Category Archives: Silicon Valley

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.

# # # 

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.

Things to Avoid in Selecting an Executive-Level Job at a Software Startup

This is a sister post to my recent one, Career Decisions:  What to Look For in a Software Startup.  That piece is all about what to look for when considering taking a job at a software startup.  This piece is kind of the opposite:  what to look out for when considering an executive job at a software startup.

This post isn’t simply the inverse of the other and I didn’t approach writing it that way.   Instead, I started blank slate, thinking what are the warning signs that would make me think twice before taking an executive-level job at a software startup.

Before jumping into the list, let me remind you that no startup is perfect and that unless your name is Frank Slootman that you are unlikely to get a C-level offer from a startup that has all eight of the things I say to look for and none of the eight I say to avoid.  The rest of us, to varying degrees, all need to make intelligent trade-offs in facing what is effectively a Groucho Marx problem [1] in our career management.

That said, here’s my list of things to avoid in selecting an executive-level job at a startup:

1. Working for TBH, i.e., working for a boss who is to-be-hired. For example, if a company’s board is leading the search for a new CMO while the CEO slot is also open, the CMO would be working for TBH.  Don’t do this.  You have no idea who the new CEO will be, if you will like them, and whether their first act will be to fire you.  Ignore any promises that “you will be part of the process” in hiring the new boss; you may well find yourself interviewing them as you notice an offer letter sticking out of their backpack, suddenly realizing that you’re the interviewee, not the interviewer.  Read my post on this topic if you’re not convinced.

2. The immediate need to raise money.  Particularly for a CEO job, this is a red flag.  The problem is that unless you are a tier 1 rockstar, investors are not going to want to back the company simply because you’ve arrived.  Most investors will want you to have about a year in the seat before considering investing.  If you’re immediately dispatched to Sand Hill Road in search of capital, you’ll be out pitching the company poorly instead of learning the business and making plans to improve it.  Moreover, to state the obvious, joining a company that immediately needs to raise money means joining a company that’s in the midst of running out of cash.  That means either the company gets lucky and does so (often via an inside round [2]) or it doesn’t and your first quarter on the job will be focused on layoffs and restructuring instead of growth.  Think:  “I love you guys; call me back once you’ve done the round.”

3. Key internal customer TBHs.  For example, the VP of Sales is the VP of Marketing’s key internal customer, so Marketing VPs should avoid taking jobs where the VP of Sales is not in place.  Why?  As your key internal customer, the VP of Sales has a lot of power in both assessing your performance and determining your continued employment [3], so you really want to know if you get along and see eye-to-eye before signing up for a new job.  Moreover, even if you are work-compatible, some Sales VPs like “travel with” their favorite VP of Marketing.  Think:  “Mary’s great.  I just want to work with Joe like I have done at my last two companies.”  Bye Mary.

4. Strategic “traveling” violations.  “Pivot” is one of my favorite startup euphemisms. While many great startups have indeed succeeded on their second try, after a strategic pivot [4], some startups seem to want to make the pivot into an annual event.  Let’s remember that pivots mean strategic failure and the virtual write-down of any VC that went into funding the failed strategy.  While pivots can save a troubled company from continuing to execute a doomed strategy, they’re not something you want to do at all, let alone on a periodic basis.  In basketball, you get called for traveling if you (a) take more than two steps without dribbling or (b) move an established pivot foot.  I call startups for traveling when they (a) do two or more strategic pivots or (b) pivot to a new strategy that has nothing to do with the old one [5] (i.e., moving both feet).

5.  Nth-place Vendors (for all N>=3).  Most high-tech markets have increasing returns effects because customers like to reduce risk by buying from market leaders.  In the early 2000s, these normal increasing returns effects were compounded by network effects [6] in many markets.  Today, machine learning is compounding increasing returns yet again [7].  In short, it sucks to be third in Silicon Valley, it always has, and it’s likely to suck more in the future than it does now.

Therefore avoid working at vendors who are not #1 or #2 in their category.  If you’re considering a #N vendor, then it should be part of it moving to a focus strategy to become #1 at a product or vertical segment.  Don’t get sold the idea that a mega-vendor is going to acquire #4 after being rebuffed by the market leaders or to get a better price.  Mega-vendors greatly prefer to acquire market leaders and recent history has shown they are more than willing to pay up to do so.  Tuck-ins and acqui-hires still happen, but typically for very early-stage companies and not at great valuations.

