Tag Archives: VC

Kellblog Predictions for 2019

Because I’ve been quite busy of late with the sale of my company, I’m doing a somewhat quicker and lighter (if not later) version of my annual predictions post.  Here goes, starting with a review of last year’s predictions.

2018 Kellblog Predictions Review

1. We will again continue to see a level of divisiveness and social discord not seen since the 1960s. HIT.  Hard to argue I need to justify this one.  Want to argue about it?

2. The war on facts and expertise will continue to escalate. HIT. Unfortunately, the President is leading the charge on this front, with the Washington Post fact checker tallying 7,645 false claims since taking office.

factchecker

3. Leading technology and social media companies finally step up to face ethical challenges. MAJOR MISS.  Well, I nailed that the issue would be critical, but boy did I overestimate the maturity of the management of these companies.

4. AI will move from hype to action, meaning bigger budgets, more projects, and some high visibility failures. HIT, I think.  See this McKinsey report for some interesting survey data on AI adoption and barriers to it.

5. AI will continue to generate lots of controversy about job displacement. HIT. While the optimists say AI will create more jobs than it will displace, many still worry conversely.  Since the prediction was about the controversy continuing, we’ll call it a hit.

6. The bitcoin bubble bursts. MAJOR HIT.  This one partially redeems me for over-estimating Facebook’s management.

btc

7. The Internet of Things (IoT) will continue to build momentum.  HIT. See this Forbes article about data from Dresner Advisory’s 2018 IoT Intelligence Market Study.

8. The freelance / gig economy continues to gain momentum with freelance workers poised to pass traditional employees by 2027. HIT.  Per this Forbes article, 57M people now participate in the gig economy in some way.

9. M&A heats up due to repatriation of overseas cash.  HIT. Per Berkery Noyes, software M&A deal value was up nearly $100B over 2017.  To the extent this was due to overseas cash repatriation I don’t know, but it certainly was a factor.

m-and-a

10. 2018 will be a good year for cloud EPM vendors. MAJOR HIT.  Anaplan went public, Adaptive Insights was acquired by Workday, and Host Analytics was acquired by Vector Capital. 

With 9 hits, two of them major – and with only one offsetting major miss — I should probably just drop the mike and get out of the predictions business.  But no guts, no glory.

Kellblog’s 2019 Predictions

Reminder to see the disclaimers in my FAQ and remember that these predictions are not financial or business advice – they are made in the spirit of fun.  To the extent they’re concrete, that’s to make the game more interesting so we can better assess them next year.  Here we go.

1. Fred Wilson is right, Trump will not be president at the end of 2019. I think Fred’s also right on virtually all of the other predictions made in his epic post, which I won’t attempt to summarize here. Read Fred’s post – and just make sure you read to the end, because it’s not all doom and gloom.  So, as a Kellblog first, prediction #1 is a pointer.

2. The Democratic Party will continue to bungle the playing of its relatively simple hand. Party leaders will continue to fail to realize that the way to beat Trump is not through a hard-left platform with 70% tax rates that caters to the most liberal Democrats – but a centrist, pragmatic, people- and business-friendly platform that certainly won’t be enough for the far left, but will be far better than the Republican alternative for all Democrats, and most importantly, give centrist Republicans a realistic alternative to what their party is offering them.  The Democratic Party will continue to be more concerned with making statements than winning elections.  This may cost it, and the Nation, dearly.

Remember the famous Will Rodgers quote: “I am not a member of any organized political party.  I am a Democrat.”

 3. 2019 will be a rough year for the financial markets. Political problems in the USA, Europe, and increasingly Latin American.  Trade wars.  Record deficits as we re-discover that trickle-down, tax-cut economics don’t work.  Threat of rising interest rates.   Brexit.   Many folks see a bear market coming.

Years ago, I accepted the fact that – like many – I am a hypocrite when it comes to the stock market.  Yes, I absolutely believe that it’s theoretically impossible to time the market.   But yes, I’m entering 2019 with a high allocation to cash and intend to keep it that way.  Hum.  Try to reconcile that.

For fun, let’s makes this concrete and predict that the BVP Emerging Cloud Index will end 2019 at 750.  I do this mostly to provide some PR for Bessemer’s Index, officially launched via the NASDAQ in October, 2018, but which was built on the back of five years of Bessemer maintaining it themselves.

4. VC tightens. Venture capital funding has been booming the past several years and – for the above reasons and others (e.g., the fact that most VCs don’t product enough returns to justify the risk and illiquidity) – I believe there will be tightening of VC in 2019.  If you agree, that means you should raise money now, while the sun’s still shining, and try to raise two years of capital required in your business plan (with some cushion).

dwk-2mru8aaof8b

If things follow the recent trends, this will be hardest on average and/or struggling companies as VCs increasingly try to pick winners and make bets conservative in the sense that they are on known winners, even if they have to overpay to do so.  In this scenario, capital on reasonable terms could all but dry up for companies who have gone off-rails on their business plans.   So, if you’re still on rails, you might raise some extra capital now.  Getting greedy by trying to put up two more good quarters to take less dilution on your next round could backfire – you might miss one of those quarters in this increasingly volatile environment, but even if you don’t, VC market tightening could offset any potential valuation increase.

5. Social media companies get regulated. Having failed for years to self-regulate in areas of data privacy and usage, these companies will likely to face regulations in 2019 in the face of strong consumer backlash.  The first real clue I personally had in this area was during the 2016 election when Facebook didn’t just feed me, but actually promoted, a fake Denver Guardian story about a supposedly dead FBI agent linked to “her emails.”  I then read the now-famous “bullshit is highly engaging” quote from this story which helped reveal the depth of the problem:

Or, as former Facebook designer Bobby Goodlatte wrote on his own Facebook wall on November 8, “Sadly, News Feed optimizes for engagement. As we’ve learned in this election, bullshit is highly engaging. A bias towards truth isn’t an impossible goal. Wikipedia, for instance, still bends towards the truth despite a massive audience. But it’s now clear that democracy suffers if our news environment incentivizes bullshit.”

I won’t dive into detail here.  I do think Sheryl Sandberg may end up leaving Facebook; she was supposed to be the adult supervision, after all.  While I think he’s often a bit too much, I nevertheless recommend reading Chaos Monkeys for an interesting and, at times, hilarious insider look at Facebook and/or following its author Antonio Garcia Martinez.

6. Ethics make a comeback, for two reasons.  The first will be as a backlash to the blatant corruption of the current administration.  To wit:  the House recently passed a measure requiring annual ethics training for its members.  The second will have to do with AI and automation.  The Trolley Problem, once a theoretical exercise in ethics, is now all too real with self-driving cars.  Consider this data, based on MIT research in this article which shows preferences for sparing various characters in the event of a crash.

crash

Someone will probably end up programming such preferences into a self-driving car.  Or, worse yet, as per the Trolley Problem, maybe they won’t.  While we may want to avoid these issues because they are uncomfortable, in 2019 I think they will be thrust onto center stage.

7. Blockchain, as an enterprise technology, fades away. Blockchain is a technology in search of a killer application.  Well, it actually has one killer application, cryptocurrency, which is why it was built.  And while I am a fan of cybercurrencies, blockchain is arguably inefficient at what it was built to do.  While Bitcoin will not take down the world electric grid as some have feared, it is still tremendously energy consumptive –in coming years, Bitcoin is tracking to consume 7.7 GW per year, comparable to the entire country of Austria at 8.2 GW.

While I’m not an expert in this field, I see three things that given me huge pause when it comes to blockchain in the enterprise:  (1) it’s hard to understand, (2) it consumes a huge amount of energy, and (3) people have been saying for too long that the second blockchain killer app (and first enterprise blockchain killer app) is just around the corner.  Think:  technology in search of a business problem.  What’s more, even for its core use-case, cryptocurrency, blockchain is vulnerable to being cracked by quantum computing by 2027.

8. Oracle enters decline phase and is increasingly seen as a legacy vendor. For decades I have personally seen Oracle as a leader.  First, in building the RDBMS market.  Second, in consolidating a big piece of the enterprise applications market.  Third, more generally, in consolidating enterprise software.  But, in my mind, Oracle is no longer a leader.  Perhaps you felt this way long ago.  I’d given them a lot of credit for their efforts (if not their progress) in the cloud – certainly better than SAP’s or IBM’s.  But SAP and IBM are not the competitors to beat in the future:  Amazon, Google, and a rejuvenated Microsoft are.  The reality is that Oracle misses quarters, cloud-washes sales, and is basically stagnant in revenue growth.  They have no vision.  They have become a legacy vendor.

