Category Archives: Strategy

Appearance on the Twenty Minute VC: Financing Thoughts, The Private Equity Sales Process, and More

Today famed venture capital podcaster and now venture capitalist at StrideVC, Harry Stebbings, released a new episode of the Twenty Minute VC podcast with me as his guest.  (iTunes version here.)

dk harry 500

Harry’s interview was broad-ranging, covering a number of topics including:

  • Financing lessons I’ve learned during prior bubble periods and, perhaps more importantly, bubble bursts.
  • The three basic types of exits available today:  strategic acquirer, old-school private equity (PE) squeeze play, and new-school PE growth and/or platform play.
  • A process view of exiting a company via a PE-led sales process, including discussion of the confidential information memorandum (CIM), indications of interest (IOIs), management meetings, overlaying strategic acquirers into the process, and the somewhat non-obvious final selection criteria.

The Soundcloud version, available via any browser is here.  The iTunes version is here.  Regardless of whether you are interested in the topics featured in this episode, I highly recommend Harry’s podcast and listen to it myself during my walking and/or driving time.

Oh, and if you like the content in this episode, don’t miss my first appearance on the show.

 

The Market Leader Play: How to Run It, How to Respond

Business-to-business (B2B) high technology markets are all about the market and only less so about the technology.  This is primarily driven by corporate buyer conservatism — corporate buyers hate to make mistakes in purchasing technology and, if you’re going to make one, it’s far better to be in the herd with everyone else, collectively fooled, than to be out on your own having picked a runner-up or obscure vendor because you thought they were “better.”  Hence, high-technology markets have strong increasing returns on market leadership.  I learned this live, in the trenches, way back in the day at Ingres.

Uh, Dave, please stop for a second.  Thank you.  Thanks so much for coming out to visit us here at BigCo today.  Before you begin your presentation, we wanted you to know that if you simply convince us that Ingres is as good as Oracle that we’re going to chose Oracle.  In fact, I think you’re going to need to convince us that Ingres is 30% to 40% better than Oracle before we’d realistically consider buying from your company.  You may now go ahead with your presentation.

Much as I hated it on that day, what a great position for Oracle to be in!  Somehow, before the product evaluation cage-fight had even begun, Oracle walked into the cage with a 40% advantage — brought to them by their corporate marketing department, and which was all about market leadership.

Why do corporate buyers care so much about buying from market leaders?

  • Less project risk.  If everyone else is buying X, it must be good enough, certainly, to get the job done.
  • Less embarrassment risk.  If the project does fail and you’re using the leading vendor, it’s much less embarrassing than if you’re on an obscure runner-up.  (“Well, I guess they fooled us all.”) [1]
  • Bigger technology ecosystem.  In theory, market leaders have the most connectors to other systems and the most pre-integrated complementary technologies.
  • Bigger skillset ecosystem.  Trying to find someone with 2+ years of experience with, e.g., Host Analytics or Adaptive Insights is way easier than trying to find someone with 2+ years of experience with Budgeta or Jedox.  More market share means more users means you can find more skilled employees and more skilled partners.
  • Potential to go faster.  Particularly for systems with low purchase and low switching costs, there’s a temptation to bypass an evaluation altogether and just get going.  Think:  “it’s the leader, it’s $35K/year, and it’s not that hard to change — heck, let’s just try it.”

Thus, relatively small differences in perceived or actual market leadership early on can generate a series of increasing returns through which the leading vendor wins more deals because it’s the leader, becomes relatively larger and thus an even more clear leader, then wins yet a higher percentage of deals, and so on.  Life for the leader is good, as the rich get richer.  For the others, life is a series of deals fighting from behind and, as they said in Glenngarry Glenn Ross, second prize really is a set of steak knives.

This is why smart vendors in greenfield markets fight for the market leadership position as if their corporate lives depended on it.  Sometimes, in this game of high-stakes, winner-takes-all poker companies cross boundaries to create a perception of success and leadership that isn’t there. [2]

When run correctly — and legally — the goal of the market leader play (MLP) is to create a halo effect around the company.  So how do you run the market leader play?  It comes down to four areas:

