Video of my Host Analytics World 2015 Keynote Presentantion

Thanks to the 700+ folks who attended my keynote address at last week’s Host Analytics World 2015 conference in San Francisco.  We were thrilled with the event and thank everyone — customers, partners, and staff — who made it all possible.

Below is a 76-minute video of the keynote presentation I gave at the event. Enjoy!  And please mark your calendars now for next year’s Host Analytics World — May 9 through May 12, 2016 — in San Francisco.

Bottom-Fishing Acquisitions and Catching Falling Knives

As mentioned in my recent Curse of the Megaround post, some companies that find themselves flush with cash and under heavy pressure to grow, decide to embark on dubious acquisitions to help shore up the growth story.

As one reader it put it, you can summarize your megaround post with the simple phrase “much money makes you stupid.”  And it can.  Thus, as the old saw goes, fools and their money are soon parted.

What separates good from bad acquisitions in this context?  As a general rule, I’d say that when high-growth venture-backed companies acquire firms that would otherwise best be acquired by private equity, it’s a bad thing.  Why?

Firms destined to be acquired by private equity follow a typical pattern.

  • They are old, typically 10+ years
  • They have tried multiple iterations on a strategy and none has worked
  • They have a deep stack of technology built over the years but most of which could be quickly replaced with modern, often open source, standard components
  • They tend to get strategically inverted — starting out with “what we have” as opposed to “what the market wants”
  • They have gone through several generations of management teams
  • Basically, they’re turnarounds

So private equity funds bottom-fish these opportunities, buy companies for a fraction of the total invested venture capital, scrap most of the original dream and either [1] double down on one core piece that’s working or [2] roll the company up with N adjacent companies all selling to the same buyer.

This is hard work.  This is dirty work.  This is “wet work” involving lots of headcount changes.  And private equity is good at it.   In one sense (and excluding private equity growth funds), it’s what they do.

High-flying VC backed startups are simply the wrong types of buyers to contemplate these acquisitions.  In the core business, it’s all about grow, grow, and grow.  In the acquired business, it’s all about cut, cut, cut and focus, focus, focus.  These are two very different mentalities to hold in your head at one time and the typical fail pattern is apply the grow-grow-grow mentality to the broken startup that repeatedly hasn’t-hasn’t-hasn’t.

The other failure pattern is what I call the worst-of-breed suite.  This happens when a player in space X acquires a two-bit player in space Y, hoping to “get a deal” on a cheap technology they can then sell to their customers.   The vendor is thinking “I can sell more stuff through my existing channel.”  However, the customer is thinking “I don’t want to use a worst-of-breed product just because you decided to acquire one on the cheap.”  Moreover, with easy of integration of cloud services, there is typically no real integration advantage between the cheaply acquired product and a third-party best-of-breed one.

On Wall Street, they say that bottom-fishing falling stocks is like catching falling knives.  For high-growth startups, trying to bottom-fish failed startups is pretty much the same thing.

The Curse of the Megaround

With what everyone seems reluctant to call a bubble in late-stage, private financing in full swing, I thought I’d do a quick post to drill into a concept I presented in my 2015 predictions post, something I call the curse of the megaround.

We will do that by examining the forces, and the winners and losers, surrounding a megaround.  Let’s start with a hypothetical example. Company X raises $200M at $1B pre-money, giving them a $1.2B post-money valuation.

Champagne is popped, the financing is celebrated, the tech press bows, and the company is added to many unicorn trackers.

Now what happens?

