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Transcript

Alex Western – Managing Director at Think3

I’d like to start with a story. About a year ago I met a company called PowerDrive which sells a CRM solution to the auto mechanic space. The founder Marko is actually become a friend of mine. The company was 3 million a year in recurring revenue US had 90 percent customer retention. It had just raised three million dollars at a 12 million dollar valuation from a venture capital firm and it had just secured a two million dollar secured credit facility from a commercial bank that the venture capital firm had introduced Power Drive to. We just agreed to stay in touch. Power drive, Marco the founder and I. So fast forward six months I reconnected with Marco and he said things weren’t going well. The V.C. firm said it’s time to take it to the next level or kick the growth. So he had expanded into three adjacent markets tire change shops, oil chain shops and paint and body shops. But those customers had different use cases and they had poorer financial profiles which meant that his sales cycles were longer. His conversion rates were lower and customer churn was higher. So at that time he had three point five million in annual recurring revenue. He was posting 80 percent customer retention but he had a million and a half dollars of incremental cash burn from all of the sales and marketing investments. But he had lost his second largest customer who felt neglected because of the focus on growth. All right. Fast forward again to present day and Marco and I connected via video conference about two weeks ago. And he said that the commercial bank which had lent him that 2 million dollars was threatening to foreclose. Because he had been in covenant default for 90 days. He said it was ironic that at the very moment he decided to grow. He was growing broke. Marco’s going to lose his company. That’s just an anecdote but it illustrates a broader point which is there’s a fine line between growing recklessly and growing expeditiously.

And the first thing I’d like to share with you tonight. Is that we Think3 think. That there is an incentives misalignment fundamentally between most VCs and founders and that that incentives misalignment is pushing companies to grow too much too fast and it’s ruining great companies like Power Drive. Fundamentally a founder has the incentive to maximize the value of her company. A VC has the incentive to maximize the value of her portfolio. And those two things aren’t the same thing. To understand why take a look at this illustration for me this is one portfolio company whose future value is represented by a span of potential outcomes at t equals zero it’s worth 1 times invested capital. On the left, in a future states of the world, it could be worth zero. Or it could be worth as much as six times invested capital. Or it could be worth something in between. Same portfolio company to which a V.C. might apply the maximum amount of growth pressure. Growth is another word for introducing volatility. Widening the fan of outcomes for that company. So look at the shaded region. You still can’t lose any more than what you put in. You can’t lose any more than a hundred percent but look at the expanded shaded region up top right.

There is an increased chance that it can return ten eleven twelve times invested capital. So show of hands if you’re a founder. Which would you rather choose. In most cases. Left. Right. OK. If you’re a V.C. which would you rather choose. Left. Right. Exactly. There. There’s a misalignment of incentives because. These are really smart. They understand that their portfolio returns don’t follow a normal distribution. They don’t follow a bell curve they follow a power distribution where literally one or two companies drives the entirety of the returns 20 to 30 percent plod along and return between 1 and 2 x and two thirds actually lose money. So. If you’re a V.C. you have the incentive no matter where you think the company might initially fall on this rank. Force ranking of multiples of invested capital. You have an incentive to try to force every company to be a unicorn to try to shoot for the stars because as a founder you might not make that choice because there’s actually an increased chance of total loss on the right hand side. But as a V.C. you’ll make that choice all day long. Because even if it wrecks every company but one. That’s OK because one is all you need.

OK. Quick show of hands who thinks we’re in a bubble right now. All right. That’s good. So we agree on that and raise your hand if you didn’t just raise your hand because I put you to sleep. Yeah. All right. So I think we should. I’m going to go ahead and skip through these next few slides but I hope. Because there are pretty graphs on them you’ll believe that I did my homework. I want to pause here for a moment. That misalignment of incentives I just highlighted has always existed. The reason it’s a bigger deal now. Is because of the bubble we’re in. The proliferation of venture capital firms over the last five 10 15 years and of fundraising by those venture capital firms has created an environment where only moon shots will do for venture capital firms. It’s created almost a paramedic game of musical chairs where. You need. The companies to outgrow their over capitalization in order to justify their valuation. To pass them on to someone higher up the food chain who’s just going to do the same thing. The misalignment of incentives is worse and is having a greater impact because of how large the industry is and because it’s self reinforcing not self-correcting. Because ironically if and as things start to turn sour VCs actually have to push harder to make up the losses.

Ok. I see someone shrugging over there. So thank you for helping me make my transition. All this has been very theoretical to date. Even if it’s maybe been interesting so. How does this manifest itself what are actually the risks of overgrowth?

At Think3, We keep a database of 60000 B2B technology companies globally. We speak with fifteen hundred of them every quarter. We keep detailed notes on their metrics their progress and their challenges. And from that primary research we’ve come up with. This list of six mutually exclusive collectively exhaustive reasons why we think overgrowth can be bad. I see a handful of people taking pictures of their phone that’s good. You can refer to it later in the interest of time I’m actually not going to walk through each one but I will highlight a few things. In Numbers 1 and 2 when we say debt. We mean. The increase costs tomorrow of shortcuts today. It can be in your product or it can be in your organization. Number three I’d like to share that. We consistently find art ESW Capital and Think3. Founders retrospectively regret making the tradeoff between retention and growth. Even though the simple math is. If you shoot for an extra percent of growth it will make up for an extra percent of churn. Because of those fans of outcomes we looked at because the distribution of returns, most companies aren’t necessarily in situations where they can grow that quickly. So we find they’re usually better off actually focusing on retention not on growth. But they can’t make that tradeoff because they feel a lot of pressure from their venture capital and investors or they feel too much pride to make that tradeoff. But because it’s a regret that’s so often shared with us I thought it was worth highlighting. Numbers 4 and 5 are self-explanatory. But number six I want to take a moment on. Because my college roommate. Is a principal at Bain Capital Ventures. And it’s ironic. That when friends of his. Ask him for fundraising advice. He actually dissuades them from talking to Bain Capital Ventures.

He says that the bar is too high and they don’t wanna play that game. He says that one hundred million dollar exit. Is a bad outcome that something went wrong. And I’m like What. Like I know what you’re talking about but. There is something wrong in that scenario because one hundred million dollar exit a 50 million dollar exit a five million dollar exit can be life changing. It should be a raging success. But. What my college roommate is referring to is each time you raise V.C. funding each time you bring more investors into your cap table each time you have to. Introduce greater and greater growth projections in order to justify that valuation and get to the next step you take more and more options off the table. And pretty soon only a rocket ship to the moon will do and your voices won’t let you take some of the exit opportunities that might otherwise look pretty attractive because they’ve got too much skin in the game.

And again think back to the distribution of returns they need to go for 15 x not one two three or four X that doesn’t drive their fund returns. And there’s nothing pernicious about this approach by VCs. I’m not I’m not even critiquing it. I’m just trying to share that that’s how the model works. So we should be aware of it. Those of us who are founders and running our companies. All right. So those are the six risks to overgrowth as we see them. So to take stock real quick. We’ve tried to talk about the fact that we at thing three believe there is a misalignment of incentives between venture capitalists and their portfolio companies. That leads to over focusing on growth. And we’ve talked about the fact that the bubble is actually exacerbating that impact.

And now we’ve talked about why we think it’s dangerous. So what do you do with all that good news right. I’m just a barrel of laughs today. Should I point this somewhere. Would you mind taking me to the next slide if you could. Notwithstanding I’m going to walk through a framework. That will help us. Think about. What we should do because a talk is not very helpful that just identifies a problem and then tries to explain it. What should you do about it. So this is the takeaway. So if you’re asleep wake up. There are basically three states of the world we think 3C for entrepreneurs. You should do some soul searching. And it’s no one ever has the time to but ask yourself whether you really want to have a lifestyle business or whether you want to play in the big leagues so to speak. And there’s nothing pejorative about a lifestyle business. We just mean a business where you can have a life. We mean a business where. A 10 million dollar exit would be good. Where you can keep more equity where you wouldn’t be forced to grow as quickly most of the founders we talked to actually want to choose the lifestyle option but, they’re almost sort of embarrassed by it given the market we’re in. So they feel like they have to sprinkle a little bit of big leagues into it and that just makes their lives more complicated.

So some actionable advice is don’t necessarily go for the Tier 1 bases or the big names especially if you think you might be in Camp 3 because the prestige really does come with strings. But you’re all at SaaStr conference which probably means you’re not necessarily building a lifestyle business. So let’s talk about if you choose. No I want to play the game at. The highest possible level. I want to play in the big leagues. Then to oversimplify. There’s one of two possible outcomes Either it’s the first state of the world. And it works. Like it clicks product market fit. Everything even if only briefly. And if you actually find that perfect scenario just put the gas pedal to the floor and dance until the music stops. Rays from the Tier 1 v C’s just hang on. It’s gonna be painful but hang on. The reason I put zero point zero two percent on that line in the decision tree though is there was some now famous research done by cowboy ventures into outstanding. V.C. backed startups. And they found that zero point zero two percent of U.S. backed startups become unicorns. And our own research suggests that only about 10 percent are ever on escape velocity trajectory or above the Mendoza line so to speak. Even if only for a brief time. And that implies that most founders should actually probably be choosing the lifestyle option.

But where’s the fun in that?

So what should you do if you’re in the second State of the world because that’s the likelier outcome right. You don’t want a lifestyle business you want to play in the big leagues but. It is so rare that that actually pans out. Our unusual advice and hear me out. Is sell more quickly give up. What we mean by that is founders should more often be selling their companies more quickly and moving on to start more companies because they get a lot better every time they do it. Interesting from the same cowboy ventures research that 90 percent of unicorn teams had worked together previously and the average age of a founder was 34. It means it takes multiple shots to get it right. It’s not someone in their college dorm room it’s not someone at the beginning of their career.

We also found not we cowboy venture is also found and I’m plagiarizing their stuff that once they were in the unicorn venture 90 percent of those startups never pivoted and 100 percent of those startups were always above the Mendoza line. The Escape Velocity trajectory and the hard lesson from that piece of the research is. The second. You think you’re not headed to the first state of the world. You need to get out. Because statistically speaking there’s not going to be a third pivot or a second bridge financing or you know a growth inflection that’s just around the corner. Statistically speaking it doesn’t happen. There’s only one slack. What that means.

Again. And this is the real take away from the talk. We at Think3 think. That most founders tragically underestimate the value of their time as being their portfolio. Just like venture capitalists can think of their capital as their portfolio. They get many portfolio companies. But most founders think that well this is my one shot. This is my baby. And our advice is that it’s actually important to try to force yourself to be more rational than that to give up more quickly the second you think you’re not on escape velocity trajectory. Because you can try again and you’ll get a lot better every time you do. And that’s why we founded Think3. Because we have an operating model and a permanent capital solution for those who want to do right by their customers or their investors or their employees and whose companies deserve sustainability and to be made profitable and to have a legacy. But it’s just not possible to build methodically. A pretty steady Eddie company with venture financing. In today’s environment because everyone is shooting for the moon. And there’s no points for second place.

Okay I’ve been talking for like 15 minutes. So it’s time to wrap this up. There are three takeaways. Number one. We think most founders don’t understand that there is a misalignment of incentives. Implicitly between them and their venture capitalists and that that misalignment results in an over focus on growth. Number two. We think that most founders don’t realize that the over focus on growth is actually dangerous for their companies. And number three. We think that most founders can actually use the over focus on growth to their advantage like a judo artist either by more often choosing the lifestyle option or by having a more sober approach to their relationship with their companies and with VCs by actually selling companies more often more quickly to take their learnings and try again and again. And ultimately even though they’re selling individual companies for lower valuations, they amass greater wealth for themselves and create more value for society as a whole. If they follow that path. And. That’s really the crux of why we think growth is sometimes bad for startups but what we think the opportunity is from it. Because Marco of Power Drive learned this lesson the hard way.

When he and I were talking two weeks ago and he was sharing that he thought that the bank was gonna foreclose. He sort of said like what do I do. And I share with him a story of he’s a car guy and I’m a car guy of a mid 20th century Italian engineer named Enzo. Who in 1957 Milla Muglia race debut the fastest biggest car he’d ever built because he was in growth mode and it was called the three thirty five s it was a monster V12 it went 200 hundred miles an hour three hundred kilometres an hour in 1957 it’s a beast. During the race. It busted a tire. It careened off the road into a roadside crowd. It killed both drivers and nine spectators. Anyway he was like. Thanks Alex. So like your takeaway is okay too little growth you die. Just the right amount of growth. You thrive in too much growth you die.

I told him sort of. I told him my point was the engineer’s name was Enzo Ferrari. I told him my point was. He should have sold his company a year ago. But if he still had the ambition he should give up now and go start another one. I told him my point was that growth like speed is inherently dangerous. But, he should keep racing he should keep building. Just like Enzo Ferrari. That is the unusual but I think necessary message that we wanted to share with you this afternoon. Thank you for listening.

(Cross-posted @ SaaStr)

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FULL TRANSCRIPT BELOW

Dave Yarnold–  CEO of ServiceMax

Jason Green – General Partner and Founder at Emergence Capital

Jason Green: Hi.

Dave Yarnold: Wow.

Jason Green: This is … I feel like I have my own talk show. This is awesome.

Dave Yarnold: This looks like one of your Emergence portfolio events, all these SaaS people here.

Jason Green: This is my crowd. Hi everybody. I’m Jason Green, founding partner of Emergence Capital. We were early into the SaaS space, and got very lucky and fortunate to back some incredible founders and entrepreneurs, Dave being one of them. Originally at Success Factors and then at ServiceMax. And we were also investors in Jason Lemkin’s company EchoSign, and I want to say how incredibly grateful I am to Jason for creating this community and being willing to share his wisdom with all of you. He’s really created just a diaspora of SaaS around the world, and it’s really fun to be part of that. So, Jason, thank you for everything you’ve done for SaaS entrepreneurs around the world.

Jason Green: I’m really honored to welcome you, Dave, to the stage. Dave is and was CEO of ServiceMax. He’s a really unique individual. Not only a wonderful human being, but pretty unique pedigree. This guy has been responsible not just once but twice for building a billion dollar plus SaaS company. He first was global head of sales at Success Factor, which he took from … I don’t know. Maybe $1 or $2 million in ARR to over $100 million in public company. And then we were lucky enough to recruit him to become CEO of ServiceMax, which at the time was a very small company, less than $1 million ARR. And grew that now from certain well north of $100 million plus in ARR. And we are celebrating this past week with a year anniversary of the sale to GE for $1 billion. So congratulations, Dave, on an amazing run.

Dave Yarnold: Thank you.

Jason Green: I’m sure everybody in the crowd wants to know, what is $1 billion feel like?

Dave Yarnold: Relief. No, it’s something … It’s interesting. It’s I guess the pot of gold at the end of the rainbow. But it was also indicative of what we were trying to build at ServiceMax, and I was telling you the story that even from the early, early days when I was schlepping back and forth from Santa Clara. When we were less than $1 million, well less than $1 million in ARR, my brother and I used to text back and forth while I was driving back in the days when I did that 1B. It was basically 1B that’s all we would text back and forth. And to me it’s like I’m going to do this, and for him it was you can do this. And so just visualizing your dream.

Dave Yarnold: It was the ultimate realization of building something significant that delivered a lot of goodness to all of our stakeholders, our employees, our investors, and our customers. Something that’s meaningful today and will be meaningful going forward, and that was something that we were trying to build.

Jason Green: Yeah. Well, we’re going to get into a little bit of the story of how you got there, but I do know Dave just got back from Hawaii and you’re probably drinking margaritas on the beach, and you deserve it. So that was awesome.

Jason Green: But it’s always easy in retrospect to kind of look at the success and assume … Because when you look back retrospectively, it looks pretty linear. But it was definitely not linear. In fact, to rewind the clock a little bit to the fall of 2008, the back drop of the financial crisis happening, those are when the discussions about joining ServiceMax started, and the company had five employees, about 20 customers, half a million in ARR. We had put in a term sheet to invest a couple million dollars, $5 million-ish, whatever, pre money valuations. So very early stage. But immediately knew that we wanted to bring on somebody like Dave.

Jason Green: So I think we started recruiting you literally before we even closed the deal.

Dave Yarnold: That’s true.

Jason Green: It’s really hard to reflect on this, but back in March of 2009 when you joined, the S&P was at 700. A 20 year low, and we’re closed at whatever, 2700 in the S&P. It was not a pretty time.

Dave Yarnold: It was literally falling apart at that time.

Jason Green: The world was falling apart.

Dave Yarnold: The banks were folding. It was crazy.

Jason Green: And here you were, you’re coming off the success of Success Factors. You’d made some money. You built a great company there. What on earth gave you the confidence to join this tiny little startup?

Dave Yarnold: As you mentioned, I had been a part of some great companies, and I had had some great mentors. I’d learned a lot. Going all the way back to the early days of Oracle where I was part of the initial applications team there. So I had acquired a bunch of viewpoints and skills that I wanted to apply and build something great. I wanted to recruit some of the folks that I had worked with who had helped make me successful, and with them, just build something that we could all be proud of.

Dave Yarnold: So I was hell bent to do that at that point in my career, and I came to you actually. We had worked together in your role as an early investor at Success Factors, and I told you I wanted to do this. And it was great to sit down with Jason and his team at Emergence. They had a tremendous portfolio of SaaS companies in various stages of maturation, and really kind of look at where might I be able to add value and focus on this dream that I had.

Jason Green: Yeah. So when we invested in the company, they had several founders, wonderful guys.

Dave Yarnold: Yep.

Jason Green: Two of whom basically made this transition with you, and ultimately where there really through the end, all the way through the acquisition. It’s one of the things I’m really proud of having seen you make that transition successfully with the founders. Can you talk a little bit about like what did you do to set the table there for that relationship to blossom like it did?

Dave Yarnold: Well, first off, I was very fortunate, the founders of ServiceMax, Hari, Athani, amazing, intelligent, driven. They knew the domain so well that I needed them. But I think when I think about our journey, a lot had to do with our core values, and my number one value in life is just respect. And so applying that to my relationship with Hari and Athani, and particular respecting what they had done, the risks that they had taken putting their houses up, mortgaging their houses, taking all the money that they had in prior businesses and believing in building a product. So I respected that. I made sure that throughout the history of the company they were the founders. I’m not a founder. I work with them from the early days, but I respected what they had done and the risks that they had taken. And then their knowledge and domain and their ability to connect the business issues to the solution and make that work for our customers. I had a lot of respect for that.

Dave Yarnold: I also engaged with them throughout the nine years that we were together. Every significant decision that we made, whether it was a strategic decision, a product decision, we worked on that together. So we had this little informal, strategic counsel that I never made a significant decision without soliciting their input and taking that input seriously. So I think it was just respecting and collaborating with fortunately some amazing people that were like brothers to this day.

Jason Green: They’re wonderful guys, and they’re off now probably starting their own companies. So you should feel very proud.

Dave Yarnold: And foundations and doing really cool stuff.

Jason Green: Great leaders develop people into great leaders. But they also attract other great leaders to the company. And I’ve actually rarely seen somebody attract the quality of the team you did as early in the history of the company. Talk to us a little bit about how you did that. How’d you attract these folks to come join you and was it the right decision to bring on that high powered group so early in the life of the company?

Dave Yarnold: Well, I will say that wherever you are in your career, apply the golden rule, respect the people around you. Don’t burn bridges. If you’re a good collaborator and a good person that down the road when you start to look for great people who can help you be successful, that’s going to play well for you. I was fortunate that I had done that, and as I was kind of pulling this dream together, there was a dream team that I had envisioned bringing together to do this. You can’t do it on your own. You got to have a great product, great founders, and then some great team mates who can do great things.

Dave Yarnold: So I had this vision of creating a great company, a great place to work, a great company culture, and then you have to have a mission. You have to have a market that you believe in and that you can get your collaborators to believe in as well. But it was …

Jason Green: Let’s talk about that a little bit because, no disrespect, but field service applications maybe not the thing everybody wakes up in the morning going, “I want to dedicate my career to field service.” How did you make that sexy and exciting?

Dave Yarnold: Every discussion started with, “Okay, Dave. Really respect you but what the hell is field service and why should I be fired up about that?” So I think a big part of a leader of any enterprise SaaS company, you need to understand who you serve and what that market is. So fortunately when I dug into it, enterprise field service market is massive. There’s probably more than 20 million potential end users around the world.

Jason Green: More field service users than salespeople from what I understand.

Dave Yarnold: In many countries, yes. Service is a big priority. It’s going to be the majority of revenue generated by most manufacturers over time. GE, which bought us, more than two thirds of their profits come out of service. You need to know that stuff, and be able to sell it initially to bring a team on board. So you have to know the market opportunity but you have to be able to talk about the type of company you want to build, the type of values that you’re going to build the company around, and ultimately those couple of things combine into a mission that you commit to and get everybody committed to.

Jason Green: Yeah. How did you make that real, the mission? Tell us about some of the techniques you used.

Dave Yarnold: Yeah. So it’s interesting for many SaaS businesses, we’re able to apply something we all call eating your own dog food, right? So you use your own software and you have a good sense of what could go wrong and where you need to fix the product. Well, our customers, they go out and fix things like oil rigs and power generation plants, things like that. There’s no way we as software folks are going to be able to eat our own dog food. But we really needed to embrace the domain. One of the core aspects of this company, I think one of the core things that any SaaS business should aspire to do is capture the hearts and minds of your core market.

Dave Yarnold: So how are we going to do that if we don’t really know what those folks do on a day to day basis? So we did a number of things. First off, I hired some folks out of the industry who had walked in the shoes of the folks that we serve, and they were passionate about that industry. They brought a level of knowledge, domain expertise to the company. The second thing I kind of …

Jason Green: From one of your customers too, right? I mean, one of your hires …

Dave Yarnold: Yeah. One of the people I hired who was a key hire was running the European service business for Pitney Bowes. He ran 1000 technician workforce, and he and I hit it off. We had a lot of things that we believed in in the service business, and I said, “You need to change in your life. You need to come work for us and be an evangelist for how we can improve organizations like yours,” which we had been doing for them.

Dave Yarnold: One of the other things that was really interesting is I really wanted to get a sense of who’s using our software, what do they go through on a day to day basis. So I started … When I would have meetings with my customers, I’d say, “Hey, can I go out with your guys? Can I go out and see what they do, what they’re fixing, what they deal with on a day to day basis?” And of course the customers like, “Yeah. That’d be great. Thanks for having an interest.” So I started going on what we all ride-a-longs. And it was amazing to see the business from the end user’s perspective, see what they were dealing with when they were using our software, which wasn’t always perfect. You just don’t know until you actually live the life with your customers.

Dave Yarnold: So I love this so much. I came back after a couple of ride-a-longs, and I said, “Everybody in the company is going on a ride-a-long.” So I had everybody going out …

Jason Green: Kind of like Jeff Bezos who makes everybody answer a customer support calls. I mean, it’s getting real with your customers.

Dave Yarnold: It was an unbelievable experience for the entire company, for all of our companies. We actually ended up with a form where they had to come … They had to learn things about the customer and share that with the entire company. We had a whole group set up internally to share, and lots of great stories.

Dave Yarnold: The last thing I’ll say, so I tried a bunch of wacky stuff. I don’t even know if I’ve shared this with you. But one here I came back … I’d always go to Hawaii for the holidays, and the team would be like, “Uh. He’s taking time off. This is going to be bad.” Because I’d always come back with crazy ideas.

