Category Archives: Social

The US Navy Posts Ten-Word Tweet of the Year

Once in a while a phrase or photograph just perfectly captures everything about a given moment.  I think the @USNavy account achieved that in a tweet about yesterday’s passing of George H.W. Bush.  People always say when it comes to communications that “less is more.”  Few writers actually chose brevity.  This tweet captures an enormous amount in just ten words.

(And, in my estimation, this is infinitely more powerful than the alternative artsier version of it, which has about 1/10 the likes.)

Kellblog Predictions for 2018

In continuing my tradition of offering predictions every year, let’s start with a review of my hits and misses on my 2017 predictions.

  1. The United States will see a level of divisiveness and social discord not seen since the 1960s.  HIT.
  2. Social media companies finally step up and do something about fake news. MISS, but ethical issues are starting to catch up with them.
  3. Gut feel makes a comeback. HIT, while I didn’t articulate it as such, I see this as the war on facts and expertise (e.g., it’s cold today ergo global warming isn’t real despite what “experts” say).
  4. Under a volatile leader, we can expect sharp reactions and knee-jerk decisions that rattle markets, drive a high rate of staff turnover in the Executive branch, and fuel an ongoing war with the media.  HIT.
  5. With the new administration’s promises of $1T in infrastructure spending, you can expect interest rates to raise and inflation to accelerate. MISS, turns out this program was never classical government investment in infrastructure, but a massive privatization plan that never happened.
  6. Huge emphasis on security and privacy. PARTIAL HIT, security remained a hot topic and despite numerous major breaches it’s still not really hit center stage.
  7. In 2017, we will see more bots for both good uses (e.g., customer service) and bad (e.g., trolling social media).  HIT.
  8. Artificial intelligence hits the peak of inflated expectations. HIT.
  9. The IPO market comes back. MISS, though according to some it “sucked less.”
  10. Megavendors mix up EPM and ERP or BI. PARTIAL HIT.  This prediction was really about Workday and was correct to the extent that they’ve seemingly not made much progress in EPM.

Kellblog’s Predictions for 2018

1.  We will again continue to see a level of divisiveness and social discord not seen since the 1960s. We have evolved from a state of having different opinions about policies based on common facts to a dangerous state based on different facts, even on easily disprovable claims, e.g., the White House nativity scene.  The media is advancing, not reducing, this divide.

2.  The war on facts and expertise will continue to escalate. Read The Death of Expertise for more.   This will extend to a war on college. While an attempted opening salvo on graduate student tuition waivers didn’t fire, in an environment where the President’s son says, “we’ll take $200,000 of your money; in exchange we’ll train your children to hate our country,” you can expect ongoing attacks on post-secondary education.  This spells trouble for Silicon Valley, where a large number of founders and entrepreneurs are former grad students as well as immigrants (which is a whole different area of potential trouble).

3.  Leading technology and social media companies finally step up to face ethical challenges. This means paying more attention to their own culture (e.g., sexual harassment, brogrammers).  This means taking responsibility for policing trolls, spreading fake news, building addictive content, and enabling foreign intelligence operations.  Thus far, they have tended to argue they are simply keepers of the town square, and not responsible for the content shared there.  This abdication of responsibility should start to stop in 2018, if only because people start to tune-out the services.  This leads to one of my favorite tweets of the year:

Capture

4.  AI will move from hype to action, meaning bigger budgets, more projects, and some high visibility failures. It will also mean more emphasis on voice and more conversational chatbots.  For finance departments, this means more of what Ventana’s Rob Kugel calls the age of robotic finance, which unites AI and machine learning, robotic process automation (RPA), natural language bots, and blockchain-based distributed ledgers.

5. AI will continue to generate lots of controversy about job displacement. While some remain optimistic, the consensus viewpoint seems to be that AI will suppress employment, most likely widening the wealth inequality gap.  A collapsing educational system combined with AI-driven pressure on low-skilled work seems a recipe for trouble.

