The hackers and engineers of Y Combinator are doing what hackers and engineers do to any industry, they’re efficiently and ruthlessly disrupting the traditional model of venture capital and are going to destroy far more more wealth for their contemporaries than they create for themselves, as broadband did to entertainment, Craigslist did to newspapers, and Amazon did to traditional retailers.

– WordPress founder Matt Mullenweg

Tech-jobs website operator Dice Holdings Inc. said salaries for software and other engineering professionals in California’s Silicon Valley rose 5.2 percent to an average $104,195 last year, outstripping the average 2 percent increase, to $81,327, in tech-workers’ salaries nationwide. It was the first time since Dice began the salary survey in 2001 that the wage barometer broke the $100,000 barrier, said Tom Silver, a Dice senior vice president.

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The e-commerce giant (a term typically reserved for Amazon in these woods) is one of the larger examples companies from the Bay Area that are setting up shop here and looking to soak up some of the Northwest’s rich engineering talent.

Other companies with satellite offices in the Seattle area include Google, Facebook, Zynga and Salesforce.

“I’m surprised I ended up at eBay, but the story is compelling,” said Ken Moss, who was hired in November to be eBay’s VP of managed marketplaces technology; Moss is GM of the Redmond office.

A long-time Microsoft employee whose claim to fame includes inventing the Pivot table in Excel, Moss more recently co-founded CrowdEye, a start-up focused on search technology and later on stock market prediction.

He said eBay’s dedication to the region is one of the biggest selling points for recruitment.

Most of the 75 employees that currently work there were hired over the past few months, and a small team has been here for seven years. Among the newbies I met were a number of Microsoft veterans who had been there for 12 to 15 years.

Moss says he will report directly to eBay’s CTO Mark Carges, which is “a signal to the whole company that diversified development is for real.”

“We are first-class citizens,” Moss said, referring to sometimes strained relationship between remote workers and a company’s headquarters.

Eric Brill, VP of eBay’s research labs, is also based in the Redmond office, and has been working part-time there since joining the company in 2009.

Moss said eBay will be looking to hire a range of technologists, from college graduates to senior leaders, including developers, testers, researchers, data miners and other positions.

While I was at the office on Tuesday, the mountains were peeking out from the clouds and were easy to spot from the floor-to-ceiling windows on the fourth floor. It was easy enough for everyone to have a window seat in the open-floor plan.

Although the employees just moved in on Monday, a sign outside the building already announced eBay’s presence. Inside, workers were busy putting the final touches on the space to make it feel like eBay. Primary colors of red, blue, yellow and green highlighted the office walls; with a bit of Seattle flair, conference rooms were named after Northwest tribes such as Puyallup and Quinault (and other names that might be difficult for San Jose-based employees to pronounce).

But missing were some of the perks that some recruits expect these day — no shuttles to and from work or fancy cafeterias, for instance. 

In fact, eBay has a long way to go to compare with what Google has done here. Since entering the market seven years ago, Google has hired more than 900 employees, spread across two locations, a spokesperson confirmed.

One office is in Seattle’s Fremont neighborhood; the other is on the Eastside.

The two offices are geographically divided by Lake Washington, which can be crossed by one of two floating bridges — or by boat, if you are crafty enough. The traffic bottlenecks make for a horrendously notorious commute, so having two locations that straddle both sides is a huge perk — like having offices in both San Francisco and San Jose.

Because of Google’s size here, many of its perks are similar to its Mountain View headquarters, including free meals prepared by chefs, frozen-yogurt bars and other, mostly food-based, luxuries.

In eBay’s case, the new digs are located deep on the Eastside, a couple of miles past Microsoft in Redmond, and roughly 15 miles from Jeff Bezos’s empire in downtown Seattle. Recently, Amazon relocated its headquarters to a brand-new campus in South Lake Union, a neighborhood being revitalized by former Microsoft executive Paul Allen.

Other outside companies that have also established sizable tech centers here include Facebook and Zynga. A couple others have gained offices through acquisitions. Electronic Arts, for instance, now has a large office here, after acquiring PopCap; EMC now has big expansion plans here, after purchasing Isilon.

And Geekwire, a Seattle-based technology blog, is good at keeping an ongoing tally, including recent moves into the area by Jawbone and SweetLabs, a San Diego-based start-up, based by Intel Capital and Google Ventures.

Two years ago, Facebook opened an office in the heart of downtown Seattle. It plans to move soon to a 27,000-square-foot space that will have room for about 135 employees. The 70 or so engineers in the office today have worked on projects such as video calling, the Facebook iPad app and other big issues, such as security.

Last April, social game maker Zynga opened an office in Seattle’s historic Pioneer Square neighborhood, hoping to absorb some of the game talent here, spawned from Xbox and Nintendo, and cloud-computing knowledge from Amazon. It has 50 employees today, but declined to say how many it planned to hire in the near future.

As with most of these companies, eBay believes it can find a diversity of talent here that can’t always be easy to hire in the Bay Area.

As a Seattle native, and having covered tech here for the past 12 years, including an eight-year stint at the Seattle Times, I might not be the most unbiased on the subject. But I’ve seen first-hand the breadth of talent here, from Microsoft, Amazon, Expedia, T-Mobile and many others, including a strong start-up pool.

Despite that, the local tech community often suffers from an inferiority complex when it compares itself with the Bay Area, which is much larger. Still, it seems that Silicon Valley companies are finding a number of excuses to travel north to drink from the area’s plentiful tech waters.

Venture capitalists and Bay Area entrepreneurs say local start-ups face extra hurdles in raising money or are denied funding if the companies don’t have what is considered to be a full team of qualified employees — especially engineers. This has traditionally been the case, but the problem has become more pronounced in recent years as the number of solo entrepreneurs in Silicon Valley has grown.

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When you think of it that way, you might wonder why GE doesn’t already have some kind of operation in Silicon Valley, where all the world’s best software engineers are. Today, the company is rectifying that with the announcement of a software development center in San Ramon, Calif. It will employ about 400 workers.

The reason, says Bill Ruh, GE’s VP and global technology director — he’s the guy who will run the place — is that the so-called “Internet of things” is becoming a reality. This, Ruh thinks, will morph into something of an industrial Internet, which is directly in GE’s wheelhouse. “We will make our devices more intelligent, which will be driven by software, collect that data, and do some high-end analytics on it, and then drive it to our own people and to our customers,” Ruh told me. He joined GE earlier this year, after almost seven years as a VP at Cisco Systems.

Smart devices, he says, are “table stakes,” but what’s more important is the data they generate, and what you do with it. “At the end of the day, the analytics is where the action will be,” Ruh says.

Here’s an example. GE makes a product called “My Engine,” which Ruh describes as a “Facebook for engines.” If you’re the person in charge of maintaining the engines on a particular plane, wouldn’t it be helpful if you could keep track of its status as easily as you might the drinking and dining habits of your friends on Facebook? Of course, the engine and all its parts would need to have some Internet smarts built in. But once that’s done, there’s a lot of data worth tracking and analyzing about where the planes go, the conditions they fly in, which parts tend to fail or need replacing more often, and so on. From there, it’s a short leap to reorganizing maintenance schedules to be more efficient and less costly.

That’s just one example, and GE has a lot of software that’s specifically geared toward its various lines of business. Out of that, Ruh says, come some “big themes” that will apply to outside customers. “If you look at remote monitoring and diagnostics, that kind of stuff is broadly the same, whether you’re monitoring a wind turbine or a CAT scan machine,” he says. “So we have some horizontal plays that we see coming out of this.”

This is the third new software center for GE in recent years. The other two are near Detroit and near Richmond, Va. Design work on the San Ramon site is under way, and employees will start moving in near the middle of next year.

