Strategic Focus: I’m Just Trying to Get My Space Together

As a long-time Grateful Dead fan, I have to say that I was advantaged in understanding how the Blown to Bits problem would affect digital media businesses.  You see, for years, the Dead had changed the business model of the music industry, choosing to use “albums” as a loss leader and choosing to make money on live concerts, playing some 2,300 concerts together, not to mention those done individually be band members. (Think:  Jerry Garcia at the Keystone Berkeley.)

steal your face

The Dead even had a “tapers” section at most concerts and sometimes could be heard literally stopping the show to allow someone to move back their microphones.  The Dead have a valid claim to “we did Freemium 30 years before Freemium was cool.”

While I won’t go as far to say that Everything I Learned about Business, I Learned from the Grateful Dead (a good book, by the way, that takes a top ten set of lessons from “the long, strange trip”), I do believe the Dead were both musical and business model innovators.

Improvisation as strategy was profiled in Competing On The Edge:  Strategy as Structured Chaos, published by Harvard Business School press.  Excerpt:

The Grateful Dead met this challenge through improvisation [...] as distinguished by two key properties:  first, performers intensely communicate with each other in real time [...] second, they rely on a few very specific rules, such as who plays first, what are the permitted chords, and who follows whom.

While I’m riffing on the Dead, I should probably also mention Marketing Lessons from the Grateful Dead, a great booking on topics like community, branding, customer centricity, teamwork, category creation, technological innovation, disruptive business models, disintermediation, and giving back.  The Dead, indeed, were innovators in all these areas and the book is well worth reading.

My favorite Dead-related quote, however, comes not from that book but  from The Grateful Dead Movie, in a famous scene where a completely zonked head is ambling around outside the concert and tells a security guard the inimitable:

“I’m just trying to get my space together, so that I can go into the show.”

..

I always think of this guy whenever I talk to a startup about strategy.  Why?  Because startups are very much about trying to get your space together.

  • What space do you want to be in?
  • Against whom do you want to compete?
  • Where do you draw the boundaries on your space?
  • What adjacent spaces, if any, do you want to incorporate into your space?
  • In what adjacent spaces do you want to partner?
  • How do you see the boundaries on your space evolving over time?

My meta-answer to these questions is “the world is a very large place.”  How does that relate?  In two ways.  It means first that you better define your space in such a way that you are truly world-class within it — and not using world-class as a nice sounding compound adjective, but really grokking its meaning:  what can truly be best in the world at doing?  Second, it means that because the world is a big place that you can turn what might appear to be a small niche into a  very big business if you are truly the best at it in the world.  So don’t be afraid to focus.

Most startups forget focus too early and delude themselves into thinking they can be world-class in across a number of areas.  Take enterprise performance management (EPM) — the space in which Host Analytics competes –for example.  EPM is a $4B market for financial analytic applications that is adjacent to the broader $13B business intelligence (BI) market.  Some of our competitors consider themselves addressing the (incorrectly calculated) “$33B BI market” and are either building or acquiring products in the broader BI space?  It sounds good from a total available market (TAM) perspective.  Wow!  You’ve tripled your TAM.

But think for a minute — what are the odds that  your cheaply-acquired or hastily built BI tools are world-class?  None.  So all you’ve really done is dilute your focus on EPM by complementing it with some third-tier BI.  A far better solution (and the one we follow at Host Analytics) is to partner with someone else who is spending all their energy focused on being world-class in the adjacent space.  In our case, that partner is Birst who is focused on being world-class at cloud BI.

So if you’re thinking of starting a company, ask yourself:  what can we really be world-class at doing?

Answering that question is the only way to get your space together, before you go into the show.

Burn Baby Burn: A Look at the Box S-1

I’m pretty busy this week so I was hoping not to dive into the Box S-1, but David Cummings’ excellent summary served only to whet, as opposed to satiate, my appetite.

Perhaps it was the $168M FY14 operating loss.  Maybe it was the $380M in financing raised during the last three years.  Or the average quarterly burn rate of $23M.  But somehow, I got sucked in.

I just had to know their CAC ratio.  Of course, it’s not going to be easy to calculate.  While they give us quarterly S&M expense, that’s only half the equation; we’re going to have a figure out –as best we can — quarterly new annual recurring revenue (ARR).

Billings as a Sales Metric

While many SaaS companies don’t disclose “billings,” Box does — but on an annual basis only — in their S-1.

[Click on the images to see full size.]

box billings

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Billings is an attempt to triangulate on new sales (or bookings) in a SaaS company.  The standard way to calculate billings is to add revenue plus change in deferred revenue.

The idea is that if you want to know how “sales” went during a given period, then revenue is not a great indicator because, in a SaaS company, revenue is an indicator of how much you sold in prior periods, not the current one.  So you look at deferred revenue trying to pick up the volume of new orders.  The problem is that things quickly get very complicated because (1) deferred revenue is moving both down (as past deals convert into revenue) and up (as new deals are signed) and (2) deferred revenue itself is limited only to deals that are prepaid — if a company does a constant business volume but suddenly starts doing a lot of two-year prepaids, then deferred revenue will skyrocket and if, for example, hard economic times drive loyal customers to ask for bi-annual billing, then deferred revenue will plummet, all without any “real” change in underlying subscription business.  In addition, multi-year non-prepaid deals are invisible from a deferred revenue perspective (because there’s nothing, i.e., no cash prepayment, to defer).

In short, any metric built upon deferred revenue is only as a good as deferred revenue at reflecting the business.

