The Self-Fulfilling 3x Pipeline Coverage Prophecy

Posted on April 19, 2013 | 13 Comments

Quick, go ask any sales manager or Silicon Valley how much pipeline you need to make your quarter.

The answer you will hear:  3x.  Always, everywhere, every time.  Let’s talk about why that’s true, what it means, and what to do about it in this post.

First, let’s define some terms.  What is pipeline?  Pipeline for a period is the sum of the value of all opportunities with a close date in that period.

That is, quarterly pipeline for 2Q13 is the sum of the values of all opportunities with a close date on or before 6/30/13.  (Note that in most companies saying before 6/30/13 as opposed to “on or before” cuts the pipeline in half.  But that’s a different story.)

This begs the question:  what’s an opportunity?  I have two definitions:  (1) the way you track deals in your salesforce automation (SFA) system, which these days is typically Salesforce.com, or (2) a possible deal that a salesperson is willing to be asked about every week by his sales manager on a forecast call.  (By the way, I love definition 2 because that’s how “opportunity” really is defined from the viewpoint of the salesperson.)

This in turn begs the question:  how do you value an opportunity?  Most organizations should have rules for establishing the value of an opportunity, given its evolution in its lifecycle.  Early stage opportunities should either count as zero or some agreed-upon placeholder value.  Mid- and later-stage opportunities should have a value which is the likely amount that the deal will close at, including discounts and concessions made during final negotiations.  (Always be sure that this value has been socialized with the customer and is not simply a figment of a salesperson’s overly active imagination.)

So where does the magical 3x coverage ratio come from?  I don’t know the history, but I can say that long before I saw — and I mean years — my first salesforce automation system, I heard sales managers speak of the rule of three.  It makes sense:  2x seems tight and 4x seems rich.  So, through the Goldilocks Principle, we ended up with 3x.

Back then, it was kind of harmless; you couldn’t easily track the pipeline because deals and forecasts were being managed in a conglomeration of spreadsheets.  But along came SFA with Siebel, and its democratization via Salesforce, and — bang — now every sales manager on the planet could quickly and easily calculate the total pipeline for a salesrep, for a region, and for the company.

What happened next should be no surprise.

Every time a sales manager had  salesrep whose pipeline didn’t have 3x coverage, they beat the salesrep until they did.  Every time an regional manager had a district manager whose pipeline didn’t have 3x coverage, they beat the district manger it did.  Every time the worldwide sales VP had a country without 3x coverage, they beat the country manager until it did.  Heck, it even worked on overlays:  every time a product manager with a revenue number saw a country without 3x coverage of his/her product, they beat the local product manager and the local sales director until it did.

And, fairly quickly, every company on the planet had 3x pipeline coverage.

But, of course, it was all meaningless because it was a giant self-fulfilling prophecy.  And one that many or most organizations still perpetuate today.

What management should do is to beat on salesreps to show the real pipeline, as they believe it exists, using well-defined staging and valuation rules.  They should never mention the 3x, nor institutionalize any coverage ratio because, once you do so, you can be certain of only on thing:  you will have that coverage ratio in your  pipeline.  Whether that pipeline actually converts into sales at the inverse of the ratio  (so you can achieve your sales target) is an entirely different matter.  And most of the time it certainly won’t.

We’ve taken a perfectly good metric and we’ve ruined it by generalizing it, institutionalizing it, and communicating it.  Its predictive value is now zero.  Such metric abuse should be a crime.

Instead, we need to think about the problem differently.  To do this right, these coverage and conversion rates should be:

  • Emergent.  They should regressed from your actual data, not taken top-down as rules of thumb.
  • Personalized.  They should be tailored to a rep, a region, or product.  Example:  Joe usually closes 40% of his pipeline so 2.5x coverage should be good enough for him or France typically needs 3.5x coverage to hit its number.  
  • Secret.  As you as you tell the head of France he needs 3.5x coverage you start the metric abuse cycle and destroy the predictive value of the metric.  Instead, management should direct marketing or telesales should be instructed to focus on pipeline development when they see insufficient coverage, without any explicit reference to the 3.5x.  
  • Time varying and to-go based.  As the quarter proceeds business closes along the way so coverage ratios can get quite complex.  They need to be based on business to-go (to get to plan) and based on historic linearity patterns.  While the math gets cumbersome, this complexity is good because it eliminates the possibility of a single number getting burned into the organizational consciousness.   Instead of everyone saying “3x,” it actually sounds like:  ”in week 7, France has 2.2x to-go coverage and they typically need only 2.0x to get to plan.”  Some companies abstract this into a “waterline” that shows what coverage is needed by week given both personalization and linearity.  