6. Sick cultures and/or dishonest leaders.  Silicon Valley companies often make a big deal about “culture” but too often they conflate culture with ping pong tables, free lunch, and company parties.  Culture, to me, is the often unwritten code [8] of what the company values and how business gets done.  Alternatively, to paraphrase Henry Ford’s thoughts on quality, culture is what happens when no one is watching.  While many Silicon Valley leaders — going all the way back to HP — are “true believers” trying to build not only unique products but also create unique places to work, there are unfortunately charlatans in our midst.  Some leaders are disingenuous, others dysfunctional, and a few downright dishonest.  If you sense cultural sickness during your interview process, back-checking references, or reading Glassdoor [9], then I’d say tread carefully.

7. Low post-money valuations.  You’ll hear this argument a lot with Nth-place companies:  “well, the good news is we only got an $80M post-money valuation on our last round of $20M, whereas we heard LeaderCo was valued at $240M — so if you come here you’ll start making money off $80M, not $240M.”  At one level, it’s persuasive, especially if you think LeaderCo and NthCo are similar in many respects — “it’s like buying shares at 2/3rds off,” you might think.  But that thinking basically assumes the venture capital market mispriced LeaderCo.  You might justify that position by thinking “valuations are crazy right now” but if LeaderCo got a crazy valuation why didn’t NthCo get one too, raising in the same market?  While some people will try to market low valuations as opportunities, I now see them as problems.

Think not:  wow, what a great arbitrage play.  Think instead:  (a) what don’t I know [10] such that the market priced NthCo at 1/3rd the price of LeaderCo, and (b) what effects that will have on future financing — i.e., it’s likely LeaderCo will continue to have better access to capital going forward.  (Remember, the IPO class of 2018 raised a median of around $300M.)

In olden days, the rule was if the market leader went public at a valuation of $1B, then number two was worth about $500M, and number three $250M (4x, 2x, 1x).  Today, with companies going public later, more access to capital, and stronger increasing returns effects, I think it’s more like $4.5B, $1.5B, and $300M respectively (15x, 5x, 1x).  Given that, and increasing returns, maybe a “crazy” early valuation gap isn’t so crazy after all.

8. First-time, non-founder CEOs.  First-time, founder CEOs are the norm these days and VCs do a good job of helping surround them with a strong executive team and good advisors to avoid common mistakes.  Personally, I believe that companies should be run by their founders as long as they can, and maybe then some.  But when a founder needs to replaced, you get a massive signal from the market in looking at who the company is able to attract to run it.  Back in the day, if you were Splunk, you could attract Godfrey Sullivan.  Today, if you’re Snowflake, you can attract Frank Slootman.

My worry about companies run by first-time, non-founder CEOs [11] is less about the difficulty for the first-timer in transitioning to the CEO job — which is indeed non-trivial — and more about the signaling value about who would, and more importantly, who wouldn’t, take the job.  Experienced CEOS are not in short supply, so if a company can’t attract one, I go back to what don’t I know / what can’t I see that the pool of experienced CEOs does?

That’s not to say it never works — we did a fine job building a nice business at MarkLogic under one first-time, non-founder CEO that I know [11].  It is to say that hiring a non-founder, first-time CEO should prompt some questions about who was picked and why.  Sometimes there are great answers to those questions.  Sometimes, things feel a bit incongruous.

# # #

Notes

[1] Marx often quipped that he wouldn’t want to be a member of any club that admitted him, the rough equivalent to saying that you wouldn’t take a C-level job at any startup that would offer you one.

[2] As one VC friend so tersely put it:  “our job isn’t to put more money into a company, it’s to get other people to put more in at valuations higher than the one we invested at.”  (This somehow reminds me of the  General Patton quote:  “the object of war is not to die for your country, but to make the other bastard die for his.”)

[3] The number one “cause of death” for the VP of Marketing is the VP of Sales.

[4] I particularly like when those pivots are emergent, i.e., when the company is trying one thing, spots that another one is working, and then doubles down on the second thing.

[5] In the sense that they moved an established pivot foot by changing, e.g., both the target customer and the target product.  Changing your strategy to sell a different app to the same buyer, or the same app to a different buyer feels much more like a pivot to me.

[6] Everyone wants to be on the social network that their friends are on, so the more your friends pick network A over B, the more newcomers want to pick network A.  Back when there was competition in consumer social networks, entire high schools went either Facebook or MySpace, but virtually none went both.

[7] Where machine learning (ML) is an important part of the value proposition, you have even stronger increasing returns effects because having more customers, which means having more data, which means having better models, which means producing superior results.