6.  The bitcoin bubble bursts. As a reminder, at one point during the peak of tulip mania, the Dutch East India Company was worth more, on an inflated-adjusted basis, than twenty of today’s technology giants combined.

tulips

7.  The Internet of Things (IoT) will continue to build momentum.  IoT won’t hit in a massive horizontal way, instead B2B adoption will be lead by certain verticals such as healthcare, retail, and supply chain.

8.  The freelance / gig economy continues to gain momentum with freelance workers poised to pass traditional employees by 2027. While the gig economy brings advantages to high-skilled knowledge workers (e.g., freedom of location, freedom of work projects), this same trend threatens low-skilled workers via the continual decomposition of full-time jobs in a series of temp shifts.  This means someone working 60 hours a week across three 20-hour shifts wouldn’t be considered to be a full-time employee and thus not eligible for full-time benefits, further increasing wealth inequality.

freelancers

9.  M&A heats up due to repatriation of overseas cash. Apple alone, for example, has $252B in overseas cash.  With the new tax rate dropping from 35% to 15.5%, it will now be ~$50B less expensive for Apple to repatriate that cash.  Overall, US companies hold trillions of dollars overseas and making it cheaper for them to repatriate that cash suggests that they will be flush with dollars to invest in many areas, including M&A

10.  2018 will be a good year for cloud EPM vendors. The dynamic macro environment, the opportunities posed by cash repatriation, and the strong fundamentals in the economy will increase demand for EPM software that helps companies explore how to best exploit the right set of opportunities facing them.  Oracle will fail in pushing PBCS into the NetSuite base, creating a nice third-party opportunity.  SAP, Microsoft, and IBM will continue to put resources into other strategic investment areas (e.g., IBM and Watson, SAP and Hana) leaving fallow the EPM market adjacent to ERP.  And the greenfield opportunity to replace Excel for financial planning, budgeting, and even consolidations will continue drive strong growth.

Let me wish everyone, particularly the customers, partners, and employees of Host Analytics, a Happy New Year in 2018.

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Disclaimer:  these predictions are offered in the spirit of fun.  See my FAQ for more on this and other usage terms.

How To Get Your Startup a Halo

How would you like your startup to win deals not only when you win a customer evaluation, but when you tie — and even sometimes when you lose?

That sounds great.  But is it even possible?  Amazingly, yes — but you need have a halo effect working to your advantage.  What is a halo effect?  Per Wikipedia,

The halo effect is a cognitive bias in which an observer’s overall impression of a person, company, brand, or product influences the observer’s feelings and thoughts about that entity’s character or properties

There’s a great, must-read book (The Halo Effect) on the how this and eight other related effects apply in business.  The book is primarily about how the business community makes incorrect attributions about “best practices” in culture, leadership, values, and process that are subsequent to — but were not necessarily drivers of — past performance.

I know two great soundbites that summarize the phenomenon of pseudo-science in business:

  • All great companies have buildings.” Which comes from the (partly discredited) Good To Great that begins with the observation that in their study cohort of top-performing companies that all of them had buildings — and thus that simply looking for commonalities among top-performing companies was not enough; you’d have to look for distinguishing factors between top and average performers.
  • “If Marc Benioff carried a rabbit’s foot, would you?”  Which comes from a this Kellblog post where I make the point that blindly copying the habits of successful people will not replicate their outcome and, with a little help from Theodore Levitt, that while successful practitioners are intimately familiar with their own beliefs and behaviors, that they are almost definitionally ignorant of which ones helped, hindered, or were irrelevant to their own success.

Now that’s all good stuff and if you stop reading right here, you’ll hopefully avoid falling for pseudo-science in business.  That’s important.  But it misses an even bigger point.

Has your company ever won (or lost) a deal because of:

  • Perceived momentum?
  • Analyst placement on a quadrant or other market map?
  • Perceived market leadership?
  • Word of mouth as the “everyone’s using it” or “next thing” choice?
  • Perceived hotness?
  • Vibe at your events or online?
  • A certain feeling or je ne sais quoi that you were more (or less) preferred?
  • Perceived vision?

If yes, you’re seeing halo effects at work.

