Monthly Archives: December 2011

Two Bosses Are Better Than One: Thoughts on the Virtues of Matrixed Organizations

Posted on December 30, 2011 | 4 comments

When I was new to the workforce, I was violently opposed to matrixed organizational structures.  “They’re bullsh*t,” I thought, “people will always favor one direction over the other, making one of the two managers superfluous.  And, if that’s the case, then why bother at all?”

It was only as Business Objects grew, and me with it, that I realized matrix structures weren’t an “if” but a “when” and the ability to work within such structures would become a defining attribute of someone who “could scale” within the organization as it grew.

As the head of worldwide marketing, the defining question to me was simple — say, for example, the French country marketing VP came to me and said, “which is it, am I French or am I in marketing?”

The answer was, inevitably, both.

  • You are supposed to be a right-hand to the French country manager.  You are supposed to worry about the French pipeline and the French sales number.  You are supposed to work on French go-to-market strategy.  You drive French public relations.
  • You are in marketing.  So you are supposed to be consistent with the positioning and messaging that use worldwide.  We want you to use programs that have worked elsewhere to improve cost-efficiency and we want you to contribute back to the worldwide marketing community by attending leadership meetings, sharing best practices, and leveraging common systems.

Like it or not, you’re both.  And, more importantly, if you can’t handle that, then perhaps you’re not the right person for the job.

But given my historical views on matrices, we didn’t do the classic “solid one-way and dotted the-other” reporting structure.  We created a double solid-line matrix that, to me, more accurately reflected the business reality.  It also gave the matrix some teeth.  I thought the model worked quite well, balancing local empowerment with global consistency and scale economy.

That’s how I, a dyed-in-the-wool anti-matrix person, became a big fan of matrices.  The fact is, as a company grows, certain leaders in the organizations will inevitably need to have dual allegiance.  For example:

  • The head of product marketing for a business unit owes allegiance to both marketing and the product business unit.
  • The head of sales engineering for a country owes allegiances to both the country and the worldwide sales engineering organization
  • An head of overlay sales for a given product owes allegiance to both the product unit and the sales organization

In fact, in a perverse way, as either the head of marketing at Business Objects or the head of a product business unit at Salesforce, I have noticed the following law:

The more a local leader treats me like a virtual boss, the less I care about reporting structure.  And conversely.

That’s my take on the matrix.  What’s yours?

4 Comments

Posted in Management

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

Posted on December 19, 2011 | 2 comments

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

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

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

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

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

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

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

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

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

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

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

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

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

2 Comments

Posted in IPO

Endeca and The Butterfly Effect

Posted on December 7, 2011 | 4 comments

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

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

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

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

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

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

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

4 Comments

Posted in VC