Category Archives: Silicon Valley

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).

porters-five-forces

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.

the-graduate-plastics
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.
SAP_logo

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-org-chart-300x195

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.

good

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.

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Footnotes

[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.

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.

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Footnotes

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.

Conflict Avoidance Causes Conflict: Managers Too Nice for Their own Good

One thing I try to teach all new (and many old) managers is the simple, somewhat counter-intuitive rule that conflict avoidance causes conflict.

Example:  a manager has problems with an under-performing employee, but doesn’t tell them that their work is below expectations and they need to ship up.  Over time the manager gets increasingly frustrated with the work quality and eventually fires the employee abruptly in a heated conversation.

The employee has no idea his work was sub-par, had been repeatedly reassured by his manager that things were OK, had received a solid annual performance review, and thus leaves the organization angry and confused.  This results in a downstream lawsuit, with the company entering in a weak position because (due to the lack of dialog) there is little or no “paper trail” documenting the performance issues.

Now the company is looking at a legal battle that will cost or settle in the tens of thousands of dollars — if not more — all because a manager was too afraid to say “you write bad code” or “you run events poorly.”

And why did the manager never say these things?  Because they were avoiding conflict.

This pattern happens over and over in business:

  • Managers unhappy with supplier performance and simply cancelling a contract rather than trying to work together to improve service.
  • CEOs and boards getting alignment and everyone being too polite to face the issue until it comes to a major boardroom blow-up.
  • Directors quietly passed over for promotions for reasons they don’t understand until they eventually quit the company.
  • Non-native English speakers getting glass-ceiling-ed due to their communications skills, but their manager is too afraid to put the issue on the table.

In each case, conflict avoidance results in [1] a lose/lose situation and [2] more conflict.

So to phrase a slightly longer version of my rule:  conflict aversion leads to pressure build-up which leads to explosive conflict.

Why does this happen so often in Silicon Valley?

  • In general, we are all taught to be nice as we grow up (e.g., “if you haven’t got anything nice to say, then don’t say anything at all”).  Many people have trouble adapting that principle to the workplace.
  • Silicon Valley is full of introverted math and science types who enjoy working on hard conceptual problems but who, for the most part, would rather have a root canal than sit down with someone to discuss a conflict situation.

Overcoming this isn’t easy.  Hard as it may be to believe, I used to be “nice” myself.  But then I realized that being nice wasn’t actually being nice, it was being conflict averse, avoiding tough situations to the detriment of both parties until things come to a typically explosive ending.

Most of the articles you’ll find on the web about work conflict are about peer-level conflict, such as this nice write-up on UC San Diego’s HR site.  But the most dangerous avoided conflicts are those between manager and subordinate, where the manager simply abdicates the responsibility for doing his/her job.  Over time, this will cost someone their job — either the manager for failing to manage, or the employee, often in what he/she perceives as a blind-side attack.

Here’s a nice Harvard Business Review blog post on giving negative feedback that any conflict-averse manager should read.  If your problem runs deeper, then you should read Difficult Conversations, an excellent book in its own right but also one with a title that provides part of the job description of any senior executive.

What do CEOs do for a living?  I’d argue three things:

 

The Silicon Valley Strategic “Pivot”

The first time I heard the word “pivot” in the context of business strategy was about nine months ago.  As a student of language, my ears perked up when I heard it.  I remember thinking, “pivot … interesting, haven’t heard that one before, … strong buzzword potential, … nice metaphor, with one foot stationary and the other moving.”

Silicon Valley being Silicon Valley, with more fashion around language than clothing, today you hear it all the time.  Some sample usage:

  • “Yeah, dude, we had to pivot after our A-round, but after that we really got traction.”
  • “I think you know like, we’re running on our 401k round, just trying to figure out the core product, then we’ll expose it to the market, through a pre-alpha and pivot from there.”
  • “Like, you know, every startup needs to  pivot like two or three times before locking-in on its final strategy.  That’s the nature of innovation.”

