Category Archives: Venture Capital

Kellblog's 10 Predictions for 2020

As I’ve been doing every year since 2014, I thought I’d take some time to write some predictions for 2020, but not without first doing a review of my predictions for 2019.  Lest you take any of these too seriously, I suggest you look at my batting average and disclaimers.

Kellblog 2019 Predictions Review

1.  Fred Wilson is right, Trump will not be president at the end of 2019.  PARTIAL.  He did get impeached after all, but that’s a long way from removed or resigned. 

2.  The Democratic Party will continue to bungle the playing of its relatively simple hand.  HIT.  This is obviously subjective and while I think they got some things right (e.g., delaying impeachment), they got others quite wrong (e.g., Mueller Report messaging), and continue to play more left than center which I believe is a mistake.

3.  2019 will be a rough year for the financial markets.  MISS.  The Dow was up 22% and the NASDAQ was up 35%.  Financially, maybe the only thing that didn’t work in 2019 were over-hyped IPOs.  Note to self:  avoid quantitative predictions if you don’t want to risk ending up very wrong.  I am a big believer in regression to the mean, but nailing timing is the critical (and virtually impossible) part.  Nevertheless, I do use tables like these to try and eyeball situations where it seems a correction is needed.  Take your own crack at it.

4.  VC tightens.  MISS.  Instead of tightening, VC financing hit a new record.  The interesting question here is whether mean reversion is relevant.  I’d argue it’s not – the markets have changed structurally such that companies are staying private far longer and thus living off venture capital (and/or growth-stage private equity) in ways not previously seen.  Mark Suster did a great presentation on this, Is VC Still a Thing, where he explains these and other changes in VC.  A must read.

5. Social media companies get regulated.  PARTIAL.  While “history may tell us the social media regulation is inevitable,” it didn’t happen in 2019.  However, the movement continued to gather steam with many Democratic presidential candidates calling for reform and, more notably, none other than Facebook investor Roger McNamee launching his attack on social media via his book Zucked: Waking Up To The Facebook Catastrophe.  As McNamee says, “it’s an issue of ‘right vs. wrong,’ not ‘right vs. left.’”

 

6. Ethics make a comeback.  HIT.  Ethics have certainly been more discussed than ever and related to the two reasons I cited:  the current administration and artificial intelligence.  The former forces ethics into the spotlight on a daily basis; the later provokes a slew of interesting questions, from questions of accidental bias to the trolley car problem.  Business schools continue to increase emphasis on ethics.  Mark Benioff has led a personal crusade calling for what he calls a new capitalism.

7.  Blockchain, as an enterprise technology, fades away.  HIT.  While I hate to my find myself on the other side of Ray Wang, I’m personally not seeing much traction for blockchain in the enterprise.  Maybe I’m running with the wrong crowd.  I have always felt that blockchain was designed for one purpose (to support cybercurrency), hijacked to another, and ergo became a vendor-led technology in search of a business problem.  McKinsey has a written a sort of pre-obituary, Blockchain’s Occam Problem, which was McKinsey Quarterly’s second most-read article of the year.  The 2019 Blockchain Opportunity Summit’s theme was Is Blockchain Dead?  No. Industry Experts Join Together to Share How We Might Not be Using it Right which also seems to support my argument. 

8.  Oracle enters decline phase and is increasingly seen as a legacy vendor.  HIT.  Again, this is highly subjective and some people probably concluded it years ago.  My favorite support point comes from a recent financial analyst note:  “we believe Oracle can sustain ~2% constant currency revenue growth, but we are dubious that Oracle can improve revenue growth rates.”  That pretty much says it all.

9.  ServiceNow and/or Splunk get acquired.  MISS.  While they’re both great businesses and attractive targets, they are both so expensive only a few could make the move – and no one did.  Today, Splunk is worth $24B and ServiceNow a whopping $55B.

10.  Workday succeeds with its Adaptive Insights agenda.  HIT.  Changing general ledgers is a heart transplant while changing planning systems is a knee replacement.  By acquiring Adaptive, Workday gave itself another option – and a far easier entry point – to get into corporate finance departments.  While most everyone I knew scratched their head at the enterprise-focused Workday acquiring a more SMB-focused Adaptive, Workday has done a good job simultaneously leaving Adaptive alone-enough to not disturb its core business while working to get the technology more enterprise-ready for its customers.  Whether that continues I don’t know, but for the first 18 months at least, they haven’t blown it.  This remains high visibility to Workday as evidenced by the Adaptive former CEO (and now Workday EVP of Planning) Tom Bogan’s continued attendance on Workday’s quarterly earnings calls.

With the dubious distinction of having charitably self-scored a 6.0 on my 2019 predictions, let’s fearlessly roll out some new predictions for 2020.

Kellblog 2020 Predictions

1.  Ongoing social unrest. The increasingly likely trial in the Senate will be highly contentious, only to be followed by an election that will be highly contentious as well.  Beyond that, one can’t help but wonder if a defeated Trump would even concede, which could lead to a Constitutional Crisis of the next level. Add to all that the possibility of a war with Iran.  Frankly, I am amazed that the Washington, DC continuous distraction machine hasn’t yet materially damaged the economy.  Like many in Silicon Valley, I’d like Washington to quietly go do its job and let the rest of us get back to doing ours.  The reality TV show in Washington is getting old and, happily, I think many folks are starting to lose interest and want to change the channel.

2.  A desire for re-unification.  I remain fundamentally optimistic that your average American – Republican, Democrat, or the completely under-discussed 38% who are Independents — wants to feel part of a unified, not a divided, America.  While politicians often try to leverage the most divisive issues to turn people into single-issue voters, the reality is that far more things unite us as Americans than divide us.  Per this recent Economist/YouGov wide-ranging poll, your average American looks a lot more balanced and reasonable than our political party leaders.  I believe the country is tired of division, wants unification, and will therefore elect someone who will be seen as able to bring people together.  We are stronger together.

3.  Climate change becomes the new moonshot.  NASA’s space missions didn’t just get us to the moon; they produced over 2,000 spin-off technologies that improve our lives every day – from emergency “space” blankets to scratch-resistant lenses to Teflon-coated fabrics.  Instead of seeing climate change as a hopeless threat, I believe in 2020 we will start to reframe it as the great opportunity it presents.  When we mobilize our best and brightest against a problem, we will not only solve it, but we will create scores to hundreds of spin-off technologies that will benefit our everyday lives in the process.  See this article for information on 10 startups fighting climate change, this infographic for an overview of the kinds of technologies that could alleviate it, or this article for a less sanguine view on the commitment required and extent to which we actually can de-carbonize the air. Or check out this startup which makes “trees” that consume the pollution of 275 regular trees.

4.  The strategic chief data officer (CDO).  I’m not a huge believer in throwing an “O” at every problem that comes along, but the CDO role is steadily becoming mainstream – in 2012 just 12% of F1000 companies reported having a CDO; in 2018 that’s up to 68%.  While some of that growth was driven by defensive motivations (e.g., compliance), increasingly I believe that organizations will define the CDO more strategically, more broadly, and holistically as someone who focuses on data, its cleanliness, where to find it, where it came from, its compliance with regulations as to its usage, its value, and how to leverage it for operational and strategic advantage.   These issues are thorny, technical, and often detail-oriented and the CIO is simply too busy with broader concerns (e.g., digital transformation, security, disruption).  Ergo, we need a new generation of chief data officers who want to play both offense and defense, focused not just tactically on compliance and documentation, but strategically on analytics and the creation of business value for the enterprise. This is not a role for the meek; only half of CDOs succeed and their average tenure is 2.4 years.  A recent Gartner CDO study suggests that those who are successful take a more strategic orientation, invest in a more hands-on model of supporting data and analytics, and measure the business value of their work.

5.  The ongoing rise of DevOps.   Just as agile broke down barriers between product management and development so has DevOps broken down walls between development and operations.  The cloud has driven DevOps to become one of the hottest areas of software in recent years with big public company successes (e.g., Atlassian, Splunk), major M&A (e.g., Microsoft acquiring GitHub), and private high-flyers (e.g., HashiCorp, Puppet, CloudBees).  A plethora of tools, from configuration management to testing to automation to integration to deployment to multi-cloud to performance monitoring are required to do DevOps well.  All this should make for a $24B DevOps TAM by 2023 per a recent Cowen & Company report.  Ironically though, each step forward in deployment is often a step backward in developer experience, why is one reason why I decided to work with Kelda in 2019.

6. Database proliferation slows.  While 2014 Turning Award winner Mike Stonebraker was right over a decade ago when he argued in favor of database specialization (One Size Fits All:  An Idea Whose Time Has Come and Gone), I think we may now too much of a good thing.   DB Engines now lists 350 different database systems of 14 different types (e.g., relational, graph, time series, key-value). Crunchbase lists 274 database (and database-related) startups.  I believe the database market is headed for consolidation.  One of the first big indicators of a resurgence in database sanity was the failure of the (Hadoop-based) data lake, which happened in 2018-2019 and was the closest thing I’ve seen to déjà vu in my professional career – it was as if we learned nothing from the Field of Dreams enterprise data warehouse of the 1990s (“build it and they will come”).  Moreover, after a decade of developer-led database selection, developers and now re-realizing what database people knew along – that a lot of the early NoSQL movement was akin to throwing out the ACID transaction baby with the tabular schema bathwater.

7.  A new, data-layer approach to data loss prevention (DLP).  I always thought DLP was a great idea, especially the P for prevention.  After all, who wants tools that can help with forensics after a breach if you could prevent one from happening at all — or at least limit one in progress?  But DLP doesn’t seem to work:  why is it that data breaches always seem to be measured not in rows, but in millions of rows?  For example, Equifax was 143M and Marriott was 500M.  DLP has many known limitations.  It’s perimeter-oriented in a hybrid cloud world of dissolving perimeters and it’s generally offline, scanning file systems and database logs to find “misplaced data.”  Wouldn’t a better approach be to have real-time security monitored and enforced at the data layer, just the same way as it works at the network and application layer?  Then you could use machine learning to understand normal behavior, detect anomalous behavior, and either report it — or stop it — in real time.  I think we’ll see such approaches come to market in 2020, especially as cloud services like Snowflake, RDS, and BigQuery become increasingly critical components of the data layer.

8. AI/ML continue to see success in highly focused applications.  I remain skeptical of vendors with broad claims around “enterprise AI” and remain highly supportive of vendors applying AI/ML to specific problems (e.g., Moveworks and Astound who both provide AI/ML-based trouble-ticket resolution).  In the end, AI and ML are features, not apps, and while both technologies can be used to build smart applications, they are not applications unto themselves.  In terms of specificity, the No Free Lunch Theorem reminds us that any two optimization techniques perform equivalently when averaged across all possible problems – meaning that no one modeling technique can solve everything and thus that AI/ML is going to be about lots of companies applying different techniques to different problems.   Think of AI/ML more as a toolbox than a platform.  There will not be one big winner in enterprise AI as there was in enterprise applications or databases.  Instead, there will be lots of winners each tackling specific problems.  The more interesting battles will those between systems of intelligence (e.g., Moveworks) and systems of record (e.g., ServiceNow) with the systems-of-intelligence vendors running Trojan Horse strategies against systems-of-record vendors (first complementing but eventually replacing them) while the system-of-record vendors try to either build or acquire systems of intelligence alongside their current offerings. 

9.  Series A rounds remain hard.  I think many founders are surprised by the difficulty of raising A rounds these days.  Here’s the problem in a nutshell:

  • Seed capital is readily available via pre-seed and seed-stage investments from angel investors, traditional early-stage VCs, and increasingly, seed funds.  Simply put, it’s not that hard to raise seed money.
  • Companies are staying in the seed stage longer (a median of 1.6 years), increasingly extending seed rounds, and ergo raising more money during seed stage (e.g., $2M to $4M).
  • Such that, companies are now expected to really have achieved something in order to raise a Series A.  After all, if you have been working for 2 years and spent $3M you better have an MVP product, a handful of early customers, and some ARR to show for it – not just a slide deck talking about a great opportunity.

Moreover, you should be making progress roughly in line with what you said at the outset and, if you took seed capital from a traditional VC, then they better be prepared to lead your round otherwise you will face signaling risk that could imperil your Series A.

Simply put, Series A is the new chokepoint.  Or, as Suster likes to say, the Series A and B funnel hasn’t really changed – we’ve just inserted a new seed funnel atop it that is 3 times larger than it used to be.

10.  Autonomy’s former CEO gets extradited.  Silicon Valley is generally not a place of long memories, but I saw the unusual news last month that the US government is trying to extradite Autonomy founder and former CEO Mike Lynch from the UK to face charges.  You might recall that HP, in the brief era under Leo Apotheker, acquired enterprise search vendor Autonomy in August, 2011 for a whopping $11B only to write off about $8.8B under subsequent CEO Meg Whitman a little more than a year later in November, 2012.  Computerworld provides a timeline of the saga here, including a subsequent PR war, US Department of Justice probe, UK Serious Fraud Office investigation (later dropped), shareholder lawsuits, proposed settlements, more lawsuits including Lynch’s suing HP for $150M for reputation damages, and HP’s spinning-off the Autonomy assets.  Subsequent to Computerworld’s timeline, this past May Autonomy’s former CFO was sentenced to five years in prison.  This past March, the US added criminal charges of securities fraud, wire fraud, and conspiracy against Lynch.  Lynch continues to deny all wrongdoing, blames the failed acquisition on HP, and even maintains a website to present his point of view on the issues.  I don’t have any special legal knowledge or specific knowledge of this case, but I do believe that if the US government is still fighting this case, still adding charges, and now seeking extradition, that they aren’t going to give up lightly, so my hunch is that Lynch does come to the US and face these charges. 

