CloudAve http://www.cloudave.com Software in Business. The Business of Software. Mon, 18 Aug 2014 17:21:12 +0000 en-US hourly 1 http://wordpress.org/?v=3.9.2 Copyright © CloudAve 2014 admin@cloudave.com (CloudAve) admin@cloudave.com (CloudAve) http://www.cloudave.com/wordpress/wp-content/plugins/podpress/images/powered_by_podpress.jpg CloudAve http://www.cloudave.com/wordpress 144 144 Software in Business. The Business of Software. CloudAve CloudAve admin@cloudave.com no no A Discussion with Jon Bischke of Entelo: On Successfully Switching from B2C to B2B (SaaS) http://www.cloudave.com/35464/discussion-jon-bischke-entelo-successfully-switching-b2c-b2b-saas/?utm_source=rss&utm_medium=rss&utm_campaign=discussion-jon-bischke-entelo-successfully-switching-b2c-b2b-saas http://www.cloudave.com/35464/discussion-jon-bischke-entelo-successfully-switching-b2c-b2b-saas/#comments Fri, 15 Aug 2014 18:22:00 +0000 http://saastr.com/2014/08/14/a-discussion-with-jon-bischke-of-entelo-on-successfully-switching-from-b2c-to-b2b-and-saas/ One outstanding SaaS entrepreneur I’ve enjoyed getting to know is Jon Bischke, CEO of Entelo.  Entelo is a sophisticated solution that leverages social and other networks to help you recruit great candidates to your company (e.g., going beyond LinkedIn). Entelo has now hit millions in ARR and is accelerating, and one thing Jon is great […]

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One outstanding SaaS entrepreneur I’ve enjoyed getting to know is Jon Bischke, CEO of Entelo.  Entelo is a sophisticated solution that leverages social and other networks to help you recruit great candidates to your company (e.g., going beyond LinkedIn).

EnScreen Shot 2014-08-13 at 2.19.37 PMtelo has now hit millions in ARR and is accelerating, and one thing Jon is great at is explaining how different things are in SaaS than B2C — where his past start-ups were.

I thought his learnings might be helpful for others.  As more and more founders think about doing something great in SaaS but have grown up in B2C … it’s important to really understand that it’s different in SaaS and B2B.

Mainly, because it’s about Customers.  Not Users.

But in many other ways as well.

Here are Jon’s learnings:

Screen Shot 2014-08-13 at 2.16.45 PMBackground on Jon Bischke:

I started three companies before the age of 35. All were of the B2C variety with two being platforms for online learning and the third being a social network for progressive types (which competed with Mark Pincus’s pre-Zynga company Tribe.net). Two of those companies were acquired by public companies and while none of them would be considered “home run” exits, two could be considered solid singles or doubles.

My top lessons from the transition from B2C to B2B:

Screen Shot 2014-08-13 at 2.21.23 PM#1 – The over-arching lesson was that a playbook exists for B2B success.That’s not to say that one doesn’t exist for B2C but B2C seems a lot less predictable than SaaS. SaaS has best practices and lessons to learn and is typically less about riding a wave of massive disruption (e.g., social networking, mobile phone adoption, etc.). At the end of the day, starting a successful SaaS company seems to boil down to finding a major problem that businesses face and are willing to pay to get rid of and then solving it for them in the best way possible. That’s an over-simplification of course but nonetheless accurate.

You could say that the same is true in B2C but I think it’s a lot more nuanced. Timing plays such an incredible role in B2C because the number of people you need to solve the problem for in B2C is so much larger. Finding a problem that 1,000 people have and solving it is rarely a recipe for B2C success. You need numbers that are at least an order of magnitude and probably two orders of magnitude greater.

But in B2B, if you solve a problem for 1,000 companies you almost certainly have a viable company on your hands. In fact, if you solve a problem for 100 companies you probably have a viable company on your hands. That’s a pretty big deal and a significant shift in how to think about succeeding in B2B vs. B2C.