The final piece of this snapped into place when Thomas Kurian departed to Google in a dispute with Larry Ellison about the cloud.  DEC’s Ken Olsen once said that Unix was “snake oil” and that was the beginning of the end for DEC.  Ellison once said roughly the same thing (“complete gibberish”) about the cloud.  And now the cloud is laughing back.

9. ServiceNow and/or Splunk get acquired. A friend of mine planted this seed in my mind and it’s more about corporate evolution than anything else.  They’re both great businesses that mega-vendors would love to own – especially if they end up “on sale” if we hit a bear market.

10. Workday succeeds with its Adaptive Insights agenda, meaning that Adaptive’s mid-market and SMB presence will be greatly lessened.   Most people I know think Workday’s acquisition of Adaptive was a head-scratcher.  Yes, Workday struggles in financial apps.  Yes, EPM is an easier entry point than core financials (which, as Zach Nelson used to say, were like a heart transplant).  But why in the world would a high-end vendor (with average revenue/customer of $1M+) acquire a low-end EPM vendor (with average revenue/customer of $27K)?  That’s hard to figure out.

But just because the acquisition was, to be kind, non-obvious, it doesn’t mean Workday won’t be successful with it.  Workday’s goals are clear: (1) to unite Adaptive with Workday in The Power of One – including re-platforming the backend and re-writing the user-interface, (2) to provide EPM to Workday’s high-end customer base, and (3) to provide an alternate financial entry point for sales when prospects say they’re not up for a heart transplant for at least 5 years.  I’m not saying Workday can’t be successful with their objectives.  I am saying Adaptive won’t be Adaptive when they’re done — you can’t be the high-end, low-end, cheap, expensive, simple, complex, agnostic, integrated EPM system.   Or, as SNL put it, you can’t be Shimmer — a dessert topping and a floor wax.  The net result:   like Platfora before them or Outlooksoft within SAP, Adaptive disappears within Workday and its presence in the mid-market and SMB is greatly reduced.

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Disclaimer:  these predictions are offered in the spirit of fun.  See my FAQ for more and other terms of use.

Highlights from the Fenwick & West 3Q18 Venture Capital Survey

It’s been a few years since I wrote about this survey, which I post about less to communicate recent highlights and more to generate awareness of its existence.  The Fenwick & West Venture Capital Survey is must-read material for any entrepreneur or startup CEO because it not only makes you aware of trends in financing, but also provides an excellent overview of venture capital terminology as well as answering the important question of “what’s normal” in today’s venture funding environment (also known as “what’s market.”)

So if you’re not yet subscribed to it, you can sign up here.

3Q18 F&W Venture Capital Survey Highlights

  • 215 VC financing rounds were closed by companies with headquarters in Silicon Valley
  • Up rounds beat down rounds 78% to 9%
  • The average price increase (from the prior round) was 71%
  • 24% of rounds had a senior liquidation preference
  • 8% of rounds had multiple liquidation preferences
  • 11% of rounds has participation
  • 6% of rounds had cumulative dividends
  • 98% of rounds had weighted-average anti-dilution provisions
  • 2% of rounds had pay-to-play provisions
  • 6% of rounds had redemption rights

In summary, terms remained pretty friendly and valuations high.  Below is Fenwick’s venture capital barometer which focuses on price changes from the prior financing round.  It’s a little tricky to interpret because the amount of time between rounds varies by company, but it does show in any given quarter what the price difference is, on average, across all the financings closed in that quarter.  In 3Q18, it was 71%, slightly down from the prior quarters, but well above the average of 57%.

vc barometer

 

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How To Get Your Startup a Halo

How would you like your startup to win deals not only when you win a customer evaluation, but when you tie — and even sometimes when you lose?

That sounds great.  But is it even possible?  Amazingly, yes — but you need have a halo effect working to your advantage.  What is a halo effect?  Per Wikipedia,

The halo effect is a cognitive bias in which an observer’s overall impression of a person, company, brand, or product influences the observer’s feelings and thoughts about that entity’s character or properties

There’s a great, must-read book (The Halo Effect) on the how this and eight other related effects apply in business.  The book is primarily about how the business community makes incorrect attributions about “best practices” in culture, leadership, values, and process that are subsequent to — but were not necessarily drivers of — past performance.