To demonstrate the relationship between billings and new ARR, I built a model which assumes a SaaS company that starts from scratch, increases new ARR added each quarter by $500K (i.e., $500K in its first quarter, $1M in its second, $1.5M in its third), does only one-year prepaid deals, and has a 90% renewal rate.  Here’s what happens.

(You can download the spreadsheet with Box financial summary and the full version of the model here.  Be sure to download as an Excel file, not a PDF.)

generic model

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While in year one, billings is equivalent to new ARR, as you build up the renewals base, it contributes more to revenue and muddies thing up.  For a company of the above size, growth, and renewal rate, the ratio of new ARR to billings ends up 0.4.

When you take this same model and (manually) force fit the new ARR numbers to try approximate Box’s revenue and billings from 2012-2014, you get:

box like model

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A CAC of ~1.6

In this case (and given my assumption set) you end up with a new-ARR/billings ratio of 0.6.  To make life easier, I also calculated a new-ARR/revenue ratio (see the full sheet), which ends up around 0.8.  I’ll use to this number to calculate my CAC, which comes out to between 1.5 and 1.8.  While not quite an idyllic 1.o to 1.2, it’s well below 2.0 and helps explain why Box has been able to raise so much money:  their growth has been deemed scalable.

Billings = Ending ARR

In reviewing my models, it’s hard not to notice that billings for a period equals ending ARR for that period.  This turns out to be true under my assumption set of subscription-only (no services), one-year deals only, and everything pre-paid.  Why?  Because for any deal taken at any point during the year, we will recognize some percent of it (X) and the rest (Y) will go to deferred revenue.  The difference between X and Y changes across the year but X+Y= the deal size at all times.

This is not true when you have consulting or do multi-year prepaid deals (which can make billings > ending ARR).  It’s also not true when you do semi-annual billing (which can make billings < ending ARR).

If you assume for any given company that these factors are roughly constant, then even though uniformly inaccurate, it does provide a simple way to approximate new ARR:  take the difference in ending ARR two periods, add a churn assumption, and bang you have new ARR during the period.

Key Metrics, Cashflow, and the P&L

Here are some summarized key metrics (using yellow to highlight points of interest).

box key metrics

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Of note:

  • Year over year growth, while high at 97% is slowly decelerating.
  • Gross margins are nice at nearly 80%
  • Operating expenses are massive:  278% of sales in 1Q12 down to “only” 182% in 4Q14.
  • S&M expense are a seemingly very high 121% of revenues.  This looks bad, but to really know what’s going on we need to examine the CAC, which looks pretty good.
  • Return on sales is -112%
  • That burn rate sure grabs you:  $22M per quarter

In many ways you see a typical “go big or go home” cloud computing firm, burning boatloads of cash but acquiring customers in a reasonably efficient manner and doing a nice job with retention/cross-sell/up-sell as judged by their retention numbers. When you look big picture, I believe they see themselves in a winner-take-all battle vs. DropBox and in this case, the strategy — while amazingly cash consumptive — does make sense.

Here is  a look at cashflow and billings:

box cashflow and billings

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And last, but certainly not least, here is the P&L:

box p+l

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Of note:

  • I’m always amazed  by the R&D spend of seemingly simple consumer services.  They spent $46M in R&D last year … on what?
  • The $171M in S&M expense sure grabs your attention
  • As does the $168M net loss!

Burn baby burn!

[Revised and expanded 3/27/14 9:18 AM]

# # #

I am not a financial analyst.  I do not make buy, sell, or hold recommendations on stocks.  See my FAQ for affiliations and disclaimers.

To Pre-Meet Or Not To Pre-Meet: That Is The Question

I once asked one of my board members which CEO ran the best board meetings across his portfolio companies.  His answer was, let’s call him, Jack.  Here’s what he said about him:

  • Jack got the board deck out 3-4 days in advance of the board meeting
  • Jack would call him — and every other board member — 2-3 days before each board meeting and walk through the entire deck and answer questions, taking maybe 2 hours to do so.
  • Board meetings with Jack would go very quickly and smoothly because all the questions had been asked in advance.

When I heard this, I thought, well, I have a few issues with Jack:

  • He spends a lot of time managing his board instead of running his business.  (I guess he got his CEO job by managing-up.)
  • He completely violates my “do it in the meeting” principle by having a series of pre-meetings before the actual meeting.

While I may have my doubts about Jack, others don’t seem to.  Consider entrepreneur and VC Mark Suster’s recent post, Why You Shouldn’t Decide Anything Important at Your Board Meetings.  Suster straight out recommends a 30 minute pre-meeting per board member.  Why?

  • Agenda input so you can adhere to the Golden Rule of Board Meetings:  “no surprises.”
  • So you can “count votes” in advance as know where people stand on important and/or controversial issues.
  • So you can use board members to convince each other of desired decisions.
  • Ultimately, because in his opinion, a board meeting is where you ratify decisions that are already pre-debated.

OK, I need to chew on this because, while practical, it violates every principle of how I think companies should conduct meetings — operational ones, at least.  When it comes to operational meetings, nothing makes me grumpier than:

  • Pre-meeting lobbying
  • Post-meeting “pocket vetoes”

My whole philosophy is that meetings should be the place where we debate things and make decisions.  Doing everything in advance defeats the purpose of meeting and risks encouraging political behavior (e.g., “if you vote for my bridge in Alaska, I’ll vote for your dam in Kentucky”), with managers horse-trading instead of voting for ideas based on their merits.

The only thing worse that teeing up everything in advance is what one old boss called the “pocket veto,” where a manager sits in a meeting, watches a decision get made, says nothing, and then goes to the CEO after the meeting and says something akin to “well, I didn’t feel comfortable saying this in the meeting, but based on point-I-was-uncomfortable-raising, I disagree strongly with the decision we reached.”

I remember this happened at Business Objects once and I thought:  “wait a minute, we’ve flown 15 people from around the world (in business class) to meet at this splendid hotel for 3 days — costing maybe literally $100,000 — and the group talked for two hours about a controversial decision, came to resolution, and made a decision only to have that decision overruled the next day.”  It made me wonder why we bothered to meet at all.

But I learned an important lesson.  Ever since then, I flat refuse to overrule decisions made in a meeting based on a pocket veto.  Whenever someone comes to me and says, “well, I didn’t feel comfortable bringing it up in the meeting (for some typically very good sounding reason about embarrassing someone or such), but based upon Thing-X, I think we need to reverse that decision,” I say one thing and only one thing in response:  “well, I guess you should have brought that up in the meeting.”

You see, I believe, based on a bevy of research, that functional groups of smart people make better decisions than even the smartest individuals.  So my job as CEO is to then assure three things:

But I’ve got a problem here because while we know that boards like pre-meetings, operationally I am opposed to both pre- and post-meetings.  Would it hypocritical for to say that pre-meetings are OK for me to conduct with the board, but that managers internally should avoid them?

Maybe.  But that’s what I’m going to say.   How can I sleep at night?  Because I think we need to differentiate between meetings with a decision maker  and meetings of a decision-making body.

Most people might think that the pricing committee, product strategy committee, or new product launch committee are democratic bodies, but they aren’t.  In reality, these are meetings with a decision maker present (e.g., the CEO, the SVP of products) and thus the committee is, perhaps subtly, an advisory group as opposed to a decision-making body.  In such meetings, the decision-maker should want to encourage vociferous debate, seek to prevent pre-meetings and horse-trading, and eliminate pocket vetoes because he/she wants to hear proposals debated clearly and completely based on the merits in order to arrive at the best decision.

However, board meetings are different.  Boards truly are a decision-making bodies ruled by one-person, one-vote.  Thus, while I reject Suster’s advice when it comes to conducting operational meetings (which I believe are inherently advisory groups), I agree with it when it comes to decision-making bodies.  In such cases, someone needs to know who stands where on what.

And that person needs to be the CEO.

The Old “Don’t Bring Up a Problem Unless You Have a Proposed Solution” Rule

There’s a rule out there, undoubtedly made long ago, and circulated widely as conventional wisdom that in the workplace you should never bring up a problem unless you have a proposed solution.

For example, consider the following excerpt from this Inc Magazine article, Eight Things Great Bosses Demand from Employees:

Rule 6:  Provide Solutions, Not Complaints.  Complainers are the bane of your boss’s existence. Nothing is more irritating or more boring than listening to somebody kvetch about things that they’re not willing to change.  So never bring up a problem unless you’ve got a solution to propose–or are willing to take the advice the boss gives you.

The argument goes that if you just bring up problems, then you’ll be seen as a whiner, as a complainer, who drones on endlessly about problems that can’t be solved or that no one knows how to solve.

The question is:  is this a good rule?

Let’s take an old example from my career.  It’s 1990, you work at Ingres which is $250M division of ASK, and you compete in the relational database market against Oracle, who is about $1B.  You are getting your ass kicked up and down by Oracle in the RDBMS market.  Management is silently executing a retreat strategy into the application development tools market and worse yet, your parent company, ASK, is betting all-in on a new version of Ingres 4GL that only works on the Ingres DBMS for their next-generation ERP system.

Here are some darn good problems:

  • Oracle is killing us in the DBMS market.
  • We are moving into tools when “runtimes” are increasingly free and there is no money to be made
  • We are double-downing on a proprietary, unstable application development environment instead of using standard tools
  • ASK is suffering from a serious escalation of commitment problem and should not double down on a dying database business.

If you followed the “don’t bring up a problem without a solution” rule then you could never talk about any of these problems.  And they are only the most important problems facing the company (and that would ultimately lead to its undoing).  What if, for example, you ran sales and had no idea what application development tools the company should be using, but simply knew which it should not?  Should you make up a bad solution just so you can talk about the problem?

I can take more recent examples of similar no-easy-solution problems:

  • What do we do about the Internet?  (At Business Objects in 1996, when we were 100% Windows client applications.)
  • What do we do about NoSQL?  (At MarkLogic in 2009 when we were a closed-source non-relational DBMS into a strong open-source trend.)
  • What do we do about Zendesk? (At Salesforce in 2012 after acquiring Assit.ly and mistakenly seeking synergy vs. trying to use it in a major blunting initiative.)

Let’s look beyond the business environment and see some problems that we couldn’t talk about if we followed the rule:

  • Mid-East peace
  • Cancer
  • Global warming

“Sorry Jimmy, if you don’t know the solution to global warming then you shouldn’t bring it up because you’ll just be whining.”

Obviously, I think it’s a stupid rule.

The correct rule is:  don’t whine.

It turns out the hardest problems, the most important problems, often have no obvious solution.  So if you prohibit discussing them, you cripple our organization and limit discussion only to easier, more tactical matters, akin to re-arranging the deck chairs on the Titanic.

PayPal President’s Ream-the-Team Email: Good or Bad Leadership?

