The Independently Wealthy Salesperson

Posted on February 26, 2012 | 1 Comment

Technical founders and entrepreneurs can easily overlook the coin-operated nature of salespeople. Why? Because they aren’t salespeople, they’re product people and they’re just not wired the same way.

Founders might be motivated by changing the market, popularizing a product, or just proving they are right. Salespeople, almost all the time, are motivated by their compensation plans, so the compensation plan should be the de facto expression of what you want them to do and how they should spend their time.  Ergo, as mentioned in this post, you should get them done before kickoff. And put a lot of thought into them.

Why? Because a typical salesperson will spend the whole weekend after you give them their comp plan in Excel modeling how much money they will make under various scenarios. I’d also say to make them as simple as possible both to make it clear what you want salespeople to do and to avoid the inevitable unintended consequences that often accompany complexity.

One huge question is whether comp plans should be capped. Almost all salespeople would say no. Part of the reason they’re playing the game – particularly at a startup – is for the lottery ticket.  Think: while I know my on-target earnings are $250K, I want to have a shot at earning $1 or $2M – that’s what drives me to work those killer hours.  So while I recommend leaving comp plans uncapped, I also recommend that management model the full range of scenarios and, for example, accelerate rates in the 100-250% of plan range but to greatly decelerate them after that.

You can always hedge your bets in the compensation plan terms and conditions (e.g., plan can be changed at any time to correct for errors or unforeseen circumstances), but if you actually use that language the whole salesforce will know and you will quickly lose the lottery-ticket value in your comp plan. It is far better to put some more thought into the plan on the front-end. I know one guy at a startup who did a $10M deal off a $1M quota and received only a fraction of his stated comp. Because he didn’t want to burn bridges, he just quit. But in this scenario, everybody loses.

Outliers, however, can take several forms. I know one sales manager who groups salespeople into three buckets:

  • Those who clearly understand their comp plans. They sell what’s incented, when it’s incented, and make the most money per sales dollar.
  • Those who mostly understand their comp plans. Those who do a good job following the plan incentives, but not a perfect one.
  • The “independently wealthy” who seem to pay no regard to the incentives in the comp plan

I love bucketing reps in this way both because it’s funny and it immediately prompts an important question. Why are these reps not following the plan? Perhaps it’s just sloppiness or stupidity. Or perhaps there is more going on. My advice is to analyze reps in this way, show them that if they had sold different products at different times how their pay would have varied and then ask them why they didn’t. While some people invariably just miss the point, you might also discover “good reasons” why your people aren’t following your plan: maybe it’s too complicated and they don’t understand it, maybe they don’t think the higher incentive offsets the additional risk of selling a new, strategic product.

Or maybe they truly are independently wealthy and just doing sales for fun. But I doubt it.

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Posted in Uncategorized

The One Thing To Get Done Before Sales Kickoff

Posted on February 20, 2012 | 3 Comments

It’s that time of the year again.  With many tech companies now on a 1/31 fiscal year end, that makes February kickoff month.  So it’s a time to say “thanks” for a great last year, but also to move quickly on to launching the new year.  Every week lost costs you 1.9% of your FY12 selling days.  While that may not seem like a lot right now, trust me it will come end of the year.

Thus February is a month that requires great operational discipline.  I’ll tell you a story about my old friend Larry to explain why.  For the first few weeks of every year Larry would stroll into the office around 10 AM with a few different newspapers in his hands.  Then he’d sit in his office, with his feet on his desk, and quite visibly read the newspaper.  If you went into his office and said, “Larry, what the heck are you doing?” he’d reply:

“I’m reading the paper because I don’t know what to do.  I haven’t received my compensation plan yet.”

Larry was lucky not to get fired, but his management was lucky to have him around to make the point so dramatically.  I am a salesperson.  I am, by definition, coin-operated.  My compensation plan is supposed to be *the* definition of the behavior the company would like to incent in the new year.  So, if I haven’t received my comp plan, then I don’t know what to do.  QED.

