How To Run a Sales Kickoff

Since we’re wrapping up what has been a simply amazing Host Analytics 2016 sales kickoff, I thought I’d share some of the rules I’ve developed, learned, appropriated, discovered, et cetera during my career.

Rule 1:  for salespeople, your signed compensation plan is your admission ticket to kickoff.  This is incredibly important because comp plans define what you want your sales people to do and too many companies don’t get them finalized early enough in the quarter, leaving sales in a directionless limbo for weeks or months.

Rule 2:  the purpose of the kickoff is to send salesreps home from the event fired up and having everything they need to be successful in the new year.  When they get on the plane home, they should know their territory, their compensation plan, all the new messaging, all the latest competitive information, the new pricing, and have all the new kit required for their success.

Rule 3:  be inclusive.   At the companies I’ve run, we follow a simple philosophy: the event is a sales kickoff to which the whole company is invited.  So don’t complain if the content is too rah-rah or too salesy because it can’t be — it’s a sales kickoff.  But invite everyone so they can benefit both from the communications of plans, goals, and changes for the new year, and also from the contagious enthusiasm of hanging out with the sales force at a rah-rah event.

Rule 4:  mix it up.  Don’t run all day on a single-track, keynote-only format.  Yes, do some keynotes.  But have track sessions as well.  Mix in some panel discussions.  A game or contest is always fun — particularly if you take the trouble to ensure it’s on-message.  Ideally, let people choose freely about which track sessions they attend and which they don’t.

Rule 5:  invite some customers.  There’s nothing like a customer panel to communicate the reality of the product-market back to the organization.  They’re usually honored to come and their comments make a big impact.

Rule 6:  remember EMDI as the four major things to do at a kickoff.  Educate / Motivate / Decorate / Inebriate.  For “decoration,” have an awards dinner where you recognize achievement across the organization.   On “inebriation,” remind employees to do so within bounds.  At almost every kickoff I’ve been too, there’s been at least one person who takes it far — my favorite story was a salesrep who urinated on a roulette table at a Vegas kickoff and who, subsequently barred from the casino, was unable to traverse it to gain access to the ballroom and fired for non-attendance at the general session.

Rule 7:  Have an open-mic executive Q&A.  These can be awkward and some CEOs hate doing them, but in a healthy organization you should be able to put the exec team in front of the company to answer questions.

Rule 8:  Invite analysts as speakers.  You get a double win when you do this — you get to hear what the analyze has to say and the analysts get to see all the many happy smiling faces in your company — and how much it has grown since the last time they were by.

Rule 9:  Have some silly time.  Do things to break down hierarchical barriers and make the CEO and execs more approachable.  Costumes, videos, et cetera can go a long way in this department.

Rule 10:  Make it better every year.  This is hard, but we did successfully both at MarkLogic and at Host Analytics.  Always add some new twist, some new event, some new thing, some increased production values, a better guest speaker, something every year.

Bonus Rule 11:  Work with a top-quality events person and a top quality production company to execute it.  This means zero time gets wasted on production-related problems and all your energy can be focused on your people and your content.

The CEO Should Be the Most Bullish Person on the Future of the Company

“I am 100% behind my CEOs up until the day I fire them.” — Don Valentine, Sequoia Capital

I’ve always loved that Don Valentine quote although, like many great quotes, it took me a while to really understand it.  In short, it means that the board of directors should either support the CEO or replace them – there is no third option.  There is no board-runs-the-company option.  The CEO runs the company and the board’s only operating duty is to decide who is CEO.

Over time, I developed my own corollary:

“The CEO should be the most bullish person on the future of the company, up until they’re gone.” — Dave Kellogg

Fair weather or foul.  Making plan or missing plan.  Whether a megavendor just introduced a free directly competitive product or whether you just got a patent on a fundamental industry-enabling technology.  Whether the CEO is quite certain things are going to end well or whether they have some serious doubts.  It doesn’t matter.

I’m not saying CEOs should lie to people.  I am saying that no matter the situation they should always be the most bullish person in the room:  whether atop the mountain’s peak or neck-deep in shit, the CEO should always see the stars.  Why?  Because it’s their job.  The CEO’s job is to find the best path forward, period.  Regardless of whether that path looks easy or hard.

