Curse of the Megaround: Expectations and Power

I’ve written before about the curse of the megaround which can happen, for example, when a startup raises $100M at a unicorn valuation and I’ve described before what typically happens next:

  • The company is under great pressure to invest the money to drive strong growth.  Late-stage investors don’t give you money to put in the bank at 0.2% interest.  They want you to invest it, typically over the next 2-3 years, implying something like an insane $15 to $20M/quarter burn rate.
  • As a result of this spending pressure the company gets inverted — instead of making a plan and finding money to finance it, the company gets a pile of money and then needs to figure out how to spend it.  This is backwards.
  • The company over-expands and over-invests.  You end up in 10 countries not 3.  You double your employee base in 9 months.  You sign up not just for projects 1-3, but for 4-9 as well.  It sounds great until you realize that half your countries are executing the wrong strategy, half the new employees can’t articulate the company message, and that projects 4-9 were down-the-list for a reason:  they were dubious ideas that shouldn’t have been funded in the first place.
  • The soon-to-be-former CEO develops a sudden interest in spending more time with his/her family.  A new CEO is hired to “bring focus” to the situation.  He/she ceases operations in 5 of the countries, lays off 35% of the employees, and shuts down projects 4-9.

If you were paying attention, you probably just noticed that $50M went up in smoke in the process.  Fortunately, in Woodsideno one can hear a venture capitalist scream.

The Math Behind the Problem:  Expectations and Power
In this post on the Silicon Valley hype machine, I argued that unicorns were the product of three trends:

  • The cost and hassle of being a public company.  Why go public if you don’t have to?
  • The ability to raise formerly IPO-sized rounds in the private markets.
  • A generally frothy environment in late-stage financing .

This got me thinking about what really differentiates a $100M IPO from a $100M late-stage private financing.  Benchmark Capital’s Bill Gurley recently did a great post on this precise subject where he points out several major differences:

  • The private round has far less scrutiny due to lack of an IPO process.  The numbers in a financing deck may not be the same numbers that would have been in the S-1.
  • In the private financing, the money is much more likely to have  perverse effects on operating discipline (as I detailed above).
  • In an IPO the company usually ends up with a single class of (common) stock, putting everyone on an equal footing.  The $100M private round will be preferred stock, with strings attached in the form of liquidation preferences.   This creates a difference between a common stockholder’s nominal and effective ownership positions and — if the business subsequently gets in any trouble — can literally wipe out the value of the common stock in an M&A exit scenario.  This can be devastating for employees who typically are unaware of the terms (e.g., multiple and/or participating preferences) that create the gap between nominal and effective ownership.

While I think Bill’s post his excellent, I think he missed two factors that are particularly important from the CEO’s perspective:  expectations and power.  Specifically, what are the go-forward expectations for the stock and what is the power of the people who have them?

In the IPO scenario, there is a short-term expectation of an immediate pop in the stock price, which is conveniently handled by the endemic under-pricing of IPOs.  So, assuming that takes care of itself through the usual process, what are the general expectations of an IPO stock after that, say during the next three years?

I spent some time researching this, looking at several studies and reviewing the capital asset pricing model.  Since I didn’t find any authoritative source (and since many IPOs actually under-perform), I will somewhat arbitrarily suggest that an public-market investor would be happy with a 20 to 25% annual return on an IPO stock purchased a few days after the offering.  I would be.

What does our late-stage private investor want?  Everybody knows that:  the rule of threes.  They want a 3x return over 3 years.  That’s a 44% annual return.   And, in today’s markets, that will often be atop a considerably higher initial valuation.

So the first big difference is about expectations.  Our private buyer expects roughly double the return of our public buyers.

The second big difference is about power:  who, exactly, wants that return?

  • In the IPO scenario, it’s a series of portfolio managers at institutions like Fidelity who each own positions worth single-digit millions.  If they get mad at you, they can sell their shares or their sell-side analysts can downgrade the stock.
  • In the private scenario, it’s a board member from a VC/PE firm that owns maybe $75M worth of stock.  If they get mad at you, they can try to fire the CEO at the next board meeting.

So other than getting an investor with infinitely more power seeking double the return, in an environment with far less scrutiny over the numbers, in a situation more likely to cause a loss of operational discipline, and the use of structure / preferences that create potentially large gaps between nominal and effective ownership, there’s no real difference between doing a $100M private round and an IPO.

Well, at least the CEO can sometimes sell into the late-stage round.  He or she may well need to.

Unicorn Tears, Beyond Ultimate, and the Silicon Valley Hype Mentality,

Back in the day we working on a press release and I was a CMO.