Extending the metaphor, one wonders in the last example if your board can call the CEO for strategic traveling.  

Despite my general buzzword aversion, I like the pivot metaphor precisely because one foot is stationary.  A complete strategy change is therefore not a pivot but a traveling violation because you entirely abandon the old strategy as opposed to changing direction in a way that leaves one foot in the old strategy and one foot in the new.

I also like the pivot metaphor because I agree with the idea that from inception to $100M that a company will need to pivot and probably a few times.  (Think pivoting multiple times in a game, but not on one ball.)  That truly is the nature of innovation and Silicon Valley companies do it all the time.

The two interesting questions then become:

  • How do you know if you’re traveling vs. pivoting?
  • How you know if the pivot worked?

I answer the first question by evaluating the degree of continuity between the old and the new strategy.  I’d evaluate the second question by the revenue and margin contribution of the old strategy vs. the new one.  If the old strategy is driving all the revenue, then you may have pivoted, but it’s not working.  If the new strategy is driving the lion’s share of revenue and margin, then — and only then — have you done a successful pivot.

Seating Chart for President Obama’s Silicon Valley Tech Titans Dinner

While I was reading this story in the Mercury News about President Obama’s dinner yesterday with a number of Silicon Valley tech titans, an odd thought occurred to me:   Boy, I’d hate to make the seating chart for that dinner!

How do you prioritize Larry Ellison, Steve Jobs, Mark Zuckerberg, Eric Schmidt, Reed Hastings?  Who gets to sit near the President?  Who has to sit far away?

So when  saw this photo in the paper, I thought I’d add some value and turn it into a seating chart for your interest and amusement.  In the end, having Obama sit between Zuckerberg and Jobs wasn’t that surprising, but the structure among the rest is still fun.  (Bear in mind the dinner was held at Doerr’s house, so he and his wife were the hosts.)

Strategic Thoughts on Finding a Job in Silicon Valley

While I know that reading the newspaper — with high unemployment, record budget deficits, and drastic spending cuts  — might make you want to go back to bed in the morning, from my experience there is plenty of positive excitement happening in Silicon Valley right now.  Venture capital (VC) is the engine of Silicon Valley, VC investment is strong, and entrepreneurship seems to be alive and well.

After finishing up a six-year run at my last company, I am currently in the process of looking for my next opportunity.  Since I’ve been out-and-about and thinking quite a bit about the job search process, I thought I’d share a few of my learnings along the way.