As you may have heard, PayPal president David Marcus recently zipped off a zinger of an email to company employees which was leaked to Business Insider and featured in this story:  PayPal Chief Reams Employees — Use our App or Quit.

Some highlights:

PayPal It, our program enabling you to refer businesses that don’t accept PayPal has seen the least amount of leads in *absolute* and relative terms vis-a-vis ALL other locations. Offices with under 100 employees beat us by an order of magnitude (total PayPal it leads to date: 126,862, San Jose leads: 984…).

Product usage data is similar. Employees in other offices hack into Coke machines to make them accept PayPal because they feel passionately about using PayPal everywhere. I don’t see these behaviors here in San Jose. As a matter of fact, it’s been brought to my attention that when testing paying with mobile at Cafe 17 last week, some of you refused to install the PayPal app (!!?!?!!), and others didn’t even remember their PayPal password. That’s unacceptable to me, and the rest of my team, everyone at PayPal should use our products where available. That’s the only way we can make them better, and better.

[...]

In closing, if you are one of the folks who refused to install the PayPal app or if you can’t remember your PayPal password, do yourself a favor, go find something that will connect with your heart and mind elsewhere. A life devoid of purpose, and passion in what you do everyday is a waste of the precious time you have on this earth to make it better.

While I think it’s easy to agree that companies should “eat their own dog food,” it’s harder to decide whether this email constitutes good or bad leadership.

Here are some things to ponder in answering that question.

  • In this day and age, there is a 100% chance that this email will leak.  I argue that every all-hands CEO email must now be written as if it is going to be leaked.  While perhaps a surprise 5-10 years ago, these leaks are simply a realty today.  The CEO should know that.
  • While we all want our employees to use our products, should they not do so because they are good products and they want to use them as opposed to being forced to at gunpoint?
  • By the way, using only the company’s products (and not our competitors) creates an insulation from the market such that the company may lose tough with realty.  (Think:  Detroit auto-makers giving execs new company cars every year.  They never had to deal with the vehicles poor aging/maintenance and never drove the competition for comparison.)  The PayPal cafeteria should accept Square and Google Wallet on these grounds.
  • Would a better approach have been to “seek first to understand” and learn why employees weren’t using their accounts?  (Ditto for the iPhone app.)  After all, you can force your employees to use PayPal but you can’t force the other 99.999% of the market.  Why not use  your employees — who should be naturally predisposed — as a test lab.
  • Could he not have provided an incentive (say a 10% discount) at the cafeteria if you use PayPal.  Then it would be really interesting to see why people weren’t using it.
  • Does anyone honestly believe that if everyone uses the products they will get better?  It’s a quaint idea, but if one of the junior marketing events people has some product feedback, does PayPal really run the kind of organization where it’s going to be listened to?  If he’s going to say “everyone should use the products so everyone can make them better,” then he better put wood behind the product-input arrow (e.g., an internal “ideas community” — today PayPal seems to lack even an external one).
  • Does this email actually motivate anyone or just make the CEO look frustrated and desperate?
  • To the extent San Jose employees are unexcited about the company and its products, will this email do anything to improve that?
  • Finally, should telling people to quit if they don’t use the products accomplish anything?  In complacent companies it’s the non-complacent who quit.  The complacent generally need to be fired.  So why yell at everyone about complacency — it irritates the non-complacent and has zero effect on the complacent (“oh, David’s yelling again; wonder when he’ll stop.”)

That’s my take.  Overall, this email was a terrible idea.  What’s yours?

Is Salesforce / Siebel a Classic Disruption Case?

Like many others, I have often used Salesforce / Siebel as a classic example of Innovator’s Dilemma style disruption.  Several months ago, in response to this article about Host Analytics, I received a friendly note from former Siebel exec and now venture capitalist Bruce Cleveland saying roughly:  “nice PR piece, but the Salesforce / Siebel disruption story is a misconception.”

So I was happy the other day to see that Bruce wrote up his thoughts in a Fortune article, Lessons from the Death of a Tech Giant.  In addition, he posted some supplemental thoughts in a blog post Siebel vs. Salesforce:  Lessons from the Death of  a Tech Giant.

Since the premise for the article was Bruce gathering his thoughts for a guest-lecture at INSEAD, I thought — rather than weighing in with my own commentary — I’d ask a series of study guide style questions that MBA students pondering this example should consider:

  • What is disruption?  Given Bruce’s statement of the case, do you view Siebel as a victim or disruptive innovation or a weakening macro environment?
  • Are the effects of disruptive innovation on the disruptee always felt directly or are they indirect?  (e.g., directly might mean losing specific deals as opposed to indirect where a general stall occurs)
  • What does it feel like to be an executive at a disruptee?  Do you necessarily know you are being disrupted?  How could you separate out what whether you are stalling due to the macro environment or a disruptive innovator?
  • What should you do when you are being disrupted?  (Remember the definition of “dilemma” — two options and both are bad.)
  • While not in the article, according to friends I have who worked at Siebel, management could be quoted in this timeframe as saying “Now is the time to be more Siebel than we’ve ever been” (as opposed to emulating Salesforce).  Comment.
  • What should Siebel have done differently?  Was the over-reliance on call center revenue making them highly exposed to a downturn in a few verticals?  How could they have diversified using either SFA or analytics as the backbone?
  • What should Siebel have done about the low-end disruption from Salesforce?  Recall that in 2003 Siebel launched Siebel CRM On Demand as an attempted blocking strategy in the mid-market and acquired UpShot as a blocker for SMB.  How could Siebel have leveraged these assets to achieve a better outcome?
  • To what extent should external environment variables be factored in or out when analyzing disruption?  Are they truly external or an integral part of the situation?
  • To what extent do you believe that Oracle’s acquisition of Siebel left Salesforce unopposed for 8 years?  To what extent was that true in the other categories in which Oracle made large acquisitions (e.g., HCM, middleware)?
  • After hearing both sides of the argument, to what extent do you believe the reality of the case is “Salesforce David slaying Siebel Goliath” versus “Siebel getting caught over-exposed to a macro downturn, selling to Oracle and giving the CRM market to Salesforce?”   In effect, “they didn’t kill us; we killed ourselves.”

