Category Archives: strategy

Bobby Fischer Applied to Silicon Valley: Pattern Matching vs. Good Moves

Posted on July 26, 2011 | 4 Comments

When asked why he won so many matches, chess grandmaster Bobby Fischer would reply:  ”all that matters on the chessboard is good moves.”

That is, winning is all about the moves.  And moves, in turn, are all about the situation.  Contrast this to today’s Silicon Valley fashion of “pattern matching” which seems the opposite — all about the players and not so much about the moves.

Consider Blippy, a bad idea if there ever was one, which created a $13M VC sinkhole for a service to share credit card receipts on your social network.  Let’s look at the founders:  two recent Stanford engineering grads and an experienced entrepreneur, Philip Kaplan (most famous for bubble-era website,  F**kedCompany).

How about Cuil?  (Pronounced coo-il.)  Cuil launched in July, 2008 claiming to be the next Google with superior indexing and operational cost advantages.  It seemed clear to me (and the world) that from the start, Cuil wasn’t any better than Google.  They burned $33M in VC and entered theTechCrunch deadpool in Sept, 2010.  Let’s look at the founders:  three ex-Google engineers, two of them PhDs and one from Stanford.

When pattern matching is the rage, when the moves are so obviously bad, and when the players so clearly match the pattern, I’d argue that Blippy and Cuil broke Fischer’s law.  They weren’t about the moves; they were about the players.

I used to joke that if you wanted to raise money in Silicon Valley you should be aware that VCs see people in one of four buckets:

  1. Made me money before.
  2. Made someone money before.
  3. Went to Stanford
  4. Everybody else

Now, make no mistake, the team is has always been a key factor in venture capital investment.  But I think the historical approach was to see the team as de-risking element for the idea.  Put differently, we are investing in a market opportunity and we would like to isolate as much risk as possible to the market opportunity.  How do we do that?  By getting an experienced executive team to reduce execution risk, by hiring experienced engineers to reduce product development risk, etc.  That is, as VC founding father Don Valentine used to say, “great markets make great companies.”

(Asides:  [1] Irony alert in the above video where Don tells a bunch of Stanford graduate students it doesn’t matter where they go to school and [2] note further that Valentine was a pithy quote machine, coming up with such classics as “I am 100% behind my CEOs up until the minute I fire them” and “all companies that go out of business do so for the same reason – they run out of money.”)

Somehow I wonder if things haven’t gotten upside-down of late:  where the players matter more than the moves.  I’d argue that Silicon Valley used to be about the moves (the strategy and market opportunity) and VCs sought experienced players as a risk reduction technique.  Now, it appears to be about the players and the implicit assumption that those who match the player-pattern can win any match, regardless of the moves.

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Posted in strategy, Venture Capital

Marketing Vision While Selling Product: The 3+1 Repositioning

Posted on July 15, 2011 | 1 Comment

This post was inspired by a recent beer with long-term colleague, friend, and fellow volleyball dad, Paul Albright, now chief revenue officer at Marketo.

The question we discussed was how can a company sell current product capabilities but also market vision at the same?  (For brevity’s sake I mean “product” to include either traditional software products or SaaS / cloud services.)

Most companies simply market their current product capabilities:  Here we are.  This is what we do.  Here are the benefits of using it.  Wanna buy one?

While this isn’t bad — particularly if you don’t forget step 3 (benefits) — you can do better.  How?  Say, for example, your competition sells an offering similar to yours and they sell using a current capabilities patter similar to the one above.  Now you show up selling something bigger:

 This is our current offering and it includes area 1 (which the other guy is pitching), but also areas 2 and 3, and the vision for our company is not just about having the best area 1, but instead to pursue a capstone vision that includes areas 1, 2, and 3.

Ceteris paribus, who do you think wins?  You do.  Why?  Because you completely enveloped the other guy’s message.    You neutralized him on area 1, you one-upped him in areas 2 and 3 (even if your current offering is anemic on an absolute basis), and then you made the customer feel both more aligned with and safer buying from your company because you are pursuing the bigger vision.