So the next time you ask a sales manager how much pipeline he/she needs to make a quarter, wait for them to say 3x, and then start asking questions.

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Posted in Management, Sales

Startup CEOs and the Three Doors

Posted on April 15, 2013 | 1 Comment

Everyone knows the old joke about the new CEO and the three envelopes.  I thought I’d take a moment in this post to talk about the new CEO and what I call the three doors.

I think most people fail to grasp the commitment that hired (non-founder) CEOs make when joining a startup.  First, the new CEO is are typically leaving a perfectly reasonable job to join the startup, so there can be a significant opportunity cost.  Second, and more importantly, the new CEO is voluntarily signing up for a situation from which there are only three exit doors — because from the board’s perspective (and the venture capitalists on it) there are really only three possible outcomes:

Door #1:  he* got an exit.  This is definitionally a good case because, grumbles aside, boards will generally not approve exits that they don’t believe are sufficiently good.  The issue is that getting exits can take from 7-12 years in today’s market and unless exited via door #2 or door #3, the new CEO is expected to remain on board for the duration.  If you compound this fact with one of my favorite definitions of a board of directors (“a group that meets 4 times per year to decide whether to fire the CEO”), it becomes clear that the new CEO may be signing up for a long haul.

Door #2:  we fired him.  This is a bad case because the CEO is perceived to have ultimately failed, pretty much regardless of how many good things he/she did in the often many years before the last one during which the board lost faith.  Steve Jobs comeback stories are very rare (though one just happened this week at JC Penney).  The better analog is football or baseball coaches who seem never to quit but who are only fired.  While some CEOs seem to defy gravity in terms of investor patience with consecutive non-successes, these are most likely types brought into broken situations who ultimately end up leaving through door #1 (at modest but acceptable value) as opposed to door #2.

Door #3:  he screwed us.  This is also a bad case because venture capital is a trust business.  Given that the CEO is expected to stay on until either an acceptable exit is achieved or he/she is asked to move on, the only other option is door #3.  While there are definitely both good and bad ways for a CEO to voluntarily leave, any departure that is not provoked by the board is likely to be seen to some extent as a betrayal of trust (with the possible exception of a family crisis).  

In rare cases, CEOs can leave via door #4, but it requires that they have been tremendously successful in growing a company 10-20x in size over the course of four or more years.  In this situation, he/she can possibly run the “scale out” play and gently signal that perhaps the company has been so successful that someone else is required to take it to the next level.  Done at the right way at the right time, this can actually earn goodwill credits for foresight and lack of ego.  

But that case aside, and unlike the Captain of the Costa Concordia who tripped and fell into a lifeboat, startup CEOs are expected to stay with their ship.

So if you’re thinking of taking your first CEO job, I have one piece of advice: be picky, because unlike your SVP or GM job at a big company, you’re taking a position with only three doors out.

If you’re on your 2nd or 3rd CEO job, you know this already.

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* = I’ll use “he” for “he/she” both for brevity and to reflect the (sad) reality of Silicon Valley.

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Posted in Management, Startups, Venture Capital

So You Wanna Be a Data Scientist

Posted on April 11, 2013 | 6 Comments

I’ve often said that “data science” is the new “plastics,” hearkening back to that famous scene in The Graduate where a neighbor gives cryptic one-word career advice to the young graduate Benjamin Braddock, portrayed by Dustin Hoffman.

I’ve told my own son data science numerous times as well.  (Yes, that’s to the one in college, not grade school, but I suppose it’s never too early to start.)

The question this begs is how to become a data scientist.  Few schools have a data science major, per se, but many schools are starting to offer related majors at both the undergraduate and graduate level.  Some, like Northwestern, even do this online.