The problem: The talent pool isn’t growing nearly that fast.

“The demand is constant,” said Dan Gilmartin, Where’s vice president of marketing. “Every company is looking for these people.”
The intense competition for mobile engineers, which affects large companies and fast-growing start-ups alike, is emerging as a key bottleneck as companies scramble to capitalize on the fast growth of smartphones and other mobile devices.

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Online real-estate brokerage Redfin Corp. is feeling the fallout. The 200-person company, which is based in Seattle and has offices in San Francisco, typically hires new engineers fresh out of college, relying on competitive compensation and the allure of working at a profitable start-up.

Redfin said it has recently been up against salary-and-bonus offers of $100,000 to $150,000 a year for new college grads from social-gaming start-up Zynga, among others—far above the $80,000 or so a year Redfin would normally offer.

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As the seven-year-old company ramps up its hiring and adds new features to its social network, it is disrupting the businesses of established companies like Yahoo Inc. and Google Inc. and putting even more Internet firms on notice.

Facebook, which has more than 600 million users and was valued at $50 billion in a recent funding round, is grabbing online-advertising from Yahoo, Myspace and others. The social network is a potential rival in electronic payments to eBay Inc.’s PayPal, while partnerships Facebook is cementing with smartphone makers set the stage for competition with Apple Inc. and Google in mobile services.

Meanwhile, Facebook is tussling with Google and Microsoft Corp. for top engineers.

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Nokia has already announced the key piece of its strategy–a shift to Windows Phone for future smartphones. Now the company is set to talk about the financial implications of that and go through the rest of its strategy, which includes a mix of Symbian and even a dash of MeeGo.

The investor event is scheduled to start shortly and due to run until about 2 pm London time. Mobilized will have live coverage, providing our battery holds out. I’ll try to mention only the high points, however. Mobilized loves numbers, but it is awfully early for a whole lot of financial speak, especially for the U.S. insomniacs tuning in.

12:02 pm: Still waiting for things to get going. But if you really want something to do, we have plenty of earlier coverage, including the press conference and the YouTube video of Microsoft CEO Steve Ballmer and Nokia CEO Stephen Elop, as well as a chat with Elop on how he made his big decision.

12:05 pm: Okay, things are getting going as Elop takes the stage (the same one as the earlier press conference.

12:06 pm: Elop is reviewing things. Lots of talk of both challenges and gems. If you read his memo, or anything else he’s said recently, you have heard this.

Battle of devices to war of ecosystems, etc. Mobilized has this part memorized.

12:09 pm: Smartphone strategy is just one piece.

Reviewing the three alternatives that Elop considered–MeeGo, Android or some partnership with Microsoft.

As for Google, Elop says it is the case there are some advantages for that approach.

“There’s something happening there. There’s no denying that.”

However, Elop says the company was worried it would be late and be just one of many, and was not sure how it could leverage assets like its Navteq location-based services.

“Our sense was differentiation could be a pretty big challenge,” Elop says. “The risk for commoditization would increase dramatically.”

Feels profit would have eventually moved to Google, with handsets becoming a commodity.

“It felt a little bit like giving up and not enough like fighting back,” Elop says.

12:12 pm: As for Microsoft, Elop says both companies are bringing something to the table.

As expected, Elop is characterizing this as more strategic than just taking a license to Windows Phone. Talking about Nokia services like mapping, local advertising and other things that Nokia can bring to the table.

“It’s far more interesting than a simple licensing deal,” Elop says. This was the only strategy that makes it a three horse race with Google and Apple.

Elop says he is convinced that Nokia will be able to differentiate within the Windows Phone ecosystem on a sustainable basis.

12:15 pm: There were some challenges and potential disadvantages, he acknowledges.

Top among these is the fact that Windows Phone 7 is new on the market.

“It’s early,” he says. “Will it succeed?”

12:17 pm: Also, there is the issue of being locked in or a lack of control. Elop does not disclose terms but says the company has flexibility and “substantial control” over the future of the ecosystem.

“This is not your mother’s OEM deal with Microsoft,” Elop says.

12:17 pm: Elop says the deal is at the “term sheet” stage, noting that the companies have yet to sign the “definitive agreement.”

12:18 pm: Already the engineers are working through, and Elop says this deal will allow Nokia to move far faster than it has in recent years.

12:18 pm: He’s also making the cost-saving argument, saying Nokia can focus its investment, which he acknowledges hasn’t been getting the return it should.

Elop earlier acknowledged that the company expects significant cost savings from the move as well as substantial workforce reductions.

“Bottom line: Products that are more competitive,” he says.

12:22 pm: Operators are excited by a third viable option, Elop says.

“A two-horse race is not a satisfactory [situation] for operators,” Elop says.

Elop says that Microsoft-Nokia will be operator-friendly, as compared with Google and Apple.

12:24 pm: Elop talking about differentiation–a key concern of analysts and investors.

Elop talks about Windows Phone as offering differentiation form Apple and Google, but also insisting that Nokia has the assets and business terms it needs to stand out from other Windows Phones. He focuses on camera technologies and “unique relationship.”

Stresses again that this is not a standard handset maker agreement. But he also says that just because Nokia can change lots of things within Windows Phone, doesn’t mean it should.

Nokia, he says, must “resist the temptation to customize just for the sake of customization.”

12:27 pm: Now talking about Symbian. For those that missed it, Elop reiterates this is a transition strategy, but adds that the company still expects to sell 150 million more Symbian devices before that transition is complete.

12:29 pm: Strategy is more than just smartphones. He wants the company to be a leading force in connecting the next billion people to the Internet via phones in emerging markets. “The market for feature phones is pushing down the price curve and that is an opportunity for Nokia.”

Nokia will do incremental work in that area–things like Nokia Money for people that don’t have a bank account or telephone. Another, Nokia Life Tools, helps connect, say, farmers to market information.

This area is still a target for innovation, he says, but it also faces competition from Chinese-made phones based on MediaTek chipsets.

Elop says that the company must also plan for the future so that it can be disruptive down the road. “As they say in Finland, it is time to shoot ahead of the duck,” he says.

That’s where MeeGo comes in–the mobile version of Linux that until recently was seen as Nokia’s future. Nokia said that team will ship a phone later this year and then see where the future is headed.

12:35 pm: Want to point out this New York Times article that said both Google and Microsoft were offering hundreds of millions of dollars in engineering and marketing support in order to woo Nokia.

12:36 pm: Elop now talking about cost cuts, including significant job reductions.

“We are not announcing how many and in what country,” Elop says, but adds that the company wants to move quickly on that front.

He says that he has made changes to the business to ensure speed, including leadership structure changes aimed at ensuring accountability. “If things go well today, I’ll be the CEO.”

Of note, the two of the three business unit leaders are women–Mary McDowell, who will lead lower-end phones, and Jo Harlow, who will head the smartphone business.

12:40 pm: Nokia looking for a new leader for its services and developer division. The acting head is Tero Ojanpera, but he will soon be looking for other opportunities within Nokia, Elop says.

Also of note, Louise Pentland, who is head of the legal and intellectual property unit, is being elevated to the top leadership team.

“We have one of the strongest patent portfolios out there” he says, adding that he would encourage all players to take a license to said patents. (hear that, Apple?)

New leader of North American sales unit to be named in coming days.

“We are creating a different industry,” Elop says in closing his introductory remarks.

12:44 pm: Elop Brings on CFO Timo Ihamuotila to go through the numbers.

12:46 pm: Ihamuotila acknowledged Nokia didn’t meet the targets it had set out to achieve at its last financial analyst day.

“Our execution did not cut it.” he says.