  • The CEO is under immediate pressure to invest the additional capital.  If you take the rule of thumb that most venture rounds are designed to last 18-24 months, then a $200M raise implies a cash burn rate of $8 to $10M/month or $25 to $30M/quarter.  That is an enormous burn rate and in many cases it is difficult or impossible to spend that much money wisely.
  • The CEO is under heavy pressure to triple the value of the company in 2-3 years.  The investors who do these rounds are typically looking for a 3x return in 2-3 years.  So the CEO is under huge pressure to make the company worth $3.6B in 2-3 years.
  • This, in turn, means the CEO will start investing the money not only in promising growth initiatives, but also dubious ones.   Product lines are over-extended.  Geographic over-expansion occurs.  Hiring quality drops — in an attempt to not fall behind the hiring plan and lose all hope of achieving the numbers.
  • In cases, money is waste en masse in the form of dubious acquisitions, in the hope of accelerating product, employee, and customer growth.  However, the worst time to take on tricky acquisitions is when a company is already falling behind its own hypergrowth plans.
  • All of this actions were done in the name of “well, we had no hope of making the plan if we didn’t open in 12 countries, hire 200 people, add 3 product lines, and buy those 2 companies.”  So we may as well have tried as we would have been fired anyway.  At least we gave it our best shot, right?
  • This often comes to a head in a Lone Ranger moment when the board turns on the CEO.  “Didn’t we agree to that hiring plan?  Didn’t we agree to those product line extensions?  Didn’t we agree to that acquisition?” the CEO thinks.  But the board thinks differently.  “Yes, we agreed to them, but you were accountable for their success.”

Yes, being CEO can be a lonely job.  This is why I call it the curse of the megaround — because it’s certainly a curse for the CEO.  But the situation isn’t necessarily a curse for everyone.  Let’s examine the winners and losers in these situations.

Winners

  • The founders.  They get the benefit of a large investment in their company at low dilution without the downside of increased expectations and the accountability for delivering against them.
  • The private equity fund managers.  Provided the turmoil itself doesn’t kill the company and new, more realistic plans are achieved, the PE fund managers still get their 2+20 type fee structure, earning 2% a year baseline and 20% of the eventual upside as carry.  In a “more normal” world where companies went public at $300M in market cap, there would be no way to earn such heavy fees in these investments.

Losers

  • The CEO who is typically taken out back and shot along with any of the operating managers also blamed for the situation.
  • The company’s customers who are typically ignored and under-served during the years of turmoil where the company’s focus is on chasing an unreachable growth plan and not on customer service.
  • In the event the company is sold at a flat or down valuation, the common stock holders (including founders and employees) who can see their effective ownership either slashed or wiped-out by the multiple liquidation preferences often attached to the megaround.  (People love to talk about the megaround valuation, but they never seem to talk about the terms that go with it!)
  • The private equity limited partners whose returns are diminished by the very turmoil their investment created and who are stuck paying a high 2+20 fee structure with decade-ly liquidity as opposed to the 1% fee structure and daily liquidity they’d have with mutual funds if the companies were all public (as they would have been pre-Sarbox.)
  • The private equity limited partners who ultimately might well end up with a down-round as IPO.

In some situations — e.g., huge greenfield markets which can adopt a new solution quickly and easily — a megaround may well be the right answer.  But for most companies these days, I believe they are more curse than blessing.

Host Analytics World: Some Key Takeaways

We are having an amazing time at Host Analytics World this week in San Francisco.  I’m thrilled with size (over 700 people), the positive energy, and the learning/sharing that’s taking place at this event.

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Probably the single best thing I’ve heard from customers at the conference is this:

“I use a lot of cloud software and … the relationship you have with your customers is unique.”

The reason this makes me so happy is that’s what our strategy is all about.  We are a 100% customer-focused SaaS vendor and a huge part of my strategy here is to build a real, deep, sincere customer-success culture.  So any time I hear an echo back from our customers that is what they are seeing/feeling it makes me very happy.  And I’ve heard plenty of those echos this week.

The other big things I’ve seen thus far:

  • Tremendous interest in modeling and our new Modeling Cloud offering.  Organizations are doing more modeling than ever before and they want a modeling solution that leverages Excel and ties together disparate departmental models into a single enterprise model.
  • Huge support for our intelligent leverage of Excel strategy.  AirLiftXL, SpotLightXL, and our web-based Excel grid allow customers to leverage their existing models and, more importantly, skills / human capital in the context of a proper planning system.
  • Major interest in tying together sales and financial planning.  This is a real hot button in finance right now as sales planning is increasing done by sales ops and/or sales strategy groups outside of finance and in software not linked to the central planning system.
  • Big interest in our new Aviso partnership as part of our strategy to better link sales and finance.  Aviso delivers predictive analytics that not only help forecast sales but actually guides sales management to the most important opportunities in the pipeline.  In general, customers seem to support our strategy to stay focused on EPM and not extend ourselves in adjacent fields where best-of-breed players already exist.
  • And finally, I’d be remiss if I didn’t introduce our new mascots, Tick and Tie.