I call this a 3+1 repositioning.

I did my first 3+1 repositioning  back in about 1989 when I launched Ingres 6.3.  Prior versions Ingres were just for data management, but with release 6.3 we not only improved data management, but added knowledge management and object management capabilities and introduced the vision of an intelligent database system.  So area 1 = data management, area 2 = knowledge management, area 3 = object management, and the capstone vision was the intelligent database.  While it was a well-executed launch, it was a long time ago, Ingres had many other problems, and the ending wasn’t terribly happy.

So let’s look at some more recent examples.  SuccessFactors (where Albright was CMO and GM for several years) started out as a SaaS provider of performance reviews. How do you broaden that vision?  Well let’s look at what they say now:

Now let’s take a look at Marketo, a firm that I have traditionally thought of as about lead nurturing and incubation.

The magic of the 3+1 repositioning is:

  • It paints a broader vision, enveloping your competition
  • It provides a simple, memorable three-point message.  (Heck, I launched Ingres 6.3 more than 20 years ago and still remember the message!)
  • It lets you call higher, getting access to more power within the organization
  • It positions your company as a thought leader, someone defining the future of the market
  • It takes for granted your ability to neutralize any features du  jour in the core area.  (Oh, yes, we’re committed to having top-end lead management, but that’s just one part of the picture.)
  • It rallies your company, providing a North star towards which everyone can navigate.

The perils of a 3+1 repositioning are:

  • It can’t be done solely are a marketing exercise; it must be a company strategy and some resources must be invested in areas 2 and 3.
  • You can easily oversell areas 2 and 3, ending up with disappointed customers.  Remember the bear joke:  you just need to run faster than the other guy, so don’t overset expectations.
  • It can make your accountants nervous because there is a distinction between buying today’s product and buying into a (disclaimed) future vision and buying tomorrow’s product.  The latter tends to have negative revenue recognition issues.

In the end, I am a big fan of this 3+1 formula and encourage marketers everywhere to keep it in your toolbox.

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Posted in Marketing, strategy

The Silicon Valley Strategic “Pivot”

Posted on July 13, 2011 | 6 Comments

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.

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Posted in Silicon Valley, strategy

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

The Open Source Software Paradox

Posted on May 10, 2011 | 11 Comments

As a marketer, I’m a fan of open source software.   After all, if you can’t dislodge Microsoft from mid-range server operating systems, Microsoft Office from desktop productivity suites, or Oracle from relational databases — and doing so through traditional means is a virtual impossibility —  then blowing up the whole business model isn’t a bad start.  It’s creative and it cuts right to the core of the problem.

But as a business-person I am not.  When you play the role of market spoiler it’s much easier to be famous than rich.  For example, when MySQL was acquired by Sun in 2008 for $1.2B, MySQL was doing only about $65M in annual revenues.  While the revenue multiple on the exit was spectacular, their capture rate was not:  MySQL disrupted literally billions in “big three” (i.e., Oracle, DB2, SQL Server) database revenues.  But if your value proposition is rooted in “almost free relative to leading commercial alternatives,” then you won’t succeed at 50% of their cost; you’ll need to be more like 2-5%.

I refer to open source as both a development model —  i.e., a way of building software — and a business model.  While the former is more well defined than the latter, the typical way to make money in open source is through selling subscriptions or licenses to certified and more-quickly-patched releases as well as selling technical support and/or consulting services to go with them.

While a spectacular exit multiple may occasionally pay off big time for shareholders (e.g., JBoss, MySQL), my theory is that in general it’s very hard to make money with the open source business model.  Red Hat is the obvious exception, and we’ll talk about them in a minute.

The basic paradox of open source is this:

  • The smaller the community the worse the software quality and the more people need certified releases and support.
  • The bigger the community the higher quality the software and the less people need certified releases and support (i.e., the community version will do).

So you can have a large community who doesn’t need to buy from you or a small community who does.

