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A Look at the Tintri S-1

Every now and then I take a dive into an S-1 to see what clears the current, ever-changing bar for going public.  After a somewhat rocky IPO process, Tintri went public June 30 after cutting the IPO offering price and has traded flat thus far since then.

Let’s read an excerpt from this Business Insider story before taking a look at the numbers.

Before going public, Tintri had raised $260 million from venture investors and was valued at $800 million.

With the performance of this IPO, the company is now valued at about about $231 million, based on $7.50 a share and its roughly 31 million outstanding shares, (if the IPO’s bankers don’t buy their optional, additional roughly 1.3 million shares.)

In other words, this IPO killed a good $570 million of the company’s value.

In other words, Tintri looks like a “down-round IPO” (or an “IPO of last resort“) — something that frankly almost never happened before the recent mid/late stage private valuation bubble of the past 4 years.

Let’s look at some numbers.

tintri p+l

Of note:

  • $125M in FY2017 revenue.  (They have scale, but this is not a SaaS company so the revenue is mostly non-recurring, making it easier to get to grow quickly and making the revenue is worth less because only the support/maintenance component of it renews each year.)
  • 45% YoY total revenue growth.  (On the low side, especially given that they have a traditional license/maintenance model and recognize revenue on shipment.)
  • 65% gross margins  (Low, but they do seem to sell flash memory hardware as part of their storage solutions.)
  • 87% of revenue spent on S&M (High, again particularly for a non-SaaS company.)
  • 43% of revenue spent on R&D  (High, but usually seen as a good thing if you view the R&D money as well spent.)
  • -81% operating margins (Low, particularly for a non-SaaS company.)
  • -$70.4M in cashflow from operating activities in 2017 ($17M average quarterly cash burn from operations)
  • Incremental S&M / incremental product revenue = 73%, so they’re buying $1 worth of incremental (YoY) revenue for an incremental 73 cents in S&M.  Expensive but better than some.

Overall, my impression is of an on-premises (and to a lesser extent, hardware) company in SaaS clothing — i.e., Tintri’s metrics look like a SaaS company, but they aren’t so they should look better.  SaaS company metrics typically look worse than traditional software companies for two reasons:  (1) revenue growth is depressed by the need to amortize revenue over the course of the subscription and (2) subscriptions companies are willing to spend more on S&M to acquire a customer because of the recurring nature of a subscription.

Concretely, if you compare two 100-unit customers, the SaaS customer is worth twice the license/maintenance customer over 5 years.

saas compare

Moreover, even if Tintri were a SaaS company, it is quite out of compliance with the Rule of 40, that says growth rate + operating margin >= 40%.  In Tintri’s case, we get -35%, 45% growth plus -81% operating margin, so they’re 75 points off the rule.

Other Notes

  • 1250+ customers
  • 21 of the Fortune 100
  • 527 employees as of 1/31/17
  • CEO 2017 cash compensation $525K
  • CFO 2017 cash compensation $330K
  • Issued special retention stock grants in May 2017 that vest in the two years following an IPO
  • Did option repricing in May 2017 to $2.28/share down from weighted average exercise price of $4.05.
  • $260M in capital raised prior to IPO
  • Loans to CFO and CEO to exercise stock options at 1.6% to 1.9% interest in 2013
  • NEA 22.7% ownership prior to opening
  • Lightspeed 14.5% ownership
  • Insight Venture Partners 20.2% ownership
  • Silver Lake 20.4% ownership
  • CEO 3.8% ownership
  • CFO 0.7% ownership
  • $48.9M in long-term debt
  • $13.8M in 2017 stock-based compensation expense

Overall, and see my disclaimers, but this is one that I’ll be passing on.

 

The Dogshit Bar: A Memorable Market Research Concept

I can’t tell you the number of times I’ve seen market research that suffers from one key problem.  It goes something like this:

  • What do you think of PRODUCT’s user interface?
  • Do you think PRODUCT should be part of suite or a standalone module?
  • Is the value of PRODUCT best measured per-user or per-bite?
  • Is the PRODUCT’s functionality best delivered as a native application or via a browser?
  • Would you like PRODUCT priced per-user or per-consumption?
  • Rank the importance of features 1-4 in PRODUCT?