I deliberately will offer no answers here.  As an old friend of mine says, “there are three sides to every story:  yours, mine, and what really happened.”  Real learning happens when you try understand all three.

10 Things Never To Do at a Business Dinner

Business travelers spent $260B in 2012 with food services being the #1 source of expense.  Salespeople love dinners with customers and prospects. Marketers love networking dinners.  We have customer advisory board dinners, pre-board dinners, awards dinners, relationship-building dinners, team dinners, customer appreciation dinners, partner summit dinners, project completion dinners, analyst dinners, investor dinners, … the list goes on and on.

Because business dinners can be so powerful, I am a huge fan of them as a marketing tool.  However, I’ve also been a part of many “dining accidents” over the years — the most infamous being the “white burgundy and stone crab incident” at Estiatorio Milos — almost invariably due to a combination of lack of focus on the business goals of the meal, lack of pragmatism, and lack of adaptation to changing circumstances.

As a result of these experiences, I have composed this list of 10 things never to do at a business dinner.

10.  Lack clear goals.  Whether we’re organizing a 1-1 meal for the CEO and a key customer or a 56-person customer appreciation dinner, everyone on the team should understand the goals for the meal.  Every member of the team should understand why they are there and what they are supposed to do.

9.  Eat in a noisy restaurant.  A universal purpose of a business dinner is for people to get know each other.  That is not going to happen when it’s loud, especially if your guests are a bit older.  Some restaurants are just incredibly noisy (e.g., Wolfgang’s on Park Avenue with a parabolic tile ceiling).  Sometimes private rooms can be quite loud as well, especially if they are not really cut off from the main room.  Avoid live music at all costs.  Avoid low ceilings.  Beware converted bank vaults and train stations.  I’ve seen more business dinners die on this hill than any other.  Fun or hip doesn’t matter if people can’t hear each other.

8.  Have tables bigger than 8.  If people are going to get acquainted, they need both a quiet environment and a table small enough so everyone can hear everyone else.  One friend has a rule that if you want one conversation at a table, then you should limit table size to six.   I think you can go up to 8, provided your team members know there is supposed to be one conversation.  Avoid rectangular tables which greatly limit the number of people with whom one can speak.

7.  Bring too many people.  One advantage of clear goals is that they help in deciding the guest list.  If the goal is to recognize the hard work of a 24-person team, great:  go get 3 tables of 8.  If the goal is for the CEO to build a relationship with another CEO, then either hold a 1-1 dinner or a 2-2, where each CEO brings a lieutenant.  But don’t say you’re having a CEO relationship dinner and bring your sales VP, sales director, account manager, and CFL rep.  It ends up like dating with an audience.  Don’t invite people just because they are in town — you can easily unbalance a dinner by bringing 9 of us and 3 of them, turning it into a multi-conversation, intra-company event to which a few customers are invited.  When in doubt, say no.

6.  Mis-level the crowd.  I think the most important part of networking dinners is that each participant feels like he/she gets value from meeting every other participant.  So if you’re hosting a 16-person CMO dinner, make sure the invitations are non-transferable so you can say “no” when several CMOs want to send their advertising or PR directors at the last minute.  While your PR director may enjoy having dinner with a bunch of CMOs, it’s unlikely to work in reverse.  The worst case is when two CMOs show up and are surrounded by 14 PR directors:  your intended target ends up feeling out-of-place.  It is far better to have 6 CMOs when you were hoping for 16 than it is to have 6 CMOs and 10 PR directors.  Burn that into your brain.  Tattoo it to your wrist.  Don’t not prioritize filling up seats at the cost of mis-levelling the dinner and destroying the event concept.  You can build on a great 6-person CMO event in the future.  You are dead when you host a mis-leveled event.

5.  Leave seating to chance.  Since we’re investing peoples’ valuable time (and probably $100 to $200 per head) in the event, we shouldn’t leave anything to chance.  For larger events, use place cards.  For smaller events, pre-brief the team on who to direct where.  It’s a disaster, for example, when at a square table, you place the two people you want talking next to each other, instead of across.  Make sure it doesn’t happen.  (And if it does, change it per rule 2 below.)

4.  Take more than 2 hours. Business dinners are business.  If you want to add a social part, go the bar afterwards for drinks.  It’s very awkward to leave a business dinner in progress and someone could  end up missing their train and getting in trouble with a spouse, because they expected a business dinner and you ran a lingering social event that took 3.5 hours.  In general, the more senior the invitee, the more likely the dinner is “just another calendar slot” as opposed to a social opportunity.  So when having dinner for 4-6 people at a restaurant (and I’m not in Europe), I tell the waiter in advance that my goal is to be done in two hours and that we want to have two courses and possibly dessert — no shared calamari pre-appetizer, no extra-salad (i.e., salad plus appetizer) shoved in as they love to do at Morton’s.  Just an appetizer per person, a main course, and when the time comes, a decision about dessert.  If things start to go too slowly, have some pre-appointed to leave the table, speak to the waiter discretely and say “get it moving.”  On dessert, if asked first, my answer is, “no thanks, just an espresso.”  If the customer  subsequently orders then I can always join in afterwards. Overall, by respecting your guest’s time, you increase the odds they will say yes the next time you invite them out.