  • Fundraising.  Get the biggest name investors [3], raise the most capital, make the most noise about the capital you’ve raised, and use the money to make a few big-name hires, all in an effort to make it clear that Sand Hill Road has thoroughly evaluated the company and its technology and chosen you to be the leader.
  • Public relations and corporate awareness. Spend a nice chunk of that capital on public relations [4].  Have the CEO speak at the conferences and be quoted or by-line articles in the right tech blogs.  Better yet, hire a ghost-writer to author a book for the CEO as part of positioning him/her as a thought leader in the space.  If applicable, market your company’s culture (which is hopefully already documented in a one-hundred slide deck).  Spend big bucks to hold the biggest user conference in the space (which of course cannot be labeled as a user conferenced but instead an industry event with its own branding).  Use billboards to make sure the Digerati and other, lesser denizens of Silicon Valley know your company’s name.  Think:  shock and awe for any lesser competitor.
  • Growth.  Spend a ton of that capital to hire the biggest sales force, wisely first building out a world-class onboarding and enablement program, and then scaling as aggressively as you can.  In enterprise software new sales = number of reps * some-constant, so let’s make sure the number of reps is growing as fast, and perhaps a little faster, than it wisely should be.  Build out channels to increase the reach of your fast-growing sales force and don’t be cheap, during a market-share grab, about how you pay them.  In the end, Rule of 40 aside, hotness in Silicon Valley is really about one thing:  growth.  So get hot by buying the most customers most quickly. [5]
  • Strategic relationships.  Develop strategic relationships with other leading and/or cool companies on the theory that leaders work with leaders.  These relationships can vary from a simple co-marketing arrangement (e.g., Host Analytics and Floqast) to strategic investments (e.g., Salesforce Ventures invests in Alation) to white label re-sale deals (e.g., NetSuite’s resales of Adaptive Insights as NetSuite Planning), and many others.  But the key is to have the most and best strategic relationships in the category.
  • Denial of differentiation.  While you should always look forward [6] when it comes to external communications, when it comes to competitive analysis keep a keen eye looking backward at your smaller competitors.  When they see you running the market leader play, they will try various moves to differentiate themselves and you must immediately deny all such attempts at differentiation by immediately blocking them.  Back in the day, Oracle did this spectacularly well — Ingres would exhaust itself pumping out new/differentiated product (e.g., Ingres/Star) only to have Oracle immediately announce a blocking product either as a pure futures announcement (e.g., Oracle 8 object handling) or a current product launch with only the thinnest technical support (e.g., Oracle/Star).  Either way, the goal is for the mind of the buyer to think “well the leading vendor now does that (or shortly will), too.”  Denying differentiation gives the customer no compelling reason to buy from a non-leader and exhausts the runners-up in increasing futile and esoteric attempts at differentiation.

So that, in a nutshell, is how creating a leader is done.  But what if, in a five-vendor race, you’re not teed up to be the leader.  You haven’t raised the most capital.  You’re not the biggest or growing the fastest.  Then what are you supposed to do to combat this seemingly air-tight play?

Responding to the Market Leadership Play
I think there are three primary strategic responses to the market leadership play.

  • Out-do.  If you are in the position to simply out-do the flashy competitor, then do it.  Enter the VC arms raise — but like any arms race you must play to win. [7]  Raise more capital than they do, build your sales force faster, get even better strategic relationships and simply out-do them.  Think:  “yes, they were on a roll for a while but we are clearly the leader now.”  Cloudera did this to Hortonworks.
  • Two-horse race.  If you can’t win via out-do, but have a strong ability to keep up [8], then reframe the situation into a two-horse race.  Think:  “no, vendor X is not the leader, this market is clearly a two-horse race.”  While most B2B technology markets converge to one leader, sometimes they converge to two (e.g., Business Objects and Cognos).  Much as in a two-rider breakaway from the peloton, number 1 and 2 can actually work together to distance themselves from the rest.  It requires a certain cooperation (or acceptance) from both vendors to do this strategy, but if you’re chasing someone playing the leadership play you can exhaust their attempts to exhaust you by keeping up at every breakaway attempt.
  • Segment leadership.  If you can’t out-do and you can’t keep up (making the market a two-horse race) then have two options:  be a runner-up in the mainstream market or a be a leader in a segment of it.  If you stay a runner-up in the mainstream market you have the chance of being acquired if the leader rebuffs acquisition attempts.  However, more often than not, when it comes to strategic M&A leaders like to acquire leaders — so a runner-up-but-get-acquired strategy is likely to backfire as you watch the leader, after rebuffing a few takeover attempts, get acquired at a 10x+ multiple.  You might argue that the acquisition of the leader creates a hole in the market which you can then fill (as acquired companies certainly do often disappear within larger acquirers), but (unless you get lucky) that process is likely to take years to unfold.  The other choice is to do an audit of your customers, your product usage, and your skills and focus back on a product or vertical segment to build sustainable leadership there.  While this doesn’t preserve horizontal M&A optionality as well as being a runner-up, it does allow you to build sustained differentiation against the leader in your wheelhouse.

