Category Archives: Leadership

Should Customer Success Report into the CRO or the CEO?

The CEO.  Thanks for reading.

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I was tempted to stop there because I’ve been writing a lot of long posts lately and because I do believe the answer is that simple.  First let me explain the controversy and then I’ll explain my view on it.

In days of yore, chief revenue officer (CRO) was just a gussied-up title for VP of Sales.  If someone was particularly good, particularly senior, or particularly hard to recruit you might call them CRO.  But the job was always the same:  go sell software.

Back in the pre-subscription era, basically all the revenue — save for a little bit of services and some maintenance that practically renewed itself — came from sales anyway.  Chief revenue officer meant chief sales officer meant VP of Sales.  All basically the same thing.  By the way, as the person responsible for effectively all of the company’s revenue, one heck of a powerful person in the organization.

Then the subscription era came along.  I remember the day at Salesforce when it really hit me.  Frank, the head of Sales, had a $1B number.  But Maria, the head of Customer Success [1], had a $2B number.  There’s a new sheriff in SaaS town, I realized, the person who owns renewals always has a bigger number than the person who runs sales [2], and the bigger you get the larger that difference.

Details of how things worked at Salesforce aside, I realized that the creation of Customer Success — particularly if it owned renewals — represented an opportunity to change the power structure within a software company. It meant Sales could be focused on customer acquisition and that Customer Success could be, definitionally, focused on customer success because it owned renewals.  It presented the opportunity to have an important check and balance in an industry where companies were typically sales-dominated to a fault.  Best of all, the check would be coming not just from a well-meaning person whose mission was to care about customer success, but from someone running a significantly larger amount of revenue than the head of Sales.

Then two complications came along.

The first complication was expansion ARR (annual recurring revenue).  Subscriptions are great, but they’re even better when they get bigger every year — and heck you need a certain amount of that just to offset the natural shrinkage (i.e., churn) that occurs when customers unsubscribe.  Expansion take two forms

  • Incidental:  price increases, extra seats, edition upsells, the kind of “fries with your burger” sales that are a step up from order-taking, but don’t require a lot of salespersonship.
  • Non-incidental:  cross-selling a complementary product, potentially to a different buyer within the account (e.g., selling Service Cloud to a VP of Service where the VP of Sales is using Sales Cloud) or an effectively new sale into different division of an existing account (e.g., selling GE Lighting when GE Aviation is already a customer).

While it was usually quite clear that Sales owned new customer acquisition and Customer Success owned renewals, expansion threw a monkey wrench in the machinery.  New sales models, and new metaphors to go with them, emerged. For example:

  • Hunter-only.  Sales does everything, new customer acquisition, both types of expansion, and even works on renewals.  Customer success is more focused on adoption and technical support.
  • Hunter/farmer.  Sales does new customer acquisition and non-incidental expansion and Customer Success does renewals and incidental expansion.
  • Hunter/hunter.  Where Sales itself is effectively split in two, with one team owning new customer acquisition after which accounts are quickly passed to a very sales-y customer success team whose primary job is to expand the account.
  • Farmers with shotguns.  A variation of hunter/hunter where an initial penetration Sales team focuses on “land” (e.g, with a $25K deal) and then passes the account to a high-end enterprise “expand” team chartered with major expansions (e.g., to $1M).

While different circumstances call for different models, expansion significantly complicated the picture.

The second complication was the rise of the chief revenue officer (CRO).  Generally speaking, sales leaders:

  • Didn’t like their diminished status, owning only a portion of company revenue
  • Were attracted to the buffer value in managing the ARR pool [3]
  • Witnessed too many incidents where Customer Success (who they often viewed as overgrown support people) bungled expansion opportunities and/or failed to maximize deals
  • Could exploit the fact that the check-and-balance between Sales and Customer Success resulted in the CEO getting sucked into a lot of messy operational issues

On this basis, Sales leaders increasingly (if not selflessly) argued that it was better for the CEO and the company if all revenue rolled up under a single person (i.e., me).  A lot of CEOs bought it.  While I’ve run it both ways, I was never one of them.

I think Customer Success should report into the CEO in early- and mid-stage startups.  Why?

  • I want the sales team focused on sales.  Not account management.  Not adoption.  Not renewals.  Not incidental expansion.  I want them focused on winning new deals either at new customers or different divisions of existing customers (non-incidental expansion).  Sales is hard.  They need to be focused on selling.  New ARR is their metric.
  • I want the check and balance.  Sales can be tempted in SaaS companies to book business that they know probably won’t renew.  A smart SaaS company does not want that business.  Since the VP of Customer Success is going to be measured, inter alia, on gross churn, they have a strong incentive call sales out and, if needed, put processes in place to prevent inception churnThe only thing worse than dealing with the problems caused by this check and balance is not hearing about those problems.  When one exec owns pouring water into the bucket and a different one owns stopping it from leaking out, you create a healthy tension within the organization.
  • They can work together without reporting to a single person.  Or, better put, they are always going to report to a single person (you or the CRO) so the question is who?  If you build compensation plans and operational models correctly, Customer Success will flip major expansions to Sales and Sales will flip incidental expansions back to Customer Success.  Remember the two rules in building a Customer Success model — never pair our farmer against the competitor’s hunter, and never use a hunter when a farmer will do.
  • I want the training ground for sales.  A lot of companies take fresh sales development reps (SDRs) and promote them directly to salesreps.  While it sometimes works, it’s risky.  Why not have two paths?  One where they can move directly into sales and one where they can move into Customer Success, close 12 deals per quarter instead of 3, hone their skills on incidental expansion, and, if you have the right model, close any non-incidental expansion the salesrep thinks they can handle?
  • I want the Customer Success team to be more sales-y than support-y.  Ironically, when Customer Success is in Sales you often end up with a more support-oriented Customer Success team.  Why?  The salesreps have all the power; they want to keep everything sales-y to themselves, and Customer Success gets relegated to a more support-like role.  It doesn’t have to be this way; it just often is.  In my generally preferred model, Customer Success is renewals- and expansion-focused, not support-focused, and that enables them to add more value to the business.  For example, when a customer is facing a non-support technical challenge (e.g., making a new set of reports), their first instinct will be to sell them professional services, not simply build it for the customer themselves.  To latter is to turn Customer Success into free consulting and support, starting a cycle that only spirals.  The former is keep Customer Success focused on leveraging the resources of the company and its partners to drive adoption, successful achievement of business objectives, renewals, and expansion.