The playbook in B2B is highly learnable as well. Here are a few of the things I’ve done:

  • Read every post on SaaStr and blogs like David Skok’s, Mark Suster’s and Joel York’s.
  • Listen to as much of the industry dialogue as possible. In our space we have excellent podcasts like The Bill Kutik Radio Show (which I was recently a featured guest on) and HR Happy Hour.
  •   Spend time with as many successful entrepreneurs and executives in B2B as possible. There are literally too many people to list who’ve helped me over the last few years. And I’m excited to “pay it forward” by helping up-and-coming SaaS entrepreneurs as I better understand the playbook.

#2 – Personal networks seem to matter more in B2B. Think about Dave Duffield succeeding at Workday. A big part of their success was Dave’s network. He knew everyone. Relationships with potential customers, influencers, etc. play a huge role in B2B success.

Contrast that with B2C. Many successful first-time entrepreneurs fail in their sophomore efforts in B2C. The advantages just don’t seem to be as great for that second-time B2C entrepreneur. Sure, they might succeed but success is less guaranteed than for the seasoned B2B entrepreneur. There are many stories of entrepreneurs churning out success after success in B2B (think Duffield with PeopleSoft and Workday, Ellison with Oracle and NetSuite, etc.).

Which brings me to a related point. It seems like older you get, the tougher it is to succeed in B2C. Sure, there are examples of entrepreneurs succeeding in B2C at late stages in life. However, they tend to be somewhat few and far in between. Now look at the ages of your typical B2B entrepreneurs. It almost seems as if the older you get, the easier it is to succeed in B2B. Part of this is related to network, part is due to deeper understanding of the challenges businesses face and part can be attributed to a better grasp of the “playbook”.

Networking in B2B is a lengthy topic (probably worth a post of its own!) but it’s been critical to Entelo getting as far as it has.

#3 – LTV is much easier to calculate in SaaS. Unless you are running a subscription consumer business, it’s often tough to tell what your LTV is until several years in. This is because the usage and/or buying patterns are often very lumpy. Someone might spend $100 with you in month one and then not buy for six months only to show up and buy $300 worth of product. What’s your LTV for that customer?

Sure, at some point with enough customers you should have a pretty good feel. But with SaaS you can typically figure out your LTV within a year or so. Even if you sell annual contracts where you don’t know how many years a customer will stick around, you can use the formula of average annual revenue per customer divided by churn rate to get a rough approximation of LTV.

Understanding your LTV will help you better understand how much you can pay to acquire customers and that’s everything in B2B (and B2C for that matter). Understanding early whether you have a self-service, inside sales or field sales model is critical to success in B2B. So many companies have died because they’ve tried to take a low LTV model and sell it using an expensive sales force.

And of course, as you better understand your LTV you quickly realize how important churn is to your overall business health. Cutting your churn in half doubles your LTV which means that you could theoretically spend twice as much to acquire customers to grow faster. And what hard-charging entrepreneur doesn’t want to be able to have a larger budget to acquire customers with?!

#4 – It’s much easier to target customers in B2B. When I was running eduFire, we were trying to target people who wanted to learn foreign languages.  That’s not easy. Sure, Adwords can be fruitful and marketing on social channels is becoming easier and more trackable. But it’s much more of a scattershot effort in B2C. Just think about Rosetta Stone. How much of their massive ad budget is wasted? A ton.

In B2B, you often have a strong sense of exactly who the ideal buyer is fairly early on. For Entelo, it’s people running talent acquisition in mid-market and enterprise companies. Those people are reasonably easy to target using outbound efforts and also tend to run in the same circles at conferences. They are also well-networked with each other and we’ve closed many deals because one VP of Talent told another VP of Talent of the success they had with Entelo.

Easier targeting of customers helps with the other side of the all-important LTV to CAC (“customer acquisition costs”) ratio. If you can better target you can reduce acquisition costs and lower your CAC. If you can increase your LTV and decrease your CAC, you now have a recipe for explosive growth in SaaS. That’s powerful.