# # #

Notes

[1] Or, more tritely, “no one ever got fired for buying IBM” back in the day (communicated indirectly via ads like this), which might easily translate to “no one ever got fired for buying Oracle” today.

[2] Personally, I feel that companies that I’ve competed against such as MicroStrategy, FAST Search & Transfer, and Autonomy at various points in their history all pushed too hard in order to create an aura of success and leadership.  In all three cases, litigation followed and, in a few cases, C-level executives even went to jail.

[3] Who sometimes have in-house marketing departments to help you run the play.

[4] In accordance with my rule that behind every “marketing genius” is a big marketing budget.  You might argue, in fact, that allocating such a budget the first step of the genius.

[5] And build a strong customer success and professional services team to get those customers happy so they renew.  Ending ARR growth is not just about adding new sales to the bucket, it’s about keeping what’s in the bucket renewing.

[6] That is, never “look back” by mentioning the name of a smaller competitor — as with Lot’s Wife, you might well end up a pillar of salt.

[7] If you’re not committed to raising a $100M round after they raise a $75M round in response to your $50M round, then you shouldn’t be in an arms race.  Quoting The Verdict, “we’re not paid to do our best, we’re paid to win.”  So don’t a pick fight where you can’t.

[8] This could be signalled by responding to the archrival’s $50M round with a $50M round, as opposed to a $75M.

The Two Dimensions of Startup Performance

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

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

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

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

You can combine these two dimensions into a quadrant.

startup perf quadrant

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

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

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

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

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

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

Possible reasons for stalled growth include:

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

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

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

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

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

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

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

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

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

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

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

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

# # #

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

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

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

[4] For example, multiple liquidation preferences.

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

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

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

What It Takes to Make a Great SaaS Company

I’ve been making a few presentations lately, so I thought I’d share the slides to this deck which I presented earlier this week at the All Hands meeting of a high-growth SaaS company as part of their external speaker series.

This one’s kind of a romp — it starts with some background on Kellblog (in response to some specific up-front questions they had), takes a brief look back at the “good old days” of on-premises software, introduces my leaky bucket concept of a SaaS company, and then discusses why I need to know only two things to value your SaaS company:  the water level of your bucket and how fast it’s increasing.

It kind of runs backwards building into the conclusion that a great SaaS company needs four things.

  1. An efficient sales model.  SaaS companies effectively buy customers, so you need to figure out how to do it efficiently.
  2. A customer-centric culture.  Once you’ve acquired a customer your whole culture should be focused on keeping them.  (It’s usually far cheaper than finding a new one to back-fill.)
  3. A product that gets the job done.  I like Clayton Christensen’s notion that customers “hire products to do jobs for them.”  Do yours?  How can you do it better?
  4. A vision that leaves the competition one step behind.  Done correctly, the competition is chasing your current reality while you’re out marketing the next level of vision.

Here are the slides:

The Three Marketing Books All Founder/CEOs Should Read

Few founder/CEOs come from a marketing background; most come from product, many from engineering, and some from sales, service, or consulting.  But few — ironically even in martech companies — grew up in the marketing department and consider marketing home.

When you combine this lack of experience with the the tendency that some marketing leaders and agencies have to deliberately obfuscate marketing, it’s no wonder that most founder/CEOs are somewhat uncomfortable with it.

But what’s a founder/CEO to do about this critical blind spot?  Do you let your CMO and his/her hench-agencies box you out of the marketing department?  No, you can’t.  “Marketing,” as David Packard once famously said, “is too important to be left to the marketing department.”

I recommend solving this problem in two ways:

  • One part hiring:  only hire marketing leaders who are transparent and educational, not those who try to hide behind a dark curtain of agencies, wizardry, and obfuscation.  Remember the Einstein quote:  “if you truly understand something you can explain it to a six-year old.”
  • One part self-education.  Don’t fear marketing, learn about it.  A little bit of fundamental knowledge will take you a long way and build your confidence in marketing conversations.

The problem is where to begin?  Marketing is a broad discipline and there are tens of thousands of books — most of them crap — written about it.  In this post, I’m going to list the three books that every founder/CEO should read about marketing.

I have a bias for classics here because I think founder/CEO types want foundational knowledge on which to build.  Here they are:

  • Positioning by Al Ries and Jack Trout.  Marketers frequently use the word “positioning” and after reading this classic, you’ll know exactly what they mean [1]. While it was originally published in 1981, it still reads well today.  This is all about the battle for the mind, which is the book’s subtitle.
  • Ogilvy on Advertising by David Ogilvy.  Ogilvy was the founder of marketing powerhouse agency Ogilvy and Mather and was the king of Madison Avenue back in the era of Mad Men.  Published in 1963, this book definitely shows signs of age, but the core content is timeless.  It covers everything from research to copy-writing and is probably, all in, my single favorite book on marketing. [2]
  • Crossing the Chasm by Geoffrey Moore.  The textbook classic Silicon Valley book on strategy.  Many people refer to the chasm without evidently having even read the book, so please don’t be one of them.  Published in 1991, it’s the newest of the books on my list, and happily Moore has revised it to keep the examples fresh along the way.

