Category Archives: Management

Fly the Aircraft First: The Potentially Paralyzing Effects of Fundraising

Startup CEOs can learn an important lesson from pilots.  Specifically, to always fly the aircraft first.  Sounds obvious, like maybe you shouldn’t need to remind pilots to do this, but here’s what they teach them and why:

From the earliest days of flight training, pilots are taught an important set of priorities that should follow them through their entire flying career: Aviate, Navigate, and Communicate.  The top priority — always — is to aviate. That means fly the airplane by using the flight controls and flight instruments to direct the airplane’s attitude, airspeed, and altitude …

A famous example of a failure to aviate is the December 1972 crash of Flight 401, an Eastern Airlines Lockheed L-1011. The entire crew was single-mindedly focused on the malfunction of a landing gear position indicator light. No one was left to keep the plane in the air, as it headed towards a shallow descent into the Florida Everglades. Four professional aviators … were so focused on a non-critical task that they failed to detect and arrest the descent.

In my work with startups, I periodically see CEOs surprisingly stop flying the aircraft first.  When does that happen?  When they are raising money, or think that they might be soon.  I know they’re not flying the aircraft first because they say things like:

  • “I want to replace the CRO, but I can’t because I’ll be out fundraising next quarter.”
  • “We need to reduce the burn rate because cash-out is about 9 months away, but I don’t want to cut expenses now because I’m trying to raise money.”
  • “I’m no longer excited about the new product that we’re building, but I want to keep funding it because we’re out raising money and VCs like it as part of the pitch.”

Not flying the aircraft first means not making operational changes that you normally would because you are fundraising, or believe you soon will be.  It means running your business differently because you are trying to raise money.

This begs two questions:

  • Are you actually fundraising or just talking to venture capitalists? There is a difference.
  • Even if you actually are fundraising, is deferring such changes a good idea?

Are You Actually Out Raising Money?

Sometimes you want to keep the burn rate high while fundraising to stay on a hypergrowth trajectory and enable the big, next round.  Other times, you’re growing at 30%, and not particularly efficiently, and that next round is more fantasy than reality. Happy ears can help you avoid unpleasant-but-necessary decisions for another few weeks or months.

Are you out raising money or are you simply talking to VCs? How can you tell the difference?

  • By receiving a term sheet.  VCs don’t need your permission to make you an offer, though such proactive term sheets are less common than they used to be.  Remember that if all that love is real, there’s an easy way for a VC to show it.
  • By asking.  Remember the first rule of VC (and M&A):  the amount of time you invest, access you offer, and data you provide must always be proportional to the odds you see of actually closing a deal.  Ask if they’re thinking of making an offer, why or why not, and when.  Ask what additional information they need and provide it only if they are clearly doing their homework, signal an acceptable valuation range, and express valid concerns that you can resolve.

If you’re not getting term sheets and are starting to doubt some of the answers you’re hearing, then look for these clues that you’re more talking to VCs than raising money:

  • You have been talking with an analyst or associate for 2+ meetings without talking to a principal or partner.
  • Your meetings get rescheduled and responses to your communications come slowly. That likely means the VC doesn’t see your deal as urgent and probably thinks of your interactions more as a simple chat or check-in.
  • The VC doesn’t appear to be doing their homework. They ask questions that are answered in the material you’ve already shared, they don’t communicate the due diligence agenda ahead of meetings, and they don’t follow-up on the data requests they’ve made. VCs do a lot of work preparing for their internal investment committee, and you can usually tell when they’re doing it.
  • The VC focuses only on financial metrics, which could indicate that they’re just updating their database or, worse yet, are looking at another player in the space and using you as a data point. [1]

But even if an investor is genuinely working on an offer, if that offer is not qualified on valuation or, increasingly in these days, terms, then once again you’re not out raising money, you’re just talking to VCs. On valuation, it’s pretty clear — if an investor says they’re working on a term sheet at a valuation of 4x revenues when your absolute minimum is 6x, then you’re not out raising money; you’re just talking to VCs.