The problem is, of course, that you’ve never asked the one question that actually matters — would you buy this product — and are pre-supposing the need for the product and that someone would pay something to fulfill that need.

So try this:  substitute “Dogshit Bar” (i.e., a candy bar made of dog shit) for every instance of PRODUCT in one of your market research surveys and see what happens.  Very quickly, you’ll realize that you’re asking questions equivalent to:

  • Should the Dogshit Bar be delivered in a paper or plastic wrapper?
  • Would you prefer to buy the Dogshit Bar in a 3, 6, or 9 oz size?
  • Should the Dogshit Bar be priced by ounce or some other metric?

So before drilling into all the details that product management can obsess over, step back, and ask some fundamental questions first.

  • Does the product solve a problem faced by your organization?
  • How high a priority is that problem?  (Perhaps ranked against a list of high-level priorities for the buyer.  It’s not enough that it solves a problem, it needs to solve an important problem.)
  • What would be the economic value of solving that problem?  (That is, how much value can this product provide.)
  • Would you be willing to pay for it and, if so, how much?  (Which starts to factor in not just  value but the relative cost of alternative solutions.)

So why do people make this mistake?

I believe there’s some feeling that it’s heretical to ask the basic questions about the startup’s core product or the big company’s new strategic initiatiave that the execs dreamed up at an offsite.  While the execs can dream up new product ideas all day long, there’s one thing they can’t do:  force people to buy them.

That’s why you need to ask the most basic, fundamental questions in market research first, before proceeding on to analyzing packaging, interface, feature trade-offs, platforms, etc.  You can generate lots of data to go analyze about whether people prefer paper or plastic packaging or the 3, 6, or 9 ounce size.  But none of it will matter.  Because no one’s going to buy a Dogshit Bar.

Now, before wrapping this up, we need to be careful of the Bradley Effect in market research, an important phenomenom in live research (as opposed to anonymous polls) and one of several reasons why pollsters generally called Trump vs. Clinton incorrectly in the 2016 Presidential election.

I’ll apply the Bradley Effect to product research as follows:  while there are certain exception categories where people will say they won’t buy something that they will (e.g., pornography), in general:

  • If someone says they won’t buy something, then they won’t
  • If someone says they will buy something, then they might

Why?  Perhaps they’re trying to be nice.  Perhaps they do see some value, but just not enough.  Perhaps there is a social stigma associated with saying no.

I first learned about this phenomenom reading Ogivly on Advertising, a classic marketing text by the father of advertising David Ogilvy.  Early in his career Ogilvy got lucky and learned an important lesson.  While working for George Gallup he was assigned to do polling about a movie entitled Abe Lincoln in Illinois.  While the research determined the movie was going to be a roaring success, the film ended up a flop.  Why?  The participants lied.  After all, who wants to sound unpatriotic and tell a pollster that you won’t go see a movie about Abe Lincoln?  Here’s a picture of Ogilvy doing that research.  Always remember it.

ogilvy

The Opportunity Cost of Debating Facts

I read this New York Times editorial this morning, How the Truth Got Hacked, and it reminded me of a situation at work, back when I first joined Host Analytics some four years ago.  This line, in particular, caught my attention:

Imagine the conversation we’d be having if we weren’t debating facts.

Back when I joined Host Analytics, we had an unfortunate but not terribly unusual dysfunction between product management (PM) and Engineering (ENG).  By the time the conflict got to my office, it went something like this:

PM:  “ENG said they’d deliver X, Y, and Z in the next release and now they’re only delivering X and half of Y.  I can’t believe this and what am I going to the customers and analysts who I told that we were delivering …”

ENG:  “PM is always asking us to deliver too much and we never actually committed to deliver all of Y and we certainly didn’t commit to deliver Z.”

(For extra fun, compound this somewhat normal level of dysfunction with American vs. Indian communication style differences –including a quite subtle way of saying “no” – and you’ll see the real picture.)

I quickly found myself in a series of “he said, she said” meetings that were completely unproductive.  “We don’t write down commitments because we’re agile,” was one refrain.  In fact, while I agree that the words “commitment” and “agile” generally don’t belong in the same sentence, we were anything but agile at the time, so I viewed the statement more as a convenient excuse than an expression of true ideological conflict.

But the thing that bugged me the most was that we had endless meetings where we couldn’t even agree on basic facts.  After all, we either had a planning problem, a delivery problem, or both and unless we could establish what we’d actually agreed to deliver, we couldn’t determine where to focus our efforts.  The meetings were a waste of time.  I had no way knowing who said what to whom, we didn’t have great tracking systems, and I had no interest in email forensics to try and figure it out.  Worse yet, it seemed that two people could leave the same meeting not even agreeing on what was decided.

Imagine the conversation we’d be having if we weren’t debating facts.

In the end, it was clear that we needed to overhaul the whole process, but that would take time.  The question was, in the short term, could we do something that would end the unproductive meetings so we take basic facts in evidence and then have a productive debate at the next level?  You know, to try and make some progress on solving our problems?

I created a document called the Release Scorecard and Commitments document that contained two tables, each structured like this.

release-scorecard

At the start of each release, we’d list the major stories that we were trying to include and we’d have Engineering score their confidence in delivering each one of them.  Then, at the end of every release, PM would score how the delivery went, and the team could provide a comment.  Thus, at every post-release roadmap review, we could review how we did on the prior release and agree on priorities for the next one.  Most importantly, when it came to reviewing the prior release, we had a baseline off which we could have productive discussions about what did or did not happen during the cycle.

Suddenly, by taking the basic facts out of question, the meetings changed overnight.  First, they became productive.  Then, after we fully transitioned to agile, they became unnecessary.  In fact, I’ve since repeatedly said that I don’t need the document anymore because it was a band-aid artifact of our pre-agile world.  Nevertheless, the team still likes producing it for the simple clarity it provides in assessing how we do at laying out priorities and then delivering against them.

So, if you find yourself in a series of unproductive, “he said, she said” meetings, learn this lesson:  do something to get basic facts into evidence so you can have a meaningful conversation at the next level.

Because there is a massive opportunity cost when all you do is debate what should be facts.

A Key Lesson Marketers Can Learn from Donald Trump

While we won’t go into my views on the election here, I will say that all marketers and solution sellers can learn one “yuge” lesson from Donald Trump:  understanding your audience and talking to them in their terms will take you a long, long way.

I’ve always said that solution selling entails getting the customer to conclude three things:

  1. They understand my problem.
  2. They can solve my problem.
  3. I want to work with them.

I put this in reverse form (i.e., calling the company “they”) as a reminder that these are not assertions — they are conclusions.  These are three conclusions that we want the customer to draw.  Asserting them is probably one of the worst ways to get customers to conclude them.  So how might we get a customer to conclude these things?

They Understand My Problem

How might we lead someone to conclude that your organization understands their problem?

  • Hire people who have had the customer’s job and walked in their footsteps.
  • Speak to the customer in their own language about the problem.
  • Active listen to the customer, playing back what they are telling you about the problem.
  • Complete their sentences, saying “and I bet you saw this problem next.”

The ultimate goal is to get the customer to think “Holy Cow, these people might understand my problem even better than I do.”

They Can Solve My Problem

They are several ways to get someone to conclude you can solve their problem

  • Talking about similar reference customers — where similar is defined in the mind of the buyer — whose problems you have solved.
  • Bringing in staff who have worked on solving those very problems.  Telling Pearson, “oh, when we were over at McGraw-Hill we worked on the XYZ system.”
  • Filling in requirements documents but beware that these are often, dare I say “rigged,” by the vendors who got in first as they attempt to set their differentiators on the agenda.
  • Performing a prototype or proof of concept (POC) that shows how key requirements are met using your solution.

I Want To Work With Them

How do you get someone to conclude you they want to work with you?

  • Execute the basics:  show up on time, be prepared, do your homework, communicate status.  (I’m stunned how many people screw up these things and still expect to win.)
  • Be reliable.  Say what you’ll do and do what you say.  Customers want to know they can count on you.  Don’t surprise them.
  • Be personal, build relationships, get to know people, and make them understand you want their business and care about their success.

Back To Trump

Now I have always believed that the first of these tests was the most important:  getting someone to believe you understand their problem.  But Trump has taken my belief in this to a whole new level.