Dave Yarnold: So one day I get back from Hawaii. It’s like January 2nd, and I said, “Okay. So we’re going to turn the entire company into a fantasy football league basically.”

Jason Green: No, you haven’t told me this one.

Dave Yarnold: Have I told you?

Jason Green: No, you have not.

Dave Yarnold: So basically the biggest challenge as you get bigger and bigger is to get people aligned around the things that matter, get everyone to focus on your customers, on your salespeople, and doing that cross functionally is hard. As you get bigger, everybody gets into their silos. So what we did was we had team captains, eight of them, from around the company across different functions, and then at our kickoff, we had an evening event where we actually had a draft. It was like the NFL draft. We had hats for all the teams.

Dave Yarnold: So we had salespeople. So the salespeople were all on different teams. They all got hats. The whole company then was allocated amongst these eight teams, and every month there were prizes, there were points mostly for closing sales, right? So we got everybody on that team focused on how are my sales folks doing, what can I do to help them close more business, but then it also gave us a lever to say, “Hey, this month we’re going to do penalty kicks, and we’re going to get points for getting sign ups for our customer conference,” or, “We need NPS feedback.” So it gave us a way to get everybody aligned around the things that mattered, and was a fun experiment.

Dave Yarnold: At the end of the year, the prize was a big prize. Somebody actually got a car. So there was actually something in it for the team that won.

Jason Green: Not a van. Huh?

Dave Yarnold: Not a van. Not a smart van. But yeah.

Jason Green: No.

Dave Yarnold: It was pretty interesting.

Jason Green: I mean, you can see Dave’s customer passion like just flows through him, and he’s excited in his passion about building the company as he is about building a product. And I think that’s important. And culture, it gets thrown around a lot as a term. How important is it do you think really and what did you do to actually make sure that your values were being inculcated into the company?

Dave Yarnold: I think it’s huge, especially when you go through the dips. It’s the fabric of the company that binds everybody together. So I’ll talk a little bit about culture. Everybody has their own perspective on what that culture should look like. I don’t think there’s any right or wrong one. But I think that adopting one and then being consistent about it over a period of time yields a lot of dividends. So I’ll tell you the story of how ours got started. I had a lot of ideas but it wasn’t necessarily going to put it on paper. But our first, I don’t know. First month or so in the office, one of our-I don’t know-eight employees there said, “Hey, you need to start communicating like a CEO. When are we going to have our first company meeting?” We were in an office about the size of this stage.

Jason Green: I remember it. Yeah.

Dave Yarnold: Yeah. Except it wasn’t as cool. And so, “All right. Company meeting. I’ll do that. I’ll put together a PowerPoint, talk about my kids and where I came from and what my aspirations were for the business.” But then I also put together a slide that said, “All right. How are we going to behave as a company? How are we going to interact with each other, with our customers, with our partners?” And I just threw a few things down that were important for me in life. I talked about respect. I also am a big competitor. I want to win and I wanted to explain what winning on a big scale, what that was going to mean, not only to the company, but to each of them individually being a part of that.

Dave Yarnold: So I had a list of seven or eight how I want us to behave, and I put that on a slide. I talked about it. “Hey, this is a little bit of me. This is how I want to operate.” And about a month later, it was time to have another company meeting, and had a whole bunch of other topics. I said, “Maybe I’ll throw that slide in again. Emphasize a few of those points.” I had that same slide, different fonts, a little prettier over time. I had that same slide in every presentation I gave at every company meeting for like eight years. And there were times when I said to my team, “Hey, this is feeling a little hooky to me because I try to keep it fresh and emphasize a few different points. But should I stop doing this?” And my team was, “No, no, no. You need to do more of this. This is what people believe in.”

Dave Yarnold: Look, we stood behind those values very early in our history. We had an engineer who was verbally abusive to other people, not being respectful. One of our best people, out.

Jason Green: I remember a sales executive.

Dave Yarnold: Sales executive who generated half our sales in one of the early years. Again, disrespectful, out. If you walk the talk on your culture, stand behind it, everybody knows what they should do and why they should do it, and it empowers the entire organization. Everybody feels good that we’re going to act consistently. We know what we believe in. We know how to behave. Everybody feels really, really good about that.

Dave Yarnold: And it doesn’t have to be my version of the slide. It has to be something that you stick to, that you’re consistent, that you stand behind, that everybody understands it and buys into it. It’s the core of a good culture.

Jason Green: So it’s always this kind of tension between performance and culture. You made some decisions obviously where the cultural fit wasn’t there to sacrifice some short term performance for long term success. There were a couple situations where things where individuals were topping out on the executive team. Tell us a little bit about how did you know when you needed to make a change and then how did you do that in a way that didn’t ripple out into the rest of the organization in a negative way?

Dave Yarnold: The honest answer is sometimes you can see it but a lot of times you don’t see it. And I think this is one of the biggest blind spots that you can have as a CEO is you’ve got this team …

Jason Green: What’s the tell?

Dave Yarnold: Yeah. So, look, the tell is when you’re struggling as an organization. You start to see where certain parts of the organization are falling behind, but you still can justify keeping your team in place. You can still kind of get yourself there. That’s why I think it’s really important to leverage some of the folks around you. So I had a couple of … First off, the board’s input, it’s painful at times to hear from your board like, “Hey, Dave. Maybe you need to think about a change here. We’re seeing it. We sit on a lot of boards. We see a lot of companies.” So having that feedback was important.

Jason Green: Had that mentoring group, 10X, right?

Dave Yarnold: Yeah. The second thing that I would mention is that I was part of … Jason actually introduced me to a gentleman named Mark Kilo who runs a methodology called 10X CEO, and his premise is that CEOs should focus on a few things at any point and time, and actually focus on a certain set of skills based on the size of the company, and that focusing on those things will result in inordinately positive results. And part of this was I was part of a group of eight CEOs that every quarter I would kind of walk through by business. This is not a social thing. This is very vigorous and I would bring my business and I’d talk about my team. And it’s amazing, when you sit with a group of folks, you can tell when somebody’s team is weak. It needs to be changed.

Dave Yarnold: So I got a lot of feedback from what was like a second board for me. I’d have a second meeting where I’d have to go through my business with a bunch of CEOs that I really respected who had come to know my business. That was a really valuable thing to have.

Jason Green: I love the perform group. Both methodology and structure of peers who have mutual trust and are willing to give you that feedback. It’s very, very powerful.

Jason Green: I want to shift a little bit to the GE relationships because every entrepreneur is out there building their business, you’re growing the business, you’re raising money, you’re doing the right things. Ultimately, if you get investors involved, you need to generate returns. We aim to try and take these companies public ideally and build really independent companies but this is clearly was a great outcome. Tell us about some of those key evolution steps of building the trust required for somebody to pay $1 billion for your company.

Dave Yarnold: So it started … I don’t know if you remember. You probably remember this. Really early on when we were still in Santa Clara, we got our first deal with GE. It was for …

Jason Green: It was $150-

Dave Yarnold: No, it was like $25,000.

Jason Green: Pilot.

Dave Yarnold: It was a little pilot. It took us a year to close. We’re really proud of that. I mean, GE is an icon of global business despite what it’s going through today. It’s just one of those great companies. Very focused on service. And it really felt like we could do something to help them with their business. That was a point of pride for me and for the company. I stayed really involved with that early implementation, got to know the local CIO, built a lot of relationships across the company, and I think the relationship that we established with them was that one, we were trying to do great things for their business, and two, we were just really transparent and flawed and human in our interaction with them. They believed they could trust us, and it was really interesting, over time our competitors tried to undermine us with some I’d say less than honest tactics.

Jason Green: Never happens, I’m sure.

Dave Yarnold: Right. Right. Little fudd here and there. And the fact that we were so honest and, again, not perfect but committed to doing the right things for them, we just built a great relationship. Now I never thought it would end up at a dinner where the CFO said, “Hey, how about if we help you grow this business. We do this together because we really understand service and we believe in the potential of this business.” But that wasn’t why I was so committed to it. It was a great company that was … It was the epitome of what we were building the product for, which was large scale enterprise field service with 40-50,000 field techs supporting things like oil rigs and MRI machines and wind turbines globally.

Jason Green: So they started out as a pilot customer, and then they were significant customer in a division, and then you rolled out to multiple divisions.

Dave Yarnold: 13 different divisions.

Jason Green: 13 different divisions of GE. Then they become an investor in the company.

Dave Yarnold: Yes.

Jason Green: Right? We raised a strategic round with them and PTC I think and others, right?

Dave Yarnold: Yes.

Jason Green: And then ultimately, and I do think like companies generally aren’t sold for $1 billion. They’re bought for $1 billion, and the reason they’re bought because they believe you’re going to fill a strategic need for their organization going forward. And I think you had those trusted relationships and you built that vision.

Dave Yarnold: And they were building a software business, and the fact that we had software that was geared around what they do to make a living, which is do large scale service contracts and deploy tens of thousands of field service techs, they’re going to build a software business around their core competency. This is it. So there was tremendous overlap in terms of how we saw the business and how they saw the world.

Jason Green: I know we’re running short on time. There’s so much to cover. Tell us a little bit about looking back now, the process of actually selling the business, now having been integrated for the last year. Any thoughts or words of wisdom for folks about reflections now, seeing one of the largest companies in the world and how they operate, and the challenges you faced as a startup entrepreneur?

Dave Yarnold: In terms of the integration process or the acquisition process?

Jason Green: I would say you set it up well for the acquisition. I think you put a lot of effort into making it successful post the acquisition as well, and I think that was a really intentional thing.

Dave Yarnold: So I’d say it’s easy to assume that your acquirer knows exactly what they’re going to do with you after the acquisition. And some of the acquirers, we’ve all heard Oracle has a process and Cisco has a well defined process. But a lot of companies don’t have an incredibly well defined process. And I think it’s easy to just be lambs to the slaughter and just let whatever happens happen. But the team, we had pride in what we had built, and we wanted to have influence over GE’s business. So we did in two stages. Going into the acquisition we said, “This is going to be our strategy around our product, around culture,” how we were going to maintain the goodness of what we had built but also be respectful of what we were being required into. And then also we had a really clear strategy on how we wanted to influence GE’s roadmap.

Dave Yarnold: So that was stage one was actually saying, “Hey, we’re going into this thing. We can either go in passively or we can go in with a point of view,” and we went in with a point of view. And it was well defined and we shared it with the company.

Dave Yarnold: I think once we got into the process, then what happens is you have these integration teams that come and they have their clipboards and their checklists and all this stuff. And you find yourself just allowing that to happen, and after about a month or so, I said, “This is going down the wrong path.” I went back to the CFO of GE and said, “Let me just reaffirm what is the number one objective here.” And it was growth. They wanted us to grow 45% year over year. I said, “If that’s the objective, then you need to let me do this and we will do that for you if that’s the number one objective. So we need to strip out a lot of this integration activity so that we can hit that number one objective.”

Dave Yarnold: So the bottom line is we got that accomplished. We had a great plan. We ended up growing 85% in our first year with GE, which I feel really good about.

Jason Green: Yeah. Despite a lot of the things going on at GE, this is one of the high points for sure.

Dave Yarnold: Absolutely.

Jason Green: I think, again, the way you’ve treated your acquisition partner here is the same way that you’ve treated everybody that I’ve seen, which is you treat them as you would want to be treated. I think that that reputation will build great businesses in the future.

Jason Green: As you look back and reflect on the Success Factors experience, I mean, I know you worked incredibly hard. It was taking that company public and then ServiceMax was a eight year plus journey.

Dave Yarnold: Right.

Jason Green: When you look back, inspirationally, was it worth it? Was it worth all that sacrifice? I mean, you carried a lot of burden and weight, and what is it that you look back on that made it worthwhile to do what you had to do to be successful?

Dave Yarnold: Oh, so much. I mean, there’s just so much pride in building something that everybody is proud of. I used to talk about the mall test with my employees. I used to say, “Look, if we run into each other in the mall, is your family going to like turn away and not want to see me or are they going to embrace me,” because this is one of the greatest experiences of their family members career and they feel really good about that. So creating that and some of the feedback that I’ve gotten over the last year, what this has meant to my employees families and lives and careers, I mean, it makes it so … It’s a rush. It’s unbelievable. And, again, it’s just being focused on building something that’s going to be great for your investors, your employees, and your customers. If you stick to that, it’s going to lead you down the right path.

Jason Green: I know you’ve always talked about how proud you are of your team and how much it was as much for them as it was for you. I can speak, I’ve been in the business for 20 plus years in the venture business, and we’ve had a lot of fortune at Emergence. I’ll tell you, this is one of the most special rides I’ve ever been on. I’m sorry it’s over, and I hope to find opportunities to work together going forward. But thank you for being here to share your wisdom and inspiration.

Dave Yarnold: Pleasure.

Jason Green: And the next ServiceMax out there, let me know at the end of this session. So thanks very much.

Dave Yarnold: We’ll do right by you. Be a good conversation to have.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Or has culture been put on the backburner as you have scaled?

Well, it’s time to put culture at the forefront of your startup if you are looking for more funding in 2019.

Jonathan Userovici, VC at Idinvest Partners, talks about culture being a key criterion for raising capital. He uses the 5 Ps when it comes to culture.

1. Priority – Shift your priority to be on culture from day 1
2. Pen – Grab a pen and write it clearly. Hubspot is a great example.
3. Proclaim – Implement your culture in every element of your business (recruiting, onboarding, etc.)
4. People analytics – While not available in the past, it is available in many SaaS products today. Jonathan recommends using people analytics tools so you can know if your culture is starting to break from employee feedback.
5. Personal – Make your culture personal. Let it represent your values because there is not a “one size fits all” culture that will work for your startup.

Also, if you didn’t attend SaaStr Europa, we’re doing it bigger and better in June 2019.  Grab your tickets!

Transcript

Jonathan Userovici – Tech VC @ Idinvest Partners

Hi everyone. So my name is Jonathan. So I’m a VC at Idinvest which is one of the largest pan-European VCs based in Paris. So we invest about 200 million euros annually series and b across Europe sometimes in the US. And I’m gonna talk today about building a good culture. Has a good culture and accompanies one of our main criteria when we invest. So first of a couple of definitions myth and truth about culture. What culture is so first myth when we speak with entrepreneurs that culture is exterior said basically a lot about ping pong table in the office or slide beers on Thursday Star Wars movies every other month. So it’s a myth. Culture is definitely not on the exterior. Second myth is that group culture is actually organic. So I build a company I will have a culture in my company anyways it’s gonna grow organically. So that’s true. You will get a culture at the end of the day in your company but it doesn’t mean it’s gonna be a good culture. So that’s a myth as well. So now the truth though the definition I took the Harvard Business Review definition for a few weeks ago they wrote like a big magazine on this topic. So it’s a bit boring but it’s the tacit social order of an organization blah la la la. Which basically means that culture is shared among all the people in the company and it’s enduring something you have in the long term. And what we think as investors and by experience with research with experts we spoke with is that culture is actually a product. It’s something that could be managed and that has to be managed to scale. So it’s important to work on your culture because it’s proven there is a clear correlation between culture and success.

I took a few examples to show that. So Harvard approved that. So we should research approves. They did a big study in 230 companies with 1300 executives in seven different verticals showing that companies which has which had at least two of these four values had a very high employee engagement so purpose learning enjoyment and caring. And there is a clear correlation between employee engagement and the results of your company. Other VCs and very renown VCs all over the world. Say it. So Ben in the US wrote a lot about culture. It sounds abstract yes but there’s nothing more important when you listen to suddenly from Excel in Europe. The two main two top qualities of every great leader are that they can hire like incredible talents and that they know that culture is every single year which are two things which are correlated. I put another quote from index so basically showed that people with a lot of experience tell you that they have worked with tens and tens and hundreds of companies and that culture is everything. And the more analytical slide that says you know the numbers show it. So basically the three first lines in this graph from Glassdoor show that the three groups of Best Places to Work outperform from far the S&P 500. So it’s kind of proven and why because a very strong culture allows you to hire the best people. And for me it’s your marketing to hire the best people and to retain them.

And that’s why you see a lot of people using Glassdoor great places to work best places to work and it’s got a study to attract talent because talent wants to work for a great place and not for and not only for a good salary at least. So I did, I tried to do this five minutes five-piece guide so we can get actionable things out of this talk. After this talk in your company to implement not only culture but group culture and I spoke with a couple of companies in our portfolio that you can see on the on this slide and which either working on it very hard either worked on it very hard recently so the first P is priority so we speak with so many founders especially in the early stage telling us that they have to build a product the customer is the most important thing in the company. And culture is secondary because culture will grow organically so that’s not true. You have to think about your culture as a priority from day one. The second P is take your pen and just write it clearly. A good example of this is what HubSpot did in the US basically building an 120 page deck with a culture code. Here are kind of the seven big thing that I wanted to implement the culture code in the companies but it’s actually 120 pages talking about that so you can reflect what you implement in your culture and all your processes and how you work in the organization communication etc..

And so this was a time the 3rd P is proclaim. So spread it everyday and in your processes for example recruitment and boarding engagements.

So what does it mean? It means that you have to tell it to write it to spread it in your company every day. So when you scale for you know from 100 employees to 1000 employees in 18 months. You have to spread your values and what your culture is and what kind of company you want to be. So recruitment for example I spoke with a founder a few weeks ago who told me was looking for this very particular talent technical talent that was scarce for months and he ended up hiring a guy with the talent but which was not the perfect cultural fit. He finally hired it. He stayed like three months of four month and then he was invited to leave the company because the cultural fit was really really bad and the product was roadmap didn’t like go very fast because you didn’t want to communicate very well with the rest of the team. The atmosphere was not really good at so first they lost like for a month. They have to hire another guy. And there were some toxicity left in that team and that company. So again maybe it’s a very important and scar stallion but it should fit your culture from day one from the recruitment process onboarding same thing. We have a lot of companies doing things about that that’s more like classic let’s save it on Fiero for example a background check SaaS based in the UK had this onboarding days the first Tuesday of every month and they basically tell the employees we are like that we want to do that. These are our values. These are the schemes to get a promotion because you represent this or this value. So I mean they just take the occasion to do it. And engagement same thing.

The fourth P is people analytics so people analytics tools we’re pretty scarce ten years ago, five years ago. But now you have like so many tools like Pekin for example which allow you to track your employee engagement your employee happiness to get feedback for data and peers from your employees and to get feedback in real time so you don’t have to wait for the annual survey you just tracked that feedback every day every week every other week and so you can iterate on your culture you can keep your people and you can strive. So use people analytics and it’s not very expensive tool.

The 5th P, the last one, is make it personal. So when I spoke with the founder of Waze a few weeks ago he told me that you actually built Waze because he wanted to build a place we wanted to work in. So it’s thought culture from day one and his advice to thousand founders was get a culture plan from day one. And it was his personal culture plan you didn’t imitate was just his values with his management team his founders co-founders et cetera. But there is not one model to rule them all and so make it personal from day one. Here are like a few example of great companies with different cultures. Zappos is more about enjoyment like having fun every day. Disney World by carrying so and the hero like some quotes that you can read afterwards. But it basically means that there is definitely no one model to rule them all and that you can succeed with a different culture it can actually be a big different vision for a company.

So last point and last slide is what can be tressing for SaaS founders today or founders generally speaking, is how does a V.C. evaluate culture? So we do three things. The first thing when we evaluate culture is doing our job which is basically asking questions. So what do you do about culture and asking all the questions that so that if you’re making an effort if you’re done making efforts to have a strategy if you don’t have a strategy. We also meet your team members we meet your management. We go in your office. We see things that the first the diverse thing. The second things is we do due diligence right. So we speak with your clients. We speak with your partners. We speak with a former VCs which invested in your companies. We speak with previous employees sometimes that we know. And it gives you know a very very good picture of and a good valuation of your internal culture and the third thing we do is we actually use the tools that are public today and that allow us to get some data on your and your culture and your employee engagements. So we go on The Glassdoor you know we go to Google and we just type you know the name of the company Glassdoor. And if you get two stars be with like tons of reviews then it’s kind of weird or we use data from softwares like Pika, Cultureamp and Glint which some startups use as a KPI. They track doing their board and we have it and they send it to us. And so we can we can track that.

So that’s how we that’s how we try to evaluate culture and that’s why generally speaking it’s a very important investment criteria for us because culture is important for success so thank you.

The post Why Culture is a Key Criterion for Raising Capital and Driving Growth with Idinvest partners (Video + Transcript) appeared first on SaaStr.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

What we haven’t done yet is put it all together in a simple, quantitative spreadsheet.  Let’s do that — it is eye-opening:

This is what happens in the real world.  A great rep often literally closes 9x more than a poor rep.  And even 2.5x+ that of a decent, mid-pack rep.  With the exact same number — and same quality — of leads.

But how?  How does this happen?  It’s several factors compounding:

• First, the best reps close more seats / more revenue per deal.  They are better at mapping out business processes, at discovering how many seats, units, whatever there is to sell … and they just sell more.  Like clockwork. The great reps truly and quickly and effectively learn how much each prospect really can buy — and they get that much.  Without fear, and without ripping the customer off.
• Second, the best reps generally discount less.  Not always, but usually.  The best reps get very confident in the value proposition.  And poor reps and even mediocre reps fall back on the only arrow in their quiver — A Discount!!  But discounting a product a prospect doesn’t really want doesn’t really work.  In fact, it can harm close rates.
• Finally, the best reps close faster and close more.  They don’t mess around, or play games.  They know time is the enemy of deals.  They get very good at key objections.  The know the product and the pitch and the value prop cold.  They build strong relationships with prospects, and add enough value they can ask for a favor back — the sale.  They close better and faster.

These 3 factors together have a compounding effect, which is key.  You can still be a good rep and just be good at some of these 3 factors.   If you are great at all 3, then magic happens.

The top reps close larger deals than a mid-pack rep, discount just a bit less, and close faster … and the three factors together pull them far, far ahead of the pack.  For the same amount of effort (and often, even less total time).

This is also why you have to fire the poor reps fast.  You need to see if they can deliver.  But if they can’t, they don’t just miss quota.  They leave all the money in the spreadsheet above on the table.

Put differently, in the above scenario, the above Poor Rep left $160,000 on the table ($189,000-$20,790). In just one quarter.  Revenue that was there for the taking.  The leads were there.  Waiting to be sold to.

Route those leads to someone better, and magic will happen.  Fast.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Also, if you didn’t attend SaaStr Europa, we’re doing it bigger and better in June 2019.  Grab your tickets!

Transcript

Founder & CEO @ SaaStr| Jason Lemkin

Partner @ Point Nine Capital | Christoph Janz

Jason Lemkin: You know we probably met. This is so Bessemer if you haven’t seen this go to Bessemer Venture Partners Web site there’s something called the Cloud index and they look at where all the public cloud companies have gone. And I think this starts around 2013. And Cloud stocks and SaaS stocks start to do well. And then in February 2016 there is that drop. You remember that? I seemed like the world was over.

Christoph Janz: That was the day of the SaaStr conference in SF.

Jason Lemkin: It was. So every VC said that said the unicorns were dead the world was over. Right.

Jason Lemkin: So but literally in February 26 2016 people thought SaaS is gonna be tough. Yeah. And that lasted almost three weeks. That downturn didn’t it. Yeah something like that. And then what happened since then?

Christoph Janz: Yeah well first of all like in so many pitch decks that we’re getting there is no description of what line we bought but I’ll guess right.

Jason Lemkin: It works well for YC.

Christoph Janz: It goes up and to the right so it must be good. I am assuming that the blue one is the cloud index and below is NASDAQ.

Jason Lemkin: And that’s just my fault for making the slides. Yeah the top is SaaS companies and its NASDAQ back down. I never got Dow Jones or something. Yeah the top one is the cloud. What is that five hundred and fifty percent growth in the last five years?

Christoph Janz: Yeah I think that that is remarkable. I think it’s even like even if you look at the the multiples. Yes I mean doesn’t look quite like it but it doesn’t look quite like this but it’s also clear that it’s and pretty much never seen before all time high.

Jason Lemkin: So let me ask your question we are we had the speaker dinner last night in one speaker who will remain nameless. That’s all off the record but but I suspect he may bring it up again. He said he thought the markets were overvalued from from a public company what do you think. Is it overvalued. I don’t worry. Should people prepare for a huge crash next week? Are the good days gonna be over soon.

Christoph Janz: Super hard to predict. I don’t even dare to come up with a prediction. I think it’s clearly highly valued in comparison to the past. Yes. Is it going to be expensive compared to the future. Hard to say. I mean history probably tells us that there is going to be a reversion to the mean unless the world has somehow changed and the world has probably changed to a certain extent. But at the same time like this this time everything is different it’s also what people used to justify every bubble.

Jason Lemkin: I think so. I tell you funny just because it’s all just between us here in the room when my last company was acquired by Adobe in 2011 I was there through 2012 and Adobe his stock has since gone by I think 28 to almost 300. So it really great great idea for me to leave. But what was interesting. Adobe has been one of the most successful cloud stocks I can tell you in 2011 2012. No one there had any idea. No nobody knew. So and I think what we did. And then and then I realized why didn’t we know why didn’t we know. And I think what we didn’t realize which we’ll chat about in a couple of slides is just how forceful it would be when businesses went to we call it the cloud. Now when they went to SaaS and we all knew four or five years ago we were in the second inning. But we didn’t know what second inning meant and we didn’t know how big these these innings were. And I think we we didn’t realize that. That these markets for these products would grow one hundred or even a thousand acts right. That’s what’s changing and I don’t know that that trend has I don’t know or even not far into that trend.

Christoph Janz: I’m I mean I’m obviously super bullish about the future of science for all kinds of reasons. I think just. I mean I’m not that interested in like the stock prices so I’ve no idea if they will go up or down maybe they will. I think they can correct by 30 or 50 percent anytime right and it looks like it’s a random walk down maybe not. Maybe not Sandhill Road but Wall Street. So. But I think that’s also not what we really care about. Like we we really care much more about like the really long term potential to build great businesses. And I think if you talk about that we’ll probably agree that that is far from over.

Jason Lemkin: I think I just had a couple I put together but this was a good one that Ari had the other day. There’s twenty five SaaS companies that are public that are not just that are public that are up 40 percent this year. So when we did that SaaStr annual and 20 the first one is in 2015. Aaron Levee came he was the warm up speaker it was one week after box that IPO the roadshow he was exhausted. I asked him in that you can see it on YouTube what is Wall Street think of SaaS.

Jason Lemkin: How many folks get it. He’s like well they’re learning a few folks are getting there right. That was the first IPO. Now we’ve had a dozen IPOs this year. The ones that IPO since all the ones that were worth a billion they’re always 4 billion all the new relics and the boxes that were billion dollar companies then what Zendesk 4 billion right. 6 6 6 it was for HubSpot was like almost five the last time I looked in in a way you blink an eye and that one Bill. Zendesk seem crazy at a billion and now it’s six. Right. I’m sure you’ve held on to all your shares so you’ve benefited from the subsequent appreciation. How do you have any idea how many IPOs can we can we can can get out. How many can everyone here IPO. You think we can have 100 or 200 SaaS companies IPO

Christoph Janz: Um and it depends on the timescale I would say right.

Jason Lemkin: Everyone here is committed for 10 to 20 years so so that that’s OK.

Christoph Janz: I mean I think would be statistically quite unlikely unlikely that all of you in the room will eventually have a billion dollar. I feel so so sorry. But I think some some will end.

Christoph Janz: Yeah. Like how many more billion dollar SaaS unicorns can we have. I think depends on many factors like dependence on like where do the tens if not hundreds of billions of market cap that are currently still captured in S&P and Oracle IBM like what was going to happen to them will. Will some startups be able to disrupt these markets or will this. Where will this on premise software spend move. Because I think it can’t stay there forever.

Jason Lemkin: It’s true it is true. Yeah it’s pretty crazy.

Christoph Janz: And then I think just to add to that you know you have the existing software spend which I think will eventually move over to the cloud and maybe why it doing so maybe some of that will be compressed. But at the same time with things like automation and I think the market will also expand because software will just do more things which today are done by humans so the the value creation done by software will will increase.

Jason Lemkin: I think I leave the quantitative math to folks like you and Thomas. But my gut is there is another 100 SaaS IPO is to come. We’ll hear from Meltwater after this. We’ll hear from Datadog today we’ll hear from folks that what that can IPO whenever they want. And there’s got to be one hundred of them. There’s got to be a hundred companies we may be at 14 today that can IPO when they want whether they’ll be worth 400 million or 4 billion or 40 billion. But eight in eight and how do we pronounce it. Yeah. Eight an item that IPO 20 billion market cap.

Christoph Janz: Yes that’s right.

Jason Lemkin: Yeah pretty great. So one question on this and then let’s talk just for a couple minutes because we could do it forever about coming to San Francisco in 2018. But a quick question that we saw the market’s crazy. We saw that Zendesk which was a billion a couple of years ago was 6 billion all that all of them. But my view is that the bar has also gone up. This is this is a bit of it as the cloud has grown and look at these October which had a crazy IPO. I think there were six billion today too but at six. Eighty three million in revenues. So I’m getting already tired. What’s that. Almost 400 million dollar run rate but they’re growing 60 percent a year. Shopify which is worth like 14 15 billion which is crazy but they’re growing 75 percent and even good ole’ Atlassian the last year. And we all use Atlassian and they’re at a billion dollar run rate growing 40 percent. So let me ask you a mean question if I’m SaaS founder at a million ARR are growing 100 percent year over year which is probably where I was at a million. Is that good enough today. Can I do. Does this raise the bar on me what what how fast do I have to be growing if I want to be the next octo or Shopify.

Christoph Janz: I think that’s good enough. Although it’s not quite on the famous like triple twice double three times.

Jason Lemkin: Do I have to be on the triple quadruple double or triple triple double double? What do you think.

Christoph Janz: I think for some investors you have to have those that are really just using a framework like this. But I think if you’re at a million you are at 1M ARR your doubling and it’s a good team and a great opportunity then I think you’ll be able to to raise a serious Iran to be able to raise. I think so.

Jason Lemkin: So don’t let the numbers and they intimidate me. Don’t don’t don’t let them intimidate you.

Christoph Janz: Totally. I mean it’s I mean growth rates tend to go down over time. So where do you have to start. If you want to end with 75 percent year over year by year at 100 at hundreds of millions. So yeah I mean I think there is a select small number of SaaS companies that are just growing through the roof and I think we’re seeing like Winner Takes It All dynamics which we’ve seen in consumer Internet 20 years ago with Amazon and eBay and I think we’re seeing some of this now with SaaS. You just have a small number of winners that are pretty much unstoppable and they just get outsized rewards and returns and and everybody knows them and they get all the mindshare and word of mouth and so on. And that is maybe unfortunately what all VCs is at least later stage stage see are focused on and you can’t blame them because that’s how their model works.

Christoph Janz: But all this has companies that are just a little bit below that but are still viable business is growing fast maybe not more than 100 percent but still like 80 percent and can be very profitable businesses. Currently I think for them it’s somewhat hard to raise because like for others. Yeah yeah but maybe that will change with different types of private equity. Yes well different kind of asset classes because I think that we’ll be like let’s put it that way. I think if you’re saying that there will be a hundred billion dollars house companies for each one of them the boat will probably be 10 20 or more. Viable businesses that will be multiple make tens of millions of revenues and and millions in profits. So I don’t think it’s good to have these incredible success stories as an aspirational goal. But it’s it’s not like if you’re not part of this cohort like the world is over.

Jason Lemkin: Well here’s the funny paradox and then I make sure we have time to do the next two. But Tomas did meet up at our office like you did with Matilde and he presented some data and bless him for assembling the data because I just don’t have time but interesting his point with the data was his he. His view is that SaaS companies after 10 million ARR are as a cohort the good ones that are venture backed are actually growing more slowly than a few years ago because of competition in particular. Like there’s so many vendors and yet so on the one hand there are there are there are forces that may pull your growth down. On the other hand if you have these network effects around brand especially brand you can grow faster than ever. So I think it’s tough as a founder because I think you have to you have to you have to drag the team to success up the hill so you have to realize that there’s going to be challenging quarters or years.

Jason Lemkin: And I think quietly as the CEO quietly and you can’t stress your team out you have to ask should we be doing better and maybe five years ago you didn’t know like you didn’t should I box had an IPO at work you didn’t know should I. The numbers were up but now you have to quietly say look am I doing 100 percent as good as I can. And that’s maybe for most of us that’s pretty good or can I torture my team without killing them so that because maybe there’s more revenue than I think there is in 2018 than there was in 2012. That’s my gut. I think there’s more revenue that you can get. It’s just harder than ever to get it. But there’s more there right.

Christoph Janz: And I mean I think you actually tweeted about this tonight. I don’t know if you had any sleep. But I think I think yeah I think I saw a tweet from you. It’s like the how fast you have to grow also depends on your competition right. It does. If there are others who you think are outgrowing you that’s something obviously you should try to avoid but if that’s not the case then maybe you shouldn’t build that extra whatever millions just to get them. The last couple of percent of growth which was the other most expensive ones.

Jason Lemkin: They are. Yeah I wrote that one when Tiago from TalkDesk did an event at our showing space he that was the first coming they went from 1 to 15 in 15 months. So that was the first company I was involved with that grew at that at that one to 15 at 15 month rate but I’d forgotten for two years they had zero in revenue. I never would have survived for two. So if you can if you can if you can keep making it happen and competition doesn’t kill you. What matters is getting to that to that inflection point. So we will run out of time I want to make sure because we got a little bit of late start but I want to chat about this one slide with you for a minute and I got this a little bit wrong so I apologize. I’ll I’ll get this on the blog post and fix these columns but I was trying to how important is moving to the Bay Area in 2018 and you’ve been a strong proponent of it. I’ve worked with prior to over 20 SaaS companies many of whom are today that moved to the Bay Area at least in part but I got a little burned out on the Bay Area this year myself with. Churn and inflation. I’ve got this chart a little bit wrong but. The. Turnover rate for employees and the cost of an employee is more than 2x in San Francisco than Paris. Yeah that’s crazy right.

Jason Lemkin: And rents are insane like office rent your employees in San Francisco are going to live for to an apartment where maybe they’d have a nice maybe even a house. In other places and people quit jobs more quickly in the Bay Area than ever. Like they quit if you can if you can get someone to stay a year these days employees and I’m you’re lucky because they’re going to go from pipe drive to stripe to whatever and you just don’t see the turnover here.

Jason Lemkin: And and then the last interesting thing is I think there are finally more veterans here in Europe but then this side with the tradeoffs and at the dinner last night we were talking with Zora and Anaplan and boats that both those beat you can you can hear from Mark and Maria today they’re both saying their last year they’re veterans from SaaS their last teams three or four years ago their European teams were OK but now they’re great that there’s veterans right. But yet the Bay Area’s is better than ever isn’t it by the same token.

Christoph Janz: I mean I agree with all of the downsides that you have in the Bay Area. But I think that probably like 20 reasons that make your life hard in the Bay Area and also 20 reasons that make your life very hard in Europe. And it’s also it’s a bit off I like the grass is greener on the other side thing. I think because everybody complains about the issues where they are.

Jason Lemkin: I think that is very fair point yeah.

Christoph Janz: I think at the end of the day I think there are unique advantages that you have in San Francisco that you just at least for now do not have here at the same time there are unique advantages that you have in a place like Paris, Berlin, in Krakow or Barcelona or many European cities and like my favorite model. And I know it comes with a big tax in terms of basically CEO spending lots of time on planes. But my mom one of my favorite models maybe the favorite model is really to combine both like Algolia for example which which you know very well they got to a certain stage build a fantastic culture and a magnet for engineering talent here where they can get the best engineers from Paris and and beyond and and keep them and then they have like moved to San Francisco one they two founders which is ideal for this one. One founder it stays here takes care of the team here and the the other founder goes to San Francisco and builds the commercial team they are. I think maybe that is even a better model compared to a native San Francisco. It has a start that would be like the first time in history that a European company actually is an advantage over a company out of San Francisco.

Jason Lemkin: But two quick things on this chart then let’s break so we can try and stay on track But pros are still many more veterans if you need a V.P. a sales V.P. marketing V.P. customer success the Box’s the Twilio’s NewRelics Zendesk the NewRelic the AppDynamics there they’re spitting out veterans left and right right you get so many of these hundred companies that have gotten the next level they’re changing over their management teams every couple of years and that’s creating hundreds of of directors in VPs for you to hire. So I still think huge better and veterans capital is a weird one how much better. Just quickly because we’re at a time when we started working together probably access to capital for startups was still five to 10 X in the U.S. over Europe what’s the gap today?

Christoph Janz: Is a two x one point one X I I can’t really quantify but I know that access to capital is no longer a reason to move to the US. Same may come from Zendesk where there was no that was it. Generation X had to move her capital. Today you do not know and that’s a big change there.

Christoph Janz: Definitely not. And both because they are more European funds but also because funds from the U.S. have become much more open to investing in Europe. So you don’t have to move for the capital. Maybe it will help. But it’s that’s another reason for moving that I think talent and access to partners customers being close to the market that that is that is the reason.

Jason Lemkin: Yeah. And then the last one partners and customers are still strong. But I think this last one and we were talking about before is the peers being it’s it’s so great being here in Paris and there’s so many more great SaaS companies here. There’s amazing ones here today but that both peer pressure and access to peer as you get being in San Francisco and walking down the street I was walking out four times since we’ve been doing all of us I’ve bumped into McKay from intercom I mean he’s just there right. I’m one block from the Algolia a team but the people I bump into on the street and a peer pressure I feel even myself to do well is that combination I think drives you to excellence that sometimes if you’re if you’re the biggest fish in your pond it’s harder to get that same drive and that same access to people isn’t it.

Christoph Janz: Yeah I agree. Like I mean maybe sometimes you can also go mad if you live in this echo chamber right.

Jason Lemkin: It is I am going mad sometimes yes.

Christoph Janz: So I think sometimes you also have to leave it maybe to like get to like a different part of reality again. Again I think it’s it’s not it’s not binary but I completely agree that the access to people who have done it before and have seen greatness like has seen companies like Dropbox that went from zero to a billion and in 10 years are like Consumer companies like Pinterest and Airbnb and Snap and something like that. There aren’t that many if any companies in Europe that have gone that path and are spitting out as many talent. So I think the ability to learn from these people maybe hire some of them. That that is really still what’s what makes the Bay Area unique.

Jason Lemkin: All right. Last one because we’re out of time and then we’ll then I definitely want to get the Meltwater story kicked off but my my sort of I’m trying to synthesize my learnings from the last six years. I think for Europe to US and then just challenge me. I think if you’re going enterprise and you can come to San Francisco don’t go to New York New York I love it but come to SF there as if you need to hire someone that needs knows how to close 100k deals million dollar deals 50k deals even not only that you can hire a V.P. but he or she can bring a team with them that then go out and find you 10 or 20 enterprise reps. You have a huge weapon being in San Francisco. And if you’re doing enterprise more the big deals if you’re in tech are gonna be in tech is still in is centered around there. But if you’re SMB if you’re growth hacking if you’re if you’re doing processing lots of inexpensive inbound leads hundred dollar deals thousand dollar deals I think the benefits are real but maybe they’re smaller right maybe you can do an accent you can build a billion dollar SaaS SMB company from anywhere today. That that’s my thinking. I think that the advantages are fewer but still there. Any quick thoughts on SMB versus enterprise on that.

Christoph Janz: I agree in the sense that the V.P. of sales is like a one reason for going to the Bay Area which if you’re an SMB maybe not quite as important. I think it’s not the only like trigger that might want to lead you to go to the U.S.. I think another one is like the VP of marketing our great product management or maybe in some cases even tech. So I think that depends on what exactly your doing and what the key talent is that you need for that company. Yeah. So let’s say for our developer tool for example and maybe you don’t need the V.P. of sales but you still want to like in the community. But I think that pipe drive which you’re an investor in is as far as I can tell from the outside an incredible success story where most of the team I think is still in Tallinn right. And they have people in New York. But they and they are selling mostly to SMBs. So there is not only one playbook. There isn’t only one playbook.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Do it.  It is hard, harder than you can imagine.  But if you do it right, and for real — it can last 30+ years.

If you haven’t done it before, though, here’s my list of the top 9 things founders get wrong before they start:

• It almost always takes at least 24 months to get really off the ground from Day 1. Almost no one budgets enough time, and founders quit before it even really has a chance to get off the ground. More here: If You’re Going to Do a SaaS Start-Up … You Have to Give it 24 Months | SaaStr
• VCs do not fund very many companies. Fundraising is a complex, nichey, weird art and science. The #1 thing most founders don’t get is most VCs don’t actually fund very many companies. At medium-sized funds, each partner often does 2 investments a year. And often just 1 a year at bigger funds. Even in seed funds, each partner often just does 3–4 investments a year. Why will you be that 1? If you don’t know — you won’t get funded.  A bit more here.
• You can’t hire some magic salesperson to “get you more sales”. You have to figure it out first yourself. The answer to your problems is not a magic salesperson. Once you have 10, 15, 20 customers … you can hire someone to help. But the magic will be implementing the playbook you already figured out, just full-time.
• Freemium is not a marketing strategy. Just because your product is free, or has a free category, does not mean anyone will find it. Freemium is a funnel management strategy and done right, later it can accelerate viral acquisition. But putting up a new, free product on its own will get you zero customers.
• If your co-founder is not as committed as you, he/she will leave, and before it really takes off. It’s not worth it, or at least it’s almost never worth it.
• Slow growth after a certain point is a sign of a lack of product-market fit. If after say $8k-$10k in MRR you are still growing slowly, you don’t have true product-market fit … even if the customers you do have are happy. You need to iterate more. You may be close, but you don’t really have a product the market is demanding. Not yet.
• First-to-market matters, but so do many other things. Focus instead on being first to do something important 10x better. Mailchimp was not the first email tool. Qualtrics was not the first survey tool. Asana was not the first project management tool. You need to be 10x better at something important. Be first-to-market on that. More here: On Not Forgetting to be 10x Better | SaaStr
• VCs are not out to get you. I’ve had some rough experiences with VCs, but VCs are not out to fire you, steal your company, etc. They are out to invest $1 and make $10 or more … by your growing like a weed. When that doesn’t happen, issues prop up. But VCs do not want to take over your company or fire you. They want to go skiing and do triathalons and see their capital grow with little work. Ideally.
• You don’t have to spend 100 hours a week in the office. But … Work-life balance is a myth. I’m sorry. You don’t have to work in the office 100 hours a week to make your start-up a success. Not at all. But you will need to obsess about it 24×7. The best CEOs and founders all do. On vacation. In the shower. On a run. When you are playing with your kids. Obsession about making it better will always be on your mind. This is stimulating, validating, and interesting. It also changes you. Forever.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Also, don’t miss out on SaaStr Annual happening in less than one month!.

Transcript

Jason Cohen – CTO & Co-Founder @ WP Engine

Oh my goodness look at that. This is not a presentation. This is a sermon.

We’re going to take as our object of study a passage from the Book of Hacker News. This post was put on Hacker News about a couple months ago anonymously. It’s titled “I don’t want to be a founder anymore.” I’m using a throwaway account because there’s a lot to lose from speaking how I feel. I found that a company several years ago. Fast forward to today and we’re profitable growing steadily debt free and are about to be acquired. The problem is I’m supremely unhappy. Each morning my first thought has been what if I didn’t work here. I explore what it’d be like to work at Wal-Mart. It seems so stress free. Then my phone starts ringing and I’d snap back to reality. This morning I lock myself in the bathroom with the shower running so my wife wouldn’t hear and cried my eyes out. So from my possibly skewed point of view. I have two options I can quit. Which effectively kills any acquisition and the company as well. I can suck it up and work on the same thing for two to five more years. I’ve been mulling over a third option which is to hire someone to do my day to day but I don’t know how to make it work. The product is too complicated for someone to come in and take over and it just isn’t that interesting. It’s just a glorified CRUD app and it’s been hard to retain developers. Is it common for a founder to go through this train of thought before an acquisition. Is there a trick to convince yourself you want to keep doing this. Maybe I’m depressed and need drugs signed a founder in pain.

So let’s answer his question is it common? So there was a study by Columbia Business School of 22 entrepreneurs who also exited their businesses and made 10 million or more personally from it. In other words success 21 out of the 22 were depressed after having that success. It’s not just common. It’s what always happens. So this is hahaha except all of you are gonna be like this except one out of 22 and that’s not OK. This is Marcus he founded Minecraft. He sold it to Microsoft that made hundreds of millions of dollars. I don’t know how much more successful you can get and he almost committed suicide and did it on Twitter. It’s not funny right. They all hate me

And this is success. Maybe you shouldn’t have sold the game. No. Even though he’s about to do that. Best thing I ever did to sell Minecraft. What are we supposed to do with this? So that’s of course we’re gonna talk about is there a trick. Nope. Of course not. But let’s start exploring what’s going on. How did they get here? How did all of us get here? Well it’s not intentional. We didn’t intend to do that. It’s frog boiling in water. That means it’s happening right now. It’s unfolding right now for you unintentionally. And so the right question is what should you be doing differently now in order to prevent this. In order to build a company that’s more healthy and prosperous. Of course. And also avoid this balloon payment of emotional toil at the end. And so the thesis that I’m going to talk about today is I think you have to make emotionally difficult choices and I’ll be very specific. All along the way to build a healthier company and to make you also maybe avoid this fate which kind of puts in question why we’re all doing this at all. I did this wrong in my previous startups I’ve sold companies for millions of dollars and our current startup which we are now at 100 million in ARR which is always the magical SaaStr number. So in other words and I’m still here after eight years and not upset. So you see I’ve done it wrong and right. So hopefully this will be useful to you too. So let me zoom in on this part. The product is complex and boring too. So the product is now these sound like good reasons. But they’re not the real reasons. I can’t get someone to help because the product is too complex. Really. Because I know a lot of developers that work on really complex stuff. That sounds like a good reason why it’s too hard to get help. But that’s not true is it.

