Intel acquires eTextbook distributor Kno, co-founder departs

TechCrunch reports that Kno, a higher-education eTextbook distributor, has been acquired by Intel. It will become part of Intel's global education program run by John Galvin, a Vice President of Sales and Marketing at Intel. The acquisition terms weren't released. (Update, November 11: On GigaOm, Om Malik wrote that according to his sources, Intel acquired Kno for $15 million plus some retention bonuses for employees. Kno's equity investors put $73.4 million into the company, and Kno also took on $20.3 million in debt, so Malik believes it's likely that the investors will see little or no return.)

Kno's initial plan in 2009 was to develop and launch its own higher-education oriented tablet, for which the company would sell eTextbooks. The tablet had dual 14.1" touchscreens and used both touch and stylus input. However, less than a year after the company was founded, Apple introduced its original iPad, which dramatically changed customer expectations for how big tablets should be and how they should work. Kno reportedly only shipped a handful of its tablets to customers in late 2010 before giving up on its proprietary design and selling it to Intel in April 2011 for $20 million (which was structured as an equity investment.) Kno subsequently focused on software, and developed eReaders for the iPad and Android tablets, Windows 7 and 8, and in-browser use. According to Wikipedia, Kno began selling content for the K-12 market in April 2012, but the company isn't a significant player in that market.

Once Kno dropped its proprietary hardware, it became just another eTextbook vendor, and had to compete with far more established players including Follett, Barnes & Noble, Amazon, CourseSmart and Chegg, which was co-founded by Kno co-founder Osman Rashid. To date, eTextbooks have been poorly accepted by college students, and unlike its competitors, Kno doesn't also offer print textbooks, which put it into an even worse competitive situation.

TechCrunch reports that Kno's investors, led by Andreessen Horowitz, have been pushing the company for several months to find a buyer or some other way to exit. One interesting fact is that a difference of opinion between Kno CEO Rashid and Intel VP Galvin led to Rashid's departure when the acquisition was announced; Rashid wanted to continue focusing on the North American market, while Galvin wants to focus on international markets. Given how competitive the U.S. and Canadian markets are, an international focus for Kno makes a lot of sense. However, it's not clear to me what Intel brings to the party, other than money. The company has never sold content successfully and pulled the plug a week ago on its biggest investment in content to date, its OnCue over-the-top video content service. It also appears that Intel did nothing with the tablet designs that it acquired from Kno in 2011. Intel wrote that "The acquisition of Kno boosts (our) global digital content library to more than 225,000 higher education and K-12 titles through existing partnerships with 75 educational publishers." Kno claims on its own website that it has more than 200,000 titles, so its collection is responsible for all or nearly all of Intel's "global digital content library."

My bet is that within a couple of years, Intel will shut down or sell off Kno, just as it's rumored to be selling off its OnCue business to Verizon for a small fraction of what it invested. Intel isn't a content company, its management doesn't understand content, and in my opinion, it should make investments in content companies but leave content production and distribution to others.

Jack Sprat and the semantics of startups

"Jack Sprat could eat no fat.
His wife could eat no lean.
And between the both of them, you see
They licked the platter clean."

It looks like we've got yet another semantic dustup going on in Startup City. A couple of weeks ago it was about ridding the world of the term "fail fast", and last week, a battle broke out between Lean and "fat" startups. The breaker-outer was Ben Horowitz of Andreessen Horowitz, who wrote an op-ed piece for the Wall Street Journal's All Things Digital website titled  "The Case For the Fat Startup." In his article, Horowitz reviewed the history of Loudcloud and Opsware, the companies that he and Marc Andreessen co-founded, and argued, in his words, '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."

Fred Wilson, a well-known New York-based VC, argued in his blog post titled "Being Fat Is Not Healthy" that "I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's (sic) sweet spot." He points out that Loudcloud and Opsware raised $350MM in four rounds of financing, including an IPO, in the space of 15 months. The only reason that they were able to do that was because the companies had been co-founded by Marc Andreessen, and Netscape made a bunch of people rich.

If Loudcloud and Opsware had been founded by two different people, even if their resulting services and products were exactly the same, they would have had a dramatically different outcome, because they would have only been able to raise a fraction of the capital. In statistics, we call something that is so far outside the realm of normal occurence an "outlier". Loudcloud and Opsware were outliers, and using an outlier as proof of the validity of a concept is like saying "I won $10 million in the lottery, so anyone can do it." Technically, yes, "anyone" can do it, but the odds against it are astronomical.

Wilson argues that once you've got your product/market fit right and you're sure that you're pursuing a real market and not a mirage, then go ahead and raise all the money that you can. Loudcloud didn't do that. It raised and spent an enormous amount of money only to learn that it didn't have a good product/market fit. (Horowitz claims that Loudcloud had, in fact, found a viable product/market fit, but then why did he decide to sell it off and focus on software?) It could have learned that it had an insufficiently appealing product/market fit by spending only a fraction as much as it did, and then put its resources into the real market opportunity that it finally identified. And it's true that reaching a product/market fit isn't a binary decision; it takes time. However, I'd argue that you want to floor the accelerator when you've found the right fit, not the first fit.

I worked with Ben at Netscape, and I consider him a friend, but the approach he advocates smacks of both "Ready, Fire, Aim" thinking and the now-discredited "get big fast" philosophy of the dot-com boom. I'd argue that Loudcloud spent the money because it had access to the money. If it hadn't had access to so much money, it would have been run very differently.

When you know that what you're doing is right, by all means raise the money you need to "crush your competition." There are also businesses where the capital investment required to even figure out if you're going in the right direction is so high that there's no alternative to being a fat startup. But for most software companies, being fat won't be a winning strategy for either entrepreneurs or investors.