Me:  “Somebody, get Randy (the PR director) in here.”

Me:  “Randy, what is this press release calling our new offering the ultimate in business intelligence?”

Randy:  “Yes and the problem is?”

Me:  “The problem is it’s not the ultimate, it’s better than ultimate, it’s beyond ultimate … there must be a word for that … I don’t know, maybe penultimate.”

Randy:  “Chief,” he said sheepishly after waiting a minute, “penultimate means one less than ultimate.  Ultimate means ultimate.  There is no word for one more than ultimate.”

Me:  “Oh.  Well, God damn it, go make one up.”

It was at that moment that I realized I’d been fully sucked into the Silicon Valley hype machine.  Just as unique means unique and requires no modifier like “amazingly,” so does ultimate means ultimate.

Speaking of “amazing,” during my tenure at Salesforce, I used to count the number of amazing’s Marc Benioff would say during a speech.  You’d run out of fingers in minutes.  But somehow it worked.  He was a great — no, amazing — speaker and I never got tired of listening to him.

This is Silicon Valley.   The land where one of my competitors can still peddle a cock-and-bull story about how he, as an immigrant limo driver with $26 (and a master’s in computer science), sold a company (where he was neither founder nor CEO), worked as (a member in the office of the) CTO at SAP, and is growing stunningly — no, amazingly — fast (despite a rumored recent down-round and rough layoffs).  Fact-checking, smact-checking.  If it’s a Man Bites Dog story, people will eat it up.  Blog it, hit publish, and move onto the next one.

Maybe I should pitch the equivalent story about me:

Lifeguard and Self-Taught Programmer Who Arrived in California with Only $30, a Red Bandana, and a Box of Bootlegged Grateful Dead Tapes Becomes CEO of Host Analytics

“Dude, I was guarding by the pool one day and this wicked thunderstorm hit and, flash, like totally suddenly I realized the world needed cloud-based, enterprise planning, budgeting, modeling, consolidation, and analytics.”

And we could discuss how I “hacked” on paper tape back in high school:  “the greatest part about hacking on paper tape was you could roll bones with it when you were done and literally, like, smoke your program.”

It would be a roughly equivalent story.  I’m sure they’d eat it up.

Silicon Valley is a place, after all, where we can create a metaphor for something that doesn’t exist — a unicorn  — and then discover 133 of them.

Is our reaction “bad metaphor?”  No, of course not.  It’s “wow, we’re special, we’ve got 133 things that don’t exist.”

Unicorns (generally defined as startups with a $1B+ valuation) are mostly of a result of three things:

  • The cost and hassle of being a public company, post Sox.  Why go public if you don’t have to?
  • The ability to raise formerly IPO-sized rounds (e.g., $100M) in the private markets.
  • A general bubble in late-stage financing where valuations are high enough to create the IPO-as-down-round phenomena

As the late-stage financing bubble appears to be near popping, you increasingly hear new terms for unicorns.  For example, Good Technology, a “onceacorn,” sold earlier this month for $400M.  Since I love words, I’ve been tracking these new terms closely with some amusement:  formercorns, “just horses with birthday hats on,” usta-corns, dying unicorns, and unicorpses.

So, hopefully, as the financing fuel that’s stoking the fire starts to die down, the hype bubble will go with it.  Until then, enjoy this tweet, which captures the spirit of Silicon Valley today just perfectly:


Finance Transformation Themes from the IE FP&A Conference in Boston

After attending our amazing, sold-out Future of Finance Tour session in Minneapolis earlier this week, I swung out to Boston attend a chunk of the IE Groups’s FP&A Summit.

I had some great conversations with delegates and attended several interesting sessions.  Transforming finance was, as expected, a big theme.  Here are some of things I heard:

  • Old-school finance used to say, like a TV anchorperson, “we don’t make the news, we just tell you about it.”  This finance-as-spectator role is passé.
  • We need to transform FP&A from the engine room for report production — “here are the variances, don’t ask us about them” — to an active role in working with the business.
  • FP&A needs to no longer be the data crunchers, but insight providers who can tell the story in the data.
  • Finance needs to engage with the business.  Interact with them.  Sit with them.  Ask them.  Iterate with them.  Financial processes (e.g., forecasting) are inherently iterative and require finance to interact with subject matter experts (SMEs).
  • FP&A needs to challenge the conventional wisdom or common knowledge about the business.  It’s amazing how often common rules of thumb (e.g., which products are profitable and which aren’t) simply aren’t true when you dive into the data.
  • Finance should be more focused on having a seat at the table than knowing what the table cost and how far it is into its depreciation cycle.
  • “I spent years leveraging my ‘CPA’ doing copy / paste / attach from Excel spreadsheets into board books and presentations.”
  • While overuse of Microsoft Excel is definitely part of the problem, Excel is also definitely part of the solution.   “There are over 1,000 person-years of Excel experience in this (not very big) room.  You can’t throw that out.”
  • “I fell out of bed knowing how to do that in Excel.”
  • In leveraging technology for FP&A the cloud is now a given — five years ago that was not the case.