I’m not saying that CEOs shouldn’t be 100% realistic in situation assessment when devising their strategies.  While I’m not a huge fan of the book for many reasons, Good to Great produced an awesome rule that captures the spirit exactly in the Stockdale Paradox:  you must confront the brutal facts of your current reality and combine that with an unwavering faith in an eventual positive outcome.

The last thing a CEO wants is a bullishness inversion.  Imagine a scenario where the board felt much better about the future than the CEO.  You can almost hear them saying:  “gosh, I just don’t think Dave believes in the future of the company as much as we do.” That, by the way, is the boardroom equivalent of, “gosh, I think we need to invoke the Don Valentine rule and get a new CEO.”

I decided to write this post when I read the New York Times story on the sale of Good Technology to Blackberry.  While I think it’s a must-read story that makes some important points about unicorns, excess financing, dilution, and the potential divergence of interest between preferred and common stock, I think the story was a bit too hard on the Good Technology CEO and took some cheap shots that reflect a failure to fully understand the situation and the job of the CEO.

Before diving in, let me tell you a true story about the scariest flight I ever had.

I was bound for Paris, departing from SFO.  I was tucked nicely in my window seat, eager to dive into the latest Harvard Business Review.  Just after wheels-up I noticed that we took a steep angle of ascent.  I looked out at the wing and noticed little nozzles that I’d somehow never noticed before, and wondered “what are they for?”  Seconds later there was a loud thud and a big bump and white spray was flying out the nozzles.  “Oh yes,” I remembered, “those nozzles are for dumping the fuel IN AN EMERGENCY.”

Seconds later an absolutely nonchalant, The Right Stuff voice came over the intercom, “Ladies and gentlemen, this is Captain Smith up in the cockpit and we’ve had a little problem with the right engine — which has overheated — so we’re going to take a loop around, dump a bit of fuel, and land back at SFO in a few minutes.”

After an emergency briefing from the flight attendants and adopting the brace position, we had a perfect landing at SFO.

“Ladies and gentlemen, this is Captain Smith again.  You may have noticed the people on tarmac spraying foam on the landing gear.  That’s because we couldn’t thrust-reverse to slow down with only one engine, so we had to work the brakes extra hard and now they’ve overheated as well.  This is just a precautionary measure and we’ll have you at the gate in a few minutes.”

That sounded reasonable until I looked out the window and saw (roughly) this:


“OK,” I think, “so the Captain’s telling me everything’s fine but the guys on the ground won’t come within 50 yards of the plane while wearing a full-body silver flame suit.”  But nevertheless, given the Captain’s calm, I didn’t panic.

I thought it was a great example of professional communications keeping everyone both informed and calm in a critical situation.  Now maybe I’m a bad capitalist, but it never occurred to me to call Schwab while we were circling to buy some put options on UAL stock.

Imagine if the pilot had said:

“The right engine has exploded and we are a roman candle full of fuel that we have nowhere near enough time to dump, but we’ll dump what we can while we circle around, and then we are going to land way, way heavier than you’re supposed to, and I won’t be able to slow us down with the thrust reversers so the brakes are going to catch fire, and if they can put that fire out before any fuel leaks on it, then we’ll all be OK.”

Maybe then I’d have thought to buy those put options.  But maybe three people on the plane would have had heart attacks, too.

The pilot’s duty is to get the aircraft through the situation while informing the passengers in such a way that does not make the situation worse.  Whether the pilot knows the odds of success are 95% or 40%, they’re going to deliver roughly the same message.  The pilot’s job, notably, is not to offer financial advice — no one would posthumously sue the pilot for misrepresentation in saying “we’re going to get through this” when they didn’t and for thus denying passengers the opportunity to sell (or buy puts on) the airline’s stock.

Now, let’s flip back to the Good Technology story.  Look at these excerpts:

At a May company meeting, Ms. Wyatt said the company missed financial projections and addressed an email from a competitor that said Good would soon run out of cash …

At an all-hands company meeting in June, Ms. Wyatt again said Good was spending responsibly. Thanks to the cash from a recent $26 million legal settlement, she added, the company had “a ton of options”

I’d argue she was actually pretty transparent.  She told employees they were missing plan and that were it not for a one-time legal windfall they’d be in cash trouble.  She even gave them idea of the scale.  (A $200M breakeven company spends about $50M/quarter which means they were within about half a quarter, or 6 weeks, of running out of money.)

My question is simple:  what do you want her to say at those meetings?