Halo effects are real.  Halo effects are human nature.  Halo effects are cognitive biases that tip the scales in your favor.  So the smart entrepreneur should be thinking:  how do I get one for my company?  (And the smart customer, how can I avoid being over-influenced by them?  See bottom of post.)

In Silicon Valley, a number of factors drive the creation of halo effects around a company.  Some of these are more controllable than others.  But overall, you should be thinking about how you can best combine these factors into an advantage.

  • Lineage, typically in the form of previous success at a hot company (e.g., Reid Hoffman of PayPal into LinkedIn, Dave Duffield of PeopleSoft into Workday).  The implication here (and a key part of halo effects) is that past success will lead to future success, as it sometimes does.  This one’s hard to control, but ceteris paribus, co-founding (even somewhat ex post facto) a company with an established entrepreneur will definitely help in many ways, including halo effects.
  • Investors, in one of many forms:  (1) VC’s with a strong brand name (e.g., Andreessen Horowitz), (2) specific well known venture capitalists (e.g., Doug Leone), (3) well known individual investors (e.g., Peter Thiel), and to a somewhat lesser extent (4) visible and/or famous angels (e.g., Ashton Kutcher). The implication here is obvious, that the investor’s past success is an indication of your future success.  There’s no doubt that strong investors help build halo effects indirectly through reputation; in cases they can do so directly as well via staff marketing partners designed to promote portfolio companies.
  • Investment.  In recent years, simply raising a huge amount of money has been enough to build a significant halo effect around a company, the implication being that “if they can raise that much money, then there’s got to be a pony in there somewhere.” Think Domo’s $690M or Palantir’s $2.1B.   The media loves these “go big or go home” stories and both media and customers seem to overlook the increased risk associated with staggering burn rates, the waste that having too much capital can lead to, the possibility that the investors represent “dumb money,” and the simple fact that “at scale” these businesses are supposed to be profitable.  Nevertheless, if you have the stomach, the story, and the connections to raise a dumbfounding amount of capital, it can definitely build a halo around your company.  For now, at least.
  • Valuation.  Even as the age of the unicorn starts to wane, it’s undeniable that in recent years, valuation has been a key tool to generate halos around a company.  In days of yore, valuation was a private matter, but as companies discovered they could generate hype around valuation, they started to disclose it, and thus the unicorn phenomenon was born.  As unicorn status became increasingly de rigeur, things got upside-down and companies started trading bad terms (e.g., multiple liquidation preferences, redemption rights) in order to get $1B+ (unicorn) post-money valuations.  That multiplying the price of a preferred share with superior rights by a share count that includes the number of lesser preferred and common shares is a fallacious way to arrive at a company valuation didn’t matter.  While I think valuation as a hype driver may lose some luster as many unicorns are revealed as horses in party hats (e.g., down-round IPOs), it can still be a useful tool.  Just be careful about what you trade to get it.  Don’t sell $100M worth of preferred with a ratcheted 2 moving to 3x liquidation preference — but what if someone would buy just $5M worth on those terms.  Yes, that’s a total hack, but so is the whole idea of multiplying a preferred share price times the number of common shares.  And it’s far less harmful to the company and the common stock.  Find your own middle ground / peace on this issue.
  • Growth and vision.  You’d think that industry watchers would look at a strategy and independently evaluate its merits in terms of driving future growth.  But that’s not how it works.  A key part of halo effects is misattribution of practices and performance.  So if you’ve performed poorly and have an awesome strategy, it will overlooked — and conversely.  Sadly, go-forward strategy is almost always viewed through the lens of past performance, even if that performance were driven by a different strategy or affected positively or negatively by execution issues unrelated to strategy.  A great story isn’t enough if you want to generate a vision halo effect.  You’re going to need to talk about growth numbers to prove it.  (That this leads to a pattern of private companies reporting inflated or misleading numbers is sadly no surprise.)  But don’t show up expecting to wow folks with vision. Ultimately, you’ll need to wow them with growth — which then provokes interest in vision.
  • Network.  Some companies do a nice and often quiet job of cultivating friends of the company who are thought leaders in their areas.  Many do this through inviting specific people to invest as angels.  Some do this simply through communications.  For example, one day I received an email update from Vik Singh clearly written for friends of Infer. I wasn’t sure how I got on the list, but found the company interesting and over time I got to know Vik (who is quite impressive) and ended up, well, a friend of Infer.  Some do this through advisory boards, both formal and informal.  For example, I did a little bit of advising for Tableau early on and later discovered a number of folks in my network who’d done the same thing.  The company benefitted by getting broad input on various topics and each of us felt like we were friends of Tableau.  While sort of thing doesn’t generate the same mainstream media buzz as a $1B valuation, it is a smart influencer strategy that can generate fans and buzz among the cognoscenti who, in theory at least, are opinion leaders in their chosen areas.