3.  Order very expensive wine.  Here are a few things that can go wrong when you do:  [1] the wine is bad and you end up distracted with the whole rejection and re-tasting process, [2] the attendee is subject to a company policy where he/she has to pay his part of the meal (e.g., government, journalists) so you backfire screw them on their expense report, [3] people love it and you drink three bottles, tripling an expensive proposition, [4] you look pretentious, [5] your company looks wasteful and poorly controlled, [5] your three employees drink it but the customer subsequently announces he doesn’t drink wine and you end up treating the crew and not your customer.  When I lived in France, our classiest sales VP had a simple rule: order Sancerre.  It’s neither too cheap, nor too expensive.  It comes in dry, aromatic white (sauvignon blanc), mild-bodied red, and even rosé (both pinot noir based) so most people will like it.  I’ll demo the Sancerre principle on the wine list from the tony Village Pub, one of the best restaurants in Silicon Valley, where a Corton-Charlemagne will set you back $400 and a Kistler single-vineyard chardonnay $250.  The Sancerre weighs in about $130.

2.  Not roll with the punches.  Entertaining is always full of surprises and you need to roll with them.  We once arrived at The Triomphe in NYC only to find ourselves literally surrounded by a loud, drunken, office Holiday Party.  On arriving, we knew we were dead, so we dispatched a team member to find a quieter spot and did about 3 blocks away.  If a snowstorm wipes out 30% of your attendees, you better eliminate some tables and redo your place settings.  The key thing to remember in rolling with the punches is how to preserve the original goals of the meal.  Twice, I’ve been in cases where 4-5 employees had gathered at a very expensive restaurant (e.g., Morimoto) waiting for a group from a customer who never showed up.  In this case, rolling with the punches should mean eating somewhere else because the company shouldn’t be dropping Morimoto-style dollars on a basic mid-week traveling dinner.

1.  Order the tasting menu.  There are four problems with tasting menus:  they are expensive, they take the whole table hostage because they are ordered on an all-or-nothing basis, they take a long time to serve, and they don’t fill you up. The thing I hate most about tasting menu is not the first check — the $900 check for 4 — it’s the second check, the one for $100 for sliders and wings at the sports bar afterwards.  I am so opposed to tasting menus on business dinners that I actually try to avoid restaurants that offer them; I try to reduce the odds to zero that one person, typically a new employee, will provoke the chain reaction that results in the whole table ordering one.  I’ll do a tasting menu at a business dinner only if we are a small group of known foodies who will order the wine pairings, take three and a half hours on the meal, greatly enjoy it, and not run to McDonald’s right after.  Otherwise, stay away.

I could add as “rule 0″ don’t get drunk, but frankly I’ve not seen that rule broken terribly often at the business dinners I’ve attended.  More often, I see it broken at company events — which is a whole different blog post.

I hope you find these rules, and the thinking behind them, helpful to you in optimizing all your business dinners.

Bon Appétit!

Insight Ventures Periodic Tables of SaaS Sales and Marketing Metrics


I just ran into these two tables of SaaS metrics published by Insight Venture Partners (or, more precisely, the Insight Onsite team) and they are too good not to share.

Along with Bessemer’s awkwardly titled 30 Questions and Answers That Every SaaS Revenue Leader Needs to Know, financial metrics from Opex Engine, and the wonderful Pacific Crest Annual SaaS Survey, SaaS leaders now have a great set of reference documents to benchmark their firms.

(And that’s not to mention David Skok’s great post on SaaS metrics or, for that matter, my own posts on the customer acquisition cost (CAC) ratio and renewals rates / churn.)

Here is Insight’s SaaS sales periodic table:

ivp saas sales

And here is Insight’s B2B digital marketing periodic table:

ivp saals mkting

Did You Just Make a Plan or a Budget?

Congratulations!  If your company is like most, you’ve recently finished a (hopefully) solid 2013 and, from an EPM perspective, completed your 2014 annual planning process. 

Before we get too excited, however, let’s ask one quick question:  did you just make a plan or a budget?  In business, we tend to use the terms “plan” and “budget” as synonyms. But are they?  Methinks strongly no.

A budget is a set of numbers that say how much each operating manager (above some level of seniority) is supposed to spend and/or sell in the coming fiscal year.  A budget is made by finance and owned by finance.  Budgets are often built by trending (i.e., if we want revenue to go up 30%, then to improve profitability, we want expenses to up by only 20%, so give every cost center 20% more than last year, spreading it across time periods in line with historical actuals).  Operating managers often perceive budgets as “falling from the sky” — i.e., targets are dropped on them without conversation which makes sense in some perverse way (if the whole thing is a giant trending exercise, then there really isn’t much to discuss anyway).  Because budgets are trended, they are often nothing more than “buckets of money” — i.e., marketing is going to spend 20% more than last year on analyst relations, but no one can tell you  — and the model certainly does not include — any line-items/details on how it is to be spent.  Finally, the seniority-line (mentioned above) is usually quite high in the organization with budgets; only the top functional managers may actually have budgets that they control.

