Category Archives: management

The One Key to Dealing with Senior Executives: Answer the Question!

Posted on January 17, 2012 | 10 Comments

I can’t tell you how many times over the years that I’ve needed to coach people to “answer the question” when dealing with senior executives.  It amazes me to sit in meetings and watch people hem, haw, dodge, extemporize and do just about anything but answer the question they were asked.  I have a old friend who used to say that corporate meetings were often “parallel independent conversations” due to two factors:  [1] the non-answering of questions posed and [2] the non-listening that comes from people spending all their energy preparing what they want to say next.

Both are bad behaviors.  But the one that will stall your career inside your company — or wreck a salescall outside of it — is not answering the question.

In my career I’ve had the good fortune to meet with many senior executives.  Almost without fail, they share these qualities:

  • They are direct.  They speak clearly and in simple language.  Buzzwords and spin are the province of middle management, not the C-suite.
  • They go fast.  They are busy.  They don’t want to waste time.
  • They want to drive the agenda (and are used to getting their way).  This is a key reason why you should not present to senior executives unless asked.
  • They have a series of questions that they want answered.

So the best thing you can do in front of a senior executive is answer the question.

  • Question:  On a scale of 1-10 how is the team working?
  • Bad Answer:  Well, you know, the guys have been trying hard, things haven’t been perfect, but the team has really been pulling together lately, and I think things are improving.  We’ve filled the open headcount and are making real progress.
  • What the Executive Hears:  Blah, blah, blah this fool is not answering my question blah, blah, blah.
  • Good Answer:  7.
  • Best Answer.  7, but there one or two key problems to work out.

You should answer the question because the executive wants it answered.  You should answer it succinctly because there is a 90% chance he/she has a line of questioning prepared and wants to move through it quickly.  I believe the last answer, above, is the best one because:

  • It answers the question.
  • It’s succinct and doesn’t interrupt a potential line of questioning.
  • It leaves a thread the executive can pull if he/she desires.

Verbal hedging can be used to leave such threads open and avoid the huge “disclaimers” that people often insert before answering questions.

  • Question:  is the project tracking to finish on time?
  • Bad Answer:  well, you know, you can never be sure about these things, but it is going pretty run, the head PM has had a cold, and we got behind on a few tasks and — gosh you never know if an Act of God is going to interrupt things — and the long pole in the tent is getting some new servers delivered, and risk, yes risk, there’s always risk in managing such projects.
  • Good Answer:  Yes, but one item on the critical path — server delivery — is holding us up, but not so much that I think we’ll miss the deadline.
  • Best Answer:  Yes, mostly.

I like the last answer best, because — if I care — I can simply ask:  what do you mean by mostly?  And if I don’t, then I can proceed.

My advice:  in the meetings you attend, start tracking how often people actually answer the question and observe how much time is wasted on useless filler.  My guess is that once you start paying attention to this issue that you’ll first be shocked at how often it occurs and second become a much better answerer in the process.

And, if all else fails, then mail people this link.

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Posted in management

Two Bosses Are Better Than One: Thoughts on the Virtues of Matrixed Organizations

Posted on December 30, 2011 | 4 Comments

When I was new to the workforce, I was violently opposed to matrixed organizational structures.  “They’re bullsh*t,” I thought, “people will always favor one direction over the other, making one of the two managers superfluous.  And, if that’s the case, then why bother at all?”

It was only as Business Objects grew, and me with it, that I realized matrix structures weren’t an “if” but a “when” and the ability to work within such structures would become a defining attribute of someone who “could scale” within the organization as it grew.

As the head of worldwide marketing, the defining question to me was simple — say, for example, the French country marketing VP came to me and said, “which is it, am I French or am I in marketing?”

The answer was, inevitably, both.

  • You are supposed to be a right-hand to the French country manager.  You are supposed to worry about the French pipeline and the French sales number.  You are supposed to work on French go-to-market strategy.  You drive French public relations.
  • You are in marketing.  So you are supposed to be consistent with the positioning and messaging that use worldwide.  We want you to use programs that have worked elsewhere to improve cost-efficiency and we want you to contribute back to the worldwide marketing community by attending leadership meetings, sharing best practices, and leveraging common systems.

Like it or not, you’re both.  And, more importantly, if you can’t handle that, then perhaps you’re not the right person for the job.

But given my historical views on matrices, we didn’t do the classic “solid one-way and dotted the-other” reporting structure.  We created a double solid-line matrix that, to me, more accurately reflected the business reality.  It also gave the matrix some teeth.  I thought the model worked quite well, balancing local empowerment with global consistency and scale economy.

That’s how I, a dyed-in-the-wool anti-matrix person, became a big fan of matrices.  The fact is, as a company grows, certain leaders in the organizations will inevitably need to have dual allegiance.  For example:

  • The head of product marketing for a business unit owes allegiance to both marketing and the product business unit.
  • The head of sales engineering for a country owes allegiances to both the country and the worldwide sales engineering organization
  • An head of overlay sales for a given product owes allegiance to both the product unit and the sales organization

In fact, in a perverse way, as either the head of marketing at Business Objects or the head of a product business unit at Salesforce, I have noticed the following law:

The more a local leader treats me like a virtual boss, the less I care about reporting structure.  And conversely.

