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Very Early Stage Technology Investing

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What “great team” really means (Part II – Software/Business Applications)

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We covered building the unique elements of a bioscience team in the last post.  Now we will look at building a great software team, with some thoughts on what that means in traditional software products, business applications and consumer digital companies.  Most of the digital opportunities I see don’t emerge from research institutions, so we will focus on software that emerges from the general community of talent in the world.

For a horizontal software application – think of databases, utilities, b/i tools, etc. – that are primarily sold to IT buyers for IT users, the founder is typically a practitioner who sees some gap in the always creatively destructive software market and fills the breach.  This happens constantly, the infrastructure of what we see in business applications, is constantly being rebuilt using new tools.  These evolutions happen around every 10 years it seems, but there are segments of the infrastructure world that change under the covers while the user experience doesn’t change.  Buzz word though it may be, the movement to cloud computing may be the most disruptive yet, as it is obliterating the cost structure of a lot of existing companies and markets, while creating interesting opportunities for others.  There are large software companies in the enterprise space that are under assault from Amazon just as much as the traditional book business.  A good founder in this space is both a good practitioner, but may not a great one, but has the ability to look at the impact of changes in the complex world of IT infrastructure and develop something quickly that, while not need today, will be needed by everyone in a few years.

A great example of that in my career was Gaurav Dhillon, founder of Informatica in the 90’s and now the founder of SnapLogic.  I met Gaurav when Informatica was still in fresh in the market.  He explained how he had come up with the idea for a better way to move data – it was batch oriented at the time – while working for a large company in Europe, but they didn’t think it was that interesting.  Gaurav knew that the data warehouse boom was coming and that people would demand a better way to move data from transaction systems to large data warehouses.  And because he knew it would happen he founded Informatica and willed the company to become an IPO and continued relevance today.  He built a great team, surrounded himself with smart investors and simply out-performed the field.  Today Gaurav is back with a relatively new start-up that focuses on how to move data with cloud infrastructure.  The need is the same, but the game is changing and he knows it.  I wouldn’t bet against him and this blog post by Ben Horowitz perfectly describes what a founder looks and acts like.  I love this quote: “Although, Informatica is considered a great success, it isn’t a great success for Gaurav, because he deeply believes that both the idea and his ability to execute it exceed the outcome that he achieved.”  And if you read the entire post you’ll see both that Gaurav made a lot of money at Informatica, and that money does not drive him.  Most great founders are shocked to be rich when they get there.  They almost forget that is a by-product of success.  In the application software market you need a bit of a different kind of obsessed practitioner, more of a business leader in a functional area, but they need to have the same insight around how software responds to business needs.  Both Tom Siebel and Marc Benioff were executives at Oracle with sales experience.  They each saw the need for CRM, and one eventually displaced the other by deploying a new type of infrastructure.

The founder of the great software company is almost always a great product evangelist and will drive the first sales.  But early sales don’t mean much unless they can be repeated by less visionary, less willful sales people or channel partners.  In the end one person can only sell so much software on their own, so the great founder now needs a great sales leader.  I have described these characteristics in a previous post, and I don’t really think much has changed.  Read it again for the key qualities, but you cannot compromise on this position.  Too many CEOs mistake their ability to sell with willfulness as a gift that can infect others.  The opposite is more likely true.  Sales success comes from simplifying the message so that any competent, trained sales rep can deliver it.  You shouldn’t need virtuoso skills to sell a compelling product.  You need process, good packaging and pricing, and great competitive materials and training.  A good sales leader will have carried a number bigger than your 2 year plan, know the first five people he/she is going to hire, and have a Rolodex (there’s a Brand name that endures longer than the product itself) of qualified buyers that they will have already talked to before they come on board.

Some companies need a CTO, but it’s not always an early hire.  The mistake is often to put the founder’s coder friend in that role, but that makes sense only if that person is a visionary, good in a market facing role, and really owns the product vision.  And I don’t know that too many business application companies need a CTO.  And having a CTO does not obviate the need for an engineering lead.  Someone with product development experience who is willing to be held accountable to a schedule is first priority, then figure out if you need a glamour CTO.  The most underappreciated position in any software company is product manager.  You need a product champion that manages the natural tension between market need (tractable, infinitely broad) and technical team output (overly optimistic, sometimes too creative).  Software is just too easy to write today, and it is very easy to create too much of the wrong thing and little of the right thing in an application, website or other product.  The product manager must be technically conversant, maybe a developer who hates to code but is good w/ users, but not impressed by just more output.