Well that competitive email does some valid math and there certainly are scenarios where we run out of cash, which means we’ll probably have drastic layoffs.  We’re basically almost out of money now — we got lucky with that windfall from the lawsuit so we’re still able to make payroll.  Boy, the board and I sure feel stupid for declining that buyout offer from CA, but with a bit of luck we might get through this.

What happens then?  The employees start looking for jobs, the best ones find them first, so you start losing your best people — who you need to get out of the situation.  You also start losing deals to the competitor who is spraying FUD on you, which means you will have lower cash collections.  You make the situation worse.

But her job is to get the company through the situation, so if she sends the scarier message and makes the situation worse, then she’s not doing her job.  In addition, because her job is find a way through the maze, she probably genuinely believes that she can get the company to a reasonable outcome — and if she doesn’t believe that then, per my rule, maybe she shouldn’t be running the company.  You want a pilot in the chair who thinks they can land the plane.

This wouldn’t be much of a paradox were it not for the fact that Good was a private company that had an active secondary market in its stock.  This is the problem.  In short, we have a company following private-company communications practices with a public-like market in its stock.

Public companies have precise rules about what gets communicated, when, how and to whom, when it comes to financial information and future guidance.  Public companies have trading windows which prohibit trading the stock during sensitive periods.   Public companies have detailed safe harbor disclaimers when it comes to discussing forward-looking  statements.

Private companies don’t.  Historically they haven’t needed them because historically there were no secondary markets for private company stock.  In the old days, employees exercised options (1) when they left the company, (2) when they wanted to play a (dangerous) ISO buy-and-hold tax strategy that takes a year execute and is thus insensitive to short-term news, and (3) through a same-day sale once the company was public.

But with an active secondary market, employees can decide to either sell (or not sell) shares to a third-party at pretty much any time.  There is a complete dearth of information for buyer and seller in these secondary markets.  Most companies won’t release financial information to either party both because they want it kept private and they don’t want liability for any errors it might contain.  So they trade on rumor and hearsay.

And to think all this has happened as a result of the government trying to protect investors post-bubble and post-Enron with regulations like SOX.  In this case, pretty much the opposite has happened. Remember Ronald Reagan’s quote about the nine scariest words in the English language:  “We’re from the government and we’re here to help.”

If I were common stockholder of Good Technology, I’d be unhappy but not surprised about the outcome — when a company that’s raised $300M sells for $425M, it’s clear that they’ll be at most $125M for the common shareholders and quite possibly less:  if there’s debt to repay, multiple liquidation preferences, or if the preferred stock is participating.  I’d be upset about the board declining the buyout offers from CA and Thoma Bravo — but such mistakes happen all the time (e.g., Yahoo declining the Microsoft offer).

But I wouldn’t be mad at the CEO for being a calm pilot and trying to navigate through a difficult situation without making it worse.  She was doing her job.  Even neck-deep in shit, as she apparently was, she needed to be the most bullish person on the future of the company and find a way to a successful outcome.

Finally, should private companies start adapting internal communications to the new reality of private companies with public-like stock?   Yes, no doubt.

And, in my opinion, in a perfect world, we’d roll back to the days when companies could go public at $30M (as we did at Business Objects) and eliminate a lot of problems created by pushing IPOs out much further out into a company’s lifespan.  For that is the root cause of the problem.

Let me help my readers avoid some problems that Good Technology employees faced .  First, remember the dangers of ISO buy-and-hold strategies that many learned that hard way in Bubble 1.0.  Second, if you have stock-related compensation, you should learn the important basics about it by reading a book like Consider Your Options.  Third, you should always get advice from your tax and finance professionals before making any stock option moves.  Finally, remember that I am not offering financial advice and you should go here for a reminder of this and other Kellblog disclaimers.

Kellblog Predictions for 2016

As the new year approaches, it’s time for another set of predictions, but before diving into my list for 2016, let’s review and assess the predictions I made for 2015.