I learned a simple trick from my old boss John Olsen to help your thinking when it comes to the timing of comp plans:

Your signed compensation plan is your admission ticket to the sales kickoff.

This is a fantastic rule for many reasons:

  • It forces management to reverse-engineer the timeline to get things done early.  Making comp plans (and dividing territories) is hard, iterative work that takes time.  Most salespeople want to negotiate certain terms, which adds time as well.  By putting this stake in the ground you are committing to starting early.
  • It creates a deadline.  Comp plans often linger for months into the new year and while most salespeople won’t overtly act like Larry, they may well be operating at reduced productivity until they understand what they’re supposed to do.
  • It lets kickoff be a real beginning.  Sales reps enter the room with your comp plan and territory.  They hear great things about last year.  And they hear what’s coming this year in terms of new products and new go-to-market strategies. So when reps get home, they can start selling. 

So have a great kickoff.  Fire up your salesreps about what a great year they’re going to have.  Send them home with new messaging and tools.  Whip them into a frenzy.  But, please don’t let them into the event unless they’ve signed their comp plan.  And make sure you’ve done work on your end, in advance, to make that a reasonable request.

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Posted in Uncategorized

Thoughts on the Splunk IPO and S-1

Posted on January 20, 2012 | 8 Comments

I like Splunk.  I like Godfrey Sullivan and what he’s done with the company.  Steve Sommer is a great marketing guy and I think he’s done a superb job with Splunk’s marketing, particularly in imbuing the company with a hip, fun, consistent corporate personality, making them the Virgin Americas of log file analysis.

I also like Splunk because many months ago, they let me riff with Godfrey and many members of the e-staff about marketing and strategy.  They were smart and it was fun.  They even gave me a superb bottle of wine for my troubles.

I like Splunk because, unlike Jive, Godfrey hasn’t turned the e-staff into a crony club.  Building great teams is about finding the right people for the right job, not just carrying around an entourage.  Exercise:  search Spunk’s management page for Hyperion and then search Jive’s for Mercury.  (Answer:  2 and 6.)

I also like Splunk because they pivoted.   When I first heard of them, they were positioned as “IT search.”  I had no idea what that was or who would buy it.  When we met for the strategy riff, they were in middle of re-positioning around machine-generated data, a message that I liked.

Most folks make software that analyzes human-generated data; we focus on machine-generated data.

Clear, simple, and true.  Instead of piling on as a YABDW (yet another big data wannabe), Splunk built a message that was sexier than “log file analysis” but still true to their essence and still generalizable to a broader vision of “operational intelligence.”  A+ marketing.  Bien fait.

Finally, I like Splunk because they haven’t burned through lots of cash.  They’ve raised $40M.  They have $23M in the bank.  $17M net burn isn’t bad for what they’ve created.

Splunk’s fact sheet does a great job of telling their story in two pages.

When I heard that Splunk had filed their S-1 to for an initial public offering, it was no surprise.  I’ll spend the rest of this post analyzing it and pulling some highlights.  Those looking for controversy will not be happy.  I’ve read the S-1 over the past few days and found few surprises.  Overall, the company looks pretty clean from where I sit.

Let’s start with the income statement:

  • FY11 revenues of $66M, up 88%
  • Trailing 9 month (T9M) revenues of $77M, up 78% so there’s a slight deceleration in growth
  • FY11 gross margin of 89%, on the high side for an enterprise software company and reflective of the high license revenue mix (75%)
  • S&M expense in FY11 of 60% of sales, which rose to 62% for the T9M period.  They’re not afraid to spend on growth.
  • Healthy R&D expense of 21% of sales in FY11, which stayed roughly constant.
  • Small operating loss of 5% in FY11, rising to 10% for the T9M period, probably due to costs associated with the offering.

In my opinion, this is a VC’s dream income statement (with one notable exception that we’ll cover in a minute).