But it does sound like someone who’s very self-important. It’s so complex only I could possibly understand. Maybe that’s more of the real problem and also the product is boring. Okay so that’s so complex. No one can figure it out but you and also it’s so boring no one wants to work on it. And that’s why you can’t retain developers. Probably not. So I want to prove that you are making exactly this error now. The same error that this guy is making. So raise your hand if you have ever fired someone too late taking too much time and finally did. So that’s most hands. OK. Now raise your hand if you’ve ever find anybody too soon. One two three. OK so about 1/100. Do you think the pattern is clear. This is very predictable. We all. We make this failure of judgment all the time. We all do it. We’re all guilty. But what’s going on. Same thing. There’s good reasons not to fire someone. You know that team before I get some replacement in that team. It’s too hard for the team to continue. I need to wait. That sounds like a good reason that’s the excuses we tell ourselves why we are not doing it right.

We all know that’s not true. We’ve all been on teams with something that shouldn’t be on the team and be much better if they were just gone rather than the team having to make up for them clean up after them. Right. It’s not the real reason. Another reason we tell ourselves especially as new founders is I’m a bad manager. I haven’t set expectations. It’s not their fault it’s probably mine. I need to set better expectations to give them more time we say. Sounds like a good reason except what about the other seven people in a team that are thriving. You probably are a terrible manager. That’s probably true. But we need to we need to operate now and everyone else is operating now. Have time for this actually. So even if that’s true doesn’t mean that person’s a bad person or something like this it just they’re not a fit here now. That’s the truth. So these are only good reasons but they’re not the real reason is simple. It’s scary. You are scared. Can you accept that?

You just accept you’re scared and that’s why you’re not doing and that’s the whole argument. And it’s not a good very good argument of course. And of course it’s scary. It’s a hard conversation to have. What if they cry? What if you cry? What if they get upset and do something? What if other employees get upset and do stuff? What if they get violent? You have to take out a restraining order. I’ve had to do that. What if they get depressed afterwards and kill themselves and you have to explain to everybody that has happened to me. There’s a reason to be scared about it. It is scary. It is scary. OK fine. Also you’ve got to do it. That’s the truth. Making the emotionally difficult choice is better. So what are what are what’s a more general framework for thinking that these kinds of things not just this. Well there’s things you want to do. And things you don’t want to do things that need to be done in the business and things that don’t really need to be done of course. And the problem is you you do the things you want to do and you’re the founder the CEO or whatever and so you don’t have a boss telling you you can’t. And we just establish your shitty boss too. So this is a problem. No one stopping you from doing this stuff that you say doesn’t really need to be done. But you know you can. It’s very tempting but it’s a failure mode because you’re not spending the time on the things you should be doing.

Like maybe working on sales or dealing with a difficult person you should be doing the stuff on the right. So how do you know you’re in this bottom right position where you’re delaying something that needs to be done and you need to fix it quickly how do you know that. And the one way that I know is you can’t stop thinking about it. When you wake up at 2:00 in the morning and look like that. That simple thing not a deep analysis just that simple thing of I can’t stop thinking about how this person’s here and they shouldn’t be. That indicates you do need to take action. Why. Because. When there’s an emotionally difficult choice like having to fire somebody and one that’s not as difficult and you can’t decide you can’t decide only because you don’t want to. Otherwise it would be no question. If the easy one was clearly the better one you wouldn’t be stuck. The reason you’re stuck is that you have to make the hard choice. So that’s how you do it. And then how do you do things that are difficult. How do you do it well do it quickly. Delaying only hurts everybody. Everybody you the team the person be decisive our CEO Heather Bruner has a terrific phrase about this which is General Patton on the decision. Mother Teresa on the exit. Be decisive and then be kind. That’s the right way to do it.

Let’s dig into another part of our object of study here. If I quit I kill the company and the acquisition. Wow you must be so important. That’s what that person is thinking right. Except what’s really happened is the person has built a brittle organization one where if anything happens to the founder the whole thing is going to melt I guess and imagine the stress that that puts on that person. I guess this person has not hired anyone who can actually run the company and run their functions. So that it’s not true. Or maybe the person hasn’t earned allowing allowing to do that. Either way it’s a failure. Right. So let’s dig into this too because you do this kind of thing too and I want to show you.

So this is the obvious fallacy we all know this. This is the smartest person in the room. So that’s wrong. So. So Steve Jobs actually was the one who did this thing that we all also know a player’s hiring. We all know this and you can tell Apple’s full of eight players does just look at them or maybe that’s KISS without their makeup. I’m not sure.

Anyway so this is what we think we’re doing but we’re not. Let me show you. Here’s why. You actually don’t hire a players you ask a why a player so let’s say you’re an engineer. And you say I know how to hire engineers and you do you know how to interview and manage them later and so you hire other a player engineers and product people whatever. OK good. And then of course there’s the majority of things that happen in the business that whoever you are you’re not an A player about. So what do we do. We say OK we’ve got to learn and we got to do AdWords for sure. I don’t know AdWords so I’ll do it. I the founder I will figure it out I’ll spend some months and figure it out and then I’ll know the lingo and I’ll know what’s important and all these kind of things. And then I’ll be able to hire that a player because I’ll know what to ask him what to do and how to manage that person. That’s what we all think. And this is the fallacy. The idea that you can become an expert in something important something that’s an entire career for someone else in a few months and then hiring a player. That’s of course not true. So you’re actually a C player at best. And then of course you’re gonna hire only the things that you know after part time couple of months of of work on it which is bad.

And so you end up building this organization where some people are a players but most aren’t. And then guess what. Those functions don’t work very well because you haven’t hired very well and so you’re like screw that we’ll just hire more engineers and insurers can just like magically do marketing and sales and stuff like this. So as engineers say this is why.

So Steve Jobs also said I hate quoting Steve Jobs really because everyone does. At least I’m not quoting Musk No Musk quotes anyway. So. You hire smart people and so that they tell you what to do. They buoy you up. So how. That’s weird because Steve Jobs is the one who tells everyone what to do right. But no. What jobs did is he hired the best designers in the world. And then held them to a very high standard which is what an editor does not a writer. Not a maker an editor. And he wasn’t the best technologist but he had great technologists or mostly if you remember the old Mac OS stuff they misspelled the word dispose. Sometimes. I think they were high anyway. Being editor he hired the best COO the best operating officer Tim Cook that there is and hold him to a higher standard. That’s actually what he did. So that’s part of the trick. Is to do that. So here’s how you do this here’s how you hire people who are better than you and know more than you about a thing and then manage them. That’s weird. And yet that is the definition of how to build a great organization. So the first thing is when you’re in the interview process you’re looking for someone who’s enlightening you. In other words you feel like you’re learning a lot just by being in here and you come away thinking man even we don’t hire this person we need to do like half the things they just said.

That’s how it should feel. Zuckerberg said another person to quote all the time Zuckerberg said hire someone that you feel like in if the circumstances were a little different you would work for that person. But the second thing I think is more interesting which is results orientation and here’s what I mean there is action oriented people and results oriented people. Let’s say I’m hiring an event planner. Here’s where an action oriented event planner says when you ask Tell me about the last great event that you put on I say Oh man we had these great curtains with up lights that look really cool and the food is really good as able to get a deal on the shrimp and everyone said the shrimp was good. And you know people seem to really like it action oriented talking about stuff that you did it’s probably good stuff. Here’s a results oriented answer. Well the goal was to have a hundred and fifty people come. We had two hundred resort reservations and actually one hundred and sixty eight came which we’re super proud about. Now we were actually sure how many sales these we got but we got 12 leads to have already closed two more look pretty good. I’m not sure about the rest anyway were successful enough that we’ve decided to put on three more of these next year and do him in different countries and see how that goes.

Results oriented. Now why do you need to hire results oriented people in order to solve for this problem of management. It’s because you that by definition you can’t tell them how to do their job. By definition you don’t know how to put on a great event. So you you have you can’t tell them or manage what they’re doing. You have to manage the results of it and hold them to that bar. So by hiring for people who are already think that way already like to be measured by the results that they make instead of what they do then that’s how you’re going to manage them and that’s all going to be nice because that’s how the person already likes to operate. So you hold accountable to results and edit. Also this is the right way any way to manage everybody including the folks that you are expert in that stuff. Why. Well taking the engineering example. Is the fun part about engineering is inventing something new and architecting it and then all the labor is improving that you’re right and bug fixing bugs and stuff. That’s that’s the annoying part. So if you’re the architect and everybody else has to do the scut work you’ve taken away the only fun part. That’s thinks that’s bad. So I think this is the right way to manage everybody period regardless of of how.

So if you can agree. That the best thing is to have everyone in the organization be better than you. Then you can create a resilient organization where instead of feeling like this person. Crushed. The only person that can do everything it’s just the reverse should feel like the people in your organization are booing you up that they’re doing a lot of the work that they’re inventing things you wouldn’t even have thought of. That’s what a strong organization looks like. And that’s part of what prevents not only the mental health problems but also is a stronger organization almost by definition right. So there are some tricks but I want to talk about this this thing about success. And kind of dwell on that for a bit. I want to go back to this because you said I have two options. And then he lists three options which really should be a fourth option which is just don’t do any of that just keep running the company. But that’s not really an option for this person there obviously so upset and sad that even that’s not an option. They’re stuck. They have they really have zero options. So we’ve got to figure this out. So maybe you shouldn’t sell. Maybe that’s the answer. And you have this phrase you sold your baby is that true. Is that what it’s like.

Well there was a study where they put founders in MRI machines so that’s mapping the brain seeing what the brain is doing. Then they showed these neutral nothing pictures like landscape in the brain just sitting there in neutral and then they show those folks pictures of their own kids. That’s my daughter. And of course the brains like to write like kids good bad everything right.

Just stuff. So. Then they go back to the landscapes and the brain goes back to neutral and then they show pictures of the founders logo brain goes right back into kid mode. Same pattern. It is a baby that actually is. So it makes sense why this is kind of a I don’t know emotional stressful whatever. Same thing.

Nevertheless it’s not true that you should just never sell. Just like Marcus here it’s not true it’s not true for me either so this is my previous company smart bear and it was sold just last year to Frisco partners for four hundred and fifty million dollars. That’s awesome except that I sold it to incite partners in 2007. So…

Why did everyone laugh and clap! You’re just to go “Oh..” so maybe I shouldn’t have sold except this this trajectory wasn’t happening when I was the CEO was it? It was this that was the trajectory we’re on. So that’s not necessarily good. Plus I was burnt out. I’ll tell you this story. So I was

So I got this offer from insight which was good just financially speaking multiple on this and that it was good. So I come home and tell my wife I don’t know what to do. Like we’re profitable growing everything’s good. Also this offer is actually good. I don’t know what to do. And my wife goes well you have to sell. I said Why do I have to. She says “Well, don’t you realize how unhappy you are?” No I didn’t. I’d gotten in that place.

But I didn’t. I fixed this at WP Engine I’ve been at WP Engine longer and I didn’t have this problem by the way had I stay there’s another option which is maybe it did. You know this is look at the timeframe here. This is a seven. This is a 15 year timeframe. The company software companies don’t necessarily last that long. There are other people in our same space that were also bootstrapped and profitable and that green curve is what happened to them. That’s not true that I should’ve stayed. Having left. I got to be a stay at home dad because that’s when I left in 2009 and my wife was pregnant. I was a stay at home dad for a year and I wouldn’t give that back for anything. And then I founded WP Engine in 2010. And like I said we now we’ve passed 100 million annual revenue. We just got a 250 million dollar investment from SilverLake and we’re worth more than smart bear.

Right now let’s say that’s always how it happens of course not. Thank you very much. That’s not always how it happens. The point is it’s not true in retrospect that it’s you should never sell. Not true. So here’s the issue. Startups always change always. Or you change even though you think you won’t. Maybe it goes well and your job changes. And as the CEO it’s a very different job at one hundred or we’re now at five hundred people it’s a very different job at these break points than it was early. Maybe you’ll be unhappy there OK. Maybe you give up the CEO position but then you’re not in control. Maybe that doesn’t make you happy or maybe the start of the story goes sideways. You just get bored after 10 years or maybe it craters of course and feels like it’s going to change. That’s the deal. And it’s hard. That’s the deal. So you have to build it in. So here’s how I’ve been successful this time around. So this is our CEO Heather Bruner and me winning the entrepreneur of the Year award from ENY actually last year in Austin and. Heather joined our company four years after it was founded. And yet we’re both winning the Entrepreneur Award.

Together. Is that weird. Someone joining that late gets to be Entrepreneur Award winner. If you’re thinking that way then you’re not paying any attention. Yes of course. Oh you’re so blessed and awesome as a founder that no one could possibly impact the business as much as you will. Then you’re not hiring impactful people and that’s your problem. Heather is amazing. And as our CEO a lot of the success we have today is due directly directly to the things Heather did and building the executive team and the strategy and so on and so on all the things that are necessary and that wouldn’t have happened if I was a CEO. I know because I’ve done it before. You saw that trajectory right. Argues that our executive team is majority female. For example we have diversity in many areas in the business. Half of our engineering management are women for example. So we by asking what are all the people that could bring power to the business and getting those people in. Whether you’re the founder and CEO or anybody else. That is how we got strong and that explains our success.

I want to give you this story because this helped me emotionally get over this moment because a lot of people ask well what was it like to decide to not be the CEO anymore. Of course that’s a big decision. And sometimes it goes wrong. I mean there’s a lot of things around that right. So it’s not. Of course it’s not always true that you should just replace yourself. That’s not true.

But this this was useful to me emotionally some will tell you the story in case it’s helpful to you as well. So I was at this bar in Austin. And talking to one of our board members and kind of getting through it.

Intellectually I knew I shouldn’t be the CEO. We’re about 80 people and I like I’m not a good CEO at 80 people that’s that’s not my sweet spot. But emotionally you know it’s hard. Of course it’s your baby and all that of course it’s hard. That’s OK. And so he says Jason I know. I know what you’re thinking. I said what. He says you want the credit. I said What do you mean. He goes Because someday like what if you ring the bell on the Nasdaq you want the credit. And you know it’s the whole team effort add it up but you want the credit. And they said you’re right like a shallow and selfish as that is true I do. I mean I think founders generally do. And he says a. You’re the founder you’ll always get the credit

And that’s it’s so obvious in retrospect. Right. This is not a deep observation but I just needed to hear that he had some in the hopes that maybe you need to hear that. Yeah you always get the credit you don’t have to hold onto these things like CEO or C whatever blah blah blah for ego because you’ll still get the credit your ego going to be fine. You’re going to get the ego stuff anyway which is cool it’s not a bad thing to want to stoke the ego I wanted so vague of course but you can still do that. OK. So here’s the framework that I used to make this decision and I encourage everybody at WP Engine forevermore to use this framework to figure out what should I do. And what should my career be and all that so I should show to you. And you’ve seen some of this kind of stuff before I bet. But but maybe hopefully there’s different context now that you can that you can evaluate it.

So of course there’s things you like to do and things that you’re good at Venn diagrams you know it’s coming. And so this stuff I know this stuff is a learning right you’re not good at it but you like it learns good you should do some of that is cool. And then this is toil like stuff you’re good at it so you do it but you don’t enjoy it like maybe accounting or whatever.

And then this is the sweet spot where you’re happy because you’re good at it you’re doing OK. We all know about these things right. So the next layer though is. What does the company need? Again this is going to tie it together all the things that we just talked about. What does the company actually needs to do. Because these are various failure modes that we’re in all the time. And again I think if you address these modes the company will be stronger and you’ll be healthier too. So that flow is a trap that happy flow is a trap. If that’s not what the company needs you to be doing. The typical example is the engineer who implements the feature which of course you can do in two days and of course will be good and three customers will like it. But actually what you need to do is double sales and that one features you’re going to do it. Right. That’s not what the company needs. So that’s a trap that we’ve seen. This is a trap too. But the company needs it to be done. And I like it. Well if it needs to be done and needs be done well. You’ve got to focus. Start ups always constrained by time even more than money. So you have to focus so doing things that you like that the company needs is wrong because the company needs it and it’s one of the few things that you really do need to focus on that needs to be done well. Another failure mode is. This which is burnout. In other words the company needs to be done. I’m even good at it for real but I don’t like it. We always put ourselves in this positions as leaders and founders this crappy word servant leadership. It leads to stuff like this. This is the scut work that needs to be done and I can do it so I’ll do it. The team doesn’t need doesn’t have to do it. That sounds altruistic and what it does is burn you out because you’re doing all the shit you don’t like to do

Is that really the promise of entrepreneurship that you get to do all this stuff that you don’t like doing. Like what the hell’s the point of that. It’s true it needs to be done. You’re even good at it. You need to of course is find someone who also is good at it. Who likes it. Right. Because they’ll be thrilled because that’s fulfillment. Again you know that’s coming you have to go in the center of the Venn diagram. It’s never like the bottom left corner is it someday. That’s what I’m going to do. And you want to be like in the bottom left anyway. So of course that’s the place and it’s an idealization you can’t be in there all the time blah blah blah. No but the more that you are in here this is how you do it. That’s what I did. This is why wasn’t the CEO. Because what the company needed and what I liked not to mention what I was good at did not mix. I like product and engineering so I went and became the CTO and did product and engineering for a couple of years. Then the engineering team got to be 100 people and I don’t like managing people remember I maybe don’t remember but I’m a shitty manager just like all of you. I don’t like doing that. So and they deserve a good manager right.

Since then I just ran product and now I have zero direct reports just like Dharmesh at Hubspot and so that’s good because I’m not a good manager and I end and so I can if I continue to demonstrate to the whole company that even I can just change jobs at night at will but I can we can talk about what is it what is the right place for me at the company. And it’s possible for any given person including me that one day the answer is there’s nothing here for you because there’s no intersection that’s OK if that happens because you’re having this nice conversation and person maybe who’s had this conversation can be armed with figuring out what that is their next position so they can be happy fulfilled maybe happy is the wrong word. Have it fulfilled. So this is what everyone’s doing and if everybody’s doing this in the business it’s magical. I say it’s idealization I know but it’s a magical thing when everyone on the executive team is in there is in their star slot. And in fact everybody everywhere in that team it is a magical beautiful thing and you’ve built an organization it’s not just a great business but that people want to work out and they’re fulfilled. And that’s more important than they are. And I’m sorry to say that it’s faster with eight hours everything but it’s more important that you’re building lives with people doing something important that everyone’s fulfilled that that’s that is fulfilling a real job as entrepreneurs. That is that is incredible.

So I want to close with one more reading.

This is from twenty five hundred years ago just to prove that none of these ideas are new. These are just what humans do. This is just what leadership and building organizations is. So this is from the Dow charging. An old text

And it really summarizes everything that we just talked about. The best leaders the people do not know they have them. The lesser leaders are loved and praised. Even lesser are feared in the least are despised. Those leaders who show no trust. Will not be trusted. Those leaders who are quiet their words are valued. With the best leaders when the people’s task is completed the people will say we did it ourselves. So I say unto you to close the sermon. Hire the right people and let them do it themselves. Be a shepherd not an emperor. Be an editor. Not a tyrant.

Do the hard things that are the right things and set your ego aside because remember no matter what, you will still get the credit.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

One that was most interesting to me, and one I recommend adopting in the New Year (or really, ideally in December of each year), is the Top 5% and Bottom 5% identification.

At Big Companies, it’s hard to fire anyone.  HR makes it tough.  So each year, most big companies instead go through a reorg of sorts.  All the VPs get together and identify the Bottom 5% of the team.  And also, they do equity awards annually.  Equity often gets stingy in older, public companies.  So most of it again flows to the forcing function of whoever you decided is on the Top 5% of your team.

What I learned from these exercises is every identifying the Top 10% and/or Bottom 10% can be fraught with politics, divergent opinions, and more.  But the Top and Bottom 5%?  Everyone knows.  There was very little debate here.  It took each VP about 90 seconds to come up with a list of their Bottom 5% employees.  And when it came time to hand out equity, forcing the larger grants to just a handful of folks turned out to be a much simpler exercise than expanding it even to 10%.  Once you expanded it to 10%, that really became 15% (who is on the line / bubble?), and all of a sudden, it becomes a much more complicated process.

So do this 5%-ers exercise.

Find the Top 5% in your team.  And give them a raise and more equity this week.  And talk about a promotion, if appropriate.

And the Bottom 5%?  Maybe it’s time for them to move on.  You won’t miss them.

This works even better with your management team.  There will be debates and dramas about who is Good and Who is Great.  But everyone will be able to identify their top 1-2 performers.  And their top 1-2 weakest performers.  Even on a fairly small team.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Now it’s about $1b in ARR.

The above chart is a rough attempt to estimate ARR from some of the top Cloud/SaaS public companies.  The estimates will all be off / wrong a bit, but they are all directionally correct.

What you see here is every leader is coming up on or has cruised past $1,000,000,000 in ARR.

Why? The Cloud is 1000x larger than 10 years ago.

How?  SMBs are all moving to Cloud apps.  And enterprise / CIO budgets have moved an additional 10% of their $1.5T+ budget to Cloud.  The leaders benefit here.

So?  It means you can do it.  Maybe not $1b in ARR.  But the odds you can get to $100m in ARR are far, far higher than ever before.

Go long.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

Although innovation and being responsive to customers is the lifeblood of every technology organization, maintaining the spark of innovation inside a large company is hard.

To gain insight into how to drive change and innovation at a large company, I spoke with a senior executive at L3 Technologies, which is the eighth largest defense contractor in the United States. The company is doing something, to which facts attest:

• Number 276 of the Fortune 500, with revenue over $11 billion and 38,000 employees
• Stock price increasing since 1998
• Top 50 employer on the Women Engineer list
• Recognized as a top supporter of historically black college and university (HBCU) engineering programs
• Shortlisted for HR Distinction award

Heidi Wood is L3 Technologies’ Senior Vice President for Strategy and Technology. She describes her role this way:

“My team pushes for growth, both organic as well as inorganic growth. I have the privilege of being the agent that pushes for L3 to grow going into the future. Technology is always changing, and we always want to be on the cutting edge, and so we need to peer over into the abyss of what’s possible and what is conceivable into what might be inconceivable now.”

Also

Her comments are interesting, so we created a video for CXOTalk, which features conversations on innovation and transformation with business and technology leaders.

Watch our entire conversation above and read the edited comments that follow.

What is your philosophy of innovation and transformation?

Heidi Wood: The one thing that’s permanent in life is change. Once you have a company culture that embraces it, challenges it, and says we can never rest on our laurels, we can never stick with status quo — we always have to be improving, challenge ourselves to be better, and also thinking about what’s the new thing that’s going to obsolete. Whatever our customers are relying on or that we think we’re good at, we have to be ahead of everybody.

You have to embrace innovation. You have to make that part of your corporate culture. You have to encourage risk-taking because that’s a necessary, and frequently not enough spoken about, an element of innovation, which is the willingness to take risks, the willingness to be bold, put yourself out there, and be courageous.

One of the things that I talk about from a strategy is, I tell people, “I want you to be unreasonable. Don’t give me anything reasonable. I’m totally bored with that. I want to see your daring, courageous, bold things that have never been heard of before.” Crazy: that’s what we want to hear because if you’re really on the edge, then it won’t look right in the near term but, three, five years from now, people will say, “Wow. That was prescient. Who imagined that this would be the case?”

How do you drive that approach based on data inside a large organization?

Heidi Wood: I’m a big proponent of radical transparency. To reach radical transparency, you need to see data. To get the entire group of people to move along with you, you need to move towards being a data-driven enterprise.

Again, what we’re talking about at L3 is being data-driven, being radically transparent, brave, [and] courageous. Again, when you do it collectively, then people can better see.