The other day, I found this great post on the subject from Zipfian Academy  and I not only tweeted it on the spot, but wanted to blog about it here.

Here’s the introduction:

There are plenty of articles and discussions on the web about what data science is, what qualities define a data scientist, how to nurture them, and how you should position yourself to be a competitive applicant. There are far fewer resources out there about the steps to take in order to obtain the skills necessary to practice this elusive discipline. Here we will provide a collection of freely accessible materials and content to jumpstart your understanding of the theory and tools of Data Science.

The full post is here.

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Posted in Big Data, Data Science

Kellblog 2.0

Posted on April 8, 2013 | 9 Comments

After an approximately* one-year hiatus, I’ve decided to start blogging again.

What Happened?

The reincarnation begins oddly, with my discovery that cybersquatters had evidently moved into Kellblog.  My WordPress account had been hacked and because the hacking was subtle it took me a while to realize what was going on.  I’d get the odd email from a friend on a post that I had done years ago as if it were new.   I searched for my post entitled “The Final Post” and couldn’t find it; evidently it had been deleted.  I looked at my Blogroll and saw, nicely tucked within the links that were supposed to be there, numerous links that weren’t.  I read one of my top posts which now had a reference to “Best Auto Loans” jammed in the middle of an otherwise normal sentence.

So someone hacked into the blog, deleted the post saying it was closed, subtly inserted spam links into top posts, and did an occasional re-post to keep things fresh.

What Does This Mean?

It means that any post before 4/6/13 (when I officially re-started) may have been compromised in some way – e.g., the publication date may be off, content may have been changed, or spam links may have been inserted.  Since there are over 500 posts from the Kellblog 1.0 era, I can’t check them all.  I feel as uncomfortable in the blog as you might feel spending the first few nights in your house after it had been robbed and ransacked.

Thoughts on Kellblog 2.0

I’d always hoped to start blogging again one day and had continued to file things under my “to blog” label during the hiatus.  The question to me was more when than if – with the exception of my wondering if blogging itself would still exist when I was ready to resume.  Had I committed the sin of naming my site KellBuggy when I should have named it KellTransport?

Several forces came together in making me want to re-start – the hacking was simply what pushed me over the edge because I needed to login to WordPress and get dirty looking around at page elements, links, the template and such. Once in the authoring environment, dashing off a quick post was easy … and so it began.

While creating a blog is somewhat organic, I have a few new/different rules for how I want to do things going forward:

  • The posting frequency will be lower.  I have a wonderful and busy day job at CEO of Host Analytics.
  • I will write less about the category and competitors.  Recall that Kellblog started life as the MarkLogic CEO Blog and, as such, was more focused on the category and the competition.  While I may write about EPM, BI, analytics, data science, big data, and such, I will try to do so from a more distant perspective.
  • I will not directly or indirectly write about things happening in my current business life.  Some folks, in cases correctly, felt they could figure out what was happening at MarkLogic by reading between the lines of my blog.  To prevent that going forward, I now have a self-imposed, long phase-lag before I will blog about lessons from any given real experience.

I look forward to re-starting and hope you enjoy my content.  Now all I need to do is a find a new RSS reader (thanks to Google discontinuing Google Reader) so I can keep up on things myself.

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* Hence I’m not exactly sure when I stopped because that post was deleted.  I think it was around Sept 2011.

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Posted in Blogging

The Importance of Nurture in Nascent Markets

Posted on April 6, 2013 | 9 Comments

I just finished reading Phil Fernandez’s recent book, Revenue Disruption, and I have to say that I recommend it highly.  Fundamentally, Fernandez argues that the old Chinese Wall between sales and marketing needs to be torn down.  Instead, companies need to think of a continuous process, executed collaboratively between sales and marketing, that helps develop people into leads into opportunities into customers.

It’s a simple re-framing, but a powerful one.  Instead of sales and marketing handing contacts over the wall — often with strict wave-off rules where one side can’t touch the contact if he is on the other — that they need to work together, see things from the customer’s viewpoint, and understand that turning prospects into customers is a long process of intermixed touches by both sales and marketing.