  • High revenue growth = big opportunity
  • Small operating loss = sustainable, but spending it all on growth.
  • Small net loss = nowhere to go but up in profitability
  • High license mix = software-focused

The only part of that VC formula I dislike is the license mix.  Boards like high license mix because market share is measured in license dollars, license dollars are seen as the engine of a software business, license dollars drag other dollars with them (e.g., maintenance), and finally because boards get tired of companies missing their high-margin license target and covering the gap with low-margin services.  They see it as soybean filler in their hot dog.

I think that view is myopic because it is not customer-oriented.  To the extent your software is truly easy to use and requires few services, then I guess it’s great.  But to the extent you are selling typical enterprise software, it can be hard to use, setup, and configure.  In that case, keeping your services org tiny may win you cheers at the board meeting, but jeers at the user conference.

Personally, I’d like Splunk even better if they had the same license revenue and more service revenue on top, even though it would reduce the license mix and gross margin percentages.  (Note:  not gross profit, both revenue and gross profit would be higher in my ideal company, but the license mix and gross margins would be lower.)

I worry that Splunk could end up in No Man’s Land on the services issue:  too small an opportunity to entice big consultants to build serious practices around the product, but too great a need to be satisfied by a small (6% of sales) professional services organization.  For example, we are customers in my current job, and — far as I can tell — we get some good value from the software, but could probably get a lot more.

Now, if you’ll pardon the pun and the mixed metaphor, let’s find the cloud in the silver lining:  Splunk is not a SaaS company.  OMG.

For example, we typically enter into perpetual license agreements, whereby we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied.

Personally, I’m OK with it.  In some ways, I admire Splunk for swimming upstream on this issue.  While SaaS is wonderful and has many advantages, not all customers in all categories want to buy on a SaaS basis.  Splunk has evidently decided that in machine-generated data, people primarily want perpetual (yet they also offer term as an alternative).

Splunk’s sales are backloaded:

As is typical in the software industry, we expect a significant portion of our product license orders to be received in the last month of each fiscal quarter.

The combination of this backloading with the more volatile revenue stream associated with perpetual model should make Splunk’s earnings more volatile than its peers.  We’ll see if that turns out to be the case.  (See here for my generic analysis of SaaS vs. perpetual businesses.)  But they do have some ability to manage it:

We typically ship products shortly after the receipt of an order. We may have backlog consisting of product license orders that have not shipped and maintenance, professional and training services that have not been billed and for which the services have not yet been performed. Historically, our backlog has varied from quarter to quarter and has been immaterial to our total revenues.

The astute reader will notice they’re saying that they may choose to not ship all orders at the end of quarter.  This is common in perpetual software businesses both due to order volume and because experienced managers know that if you’ve hit this quarter’s targets it’s time to slow down the order processing desk.  You’ll never know if you’ll need those orders next quarter, so let’s not put them on the midnight truck.  And while a few million dollars here or there may be immaterial to revenues, in the case where expenses approximately equal revenues, these orders can have a big impact on earnings.

I always read but rarely analyze the risk factors.  For Splunk, there are about 25 pages of them, in which the only tidbit I found was this:

We employ a unique pricing model which subjects us to various challenges that could make it difficult for us to derive expected value from our customers.

We charge our customers for their use of our software based on the customers’ estimated daily indexing capacity. As the amount of machine data within our customers’ organizations grows, we may face pressure from our customers regarding our pricing, which could adversely affect our revenues and operating margins.

I wasn’t aware of this, but it makes a lot of sense.  Increasingly, software vendors  want to sell the copier machine priced by the copy.  The desire here is always to hook your pricing to “something that goes up” (e.g., the old MIPS-based pricing model).  Splunk is betting that data volumes will go up and ergo that customers will need to buy more licenses as they do.  This should help offset the volatility argument above — while existing customers aren’t setup on renewable contracts, if they have the perpetual right to analyze only half their data, I suspect they’ll be back ordering more software.

Let’s talk about equity now.