I know two great soundbites that summarize the phenomenon of pseudo-science in business:

  • All great companies have buildings.” Which comes from the (partly discredited) Good To Great that begins with the observation that in their study cohort of top-performing companies that all of them had buildings — and thus that simply looking for commonalities among top-performing companies was not enough; you’d have to look for distinguishing factors between top and average performers.
  • “If Marc Benioff carried a rabbit’s foot, would you?”  Which comes from a this Kellblog post where I make the point that blindly copying the habits of successful people will not replicate their outcome and, with a little help from Theodore Levitt, that while successful practitioners are intimately familiar with their own beliefs and behaviors, that they are almost definitionally ignorant of which ones helped, hindered, or were irrelevant to their own success.

Now that’s all good stuff and if you stop reading right here, you’ll hopefully avoid falling for pseudo-science in business.  That’s important.  But it misses an even bigger point.

Has your company ever won (or lost) a deal because of:

  • Perceived momentum?
  • Analyst placement on a quadrant or other market map?
  • Perceived market leadership?
  • Word of mouth as the “everyone’s using it” or “next thing” choice?
  • Perceived hotness?
  • Vibe at your events or online?
  • A certain feeling or je ne sais quoi that you were more (or less) preferred?
  • Perceived vision?

If yes, you’re seeing halo effects at work.

Halo effects are real.  Halo effects are human nature.  Halo effects are cognitive biases that tip the scales in your favor.  So the smart entrepreneur should be thinking:  how do I get one for my company?  (And the smart customer, how can I avoid being over-influenced by them?  See bottom of post.)

In Silicon Valley, a number of factors drive the creation of halo effects around a company.  Some of these are more controllable than others.  But overall, you should be thinking about how you can best combine these factors into an advantage.

  • Lineage, typically in the form of previous success at a hot company (e.g., Reid Hoffman of PayPal into LinkedIn, Dave Duffield of PeopleSoft into Workday).  The implication here (and a key part of halo effects) is that past success will lead to future success, as it sometimes does.  This one’s hard to control, but ceteris paribus, co-founding (even somewhat ex post facto) a company with an established entrepreneur will definitely help in many ways, including halo effects.
  • Investors, in one of many forms:  (1) VC’s with a strong brand name (e.g., Andreessen Horowitz), (2) specific well known venture capitalists (e.g., Doug Leone), (3) well known individual investors (e.g., Peter Thiel), and to a somewhat lesser extent (4) visible and/or famous angels (e.g., Ashton Kutcher). The implication here is obvious, that the investor’s past success is an indication of your future success.  There’s no doubt that strong investors help build halo effects indirectly through reputation; in cases they can do so directly as well via staff marketing partners designed to promote portfolio companies.
  • Investment.  In recent years, simply raising a huge amount of money has been enough to build a significant halo effect around a company, the implication being that “if they can raise that much money, then there’s got to be a pony in there somewhere.” Think Domo’s $690M or Palantir’s $2.1B.   The media loves these “go big or go home” stories and both media and customers seem to overlook the increased risk associated with staggering burn rates, the waste that having too much capital can lead to, the possibility that the investors represent “dumb money,” and the simple fact that “at scale” these businesses are supposed to be profitable.  Nevertheless, if you have the stomach, the story, and the connections to raise a dumbfounding amount of capital, it can definitely build a halo around your company.  For now, at least.
  • Valuation.  Even as the age of the unicorn starts to wane, it’s undeniable that in recent years, valuation has been a key tool to generate halos around a company.  In days of yore, valuation was a private matter, but as companies discovered they could generate hype around valuation, they started to disclose it, and thus the unicorn phenomenon was born.  As unicorn status became increasingly de rigeur, things got upside-down and companies started trading bad terms (e.g., multiple liquidation preferences, redemption rights) in order to get $1B+ (unicorn) post-money valuations.  That multiplying the price of a preferred share with superior rights by a share count that includes the number of lesser preferred and common shares is a fallacious way to arrive at a company valuation didn’t matter.  While I think valuation as a hype driver may lose some luster as many unicorns are revealed as horses in party hats (e.g., down-round IPOs), it can still be a useful tool.  Just be careful about what you trade to get it.  Don’t sell $100M worth of preferred with a ratcheted 2 moving to 3x liquidation preference — but what if someone would buy just $5M worth on those terms.  Yes, that’s a total hack, but so is the whole idea of multiplying a preferred share price times the number of common shares.  And it’s far less harmful to the company and the common stock.  Find your own middle ground / peace on this issue.
  • Growth and vision.  You’d think that industry watchers would look at a strategy and independently evaluate its merits in terms of driving future growth.  But that’s not how it works.  A key part of halo effects is misattribution of practices and performance.  So if you’ve performed poorly and have an awesome strategy, it will overlooked — and conversely.  Sadly, go-forward strategy is almost always viewed through the lens of past performance, even if that performance were driven by a different strategy or affected positively or negatively by execution issues unrelated to strategy.  A great story isn’t enough if you want to generate a vision halo effect.  You’re going to need to talk about growth numbers to prove it.  (That this leads to a pattern of private companies reporting inflated or misleading numbers is sadly no surprise.)  But don’t show up expecting to wow folks with vision. Ultimately, you’ll need to wow them with growth — which then provokes interest in vision.
  • Network.  Some companies do a nice and often quiet job of cultivating friends of the company who are thought leaders in their areas.  Many do this through inviting specific people to invest as angels.  Some do this simply through communications.  For example, one day I received an email update from Vik Singh clearly written for friends of Infer. I wasn’t sure how I got on the list, but found the company interesting and over time I got to know Vik (who is quite impressive) and ended up, well, a friend of Infer.  Some do this through advisory boards, both formal and informal.  For example, I did a little bit of advising for Tableau early on and later discovered a number of folks in my network who’d done the same thing.  The company benefitted by getting broad input on various topics and each of us felt like we were friends of Tableau.  While sort of thing doesn’t generate the same mainstream media buzz as a $1B valuation, it is a smart influencer strategy that can generate fans and buzz among the cognoscenti who, in theory at least, are opinion leaders in their chosen areas.

