As part of my on-going responsibilities I meet with investors (both my current and some potential future investors) throughout the year. My current investors, Columbia Capital, High Country Ventures (the Colorado state technology fund that is managed by local private equity firm Tango), and Dan Caruso meet with me monthly during our monthly board calls. I meet with other potential new investors all the time whenever I travel as it is always good to build relationships with potential partners regardless of whether you are actively seeking additional funding. (For the record, we aren’t actively seeking funding having just closed another round with our existing investors last month – although this could change in the next ~18 months as we look to accelerate our growth even further)

In any case, I’ve talked to more than a half dozen investors that I know over the past couple of weeks and came away with a very consistent theme that I’m not sure the rest of the security industry has internalized yet. The takeaway relates to how Venture Capital firms view recurring revenue.

Monthly Recurring Revenue (MRR), if you come from telecom or Recurring Monthly Revenue (RMR), which seems to be the term used more frequently in the security space, means on-going revenue that you get each month for an on-going service that you provide to a customer. MRR is the new holy grail in the security space. The appeal of MRR is simple, you get to wake up in the morning knowing that you have revenue already coming in for the month without having to go out and sell another thing. Assuming your churn (the rate at which customers decide to stop using/paying for your service) is low, it is much easier to grow revenue when you are in a recurring revenue business b/c you don’t have to start from zero each month and can build on your previous successes. Security providers see the advantages of having a predictable on-going revenue stream and are looking for ways to build that part of their business. There are segments (alarm monitoring for example) that have been MRR businesses for a long time, so this is not entirely new to the space.

The takeaway on how VCs view MRR is that not all MRR is created equal. A number of providers (systems integrators, DVR manufacturers, etc) are trying to build MRR by financing equipment. They take what used to be an upfront purchase (the sale of a DVR and cameras for a couple thousand dollars) and make it a monthly payment instead (the lease of a DVR and cameras for a couple of hundred dollars per month). There are a number of providers out there that are pushing this model heavily as they see the multiples that financial and strategic buyers pay on recurring revenue and that is very appealing to them.

Problem is this type of recurring revenue is not valued as much as the more classic recurring revenue businesses. Why would this be the case? Because leasing equipment is not at all the same as providing an on-going service and doesn’t have the same financial characteristics as other MRR businesses.

First, the only real difference between buying and leasing hardware is the nature of the payments (get cash now or get cash over time) as the customer gets the gear in either case; it isn’t really a true on-going service that is being provided.

Second, the recurring revenue is only really recurring during the lease period, then it ends (most leases have a buyout clause at the end where customer can keep the gear for a nominal amount like $1). This means that three years after a lease is signed the customer can keep using the gear but stop paying until they decide they want to buy new gear. Contrast this with alarm monitoring where the customer pays in perpetuity as long as they want their alarms monitored or with MVaaS where the customer pays in perpetuity as long as they want to use the service.

Third, the scale economics are not as strong and the working capital requirements are worse for equipment financing models. The more leased equipment you sell, the more upfront capital you need as you have to pay upfront for the gear (which you could also lease yourself). The only real scale benefit you get would come from volume discounts. Compare this to a software service where you have a fixed cost of maintaining and supporting the service, but incremental customers and monthly recurring revenue have almost no variable cost. Once you get to scale to cover your relatively fixed costs, all of your incremental revenue drops straight to the bottom line as cash.

The net of this is that VCs place a much higher valuation on true MRR than they do on equipment financing revenue. If you want to create massive shareholder value, focus on building compelling services that customers will want to pay for over time that you can deliver in a very scalable way to drive material on-going profitability. If you want to be a bank/financing company in one of the worst credit environments in recent history, that works too – just don’t expect to get the same multiples on that revenue as you would with a true service.

Envysion regularly visits our customers, providing training and receiving feedback about how to improve Envysion video.

A new customer of Envysion Insight last week had a great story to share.  An area manager had just explained to his employees the full system capabilities and how they will be used.  One of his stores saw immediate 20% increase in sales next three days and had only 1/3 of the inventory discrepancy vs normal for the week.  This made a store profitable that was never profitable before.

When a customer tells you are bringing them value, it makes you feel good!

In a prior post, I asked for suggestions on what the Unintended Consequences would be when MVaaS is introduced into an environment.  Based on the underwhelming response, one may be tempted to conclude that there aren’t any.  Just upside opportunity, right?

In an attempt to start a dialogue on this, let me share one that I’ve heard.  This is not a direct quote, but the sentiments expressed are genuine:

“I need my store managers to be in the stores.  If they have this type of tool, they may spend more time away from their stores, and they will be less effective.”

Point taken, and I’m in agreement that direct line store managers need to be on the scene to be most effective. 

However, allow me the opportunity for a rebuttal.  Even if they are on-site (as they should be), isn’t it fair to assume that they are missing important events?  Wouldn’t it be useful for them to review significant events during off hours to improve their locations go-forward performance?

And what about the others within the organization – CEO, owner, regional manager, etc?  They obviously can’t be multiple places at once.  Wouldn’t they benefit greatly from seeing how their operations are performing? 

Do you have other examples?

I was reminded today of the number of applications and the massive numbers of downloads of iPhone applications out there.  As of this writing nearly 1 billion downloads of iPhone apps have occurred.  That sure is a lot.  It also reminds me of a great quote from Sci-Fi author Kurt Vonnegut:

“It has been theorized that an infinite number of monkeys banging on an infinite number of typewriters would eventually reproduce the written works of Shakespeare. Thanks to the Internet, we now know this is not true.” ~Kurt Vonnegut

No, I don’t have an iPhone, but there’s a few apps I’d like to have. 

IMS has a new report on RVMaS (Remote Video Monitoring and Surveillance).  IMS defines RVMaS as: “…network camera based solutions that allow the end user to remotely view live or recently recorded video in security and non security related applications.”

MVaaS is certainly a piece of that market which IMS claims is about $158M in annual revenue and they estimate will grow to be 3 times that in 2013.

[Note: this is a guest post by Ori Pessach. Ori is one of the most gifted software developers I have ever had the pleasure to work with and fortunately, also our senior-most developer across our video platform]

I was asked to be on a conference call with a customer a few weeks ago. The customer was using our system for a while and it was working well, but then, mysteriously and suddenly, video streaming stopped working. It was a baffling problem – the customer assured us that he did not install any new software on his PC, that every other application that uses the network was still working fine, and we just couldn’t figure out what could be causing that.

I was asked to be on that call because I’m in charge of developing our video player. One of the challenges we had to tackle around the time I joined Envysion two years ago was making video playback rock solid. We install our recorders in many different environments, from small mom and pop stores with the cheapest DSL connection that money can buy to tightly controlled corporate computing environments where the customer’s IT staff is very wary of any new piece of equipment that appears on their network. Our system is designed to work reliably with no need to configure anything on the video recorder – in most cases, installation involves plugging everything in and powering the system up.

Since our client is web based, it works everywhere where our customers can get connected to the internet – if you can browse the web, you can use our application. But there is one exception: The video player is a browser plug in, and it opens its own network connections to stream video from our system, and we found that it can be a little tricky to get that to work reliably. Sometimes, web proxies didn’t like the way we formatted our video stream and blocked it. We found that some anti-virus products handled our network traffic incorrectly and blocked it. We fixed those issues, and did so relatively quickly, largely thanks to a feature of our video player that most of our users will never see – the debug log.

I’ve been writing software for over 20 years, and over that time I came to realize that software can be broadly (and, I have to admit, glibly) categorized into two groups: Software that produces extensive debug logs, and software with mysterious, hard to reproduce bugs that never get fixed.

A debug log is simply a file containing messages that the software outputs during its normal operation. Those messages aren’t meant to be seen by users, but they can be an invaluable tool when tracking down bugs. It’s a bit as if the software is talking to itself while it’s working, describing everything it does, sometimes in great detail.

Why is that important? Remember that we were trying to track down various issues that manifested themselves in different network configurations, on machines running various combinations of software that may or may not have an effect on the problem. In almost all the cases when playback failed, the bug report was identical: The user tries to play video, the player displays a message saying that it’s connecting, but video never plays.

This sort of problem can be very difficult to fix because the developer most likely never sees it. And it happens all the time – take this cnet report of a bug in Adobe’s Flash plugin:

http://news.cnet.com/8301-17939_109-10027752-2.html

and this response from an Adobe employee:

http://blogs.adobe.com/jd/2008/08/firefox_video_dropouts.html

If you’re not in the mood to read two lengthy articles about an obscure bug in Flash, here’s the executive summary: The cnet blog post talks about a bug that causes Flash to stop playing video after 2 seconds, and the Adobe employee’s reply boils down to “it works for us, and saying that it doesn’t work does not a bug report make.”

Which is very true. And also very wrong. It’s technically true, because most bug reports don’t provide enough useful information for a developer to fix the bug, or even know what the bug might be. In most cases, a developer fixing a bug in a piece of software spends a lot more time trying to figure out what’s broken than actually fixing the problem, and it’s a long and tedious process which can involve spending time with the customer trying to understand what it is that they’re doing, and what exactly they mean when they say “it doesn’t work.”

But it’s very wrong, because the customer doesn’t care about any of those things. The customer sent you a check, and he expects the product to work. He doesn’t want to spend time talking to technical support, and he doesn’t want to read obscure error messages over the phone, and he has better things to do than spend any time trying to help us fix the product he paid good money for thinking that it was working fine, because that’s what we told him when we sold it to him.