And the old classic, which I really believe in:  finance needs to focus on becoming a business partner to the CEO and the business.

It was a great conference and I’m glad I stopped by.

I Don’t Want to Talk to You Anymore

One time, back in the day at Business Objects, we were all flying back from Paris to San Francisco, when the plane pulled ten feet back from the gate and then stopped.  The pilot announced that we were taking a delay of several hours.

Frustrated, one of our board members, a very polished, powerful, statuesque man immediately asked the flight attendant if he could get off the plane.  He wanted to take another flight and felt unfairly trapped.  She said no.  A polite dispute ensued.

As we, the management team, watched in awe of his calm-yet-firm argumentative style, a strange thing happened.

“I don’t want to talk to you anymore,” he said.  “I want to speak to the pilot.”

“But, but, but, what do you mean, you need  to talk to me, because uh, uh, uh”

“I don’t want to talk to you anymore,” he repeated.

For years, many of us on the executive team would joke about how one day our terminations might go down.

“But you don’t understand, the seminar attendance was low because there was a blizzard that closed the roads and shut down public transportation.”

“All I know is we failed to achieve our lead generation goal.”

“But it was a freak April snowstorm, …”

“I don’ t want to talk to you anymore.”

“But, but, … uh, uh”

“I don’t want to talk to you anymore.”

The phrase developed a certain legend status to it.  I’d forgotten about it for years until one day at MarkLogic, I was supposed to meet with one my direct reports and I didn’t want to.  I wasn’t looking forward to it.  I didn’t want to talk to the person anymore.

And then a huge gut-check went off.  Wait a minute.  What does it mean when I don’t want to talk to the person who runs <function> at my company.  <Function> is an important part of the company.  I run the company.  I am hugely committed to the company’s success, which cannot happen without success in <function>.  How can this be?

In business we are generally taught to be logical and data-driven, which lines up very well with my natural style.  But this was emotional.  This was a feeling.  I didn’t want to talk with someone.  What did it mean?  Should I listen to the feeling or ignore it?  I didn’t know.

It got me to thinking about why I wouldn’t want to meet with someone.  Generically, why would I not want to speak to one of my direct reports?  I started to generate classes of people who I wouldn’t want to talk to.

  • People who don’t listen.  There’s no point in talking to someone who doesn’t listen.  It gets boring over time.
  • People who don’t follow through.  What good is agreeing to a plan and then have it not get executed?
  • People who can’t keep up.  When someone is over their head in a job, they can’t keep up with the conversation.  Who wants to talk to someone when you have to keep backing up and slowing down?
  • People who grinf–k you.  Who wants to talk to people who nod their head in agreement when you know they disagree?
  • People who can’t or won’t change.  How many times do you want to have the same conversation?
  • People who are negative.  A huge amount of business is identifying and solving problems, but it can always be done a positive constructive way.  Who wants to talk to Debby Downer every day?
  • People who are mean.  There’s a reason The No Asshole Rule is one of my favorite books, and it’s not just because I think the world of Bob Sutton.

Once I generated this list, I began to realize that the feeling was hugely important.  If I didn’t want to meet with one of my direct reports — if I didn’t want to talk to them anymore — it was no small sign.  It was a indicator of a potentially huge problem.

So now I listen to the feeling.  Because I now know that if I don’t want to talk to you anymore, then it’s sign that someone is in one of the above classes and that’s an issue we need to, well, talk about — whether I want to or not.

The Confusion Around Workday Planning

Workday’s planning strategy is enough to make an observer confused.

This far in, it looks pretty clear what happened:  Workday started out betting on Tidemark, but things didn’t work out (I’d guess because of Tidemark’s wandering eye and lack of focus on EPM), so they switched horses to Anaplan.  It happens.

But then it starts to get more interesting:

  • In January 2015, Tidemark COO Phil Wilmington leaves Tidemark (per his LinkedIn).
  • In mid-June of 2015, Workday announces leading a $25M round in Tidemark, rumored to be under fairly Draconian terms, including some non-trivial layoffs to cut the burn rate.