12:49 pm: Ah, Now on to the good stuff. CFO talking financial impact from Microsoft deal. Says should be good over the long term.

Slide shows royalty payments to Microsoft causing lower gross margins, but says sales and marketing support from Microsoft should lower operating expenses.

“We will receive substantial go-to market support from Microsoft,” he says, without giving numbers.

12:52 pm: Ihamuotila talking now about the company’s long-term targets for devices and services period “after the transition period.”

Device sales to grow faster than the market, with operating margins of 10 percent or more–but this is only after the transition period, which the company has said could last this year and next.

Significant uncertainties in this period.

Ihamuotila shows a slide showing Symbian sales slowly giving way to Windows Phone with lower-end mobile phones remaining about half of sales.

12:57 pm: Ihamuotila shows chart of how it expects to cut R&D with the company investing less in services, more in entry-level phones and far less on MeeGo, though still some. The investment in Symbian will be replaced by a far lower investment in Windows Phone R&D. Overall, R&D should be a fraction of what it was.

1:02 pm: Over long term, Ihamuotila says that the Microsoft deal should help significantly boost the company’s Navteq navigation business.

“We think this new strategy is the best way to maximize long-term value, both to our shareholders and to other stakeholders,” Ihamuotila says.

On to Q&A for financial analysts.

1:03 pm: Question on how Nokia will keep employees motivated, something else and when to expect the first Windows Phone.

“Thanks for the one question” Elop quips, before addressing them in turn.

Elop says that the key is on focused innovation so they see the fresh opportunities (at least for the ones who don’t get cut by the large workforce reductions also promised).

He also pointed to his sharply worded memo, which he said was designed to convey the message that “Here is the truth, we’re making decisions and we’re moving forward.”

Won’t give date on first Windows Phone, but says again that the move will allow a substantially faster pace than the company was on with Symbian.

1:07 pm: Elop is asked about some of the challenges with Microsoft and Nokia each responsible for different pieces of software and services, as opposed to Google and Apple, where things are more integrated.

“We wanted to drive operational simplicity,” Elop says, adding that the companies talked about other arrangements, though not a full-on acquisition. The companies, Elop says, decided not to go with the operational complexity of a joint venture.

1:10 pm: Elop says Nokia has opportunities to differentiate from other Windows Phone devices, but adds it is in Nokia’s interest for there to be other strong handset players supporting Windows Phone.

“We’ve got to make Windows Phone successful,” he says.

Nokia’s mapping technology, he says, will benefit rivals like Samsung and HTC. “We’re willing to make those trades,” Elop says.

1:11 pm: Elop is asked why he feels comfortable with a “bet the farm” strategy on Microsoft, a company he clearly knows well.

Elop points out that it was harder to see how Microsoft would rapidly be successful without someone like Nokia.

“But this is now different,” he says, adding that this is now an ecosystem that Microsoft and Nokia are jointly helping to build.

Mapping and local advertising were not part of the ecosystem before the Nokia-Microsoft partnership.

As for impact of the transition, it’s hard to say, Elop says. Symbian is strong in some places where Apple and Google are present today.

1:14 pm: Asked whether Nokia will remain profitable during the transition. “It’s hard to say financially, and I am not going to provide any further specific guidance.”

1:17 pm: Elop won’t say when the first Windows Phone will ship, but lots and lots by next year at various price points.

“We’ll be shipping in volume in 2012,” he says.

1:20 pm: Another two-parter! 1) Why will Symbian be supported if it is transitioning away? 2) Why does Nokia think it will be able to have double-digit operating margins using someone else’s platform?

Elop: They recognize Symbian is key to Nokia being able to transition, but he agrees that consumers will have to want the Symbian phones Nokia builds. CFO also notes that less than half of Symbian phones are sold through carriers.

As for question on margins, CFO says the company has opportunities for higher margins around services and advertising.

1:23 pm: Asked about how the company is confident Windows Phone can get to lower prices, Elop says that was a key consideration, down to which chipsets will be supported, etc.

Between the two companies there was a lot of work to get a high degree of confidence.

“That was a critical evaluation,” he says.

That said, Elop agrees there is a smartphone market below Windows Phone that Nokia will manage with an evolution of today’s Series 30 and Series 40 operating systems.

1:31 pm: Elop: Some of the hardware designs that would have run MeeGo or Symbian will be repurposed for Windows Phone. Some devices may come out with similar models for both Windows Phone and Symbian.

1:32 pm: Question again on who pays whom in Microsoft-Nokia. Is there a lump payment from Microsoft?

Elop doesn’t answer and instead refers to slide that shows opportunities on both sides. Saying value going both ways. As for Microsoft’s payments, “That is a significant part of the conversation,” Elop says.

1:35 pm: Two good questions: Can Windows Phone be put on any current devices? What happens to QT development layer that Nokia bought and had sought to unify developer approach?

Elop: It’s not as simple as plugging in and downloading on to current phones, though some technologies can be repurposed.

QT continues to be the development for Symbian and lone MeeGo device. Also could have a role on low-end devices.

However, Elop says, “We are not proposing a QT on Windows Phone” approach. Adding another development environment could fork the ecosystem, which is not good for Nokia or Windows Phone, he says. Development environment for Windows Phone will be Silverlight and XNA–Microsoft’s current tools.

1:38 pm: Asked about branding, he says in some cases you will see both Microsoft and Nokia brands. Examples could include Nokia Search powered by Bing or Bing maps powered by Nokia, though he says those are examples and not final choices.

1:39 pm: Asking about tablets, questioner points out that Nokia had an early lead in tablets, but Apple “stole the show.”

“We are not announcing today a specific tablet strategy,” he reiterates, saying that Microsoft creates opportunities.

Elop notes that there are rumors of Windows Phone and Windows that could power tablets.

“We could do that,” he says. “We might do that.”

Also an opportunity for Nokia to step back into the game using its own software.

1:41 pm: Elop wrapping up.

“We have set a new course for Nokia,” he says, adding that despite what has been written, Nokia is still an incredibly powerful company, though perhaps not in North America. “Today we are diving forward” he says. “We have a strong partner in Microsoft who is incented as are we in making this successful.”

Investor guy closes by reminding there were forward-looking statements. He’s still going as people leave the room.

COMPLETE COVERAGE:

• Nokia’s Stephen Elop Talks to Mobilized About the Big Microsoft Deal (Video)
• Massive Layoffs Expected at Nokia
• Nokia’s Microsoft Partnership: Does the New Strategy Add Up?
• Live From the Nokia-Microsoft Press Conference: It’s a Windows Phone World After All
• More From Nokia: Forecast Gets Cloudy, Plus Expected Executive Changes
• Nokia-Microsoft: What Steve Ballmer and Stephen Elop Have to Say in Their Joint Letter
• Nokia Confirms Microsoft Partnership With YouTube Video
• R&D Spending: Nokia Vs. Apple Shows Size Doesn’t Matter
• Not Seeing Much Return on That Massive R&D Spend, Are You, Nokia?
• Nokia: Big and Slow

The Pasadena, Calif.-based company also acquired the independently developed BlackBerry application UberTwitter, adding to its acquisition of Echofon (the Twitter client for iPhone and other Mac devices) at the beginning of the month and Twidroyd (Twitter for Android) in September. Update: On Monday UberMedia said it had acquired an additional company, Mixx, the former competitor to Digg that now curates social media channels for brands.

UberMedia, despite its seemingly perpetual identity crisis, has particular notoriety because its founder and CEO, Bill Gross, first popularized paid search advertising with his company GoTo.com in the late ’90s. When Gross first launched the company last April, he said he’d do the same thing for Twitter.

Since then, Twitter has launched its own ad system and tightened up on permissions for rival ad networks.