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Career Advice: Simplifiers Go Far, Complexifiers Get Stuck

“If you can’t explain it to a six year-old, you don’t understand it yourself.”  – Albert Einstein

There are two types of people in business:

  • Simplifiers:  who make complex things simple
  • Complexifiers:  who make simple things complex

Quick joke
Question:  What does a complexifier call a simplifier?
Answer:  “Boss.”

Somewhere, somehow, some people decided that in business you need to make everything complicated and speak using business jargon.

Well, that’s an interesting proposal and I’m not necessarily opposed to it, so let me run it up the flagpole so we can kick it around as a strawman.   Since I hear the idea has some traction in the field, let me reach out to the guys upstairs, and we’ll see if we have the bandwidth to go forward with this.  If the cost is North of $100K, I may have to backburner it, because we need to keep some dry powder pending the results of the strategy meeting — where I know we’re considering a pivot.  Right now, the long pole in the tent isn’t marketing but strategy so let’s keep lines open.  Kudos to the team for coming up with a such a great value proposition, but for now I’m afraid can’t lean in on this one.

That’s one way of hiding behind complexity: making yourself flat incomprehensible.  While that may impress your peers, your subordinates will mock you and your superiors will ask to speak to someone else.  As I argued in this post, when dealing with senior people you need to speak clearly and, above all, answer the question.  In most organizations, while jargon and doublespeak may be prevalent in middle management, they are nearly absent in the boardroom.

The other way of hiding behind complexity is not linguistic but conceptual:  always finding an upstream or bigger-picture issue that will block progress at the lower level.  Consider this statement:

I’d like to cut over to the new process, but we haven’t completed the training yet.

Is this, as it appears, a valid reason for not making progress on moving to the new process or is it passive resistance disguised as a reason.  For example, I don’t want to move to the new process so I keep “having trouble” scheduling the training.  Or is bona fide complexification?  If the training can be boiled down to one page that everyone can read in 5 minutes then just cut over.

Remember the old saw:

When you ask the time, some people will tell you how to build a watch.  Others will tell you how to build a Swiss Village.

My test for spotting complexifiers is look for the following pattern:

  • Slow progress on results
  • Blamed on everything being difficult or complicated
  • With a tendency to find artificial prerequisite activities that sound plausible, but on further examination aren’t.

Things are as complex as we want to make them. Most of the time complexity is an excuse for either not wanting to do something or not knowing how to do something.

My advice:  strive to make things simple.  Seek to understand them.  Struggle to find apt metaphors for them.  If you’re not burning real energy trying to simplify things for you audience, you are most like a complexifier.  If so, the next time you’re about to explain to someone why something take so long, is so complicated, or requires 5 steps to be completed before the start, ask yourself — do I really believe this or I am making it complicated because I either don’t want or don’t know how to do it.

Congratulations to MarkLogic on Unicorn Status

Congratulations to MarkLogic on achieving “unicorn” status with yesterday’s announcement of a $102M financing at a $1B+ pre-money valuation.

CB Insights now has MarkLogic officially on their unicorn tracker where they are in the company of a rather amazing other 102 startups all with $1B+ valuations, with a combined valuation of a staggering $371B.

Congratulations to the many team members with whom I worked during my time there (2004 to 2010), and a few names immediately spring to mind in that regard:  Max, Ian, Paul, Ron, Wayne, Mary, Ponz, Larry, Mark, Randall, Chris, Enrique, Dave, Ann, JT, Josh, Kelly, Matt, Norm, Denise, and of course, Brother Makely.

And I should also thank MarkLogic, in particular Bob and Dale, for being a Host Analytics customer — one of many high-growth, high-tech companies that choose Host Analytics as a cloud-based EPM system that you won’t outgrow.

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: