Category Archives: Venture Capital

Ten Pearls Of Enterprise Software Startup Wisdom From My Friend Mark Tice

I was talking with my old friend, Mark Tice, the other day and he referred to a startup mistake as, “on his top ten list.”  Ever the blogger, I replied, “what are the other nine?”

Mark’s been a startup CEO twice, selling two companies in strategic acquisitions, and he’s run worldwide sales and channels a few times.  I first met Mark at BusinessObjects, where he ran our alliances, we worked together for a while at MarkLogic, and we’ve stayed in touch ever since.  Mark’s a seasoned startup executive, he’s go-to-market oriented, and he has some large-company chops that he developed earlier in his career.

Here’s an edited version of Mark’s top ten enterprise software startup mistakes list, along with a few comments prefaced by DK.

1. Thinking that your first VP of Sales will take you from $0 to $100M.  Startups should hire the right person for the next 18-24 months; anything beyond that is a bonus.  (DK:  Boards will often push you to hire someone “bigger” and that’s often a mistake.) 

2. Expecting the sales leader to figure out positioning and pricing.  They should  have input, but startups should hire a VP of Marketing with strong product marketing skills at the same time as the first VP of Sales. (DK:  I think the highest-risk job in Silicon Valley is first VP of Sales at a startup and this is one reason why.)

3. Hiring the wrong VP Sales due to incomplete vetting and then giving them too much runway to perform.  Candidates should give a presentation to your team and run through their pipeline with little to no preparation (and you should see if they pay attention to stage, last step, next step, keys to winning).  You should leverage backdoor references.  Finally, you should hire fast and fire faster — i.e., you’ll know after 3 months; don’t wait for more proof or think that time is going to make things better.  (DK:  a lot of CEOs and boards wait too long in denial on a bad VP of Sales hire.  Yes, starting over is difficult to ponder, but the only thing worse is the damage the wrong person does in the meantime.)

4. Marketing and selling a platform as a vertical application.  Having a platform is good to the extent it means there is a potentially large TAM, but marketing and selling it as an application is bad because the product is not complete enough to deliver on the value proposition of an application.  Align the product, its positioning, and its sales team — because the rep who can sell an analytic platform is very different from the rep who can sell a solution to streamline clinical trials.  (DK:  I think this happens when a company is founded around the idea of a platform, but it doesn’t get traction so they then fall back into a vertical strategy without deeply embracing the vertical.  That embrace needs to be deeper than just go-to-market; it has to include product in some way.)

5. Ignoring churn greater than 15%.  If your churn is greater than 15%, you have a problem with product, market, or most likely both. Don’t ignore it — fix it ASAP at all costs.  It’s easy to say it will get better with the next release, but it will probably just get a bit less bad.  It will be harder to fix than you think. (DK:  if your SaaS bucket is too leaky, you can’t build value.  Finding the root cause problem here is key and you’ll need a lot of intellectual honesty to do so.)

6. Waiting too long to create Customer Success and give it renewals.  After you have five customers, you need to implement Customer Success for renewals and upsells so Sales can focus on new logos. Make it work. (DK:  Truer words have never been spoken; so many startups avoid doing this.  While the upsell model can be a little tricky, one thing is crystal clear:  Customer Success needs to focus on renewals so sales can focus on new ARR.)

7. Pricing that doesn’t match the sales channel.  Subscriptions under $50K should only be sold direct if it’s a pilot leading to a much larger deployment.  Customers should become profitable during year two of their subscription. Having a bunch of customers paying $10K/year (or less) might make you feel good, but you’ll get crushed if you have a direct sales team acquiring them. (DK:  Yes, you need to match price point to distribution channel. That means your actual street price, not the price you’re hoping one day to get.)

8. Believing that share ownership automatically aligns interests.  You and your investors both own material stakes in your company.  But that doesn’t automatically align your interests.  All other things being equal, your investors want your company to succeed, but they also have other interests, like their own careers and driving a return for their investors.  Moreover, wanting you to succeed and being able to offer truly helpful advice are two different things.  Most dangerous are the investors who are very smart, very opinionated, and very convincing, but who lack operating experience.  Thinking that all of their advice is good is a bit like believing that a person who reads a lot will be a good author — they’ll be able to tell you if your go-to-market plan is good, but they won’t write it for you. (DK:  See my posts on interest mis-alignments in Silicon Valley startups and taking advice from successful people.)