The team is rounded out by someone that can drive awareness and lead generation for the company, but great early stage sales leaders and their teams are usually not terribly dependent on marketing.  I think it is often better to invert the concept of lead generation in the beginning.  One of our companies has about 200 target customer to tackle this year.  The buyer is easily identified, the readiness of each account to buy is probably easily discerned in a first call/visit, and then you can move on.  A similar approach, maybe easier, works when you are building a company through indirect sales.  The best distributors can be identified and pursued.  Marketing is an important task, but a great company in the hands of great sales/biz dev people need less lead generation and more competitive information, case studies, and other things that bring credibility to the transaction.

Finally, you need a great transactional lawyer and a great CFO/VP of Finance with industry experience.  This may not be a full-time need in the seed stage, probably not.  But you do need a robust revenue and cash flow model, industry standard contracts and transaction advice, and all the right employment agreements, comp plans and other operational tools of the business.  This is a lot to assemble, and we try to add what is missing, augment with proven p/t professionals, and then scale the team.  I do think a seed stage company can’t make much progress with three good legs to the stool.  In a software company that’s the founder, sales lead and VP of Engineering.  In Part III we’ll talk about how a great team really works together, how they act, and the most important characteristic they must share.

Simple designs win Web software fans…

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User interface design has lagged other areas of computing since the 1950s. Early computers were complex, expert-only devices.  Interface methods ranged from switches and dials to key punch cards.  Only specially trained personnel were able to interact directly with the machines.

The emergence of keyboard data terminals in the late 1970s allowed expert programmers to type in commands.  Finally, in the late 1970s, specialized end-user applications emerged.  This event was revolutionary to the industry, requiring accountants, actuaries, and other business end users to interact directly with a computer rather than pass instructions through a programmer or specially trained data-entry clerk.

These early end-users were the first to complain about interface design.  The interface at the time was a simple monochrome screen with characters.  No graphical elements or icons to build a rich user experience.  No mouse to navigate.  No multiple windows to support multiple tasks.  In this world, computing tasks were highly linear, with step-wise data entry and batch reporting as the principal end-user functions.

I entered the industry in the late 1980s and lived through the graphical user interface (GUI) transition in computing.  The introduction of graphical, pixellated, multicolored screens ushered in a new age of application possibilities for the industry.  Unfortunately, application design methods and standards were divorced from how people thought and how tasks were accomplished.  There also was a steep learning curve for the industry on fonts, colors, contrast and other visual elements of design.  About the time application design had evolved to a reasonable level of competence, the Internet came along and reset expectations again.

The principles of good interface and application design that were well established when Mosaic was first introduced created outsized expectations for end-users about what could be done online.  The PC-based client-server computing environment was a complex system that supported far more intricate application elements than the Internet could at first deliver.  Even today most online applications that gather and manage data are primitive in structure and design compared to their client-server ancestors.  Moreover, Ajax and other client-side Web interface elements represent nothing more than a continual thinning of the client-side of computing.  This is true of mobile applications as well.

The real revolution driven by the Internet is the proliferation of training-free, intuitively obvious applications that address mass audiences.  Even when user interface design reached a reasonable level of proficiency in the mid-90s, the typical user was a business employee taking an order, working in a call center, running a financial report, or hiring a new employee.  Each user went through specific training on how to use each application.  User-support specialists stood by to help everyone use each business system. The Web changed that completely.  All users now have consumer-based expectations for application design.

One simple example is travel.  If you are old enough to remember travel before the Internet, you will remember that average individual travelers had no direct computer interaction with reservation systems.  Travel agents and airline/hotel/rental agency reservation agents were trained in a handful of complex applications to make reservations.  The main system, SABRE, still lives behind most travel Web sites in some form.

The Internet allowed the casual consumer to make reservations directly.  To accomplish this, the travel industry had to design user interface elements that were immediately clear to the end user, who had no special training or previous exposure to the system.  This is why Web site design revolves almost entirely around simplicity, obviousness of intent, and field-based data entry.

Today the formerly labor intensive task of taking reservations in the travel industry has been entirely outsourced to the consumer.  Making a reservation using any of the major travel sites is remarkably similar in each case, and few novelties have been introduced.  In fact, a travel site missing a pop-up calendar or violating the basic and well-known steps to complete a reservation would likely fail.  Incremental improvements to the process are allowed, but keeping things simple and task-oriented is the first rule of Web application design.

These simple principles have cascaded into business applications.  End users are trained to use computing resources first on the Web and next on their phones.  Business applications that present a more complex interface design are not likely to meet with broad acceptance.  The evolution of Web design, with a cult-like focus on customer intimacy and task focus, means less innovation in bells and whistles and more innovation in simple metaphors of usage.  It is critical for early-stage Web companies to get this right from the outset.  Tight functional circles defined by clear design elements will attract consumers or business users.  Forget simplicity and complexity will seal your fate.