Before finishing the first part of this post, I need to provide a warning that halo effects are both powerful and addictive.  I seem to have a knack for competing against companies pursuing halo-driven strategies and the pattern I see typically runs like this.

  • Company starts getting some hype off good results.
  • Company starts saying increasingly aggressive things to build off the hype.
  • Analysts and press reward the hype with strong quadrant placements and great stories and blogs.
  • Company puts itself under increasing pressure to produce numbers that support the hype.

And then one of three things happens:

  1. The company continues delivering strong results and all is good, though the rhetoric and vision gets more unrelated to the business with each cycle.
  2. The company stops delivering results and is downgraded from hot-list to shit-list in the minds of the industry.
  3. The company cuts the cord with reality and starts inflating results in order to sustain the hype cycle and avoid outcome #2 above.  The vision inflates as aggressively as the numbers.

I have repeatedly had to compete against companies where claims/results were inflated to “prove” the value of bad/ordinary strategies to impress industry analysts to get strong quadrant positions to support broader claims of vision and leadership to drive more sales to inflate to even greater claimed results.  Surprisingly, I think this is usually done more in the name of ego than financial gain, but either way the story ends the same way — in terminations, lawsuits and, in one case, a jail sentence for the CEO.

Look, there are valid halo-driven strategies out there and I encourage you to try and use them to your company’s advantage — just be very careful you don’t end up addicted to halo heroin.  If you find yourself wanting to do almost anything to sustain the hype bubble, then you’ll know you’re addicted and headed for trouble.

The Customer View

Thus far, I’ve written this post entirely from the vendor viewpoint, but wanted to conclude by switching sides and offering customers some advice on how to think about halo effects in choosing vendors.   Customers should:

  • Be aware of halo effects.  The first step in dealing with any problem is understanding it exists. While supposedly technical, rational, and left-brained, technology can be as arbitrary as apparel when it comes to fashion.  If you’re evaluating vendors with halos, realize that they exist for a reason and then go understand why.  Are those drivers relevant — e.g., buying HR from Dave Duffield seems a reasonable idea.  Or are they spurious —  e.g., does it really matter that one board member invested in Facebook?  Or are they actually negative — e.g., if the company has raised $300M how crazy is their burn rate, what risk does that put on the business, and how focused will they stay on you as a customer and your problem as a market?
  •  Stay focused on your problem.  I encourage anyone buying technology to write down their business problems and high-level technology requirements before reaching out to vendors.  Hyped vendors are skilled at “changing the playing field” and trained to turn their vision into your (new) requirements.  While there certainly are cases where vendors can point out valid new requirements, you should periodically step back and do a sanity check:  are you still focused on your problem or have you been incrementally moved to a different, or greatly expanded one.  Vision is nice, but you won’t be around solve tomorrow’s problems if you can’t solve today’s.
  • Understand that industry analysts are often followers, not leaders.  If a vendor is showing you analyst support for their strategy, you need to figure out if the analyst is endorsing the strategy because of the strategy’s merits or because of the vendor’s claimed prior performance.  The latter is the definition of a halo effect and in a world full of private startups where high-quality analysts are in short supply, it’s easy to find “research” that effectively says nothing more than “this vendor is a leader because they say they’re performing really well and/or they’ve raised a lot of money.” That doesn’t tell you anything you didn’t know already and isn’t actually an independent source of information.  They are often simply amplifiers of the hype you’re already hearing.
  • Enjoy the sizzle; buy the steak.  Hype king Domo paid Alec Baldwin to make some (pretty pathetic) would-be viral videos and had Billy Beane, Flo Rida, Ludacris, and Marshawn Lynch at their user conference.  As I often say, behind any “marketing genius” is an enormous marketing budget, and that’s all you’re seeing — venture capital being directly converted into hype.  Heck, let them buy you a ticket to the show and have a great time.  Just don’t buy the software because of it — or because of the ability to invest more money in hand-grooming a handful of big-name references.  Look to meet customers like you, who have spent what you want to spend, and see if they’re happy and successful.  Don’t get handled into meeting other customers only at pre-arranged meetings.  Walk the floor and talk to regular people.  Find out how many are there for the show, or because they’re actual successful users of the software.
  • Dive into detail on the proposed solution.  Hyped vendors will often try to gloss over solutions and sell you the hype (e.g., “of course we can solve your problem, we’ve got the most logos, Gartner says we’re the leader, there’s an app for that.”)  What you need is a vendor who will listen to your problem, discuss it with you intelligently, and provide realistic estimates on what it takes to solve it.  The more willing they are to do that, the better off you are.  The more they keep talking about the founder’s escape from communism, the pedigree of their investors, their recent press coverage, or the amount of capital they’ve raised, the more likely you are to end up high and dry.  People interested in solving your problem will want to talk about your problem.
  • Beware the second-worst outcome:  the backwater.  Because hyped vendors are actually serving Sand Hill Road and/or Wall Street more than their customers, they pitch broad visions and huge markets in order to sustain the halo.  For a customer, that can be disastrous because the vendor may view the customer’s problems as simply another lily pad to jump off on the path to success.  The second-worst outcome is when you buy a solution and then vendor takes your money and invests it in solving other problems.  As a customer, you don’t want to marry your vendor’s fling.  You want to marry their core.  For startups, the pattern is typically over-expansion into too many things, getting in trouble, and then retracting hard back into the core, abandoning customers of the new, broader initiatives.  The second-worst outcome is when you get this alignment wrong and end up in a backwater or formerly-strategic area of your supplier’s strategy.
  • Avoid the worst outcome:  no there there.  Once in awhile, there is no “there there” behind some very hyped companies despite great individual investors, great VCs, strategic alliances, and a previously experienced team.  Perhaps the technology vision doesn’t pan out, or the company switches strategies (“pivots”) too often.  Perhaps the company just got too focused on its hype and not on it customers.  But the worst outcome, while somewhat rare, is when a company doesn’t solve its advertised problem. They may have a great story, a sexy demo, and some smart people — but what they lack is a core of satisfied customers solving the problem the company talks about.  In EPM, with due respect and in my humble opinion, Tidemark fell into this category, prior to what it called a “growth investment” and what sure seemed to me like a (fire) sale, to Marlin Equity Partners.  Customers need to watch out for these no-there-there situations and the best way to do that is taking strong dose of caveat emptor with a nose for “if it sounds too good to be true, then it might well possibly be.”

The Right Time To Raise Money At A Startup

I’m often asked by entrepreneurs:  when is the right time to raise money at a startup?  I invariably say two things in response:

  • Whenever you can
  • Right now

Whenever You Can
Most startups typically go through ups and downs. Say you’ve just completed 4 consecutive quarters above plan. You growth is high and your burn rate is reasonable. You have enough cash to go three more quarters before you need money. What should you do? Unless you are virtually certain that your quarterly streak will continue, I’d say raise money.

Why? Because the increase in valuation / decrease in dilution from adding 1-2 more quarters to the streak is nothing compared to the decrease in valuation / increase in dilution from tanking a quarter along the way. Whether you’re a subscription or perpetual company, investors will always want to see new sales / new bookings as your primary growth metric. While the SaaS model does damp revenue volatility, that’s precisely why a VC will want to see bookings. And, in my experience, bookings are volatile. During my 24 quarters at MarkLogic, we hit our bookings targets about 90% of the time. But I can say, sometimes when we missed, we missed. I remember one quarter coming in around 50% of target. Right after that quarter is exactly when you do not want to be raising money. And, by the way, it’s usually precisely when you need it.

