Category Archives: Venture Capital

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 Strategy Compiler: How To Avoid the “Great” Strategy You Couldn’t Execute

Few phrases bother me more than this one:

“I know it didn’t work, but it was a great strategy.  We just didn’t have the resources to execute it.”

Huh.  Wait minute.  If you didn’t have the resources to execute it, then it wasn’t a great strategy.  Maybe it was a great strategy for some other company that could have applied the appropriate resources.  But it wasn’t a great strategy for you.  Ergo, it wasn’t a great strategy.  QED.

I learned my favorite definition of strategy at a Stanford executive program I attended a few years back.  Per Professor Robert Burgelman, author of Strategy is Destiny, strategy is simply “the plan to win.”  Which begets an important conversation about the definition of winning.  In my experience, defining winning is more important than making the plan, because if everyone is focused on taking different hills, any resultant strategy will be a mishmash of plans to support different objectives.

But, regardless of your company’s definition of winning, I can say that any strategy you can’t execute definitionally won’t succeed and is ergo a bad strategy.

It sounds obvious, but nevertheless a lot of companies fall into this trap.  Why?

  • A lack of focus.
  • A failure to “compile” strategy before executing it.

Focus:  Think Small to Grow Big

Big companies that compete in lots of broad markets almost invariably didn’t start out that way.

BusinessObjects started out focused on the Oracle financials installed base.  Facebook started out on Harvard students, then Ivy league students.  Amazon, it’s almost hard to remember at this point, started out in books.  Salesforce started out in SMB salesforce automation.  ServiceNow on IT ticket management.  This list goes on and on.

Despite the evidence and despite the fame Geoffrey Moore earned with Crossing the Chasm, focus just doesn’t come naturally to people.  The “if I could get 1% share of a $10B market, I’d be a $100M company” thought pattern is just far too common. (And investors often accidentally reinforce this.)

The fact is you will be more dominant, harder to dislodge, and probably more profitable if, as a $100M company, you control 30% of a $300M target as opposed to 1% of a $10B target.

So the first reason startups make strategies they can’t execute is because they forget to focus.  They aim too broadly. They sign up for too much.  The forget that strategy should be sequence of actions over time.  Let’s start with Harvard. Then go Ivy League.  Then go Universities in general.  Then go everyone.

Former big company executives often compound the problem.  They’re not used to working with scarce resources and are more accustomed to making “laundry list” strategies that check all the boxes than making focused strategies that achieve victory step by step.

A Failure to Compile Strategy Before Execution

The second reason companies make strategies they can’t execute is that they forget a critical step in the planning process that I call the strategy compiler.  Here’s what I think a good strategic planning process looks like.

  • Strategy offsite. The executive team spends a week offsite focused on situation assessment and strategy.  The output of this meeting should be (1) a list of strategic goals for the company for the following year and (2) a high-level financial model that concretizes what the team is trying to accomplish over the next three years.  (With an eye, at a startup, towards cash.)

 

  • First round budgeting. Finance issues top-down financial targets.  Executives who own the various objectives make strategic plans for how to attain them.  The output of this phase is (1) first-draft consolidated financials, (2) a set of written strategies along with proposed organizational structures and budgets for attaining each of the company’s ten strategic objectives.

 

  • Strategy compilation, resources. The team meets for a day to review the consolidated plans and financials. Invariably there are too many objectives, too much operating expense, and too many new hires. The right answer here is to start cutting strategic goals.  The wrong answer is to keep the original set of goals and slash the budget 20% across the board.  It’s better to do 100% of 8 strategic initiatives than do 80% of 10.

 

  • Strategy compilation, skills. The more subtle assessment that must happen is a sanity check on skills and talent.  Do your organization have the competencies and do your people have the skills to execute the strategic plans?  If a new engineering project requires the skills of 5 founder-level, Stanford computer science PHDs who each would want 5% of a company, you are simply not going to be able to hire that kind of talent as regular employees. (This is one reason companies do “acquihires”).  The output of this phase is a presumably-reduced set of strategic goals.

 

  • Second round budgeting. Executives to build new or revised plans to support the now-reduced set of strategic goals.

 

  • Strategy compilation. You run the strategy compiler again on the revised plan — and iterate until the strategic goals match the resources and the skills of the proposed organization.

 

  • Board socialization. As you start converging via the strategy compiler you need to start working with the board to socialize and eventually sell the proposed operating plan.  (This process could easily be the subject of another post.)