Does this mean a SaaS company can’t have a CRO role if Customer Success does not report into them?  No.  You can call the person chartered with hitting new ARR goals whatever you want to — EVP of Sales, CRO, Santa Claus, Chief Sales Officer, or even President/CRO if you must.  You just shouldn’t have Customer Success report into them.

Personally, I’ve always preferred Sales leaders who like the word “sales” in their title.  That way, as one of my favorites always said, “they’re not surprised when I ask for money.”

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[1] At Salesforce then called Customers for Life.

[2] Corner cases aside and assuming either annual contracts or that ownership is ownership, even if every customer technically isn’t renewing every year.

[3] Ending ARR is usually a far less volatile metric than new ARR.

How Startup CEOs Should Think About the Coronavirus

I just reached out to the CEOs I work with with on this topic and figured I should also do a quick post to speak to the CEOs who follow Kellblog as well.

The primary purpose of this post is to remind busy startup CEOs that an important part of your job is to be out ahead of things. Usually that means customer needs, market trends, and competitors. I’d argue it also includes potential epidemics, such as the one threatened by COVID-19.

Nobody wants to work for a CEO who’s panicking. But nobody wants to work for a CEO without a plan, either. You owe it to your employees, customers, and (yes) shareholders to start thinking about the impact of the Coronavirus on your business. That starts with your first action item: having a conversation about it at your next weekly e-staff meeting, if you’ve not done so already.

My thinking is based largely on this Scientific American article about what individuals should do to prepare for an eventual outbreak. On the theory that most startup employees are relatively young and healthy, the reality appears to be that the lives you save may not be your own — but instead those of the sick, elderly, weak, or otherwise vulnerable around you [1].

The driving principle behind the article is the best thing people can do to slow the spread of a virus is to stay away from each other for a few weeks. That’s not easy for a business to do, but at least in software we rarely rely on physical supply chains so we have one less major factor to consider in our planning.

So, with that warm up, let’s jump into a list of things you should consider:

  • Researching how other companies are responding to help inform your own response. Call a few of the CEOs or Chief People Officers in your portfolio peer group. Or go online and read documents like Coinbase’s four-tier response framework [2].
  • Sending an all-hands note letting people know you’re on top of this, perhaps with some links to practical, authoritative information.
  • Issuing a friendly reminder on the basics of preventative personal hygiene such as hand-washing, face-touching, etc. Basic as they are, they appear the number one tool in the fight.
  • Letting people know that elbow bumps are becoming the new handshake, though this is surprisingly not without controversy [3].
  • Sending a strong message telling people not be a hero and stay home when they’re sick. Startups are full of people who give it their all, so it’s not uncommon for folks who are not feeling well to come into the office for that big presentation or meeting [4].
  • Placing restrictions on travel, including not only guidelines for travel to affected areas but also guidelines for what you should do if you have recently traveled to one [5].
  • Taking the pressure off live attendance. Tell employees they don’t have to come into the office if they don’t want to or don’t need to. Heck, you might even see a spike in productivity as a result.
  • Changing the format of regular, periodic meetings. Most startups have some form of quarterly business review (QBR), typically a live two- or three-day meeting. Now is a great time not only to try it as a videoconference but to re-invent it while you’re at it [6] [7].
  • Encouraging customers and prospects to do videoconferences, particularly if they are uncomfortable with a live meeting. While salespeople love live meetings (and so do I), a videoconference is far superior to no meeting at all. We need to keep deals moving through the pipeline, so if someone suggests delaying a few weeks, I’d counter with a videoconference every time. For both the customer’s business and our own, the show must go on.
  • And, while some folks will probably trash me for saying this, if you have a natural, non-contrived marketing angle that can keep your business moving, don’t be afraid to gently say it [8]. Examples: (1) it’s more important now than ever to have real-time supply chain information, (2) in times like these business analytics have never been more important, (3) we all have an obligation to our employees, customers, and shareholders to keep business moving ahead.

Additional Resources

Let me end by providing links to some other excellent thoughts on this and related subjects:

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[1] Thus, there’s an argument that it’s not only your duty as CEO, but your civic duty, to think about this.

[2] Which I personally think is a bit heavy but nevertheless quite useful to read.

[3] See here for a contrarian viewpoint on elbow bumps.

[4] Yes, it appears that infected people who are asymptomatic can also communicate the virus so this may not solve as much as we hope, but it’s certainly a start.

[5] Coinbase’s framework dives pretty deep here.

[6] There’s a reason Zoom stock was up 6% yesterday in a market down 5%.