9. Making decisions to please your investors/board rather than doing what’s best for your company. This is like believing that lying to your spouse is good for your marriage. It leads to a bad outcome in most cases.  (DK: There is a temptation to do this, especially over the long term, for fear of some mental tally that you need to keep in balance.  While you need to manage this, and the people on your board, you must always do what you think is right for company.  Perversely at times, it’s what they (should, at least) want you to do, too.)

10. Not hiring a sales/go-to-market advisor because they’re too expensive.  A go-to-market mistake will cost you $500K+ and a year of time. Hire an advisor for $50K to make sure you don’t make obvious mistakes.  It’s money well spent.  (DK:  And now for a word from our sponsor.)

Thanks Mark.  It’s a great list.

Why You Should Eliminate the Title “Implementation Consultant” from Your Startup

I’ve worked with several startups that fell into the following pattern:

  • Selling a SaaS application at a healthy price (e.g., $100K to $200K ARR)
  • With low, fixed-cost implementation packages (e.g., $25K)
  • But a product that actually takes maybe $50K to $75K to successfully deploy
  • Resulting in an unprofitable professional services business (and wrecking the market for partner services)
  • High adoption failure
  • And, depending on the initial contract duration, high customer churn [1]

For example, one company had a CAC of 4.0, churn of 25%, and services margins of negative 66% when I started working with them [2].  Ouch.

Before proceeding, let me say that if you have a low-touch, high-velocity, easy-adoption business model — and the product to go with it — then you don’t need to read this post [3].  If you don’t, and any of the above problems sound familiar, then let’s figure out what’s going on here and fix it.

The problem is the company is not charging the appropriate price for the services needed.  Perhaps this is because of a zero-sum fallacy between ARR and services.  Or perhaps they feel that customers “just won’t pay” that much for implementation services.  Or perhaps their product takes more work to deploy than the competition and they feel forced to match price on services [4].

This under-pricing usually triggers a number of other problems:

  • In order to work within the self-created, low-cost implementation services model, the company “hires cheap” when it comes to implementation consultants, preferring junior staff and/or staff in offshore locations.
  • The company’s “implementation consultants” are overloaded, working on too many projects in parallel, and are largely focused more on “getting onto the next one” than getting customers successfully implemented.
  • Once a certain number of hours are clocked on any given project, the consultants go from “in a hurry” to “in a big hurry” to finish up and move on.
  • Customers are left high-and-dry with failed or partial implementations that, if left unfinished, will likely lead to churn.
  • Customer success, whose job is to prevent churn, is left holding the bag and is pulled away from its primary mission of adoption, renewal, and expansion into the implementation-completion business, potentially changing its hiring profile from more sales-oriented to more product-oriented and/or complementing CSMs with customer success architects (CSAs) or technical account managers (TAMs) to try and fill the implementation void.

I sometimes consider fixing this corporate chiropractor work, because one maladjustment results in the whole organization being twisted out of shape [5].  The good news is that, as with chiropractors, one adjustment can pop the whole system back into alignment.

Now, before we move onto fixing this, there’s one more problem we haven’t discussed yet — and give yourself ten pats on the back if you figured out before I got here:

Who ever said the customer defined success as getting the software implemented?

Oh shit.  We were so tied up trying to deliver a $25K services package that costs $40K to deliver that we forgot about the customer.  What customer equates implementation with success?  None.  Zero.  Nobody.

“Hey, it’s all set up now, you can login, gotta go!” is not the credo of a success-oriented consultant.

But what do we call our consultants again?  Implementation consultants.

What do implementation consultants think they do?  Well, implementations.

When an implementation consultant reads their own business card, what does it tell them they their job is?  Implementations.

Are implementations what customers want?  No.

So why do we have implementation consultants again?  I have no idea.

What do customers what?  Overall they want success, but what’s a good proxy?  How about attaining their first business objective?  If you sell:

  • A recruiting app, running your first recruiting campaign
  • A financial planning app, it’s making your first plan
  • A demandgen marketing app, it’s running your first demandgen campaign
  • A customer service app, it’s your first day running the call center
  • A deflection app, it’s deflecting your first cases
  • A sales enablement app, it’s training your first reps
  • An IT support app, it’s handing your first tickets

So, what’s the fix here?  While not all of this will be possible or recommended in all situations, here’s the long list:

  • Re-frame services as in the success business, not the implementation business
  • Eliminate the job title implementation consultant in favor of consultant
  • Get services to make plans that end not with implementation, but with the achievement of an agreed-to first business objective.
  • Increase your services pricing, if needed, so they can both deliver success and break even.
  • Hire more experienced consultants who can better make customers successful and don’t be afraid to charge more for them.  (They’re worth it.)
  • Agree to an ARR price before negotiating the services price; refuse to trade one off against the other.
  • Involve your services team in the sale well before the contract is signed so they propose the right prix fixe package (e.g., small, medium, large) or create an appropriately-sized bespoke statement of work.
  • Modify your product so it is not at a competitive disadvantage on required implementation work.

# # #

Notes
[1] With one-year contracts, a failed implementation that takes 6-9 months to fail typically results in churn, whereas with three-year contracts, you will often get another swing at the problem.

[2] These horrific unit economics result in an LTV/CAC of 1.0 and make the company totally uninvestable.  The CAC would be even higher if hard-ass investor added the services losses back into the CAC on the theory they were subsidizing sales.

[3] Product-led growth business models are great, but when companies that are not designed for them try to emulate pieces of the business model, they can get into trouble.  Implementation is an area that quickly goes awry when companies not built for PLG attempt bottom-up, try-and-buy, viral go-to market strategies.

[4] In which case, an obvious solution is to reduce the deployment workload requirements of the product.

[5] Put differently, the sales bone is connected to the services bone, and the services bone is connected to the customer success bone.

How Startup CEOs Should Think About the Coronavirus, Part II

[Updated 3/10 12:09]

This is part II in this series. Part I is here and covers the basics of management education, employee communications, and simple steps to help slow virus transmission while keeping the business moving forward.

In this part, we’ll provide:

  • A short list of links to what other companies are doing, largely when it comes to travel and in-office work policies.
  • A discussion of financial planning and scenario analysis to help you financially navigate these tricky waters.

I have broken out the list of useful information links and resources (that was formerly in this post) to a separate, part III of this series.

What Other Companies are Saying and Doing

Relatively few companies have made public statements about their response policies. Here are a few of the ones who have:

Financial Planning and Scenario Analysis: Extending the Runway

It’s also time to break out your driver-based financial model, and if you don’t have one, then it’s time to have your head of finance (or financial planning & analysis) build one.

Cash is oxygen for startups and if there are going to be some rough times before this threat clears, your job is to make absolutely sure you have the cash to get through it. Remember one of my favorite all-time startup quotes from Sequoia founder Don Valentine: “all companies go out of business for the same reason. They run out of money.”

In my opinion you should model three scenarios for three years, that look roughly like:

  • No impact. You execute your current 2020 operating plan. Then think about the odds of that happening. They’re probably pretty low unless you’re in a counter-cyclical business like videoconferencing (in which case you probably increase targets) or a semi-counter-cyclical one like analytics/BI (in which case maybe you hold them flat).
  • 20% bookings impact in 2020. You miss plan bookings targets by 20%. Decide if you should apply this 20% miss to new bookings (from new customers), expansion bookings (new sales to existing customers), renewal bookings — or all three. Or model a different percent miss on each of those targets as it makes sense for your business. The point here is to take a moderately severe scenario and then determine how much shorter this makes your cash runway. Then think about steps you can take to get that lost runway back, such as holding costs flat, reducing costs, raising debt, or — if you’re lucky and/or have strong insiders — raising equity.
  • 40% bookings impact in 2020. Do the same analysis as in the prior paragraph but with a truly major bookings miss. Again, decide whether and to what extent that miss hits new bookings, expansion bookings, and renewal bookings. Then go look at your cash runway. If you have debt make sure you have all covenant compliance tests built into your model that display green/red — you shouldn’t have to notice a broken covenant, it should light up in big letters (YES/NO) in a good model. Then, as in the prior step, think about how to get that lost runway back.

Once you have looked at and internalized these models, it’s time for you and your CFO to call your lead investors to discuss your findings. And then schedule a discussion of the scenario analysis at your next board meeting.

Please note that it’s not lost on me that accelerating out of the turn when things improve can be an excellent way to grab share in your market. But in order to so, you need to have lots of cash ready to spend in, say, 6-12 months when that happens. Coming out of the corner on fumes isn’t going to let you do that. And, as many once-prodigal, now-thrifty founders have told me: “the shitty thing is that once you’ve spent the money you can’t get it back.” Without dilution. With debt. Maybe without undesirable structure and terms.

Now is the time to think realistically about how much fuel you have in the tank, if you can get more, how long should it last, and how much you want in the tank 6-12 months out.

Ten Questions Founder CEOs Should Always Be Able to Answer About Their Startups

I’m working with more early-stage companies these days (e.g., pre-seed, seed, seed-plus [1]) and one of the things I’ve noticed is that many founders cannot clearly, succinctly, and confidently answer some basic questions about their businesses.  I decided to write this post to help entrepreneurs ensure they have their bases are covered when speaking to angel investors, seed firms, or venture capitalists.

Note that Silicon Valley is the land of strong convictions, weakly held so it’s better in most cases to be clear, confident, and wrong than it is to waffle, equivocate, and be right.  I often have to remind people of this — particularly founders recently out of PhD programs — because Sand Hill Road is about the dead opposite of graduate school when it comes to this philosophy [2].

Here are ten questions that early-stage founder/CEOs should be able to answer clearly, succinctly, and confidently — along with a few tips on how to best answer them.

1. Who is the target customer?  Be precise, ideally right down to a specific job title in an organization.  It’s great if the answer will broaden over time as the company grows and its strategy naturally expands, but up-front I’d name the people you are targeting today.  Wrong:  “The Office of the CIO in IT organizations in F5000 enterprises around the world.”  Right:  “VPs of financial planning and analysis in 250-1000 employee Services firms in North America.” 

I’m admittedly fanatical about this, but I want to know what it says on the target buyer’s business card [3] .  I can’t tell you the number of times that I’ve heard “we sell to the CIO,” only to be introduced to someone whose business card said “director of data warehousing.”  If you don’t know who you’re selling to, you’re going to have trouble targeting them.

2. What problem do you solve for them?  When you meet one of these people, what do you tell them?  Right:  “We sell a solution that prevents spear phishing.”  Wrong:  “We sell a way to improve security culture at your organization” [4]. The latter answer is wrong because while an improvement in security culture may be a by-product of using your solution, it is not the primary benefit

First-order benefit:  our solution stops spear phishing.  Second-order benefit:  that means you avoid data breaches and/or save millions in ransomware and other breach-related costs.  Third-order benefit:  that means you protect your company’s reputation and your valuable brand.  Fourth-order benefit:  using our solution ends up increasing security culture and awareness.  People generally go shopping for the first-order benefit — they may buy into higher-order benefits, they may say they like your company’s approach and/or vision — but budgets and shopping lists get made on the first-order.  Don’t be selling security culture when customers are buying anti-spear-phishing.

3. How do they solve that problem today?  The majority of startups solve a problem that is already being solved in some way today.  Be realistic about this. Unless you are solving a brand-new problem (e.g., orchestrating containers at the dawn of the container revolution), then somehow the problem is either being solved today (e.g., in Excel, a legacy app, a homegrown system) or the buyer has deliberately decided not to solve it, likely because they think it’s unsolvable (e.g., baldness cures [5]).

If they are already solving the problem in some way, your new solution more likely represents an optimization than a breakthrough.  And even breakthrough companies, such as VMware [6], solved very practical problems early on (e.g., providing multiple environments on a laptop without having to physically change hard drives). 

As another example: even if you’re using advanced machine learning technology to automate trouble ticket resolution and — technically speaking, customers aren’t doing that today — they certainly are handling trouble tickets and the alternative to automatic resolution is generally a combination of human work and case deflection.

4. Why is your solution superior to the status quoOnce you can clearly describe how customers solve the problem today, then you should be able to clearly answer why your solution is superior to the status quo.  Note that I’m not asking how your technology works or why it’s superior — I’m asking why it provides a better solution for the customer. Sticking with the trouble ticket example:  “our solution is superior to human resolution because it’s faster (often by days if not hours), cuts ticket resolution cost by 90%, and results in greatly superior end-user satisfaction ratings.”  That’s a benefits-driven explanation of why it’s superior. 

5. Why is your technology different from that offered by other suppliers? Marketers call this differentiation and it’s not really just about why your technology is different from alternatives, it’s about why it’s better. The important part here is not to deep dive into how the technology works. That’s not the question; the question is why is your technology is better than the alternatives. The most common incorrect answer to this question is a long speech about how the technology works. (See this post for tips on how to build a feature, function, benefit marketing message.)