The way I like to describe it is, we took all of the different systems that we have, and we piped them together into a fused system. It helps us come back to better decisions. Together, we can move with speed because all of us are seeing it at the same time and it’s based on fact, not anecdotes.

One of the things I like to write on the board is, you take that Greek symbol for the sum. I put the sum and then, in parentheses, anecdotes, and then not equal data. In other words, sometimes when you say, “How is something working?” they say, “Fine.”

“How is this other thing?”

“Oh, good.”

I’m sitting there thinking, I don’t want an English word for the answer. I want the data.

Where do data and corporate culture intersect?

Heidi Wood: One of the things that I didn’t like when I joined, and it’s common in corporate culture but I wanted to change within L3 is, somebody would ask a perfectly reasonable question, and another person will say, “Well, we don’t know the answer. We’ll get back to you.”

Well, now the conversation is dead. But, what you want is an active, “Well, let’s see what the data says,” because it exists, right? That’s the thing that drove me crazy. Somebody has got the data. How come it all isn’t in a giant warehouse so that we can peal things back to the infinite level that we want to? Sort of like an onion. You peel back the layers and peel back the layers to get down to the answer to say, “The reason why this isn’t working or is working so well, is because of this.”

People must get used to having so much data being available. Again, it’s human nature to want to shade. You want to show your better parts. But, you kind of get to a stage where everybody gets comfortable with, look, this is the truth; this is where we’re really, really at. It enables more collective contributions because people can see the areas that are ailing and say “Well, I’ve got some guys that can help with this thing that you’re working on because now we can see that that area needs work.

Sunlight, if you go from dark to sunlight, there’s that moment where you go, “Oh, it’s blinding.” But then, as soon as your eyes adjust, everybody is going to say, “I’d rather be in the sunlight than in the dark cave,” right?

One of the exciting things about IT is changing the culture with what we’re doing with radical transparency. You have an angle where IT is helping change the culture of a company.

Disclosure: This video is part of a series in which SAP invited me to SAP Select, as a paid engagement, to conduct interviews with senior executives on topics related to Intelligent Enterprise.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

CloudAve is sponsored by Salesforce.com and Workday.

There are times to fight.

No great startup has been built without getting one’s knuckles bloody at times. This is especially true because incumbents now know how much is at stake when they let a startup get a huge head start in a market.

So if you’re in a battle, if you’re right, if you feel confident you can win and importantly if the prize for winning is worth the fight — then go for it. But you should feel confident that all of these conditions are met before fighting and you should try hard to make your fight as unemotional as possible.

There are times to give in and compromise — even when you feel you’re right.

Perhaps the costs of “winning” the battle aren’t worth the consequences. This happens sometimes in lawsuits where as unpleasant as it sometimes is you have to chalk up some situations as “not worth fighting.” I have seen this in cases where a fight would take the CEO’s time & attention away from important business dealings or where the cost of not settling is huge (as in, inability to raise more capital until the dispute is resolved).

It might be that you assess the situation and realize you can’t win if you were to carry on the fight. This sucks because even when you feel “wronged” — there are times where you still aren’t going to win if you engage in battle. I’ve had this at times in dealing with big companies like Facebook and Apple where we realized that going against the machine was going to be counter-productive. It’s a Hobbesian world and the sooner you realize this the better equipped you are to know how you fit into it.

The key in life and business is to know the difference of when to fight and when not to and not to confuse situations due to emotions or self-righteousness.

I like to tell people …

“If somebody has wronged you AND you let it eat you up then YOU LOSE TWICE.”

If you decide that your current situation isn’t worth fighting then I recommend you come to emotional peace with that and move on. When you decide give in, do so graciously. Take the high road. Act and feel zen.

Back when I ran my first company I fought a lot. It seemed the world was always on fire and there was some skirmish to be had. I fought with landlords (when the real estate market crashed), venture debt providers (who wouldn’t take a hair cut when everybody else had to), the board (over compensation), our competitors (over everything) and any service provider who didn’t live up to our perceived contract (recruiters, accountants, sales lead companies, web hosting companies).

The longer I was CEO and the more skirmishes I had been through, the more I realized that finding common ground is often better than fighting. My scarcest resource was time and it was important to put my time against the most productive activities. You don’t need to sub-optimize your results but if you can find solutions you should try.

If you give in or compromise and then feel miserable about the outcome and it sours you emotionally then you’ve lost twice. Don’t get less than you deserve AND beat yourself up about it! You can only lose twice if you let yourself give in to anger or resentment.

Also if you do need to compromise to accommodate somebody you think is acting inappropriately it’s very tempting to fold your cards but then swipe back by saying or writing things you’ll regret. If you compromise but then display “sour grapes” to the other party then you not only didn’t get the result you wanted but you’ve also created ill will with other people and you lose twice.

This also applies to internal company decisions. Let’s say a senior member of your team demanded a pay increase (cash or equity) and you didn’t like the way he or she approached you. Sometimes the right thing is to firmly but politely resist the increase. Sometimes the right thing to do is to give in completely. And sometimes the right thing to do is to compromise. If you do decide to compromise then don’t be snide or mean-spirited about it after the fact. If you’re going to give him a victory then lavish praise on him as you meet his request. There’s nothing worse than consenting to the increase and having him feel pissed off about it. You lose twice.

There are many times in life where taking the wrong path causes you to lose twice. Know the difference between fighting (and enjoying it) or giving in, letting go of the angst and choosing to be zen. So in business when it’s time to fight — fight. When it’s time to concede or compromise — do so graciously.

But never lose twice.

Photo by Jyotirmoy Gupta on Unsplash

(Cross-posted @ Both Sides of the Table)

CloudAve is sponsored by Salesforce.com and Workday.

Many people will write the history on why Ring became an enormously successful company and why it became a real-world unicorn in a world when many startups are anointed that merely on paper. Since I had a ringside seat to the company before it really existed all the way through the end I thought I’d offer my version and what I think it means for our future.

If you don’t know, Ring offers home security products that started with a video doorbell, then video floodlights, outdoor stickup cams and now in-home security features that innovate in-home security alongside outside protection. It is an LA-based company that was recently acquired by Amazon, which you can read more about in this incredibly well-researched article.

But why did Ring succeed when the entire market kept saying that Nest was going to be the winner? Why did Ring become an enormous success when it produced a hardware product and the market keeps saying, “hardware is too difficult to scale?”

Here are my views …

1. Founder, Founder, Founder

At Upfront we talk regularly about how 70% of our investment decision in Seed and A rounds is the quality of the entrepreneur and 30% is the quality of the idea. Of course we have to believe that there is a viable market, a differentiated product offering and a chance to build something defensible but if you do those basics right you still get crushed without an amazingly talented founder.

The minute your company reaches its peak acceleration in terms of growth is when all of the sleeping giants wake up to compete with you and will spend massive amounts of money to keep you from capturing a growth market and other talented entrepreneurs will raise large amounts of venture capital as people start to see value in the market.

Jamie Siminoff is not only one of the single best true entrepreneurs in Los Angeles, he’s amongst the best we’ve worked with in the country. We first met Jamie when had had a startup called Simulscribe, which transcribed voicemail so you could read your messages rather than listen to them. It was a novel concept well before the major players did this for you. He launched a business called Unsubscribe, which helped consumers deal with the deluge of email lists that one gets signed up to and get rid of them all. Throughout all of this we saw a tinkerer, a problem solver and a completely obsessed leader who was competitive and wanted to win.

When Jamie told us he was going to build “Doorbot” (the name prior to Ring) and he explained to us that it was a video security doorbell sold at mass-market prices to bring security to homes that have never been able to afford them — we were sold on the concept immediately. We funded the seed round, the A round, the B round, C round, D round and E round. We would have gladly followed Jamie (and Josh Roth, the CTO who is phenomenal and we’ve also known for a decade) right through an IPO if we could have. Jamie is truly a visionary and a focused executioner.

Were we SURE that consumers would buy a video doorbell? We were CONVINCED Dropcam (then Nest) wouldn’t mobilize a competing product quickly if it did sell? No. We weren’t sure. But we were sure that Jamie would be maniacally focused on improving the product, marketing the dream to consumers and out-maneuvering the slower-moving competition. He did all of these and more.

I should also say a huge thank you to my partner Greg Bettinelli, as Ring was amongst the first deals he ever funded and along with GOAT, thredUP and some of the other great deals he’s led for us — his insights and track record are looking stellar.

2. Single-purpose beats generic

One our biggest beliefs about Ring and frankly many of the other companies we’ve backed in computer vision (Nanit for baby monitors, Osmo for kids education & games, Density for people counts) is that focused computer vision beats generic use cases. Sure, general purpose cameras or laser tracking can be put up anywhere in your house, business or yard but they don’t solve specific problems well so eventually consumers stop using them.

With Ring it became your doorbell so of course you always use it when someone’s at your door. It has computer vision that sets off a motion detector when somebody passes in front of its field of vision so that you know when there’s somebody in front of your house even IF they don’t ring the doorbell. Importantly you can set “zones” so that it only triggers when somebody is only 10 feet from the house in front where perhaps cars might otherwise trigger the system whereas you can set the left and right field of vision to 30 feet so that intruders are picked up more quickly if they’re in a zone they shouldn’t be in (you can see some visuals in this old TechCrunch article from 2014).

Generic cam’s could never match the security use case as well as Ring could and when consumers went online or to a store to find our product the offering was very clear. Where you see cameras on Amazon and think “cool, but what would I really use it for?”— you would immediately understand a video doorbell use case.

Then Jamie built “stick up cams” to allow you to protect the perimeter of your house and floodlight cams for night time that screwed into existing floodlight sockets, making installation a piece of cake.

3. Consumer value

Once Jamie realized that he could not only sell tens of millions of dollars of home security cameras he also realized that he could get customers to sign up for a monthly subscription to keep the videos in storage in the cloud and review them after the fact. Jamie’s ethos led him to price at just $3 / user / camera / month at a time when traditional home security companies’ monthly fees were so unaffordable. He really thought about helping middle-income families. We had this discussion many times and with Jamie it wasn’t a marketing slogan — it was a personal mission.

A critical component to building a successful business is being able to capture ongoing revenue from consumers who feel they are getting incredible value and continue to feel good about paying. Having recurring revenue allows you to keep the original purchase price down, which in turn increases sales. In addition to the service where you can watch old videos being very compelling, the fact that Jamie has provided this service at such an affordable cost has been a large part of the appeal.

All of this was deeply rooted in Jamie’s desire to deliver consumer value for middle-income homes across the country. On numerous occasions I heard investors suggest that there was a much higher price point that consumers would pay but Jamie would have none of it. He believed that if he sold low-cost, affordable security solutions he not only would build a mass-market company but he would also earn the right to sell more future products to existing customers, which is always more valuable than signing up new customers.

Ultimately, I believe Jamie’s maniacal focus on consumer value proved to be one of the endearing things that established Ring as a beloved consumer brand.

4. Hardware + Software

The world is filled with investors who will tell you, “We don’t do hardware.” I always thought this was kind of silly because HW plus SW can produce some of the most defensible, enduring businesses if one gets it right. Yes, you have to figure out how to finance inventory and sure, it’s harder to iterate products when it involved physical production — but greatness is never easy and the spoils go to those who solve harder problems.

Just look at the success of Apple. It is fundamentally because they build very compelling hardware that couples with iTunes, the App Store and so forth. I have often argued that I believe Amazon is very well positioned in the long-term vs. Netflix because with its Echo product and Amazon Fire and its emerging tablet business it will offer significantly more touch-points for customers when they go to discover video.

And the advantages in hardware are precisely why Google had to build the Pixel phone and Google Home because if it cedes hardware dominance to others it would have eventually found its core search business eroding.

While many analysts have equated “IoT” (Internet of Things) with wearables, I have long believed that the true value would come more from using cameras, lasers, infrared and sensors to track what is happening in the physical world through the use of technology. Today voice is becoming more dominant as an “input” to computing but in the future cameras and sensors will become even more important.

5. Brand

Jamie was one of the first entrepreneurs I knew to go on Shark Tank. Back when many VCs and entrepreneurs were still dismissing the show as “cheesy” — Jamie understood the mass-market appeal and the massive audience he could reach going on the show. Both the show and Ring went on to be smashing successes and to this date Ring has been the most successful startup to appear on Shark Tank (even though those suckers passed! They could have owned 10% for $700k. If you want to see the original episode it’s here).

While Jamie started the company as DoorBot he knew that he needed a more memorable name to build a consumer brand so as soon as he had raised enough money he ponied up to buy Ring.com, which you could imagine wasn’t cheap. Not everybody was convinced it was worth the money but Jamie was steadfast.

When Jamie wanted to sign on Shaq as the company spokesperson it also cost money. Traditional investors are so focused on “quantitative marketing” that he got a lot of advice that this money was better spent on online customer acquisition. I remember Jamie told me back then, “Mark, when people walk into a store to buy a security camera three years from now there are going to be five of them listing features, functions and gadgets. They’re not going to be able to differentiate one from the other based on product specs but then they’ll see “Ring” and Shaq and have the recognition of the marketing campaigns we ran and reach for our product.” He was steadfast. He was dogmatic. He was self-assured. He was right. See bullet point 1.

Next Jamie told me he planned to sell products on QVC. That was probably one step further away from the Silicon Valley ethos than even Shark Tank! Jamie’s logic was clear — millions of people watch QVC and I will have unique access to them to tell our story that they might not pay attention to in an online ad — so he went on. And although I can’t reveal actual numbers I can tell you that through his first few appearances he sold TENS OF MILLIONS of dollars of product.

6. Viral Adoption / Group Use Cases

Jamie didn’t want to stop at a single household. He believed he could build a “Ring of Security” around your neighborhood. He created a technology version of Neighborhood Watch where people in your neighborhood could share suspicious footage of individuals around their house.

If you have a minute please watch this really inspirational video of how Ring reduced crime in an LA neighborhood by 55%. It’s a really important lesson because when you see the extent to which Jamie went out into the community to drive real change using his product and working with the police you can see what it took to have an A++ founder with a single-purpose device (security) and low-cost solutions for middle-income families helped build a beloved brand.

What does this all mean for the future?

Security is only one of the many use cases for how cameras, lasers and sensors can interpret the physical world and aid us in creating more compelling life experiences. I believe that the keyboard I am typing from and the mouse for navigation is a thing of the past.

Today we are bridging the Human-Computer Interface (HCI) through voice commands but we’re also very clearly moving towards computer vision HCI to improve how humans interact with computing devices. Whereas a doctor can ask you to walk across her office on one date and look at your gait for signs of Parkinson’s or other maladies that cause shuffling — she may not observe the behavior on that date. Camera, lasers and sensors can observe on a continual basis helping us with medical diagnosis.

The future is a computer vision world, from autonomous vehicles to robotics to security, training, education and entertainment. I’m super proud to see Jamie having become a world-class leader in this space and to Amazon for having the foresight to bring on board a tremendous brand, a great leader, an amazing team and for continuing to be … #LongLA.

(Cross-posted @ Both Sides of the Table)

CloudAve is sponsored by Salesforce.com and Workday.

A citizen developer in action. Photo by Michael Krigsman.

The topic of low-code platforms and citizen development has come up a lot lately during my discussions with Chief Information Officers. Given the mandate to innovate while spending less money, interest in this topic is not surprising.

The heart of citizen development is giving knowledgeable end-users the tools to create applications on their own, without IT involvement or intervention.

Citizen development offers several benefits:

• Fit. No one knows what a business user needs better than that person herself. When users create apps, by definition, those apps fit the users’ business purposes.
• Speed. Citizen developers don’t wait for IT to approve apps, specs, screens, data access, or anything else. They do the work and have the result right away.
• Cost. IT saves money on developers when users in other departments build apps; it’s a simple cost equation.

During episode 283 of the CXOTalk series of conversations with the world’s top innovators, I asked three-time CIO and author of the book Driving Digital, Isaac Sacolick, for his thoughts on citizen development:

I think it’s probably the most important technology tool that CIOs need to look at. We do not have enough staff and our staff who are strong at AppDev really need to focus on the customer-facing pieces that are going to move the needle.

Building tools for dealing with knowledge bases, doing workflows, integrating enterprise data sources into a single utility that can be used for a one-time purpose — these are great use cases for low-code environments to get developers to be more productive and even citizen development programs.

Sacolick also addressed potential issues with citizen development, in areas such as governance, security, and data integration:

CIOs should stop using the word governance. They should implement governance in a way that people will understand it. Governance includes things like version control, locking down information but giving access to the people who need it. It means improving data quality and solving those problems when you give new technology to a business group.

We need to provide tools [that allow citizen developers] to do things in a safe way, in a controlled way, and a practiced way. That’s what governance is about. We must help end-users understand the practices they must implement.

Citizen development is a crucial topic for CIOs today. Nick Johnson of Salesforce interviewed me recently about citizen development, and the conversation sheds light on important issues.

Here is a somewhat edited and reworked version of that conversation:

SALESFORCE: In 2017, all U.S. computer science graduates would have filled less than 9% of all open developer positions. There are plenty of people out there who are suggesting there is a large and growing “skills gap” in the IT world. Do you agree with them and how did we get to this point?

MICHAEL KRIGSMAN: I agree that there’s an IT skills gap, but to answer your question, let’s look at the history of IT.

IT as a corporate function began with technology in the 1950’s. Computers were large, expensive, and complicated machines, so it made sense to create layers of protection between business users and those with the technical skills to operate that equipment. We all know the stereotype of people in white coats with punch cards.

From the dawn of corporate computing until recently, the focus of IT has been on protecting those complicated machines and providing an interface to make them available to business users.

UNIVAC computer, used for the 1960 U.S. census

We live in a different world now — a world of digital transformation — and two key shifts have had a major impact on the role, responsibilities, and purpose of the IT department.

First, equipment has become much less expensive and therefore pervasive. Second, we’re all computer experts now, and computing is an integral part of our daily lives.

Although these shifts have had profound implications for modern IT departments, some senior IT leaders still have the old mentality and act like the primary role of IT is protecting corporate assets and infrastructure. Although these attitudes are changing, they are still out there.

And yet, business partners and users today expect IT to support agility and speed rather than merely protect assets. Yes, protection and governance are essential, but users want IT to deliver clear business benefit – they want IT to supply technology that solves their problems fast and without hassle.

We need to distinguish between speed, efficiency, and innovation when it comes to IT.

The business wants IT to be fast (meaning agility) and efficient (meaning, get more stuff done with fewer resources), but also to support innovation (which means improvement, or doing things better).

The modern challenge for IT is changing the focus from efficiency to innovation. This the challenge number one for the CIO today.

It’s hard, because the business says, “We want you to do a lot more stuff, and we want you to innovate, but we also want to cut your budget.”

SALESFORCE: How does this history of IT relate to the skills gap today?

MICHAEL KRIGSMAN: We need to look at three main areas:

First, we know that the business expects IT to be a strategic partner. But, does the IT department have the skills needed to fulfill this demand? Can we realistically expect IT to engage with the business beyond technology solutions and infrastructure, to have expertise about marketing campaigns, financial programs, and the like? There’ a business skills gap. Actually, that’s the most important gap.

Second, we have the mindset issue. The demand that people in IT shift their thinking from efficiency as the prime directive to innovation as the essential IT mandate.

Third, the mandate of IT has changed, and people in business have strong technical skills, so they expect IT to supply resources of a certain caliber. Does IT have those resources on-board to allocate quickly to meet business demand?

Coming back to citizen developers, the tools now exist for non-technologists to take a certain level of development into their own hands. In this world, companies must decide where development and computing should take place.

With the proliferation of easy-to-configure SaaS applications, there’s a fine line between departments buying their own computing applications and doing their own development.

The ease of buying web-based applications has accelerated the rise of “shadow IT.” The concept of shadow IT means people in the business buying (and configuring or developing) applications without involving or asking IT.

The skills gap is about meeting business needs in a world where IT does not have unlimited resources, but the business has almost insatiable demand for IT support.

That’s your gap.

SALESFORCE: How can citizen development help bridge that skills gap?

MICHAEL KRIGSMAN: CIOs should provide the services, the infrastructure, get the right governance in place — and then let your employees have at it. It’s beneficial for IT and helpful for employees who want to become citizen developers.

Why not offload a lot of the work of traditional IT on to the people who need it and know what they want? If you give them the right tools and they have the right skills, and they can do it themselves. They don’t have to talk to IT; they just go do it.

It’s less work for IT and lets the CIO do more with less, as I described earlier. It’s faster for the business, which increases speed and makes them happy.

Citizen development lets the CIO focus on infrastructure, services, enterprise architecture, security, and other areas that must remain the exclusive province of corporate IT.

SALESFORCE: How should companies define the governance around this new cadre of citizen developers?

MICHAEL KRIGSMAN: Make sure that your systems don’t allow users to bypass core governance standards.

For example, don’t allow them to expose data through the firewall unless it’s governed in the usual ways that the corporation allows. Give citizen developers access to certain types of data only, whatever is within their permission role or profile. Things like that. Only expose the services that are, again, appropriate to the organizational role and profile of the citizen developer.

Build governance into the system and then let users do whatever they want. That’s the mark of an efficient and innovative IT organization!

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

CloudAve is sponsored by Salesforce.com and Workday.

A citizen developer in action. Photo by Michael Krigsman.

The topic of low-code platforms and citizen development has come up a lot lately during my discussions with Chief Information Officers. Given the mandate to innovate while spending less money, interest in this topic is not surprising.

The heart of citizen development is giving knowledgeable end-users the tools to create applications on their own, without IT involvement or intervention.

Citizen development offers several benefits:

• Fit. No one knows what a business user needs better than that person herself. When users create apps, by definition, those apps fit the users’ business purposes.
• Speed. Citizen developers don’t wait for IT to approve apps, specs, screens, data access, or anything else. They do the work and have the result right away.
• Cost. IT saves money on developers when users in other departments build apps; it’s a simple cost equation.

During episode 283 of the CXOTalk series of conversations with the world’s top innovators, I asked three-time CIO and author of the book Driving Digital, Isaac Sacolick, for his thoughts on citizen development:

I think it’s probably the most important technology tool that CIOs need to look at. We do not have enough staff and our staff who are strong at AppDev really need to focus on the customer-facing pieces that are going to move the needle.

Building tools for dealing with knowledge bases, doing workflows, integrating enterprise data sources into a single utility that can be used for a one-time purpose — these are great use cases for low-code environments to get developers to be more productive and even citizen development programs.

Sacolick also addressed potential issues with citizen development, in areas such as governance, security, and data integration:

CIOs should stop using the word governance. They should implement governance in a way that people will understand it. Governance includes things like version control, locking down information but giving access to the people who need it. It means improving data quality and solving those problems when you give new technology to a business group.

We need to provide tools [that allow citizen developers] to do things in a safe way, in a controlled way, and a practiced way. That’s what governance is about. We must help end-users understand the practices they must implement.

Citizen development is a crucial topic for CIOs today. Nick Johnson of Salesforce interviewed me recently about citizen development, and the conversation sheds light on important issues.

Here is a somewhat edited and reworked version of that conversation:

SALESFORCE: In 2017, all U.S. computer science graduates would have filled less than 9% of all open developer positions. There are plenty of people out there who are suggesting there is a large and growing “skills gap” in the IT world. Do you agree with them and how did we get to this point?

MICHAEL KRIGSMAN: I agree that there’s an IT skills gap, but to answer your question, let’s look at the history of IT.

IT as a corporate function began with technology in the 1950’s. Computers were large, expensive, and complicated machines, so it made sense to create layers of protection between business users and those with the technical skills to operate that equipment. We all know the stereotype of people in white coats with punch cards.

From the dawn of corporate computing until recently, the focus of IT has been on protecting those complicated machines and providing an interface to make them available to business users.

UNIVAC computer, used for the 1960 U.S. census

We live in a different world now — a world of digital transformation — and two key shifts have had a major impact on the role, responsibilities, and purpose of the IT department.

First, equipment has become much less expensive and therefore pervasive. Second, we’re all computer experts now, and computing is an integral part of our daily lives.

Although these shifts have had profound implications for modern IT departments, some senior IT leaders still have the old mentality and act like the primary role of IT is protecting corporate assets and infrastructure. Although these attitudes are changing, they are still out there.

And yet, business partners and users today expect IT to support agility and speed rather than merely protect assets. Yes, protection and governance are essential, but users want IT to deliver clear business benefit – they want IT to supply technology that solves their problems fast and without hassle.

We need to distinguish between speed, efficiency, and innovation when it comes to IT.

The business wants IT to be fast (meaning agility) and efficient (meaning, get more stuff done with fewer resources), but also to support innovation (which means improvement, or doing things better).

The modern challenge for IT is changing the focus from efficiency to innovation. This the challenge number one for the CIO today.

It’s hard, because the business says, “We want you to do a lot more stuff, and we want you to innovate, but we also want to cut your budget.”

SALESFORCE: How does this history of IT relate to the skills gap today?

MICHAEL KRIGSMAN: We need to look at three main areas:

First, we know that the business expects IT to be a strategic partner. But, does the IT department have the skills needed to fulfill this demand? Can we realistically expect IT to engage with the business beyond technology solutions and infrastructure, to have expertise about marketing campaigns, financial programs, and the like? There’ a business skills gap. Actually, that’s the most important gap.

Second, we have the mindset issue. The demand that people in IT shift their thinking from efficiency as the prime directive to innovation as the essential IT mandate.

Third, the mandate of IT has changed, and people in business have strong technical skills, so they expect IT to supply resources of a certain caliber. Does IT have those resources on-board to allocate quickly to meet business demand?

Coming back to citizen developers, the tools now exist for non-technologists to take a certain level of development into their own hands. In this world, companies must decide where development and computing should take place.

With the proliferation of easy-to-configure SaaS applications, there’s a fine line between departments buying their own computing applications and doing their own development.

The ease of buying web-based applications has accelerated the rise of “shadow IT.” The concept of shadow IT means people in the business buying (and configuring or developing) applications without involving or asking IT.

The skills gap is about meeting business needs in a world where IT does not have unlimited resources, but the business has almost insatiable demand for IT support.

That’s your gap.

SALESFORCE: How can citizen development help bridge that skills gap?

MICHAEL KRIGSMAN: CIOs should provide the services, the infrastructure, get the right governance in place — and then let your employees have at it. It’s beneficial for IT and helpful for employees who want to become citizen developers.

Why not offload a lot of the work of traditional IT on to the people who need it and know what they want? If you give them the right tools and they have the right skills, and they can do it themselves. They don’t have to talk to IT; they just go do it.

It’s less work for IT and lets the CIO do more with less, as I described earlier. It’s faster for the business, which increases speed and makes them happy.

Citizen development lets the CIO focus on infrastructure, services, enterprise architecture, security, and other areas that must remain the exclusive province of corporate IT.

SALESFORCE: How should companies define the governance around this new cadre of citizen developers?

MICHAEL KRIGSMAN: Make sure that your systems don’t allow users to bypass core governance standards.

For example, don’t allow them to expose data through the firewall unless it’s governed in the usual ways that the corporation allows. Give citizen developers access to certain types of data only, whatever is within their permission role or profile. Things like that. Only expose the services that are, again, appropriate to the organizational role and profile of the citizen developer.

Build governance into the system and then let users do whatever they want. That’s the mark of an efficient and innovative IT organization!

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

CloudAve is sponsored by Salesforce.com and Workday.

As the CRO at SaaStr, I am doing a lot of hiring these days! A lot. And that means spending countless hours skimming through resumes, taking phone screens, and meeting candidates in person.

Quick shameless plug–seriously, I am hiring for a lot of people, so if interested in working at SaaStr–check out our open jobs here.

Typically, when I go on a hiring spree, I spend at least 20% of my time screening and interviewing candidates–(if not more time TBH). Because the longer a position goes unfilled the more difficult it becomes to fill, and the more difficult my life becomes because I am trying to do all of these jobs myself. And if I am doing everyone else’s job, it is incredibly difficult to do my own job.

Since I do a lot of hiring, I am constantly re-inventing the list of attributes I look for in a new hire. Especially in a start-up environment, like SaaStr, it is important to have a framework for the kind of early marketing team hires that can thrive in your business.

Here are some of the traits that I look for when hiring a team of early stage marketers:

Marketing Specialists that Can Be a Generalists

When building out my marketing teams, I always hire specialists in certain areas–demand generation, events, content marketing, social media, etc. It is incredibly important as the marketing team scales that all of my players know their functional roles inside and out. However, since SaaStr is a startup, not only do I need marketing specialists who are rockstars in their particular roles, but I also need people who can venture outside of their functions when needed. This becomes an incredibly important skill that helps your team scale as your company grows.

For instance, while I have a demand generation manager that lives and breathes in Marketo, my content marketer knows how to go into Marketo and create her own content programs if needed. And my demand gen manager can easily roll up her sleeves to run event logistics when in a pinch. On my team, everyone knows each other’s role and shares in the responsibility of getting it done. So while I always look for experts, I always interview for a candidate’s ability to venture outside of their predefined role.

Marketers Who Can Moonlight as Sales

All marketers should know how to sell. Afterall, every marketing program, ad, ebook, and event, should have the goal of driving closed deals. However, I like my marketing team to take it one step further and embed themselves in the sales process itself. This means understanding lead handoff, opportunity stages, pipeline, forecasts, and more. This also means having basic (and not so basic) knowledge of how to build out reports and customizations in Salesforce. The closer your marketers are to the sales process, the better your sales and marketing alignment will be.

Additionally, I believe that a good marketer can be a pinch hitter during the sales process if a rep needs more fire power. We have a small sales team, so it is always helpful if one of my marketers can jump in and sell an event or booth sponsorship on the fly if needed.

Marketers Who Are Biased Toward Action

Especially in a smaller, growing organization, it is critical that your marketing team knows how to execute across multiple programs and are agile enough to make quick decisions where it counts. The more action-oriented your team, the more you can tackle and scale. While certainly executing recklessly can lead to mistakes, there is a subtle balance you can achieve through having the right approval processes in place.

You need your marketing team to keep pace with the growth of your organization, and that means handling multiple projects at once without being overwhelmed. We have a lot going on here at SaaStr, so I always try and test for bias towards action during the interview process.

Marketers Who Are Content Creators

Communication across a variety of mediums is incredibly important for a marketer, but you would be surprised how many marketers I meet that can’t write an email or conduct a live presentation. As an example, I have interviewed many demand generation marketers who live in Marketo running email campaigns but expect someone else to write their email copy.

On a small team, everyone needs to be content driven. That means everyone knows how to produce content–whether it is an email, blog post, live presentation, or a tweet. This increases self-sufficiency on the team, helps you fill in the content gaps if you have any, and it encourages the all-hands-on-deck mentality. Of course, not everyone is a natural writer, and that is OK. As a team leader and mentor, make sure to spend time to help your team develop that skill.

Marketers Who Are Humble

One of my old bosses had a rubric that he used for marketing hires, and an important element of the interview process was always assessing whether or not a candidate was humble. Since then, I have always included this assessment during my own hiring process. Basically, this translates to coachability, collaboration, and a “one team” mentality. Hiring a marketer in the Bay Area can be challenging for many reasons, and sometimes the most technically skilled marketers falter in showing that they are able to work as a team.

That “one team” mentality, while obviously critical for any size team, becomes even more important when hiring for a small team. You want your team to work together with a strong sense of fluidity and be able to lean on each other during the challenging times. If you have someone who is only looking out for themselves, you risk the cohesiveness of your team.

Marketers can be some of the most challenging hires that you have to make as a leader, and it is easy to get it wrong. However, by implementing a framework for candidate assessment, your interview process might start to get easier.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

1.  How did you get to be where you are with your blogging? You’re not a native English speaker, nor a trained writer….

2. What kind of name is “iamondemand?”

So I figured it’s time to share my “tech evangelist” story.

(In the feature picture of this blog you can find me with one of the industry cloud leader, Mr. Andy Jassy, CEO at Amazon Web Services. )

The Story Starts Like This

Ten years ago, a company I had co-founded was acquired by ClickSoftware (CKSW). At the time, I was the general manager of the company’s Tel Aviv office, which included the R&D and operations teams. (You should read more about ClickSoftware’s journey. Especially those of you just discovering cloud, you might find it interesting to learn what it meant to adopt the public cloud back in 2011.)

After four years of hard work and great uncertainty in a tiny organization, the transition to the larger company was a harsh wakeup call for younger Me, especially as I learned that the lean and fast method we employed as a small organization wasn’t how the rest of the corporate world behaved.

Soon after the acquisition, I was called to the CEO’s office. There, members of the management team asked me to help educate the company on cloud-related topics, such as “what is multi-tenancy when it comes to the database,” and “how sales can make these small deals of $150/user,” as well as other cloud-related topics including R&D, support, marketing, and sales. The IT department already had its first few instances on AWS thanks to one of the early cloud adopters, Dan Feld, CIO of the company at the time, but they needed someone to focus singularly on helping educate the company on the transition of the core software offerings to Amazon cloud.

I was thrilled for this opportunity, but when it came time to assign an official title to this role, I wasn’t sure what to call it. Titles had never really mattered to me — I was always more concerned about my responsibilities — but in this new online world where people searched LinkedIn to find an organization’s point of contact, I knew that I needed an official title. I wasn’t a VP or a director, but I also wasn’t a “senior something.” And then it struck me—tech evangelist, or even better, cloud evangelist.

Purchasing My Domain

I was “born in the cloud.” I hate legacy applications. At ClickSoftware, one of my responsibilities was to share the knowledge I gained with the entire company. I was instructed to do so using the company sharepoint, but I couldn’t stand it, so I took the advice of my good friend Eden (now, a celebrity chef) who told me she was using Tumblr for her small blog. Subsequently, I created my own micro blog on Tumblr, and purchased the domain “iamondemand.com.”

So why did I chose iamondemand.com? Really it was in response to a nickname: my colleagues at ClickSoftware called me “Ofir on-demand” because I pushed and evangelized the company’s new on-demand cloud service.

As the company’s cloud evangelist, I created and posted articles on Tumblr and then put links to those articles onto the company sharepoint. When I started blogging about cloud, I never thought I would end up becoming one of the top 100 cloud computing experts. But when I received a consulting request from a venture capitalist, I realized the value of what I was doing and how creating a personal brand would advance my career.

From In-House Evangelist to Professional Blogger

It took me a little while to feel confident and secure in my content offerings, but I quickly learned that the most important key to tech blogging success was thinking up interesting topics, choosing somewhat sensational titles, and publishing on a weekly basis. And, just as it is with running or any form of exercise: do it, and do it consistently.

And it worked. Soon I was blogging on the side in addition to the content I was creating and sharing with the company.

Soon my audience started to grow. One way I expanded my audience was by reaching out to people of interest in the field for interviews. Nati Shalom, the founder and CTO of GigaSpaces, was one of the first. I interviewed him about cloud vendor lock-in.

Not only did I a learn a lot from the discussion with Nati, but I also learned how to conduct future interviews more strategically. For instance, prepare questions carefully in advance, listen closely while my interviewee spoke, and record the entire discussion so I could pay attention during our conversation and not be consumed by note-taking. All of these things probably seem glaringly obvious for those of you who are professional journalists, but for those of us who aren’t, these were important lessons to learn.

I started to attend local events, too. I figured out that my experiences at these events would produce interesting topics to write about. Back then, I never read about blogging best practices; I just tried new things. Sometimes the things I tried worked out, and sometimes they didn’t. One time it didn’t work out was when I spent three months researching and writing an article that, in the end, only attracted a few readers.

Over time, I understood that while native English isn’t a “must” in order to successfully write English blogs, I could sound a lot more professional if I hired an editor to clean up my draft. So I did. I also worked with a graphic designer to create a logo and help me better design my blog.

A Social Animal

Marketers will say (for good reason) that creation is only half the battle; distribution is the other half.

Certainly distribution is important, but high-quality long-form content alone can multiply your traffic by tens. I’ve seen it happen for many of our customers.

That said, Twitter really did help me solidify my online presence. There, I was able to communicate directly with influential professionals in the industry, such as tech evangelist Adrian Cockroft. In addition, I started to extend my reach through LinkedIn. Today, I have more tens of thousands of connections and followers in the social worlds of B2B tech and cloud alone.

As an evangelist, you need to be present online every day, promoting both your own interests and the interests of others, especially those who you know personally and will return the favor with a share and a like. These are obvious marketing tactics, but what might not be so obvious is that a successful tech evangelist needs to run quality online discussions, and better yet, arguments and debates. When I was first starting out, for instance, the most popular discussion was surrounding the hybrid cloud. I spent many hours holding discussions with multiple cloud gurus.  

Final Notes: The Tech Evangelist Is the Coolest Geek

In case you don’t know him already, this is Jeff Barr, Amazon cloud’s chief evangelist. This picture is in black and white, but his hair is actually bright purple—and just look at his Hawaiian shirt.

The tech evangelist is the coolest geek in an organization.

The evangelist has the most reliable and important function in today’s marketing world, specifically in the world of tech. The largest brands in the world, including Microsoft and Amazon, have a designated in-house evangelist position. And, unlike most marketing positions, the candidate must have actual tech experience and the ability to easily explain (even without preparing in advance) the value of a sophisticated product capability they have just seen for the first time. This technical competence makes the evangelist a trustworthy source of information for the target audience.

Source: Glassdoor

In addition to being knowledgeable, the tech evangelist must also be transparent. Some say that evangelists shouldn’t be too “salesy,” but I believe that if the evangelist truly stands behind their words, they should promote the organization’s product—and if they don’t believe in the product, they should say so. The evangelist also serves as a connector, not only in terms of networking between people, but also leverage his/her vast network, in terms of connecting businesses that have certain challenges with the vendors with the right technology to fix them.

To be a successful tech evangelist, you have to be authentic: you must truly want to help people be successful, not just try to sell them something. You have to be a trusted advisor, which means being transparent and upfront about any possible biases that you may have. It means telling the whole truth 100% of the time—nothing you say or write should be any less true if you were working for a competitor. Really being a tech evangelist is about connecting people with products, technology, and knowledge they need to succeed.

Originally posted at iamondemand

CloudAve is sponsored by Salesforce.com and Workday.

At its heart, customer experience means all touchpoints or interactions between an organization or brand and its customers. It’s a simple concept that is fraught with complexity.

Think about the touchpoints that a typical consumer or business buyer may have when interacting with a seller through the entire lifecycle or customer journey:

• First, they research the product and company, seeking information directly from the brand but also from reviewers, friends, and other sources.
• Having decided on a product or service, the consumer evaluates where to buy and may choose among product variants and configurations. Obviously, the nature of the purchase, whether consumer or enterprise, for example, dictates specifics of the actual transaction flow.
• Following the purchase, the customer may need post-sales help with setup and initial use.
• Eventually, that consumer may seek technical support or other forms of customer service.
• At some point, the consumer may make another purchase, beginning the cycle again, or, hopefully, remain with the brand as a repeat buyer.

While the brand can control some of these steps directly — such as product features or technical support — other aspects of this broad customer journey are fully in the hands of consumers. No brand can control, for example, the discussions that consumers have among themselves outside of official company channels. Through its actions, the brand can influence, but not control, these conversations.

Customer experience is challenging because so many points of interaction must come together to create a positive impression in the customer’s mind. Product design, engineering, marketing, sales, support, and service all contribute to a buyer’s overall experience with a company or brand.

To dive into the complexities of customer experience, I asked the seven-time author of books on customer experience and digital transformation, Anurag Harsh, to share his thoughts. Harsh is the chief marketing officer at IPsoft [disclosure: a CXOTalk underwriter] that develops cognitive AI technology for customer service. He also co-founded the large publishing company, Ziff Davis, giving him a broad perspective on these issues:

Customer experience is not just a touchpoint or a series of interactions between a customer and a company, but a voyage. I call it a voyage because customer experience demands re-wiring a company’s systems, employees, and culture towards the sole benefit of the customer.

Companies must learn to view the world from the customer’s point of view and deploy resources around the customer’s needs, to build a company culture that screams “customer first.” This task is hard, especially in companies with large numbers of employees, because everyone must evolve together, speaking the same company language.

In customer support, for example, creating the right experience goes beyond conversations between a customer and support agent. You need a customer-first culture that performs well behind the scenes at the back-end. All this directly affects the quality of the agent’s response back to the customer.

Great experience happens when a customer-first culture meets the right back-end processes and technology, supported at every step by the organization’s leadership.

Because customer experience is profoundly important, I invited two of the world’s top practitioners to join me on episode 267 of the CXOTalk series of conversations with innovators.

Chris Satchell is executive vice president and chief product officer at Comcast, where is he responsible for the company’s product, design, and innovation teams. Comcast has annual revenue over $80 billion.

Brian Solis is one of the most well-known authors and analysts on digital transformation. He is a principal analyst at Altimeter Group, a Prophet company. Among his reports are the 2017 State of Digital Transformation and the Digital Change Agent’s Manifesto.

See also: Comcast: How AI, machine learning, DevOps, and a bit of hardware may make it a smart home platform

During this episode of CXOTalk, these experts discuss the subtle points of customer experience and present a framework for thinking about the problem. The conversation describes how Comcast uses customer experience as a reference point when developing new products and services.

Watch the entire conversation embedded at the top of this page and read a complete transcript at the CXOTalk site.

Here are edited highlights from the discussion:

What are the core issues around customer experience?

Brian Solis: If you look at the proper definition of customer experience, or employee experience for that matter, it is the sum of all engagements someone has with your organization throughout the entire journey and throughout the lifecycle. It’s not just about any one moment. It’s about how all those moments come together.

Chris Satchell: It’s about designing the entire journey. There’s a couple of things we focused on [when I worked] at Nike.

One was this idea of consumer brand business. Do what’s right for the customer first; then worry about the brand and the brand promise you make to the customer; then worry about the business. If you get the first two right, the third will come.

The second one was about thinking about the entire journey. Every touch point on that journey is an interaction with the customer. That can be positive or negative so that you could be building promoters all the way along or detractors all the way along.

You must think very broadly, and so you think way beyond when you’ve got a product installed, or you’ve got it in your home. You have to think, “How did I learn about it? How did I acquire it? How did I pay for it? How did it get to me? How did I install it?”

At Nike, we would think all the way to, “What is my interaction with an in-store athlete that was serving me?” because that is a great connection point with the company. Every point along a journey is your brand. You have to be authentic, and you have to serve the customer correctly there. That’s some of the things we brought here.

Then from my time at Xbox, again it’s a lot about delivering the very best experience, not settling, and never being content with what you’re providing, no matter how good it is, because you have to think in this consumer world about how good you think your experience is. There is somebody out there merrily raising the bar on you. It won’t have to be in your sector. It doesn’t have to be in your industry.

Brian Solis: I wrote a book a couple of years ago called X: The Experience When Business Meets Design. It explained how to think differently about innovation by taking a step back and thinking about design for a new generation of customers and employees that are not in alignment with today’s corporate policies, processes, and even just how we think and how we think about productization.

The consumer doesn’t care about all of the politics and BS that happen within the organization. They just want the experience to be personalized. They want it to be great. They want it to be intuitive, maybe transparent in many ways. Innovation is as much about products as it is about policies, processes, and how we even work as well. I think the biggest thing is just shifting mindsets.

I look at today’s — I call them — Generation C. They’re not millennials. They’re not Centennials. They’re not Generation X. They’re just anybody who lives a digital lifestyle. What they all share is this heightened bar for expectations and these new behaviors. They’re impatient. For example, we talk about the uberization or the consumerization of technology. When someone uses Uber, that becomes their standard of engagement. When someone uses an Apple product, that’s their standard — or Google Search.

This new level of experience is blurring the line regardless of products or services that they want that same sort of intuition, that same sort of clarity and cleanliness throughout the entire journey. Yet, organizations are built on these 50-, 60-year-old structures that have all those things apart.

Chris Satchell: If I’m a customer, my reaction is, “Your org structure is not my problem.” We used to talk about this back at Xbox about trying to paper over the cracks in our org structure so that the consumer didn’t see. You’ll see so many companies when you track that product portfolio, it matches the org structure, and you’ve got to fight so hard to take that mentality out, and you’ve got to find leaders who will be selfless and say, “Okay. Yes, I have this release vehicle, but I’m going to take functionality from somewhere else. I’m going to give up something in my release vehicle because it doesn’t make sense to the customer.”

How do you empower teams to create great customer experiences?

One of the things that we’ve done that’s helped empower the teams — and it’s going to sound boring, but it’s so important — is we have this quarterly planning process. It’s how we take our annual goals for our portfolio and break it into quarters. Every quarter what we do is, the products managers, they get with all their stakeholders, wherever they are, including user research and what they want to do, and they write. They say, “For my area, here is a one-page spec of what I want to do,” and it’s something that can be achieved in a quarter for their end of the product or their product.

It says, “Here’s all the teams’ help I need.” What we do is we have this process where we stack rank them. Then we plan, and we just plan from top to bottom, making sure that any higher priority thing, you know, it fills resources in first.

There are 2,000 people in my organization and another 8,000 people we work with. What you don’t want to have happen is you start off on something and then find out one of the constituent teams can’t deal with the capacity constraints for that quarter, and you can’t deliver anything.

We solved that problem, but importantly, it gives all your partners somewhere to go. When they say mid-quarter, “We’d like to go in this direction,” or, “We want to change what’s happening,” you say, “Great. Talk to your product manager. If they like the idea, they can bring it to the next planning.”

It’s a way that we have managed to bring quarterly agility to annual planning. What we do is we only schedule 50 percent of our capacity that way. We call it “directed.” We do 50 percent of what we call “trusted capacity” where we just say to the scrum teams, “Hey, work your backlog. Put on your backlog what you know that you need, what the customer needs. That’s your capacity to manage. Go manage it.” We work very hard to carve off part of their capacity that they could just use to do the right thing. It’s taken us a year and a half of constant effort to get that to work, but it has helped us take the 36 teams that we’re feeding into video and make them more agile and coordinate across them. It’s agile writ large at a very big scale.

How do you measure ROI?

Here’s a controversial statement. I think it is pointless measuring ROI below the portfolio level for a given line of business. I sometimes have some very spirited discussions with our finance team around this. The reason is, we’ve got all these projects. They’re feeding into the overall experience the consumer gets. Then the consumer, especially in our business, has got a subscription they’re holding because of that.

When somebody comes to me and says, “Well, we need to know exactly what it costs,” I go, “Why do you need to know what it costs? You know what the portfolio costs.”