Conclusion: SaaS success isn’t easy of course. Things are great at Entelo but we still face significant challenges on a daily basis. That said, I think B2B can be at least as exciting as B2C and perhaps a bit more “logical” at times. For any B2C entrepreneur who is looking to change it up a bit, I’d strongly recommend taking a look at starting a SaaS company. Those of us in the “SaaS Mafia” would welcome you with open arms!

(Cross-posted @ saastr)

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New Research from Pew on AI, Robotics, and the Future of Jobs http://www.cloudave.com/35467/new-research-pew-ai-robotics-future-jobs/?utm_source=rss&utm_medium=rss&utm_campaign=new-research-pew-ai-robotics-future-jobs http://www.cloudave.com/35467/new-research-pew-ai-robotics-future-jobs/#comments Fri, 15 Aug 2014 15:42:48 +0000 http://www.thefutureorganization.com/?p=10744 There’s an ongoing debate around whether technology, AI, and Robotics will displace more jobs than it creates or create more jobs than it displaces. The latest research from Pew tries to help answer that question by surveying around 1,900 experts. Not surprisingly the results were close. 48% say scenario one is more likely (more jobs […]

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ROBOTS_B_400There’s an ongoing debate around whether technology, AI, and Robotics will displace more jobs than it creates or create more jobs than it displaces. The latest research from Pew tries to help answer that question by surveying around 1,900 experts. Not surprisingly the results were close. 48% say scenario one is more likely (more jobs replaced than created by 2025) and 52% say scenario two is more likely (more jobs created than replaced by 2025).

The report broke down key themes around which to be hopeful and key themes around reasons to be concerned.

Reasons to be hopeful

  1. Advances in technology may displace certain types of work, but historically they have been a net creator of jobs.
  2. We will adapt to these changes by inventing entirely new types of work, and by taking advantage of uniquely human capabilities.
  3. Technology will free us from day-to-day drudgery, and allow us to define our relationship with “work” in a more positive and socially beneficial way.
  4. Ultimately, we as a society control our own destiny through the choices we make.

Key themes: reasons to be concerned

  1. Impacts from automation have thus far impacted mostly blue-collar employment; the coming wave of innovation threatens to upend white-collar work as well.
  2. Certain highly-skilled workers will succeed wildly in this new environment—but far more may be displaced into lower paying service industry jobs at best, or permanent unemployment at worst.
  3. Our educational system is not adequately preparing us for work of the future, and our political and economic institutions are poorly equipped to handle these hard choices.

You can read through the whole report or download a pdf version by visiting Pew research.

I’m curious to hear what you think. Will technology create more jobs than it replaces or vice versa?

(Cross-posted @ The Future Workplace)

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You Can’t Hire a VP That You Don’t Love http://www.cloudave.com/35451/cant-hire-vp-dont-love/?utm_source=rss&utm_medium=rss&utm_campaign=cant-hire-vp-dont-love http://www.cloudave.com/35451/cant-hire-vp-dont-love/#comments Wed, 13 Aug 2014 16:02:00 +0000 http://saastr.com/2014/08/12/you-really-have-to-love-your-vps/ Recently, a good friend of mine running a Hot SaaS Start-up asked me if he should hire a particular VP of Product candidate I knew well.  The team he’d be managing was a big thumbs up on him.  The board was in favor.  And I knew this VP.  This VP is a 10/10. But … it wasn’t […]

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Recently, a good friend of mine running a Hot SaaS Start-up asked me if he should hire a particular VP of Product candidate I knew well.  The team he’d be managing was a big thumbs up on him.  The board was in favor.  And I knew this VP.  This VP is a 10/10.

But … it wasn’t what this CEO was looking for.  He wanted someone different.  It just didn’t click.  Not deep down.

My advice?  Let her go.  Just don’t hire her.  Even if everyone loves this VP … you have to love the VPs you’re with.  Or you’ll never really trust them.  And then, they’ll never really succeed.  It’s just too hard unless everyone really, truly has each others’ backs.