While Fernandez would say this is important for all companies, I believe it’s critical for start-ups in nascent markets.  Why?  Because when a market is only 3% penetrated it means that 97 people out of 100 that you meet will definitionally not be ready to buy.  Ergo, start-ups must develop awesome nurture programs that both help accelerate the buying timeframe (e.g., through education) and ensure top-of-mind awareness when the customer eventually does decide to enter the market.

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Posted in Marketing

The 42 Rules of Product Marketing: Be The Expert in How Customers Use Your Product

Posted on March 27, 2012 | 4 Comments

Several months ago, Phil Burton from The 280 Group asked me to contribute a rule to a book they were writing entitled The 42  Rules of Product Marketing.

The book is no theoretical tome.  It’s a quick set of practical rules from marketing practitioners on how to get things done.  I decided to focus my rule not on “understanding your products” (as I might have 20 years ago), but instead on “understanding how your customers use your products.”

Hence, Rule 38:  Be the Customer Usage Expert.

Here’s a draft of what went into the book.  To see the final version and/or to find out the other 41 rules, I suppose you’ll have to buy the book.

Rule 38:  Be The Expert in How Customers Use Your Product

Most product marketers understand their products.  That’s important.  But what will change your career is becoming THE expert in how your customers use your product.  What’s the difference?

Product Expert Usage Expert
Talks about technology Talks about applications
Justifies technology value Justifies business value
Understands how features work Understands why people need features
Knows current competitors Knows where the market is going
Seen internally as valuable resource Seen internally as organizational leader

There are plenty of people in your company’s engineering and product teams who are experts in how your products work.  Over time, those people are typically seen as valuable resources for the company (as in, “No one knows more about the optimizer than Joe”).

If, however, you’re looking to both impact revenues and be seen as an organizational leader, then you must become THE expert not on how your products work, but on how your customers use them.

Here are four ways to do that:

Engage Constantly with Customers

Thanks to social media, it’s never been easier to engage with your customers.  Use a blog, Twitter, Facebook, and LinkedIn to enable direct web-based customer communication.  Make yourself easy to find on the web and easy to contact. But don’t stop there.

Run periodic and topical surveys so you can not only watch the needles move over time, but also stay on top of the market pulse.  Attend industry conferences and user-group meetings.  Give presentations so people can find you. Most importantly, work with your sales channels to set up as many live customer meetings as possible.

Ask the Basic Questions

In customer meetings, learn to say:  “I don’t know.”  Once you start pretending to understand a customer’s business, you’re sunk.  Start with “I’m sorry, I don’t know anything about medical products distribution and it will help me greatly to have a basic understanding of your business.”  Then pepper the customer with why, how, and impact questions.

  • Why do you customers buy from you?
  • How does our product help you make money?
  • What’s the impact of failing to meet the service-level agreement?

When you later get into a product discussion, you’ll have an infinitely better understanding of their requirements.

Watch Your Language

Remember that you are delegated to the level at which you speak.  If you start talking bits/bytes or saying “orthogonal” too much, you’re likely to find yourself talking to someone in a cubicle outside the corner office.  Marketers must be bi-lingual:  speak tech to techies and business to businesspeople.  Mix the two at your peril.

Develop Legendary References

As you meet customers and learn the business impact of your products, invariably a few people and a few stories will stand out.  The stories will be easy to understand and impactful.  The people will have an unusual passion and willingness to tell them.  Embrace these few people and turn them into legendary references.  Feature them in case studies.  Invite them to speak at user groups.  Place them as industry conferences.  Connect them to the business and technology press.  Ensure they build relationships with your top executives.  Teach the entire company their stories and how your product affected their businesses.

My favorite legendary reference went from being an internally focused CIO to a repeat InformationWeek 500 award winner and right-hand to his CEO.  They’d cross the country on the corporate jet telling their customers how my product helped them provide the best service in his industry.

Do that.  And then watch what happens to your career when people say:  “Nobody knows more about our customers” than you.

The 42 Rules of Product Marketing is available here.

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Posted in Marketing

The Simple, Definitive One-Step Hot Market Test

Posted on March 22, 2012 | 1 Comment

Founders, entrepreneurs, venture capitalists and startup employees often spend a lot of time wondering, worrying, and pondering if a company is in a hot market.  Will the company shoot the moon?  What is the market potential?  Are you in Geoffrey Moore’s tornado?