By driving hard on two fronts:

  • A huge dose of “I understand your problem” — with his speeches aimed at a segment of the public who feels unacknowledged and misunderstood, he energizes crowds largely by simply active listening their problems back to them.
  • With a small dose of “I want to work with him” — the whole political outsider, straight-talking guy image.

He has been able to “get the order” from a large number of Americans without providing much detail at all about the second — and one would think rationally very important — point:  the “I can solve your problems” point.  Put differently, I’d say he put nearly 100% of his eggs in the “I understand your problem” basket and virtually none in the “I can solve it” basket (i.e., a huge amount of what and a stunning lack of how when it comes to policy).

This is all more proof that by simply demonstrating that you understand the customer’s problem and by being someone the customer wants to work with, that you can get the order without actually convincing them that you can solve the problem.

In most corporate sales cycles people incorrectly assume all the importance is on the second point — can they solve the problem?  In reality, salespeople and marketers should put emphasis on all three points and on leading the customer to conclude, in this order, that:

  • They understand my problem
  • I want to work with them
  • They can solve my problem

[Reposted and slightly revised post election.]

Another United Odyssey

Despite being (or perhaps, because of being) a 2 million mile lifetime flyer on United, I generally do my best to try and avoid them.  But once in while, routes being routes, I decided to give them a chance and see if things have improved.

Silly me.

Today’s odyssey begins in Hartford where what looked like a fairly empty flight (from the check-in seatmap) ends up an overbooked mess at 6:30 AM.  The weather in Chicago chips in for some fun and after boarding 25% of the plane, they stop, and ask us to de-board citing a ground stoppage in Chicago.

Being one of the first on the plane I am one of the last off and face this line for a cup of coffee at Dunkins. (You can see the sign way down at the end.)

dunkins

We’re not off to a good start.  About 30 minutes later,  and before I could finish my hard-earned cup of Joe, we board again.  I am constantly using my United app to decide on the likelihood of making my connection.  But the whole time we’re boarding it shows us arriving at 845 and my flight leaving at 910.  Until they close the door.  Now it says 930 arrival, which quickly turned into 950.  Unless my connection is delayed, too — I am toast.  (And the app has let me know is that my flight had already landed from Hawaii hours before and ergo wasn’t going to get badly outbound delayed, due a late in-bound at least.)

So, now, I’m screwed.  If they had just been honest and either told me (or given me the information to conclude) that I had 0% of making my connection, I would have gotten off the plane.  I needed to back on the East Coast later that week and knowing that Chicago is in trouble and San Francisco is also having bad weather, I knew I would be toast if I showed up in Chicago connection-less.

Part of the problem here is misinformation — when my outbound showed no delay, United’s staff response was “they always show no delay right up until they delay it” — which gave me some hope that the outbound would be subsequently delayed and kept me on the plane.

Well, connection-less in Chicago is exactly what happened, after my outbound was delayed twice so I managed to miss it, just two gates down, by about 10 minutes.  Thanks for waiting.

Then I look at the customer service line, which was literally as long as a football field.  (You can’t even see the end of this one.)

united

I don’t think I’ve seen a line that long (and that’s before even entering the roped back-and-forth real line on the right) in a decade.

I slip into the United Club (which for some reason I still pay for) and it resembles a refugee camp at this point.  I fire up my web browser to look at rebookings.  I quickly realize — and this is possibly a good thing — that the United mobile app has way more functionality in this situation than the website which — and this is a bad thing — is basically useless and tells me I need to call and rebook.

I use the United mobile app.

The trick is every flight is full / standby, but one.  So I choose that one, for a whopping 10 hour delay in arrival.  Since I had ponied up for a First Class seat, I figured it would only show me flights with First available.  Nope.  They put me into an economy middle seat on a First Class fare without saying anything, proposing a refund, nothing.  Not a peep.

This continues United’s tradition of basically ignoring whether you paid extra for Economy Plus (where they are so careful to price each seat) or even First Class when things go awry.  All that’s out the window.

I figure First is small so maybe it’s unavoidable.  And then I see that they have been upgrading people into First on earlier flights that I am standby on instead of giving me the ticket that I paid for.  I look at my place on the “complimentary First Class upgrade” line for the flight they have me on standby — and I’m number 36.  But wait, I’m not asking for a complimentary upgrade.  I paid nearly $1000 for a one-way ticket that I needed to buy on short notice.