More broadly, regardless of how this particular case works out, in a place so prone to excess, where so much money can be made so quickly, frauds will periodically happen and it’s probably the most under-reported class of story in Silicon Valley.  Even this potentially huge headline case – the proposed extradition of a British billionaire tech mogul —  never seems to make page one news.  Hey, let’s talk about something positive like Loft’s $175M Series C instead.

To finish this up, I’ll add a bonus prediction:  Dave doesn’t get a traditional job in 2020.  While I continue to look at VC-backed startup and/or PE-backed CEO opportunities, I am quite enjoying my work doing a mix of boards, advisory relationships, and consulting gigs.  While I remain interested in looking at great CEO opportunities, I am also interested in adding a few more boards to my roster, working on stimulating consulting projects, and a few more advisory relationships as well.

I wish everyone a happy, healthy, and above-plan 2020.

Why I'm Advising Kelda

A few months ago I signed up to be an advisor to Kelda, and I thought I’d do a quick post to talk about the company and why I decided to sign up.

What is Kelda?

Kelda provides developer sandboxes in a customer’s cloud within their Kubernetes cluster. Why does this matter?

  • The world is moving to cloud computing at a rapid place.
  • Cloud computing is moving away from virtual machines as the unit of abstraction and towards containers, microservices, and serverless architectures.
  • The exact technologies that make microservices powerful in production environments have made the development experience worse.

In short, nobody was thinking much about developers when they started migrating to these new architectures.

Think for a minute about being a developer building a microservices-based application. Then think about testing it. Your code has dependencies on scores or hundreds of microservices which in turn have dependencies on other microservices. Any or all of these microservices are themselves changing over time. How you are you supposed to find a stable test-bed on which to test your code?

Unlike production environments, run by DevOps teams with a sophisticated CI/CD platform, development environments are often primitive by comparison. Tools for collecting dependencies are not robust. Developers often have to test on their own laptops, running all the required microservices locally, which elongates test cycles because of slow performance. Moreover, debugging is potentially complicated by non-deterministic interactions among microservices.

Kelda solves all that by effectively spinning up a private, stable, server-based Kubernetes cluster where developers can test their code. If that sounds pretty practical, well it is. If that sounds pedestrian, remember that one of VMware’s top early use-case was … stable test environments for QA teams across different version of operating systems, middleware, and databases. Pragmatic solutions often generalize way beyond their initial landing point.

For more technical information on Kelda, here’s a link where you can download their white paper. And here’s an excerpt that sums things up quite nicely:

Why Did I Sign Up to Advise Kelda?

There are always many reasons behind such a decision, so in no particular order:

  • The awesome founder, Ethan Jackson, who put his Berkeley computer science PhD on the back burner in order create the company. I like that this isn’t his first corporate rodeo (he worked at Nicira –> VMware) for 5 years. I also like the burn-the-ships level of commitment.
  • The practical logic behind the product idea. Remember the famous William Gibson quote: “the future is already here — it’s just not very evenly distributed.” When you’re working at the cutting edge, the next step looks kind of obvious. So while this looks very high-tech to me, it looks pretty obvious to Ethan and, in my humble opinion, a lot of people have been very successful doing the next pretty-obvious thing (e.g., from PeopleSoft building apps atop Oracle to NetSuite taking financials to the cloud to Palo Alto Networks doing application-based firewalls).
  • The trends driving the company. Kelda is dead center of the movement to containers and microservices-based architectures in the cloud. The technology elite can use all these technologies today. Kelda makes them more accessible to the typical corporate development shop.

The Red Badge of Courage: Helping Overachievers to Manage and Process Failure

When I lived in France for five years I was often asked to compare it to Silicon Valley in an attempt to explain why — in the land of Descartes, Fourier, and Laplace, in a country where the nation’s top university (École Polytechnique) is a military engineering school that wraps together MIT and West Point, in a place that naturally reveres engineers and scientists, why was there not a stronger tech startup ecosystem?

My decade-plus-old answer is here: Is Silicon Valley Reproducible? [1]

My answer to the question was “no” and the very first reason I listed was “cultural attitudes towards failure.” In France (at least at that time) failure was a death sentence. In Silicon Valley, I wrote, failure was a red badge of courage, a medal of valor on one’s resume for service in the startup wars, and a reference to the eponymous classic written by Stephen Crane.

In this post, I want to explore two different aspects of the red badge of courage. First, from a career development perspective, how one should manage the presence of such badges on your resume. And second, from an emotional perspective, how thinking of startup failure as a red badge of courage can help startup founders and employers process what was happened.

Managing Failure: Avoiding Too Many Consecutive Red Badges

In Silicon Valley you’ll often hear adages like “failure is a better teacher than success,” but don’t be too quick to believe everything you hear. While failure is certainly not a scarlet letter in Silicon Valley, companies nevertheless hire for a track record of success. In the scores of C-level position specifications that I’ve read and collected over the years, I cannot recall a single one that ever listed any sort of failure as required experience.

We talk as if we love all-weather sailors, but when it comes to actually hiring people — which often requires building consensus around one candidate in a pool [2] — we seem to prefer the fair-weather ones. Back in the day, we’d all love a candidate who went from Stanford to Oracle to Siebel to Salesforce [3].

But, switching metaphors, I sometimes think Silicon Valley is like a diving competition that forgot the degree of difficulty rating. Hand a CEO $100M, 70% growth company — and the right to burn $10M to $15M per quarter — and it will likely go public in a few years, scoring the company a perfect 10 — for executing a swan dive, degree of difficulty 1.2.

Now, as an investor, I’ll put money into such swan dives whenever I can. But, as an operator, remember that the charmed life of riding in (or even driving) such a bus doesn’t necessarily prepare you for the shocks of the regular world.

Consider ServiceMax who, roughly speaking, was left at the altar by Salesforce with a product built on the Salesforce platform and business plan most thought predicated on an acquisition by Salesforce. That team survived that devastating shock and later sold the company for $900M. That’s a reverse 4½ somersault in pike position, degree of difficulty 4.8. Those folks are my heroes.

So, in my estimation, if Silicon Valley believes that failure is a better teacher than success, I’d say that it wants you to have been educated long ago — and certainly not in your most recent job. That means we need to look at startup failure as a branding issue and the simple rule is don’t get too many red badges in a row on your LinkedIn or CV.