Before finishing the first part of this post, I need to provide a warning that halo effects are both powerful and addictive.  I seem to have a knack for competing against companies pursuing halo-driven strategies and the pattern I see typically runs like this.

  • Company starts getting some hype off good results.
  • Company starts saying increasingly aggressive things to build off the hype.
  • Analysts and press reward the hype with strong quadrant placements and great stories and blogs.
  • Company puts itself under increasing pressure to produce numbers that support the hype.

And then one of three things happens:

  1. The company continues delivering strong results and all is good, though the rhetoric and vision gets more unrelated to the business with each cycle.
  2. The company stops delivering results and is downgraded from hot-list to shit-list in the minds of the industry.
  3. The company cuts the cord with reality and starts inflating results in order to sustain the hype cycle and avoid outcome #2 above.  The vision inflates as aggressively as the numbers.

I have repeatedly had to compete against companies where claims/results were inflated to “prove” the value of bad/ordinary strategies to impress industry analysts to get strong quadrant positions to support broader claims of vision and leadership to drive more sales to inflate to even greater claimed results.  Surprisingly, I think this is usually done more in the name of ego than financial gain, but either way the story ends the same way — in terminations, lawsuits and, in one case, a jail sentence for the CEO.

Look, there are valid halo-driven strategies out there and I encourage you to try and use them to your company’s advantage — just be very careful you don’t end up addicted to halo heroin.  If you find yourself wanting to do almost anything to sustain the hype bubble, then you’ll know you’re addicted and headed for trouble.

The Customer View

Thus far, I’ve written this post entirely from the vendor viewpoint, but wanted to conclude by switching sides and offering customers some advice on how to think about halo effects in choosing vendors.   Customers should:

  • Be aware of halo effects.  The first step in dealing with any problem is understanding it exists. While supposedly technical, rational, and left-brained, technology can be as arbitrary as apparel when it comes to fashion.  If you’re evaluating vendors with halos, realize that they exist for a reason and then go understand why.  Are those drivers relevant — e.g., buying HR from Dave Duffield seems a reasonable idea.  Or are they spurious —  e.g., does it really matter that one board member invested in Facebook?  Or are they actually negative — e.g., if the company has raised $300M how crazy is their burn rate, what risk does that put on the business, and how focused will they stay on you as a customer and your problem as a market?
  •  Stay focused on your problem.  I encourage anyone buying technology to write down their business problems and high-level technology requirements before reaching out to vendors.  Hyped vendors are skilled at “changing the playing field” and trained to turn their vision into your (new) requirements.  While there certainly are cases where vendors can point out valid new requirements, you should periodically step back and do a sanity check:  are you still focused on your problem or have you been incrementally moved to a different, or greatly expanded one.  Vision is nice, but you won’t be around solve tomorrow’s problems if you can’t solve today’s.
  • Understand that industry analysts are often followers, not leaders.  If a vendor is showing you analyst support for their strategy, you need to figure out if the analyst is endorsing the strategy because of the strategy’s merits or because of the vendor’s claimed prior performance.  The latter is the definition of a halo effect and in a world full of private startups where high-quality analysts are in short supply, it’s easy to find “research” that effectively says nothing more than “this vendor is a leader because they say they’re performing really well and/or they’ve raised a lot of money.” That doesn’t tell you anything you didn’t know already and isn’t actually an independent source of information.  They are often simply amplifiers of the hype you’re already hearing.
  • Enjoy the sizzle; buy the steak.  Hype king Domo paid Alec Baldwin to make some (pretty pathetic) would-be viral videos and had Billy Beane, Flo Rida, Ludacris, and Marshawn Lynch at their user conference.  As I often say, behind any “marketing genius” is an enormous marketing budget, and that’s all you’re seeing — venture capital being directly converted into hype.  Heck, let them buy you a ticket to the show and have a great time.  Just don’t buy the software because of it — or because of the ability to invest more money in hand-grooming a handful of big-name references.  Look to meet customers like you, who have spent what you want to spend, and see if they’re happy and successful.  Don’t get handled into meeting other customers only at pre-arranged meetings.  Walk the floor and talk to regular people.  Find out how many are there for the show, or because they’re actual successful users of the software.
  • Dive into detail on the proposed solution.  Hyped vendors will often try to gloss over solutions and sell you the hype (e.g., “of course we can solve your problem, we’ve got the most logos, Gartner says we’re the leader, there’s an app for that.”)  What you need is a vendor who will listen to your problem, discuss it with you intelligently, and provide realistic estimates on what it takes to solve it.  The more willing they are to do that, the better off you are.  The more they keep talking about the founder’s escape from communism, the pedigree of their investors, their recent press coverage, or the amount of capital they’ve raised, the more likely you are to end up high and dry.  People interested in solving your problem will want to talk about your problem.
  • Beware the second-worst outcome:  the backwater.  Because hyped vendors are actually serving Sand Hill Road and/or Wall Street more than their customers, they pitch broad visions and huge markets in order to sustain the halo.  For a customer, that can be disastrous because the vendor may view the customer’s problems as simply another lily pad to jump off on the path to success.  The second-worst outcome is when you buy a solution and then vendor takes your money and invests it in solving other problems.  As a customer, you don’t want to marry your vendor’s fling.  You want to marry their core.  For startups, the pattern is typically over-expansion into too many things, getting in trouble, and then retracting hard back into the core, abandoning customers of the new, broader initiatives.  The second-worst outcome is when you get this alignment wrong and end up in a backwater or formerly-strategic area of your supplier’s strategy.
  • Avoid the worst outcome:  no there there.  Once in awhile, there is no “there there” behind some very hyped companies despite great individual investors, great VCs, strategic alliances, and a previously experienced team.  Perhaps the technology vision doesn’t pan out, or the company switches strategies (“pivots”) too often.  Perhaps the company just got too focused on its hype and not on it customers.  But the worst outcome, while somewhat rare, is when a company doesn’t solve its advertised problem. They may have a great story, a sexy demo, and some smart people — but what they lack is a core of satisfied customers solving the problem the company talks about.  In EPM, with due respect and in my humble opinion, Tidemark fell into this category, prior to what it called a “growth investment” and what sure seemed to me like a (fire) sale, to Marlin Equity Partners.  Customers need to watch out for these no-there-there situations and the best way to do that is taking strong dose of caveat emptor with a nose for “if it sounds too good to be true, then it might well possibly be.”