No one cares.  United Twitter support which promptly offers to help when I first reported my troubles goes silent when I raise this issue.  You feel a mentality of, “whatever, it’s a crisis — you should be happy with any seat regardless of whether we chose to charge you a premium when you bought it.”  I beg to differ.  If you want me to not care at crisis time, don’t care at purchase time.

Then I notice that the 777 is configured 3-4-3 in coach.  The 777 was designed to 2-5-2 but in order to squeeze in an extra seat per row, ever customer-centric United has decided to go 3-4-3 on some models, and of course this is one.

The hits just keep coming.  Everything they do to reduce my experience they have done.

I call my wife and she says to try another airline.  “No, that won’t work,” I say.  “The weather’s the problem and I’m sure if seats were available on other airlines, United would be routing people to them — instead of making them 12 hours late.  I’m sure that every flight on every airline is toast.”

Amazingly, I still give too much credit to United and too little to my wife. About 4 clicks later, I have a bulkhead seat on American.

I arrive 6 hours late having traveled 16 hours door-to-door on an East Coast flight and having needed to purchase a pricey second ticket on American.

The moral is to avoid two things at all costs:  one-stop travel (I should have driven the extra hour to Boston) and United.

Aligned to Achieve: A B2B Marketing Classic

Tracy Eiler and Andrea Austin’s Aligned to Achieve came out today and it’s a great book on an important and all too often overlooked topic:  how to align sales and marketing.

I’m adding it to my modern SaaS executive must-read book list, which is now:

So, what do I like about Aligned to Achieve?

The book puts a dead moose issue squarely on the table:  sales and marketing are not aligned in too many organizations.  The book does a great job of showing some examples of what misalignment looks like.  My favorites were the one where the sales VP wouldn’t shake the new CMO’s hand (“you’ll be gone soon, no need to get to know you”) and the one where sales waived off marketing from touching any opportunities once they got in the pipeline.  Ouch.  #TrustFail.

Aligned to Achieve makes great statements like this one:  “We believe that pipeline is absolutely the most important metric for sales and marketing alignment, and that’s a major cultural shift for most companies.”  Boom, nothing more to say about that.

The book includes fun charts like the one below.  I’ve always loved tension-surveys where you ask two sides for a view on the same issue and show the gap – and this gap’s a doozy.

sm gap

Aligned to Achieve includes the word “transparency” twenty times.  Transparency is required in the culture, in collaboration, in definitions, in planning, in the reasons for plans, in process and metrics, in data, in assessing results, in engaging customers, and in objectives and performance against them.  Communication is the lubricant in the sales/marketing relationship and transparency the key ingredient.

The book includes a nice chapter on the leadership traits required to work in the aligned environment:  collaborative, transparent, analytical, tech savvy, customer focused, and inspirational.  Having been a CMO fifteen years ago, I’d say that transparent, analytical, and tech savvy and now more important than ever before.

Aligned to Achieve includes a derivative of my favorite mantra (marketing exists to make sales easier) in the form of:

Sales can’t do it alone and marketing exists to make sales easier

The back half of that mantra (which I borrowed from CTP co-founder Chris Greendale) served me well in my combined 12 years as a CMO.  I love the insertion of the front half, which is now more true than ever:  sales has never been more codependent with marketing.

The book includes a fun, practical suggestion to have a bi-monthly “smarketing” meeting which brings sales and marketing together to discuss:

  • The rolling six-week marketing campaign calendar
  • Detailed review of the most recently completed campaigns
  • Update on immediately pending campaigns
  • Bigger picture items (e.g., upcoming events that impact sales and/or marketing)
  • Open discussion and brainstorming to cover challenges and process hiccups

Such meetings are a great idea.

Back in the day when Tracy and I worked together at Business Objects, I always loved Tracy’s habit of “crashing” meetings.  She was so committed to sales and marketing alignment – even back then – that if sales were having an important meeting, invited or not, she’d just show up.  (It always reminded me of the Woody Allen quote, 80% of success is showing up.)  In her aligned organization today, the CEO makes sure she doesn’t have to do that, but by hook or by crook the sales/marketing discussion must happen.