  • It appears to me that there are about 1o2M shares outstanding before the offering based on 79.4M outstanding on 10/31 plus 23.2M shares issuable upon exercise of stock options.
  • If they raise $125M in the IPO with a typical share price of $15, then that’s another 8.3M shares, so that means about 110M shares outstanding after the offer.
  • This implies a target valuation of around $1.6B which I find high, so high, that I’m wondering if I’ve made an error.  This article says the valuation may be $1B.   Either I’ve mangled the math or they will reverse-split their way out of the problem.  Either way, let me assume they’re targeting a ~$1B valuation after the IPO even though I can’t yet see how that pops out from the math.

Here’s a graph of Splunk’s common share price as seen by the strike price of options during the year.

While there are literally pages of math explaining how they calculate the fair market value (FMV) of the stock to me this curve looks a big flat and a bit low.  The point of periodically performing section 409a valuations is to ensure that boards didn’t hand out in-the-money stock right up before the IPO.  If the company goes public at $15 and even just stays flat, I’ll let you explain to the IRS and the SEC how the stock was really worth $4 in October and $15 in February.

The pages on  compensation and the fees paid to compensation consultants always make me ill.  The CEO loses a lot of control in the IPO process, consultants make a lot of money, and executive pay is not constrained in the process because the exercises are based on benchmarking. By the way, despite those general objections my reactions to Splunk executive compensation are:

  • The bases seem reasonable
  • The on-target earnings (OTEs) seem reasonable
  • They have a highly leveraged compensation plan (Godfrey is a salesman, after all.)
  • They blew out their numbers
  • Ergo, they made a lot of cash compensation
Let’s look at the cap table.

The VCs own 70% of the company, which had raised a total of $40M in venture capital.  If the company ends up with a $1B valuation, then the VCs will on average — which is both interesting and misleading because different people bought in at different valuations — get a 17.5x on their money.  Not bad.

Godfrey Sullivan owns a hefty 8.1% of the company — quite a lot for a hired CEO (as opposed to a founder).  This is because Splunk is successfully running what I call the “new VC play.”   Because:

  • Consolidation means there is an oversupply of very senior executives
  • There are relatively few portfolio companies with the potential to go public
  • It now takes 7-10 years as opposed to 3-5 to go public
  • There is ample venture to fund the promising companies through IPOs that now happen closer to the $100M revenue bar than the $30M bar of the 1990s

You then go get the biggest guy you can find, load him up with options so a $1B CEO will run a $20M company, and then fund him for high growth over the long haul to get to the IPO.  This is true of Jive (Zingale) and Splunk (Sullivan).  It is true to a lesser extent at Lithium:  Tarkoff was a billion-dollar GM (which isn’t quite the same league) though the VCs are certainly backing him with money.

Hence, if things go I think, my guess is that Sullivan’s share will be worth $80 to $100M after the IPO.  Nice work if you can find it.  Or, as I believe was the case in this instance, have the vision to see the potential and pick it.

I’m fizzling here about page 120 of what looks to be 175 or so pages.  If you find anything interesting in those pages or have thoughts on what I’ve presented here, please share them.

And, in conclusion, congrats to the Splunk team and best of luck with the IPO.

(Be sure to read my disclaimers.)

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Posted in IPO, Venture Capital

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

Posted on January 17, 2012 | 13 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

The Privacy Inversion

Posted on December 21, 2011 | 5 Comments

I’ve always been an avid reader, particularly when I was younger and seemed to have more time.  I’ve always loved bookstores.  I’d spend hours in them browsing from category to category.  One category I never understood was Self Help, where the titles were usually so dramatic that it had to depress sales.  After all, it took real guts to grab some of those books, stand in line, hand them to a cashier, and buy them.

What were you supposed to do if you were waiting for 10 minutes behind a woman holding Men Who Can’t Love and Women Who Love Too Much?  Quickly hop off line, grab copies of Jane Eyre and Wuthering Heights, and say “Hi, my name’s Dave” with a coy smile?

So when Amazon first came along, I thought, wow, people can finally buy books in privacy.  I bet sales of Self Help and other potentially-embarrassing-to-buy categories will go up.   After all, only you and Amazon would know you bought them.