Using Grateful Dead concert notation, if your CV looks like Berkeley –> Salesforce –> failure –> Looker, then you’re fine. You’ve got one red badge of courage that you can successful argue was a character-building experience. However, if it looks like Berkeley –> Salesforce –> failure –> failure –> failure, then you’ve got a major positioning problem. You’ve accidentally re-positioned yourself from being the “Berkeley, Salesforce” person to the “failed startup person.” [4]

How many consecutive red badges is too many? I’d say three for sure, maybe even two. A lot of it depends on timing [5].

Practically, it means that after one failed startup, you should reduce your risk tolerance by upping the quality bar on your next gig. After two failed startups, you should probably go cleanse and re-brand yourself via duty at a large successful vendor. After a year or two, you’ll be re-positioned as a Brand-X person and in a much better position to again take some career risk in the startup world [6].

Processing Failure: Internalizing the Red Badge Metaphor

This second part of this post deals with the emotional side of startup failure, which I’m going to define quite broadly as materially failing to obtain your goals in creating or working at a startup. Failure can range from laying off the entire staff and selling the furniture to getting an exit that doesn’t clear the preference stack [7] to simply getting a highly disappointing result after putting 10 years into building your company [8]. Failure, like success, takes many forms.

But failures also have several common elements:

  • Shock and disappointment. Despite knowing that 90% of startups fail, people are invariably shocked when it happens to them. Remember, startup founders and employees are often overachievers who’ve never experienced a material setback before [9].
  • Anger and conflict. In failed startups there are often core conflicts about which products to build, markets to target, when to take financing, and whether to accept buy-out offers.
  • Economic loss. Sometimes personal savings are lost along with the seed and early-round investors’ money. With companies that fail-slow (as opposed to failing-fast), opportunity cost becomes a significant woe [10].

For the people involved in one — particular the founders and C-level executives — a failed startup feels Janis Joplin singing:

Come on. Come on. Come on. Come on. And take it! Take another little piece of my heart now, baby! Oh, oh, break it! Break another little bit of my heart now Darling yeah, yeah, yeah, yeah.

I was reminded of this the other day when I had a coffee with a founder who, after more than four years, had just laid of his entire team and sold the furniture the week before.

During the meeting I realized that there are three things people fresh from failed startups should focus on when pursuing their next opportunity:

  • You need to convince yourself that it was positive learning experience that earned you a red badge of courage. If you don’t believe it, no one else will — and that’s going to make pursuing a new opportunity more difficult. People will try to figure out if you’re “broken” from the experience. Convincing them you’re not broken starts out with convincing you. (Don’t be, by the way. Startups are hard. Cut yourself some slack.)

  • You need to suppress your natural desire to tell the story. I’m sure it’s a great story, full of drama and conflict, but does telling it help you one iota in pursuing a new opportunity? No. After leaving MarkLogic — which was a strong operational success but without an investor exit — I was so bad at this that one time a VC stopped me during a CEO interview and said, “wow, this is an amazing story, let me get two of my partners to hear it and can you start over?” While I’m sure they enjoyed the colorful tale, I can assure you that the process didn’t result in a dynamite CEO offer. Tell your story this way: “I [founded | worked at] a startup for [X] years and [shut it | sold it] when [thing happened] and we realized it wasn’t going to work. It was a great experience and I learned a lot.” And then you move on. The longer you talk about it, the worse it’s going to go.

  • You need to convince prospective employers that, despite the experience, you can still fit in a round hole. If you were VP of product management (PM) before starting your company, was a founder/CEO for two years, and are now pursuing a VP of PM role, the company is going to wonder about two things: (1) as per the above, are you broken as a result of the experience and (2) can you successfully go back into a VP of PM role. You’ll need to convince them that PM has always been your passion, that you can easily go back and do it again, and in fact, that you’re quite looking forward to it. Only once that’s been accomplished, you can try to convince them that you can do PM even better than before as a result of the experience. While your natural tendency will probably be to make this argument, remember that it is wholly irrelevant if the company doesn’t believe you can return to the role. So make sure you’ve won the first argument before even entertaining the second.

# # #

Notes

[1] A lot has presumably changed since then and while I sit on the board of a French startup (Nuxeo), I no longer feel qualified, nor is the purpose of this essay, to explore the state of tech entrepreneurship in France.

[2] And ergo presumably reduces risk-taking in the process.

[3] And not without good reason. They’ve probably learned a lot of best practices, a lot about scaling, and have built out a strong network of talented coworkers.

[4] Think of how people at a prospective employer might describe you in discussing the candidates. (“Did you prefer the Stanford/Tableau woman; the CMU/Salesforce man; or the poor dude who did all those failed startups?”)

[5] Ten years of impressive growth at Salesforce followed by two one-year failures looks quite different than three years at Salesforce followed by two three-year failures. One common question about failures is: why did you stay so long?

[6] And see higher quality opportunities as a result.

[7] Meaning investors get back all or part of what they are entitled to, but there is nothing leftover for founders and employees.

[8] And, by extrapolation, expected that they never world.

[9] For example, selling the company for $30M, and getting a small payout via an executive staff carve-out.

[10] Think: “with my PhD in AI/ML, I could have worked at Facebook for $1M per year for the past six years, so in addition to the money I’ve lost this thing has cost me $6M in foregone opportunity.”

Whose Company Is It Anyway? Differences between Founders and Hired CEOs.

Over the years I’ve noticed how different CEOs take different degrees of ownership and accountability when it comes to the board of directors.  For example, once, after a long debate where the board unanimously approved a budget contingent on reducing proposed R&D spending from $12M to $10M, I overhead the founder/CEO telling the head of R&D to “spend $12M anyway” literally as we walked out of the meeting [1].  That would be one extreme.

On the other, I’ve seen too-many CEOs treat the board as their boss, seemingly unwilling to truly lead the company, or perhaps hoping to earn a get out of jail free card if good execution of a chosen plan nevertheless fails.

This all relates to a core Kellblog theme of ownership — who owns what — that I’ve explored in some of my most popular posts:

Let’s now apply the same kind of thinking to the job of the CEO.  Startup CEOs generally fall into one of two categories and the category is likely to predict how they will approach the ownership issue.

Founder CEOs:  It’s My Company

Founders think it’s their company, well, because it is.  Whether they currently own more than 80% or less than 5% of the stock, whether they currently even work there anymore or not, it’s their company and always will be.  CEOs will come and go along a startup’s journey, but there is only one founder [2].  The founder started the company and made a big cultural imprint on it.  Nothing can take that away.

However, as soon as a founder/CEO raises venture capital (VC) they have decided to take investing partners along on the journey.  The best VC investors view their relationship with the founder as a partnership:  it’s the founder’s company, we are investing to partner with the founder, and our primary job is to advise and support the founder so as to help maximize the outcome.