[8] In cases there may be a very public written code about company culture.  But, to the extent the written culture is not the one lived, it’s nothing more than public relations or a statement of aspiration.

[9] While Glassdoor has many limitations, including that reviewers are not verified and that most reviewers are recently-terminated job-seekers (because the requirement to look for a job is to write a review), I still use it in researching companies.  My favorite dysfunctional pattern is a litany of detailed, fact-filled, seemingly sincere negative reviews, followed by a modest number of summary, high-level, HR-buzzwordy positive reviews followed by someone saying “I can’t believe management is feeding positive reviews to people in order to up our ratings.”

[10] An economist friend once taught me that when economists studied established practices in any field, e.g.,  the need for a second-serve (as opposed to just hitting two first serves) in professional tennis, they start out assuming the practice is correct, i.e., that the professionals really do know what they’re doing, and then see if the statistics justify the practice.  One might apply the same philosophy to valuations.

[11] Yes, I was one at MarkLogic.  In terms of signaling value, I was at least CMO of $1B company before starting and while I’d not been a CEO before, I did bring an unusual amount of database domain expertise (i.e., Ingres, Versant) to the party.

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.

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.

Lost and Founder: A Painful Yet Valuable Read

Some books are almost too honest.  Some books give you too much information (TMI).  Some books can be hard to read at times.  Lost and Founder is all three.  But it’s one of the best books I’ve seen when it comes to giving the reader a realistic look at the inside of Silicon Valley startups.NeueHouse_Programming_LostandFound

In an industry obsessed with the 1 in 10,000 decacorns and the stories of high-flying startups and their larger-than-life founders, Lost and Founder takes a real look at what it’s like to found, fund, work at, and build a quite successful but not media- and Sand-Hill-Road-worshiped startup.

Rand Fishkin, the founder of Moz, tells the story of his company from its founding as a mother/son website consultancy in 2001 until his handing over the reins, in the midst of battling depression, to a new CEO in February 2014.  But you don’t read Lost and Founder to learn about Moz.  You read it to learn about Rand and the lessons he learned along the way.

Excerpt:

In 2001, I started working with my mom, Gillian, designing websites for small businesses in the shadow of Microsoft’s suburban Seattle-area campus. […] The dot-com bust and my sorely lacking business acumen meant we struggled for years, but eventually, after trial and error, missteps and heartache, tragedy and triumph, I found myself CEO of a burgeoning software company, complete with investors, employees, customers, and write-ups in TechCrunch.

By 2017, my company, Moz, was a $45 million/ year venture-backed B2B software provider, creating products for professionals who help their clients or teams with search engine optimization (SEO). In layman’s terms, we make software for marketers. They use our tools to help websites rank well in Google’s search engine, and as Google became one of the world’s richest, most influential companies, our software rose to high demand.

Moz is neither an overnight, billion-dollar success story nor a tragic tale of failure. The technology and business press tend to cover companies on one side or the other of this pendulum, but it’s my belief that, for the majority of entrepreneurs and teams, there’s a great deal to be learned from the highs and lows of a more middle-of-the-road startup life cycle.

Fishkin’s style is transparent and humble.  While the book tells a personal tale, it is laden with important lessons.  In particular, I love his views on:

  • Pivots (chapter 4).  While it’s a hip word, the reality is that pivoting — while sometimes required and which sometimes results in an amazing second efforts — means that you have failed at your primary strategy.  While I’m a big believer in emergent strategy, few people discuss pivots as honestly as Fishkin.
  • Fund-raising (chapters 6 and 7).  He does a great job explaining venture capital from the VC perspective which then makes his conclusions both logical and clear.  His advice here is invaluable.  Every founder who’s unfamiliar with VC 101 should read this section.
  • Making money (chapter 8) and the economics of founding or working at a startup.
  • His somewhat contrarian thoughts on the Minimum Viable Product (MVP) concept (chapter 12).  I think in brand new markets MVPs are fine — if you’ve never seen a car then you’re not going to look for windows, leather seats, or cup-holders.  But in more established markets, Fishkin has a point — the Exceptional Viable Product (EVP) is probably a better concept.
  • His very honest thoughts on when to sell a startup (chapter 13) which reveal the inherent interest conflicts between founders, VCs, and employees.
  • His cheat codes for next itme (Afterword).