But over time that’s completely inverted.  Say, for example, you’re bored and want to watch something juvenile late at night like Old School or American Pie.  The next morning your wife goes to Netflix and sees the Recently Watched list with Old School right there on on top.  “Honey, I thought you said you were working late last night.”

Ah, but you’re clever and think, I can defeat that by deleting the movie from my history.  But you can’t.  Netflix has decided that you cannot delete a move from your history.  You watch it and it’s there forever.   And that’s putting aside the issue that even if you could delete it, that somewhere in backup- or log-land there’s still a record of the rental.

I’m pretty sure that Amazon’s order history is permanent, too.  With one click I just looked at all my orders from 14 years ago.  And then there are recommendations which can pull things from your past and highlight them, bypassing “security by obscurity.”  Example:  we’re recommending Hall Pass because you liked American Pie even, I’d imagine, if it was some time ago.

Imagine the possibilities if someone starts sharing their 10 year old Amazon account with a curious new spouse who decides to dig into what their new partner bought way back before they were dating.  The data’s there and only a shared password away.

Nor does any of this consider the subpoena issue where I’d imagine they could go dig up offline and/or “deleted” information if so asked by effectively anyone in the right legal proceeding.

All of sudden, standing in line in the bookstore — if you can find one — and paying with cash doesn’t seem such a bad idea.

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Posted in Privacy

First-Day Stock Price Appreciation is Not the Correct Measure of IPO Success

Posted on December 19, 2011 | 2 Comments

Zynga went public last Friday.  The company raised $100M and was valued at around $7B off TTM revenues of about $1B (see S-1 here).  This puts the Zynga’s valuation in the same range as Electronic Arts, a company founded in 1982 and whose TTM revenues are 3.6x times larger at $3.6B.  One might easily say:  “Wow!”

But because the shares did not rocket upwards on the first day of trading the media portrayed the IPO as lackluster.  Consider, for example, some of these headlines:

I’d argue that the Zynga IPO was a tremendous success.  Why?

  • The company is now public and has established a liquid market for its shares.  This, over time, will benefit existing shareholders who want liquidity and will facilitate future fundraising for the company.
  • The company received $100M in capital which it can use to fuel future growth.
  • The share price did not rocket upwards on day 1.

Wait a minute, doesn’t everybody judge the success of an IPO by the first-day pop in valuation?  Yes, most people do.  But they’re wrong.  If you look at things from the company’s perspective, the day-one share price “pop” is clearly not the right metric.

Let’s show this by pretending the stock did double to $20 on the first day of trading.  In this case, the company would have sold 100M shares for $10 that were, at its turns out, actually worth $20.

Who wins and loses in the first-day double scenario?

  • The company loses, because it gave away $100M.  Had the shares been properly market-priced at $20, it could have either raised $200M or issued half as many shares (reducing dilution for existing shareholders).
  • Employees lose.  This one’s tricky because people think they are happy.  “Hey, my 10K shares were worth $100K in the IPO and now they are worth $200K!”  The reality is that they were worth $200K all along and employees only believe the price “doubled” because they were psychologically anchored to a price of half their value.
  • The institutional investors who bought in the IPO win.  These people are the usual customers of the investment bankers who underwrite the offering, and quite possibly their buddies from b-school.
  • Anyone else able to get access to some shares in the offering wins.  I’m not sure what happens today, but back in the bubble if you were CEO of another company and had a discretionary account with an underwriter (who was hoping to get your future business) you might well have been allocated some shares in the IPO which were sold on the first day for a nice profit.  (Recall the Meg Whitman issue, where she allegedly netted $1.8M through this practice.)

As my friend Crispin Read once said:  “if you work in a donut shop, you get free donuts; if you work in a bank, you get free money.”  In this example, the $100M gap between the aggregate sale price of the IPO shares and their value at the end of day one  is the closest thing to free money you can find.  And its allocation is controlled not by the company, but by the bankers and presumably to their advantage.

I understand the common counter-arguments to my viewpoint, but disagree with them.

