A Look at the Zendesk S-1 (IPO)

I thought I’d take a quick read of the Zendesk S-1 today, so here are my real-time notes on so doing.  Before diving in, let me provide a quick pointer to David Cummings’ summary of the same.

My notes:

  • 40,000 customers in 140 countries
  • 2012 revenues of $38.2M
  • 2013 revenues of $72.0M, 88% growth
  • 41% of revenues from international.  (High for a SaaS company at this size, but makes sense given their roots.)
  • Net loss of $24.4M and $22.6M in 2012 and 2013, -30% net loss in 2013
  • Zendesk approach:  beautifully simple, omni-channel, affordable, natively mobile, cloud-based, open, proactive, strategic.  They do this well.  (I’ve always viewed them as a very well run, low-end-up market entrant, and we are very happy customers at Host Analytics.)
  • Founded in Denmark in 2007.
  • 115M shares outstanding anticipated after the offering with seemingly another 40M in options under various options and ESOP plans.  (Seems like a lot of dilution looming.)
  • 65% gross margins.  (Though they don’t break out subscription vs. service which probably depresses things a tad.)
  • 20% of revenue spent on R&D.  (Normal.)
  • 52% of revenue on S&M.  (High, particularly for freemium which is notionally low-cost!)
  • 22% of revenue on G&A  (Normal to high, probably due to IPO itself.)
  • $53M in cash at 12/31/13
  • Headcount growth from 287 to 473 employees in year ended 12/31/13, up 68%
  • They have experienced security breaches:

We have experienced significant breaches of our security measures and our customer service platform and live chat software are at risk for future breaches as a result of third-party action, employee, vendor, or contractor error, malfeasance, or other factors. For example, in February 2013, we experienced a security breach involving unauthorized access to three of our customers’ accounts and personal information of consumers maintained in those customer accounts.”

  • “[We are] highly dependent on free trials.”  (These guys define freemium model for enterprise software in my opinion.)
  • S&M org grew from 85 to 165 employees in period ending 12/31/13.
  • Owe $23.8M on a credit facility.  (Rare to see this much debt, but probably a smart way to reduce equity dilution.)
  • The three principles that drive the founders:  Have great products.  Care for your customers.  Attract a great team.  (Beats “Don’t Be Evil” any day in my book.)
  • Dollar-based “net expansion rate” (closest thing they discuss relative to renewals or churn):

    “We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and churn by our base revenue. We define our base revenue as the aggregate monthly recurring revenue of our customer base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and churn as the aggregate monthly recurring revenue of the same customer base included in our measure of base revenue at the end of the annual period being measured. Our dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that we identify involving the transfer of agents between customer accounts, consolidation of customer accounts, or the split of a single customer account into multiple customer accounts. [...] Our dollar-based net expansion rate was 126% and 123% as of December 31, 2012 and 2013, respectively. We expect our dollar-based net expansion rate to decline over time as our aggregate monthly recurring revenue grows.”

  • $66M accumulated deficit
  • Have data centers in North America, Europe, and Asia
  • 4Q13/4Q12 growth rate = 83% compared to 2013/2012 growth rate = 88%.  (Suggests growth is gently decelerating.)
  • Cashflow from operations in 2013 = $4.0M.
  • But they had -$24.1M in cashflow from investing activities.  (This is confusing because it’s a mix of items but broken into $12.4M in “marketable securities, property and equipment,” $7.1M to build data centers, and $4.7M in capitalized software development.  I’m not an accountant but if you ask me if “the business” is cashflow positive, the answer is no despite the $4.0M positive cashflow from operations. Building data centers and developing software, regardless of accounting classification, are all part of running the business to me.)
  • I am surprised they capitalize R&D.  Most software companies, far as I know, don’t.

zendesk common fmv

 

The FMV of the common stock is depicted above, by my math an annual 68% appreciation rate.

  • Huge number of leads are organic:  “the quarter ended December 31, 2013, 70% of our qualified sales leads, which are largely comprised of prospects that commence a free trial of our customer service platform, came from organic search, customer referrals, and other unpaid sources.”
  • SVPs listed (CFO, R&D) earn $240K base + $40K bonus
  • Automatic 5% share expansion / “overhang” built into the stock option and incentive plan.  Pretty rich in my experience and haven’t noticed anyone else doing it automatically before.
  • Letting execs buy stock with promissory notes … hum, I thought that went out with leg warmers.  Both loans were paid off by 12/31/31 and maybe that’s why.
  • CEO will own 7.1% of shares after the offering, including 4.3M (of the 8.1M beneficially owned) granted as options at the 2/14 board meeting.  (Seems odd to me; a huge option grant right before the IPO.  Hum.)
  • Nice banker line-up:  Goldman Sachs, Morgan Stanley, Credit Suisse, Pacific Crest
  • Raised $71M in preferred equity / venture capital
  • They do monthly, quarterly, and annual invoicing.  (Surprised they offer the short terms, particularly monthly.)
  • $6.5M in advertising expense in 2013
  • $11.4M in capitalized “internal use” software on the balance sheet at 12/31/13
  • They paid $16M for the Zopim (live chat) acquisition
  • Ticker symbol:  ZEN

If Marc Benioff Carried a Rabbit’s Foot, Would You?