[7] On the theory that you should almost certainly get a better result if you re-invent the agenda based on the format, rather than simply video-conferencing the existing meeting and format. Something about paving cow paths comes to mind.

[8] And how you say it makes all the difference. I can think of genuine, sincere, intelligent ways to do so and I can think of absolutely stone-handed ways of doing so as well. If you’re considering this, bounce the idea off lots people within your company and with your family and friends for a sniff test.

Whose Company Is It Anyway? Differences between Founders and Hired CEOs.

Over the years I’ve noticed how different CEOs take different degrees of ownership and accountability when it comes to the board of directors.  For example, once, after a long debate where the board unanimously approved a budget contingent on reducing proposed R&D spending from $12M to $10M, I overhead the founder/CEO telling the head of R&D to “spend $12M anyway” literally as we walked out of the meeting [1].  That would be one extreme.

On the other, I’ve seen too-many CEOs treat the board as their boss, seemingly unwilling to truly lead the company, or perhaps hoping to earn a get out of jail free card if good execution of a chosen plan nevertheless fails.

This all relates to a core Kellblog theme of ownership — who owns what — that I’ve explored in some of my most popular posts:

Let’s now apply the same kind of thinking to the job of the CEO.  Startup CEOs generally fall into one of two categories and the category is likely to predict how they will approach the ownership issue.

Founder CEOs:  It’s My Company

Founders think it’s their company, well, because it is.  Whether they currently own more than 80% or less than 5% of the stock, whether they currently even work there anymore or not, it’s their company and always will be.  CEOs will come and go along a startup’s journey, but there is only one founder [2].  The founder started the company and made a big cultural imprint on it.  Nothing can take that away.

However, as soon as a founder/CEO raises venture capital (VC) they have decided to take investing partners along on the journey.  The best VC investors view their relationship with the founder as a partnership:  it’s the founder’s company, we are investing to partner with the founder, and our primary job is to advise and support the founder so as to help maximize the outcome.

However, VC investors are material shareholders, typically negotiate the contractual right to sit on the board of directors, and have certain governance and fiduciary duties as a part of sitting on the board.  (Those fiduciary duties, by the way, get complicated fast as VC board members also have fiduciary duties to their funds as well [3].)

Most of the time, in my experience, VCs run in advice/support mode, but if a company starts to have continual performance problems, is considering a new financing, or evaluating potential exit opportunities (e.g., M&A), founders can get a quick (and sometimes stark) reminder of the “second hat” that their VCs wear.

While it’s always spiritually the founder’s company, it’s only really and totally the founder’s company if they’ve never raised money [4].  Thankfully, most founder/CEOs don’t need to be reminded of that.  However, some do [5].

Hired CEOs:  It’s the Board’s Company vs. It’s My Company to Run

You become a hired CEO primarily through one path — climbing the corporate ladder at a large tech company [5a], reaching the GM or CXO level, and then deciding to branch out.  While virtually all hired CEOs have been large-tech CXOs or GMs, not all large-tech CXOs or GMs are wired to be successful as CEOs in the more frenetic world of startups.

Regardless of whether they should take the plunge, the problem that CEOs sometimes face is fighting against decades of training in climbing the corporate ladder.  Ladder-climbing wires you with three key priorities [6]:

  • Always make the boss look good
  • Never surprise the boss
  • Build strong relationships with influential peers

The problem?  When you’re CEO of a startup there is no boss and there are no peers.  Yes, there is a board of directors but the board/CEO relationship is not the same as the manager/employee relationship with which corporate execs are so familiar.

Yes, boards provide strategic and financial input, support, guidance, help with recruiting, and occasionally help with sales, but boards don’t run companies.  CEOs do.  And to repeat one of my favorite CEO quotes from Sequoia founder Don Valentine:  “I am 100% behind my CEOs up until the day I fire them” [7].

The challenge for hired CEOs is for them to understand:  it’s not my company in the sense that I founded it, but it is my company to run.  It’s not the board’s company to run and the board is not my manager.  The board is my board, and it’s not at all the same relationship as manager/employee.
Because this is somewhat conceptual, let’s provide an example to make this concrete.

“It’s My Company” Thinking “It’s the Board’s Company” Thinking
Based on what is happening in the market and our models we think it’s best to shoot for growth of X% and EBITDA margin of Y% How much do you want us to grow next year and at what EBITDA margin?
We believe we need to focus on a vertical and we think Pharma is the best choice. We were thinking that maybe we could focus more on a vertical, what do you folks think?
We think we should hold off doing channels until we’ve debugged the sales model. You told us to do channels so we signed up 17 partners but no one is actually selling anything.  Maybe it wasn’t a great idea.
Pattern:  we think we should do X and here’s why.  Please challenge it. Pattern:  we are here to do what you want, so what do you want us to do?  

CEOs need to remember that:

  • The management team spends 50-60 hours/week working at the company.  The board might spend that same amount of time in a year [8].  The team is much, much closer to the business and in the best position to evaluate options.
  • Even if they don’t always sound that way, the board wants the CEO to lead.  The scariest thing a new CEO can say is “it looks like you guys had a bad quarter” [9]. The second scariest thing is “looks like we had a bad quarter, what do you want us to do about it?”  Instead, they want to hear, “we had a bad quarter and here’s our plan to get things back on track.  Please give us frank feedback on that plan because we want the best plan possible and we want it to work [10].”
  • The CEO’s job is not to execute the board’s plan.  The CEO’s job is to work with the team to create the plan, get board approval of it, and then execute.  If the plan doesn’t work, the CEO doesn’t get to say “but you approved it, so you can’t fire me.” The job was to both make and execute the plan.