  • If IPO shares don’t pop, then no one will want to buy them.  Hum, seems to me as if billions of shares are traded everyday without the expectation of one-day pops.  Somehow, investors buy all those shares.
  • IPO firms are risky and thus  buyers should expect a higher absolute return.  Yes, I can buy this.  So perhaps a buyer will need to expect a 15-20% first-year return to compensate for this additional risk.  That’s quite different from a 50% first-day return.
  • The IPO shares are actually worth more on IPO day then they were previously.  Indeed, a liquidity premium should apply to the shares — but this should be reflected in the IPO price.  Buyers in the IPO are buying shares that will be publicly traded, and they know it.
  • Thin floats and lock-up periods will make the shares more volatile than “normal” companies in the first six months and thus some discount should apply.  While both of those are true, they again well known and should be priced into the IPO price itself.

I’m not sure what the right first-day pop is.  There is an argument that a 0% pop is ideal — it means the shares were perfectly priced in the IPO roadshow, no free money was created that can be handed out by the bankers, and the company raised funds at the optimal price.  I suppose that’s too idealistic.  My gut feel is that success looks like a 10-20% pop — which, by the way, is still huge compared to typical stock-market investment returns.

But I am certain that the media tradition of weighing IPO success by the size of the first-day pop is misguided.  In the end, if every IPO pops 50% on its first day it simply means that IPO shares are being systematically undervalued, which then prompts the question of who wins and who loses as a result of that undervaluation?

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Posted in IPO

Endeca and The Butterfly Effect

Posted on December 7, 2011 | 4 Comments

Let’s go back to July of 2010.  Imagine you’re having coffee with Endeca’s CEO, Steve Papa, a brilliant guy and someone for whom I have great respect.

But let’s say we’re having a coffee with Steve in July, 2010 and say the following:  ”Here is what’s going to happen over the next 18 or so months.

  • Hurd will expense those dinners.  Someone at HP is going to look into those expense reports and launch an investigation.
  • Hurd will — and I know you’re not going to believe this — basically get fired over those expense reports, which are the monetary equivalent of stealing Post-It notes relative to his salary.
  • HP’s board is going to appoint — and I know you’re really not going to believe this one — former SAP CEO Leo Apotheker to the HP CEO slot.
  • Leo is going to miss financial targets  – OK you can believe that — and then one day he’ll announce that he’s spinning off the the PC business and acquiring Autonomy for an astronomical $10B.  Yes, that’s right $10B for the meaning-based M&A leader.
  • And, as a strategic response to that, Oracle is going to buy Endeca for what I’m guessing will be a very nice multiple as well.”

This purpose of this post isn’t to slight either Endeca or its CEO.  I think Endeca was a fine company, I am a big fan of founder CEOs who build their companies, I have even greater respect for those few who make it work over extended time periods (Endeca was founded in 1999) and with a pivot or two along the way.

But I’d say that the average (largely perpetual) enterprise software company is worth 2-4x revenues and I’m guessing / speculating that Endeca got more like 6.  What accounts for that 50% uplift?  You could say it’s market dynamics and demand.  Or, looking at the above chronology, you could say it’s The Butterfly Effect.

But, either way, timing is everything and I believe Endeca did the right thing at the right time for the right price.  And making the wise decision to say yes wasn’t random.  Well done and congrats.  But remember the butterflies.

“In preparing for battle, I have always found that plans are useless, but planning is indispensable.” — General Dwight Eisenhower.

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Posted in Endeca, Venture Capital

The Three Faces of the Social Revolution: Media, Marketing, and Service

Posted on November 23, 2011 | 3 Comments

Thanks to MarkLogic‘s historical focus on the media industry, I had front-row seats to the social media revolution.  But the part of the stage visible from those seats was how social media disrupted traditional media.  How “weekly news magazine” became an oxymoron. How Craigslist wiped about classified advertising.  How Yelp clobbered Zagat.  How columnists became bloggers.  How YouTube impinged on TV.  How social sites gobbled up time from first traditional media and later alternative web-based media.  I could go on and on.