Kellblog’s 2015 Predictions Review

  1. The good times will continue to roll in Silicon Valley.  I asserted that even if you felt a bubble, that it was more 1999 than 2001.  While IPOs slowed on the year, private financing remained strong — traffic is up, rents are up and unemployment is down.  Correct.
  2. The IPO as down-round continues.  Correct.
  3. The curse of the mega-round strikes many companies and CEOs.  While I can definitely name some companies where this has occurred, I can think of many more where I still think it’s coming but yet to happen.  Partial / too early.
  4. Cloud disruption continues.  From startups to megavendors, the cloud and big data are almost all everyone talks about these days.  Correct.
  5. Privacy becomes a huge issue.  While I think privacy continues to move to center stage, it hasn’t become as big as I thought it would, yet.  Partial / too early.
  6. Next-generation apps like Slack and Zenefits continue to explode.  I’d say that despite some unicorn distortion that this call was right (and we’re happy to have signed on Slack as a Host Analytics customer in 2015 to boot).  Correct.
  7. IBM software rebounds.  At the time I made this prediction IBM was in the middle of a large reorganization and I was speculating (and kinda hoping) that the result would be a more dynamic IBM software business.  That was not to be.  Incorrect.
  8. Angel investing slows.  I couldn’t find any hard figures here, but did find a great article on why Tucker Max quit angel investing.  I’m going to give myself a partial here because I believe the bloom is coming off the angel investing rose.  Partial.
  9. The data scientist shortage continues. This one’s pretty easy.   Correct.
  10. The unification of planning becomes the top meme in EPM.  This was a correct call and supported, in part, through our own launch of Modeling Cloud, a cloud-based, multi-dimensional modeling engine that helps tie enterprise models both to each other and the corporate plan.  Correct.

So, let’s it call it 7.5 out of 10.  Not bad, when you recall my favorite quote from Yogi Berra:  “predictions are hard, especially about the future.”

Kellblog’s Top Predictions for 2016

Before diving into these predictions, please see the footnote for a reminder of the spirit in which they are offered.

1. The great reckoning begins.   I view this as more good than bad because it will bring a return to commonsense business practices and values.  The irrationality that came will bubble 2.0 will disperse.  It took 7 years to get into this situation so expect it to take a few years to get out.  Moreover, since most of the bubble is in illiquid securities held by illiquid partnerships, there’s not going to be any flash crash — it’s all going to proceed in slow motion, expect for those companies addicted to huge burn rates that will need to shape up quickly.  Quality, well run businesses will continue attract funding and capital will be available for them.  Overall, while there will be some turbulence, I think this will be more good than bad.

2. Silicon Valley cools off a bit.  As a result of the previous prediction, Silicon Valley will calm a bit in 2016:  it will get a bit easier to hire, traffic will modestly improve, and average burn rates will drop.  You’ll see fewer corporate buses on 101.  Rents will come down a bit, so I’d wait before signing a five-year lease on your next building.

3. Porter’s Five Forces comes back in style.  I always feel that during bubbles the first thing to go is Porter five force analysis.  What are there barriers to entry on a daily deal or on a check-in feature?  What are the switching costs of going from Feedly to Flipboard?  What are the substitutes for home-delivered meal service?   In saner times, people take a hard look at these questions and don’t simply assume that every market is a greenfield market share grab and that market share itself constitutes a switching cost (as it does only in companies with real network effects).


4.  Cyber-cash makes a rise.  As the world becomes increasingly cashless (e.g., Sweden), governments will prosper as law enforcement and taxation bodies benefit, but citizens will increasingly start to sometimes want the anonymity of cash.  (Recall with irony that anonymity helped make pornography the first “killer app” of the Internet.  I suspect today’s closet porn fans would prefer the anonymity of cash in a bookshop to the permanent history they’d leave behind on Netflix or other sites — and this is not to mention the blackmailing that followed the data release in the Ashley Madison hack.)  For these reasons and others, I think people will increasingly realize that in a world where everything is tracked by default, that the anonymity of some form of cyber-cash will sometimes be desired.  Bitcoin currently fails the grade because people don’t want a floating (highly volatile) currency; they simply want an anonymous, digital form of cash.

5.  The Internet of Things (IoT) starts its descent into what Gartner calls the Trough of Disillusionment.  This is not to say that IoT is a bad thing in any way — it will transform many industries including agriculture, manufacturing, energy, healthcare, and transportation.  It is simply to say that Silicon Valley follows a predictable hype cycle and that IoT hit the peak in 2015 and will move from the over-hyped yet very real phase and slide down to the trough of disillusionment.  Drones are following along right behind.