However, VC investors are material shareholders, typically negotiate the contractual right to sit on the board of directors, and have certain governance and fiduciary duties as a part of sitting on the board.  (Those fiduciary duties, by the way, get complicated fast as VC board members also have fiduciary duties to their funds as well [3].)

Most of the time, in my experience, VCs run in advice/support mode, but if a company starts to have continual performance problems, is considering a new financing, or evaluating potential exit opportunities (e.g., M&A), founders can get a quick (and sometimes stark) reminder of the “second hat” that their VCs wear.

While it’s always spiritually the founder’s company, it’s only really and totally the founder’s company if they’ve never raised money [4].  Thankfully, most founder/CEOs don’t need to be reminded of that.  However, some do [5].

Hired CEOs:  It’s the Board’s Company vs. It’s My Company to Run

You become a hired CEO primarily through one path — climbing the corporate ladder at a large tech company [5a], reaching the GM or CXO level, and then deciding to branch out.  While virtually all hired CEOs have been large-tech CXOs or GMs, not all large-tech CXOs or GMs are wired to be successful as CEOs in the more frenetic world of startups.

Regardless of whether they should take the plunge, the problem that CEOs sometimes face is fighting against decades of training in climbing the corporate ladder.  Ladder-climbing wires you with three key priorities [6]:

  • Always make the boss look good
  • Never surprise the boss
  • Build strong relationships with influential peers

The problem?  When you’re CEO of a startup there is no boss and there are no peers.  Yes, there is a board of directors but the board/CEO relationship is not the same as the manager/employee relationship with which corporate execs are so familiar.

Yes, boards provide strategic and financial input, support, guidance, help with recruiting, and occasionally help with sales, but boards don’t run companies.  CEOs do.  And to repeat one of my favorite CEO quotes from Sequoia founder Don Valentine:  “I am 100% behind my CEOs up until the day I fire them” [7].

The challenge for hired CEOs is for them to understand:  it’s not my company in the sense that I founded it, but it is my company to run.  It’s not the board’s company to run and the board is not my manager.  The board is my board, and it’s not at all the same relationship as manager/employee.
Because this is somewhat conceptual, let’s provide an example to make this concrete.

“It’s My Company” Thinking “It’s the Board’s Company” Thinking
Based on what is happening in the market and our models we think it’s best to shoot for growth of X% and EBITDA margin of Y% How much do you want us to grow next year and at what EBITDA margin?
We believe we need to focus on a vertical and we think Pharma is the best choice. We were thinking that maybe we could focus more on a vertical, what do you folks think?
We think we should hold off doing channels until we’ve debugged the sales model. You told us to do channels so we signed up 17 partners but no one is actually selling anything.  Maybe it wasn’t a great idea.
Pattern:  we think we should do X and here’s why.  Please challenge it. Pattern:  we are here to do what you want, so what do you want us to do?  

CEOs need to remember that:

  • The management team spends 50-60 hours/week working at the company.  The board might spend that same amount of time in a year [8].  The team is much, much closer to the business and in the best position to evaluate options.
  • Even if they don’t always sound that way, the board wants the CEO to lead.  The scariest thing a new CEO can say is “it looks like you guys had a bad quarter” [9]. The second scariest thing is “looks like we had a bad quarter, what do you want us to do about it?”  Instead, they want to hear, “we had a bad quarter and here’s our plan to get things back on track.  Please give us frank feedback on that plan because we want the best plan possible and we want it to work [10].”
  • The CEO’s job is not to execute the board’s plan.  The CEO’s job is to work with the team to create the plan, get board approval of it, and then execute.  If the plan doesn’t work, the CEO doesn’t get to say “but you approved it, so you can’t fire me.” The job was to both make and execute the plan.

Finally, there are certain risk factors that can increase the chance a hired CEO will adopt the wrong type of thinking:

  • PE-backed firms.  In most venture-backed firms, a hired CEO will find a board consisting of several different venture capital partners, each with their own opinion.  Even though most venture boards do end up with an Alpha member [11], it’s still hard for the CEO to get confused and think of the Alpha member as the boss.  In a PE-backed firm, however, the board may consist of a single investing partner from the one firm who owns the company, perhaps accompanied by a few more junior staff.  In this case, it’s fairly easy for the CEO to revert to CXO-mode and treat that board member as “the boss” as opposed to “the board.”  While PE firms are more active managers who often come with playbooks and best practices consultants, they still want the CEO to be the CEO and not the EVP of Company.
  • First-time CEOs.  Veteran CEOs have more time to learn and understand the board/CEO relationship.  First-timers, fresh from climbing the corporate ladder, sometimes have trouble with the adjustment.

If you’re in either of the above categories or both, it’s important to ask yourself, and most probably your board, about what kind of relationship is desired.  Most of the time, in my estimation, they hired a CEO because they wanted a CEO and the more leadership you take, the more you think “my company” and not “board’s company,” the better off everyone will be.

Finally, you may also want to read this post about the board/CEO relationship which includes another of my favorite passages, on what I call the Direction Paradox.

The Direction Paradox
While discussions, challenges, advice, and questioning are always good, when boards give operational direction (i.e., “you should do X”) they risk creating a paradox for the CEO.  It’s easy when the CEO agrees with the direction and in that case the direction could have been offered as advice and still would have been heeded.
It gets hard when the CEO disagrees with the direction:

Case 1:  If the CEO follows the direction (and is correct that it was wrong), he or she will be fired for poor results.
Case 2:  If the CEO fails to follow the direction, his or her political capital account will be instantly debited (regardless of whether eventually proven right) and he or she will eventually be fired for non-alignment as the process repeats itself over time.

In case 1, the CEO will be surprised at his termination hearing.  “But, but, but … I did what you told me to do!”  “But no,” the board will reply.  “You are the CEO.  Your job is to deliver results and do what you think is right.”  And they’ll be correct in saying that.

Once caught in the paradox, weak CEOs die confused on the first hill and strong ones die frustrated on the second.

See the post for advice on how to prevent the Direction Paradox from starting.

# # # 

Notes
[1] And clearly within earshot of the directors

[2] To simplify the writing, I’ll say “one founder” meaning “one founder or equivalent” (i.e., a set of co-founders).  To the extent that this post is really about the CEO role, then it does flip back to one person, again — i.e., that co-founder (if any) who decided to take the CEO role.  This post isn’t about non-CEO co-founders, but instead about [co-]founder CEOs.

[3] See this 27-page classic (PDF) by Wilson Soncini, The Venture Capital Board Member’s Survival Guide:  Handling Conflicts While Wearing Two Hats.  It’s a must-read if you want to understand these issues.