Finally, there are certain risk factors that can increase the chance a hired CEO will adopt the wrong type of thinking:

  • PE-backed firms.  In most venture-backed firms, a hired CEO will find a board consisting of several different venture capital partners, each with their own opinion.  Even though most venture boards do end up with an Alpha member [11], it’s still hard for the CEO to get confused and think of the Alpha member as the boss.  In a PE-backed firm, however, the board may consist of a single investing partner from the one firm who owns the company, perhaps accompanied by a few more junior staff.  In this case, it’s fairly easy for the CEO to revert to CXO-mode and treat that board member as “the boss” as opposed to “the board.”  While PE firms are more active managers who often come with playbooks and best practices consultants, they still want the CEO to be the CEO and not the EVP of Company.
  • First-time CEOs.  Veteran CEOs have more time to learn and understand the board/CEO relationship.  First-timers, fresh from climbing the corporate ladder, sometimes have trouble with the adjustment.

If you’re in either of the above categories or both, it’s important to ask yourself, and most probably your board, about what kind of relationship is desired.  Most of the time, in my estimation, they hired a CEO because they wanted a CEO and the more leadership you take, the more you think “my company” and not “board’s company,” the better off everyone will be.

Finally, you may also want to read this post about the board/CEO relationship which includes another of my favorite passages, on what I call the Direction Paradox.

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.

See the post for advice on how to prevent the Direction Paradox from starting.

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Notes
[1] And clearly within earshot of the directors

[2] To simplify the writing, I’ll say “one founder” meaning “one founder or equivalent” (i.e., a set of co-founders).  To the extent that this post is really about the CEO role, then it does flip back to one person, again — i.e., that co-founder (if any) who decided to take the CEO role.  This post isn’t about non-CEO co-founders, but instead about [co-]founder CEOs.

[3] See this 27-page classic (PDF) by Wilson Soncini, The Venture Capital Board Member’s Survival Guide:  Handling Conflicts While Wearing Two Hats.  It’s a must-read if you want to understand these issues.

[4] Increasingly, experienced founders (and/or those sitting on a hot enough hand) are able to raise venture capital and maintain near-total control.  Mechanisms include: a separate class of founder stock with 10x+ voting rights; control of a majority of the board seats; or protective provisions on the founder stock, such as the right to block a financing or sale of the company.  Even in such cases, however, a high-control founder still has fiduciary duties to the other shareholders.

[5] I believe incubators (and the like), by removing a lot of hard work and risk in starting a company, can inadvertently produce what I call “faux founders” who — when it comes to the business side of the company — act more like first-time hired CEOs than typical founders.  Don’t get me wrong, plenty of fine founder/CEOs come out of incubators, but I nevertheless believe that incubators increase the odds of creating a founder/CEO who can feel more like a CTO or CPO than a CEO.  That’s not to say the company won’t be successful either with that original founder or a replacement; it is to say, in my experience, that incubator founders can be different from their non-incubated counterparts.

[5a] And even better, helping to make it large while so doing.

[6] Like it or not, it’s not a bad three-part formula for climbing the corporate ladder.  And the “don’t surprise” rule still applies to boards as it does to managers.

[7] Note that any idea that the CEO might quit doesn’t seem to exist in his (or most VC’s) mind.  That’s because it’s incomprehensible because it’s a career mistake that may well make the person unemployable as CEO in a future VC-backed startup.  Who, after all, wants to hire the Captain of the Costa Concordia?  See this post, Startups CEOs and the Three Doors, for more.

[8] 6 board meetings at 4 hours = 24 hours, one hour prep per board meeting = 6 hours, 2 hours x 4 committee meetings = 8 hours, 2 hours/month on keeping up with news, updates, monthly reports = 24 hours.  Total of 62 hours/year for a committee member, less if not.  Time can vary widely and may be much higher if the board member is providing ad hoc support and/or ad hoc projects.

[9] Oh no!  The new CEO doesn’t even yet consider himself one of us!

[10] Because it’s not about ego or authorship, it’s about the best results.

[11] Often, but not always, the person who led the Series A investment.

My Appearance on the Private Equity Funcast

Who else but my old friend Jim Milbery, a founding partner at ParkerGale, could come up with a podcast called the Private Equity Funcast, complete with its own jingle and with a Thunderbirds-inspired opening?

Jim and I worked together at Ingres back in the — well “pre-Chernobyl” as Jim likes to put it.   When we met, he was a pre-sales engineer and I was a technical support rep.  We’ve each spent over 25 years in enterprise software, in mixed roles that involve both technology and sales & marketing (S&M).  Jim went on to write a great book, Making the Technical Sale.  I went on to create Kellblog.  He’s spent most of his recent career in private equity (PE) land; I’ve spent most of mine in venture capital (VC) land.

With a little more time on my hands these days, I had the chance to re-connect with Jim so when I was in Chicago recently we sat down at ParkerGale’s “intergalactic headquarters” for a pretty broad-ranging conversation about a recent blog post I wrote (Things to Avoid in Selecting an Executive Job at a Startup) along with a lot of banter about the differences between PE-land and VC-land.