In business we have a sad tendency to copy success blindly.

I remember the first time I read about this I didn’t even understand what I was reading:

“Nothing in business is so remarkable as the conflicting variety of success formulas offered by its numerous practitioners and professors.  And if, in the case of practitioners they’re not exactly “formulas,” they are explanations of “how we did it” implying with firm control over any fleeting tendencies toward modesty that “that’s how you ought to do it.”  Practitioners filled with pride and money turn themselves into prescriptive philosophers, filled mostly with hot air.”

Through blind luck, I’d had the good fortune that Theodore Levitt’s The Marketing Imagination (1983) was the very first book I read on marketing.  That paragraph — the opening paragraph of the book — stuck with me in some odd way, but it would be years before I truly appreciated what it said.

I was business-educated in the In Search of Excellence (1982) era and, while I suppose the same approach had been happening for years, In Search of Excellence was about as unscientific as they come.  The authors, Tom Peters and Bob Waterman, started out with a list of 62 companies identified by asking their McKinsey partners and friends “who’s doing cool work,” cut the list rather arbitrarily to 43 (excluding, for example, GE — but retaining Wang, Atari, and Xerox), and then “derived” eight themes which they thought were responsible for their success.

That was the mentality of the time.  Arbitrarily identify a set of companies you deem “cool” and then arbitrarily come up with things they have in common.  (And that’s not to mention the allegations of “faked data.”)

So I was happy when Jim Collins came along in 2001 arguing that he was bringing a more scientific approach in Good to Great.  Arguing that seeking only common traits could you lead to discoveries such as “all great companies have buildings,” Collins strove to differentiate good companies from great ones.  Starting with 1,435 companies and examining their performance over 40 years, Collins’ team identified 11 companies that became great along with 11 comparison companies in the same markets that did not.

While Collins’ thinking may have been clearer than Peters’, his luck was no better. Seven years after the book was published, several “great” companies like Circuit City were in deep trouble, Fannie Mae required a Federal bailout, and only only one of the eleven companies, Nucor, had dramatically outperformed the stock market.  Amazingly, despite the poor to lackluster performance of the “great” companies, it remains a best-seller to this day, ranking #5 on Amazon in management at last check.

Even when trying to avoid it, fake science and, in particular, survivor bias had struck again.  Thank goodness Phil Rosenzweig came along in 2009 with The Halo Effect, describing it and eight other business delusions from which managers suffer.  Here’s a nice excerpt:

On the way up to a stock market value of half a trillion dollars, everything about Cisco seemed perfect. It had a perfect CEO. It could close its books in a day and make perfect financial forecasts. It was an acquisition machine, ingesting companies and their technologies with great aplomb. It was the leader of the new economy, selling gear to new-world telecom companies that would use it to supplant old-world carriers and make their old-world suppliers irrelevant. Over the past year, every one of those characterizations has proved to be false.

As I often said about running analyst relations at Business Objects: “when the stock was going up everything I said was genius, when we missed a quarter, everything I said was suspect.”  This is, in my estimation, the real reason why some bad-egg companies such as bubble-era MicroStrategyFast Search & Transfer, or Autonomy (not yet settled) are tempted to inflate results.  I think it’s less about inflating valuation, and more about inflating the company’s perception of success in order to “validate” their strategy going forward.

But, to Levitt’s point at the start of this post, we are swimming in advice from successful practitioners.  

We have advice from Sequoia billionaire Mike Moritz who says the best advice he ever received was to “follow his instincts” which, as it turns out, works swimmingly well if you happen to have his instincts.  (And perhaps less so well, if you don’t.)

We have advice from billionaire Peter Thiel, who sounds vaguely like Timothy Leary with the drop-out part of turn on, tune in, drop out.

We have advice from Steve Blank, one of the more reasonable and thoughtful sources out there, and someone, in my opinion, to be admired for his commitment to giving back intellectually to Silicon Valley.

We have a plethora of advice from Marc Benioff, for example, the 111 “plays” in Beyond the Cloud, including “make your own metaphors” and “cultivate select journalists.” 

Who knows, maybe “beware of billionaires bearing business advice” may become the new “beware of Greeks bearing gifts.”

Finally, we also have advice from, dare I say, Kellblog who, while not a billionaire (yet), has opinions as tempered by experience and as firmly held as any of the above — and often as unscientific.

Given this sea of advice, how do I recommend processing it?  In the end, as Rosenzweig reminds us, in the absence of real silver bullets and magic formulae, we need to think for ourselves.  So every time I hear a successful businessperson bearing business advice I remind myself of one key fact — the plural of anecdote is not data — and ask myself two key questions:

  • Do I believe that he/she was successful because of, in spite of, or completely independent of this advice?
  • If Marc Benioff carried a rabbit’s foot, would I?

Strategic Focus: I’m Just Trying to Get My Space Together

As a long-time Grateful Dead fan, I have to say that I was advantaged in understanding how the Blown to Bits problem would affect digital media businesses.  You see, for years, the Dead had changed the business model of the music industry, choosing to use “albums” as a loss leader and choosing to make money on live concerts, playing some 2,300 concerts together, not to mention those done individually be band members. (Think:  Jerry Garcia at the Keystone Berkeley.)

steal your face

The Dead even had a “tapers” section at most concerts and sometimes could be heard literally stopping the show to allow someone to move back their microphones.  The Dead have a valid claim to “we did Freemium 30 years before Freemium was cool.”