[4] Increasingly, experienced founders (and/or those sitting on a hot enough hand) are able to raise venture capital and maintain near-total control.  Mechanisms include: a separate class of founder stock with 10x+ voting rights; control of a majority of the board seats; or protective provisions on the founder stock, such as the right to block a financing or sale of the company.  Even in such cases, however, a high-control founder still has fiduciary duties to the other shareholders.

[5] I believe incubators (and the like), by removing a lot of hard work and risk in starting a company, can inadvertently produce what I call “faux founders” who — when it comes to the business side of the company — act more like first-time hired CEOs than typical founders.  Don’t get me wrong, plenty of fine founder/CEOs come out of incubators, but I nevertheless believe that incubators increase the odds of creating a founder/CEO who can feel more like a CTO or CPO than a CEO.  That’s not to say the company won’t be successful either with that original founder or a replacement; it is to say, in my experience, that incubator founders can be different from their non-incubated counterparts.

[5a] And even better, helping to make it large while so doing.

[6] Like it or not, it’s not a bad three-part formula for climbing the corporate ladder.  And the “don’t surprise” rule still applies to boards as it does to managers.

[7] Note that any idea that the CEO might quit doesn’t seem to exist in his (or most VC’s) mind.  That’s because it’s incomprehensible because it’s a career mistake that may well make the person unemployable as CEO in a future VC-backed startup.  Who, after all, wants to hire the Captain of the Costa Concordia?  See this post, Startups CEOs and the Three Doors, for more.

[8] 6 board meetings at 4 hours = 24 hours, one hour prep per board meeting = 6 hours, 2 hours x 4 committee meetings = 8 hours, 2 hours/month on keeping up with news, updates, monthly reports = 24 hours.  Total of 62 hours/year for a committee member, less if not.  Time can vary widely and may be much higher if the board member is providing ad hoc support and/or ad hoc projects.

[9] Oh no!  The new CEO doesn’t even yet consider himself one of us!

[10] Because it’s not about ego or authorship, it’s about the best results.

[11] Often, but not always, the person who led the Series A investment.

My Appearance on the Private Equity Funcast

Who else but my old friend Jim Milbery, a founding partner at ParkerGale, could come up with a podcast called the Private Equity Funcast, complete with its own jingle and with a Thunderbirds-inspired opening?

Jim and I worked together at Ingres back in the — well “pre-Chernobyl” as Jim likes to put it.   When we met, he was a pre-sales engineer and I was a technical support rep.  We’ve each spent over 25 years in enterprise software, in mixed roles that involve both technology and sales & marketing (S&M).  Jim went on to write a great book, Making the Technical Sale.  I went on to create Kellblog.  He’s spent most of his recent career in private equity (PE) land; I’ve spent most of mine in venture capital (VC) land.

With a little more time on my hands these days, I had the chance to re-connect with Jim so when I was in Chicago recently we sat down at ParkerGale’s “intergalactic headquarters” for a pretty broad-ranging conversation about a recent blog post I wrote (Things to Avoid in Selecting an Executive Job at a Startup) along with a lot of banter about the differences between PE-land and VC-land.

Unlike most podcasts, which tend to be either lectures or interviews, this was a real conversation and a fun one. While I’m not sure I like the misparsing potential of their chosen title, Things To Avoid in Selecting an Executive Job with Dave Kellogg, I’ll assume the best.  Topics we covered during the fifty-minute conversation:

  • The pros and cons of CEOs who want to get the band back together.
  • Pros and cons of hiring people who have only worked at big, successful companies and/or who have only sailed in fair weather.
  • The downsides of joining a company that immediately needs to raise money.
  • How CMOs should avoid the tendency to measure their importance by the size of their budget.
  • Should companies hire those who “stretch down” or those who “punch above their weight”?
  • The importance of key internal customer relationships (e.g., the number-one cause of death for the CMO is the CRO) and how that should affect the order of your hires when building a team.
  • Feature-addicted founders and product managers (PMs), technical debt, and the importance of “Trust Releases.”
  • Pivoting vs. “traveling” when it comes to startup strategy.
  • The concept of Bowling Alleys within Bowling Alleys, which we both seem to have invented in parallel.  (Freaky.)
  • The difference between knocking down adjacent markets (i.e., “bowling pins”) and pivots.
  • Corporate amnesia as companies grow and surprisingly fail at things they used to know how to do (e.g., they forget how to launch new products).
  • My concept of reps opening new markets with only a telephone, a machete, and a low quota.
  • My pet peeve #7: salespeople who say it’s impossible to sell into an industry where the founders managed already to land 3-5 customers.
  • The difference between, in Geoffrey Moore terms, gorillas and chimps.
  • How there are riches in the niches when it comes market focus.
  • How feature differentiation can end up a painful axe battle between vendors.
  • Thoughts on working for first-time, non-founder CEOs in both the PE and VC context.
  • The difference between approval and accountability, both in formulating and executing the plan.

Here are some other episodes of the Private Equity Funcast that I found interesting:

So my two favorite podcasts are now The Twenty Minute VC on the venture side and The Private Equity Funcast on the PE side.  Check them both out!

Thanks for having me on the show, Jim, and it was a pleasure speaking with you.

Avoiding the Ten-Year Stock Option Trap (and Other Stock-Option Considerations)

I’ve increasingly spoken to startup employees who find themselves in a difficult trap.  Let’s demonstrate it via an example:

Say you joined a startup in September 2009 as an early employee and immediately received a stock-option grant of 400,000 shares with a strike price of $0.10 when you joined.  The company, while having experienced some ups and downs over the years, has done very well.  At its last 409a valuation, the common stock was valued at $10/share [1].  You feel great; after all, you’re a paper millionaire, with an option worth about $4M [2].

What could possibly be the problem in this seemingly great situation?  Well, sometime in the next 45 days that stock-option is going to vaporize and become worthless.  

More scarily, what needs to happen for that option to become worthless?  Absolutely nothing.  Nobody has to say or do anything.  No notices need to be sent.  Sometime in the next 45 days that option will silently cease to exist [3].  If the company gets acquired two years later at $20/share and you’re expecting an $8M payout you’re going to be rudely surprised to find you get nothing.

The Silent Killer
What happened?  What is this silent killer of stock option value?  Expiration.  The option expired ten years after its grant date.

The vast majority of Silicon Valley stock option plans feature options that expire after ten years.   In this example, your option was granted in September 2009 which means that by October 1, 2019 that option will be expired.  And the really scary part is that nobody needs to tell you it’s about to happen.

While some companies are undoubtedly more proactive than others in both helping employees avoid getting into this situation and warning them as it approaches, in the end, it’s up to you to make sure you don’t get caught in this trap.  Technically, the company doesn’t need to say or do anything.  And – to be clear — because it’s a relatively new phenomenon in Silicon Valley the company may not even have noticed it’s happening and, even if it does, it may remain silent because it doesn’t really have any good remediation options.  It’s a tough situation on both sides because there are no easy wands that anyone can wave to fix this.