Two other drivers complete the picture:

  • The nature of the software and to what extent it truly requires an almost-daily stream of patches and updates and …
  • The monetization rate which is a function of the commercial market structure.  For example, the lower-level the software (e.g., operating systems) the more the market tends towards natural monopoly as customers want to minimize entropy at the bottom of the stack.  This should drive high pricing/margins on the commercial side of the market, and a parallel opportunity for someone to establish clear leadership on the open source side.

This is why Red Hat does so well when most others end up stagnating in the tens-of-millions of revenues range. The market is huge.  The software is low-level and thus the market “wants” a clear leader (think:  increasing returns) who can provide a hardware-independent, low-cost, supported product as an alternative to the proprietary Unix-es of days past.

Put differently, the bigger the commercial market and the more monopolistic its structure, the better the open source opportunity.  Conversely, the smaller the commercial market and the more fragmented leadership is within it (e.g., enterprise search, document management, and to some extent BI), the worse the open source opportunity.

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Posted in Open source, strategy, Uncategorized

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

Business Strategy and The Wrong Medicine

Posted on March 11, 2011 | 4 Comments

Let’s say you’re not feeling well, so you visit the Doctor.  You walk into her office and she says, “Hi, it’s great to see you again.  I’m going to start you on 125 mcg of Synthroid.”

You say, “What?  You have even examined me yet!”

“I’m starting you on thyroid hormones because the patient before you had Hashimoto’s disease.”

“But, how do you know what I have?”

This sounds crazy, right?  It would never happen in a Doctor’s office.  But — rather amazingly — it happens every day in business. I call it “rewind/play syndrome” (an increasingly anachronistic metaphor, I now realize) where successful, otherwise-smart business executives repeat strategies that worked in their last engagement, regardless of whether those strategies are appropriate, or even relevant, in their new one.

To make this concrete I’ll give two examples.

My first example is Ingres, an early relational database vendor that for many reasons lost out on the second biggest market opportunity of the last century, losing the RDBMS market to Oracle.  In October, 1990 ASK Computer Systems (the company that defined and dominated MRP, the predecessor category to ERP) acquired Ingres.  In a sense, the company that could have been Oracle was acquired by the company that should have been SAP.  ASK had bet their next-generation product on Ingres, developing it on both the Ingres database and its proprietary application development environment.  In a classic escalation-of-commitment error, when Ingres got into deep trouble, rather than abandoning Ingres and switching horses to Oracle, ASK chose to acquire its technology supplier instead.

Quality, process-focus,  TQM, and Deming worship were the business fashion of the day and, in the manufacturing sector at least, for very good reason.  Since ASK sold almost entirely to manufacturers they knew quality cold.  So when they showed up at Ingres , they did what they knew — implemented a total quality process.  It was a major focus for the first year of the integration. The process itself — just the templates and the forms — took about four 3-inch deep white binders.

The project struck me as impractical from the beginning.  I repeatedly voiced the concern that if we could barely muster the resources to define the process (and maintain that definition) then how in the world could we allocate enough project managers to even have a chance at executing it?

Practical though I was, in my youth I had failed to see the even bigger blunder:  the problem with Ingres wasn’t product quality.  The software was almost universally acknowledged to be superior in both functionality and performance to Oracle.  Yet more and more people bought Oracle anyway.  Why?  Because Ingres was in a landgrab market with high-switching costs and strong increasing returns of market leadership. The further Oracle got ahead the easier it was to beat Ingres.

By 1990, Oracle was already 4x larger than Ingres — the horizontal market was already lost and all the quality process in the world wasn’t going to fix that.  Ingres needed a new strategy — perhaps focused on owning a horizontal or vertical niche — not a TQM overhaul.

Needless to say, the whole thing failed.  In its last quarter as independent company the ASK Group lost $69M on sales of $87M and was subsequently sold for a pittance — $310M, less than 1x revenues — to Computer Associates (CA).

