Category Archives: CEO

Thoughts on Hiring:  Working for TBH

One of the most awkward situations in business is trying to recruit someone who will work for to-be-hired (TBH).   For example, say you’ve started a search for a director of product marketing, have a few great candidates in play, only to have your marketing VP suddenly quit the company to take care of a sick parent.   Boom, you’re in a working-for-TBH situation.

These are hard for many reasons:

  • Unknown boss effect. While your product marketing candidate may love the company, the market space, the would-be direct reports, and the rest of the marketing team, the fact is (as a good friend says) your boss is the company.  That is, 80% of your work experience is driven by your boss, and only 20% by the company.
  • Entourage effect. Your top product marketing candidate is probably worried that the new marketing VP has a favorite product marketing director, and that they’ve worked together through the past 10 years and 3 startups.  In which case, if there is an entourage effect in play, the candidate sees himself as having basically no chance of surviving it.
  • False veto effect. You may have tried to reassure product marketing candidates by telling them that they will “be part of the process” in recruiting the new boss, but the smart candidate will know that if everybody else says yes, then the real odds of stopping the train will be zero.

So who takes jobs working for TBH?  Someone who sees the net gain of taking job the job as exceeding the risk imposed by the unknown boss, entourage, and false veto effects.

That net gain might be:

  • The rare chance to switch industries. Switching industries is hard as most companies want to hire not only from within their industry (e.g., enterprise software) but ideally from within their category (e.g., BI).  For example, Adaptive Insights recently hired president and CRO Keith Nealon (announced via what is generally regarded as among the most bizarre press releases in recent history) despite an open CEO position and ongoing CEO search.   Nealon took the job joined from Shoretel, a telecommunications company, and offered him the chance to switch (back) into enterprise SaaS and switch into the hot category of BI and EPM.
  • The rare chance to get a cross-company promotion. Most companies promote from within but when they go outside for talent, they want to hire veterans who have done the job before.  For example, when LinkedIn needed a new CEO they promoted Jeff Weiner from within.  When ServiceNow needed a new CEO and didn’t find anyone internally who fit the bill, they didn’t hire a first-timer, they hired Frank Slootman, who had been CEO at Data Domain for six years and lead a spectacular exit to EMC.  By contrast, when Nealon joined Adaptive Insights, it offered him the chance to get promoted from the GM level to the CXO level, something not generally seen in a cross-company move, but likely enabled by the working-for-TBH situation.
  • The rare chance to get promoted into the TBH job. Sometimes this is explicitly pitched as a benefit to person working for TBH.  In reality, while this rarely happens, it’s always possible that the new hire does so well in the job – and it takes so long to hire TBH – that the person gets promoted up into the bigger job.  This is generally not a great sign for the company because it’s a straight-up admission that they viewed the working-for-TBH hire as not heavy enough for the TBH job, but eventually gave up because they were unable to attract someone in line with their original goals.

Who doesn’t take jobs working for TBH?  Veterans — who, by the way — are precisely the kind of people you want building your startup.  So, in general, I advise companies to avoid the working-for-TBH situation stalling the next-level search and hiring the boss first.

Making the working-for-TBH hire is particularly difficult when the CEO slot is open for two reasons:

  • E-staff direct reports are among the most sophisticated hires you will make, so they will be keenly aware of the risks associated with the unknown-boss, entourage, and false-veto effects. Thus the “win” for them personally needs to offset some serious downside risk.  And since that win generally means giving them opportunities they might not otherwise have, it means an almost certain downgrading in the talent that you can attract for any given position.
  • New CEO hires fail a large percentage of the time, particularly when they are “rock star” hires. For every Frank Slootman who has lined up consecutive major wins, there are about a dozen one-hit wonders, suggesting that CEO success is often as much about circumstance as it is about talent.  You need to look no farther than Carly Fiorina at HP, or any of the last 5 or so CEOs of Yahoo, for some poignant examples.  Enduring a failed new-hire CEO is painful for everyone — the company, the board — but no more group feels the pain more than the e-staff.  Frequently, they are terminated due to the entourage effect, but even if they survive their “prize” for doing so is to pull the slot-machine arm one more time and endure a second, new CEO.