Example 1: traditional databases were built for and work well at storing structured data, but they have little or no capability for handling unstructured data. Unlike traditional databases, our technology is built using a hybrid of database and search engine technology and thus provides excellent capabilities for storing, indexing, and rapidly querying both structured and unstructured data.

Example 2: many planning systems require you to throw out the tool that most people use for planning today — Excel. Unlike those systems, our product integrates and leverages Excel as part of the solution; we use Excel formula language, Excel formatting conventions, and provide an Excel add-in interface that preserves and leverages your existing Excel knowledge. We don’t throw the baby out with the bathwater.

6. How many target customers have you spoken to — and what was their reaction to your presentation?  First, you means you, the founder/CEO.  It doesn’t mean your salesperson or co-founder.  The answer to the first part of the question is best measured in scores; investors want to know that you are in the market, talking with customers, and listening to their feedback.  They assume that you can sell the technology [7], the strategic question for later is the transferability of that skill.  They also want to know how target customers react to your presentation and how many of them convert into trials or purchases. 

7. Who’s using your product and why did they select it? It’s not hard to sell government labs and commercial advanced research divisions one of pretty much anything. It’s also not hard, in brand new categories, to sell your software to people who probably shouldn’t have purchased it — i.e., people not knowing all their options in the nascent market picked the wrong one. And that’s not to mention the other customers you can get for the wrong reason — because a board member had a friend on the executive staff, because someone was a big donor, etc. Customers “buy” (and I use air quotes become sometimes these early “customers” didn’t pay anything at all) the wrong software all the time, particularly in the early days of a market.

So the question isn’t who downloaded or tried your product, the question is who’s using it — and when they selected it did they know all their options and still choose you? Put differently, the question is “who’s not an accidental customer” and why did that set of non-accidental customers pick you over the alternative? So don’t give a list of company brand names who may or may not be active users. Instead tell a few deep stories of active customers (who they could ask to call), why they picked the software, and how it’s benefiting them.

8.  What is the TAM for solving this problem?   There are a lot of great posts about how to build a total available market (TAM) analysis, so I won’t explain how to do it here. I will say you should have a model that calculates an answer and be able to explain the hopefully simple assumptions behind that model. While I’m sure in b-school every VC undoubtedly said that “getting 1% of a $10B market is a bad strategy,” when they got into the workplace something changed. They all love big TAMs [8]. Telling a VC you’re aiming for 50% of an $800M TAM will not get you very far. Your TAM better be in the billions if not the tens of them.

9.  Why are you and your team the best people to invest in? Most interesting ideas attract several startups so, odds are, you have fairly direct competitors pretty much from inception. And, particularly if you’re talking with a VC at a larger firm, they have probably researched every company in the nascent space and met most of them [9]. So the question here is: (of all the teams I’ve met in this space) why are you the folks who are going to win?

I’d expect most startups in your space have smart people with strong educations, with great backgrounds at the right companies. That’s become the table stakes. The real question is thus why is your team of smart, well educated, and appropriately experienced people better than the others [10]:

  • A lot of this is confidence: “of course, we’re the right folks, because we’re the ones who are going to win.” Some people feel like they’re doing a homework assignment while others feel like they’re building a winning company. Be the latter. We know the stakes, we know the second prize is a set of steak knives, and we are going to win or die trying. #swagger
  • Drivers vs. passengers. Big successful enterprise software companies have definitionally employed a lot of people. So if you’re doing a sales-related category it’s not hard to companies full of ex-Siebel and ex-Salesforce people. The real question thus becomes: what did your people do at those prior companies? Were they drivers (who drove what) or were they passengers just along for the ride. If they drove, emphasize the amazing things they did, not just the brand names of where they worked.
  • Completeness. Some startups have relatively complete teams while others have only a CEO and CTO and a few functional directors. The best answer is a fairly complete team that’s worked together before. That takes a lot of hiring and on-boarding risk off the table. Think: give us money and we can start executing right away.
  • Prior exactly-relevant experience. Saying Mary was VP of ProductX Sales carrying a $500M number at BigCo is quite different from saying Mary just scaled sales at her last startup from $10M to $100M and is ready to do the exact same thing here. The smaller the gap between what people just did and what you’re asking them to do, the better.
  • Finally, and this is somewhat tongue in cheek, remember my concentric circles of fundraising from this post. How VCs see founders and entrepreneurs:

10.  If I give you money what are going to do with it? The quantitative part of this answer should already be in the three-year financial model you’ve built so don’t be afraid to reference that to remind people that your plan and financial model are aligned [11]. But then drill down and give the detail on where the money is planned to be spent. For extra credit, talk about milestone- or ARR-based spend triggers instead of dates. For example, say once we have 3 sales reps hitting their numbers we will go out and hire two more. The financial plan has that happening in July, but if July comes and we haven’t passed that milestone we won’t pull the trigger. Ditto for most hiring across the company. And ditto for marketing: e.g., we’ve got a big increase in programs budget in the second half of next year but we won’t release that money until we’re sure we’ve correctly identified the right marketing programs in which to invest.

It’s also very important that demonstrate knowledge of a key truth of VC-backed startups: each round is about teeing-up the next one. So the key goal of the Series A round should be to put the company in a position to successfully raise a Series B. And so on. Discuss the milestones you’re aiming to achieve that should support that tee-up process. And don’t forget the SaaStr napkin for getting a rough idea of what typical rounds look like by series.

Bonus: origin story. If I were to add one question it would be: tell me how you came to found your company? Or, using the more modern vernacular: tell me about your origin story? If yours is good and your founders are personable and videogenic, then I’d even make it into a short video, like the founders of Hashicorp did. You’re going to get asked this question a lot, so why not work on building the optimal answer and then videoing it.

# # #

Notes

[1] My, how things have changed.  The net result is that the new choke-point is series A (prediction 9).  Seed and angel money seems pretty easy to raise; A-rounds seem pretty hard — if you’ve already raised and spent $2M in seed capital then you should have something to show for it. 

[2] Most of the graduate student types I meet tend to be quite circumspect in their replies.  “Well, it could be this, but we don’t really know so it could be that.  Here are some arguments in favor of this and some against.”  In business, it’s better to be seen as decisive and take a clear stand.  As long as you are also perceived as open-minded and responsive to data, you can always change your mind later.  But you don’t want to be seen as fence-sitter, endlessly equivocating, and waiting for more data before making a decision.

[3] Or the more modern equivalent: an email footer or LinkedIn profile.

[4] Unless a company is shopping for training to improve security culture.  In which case, it’s a first-order benefit.

[5] Reminder that I have moral authority to talk about this :-). This type of problem is often called “latent pain” in sales, because it’s a pain the buyer is unaware they have because they don’t believe there is a solution. Ergo, they just get used to it. Thus, the first job of sales and marketing is to awaken the buyer to this latent pain.

[6] Yes, I know that virtual machines predate VMware considerably, particularly IBM’s VM/CMS operating system, so it wasn’t the creation of the virtual machine that I’d call a breakthrough, but using it to virtualize Microsoft and later Linux servers.

[7] If you can’t, it’s hard to assume that someone else will be able to.  Perhaps you’re not a natural-born seller, but if you were passionate enough about your idea to quit your job and found a company that should generally compensate.  Authenticity works.

[8] Most probably on the logic that they don’t want 1% of a $5B market, they want 40%. That is, they want both: big share and big TAM. And, if you mess up, there’s probably a safer landing net in the $5B market than the $500M one. Quoting the VC adage: great markets make great companies.

[9] This is the big difference between angels and funds. Angels typically meet one team with one idea, evaluate both and make a decision. Early-stage funds meet a company then research every company in the space and then pick a winner.

[10] I’m doing this in the abstract; it’s much easier in the concrete if you make a table and line up some key attributes of your team members vs. those of the competition. You use that table to come up with the arguments, but you don’t ever use that table externally with investors and others.

[11] I’m surprised how many folks dive into answer this question completely ignoring the fact that you’ve likely already put a three-year financial model in front of them that provides the high-level allocation of spend already. While it doesn’t seem to slow down some entrepreneurs, I think it far better to be a founder who refers to his plan a bit too much than a founder acts as if the financial plan doesn’t even exist.

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.

The Red Badge of Courage: Managing and Processing Failure in Silicon Valley

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, failure was a death sentence. In Silicon Valley, I wrote, failure was a red badge of courage, a medal of valor 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 employees 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 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 hiring people — which often requires building consensus around one candidate in a pool [2] — we 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].

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 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.

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. Thus we need to look at startup failure as a branding issue and the simple rule is don’t get too many consecutive red badges 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 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 of work, had 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.

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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.