———-

Over the past 18 months or so, I’ve played a little bit of a matchmaker.  I’m no recruiter, but I’ve “placed” probably 20 folks I know in promising SaaS start-ups as VPs or Directors.  The key here is I look not just for the necessary experience (at same ACV, ability to hire a team), but also, a good personality match.  People that would work well together.

Screen Shot 2014-08-11 at 1.10.43 PMAnd I’d say my success rate so far is about 19/20.  19 have gone on to be, at least so far, a real success in as a VP or Director at their Next SaaS Start-up.  But the 1 that failed did shake me a bit.

This was for a VP Sales position for a fast-growing SaaS company at about $4m in ARR.  The company had never had a true VPS before, and clearly, it was time.  No VP of Sales candidate is perfect — if they aren’t, something’s off.  Why would they take the job if it’s exactly what they’ve done before successfully?  But this candidate was good.  He had managed a team of 20 before, hired 8 of them successfully, and 3 of the best ones were ready to join him.  He had sold as a similar ACV and even in the same vertical.  And he clearly cared a lot, and was excited about selling the product.

What he wasn’t, was a Mr. Dashboards.  He couldn’t sell up.  He didn’t schmooze, and he didn’t look Great in a Suit.  And he was relatively young and only been a Director of Sales before.   He wasn’t 100% proven a a VP.  He liked to just deliver.  And the CEO didn’t love him.  Instead, he loved another candidate he couldn’t get.  Another candidate that was smooth as silk, knew the industry cold, and had a proven “VP of Sales” on his resume.

I told the CEO to just hire this VP of Sales candidate.  That at $4m in ARR, it was late already, the logo accounts were there, there were enough leads, enough to build on.  Get it done.  I believed, at a minimum, this VP of Sales would drive revenue per lead up, and more than pay for himself.

And the CEO hired him.  And never loved him.  And within 4 months, the VP of Sales was gone.  They never really hit it off, and everything this VP of Sales did that was “wrong” (and there was plenty, as there always is), was viewed as failing a test.   And I guess … this failure … it was my fault.

Fast forward to today.  Coincidentally-ish, I recently met with this VP of Sales and his new CEO in the next job he took.  Where this VP of Sales is just killing it.  They’ve just crossed $10m in ARR and growing fast.  I asked this second CEO, how the VP of Sales was doing.  Blowing it up, he said.  And importantly — the new CEO loved this VP of Sales.  Just loved him.  One of his best hires ever, he said.

Ok …

So we all know different folks excel in different environments.  But it’s more than that.

SaaS is going into battle together every day.  Wining that next customer.  Saving that big deal.  Building that crazy feature.  Every day, there’s a new drama.

It’s truly a team effort.  The VP of Sales opens and closes.  The VP Marketing feeds the machine. The VP of Customer Success keeps it running and adds fuel to the fire.  The VP Product makes sure the 1,000+ customers get what they need, as impossible as that is.  And the VP Engineering’s job is to make a business process 10x better than it ever was before, just using computers.  This is teamwork.  And it’s really not that silo’d at all.  You’re all working on different parts of the same puzzle — Customers.

Where I don’t see true teamwork, I almost always see eventual failure.  Or at least, underperformance.

As CEO of a SaaS start-up, you really can’t micromanage past Initial Traction ($1.5m in ARR or so) at least.  Before, maybe.  But then, there will just be too much going on.  And you can only let go and delegate to people you trust.

So don’t hire a VP you don’t love.  It’s a little bit like a marriage, perhaps.  No matter what their LinkedIn is, no matter what anyone else says, you have to 100% believe it them on Day 1.  Period.

If not — just press on.