Why, as CEO, I Love Driver-Based Planning

While driver-based planning is a bit of an old buzzword (the first two Google hits date to 2009 and 2011 respectively), I am nevertheless a huge fan of driver-based planning not because the concept was sexy back in the day, but because it’s incredibly useful.  In this post, I’ll explain why.

When I talk to finance people, I tend to see two different definitions of driver-based planning:

  • Heavy in detail, one where you build a pretty complete bottom-up budget for an organization and play around with certain drivers, typically with a strong bias towards what they have historically been.  I would call this driver-based budgeting.
  • Light in detail where you struggle to find the minimum set of key drivers around which you can pretty accurately model the business and where drivers tend to be figures you can benchmark in the industry.  I call this driver-based modeling.

While driver-based budgeting can be an important step in building an operating plan, I am actually bigger fan of driver-based modeling.  Budgets are very important, no doubt.  We need them to run plan our business, align our team, hold ourselves accountable for spending, drive compensation, and make our targets for the year.  Yes, a good CEO cares about that as a sine qua non.

But a great CEO is really all about two things:

  • Financial outcomes (and how they create shareholder value)
  • The future (and not just next year, but the next few)

The ultimate purpose of driver-based models is to be able answer questions like what happens to key financial outcomes like revenue growth, operating margins, and cashflow given set of driver values.

I believe some CEOs are disappointed with driver-based planning because their finance team have been showing them driver-based budgets when they should have been showing them driver-based models.

The fun part of driver-based modeling is trying to figure out the minimum set of drivers you need to successfully build a complete P&L for a business.  As a concrete example I can build a complete, useful model of a SaaS software company off the following minimum set of drivers

  • Number and type of salesreps
  • Quota/productivity for each type
  • Hiring plans for each type
  • Deal bookings mix for each (e.g., duration, prepayments, services)
  • Intra-quarter bookings linearity
  • Services margins
  • Subscription margins
  • Sales employee types and ratios (e.g., 1 SE per 2 salesreps)
  • Marketing as % of sales or via a set of funnel conversion assumptions (e.g., responses, MQLs, oppties, win rate, ASP)
  • R&D as % of sales
  • G&A as % of sales
  • Renewal rate
  • AR and AP terms

With just those drivers, I believe I can model almost any SaaS company.  In fact, without the more detailed assumptions (rep types, marketing funnel), I can pretty accurately model most.

Finance types sometimes forget that the point of driver-based modeling is not to build a budget, so it doesn’t have to be perfect.  In fact, the more perfect you make it, the heavier and more complex it gets.  For example, intra-quarter bookings linearity (i.e., % of quarterly bookings by month) makes a model more accurate in terms of cash collections and monthly cash balances, but it also makes it heavier and more complex.

Like each link in Marley’s chains, each driver adds to the weight of the model, making it less suited to its ultimate purpose.  Thus, with the additional of each driver, you need to ask yourself — for the purposes of this model, does it add value?  If not, throw it out.

One of the most useful models I ever built assumed that all orders came in on the last day of quarter.  That made building the model much simpler and any sales before the last day of the quarter — of which we hope there are many — become upside to the conservative model.

Often you don’t know in advance how much impact a given driver will make.  For example, sticking with intra-quarter bookings linearity, it doesn’t actually change much when you’re looking at quarter granularity a few years out.  However, if your company has a low cash balance and you need to model months, then you should probably keep it in.  If not, throw it out.

This process makes model-building highly iterative.  Because the quest is not to build the most accurate model but the simplest, you should start out with a broad set of drivers, build the model, and then play with it.  If the financial outcomes with which you’re concerned (and it’s always a good idea to check with the CEO on which these are — you can be surprised) are relatively insensitive to a given driver, throw it out.

Finance people often hate this both because they tend to have “precision DNA” which runs counter to simplicity, and because they have to first write and then discard pieces of their model, which feels wasteful.  But if you remember the point — to find the minimum set of drivers that matter and to build the simplest possible model to show how those key drivers affect financial outcomes — then you should discard pieces of the model with joy, not regret.