  • Opportunity trumps execution.  Seek companies that face large and/or obvious market opportunities.  I have always done best when joining companies where I am convinced that everybody needs one.
  • Team trumps position.  Being on the right team is more important than the particular position you’re asked to play.  Positions change over time.  Don’t pick a director title at a weaker company when you could have made five times the money, had five times the fun, and made five times more valuable networking relationships as a senior product manager at a stronger one.  Business card narcissism can be a road to nowhere.  See the bottom of this post for some fun math in this regard.
  • Think IPO-zone, not pre- or post-IPO.  Most people draw a bright line at a company’s IPO, acting as if the good part of the movie ends there.  In reality, an IPO is like high school graduation — it is the beginning, not the end.  If you can join a quality company in the IPO zone (e.g., 12 months either side of an IPO), you are likely to do very well.  Which side of the IPO line matters far less than whether company is reasonably in the IPO zone.  (Thanks to Jerry Held for helping me reframe things this way.)
  • Know thyself.  Get a sense for what kind of environment you will realistically like and then use interviews to validate or invalidate that view.  For example, I’ve talked to companies ranging from 3 to 300,000 employees, and I can say that I most enjoy the 100 to 10,000 range.  Yes, that’s two orders of magnitude, but I’ve talked across five!
  • Have a positioning.  I have worked hard to keep my positioning “strategic marketing guy.”  You might think I would have dumped “marketing guy” in favor of “CEO” during the past 6 years, but I deliberately did not for two reasons:  I thought it would needlessly close doors for  SVP/ GM jobs at larger organizations and I thought it was inaccurate.  In the end, nobody grows up a CEO; we all grow up in some function that helps define who we are.  Yes, I have been a successful CEO, think I’m process-oriented, and think I’m great at running and scaling operations — but deep down I’m an analytical, strategic marketing guy from New York.  It’s essence vs. experience:  positioning is about essence.
  • Remember that like sales, it’s a volume game.  I have looked at over 40 different opportunities in one month and keep finding new ones every day.  I’ve done this through networking with peers and venture capitalists, cultivating recruiter relationships over the years, and to a lesser extent by leveraging social media.  At some point you will pick a new role and you will make a more informed choice if you have really beaten the bushes while searching.
  • Be picky.  Life’s too short and we spend too much time at work to work with people we don’t genuinely enjoy.  For me, that means finding smart, direct people who are just a little bit crazy.  For you, it probably means something else.  But all of us should (politely) avoid bossholes (or boardholes) who ruin things for everyone.
  • Be nice.  A CEO friend has a board member who is fond of saying “friends come and go; enemies accumulate.” That’s great advice to remember both in day-to-day work life as well as when you’re out looking for a new opportunity.  It’s a small valley and you want to accumulate as few enemies as possible during your time working in it.

Bonus:  Some Fun Employment Math
First, let me make a table that demonstrates two rules of thumb:  salary increases 30% with each level in an organization and equity increases 4x.  Applying these two rules generates a reasonable approximation of a B-round startup, below.

Note that while the CEO makes 4.6 times a clerk’s salary, he or she makes 1024 times a clerk’s equity.  That is the argument for being high in an organization.  But we have to be careful not to apply that logic blindly.

Let’s take an example.  Say you’re good enough to get a VP job at a good quality startup.  That might come with 1% equity grant.  Now, let’s say you’re talking to another, better-quality startup and they want to make you a director with a 0.3% equity grant — but, because you’re a hot candidate you can talk them up to 0.5%.  Let’s say the stronger company is growing 80% and the weaker one 30%.

You make 3.5 times as much money with the smaller grant, and smaller title, at the stronger startup.  Note that even if you can’t talk up the grant to 0.5% and only get the 0.3% initially offered, you still make over twice the money at the stronger company.  Which company will look better on your resume in the future?  And, if you’re good, who’s to say you won’t end up a VP at the stronger company in year two?

Hopefully this demonstrates how company opportunity trumps job title — i..e, that being on the right team is more important than the position you’re initially asked to play.

Veterans vs. Up-and-Comers in Startups

The conventional Silicon Valley /  venture capital (VC) wisdom is that startups should not bet on first-time managers in just about any position, but particularly at the executive team level.  It’s best captured by the statement:  a high-growth startup is not the place to learn how to do your job.

This is the conventional wisdom because, while counter-intuitive to some, VCs are not actually risk-takers, they are risk-isolators.  A typical VC is trying to isolate risk down to one thing:  the unique value proposition behind the startup.  Those value propositions can vary considerably:

  • Sometimes, it’s about the technology.  Mark Logic, for example, is a technology disruptor.
  • More in vogue these days, it’s about the business model.  Salesforce disrupted the on-premises, perpetual license business model with SaaSMySQL disrupted the traditional license model with open source.
  • Sometimes, it’s about both.  My friends at Clearwell will rent you an appliance that includes an innovative e-discovery application.

But the point is that VCs are trying to isolate risk down to the one key value proposition.  They do that by setting every other lever in the business to standard.  For example, per the conventional wisdom, a SaaS BI business model disruptor should:

  • Hire standard managers with experience in big BI companies, and use equity to lure them from their cozy jobs.
  • Develop a standard BI application/product that contains the features users expect.
  • Build a standard enterprise sales force, hiring salespeople from the established BI vendors
  • Implement a standard BI partnering strategy, with the usual suspect technology and systems integration partners
  • Devise a standard marketing strategy, typical of those used by other BI companies but with a key emphasis on the unique value proposition.