The fastest way to end up bridge loans – where you lose almost all control of your company and are fed milestone to milestone – is to not raise money when skies are blue and instead try to raise money in a storm. Much as I love them, VCs are not in the business to be nice people:  if you’re coming to them, hat in hand, with 30 days of cash in the bank, I can assure you that you will not raise money on favorable terms. You could have done that 90 days ago. But, if you’ve tanked the quarter, now it’s too late.

To show this in reverse, one trick VCs love is to sneak a peek at an extra quarter. I remember one time when I was raising money, we’d agreed on terms, and the lawyers said it should take 2-3 weeks to close the round. It was June 12th, so if everybody pushed hard we should have been able to close the round before the quarter ended on June 30th. But suddenly everyone disappeared. Hello? Hello? Why aren’t the VCs calling back? How come their lawyers have gone silent and are taking forever to turn paper? Hello? Hello?

We made the quarter and the round closed July 5th. Arguably, I could have gone back and asked for a higher valuation based on having made the quarter – i.e., knowing that 2Q would be successful wasn’t priced into the round. But the VCs are good, they knew I wouldn’t do that – and they wouldn’t have let me if I tried.  So they got a “free peek” at the 2Q results. I’ll bet you $1000 that if we’d tanked that quarter, they’d have come back to me seeking to lower the valuation. The game is neither fair nor symmetric. (So time your round to close before the first day of the last month of the quarter.)

Right Now
Particularly for new companies, I believe the right time to raise VC money is right now. Too many would-be entrepreneurs treat fund-raising like going to the Senior Prom. I need to find a date. I need to book a limo. I need to do my hair. I need to get a dress.

Translation: I couldn’t possibly go talk to VCs about raising money until I have a great slide deck, an advisory board, a CEO, a Beta product, or some customers.

To me, it’s all avoidance. Traditional A-round VCs want to catch you in your dorm room. They are used to talking PhD students (or drop-outs) about their visionary ideas. They are not worried about whether you have a CXO. (In fact, they would be more than happy to help you find a CXO which, by the way, I wouldn’t recommend.)  They are worried primarily about the market opportunity, your idea, and your technology. As Don Valentine always said: great markets make great companies.

What’s more, they want to invest in people they know. One way to get known is to build a relationship over time as you think about raising money for your company. The best way to do this is to find someone in your network who can connect you to a top VC partner and who’s spent time getting to know you and your company (e.g., someone who’s perhaps done some advisory work or an angel investment). Then you want that person to send a top VC an email that looks like:

Dear Joe,

I have been working a bit with Mark Smith who just (ideally, either left great company or completed or ideally dropped out of a great PhD program) and who has a very interesting idea for a company. They are thinking about raising money and thus weighing the pros and cons of bootstrapping, an angel round, or a VC round.

I’d suggest meeting with him.

This way you remove the “prom factor” from your VC meetings because are not going on the big one-shot date. You’re not raising money. You are thinking of raising money. So it’s not awkward for them to not invest – in fact, they never even need to say no. But if they like your idea and your company they’ll be shoving money in your pockets whether you ask for it or not.

Better yet, you can invoke their competitive instincts by noting that you’re chatting with several VCs about whether you should raise money. Best of all, this approach lets you benefit from their wise (and free) feedback as you develop a relationship over time. If they are even moderately interested, they are going to want to track you (i.e., “hey, come back in a month and let’s have a coffee”).  If you continue to make good progress during that time (i.e., accomplish what you say you will in a given timeframe), you not only build credibility but also slowly transform yourself from stranger to interesting person who I’ve been tracking for the past 6 months. That becomes even more helpful when the VC needs to convince his partners to invest in you, as he invariably will.