While I won’t go as far to say that Everything I Learned about Business, I Learned from the Grateful Dead (a good book, by the way, that takes a top ten set of lessons from “the long, strange trip”), I do believe the Dead were both musical and business model innovators.

Improvisation as strategy was profiled in Competing On The Edge:  Strategy as Structured Chaos, published by Harvard Business School press.  Excerpt:

The Grateful Dead met this challenge through improvisation [...] as distinguished by two key properties:  first, performers intensely communicate with each other in real time [...] second, they rely on a few very specific rules, such as who plays first, what are the permitted chords, and who follows whom.

While I’m riffing on the Dead, I should probably also mention Marketing Lessons from the Grateful Dead, a great booking on topics like community, branding, customer centricity, teamwork, category creation, technological innovation, disruptive business models, disintermediation, and giving back.  The Dead, indeed, were innovators in all these areas and the book is well worth reading.

My favorite Dead-related quote, however, comes not from that book but  from The Grateful Dead Movie, in a famous scene where a completely zonked head is ambling around outside the concert and tells a security guard the inimitable:

“I’m just trying to get my space together, so that I can go into the show.”

..

I always think of this guy whenever I talk to a startup about strategy.  Why?  Because startups are very much about trying to get your space together.

  • What space do you want to be in?
  • Against whom do you want to compete?
  • Where do you draw the boundaries on your space?
  • What adjacent spaces, if any, do you want to incorporate into your space?
  • In what adjacent spaces do you want to partner?
  • How do you see the boundaries on your space evolving over time?

My meta-answer to these questions is “the world is a very large place.”  How does that relate?  In two ways.  It means first that you better define your space in such a way that you are truly world-class within it — and not using world-class as a nice sounding compound adjective, but really grokking its meaning:  what can truly be best in the world at doing?  Second, it means that because the world is a big place that you can turn what might appear to be a small niche into a  very big business if you are truly the best at it in the world.  So don’t be afraid to focus.

Most startups forget focus too early and delude themselves into thinking they can be world-class in across a number of areas.  Take enterprise performance management (EPM) — the space in which Host Analytics competes –for example.  EPM is a $4B market for financial analytic applications that is adjacent to the broader $13B business intelligence (BI) market.  Some of our competitors consider themselves addressing the (incorrectly calculated) “$33B BI market” and are either building or acquiring products in the broader BI space?  It sounds good from a total available market (TAM) perspective.  Wow!  You’ve tripled your TAM.

But think for a minute — what are the odds that  your cheaply-acquired or hastily built BI tools are world-class?  None.  So all you’ve really done is dilute your focus on EPM by complementing it with some third-tier BI.  A far better solution (and the one we follow at Host Analytics) is to partner with someone else who is spending all their energy focused on being world-class in the adjacent space.  In our case, that partner is Birst who is focused on being world-class at cloud BI.

So if you’re thinking of starting a company, ask yourself:  what can we really be world-class at doing?

Answering that question is the only way to get your space together, before you go into the show.

Burn Baby Burn: A Look at the Box S-1

I’m pretty busy this week so I was hoping not to dive into the Box S-1, but David Cummings’ excellent summary served only to whet, as opposed to satiate, my appetite.

Perhaps it was the $168M FY14 operating loss.  Maybe it was the $380M in financing raised during the last three years.  Or the average quarterly burn rate of $23M.  But somehow, I got sucked in.

I just had to know their CAC ratio.  Of course, it’s not going to be easy to calculate.  While they give us quarterly S&M expense, that’s only half the equation; we’re going to have a figure out –as best we can — quarterly new annual recurring revenue (ARR).

Billings as a Sales Metric

While many SaaS companies don’t disclose “billings,” Box does — but on an annual basis only — in their S-1.

[Click on the images to see full size.]

box billings

..

Billings is an attempt to triangulate on new sales (or bookings) in a SaaS company.  The standard way to calculate billings is to add revenue plus change in deferred revenue.

The idea is that if you want to know how “sales” went during a given period, then revenue is not a great indicator because, in a SaaS company, revenue is an indicator of how much you sold in prior periods, not the current one.  So you look at deferred revenue trying to pick up the volume of new orders.  The problem is that things quickly get very complicated because (1) deferred revenue is moving both down (as past deals convert into revenue) and up (as new deals are signed) and (2) deferred revenue itself is limited only to deals that are prepaid — if a company does a constant business volume but suddenly starts doing a lot of two-year prepaids, then deferred revenue will skyrocket and if, for example, hard economic times drive loyal customers to ask for bi-annual billing, then deferred revenue will plummet, all without any “real” change in underlying subscription business.  In addition, multi-year non-prepaid deals are invisible from a deferred revenue perspective (because there’s nothing, i.e., no cash prepayment, to defer).

In short, any metric built upon deferred revenue is only as a good as deferred revenue at reflecting the business.