That’s my take on the matrix.  What’s yours?

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Posted in management

A Note to the Results-Oriented: Just Be Nice

Posted on August 12, 2011 | 3 Comments

The situation was clear.  The company had just brought in a new COO.  That person was band-leader, intent on bringing a slew of folks from his last company. My friend Pete, who worked for the new COO, had strong track record of delivering results, but the internal rap on him — in a full 360 sense — was mixed.

“How goes, Pete?” I said a few days into the transition.

“Pretty good, I think the new guy’s going to give me a chance.”

“Really?  I’m not so sure.”  Digging up one of my favorite corporate analogies  from The Sixth Sense, I say:  ”Pete, I’ve got to be honest.  I see dead people.  They … don’t … know … they’re dead.”

Normally, I’m open minded in such situations, but this time the data was clear. Someone needed to get through Pete’s optimistic head that he was dead.  No way, no how, you are going to survive this one.  Sorry.

It took about half an hour, but at some point it clicked.  ”Wow, there really is no way.  Shit.  Well, then, what do I do now?“

“I don’t know,” I said.  It hadn’t actually occurred to me that I might succeed in the primary mission and then have to offer advice on what to do next.

“Let’s think about it,” I said.  ”First, you need to keep delivering on your goals, so you can go out on top.  Second, you need to fire up a search process in the background — start taking calls.  Third, you need to recognize that there is only thing you want from every person in this building:  a positive reference.  So, to help ensure that, just be nice to everyone because you never know who they’re going to call.”

Pete found a great new job and continued his successful career.  A few years later we found ourselves having a beer.

“Dave, you remember when you told me to just be nice?”

“Yes, I do.”

“First, thank you because it was great advice for that situation.  I did need to focus 100% on ensuring that my internal relationships would give me strong references.  But you know what?  A funny thing happened.  We did end up delivering strong results during that transition period but I think the focus on being nice made me a much more effective manager as well.”

I love this story because successful business people are results-oriented.  That’s what we do.  Deliver results.  But sometimes the results-oriented among us can lose sight of the bigger picture of people and relationships.  Must we frame things as people-people vs. results-people or can we strive to be both?

I’ve never found a starker exercise to demonstrate this than Pete’s.  Assume you be fired in six months.  How would you think about your colleagues?  How would you change your behavior?

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Posted in management

Twelve Questions Executives Can Ask To Improve Decision Making

Posted on August 2, 2011 | Leave a comment

I first became interested in decision making more than a decade ago, back when I was running marketing at Business Objects.  My interest was prompted by the evolution of taglines among BI vendors.  In the early days, taglines were descriptive like First in Enterprise Decision Support or The Enterprise Data Mart Company.

Over time, pressure mounted on marketing to pitch benefits — the message shouldn’t just be about getting people information, but the benefit of having it.  Slogans evolved accordingly:  Now You Know, The Power To Know, and Business Intelligence:  If You Have It, You Know.

But was knowing enough of a benefit?  You could certainly take it up a level, and Cognos did:  Better Decisions Every Day.  For a marketing slogan it was good enough, but was it true?   Did providing better access to corporate information  invariably improve decision making?  It seemed like a leap so I decided to research it.

I’ll never forget when Cornell professor Jay Russo told me, “the primary use of new information is selective filtering to justify previously established conclusions.”  So, despite the commonsense appeal of the Cognos tagline, you most certainly could not draw a straight line from “more information” to “better decisions.”

I studied how individuals and groups  made decisions.  I read interesting books like Russo’s Decision Traps (later positively reframed into Winning Decisions) and Smart Choices.  Years later I became interested in mass decision making  in The Wisdom of Crowds and behavioral economics in Predictably Irrational and Why Smart People Make Big Money Mistakes.

I remember asking Russo why decision making wasn’t more of a focus in business schools.  His answer came down to two things:

  • If you can’t measure it, you can’t manage it.  Until corporations want to start measuring decision making, you can’t focus on improving it.  (I remember once suggesting a BI product that tracked votes on strategic decisions, evaluated their success years later, and calculated batting averages for team members.  The idea was shot down as my colleagues imagined executives fleeing like cockroaches under an illuminated light.)
  • Executives perceive their jobs as decision-making and themselves as experts.  Think:  Why would I need a class in decision making?  I make decisions for a living and my success in rising up this organization is proof that I am good at it.

But if quenching thirst is the ultimate benefit of Coke, improved decision making really is the ultimate benefit sought by BI consumers.  The problem was  – and is — that BI software can’t deliver it.

So if you want to improve your decision making, then you’re going to have to read up a bit, either through the books I’ve referenced above or via a recent article in Harvard Business Review entitled Before You Make That Big Decision, which provides 12 questions that senior executives can ask about decisions and decision-making processes to avoid the most common errors.