My second example is less dramatic and simply about marketing programs.  At one point in my career I worked for an executive who had been a key part of building Cadence to $1B.  As part of that great success one thing he always remembered and enjoyed was doing some very high-end marketing programs focused on a very small number of people. The concept was to give people experiences they’d never have on their own and that they would remember for a lifetime.  That’s cool.

But to baseline the discussion, note that a typical software company might spend $100 on average to generate a sales lead.  Thus, an expensive marketing program might run $500/lead and a cheap one $25.  The program I’m talking about cost $30,000/lead — 300 times more than the average program and enough, as I pointed out at the time, to buy every participant a Ford Taurus and still have money leftover.

To me, at a gut level it was just crazy — fun, but crazy.  One of my colleagues, however, cracked the code on what was going on by posing the following questions:

  • At Cadence, what percent of total revenues came from your top 10 customers?  While I can’t remember the answer, it was very high — say 70%.
  • At BusinessObjects, what percent of total revenues come from our top ten customers?  Answer, like 5 to 10% — we ran a high-volume, relatively modest deal-size business.

So it wasn’t a matter of whether — in absolute terms — it was just plain crazy to run a program that cost $30K/attendee.  At Cadence, it probably wasn’t — if your top ten customers are generating $700M/year then go ahead and drop the big bucks on the right people at those firms.  But at BusinessObjects, it made no sense.  We didn’t have that kind of business.  Again, see the rewind/play problem.

I can provide a dozen other examples, which I also sometimes refer to as an “FBI guys” problem if you remember the scene from Die Hard where the “professionals” (the FBI guys) show up in black helicopters, take control from the LAPD, and say “this is just like freaking ‘Nam.”  One RPG later, the helicopter is in flames on the ground and LAPD Chief Duane T. Robinson sheepishly says:  “We’re gonna need some more FBI guys, I guess.“

Because I’ve seen this mistake happen so often and committed by so many very smart people, I must admit that I’m rather fascinated by it.  After much thought, I think that business people apply the wrong medicine for several reasons.

  • People like to do what they know.  ASK knew quality, so ASK applied quality to Ingres.
  • People instinctively repeat what made them successful.  You try convincing someone who made $50M executing a given strategy  at his last company that it’s a bad idea at this one.  (Hint:  revise your resume before doing so.)
  • People are often actually hired to repeat what made them successful.  If you look at boards and the search process, they tend to diagnose the problem and then say we want a person who can do X.  Of course, you might think that a new person would still want to make his/her own opinion of what’s indicated, but when you consider the prior point plus the board pressure to lather/rinse/repeat, you can see how it happens.
  • It’s often easier to do what you know and feel busy than step up and face the real problems that are not easy to solve.  Ingres’s real problem was huge — it had blown the market opportunity of a lifetime, needed to give up on general market leadership, and try to gain niche leadership.  That’s a tough pill to swallow.  So it’s easier to blame quality and focus on that.

It’s like saying go bandage the skinned knee when patient has a brain tumor, because at least you know what to do about the knee.  Zig Ziglar, in his oft-told story of processionary caterpillars, calls this confusing activity with accomplishment.

What can executives do to avoid this mistake?

  • Seek first to understand.  If you show up with all the answers, you’re probably just doing what worked last time.
  • Diagnose then prescribe.  Perform a situation assessment of the business and then derive strategy and tactics from the company’s situation.
  • Keep yourself honest.  Beware that rewind/play is a natural human tendency, and ask yourself — deeply and honestly — if you think you’re doing it.
  • Avoid avoidance.  Make a list of your company’s problems, including all the big nasty ones, and then make sure that your strategy isn’t the equivalent of fiddling while Rome burns.  Find the hardest nasty problems, and the biggest best opportunities, and focus your business on them.

Hint:  if you’re blaming “execution” then you’re most probably avoiding bigger, harder strategic issues.

