If any venture capital business has been able to couple prudent planning with good fortune, it’s been Crosspoint Venture Partners. The Woodside, CA-based company helped develop Ariba in 1996, before the potential of an Internet business-to-business exchange was apparent. The firm also invested heavily in Efficient Networks, Foundry Networks, and Juniper Networks, as well as Storage Area Network solutions vendor, Brocade.
Seth Neiman, Managing Partner at Crosspoint, has been at the center of much of the company’s success. We spoke with him recently about the direction of the New Economy and how it will affect new business creation during the next few years.
In the first half of this interview, Seth Neiman discussed how his company decides to fund businesses, the shakeout of the dot-com market, and the opportunities still available for Internet companies. In the second half, Neiman talks about changing business models and the direction of the New Economy.
TechRepublic: Do you think that the common analogy of the Internet to the telegraph or the railroad is shallow, or do you think it’s much deeper?
Neiman: With the Internet, the impact is much broader and, for that reason, deeper. It’s not well known that Alexander Graham Bell couldn’t get funding. When you have these big enabling technologies, it’s hard to point at the killer app.
TechRepublic: It’s hard to visualize the scope of what we’re really talking about.
Neiman: Right—the Internet is like that. It was pretty obvious what the railroad would do. It wasn’t obvious what the telephone would do. We’re in a period where, because data communications has become fundamental to business, it’s changing all of business. But it’s also changed all the underlying enterprise-oriented computer technology. What isn’t true is that “everything goes” on the Internet.
TechRepublic: So we need to reach more of a balance between speculation and prudent participation….
Neiman: That’s exactly right. We’re just entering that phase. We’re going to see the continuation of growth and focus on the Internet. We’re just in the first inning of this reinvention; we need to get to the second inning. These are deeper, much more complicated, more technical companies built by focusing on more difficult technologies.
We’re going to see companies that have business models that have never been seen before—companies that are service providers using the broadband infrastructure delivering high-end applications and third-party business relationships and transaction capacity. Complicated business models with unbelievably valuable businesses. Technical service provider businesses that will become intertwined with their customers so deeply that they’ll be fundamental to [those customers’] futures.
Imagine the consultants of the world unified with the good enterprise-software companies of the world, but selling their goods as genuine solutions, not just “I can come in and install it.”
TechRepublic: It’s the old, “Here you go. We installed it. Good luck!”
Neiman: Right, [but] that world is going away. Special services are going to be deeply important, but as a component of long-term service providers that [offer] highly integrated technology, customized for a given business’s needs and integrated along vertical lines with the important relationships in their industry. That is one major theme of our investment strategy.
TechRepublic: It sounds like a place where consulting, a vertical service-provider model, and the underlying technology all converge to provide a complete level of integrated partnership.
Neiman: That’s exactly right. Let me give you a couple of examples. I’m involved with a company called eConvergent, an incredibly capable professional services and technical group out of the blended-media CRM space. They integrate best-of-breed applications and platforms, everything you would think of as CRM and more—and deliver it over T1 and DSL.
Instead of an on-site business that needs 20 customer-service seats that has to be completely integrated into pre-sales and post-sales and all that stuff, they look at it and say, “Oh no, this is a $2 million first-wave project, plus equipment, plus a host of people to run it forever….”
TechRepublic: It becomes a whole department.
Neiman: Right. EConvergent says “No, you’re going to pay by the month, by the seat, and we’ll have you up and running in 90 days.” And they are doing it today. We also think that there are businesses that are more horizontal that will turn into service provisioning, and an obvious one that I’m very interested in seeing projects on is the storage group, which should also be interesting for your CIO group. The demand for storage is the only thing that’s growing faster than the demand for bandwidth. The number of people who can install and manage the storage infrastructure today is woefully small. It’s sort of like the early days of multiprotocol networking, where nobody could build a routed network. So specialized service providers emerged, and we have one that I can’t tell you about yet.
We’re going to see a marketplace for companies [offering] storage equipment [similar to the present] network equipment [marketplace]. We are front and center in the network equipment space—virtually every company is a Crosspoint company—and we think the same thing is going to happen in the storage market. Fifteen years ago, network equipment was pretty generic, much like storage equipment is today. As the market has gotten very large, specialization—which looked like niches or product lines—is now a segment that can support a whole company.
TechRepublic: Or an industry. What do you think of the @Backup online, over-the-Internet storage model?
Neiman: I think service provider storage companies like that are a major new industry. I think that, of the consumer-oriented ones like @Backup, there will be some winners there.
TechRepublic: There’s a lot of conversation about the “start-up versus carve-out” concept—about the advantages of being two guys in a garage or two guys coming out of Cisco with a great idea versus an existing company with brand equity and facilities and third-party relationships. Is that a meaningful distinction, and does one have advantages over the other?
Neiman: It is a meaningful distinction, but I would cast it a bit differently. One of the ways in which the new business creation and venture capital world has matured in the last five years is that with the invention of the Internet, there are now many enormous businesses, such as TheSupply.com or Rooster.com (which is the Cargill grain exchange), for which the intellectual capital is not the dominant theme in the creation of the business. This is not to take anything away from [those businesses], but the creation of the business is really about whether you can get all the current players to the table so that you can get this distribution network onto the Internet. The seed crystal to make something happen is critical mass as opposed to intellectual insight.
TechRepublic: There really is no intellectual property; it’s more about relationship capital than it is about intellectual property.
Neiman: Again, I would shape it a little bit. [The corporations] have some very hard technological hurdles to cross, but they’re mostly about deployment as opposed to invention. They’ll be huge, but they’re created by activity that is more like what a merchant bank does: Let’s get all the partners together, let’s try to work out a very complex deal, let’s keep a joint venture on track, and let’s go rebuild our industry. These are legitimate, great businesses, but the seed factor, critical mass, and the economics are very different.
There also are enormous opportunities for what has been the mainstay of new business creation in the technology world forever, which is two guys and a dog with a brilliant idea.
In the top-tier firms like ourselves, that’s happening every day. Those people who think that corporate venture capital is going to swamp venture capital...that’s a ridiculous notion. The corporations are great at one thing, but really honest business creation is a different world.
We’re in an era where firms are doing both. We obviously have done a huge amount of the intellectual, capital-oriented things, but because of our dominant position in B2B, we’ve had the opportunity to do these critical-mass projects with firms like Cargill and IBM. We, over the long haul, will stick to that deep-value creation that comes from technology and intellectual capital. I think you’ll see great firms that focus on the critical-mass capital.
TechRepublic: Any closing comments that CEOs, CIOs, and IT professionals would be interested in?
Neiman: The CIOs of the world are only going to increase in their importance and stature. If you think about the service provider model that I described, the people that put this together and run it become very fundamental, even more than they have been with network infrastructure and high-end software. They become very important business leaders, and that’s something that I think they should hear.
Did you spin off a company from an existing business, or did you start your enterprise as “two guys in a garage?” Share your experience with us in an e-mail or begin a discussion below.
Rick Freedman is the author of three books on IT consulting, including "The IT Consultant." Rick is an independent consultant and trainer, working, through his company Consulting Strategies Inc., to help agile teams and organizations understand agile practices and migrate successfully.