Perhaps the single best slide I produced was entitled Media’s Philosophical Coasts (presentation here) where I contrasted East vs. West Coast media mentality.

I first came at social media from a media perspective. Secondly, I came at social media from a marketing perspective.  After all, I’m a marketing guy by background and the more that people are saying in social media, the more you want to measure it the way we used measure traditional media.  How many column-inches did we get?  Was the tone positive negative?  But the explosion in content and The Long Tail effect meant that there was no way you could hire English majors with rulers to get that data.  You’d have to use technology.  Spidering and/or licensing content, text mining to find entities and sentiment, and analytics for summarizing and interactively analyzing the data.

Sometimes I kick myself for not founding a company like Radian6.  I was right in the middle of social media, unstructured information, text mining, and analytics.  I saw the opportunity — heck, I watched some early text miners like Attensity pivot to social media (aka “voice of the customer”) applications as strategic plan B’s.  But MarkLogic was perversely doing too well with its platform strategy to pivot to something else and I, at the time, didn’t have a practical way to so independently.  (Axiom:  burn your VCs and you never raise money again.  Corollary:  all departures must be organized and peaceful.)

If you’re not familiar with Radian6, check it out.  It is an amazing platform for social media monitoring and engagement.

When you come at social media from a marketing perspective, you tend to think listen / analyze / monitor.  What are people saying?  How are they reacting?  How can I slice-and-dice that information by location, by demographics, by target audience?

But when you come at social media from the third perspective — the customer service perspective — you can see another angle:  engagement.  If someone is Tweeting that they don’t like Comcast, you can do more than measure it.  You can respond.  See Comcast Cares.  If someone says that they can’t find a BofA ATM, you can help them out.  See @BofA_Help and their clever ^-based naming convention so you can see which person is helping you.

As the social revolution transforms us, it first hit media, then hit marketing, and is now hitting customer service.  Customer service is now the front lines.

And if for some reason, you’re not yet convinced on the enormity of the social revolution, look at this video from Socialnomics.

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Posted in Uncategorized

Social Customer Service at Comcast

Posted on October 17, 2011 | 1 Comment

About five years ago, Comcast was featured in a slew of home-made YouTube videos of field service representatives literally falling asleep while on-hold for back-line customer service.

What’s happened since then?  Well, the once-victim of social media is now a leader in how organizations can leverage social media to improve not only customer service, but their overall business.  In 2008 they launched the @ComcastCares initiative under the leadership of Director of Digital Care Frank Eliason, profiled in this BusinessWeek story.  In mid-2010, Eliason moved on to become SVP of Social Media at Citibank but @ComcastCares lives on and has grown under new leadership.

In this post, How Social Customer Service is Changing the Culture at Comcast, social media guru and author Brian Solis talks with Kip Wetzel, Senior Director of Social Media Servicing and Strategy at Comcast about the initiative today and its impact on the business.

Some key quotes and tidbits:

  • Most people feel that large companies “speak at” consumers.  We have the ability to “speak with” consumers and to let them know that their voice is heard.
  • Comcast does not use social media as a way to push customers into traditional channels.  You need both.  The situation should dictate which method is most appropriate and you need integration:  you can’t fix a line downed by a tree over Twitter.
  • Let people see one company; don’t show them silos or divisions.
  • You can scale your social media department to 100 people, but if you don’t fix the problems internally, you’ll never have enough.
  • We can use Twitter as well as proactive traps and alarms to quickly identify faults and problems.
  • There isn’t a social media team — it’s an extension of product, marketing, PR, care … we can evaluate what people are saying, take that feedback, see the impact on the different organizations at Comcast and adapt.
  • Social is a catalyst for internal conversation … how does a theme evolving about a product or service influence the different organizations, and how do we collectively evaluate those things and put our real change a day later, a week later.
  • Social is not just about reacting, listening, or responding, it’s about building better products, services, and processes that allow you to lead the customer experience.

Here is a direct link to the video interview.

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Posted in Uncategorized