 

If you view strategy as the plan to win, then successful strategies include only those strategies that your organization can realistically execute from both a resources and skills perspective.  Instead of doing a single-pass process that moves from strategic objectives to budgets, use an iterative approach with a strategy compiler to ensure your strategic code compiles before you try to execute it.

If you do this, you’ll increase your odds of success and decrease the odds ending up in the crowded section of the corporate graveyard where the epitaphs all read:

Here Lies a Company that Had a “Great” Strategy  It Had No Chance of Executing

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.”

Don’t Start a Customer Relationship with a Lie

As a manager, I like to make sure that every quarter that each of my direct reports has written, agreed-to goals.  I collect these goals in a Word document, but since that neither scales nor cascades well, I’ve recently been looking for a simple SaaS application to manage our quarterly Objectves and Key Results (OKRs).

What I’ve found, frankly, is a bit shocking.

Look, this is not the world’s most advanced technical problem.  I want to enter a goal (e.g., improve sales productivity) and associate 1-3 key results with that goal (e.g., improve ARR per salesrep from $X to $Y).  I have about 10 direct reports and want to assign 3-5 OKRs per quarter.  So we’re talking 30-50 objectives with maybe 60-100 associated key results for my little test.

I’d like some progress tracking, scoring at the end of the quarter, and some basic reporting.  (I don’t need thumbs-ups, comments, and social features.)  If the app works for the executive team, then I’ll probably scale it across the company, cascading the OKRs throughout the organization, tracking maybe 1,200 to 1,500 objectives per quarter in total.

This is not rocket science.

Importantly, I figure that if I want to roll this out across the entire team, the app better be simple enough for me to just try it without any training, presentations, demos, or salescalls. So I decide to go online and start a trial going with some SaaS OKR management providers.

Based on some web searches, PPC ads, and website visits, I decide to try with three vendors (BetterWorks, 15Five, and 7Geese).  While I’m not aiming to do a product or company comparison here, I had roughly the same experience across all three:

  • I could not start a free trial online
  • I was directed to an sales development rep (SDR) or account exec (AE) before getting a trial
  • That SDR or AE tried to insist on a phone call with me before giving me the trial
  • The trial itself was quite limited — e.g., 15 or 30 days.

At BetterWorks, after getting stuck with the SDR, I InMailed the CEO asking for an SDR-bypass and got one (thanks!) — but I found the application not intuitive and too hard to use.  At 7Geese, I got directed to an AE who mailed me a link to his calendar and wanted to me to setup a meeting.  After grumbling about expectations set by the website, he agreed to give me a trial.  At 15Five, I got an SDR who eventually yielded after I yelled at him to let me “follow my own buyer journey.”

But the other thing I noticed is that all three companies started our relationship with a lie of sorts.  What lie?  In all three cases they implied that I’d have easy access to a free trial.  Let’s see.

If you put a Free Trial button on your website, when I press it I expect to start an online process to get a free trial — not get a form that, once filled, replies that someone will be in touch.  That button should be called Contact Us, not Free Trial.

7Geese was arguably more misleading.  While the Get Started button down below might imply that you’re starting the process of getting access to a trial, the Get Started Now button on the top right says, well, NOW.

Worse yet, if you press the Get Started Now button on 7Geese, you get this screen next.

Tailored tour?  I pressed a button called Get Started Now.  I don’t want to setup a demo.  I want to get started using their supposedly “simple” OKR tracking app.

15Five was arguably the most misleading.

When you write “14 days free. No credit card needed.” I am definintely thinking that when I press Get Started that I’ll be signing up for a free 14-day trial on the next screen.  Instead I get this.

I didn’t ask to see if 15Five was right for my company.  I pressed a button that advertised a 14-day free trial with no credit card required.

Why, in all three cases, did these companies start our relationship by lying to me?  Probably, because in all three cases their testing determined that the button would be clicked more if it said Get Started or Frial Trial than if it said something more honest like Contact Us or  Request Free Trial.

They do get more clicks, I’m sure.  But those clicks start the relationship on a negative note by setting an expectation and immediately failing to meet it.

I get that Free Trials aren’t always the best way to market enterprise software.  I understand that the more complicated the application problem, the less a Free Trial is effective or even relevant.  That’s all fine.  If you haven’t built a viral product or work in a consumer-esque cateogry, that’s fine.  Just don’t promise a Free Trial on your website.