6.  Data science continues to rise as a profession.  23 schools now offer a master’s program in data science.  As a hot new field, a formal degree won’t be required as long as you have the requisite chops, so many people will enter data science they way I entered computer science — with skills, but not a formal degree. See this post about a UC Berkeley data science drop-out who describes why he dropped the program and how he’s acquiring requisite knowledge through alternative means, including the Khan Academy.  Galvanize (which acquired data-science bootcamp provider Zipfian Academy) has now graduated over 200 students.   Apologies for covering this trend literally every year, but I continue to believe that “data science” is the new “plastics” for those who recall the scene from The Graduate.

7. SAP realizes it’s an complex, enterprise applications company.  Over the past half decade, SAP has put a lot of energy into what I consider strategic distractions, like (1) entering the DBMS market via the Sybase acquisition, (2) putting a huge emphasis on their column-oriented, in-memory database, Hana, (3) running a product branding strategy that conflates Hana with cloud, and (4) running a corporate branding strategy that attempts to synonymize SAP with simple.

Some of these initiatives are interesting and featured advanced technology (e.g., Hana).  Some of them are confusing (e.g., having Hana mean in-memory, column-oriented database and cloud platform at the same time).  Some of them are downright silly.  SAP.  Simple.  Really?

While I admire SAP for their execution commitment  — SAP is clearly a company that knows how to put wood behind an arrow — I think their choice of strategies has been weak, in cases backwards looking (e.g., Hana as opposed to just using a NoSQL store),  and out of touch with the reality of their products and their customers.

The world’s leader in enterprise software applications that deal with immense complexity should focus on building upon that strength.  SAP’s customers bought enterprise applications to handle very complex problems.  SAP should embrace this.  The message should be:  We Master the Complex, not Run Simple.  I believe SAP will wake up to this in 2016.

Aside:  see the Oracle ad below for the backfire potential inherent in messaging too far afield from your reality.


powered by oracle

8.  Oracle’s cloud strategy gets revealed:  we’ll sell you any deployment model you like (regardless of whether we have it) as long as your yearly bill goes up.  I saw a cartoon recently circulated on Twitter which depicted the org charts of various tech megavendors and, quite tellingly, depicted Oracle’s as this:


Oracle is increasingly becoming a compliance company more than anything else.  What’s more, despite their size and power, Oracle is not doing particularly well financially.  Per a 12/17/15 research note from JMP,

  • Oracle has missed revenue estimates for four quarters in a row.
  • Oracle provided weak, below-expectations guidance on its most recent earnings call for EPS, cloud revenue, and total revenue.
  • “While the bull case is that the cloud business is accelerating dramatically, we remain concerned because the cloud represented only 7% of total revenue in F2Q16 and we worry the core database
    and middleware business (which represents about half of Oracle’s revenue) will face increasing competition from Amazon Web Services.”

While Oracle’s cloud marketing has been strong, the reality is that cloud represents only 7% of Oracle’s total revenue and that is after Oracle has presumably done everything they can to “juice” it, for example, by bundling cloud into deals where, I’ve heard, customers don’t even necessarily know they’ve purchased it.

So while Oracle does a good job of bluffing cloud, the reality is that Oracle is very much trapped in the Innovator’s Dilemma, addicted to a huge stream of maintenance revenue which they are afraid to cannibalize, and denying customers one of the key benefits of cloud computing:  lower total cost of ownership.  That’s not to mention they are stuck with a bad hardware business (which again missed revenues) and are under attack by cloud application and platform vendors, new competitors like Amazon, and at their very core by next-generation NoSQL database systems.  It almost makes you feel bad for Larry Ellison.  Almost.

8.  Accounting irregularities are discovered at one or more unicorns.  In 2015 many people started to think of late-stage megarounds as “private IPOs.”  In one sense that was the correct:  the size of the rounds and the valuations were very much in line with previous IPO norms.  However, there was one big difference:  they were like private IPOs — but without all the scrutiny.  Put differently, they were like an IPO, but without a few million dollars in extra accounting work and without more people pouring over the numbers.  Bill Gurley did a great post on this:  Investors Beware:  Today’s $100M+ Late-Stage Private Rounds are Very Different from an IPO.  I believe this lack of scrutiny, combined with some people’s hubris and an overall frothy environment, will lead to the discovery of one or more major accounting irregularity episodes at unicorn companies in 2016.  Turns out the world was better off with a lower IPO bar after all.