With terms (also known as structure), things are somewhat more subtle. You can receive a term sheet with an attractive headline valuation only to discover it’s dirty because it contains terms such as:

  • A multiple liquidation preference, where the new investor gets not the usual 1x their money back before the common shareholders, but perhaps 1.5x or 2.0x.
  • Participating preferred stock, where the new class of preferred stock gets both its liquidation preference and its pro rata, as opposed to one or the other.
  • Redemption rights, where the company has the obligation to repurchase the shares from the new investor after some time period (e.g., five years). (Which begs the question of where it’s going to get the money to do so?)

For more information on dirty term sheets, see this excellent post by Janelle Teng. If you’re in receipt of one, I recommend doing these three things:

  • Do the work to understand the terms. Ask your CFO, lawyer, or banker to create liquidation waterfalls to model the outcomes in numerous liquidation scenarios.
  • Ask the investor if they would provide an equivalent offer on clean terms [2].  Understand and compare a possible down-round to a flat- or up-round on less desirable terms.
  • Remember that terms only get worse.  No investor wants to invest on terms inferior to the prior investors.  This suggests that if you’re going to do a round with dirty terms that you make it big enough (and/or your path-to-profitability fast enough) to be pretty sure it’s your last [3].

But let’s zoom back up.  Why are we talking about dirty term sheets again? 

Just as spending time with VCs who will eventually make you an offer at an unacceptable valuation is not actually “out fundraising,” so is spending time with VCs who will eventually make you an offer on unacceptable terms. It’s more subtle, but it’s the same issue. And to defer necessary operational changes because of it is a big mistake.

Is Deferring Change a Good Idea?

Let’s say that you are actually out raising money — not just talking to VCs, but talking to VCs who are likely to make you an offer at an acceptable valuation and on acceptable terms.

In this case, is not flying the aircraft first a good idea? I think this is a hard question because of the risk of derailing a potentially transformational financing round. 

Even here, I think it’s wrong to defer the changes [4].  Why?  Because it’s:

  • Dishonest.  You shouldn’t start your long-term relationship with a new investor by saying, “just kidding when I said the CRO was great, we need to replace them.” [5] You might be working together for the next 5-10 years.
  • Ineffective.  It has spectacular backfire potential. Specifically, the investor is likely to detect the problem with the CRO and your vigorous (but disingenuous) defense of the CRO may cause them to question you and drop out the round as a result. [6]
  • Bad for the company.  Failing to make a desired operational change is definitionally bad for the business.

As one VC said to me, “We don’t invest in perfect companies. We invest in companies where the upside is greater than the downside. I have invested in companies where the CRO, CTO, and CFO were all recently or in the midst of transition. The important thing is that we talk about the changes and understand them. We’re going to be investors for the next 5-10 years.”

What does that mean to me? If you, as CEO, think something needs to be done, then do it. Always fly the aircraft first.

# # #


Thanks to Michael Lavner for his comments and review.

[1] This happened to me. If the VC had just told me they were doing diligence in the space on another potential investment (as opposed to seeming to express genuine interest in my company), then I wouldn’t have felt burned. Plus, a note to VCs: if you meet me, ask me all about the space, and then announce a deal with one of my competitors in about 2 weeks, I’m going to know what happened and feel used in the process.

[2] I love this one because they do the work for you and show you an offer that is mathematically equivalent (to them). Comparing the two sheets (and associated liquidation waterfalls) shows you the cost of maintaining the headline valuation and avoiding the consequences of a down-round.

[3] To be clear, some investors will be scared off by finding a lot of structure in previous rounds. So it’s not simply a question that you will have to raise subsequent rounds on equal or inferior terms. You may not be able to raise at all, or at least from the investors who you want to raise from.

[4] Though, perhaps sadly, it takes me longer to reach that conclusion. While I “get” the theory that I’m preaching, I’ve also raised money on the back of a CRO transition, and it wasn’t easy. Nevertheless, I still preach the theory.

[5] You easily could have said, “they’re nearing the end of their runway” during the process, instead.

[6] Or, more simply, they may just detect the deception.