But when you’re in a category where the problem is pretty simple and you promise a Free Trial on your website, then I expect to get one.  Don’t start our relationship with a lie.  Even if your testing says you’ll get more clicks — because all you’ll be doing is telling more lies and starting more customer relationships on the wrong foot.

Quick Thoughts on Tagetik Acquistion by Wolters Kluwer

Earlier today, the tax and accounting division of Dutch publishing giant Wolters Kluwer announced the acquistion of Italian enterprise performance management (EPM) vendor Tagetik for 300M Euros, or about $318M.

Founded in 1986, Tagetik was a strong regional European player in on-premises EPM and about 2.5 years ago had raised $37M in capital in order to attack the USA market and accelerate their transition from on-premises to cloud computing.

The press release said Tagetik was valued at 300M Euros off 57M Euros in 2016 revenues, of which 35% are “recurring in nature.”  At a hybrid on-premises / SaaS software company you have two types of revenue that’s recurring in nature:  (1) SaaS subscription fees and (2) on-premises annual maintenance fees.  Doing some back of the envelope math (detailed below), you end with Tagetik breaking into a roughly $13M SaaS business and a $47M on-premises business.

If you buy that analysis, then we can do some valuation guestimation.

While we know the overall multiple of 5.3x revenues, we need to estimate separate multiples paid for the estimated $13M SaaS business vs. the estimated $47M on-premises business.  While there is an infinite number of ways to weight the two pieces compromising the total valuation, my best guess is that Wolters Kluwer paid 10x revenues for the SaaS business and 3.9x revenues for the on-premises business, generally in line with the notion that $1 of SaaS revenue is worth about $2.5 to $3.0 of on-premises.

White Bridge, who led the investment in 2014, got about a 3x return on investment by my math (with one assumption) over about a 3 year period, for an IRR of around 45%.

Market-wise, this is not the first EPM vendor to acquired by an off-axis competitor.  Axiom was acquired by vertically oriented management consultancy Kaufman Hall in 2014 (and has since generally disappeared from the regular EPM market).  My belief is that Tagetik awaits a similar fate.

“The acquisition of Tagetik tightly aligns with our vision to expand our position in the faster growing areas of the corporate tax and accounting market,” said Tax & Accounting Division CEO Karen Abramson.

While Wolters Kluwer has a strong tax and accounting division, only one piece of EPM (consolidation) is generally sold to accounting.  Planning, in all its forms, represents about 65% of the EPM market and that is sold to FP&A, not tax and accounting.  Bridging that gap, both in terms of buyer and mentality, should not be easy for Wolters Kluwer.  I suspect this means Tagetik will play a dimishing role in the mainstream EPM market going forward.

But either way, congratulations to co-CEOs Marco Pierallini and Manuel Vellutini on a successful sale of their company.  Felicitazioni!

The Evolution of Marketing Thanks to SaaS

I was talking with my friend Tracy Eiler, author of Aligned to Achieve, the other day and she showed me a chart that they were using at InsideView to segment customers.  The chart was a quadrant that mapped customers on two dimensions:  renewal rate and retention rate.  The idea was to use the chart to plot customers and then identify patterns (e.g., industries) so marketing could identify the best overall customers in terms of lifetime value as the mechanism for deciding marketing segmentation and targeting.

Here’s what it looked like:

saas-strategic-value

While I think it’s a great chart, what really struck me was the thinking behind it and how that thinking reflects a dramatic evolution in the role of marketing across my career.

  • Back two decades ago when marketing was measured by leads, they focused on how to cost-effectively generate leads, looking at response rates for various campaigns.
  • Back a decade ago when marketing was measured by opportunities (or pipeline), they focused on how to cost-effectively generate opportunities, looking at response and opportunity conversion rates.
  • Today, as more and more marketers are measured by marketing-sourced New ARR, they are focused on cost-effectively generating not just opportunities, but opportunities-that-close, looking all the way through the funnel to close rates.
  • Tomorrow, as more marketers will be measured on the health of the overall ARR pool, they will be focused on cost-effectively generating not just opportunities-that-close but opportunities that turn into the best long-term customers. (This quadrant helps you do just that.)

As a company makes this progression, marketing becomes increasingly strategic, evolving in mentality with each step.