9. Startup workers get disappointed on exits, resulting in lawsuits.  Many startup employees work long hours predicated on making big money from a possible downstream IPO.  This has been the model in Silicon Valley for a long time:  give up the paycheck and the perks of a big company in exchange for sleeves-up work and a chance to make big money on stock options at a startup.  However, two things have changed:  (1) dilution has increased because companies are raising more capital than ever and (2) “vanity rounds” are being done that maximize valuation at the expense of terms that are bad for the common shareholder (e.g., ratchets, multiple liquidation preferences).

In extreme cases this can wipe out the value of the common stock.  In other cases it can turn “house money” into “car money” upon what appears to be a successful exit.  Bloomberg recently covered this in a story called Big IPO, Tiny Payout about Box and the New York Times in a story about Good Technology’s sale to BlackBerry, where the preferred stock ended up 7x more valuable than the common.  When such large disparities occur between the common and the preferred, lawsuits are a likely result.


Many employees will find themselves wondering why they celebrated those unicorn rounds in the first place.

10.  The first cloud EPM S-1 gets filed.  I won’t say here who I think will file first, why they might do so, and what the pros and cons of filing first may be, but I will predict that in 2016 the first S-1 gets filed for a cloud EPM vendor.  I have always believed that cloud EPM is a great category and one that will result in multiple IPOs — so I don’t believe the first filing will be the last.  It will be fun to watch this trend and get a look at real numbers, as opposed to some of the hype that gets circulated.

11.  Bonus:  2016 proves to be a great year for Host Analytics.  Finally, I feel great about the future for Host Analytics and believe that 2016 will be a wonderful year for the company.  We have strong products. We have amazing customers.  We have built the best team in EPM.  We have built a strong partner network.  We have great core applications and exciting, powerful new capabilities in modeling. I believe we have, overall, the best, most complete offering in cloud EPM.

Thanks for your support in 2015 and I look forward to delivering a great 2016 for our customers, our partners, our investors, and our team.

# # #


[1]  These predictions are offered in the spirit of fun and I have no liability to anyone acting or not acting on the content herein.  I am not an oracle, soothsayer, or prophet and make no claim to be.  Please enjoy these predictions, please let them provoke your thoughts, but do not use them as investing or business consulting advice.  See my FAQ for additional disclaimers.

Best of Kellblog 2015

Here’s a quick post to highlight some of my top blogs in 2015 — just in case you missed any of them.

Thanks, as always, for your readership and support and Happy New Year to all.


The Great Reckoning: Thoughts on the Deflation of Technology Bubble 2.0

This post shares a collection of thoughts on what I’ve variously heard referred to as “the tightening,” “the unwinding,” “the unraveling,” or “the great reckoning” — the already-in-process but largely still-coming deflation of technology-oriented stock valuations, particularly in consumer-oriented companies and particularly in those that took large, late-stage private financings.

The Four Horsemen

Here are four key signs that trouble has already arrived:

  • The IPO as last resort.  Box is the best example of this, and while I can’t find any articles, I have heard numerous stories of companies deciding to go public because they are unable to raise high-valuation, late-stage private money.
  • The markdowns.  Fortune ran a series of articles on Fidelity and other mutual funds marking down companies like Snapchat (25%), Zenefits (48%), MongoDB (54%), or Dataminr (35%).  A unique feature of Bubble 2.0 is publicly-traded mutual funds investing in private, VC-backed companies resulting in some CEOs feeling, “it’s like we went public without even knowing it.”
  • The denial.  No bubble would be complete without strong community leaders arguing there is no bubble.  Marc Andreessen seems to have taken point in this regard, and has argued repeatedly that we’re not in a technology bubble and his firm has built a great data-rich deck to support that argument.

The Unicorn Phenom

If those aren’t sufficient signs of bubbledom, consider that mainstream media like Vanity Fair were writing about unicorns  and describing San Francisco as the “city by the froth” back in September.

It’s hard to talk about Bubble 2.0 without mentioning the public fascination with unicorns — private tech companies with valuations at $1B+.  The Google search “technology unicorn” returns 1.6M hits, complete with two unicorn trackers, one from Fortune and the other from CBInsights.  The inherent oxymoron that unicorns were so named because they were supposed to be exceptionally rare can only be lost in Silicon Valley.  (“Look, there’s something rare but we’re so special, we’ve got 130 of them.”)  My favorite post on the unicorn phenom comes from Mark Suster and is entitled:  Why I Effing Hate Unicorns and the Culture They Breed.