Written by Mike Venerable

October 13, 2009 at 8:50 am

Exit Fixation

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I spent some time over the last week thinking about exits and how the world has changed in the last decade.  Eleven years ago I sold a company to a pre-IPO software company in California.  Six months before that happened it is safe to say that my business partner and I had never contemplated a liquidity event.  We were too busy running and growing the company to ponder an end to it.  I still remember operating the company as a great time in my life, as we morphed and grew and adapted.  I sense the entrepreneurial spirit of driving forward to build something that is self-sustaining and enduring has diminished in the last decade.

While I would never tell a company owner to ignore liquidity, it will most likely occur in a positive way if you are pouring your energy into growth and milestones.  When you are looking to sell you will only find bottom feeding buyers.  When you are looking to grow and prosper, you will likely find a buyer that wants to capture and own that magic.  I am increasingly mindful of this as I work with our portfolio companies and co-investors.  We are all very focused on capital raising and liquidity, and rightly so.  But I fear outside capital too often squeezes the joy out of company creation and company growth for the owners.  I spend too much time talking to CEO’s about fund-raising, not enough about revenue growth, sales and distribution, and market changing product ideas.

During the Internet bubble’s early days and to a lesser degree during the credit bubble this fixation was understandable.  But in today’s market, a liquidity event for a company is rarely an exit for the leadership team and often the shareholders.  Earn-outs are de rigueur today for founders and often attach to shareholders as well.  Founders who sell must navigate how to structure deals that make sense personally, which can include a few years of Tiffany-class servitude in a bigger company.

Better for investors and founders to be aligned on an exit that grants the liberty entrepreneurs and investors crave.  For investors that means cash at closing.  For founders that means being able to control and define their post-transaction involvement in the acquiring entity.  So how does that occur?  Three ways, I think.  First, getting customers to consistently purchase/use your high gross margin product is paramount.  Second, you must matter to customers that matter to an acquirer, not small and insignificant customers.  Third, you must show that you can win in competitive situations.  This is why breaking out of the boundary dimensions of your company – geography, vertical industry, platform, demographic – into a large market segment is so important.  It validates to a venture investor and to potential acquirers that you are going somewhere other than flat-line, segment-limited boredom.

In short, accelerating revenue growth is the path to capitalization and an exit.  We would all do well, investors and founders, to make sure we are doing all we can to make that happen.

Great Sales Advice

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A friend sent me this post from the NY Times BITS blog last week.  It contains some solid advice on software sales execution from Sohaid Abbassi of Informatica.  Informatica was blessed in its early years with some great sales leadership, including Clive Harrison (most recently at Exeros) and Mark Burton (ran MySQL prior to the Sun acquisition).  The company had a great pre-bubble run of growth under founding CEO Gaurav Dhillon.  Back then they won consistently on sales execution, and seem to be doing that again, more than 10 years later.  And of all the BI/DW companies of that vintage, they appear to be the only significant stand-alone survivor.

Now, to the advice.  During the downturn the company focused on near-term deals first, and tracked account progress weekly.  They focused on where purchase approval paths were clear and understood.  This was done in response to the current economic contraction, but the advice and approach would be a good daily operating model for market-entry software companies.  Most early stage companies struggle with sales and lack the experienced leadership or discipline required to define a clear sales process.  Qualification discipline is typically lacking, and is almost non-existent if the market path is indirect.

Good sales process metrics should be defined first using an analogous example from an existing company.  Hire at least one successful and qualified sales professional to work prospects as early as possible.  New products are first sold on the personal relationships and will of the founder(s).  That is great, but it will not scale.  At some point the product must be sold by sales people or distribution partners who can articulate a value proposition, qualify opportunities, and close deals without hand-holding.  Recognize also that early buyers are typically more vested in the product than later ones.  There is often a mutual feeling of creation and excitement around new products among the first 3-5 customers.  Normal purchasing behavior is ignored, competitors kept out, and everyone is working towards a successful first transaction.  Not so with later customers.  To succeed in scaling revenue the early stage company should focus on process discipline, hiring proven sales talent, and listening to the market feedback they provide.

Written by Mike Venerable

September 14, 2009 at 12:54 pm

What makes a great sales culture…

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Continuing on the topic of great sales leadership from my last post, I reflected on some of the best sales leaders I’ve been around and what set them apart.