They’re like, “Well, so we can plan ROI.” I’m like, “How on earth do you know what the return is? There is no way to untangle these variables. That is impossible. It’s mathematically impossible. We don’t have that precision.”

And so, I think one of the problems is when people start measuring ROI. Measure it at an appropriate level. The level I think is appropriate is: Here’s what we invest in a business, and here’s what that business returns. If you start looking at features, and you start looking at product extensions and all these other things, and saying, “Well, we need an ROI,”

I think you’re missing the point in the modern world. You need to look at total investment, total return. That clears up a lot of the mess if you can convince people of that. I find that a lot of organizations love, would much prefer, to be precisely incorrect than right, because it gives them a sense of, “Well, we must be on it because we got all these detailed numbers.”

Well, the detailed numbers are fiction. We don’t know how the customer will receive it. How many of us see ROI projections that pan out?

Now, large-cap scale investment and capital investment, that’s a different matter. You can plan that. But, when it comes to consumer-based products, I just don’t think, other than the line of business, you can plan it. The first one is, if you can, don’t get caught in the game of ROI for small things. Talk about portfolio ROI.

Then what we measure depends. You’ve got your vanity stats because you want to know your population and what your monthly actives are and your unique users. But beyond that, you must measure, one, what you think is important. If you’re in a moment of truth, you need to measure success across a moment of truth. Maybe you need to measure net promoter score on one side then the other.

That means you must run experiments, take people through a new experience and measure what their net promoter score was at the end versus the net promoter score of people on the old path.

We have this idea of relationship net promoter score, so RNPS, which is the long-term [of] how you feel. Then TNPS, which is, through a transaction, how did you feel? Then other than that it’s, you’ve got to come back to the product teams. It’s like any good data science. KPI is no different. What question do you need to answer? You have to think about the questions you need to answer and then plan for the data to answer those questions.

From a development perspective, it’s great to put the infrastructure in to be able to say, “I want real-time stats. I want batch stats. I’ve got these different things that I want to get back from my application to make it very easy for developers to instrument.” Whereas, product comes in and says, “Could you find these things out for me?” They’re like, “Yeah, that’s easy. I can just go and add that.”

Beyond that, it depends [on] what you’re trying to answer for that question. If you’ve got a funnel problem with, “Hey, how do I track from when somebody downloads an application, how many people go through, set up an account, and they watch that first video and go to the second video?” That’s very different than saying, “I want to understand the heat map of how somebody moves through our user experience.” We’d say in England, “Horses for courses,” but it is about understanding the question; design your data feeds and your data analysis for the answer.

How does data help customer experience?

Chris Satchell: We have huge amounts of data on everything, whether it’s our products. You can only vaguely imagine how much data our network produces. We use it in many ways. We use it operationally to keep the service running, to give customers a great service. We also use it, as I said, to answer product questions, to understand where we should go next in our products.

We have a very strong machine learning, artificial intelligence, and deep learning set of core teams here. We’re using that data to recognize new insights in our products and also to

create new product experiences that you can only do with those intelligent methods.

The same with operations, feeding data in and looking for that sort of pattern matching recognition and next action recommendation that you can only do by using very deep networks to recognize all this data coming in.

We’re starting to use data as a way to change how we operate and as a core of how we build and the functionality our products deliver. I think that’s going to become common to many companies. Data will become part of the product.

We’re finding that the algorithms that are available are becoming a commodity. You can get great data algorithms everywhere.

The actual technology frameworks — whether it’s MXNet, whether it’s TensorFlow — analysis and modeling frameworks are becoming a commodity. The real thing you have as a company is your data. The models you build with that data, that is your secret sauce. That is your gold.

We’re very focused on using our data effectively. It’s a question of capacity. We have infinite amounts of great questions and things we can do. It’s just sequencing them through product development, through product insights, through network operations, and customer experience to get the most valuable things done first.

I think we always talk about big data. Now we’re talking about AI and machine learning, but all of that — let’s just remember, they’re just tools. Without great people thinking great ideas, without being able to develop it, without being able to take the insights or the data and have the actuation loop to affect things, there’s no point collecting it.

I used to joke that what would happen in the big data world, you’d have a board of directors that says, “We need data.” Dutifully, the company would go off and gather huge amounts of data. Then they would say, “Well, nothing is happening,” and so they go, “Ah, we need more data!” So you get even bigger data.

Then you realize a little bit later, you’ve got no insights from it, so you start building the insight engine. You have this, like, huge first bit, and then it narrows to insights. Then still nothing happens.

Everybody is scratching their heads, and then you realize actuation. There was no pathway to take the results we had and change the world based on that. You want it to look more like a pipe where your insights match your analysis match your ability to actuate.

There is also a cultural element where you need to check your ego and say, “Wow. I’m surprised. I had an insight. My insight was wrong, but I’ve got a new insight. Let’s go drive that.” If you can get those to line up, you can start making a change in the org.

Brian Solis: [Chris just described] the biggest challenge I’ve seen with data. This is across the board. The challenges for any of this are human.

You’re working against a lengthy career of experiences that are behind every executive or decision-maker. They got to that role of where they are because they’ve made great decisions along the way. Those decisions have fortified their experiences and have validated their beliefs and their perspectives. When you’re trying to challenge convention, data only reinforces what you want to see or what you expect to see.

Being a data storyteller and having common language [means] getting data to tell the story of what is happening based on assumptions that will challenge convention. That’s the art.

Final thoughts on innovation?

Brian Solis: I often talk about the difference between iteration and innovation. Many companies think they’re innovative, but they’re actually being iterative, which I describe as doing the same thing, but better, whereas innovation is doing new things that create new value.

I look at the Comcast or the Xfinity remote as sort of this metaphor for the two. Buttons are iterative: backlit keys, dedicated buttons. Then the voice, the whole infrastructure for voice was innovative.

Chris Satchell: It’s a continuum, so I think small iteration is just micro innovation. You need innovation that’s small. You need innovation that’s medium where you’re expanding products. You need innovations doing completely new things, and you have people dedicated across that time continuum.

CXOTalk brings together the most world’s top business and government leaders for in-depth conversations on digital disruption, AI, innovation, and related topics. Be sure to watch our many episodes! Thumbnail image Creative Commons from Pixabay.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

CloudAve is sponsored by Salesforce.com and Workday.

Caroline Fairchild, New Economy Editor @ LinkedIn, sits down with Matt Straz, CEO at Namely, to discuss what exactly changes at 200 employees and how you navigate those changes. For one, it becomes extremely difficult for the CEO to connect in a meaningful way with everyone across the company so you have to go out of you way to communicate with all of your employees.

Matt also discusses why you should actually avoid press for as long as you can in the beginning, how to think about giving perks and managing how people use them, and why the relationship between a CEO and the head of HR is so important.

And if you haven’t heard: SaaStr Annual will be back in 2018, bigger and better than ever! Join 10,000 fellow founders, investors and execs for 3 days of unparalleled networking and epic learnings from SaaS legends like Jon Miller, David Steinberg, Jennifer Tejada, and Eoghan McCabe. If you don’t have tickets, there’s still time to grab yours today and bring your team from just $999! (Hurry before they’re all gone!) Get tickets here. 

TRANSCRIPT 

Announcer:  Please welcome New Economy Editor of LinkedIn, Caroline Fairchild, and CEO of Namely, Matt Straz.

Caroline Fairchild:  Hi, everybody? How’s it going? Feeling good?

Audience:  Yeah.

Matt Straz:  We’re competing against puppies, right?

Caroline:  I think I speak for Matt and I both by saying we’re glad you’re here and not at Yappy Hour. You can compete against a lot of things, but puppies is tough. I’m thrilled to be here today to speak with you guys for a very hyper tactical conversation about what happens after employee 200, with Matt here.

We were just discussing some of the challenges before we got on stage. I’m Caroline Fairchild. I oversee LinkedIn’s publishing platform. Who here has written a post on LinkedIn or has read content on LinkedIn recently? OK. I love seeing that.

Matt is one of my writers and he’s pretty prolific on the platform, sharing content with an audience on LinkedIn as well as a way for him to reach his employees.

To start, I just wanted to ask him a little bit about why blog, why share content on a social network, like LinkedIn, and what are you getting out of that?

Matt:  From a business standpoint, it’s certainly good at lead generation. It’s great with partnerships. It’s great from a recruiting standpoint.

One of the side benefits that I didn’t recognize at the time, especially after we crossed the 200 employee mark was that it’s also a really powerful way to connect with employees, and to let them know what you care about, and then have them, obviously, amplify that content and share it.

It has been one of the biggest surprises. If I send an all @namely.com email, maybe, 20, 30 percent people might read it in the first day. LinkedIn content and other social media content is a way to get people engaged with content, especially employees, in a natural way.

Caroline:  As Namely has grown, have you found it more challenging to be transparent on social networks? How have you thought about that as the company has grown?

Matt:  Amy from marketing would probably never accuse me of being not transparent enough. It’s probably the opposite. She’s back there right now holding on with bated breath to see what happens here.

I’ve always been really transparent. You get a little bit more measured in what you communicate versus the early first couple of years of startups. I pretty much share almost everything, whether it’s one on one with employees or generally to everybody.

Caroline:  What’s one thing about you that’s not on your LinkedIn profile that you want to share right now?

Matt:  Oh, I went to School for Fine Arts and Design, and I played in a punk band when I was younger. That’s definitely not out on there.

Caroline:  Awesome. Let’s backtrack. Give us a little background on Namely and its growth and history up until right now.

Matt:  I had founded two other companies. Both of them got acquired in a relatively short amount of time. In both of those companies, I was really frustrated as a mid size company with the lack of great software out there. It’s just that simple.

I didn’t have the information I needed as an employee to, I didn’t feel like, do my job as well as I could have. Whether it was a founder or, once we got acquired in larger companies, I didn’t really have access to the people data to make really good decisions.

That’s how it started. I knew nothing about HR, nothing about payroll, nothing about benefits. Went into it totally ignorant, which in hindsight was probably a good thing, later understanding how complex those businesses are, but that’s how we got started. It was blind, focused on a problem that was driving me crazy and a real desire to do whatever it took to build a significant business.

Caroline:  We’ve heard that narrative a little bit in this space where founders have just found a pain point and been like, “There’s got to be a better way,” which is a very different approach than founders who are very specialized in a field. What do you think are some of the benefits to the fact that you identified a pain point without an expertise and were able to drill down into that?

Matt:  That big change for us and what we did differently was because I came at it as an employee, I was solving HR problems, but not necessarily for the admins to start with, really focused on the employee first. Up until recently, whether it’s us, Gusto, or Zenefits, nobody had really thought in those terms before.

That ignorance was definitely bliss. It allowed us to have a fresh approach, but it definitely caused some problems down the line that we had to address in the product to make sure that it also worked for admins as well.

Caroline:  Focusing on employee is very different when there’s 20 of them versus 200, which you hit the 200 mark last January. Speaking specifically before we move to HR about your role as CEO, what changed the most dramatically would you say last year when you hit that 200 mark in employees?

Matt:  I think Jason flagged this in his post when he was promoting this segment. Dunbar’s an anthropologist and, in the 1990s, he said that the maximum limit of relationships that you can have, meaningful relationships that you really connect with other people, is around 150.

If you look at most startups, the wheels start to come off at around 150 to 200, specifically because that founder can no longer connect to everybody themselves across the company.

That’s when the challenges come up. That’s when the lack of processes, the lack of codifying how you operate as a company, implicitly and explicitly, starts to come back to bite you, because you also have about 200 employees and the chances are at that size that anything that can happen will happen.

People will start to push the bounds of what your culture is, what your policies are if they’re not actually codified in some way.

Caroline:  You’re going to give us a specific example of that?

Matt:  Sure, PTO. If you tell everyone that you have an unlimited PTO policy, I promise you by 150 to 200 employees, there will be somebody that will test what you actually mean by unlimited. Does that mean that I can go away for three months on a vacation? Does that mean that I can leave the rest of my team in a lurch and just disappear?

I think those things start to come to a head because again the odds are that somebody will push the boundaries of PTO. You’ll also have the other extreme right, where people don’t take enough off that suddenly you realize that somebody is only taking two or three days off the whole year. Those are the things that start to hit you and realize that you’ve got to become a grownup company.

Caroline:  What are some of the strategies if you think about, let’s just say, benefit and a benefit is a bell curve and how people treat it. You have an ideal range where you want people to do whatever the benefit is, either use it or not use it. What do you do with the people on either sides and how do you codify the roles in a way that makes it so that bell curve is shaped the way you want to?

Matt:  The one thing you can’t do is once you start to see it happening, you need to address it right away. The longer you let it linger and you let those outliers at either extreme go, the more difficult will be to course correct. I think it’s important to deal with it very upfront and honestly as quickly as possible.

That’s the first thing and also just to be really open about it. I found that having meetings like this, having in all hands and communicating it directly is somewhat better than sending out an all hands email all @namely.com and telling everybody what the policy is.

I think what I learned is that sometimes when you codify your policies that way, it’s just really brutal. It’s a brutal way to communicate a new policy. Sometimes doing it in person is a better way to do it. You follow up later on by putting it in writing.

Caroline:  Communicating new policies, new benefits is something that tech companies have to do a lot in order to stay competitive and recruit talent. Matt and I were just talking about how crazy some of the benefits are at tech companies now and what prospective employees are expecting from their employer.

Given that environment where there’s free kombucha on tap and there’s ping pong and there is unlimited PTO, how do you think about the role that benefits play in recruiting talent and growing your company to get the best people in the door?

Matt:  I think the big learning from me was when we hit about 200 a year, a year and a half ago, I thought that if we just ladled on enough perks, everybody would be happy. Actually, that’s not human nature. There’s actually a point where there’s tremendous diminishing returns to that.

People actually want to work in a place that’s meaningful, that has great communication, that has great managers. When we talk about benefits, they actually want great core benefits even more so than great snacks. Snacks are easy to complain about. That’s a symptom of something deeper that you need to fix in your culture.

[laughter]

Caroline:  In like human culture or company culture something, or…?

Matt:  I think just generally people will complain about the most superficial things because it’s the easiest thing to complain about. It usually means that there’s something deeper that you need to solve about your business. I think what we found and we have close to 1,000 companies on our platform right now. They’re all about our size.

I think that they all find the same thing, that it’s a balance where you provide a certain amount of perks, but you also have to be really clear about what the mission and what we’re all doing here is, what the purpose of that is.

Caroline:  Namely has how many employees now, 300 and…?

Matt:  We’re about 350.

Caroline:  How has the role between you as CEO and the HR department changed as the company has evolved?

Matt:  I would say, as founder, the biggest change is that the product used to be my product. I would just come in everyday and I would say, “If I can just make this product 10 percent better, in the next month, everything will be solved.” Now I realize that the company is my product. Just as products need to be refactored, companies have to be refactored at different points.

You’ve got to upgrade certain parts of it. You can look at the company sometimes like a piece of code. You’ve got to upgrade that and keep it performing really, really well. That is going to change over the life of the company. That was the biggest learning.

I think with HR, the biggest learning is that…I have HR report directly to me. I know a lot of companies have HR report into finance, but I would really urge every founder to have your…Whether it’s your Chief People Officer, your VP of HR, even if it’s your Manager of HR, have them report directly to you. That is my most important partnership right now.

Talent becomes the number one objective once you get over 200 employees. For me, that partnership…I talk with our Chief People Officer probably 10 times a day.

Caroline:  Do you think that’s uncommon?

Matt:  I don’t know if it’s uncommon, but I would highly recommend it. Once you start to scale and you’re growing as fast as we are, the opportunities around talent and people, I can’t think of something that’s more important at this stage.

Caroline:  What are the conversations that you’re having with your Chief People Officer? What are they like and how do you think they’re different than the other people members of your executive leadership team are speaking to that executive?

Matt:  We’ve grown a tremendous amount in 24 months. We went from a tiny company to a high growth company in a very short amount of time, 18, 24 months.

When you’re growing that fast, you need to bring as many of your people along with you, and then you also need to bring in people and talent from the outside. Getting that mix right is really, really important. That’s one of the biggest things we’re focused on right now, is what do we have for talent today and what are we going to need in another 24 months when we double in size yet again?

Caroline:  When you do double in size, there are people in roles right now who are doing a good job at this stage for the company, and then you up level them and bring in someone with a lot of experience, maybe from another industry, how do you keep that employee happy if they are intending to stay there? What are the conversations like if maybe it’s time for them to leave?

Matt:  We’ve got a couple people today that have been with me from the very beginning, two people that have been here three, four, or five years now. What I’ve tried to do is work with them very early on to figure out…

In the beginning, you need generalists to grow your company, but as you grow, you need specialists. It’s an ongoing conversation because roles become more and more specialized over time. Because this was my third startup, I realized early on that our earliest employees are going to be the ones that need the most attention in their career pathing.

Caroline:  Let’s talk about your role as CEO. Going from generalist doing everything to specialist, what was the hardest thing for you to let go, whether it’s a meeting or a report or something that you were like, “I actually don’t have the bandwidth to do this anymore.”

Matt:  I’m at my core a product and marketing person. The mistake that I made was that we waited too long to bring on product and marketing expertise because I just wanted to hold on to it, because I felt that I could do it and we could invest in other places. I figured I’ve got this.

What happens is suddenly, you realize, “I don’t got this,” especially once you start growing fast. That was the mistake I made, but the real challenge, I have to say, over the last year, is the degree to which to delegate. You can delegate everything, which isn’t the answer, or you can be micromanaged everything.

I think striking that balance of staying involved in the business while giving people the room to do their job is really important.

Caroline:  Do you feel like as CEO, you are responsible…What are you responsible for? I’m not even going to give you the answer.

[laughter]

Matt:  I’m responsible for a lot of things, but ultimately, at the end of the day, we’re a venture backed startup. We’ve raised over $150 million, 80 million of it in the last 12 months. We’ve got 350 employees. Every one of them are an investor in our company.

My job, ultimately, is to provide a great return, whether that’s financial or career wise in the coming years. That’s my number one responsibility. I need to provide a return. I need to provide a return no matter how you define that for everybody in the company and everyone who’s invested in the company.

What that means for me is based on the returns that investors would like to see for me to be successful, I need to create a company that has an enterprise value at the end of the day of somewhere between $5 to $10 billion because major investors want to see a significant return. That’s my job.

Caroline:  One of your major competitors was in the news a lot last year for having some stumbling blocks in that space, Zenefits. A lot of it had to do with their company culture. Connect for me how company culture ties back to getting return for your investors.

Matt:  Quite honestly, they definitely had their challenges and that was unfortunate. For us, we’ve always had a fun culture, but we’ve also been focused on compliance. Keeping those two things balanced is important.

Last year, we brought in a VP of Compliance from MetLife. He had worked in the insurance industry for a decade. We certainly respond to that. Even though we’re growing fast, we never let growth get too out of control. That’s been another core part of our approach.

Somewhere in between, that unsustainable growth and growth that is simply too slow for investors’ patience, we’ve worked to split the difference.

Caroline:  For the HR compliance wonks in the audience, about a year ago, you published a post about compliance across states and how complicated the field is, trying to figure out for the people who are in your audience, what’s going on there.

How has HR compliance across states changed in the last year? What are the bigger trends that we’re seeing amongst compliance for HR?

Matt:  Certainly, with presidential outcome there, we’ve gone from a period of incredible employee focused regulation last eight years and now, basically as far as we can tell, the total opposite of that. That’s happening at the federal level.

At the state and local level, we see just as much, if not more, employee related regulation happening. It’s been a big focus for us. It means a lot of things to us and our product and also the support that we provide to our customers.

Compliance is as important as ever, just our focus is a bit more on the state and local level right now.

Caroline:  President Trump has issued some executive proposals as well as some policies that could directly impact the way that startups and small businesses recruit talent. How are you thinking about that, advising your customers about that? Very early days, but what are you focusing on in that space?

Matt:  We invested in creating content around HR and regulation about a year ago pretty significantly, so we publish constantly on this. We cover it and we publish it and we keep our customers informed about the changes. They are changing day by day and I think the future of something like ACA is very, very cloudy.

I think there’s investments that all HR companies made in building out functionality that may not be necessary a year or two from now. The best advice right now is just watch it very carefully. If you want to keep up to date on it, we publish a lot on these topics.

Caroline:  One of the other things I wanted to ask you in terms of trends is I think “The Wall Street Journal” came out with an article last week talking about the independent workforce and how it has as many as 20 million people could be working in the gig contract economy.

What does that mean for you as someone whose businesses is around HR software, and how are you thinking about that?

Matt:  A big focus for us, we just recently launched a major time and attendance functionality to get more to hourly workforce. We had originally focused on tech companies, media advertising, and primarily, salaried workers.

The big change for us is now focused on this other part of the workforce. It’s a must have, frankly. Everyone needs to pay attention to it. For software companies like ours, it’s just absolutely essential that you address the hourly part of the workforce.

Caroline:  This is your third company?

Matt:  Yes.

Caroline:  A lot of people in the audience probably are leading companies right now and haven’t had the luxury to do it two times before. What are some key learnings that are key stumbling blocks, ways you failed in past that you feel like you’re better suited to be a CEO now?

Matt:  Number one way that I failed, it wasn’t necessarily a failure, but it was being open to M&A, and acquisition. The biggest challenge with that, the biggest learning that I had in those two first companies is if you go in with a mindset of building a company to get acquired, you will absolutely get acquired.

What will happen is that you’ll go out after work and you’ll talk with some of your coworkers and you’ll play the Who Might Buy Us game. Before you know it, you’ll actually optimize your company and build it to get acquired. That happened both times for me.

I went out on a limb in 2012 and we had no employees and no product, and said that we were going to be a public company by the end of the decade. It was a ridiculous, audacious thing to say, but it’s kept us true.

It’s enabled us to say no to M&A offers all along the way. It also enabled me to end up with a board and investors who are also not interested in doing that. That was my biggest mistake, you could say. So far, it’s kept us very true in what we want to accomplish over the next 5 to 10 years.

Caroline:  Are there any other parts of the business where you’ve had to fake it til you make it or put a mantra out there without even knowing it’s what…?

Matt:  I’ve been to it. No, that’s what a founder does.

[laughter]

Matt:  No. I remember, early days, we’d gather together. There was 5 or 10 of us and I said, we’re going to create Workday for the mid market.

Mind you, I was saying this in Brooklyn, New York, where there is absolutely no history of ever building an enterprise software company that competed with anybody. It was ludicrous to say such a thing.

I just fully believed it. I saw that there was a mid market and I saw that mid market not being addressed and I thought that we could do it. I’m glad I was that delusional because it ended up getting us to this point. I think I was right. As crazy as it was to say that back then, it was the right thing to believe. I think that’s what founders are for.

Caroline:  You got to this point and have grown so quickly at the same time that one of your competitors has been in the press with a lot of negative news.

Do you have any advice for the leaders in the audience who maybe in the similar situation where they are getting a lot of press attention or a lot of inquiries because of what the competitor’s doing or what’s going on with them?

Matt:  I will say that…so it hurt when Zenefits raised $500 million. I had every investor and every potential investor start asking me, “Why can’t you be more like Zenefits?” When I went out to raise the last round, [laughs] they started asking, “How are you different than Zenefits?”

We’ve always been different. One key thing I’d say is, and this is going to be counter intuitive, but initially, avoid the press and stay below the radar as long as you possibly can.