As the bubble has started to deflate, we now hear terms like formercorns, onceacorns, unicorpses, or just plain old ponies (with birthday hats on) to describe the downfallen.  Rumors of Gilt Groupe, once valued at $1.1B, possibly selling to The Hudson’s Bay Company for $250M stokes the fire.

What Lies Ahead?

While this time it’s different is often said and rarely true, I do believe we are in case when the unwinding will happen differently for two reasons:  (1) the bubble is in illiquid assets (private company preferred shares) that don’t trade freely on any market and (2) the owners of these illiquid shares are themselves illiquid, typically structured as ten-year limited partnerships like most hedge, private equity growth/equity, or venture capital funds.

All this illiquidity suggests not a bubble bursting overnight but a steady deflation when it comes to asset prices.  As one Wall Street analyst friend put it, “if it took 7 years to get into this situation, expect it to take at least 3.5 years to get out.”

Within companies, particularly those addicted to cheap cash and high burn, change will be more dramatic as management teams will quickly shift gears from maximizing growth to preserving cash, once and when they realize that the supply of cheap fuel is finite.

So what’s coming?

  • Management changes.  As I wrote in The Curse of the Megaround, big rounds at $1B+ valuations come wrapped in high expectations (e.g., typically a 3x valuation increase in 3 years).  Executives will be expected to deliver against those expectations, and those who do not may develop sudden urges to “spend more time with the family.”  Some CEOs will discover that they are not in the same protected class as founders when these expectations go unmet.
  • Layoffs.  Many unicorns are burning $10M or more each quarter.  At a $10M quarterly burn, a company will need to layoff somewhere between 200 and 400 people to get to cashflow breakeven.  Layoffs of this size can be highly destabilizing, particularly when the team was putting in long hours, predicated on the company’s unprecedented success and hypergrowth, all of which presumably lead to a great exit.  Now that the exit looks less probable — and maybe not so great — enthusiasm for 70-hour weeks may vanish.
  • Lawsuits from common stockholders.  Only recently has the valuation-obsessed media noticed that many of those super valuations were achieved via the use of special terms, such as ratchets or multiple liquidation preferences.   For example, if a $100M company has a $300M preference stack and the last $100M went in with a 3x preference, then the common stock would be be worthless in a $500M sale of the company.  In this case, an executive with a 0.5% nominal ownership stake discovers his effective ownership is 0.0% because the first $500M of the sale price (i.e., all of it) goes to the preferred shareholders.  When people find they’re making either “no money” or “car money” when they expected “house money,” disappointment, anger, and lawsuits can result.  This New York Times story about the sale of formercorn Good Technology provides a real example of what I’m talking about, complete with the lawsuits.
  • Focus will be the new fashion.  Newly-hired replacement executive teams will credit the core technology of their businesses, but trash their predecessors for their lack of focus on core markets and products.  Customers unlucky enough to be outside the new core business will be abandoned — so they should be careful to ask themselves and their vendors whether their application is central to the company’s business, even in a downturn or refocus scenario.
  • Attention to customer success.  Investors are going to focus back on customer success in assessing the real lifetime value of a customer or contract.  People will remember that the operative word in SaaS is not software, but service, and that customers don’t pay for services that aren’t delivering.  Companies that emphasized TCV over ARR will be shown to have been swimming naked when the tide goes out, and much of that TCV is proven theoretical as opposed to collectible.
  • Attention to switching costs.  There is a tendency in Silicon Valley to assume all markets have high switching costs.  While this is certainly true in many categories (e.g., DBMS, ERP), investors are going to start to question just how hard it is to move from one service to another when companies are investing heavily in customer acquisition on potentially invalid assumptions about long-term relationships and high pricing power.

Despite considerable turmoil some great companies will be born from the wreckage.  And overall, it will be a great period for Silicon Valley with a convergence to the mean around basics like focus, customer success, and sustainable business models.  The real beauty of the system is not that it never goes out of kilter, but that it always returns to it, and that great companies continue to be produced both by, and in cases despite, the ever-evolving Silicon Valley process.

# # #


This post was inadvertently published on 12/23/15 with an incomplete ending and various notes-to-self at the bottom.  While I realized my mistake immediately (hitting PUBLISH instead of SAVE) and did my best to pull back the post (e.g., deleted the post and the auto-generated tweet to it, created a draft with a new name/URL), as the movie Sex Tape portrays, once something gets out in the cloud, it can be hard to get it back.