(Cross-posted @ saastr)

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How a 300,000 Person Company is Becoming a Start-Up http://www.cloudave.com/35446/300000-person-company-becoming-start/?utm_source=rss&utm_medium=rss&utm_campaign=300000-person-company-becoming-start http://www.cloudave.com/35446/300000-person-company-becoming-start/#comments Tue, 12 Aug 2014 17:36:09 +0000 http://www.thefutureorganization.com/?p=10737 A few months ago I created a Youtube video where I talked about the paradox of organizations which is as follows. Business leaders know that as their organization’s grow they increase in complexity and decrease in speed and agility, however these same business leaders are constantly focusing on growth. So the paradox is how do […]

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A few months ago I created a Youtube video where I talked about the paradox of organizations which is as follows. Business leaders know that as their organization’s grow they increase in complexity and decrease in speed and agility, however these same business leaders are constantly focusing on growth. So the paradox is how do you create an organization that can continue to grow while simultaneously focusing on staying “small,” nimble, agile, and adaptable?

General Electric (GE), the 300,000 person conglomerate is attempting to tackle this challenge head on by tacking a page right out of the start-up world. GE brought in Eric Ries, the creator of The Lean Startup to help change how they operate. The new approach is being called FastWorks and is being rolled out to the entire company.

Take a look at the image below (from Businessweek) to see how this works, you can also read the full article that they wrote up about this.

comp_gegraphic33-b_630

When a company like GE makes such a drastic change then clearly something is happening. Today the rate of change in the world of work (and in the world in general) is increasing at a more rapid rate which places the advantage of adaptation squarely in the hands of  new, smaller, disruptive incumbents that tend to have less bureaucracy, complexity, legacy technologies, and sluggishness.

In my upcoming book on the future of work I spend some time talking about how organizations have gotten too large and that moving forward we are going to become much more distributed entities with smaller teams and more decentralized decision making. For organizations to continue to grow and operate in their current models is just not realistic, scalable, or practical. We can expect to see other companies follow in GE’s footsteps and place a growing emphasis on intrapreneurs, a topic which will I spend more time exploring later.

(Cross-posted @ The Future Workplace)

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Public Cloud Economies of (Web-)Scale Aren’t About Buying Power http://www.cloudave.com/35434/public-cloud-economies-web-scale-arent-buying-power/?utm_source=rss&utm_medium=rss&utm_campaign=public-cloud-economies-web-scale-arent-buying-power http://www.cloudave.com/35434/public-cloud-economies-web-scale-arent-buying-power/#comments Fri, 08 Aug 2014 13:10:50 +0000 http://www.cloudscaling.com/?p=7568 As you no doubt heard this week, Rackspace has announced the intention to focus on managed cloud.  Inevitably this brought observations from many about RAX, and others, ability to compete effectively against the web scale public cloud giants: Amazon, Microsoft, and Google. One of the commenters was Mike Kavis (twitter link), a long time cloud pundit […]

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Rackspace OfficeAs you no doubt heard this week, Rackspace has announced the intention to focus on managed cloud.  Inevitably this brought observations from many about RAX, and others, ability to compete effectively against the web scale public cloud giants: Amazon, Microsoft, and Google. One of the commenters was Mike Kavis (twitter link), a long time cloud pundit and someone who’s opinion I respect. Mike wrote up a fairly interesting article that he posted on Forbes that I encourage you to read in full. Unfortunately, Mike falls into one of the older cloud tropes that I thought was well and truly dead. Today I seek to clarify and hopefully amplify much of what he said.

First, we need to address the so-called “economies of scale” that large public cloud providers enjoy. Simply put, economies of scale are structural cost advantages that come from sufficient size, greater speed, enhanced productivity, or scale of operation. Unfortunately, many folks, including Mike, fall into the trap of assuming that “economies of scale” == “buying power”. Buying power can be an element of achieving scale, but it is seldom a structural or sustainable advantage, certainly not against other large businesses who can command similar quantities of capital.

No, the real economies of scale that are relevant here are the tremendous investments in R&D that have led to technological innovations that directly impact the cost structures of Amazon Web Services, Google Cloud Platform, and Microsoft Azure. Here are some examples of what I mean:

This is just the first three items that are A) public and B) come to my mind without a lot of additional research. There are hundreds of other innovations. Most of these innovations share a central theme: reduction of cost through greater efficiency or being able to deploy lower cost hardware. For example, Google’s G-Scale Network uses inexpensive Taiwanese ODM switches.