If you think you should stop reading here because you’re only at year two of your vesting, don’t.  If you resign (and/or get fired) from your job your stock options will typically expire in just 90 days, so you’ll be facing these same issues — just on a greatly shortened timeframe.

Who Is The Evil Genius Who Set This Up?
None.  There is no evil genius.  It’s simply an unwelcome artifact of Silicon Valley history.  In olden days it took about 4 years for a startup to hit a liquidity event [4] [5].  That’s why stock options vest over 4 years.  It’s also why they expire after 10 years.  All options need to have an expiration date and back in the day, 10 years approximated infinity [6].

As employees, we benefit from the artifact of 4-year-vesting.  However, if we’re not paying attention, we can get crushed by the artifact of 10-year expiration.

What Can I Do About It?
First, this is a tough situation and you may have few or no good options.

Second, I’m not a financial advisor [7]; you’ll need to see your financial and/or tax advisors to figure this out.  In this post, I’ll walk through what I see as some of your options – which will itself demonstrate the problem.

Third, short timeframes are not your friend.  If you see this problem coming I recommend you start thinking hard about it at least 12 months in advance; when you’re down to 30 days left your available choices may be extremely limited.

Here are some of your available options for handling this situation.

1. Exercise the stock-option before it expires. You’ll need to find $40K to pay the company for the exercise, but that’s not the hard part.  Because the fair market value (FMV) of the stock is $10/share you’re going to face a tax bill of somewhere between $1.1M and $1.9M on the exercise, even if you hold the stock (i.e., you don’t sell it) [8].  This is, in fact, the problem statement.

2. Exercise the option before it expires and sell enough to a third-party to pay the tax bill. This means, if you’re selling in the private market (e.g., EquityZen, Sharespost) at the FMV of $10, that you exercise 400K shares and then sell about 150K of them to cover your tax bill [9] [10A].  That leaves you holding 250K shares of stock.  This, however, requires (a) the existence of such a market and/or your ability to independently find a buyer, (b) the stock to be not restricted from you selling it without company approval (or the company granting such approval), and (c) you paying I’d guess $10K or more in legal and/or other transaction fees to make it happen [10].

3. Exercise the option with the support of a specialist fund (e.g,. ESOfund) that cuts rather exotic deals to solve this and related problems [10A]. For example, one of these (typically very boutique) funds might say:  “I’ll give you the cash both for the exercise and to pay your tax bill, if you give me the shares.  When we eventually sell them, I’ll keep 100% of proceeds until I get my money back, 50% until I get 3x my money back, and 25% after that [11].”  These funds are hard to find and the deals can be very hard to understand.  Legal bills can rack up quickly.  And you’ll need to be a major shareholder; no one wants to do a lot of complex work for 2K shares. 

4. Use a company liquidity program, if offered, to avoid getting into the situation.  Some companies periodically offer employees the right to sell shares in order to demonstrate to everyone that liquidity is possible.  Don’t be so busy doing your job that you forget to consider these programs.  While you may think the valuations offered are too low, if there is no secondary market for the stock and/or the company restricts selling the stock after its purchase, you may have no choice but to use such a program.  It’s a far better deal than letting the options expire worthless.

5. Live in Belgium. I believe Belgium has a great law whereby you pay a modest tax at the time you receive a stock option grant and then no tax on either exercise or sale [12].  I’m telling you this not to encourage you to start learning to enjoy moules frites and making immediate plans to move to Brussels (it’s probably too late) — but to remind my international readers that I’m writing from a US point of view and that stock option taxation, in particular, varies a lot from country to country.  If you happen to live in Belgium and the law hasn’t changed, it’s a particularly good place to get stock-options in early-stage startups.   But the main point is to be sure you understand the law of your country before making any plans or decisions when it comes to stock options (or any other tax matter).

6. Avoid the problem in the first place via an early-exercise with section 83b election. Some companies will allow you to exercise your options before they vest by effectively reversing the stock option – you pay the exercise price, the company gives you the shares, and the company retains a right to buy back the shares from you (at the exercise price) which declines by 1/48th per month over four years.  In addition, if you file a section 83b election within 30 days (and the grant was not in-the-money) then you pay no tax at exercise time and incur tax liability only when you eventually sell the shares, which if it’s more than a year away, results in long-term capital gains tax treatment [13].  Wow, this sounds awesome – and it is.

What’s the downside?  (a) Ideally, you need to do this up-front so it’s not necessarily a good solution if you’re in year three, (b) you need enough money to pay the exercise price which typically works well at early-stage startups (400K shares at $0.01/share = $4K) and a lot less well at later stage ones (100K shares at $5/share = $500K), (c) if the company gets in trouble [14] your common stock could well end up worthless and you won’t get your money back – you are effectively destroying the option-value of your option by exercising it, (d) if you don’t file your section 83b in a timely manner and/or lose your records of having filed it you could end up in a very bad position tax-wise [15].

7. Mitigate the problem via regular exercises along the way (laddered). While I don’t think this is a great strategy, it’s simple to understand, and mixes preserving option value while periodically exercising (and incurring taxes) along the way – so it’s going to be expensive to execute; but nevertheless way less expensive than a forced exercise in year 10.  The two nice things about this strategy are (a) you shouldn’t need company approval to execute it and (b) you can stop along the way and still own some of your options — it only gets very expensive in years 3 and 4.  Here’s a spreadsheet to show it (including some comments not in the image below) which you can download here.

ladder vs. panic

Of course, you may find other strategies, proactive companies may offer programs with other strategies, you might be able to execute a derivative of one of these strategies (e.g., number 3 with a rich uncle), and you can combine the above strategies (e.g., laddering plus early-exercise) as you see and your financial and tax advisors see fit.

I should note that later-stage startups may offer restricted stock units (RSUs) instead of options.  Though some of the same principles can apply (e.g., section 83b elections also relate to RSUs), RSUs work differently than stock options and bring different complexity which is beyond our current scope.

In this post, I’ve alerted you to the ten-year stock option expiration trap and given you a few ideas on how to avoid it.  Moreover, remember that if you resign (or get terminated) that this distant ten-year expiration problem becomes a 90-day problem.  Finally, I’ll point you to my favorite book on this subject (which covers both stock-options and RSUs), Consider Your Options 2019, and which has a nice website as well.

Remember to always talk to your financial and tax advisors before making key decisions about equity-based compensation.