Unlike most podcasts, which tend to be either lectures or interviews, this was a real conversation and a fun one. While I’m not sure I like the misparsing potential of their chosen title, Things To Avoid in Selecting an Executive Job with Dave Kellogg, I’ll assume the best.  Topics we covered during the fifty-minute conversation:

  • The pros and cons of CEOs who want to get the band back together.
  • Pros and cons of hiring people who have only worked at big, successful companies and/or who have only sailed in fair weather.
  • The downsides of joining a company that immediately needs to raise money.
  • How CMOs should avoid the tendency to measure their importance by the size of their budget.
  • Should companies hire those who “stretch down” or those who “punch above their weight”?
  • The importance of key internal customer relationships (e.g., the number-one cause of death for the CMO is the CRO) and how that should affect the order of your hires when building a team.
  • Feature-addicted founders and product managers (PMs), technical debt, and the importance of “Trust Releases.”
  • Pivoting vs. “traveling” when it comes to startup strategy.
  • The concept of Bowling Alleys within Bowling Alleys, which we both seem to have invented in parallel.  (Freaky.)
  • The difference between knocking down adjacent markets (i.e., “bowling pins”) and pivots.
  • Corporate amnesia as companies grow and surprisingly fail at things they used to know how to do (e.g., they forget how to launch new products).
  • My concept of reps opening new markets with only a telephone, a machete, and a low quota.
  • My pet peeve #7: salespeople who say it’s impossible to sell into an industry where the founders managed already to land 3-5 customers.
  • The difference between, in Geoffrey Moore terms, gorillas and chimps.
  • How there are riches in the niches when it comes market focus.
  • How feature differentiation can end up a painful axe battle between vendors.
  • Thoughts on working for first-time, non-founder CEOs in both the PE and VC context.
  • The difference between approval and accountability, both in formulating and executing the plan.

Here are some other episodes of the Private Equity Funcast that I found interesting:

So my two favorite podcasts are now The Twenty Minute VC on the venture side and The Private Equity Funcast on the PE side.  Check them both out!

Thanks for having me on the show, Jim, and it was a pleasure speaking with you.

Reacting to Feedback as CEO

The other day I saw this tweet from my friend Nick Mehta, CEO of GainSight, and it got me thinking.

feedback

It turns out that in addition to making fun music videos for company events, that Nick and I have another thing in common:  we both wrestle with finding the right balance in listening to feedback.  Since this is a topic I’ve pondered quite a bit over my 12+ years as a startup CEO, I thought I’d share those thoughts in this post.

First, you don’t get to be CEO of a startup by not caring.  You want your company to be great, you want your customers to be delighted, and you want your employees to be happy working at your company.  So I think most CEOs will have that same natural tendency towards immediate action that Nick mentions.

But CEOs who overreact both irritate employees (“so you’ve heard one side of this and it sounds like you’ve already made up your mind”) and, more dangerously, are easily manipulated.  If you find 3 people outside your office before a big meeting, each hoping to the last one to talk to you before it begins, then I’d view that as flashing yellow sign that you might be an overreactor.

On the flip side, there is some chance that the feedback is an outlier, and that reacting to it would be a mistake, particularly in terms of the opportunity cost of not having focused on something more generally important.

Finding that balance in the middle is indeed the hard part.  On one hand, CEOs are action-oriented and if they hear something plausible, they want to immediately dispatch someone to fix it.  On the other, CEOs get lots of feedback and it’s a little too easy to create a platitude shield around yourself that rationalizes feedback before it gets through — e.g., salespeople are never happy with their comp plans, employees generally don’t like their bosses, and customers always want more for their services dollar.  If you gave me 30 minutes I think I could generate about ten platitudes that would screen out 90% of feedback.  And that’s not good either.

So what should you do to find this balance?  Here are some tips:

  • Listen to everyone, all the time.  Ask open-ended questions.  For example:  “how’s your experience been working here”, “what are we like to work with as a customer”,  or “what do you think we can do better.”  Rule 1 is you’re not listening if you’re talking, so speak little and listen a lot.  Try to set up meetings as listening or feedback sessions as opposed to the default that “our CEO wants to come in and talk to you.”  Reframe it:  “our CEO wants to come in and listen to you, hear about your project, etc.”  The more feedback you get the harder it is to overreact to any one piece.
  • Remember that people have good days and bad days so do not overreact to any one incident.  (If someone really unloads on you, listen politely, take notes, and set up a follow-up call in a week or two to check back in.)
  • Listen no matter what you’re hearing.  You might hear things that are factually wrong.  You might hear things you find offensive.  You might hear things you immediately want to explain.  Recognize these as defensive reactions (even if they are appropriate defensive reactions) and remember Rule 2:  defensiveness kills communications.  Shut up, let the other person keep talking, take notes about any points you want to clarify, and discuss them at the end of the conversation.
  • Ask the “dead moose” question.  Is there any issue so big and glaring that we’re afraid to talk about and it’s like a giant dead moose in the middle of the conference room table that we’re all ignoring as we converse?  This gives people permission to put the big, often obvious, but potentially dangerous issues on the table — and get the moose off it)
  • Remember that people sometimes have agendas that shape their feedback.  Not all feedback is “pure” or unbiased in the sense that it’s a neutral voice wanting what it perceives as best for the company.  Maybe a customer is in the middle of negotiating a big contract.  Maybe an employee is angry about having missed a promotion.  Maybe a manager is trying to reorganize a department.  There’s nothing wrong with having an agenda, but it helps to know what it is when processing feedback.  Ask:  is there any bigger picture item that’s shaping this feedback overall?
  • When it comes to employee incidents, remember there are three sides to every story:  yours, mine, and what actually happened.  If you react to the first person you hear, then you’ll be teeing up a race to your office after every dispute because (as with patents) the first one to the office wins.  When faced with interpersonal disputes, remember my friend Martin Cooke’s favorite question:  “so what did Joe say when you spoke to him about this?”  If they’ve not spoken yet, then send them off to do so.
  • Beware hearsay.  It’s not allowed in court, so perhaps it shouldn’t be allowed in your office.  I don’t want to spend time with Pete saying he heard Paula say something offensive to Joe.  Tell Joe to come see me.  Or go find Joe yourself.  But we’ve all played the telephone game and know what happens to messages as they told and re-told through layers of people.
  • Remember that “not reacting now” is not the same as “not reacting.”  This is very important because “not reacting now” is probably the right answer 90% of the time.  Write it down.  Think about it.  Schedule a meeting.  But resist — and I know it’s hard — any action-oriented tendency to “do something” right now.  Once you get a reputation for going off half-cocked it’s pretty hard to shake — and very easy to get manipulated.  Time is usually your friend.
  • Remember, the plural of anecdote is not data.  Hearing the same story or opinion two to three times doesn’t automatically turn it into data.  Use surveys to gather data and use all your feedback conversations to guide topical questioning in those surveys.
  • Go get data.  You should already be running quarterly customer surveys and bi-annual or quarterly employee surveys.  Study the data in them.  Use what you’ve heard listening to people to drive special, topical lines of questioning within them.  Or, if indicated, do a special topic survey.  Once you’ve done the survey, call an optional Town Hall meeting to discuss the results.
  • Remember that 80% of an employee’s experience at your company is shaped by their manager (and, as a corollary that 80% of a customer’s experience is shaped by their account manager).  Ask specific questions about both in your surveys and when hot spots light up, go dig into them (i.e, why are so many of Joe’s employees rating him poorly on management).  Most companies are small enough that the digging can be done by live 1-1 meetings or phone calls.
  • View external data with a skeptical eye.  You can’t ignore the fact that product and company review sites exist.  All review sites have limitations — competitors can launch coordinated attacks to decrease your scores while HR can launch proactive programs to increase your scores.  My controversial advice for CEOs is to ignore these sites yourself and put your VP of Marketing in charge of product review sites and your VP of People on company review sites.  If you start to personally and immediately respond to these public posts, you are basically incenting employees to raise gripes in a public forum, as opposed to a private one such as your employee survey or coming to you directly.

Let me thank Nick for putting an important question on the table.  If you have other tips on how to answer it, please share them here.

The Two Dimensions of Startup Performance

When it comes to evaluating a startup’s performance, I think there are two key, orthogonal questions that need to be examined:

  1. Is the company delivering growth?
  2. Is management in control of your business?

Growth is the primary driver of value creation in a software startup.  I’m not going to quantify what is good vs. bad growth here – it’s a function of too many other variables (e.g., state of market, stage of startup).  For a seed stage company 100% growth (e.g., from $200K to $400K in ARR) is not particularly good, whereas 40% growth off $150M is quite strong.  So, the first question is — given the company’s size and situation — is it delivering good growth?

The second question is whether management is in control of the business.  I evaluate that in two ways:  how often does the company miss its quarterly operating plan targets and how often does the company miss its early-quarter (e.g., week 3) forecast for sales, expenses, and cash burn?

You can combine these two dimensions into a quadrant.

startup perf quadrant

Let’s take a look at companies in each of these quadrants, describe the situation they’re in, and offer some thoughts on what to do.

Moribund Startups
Companies that are moribund are literally on death’s door because they are not creating value through growth and, worse yet, not even in control of their business.  They make annual plans that are too aggressive and continually miss the targets set within them.  Worse yet, they also miss quarterly forecasts, forecasting sales of 100 units in week 3, 80 units in week 12, and delivering sales of only 50 units when the quarter is done.  This erodes the board’s faith in management’s execution and makes it impossible for the company to manage expenses and cash.  Remember Sequoia founder Don Valentine’s famous quote:

“All companies go out of business for the same reason.  They run out of money.” — Don Valentine, Sequoia Capital

While there may be many reasons why a moribund company is not growing, the first priority needs to getting back in control of the business:  setting realistic annual operating plans, achieving them, and having reliable early-quarter (e.g., week 3) forecasts for sales, expense, and cash burn.  I think in their desperation to grow too many moribund startups fail to realize that getting back in control should be done before trying to rejuvenate growth and thus die doing neither.

Put differently, if you’re going to end up delivering sub-par growth, at least forecast it realistically so you will still be in control of your business and thus in a far better position to either turnaround operations or pivot to a better strategic place.  Without control you have nothing, which is what your business will soon be worth if you don’t regain it.

Stuck Startups
Stuck companies face a different set of problems.  The good news is that they are in control of the business:  they make and hit their plans, they come in at or above their forecasts.  Thus, they can manage their business without the risk of suddenly running out of cash.  The bad news is that they’re not delivering sufficient growth and ergo not creating value for the shareholders (e.g., investors, founders, and employees).  Stuck companies need to figure out, quickly, why they’re not growing and how to re-ignite growth.