UberMedia has let its Twitter account recommendation widgets languish, but says they will be relaunched soon as a new product called FollowMe. Meanwhile, the Twitter clients the company has acquired have a combined three million active users. They are some of the leading independent options, despite somewhat precarious positioning now that Twitter has launched its own official clients for most every platform.

Gross is traveling in Europe this week, but UberMedia COO Jon Kraft got on the phone with NetworkEffect over the weekend to say that there is indeed a method behind all this name-changing and client-acquiring madness. Here’s an edited transcript:

NetworkEffect: Why the name UberMedia?

Kraft: Obviously we’re very excited about the acquisition of UberTwitter, and we felt like our mission had expanded a bit since we first launched. It was really all about this paid search platform, and PostUp was a great name….

And before that you had another name, TweetUp.

Yes, but as we started to grow our business on the client side, we saw ourselves increasingly as a media company. We’re not crazy about the fact that we’ve changed our name twice now, but hopefully we’ll build a company around that brand.

How did this acquisition strategy come about?

We first bought Twidroyd seven months ago, and we really loved what we learned about the way consumers use Twitter.

What is the involvement of the founders of the companies you bought? Are they all running their respective apps?

Obviously a big part of what makes those companies exciting is the passion of the founders, so we encourage them to operate fairly independently.

Who is the staff of UberMedia?

We have some business development to create partnerships, but the vast majority is engineers. We have a little over 40 employees as a distributed team.

And what’s happened to the sponsored Twitter accounts and tweets?

We’re still very excited about what we’re doing with the marketplace, but there are a number of other innovations that we’re planning. The bigger vision is to innovate inside the Twitter ecosystem.

What does that mean in the context of Twitter competing within its ecosystem, especially through Twitter clients? That doesn’t seem like a category other start-ups and investors are investing in as much today.

It’s not easy to organically grow a new Twitter client from scratch, it’s a real challenge. But I think the Twitter platform is still greatly under-leveraged, and there’s surprisingly low penetration of Twitter users today.

But it’s not as if Twitter allows application makers to just make whatever money they want on its platform.

Twitter has been understandably conservative about wanting to protect the user experience across their platform, so we’re being conservative as well and thinking of other ways to innovate and monetize.

What is your company’s relationship with Twitter?

It’s a great relationship. I can’t talk details about what we’re discussing, but the relationship is quite good.

Are you raising more funding? [UberMedia, which launched out of Gross's Idealab, had previously raised $3.5 million from Index Ventures, Betaworks, Revolution, First Round Capital and others.]

We’re not talking about our funding right now, but obviously you have to raise money in order to grow aggressively.

Will you keep acquiring? It seems like you have Twitter clients for most of the major platforms now.

It is possible, but not top of our priority list.

One things you have not had is a problem with agility.

That’s a concise way to put it.

What about Bill Grosss involvement? Is he still CEO or is he doing other Idealab stuff?

Absolutely. He’s head-down 100 percent on this project.

He’ll talk to Kara Swisher about the company’s efforts to sell advertising on the service, and if we’re lucky, he’ll give us a glimpse of his improv comedy roots, too. Don’t be shy, Dick!

Dick starts off by insulting Kara’s vest. “Matador casual,” he calls it. Good one! Kara responds by asking him why he’s hanging out at CES.

The same reason everyone else is, Dick says: To talk to industry people. For example, he’d like to get device makers to preload some features like “Fast Follow.”

Kara wants to know if Dick would like a “Twitter button” installed on phones. No, says Dick. But he’d like Twitter to work the same way on different platforms.

So how do you make that happen?

Dick: We’re assigning a product team to make sure that this happens.

Kara: And you’re talking to TV people, too? What’s that about?

Dick: Yep. Because mainstream TV viewing, more and more, they have a device in their hand when they’re watching TV. Like on “Glee.” The characters tweet while the show is on. [This baffles Kara.] When “Glee” starts, tweets per second for “Glee” shoot up, and stay up 100 times that level until the show ends, and then they drop.

That has interesting implications. Like, it takes the DVR out of the mix, because you have to watch in real time to make it worthwhile.

But we don’t know if all of this means Twitter while you watch TV, or Twitter actually on your TV screen.

Kara: Is it important for you to be on the screen?

Dick: We’re already on the screen. But we don’t know if that will be the mainstream experience.

Kara: We had Steve Levitan from “Modern Family” talking about how the Web doesn’t help him, but that he and his team like Twitter.

Dick: Sure! “I was having a conversation with Conan O’Brien, as one does” and he was talking about the importance of Twitter to him, and how the 140 character limit is the right length for a joke. It’s definitely the case that network TV people like Twitter, because it gives them feedback, like they’re in the theater, watching how the shows play out.

Kara: Keep talking about celebrities! I love celebrities.

Dick: Sure! The folks that we’ve hired to work with talent and agencies, etc., we think of those people has high-value publishers. They have a huge following. A lot of people are on Twitter just to hear what those folks have to say.

The interesting thing about the top 200 to 300 tweeters–a lot of them are musicians, actors, etc. LeBron James, etc. I think Lady Gaga is number one. But! They’re not all celebrities. There’s CNN Breaking News. And the New York Times. And other brands like Gary Vaynerchuk, who aren’t really that known outside that world.

And Twitter is disaggregating some of those businesses. Like a third of all the players in the NFL playoffs are using Twitter actively. And many players have more followers than their teams. [Here Dick explains football to Kara.] That’s fascinating.

Kara: Let’s go back to phones. Whats the most important device? Tablet? PC? Phone?

Dick: Mobile is a more and more and more common use of Twitter–40 percent of all tweets created on mobile devices. That might seem low, but it was 25 percent a year ago. 50 percent of active users are also active on mobile.

But Twitter ought to work platform to platform. We want to be agnostic.

Kara: What about what’s coming out from Palm? Working with them?

Dick: Not yet.

Kara: What about games? Talking to those guys?

Dick: Yep. Like with Microsoft on their Xbox, you can see integrating tweets into people who have discussions on Xbox.

Dick: You lost interest in the answer to your question. [True!]

Kara: You’re so annoying.

[Some laughter. Not a lot, though!]

Dick: Anyway, the important thing for us is consistency across device to device to device.

Kara: Speaking of working consistently, how’s that going for Twitter?

Dick: Right. So, we raised a bunch of money. We’re hiring “tons of engineers and operations engineers” in the last year. We hired 100 people in Q4, out of about 350 total. And we’re working very hard on erasing our “technical debt.”

Kara: “That’s a great word for fuck-ups”

Dick: Anyway, we’ve got a guy assigned to this pretty much exclusively. And there used to be a tolerance for this, and now there isn’t. If someone fires a pistol next to your ear every hour, after a while you stop flinching when you hear it. It’s crucial that we do this, both for our users and our engineers, who shouldn’t have to get up at 3 am all the time.

Kara: Time for a vision question, which stumps Yahoo. What is Twitter? What is your vision?

Dick: “We want to instantly connect people everywhere to what’s most important to them.”

See, that’s a good statement. We’re not just a social network that’s connecting people. It’s connecting for a purpose.

So some people meet girlfriends on Twitter. And other people get tickets to shows they like on Twitter. Etc.

And you don’t have to tweet to get a lot of value out of it.

Kara: What’s the percentage of people who just read Twitter, and don’t tweet themselves?

Dick: Rising. And we have to make that easier to do. “We’re going to spend a lot of time making that consumption experience much better.”

Kara: What’s your business plan?

Dick: To continue to raise money!