To demonstrate the relationship between billings and new ARR, I built a model which assumes a SaaS company that starts from scratch, increases new ARR added each quarter by $500K (i.e., $500K in its first quarter, $1M in its second, $1.5M in its third), does only one-year prepaid deals, and has a 90% renewal rate.  Here’s what happens.

(You can download the spreadsheet with Box financial summary and the full version of the model here.  Be sure to download as an Excel file, not a PDF.)

generic model

..

While in year one, billings is equivalent to new ARR, as you build up the renewals base, it contributes more to revenue and muddies thing up.  For a company of the above size, growth, and renewal rate, the ratio of new ARR to billings ends up 0.4.

When you take this same model and (manually) force fit the new ARR numbers to try approximate Box’s revenue and billings from 2012-2014, you get:

box like model

..

A CAC of ~1.6

In this case (and given my assumption set) you end up with a new-ARR/billings ratio of 0.6.  To make life easier, I also calculated a new-ARR/revenue ratio (see the full sheet), which ends up around 0.8.  I’ll use to this number to calculate my CAC, which comes out to between 1.5 and 1.8.  While not quite an idyllic 1.o to 1.2, it’s well below 2.0 and helps explain why Box has been able to raise so much money:  their growth has been deemed scalable.

Billings = Ending ARR

In reviewing my models, it’s hard not to notice that billings for a period equals ending ARR for that period.  This turns out to be true under my assumption set of subscription-only (no services), one-year deals only, and everything pre-paid.  Why?  Because for any deal taken at any point during the year, we will recognize some percent of it (X) and the rest (Y) will go to deferred revenue.  The difference between X and Y changes across the year but X+Y= the deal size at all times.

This is not true when you have consulting or do multi-year prepaid deals (which can make billings > ending ARR).  It’s also not true when you do semi-annual billing (which can make billings < ending ARR).

If you assume for any given company that these factors are roughly constant, then even though uniformly inaccurate, it does provide a simple way to approximate new ARR:  take the difference in ending ARR two periods, add a churn assumption, and bang you have new ARR during the period.

Key Metrics, Cashflow, and the P&L

Here are some summarized key metrics (using yellow to highlight points of interest).

box key metrics

..

Of note:

  • Year over year growth, while high at 97% is slowly decelerating.
  • Gross margins are nice at nearly 80%
  • Operating expenses are massive:  278% of sales in 1Q12 down to “only” 182% in 4Q14.
  • S&M expense are a seemingly very high 121% of revenues.  This looks bad, but to really know what’s going on we need to examine the CAC, which looks pretty good.
  • Return on sales is -112%
  • That burn rate sure grabs you:  $22M per quarter

In many ways you see a typical “go big or go home” cloud computing firm, burning boatloads of cash but acquiring customers in a reasonably efficient manner and doing a nice job with retention/cross-sell/up-sell as judged by their retention numbers. When you look big picture, I believe they see themselves in a winner-take-all battle vs. DropBox and in this case, the strategy — while amazingly cash consumptive — does make sense.

Here is  a look at cashflow and billings:

box cashflow and billings

..

And last, but certainly not least, here is the P&L:

box p+l

..

Of note:

  • I’m always amazed  by the R&D spend of seemingly simple consumer services.  They spent $46M in R&D last year … on what?
  • The $171M in S&M expense sure grabs your attention
  • As does the $168M net loss!

Burn baby burn!

[Revised and expanded 3/27/14 9:18 AM]

# # #

I am not a financial analyst.  I do not make buy, sell, or hold recommendations on stocks.  See my FAQ for affiliations and disclaimers.

To Pre-Meet Or Not To Pre-Meet: That Is The Question

I once asked one of my board members which CEO ran the best board meetings across his portfolio companies.  His answer was, let’s call him, Jack.  Here’s what he said about him:

  • Jack got the board deck out 3-4 days in advance of the board meeting
  • Jack would call him — and every other board member — 2-3 days before each board meeting and walk through the entire deck and answer questions, taking maybe 2 hours to do so.
  • Board meetings with Jack would go very quickly and smoothly because all the questions had been asked in advance.

When I heard this, I thought, well, I have a few issues with Jack:

  • He spends a lot of time managing his board instead of running his business.  (I guess he got his CEO job by managing-up.)
  • He completely violates my “do it in the meeting” principle by having a series of pre-meetings before the actual meeting.

While I may have my doubts about Jack, others don’t seem to.  Consider entrepreneur and VC Mark Suster’s recent post, Why You Shouldn’t Decide Anything Important at Your Board Meetings.  Suster straight out recommends a 30 minute pre-meeting per board member.  Why?

  • Agenda input so you can adhere to the Golden Rule of Board Meetings:  “no surprises.”
  • So you can “count votes” in advance as know where people stand on important and/or controversial issues.
  • So you can use board members to convince each other of desired decisions.
  • Ultimately, because in his opinion, a board meeting is where you ratify decisions that are already pre-debated.

OK, I need to chew on this because, while practical, it violates every principle of how I think companies should conduct meetings — operational ones, at least.  When it comes to operational meetings, nothing makes me grumpier than:

  • Pre-meeting lobbying
  • Post-meeting “pocket vetoes”

My whole philosophy is that meetings should be the place where we debate things and make decisions.  Doing everything in advance defeats the purpose of meeting and risks encouraging political behavior (e.g., “if you vote for my bridge in Alaska, I’ll vote for your dam in Kentucky”), with managers horse-trading instead of voting for ideas based on their merits.