After 25 years or so doing high tech companies, I have a simple test:

If you have to wonder whether you are in a hot market, you’re not.

It’s really that simple.

That’s not to say that re-positioning / pivoting into a hot market is impossible.  But I have always believed the biggest strategy problem most companies face is not “step 2” — i.e., determining strategy given a situation assessment.  That’s actually not that hard.  Step 1, however — figuring out your market situation — is the killer.

Companies get it wrong because people are optimistic.  No one wants to call the baby ugly.  People confuse the potential to be in a hot market in the future with being in one in the present.  (If we just sit here, maybe Prince Charming will come along.)  And people want to believe that changing markets is as easy as putting { mobile | big data | social | analytics } lipstick on the proverbial pig.

Because the prospect of not being in a hot or soon-to-be-hot market is too grim to ponder (and/or too politically incorrect an assertion to state), companies tend to always assume that they are in a hot market.

I remember visiting an empty building with 2 guys sitting  atop a $30M venture capital sinkhole.  “We’re in big data.  That’s a hot market.”  That was funny I thought.  I didn’t think of them big data.  And I was on the board of Aster Data, one of the original “big data” companies.  And if you’re in a hot market, why is the building empty?

It’s also not to say that you can’t build a nice company or get a good return for your investors if you are not in a hot market.   Many strategies — mostly focused on developing series of market niches — can be successfully applied in these situations.

But if you get the situation assessment wrong, you’ll never correctly arrive at the right strategy for it.  (And hoping for offsetting errors isn’t a good approach, either.)

I’ve spent about 18 years of my career working in hot markets and about 8 in cold ones.  I’ve also advised a handful of companies over the past 4 years, some in hot markets and some in cold ones.  I can tell you there is a difference.  A difference so obvious that I am positive that the only people who wonder if they are in hot markets are the ones who aren’t.

If you’re in one, you know.

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Posted in Strategy

The Future of the Company

Posted on March 8, 2012 | 10 Comments

It’s fairly common to hear the CEO of a company that makes most of its money doing thing-X announce that the future of this company is thing-Y.

Why might they do this? I think it’s often just to sound visionary and bold. In rare cases it might be a clever plan to distract thing-X challengers by redefining the competitive agenda to include both things X and Y (Oracle excelled at this with many failed initiatives such as the NC).  There are certainly also cases where markets go bad and must be exited, such as when Intel needed to flee the commoditizing DRAM market.

But in the embrace-change-or-die culture of Silicon Valley, there’s also something fashionable about saying, “I know we are the leaders in thing-X. But thing-X is not strategic enough. So the future of this company is thing-Y.”

It takes guts to say it. TechCrunch and the VCs will get goosebumps.  There’s a certain burn-the-ships attitude that one can’t help but admire.

But is a good idea? I think, for the most part, no.

While it is sometimes absolutely necessary to lead companies through major transitions, I think the “future is Y” tactic is overused and often misapplied.
Sometimes burning the ships drives a high level of commitment to developing a fertile new world. Sometimes, however, it leaves a bunch of starving sailors on a barren rock.

My two favorite examples of this principle are Ingres and MarkLogic.

Let’s do Ingres first. Ingres was founded in 1980 about 2 years after Oracle and was one of the original 4 players in the relational database market. For a bevy of reasons more related to marketing and strategy than technology, Ingres lost the early relational database wars to Oracle. For example, by 1992, Ingres was struggling $240M division of the $400M struggling applications vendor ASK, while Oracle dominated the market and was about $1.2B. Somewhere around 1989 or so, it became clear to Ingres that they couldn’t win the core RDBMS market. In an epic display of bad decision-making, the company declared that the RDBMS market was commoditizing and decided to strategically focus on application development tools. I remember hearing top management say “the future of this company is application development tools.”