[hohoho]

Dick: I’m going to steal Jeff Weiner’s line. We’re a technology company that’s in the media business. Our business model is an advertising model [cough, cough, that's familiar! You're welcome!] So we’re selling ads, and we’re letting people promote their accounts, etc. And we really don’t have to do anything else. Our engagement rates on these ads are ridiculously high. When we saw our stats this last spring when we launched, the numbers were so big we thought we were measuring it incorrectly.

Kara: Is that a big enough business to be a standalone company and/or IPO?

Dick: It’s enough to be a standalone company.

Kara: Sell or IPO?

Dick: We want to be a standalone company. It’s my sincere hope. We’ve accomplished 1 percent of what we want to do.

Kara: You like to sell companies, though.

Dick. Yes, I had two companies that I sold. But that doesn’t mean we’ll sell this one. I’ve had two kids too. But I shouldn’t get a reputation for having kids.

Kara: What’s up with people buying and selling secondary shares of Twitter. It’s an issue for Facebook. What about you?

Dick: We keep an eye on it, and talk to employees about it. But I just think that there are other people that are focusing on it and paying attention, and I’ll let them talk about it. But I just don’t think about that stuff on a day-to-day basis.

Questions and Answers

Q: [sorry missed it].

But answer seems to be about whether Twitter is a platform company or not. Dick quotes Ev Williams by saying they’re not a platform company–they’ve had an API. They want people to be able build off Twitter and build into Twitter. Which requires a more robust API.

Kara has more questions. How do you look at yourself as a leader?

Dick: As a very bald leader.

Kara: But you’re very different than Evan.

Dick: Right. Two components. Three founders at company: Ev, Jack, Biz. They all come at it from a different angle. Jack thinks about simplicity and elegance and the mobile experience. Ev thinks about the user. Biz is “the protector of the brand and the guardian of the culture.”

Kara: He’e the guy who goes on Colbert.

Dick: And he’s great at it. Anyway, those guys are great. My focus is on operational greatness. I try to emulate operators like Ben Horowitz (Opsware) and Susan Wojcicki (Google).

Q: What’s up with that internal page rank for each user? asks Ben Parr from Mashable.

Dick: Your’re not exactly right. We play around with stuff like that. But there’s nothing robust that we would think of productizing anytime soon, and we don’t use it for things like resonance, which we use in ads.

Q: [Sorry, couldnt quite understand.]

Dick is talking about WikiLeaks in general, says there was something specific about WikiLeaks today that he can’t talk about. In general, he hates government mandates to keep things quiet. And he hates that a woman in China was punished for retweeting something. He reiterates Twitter’s desire to connect people with useful information. “We’re going to lash out at things that prevent us from doing that, as aggressively as we can.” The proof is that we’re banned in China. “We’re not going to sacrifice what we’re trying to do to, you know, get into this country over here.”

Q: How will you work with brands in the future, vs. advertising?

Dick: Our promoted suite of stuff doesn’t simply let advertisers use a giant bullhorn. This stuff has to be organic. “It almost is like a quality-assurance program.”

[Some context for what Dick wouldn't talk about: Feds Subpoena Twitter Seeking Information on Ex-WikiLeaks Volunteer].

Dick is now talking about Twitter and international growth and language. Twitter is growing fast in the U.K. but not in Germany. Why is that? Because German has really, really long words. “There’s a bunch of stuff we want to do, and have to do” just to make things usable in those languages.

Last question, from Kara: What’s the most interesting thing you’ve seen at CES?

Dick won’t give a one-word answer. CES is a “quantum conference.” Some years are transformational, some are incremental. “This seems like it was an incremental year.”

And we’re done! Thanks all for your patience. We’ll have video up over the next few days, which should help fill in the gaps left by my lousy note-taking.

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]]> http://allthingsd.com/20110107/live-twitter-ceo-dick-costolo-at-dces/feed/ 3 http://allthingsd.com/20101206/meet-lew-tucker-ciscos-mr-cloud/ http://allthingsd.com/20101206/meet-lew-tucker-ciscos-mr-cloud/#comments Mon, 06 Dec 2010 23:30:18 +0000 Arik Hesseldahl http://newenterprise.allthingsd.com/?p=189 Cisco Systems is serious about cloud computing. If today’s news about its strategic alliance with BMC Software doesn’t make that clear, talking with Lew Tucker, Cisco’s CTO for Cloud Computing certainly will.

Tucker is a 13-year veteran of Sun Microsystems whose last job was as Sun’s CTO of cloud computing. He was also VP of the AppExchange at Salesforce.com. He’s also known for “Lew’s Law,” which he describes as more of an informal observation about how far the cost of computing can realistically fall.

I caught up with him last week in New York City to talk about what Cisco, long the powerhouse of networking, plans to do in the cloud.

NewEnterprise: First off, what is Lew’s Law?

Lew Tucker: It’s just an observation, not a real law, that the price of computing will never be free, because it requires energy to compute. Computing is really about changing the state of physical bits, and that requires energy. It’s great that we’re driving the costs down. Moore’s Law is hammering the costs. But there is a lower limit. Right now the dominant cost is around managing software, operations and everything else. So we can take a lot of those costs out through automation.

NewEnterprise: When I think of Cisco I think of industrial-strength routers and switches. How do you get from there to cloud computing?

LT: Eight months ago I thought the same thing. I was with Sun for many years and then left to go to Salesforce.com to do software as a service. I became very enamored of the Salesforce model. I came back to Sun to build the Sun Cloud, which was to be a direct competitor to Amazon Web Services. I was an Amazon user myself and I loved how you could so easily spin up as many servers as you wanted without having to buy them, configure them and so on. Building a cloud is another thing entirely. When Cisco called me, I said to them, “You’re about routers and switches and I’m all about complex distributed computing systems.” And Cisco said they were really about networking and making distributed systems. I started digging into it and realized there was a really unique position at Cisco if you think of cloud computing as a fully automated system with different elements. Some of those are networking elements, and some of those are integrated boxes with computing and storage and networking all in one. Some are networking services.

NewEnterprise: When you think about how cloud computing works, you really can’t do anything without fast connections between one system or another, which is something that Cisco knows very well.

LT: The network has always been a shared piece of infrastructure. There are a lot of different applications running on different servers that are trying to reach either each other or their endpoints. So there’s an awful lot that’s going into the network to make that happen in a fair and efficient way.

NewEnterprise: So what hardware is Cisco building here?

LT: We build pre-integrated compute, storage and networking that we’re calling our Unified Computing Systems. You can buy a rack of these systems, and they’re driven by a set of APIs [application programming interfaces]. We’re not alone in that. Hewlett-Packard does something similar. Then the customers add in their own preferred storage environment, like EMC or NetApp, or they can build their own.

NewEnterprise: What kind of use cases are you seeing in companies? What are your customers asking for right now?

LT: Right now what they are asking about is collaboration services, the integration of video and voice and calendaring and messaging. We’ve seen consumer services like Facebook change what people expect at the office. We have a collaboration product called Quad that looks just like Facebook. WebEx is a Cisco service. We’re working on offering that as both a hosted form and one that runs inside the customer’s own environment.

NewEnterprise: So there are a lot of cloud providers out there already–Amazon, Google and Microsoft, which has its Azure platform. They’ve already deployed their services and have relationships with vendors. How do you see the market shaping up, and what is Cisco’s place in it?

LT: I think there’s going to be two or three large cloud providers, but then there will be many smaller ones who specialize in delivering specialized services. Take health care. In that industry, groups of companies are going to get together and offer a HIPAA-compliant cloud. You’ll also see something similar happen around financial services. Those are two industries that have very specific needs. The cloud will be dominated by a few large providers for sure, but there will also be many specialty cloud providers.

NewEnterprise: You’ve been on the job about six months. What have you learned so far?