Possible reasons for stalled growth include:

  • Lack of product-market fit. The company has never established that it solves a problem in the market that people are willing to pay (an amount compatible with your business model) to solve. You may have built something that nobody wants at all, or something that people are not simply willing to pay for.  This situation might call for a “pivot” to an adjacent market.
  • Poor sales & marketing (S&M) execution. While plenty of startups have weak S&M organizations, a lot of deeper problems get blamed by startup boards on S&M.  Why?  Because most boards/investors want to believe that S&M is to blame for company performance problems because S&M issues are easier to fix than the alternatives:  just fire the VP of Sales and/or Marketing and try again.  After all, which would you rather be told by doctor?  That your low-grade fever and weakness is due to the flu or leukemia?  The risk is that through willful misdiagnosis you keep churning S&M executives without fixing (or even focusing on) a deeper underlying problem. [1]
  • Weak competitive positioning. Through some combination of your product and product marketing, customers routinely short-list you as a contender, but buy from someone else.  Think: “we seem to be everyone’s favorite second choice.”  This can be driven by anything from poor product marketing to genuine product shortcomings to purely corporate factors (e.g., such as believing you have a fine product, but that your company will not be a winner in the market).

Stuck companies need to figure out, with as much honesty as possible with themselves, their customers, and their prospects, why they are stuck and then take appropriate steps to fix the underlying causes.  In my opinion, the hard part isn’t the fixes – they’re pretty obvious once you admit the problems.  The hard part is getting to the unpleasant truth of why the company is stuck in the first place. [2]

Unbridled Startups
Like Phaeton driving his father’s chariot [3], the unbridled startup is growing fast, but out of control, and thus risks getting too close to the Sun and burning up or simply smashing into the ground.  Unbridled startups typically are delivering big growth numbers – but often those big numbers are below the even bigger numbers in their aggressive annual operating plan.  The execs dismiss the plan as irrelevant and tell the board to look at growth and market share.  The board looks at the cash burn, noting that the management team — despite delivering amazing growth — is often still under plan on sales and over plan on expenses, generating cash burn that’s much larger than planned.

If the growth stops, these companies burn up, because they are addicted to high cash burn and can suddenly find themselves in the position of not being able to raise money.  So to keep the perpetual motion machine going, they’ll do almost anything to keep growing.  That might include:

  • Raising money on an unattainable plan
  • Raising money on undesirable terms [4] that hurt earlier investors and potentially really hurt the common stock
  • Spending heavily on customer acquisition and potentially hiding that in other areas (e.g., big professional services losses)

Remember that once the Halo is lost, it’s virtually impossible to get back so companies and executives will do almost anything to keep it going.  In some cases, they end up crossing lines that get the business in potentially serious trouble.  [5]

Unbridled companies need to bring in “adult supervision,” but fear doing so because they worry that the professional managers they’ll bring in from larger companies may kill the growth, driven by the company’s aggressive, entrepreneurial founders.  Thus, the board ends up in something of a waiting game:  how long do we bet on the founding/early team to keep driving crazy growth – even if it’s unbridled – before we bring in more seasoned and professional managers?  The smart part about this is realizing the odds of replacing the early team without hurting growth are low, so sometimes waiting really is the best strategy.  In this case, the board is thinking, “OK let’s give this [crazy] CEO one more year” but poised to terminate him/her if growth slows.

The transition can be successfully pulled off – it’s just hard and risky.  I’d argue MongoDB did this well in 2014.  But I’d argue that Anaplan did it not-so-well in 2016, with a fairly painful transition after parting ways with a very growth-oriented CEO, leaving the top job open for nearly 9 months [6].

So, the real question for unbridled companies is when to bridle them and how to do so without killing the golden goose of growth.

Star Startups
There’s not much to say about star startups other than if you’re working at one, don’t quit.  They’re hard to find.  They’re great places to learn.  And it’s sometimes easy to forget you’re working at a star.  I remember when I joined Business Objects.  The company had just gone public the prior year [7], so I had the chance to really dig into their situation by reading the S-1.  “This place is perfect,” I thought, “20-something consecutive quarters of profitable growth, something like only $4M in VC raised, market share leadership, a fundamental patented technology, and a great team — I’m critical as heck and I can’t find a single thing wrong with this place.  This is going to be my first job at a perfect company.”

That’s when I learned that while Business Objects was indeed a star, it was far from a perfect company.  It’s where I learned that there are no perfect companies.  There are always problems.  The difference between great and average companies is not that great companies have fewer problems:  it’s that great companies get what matters right.  Which then begs the question:  what matters?

(Which is an excellent topic for any startup strategy offsite.)

# # #

Notes
[1] One trick I use is to assume that, by default, we’re average in all regards.  If we’re hiring the same profiles, using the same comp plans, setting the same quotas, doing the same onboarding, providing the same kit, then we really should be average:  it’s the most likely outcome.  Then, I look for evidence to find areas where we might be above or below.  This is quite different from a vigilante board deciding “we have a bad sales organization” because of a few misses (or a personal style mismatch) and wanting to immediately replace the VP of sales.  I try to slow the mob by pointing out all the ways in which we are normal and then ask for evidence of areas where we are not.  This helps reduce the chance of firing a perfectly good VP of sales when the underlying problem is product, pricing, or competition.

[2] And that’s why they make high-priced consultants – a shameless plug for my new Dave Kellogg Consulting business.

[3] See Ovid’s version, the one I was raised on.

[4] For example, multiple liquidation preferences.

[5] I seem to have a knack to end up competing with companies who do – e.g., Oracle back in the late 1980s did some pretty dubious stuff but survived its comeuppance with $200M in financing from Nippon Steel (which was a lot of money, back in the day), MicroStrategy in 2000 got itself into trouble with reports of inflated earnings and had to pay nearly $100M in settlements (along with other constraints), Fast Search and Transfer managed to get acquired by Microsoft for $1.2B in the middle of an accounting scandal (and were even referred to by some as the “Enron of Norway”) and after its $11B acquisition by HP, Autonomy was charged with allegations of fraud, some of which are still being litigated.