Here are those 12 questions and the biases that they are trying to detect:

  1. Is there any reason to suspect motivated errors, or errors driven by the self-interest of the recommending team?  (self-interest bias)
  2. Have the people making the recommendation fallen in love with it?  (affect heuristic)
  3. Were there dissenting opinions within the recommending team?  (groupthink)
  4. Could the diagnosis of the situation be overly influenced by salient analogies?  (saliency bias)
  5. Have credible alternatives been considered?  (confirmation bias)
  6. If you had to make this decision again in a year, what information would you want and can you get more of it now?  (availability bias)
  7. Do you know where the numbers came from?  (anchoring bias)
  8. Can you see a halo effect? (halo effect)
  9. Are the people making the recommendation overly attached to past decisions?  (sunk-cost fallacy, endowment effect)
  10. Is the base case overly optimistic?  (overconfidence)
  11. Is the worst case bad enough?  (disaster neglect)
  12. Is the recommending team overly cautious?  (loss aversion)
The full article is here.

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Posted in business intelligence, decision making, management

Why Palantir Makes My Head Hurt

Posted on June 27, 2011 | 18 Comments

While I’ve blogged before about Palantir Technologies (e.g., Beware the Spectacular B-Round Valuation), this will probably be my last post about them because, since leaving MarkLogic, I am no longer terribly involved in the Intelligence Community space nor engaged against them as an indirect competitor.

I initially became interested in Palantir for several reasons:

Part of the marketing was making controversial claims, such as:

  1. We have no sales.  (e.g., at minute 5:40)
  2. We have no marketing.
  3. We have no services.  (Our field technical staff aren’t consultants, they are forward-deployed engineers.)
  4. Positioning as a billion-dollar company when sales were probably in the tens of millions.
  5. Talking about valuation on funding rounds.

Now, as a credibility-is-key marketer, these kinds of claims bug me at two levels:  first, that people would make them and second, that the media would report them.  Here’s my take on these 5 claims:

  1. Whether you want to call it sales or not, someone meets customers, talks about what your software does, discusses how to price it, negotiates and signs a contract.  In the normal world, that is called sales.
  2. Whether you want to call it marketing or not, someone made the website, spent money to sponsor a party, setup the Charlie Rose interview, and designed and paid for the DC subway ads.  In the normal world, that is called marketing.
  3. Whether you want to call it services or forward-deployed engineering, you are sending smart people with engineering and computer science degrees to customers’ sites and helping them solve problems using your software.  In the normal world, those tasks are called pre-sales engineering and consulting, depending on whether they happen before or after a sale.
  4. The standard way, in the real world, to refer to a company’s size is by revenue.  The one and only time I frequently heard people referring to company size by market capitalization (or valuation) was during the Internet bubble.
  5. While this is primarily a style issue, most companies do not disclose valuation on venture funding rounds.  I believe those who do are trying to generate hype.  (And for a company that insists it has no marketing to want to generate hype is doubly irritating.)

At the big picture level, Palantir reminded me of MicroStrategy:  big claims and hype, DC-centricity,  elite school hiring focus, youth focus, a large field technical team, and a work hard / party hard ethos.

At this point I should admit to having some scars from having run marketing at Business Objects during MicroStrategy’s rise.  Let demonstrate what a day in life looked like:

  • Dave, MicroStrategy says their mission is to “purge ignorance from the planet.”  How come we can’t say anything visionary like that in our mission?
  • Dave, Michael Saylor says he’s going to build a modern-day Versailles just outside of DC.  How come our CEO never says stuff like that?
  • Dave, MicroStrategy says they’re building a service where people will wear tiny microphones in their ears and it will notify them if their house catches fire.  How come we don’t have product vision like that?
  • Dave, MicroStrategy just did a $52.5M deal in an industry where average sales prices are $250K and a big deal is a few million.  Why can’t we do huge deals like that?
  • Dave, Michael Saylor says that there will be riots if his software doesn’t work and that this year people will die — literally — because they didn’t buy his software.  How come we’re not mission-critical like that?

To which for several years I had to say “it’s all bullshit, it’s all bullshit, it’s a barter transaction and they’re double counting, and it’s all bullshit.”

It turns out being a naysayer isn’t fun work:  for three years you sound like a whining, doubting-Thomas constantly on the back foot, constantly playing defense and then one day you’re proven right.  But there’s no joy in it.  And the naysaying doesn’t help sell newspapers so you don’t get much press coverage.  And, in the end, all people remember is that “MicroStrategy was pretty cool back in the day” and “Dave’s a grump.”

It was during this period that I got interested in Corporate Cults because MicroStrategy struck me as one.

  • Hire young people with similar profiles from the best schools (e.g., MIT)
  • Work them long hours
  • Isolate them from friends and family
  • Blur distinctions between work life and personal life (e.g., company cruise, work hard / play together)
  • Tell them they’re the best
  • Tell them naysayers don’t get it

Six steps to make MIT engineers cult members.  Thus, in addition to other MicroStrategy parallels, Palantir struck me as a corporate cult.  Kind of a Logan’s Run (where no one is over 30) meets the Apple 1984 commercial (conformism à la the black jackets).

Since I left MarkLogic in January, Palantir got tangled up in the HBGary WikiLeaks mess (proposal here), generated some positive press in Forbes, and raised a $60M round of financing at a valuation rumored to be as high as $3B, bringing the total invested capital to an estimated $175M, a lot of money for an enterprise software company.