LT: I’ve learned that there’s an amazing amount of technology within Cisco. It has the largest concentration of network engineers in the world. Part of my job is to go and align our products and roadmaps with this future world that we’re moving into and to uncover a lot of the new approaches to how we solve different networking problems. I’m an engineer, and I like nothing better than being in a room with a bunch of other engineers with a whiteboard as they all battle it out. I’ve also learned that building cloud infrastructure is a lot harder than everyone thought.

]]> http://allthingsd.com/20101206/meet-lew-tucker-ciscos-mr-cloud/feed/ 0 http://allthingsd.com/20101203/google-buys-phonetic-arts-to-make-machines-sound-human/ http://allthingsd.com/20101203/google-buys-phonetic-arts-to-make-machines-sound-human/#comments Fri, 03 Dec 2010 22:06:05 +0000 Tricia Duryee http://emoney.allthingsd.com/?p=158 Google is beefing up its voice services with today’s acquisition of Cambridge, England-based Phonetic Arts.

Google’s view is that voice will be critical in making mobile devices with small screens and keyboards more useful. Already, it’s launched a number of services that let people use their voice to conduct a Web search, compose emails, play songs on a phone or get directions.

The acquisition of Phonetic Arts will help in the reverse situation–when the computer speaks to you, a.k.a. voice output, the company said in a blog post.

Voice interaction is a field in bloom. There are safe-driving applications that speak your text messages to you, so you can keep your eyes on the road, and Google’s own translation “speaks” text in multiple languages. Currently, Nuance Communications is one of the leaders in the voice-recognition space.

Google says Phonetic Arts’ team of researchers and engineers will focus on making the interactions less robotic and more natural by using small samples of recorded voice.

Terms weren’t disclosed, but Phonetic Arts will be joining Google’s engineering center in London.

]]> http://allthingsd.com/20101203/google-buys-phonetic-arts-to-make-machines-sound-human/feed/ 2 http://allthingsd.com/20101112/dont-call-it-a-bubble-says-fred-wilson-but-things-are-troubling/ http://allthingsd.com/20101112/dont-call-it-a-bubble-says-fred-wilson-but-things-are-troubling/#comments Fri, 12 Nov 2010 17:48:13 +0000 Peter Kafka http://mediamemo.allthingsd.com/?p=25815 Fred Wilson is one of the most high-profile investors in tech. And his blog is certainly one of the best-read. So if the Union Square Ventures partner says we’re in a bubble, that would be a very big deal.

But Wilson doesn’t use the word “bubble” anywhere in the post he wrote this morning. Instead he refers to “storm clouds” in two markets: One for tech start-up financing, and one for tech workers themselves (courtesy Google, Facebook, et al).

These are ominous clouds! A few excerpts from his post:

• “The competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening.”
• “We are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.”
• “I think both of these situations are unsustainable. And anything that is unsustainable will eventually stop happening.”

On Twitter, I summarized Wilson’s post this way: “@fredwilson says yes, it’s bubbletime.” And then I heard immediately from Betaworks’ Andrew Weissman and O’Reilly AlphaTech Ventures’ Bryce Roberts, both of whom have invested with Wilson in the past: They don’t think Wilson means there’s a bubble.

And neither does Wilson himself:

Why does it matter if we describe something as a “bubble” instead of “troubling”? I’m not sure that it does for the layperson. But I think it’s very meaningful for professional investors like Wilson. For one thing, if they think it’s a bubble, then their own investors might wonder why they’re continuing to make bets.

It’s also worth noting that even if we are in a bubble, it’s nothing like the housing bubble, or the 2000-era Web bubble (when Wilson was making VC investments via Flatiron Partners): The scale isn’t remotely similar, and the general public has very little stake in the outcome.

But it’s Wilson’s post, so he gets the last word here. Here’s his response to an email I sent asking him for additional input (I’ve added a punctuation mark or two):

I don’t think it’s helpful to use the bubble framework. There is a supply demand imbalance in hot deals and sw engineers, particularly in Silicon Valley. That is driving up prices but also leading to some odd behavior. I just think it’s healthy to talk about it calmly and rationally.

[Image credit: Joi Ito]

]]> http://allthingsd.com/20101112/dont-call-it-a-bubble-says-fred-wilson-but-things-are-troubling/feed/ 2 http://allthingsd.com/20100806/u-s-senator-infosys-is-a-chop-shop/ http://allthingsd.com/20100806/u-s-senator-infosys-is-a-chop-shop/#comments Fri, 06 Aug 2010 19:43:02 +0000 Amol Sharma http://voices.allthingsd.com/?p=28036 While discussing an immigration bill on the U.S. Senate floor Thursday, New York Democrat Charles Schumer likened Indian tech giant Infosys Technologies (INFY) to a “chop shop.”

We’re pretty sure that was a slip. After all, the term “chop shop” refers to shady places of business where people dismantle stolen cars and sell off their parts. Surely he isn’t comparing the legal outsourcing of America’s jobs to the illegal selling of America’s brake pads and V-8 engines?

It is likely the senator was going for “body shop,” also a derogatory term, but one that describes firms who shuffle low-cost tech engineers around the globe.

Sen. Schumer’s office didn’t immediately respond to a request for a comment or clarification on his remarks.

Read the rest of this post on the original site

]]> http://allthingsd.com/20100806/u-s-senator-infosys-is-a-chop-shop/feed/ 0 http://allthingsd.com/20100630/apple-puts-out-feelers-for-antenna-experts/ http://allthingsd.com/20100630/apple-puts-out-feelers-for-antenna-experts/#comments Wed, 30 Jun 2010 19:10:24 +0000 Voices http://voices.allthingsd.com/?p=26693 Read into this what you will, but Apple’s job listings now include at least eight openings for phone antenna and reception experts, several posted right around the time that reports of iPhone 4 antenna problems began to surface. The current crew of engineers certainly has its hands full–as do the AppleCare reps.

]]> http://allthingsd.com/20100630/apple-puts-out-feelers-for-antenna-experts/feed/ 0 http://allthingsd.com/20100421/agnilux-is-that-latin-for-annoy-steve-jobs/ http://allthingsd.com/20100421/agnilux-is-that-latin-for-annoy-steve-jobs/#comments Wed, 21 Apr 2010 14:07:02 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=38836 Of the 66 acquisitions Google has made, the purchase of Agnilux ranks among the most curious. So little is known about the company’s mission that it’s impossible to say definitively what Google wants with it. And the Agnilux Web site, which has been take offline, reveals only a street address and the derivation of its name: Agni is Sanskrit for “fire,” and lux, Latin for “light.”

But the company’s origins are interesting indeed. You see, Agnilux was reportedly founded by a group of former Apple (AAPL) employees that includes several from P.A. Semi, the boutique chip design company Apple acquired in 2008. Among them: P.A. Semi founder and CEO Dan Dobberpuhl, former P.A. Semi principal Amarjit Gill, and Mark Hayter, once one of the company’s leading system architects. Already on board at the company: A handful of engineers from Cisco (CSCO) and a software architect from TiVo (TIVO).

Serious talent, but what does Google (GOOG) want with it?

The answer isn’t clear. Unconfirmed reports suggest Agnilux has been working on “some kind of server.” If that’s the case, Google could be thinking of using that server or the design savvy that created it to enhance its own servers, which it designs and builds itself.

That said, Dobberpuhl and company are the folks who presumably led development of Apple’s new A4 chip, which powers the iPad, so it’s possible that Google might have some mobile aspirations here as well. Impossible to say until someone talks. And right now, no one is doing much of that.