Like most VC wisdom, at the first order the approach makes a lot of sense.  At the second order, however, it presents some problems.

  • It encourages cronyism, where the first such experienced manager knows a whole clan of other folks who also are looking for jobs, often for the same reason he or she was (e.g., recent of acquisition by Oracle, a new CEO, a strategy shift).  While one of the benefits of hiring experienced managers is undoubtedly their networks, I’ve seen this work out both quite well and spectacularly badly.    The key issue boils down to whether you are hiring drivers or passengers.  Was the company from which you’re hiring successful because of these people, regardless of these people, or indeed in spite of them?  Are you hiring real results drivers or people who, Fooled by Randomness, have great resumes and think very highly of themselves, but who are incapable of solving your company’s problems?
  • This cronyism often creates a divisive environment that drives out your top existing talent.  As the “Company X” mafia takes over, they typically show insufficient respect for those who got the company where it is, ridicule some past practices, and talk boisterously how easy it’s going to be to fix all this.  While problems in operational practices are easy to spot and fix, this approach overlooks the startup’s need for process maturity (e.g., size relative to Company X) and the startup’s strategic position in its market.  I remember when the experienced (manufacturing-oriented) managers from ASK took over Ingres (then a ~$200M company) and decided that implementing a heavyweight quality process was the answer to our problems.  In reality, our problem was strategic:  in a land-grab market we’d made some poor technology choices (e.g., Quel vs. SQL) that hampered sales and we had been too conservative about grabbing land.  Just as the Ingres executive team’s only hammer was technology, the ASK executive team’s only hammer was process.  Neither, unfortunately, was called for given the company’s situation.
  • It limits career growth for talented up-and-comers within the company:  either individuals with management potential or existing managers with executive staff potential.  If every new management job will be filled by an experienced outsider, then insiders quickly feel trapped and unable to advance in their careers, making them — particularly the more ambitious ones — more likely to leave the company.

The answer to managing all this is, of course, balance.  Both the CEO and the executive team need to take some calculated risks in betting on up-and-comers in a number of posts.  This generally will cost the CEO some political capital (debited at promotion time and never credited back, even if the up-and-comer is highly successful), but will help him or her retain both institutional memory and some key people for the future of the company.

Having a stronger-than-usual preference for up-and-comers, I’ve developed a few rules for managing this process.

  • Always do a external search.  You can turn the dial on how hard — from a check-the-network or calling a few contingency recruiters all the way up to a retained search — but you should always expend energy to see “who’s out there” so you have a sense of the market in making the veteran vs. up-and-comer decision.  You owe this to yourself, your board, and your shareholders.
  • Run up-and-comers through the same process as the external candidates.  The only exception here is when you are restructuring in which case many people may be changing roles without following an interview process.
  • Keep a mental balance of how many up-and-comer chits you have used and how many you think you have left.  You need to view them as a scare resource, because they are.
  • Ensure the up-and-comer is “all in.”  If you are going to bet political capital on someone they can’t either be [1] telling you what you think you want to hear or [2] be unsure of whether they can do the job.  You should only bet on up-and-comers who are certain they can be successful, and so certain that they will probably quit in the not-too-distant future if not offered opportunities.
  • Limit up-and-comers’ ability to bet on other up-and-comers.  Force them to prove they merit their posts by demonstrating how they can bring in veterans.  This is a both a solid practice and a great test.  The worst outcome is that your up-and-comer hires no veterans for his team and you end up with a whole multi-level hierarchy of inexperienced people.  (I’ve seen this happen, too, though happily not in my department and it’s one heck of a mess because there is typically no organizational awareness that anything’s even wrong! )