So, now you know the secret. When’s the right time to raise money in a startup? Either right now or whenever you can depending on your situation. No business ever died from a little extra dilution. But, as the ever-quotable Don Valentine also pointed out: “all companies that go out of business do so for the same reason; they run out of money.”

Highlights from the Fenwick & West 2Q11 Venture Capital Survey

Each quarter the legal eagles at Fenwick & West run a great survey on the state of venture capital and write a brief report that rounds-up data from other sources and publishes their survey results.  Here are some quick highlights from the 2Q11 venture capital survey:

  • Total VC investment was $8.0B, a 20% increase compared to the $6.4B invested in 1Q11 per VentureSource.  Of this, $2.9B was invested in Silicon Valley.
  • 14 venture-backed companies went public in 2Q11, raising $1.7B.  In 1Q11 11 companies went public raising $700M, per VentureSource.
  • Venture capitalists raised $2.7B in funding in 2Q11, a 65% decline relative to the $7.6B raised in 1Q11, per Thompson/NCVA.
  • The Silicon Valley Venture Capitalist Confidence Index dropped to 3.66 out of 5.0, a sharp drop from the 3.91 recorded in 1Q11.  I added the red line to chart below which seems to indicate that confidence is about average since 1Q04.

  • 19% of financing rounds were series A, about normal for the past two years, somewhat contradicting the analysis in this recent TechCrunch story, The Series A Squeeze.  (Though it’s unclear how Fenwick handles seed fundings in their study.)
  • 61% of financing rounds were up-rounds, 14% were flat, and 25% were down.
  • The Fenwick & West VC Barometer, a measure of per-share pricing, was up 71%, with the software sector leading the way at 123% and internet / digital media at 115%.
  • 37% of rounds included senior liquidation preferences and, of those, 29% were multiple liquidation preferences.
  • 38% of rounds had participating preferences.
The full survey is available here.

Startups are Hard, Really Hard: Ergo Seek Mentors and Allies

A friend forwarded me a link to this presentation — So You Wanna Do A Startup, Eh?  I liked it so much, I thought I’d do quick post with some brief commentary.

Highlights:

  • Slide 30:  “Seek Mentors and Allies.  This is the most important point I make in this entire presentation.”  Why it’s listed as bullet 5 on slide 30 is beyond me, but it is nevertheless a key point.  I’m doing some startup advisory work of l ate and I certainly believe that some friends with experience, wisdom, and connections can go a long way towards helping a new venture head down the right path and avoid some obvious mistakes.
  • Slide 11:  Five myths about startups, particularly myth 2 (the average tech startup founder is a 25 year old Ivy league dropout) and myth 5 (location doesn’t matter)
  • Slide 30:  Ask rejectors for feedback.  Critical.
  • Slide 36:  Too funny!
  • Slide 40:  I love the Venn diagram and also note that the delusional aspect that enables founders to do the impossible in starting companies can lead to problems later on.

Thoughts on the Qlik Technologies (QlikTech) IPO

I spent an hour or so browsing the QlikTech S-1 and thought I’d share some observations.  (See here for my prior post on the company.)