Finally, in a Silicon Valley where failure is supposedly a red badge of courage, but one only worn after your next big success, Fishkin has an unique take on vulnerability (chapter 15) and his battles with depression, detailed in this long, painful blog post which he wrote the night before this story from the book about a Foundry CEO summit:

Near the start of the session, Brad asked all the CEOs in the room to raise their hand if they had experienced severe anxiety, depression, or other emotional or mental disorders during their tenure as CEO. Every hand in the room went up, save two. At that moment, a sense of relief washed over me, so powerful I almost cried in my chair. I thought I was alone, a frail, former CEO who’d lost his job because he couldn’t handle the stress and pressure and caved in to depression. But those hands in the air made me realize I was far from alone— I was, in fact, part of an overwhelming majority, at least among this group. That mental transition from loneliness and shame to a peer among equals forever changed the way I thought about depression and the stigma around mental disorders.

Overall, in a world of business books that are often pretty much the same, Lost and Founder is both quite different and worth reading.  TMI?  At times, yes.  TLDR?  No way.

Thanks, Rand, for sharing.

Video of my SaaStr 2018 Presentation: Ten Non-Obvious Things About Scaling SaaS

While I’ve blogged about this presentation before, I only recently stumbled into this full-length video of this very popular session — a 30-minute blaze through some subtle SaaS basics.  Enjoy!

I look forward to seeing everyone again at SaaStr Annual 2019.

The Domo S-1: Does the Emperor Have Clothes?

I preferred Silicon Valley [1] back in the day when companies raised modest amounts of capital (e.g., $30M) prior to an IPO that took 4-6 years from inception, where burn rates of $10M/year looked high, and where $100M raise was the IPO, not one or more rounds prior to it.  When cap tables had 1x, non-participating preferred and that all converted to a single class of common stock in the IPO. [2]

How quaint!

These days, companies increasingly raise $200M to $300M prior to an IPO that takes 10-12 years from inception, the burn might look more like $10M/quarter than $10M/year, the cap table loaded up with “structure” (e.g., ratcheting, multiple liquidation preferences).  And at IPO time you might end up with two classes common stock, one for the founder with super-voting rights, and one for everybody else.

I think these changes are in general bad:

  • Employees get more diluted, can end up alternative minimum tax (AMT) prisoners unable to leave jobs they may be unhappy doing, have options they are restricted from selling entirely or are sold into opaque secondary markets with high legal and transaction fees, and/or even face option expiration at 10 years. (I paid a $2,500 “administrative fee” plus thousands in legal fees to sell shares in one startup in a private transaction.)
  • John Q. Public is unable to buy technology companies at $30M in revenue and with a commission of $20/trade. Instead they either have to wait until $100 to $200M in revenue or buy in opaque secondary markets with limited information and high fees.
  • Governance can be weak, particularly in cases where a founder exercises directly (or via a nuclear option) total control over a company.

Moreover, the Silicon Valley game changes from “who’s smartest and does the best job serving customers” on relatively equivalent funding to “who can raise the most capital, generate the most hype, and buy the most customers.”  In the old game, the customers decide the winners; in the new one, Sand Hill Road tries to, picking them in a somewhat self-fulfilling prophecy.

The Hype Factor
In terms of hype, one metric I use is what I call the hype ratio = VC / ARR.  On the theory that SaaS startups input venture capital (VC) and output two things — annual recurring revenue (ARR) and hype — by analogy, heat and light, this is a good way to measure how efficiently they generate ARR.

The higher the ratio, the more light and the less heat.  For example, Adaptive Insights raised $175M and did $106M in revenue [3] in the most recent fiscal year, for a ratio of 1.6.  Zuora raised $250M to get $138M in ARR, for a ratio of 1.8.  Avalara raised $340M to $213M in revenue, for a ratio of 1.6.

By comparison, Domo’s hype ratio is 6.4.  Put the other way, Domo converts VC into ARR at a 15% rate.  The other 85% is, per my theory, hype.  You give them $1 and you get $0.15 of heat, and $0.85 of light.  It’s one of the most hyped companies I’ve ever seen.

As I often say, behind every “marketing genius” is a giant budget, and Domo is no exception [4].

Sometimes things go awry despite the most blue-blooded of investors and the greenest of venture money.  Even with funding from the likes of NEA and Lightspeed, Tintri ended up a down-round IPO of last resort and now appears to be singing its swan song.  In the EPM space, Tidemark was the poster child for more light than heat and was sold in what was rumored to be fire sale [5] after raising over $100M in venture capital and having turned that into what was supposedly less than $10M in ARR, an implied hype ratio of over 10.