This begs the perennial question of “if they’re doing so well, then why do they need so much cash?”  While there are potentially both good and bad answers to that question, my guess is the answer is roughly:

  • Because they can raise it at huge valuations for relatively little dilution.  (Peter Thiel may be a huge help on this front.)
  • Because they intend to spend it to continue hiring and perpetuate the lavish-spending culture and hype machine.
  • Because they are executing a go-big or go-home strategy that is cash intensive and will, they hope, result in a huge exit valuation.

But why does Palantir make my head hurt?

  • Because, despite my general skepticism, I believe they get some things very right.
  • Because, despite their intent, they may have created a new kind of company.

Because I can be perceived as a Palantir detractor, I’ll say it again:  Palantir gets some things very right.  Which things?

  • They hire brilliant people.  They deliver on the hype in this department.
  • They solve hard problems.  I hear customers are generally quite happy.
  • They solve the whole problem.  They don’t just drop software in your driveway and run away.
  • They aren’t afraid to ask for huge checks, order of magnitude in the tens of millions.

Personally, I don’t buy the argument that all field technical staff are “forward-deployed engineers” as opposed to pre- or post-sales consultants.  But I would believe that you can hire better people by telling them they’re engineers as opposed to pre-sales consultants.  And, I could even believe that someone could convince himself — if perhaps not his accountants — that field technical staff are not customizing an application but instead developing a product.

That last point is important.  Why?

  • If field technical staff are engineers, then the associated revenue is presumably license fees and the cost is R&D.
  • If field technical staff are consultants, then the associated revenue is services and the cost is COGS.

Why does this matter?  Because most software company boards and investors see the world in a pretty black-and-white way:

  • License revenue is good.  Services revenue is bad.  (Largely because gross margins run 98% on the former and 20-30% on the latter).
  • R&D expense is investment and ergo good.  Cost of goods sold is bad.

Almost all Silicon Valley boards will want an emerging enterprise software company to run with a consulting business that’s no more than about 20% of total sales.  In practice this means a company can have at most about 1.5 consultants (pre- and post-sales) per salesperson.  Any work that can’t be done either as R&D investment or by that small consulting team needs to get handed off to partners.  This means the vendor loses control over customer success (which customers don’t like) and the vendor doesn’t end up owning all the IP required to solve the whole problem.

Now, my guess is that Palantir’s board doesn’t care about any of the preceding four paragraphs, probably because of cult arrogance:  we don’t care what pedestrian accountants say because we are changing the world and building the ultimate set of products.  Accounting, schmaccoutning.

This works well as a private company, particularly if you don’t plan on going public.  But the constraint on consulting growth hamstrings most enterprise software companies forcing them into a component-orientation, a drive-by license sales model, and a disregard for customer success — the traditional negatives that helped the drive the SaaS movement.

But, regardless of the reason, Palantir is a different type of company.

  • Like a system integrator (SI), they have a small sales force, a large field technical staff, solve whole problems, and ask for big checks.
  • Like a software company, they hire world-class engineers and try to capture everything in product.

Is Palantir an enterprise software company with no sales, marketing, or services (as they would like to believe) or are they the first SI to figure out how to build a world-class software business as most SI’s aspire?

You can argue the difference is just semantics, but I’d argue the latter.

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Posted in intelligence, Intelligence 2.0, management, MicroStrategy, Palantir, United States Intelligence Community, Venture Capital

Interest Misalignments in Silicon Valley Startups

Posted on June 8, 2011 | 14 Comments

Everyone’s aligned in a Silicon Valley startup, right?  Give everyone some options so everyone has skin in the game and then everyone wants what’s best for the share price:  one for all and all for one!

Not so fast.

In this post, inspired by a chat with longtime serial entrepreneur Ken Ross, I’ll delve into what I see as the common alignment issues in Silicon Valley startups.  While I am a big believer in broad employee share ownership, one shouldn’t make the mistake of believing that simply because everyone has shares that they are automatically and permanently aligned.

In my estimation, there are four drivers of potential misalignment.

  • Portfolio theory
  • Shareholdings and net worth
  • The “exit” concept
  • Irrational considerations

Portfolio Theory

The most common cause of misalignment is driven by portfolio theory.  VCs typically invest in 10-15 companies and work in partnerships of 5-10 partners.  Thus a VC might get “carry” (i.e., a slice of the investment profits) on 50-80 companies.  A friend once calculated that a VC gets the equivalent of a VP-level (or better) equity stake in each of the portfolio’s companies.

Entrepreneurs and executives, however, have but one life to give and must work at one company at a time.

Divergence can result when VCs want to take more risk than founders and executives because they have placed 80 bets while the executives have placed one.  This can manifest itself in pushing for overly aggressive operating plans or declining “base hit” acquisition offers in favor of “swinging for the fences” each time.   Time can compound this divergence as accumulated sweat equity tends to make the founders and executives more conservative over time.  (Think:  ”I have 8 years of my life in this thing, we can’t take that risk.”)

In addition, VC is increasingly a “hits business” – i.e., a fund that delivered an IRR of 35% might deliver only 15% excluding its top two investments.  Thus, VCs are generally more afraid of selling too early than too late.  While founders often tell tales of VCs declining early acquisition offers that could have earned them a quick $20M, VCs might tell the tale of VMware, which sold for $625M in 2004 and is now worth $41B.