This was a terrible decision for several reasons:

  • The RDBMS market was still in its infancy. Today, it’s a $15B (per year) market. Literally, hundreds of billions of RDBMSs were sold subsequent to Ingres’s decision that it was a poor market. It was in the top-two market opportunities for IT in the last century. (The other being PC operating systems.)
  • The RDBMS market was not commoditizing. Ingres confused the growing dominance of a standard query language (SQL) with product commoditization. The products were all quite different. SQL would be extended and, in effect, re-made proprietary. The market wasn’t trending to pure competition and commoditization; it was headed towards oligopoly. Oracle drives 50%+ margins in RDBMS.
  • The notion of carving a segment off the market was never considered. When someone loses the battle for dominance in market A, you don’t need to move to market B; you can segment the market instead. For example, Ingres was always very strong in query optimization. As Ingres was bailing out of RDBMS, a new multi-billion dollar segment was opening in databases specific to data warehousing, where that optimization technology would have been critical. Open source was another option was hiding in plain sight (the original University Ingres was always open-source; even before the term or concept was widely in use).
  • Application development tools were a non-attractive market maybe 1/5th the then-current size with low barriers to entry, boatloads of competitors, strong downward pricing pressure (e.g., free runtimes), a powerful entry Visual Basic / Visual Studio and a bevy of other PC-based tools.
  • The statement, and accompanying reallocation of resources, alienated all the database people who thought “why do I want to work at a database company not committed to databases?” The answer was you didn’t. Many of them ended up at Oracle and Sybase.

Tools were indeed the future of Ingres and that future ended up pretty bleak. In 1994, the whole struggling ASK/Ingres mess was sold to CA for $311M, a fraction of annual revenues.

Now, let’s look at MarkLogic. MarkLogic was founded in 2000, to create a hybrid DBMS / search engine based on the XML data model and the XQuery language. In 2003, Gartner wrote a note called XML DBMS: The Market That Never Was. Despite that, I joined the company as CEO in 2004 because, while I was aware that there was no horizontal momentum for the XML DBMS category, the company did have outstanding technology, strong investors, a great team, and a handful of good early customers.  I strongly believed it was a classic case of where a “bowling alley” strategy could be applied successfully.

(A bowling alley strategy is a systematic vertical market development strategy described in Inside the Tornado by Geoffrey Moore. The idea is simple: in the absence of strong category momentum, a vendor can be successful nevertheless by focusing on specific needs in specific industries and then bridge across markets by solving similar problems in new industries or new problems in the same industries.)

To me, it was clear cut and, God bless Geoffrey Moore, it worked. Of the dozen or so XML DBMS vendors in existence in 2004, the only one who succeeded in building a real business was MarkLogic. Some went out of business. Some repositioned into XML publishing applications. Some were sold for a pittance.  Do you remember any of these names:  Tamino, Ipedo, x-Hive, TigerLogic, Ixiasoft, Xyleme, eXist? It wasn’t exactly a hot category.

Despite the fact that 90%+ of the revenue was coming from the media and government verticals, several “important people” persisted in believing that the future of the company was enterprise. (Meaning, selling horizontally to F1000 IT.)  I never liked that because a horizontal enterprise assault had played no role in the company’s success to that point, and the data I saw suggested that wasn’t going to change in the future. To me, anyone paying close attention to the present might well conclude that if enterprise were the future, then that future might be pretty bleak.

Several things happen when leaders of thing-X companies declare the future of the company is thing-Y.

  • You make counter-intuitive investment decisions. For example, if I told you that thing-X salespeople sold $2M/year and thing-Y salespeople sold $1M/year, you might expect that a company would consist of 100% thing-X salespeople. (For a given number of salespeople that maximizes revenue.) But once thing-Y is declared strategic, the company will seek to hire more of the lower productivity salespeople to support the strategy.
  • Thing-X employees feel disenfranchised. I’d always felt that Oracle never forgot it was a database company. No matter the timeframe,  a top database engineer was a prestigious job. At Ingres, after about 1989, it wasn’t prestigious to be in the database group. Oracle never said tools or apps were the future of the company. Oracle, in effect, said: we are the leader in database and will leverage that to expand into tools and apps.
  • Thing-X customers can potentially get rattled. I’m told that at the first MarkLogic User Conference after I left, that new management explained to an audience almost composed of media and government customers that the future of the company was enterprise.  It’s risky to treat your customers like your high school sweetheart on the day you went off to college.  (Hasta la vista.)
  • Your best employees will want to move to thing-Y. By saying the future is thing-Y, you are announcing to your team that the past is thing-X. Your best and brightest will quickly get the message that to maximize their career opportunity, they should be working on thing-Y.