The Top-Level View on Domo
Let’s come back and look at the company.  Roughly speaking [6], Domo:

  • Has nearly $700M in VC invested (plus nearly $100M in long-term debt).
  • Created a circa $100M business, growing at 45% (and decelerating).
  • Burns about $150M per year in operating cash flow.
  • Will have a two-class common stock system where class A shares have 40x the voting rights of class B, with class A totally controlled by the founder. That is, weak governance.

Oh, and we’ve got a highly unprofitable, venture-backed startup using a private jet for a bit less than $1M year [7].  Did I mention that it’s leased back from the founder?  Or the $300K in catering from a company owned by the founder and his brother.  (Can’t you order lunch from a non-related party?)

As one friend put it, “the Domo S-1 is everything that’s wrong with Silicon Valley in one place:  huge losses, weak governance, and now modest growth.”

Personally, I view Domo as the Kardashians of business intelligence – famous for being famous.  While the S-1 says they have 85 issued patents (and 45 applications in process), does anyone know what they actually do or what their technology advantage is?  I’ve worked in and around BI for nearly two decades – and I have no idea.

Maybe this picture will help.

domosolutionupdated

Uh, not so much.

The company itself admits the current financial situation is unsustainable.

If other equity or debt financing is not available by August 2018, management will then begin to implement plans to significantly reduce operating expenses. These plans primarily consist of significant reductions to marketing costs, including reducing the size and scope of our annual user conference, lowering hiring goals and reducing or eliminating certain discretionary spending as necessary

A Top-to-Bottom Skim of the S-1
So, with that as an introduction, let’s do a quick dig through the S-1, starting with the income statement:

domo income

Of note:

  • 45% YoY revenue growth, slow for the burn rate.
  • 58% blended gross margins, 63% subscription gross margins, low.
  • S&M expense of 121% of revenue, massive.
  • R&D expense of 72% of revenue, huge.
  • G&A expense of 29% of revenue, not even efficient there.
  • Operating margin of -162%, huge.

Other highlights:

  • $803M accumulated deficit.  Stop, read that number again and then continue.
  • Decelerating revenue growth, 45% year over year, but only 32% Q1 over Q1.
  • Cashflow from operations around -$150M/year for the past two years.  Stunning.
  • 38% of customers did multi-year contracts during FY18.  Up from prior year.
  • Don’t see any classical SaaS unit economics, though they do a 2016 cohort analysis arguing contribution margin from that cohort of -196%, 52%, 56% over the past 3 years.  Seems to imply a CAC ratio of nearly 4, twice what is normally considered on the high side.
  • Cumulative R&D investment from inception of $333.9M in the platform.
  • 82% revenues from USA in FY18.
  • 1,500 customers, with 385 having revenues of $1B+.
  • Believe they are <4% penetrated into existing customers, based on Domo users / total headcount of top 20 penetrated customers.
  • 14% of revenue from top 20 customers.
  • Three-year retention rate of 186% in enterprise customers (see below).  Very good.
  • Three-year retention rate of 59% in non-enterprise customers.  Horrific.  Pay a huge CAC to buy a melting ice cube.  (Only the 1-year cohort is more than 100%.)

As of January 31, 2018, for the cohort of enterprise customers that licensed our product in the fiscal year ended January 31, 2015, the current ACV is 186% of the original license value, compared to 129% and 160% for the cohorts of enterprise customers that subscribed to our platform in the fiscal years ended January 31, 2016 and 2017, respectively. For the cohort of non-enterprise customers that licensed our product in the fiscal year ended January 31, 2015, the current ACV as of January 31, 2018 was 59% of the original license value, compared to 86% and 111% for the cohorts of non-enterprise customers that subscribed to our platform in the fiscal years ended January 31, 2016 and 2017, respectively.

  • $12.4M in churn ARR in FY18 which strikes me as quite high coming off subscription revenues of $58.6M in the prior year (21%).  See below.

Our gross subscription dollars churned is equal to the amount of subscription revenue we lost in the current period from the cohort of customers who generated subscription revenue in the prior year period. In the fiscal year ended January 31, 2018, we lost $12.4 million of subscription revenue generated by the cohort in the prior year period, $5.0 million of which was lost from our cohort of enterprise customers and $7.4 million of which was lost from our cohort of non-enterprise customers.