Portfolio theory has other effects that are more subtle.  You might think of a given venture-backed company as in one portfolio.  In reality, the company is in numerous “portfolios” at different levels:

  • The fund level.  The expectations for a company become a function of the performance of the other companies in the fund.  If they are performing poorly, pressure may increase to deliver a big result.  Alternatively, if the fund is old, has lackluster performance, and the VC firm has subsequently launched several high-performing funds, a lack of interest may develop.
  • The partnership level.  Different VC firms set have different investment objectives and reputations.  Some want to quietly deliver great returns.  Some favor operating guys as partners, other favor financial types.  Some like seeing their name in the press; some don’t.    As a general rule, the more early-stage and the more big-name the partnership, the more they will want portfolio companies to swing for the fences across the entire portfolio.
  • The partner level.  Each partner in a fund has his own set of companies.  VC partners track each other’s performance closely and a partner’s fate over time is, in large part, determined by his investment performance.  In addition, since most VC firms are fairly stove-piped, expectations for a given company are probably more shaped by its partner’s portfolio than any other.  Factors that influence the partner’s motivations include the performance his portfolio, his existing status in the firm (e.g., venture partner looking for a big-hit to make general partner, or established leader in the firm, or in-trouble and need of a big-hit to stay in the game), and his future plans (e.g., retirement).
  • The partnership-partnership level.  Suppose early-stage VC firm 1 does a lot of business with late-stage VC firm 3, as is often the case.  You can then think of your company in the “intersection” portfolio between these two partnerships.   Why does this matter?  To the extent that VC3 is dependent on VC1, they may make decisions that optimize the VC1/VC3 relationship over those that they might think best for a given portfolio company.  (Think:  “if Bob ever wants to work with us again, he’d better go along with us on this decision.”)

Shareholdings and Net Worth

The size of someone’s position, particularly relative to net worth, can cause a divergence of interests.  Consider a hypothetical company with 25M shares:

  • The founder owns 5M shares.
  • The total employee option pool is 5M shares.  (Of which Joe Engineer has 20K shares.)
  • VC1 owns 10M shares, having paid an average of $1.60/share across two rounds.
  • VC2 owns 5M shares, having paid $3.00/share in leading the second round.

Let’s consider a proposed $6.00/share offer for this company, for a total exit of $150M.

  • The founder would make $30M and be set for life.  He votes yes.
  • VC1 would receive $60M which does not move the needle relative to the size of his $600M fund.  On a return basis, he makes 3.75x, a poor result for an early-stage VC.  He votes no.
  • VC2 would receive $30M which moves his needle even less.  He makes a 2.0x return, low for a late-stage investor.  He votes no.
  • Neither VC partner will gain any bragging rights because the exit is small in an absolute sense.   This confirms their no votes.
  • Joe Engineer would get $120K pretax or about $60K post-tax.  He can buy nice car, but he still can’t touch a Silicon Valley house.  Joe doesn’t get a vote, but if he did, he’d vote no, too.

The interesting thing here is that Joe Engineer is much more aligned with Winston the VC than he is with the company’s founders and executives.  Joe would vote no for two reasons:  first, $60K after tax doesn’t move the needle for him and odds are (since he chose to work at the startup), Joe is a true believer in the technology and thus thinks of this deal as sell-out.  Amazingly, Winston votes no for the same reason:  $60M doesn’t do much for his fund and he also sees the deal as a sell-out.

Now, the founder would have made $30M and, using typical ratios, the CEO would have made $7.5M, and the key VPs somewhere between $1.5M and $3.0M.   In most cases, they would all vote yes.  (But in reality only the founder and CEO are on the board and actually get a vote.)

The scenario changes dramatically if the founder is already rich.  Imagine the founder made $100M on his previous startup.  Now, a $30M exit is uninteresting because it results in neither a lifestyle upgrade nor a status change.  Now, the founder aligns with Winston and Joe in voting against the deal.  You can analyze the CEO’s vote in a similar fashion.

The “Exit” Concept

Managers want to build great companies; VCs want great exits.

Unfortunately, building a great company is neither a necessary nor sufficient condition to enable a great exit.  At only 3 years old, Bebo sold to AOL for $850M.  A spectacular exit, no doubt, but a little more than 2 years later AOL sold it for less than $10M.  A great company?  Certainly not.  YouTube, while infinitely more ubiquitous, barely makes money but was sold to Google at 18 months old for $1.65B.  A great exit?  Yes — goosebumps quality even.  A great company?  Not.

The best managers tend not to focus on great exits.  They focus on building great companies.  In fact, the “IPO as exit” is almost purely a VC notion.  In reality, an IPO is almost certainly not an exit for the CEO; he or she is de facto bound to the company for at least the next several years and his/her ability to sell shares is highly restricted.

I have always believed that IPOs are like high-school graduations – they are a beginning, not an end.  Godfrey Sullivan, CEO of the red-hot company Splunk, seems to feel similarly, saying “we consider an IPO the 3rd mile of a marathon. The IPO is an early milepost, not the destination.”

In the best-case scenarios, building a great company will indeed lead to an IPO which will be yet another milestone in a long journey of success.  But this is not always the case.  I’ve seen companies (e.g., Versant back in the day) twist into pretzels to make it through the IPO window and provide a reasonable exit for the investors only to end up living-dead zombies thereafter.