As I have mentioned previously, the rate of innovation and development at these public clouds is where the true economies of scale reside.

Much of this is alluded to when Mike covers the level of investment in infrastructure and R&D from Amazon, Microsoft, and Google.  Unfortunately Mike mixes infrastructure investment (CapEx) with R&D investment (OpEx).  We actually don’t know what the levels of R&D investment are at the big three, although we know that they literally have thousands of developers at each working diligently on new capabilities.

And this is where we go off the rails because Mike throws IBM’s hat in the ring as a real contender because they are planning to invest $1.2B in new datacenters. This is actually uninteresting and mostly irrelevant when it comes to measuring the probability of success in the public cloud game. New datacenters and hardware won’t provide a true structural cost advantage. That can only come through investment in R&D and a proven track record of innovation in public cloud, neither of which IBM is clearly succeeding in. Perhaps they will and perhaps they are a true public cloud contender, but it’s hard for me to see that given that so much of this is about a cultural and organizational structure that can encourage innovation.

What does it take to change? As many of you know, I poo-pooed Microsoft’s chances for quite a while because I had no belief in their eventual success at delivering online services. Mostly because I felt the organization as a whole struggled with the operating system boat anchor and couldn’t let go. Of course this was before Satya Nadella took over the helm and declared a focus on cloud and mobile. In essence he empowered and enabled the Online/Live  teams to become the new Microsoft. The Live teams have learned “web scale” the hard way, over many many years and through the spilling of much red ink. See this article from 2011 on MSFT’s Online services operating income.  Microsoft has spent 10 years and many billions of dollars to become a credible player against the likes of Amazon and Google.

In that light, how can anyone else even pretend to the throne without similar levels of investment? Buying a hosting company is not going to get you there. This isn’t a game of buying power or outsourcing. It’s an innovation game and that’s it. The number of players who can pull this off are vanishingly small.

You want “economies of scale?” You’re going to pay for it and at this point it’s probably too little too late.

(Cross-posted @ Cloudscaling)

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Avoid these 3 mistakes when asking for employee ideas http://www.cloudave.com/35399/avoid-3-mistakes-asking-employee-ideas/?utm_source=rss&utm_medium=rss&utm_campaign=avoid-3-mistakes-asking-employee-ideas http://www.cloudave.com/35399/avoid-3-mistakes-asking-employee-ideas/#comments Thu, 07 Aug 2014 15:38:37 +0000 http://blog.hypeinnovation.com/avoid-these-3-mistakes-when-asking-for-employee-ideas Global advisory and research firm Ovum recently forecast 8% annual growth over the next five years for innovation management. Strong momentum, as organizations awake to the cognitive surplus their employees possess. Sadly, some companies launching employee innovation programs will inevitably find the going tough. They’ll launch their innovation initiative with great fanfare. They’ll give themselves the powerful […]

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One_does_not_simply...Global advisory and research firm Ovum recently forecast 8% annual growth over the next five years for innovation management. Strong momentum, as organizations awake to the cognitive surplus their employees possess.

Sadly, some companies launching employee innovation programs will inevitably find the going tough. They’ll launch their innovation initiative with great fanfare. They’ll give themselves the powerful advantage of using a campaign-based innovation approach. But will be disappointed when the employee ideas they see fail to drive the value they were seeking.

Why? As philosopher John Dewey noted:

A problem well put is half-solved.

The mistake a number of these organizations will run into is that the problem they’re trying to solve is not well put. Not the grammar of the question, but the fundamentals of what is asked, and how it is asked. With the predictable downstream effects of less-than-adequate ideas.

With that in mind, let’s look at three mistakes that mean a problem has not been well-put from employees’ perspective. Understand these mistakes, and you’re closer to uncovering the novel, high potential ideas you’re seeking.

Mistake #1: The Overask

Casting a question to a community is a wonderful form of engagement. You’ve got the attention of many people. You’re going to receive an interesting mix of responses. A great way to crack open a tough problem.