]]> http://allthingsd.com/20100421/agnilux-is-that-latin-for-annoy-steve-jobs/feed/ 0 http://allthingsd.com/20100317/the-case-for-the-fat-startup/ http://allthingsd.com/20100317/the-case-for-the-fat-startup/#comments Wed, 17 Mar 2010 19:00:09 +0000 Ben Horowitz http://voices.allthingsd.com/?p=22721 Much has been written and said about the current economic downturn and the resulting lessons on how to run high-technology companies. Quite famously, Sequoia Capital, the premier venture capital firm in Silicon Valley, held a mandatory all-CEO meeting in fall 2008 during which it advised them to “Cut spending. Cut fat. Preserve capital.” (You can see the presentation here.)

The presentation catalyzed a movement. Start-ups everywhere adopted a lean, low-burn, low-investment model. To this day, companies seeking funding at our venture firm, Andreessen Horowitz, proudly proclaim in their pitch decks that they are raising tiny amounts of capital so they can run lean.

On the one hand, it is a fact that capital invested is negatively correlated with returns in the venture capital industry. Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors.

So what’s a start-up to do? Much of what has been written and said about lean start-ups makes good sense. However, that advice is often incomplete, and some of the things left unsaid are the least intuitive. In this article, I will articulate some of those things left unsaid in arguing the case for the Fat Start-up.

Here is my central argument. There are only two priorities for a start-up:
Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

What the hell do I know?

“Al Pacino couldn’t be no gangsta, DeNiro in ‘Casino’ he no gangsta
Wanna be, wanna see, wan’ get a shovel
dig Tookie up n*&%^!, cause he know gangstas”

–The Game

At this point, some of you are asking yourselves, “What the hell does Ben know? If he were really smart, then he’d know that thin is in.” It turns out that I have some experience in managing a fat start-up through the dot-com implosion of the early 2000s. This chart offers a brief summary of equity market history when I was CEO of Loudcloud and Opsware (click to enlarge):

Note that the Nasdaq index is very highly correlated to the start-up funding environment. During the two years I was CEO of Opsware, the Nasdaq fell 80 percent, far more than it has fallen during the current 2008-10 downturn. So the 2000-02 environment was at least as traumatic as this one for Silicon Valley companies–and arguably much worse.

Here is a brief summary of Loudcloud/Opsware’s fund-raising history during that time:

• September 1999: Loudcloud founded
• November 1999: Loudcloud raises $21 million at a $45 million pre-money valuation (Benchmark Capital is the lead investor)
• January 2000: Loudcloud borrows $45 million from Morgan Stanley (MS)
• June 2000: Loudcloud raises $120M at a $700M pre-money valuation
• March 2001: Loudcloud goes public on Nasdaq, raises $160 million and is valued in the public markets at approximately $480 million. Total funds raised to this point: $346 million.
• August 2002: Loudcloud sells the managed services business to EDS (this was the only actual business we had at the time) for $63.5 million and becomes a software company (and changes its name to Opsware).
• September 2002: Opsware trades for 35 cents per share or approximately a $28 million market cap.
• September 2007: Hewlett-Packard (HPQ) acquires Opsware for $1.6 billion

During this period, Loudcloud/Opsware had over 20 direct competitors. Almost all the competitors from the Loudcloud era went bankrupt, including MFN/SiteSmith, Exodus, LogicTier, Williams Communication, Global Crossing, WorldCom/Digex and Storage Networks. Those that survived got bought with valuations of less than $100 million (e.g., Totality) or still have very low valuations (e.g., Navisite).

How did we do it?

“I had a dream I could buy my way to heaven
When I awoke, I spent that on a necklace”

–Kanye West

So how did we navigate through the great dot-com crash, crush the competition, emerge as the No. 1 company in our space and sell the company to HP for $1.6 billion? Did we “cut spending, cut now, and preserve capital?” Did we make cash preservation our No. 1 priority?

No, we didn’t. To underscore the point, here are Loudcloud’s average monthly cash burn figures for the quarters ending in:

• Apr 2001:  $39 million
• Jul 2001:  $35 million
• Oct 2001:  $29 million
• Jan 2002:  $25 million
• Apr 2002:  $22 million
• Jul 2002:  $19.4 million

As you can see, we were aggressively investing in the business throughout 2001 and 2002. While we did reduce our cash burn, we did not make cash preservation our No. 1 priority. As it was, over the course of the transition from Loudcloud to EDS, we sadly laid off 400 employees and transferred another 150 to EDS. However, we didn’t scrimp and save our way to a $1.6 billion acquisition: Instead, it’s what we chose not to cut that ultimately got us there.

Loudcloud was a Web-hosting business. Today, we’d call it a “cloud services” business, but people weren’t quite ready for the “cloud” in 2001. We supercharged our hosting business with software (called Opsware) that automated our Web-hosting operations. The other cloud services businesses of our day also had software investments. However, as the macroeconomic climate changed, they all “cut deep and cut now.” In the end, they ended up putting their software in maintenance mode and stopped building new features.

As we weighed a decision to make the same deep cuts in our own software R&D efforts (a move advocated by the intelligentsia of the day, as well as nearly every MBA we had working in the company), I faced a hard decision: Cut deep and get to cash flow break-even quickly or continue to invest heavily in software?

In the end, I decided to run fat so that we could continue to invest in the Opsware software. At the end of the day, I realized that much larger companies like IBM (IBM) could hire smart people and train them. But without a lasting technology-based advantage, it would be increasingly hard for us to defeat them and build our customer base despite early wins with Ford (F), Fox Sports, and the U.K. government (to name just three of our early customers).

Running fat meant that I laid off zero software engineers so that we could keep on investing in our technology, find our product/market fit, and build a lasting technological advantage.

Still, we had to reduce costs or we would clearly go bankrupt. With this new view of the world, I decided that rather than divesting our intellectual property, I would divest our business. Now, that may sound logical the way I’ve described it, but consider these facts:

• We were generating $65 million/year from the Web-hosting business.
• We were a publicly traded company with a market capitalization of close to $200 million.
• All of our investors (pubic and private) believed in and invested in the Web-hosting business.
• We had close to 500 employees at the time. Nearly all of them were supporting the Web-hosting business.
• We had no other business. We had software, but we did not have a software product and certainly did not have a software business.

Despite all of this, we sold the Loudcloud hosting business to EDS and became Opsware the software company. It was not clear that this was a good idea at the time. In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank.

During the transition, we shrank our payroll from 450 employees to fewer than 100. Even with this massive reduction in expenses, it would take another three quarters to reach cash-flow break-even, a milestone we finally reached in Q2 of 2003.

One could argue–and many did–that we should have cut a lot deeper than we did given that we only had one customer. Although EDS was a very large customer (it generated $20 million/year in revenue), a brand new software company doesn’t need 100 people. We could have taken steps to reach cash-flow break-even immediately (clearly, that might have helped us get above 35 cents per share). In other words, we could have “gone lean” by cutting deep, cutting now, and preserving capital.

But rather than do what seemed obvious, I decided to keep on investing. Here’s why: In an economic boom, cash is great, but not necessarily a meaningful competitive advantage. If every company is well funded, being super-well funded doesn’t help you win. In fact, being super-well funded can actually screw you.

But in a bust (like the one we were in), having a lot of cash can be a huge competitive advantage because you can use that cash to put enormous pressure on your underfunded competitors. And that’s what we did.

We spent aggressively to match our best competitor’s product, feature for feature. And we used our public currency to acquire important adjacent functionality (network, process and storage management) that our competitors did not have and couldn’t acquire because they didn’t have the cash (or the equity).

In doing so, we were able to beat a really high-quality start-up (Bladelogic) that did not have the massive technical and cultural baggage that came from exiting the managed services business. Bladelogic was eventually sold to BMC (BMC) for $800 million. But I’m firmly convinced that had we not spent the money, Bladelogic would have emerged as the No. 1 company in the space and gotten the $1.6 billion exit instead of Opsware.