Now, I have not found the particular VCs with whom I have worked over the past 20 years particularly exit-focused.  Most are surprisingly patient and indeed want to focus on building great companies.  But, you cannot ignore the possibility of divergence when some of the passengers can exit the bus reasonably quickly post-IPO while others cannot.

The terminology “exit” reflects this pretty clearly.  For employees, customers, staff, and executives, the IPO is not an exit.  Nor, for that matter, are most acquisitions.  Founders, key executives, and key staff are often locked in (through various mechanisms) for 1-3 years after a deal closes.

Irrational Considerations

As humans, we must recognize that we do not always act rationally.  Behavioral economics reminds us that we are subject to a bevy of rules and heuristics that can cause us to make sub-optimal decisions.

Some decisions that appear irrational are rationally motivated  – but by either an unknown personal or non-shared goal.  Others actually are just plain irrational.  For example:

  • Anchoring:  I need to make $50M.  (Because I decided that I need to make $50M.)
  • Benchmarking:  I need to make $50M.  (Because my roommate at Stanford made $50M and I’m smarter than he is.)
  • Fame-seeking:   I need to be famous and will take increasingly risky bets in order to achieve that.  (Arguably this is a rational decision derived from a non-shared goal, but if you are on the board of a company you have a duty to its shareholders so I’d argue it’s irrational from that perspective.)
  • Dreaming:   This technology is going to change the world, despite much evidence to support that contention.  (Because I made it and it’s really cool.)
  • One-more go:  I will take increasingly risky bets because I’m retiring soon and this is my last chance to get one more for my legacy.  Shoot the moon.

The trick here is most founders are, by definition, a little crazy.  The confidence and zeal it takes to quit one’s job, develop a product idea, start a company, and raise venture capital is well beyond that of the average “reasonable” person.  Thus, it can be hard for founders to know when to stop pressing bets.  The same traits that enabled them to be successful as founders present a risk they overplay their hands, and destroy shareholder value in the process, in the long term.

Conclusion

In this post, I’ve tried to highlight some of the common sources of potential misalignment between the various shareholders of a startup enterprise:  founders, venture capitalists, CEOs, executives and rank-and-file staff.  Hopefully, I’ve demonstrated that things aren’t as simple as they might appear and that just because everyone might own shares, doesn’t mean they have aligned goals and motivations.

If you think I’ve missed any good examples, please let me know.

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Posted in management, strategy, Uncategorized, Venture Capital

A Fun Taxonomy of Technology Executives

Posted on May 19, 2011 | 9 Comments

Building on on a post by 10gen’s Max Schireson which in turn built on a post by me, I thought I’d have some fun by playing with and enhancing Max’s taxonomy of technology senior executives.

Max’s theory is that a surprisingly number of executives have “just one play” in their business playbooks which fall into a number of categories.  Building on Max’s grouping, and based on my 20+ years in business, here is mine:

  • The Band Leader.  They get the old band back together from a prior company.  Band leaders are often surprisingly hands-off managers who swear by their teams and travel with them from gig to gig.  They often alienate existing employees, viewing themselves as “professionals” compared to the regime they are replacing.  These types are effective to the extent that the band’s capabilities are aligned with the company’s needs.
  • Joe Process.  Joe’s never met a problem that can’t be solved with process.  Consultants, methodologies, training, flowcharts, and stoplight-based performance dashboards appear from the woodwork.  Joe is effective to the extent that lack of process is a company’s problem.  In Joe’s world, by the way, that includes everything:  even a strategy problem is a process problem (“we just need a good strategy process”).  What Joe fails to grasp is that knowing how to do things is different from knowing what to do.
  • The Strategist.  Strategists focus on developing a deep understanding of the company’s current situation and then evaluating future scenarios based on it.  Good strategists are quantitative as well as qualitative in their analysis — paying attention not only to business and marketing strategies but also the resources required to execute them.  Bad strategists forget what I call “the strategy compiler” — i.e., for a given company in a given situation with a given set of resources and capabilities, is a chosen strategy executable?  A great strategy that’s only executable by some other  company is definitionally not a great strategy for yours.
  • The Cost Cutter.  Cost cutters love to take cost out of a business and spot potential inefficiencies everywhere.  They love scale economies, and eliminate anything that resembles rework with a passion, sometimes whether that rework represents valid customization or pure redundancy.   Beware when a cost cutter asks “what exactly do you do here?”
  • The Salesperson.  Born charmers, salespeople generally make a great first impression, appear sincere, and are unfailingly positive. They are power-centric, often political, and are sometimes more focused on ensuring they have the power to get things done than they are on ensuring that they are doing the right things.  Good salespeople are charismatic leaders who inspire their organizations.  Bad ones develop credibility problems if they cannot deliver against their own high expectations and if they deliver a series of expedient “in the moment” messages that are inconsistent over time.
  • The Headless Chicken.  In response to a reader comment, I’ve added this type.  Every so often, executives are “pattern matched” by boards/CEOs  into positions that are well beyond their capabilities.  When this happens, a headless chicken results — a person who is truly lost.  This becomes evident quickly to those immediately around the chicken and happily, is usually only a matter of time before those in charge see it as well.