  • The company has achieved good scale (2009 revenues of $157M) but growth has been decelerating from 82% in 2007 to 47% in 2008 to 33% in 2009.
  • Gross margins are high at 89% due largely to normal margins on license (96%), unusually  high margins on support (96%), normal margins on consulting (27%), and a fairly small consulting business (10% of total revenues) which reduces the pull-down effect on the weighted average.  Wall Street will like this.
  • Sales and marketing expense is high at 59% of sales.  Provided switching costs are high, you can argue this is a good investment, and provided growth is high, you can justify it.   I’m going to assume they make some “lost year” arguments about 2009 in their story and will guide to re-accelerated growth, but I’m not sure.  If not, then they will get pressure about the inefficiency of their sales model.
  • R&D is spectacularly low at 6% of sales.  There is an argument that if you have a largely completed (cheap and cheerful) BI tool that you should simply go sell the heck out of it and not artificially spend money in R&D when you have neither the vision nor the immediate need to either create new products or investment big money in enhancing your existing one.  I’ve just seen few companies try to make it.  I suspect Wall St. will pressure them to increase this number, regardless of whether it’s the strategically right thing to do for the company.
  • Expanded customer base from 1,500 customers in 2005 to over 13,000 in 2009.
  • I like their argument that because it’s easier to use than traditional BI tools that it should get greater penetration than the average 28% of potential BI users cited by IDC.
  • The unique business model (free downloads and 30-day guarantee post purchase) are consistent with the cheap and cheerful product positioning, which is good.  It does beg the question why sales costs so much, however, if you’re primarily upselling downloaders in a low-commitment fashion.
  • I think the claim “analysis tools are not designed for business users” is over-stated.  I can assure you that at BusinessObjects we were designing products for business users.
  • I dislike the small piece of huge pie argument, but I suppose that particular fallacy is so embedded in human nature that it will never go away.  I’d rather hear that QlikTech thinks its 2010 potential market is $400M and it wants 50% than hear – as it says in the prospectus — that they think it’s $8.6B and they presumably want somewhere around 2%.
  • They expect 63M shares outstanding after the offering, implying that if they want a $10-$15 share price that they think the company can justify a market cap in the $750M to $1B range.  If it were generating more than a 4% return on sales and growing faster than 33% that would be easier to assume.
  • 50% of 2009 license and FYM came from indirect channels.  This again begs the question why sales cost so much; indirect channels are, in theory, more cost-effective than direct.
  • They had 124 “dedicated direct sales professionals” as of 12/31/09, which suggests to me that at an average productivity of $1.8M (including all ramping and turnover effects) they could do $223M in revenues in 2010, or growth in the 40% range.  So they seem well teed-up from a sales hiring perspective.
  • If my US readers are wondering why you’ve not heard of them, it’s because they were originally founded in Sweden and do 77% of revenues “internationally” (which now means outside the US given that they moved their headquarters in 2004).   This relative lack of US presence should presumably hurt the stock.
  • They have a pretty traditional enterprise software business model:  perpetual license and maintenance.  They even state potential demand for SaaS BI as a risk factor.
  • They had $35M in deferred revenue on the balance sheet as of 12/31/09.  This strikes me as high; some quick back-of-the-envelope calculations led me to expect ~$25M if it was all the undelivered portion of pre-paid, single-year maintenance contracts.
  • Per IDC, 44% of QlikView customers deploy within a month and 77% deploy within three months.  It sounds impressive and is consistent with the small consulting business.  But it also depends on the definition of deploy.
  • This is no overnight success story; the company was founded in Sweden in 1993.  There was a six-year product development phase (which perhaps explains the low R&D today) from 1993 to 1999.  From 1999 to 2004 they sold almost exclusively in Europe.  From 2004, they added USA sales and relocated the HQ to Pennsylvania.
  • 2009 maintenance renewal rate of 85%
  • They intend to increase R&D expenses to increase in both absolute dollars and as a percent of sales going forward.
  • 73% of revenues are not dollar denominated.  This means that foreign exchange rates should hit them more (both ways) than for a typical software company.
  • This sounds typical:

Our quarterly results reflect seasonality in the sale of our products and services. Historically, a pattern of increased license sales in the fourth quarter has positively impacted sales activity in that period which can make it difficult to achieve sequential revenue growth in the first quarter. Similarly, our gross margins and operating income have been affected by these historical trends because the majority of our expenses are relatively fixed in the near-term.

  • USA revenues grew at 28% in 2009, a bit slower than company overall. Fairly surprising, given the late USA start and the presumably huge market opportunity.
  • R&D remains in Lund, Sweden with 54 staff as of 12/31/09.
  • 574 total employees as of 12/31/09 with 148 in the USA and 426 outside.
  • Accel is the biggest shareholder with 26.7% of the stock, pre-offering.
  • The proposed ticker symbol is QLIK
  • My brain started to melt around page 120.  (Somehow the document set I managed to pull down from the SEC site is about1,000 pages and includes a zillion appendices.  The regular S-1 is here.)
  • Click on the image below to blow up their recent financials.