Actually, when that was falling out, we intentionally dodged every single story and inquiry that had to do with that because we just didn’t want to be associated with it. Frankly, I thought it was unfair. Piling on doesn’t make anybody look good in that situation.

We actively didn’t engage with conversations with reporters during that stage. It’s just as important not to be in the news, as it is to be in the news. If you’re going to be in the news, make sure it really matters.

It’s totally fine for us, this is the first time I’ve ever spoken here. I don’t even think I was invited last year. It’s OK to be under the radar for four or five years while you build your company. Frankly, it takes the pressure off. It’s not going to really help your business materially. It really isn’t.

Probably, early press is only going to do bad things. I would say, avoid it, until you’re ready to be able to handle it and you’ve got a great product and a great story.

Caroline:  Or tell your own story on LinkedIn and you don’t have to worry about reporters.

Matt:  That’s right.

Caroline:  What you just said about the investors saying, “Why are you not more like Zenefits? Why are you very different than Zenefits,” is an example where you probably shouldn’t be listening to investors in order to shape your business.

How do you navigate that between the time where you do listen to investors and the times that you don’t?

Matt:  That is a great question because there is times where our investors told me things that I didn’t listen to, and I was wrong.

[laughter]

Caroline:  It’s a total crap shoot.

Matt:  I should have started hiring an executive team way sooner. I tuned them out. They were right. I should have. I should have gotten started a year earlier.

Most of the time, you just have to look inward and see if the advice that they’re giving just makes any sense at all to you. Sometimes, if you’re a first time founder or you’re building a company in a new industry, it’s really hard to not agree with them because you think they know everything.

They’re Sequoia, they’re Matrix, they’re True Ventures, how could they possibly be wrong? What I found is your gut is usually right.

You can sometimes go along with the conversation, even in a board meeting, but it doesn’t mean that you actually have to follow all the way through. Give yourself time to really reflect on, “Is that really the best course of action for the company? Do you really believe that?”

We’ve got advice throughout our history that we should go up market, that we should go down market, that we should go every market. You just have to figure out what it is that want to do.

The mid market focus for us is because I like midsized companies. I don’t want to deal with 10,000 person global company. I just don’t want to deal with that nonsense. We’re focused on the mid market because I love those companies. Everyone who works in our company loves those companies.

You just stay true to that. If you hear things that on paper makes sense like, “Yes, we could become $1 billion company a year quicker if we did that.” If it feels uncomfortable, then just don’t do it.

Caroline:  What if you have an investor who’s consistently giving you, I won’t say bad advice, but advice that doesn’t resonate with you, but it’s too late? Has it ever happened to you? Do you feel like you’re able to weed those people out before you take their money?

Matt:  I was really fortunate. This was not by grand design. We were a Brooklyn-based enterprise software company in HR five years ago. You can imagine that there are not a lot of people interested in funding that five years ago.

Now, it looks like, “Of course.” Back then, it looked like fairly maybe, perhaps not a great investment.

What happened for us, and I would recommend this to everybody, is make sure that you have the highest quality first investor that you can possibly find. Our first investor was Lerer Ventures. For some reason, they invested in us five years ago.

I knew when they invested that we are going to be OK as a company. I knew at that moment because they were one of the most well regarded seed funds in New York City and incredibly well connected. They introduced us to True Ventures, True Ventures introduced us to Matrix, and Matrix introduced us to Sequoia.

I do have to say that moment where Lerer invested in us, in a weird way, I could see that the next four years playing out. The quality of those early investors will dictate the quality of your future investors.

Honestly, almost every round of financing, I took a lower valuation, so that I could work with those investors. I haven’t really had that situation because I just optimized to having the best investors even if it meant more dilution for me.

Caroline:  Great. We’re running out of time, but I do want to bring it back to Namely. Today, the Brooklyn based HR startup is expanding its roots here on the West Coast.

What are the challenges that come with that, with having remote employees, trying to think about performance and culture when you’re not even in the same time zone as some of your people?

Matt:  We faced this throughout our lives. Initially, believe it or not, we were a small company. Some of our people were in Manhattan and some were in Brooklyn. We had to bring everybody together in Lower Manhattan, which was culture shock.

Caroline:  [laughs] Total culture shock.

Matt:  Absolutely, especially when it’s Brooklyn engineers going to Lower Manhattan.

You have to work through those shocks. We now have a significant West Coast office on Market Street. We have a growing office in Austin. The thing is that what you have to recognize is the sense of being remote, or excluded, or outside of certain information is a natural state.

If somebody works 3,000 miles away from headquarters, that’s a natural inclination to feel like you’re missing out in some information.

I publish a ridiculous amount. As you know, I publish on LinkedIn. We have a feed on our product I publish weekly. We do a monthly all hands that get broadcasts across the country to all of our employees. Even then, there is the sense that they might be missing out on something.

I just think that you have to go that extreme lengths to make everybody feel included. As a founder, you’re an ambassador to the entire company. You’ve got to spend time in every office as much as you can.

Caroline:  Great. Thank you so much, Matt.

Matt:  Sure.

Caroline:  We’re all ready to go grow our businesses to 200 employees. Thanks.

Matt:  Thank you.

[applause]

Transcription by CastingWords

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

It bores me personally, but I know it’s an important topic.  Raising money for many CEOs is one of the their top 5 priorities.  Without venture capital, I’d be nowhere.  Both of my first two-startups were venture-backed.  And it’s a weird, strange world that until recently was highly opaque.

Now having been on three sides of the table — founder 3x, worked at someone’s VC firm, solo investor — I’d like to take a moment to boil down all the possible advice I could into one learning:

The Highest Chance You Have to Get Funded is When the VC Already Wants to Invest Before The First Meeting.  Before you’ve even met him or her.

Trust me.  VCs claim to “meet” 1,000 or more start-ups a year.  But that’s not really possible.  No one can take 1,000 coffee meetings.  Not really.  They can flip through 1,000 emails, delete them, shake 1,000 hands maybe.  But it’s all just too many.  So as a CEO/founder, you have to stand out.  And then of the say 100 potential investments a VC might take seriously … they know only maybe 10-20 are going to end up being in their sweet spot.  A deal they really want to do.

And while every VC looks for different things, at different stages … they know what they want to fund, at least usually.  It may be a repeat, successful founder.  It may be traction in a very specific space.  It may be very certain metrics.  Etc.

So when they “hear” of a potential investment is right in their sweet spot the right way — they make that meeting happen.  That one doesn’t take 90 days to schedule. It gets scheduled that week, or even, that day.  That deal gets brought to the partners’ Monday meeting the next week.  They move when they see a hot prospect.  Just like a great sales rep does.

Ok you say, but how can I possibly make a VC want to fund me before I even meet her or him?

The following paths work just fine:

• A super warm intro from an amazing founder / seed investor.  If one of the top CEOs a VC has invested in says “you have to meet Diane, she’s the best founder I’ve met this year” –you take the meeting.  That day.  Similarly, VCs invest in stages.  If the top VC one stage earlier (e.g., Seed if you are Series A) says “this is my best investment” — you take this meeting.  Now.
• Amazing PR, press, and customer engagement.  If everyone on Twitter or ProductHunt or Stackoverflow or Hackernews or anywhere is saying you are the next amazing tool, that gets folks attention that are interested in your space.  Mediocre PR doesn’t work.  But “everyone saying good things” for real, works well.
• An epic cold email.  Cold emails do work — if they sell the entire pitch on their own.  Craft a no more than 40-line email (or so) that encompasses the entire pitch.  Traction, metrics, team, logos, and vision.   All of it.  Yes, you can do this in one email that isn’t a ramble.  If that email is so compelling you look like a Top 1% opportunity, you will get the meeting.  Almost no cold emails meet this bar.  But when they do …
• You are super hot.  This isn’t you, yet.  This is more relevant for later stages.  Everyone wants to meet with Slack.  But the one thing that is relevant to you is they all already want to invest in Slack even before the meeting.  You create similar energy and momentum, just at an earlier stage, and the same thing will happen.
• Sequoia, Andreeesen, etc. is going to give you a term sheet.  This is hard to play for 99% of folks, but it does mean other VCs, at least some, will want to take the meeting   Just don’t overplay this if it isn’t true, or if the social proof is mediocre.

Note I added “super”, “amazing” and “epic”.  You have to stand way, way out.

This is one reason YCombinator is so, so successful.  When 500+ investors walk into each Demo Days, they already are assuming there are 1-2 companies they will want to invest.   VCs think it’s just their job to find those 1-2.  That is something special.  EF may have this in Europe, but no one else has this.  No other accelerator has every investor coming assuming there is one deal they at least probably should do.  The investors literally, truly come with a checkbook.  They already know they want to invest before the “meeting”.

If you can reproduce that, you will get all the meetings you want.

Now flip this around.  What if you just “ask for coffee”?  What if you “want to pick a VC’s brain”?  I guess that works sometime.  But what are the odds that makes the VC want to invest before the meeting?  Zero.

Personally, every single investment I’ve done I wanted to invest before the first meeting.  So maybe I’m biased.

But I can tell you it certainly works on me.  And almost all my traditional co-investors, too.

(Cross-posted @ SaaStr)

CloudAve is sponsored by Salesforce.com and Workday.

As I talk with the many extraordinary guests on CXOTalk, an interview discussion forum that brings together the most innovative thinkers in the world, three key business aspects of artificial intelligence have emerged.

First, AI is a vague umbrella concept that ties together data and a set of technologies, such as pattern recognition and other techniques, that emulate human learning and intelligence. The term “artificial intelligence” is an imprecise marketing or presentation phrase used for the sake of convenience. Business buyers should dig deeper to understand the technologies that make the most sense for their organizations.

Second, few companies have deployed AI at scale. There are lots of prototypes and proofs of concept, but AI is still new and experimental for most organizations. For example, a recent survey by SAS states “AI adoption still in early stages.”

Third, be skeptical of vendor claims. Technology companies are still trying to figure out where AI can improve their products and the processes they automate. Many vendors have bought AI startups to gain expertise and fill gaps.

The bottom line for enterprise buyers: learn the tech, question your vendors, and plan for AI by developing data science talent in-house now. Talent scarcity is a big issue today.

—–

McKinsey Global Institute (MGI) is one of the foremost research organizations in the world on how AI will affect organizations and their workforce. McKinsey’s research combines quantitative analysis with extensive on-the-ground interviews of executives and business operators. As a result, the material they produce is insightful and useful. Two recent reports focus on the business value of AI and the impact of automation and demographics on work and the economy.

One of the partners leading McKinsey Global Institute’s work on the impact of AI and related technologies is Dr. Michael Chui, who is one of the most articulate people I know on these topics.

Chui’s comments are clear and rooted in solid research, making him a natural participant in the CXOTalk series of conversations with the most innovative leaders in the world. On episode 268 of CXOTalk, I spoke with Michael Chui about AI, business, ethics, policy, and economics.

Chui makes a couple of key points that I want to highlight. First, the success of an organization’s efforts to adopt AI is based strongly on its overall digital maturity. Companies with active programs of digital transformation will be more likely to make progress with AI initiatives. From my perspective, we can think of AI initiatives as extensions of digital transformation – rethinking culture, mindset, and business model — rather than isolated technology projects.

Second, start thinking now about how you will train your workforce as AI changes jobs and frees up labor to be re-deployed. Chui says that mass redeployment of labor will likely be one of the “grand challenges” we face.

The in-depth conversation lasts 45-minutes and is an important document describing how one of the world’s top AI business researchers views the issues today. You can watch the entire conversation and read a complete transcript of episode 268 at the CXOTalk site.

Here is an edited summary transcript pulled from the long discussion:

Tell us about McKinsey Global Institute?

McKinsey & Company is a global management consulting firm. The McKinsey Global Institute is part of McKinsey. It’s an investment by our group of global partners around the world to do research, quite frankly, on topics that matter. We’ve been around for over 25 years as part of McKinsey [and], for most of that time, have done work on productivity, country competitiveness, labor markets, [and] capital markets.

For the past few years, we’ve added another research leg, which is around the impact of long-term technology trends. We’ve looked at data and analytics. We’ve looked at open data. We’ve looked at Internet of Things. Increasingly, now we’re looking at artificial intelligence, robotics, and automation technologies and their potential impact on business, society, and jobs and employment more generally.

How do you define artificial intelligence?

You could go for hours debating it. We describe it as using machines to do cognitive work, to do the work that comes about primarily because of our brains. But, as it turns out, even from my graduate research studies, we know that not all our intelligence is just trapped in our brains. It’s also part of our bodies, et cetera. And so, we understand that, in many cases, artificial intelligence itself might enter the physical world and be things like robotics and autonomous vehicles, et cetera. But, it has to do with intelligence and then the machines that instantiate it.

What are some of the important conclusions of your research?

The potential for these technologies that we call artificial intelligence is huge. They affect potentially every sector, potentially every function. One reason for that is a lot of the potential applications of AI are extensions of the work that people had already started in data and analytics. And so, we’ve been looking at nearly 500 different use cases of artificial intelligence across every sector, across every function.

Sometimes what we say is, these traditional analytic methods, whether it’s regression or what have you, gets you this much impact. But, when you could add the multidimensionality of additional data or these additional deep learning techniques, you could increase, for instance, forecast accuracy or increased OEE or decreased waste, a number of these things, which these use cases allow us to do. You could think of AI as just being another turbocharged tool for your analytical toolkit. I think that’s one broad finding, which is that there is almost no part of the business that this couldn’t affect.

Another piece, though, is we’ve been surveying thousands of different executives in companies all around the world. My colleagues who serve clients on these topics also have very direct contact with people who are thinking about or are using AI. One of the things that we know now, as we sit in December 2017, as we’re talking, is that it’s very early. While there’s huge potential for improving economics, both in the top line and bottom line, only a very small percentage of companies have either deployed AI at scale or within core business processes.

Now, that’s changing every day as more companies develop this capability, learn more about the technology, and they can embed it within the processes of an organization, which in some cases is the hardest thing to do. We’re just very early on this learning curve. It’s a steep learning curve, but we’re early. There is so much potential, but we’re early.

What are common threads among the industries you have studied?

There are many industries where much of their value gets driven by their customer interactions. If you’re a retail company, if you’re a consumer package company, et cetera, it might make more sense to look at the value of AI and those types of functions. On the other hand, if your operational effectiveness drives you, if you’re in the business of manufacturing, delivering and shipping products, for instance, if you’re in logistics, then perhaps those operational needs [take precedence]. I think those are, at least at the top level, one way to think about it.

Another common thread that we have found is the following, which is, I think often you discover a technology which has a potentially transformative impact. You say, “Gosh, isn’t there a shortcut? Can’t I just jump and use that to compete?”

Because we need large training sets of data for AI, in fact, we’ve discovered a high correlation between sectors and individual companies that are further along on their digitization journey — the ability to use digital within their core processes to improve process effectiveness. There’s a high correlation between that and being ready for AI.

One of the other common threads we’ve discovered is, it’s quite difficult to accelerate past your digitization journey. You need to be on the digital journey to enable yourself to be ready for AI. I think that’s another finding.

If you want to accelerate your potential impact with AI, you need to accelerate your move along the digital journey.

What will the impact of AI be on workforce issues?

Some of the potential impacts are for these technologies to automate activities that we currently pay people to do in the economy.

We looked at individual activities, not just occupation, so 2,000 different activities we pay people to do in the global economy. Half the time people spend being paid at work is on activities that theoretically we could automate by adapting technologies that exist today. That sounds scary, right? That’s a large percentage, but we’re not predicting 50% unemployment tomorrow partly because it takes real time. It takes real time to develop the technology.

You need a positive business case. Technologies tend to be expensive when they are first developed, whether it’s a self-driving car or an artificial intelligence algorithm. That cost declines thanks to Moore’s law. You need to net that out against the cost of human labor, and that’s different around the world.

In any case, 50% of the world’s activities potentially might not be automated for another 40 years, so 2055. Although, we have a scenario which is 20 years earlier and a scenario that’s 20 years later. We do know that increasingly activities we pay people to do will be automated.

The question then is, will there be enough demand for human labor, even net of the things that might be automated? Our report from last month suggests yes.

If you look different potential catalysts — whether increasing prosperity around the world; another billion people entering the consuming class in the next couple of decades; whether you’re talking about aging, which is a troubling thing because we have [fewer] workers, but on the other hand it drives the need for healthcare. We have roles for people to develop and deploy the technologies themselves.

Hopefully, we’re going to see increased investment in infrastructure to help the consuming class, but also fix and improve the infrastructure we have. We’ll see changes in energy mix and efficiency, and potentially even a lot of what’s currently unpaid work in the economy that’s many times done by women at home, whether it’s childcare, cooking and cleaning, increasingly enter the market.

If you look at all of those things together, and then even your net against those the activities that AI and robotics might do, we still see plenty of work for people to do, enough to offset the effects of automation.

The broad question, though, is, if you think mass unemployment isn’t going to be the problem, mass redeployment might be the problem. As much as we want the education system to get better, it works fairly well.

We think that potentially the great grand challenge for the next couple of decades is, how do we retrain millions of workers who technology will displace? We need them to keep working to have economic growth and yet, at scale, retraining of people past their first two decades of life is something that I dare say we haven’t completely solved yet. That’s something on which we badly need to work.

Should business leaders start to think about worker retraining now or is it still too early?

This demands some immediate attention. It’s not necessarily because things are going to happen overnight, particularly with AI. But, if we think about automation technologies more broadly, then, in fact, we are starting to see these things, whether it’s robotic process automation, whether it’s physical automation from a manufacturing plant, in logistics, or in a distribution center. These technologies are coming into play today.

While we’ve described this as a multi-decade trend, which will take time in macro, it will happen quickly for individuals. It will happen quickly for individual workers. It also takes time to understand retraining. We described this as a grand challenge. Usually, grand challenges aren’t solved overnight, and so I do think business leaders engaging on this question about retraining their workforce on a continuous basis at scale is something that is a question that ought to be top of their mind when they’re starting to think about their workforce strategy.

The idea of universal basic income sometimes comes up in these discussions?

This idea of a universal basic income, guaranteed minimum income, et cetera, is capturing a lot of currency. I sit in San Francisco here and, as it turns out, there are a lot of people talking about it there. There are lots of arguments for it.

One of those arguments is if we think the machines are going to take everybody’s job and we’re going to have mass unemployment, we need to make sure that everybody has enough income so that they, in fact, can feed themselves and feed their families. I think that justification or that rationale for universal basic income gives up too early because that assumes mass unemployment. In fact, what we say is we do need mass redeployment, not mass unemployment, just to make sure that we have enough economic growth going forward.

Our point of view is that we’ve looked at the past 50 years of economic growth. Half of that has come about because of more people working. Because of aging, we’re going to lose a lot of that. One way to think about it is we just don’t have enough workers. We need all the AIs, robots, et cetera working, plus we need people working to have economic growth. Again, if you think UBI is based on the fact that we’re going to have mass unemployment, I think you’ve given up already and, in fact, you need to move.

The other thing that I think is also helpful, again, as we modeled out the potential impact of AI and other technologies, plus these additional drivers, we might continue to see this increasing income dispersion or income inequality. You might ask, “Look. We just need to make sure that people get paid enough.” Well, then again, if you want to look at it from a public policy standpoint, maybe you could target the types of subsidies such as the Earned Income Tax Credit, which both incent work as well as provide additional income to people. I think, thinking through all of those possibilities.

Now, that said, UBI for a place that’s a developing country, again, it might put a floor in place that allows people to have a lot more freedom regarding what they’re able to do in their job. But, in a developed country, both because of the expense, as well as the fact that it isn’t targeted towards trying to get people working, I think it’s challenging for that reason. That said, the overall point, another overall point that we found from history, which we hope will continue is, while we don’t think everyone can completely stop working, the working week has declined, on average, by double-digit percentages over a matter of decades and centuries.

Hopefully, we all can have more time for leisure. By the way, leisure drives new activities, new occupations. That’s something else we need to do. We need to continue to generate new activities and occupations. Hopefully, the workweek will continue to decrease over time. At least, for the foreseeable future, we don’t see it going to zero.

What about changing demographics?

Demographics is interesting and includes a number of powerful factors. Again, we cover some of this in the report we published last month. First of all, countries vary greatly in their demographics. For many countries, they’re aging, and that exacerbates this question; we don’t have enough workers to continue the economic growth that we’ve enjoyed for so many years. The reason why we have better lives than our parents and our parents had better lives than our grandparents, et cetera, is because of this economic growth and half of it coming from more people working.

Germany’s workforce is declining. Japan’s workforce is declining. China, with a population of a billion and a half people, their workforce either is or, depending on who you ask, will shortly begin declining. Those are countries which simply don’t have enough workers to underpin economic growth. Again, one of the implications of that is AI and robotics can be some of the workers, can fill in for that gap regarding just numbers of people who are available to work.

That said, there are other countries like India, countries on the African continent, et cetera, which are very young, and their demographic pyramid looks very different. We’re concerned at some point about the fact, well, gosh, what if automation AI, these technologies, come into play just as they need to create even more jobs? That’s absolutely true in India, for instance; another 150 million people need jobs going forward.

We modeled out all of these potential drivers of additional demand. By the way, we picked seven of them. We know that there are more, so even our modeling is limited. Particularly in those countries which tend to be young, those are countries also which tend to have high aspirations for their economic growth. They start relatively low on the GDP per capita scale. As a result, that will generate lots of demand for human labor, as well as robotics and artificial intelligence. Even in those countries, we see the potential for lots of work as well, work to be done.

Again, that comes back to the question of retraining and education. Can we get people into those jobs? Then, can you deploy those technologies in a way because, as I said before, AI and robotics require an underpinning of moving on the digital journey? Even those countries, which are developing and young, will need to move on the digital journey for them to take advantage of these other technologies and improve their productivity while they’re generating new jobs for people as well.

What advice do you have for established organizations?

Number one is, dedicate some time and resources to understanding the technology and its potential. I mean I should have said they should read our report, but [laughter] but I’m not going to do the commercial. I think it is starting to understand what that potential is. Then I think the same sort of test and learn philosophy, which was effective in data and analytics broadly, I think that’s something which is true here, too.

Another thing I think, which is also true, is particularly for the technologies which are working well today around machine learning and deep learning. They’re based on having training sets, so data. I think being sophisticated about having a data strategy is important.

I had the opportunity to speak with Andrew Ng, for instance, who is one of the pioneers in deep learning and machine learning, overall. He talks about some of the leading companies in the deployment of AI, really spending time on these multiyear views of what data is important to be collected or have access to so they’ll be able to compete going forward, and they’re playing these multiyear. He describes them as multidimensional chess games to have access to the data which matters.

One of the largest challenges now is on the human talent side. We saw this with data scientists previously. Again, to a certain extent, we talked about many of the AI use cases being extensions of the analytics use cases. The analytics challenges about talent now are extended to the challenges around AI as well, and so huge amounts of war for talent regarding people who understand these technologies deeply.

Of course, that’s changing, too, as more and more people take advantage of online resources, enroll in classes, et cetera. Again, supply and demand are constantly evolving. Right now, demand is so high, and supply is relatively limited. One of the biggest challenges is just having people onboard who can do it.

CXOTalk brings together the most world’s top business and government leaders for in-depth conversations on digital disruption, AI, innovation, and related topics. Be sure to watch our many episodes! Thumbnail image Creative Commons from Pixabay.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

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