OK, it’s more confusing but it still looks explainable from the outside.  After switching horses to Anaplan, perhaps they found the grass wasn’t any greener, so they decide to switch back.  People get divorced and then remarried.  It happens.

Maybe Wilmington influenced things and was trying to help out his old company, or maybe he had nothing to do with it.  It’s impossible to see from the outside, but at the same time hard to believe he had nothing to do with it.

But then things get even more interesting:

  • Two weeks later, on June 30 2015, Workday announces its own “enterprise planning, budgeting, and forecasting” solution, a seemingly independent initiative without any reference to Tidemark’s technology in the announcement.  Moreover, it appears to be a a hurried, deep future announcement with availability specified sometime “in calendar year 2016.”
  • Even today, almost 2 months after the announcement, the “Learn More” link on the products page for Workday Planning points to the press release, in an actual circular reference from the press release to products page — something I can’t recall ever seeing before in my career, and certainly implying both a hurried announcement and a lack of meat to support it.


What’s going on? Who knows?  (I have a guess and maybe I’ll share it one day in a separate post.)

But regardless of the underlying stories, the whole situation says a few things to me:

  • It’s another demonstration of why ERP and EPM are different categories.  Even a highly sophisticated ERP vendor like Workday can’t get its EPM strategy right.  It’s a different market, with a different buyer, with a different purpose, and which uses different and specialized technologies.  This pattern existed in the on-premises days and has continued into the cloud.
  • As such, it validates the desire buyers may have to go best-of-breed and buy EPM from a dedicated EPM vendor as opposed to expecting to see a great solution rolled into an ERP suite.
  • Most importantly, Workday’s pattern suggests it will be years before their EPM strategy is clear, their in-house product is delivered and proven, and whether the final strategy rides on their in-house product, Tidemark’s technology possibly picked up via a future acquisition, or some hybrid thereof.

Let me conclude by reminding anyone interested in doing EPM functions — like planning, budgeting, forecasting consolidation, reporting, and analytics — against Workday data, that at Host Analytics we have a clear strategy for Workday customers who want proven, cloud-based enterprise performance management (EPM).

My Favorite Quotes on Planning

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

“God laughs when Man plans.” — Yiddish proverb

“Everyone has a plan until they get punched in the mouth.” — Mike Tyson

“Plan your work.  Work your plan.”  — Grandpa Kellogg (and many others)

“Failing to plan is planning to fail.”  — Alan Lakein

“A good plan violently executed is better than a perfect plan executed next week.”  — George Patton

“Plans are only good intentions unless they immediately degenerate into hard work.”  — Peter Drucker

“A goal without a plan is just a wish.”  — Antoine de Saint-Exupery

“Proper planning and preparation prevents piss poor performance.”  — Military Acronym (also known as the 7 Ps)

The Venture Capital Inversion

There used to a be time in Silicon Valley when a startup created a strategy, made a business plan to go execute it, and then raised the amount of money required to execute the business plan.

That seems pretty  quaint these days.  Because today, many companies have this upside-down.  Instead of making a plan and raising funds to execute it, they raise a pile of money and then go figure out how to spend it.

This is happening largely because of the frothy, particularly mid- to late-stage financing environment that exists today.  More and more money is going into later-stage VC and PE growth funds, funds get bigger, minimum check sizes get bigger, and all of sudden you have a bunch of investors who each need to write checks of $50M to $100m to make their funds work and those check sizes start dominating round sizes in Silicon Valley.

But it’s all upside down.  Companies shouldn’t raise more money because investors want to write bigger checks.  Companies should only raise more money if they need it to fund their plan.

A key part of building a startup is focus.  Flooding companies with money works against focus.  Remember the startup epitaph:


When startups “just do both” they fail to choose — in so doing, often choose to fail.  When you flood a startup with money, it tends not just to do both, but perhaps all 4 or 5, of the ideas that were in discussion.

When a company gets caught in the VC inversion bad things happen.  For details, see this post I wrote entitled Curse of the Megaround, but the short summary is that startups with too much cash make too many questionable investments that defocus the company and don’t provide returns, ultimately resulting in the termination of the CEO and usually a chunk of the executive team along with him/her.  In short, turmoil.

Remember this tweet from Marc Andreessen:


So the next time you hear a company celebrating a $100M round ask yourself these questions:

  • Can they actually put the money to productive use?
  • What distractions will they start or continue to invest in?
  • How much longer will the CEO and executive team last given the new, heavy pressure put on the valuation?

Startups should be about entrepreneurs driving a vision for customers that benefits the founders and employees, with the VCs along for the ride.  Let’s not get that inverted and end up with startups being run for the late-stage investors with the customers, employees, and founders along for the ride.