Tuesday May 15, 2007

Diary of a startup - lessons learned

I drove out to Orange County last week to inspect the startup's new offices. They were pretty impressive, on the fifth floor of a newer highrise. They're definitely planning for future growth -- most of the desks were unoccupied. "Monty," the CIO, showed me around. The hardware is up and running, and it hasn't been moved to their co-location center yet, so I got to see it whirring away. I guess computers haven't been visually impressive since the days of big iron -- today they are just a few slim boxes sitting in a rack that you could wheel into the elevator -- but they do retain an undeniable elegance, a sense that they are the embodiment of an enormous amount of intellectual effort.

Monty and his team have done a terrific job integrating everything in a very short time: HP boxes, Cisco routers, VMware virtualization, Windows operating systems and database, BEA middleware, specialized off-the-shelf mortgage applications. They should be funding their first loan this week, only a few days beyond their original four-month schedule.

There are some key lessons that can be drawn from watching the way this startup came together, lessons both for Sun and for prospective entrepreneurs. Naturally, these are only one man's opinion.

The first is that we are in an era of intense specialization. Monty pulled together both hardware and software from many different vendors, choosing what he saw as best of breed every time. A corollary for a multi-line vendor like Sun is that to appeal to this type of buyer, you have to be among the best in every product line that you hope to sell. If you aren't, you're going to get cherry-picked. Pros like Monty don't set much store by one-stop shopping. The reason is obvious: startups are so inherently risky that their IT crews will do anything they can to mitigate risk, and the best way to do so is to buy what you perceive as the best.

The second lesson is that open source software without a vendor behind it has a huge handicap. Monty thought about using Xen for virtualization, but he went with VMware in the end because it was more expedient, and less risky.

The third lesson is that you can outsource just about everything. Their data center is outsourced. Their HR is outsourced. Their CRM is outsourced. Four of their developers are consultants in India. Their loan docs are scanned into the system by a couple of guys who were sent over by their imaging outsourcer. The ability to outsource so much allows a startup to be up and running in a very short time, and to conserve capital by paying at the point of use. To me, the lesson for Sun is that the data center outsourcing business deserves some serious study. If we can do a Black Box so well, why not a Black Building?

The fourth lesson is that the hypervisor is the new operating system. Both VMware and Xen run on bare metal. All of the startup's applications run in separate instances of Windows, but they all run on the same HP box running VMware, not HP-UX. Sun's support of Solaris on VMware and Xen couldn't have come at a better time. IT theorists make much of the idea that cost-saving server consolidation is behind the explosion in virtualization, but my hunch is that the real reason, at least for a startup, is risk mitigation again. You don't wan't the crash of one application to bring down the whole system.

The fifth lesson is that big ticket IT gear is still sold by human beings, not bought from a catalog. Sun tried hard to get Monty's business, but HP tried just a bit harder. Again, I think that risk mitigation is at the heart of this. Monty wound up buying the hardware through an HP channel partner, and one reason was that the channel partner offered some very valuable consulting services that helped ensure the project's success.

The sixth lesson is that speed is critical. Every day without income burns another tranche of the startup's limited capital, and if you burn through too much of it, you're finished. Running out of capital is the biggest risk of all. Monty made some choices based on what could be up and running quickly, and products and vendors that couldn't deliver results quickly were cast aside.  

In the end, it's all about risk. The startup that controls risk effectively will have a better chance of survival, and the vendor that can speedily provide the products and services that mitigate risk will have the best chance at selling to this type of customer.




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