Theoretical TCV: A Necessary New SaaS Metric?

The more I hear about SaaS companies talking up big total contract value (TCV) figures, the more I worry about The Tightening, and the more I think we should create a new SaaS metric:  TTCV = theoretical total contract value.


Prepaid contract value (PCV) is the prepaid portion and NPCV is the non-prepaid portion of the subscription in multi-year SaaS agreements.  We could then calculate your corporate hype ratio (CHR) with TTCV/ARR, the amount by which you overstate ARR by talking about TTCV.

I make the suggestion tongue-in-cheek, but do so to make real point.

I am not against multi-year SaaS contracts.  I am not against prepaid SaaS contracts.  In high-consideration enterprise SaaS categories (e.g., EPM), buyers have spent months in thorough evaluations validating that the software can do the job.  Thus, it can make good sense for both buyer and seller to enter into a multi-year agreement.  The seller can shield contracts from annual churn risk and the buyer can get a modest discount for the contractual commitment to renew (e.g., shielding from annual prices increases) or a bigger discount for that plus a prepayment.

But it’s all about degree.  A three-year  prepaid contract often makes sense.  But, for example, an eight-year agreement with two-years prepaid (8/2) often doesn’t.  Particularly if the seller is a startup and not well established.  Why?

Let’s pretend the 8/2 deal was written by an established leader like Salesforce.  In that case:

  • There is a very high likelihood the software will work.
  • If there are problems, Salesforce has major resources to put behind making it work.
  • If the customer is nevertheless unhappy, Salesforce will presumably not be a legal lightweight and enforce the payment provisions of the contract.

Now, let’s pretend that 8/2 deal was written by a wannacorn, a SaaS vendor who raised a lot of money, made big promises in so doing, and is way out over its skis in terms of commitments.

  • There is a lower likelihood the software will work, particularly if working means building a custom application, as opposed to simply customizing an off-the-shelf app.
  • If there are problems, the wannacorn has far fewer available resources to help drive success — particularly if they are spread thin already.
  • If the customer is unhappy they are much less likely to pay because they will be far more willing to say “sue me” to a high-burn startup than to an established leader.

So while that 8/2 deal might be a reasonable piece of business for an established leader, it looks quite different from the perspective of the startup:  three-fourths of its value may well end up noncollectable — and ergo theoretical.  That’s why startups should neither make those deals (because they are offering something for an effectively fictitious commitment) nor talk them up (because large portions of the value may never be realized).

Yet many do.  And somehow — at least before The Tightening — some investors seem to buy the hype.  Remember the corporate hype ratio:  TTCV / ARR.


The Best Work Parable

I can’t remember when I first heard this great parable, and despite Googling around couldn’t find it online [see footnote], so I thought I’d take a moment to re-tell this pointed story here.

One day an employee is asked to write a proposal for a new business idea and submits it to his manager.

Employee:  “Did you get a chance to read my proposal yet? What did you think of it?”

Manager:  “You know, I need to ask you one question about that proposal — was it really your best work?”

Employee (reluctantly):  “No … , in fact, it was not.  I can think of several things I could have done better.”

Manager:  “Great, so please do those things and resubmit it to me.”

The employee then does additional work on the proposal and resubmits it to the manager.

Employee:  “Hi, did you review my revised proposal?  What did you think?”

Manager:  “Well, I need to ask you one question about that proposal”

Employee:  “Sure”

Manager:  “Does the revised proposal represent your best work?”

Employee (reluctantly):  “Well, no, while I think it’s much better than the first version, I still have several ideas for how to improve it.”

Manager:  “OK, so I’d like to ask you to implement those ideas and then resubmit the proposal to me.”

The employee then revises the proposal again and submits it for the third time to the manager.

Employee:  “Did you get a chance to review my proposal?  What did you think?”

Manager:  “Does this third proposal represent your best work?”

Employee:  “Yes.”

Manager:  “Great, so now I’ll read it.”

If you’re playing the role of employee, do you submit your best work on the first go?  If not, why not?  Why do you want your management reviewing low-quality work?

If you’re playing the manager, are your employees getting you to do their jobs for them by having you correct/revise their work into the desired form?  How can you set the bar so you get their best work on the first go?

[Footnote: while I couldn’t find this story via Googling several readers were kind enough to inform me that it appears to have been originally told about Henry Kissinger.  See here.]