  • Starting with, “what sign will attract the most people?” (Including “Free Beer Here” which has been used at more than one conference.)
  • To “what messages aimed at which targets will attract the kind of people who end up evaluating?”
  • To “who are we really looking to sell to — which people end up buying the most and the most easily – and what messages aimed at which targets will attract them?”
  • To “what are the characteristics of our most successful customers and how can we find more people like them?”

The whole pattern reminds me of the famous Hubspot story where the marketing team was a key part forcing the company to focus on either “Owner Ollie” (the owner of a <10 person business) or “Manager Mary” (a marketer at a 10 to 1000 person business).  For years they had been serving both masters poorly and by focusing on Manager Mary they were able to drive a huge increase in their numbers that enabled cost-effectively scaling the business and propelling them onto a successful IPO.

hubspot

What kind of CMO does any CEO want on their team?  That kind.  The kind worried about the whole business and looking at it holistically and analytically.

In-Memory Analytics: The Other Kind – A Key Success Factor for Your Career

I’m not going to talk about columnar databases, compression, horizontal partitioning, SAP Hana, or real-time vs. pre-aggregated summarization in this post on in-memory analytics.  I’m going to talk about the other kind of in-memory analytics.  The kind that can make or break your career.

What do you mean, the other kind of in-memory analytics?  Quite simply, the kind you keep in your head (i.e., in human memory).  Or, better put, the kind you should be expected to keep in your head and be able to recite on demand in any business meeting.

I remember when I worked at Salesforce, I covered for my boss a few times at the executive staff meeting when he was traveling or such.  He told me:  “Marc expects everyone to know the numbers, so before you go in there, make sure you know them.”  And I did.  On the few times I attended in his place, I made a cheat sheet and studied it for an hour to ensure that I knew every possible number that could reasonably be asked.  I’d sit in the meeting, saying little, and listening to discussion not directly related to our area.  Then, boom, out of left field, Marc asked:  “what is the Service Cloud pipeline coverage ratio for this quarter in Europe?”

“3.4,” I replied succinctly.  If I hadn’t have known the number I’m sure it would been an exercise in plucking the wings off a butterfly.  But I did, so the conversation quickly shifted to another topic, and I lived to fight another day.

Frankly, I was happy to work in an organization where executives were expected to know — in their heads, in an instant — the values of the key metrics that drive their business.  I weak organizations you constantly hear “can I get back to you on that” or “I’m going to need to look that one up.”

If you want to run a business, or a piece of one,  and you want to be a credible leader — especially in a metrics-driven organization — you need to have “in-memory” the key metrics that your higher-ups and peers would expect you to know.

This is as true of CEO pitching a venture capitalist and being asked about CAC ratios and churn rates as it is of a marketing VP being asked about keywords, costs, and conversions in an online advertising program.  Or a sales manager being asked about their forecast.

In fact, as I’ve told my sales directors a time or two:  “I should be able to wake you up at 3:00 AM and ask your forecast, upside, and pipeline and you should be able to answer, right then, instantly.”

That’s an in-memory metric.  No “let me check on that.”  No “I’ll get back to you.”  No “I don’t know, let me ask my ops guy,” which always makes me think: who runs the department, you or the ops guy — and if you need to ask the ops guy all the numbers maybe he/she should be running the department and not you?

I have bolded the word “expect” four times above because this issue is indeed about expectations and expectations are not a precise science.  So, how can you figure out the expectations for which analytics you should hold in-memory?

  • Look at your department’s strategic goals and determine which metrics best measure progress on them.
  • Ask peers inside the company what key metrics they keep in-memory and design your set by analogy.
  • Ask peers who perform the same job at different companies what key metrics they track.
  • When in doubt, ask the boss or the higher-ups what metrics they expect you to know.

Finally, I should note that I’m not a big believer in the whole “cheat sheet” approach I described above.  Because that was a special situation (covering for the boss), I think the cheat sheet was smart, but the real way to burn these metrics into your memory is to track them every week at your staff meeting, watching how they change week by week and constantly comparing them to prior periods and to a plan/model if you have one.

The point here is not “fake it until you make it” by running your business in a non-metrics-focused way and memorizing figures before a big meeting, but instead to burn the metrics review into your own weekly team meeting and then, naturally, over time you will know these metrics so instinctively that someone can wake you up at 3:00 AM and you can recite them.

That’s the other kind of in-memory analytics.  And, much as I love technology, the more important kind for your career.