If I had to pick only one book, rather than suggesting original classics I’d revert to a summary, Kotler on Marketing, an overview written by Philip Kotler [3], author of one of the most popular marketing college textbooks, Marketing Management. [4]

If reading any of the above three books leaves you hungry for more (and if I were permitted to recommend just a few follow-up books), I’d offer:

  • As a follow-up to Positioning, I’d recommend The 22 Immutable Laws of Marketing also by Al Ries and Jack Trout and also written in the same accessible style.  This book would place second in the “if I only had one book to recommend” category and while less comprehensive than Kotler it is certainly far more accessible.
  • As a follow-up to Ogilvy on Advertising, and for those who want to get closer to marketing execution (e.g., reviewing content), I’d recommend The Copywriter’s Handbook by Robert Bly.  Most founder/CEOs are clear and logical writers who can get somewhat bamboozled by their marketing teams into approving gibberish copy.  This book will give you a firmer footing in having conversations about web copy, press releases, and marketing campaigns.
  • As a follow-up to Crossing the Chasm, I’d recommend Good Strategy, Bad Strategy, an excellent primer on strategy with case studies of great successes and failures and Blue Ocean Strategy, a great book on how to create uncontested market space and not simply compete in endless slug-fests against numerous competitors — which is particularly relevant in the current era of over-populated and over-funded startups. [5]

As founder/CEO you run the whole company.  But, for good reason, you might sometimes be hesitant to dive into marketing.  Moreover, some marketeers like it that way and may try to box you out of the marketing department.  Read these three books and you’ll have the tools you need to confidently engage in, and add value to, important marketing conversations at your company.

# # #

Notes

[1]  The Wikipedia entry on positioning isn’t a bad start for those in a hurry.

[2] Right from the second sentence, Ogilvy gets to the point:  “When I write an advertisement, I don’t want you to tell me that you find it ‘creative.’   I want you to find it so interesting that you buy the product.”  Love that guy.

[3] Of 4 P’s fame.  Kotler’s 4 P’s defined the marketing mix:  product, place, price, and promotion.

[4] Kotler on Marketing is deliberately not a summarized version of his classic, 700-page textbook, but alas it’s still written by someone who has produced numerous textbooks and nevertheless has a textbook feel.  It’s comprehensive but dry — especially by comparison to the others on this list.

[5] I can’t conclude any post on marketing thoughts and thinkers without a reference to one of the great marketing essays of all time, Marketing Myopia, by Theodore Levitt.  It’s old (published in 1963) and somewhat academic, but very well written and contains many pithy nuggets expressed as only Levitt could.

Video of my SaaStr 2019 Presentation: The Five Questions Startup CEOs Worry About

A few days ago, Jason Lemkin from SaaStr sent me a link to the video of my SaaStr Annual 2019 conference presentation, The Five Questions Startup CEOs Worry About. Those questions, by the way, are:

  1. When do I next raise money?
  2. Do I have the right team?
  3. How can I better manage the board?
  4. To what extent should I worry about competition?
  5. Are we focused enough?

Below is the video of the thirty-minute presentation.  The slides are available on Slideshare.

As mentioned in the presentation, I love to know what’s resonating out there, so if you ever have a moment where you think –“Hey, I just used something from Dave’s presentation!” — please let me know via Twitter or email.

The Question that CEOs Too Often Don't Discuss with the Board

Startup boards are complex.  While all board members own stock in the company their interests are not necessarily aligned.