The best driver-based models end up with drivers that are easily benchmarked in the industry.  Thus, the exercise becomes:  if we can converge to a value of X on industry benchmark Y over the next 3 years, what will it do to growth and margins?  And then you need to think about how realistic converging to X is — what about your specific business means you should converge to a value above or below the benchmark?

At Host Analytics we do a lot of driver-based modeling and planning internally.  I can say it helps me enormously as CEO think about industry benchmarks, future scenarios, and how we create value for the shareholders.  In fact, all my models don’t stop at P&L, they go onto implied valuation given growth/profit and ultimately calculate a range of share prices on the bottom line.

The other reason I love driver-based planning is more subtle.  Much as number theory helps you understand the guts of numbers in mathematics, so does driver-based modeling help you understand the guts of your business — which levers really matter, and how much.

And that knowledge is invaluable.

A Note to the CEO: Drive the Board of Directors

I remember during my first year at Cal we’d sometimes see a local band, Psycotic Pineapple [sic], who performed a song entitled “The Devil has Work for Idle Hands.” Every time they sang the chorus, audience members would hold their arms above their heads and dangle their crossed hands as they danced. Keep that scene in mind as we head into today’s post about CEOs, boards of directors, and the relationship between them.

While I don’t claim to have any particular gift in “managing” a board, I have learned a bit over the years by being a CEO, sitting as independent director, and chatting with other CEOs, venture capitalists, and independent board members.

Before discussing the board/CEO relationship, let’s define a framework first.

What Is The CEO’s Job?
The CEO’s job is to run the company, set culture, and manage the relationship with the board.

Setting culture means defining, communicating, and living the norms you want to establish inside the organization.  Running the company means setting strategy, putting the team in place to execute that strategy, letting that team do its job, and keeping everyone communicating along the way.

What Is The Board’s Job?
I’ve often quipped that the board’s job is to meet 4-6 times per year to decide if it should fire the CEO.  While overstated, it captures my belief that the board should have no operating responsibility because the board’s job is governance.

The board should question the management team on operations and discuss the team’s answers.  The board should oversee and approve financial audits, operating plans, compensation plans, bonuses, officer appointments, stock option grants, financing rounds, long-term obligations (e.g., leases), and M&A transactions.

Why Do Boards Exist?
Let’s go back to business school 101.  From first principles, boards are needed because of absentee ownership — i.e., when the owners of a company are not the operators of a company they hire agents (all employees, including the CEO) to run the company for them.  To oversee those agents, and protect against agency problems, the company creates a board of directors.

Note that in Silicon Valley startups, the absentee owner assumption is less true than in corporate America because ownership is both concentrated and well represented on the board.  Founders and VCs together might own 70-80% of company and sit together on the board.   While the VCs are absentee in the sense that they don’t work at the company, the founders typically do.

Governance = Discussion plus Approval
I’m not a lawyer, but as far as I can tell, governance is about two things:  discussion and approval.  For example, when people first see a company’s board minutes, they are typically shocked because they appear devoid of content.

On January 5, 2011, persons A, B, C, and D from the board of directors met at 10:00 AM at the Company’s headquarters in Palo Alto, California.  Mr. Smith, the VP of sales presented the sales results for 4Q10 and the forecast for 1Q11 including a discussion bookings, revenues, forecast accuracy, lost deals, and pipeline coverage.  The board asked numerous questions of Mr. Smith and a vigorous discussion followed.

But they’re not saying what the forecast is?  Or who asked what question?  Or what the sales results were?  All the facts are missing!  But they aren’t.  The facts the law cares about relate to whether the board did its job.  It convened.  It met with management.  It asked questions.  It had a vigorous discussion.

The content of the discussion matters less, primarily because in business you have the right to be wrong.  It’s not a crime to start a company that sells three-headed elephant dolls; it’s just a bad idea.  The law isn’t going to go anywhere near trying to decide what’s a good idea or a bad idea – that is left to business judgment.  The law wants to ensure that oversight is happening — that the board is meeting and the business is being discussed.