  • What appears to be reasonable revenue retention rates in the 105% to 110% range overall.  Doesn’t seem to foot to the churn figure about.  See below:

For our enterprise customers, our quarterly subscription net revenue retention rate was 108%, 122%, 116%, 122% and 115% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively. For our non-enterprise customers, our quarterly subscription net revenue retention rate was 95%, 95%, 99%, 102% and 98% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively. For all customers, our quarterly subscription net revenue retention rate was 101%, 107%, 107%, 111% and 105% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively.

  • Another fun quote and, well, they did take about the cash it takes to build seven startups.

Historically, given building Domo was like building seven start-ups in one, we had to make significant investments in research and development to build a platform that powers a business and provides enterprises with features and functionality that they require.

  • Most customers invoiced on annual basis.
  • Quarterly income statements, below.

domo qtr

  • $72M in cash as of 4/30/18, about 6 months worth at current burn.
  • $71M in “backlog,” multi-year contractual commitments, not prepaid and ergo not in deferred revenue.  Of that $41M not expected to be invoiced in FY19.
  • Business description, below.  Everything a VC could want in one paragraph.

Domo is an operating system that powers a business, enabling all employees to access real-time data and insights and take action from their smartphone. We believe digitally connected companies will increasingly be best positioned to manage their business by leveraging artificial intelligence, machine learning, correlations, alerts and indices. We bring massive amounts of data from all departments of a business together to empower employees with real-time data insights, accessible on any device, that invite action. Accordingly, Domo enables CEOs to manage their entire company from their phone, including one Fortune 50 CEO who logs into Domo almost every day and over 10 times on some days.

  • Let’s see if a computer could read it any better than I could.  Not really.

readability

  • They even have Mr. Roboto to help with data analysis.

Through Mr. Roboto, which leverages machine learning algorithms, artificial intelligence and predictive analytics, Domo creates alerts, detects anomalies, optimizes queries, and suggests areas of interest to help people focus on what matters most. We are also developing additional artificial intelligence capabilities to enable users to develop benchmarks and indexes based on data in the Domo platform, as well as automatic write back to other systems.

  • 796 employees as of 4/30/18, of which 698 are in the USA.
  • Cash comp of $525K for CEO, $450K for CFO, and $800K for chief product officer
  • Pre-offering it looks like founder Josh James owns 48.9M shares of class A and 8.9M shares of class B, or about 30% of the shares.  With the 40x voting rights, he has 91.7% of the voting power.

Does the Emperor Have Any Clothes?
One thing is clear.  Domo is not “hot” because they have some huge business blossoming out from underneath them.  They are “hot” because they have raised and spent an enormous amount of money to get on your radar.

Will they pull off they IPO?  There’s a lot not to like:  the huge losses, the relatively slow growth, the non-enterprise retention rates, the presumably high CAC, the $12M in FY18 churn, and the 40x voting rights, just for starters.

However, on the flip side, they’ve got a proven charismatic entrepreneur / founder in Josh James, an argument about their enterprise customer success, growth, and penetration (which I’ve not had time to crunch the numbers on), and an overall story that has worked very well with investors thus far.

While the Emperor’s definitely not fully dressed, he’s not quite naked either.  I’d say the Domo Emperor’s donning a Speedo — and will somehow probably pull off the IPO parade.

###

Notes

[1] Yes, I know they’re in Utah, but this is still about Silicon Valley culture and investors.

[2] For definitions and frequency of use of various VC terms, go to the Fenwick and West VC survey.

[3] I’ll use revenue rather than trying to get implied ARR to keep the math simple.  In a more perfect world, I’d use ARR itself and/or impute it.  I’d also correct for debt and a cash, but I don’t have any MBAs working for me to do that, so we’ll keep it back of the envelope.

[4] You can argue that part of the “genius” is allocating the budget, and it probably is.  Sometimes that money is well spent cultivating a great image of a company people want to buy from and work at (e.g., Salesforce).  Sometimes, it all goes up in smoke.

[5] Always somewhat truth-challenged, Tidemark couldn’t admit they were sold.  Instead, they announced funding from a control-oriented private equity firm, Marlin Equity Partners, as a growth investment only a year later be merged into existing Marlin platform investment Longview Solutions.

[6] I am not a financial analyst, I do not give buy/sell guidance, and I do not have a staff working with me to ensure I don’t make transcription or other errors in quickly analyzing a long and complex document.  Readers are encouraged to go the S-1 directly.  Like my wife, I assume that my conclusions are not always correct; readers are encouraged to draw their own conclusions.  See my FAQ for complete disclaimer.

[7] $900K, $700K, and $800K run-rate for FY17, FY18, and 1Q19 respectively.