The only thing worse that teeing up everything in advance is what one old boss called the “pocket veto,” where a manager sits in a meeting, watches a decision get made, says nothing, and then goes to the CEO after the meeting and says something akin to “well, I didn’t feel comfortable saying this in the meeting, but based on point-I-was-uncomfortable-raising, I disagree strongly with the decision we reached.”

I remember this happened at Business Objects once and I thought:  “wait a minute, we’ve flown 15 people from around the world (in business class) to meet at this splendid hotel for 3 days — costing maybe literally $100,000 — and the group talked for two hours about a controversial decision, came to resolution, and made a decision only to have that decision overruled the next day.”  It made me wonder why we bothered to meet at all.

But I learned an important lesson.  Ever since then, I flat refuse to overrule decisions made in a meeting based on a pocket veto.  Whenever someone comes to me and says, “well, I didn’t feel comfortable bringing it up in the meeting (for some typically very good sounding reason about embarrassing someone or such), but based upon Thing-X, I think we need to reverse that decision,” I say one thing and only one thing in response:  “well, I guess you should have brought that up in the meeting.”

You see, I believe, based on a bevy of research, that functional groups of smart people make better decisions than even the smartest individuals.  So my job as CEO is to then assure three things:

But I’ve got a problem here because while we know that boards like pre-meetings, operationally I am opposed to both pre- and post-meetings.  Would it hypocritical for to say that pre-meetings are OK for me to conduct with the board, but that managers internally should avoid them?

Maybe.  But that’s what I’m going to say.   How can I sleep at night?  Because I think we need to differentiate between meetings with a decision maker  and meetings of a decision-making body.

Most people might think that the pricing committee, product strategy committee, or new product launch committee are democratic bodies, but they aren’t.  In reality, these are meetings with a decision maker present (e.g., the CEO, the SVP of products) and thus the committee is, perhaps subtly, an advisory group as opposed to a decision-making body.  In such meetings, the decision-maker should want to encourage vociferous debate, seek to prevent pre-meetings and horse-trading, and eliminate pocket vetoes because he/she wants to hear proposals debated clearly and completely based on the merits in order to arrive at the best decision.

However, board meetings are different.  Boards truly are a decision-making bodies ruled by one-person, one-vote.  Thus, while I reject Suster’s advice when it comes to conducting operational meetings (which I believe are inherently advisory groups), I agree with it when it comes to decision-making bodies.  In such cases, someone needs to know who stands where on what.

And that person needs to be the CEO.

The Old “Don’t Bring Up a Problem Unless You Have a Proposed Solution” Rule

There’s a rule out there, undoubtedly made long ago, and circulated widely as conventional wisdom that in the workplace you should never bring up a problem unless you have a proposed solution.

For example, consider the following excerpt from this Inc Magazine article, Eight Things Great Bosses Demand from Employees:

Rule 6:  Provide Solutions, Not Complaints.  Complainers are the bane of your boss’s existence. Nothing is more irritating or more boring than listening to somebody kvetch about things that they’re not willing to change.  So never bring up a problem unless you’ve got a solution to propose–or are willing to take the advice the boss gives you.

The argument goes that if you just bring up problems, then you’ll be seen as a whiner, as a complainer, who drones on endlessly about problems that can’t be solved or that no one knows how to solve.

The question is:  is this a good rule?

Let’s take an old example from my career.  It’s 1990, you work at Ingres which is $250M division of ASK, and you compete in the relational database market against Oracle, who is about $1B.  You are getting your ass kicked up and down by Oracle in the RDBMS market.  Management is silently executing a retreat strategy into the application development tools market and worse yet, your parent company, ASK, is betting all-in on a new version of Ingres 4GL that only works on the Ingres DBMS for their next-generation ERP system.

Here are some darn good problems:

  • Oracle is killing us in the DBMS market.
  • We are moving into tools when “runtimes” are increasingly free and there is no money to be made
  • We are double-downing on a proprietary, unstable application development environment instead of using standard tools
  • ASK is suffering from a serious escalation of commitment problem and should not double down on a dying database business.

If you followed the “don’t bring up a problem without a solution” rule then you could never talk about any of these problems.  And they are only the most important problems facing the company (and that would ultimately lead to its undoing).  What if, for example, you ran sales and had no idea what application development tools the company should be using, but simply knew which it should not?  Should you make up a bad solution just so you can talk about the problem?

I can take more recent examples of similar no-easy-solution problems:

  • What do we do about the Internet?  (At Business Objects in 1996, when we were 100% Windows client applications.)
  • What do we do about NoSQL?  (At MarkLogic in 2009 when we were a closed-source non-relational DBMS into a strong open-source trend.)
  • What do we do about Zendesk? (At Salesforce in 2012 after acquiring Assit.ly and mistakenly seeking synergy vs. trying to use it in a major blunting initiative.)

Let’s look beyond the business environment and see some problems that we couldn’t talk about if we followed the rule:

  • Mid-East peace
  • Cancer
  • Global warming

“Sorry Jimmy, if you don’t know the solution to global warming then you shouldn’t bring it up because you’ll just be whining.”

Obviously, I think it’s a stupid rule.

The correct rule is:  don’t whine.

It turns out the hardest problems, the most important problems, often have no obvious solution.  So if you prohibit discussing them, you cripple our organization and limit discussion only to easier, more tactical matters, akin to re-arranging the deck chairs on the Titanic.

PayPal President’s Ream-the-Team Email: Good or Bad Leadership?

As you may have heard, PayPal president David Marcus recently zipped off a zinger of an email to company employees which was leaked to Business Insider and featured in this story:  PayPal Chief Reams Employees — Use our App or Quit.

Some highlights:

PayPal It, our program enabling you to refer businesses that don’t accept PayPal has seen the least amount of leads in *absolute* and relative terms vis-a-vis ALL other locations. Offices with under 100 employees beat us by an order of magnitude (total PayPal it leads to date: 126,862, San Jose leads: 984…).

Product usage data is similar. Employees in other offices hack into Coke machines to make them accept PayPal because they feel passionately about using PayPal everywhere. I don’t see these behaviors here in San Jose. As a matter of fact, it’s been brought to my attention that when testing paying with mobile at Cafe 17 last week, some of you refused to install the PayPal app (!!?!?!!), and others didn’t even remember their PayPal password. That’s unacceptable to me, and the rest of my team, everyone at PayPal should use our products where available. That’s the only way we can make them better, and better.

[...]

In closing, if you are one of the folks who refused to install the PayPal app or if you can’t remember your PayPal password, do yourself a favor, go find something that will connect with your heart and mind elsewhere. A life devoid of purpose, and passion in what you do everyday is a waste of the precious time you have on this earth to make it better.

While I think it’s easy to agree that companies should “eat their own dog food,” it’s harder to decide whether this email constitutes good or bad leadership.

Here are some things to ponder in answering that question.

  • In this day and age, there is a 100% chance that this email will leak.  I argue that every all-hands CEO email must now be written as if it is going to be leaked.  While perhaps a surprise 5-10 years ago, these leaks are simply a realty today.  The CEO should know that.
  • While we all want our employees to use our products, should they not do so because they are good products and they want to use them as opposed to being forced to at gunpoint?
  • By the way, using only the company’s products (and not our competitors) creates an insulation from the market such that the company may lose tough with realty.  (Think:  Detroit auto-makers giving execs new company cars every year.  They never had to deal with the vehicles poor aging/maintenance and never drove the competition for comparison.)  The PayPal cafeteria should accept Square and Google Wallet on these grounds.
  • Would a better approach have been to “seek first to understand” and learn why employees weren’t using their accounts?  (Ditto for the iPhone app.)  After all, you can force your employees to use PayPal but you can’t force the other 99.999% of the market.  Why not use  your employees — who should be naturally predisposed — as a test lab.
  • Could he not have provided an incentive (say a 10% discount) at the cafeteria if you use PayPal.  Then it would be really interesting to see why people weren’t using it.
  • Does anyone honestly believe that if everyone uses the products they will get better?  It’s a quaint idea, but if one of the junior marketing events people has some product feedback, does PayPal really run the kind of organization where it’s going to be listened to?  If he’s going to say “everyone should use the products so everyone can make them better,” then he better put wood behind the product-input arrow (e.g., an internal “ideas community” — today PayPal seems to lack even an external one).
  • Does this email actually motivate anyone or just make the CEO look frustrated and desperate?
  • To the extent San Jose employees are unexcited about the company and its products, will this email do anything to improve that?
  • Finally, should telling people to quit if they don’t use the products accomplish anything?  In complacent companies it’s the non-complacent who quit.  The complacent generally need to be fired.  So why yell at everyone about complacency — it irritates the non-complacent and has zero effect on the complacent (“oh, David’s yelling again; wonder when he’ll stop.”)

That’s my take.  Overall, this email was a terrible idea.  What’s yours?

Is Salesforce / Siebel a Classic Disruption Case?

Like many others, I have often used Salesforce / Siebel as a classic example of Innovator’s Dilemma style disruption.  Several months ago, in response to this article about Host Analytics, I received a friendly note from former Siebel exec and now venture capitalist Bruce Cleveland saying roughly:  “nice PR piece, but the Salesforce / Siebel disruption story is a misconception.”

So I was happy the other day to see that Bruce wrote up his thoughts in a Fortune article, Lessons from the Death of a Tech Giant.  In addition, he posted some supplemental thoughts in a blog post Siebel vs. Salesforce:  Lessons from the Death of  a Tech Giant.

Since the premise for the article was Bruce gathering his thoughts for a guest-lecture at INSEAD, I thought — rather than weighing in with my own commentary — I’d ask a series of study guide style questions that MBA students pondering this example should consider:

  • What is disruption?  Given Bruce’s statement of the case, do you view Siebel as a victim or disruptive innovation or a weakening macro environment?
  • Are the effects of disruptive innovation on the disruptee always felt directly or are they indirect?  (e.g., directly might mean losing specific deals as opposed to indirect where a general stall occurs)
  • What does it feel like to be an executive at a disruptee?  Do you necessarily know you are being disrupted?  How could you separate out what whether you are stalling due to the macro environment or a disruptive innovator?
  • What should you do when you are being disrupted?  (Remember the definition of “dilemma” — two options and both are bad.)
  • While not in the article, according to friends I have who worked at Siebel, management could be quoted in this timeframe as saying “Now is the time to be more Siebel than we’ve ever been” (as opposed to emulating Salesforce).  Comment.
  • What should Siebel have done differently?  Was the over-reliance on call center revenue making them highly exposed to a downturn in a few verticals?  How could they have diversified using either SFA or analytics as the backbone?
  • What should Siebel have done about the low-end disruption from Salesforce?  Recall that in 2003 Siebel launched Siebel CRM On Demand as an attempted blocking strategy in the mid-market and acquired UpShot as a blocker for SMB.  How could Siebel have leveraged these assets to achieve a better outcome?
  • To what extent should external environment variables be factored in or out when analyzing disruption?  Are they truly external or an integral part of the situation?
  • To what extent do you believe that Oracle’s acquisition of Siebel left Salesforce unopposed for 8 years?  To what extent was that true in the other categories in which Oracle made large acquisitions (e.g., HCM, middleware)?
  • After hearing both sides of the argument, to what extent do you believe the reality of the case is “Salesforce David slaying Siebel Goliath” versus “Siebel getting caught over-exposed to a macro downturn, selling to Oracle and giving the CRM market to Salesforce?”   In effect, “they didn’t kill us; we killed ourselves.”

I deliberately will offer no answers here.  As an old friend of mine says, “there are three sides to every story:  yours, mine, and what really happened.”  Real learning happens when you try understand all three.

10 Things Never To Do at a Business Dinner

Business travelers spent $260B in 2012 with food services being the #1 source of expense.  Salespeople love dinners with customers and prospects. Marketers love networking dinners.  We have customer advisory board dinners, pre-board dinners, awards dinners, relationship-building dinners, team dinners, customer appreciation dinners, partner summit dinners, project completion dinners, analyst dinners, investor dinners, … the list goes on and on.

Because business dinners can be so powerful, I am a huge fan of them as a marketing tool.  However, I’ve also been a part of many “dining accidents” over the years — the most infamous being the “white burgundy and stone crab incident” at Estiatorio Milos — almost invariably due to a combination of lack of focus on the business goals of the meal, lack of pragmatism, and lack of adaptation to changing circumstances.

As a result of these experiences, I have composed this list of 10 things never to do at a business dinner.

10.  Lack clear goals.  Whether we’re organizing a 1-1 meal for the CEO and a key customer or a 56-person customer appreciation dinner, everyone on the team should understand the goals for the meal.  Every member of the team should understand why they are there and what they are supposed to do.

9.  Eat in a noisy restaurant.  A universal purpose of a business dinner is for people to get know each other.  That is not going to happen when it’s loud, especially if your guests are a bit older.  Some restaurants are just incredibly noisy (e.g., Wolfgang’s on Park Avenue with a parabolic tile ceiling).  Sometimes private rooms can be quite loud as well, especially if they are not really cut off from the main room.  Avoid live music at all costs.  Avoid low ceilings.  Beware converted bank vaults and train stations.  I’ve seen more business dinners die on this hill than any other.  Fun or hip doesn’t matter if people can’t hear each other.

8.  Have tables bigger than 8.  If people are going to get acquainted, they need both a quiet environment and a table small enough so everyone can hear everyone else.  One friend has a rule that if you want one conversation at a table, then you should limit table size to six.   I think you can go up to 8, provided your team members know there is supposed to be one conversation.  Avoid rectangular tables which greatly limit the number of people with whom one can speak.

7.  Bring too many people.  One advantage of clear goals is that they help in deciding the guest list.  If the goal is to recognize the hard work of a 24-person team, great:  go get 3 tables of 8.  If the goal is for the CEO to build a relationship with another CEO, then either hold a 1-1 dinner or a 2-2, where each CEO brings a lieutenant.  But don’t say you’re having a CEO relationship dinner and bring your sales VP, sales director, account manager, and CFL rep.  It ends up like dating with an audience.  Don’t invite people just because they are in town — you can easily unbalance a dinner by bringing 9 of us and 3 of them, turning it into a multi-conversation, intra-company event to which a few customers are invited.  When in doubt, say no.

6.  Mis-level the crowd.  I think the most important part of networking dinners is that each participant feels like he/she gets value from meeting every other participant.  So if you’re hosting a 16-person CMO dinner, make sure the invitations are non-transferable so you can say “no” when several CMOs want to send their advertising or PR directors at the last minute.  While your PR director may enjoy having dinner with a bunch of CMOs, it’s unlikely to work in reverse.  The worst case is when two CMOs show up and are surrounded by 14 PR directors:  your intended target ends up feeling out-of-place.  It is far better to have 6 CMOs when you were hoping for 16 than it is to have 6 CMOs and 10 PR directors.  Burn that into your brain.  Tattoo it to your wrist.  Don’t not prioritize filling up seats at the cost of mis-levelling the dinner and destroying the event concept.  You can build on a great 6-person CMO event in the future.  You are dead when you host a mis-leveled event.

5.  Leave seating to chance.  Since we’re investing peoples’ valuable time (and probably $100 to $200 per head) in the event, we shouldn’t leave anything to chance.  For larger events, use place cards.  For smaller events, pre-brief the team on who to direct where.  It’s a disaster, for example, when at a square table, you place the two people you want talking next to each other, instead of across.  Make sure it doesn’t happen.  (And if it does, change it per rule 2 below.)

4.  Take more than 2 hours. Business dinners are business.  If you want to add a social part, go the bar afterwards for drinks.  It’s very awkward to leave a business dinner in progress and someone could  end up missing their train and getting in trouble with a spouse, because they expected a business dinner and you ran a lingering social event that took 3.5 hours.  In general, the more senior the invitee, the more likely the dinner is “just another calendar slot” as opposed to a social opportunity.  So when having dinner for 4-6 people at a restaurant (and I’m not in Europe), I tell the waiter in advance that my goal is to be done in two hours and that we want to have two courses and possibly dessert — no shared calamari pre-appetizer, no extra-salad (i.e., salad plus appetizer) shoved in as they love to do at Morton’s.  Just an appetizer per person, a main course, and when the time comes, a decision about dessert.  If things start to go too slowly, have some pre-appointed to leave the table, speak to the waiter discretely and say “get it moving.”  On dessert, if asked first, my answer is, “no thanks, just an espresso.”  If the customer  subsequently orders then I can always join in afterwards. Overall, by respecting your guest’s time, you increase the odds they will say yes the next time you invite them out.

3.  Order very expensive wine.  Here are a few things that can go wrong when you do:  [1] the wine is bad and you end up distracted with the whole rejection and re-tasting process, [2] the attendee is subject to a company policy where he/she has to pay his part of the meal (e.g., government, journalists) so you backfire screw them on their expense report, [3] people love it and you drink three bottles, tripling an expensive proposition, [4] you look pretentious, [5] your company looks wasteful and poorly controlled, [5] your three employees drink it but the customer subsequently announces he doesn’t drink wine and you end up treating the crew and not your customer.  When I lived in France, our classiest sales VP had a simple rule: order Sancerre.  It’s neither too cheap, nor too expensive.  It comes in dry, aromatic white (sauvignon blanc), mild-bodied red, and even rosé (both pinot noir based) so most people will like it.  I’ll demo the Sancerre principle on the wine list from the tony Village Pub, one of the best restaurants in Silicon Valley, where a Corton-Charlemagne will set you back $400 and a Kistler single-vineyard chardonnay $250.  The Sancerre weighs in about $130.

2.  Not roll with the punches.  Entertaining is always full of surprises and you need to roll with them.  We once arrived at The Triomphe in NYC only to find ourselves literally surrounded by a loud, drunken, office Holiday Party.  On arriving, we knew we were dead, so we dispatched a team member to find a quieter spot and did about 3 blocks away.  If a snowstorm wipes out 30% of your attendees, you better eliminate some tables and redo your place settings.  The key thing to remember in rolling with the punches is how to preserve the original goals of the meal.  Twice, I’ve been in cases where 4-5 employees had gathered at a very expensive restaurant (e.g., Morimoto) waiting for a group from a customer who never showed up.  In this case, rolling with the punches should mean eating somewhere else because the company shouldn’t be dropping Morimoto-style dollars on a basic mid-week traveling dinner.

1.  Order the tasting menu.  There are four problems with tasting menus:  they are expensive, they take the whole table hostage because they are ordered on an all-or-nothing basis, they take a long time to serve, and they don’t fill you up. The thing I hate most about tasting menu is not the first check — the $900 check for 4 — it’s the second check, the one for $100 for sliders and wings at the sports bar afterwards.  I am so opposed to tasting menus on business dinners that I actually try to avoid restaurants that offer them; I try to reduce the odds to zero that one person, typically a new employee, will provoke the chain reaction that results in the whole table ordering one.  I’ll do a tasting menu at a business dinner only if we are a small group of known foodies who will order the wine pairings, take three and a half hours on the meal, greatly enjoy it, and not run to McDonald’s right after.  Otherwise, stay away.

I could add as “rule 0″ don’t get drunk, but frankly I’ve not seen that rule broken terribly often at the business dinners I’ve attended.  More often, I see it broken at company events — which is a whole different blog post.

I hope you find these rules, and the thinking behind them, helpful to you in optimizing all your business dinners.

Bon Appétit!

Insight Ventures Periodic Tables of SaaS Sales and Marketing Metrics


I just ran into these two tables of SaaS metrics published by Insight Venture Partners (or, more precisely, the Insight Onsite team) and they are too good not to share.

Along with Bessemer’s awkwardly titled 30 Questions and Answers That Every SaaS Revenue Leader Needs to Know, financial metrics from Opex Engine, and the wonderful Pacific Crest Annual SaaS Survey, SaaS leaders now have a great set of reference documents to benchmark their firms.

(And that’s not to mention David Skok’s great post on SaaS metrics or, for that matter, my own posts on the customer acquisition cost (CAC) ratio and renewals rates / churn.)

Here is Insight’s SaaS sales periodic table:

ivp saas sales

And here is Insight’s B2B digital marketing periodic table:

ivp saals mkting