Budgets aren’t evil.  We need them.  We need targets against which to hold people accountable.  We need to be able to forecast cashflows.  We need, if we’re public, to set revenue and EPS guidance for Wall Street.

But a budget is not a plan.

A plan is strategic.  It starts not with an expense trending exercise, but instead with the company’s position in the market and a strategy for improving it.  A high-level strategy is defined.  Concrete goals/objectives are identified that support the strategy (e.g., start a European operation and sign 3 distributors).  Revenue targets are negotiated, ideally rewarding managers not just for beating the targets (which encourages sand-bagging) but also against more objective and external measures (e.g., market share).  Expense targets are set not simply by trending, but also by challenging past expenses and adding the costs of new strategic projects (i.e., stop/continue/start analysis).  Budget ownership is pushed down the organization, ideally with every people-manager controlling his/her own budget.

Plans have linked-detail, not just buckets of money.  When planning, you say “what do we need to accomplish in analyst relations and what will that cost.”  When budgeting, you say “how would we spend an extra 20% in analyst relations.”

The biggest way to tell if you’ve made a plan or a budget is when it comes to cutting time.  Budgets are cut with broad, top-down, across-the-board cuts:  “look, everyone’s going to need to take 10% more expense out.”  Plans are cut by removing strategic objectives:  “it looks like we were premature in wanting to open Europe, so I want to see a version of the plan where everyone removes those costs.”

I’d argue that a good plan is more well thought out in every way.  Budgets just trend revenue.  Plans triangulate using multiple different models with sensitivity analysis.  Budgets have TBH1, TBH2, and TBH3 as new hires.  Plans have AE/NYC, AE/Boston, and AE/Denver.

In philosophy, budgets are done by pragmatists with a goal to get them done:  “it’s imperfect, but you can’t predict the future, and we need something finalized by 12/31.”  By contrast, plans are done by strategists in a true attempt to anticipate what can be anticipated about the future.

  • If you’re going to hire 3 sales teams, they are going to want leads.
  • If Q2 is usually a rough seasonal quarter, then it’s likely to be one again.
  • If you’re going to acquire 100 customers, you are going to need to grow your support team.
  • If you are going to launch a focus on pharma sales, then you will need to develop a pharma sales kit.
  • If you know a competitor’s strategy and the backgrounds of their executive team, you can anticipate many of their moves (e.g., when Oracle put bankers in charge of the company was it a big surprise that they moved heavily towards an M&A strategy).
  • If you know industry trends, you can anticipate competitor strategy (e.g., do you think Oracle and SAP will be investing big in cloud in 2014, how about Microsoft and mobile)

As John Naisbitt once said, “the most reliable way to predict the future is to try to understand the present.”

So, if you just made a budget, congratulations.  You are far better off than many companies who can’t even get that process completed.  But beware you’ve got an opportunity ahead of you to make a plan.  If you’ve made a plan, congratulations again.  While your plan may changes many times as you go forward, the process of planning itself has made your organization more ready than most to respond to those changes.  I’ll finish with my favorite quote on planning, by Dwight Eisenhower:

“In the process of preparing for battle I have always found that plans are useless, but planning is indispensable.”

And I don’t think Eisenhower would have considered trended buckets-of-money a plan.

Kellblog’s 10 Predictions for 2014

Since it is the season of predictions, I thought I’d offer up a few of my own for 2014, based on my nearly three decades of experience working in enterprise software with databases, BI tools, and enterprise applications.

See the bottom for my disclaimer, and off we go.  Here are my ten predictions for 2014.