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Posted in fail, strategy

Leo’s Pawn to King Four: HP To Acquire Vertica (Updated)

Posted on February 14, 2011 | 9 Comments

HP today announced that they will acquire data warehouse and analytics platform provider Vertica of Billerica, MA.  Cowen and Company estimated the price at 5x revenues, estimating that Vertica did $40M in 2010 revenues, suggesting a valuation of $200M which I find low.  Frankly, I wouldn’t be surprised if it were twice that given the hotness of the space, the gradual opening of the IPO window, and the opportunity cost for Vertica of forgoing independent growth. See the bottom of the post for more math fun and guessing.

[Update:  I have now heard valuation guestimates including "over $300M" and "north of $500M" so at this point I'm starting to get confused -- rumors around valuation usually converge, not diverge.  Yesterday, the 451 Group said they believed the price was $275M up-front with up to a $100M earn-out that can be earned over time through performance.  This makes sense  to me both in terms of valuation range and in terms of the confusion about valuation.]

This move follows on EMC’s July acquistion of Greenplum, rumored to be in the $400M range.

The move marks Leo Apotheker’s first big move as CEO of HP and — finally — gets HP into the data warehousing and analytics market in a real way.  (Let’s not talk about NeoView which, for whatever reason, was never taken seriously in the market.)

Many folks, including me, thought HP missed their big chance to enter the DBMS and data warehousing markets by failing to scoop up Sybase back in May, which SAP did for $5.8B.

The move is probably a change in direction for HP’s software head, Bill Veghte, who joined HP in May from Microsoft, where he had spent his entire career after graduating from Harvard, and where he was most recently responsible for shipping Windows 7.  Based on his background, I suspect that Veghte was going to head into data center, security, and infrastructure (a la the $1.5B acquisition of ArcSight in September).  Perhaps Leo’s moves into data warehousing, analytics and presumably one day — enterprise applications — will complement, rather than replace, that more infrastructure-oriented strategy.

Yesterday, The Mercury News ran an interesting piece on HP’s new non-executive chairman of the board, Ray Lane, who was appointed at the same time as Apotheker, and who has already taken major steps to reshape HP’s board.  Lane was instrumental in steering Oracle out of a financial crisis in the early 1990s and driving their growth throughout that decade.

I suspect this is HP’s opening move.  There will be many more to come.

Guessing Vertica’s Size:  $25 to $35M-ish
LinkedIn says Vertica has 96 employees.  For West Coast companies this figure is usually quite accurate; let’s assume it is for Vertica.  “Normal” productivity of $250K to $300K/head implies revenues of $24M to $33M.  LinkedIn says Vertica has 36 employees in sales.  If one of three of those are quota carriers, then you have 12 quota-carriers at “normal” productivity of $2M implying $24M.  Alternatively, if you assume 15% of a enterprise software company’s headcount is quota-carrying that implies 15 quota carriers at $2M each yielding $30M.  All of this is very back-of-the-envelop and breaks under high-growth rates.

Nevertheless, I’ll guess they are $25 to $35M in revenues, suggesting that a $200M exit would be 6-8x revenues and a $375M exit would be 11-15x, basically validating the possibility of $200M+ up-front price with a performance-based earn-out.

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Posted in HP, strategy

The Opportunity Quality / Execution Quadrant

Posted on December 20, 2010 | 9 Comments

One thing they drill into your head in business school is how to make everything a quadrant.  While I don’t know for sure if it started with the famous BCG matrix — which groups business into dogs, cash cows, stars, and question-marks — I’d bet that the BCG matrix played a big part in initiating the quad-thinking movement.

I’ve been toying with a quadrant lately that compares businesses based on the quality of the opportunity they pursue and how well they execute against that opportunity.  I rate execution from clownish (“Inspector Clouseau”) to flawless (“Swiss Watch”).  I rate opportunity quality from difficult (“Hardscrabble”) to easy (“Fertile”).

When I built the quadrant, I decided to try and place a few companies at which I’ve worked during my career on it.  (I thought about trying to place MarkLogic, but decided against it for a number of reasons.)

Please let me know what you think of my model, what you think of my placements, and what other companies you’d place where on this diagram.  In addition, if anyone has clever names for the four quadrants themselves, I’d love to hear them.

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Posted in strategy