Aligned to Achieve has a nice discussion of the good old sales velocity model which, like my Four Levers of SaaS, is a good way to think about and simplify a business and the levers that drive it.

Unsurprisingly, for a book co-authored by the CMO of a company that sells market data and insights, Aligned to Achieve includes a healthy chapter on the importance of data, including a marketing-adapted version of the DIKW pyramid featuring data, insights, and connections as the three layers.  The nice part is that the chapter remains objective and factual – it doesn’t devolve into an infomercial by any means.

The book moves on to discuss the CIO’s role in a sales/marketing-aligned organization and provides a chapter reviewing the results of a survey of 1000 sales and marketing professionals on alignment, uncovering common sources of misalignment and some of the practices used by sales/marketing alignment leaders.

Aligned to Achieve ends with a series of 7 alignment-related predictions which I won’t scoop here.  I will say that #4 (“academia catches up”) and #6 (“account-based everything is a top priority”) are my two favorites.

Congratulations to my long-time friend and colleague Tracy Eiler on co-authoring the book and to her colleague Andrea Austin.

How To Run a Sales Kickoff

Since we’re wrapping up what has been a simply amazing Host Analytics 2016 sales kickoff, I thought I’d share some of the rules I’ve developed, learned, appropriated, discovered, et cetera during my career.

Rule 1:  for salespeople, your signed compensation plan is your admission ticket to kickoff.  This is incredibly important because comp plans define what you want your sales people to do and too many companies don’t get them finalized early enough in the quarter, leaving sales in a directionless limbo for weeks or months.

Rule 2:  the purpose of the kickoff is to send salesreps home from the event fired up and having everything they need to be successful in the new year.  When they get on the plane home, they should know their territory, their compensation plan, all the new messaging, all the latest competitive information, the new pricing, and have all the new kit required for their success.

Rule 3:  be inclusive.   At the companies I’ve run, we follow a simple philosophy: the event is a sales kickoff to which the whole company is invited.  So don’t complain if the content is too rah-rah or too salesy because it can’t be — it’s a sales kickoff.  But invite everyone so they can benefit both from the communications of plans, goals, and changes for the new year, and also from the contagious enthusiasm of hanging out with the sales force at a rah-rah event.

Rule 4:  mix it up.  Don’t run all day on a single-track, keynote-only format.  Yes, do some keynotes.  But have track sessions as well.  Mix in some panel discussions.  A game or contest is always fun — particularly if you take the trouble to ensure it’s on-message.  Ideally, let people choose freely about which track sessions they attend and which they don’t.

Rule 5:  invite some customers.  There’s nothing like a customer panel to communicate the reality of the product-market back to the organization.  They’re usually honored to come and their comments make a big impact.

Rule 6:  remember EMDI as the four major things to do at a kickoff.  Educate / Motivate / Decorate / Inebriate.  For “decoration,” have an awards dinner where you recognize achievement across the organization.   On “inebriation,” remind employees to do so within bounds.  At almost every kickoff I’ve been too, there’s been at least one person who takes it far — my favorite story was a salesrep who urinated on a roulette table at a Vegas kickoff and who, subsequently barred from the casino, was unable to traverse it to gain access to the ballroom and fired for non-attendance at the general session.

Rule 7:  Have an open-mic executive Q&A.  These can be awkward and some CEOs hate doing them, but in a healthy organization you should be able to put the exec team in front of the company to answer questions.

Rule 8:  Invite analysts as speakers.  You get a double win when you do this — you get to hear what the analyze has to say and the analysts get to see all the many happy smiling faces in your company — and how much it has grown since the last time they were by.

Rule 9:  Have some silly time.  Do things to break down hierarchical barriers and make the CEO and execs more approachable.  Costumes, videos, et cetera can go a long way in this department.

Rule 10:  Make it better every year.  This is hard, but we did successfully both at MarkLogic and at Host Analytics.  Always add some new twist, some new event, some new thing, some increased production values, a better guest speaker, something every year.

Bonus Rule 11:  Work with a top-quality events person and a top quality production company to execute it.  This means zero time gets wasted on production-related problems and all your energy can be focused on your people and your content.