  • Despite various ominous comparisons to 1914 made by The Economist, I think 2014 is going to be a good year for Silicon Valley.  I think the tech IPO market will continue to be strong.  While some Bubble 2.0 anxiety is understandable, remember that while some valuations today may seem high, that the IPO bar is much higher today (at around $50M TTM revenues) than it was 13 years ago, when you could go public on $0 to $5M in revenues.  In addition, remember that most enterprise software companies (and many Internet companies) today rely on subscription revenue models (i.e., SaaS) which are much more reliable than the perpetual license streams of the past.  Not all exuberance is irrational.
  • Cloud computing will continue to explode.  IDC predicts that aggregate cloud spending will exceed $100B in 2014 with amazing growth, given the scale, of 25%.  Those are big numbers, but think about this:  some 15 years after Salesforce.com was founded, its head pin category, sales force automation (SFA), is still only around 40% penetrated by the cloud.  ERP is less than 10% in the cloud.  EPM is less than 5% in the cloud.  As Bill Gates once said about prognostication, “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”  IT is going to the cloud, inexorably, but change in IT never happens overnight.
  • Big Data hype will peak.   I remember the first time I heard the term “big data” (in about 2008 when I was on the board of Aster Data) and thinking:  “wow, that’s good.”  Turns out my marketing instincts were spot on.  Every company today that actually is — or isn’t — a Big Data play is dressing up as one, which creates a big problem because the term quickly starts to lose meaning.  As a result, Big Data today is nearing the peak of Gartner’s hype cycle.  As a term it will start to fall off, but real Big Data technologies such as NoSQL databases and predictive analytics will continue to face a bright future.
  • The market will be unable to supply sufficient Data Science talent.  If someone remade The Graduate today, they’d change  Mr. McGuire’s line about “plastics” to “data science.”  Our ability to amass data and create analytics technology is quickly surpassing our ability to use it.  Job postings for data scientists were up 15,000% in 2012 over 2011.  Colleges are starting to offer data science degrees (for example, Berkeley and Northwestern).  There’s even an a startup, Udacity, specifically targeting the need for data science education.  Because of the scarcity of data science talent, the specialization required to correctly use it, and the lack of required scale to build data science teams, data science consultancies like Palantir and Mu Sigma will continue to flourish.
  • Privacy will remain center stage.  Trust in “Don’t Be Evil” Google and Facebook has never been particularly high.  Nevertheless, it seems like the average person has historically felt “you can do whatever you want with my personal data if you want to pitch me an advertisement” — but, thanks to Edward Snowden — we now know we can add, “and if the government wants to use that data to stop a terrorist attack, then back off.”  It’s an odd asymmetry.  These are complex questions, but in a world where the cost of data collection will converge to free, will the privacy violation be in collecting the data or in analyzing it?  In a world where one trusted the government to adequately control the querying and access (i.e., where it took a warrant from a non-secret court), I’d argue the query standard might be good enough.  Regardless, the debate sparked thus far will continue to burn in 2014 and tech companies will very much remain in the center of it.
  • Mobile will continue to drive consumer companies like Dropbox and Evernote, but also enterprise companies like Box, Clari, Expensify, and MobileIron.  Turns out the enterprise killer app for mobile was less about getting enterprise applications to run on mobile devices and more about device proliferation, uniform access to content, and eventually security and management.  (And since I’m primarily an enterprise blogger, I won’t even mention social à la SnapChat or mobile gaming).  As one VC recently told me over dinner, “God bless mobile.”  Amen in 2014.
  • Social becomes a feature, not an app.  When I first saw Foursquare in 2010, I thought it should be the example in the venture capital dictionary for “feature, not company.”  Location-awareness has definitely become a feature and these days I do more check-in’s on Facebook than Foursquare.  I felt the same way when I worked at Salesforce.com and we were neck deep in the “social enteprise” vision.  When I saw Chatter, I thought “cool, but who needs yet another communications platform.”  Then I realized you could follow a lead, a case, or an opportunity and I was hooked.  But those are all feature use-cases, not application or company use-cases.  Given the pace of Salesforce, they fell in love with, married, and divorced social faster than most vendors could figure out their product strategy.  In the end, social should be an important feature of an enterprise application, almost a fabric built across modules.  I think that vision ends up getting implemented in 2014.  (Particularly if Microsoft ends up putting in David Sacks as its next CEO as some speculate.)
  • SAP’s HANA strategy actually works.  I was one of relatively few people who was absolutely convinced that SAP’s $5.8B purchase of Sybase in 2010 was more about databases than mobile.  SAP is clearly crafting a strategy to move both analytics and transactional database processing onto HANA and they have been doggedly consistent about HANA and its importance to the firm going forward.  They have been trying for decades to eliminate their dependency on Oracle — e.g., the 1997 Adabas D acquisition from Software AG  — and I believe this time they will finally succeed.  In addition, they will succeed — quite ironically — with their ingredient-branding strategy around HANA using a database to differentiate an application suite, something that they themselves would have seen as heresy 20 years ago.
  • Good Data goes public.  Cloud-based BI tools have had a tough slog over the years.  Some good companies were too early to market and failed (e.g., LucidEra).  Birst, another early entrant, certainly hasn’t had an easy time over its ten-year history.  Personally, while I was always a fan of cloud-based applications (having become a big Salesforce customer in 2003), I always worried that with cloud-based BI tools, you’d have too much of the nothing-to-analyze problem.  Good Data got around that problem early on by adopting a Crystal-like OEM strategy, licensing their tools through SaaS applications vendors.  They later evolved to a general cloud-based BI platform and applications strategy.  The company was founded in 2007, has raised $75M in VC, is reportedly doing very well, and an IPO seems a likely event in its future.  I’m calling 2014.
  • Adaptive Planning gets acquired by NetSuite.  Adaptive Planning was founded in 2003 as a cloud-based planning company and — despite both aspirations and claims to the contrary — in my estimation continues to play the role of the low-priced, cheap-and-cheerful planning solution for small and medium businesses.  That market position, combined with an existing, long-term strategic relationship whereby NetSuite resells Adaptive as NetSuite Financial Planning, makes me believe that 2014 will be the year that NetSuite finally pulls the trigger and acquires Adaptive Planning.  I think this deal could go down one of two ways.  If Adaptive continues to perform as they claim, then a potential S-1 filing could serve as a trigger for NetSuite (much as Crystal Decisions’ S-1 served as a trigger for Business Objects).  Or, if Adaptive hits rough road in 2014 for any reason (including the curse of the new headquarters) then that could trigger NetSuite with a value-shopper impulse leading to the same conclusion.

I should end with a bonus prediction (#11) that Host Analytics, our customers, and my colleagues will enjoy a successful 2014, continuing to execute on our cloud strategy to put the E back in EPM — focus and leadership in the enterprise segment of the market — and that we will continue to acquire both high-growth companies who want an EPM solution with which they can scale and liberate enterprises from costly and painful Hyperion implementations and upgrades.

Finally, let me conclude by wishing everyone a Happy New Year and great business success in 2014.

Disclaimers

  • See my FAQ to understand my various allegiances and disclaimers.
  • Remember I am the CEO of Host Analytics so I have a de facto pro-Host Analytics viewpoint.  
  • Predictions are opinion:  I have mine; yours may differ.
  • Finally, remember the famous Yogi Berra quote:  predictions are hard, especially about the future.