Note that as skills, each of these is required in an effective executive.  Good CEOs, for example, need to understand strategy, eliminate waste, personally sell, build teams which leverage their networks, and define process.  It’s only when an executive becomes one dimensional — and all about one muscle — that it becomes a problem.

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Posted in management

Takeaways from the SVASE CXO Panel: How To Become a Talent Magnet

Posted on May 12, 2011 | 3 Comments

I spoke yesterday in Palo Alto at the Silicon Valley Association of Startup Entrepreneurs (SVASE) on a panel about recruiting entitled:  How To Become a Talent Magnet.

The event was hosted by Ram Sriram and my fellow panelists were:

The panelists generally agreed that for an early-stage startup to become a talent magnet, it should have these three things:

  • A clear, compelling vision.  The ability to tell your story, quickly and simply.
  • An aura of success.  The overall feeling projected by you, your team, your advisors, that this company is going places.  While you might not feel that way every day, you need to have your game face at all times.
  • An engineer-friendly environment.  Since most of the companies were early phase and trying to attract both the core executive team and their product development teams, this was an important point.  Engineers are good at sniffing out whether the company will be a fun and interesting place at which to work or whether they will be treated like galley slaves rowing the boat.
Here are some the tactics that can help you do that:

  • Get out and about.  ”The best entrepreneurs are those that never sleep.”  Go to meetups, conferences, etc.  Meet everyone.
  • Contact venture capitalists early, before you are asking for money.  Get a warm introduction where possible.  They can help guide your vision and potentially help build your team.
  • Get top-class advisors.  Don’t be shy.  Call the “names” in your space and ask them for an hour of time to hear your story.  Ask them if they’d be interested in advising the company or sitting on the board.
  • Remember that recruiting is a dual-selling process.  Don’t be so busy filtering candidates that you forget to sell them.  Don’t be so busy selling them, that you forget to filter them.
  • Remember that engineers can be risk averse.  Help them understand the risk equation.  Once, at MarkLogic, we lost an engineer who refused to leave her “safe job” at Sybase to go work at a “risky startup” only to be laid off from Sybase about 6 months later.  In this case, the little company turned out to be much “safer” than the big one.
  • Remember that your early employees will set the culture and tone for your company.  Filter on this dimension as well.
  • Be open about equity percentages.  Telling someone they are getting 50K shares without telling them the shares outstanding (i.e., FDSO) is like telling someone their salary is 100,000 but without specifying the currency:  dollars, euros, or yen.
  • Give fair/market equity consideration.  Most people take a pay cut to join an early stage startup.  One recruiter suggested post series-A equity percentages that look like this.  CEO 5-10%, CXO 2-4%, VP 1-3%,  key directors 0.5 -1%, independent board members and advisors 0.25-0.5%.
  • Beware that you can’t pay people nothing (or only in shares) lest you be in violation of minimum wage laws!
  • Beware moonlighting employees in the early phases — their IP may be owned by the current employer and not your startup.  Look for moonlighting clauses in their employment agreements and avoid use of their current employers computers and equipment.
  • Beware the sometimes subtle differences between employees and contractors.  The law may reclassify a contractor as an employee if they are low-level, highly directed, using company equipment, and/or long-term.  Beware that you may end up personally liable to the IRS if you don’t take payroll withholdings from such people and they fail to pay taxes.

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Posted in management, Talent

If We Can’t Have Repeatable Success, Can We At Least Have Repeatable Failure?

Posted on April 27, 2011 | 5 Comments

I’ve always found business to have a fair amount of accidental, built-in hubris, largely resulting from the strategy formulation process.  I remember one time at Business Objects we had a strategy offsite where, in our infinite wisdom and with a fair bit of groupthink, we came up with the idea for a BI workflow solution, which we dubbed Sundance for the name of the lovely venue at which it was conceived.

I remember coming home from the offsite and having a conversation akin to the following:

Me:  What if Sundance doesn’t work?

Exec:  What do you mean, “doesn’t work?”

Me:  Well, for example, what if nobody wants to buy it?

Exec:  What do you mean, what if nobody wants want to buy it!?  It’s strategic.  We can put incentives in the salesforce compensation plans and bundle it.  Don’t worry, we can sell it.

Me:  I didn’t say what if no one wants to sell it.  I said what if no one wants to buy it.

Exec:  But, it’s strategic.  We decided it at the offsite.  You’re talking crazy Dave.  Come have another beer.

As a marketer by background, I tend to view most everything as an experiment.  That is the nature of marketing.  You never know what’s going to work.  You can try different things.  You can measure them.  You can see what works and what does not.  You can even try to build explanations for why certain things work and certain things don’t.  But you are trained to approach business with humility and with an experimental spirit.

Exec:  Look.  Sundance is not an experiment.  We can’t tell Wall Street it’s an experiement.  We need to tell them it’s the future of the company.

Me:  But what if it isn’t?  What if we’re wrong?  Heck, it’s not a bad idea, but we dreamed it up in two hours on a white board.

The problem is that things fail all the time in business.   Products fail.  Startups fail.  Business models fail.  Heck, Sundance failed.  And the bigger problem is that when we dismiss the possibility of failure in our planning, we dismiss the possibility of learning along with it.