Write Actionable Emails! (aka, If You’re Going to Make a Proposal, Make One)

(Republishing this 5/7/18 post that got deleted in a recent clean-up, and it’s easier to repost than restore)

As CEO of a company, I can’t tell you the number of times, I get emails like this:


I know our policy is that we don’t pay both the salesreps their high-rate commissions on low-profit, one-of items, but we ended up doing a $50K/year pass-along storage fee for Acme, because they are managing a huge amount of data.  Because it recurs we’re considering it ARR at the corporate level.  The rep is OK because they are being paid well on the rest of the $500K deal, but I worry that the sales managers and sales consultants who also get paid on new ARR bookings won’t get 100% of their payout if we don’t pay them on this – can we please do that?


I find this email a non-actionable, incomplete proposal better suited for a philosophy class than a business discussion.  The message does eventually ask for approval, so you might think it’s actionable – but is it really?  What’s missing?  Three things.

  • A complete, concrete proposal: taking everything into account – all groups, any existing relevant policies, and any relevant precedent — what do you want to do?  Suppose the SDRs are also paid on total bookings, have you simply overlooked them and will be back asking again once you’ve figured that out, or are you saying you don’t want to pay them like the sales managers and SCs?
  • Numbers: what’s it going to cost the company?  First principles are fine, but you must translate them into recommended actions and identified costs.  I don’t mind back-of-the-envelope calculations, but I do need to be sure you’ve included everything in your analysis.  If the issue is complex or expensive, then I’d want a well thought out and clearly documented spreadsheet cost analysis.  I get the qualitative arguments, but if you are just giving me passion and philosophy with no idea of what it’s going to cost, then I have no way of answering.
  • One or more alternatives:  if I don’t want to approve your primary proposal, do you have a preferred backup?  What is your plan B and what would it cost the company and why do you prefer plan A to it?
  • Bonus: a proposal to change existing polices so this situation won’t be ambiguous in the future and require another escalation.

So, let’s re-craft this email into something I’d rather receive:


Per our policy we didn’t payout the salesrep on the $50K of ARR we took as a pass-along storage fee on the Acme account.  That’s OK with the rep because such one-of items are clearly excluded in our compensation plan terms and conditions [link], but I’ve discovered that the SC and manager compensation plans lack the same exclusionary language.  Ergo, this time, I recommend that we pay out the SCs and the managers on this $50K of ARR (total cost $2.5K as it pushes some folks into accelerators).  Additionally, I intend to immediately update and re-issue the T&C document for sales management and SC comp plans.  Can I get your approval on this proposal?

By the way, if you’re opposed to this, can we please just go and payout the SCs (total cost $1.0K) because I believe it’s more important to them than the managers.  Either way, these are small numbers so let’s get this behind us quickly and move onto more important items.


Ah.  I feel better already.

The proposer is referring to our existing policies – even providing me with links to them – applying them, noticing problems with them, and making a concrete proposal for what to do about it, along with a backup.  Kelly’s telling me correct costs – e.g., not forgetting the impact of accelerators – for approving the proposal.  And even correcting our policies so this situation won’t ever again require an escalation.

My Thoughts on the SVB Meltdown

(Revised 8:56 am 3/19)

Looks like I picked the wrong week to be off-grid in Argentina.

When I came back on-grid last night, I quickly discovered that the world, or more precisely, my Silicon Valley business world, had basically exploded while I was flyfishing in Patagonia.

A few weeks ago there had been talk of a mass extinction event for startups in 2023.  It was about funding, not banking, and the prediction was for the second half of 2023.  But perhaps it had come early and for a different reason.

Instead of writing yet-another explainer article, I’ll do two things:

  • Provide links to the best explainer articles I’ve found thus far
  • Share some of my own views on the situation, reminding readers that I am go-to-market person and former CEO (and not a finance person or former CFO)

The Best Explainer Posts I’ve Found

My Personal Views on the Situation

I’ll quickly share my personal views on the situation here:

  • Almost every company I work with uses SVB.  They are the default startup bank in Silicon Valley.  Many keep all their cash there because it’s a fairly standard term of an associated venture debt loan.  If depositors lose their funds I believe large numbers of startups could fail, eliminating the thousands of jobs that they provide.  The Alderaan scenario.  I think it’s unlikely, but absolutely must be avoided.
  • Startup death is a natural part of the Silicon Valley ecosystem, the Darwinian process that produces the innovation that drives a large part of our economy.  Startup death is a natural part of the process — but it should result from a bad idea or a unworkable product.  Not from your bank failing.
  • There is a blame game with three primary parties involved:  VCs for provoking the bank run, the Fed for raising rates (which devalued SVB’s long bonds), and SVB for putting themselves in an weak position.  Who you blame seems to say more about you than the situation.  People who like SVB blame the Fed.  People who dislike VCs blame them.
  • Answering the question “what happens to us if rates go up?” seems absolutely core to the operation of a bank.  (Think:  it’s what we do here.)  SVB put themselves into a situation where the liquidity rumors couldn’t be easily dismissed.  Yes, VCs likely provoked the bank run, but SVB put themselves in a place where they couldn’t stop it and bungled communications on top of that.
  • You cannot overstate the interconnectedness around SVB.  I know startups with all their money there.  I know VCs who are unable to provide bridge loans to startups because all their working capital is also at SVB.  I’ve heard of founder/CEOs who have all their personal money there as well, so they are unable to even use their own funds to bail out their companies.  The single worst story I’ve heard is a startup who had all their money in SVB successfully arranged a loan to cover payroll and wired that money to their payroll provider … who then put it in SVB.  Additionally, startups often sell to other startups, so the web is intereconnected not just across investors, but companies and customers.
  • SVB’s depositors must be protected.  I’m not talking about bailing out SVB investors or management.  I’m talking about protecting depositors, thousands of startups, the jobs they provide today, and their potential to become world-leading tech companies  — the next Oracle, Cisco, or Salesforce might be killed off if we don’t.

Personally, while I’m not an expert in banking, I am uncharacteristically optimistic because SVB owns plenty of high-quality assets and, as mentioned above, those assets exceed deposits in value (though that is a function of valuation method as discussed in the Rubinstein article).

They are not sitting atop a pile of incredibly complex, thinly-traded derivatives (e.g., CDOs, CDO swaps).  They are sitting atop a pile of long government bonds.   This is not 2008.  SVB is not Lehman Brothers.  Because of this, I think there is a good chance that someone acquires them this weekend (or soon thereafter), finding opportunity in SVB’s wreckage and ending this industry-wide liquidity crunch.

Let’s hope so, at least.

Appearance on the SaaS Revolution Podcast

SaaStock recently released an interview with me on their podcast, The SaaS Revolution Show.  The interview, conducted by SaaStock founder and CEO Alex Theuma, was notionally about the Balderton Founder’s Guide to B2B Sales that I published late last year.  While we ended up discussing that, we also covered a whole lot more, including:

  • My background as a CMO, CEO, and independent director
  • My work with Balderton as an EIR 
  • Which job I prefer, and why:  CEO or CMO
  • Why we made the Founder’s Guide to B2B Sales
  • Key takeaways from the guide
  • The transition from founder-led sales (FLS) to sales-led (SLS)
  • When to hire your first sales executive or leader
  • Why it’s important to define process (and metrics) early — before you need to
  • The Holy Grail of a repeatable sales process
  • Why salespeople are like airplanes (they only make money when they’re in the air)

If you’re interested in listening to the episode, you can find it here.

I’ll see you at SaaSstock USA in Austin this June where I’ll be talking about conversation intelligence, inspired by my work with Jiminny, a UK-based startup where I sit on the board.

A Tale of Two Companies: The Professional Services Paradox

Quick:  which company do you like better?

Yes, assume they’re similar size, growing at similar rates, and both at scale. Pick A or B.  Thelonious can’t help because there’s no third option.

C’mon.  You know you want to pick A.

  • Company A has a leaner services business at 10% of revenue, where company B’s is kind of hefty at 25%.
  • Both companies have barely profitable services businesses (2% gross margin), but at least company A’s is relatively smaller so that services boat anchor does relatively less damage.
  • Company A has much higher gross margins – by 13 percentage points – at 81% vs. 68%.  Additionally, that 81% is above the public company median of 76%.
  • Company A has somewhat higher operating expenses, but in the end they both produce the same 3% operating margin.

It seems clear that Company A is superior.  And not just by a little — look at the gross margins.  Think of the impact on CAC Payback Period.

Here’s the trick, though.  Company B is company A with one, single difference:  $100M additional services revenue.  Here’s a deeper look showing both dollars and percentages.