But hey, since you’ve got their attention, maybe they can provide some answers for some additional areas. That way you don’t have to ask later. This is The Overask. Below is a modified version of an actual question that was asked of employees:

How might we become more competitive? Think in terms of new revenue sources, increased efficiencies, non-value added work, margin enhancements, etc.

Revenue. Operational efficiency. Bureaucracy. Margins. All in one question. It even includes “etc”, which is essentially asking for everything but…

Kitchen_sink_(via_Overstock)

This is a textbook case of the overask. Issues that arise with this question:

  • Ideas will be all over the board, with employees assuming conflicting definitions for what “more competitive” means.
  • The basis for evaluating the different types of ideas will vary greatly (e.g. new revenue opportunities vs. cutting bureaucracy). How to effectively assess the different ideas?
  • The ability of the crowd to go deeper into a specific area is hindered by the breadth of submissions. It’s hard to build on ideas addressing such widely divergent topics.

Mistake #2: Too specific! Not specific enough!

In asking a question, be mindful of the responses you’re seeking. At the outset, expectations for a given campaign look something like this:

Campaign_-_expectations

Those are the expectations, but then there’s the reality. The degree of specificity in the question will affect the width of those outcomes. In other words, the way you ask the campaign question impacts the shape of the ideas you will see.

There are times when a very specific sort of idea is needed. For example, you’d ask a question such as: How can we reduce the amount of fuel used by our trucking fleet while they’re dropping off and picking up goods at our warehouses? The effect of that is to narrow the range of outcomes in questions due to its specificity.

On the other hand, it’s possible to ask a question that can elicit a wide range of responses. This is not the Overask, where too many topics are asked at once. Rather, it’s focused on a topic but with a deliberate vagueness to open the aperture for ideas. For instance, one could ask: How can we change our distribution processes to better deliver goods? The effect is to expand the range of ideas submitted. Because of the blue sky thinking that comes with asking such a wide-open question, the outcomes expand.

You can depict these effects as follows:

Campaign_questions_-_specific_vs_wide_open

The mistake organizations can make is to have a mismatch in expectations. You were expecting workable ideas with good, positive potential, but you got a whole heap of crazy ideas that don’t match expectations. And you weren’t ready to handle some of the out-there ideas that could be game-changers.

Or you were seeking a range of ideas that reflected some blue-sky thinking. But you were so specific in your question that people didn’t realize that was expected. You’re surprised at the pedestrian nature of the ideas.

Match the ‘ask’ with what you’re ready for.

Mistake #3: Who?

When asking employees for ideas, it matters who is making the request. Why? Because employees will make an instant judgment about the legitimacy of the campaign based on who sends the email.

Take a look at the two emails below. They each announce the same innovation campaign. But note the difference in senders:

Campaign_emails_-_who_matters

On the left, the email makes the effort appear to be an out-of-the-mainstream project. By a group that people don’t really know well. And given the group’s position, the best it can do is forward the ideas to relevant executives for their consideration. Why would an employee spend time investing effort in this campaign?

The email on the right comes from a senior executive that employees know. This executive speaks with authority, and everyone understands that the effort is real. He is able to state the sort of ideas being seeked, and back the effort up with a real plan for action. Both the executive’s presence and the specifics for how ideas will be considered and developed significantly increase the legitimacy of the effort. It will be worth employees’ time to participate.

Avoid the mistake of not considering ‘Who’ is sending the email, and the effect that will have on participation.

(Cross-posted @ The HYPE Innovation Blog)

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Know When Conceding on a Point is Better Than Being Right http://www.cloudave.com/35395/know-conceding-point-better-right/?utm_source=rss&utm_medium=rss&utm_campaign=know-conceding-point-better-right http://www.cloudave.com/35395/know-conceding-point-better-right/#comments Mon, 04 Aug 2014 16:56:11 +0000 http://www.bothsidesofthetable.com/?p=6334 Last Wednesday I had coffee with an old friend and former colleague. We haven’t worked together in a while and were reminiscing about the old days. I miss the old days when we used to be locked in battle together on the issues affecting our company. Seeing him again also reminded me of one of […]

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Last Wednesday I had coffee with an old friend and former colleague. We haven’t worked together in a while and were reminiscing about the old days. I miss the old days when we used to be locked in battle together on the issues affecting our company. Seeing him again also reminded me of one of my first big lessons as a VC – knowing when giving in is more important than being right. So I Tweeted that the next morning:

“When the consequences of “being right” are not great enough sometimes graciousness & conceding is a better option”

Yes. Of course it’s a universal lesson and one that I’m doomed to learn over and over.