I firmly believe that there are situations where companies must leave an old market and enter a new one. Cognos’s exit from mid-range application development tools into BI is a great example. In 1996, you could safely say that the future of Cognos was BI. I’m sure that created many transition issues internally for them and, for the record, I believe that Cognos managed those issues extremely well. But given what was happening to VAX/VMS and MPE/XL Cognos had no choice. They needed to burn the ships and move to a new world.

But for, the most part, I believe that VCs, board members, and executives make one of two mistakes when they say the future of a thing-X company is thing-Y.

  • They are hoping the future is thing-Y because for some reason they find that market more attractive than the market for thing-X. Often this may be a case of boredom with your own market (i.e., grass-is-greener syndrome) or a lack of creativity in developing it. Recall that Google was in part born by Yahoo declaring search non-strategic, and instead choosing to focus on portals and content.
  • They are creating an artificial rhetorical “or” for dramatic purposes when the real message should be “and.” Follow the Oracle model instead:  we are going to lead in databases and, by hook or by crook, we are going to build an applications business because we believe that both are strategic to our future.

So the next time you hear anyone say the future of your company is Y, challenge them. Ask about X. Ask about Z. Ask about X and Y as opposed to X or Y. Then consider the real consequences of having your entire organization — and customer base — truly believe that the future is Y.

If you like that picture, stick with it. If you don’t, think a bit harder and change the plan.

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Posted in Strategy

Check out Wallit

Posted on March 6, 2012 | Leave a comment

This a quick post to highlight the launch of one of my angel investments:  Wallit, an amazingly cool company founded by UC Berkeley post-doc Veysel Berk, a very interesting guy I had the pleasure of meeting  in early 2011.

To me, Wallit is Twitter meets Facebook meets Foursquare meets augmented reality.  (Thank goodness, I’m not their marketing guy.)

  • Like Facebook it supports walls that you can write on
  • Like Twitter those posts can be public
  • Like Foursquare it is location-centric.  But, much better, it enforces location — to write on a wall you need to be there
  • And, coolest of all, it’s augmented reality.

Imagine standing the Marin headleads with your girlfriend, looking at the Golden Gate bridge, holding your iPhone up, seeing an augmented reality wall appear on the bridge, and written on that wall is “Jenny, will you marry me?”  If you’re geeky enough that’s goosebumps, folks.

Or imagine writing the same message on the full moon.  Or, more practically, imagine the dating/mixer possibilities of writing on a shared wall at a jammed nightclub.  Or the fun you could contributing to a shared wall at the Shark Tank, talking about the game.  Or imagine, real-time restaurant reviews at Morimoto (e..g, “the tartare is awesome tonight” or “avoid the special”).

Basically anything you’d want to tweet about, you can now write on a virtual wall, where anyone else writing actually has to be there.  And you see it all in augmented reality.

The company has launched to some amazing press, below.

Congrats to Veysel and the Wallit team. And check it out.

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Posted in Community

The Right Time To Raise Money At A Startup

Posted on March 2, 2012 | 2 Comments

I’m often asked by entrepreneurs:  when is the right time to raise money at a startup?  I invariably say two things in response:

  • Whenever you can
  • Right now

Whenever You Can
Most startups typically go through ups and downs. Say you’ve just completed 4 consecutive quarters above plan. You growth is high and your burn rate is reasonable. You have enough cash to go three more quarters before you need money. What should you do? Unless you are virtually certain that your quarterly streak will continue, I’d say raise money.

Why? Because the increase in valuation / decrease in dilution from adding 1-2 more quarters to the streak is nothing compared to the decrease in valuation / increase in dilution from tanking a quarter along the way. Whether you’re a subscription or perpetual company, investors will always want to see new sales / new bookings as your primary growth metric. While the SaaS model does damp revenue volatility, that’s precisely why a VC will want to see bookings. And, in my experience, bookings are volatile. During my 24 quarters at MarkLogic, we hit our bookings targets about 90% of the time. But I can say, sometimes when we missed, we missed. I remember one quarter coming in around 50% of target. Right after that quarter is exactly when you do not want to be raising money. And, by the way, it’s usually precisely when you need it.

