Groove: Groupware or warware?

NYTMitchell D. Kapor, a personal computer industry software pioneer and a civil liberties activist, has resigned from the board of Groove Networks after learning that the company’s software was being used by the Pentagon as part of its development of a domestic surveillance system. [John Robb’s Radio Weblog]

I met Mitch Kapor when I was an intern at EFF 9 years ago. What strikes you about him is that he seems decent, smart and thoughtful. The spin from the NY Times article is that Kapor found out that Groove was being used at the Pentagon for Admiral Poindexter’s domestic surveillance system, and bailed from Groove’s board. Given Kapor’s background, this doesn’t seem unlikely.

Yet I can’t help but think that there’s more to the story. Specifically, Kapor has been involved in a high profile initiative dubbed Chandler, an open-source development that is intended to bring workgroup software to the masses. While it’s not really a competitor to Outlook, it would obviate the need for Outlook in many small and mid-sized businesses who want to leverage similar functionality without investing in the infrastructure necessary to run Exchange (the server that powers Outlook). I would be willing to bet on a bit of friction between the Microsoft people and Kapor.

Why does this matter? In October, 2001, Microsoft invested $51m for a 20% stake in Groove Networks. Earlier this month, Microsoft led another round of financing – resulting in another $38m pledged to Groove. (For those keeping score at home – Groove has raised a bubble-like total of $155m in venture capital in just over five years.) Indulge me in a bit of back-of-the-envelope calculation. At ~200 employees, Groove is probably in the $12m – $18m revenue range. (Could be as low as $10m, could be $20m+, but I’m guessing I’m in the ballpark.) Let’s assume that with this latest investment the valuation on Groove is around $275m. (I’m guessing that the total venture money represents around 60% of the company.) That means that Groove is valued at nearly 20 times revenues. In any event, Microsoft is not yet a majority shareholder but is presumably in the 40% range. Wouldn’t you like to know who the other major shareholders (other than Ozzie) are? Who sits on the board?

The far more interesting question for me: what are the implications of Microsoft being among the largest shareholders in a company that is providing domestic surveillance software to the Pentagon? And who raises this kind of bubble money in today’s economy?

Here’s my guess: Ray Ozzie has many relationships within the government, and Groove’s COO (Chuck Teubner) “began his career as a programmer, analyst and manager of application development for the Defense Department” and later held an executive management position with Martin Marietta. Microsoft has a few exemptions to their antitrust settlement with the DOJ dealing with national security. Whatever business plan is being shopped around to investors, I guarantee you that Groove is presented as a company with a growing lock on the burgeoning homeland security market. Groove as groupware may be interesting to the average user. Groove as warware appears to be terribly interesting to investors. And guess which constitutency will win? I think that is the lesson of Mitch Kapor’s departure.