# # #

Notes

[1]  Most private startups get an annual 409a valuation once a year to establish the fair market value (FMV) of their common stock so they can appropriately set the strike price on newly granted stock options, without being accused of granting in-the-money options (as some companies were accused of doing during the dot-com bubble).  409a valuations are always lower than “headline valuations” that companies often announce as part of financing rounds, because headline valuations take the price of a newly issued preferred share and multiply it by the entire share pool (common and preferred).  409a valuations first value the business overall, then subtract any debt, and then subtract the value of “preference stack” in arriving at a value for common stock in aggregate, and then per-share.  Because (a) of how they are calculated, (b) various valuation methodologies produce ranges, and (c) there is a general desire to preserve a low common stock price for as long as possible, 409a valuations not only differ from headline valuations (which are arguably calculated incorrectly) but they tend to produce a low-side estimate for the value of the common.

[2] And maybe a lot more than that because many private, hot-company stocks sometimes trade well above the 409a value in secondary markets.  In fact, in many cases it trades a little or no discount to the price of the last preferred round, and in some cases above it which, unless a lot of time has passed since the last round, strikes me as kind of crazy.

[3] That is, in the 45 days after August 15, 2019 – the day I wrote the post.

[4] For example, Business Objects was founded in 1990 and went public in 1994.

[5] If Silicon Valley were reinvented today, options would probably vest over 12 years, because that’s about how long it takes to get to an IPO.  However, that’s unlikely to happen as the ten years is the maximum duration under law for an ISO option.  This isn’t a VC-change kind of thing; it’s a write your Congressional Representative sort of thing.

[6] The definition of a (call) stock option is the right to buy N shares at price P by date D.  Expiration dates are inherent to options.

[7] See disclaimers in my FAQ and terms of use.

[8] Math is approximate.  On the low side, I’m assuming it’s an ISO option and the tax is all AMT at 28% and you’re in a tax-free state.  On the high side, I’m assuming it’s an NQ option, and a combined marginal rate of 49%.  See your tax professional for your situation.  The main point here:  it can be a huge number.

[9] Bear in mind, per earlier comments, the FMV tends to run on the low side and particularly for red-hot companies, prices in the secondary market can be well above the FMV, e.g., in this case, let’s say $20.  While this will help you on the sale side (you’ll need to sell half as many shares), it could bite you on the tax calculation because you’ll simultaneously be arguing that the stock is worth $10 for tax calculation purposes while actually selling it for $20.  See your tax professional.  Good luck.

[10] I’ve seen and/or heard of cases where companies charge a $5K administrative fee for people selling shares in this manner.  Some companies like it and make it easy.  Some don’t and make it anywhere from hard to impossible.

[10A] There is zero endorsement of any vendor or fund mentioned here.  I provide examples simply to make things concrete in terms of classification.

[11] This is a somewhat flawed representation of such deals, but you get the idea.  The fund effectively becomes your partner in owning the stock.  These can be expensive deals, but for the stock-optionee some value is better than none, which is what they will have once the option expires.

[12] This works particularly well for early-stage startups because I believe you pay a tax of either 9% or 18% of the aggregate value (shares x strike price) of the option at grant time, and the shares are worth next to nothing.  (It works less well if you get a grant of 100K shares valued at $100/share.)

[13] You must, must, must see your tax advisor on this.  You have only 30 days to file an election and if you don’t, you lose the benefits of this approach and can put yourself in a very bad situation.

[14] And trouble doesn’t have to mean bankruptcy.  It simply means any situation where the sale price of the company is less than the sum of debt to be repaid plus the preference stack.  In these situations, the common stock becomes worthless.  Note to the wise:  while it’s often the case, you cannot assume the preference stack is simply the amount VCs have invested in preferred stock.  In some cases, you have multiple liquidation preferences where VCs (or PEs) get 1.5x to 2.0x their investment back before the common gets anything.

[15] See [13].   I won’t go into the details of what happens because it’s complicated, but if you are going to go the section 83b route, you need to file within 30 days and keep very good records that you did.  You remember when people went bankrupt on AMT taxes due to buying-and-holding ISO options in Bubble 1.0?  You could end up rekt in a similar way if you get this wrong.

Good CEO Habits: Proactively Update Your Board at the End of Every Quarter

I am surprised by how many startup CEOs leave the board hanging at the end of the quarter.  As a CEO my rule of thumb was that if a board member ever asked me about the quarter then I’d failed in being sufficiently proactive in communications.  In tight quarters I’d send a revised forecast about a week before the end of the quarter — hoping to pre-empt a lot of “how’s it going” pings.

And every quarter I would send an update within 24 hours of the quarter-end.  In fact, if we’d effectively closed-out all material opportunities before quarter-end, I’d send it out before the quarter was technically even over.

Why should you do this?

  • It’s a good habit.  Nobody wants to wait 3 weeks until the post-quarter board meeting to know what happened.
  • It shows discipline.  I think boards like disciplined CEOs (and CFOs) who run companies where the trains run on time.
  • It pre-empts one-of emails and phone calls.  It’s probably less work, not more, to send a quick standard end-of-quarter update that includes what you do know (e.g., bookings) but not what you don’t (e.g., expenses because accounting hasn’t closed the quarter yet).

What form should this update take?  I’d start with the board sales forecast template that I’ve already written about here.  (And I’d change Forecast to Actual and drop the Best Case and Pipeline Analysis.)

how-to-present-forecast-2.jpg

Since cash is oxygen at a start-up, I’d add a line about forecast cash flows, making sure they know the numbers are preliminary, with final numbers to follow at the upcoming board meeting.  I might add a little color on the quarter as well.

Here’s an example of a good end-of-quarter board update.

Dear Board,

Just a quick note to give you an update on the quarter at GreatCo.  We beat new ARR plan by $200K (landing at $1,700K vs. plan of $1,500K) and grew new ARR YoY by 42%.  We came in slightly under on churn ARR, landing at $175K vs. a plan of $200K.  The result is we ended the quarter $225K ahead of plan on ending ARR at $11,546K, with YoY growth of 58%.

Cash burn from operations is preliminarily forecast to be $240K ahead of plan at $2,250K and ending cash is just about at-plan of $10,125K (we were a little behind in 1Q and 2Q has caught us back up).

We had some great competitive wins against BadCo and WorseCo — I’m particularly happy to report that we won the Alpha Systems deal (that we discussed in detail at the last meeting) against BadCo for $275K.  Sarah will tell us how we turned that one around at the upcoming board meeting.

Finally, I did want to point out — given the concerns about sales hiring — that we ended the quarter with 12 quota-carrying reps (QCRs), only 1 behind plan. Sarah and Marty did a great job helping us catch almost all the way back up to plan.  That said, we’re still having trouble hiring machine-learning engineers and are nearly 5 heads behind plan to-date.  Ron and Marty will update the board on our plans to fix that at the meeting.

Overall, we feel great about the quarter and I look forward to seeing everyone in a few weeks.  Thanks, as always, for your support.

[Table with Numbers]

Cheers/Dave

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