And this is exactly why I like software that logs extensively – because it makes customers happy. How? Simple – now, if a customer sees a problem with our player, I see the problem, because the player tells me where the problem is. I don’t have to ask the customers and have them repeat their actions while describing them over the phone, because I have a log of their actions and everything that the player did in response to those actions. Typically, once I have the log it takes me a few minutes to figure out what went wrong and offer a workaround.

I was reminded of this a few weeks ago while on the conference call with our customer. I was getting ready to run some diagnostics on the customer’s PC when someone in the room suggested that we use the Big Red Button.

The Big Red Button is a feature in our application that submits an instant ticket report from the application itself. One of the things that the ticket report includes is a short summary of the player log. I helped implement that feature, but I completely forgot about it. Still, there it was, and in less than a minute I was looking right at the problem – the customer had a new firewall that was installed recently, right when our application started misbehaving, and the firewall’s response to our network messages appeared in the player log – the player was being blocked. We were able to offer a workaround on the spot, and to confirm that it works.

We didn’t implement that feature because it was cool. We implemented it because it’s 100% necessary to serving our customers, and to making sure that they’re happy. Our job isn’t done when we cash the customer’s check – it’s just beginning, and that’s exactly why what we do is called Managed Video As A Service.

My last post about a week ago was about how I felt like I finally have a strong enough grasp of where Envysion fits in the broader world of video/security that congregates at ISC West, making the conference seem smaller and more manageable to me than it ever has in the past.  In that post, I promised to follow up with the key differentiator about our service that really hit home with me while I was there.

I spend my time at ISC West (and ASIS as well) doing two primary things: talking to customers/partners and checking out other players in the space.  I did the usual rounds this year and checked out everyone from the traditional PC based DVR manufacturers to the IP camera VMS software guys.  I saw a lot of really interesting solutions and some very advanced capabilities.  One IP VMS company in particular had a really cool demo.  Part of the appeal of the demo was the crazy touch screen projector that they were using for the demo – I hadn’t seen one before but it makes for one really impressive demo (sorry for the tangent there – I clearly had gadget envy)  Aside from the impressive projector, the demo showed how the software could easily manage 100s of cameras and let you create video walls and move doznes of camera views around and do 20 other things with lots of cameras simultaneously that were all very advanced.

A year or two ago this would have concerned me, seeing a bunch of advanced features that we don’t even have on our roadmap.  This year it didn’t phase me a bit.  Why not?  Because it has become increasingly clear to me that we are solving a very different problem for a very different end user/customer than almost every single provider I saw at ISC West.  The majority, if not all, of the video providers at ISC West are making their video solutions better and more powerful for the same small group within the business that utilize video today.  They are targeting the handful of people that are in loss prevention, security, or risk management.  They are adding capabilities to differentiate themselves and add value for this core group of people, hence all the really advanced features.  Our model is the exact opposite.  While our solution is valuable for this same group, our focus is on making video simple and powerful enough that the rest of the company, in addition to LP and security, can use it and derive value from it.  Two very different strategies with very different implications.

If all you care about is the security or LP group you get to deal with power users and don’t have to worry about the scalability of the service or having to manage software on lots of people’s computers.  You can innovate by adding bells and whistles that add incremental value to your existing users.  If, however, you care about the rest of the company, you get to deal with a range of technical abilities (including the very technically illiterate) and you have to worry about an entirely different scale/network challenge and a much higher bar from an expected availability standpoint.

You can argue the merits of both strategies, but there aren’t very many if any other players out there going down our path yet.  This is great for us as we continue to build this category and separate ourselves from the traditional video players.  At some point soon, however, I’d expect some more folks to start to think about the simple question “If you think you get an ROI on your video investment when 10 people in your company can use video, how much of an impact do you think you can have on your business when 1000 people are benefiting?”

Remember those images where if you “defocus” your eyes just right you can see a 3D image jumping out at you on the page?  These “stereograms”

A new imaging chip from Stanford University uses a similar principle to capture an image which includes depth information.  It sounds like they are looking at digital photography, but one can also imagine this technology trickling it’s way into surveillance video.

I’ll caveat this by stating the Today Show is not my top source for hard hitting news. However, they featured a news story this morning that illustrated the power of video surveillance in a residential setting. Would it be possible for these guys to plead not guilty?

Or perhaps, more precisely, sales of tickets to see movies on the big screen are up over 10%  according to a report from NPR.  In the last 7 years of recession since 1965, movie sales have gone up in 5 of them.

Mall Cop out grossed all comedy films of 2008.  Fast and Furious 3 had the biggest April opening sales of all time.

It makes sense.  A two hour $12 get out of the house escape from the depressing headlines of the day.  And with ticket sales up, I wonder what’s happening with popcorn sales?   Well according to Variety, it appears that concessions, where movie theaters make a lot of their money, are down by 15%.