Yes, business — and particularly so in startup-up land — is the quest for finding a repeatable, scaleable model.  (Why?  So you can “just add water” and create an arbitrarily large business — and valuation to go with it.)  But quite often in the hurry for repeatable success, managers fail to design things scientifically so they actually have some degree of repeatability and can thus learn from either success or failure.

Example:  you take a new product and put it in the hands of 8 different salespeople (all of whom are “world-class” as defined by the VP of sales) with 8 different backgrounds in 8 different cities selling to numerous types of different target customers with a variety of different sales pitches.  Consider these scenarios:

  • Everybody sells.  Buy more stock quick.  Anyone can sell this stuff to anybody saying pretty much anything.  (Hint:  this does not happen very often.)
  • Some sell and some don’t.  This is tricky.  Did the folks who sold sell because of their background, their territory, the target customer, their approach, or their salespitch?  Well, we don’t know.  We can look for patterns but we haven’t designed the experiment to make things easy.  The quick assumption is that the folks who sold did everything right and the folks who didn’t did everything wrong, but if you think about it, you can’t assume that’s the case.  Did we have a great salesperson in Chicago pitching the wrong message?  The guy in DC who sold a lot carries a rabbit’s foot — should we dispatch rabbit’s feet instantly to the whole salesforce?  After firing the VP of sales, we learn that “world-class” actually meant “I liked him/her” and can find virtually no additional common traits among the salesforce.  Hum.
  • Nobody sells.  This is hard, too.  Was everybody doing everything wrong?  Unlikely.  Yet, no one came together with the right combination to sell.  But are we sure the lady in Chicago is a bad salesperson?  Can we be sure that the pitch they’re using in DC doesn’t work?  Can we be certain that there is “no market” for the product as the VP of sales is insisting?  What can we learn from such a random experiment?  The answer is nothing.

Thus, my statement:  if we can’t have repeatable success, then can we at least have repeatable failure?

If instead of hiring 8 salespeople, we hired only 3,  put them all in NYC, and called only on the same handful of titles within investment banks using the same sales presentation and demo, could we have learned more?   Yes.

  • If it works, it’s great news, because you know exactly what to go scale.
  • If it doesn’t work, it’s still good news (perhaps for your successor) because you can, with a pretty high degree of certainty, conclude that mix of levers tried will not work.  Or, in the spirit of Thomas Edison, you’ve learned one more way not to make a light bulb.

I’ve picked two extreme cases and there certainly is middle ground in between, but the two key questions are:

  • Are we assuming only successful outcomes in our planning?
  • Are we designing things as an experiment from which we can learn no matter the outcome?

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Posted in management, Marketing, strategy

Thoughts on Ben Horowitz’s CEO Psychology Post

Posted on April 4, 2011 | 2 Comments

Last week Ben Horowitz of red-hot VC firm Andreessen Horowitz did an excellent post entitled What’s the Most Difficult CEO Skill? Managing Your Own Pyschology.

My favorite passage (edited):

Even if you know what you are doing, things go wrong. Things go wrong, because building a multi-faceted human organization to compete and win in a dynamic, highly competitive market turns out to be really hard.

If CEOs were graded on a curve, the mean on the test would be 22 out of a 100. This kind of mean can be psychologically challenging for a straight A student, particularly because nobody tells you that the mean is 22.  [...]

Being responsible for everything and getting a 22 on the test starts to weigh on your consciousness.

What then, in the imperfect world that happens to be reality, is the job of the CEO?

  • To get everything perfect?
  • To get what matters right?

I am a huge believer in #2 — the job of the CEO is to get what matters right and, not to put too fine an point on it, the hell with everything else.

I didn’t always feel this way.  When I joined Business Objects in 1995 after spending a decade at two fairly broken companies, I expected that everything would be perfect.  I’d read the S-1 cover to cover.  The company was pristine:  5 consecutive years of profitable 100%+ compound annual growth.  70%+ license revenue contribution.  An amazing IPO lead by Goldman Sachs.  Finally, I thought, I’m going to work at a company that was perfect.

Boy, was I in for a surprise.  Without diving into details, on arriving I discovered that there were zillions of things wrong at Business Objects (e.g., think:  version 4.0).  It was then that I realized it.  Business isn’t about perfection.  It is about getting what matters right. And, boy, was Business Objects good at that.

It’s not about the 22 overall grade.  It’s about getting 100 on the 20% of things that really matter.  This, of course, begs the question “what matters?” which is a question of strategy and one that I’ve already written about here.

The other reason I believe CEOs should focus on getting what matters right (as opposed to everything perfect) is a simple matter of pragmistism.  It is impossible to “focus” on getting everything perfect.  Everything never will be perfect.  CEOs who try to make everything perfect will die trying and probably kill their teams along the way.  In some ways, perfecting everything is a form of avoidance of the really hard question (“what matters?”) as opposed to the easier questions of “what do I know how to do?” and “what’s broken that I can fix?”

It’s easy to find things broken at any company.  The hard part is figuring out what matters and then making those few, strategic things work.  You might get a 22 overall.  But you should get it by scoring 100 on the 20% of the test that matters and 2 on the other 80%.

Doing the inverse is what one friend aptly calls “polishing shoes in the ER.”

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Posted in management, strategy