In the end, by continuing to invest aggressively in our technological advantage despite a hellacious funding environment, we were able to turn a doomed business into a winning one.

That is the very short version of how we won the market during the great tech recession of the early 2000s.

So did we learn?

“Hegel was right when he said that we learn from history that man can never learn anything from history.”

–George Bernard Shaw (1856-1950)

Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash. As a result, the top two priorities are always to:

1. Find the product that 1,000 enterprise or 50 million consumers want to buy and grab those customers before your competitors do.
2. Raise enough cash and spend it intelligently so that you don’t go broke along the way.

Clearly, you can’t succeed if you don’t achieve both priority No. 1 and priority No. 2. So why is taking the market more important than not running out of cash? Because the only thing worse for an entrepreneur than start-up hell (bankruptcy) is start-up purgatory.

What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.

You recruited all the employees, you raised all the money and you made all the promises. You either see it through or leave–without your good reputation. No one wants to work for an entrepreneur who quits his or her own company. This is start-up purgatory, where you work just as hard, reap none of the rewards, and watch all your best people leave you. It sucks to be you.

The Bottom Line

Spending a little or spending a lot is a means, not an end. Choose the right strategy to win the market or you may end up going straight to purgatory.

As you listen to the virtues of the lean start-up–lightweight sales, light engineering, and so on–keep the following in mind:

• If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.
• You cannot save your way to winning the market.
• The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition.

Thin is in, but sometimes you gotta eat.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

]]> http://allthingsd.com/20100317/the-case-for-the-fat-startup/feed/ 12 http://allthingsd.com/20091216/intel-engineers-shot-out-of-cannon-recreate-intel-inside-chimes-with-video/ http://allthingsd.com/20091216/intel-engineers-shot-out-of-cannon-recreate-intel-inside-chimes-with-video/#comments Wed, 16 Dec 2009 21:05:21 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=30930 Here’s a nice distraction from Intel’s mounting legal woes: A video of five helmeted Intel (INTC) engineers in Finland being shot from a cannon Gonzo-the-great style at an arrangement of massive tubular bells in a bid to bodily recreate the “Intel Inside” chimes.

Crazy Finns…

UPDATE: According to the disappearing disclaimer secreted away at the bottom of this page, the video’s not only fake (and, in retrospect I suppose that is obvious), but part of an Intel® Sponsors of Tomorrow campaign.

Yes, I am ashamed.

“All copy and videos are part of a marketing campaign for Intel® Sponsors of Tomorrow™. No Intel employees were harmed in the making of this film. All characters featured in the videos were played by actors specially trained in silly costumes and Finnish accents. Do not, under any circumstances, attempt to fire anyone out of a cannon.”

]]> http://allthingsd.com/20091216/intel-engineers-shot-out-of-cannon-recreate-intel-inside-chimes-with-video/feed/ 0 http://allthingsd.com/20091030/facebook-and-zapposs-different-views-on-worker-retention/ http://allthingsd.com/20091030/facebook-and-zapposs-different-views-on-worker-retention/#comments Fri, 30 Oct 2009 08:00:46 +0000 Tomio Geron http://voices.allthingsd.com/?p=17218 For fast-growing technology start-ups, there are many approaches to employee hiring and retention.

Two of the more successful ones, Facebook and Zappos, have very different methods, each with different goals: Facebook wants to hire entrepreneurs even if that means they will eventually leave, while Zappos wants to hire the best people to fit its culture and figure out how to keep them.

Mark Zuckerberg, chief executive of Facebook, said at a talk this weekend at Startup School, a Berkeley, Calif., event organized by Y Combinator, that Facebook seeks to hire entrepreneurial “hackers”–people who want to build something new–even though they may not want to stay for long. The company is focused on technology and tilts its hiring toward engineers, even for people in non-technical roles such as marketing, he said.

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]]> http://allthingsd.com/20091030/facebook-and-zapposs-different-views-on-worker-retention/feed/ 0 http://allthingsd.com/20091029/slump-sinks-visa-program/ http://allthingsd.com/20091029/slump-sinks-visa-program/#comments Thu, 29 Oct 2009 16:20:01 +0000 Miriam Jordan http://voices.allthingsd.com/?p=17199 A coveted visa program that feeds skilled workers to top-tier U.S. technology companies and universities is on track to leave thousands of spots unfilled for the first time since 2003, a sign of how the weak economy has eroded employment even among highly trained professionals.

The program, known as H-1B, has been a mainstay of Silicon Valley and Wall Street, where many companies have come to depend on securing visas for computer programmers from India or engineers from China. Last year, even as the recession began to bite, employers snapped up the 65,000 visas available in just one day. This year, however, as of Sept. 25–nearly six months after the U.S. government began accepting applications–only 46,700 petitions had been filed.

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]]> http://allthingsd.com/20091029/slump-sinks-visa-program/feed/ 0 http://allthingsd.com/20091020/indian-firms-shift-focus-to-the-poor/ http://allthingsd.com/20091020/indian-firms-shift-focus-to-the-poor/#comments Tue, 20 Oct 2009 20:50:48 +0000 Eric Bellman http://voices.allthingsd.com/?p=16822 Indian companies, long dependent on hand-me-down technology from developed nations, are becoming cutting-edge innovators as they target one of the world’s last untapped markets: the poor.

India’s many engineers, whose best-known role is to help Western companies expand or cut costs, are now turning their attention to the purchasing potential of the nation’s own 1.1-billion population.

The trend that surfaced when Tata Motors’ tiny $2,200 car, the Nano, hit Indian roads in July, has resulted in a slew of new products for people with little money who aspire to a taste of a better life. Many products aren’t just cheaper versions of well-established models available in the West but have taken design and manufacturing assumptions honed in the developed world and turned them on their heads.

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]]> http://allthingsd.com/20091020/indian-firms-shift-focus-to-the-poor/feed/ 0 http://allthingsd.com/20090911/doj-rachets-up-microhoo-review/ http://allthingsd.com/20090911/doj-rachets-up-microhoo-review/#comments Fri, 11 Sep 2009 17:00:46 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=24592

]]> http://allthingsd.com/20090911/doj-rachets-up-microhoo-review/feed/ 0 http://allthingsd.com/20090910/oracle-ibm-come-out-to-play-ee-ay/ http://allthingsd.com/20090910/oracle-ibm-come-out-to-play-ee-ay/#comments Thu, 10 Sep 2009 15:50:21 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=24471 Oracle has a message for CIOs and Sun customers concerned about its plans for Sun’s hardware, Solaris and SPARC businesses: Relax. In a full-page ad published in The Wall Street Journal today, the database giant made a very public commitment to all of them and told customers there’s no reason to consider jumping ship for IBM. “We’re in it to win it,” Oracle CEO Larry Ellison boasts in the ad. “IBM, we’re looking forward to competing with you in the hardware business.”

Welcome news for Sun (JAVA) engineers worried they might lose their jobs as a result of Oracle’s (ORCL) surprise acquisition of the company. Bad news for rivals like Dell (DELL), HP (HPQ), and, of course, IBM (IBM). Clearly, Oracle plans to make their lives a lot more difficult.

]]> http://allthingsd.com/20090910/oracle-ibm-come-out-to-play-ee-ay/feed/ 1 http://allthingsd.com/20090508/google-ceo-i-ain%e2%80%99t-afraid-of-no-feds/ http://allthingsd.com/20090508/google-ceo-i-ain%e2%80%99t-afraid-of-no-feds/#comments Sat, 09 May 2009 00:02:27 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=17300

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