First, they were confident, organized, professional and direct.  They were not screamers, did not motivate or try to motivate through intimidation.  I’ve seen that style of leader as well and the result is not good.  You can be sure that great sales leaders are not fire-breathers.  Sales cultures built on raw revenue wins and show-boating – the Ochocinco Sales Culture, let’s call it – rarely create sustainable growth. Rather, they reward short-term, bloated deals that are rarely in the customer’s economic interest.  In the end, the scheme will unravel, often destroying enterprise value for all stakeholders.

In the software industry, the best sales leaders I’ve known were first accomplished closers in their own right.  They rose from the ranks by setting and hitting realistic targets on a consistent basis.  They understood the mechanics of the sales process, knew their materials, asked for and utilized technical resources appropriately, and knew how to work a prospect list and turn it into a consistently achievable forecast.  They were not desperate or manic but methodical and persistent.  These traits led to consistent performance, which led to increasing responsibility.

Another trait of great sales leadership is comfort with numbers, the tedious economic details of deals, compensation structures, and channel costs.  This is, I think, an underrated talent in sales management.  Understanding the customer’s economic context is imperative to shaping a consistent winning value proposition.  It is also required to design a balanced compensation model to attract, motivate, and retain a great team.  And understanding how to optimize spending across the sales process builds enterprise value and attracts investment.  Most important of all, financial numeracy makes the sales leader a full financial partner, along with the CEO and CFO, in the design of the business.  This is especially true in the early-stage venture, when predictability and rapid learning are required to build a viable enterprise.

A good friend and great sales leader I know had all the requisite qualities when I first met him back in the mid-’90s.  At the time he was the Federal Sales Manager at a venture-backed start-up.  He was very different than many of the sales reps and regional managers I’d met before, more polished, open about his belief in building an excellent team, and committed to building long-term customer relationships.  It seemed corny at the time, because I was naive about what was important in building a great sales organization.  By the late ’90s, with the dot.com Kool-Aid flowing freely, it seemed even more out of synch with the world.  But as much of the world soared and then sank, he and his parent company thrived.

Over the years he progressed to run both commercial and public sector sales in the region, then the Eastern U.S., then the entire U.S., then all of North America.  He did this while many other sales reps and sales managers I knew in the industry job-hopped, back-tracked, or flamed out entirely.  Eventually he was given responsibility for all North American operations, not just sales, in what had become a multibillion-dollar company.  He did it by building a culture that matched his principles, the same principles that made him a solid individual sales rep.  This culture delivered consistent results for shareholders as the company continued to grow.  He attracted like-minded people with similar professional habits.  It wasn’t for everyone, and some very successful, flashy sales people bristled, but many stayed and learned to appreciate the style and consistency he brought to the task.

He’s not looking for a job right now but taking a well-earned sabbatical, unfortunately.  And he learned his basic selling skills at Unisys, of all places.  Not flashy, not load, just perfect for the job, it turns out.

Why the first 3 customers don’t matter…

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Most of the software companies we encounter are able to produce a first product and close one or two customers on little or no paid-in capital.  This is a positive trend.  With venture investors looking for lower net burn rates and a clear path to sustainability, seed-stage investors are typically paying for the first 12-24 months of customer acquisition.

Unfortunately, the first one or two customers prove little about how the product is perceived and sold to the next 10.  First customers typically have some connection with the founders that will not exist as the company scales.  Early customers are buying into a vision or a relationship or even a curiosity.  They will have great influence on the first product, often driving features that will be irrelevant to the broader market.

Early customers also have little interest in competitors, bake-offs, RFI’s and RFP’s, much less internal purchasing controls.  First customers will cheat to get a product in and not expose it to normal scrutiny.  If they did, it likely wouldn’t make the cut.  First customers rarely agree to standard pricing and terms.  That’s not to say that you don’t get value from these first customers.  But they do little to prove how the business can scale at a pace venture investors desire.

Consequently seed investors must attract sales leadership to pre-venture companies, which is no easy task.  Proven sales leaders are in great demand, and those suited to an early-stage company role are rare.  They must have solid market knowledge, be willing to spend signficant time in the field, and be able to readily attract a team of similarly minded subordinates.

Attracting such a leader is a test for the early-stage CEO.  The right sales executive is probably more experienced than the CEO and will consume more total cash compensation than anyone else.  The sales leader should be ready to set targets and become increasingly accurate in hitting those numbers as the company matures.  Predictibility and consistent quarterly growth are required to attract venture investment.  The early-stage CEO must relinquish the leadership of the sales function to someone who can focus on it and be held accountable.

None of this is easy.  In all the companies with which I work, there are challenges in transitioning from pioneer customers to sustained and consistent top-line growth.  Flame-outs of sales VPs in early-stage companies are more common than successes.

Of course, flame-outs of early stage companies are also more common than successes.  Choose carefully.