The fastest way to end up bridge loans – where you lose almost all control of your company and are fed milestone to milestone – is to not raise money when skies are blue and instead try to raise money in a storm. Much as I love them, VCs are not in the business to be nice people:  if you’re coming to them, hat in hand, with 30 days of cash in the bank, I can assure you that you will not raise money on favorable terms. You could have done that 90 days ago. But, if you’ve tanked the quarter, now it’s too late.

To show this in reverse, one trick VCs love is to sneak a peek at an extra quarter. I remember one time when I was raising money, we’d agreed on terms, and the lawyers said it should take 2-3 weeks to close the round. It was June 12th, so if everybody pushed hard we should have been able to close the round before the quarter ended on June 30th. But suddenly everyone disappeared. Hello? Hello? Why aren’t the VCs calling back? How come their lawyers have gone silent and are taking forever to turn paper? Hello? Hello?

We made the quarter and the round closed July 5th. Arguably, I could have gone back and asked for a higher valuation based on having made the quarter – i.e., knowing that 2Q would be successful wasn’t priced into the round. But the VCs are good, they knew I wouldn’t do that – and they wouldn’t have let me if I tried.  So they got a “free peek” at the 2Q results. I’ll bet you $1000 that if we’d tanked that quarter, they’d have come back to me seeking to lower the valuation. The game is neither fair nor symmetric. (So time your round to close before the first day of the last month of the quarter.)

Right Now
Particularly for new companies, I believe the right time to raise VC money is right now. Too many would-be entrepreneurs treat fund-raising like going to the Senior Prom. I need to find a date. I need to book a limo. I need to do my hair. I need to get a dress.

Translation: I couldn’t possibly go talk to VCs about raising money until I have a great slide deck, an advisory board, a CEO, a Beta product, or some customers.

To me, it’s all avoidance. Traditional A-round VCs want to catch you in your dorm room. They are used to talking PhD students (or drop-outs) about their visionary ideas. They are not worried about whether you have a CXO. (In fact, they would be more than happy to help you find a CXO which, by the way, I wouldn’t recommend.)  They are worried primarily about the market opportunity, your idea, and your technology. As Don Valentine always said: great markets make great companies.

What’s more, they want to invest in people they know. One way to get known is to build a relationship over time as you think about raising money for your company. The best way to do this is to find someone in your network who can connect you to a top VC partner and who’s spent time getting to know you and your company (e.g., someone who’s perhaps done some advisory work or an angel investment). Then you want that person to send a top VC an email that looks like:

Dear Joe,

I have been working a bit with Mark Smith who just (ideally, either left great company or completed or ideally dropped out of a great PhD program) and who has a very interesting idea for a company. They are thinking about raising money and thus weighing the pros and cons of bootstrapping, an angel round, or a VC round.

I’d suggest meeting with him.

This way you remove the “prom factor” from your VC meetings because are not going on the big one-shot date. You’re not raising money. You are thinking of raising money. So it’s not awkward for them to not invest – in fact, they never even need to say no. But if they like your idea and your company they’ll be shoving money in your pockets whether you ask for it or not.

Better yet, you can invoke their competitive instincts by noting that you’re chatting with several VCs about whether you should raise money. Best of all, this approach lets you benefit from their wise (and free) feedback as you develop a relationship over time. If they are even moderately interested, they are going to want to track you (i.e., “hey, come back in a month and let’s have a coffee”).  If you continue to make good progress during that time (i.e., accomplish what you say you will in a given timeframe), you not only build credibility but also slowly transform yourself from stranger to interesting person who I’ve been tracking for the past 6 months. That becomes even more helpful when the VC needs to convince his partners to invest in you, as he invariably will.

So, now you know the secret. When’s the right time to raise money in a startup? Either right now or whenever you can depending on your situation. No business ever died from a little extra dilution. But, as the ever-quotable Don Valentine also pointed out: “all companies that go out of business do so for the same reason; they run out of money.”

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Posted in Social, Venture Capital