While it might seem quaint, this notion of discussion is so strong in the law that board decisions made without an opportunity for discussion (e.g., not at a duly called meeting, but over an email chain) must be made unanimously.  (As an aside, misunderstandings about when such resolutions became effective were a part of the option backdating scandals of the 2000s.)

The Direction Paradox
While discussions, challenges, advice, and questioning are always good, when boards give operational direction (i.e., “you should do X”) they risk creating a paradox for the CEO.  It’s easy when the CEO agrees with the direction and in that case the direction could have been offered as advice and still would have been heeded.

It gets hard when the CEO disagrees with the direction:

Case 1:  If the CEO follows the direction (and is correct that it was wrong), he or she will be fired for poor results.

Case 2:  If the CEO fails to follow the direction, his or her political capital account will be instantly debited (regardless of whether eventually proven right) and he or she will eventually be fired for non-alignment as the process repeats itself over time.

In case 1, the CEO will be surprised at his termination hearing.  “But, but, but … I did what you told me to do!”  “But no,” the board will reply.  “You are the CEO.  Your job is to deliver results and do what you think is right.”  And they’ll be correct in saying that.

Once caught in the paradox, weak CEOs die confused on the first hill and strong ones die frustrated on the second.

Because the paradox is only created when boards give specific direction (i.e., “you should do X”), I think boards should generally refrain from so doing, and prefer questioning, challenging, brainstorming, and advice-giving to directing.

A Wacky Idea for Resolving the Direction Paradox
As a gamer, I have a simple but admittedly impractical idea for solving the paradox.  The CEO and the board each start with three credits.  Each time there is a disagreement on a major issue if the CEO goes against the board he instantly burns one credit.  If he is eventually proven right he gets 3 additional credits back.  The system separates major from minor conflict (“are we talking credits here?”), empowers to the CEO to make the decisions he/she believes in, reminds the CEO that going against the board is costly, but rewards him/her for the gumption to do so if they are eventually proven right.

A Better Idea for Managing the Whole Situation:  Drive the Board!
But there is a better way to handle the problem.  Why does the direction paradox happen?  I think for many good reasons:

  • Board members want to be helpful
  • Board members want to make an impact
  • Board members want to participate, not just sit and experience death-by-PowerPoint at every board meeting

In the past 6 months, three different VC ecosystem types have told me something akin to the following:

“You know, I love Joe, the CEO of company X.   You know why?  Joe is in charge.  Unlike most CEOs, Joe sends out his board deck 4 days early.  Then he calls me to make sure I’ve reviewed it and to ask if I have any questions.  So he’s both holding me accountable for doing my job and he’s speeding up the (boring) operational review part of the board meeting.  So the board meetings largely become discussions about important topics.  They don’t always take the full three hours, so sometimes I get to leave early, but they always energize me and let me contribute.  Heck, the craziest thing about Joe is that he’s got me working for him.  I leave the board meeting with 10 action items that can help the company and Joe calls me the next week and the week after to make sure I’m doing them.”

Joe has clearly taken control of the situation.  Joe knows the board has energy and wants to help.  And Joe learned from Psycotic Pineapple that idle hands are dangerous.  So Joe channels the board’s energy the way he sees fit, controls the situation, engages the board, and wins their esteem in the process.  That is clearly a better way to manage the situation.

Framing the Board Relationship
The other thing that Joe got right was framing the board relationship.  Many, many CEOs see their board as a tax, a group that takes time, saps energy, and distracts from running the operations of the company.

Joe has reframed things:  he has framed the board not as a tax, but as a value creation partner.  This is another smart move that sows the seeds for a healthier long-term relationship among the board, the CEO, and the whole executive team.

And if you don’t get the framing of that relationship right, your board might end up singing one of Psycotic Pineapple’s top songs:   I Wanna, Wanna, Wanna, Wanna, Wanna, Wanna, Wanna Get Rid of  You.