[6] Yes, you can argue it’s been a successful IPO since then, so the transition didn’t hurt things and perhaps eventually had to happen.  But I’m also pretty sure if you asked the insiders, they would have preferred that the transition went down differently and more smoothly.

[7] I was employee number 266 and the company was already public.  My, how times were different back then.

The Introvert’s Guide to Glad-Handing

One day back at MarkLogic, we invited our local congresswoman, Jackie Speier, to visit our offices.  Regardless of what you may think of her politics, she’s an impressive person with an fascinating background including, for those with long memories, that she was the congressional aide shot five times and left for dead on the runway in Guyana when Congressman Leo Ryan went to investigate Jonestown.  I was looking forward to meeting her.

She arrived — early of course — with a few handlers.  We exchanged the usual greetings and took a few pictures.  Then, she said, “would you mind if I went around and met a few people before the presentation?”  “No, no — not at all,” I said.  Leaving the handlers behind, off she went into the sea of cubicles.

Affordable Care Act

What I saw next blew me away.

Cube by cube she proceeded, “Hi, I’m Jackie — what’s your name?”  “Great, what do you do here?”  “Oh, I see [from the picture on your desk] you have a son, what’s his name?’  “How old is he?”  “Oh, [insert something in common here].”  More chatter.  A few laughs.  “Are there any questions I can answer for you today?”

There are extroverted people.  There are gregarious people.  There are charismatic people.  And then there are politicians.  She was the best room-worker I had ever seen in my life and she did it as effortlessly as she did naturally.

“This,” I thought, ” is why you’re not a politician, Dave. You have no skills.”

But leading the troops is a key part of the job of a startup CEO.  While such glad-handing often comes naturally to sales-oriented CEOs, it usually does not for more product-oriented ones.  A sales-oriented CEO is typically an extrovert; a product-oriented one an introvert.  So what’s a poor introvert to do?

First, Run A Normal Communications Program
All CEOs should run some sort of baseline company communications program.  This could look something like:

  • Bi-annual kickoffs where the company is brought together to hear about progress, learn about new initiatives, and recognize achievement.  Think:  educate, decorate, inebriate.
  • Post-quarter all hands calls/meetings after the off-quarters to discuss company performance, progress on quarterly goals, and go-forward priorities.
  • Topical all-hands emails and follow-up live calls/meeting to announce breaking news and provide commentary.
  • Separate and/or built-in “town hall” sessions with open employee Q&A to the CEO and the exec team.

This is baseline.  If you’re not doing this and you’re over about 20 people you need to start doing aspects of it.  If you’re over 150-200 people you should be doing all of this and quite possibly more.

For most CEOs — even the introverts — this isn’t hard.  It’s structured.  There are presentations.  Most of the questions in Q&A can be anticipated, if not solicited in advance.

Management by Walking Around
Let’s say you’ve set up such a program and are getting good feedback on it.  But nevertheless you’re still getting feedback like:

“You’re in your office and in meetings too much.  People want to see more of you.  The answer isn’t more all hands meetings.  Those are fine.  But people want to see you in a more informal and/or 1-1 way.  I know, you need to do more MBWA — management by walking around.  You’ll be great at it!”

“No, I won’t,” thinks the highly self-aware introvert CEO, imaging a nightmare that goes something like this:

CEO:  “Hey, Bro-dy!” [Struggling to choose between Bro and Buddy.]
Employee:  “Did you just call me grody?  What the –“
CEO:  “No, Buddy, no,  I called you Bro, Pal.”
CEO:  “So, how’s my Buddy doing?”  [Slaps his back.]
Employee:  “Ow!  I just had shoulder surgery.”
CEO:  “Whoops, sorry about that.”
Employee:  “No problem.”
CEO:  [Notices wedding picture on desk.]  “Hey, how’s that lovely wife?”
Employee:  “We split up three months ago.”
CEO:  [Thinking: “I bet this never happens to Jackie Speier, I bet this never happens to … “]

Sure, the CEO thinks, let’s try some more MBWA.  Or maybe not.

Find Your Way
The problem here is simple — it’s a classic, in this case “reverse,” delegation mistake.  The well-intentioned feedback-giver isn’t just telling you what needs to be done (i.e., help people get to know you better through more individualized interaction),  they’re telling you how to do it (i.e., management by walking around).  So the solution is simple:  listen to the what and find your own way of how.  If you’re not a natural grip-and-grin type, them MBWA isn’t going to work for you.  What might?  Here are some ideas:

  • Every Friday morning do three, half-hour 1-1s with employees across the organization.  This will play to your introvert strength in 1-1 meetings and and your desire to have substantial, not superficial, interactions with people.  If you’re disciplined, you’ll get to know 156 people/year this year.
  • Management by sitting in the way (MBSITW).  Pick a busy spot — e.g., the coffee room or the cafeteria — and camp out there for a few hours every week.  Work on your laptop when no one’s around but when someone walks in, say hi, and engage in a 1-1 chat.
  • Small-group town hall Q&A sessions.  Attend one department’s group meeting and do a one-hour town hall Q&A.  It’s not quite 1-1, but it’s definitionally a smaller forum which will provide more intimacy.
  • Thursday lunches.  Every Thursday have lunch with 3-4 people chosen at semi-random so as to help you build relationships across the organisation.

So, the next time someone tells you that you need to do more MBWA, thank them for input, and then go find your way of solving the underlying problem.