Company B has $100M more in total revenue, $2M more in gross profit, and $2M more in operating profit.  Every other figure (not derived from those differences) is the same.  For example:

  • The same subscription revenue of $450M
  • The same subscription COGS of $45M
  • The same S&M spend at $180M
  • The same R&D spend at $140M
  • The same G&A spend at $70M

What’s jamming our radar here?  What’s making them look so different?  Percent of sales analysis.  Normally our friend, but here it’s working against us.

While Company B looks less efficient at gross margin level, it looks more efficient at an opex level because we’re dividing by $600M, not $500M.  That 13% less efficient gross margin is exactly offset by 13% more efficient total opex.  But we didn’t really notice that.  Why?  Because we were stuck on gross margin. Think:  Company A’s clearly the better business – look at those gross margins – so it’s fine to spend a bit more to build it.

Through a purely financial lens, I might still like Company A better than Company B.  Yes, B has $2M extra in operating income, but it’s having to take on the hassle of managing a $100M larger services business.  Is it worth all that for an extra $2M in operating profit?  Maybe not.

This is how investors tend to think.  With 2% margins, it’s a crappy services business anyway, so why not let someone else do it?  Heck, they can probably do it more profitably than us, anyway.  I sometimes call this the Mikey likes it argument, referring to the ancient TV commercial where two brothers force their little brother to try a new cereal.  Think:  we don’t want to do our services ourselves, but I’m sure we can find partners who will just love doing them.  Maybe Mikey will like it, just like the commercial.

This argument overlooks a few key points:

  • The nature of the services business.  If it’s a bunch of $20K deployments, the odds are that partners won’t be too excited.  If it’s $1M transformations that consume consultants by the busload, they’ll probably like it a lot.
  • The training and certification process.  If you want to outsource all of your associated services, then who is going to build curriculum, train, and certify your services partners?  It’s hard to train people on best practices you don’t know and have never developed.
  • Customers who insist on a single point of accountability (fka, one throat to choke).  Some customers, especially in big deals with complex deployments, will want the software vendor to commit to their success.  It’s impossible to promise “no fingerpointing” when there are two parties involved.
  • Competitors who exploit your weakness.  Once your competition determines that you don’t provide services, they will likely sell deployment and adoption FUD relentlessly, find and tell your customer horror stories, and emphasize the importance of vendor-provided services to customers.
  • Customer success as a driver of renewal.  Successful deployment avoids inception churn.  Success adoption drives renewal and expansion.  Reducing customer success to avoid the hassle of managing a breakeven services business is myopic.
  • Services as the saves team.  When a customer fails in deployment and is up for renewal in 6 months, do you think a partner is going to provide free services to save the renewal?  Like relief pitchers in baseball, your services team is in the business of saves.

The biggest problem — one I think of as the services paradox — is when vendors want to transition to selling solutions, not just software.  This strategic upleveling is a common request from sales teams and boards alike.  It’s an important part of category creation and/or 3+1 repositioning strategies.

Here’s the catch — while  boards generally love to hear that you’re selling solutions, they don’t want to hear that you’re building a services business to actually deliver those solutions.  They want you to sell solutions, but deliver software.  In the absence of real, committed partners, that message is going to ring hollow with customers.

But partners are generally unwilling to make strategic come-bets on your category creation strategy.  Once you’ve created a massive market, they’ll be happy to come along and suck up services.  But taking strategic risk to do that?  Building a services practice on the come?  No thanks.  Services firms are unapologetic opportunists.

That means there are times when only you can deliver the services needed to execute a transformation strategy.  Qualtrics had to do this as part of their strategic transformation from survey software to customer experience management (CXM) to experience management (XM) platform.  And they provided plenty of services along the way, running in that uncomfortable 25% of revenues range (and perhaps higher in the earlier days, but I don’t have the numbers).

So, all that considered, which company do I like better?  I need to know the answer to two more questions.  Are they executing a strategic transformation from software to solutions?  Are they upleveling their message and creating a new, broader category (i.e., Playing Bigger)?

  • If no, I like A better for all the standard reasons.
  • If yes, I like B better and I’m fine with the “excessively large” services business

Peace out.