  • Founders may be motivated by a vision to change the world, to hit a certain net worth target, to see their name in an S-1, to make the Forbes 500, or — and I’ve seen crazier things — to make more than their Stanford roommate.  First-time founders with little net worth can be open to selling at relatively low prices.  Conversely, serial successful founders may need a large exit simply to move the needle on their net worth.  Founders can also be religious zealots and take positions like “I wouldn’t sell to Microsoft or Oracle at any price.”
  • Independent board members typically have significant net worth (i.e., they’ve been successful at something which is why want them on your board) and relatively small stakes which, by default, financially incents them to seek large exits.  While they notionally represent the common stock, they are often aligned with either the founders or one of the investors in the company — they got on the board for a reason, often existing relationships —  and thus their views may be shaped by the real or perceived interest of those parties.  Or, they can simply drive an agenda that they believe is best for the company — whatever they happen to think “best” means.
  • Venture capitalists (VCs) are motivated by generating returns for their funds.  Simple, right?  Not so fast.  VC is increasingly a “hits business” where a few large outcomes can mean the difference between at 10% and 35% IRR over a fund’s ten-year life.  Thus, VCs have a general tendency to seek huge exits (“better to sell too late than too early”), but they are also motivated by other factors such as the expectations they set when they raised their fund, the performance of other investments in the fund (e.g., do they need a big hit to bail out a few bad bets), and their relationships with members of other funds represented on the company’s board.

In this light, it’s clearly simplistic to say that everyone is aligned around a single goal:  to maximize the value of the stock.  Yes, surely that is true at one level.  But it gets a bit more complicated than that.
That’s why it’s so important that CEOs ask the board one question that, somewhat amazingly, they all too often don’t:  what does success look like?  And it doesn’t hurt to re-ask it every few years as any given board member’s position may change over time.
I’m always shocked how the simplest of questions can generate the most debate.
Aside:  back in the day at Business Objects (~1998), I suggested bringing in the Chasm Group to help us with a three-day, strategic planning offsite.  I figured we’d spend a morning reviewing the key concepts in Crossing the Chasm, at most one afternoon generating consensus on where we sat on their technology adoption lifecycle curve, and then two days working on strategic goals and operational plans after that.
Tech-Adoption-Lifecycle-01
With about 12 people who had worked together closely for years, after three full days we never agreed where we sat on the curve.  We spent literally the entire time arguing, often intensely, and never even got to the rest of the agenda.  Fortunately, that didn’t end up impeding our success, but it was a big lesson for me.  End aside.
So be ready for that simple question to generate a long answer.  Most probably, several long answers.  In fact, in order to get the best answer, I’d suggest asking board members about it first individually (to avoid any group decision-making biases) and then discuss it as a group.
But before examining the answers you can expect to this question, let’s take a minute to consider why this conversation doesn’t occur more often and more naturally.  I think there are three generic reasons:

  • Conflict aversion.  Perhaps sensing real misalignment, like in a bad marriage the CEO and board tacitly agree to not discuss the problem until they must.  You may hear or make excuses like “let’s cross that bridge when we come to it,”  “let’s execute this year’s plan and then discuss that,” or “if there’s no offer on the table then there’s nothing to discuss.”  Or, in a more Machiavellian situation, a board member may be thinking, “let’s ride Joe like a rented mule to $5M and then shoot him,” continuallying defer the conversation on that logic.  Pleasant or unpleasant, it’s usually better to address conflicts early rather than letting them fester.
  • Rationalization of unrealistic expectations.  If some board members constantly refrain “this can be a billion-dollar company,” perhaps the CEO rationalizes it, thinking “they don’t really believe that; they’re just saying it because they think they’re supposed to.”  But what if they do believe it?
  • The gauche factor.  Some people seem to think it’s a gauche topic of conversation.  “Hey, our company vision statement says we’re making the world a better place through elegant hierarchies for maximum code reuse and extensibility, we shouldn’t be focusing on something so crass as the exit, we should be talking about making the world better.”  VCs invest money for a reason, they measure results by the IRR, and they can typically cite their IRRs (and those of their partners) from memory.  It’s not gauche to discuss expectations and exits.

When you ask your board members what success looks like these are the kinds of things you might hear:

  • Disrupting the leader in a given market.
  • Building a $1B revenue company.
  • Becoming a unicorn ($1B valuation).
  • Changing the way people work.
  • Getting a 10x in 5-7 years for an early stage fund, or getting a 3x in 3-5 years for a later stage fund.
  • Showing my Mother my name in an S-1 (a sub-case of “going public”).
  • Getting our software into the hands of over 1M people.
  • Realizing the potential of the company.
  • Selling the company for more than I think it’s worth.
  • Getting acquired by Google or Cisco for a price above a given threshold.
  • Building a true market leader.
  • Creating a Silicon Valley icon, a household name.
  • Selling the company for {a base-hit, double, triple, home-run, or grand-slam} outcome.

Given the possibility of a list as heterogeneous as this, doesn’t it make sense to get this question on the table as opposed to in the closet?
I learned my favorite definition of strategy from a Stanford professor who defined strategy as “the plan to win.”  The beauty of this definition is that it instantly begs the question “what is winning?”  Just as that conversation can be long, contentious, and colorful, so is the answer to the other, even more critical question:  what does success look like?