Be Gracious

I wrote about it in this widely read post, “Be Gracious When it’s Time to Give In.”

But I started thinking more about the role of a VC and the founding team or CEO. There are simply times when you don’t agree. There are other times when your economic interests aren’t aligned. I think it’s healthy and ok to voice your opinion and stand up for what you believe. But there comes a time that even if you believe in your bones you’re right it is simply not worth enough economically speaking to fight.

I could give you a million little examples of where this comes up no matter whom you’re working with. Like inside bridge rounds where investors want to protect themselves from the company getting sold prior to the next financing and leaving the bridge funding without adequate returns. What should the right return be in this case? It’s not an easy question even thought there are industry standards.

What about when an acquisition takes place? The acquiring company wants 100% of the proceeds to go to founders whatever the cap table says because buyers care way more about incentivizing and locking in founders than they do about VC returns or legal provisions to protect VCs. Surely there is some amount of extra returns that will get set aside for founders – but what is right and what is fair? Every circumstance is different.

A founder wants his co-founder to leave and the stock agreement says you can take all of his unvested stock back and wants you as the VC to be the bad guy. Surely having some peace at the time of exit is better than fighting over relatively small amounts of stock. But it’s hard when these subjects are so emotional, involve money & prestige and have no clear black-and-white answers.

Anyway, chalk this up as one of those questions where there is no clear answer because each case is situational. But in the case of my good friend I remember the moment that I took the circumstances back to my partner Steven Dietz for advice on how to play it. He told me, “Of course you’re right on facts. 100%. But it’s not worth enough to fight over. You’ll end up pissing people off and it just won’t matter enough to our returns to be worth it. They are great entrepreneurs and let’s just make sure we work with them in the future.”

And then I preceded to do the opposite. And of course when push came to shove I did the right thing and caved. And I lost twice.

Of course I’m not suggesting that you give on every negotiation or never negotiate hard. Just understand when it’s worth it and when it’s not.

I was grateful to my friend that we could meet like old colleagues and just shoot the shit again. And grateful to have taken a moment to reflect on this lesson so I don’t repeat my mistake too often.

(Cross-posted @ Both Sides of the Table)

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Inability Of Organizations To Manage "The Flow" Of Talent Management http://www.cloudave.com/35387/inability-organizations-manage-flow-talent-management/?utm_source=rss&utm_medium=rss&utm_campaign=inability-organizations-manage-flow-talent-management http://www.cloudave.com/35387/inability-organizations-manage-flow-talent-management/#comments Fri, 01 Aug 2014 16:45:00 +0000 http://www.cloudave.com/?guid=f8f0aa3bba4bb7bd878234c5ed815013 The flow, a concept developed by one of my favorite psychologists, Mihaly Csikszentmihalyi, matches the popular performance versus potential matrix that many managers use to evaluate and calibrate their employees. For people to be in the flow they need to be somewhere in the middle moving diagonally up. Ideally, this is how employees should progress […]

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The flow, a concept developed by one of my favorite psychologists, Mihaly Csikszentmihalyi, matches the popular performance versus potential matrix that many managers use to evaluate and calibrate their employees. For people to be in the flow they need to be somewhere in the middle moving diagonally up. Ideally, this is how employees should progress in their careers but that always doesn’t happen. To keep employees in the flow you want to challenge them enough so that they are not bored but you don’t want to put them in a situation where they can’t perform and are set up for a failure.

Despite of this framework being used for a long period of time I see many organizations and managers continue to make these three mistakes:

Mistaking potential for performance

Performance, at the minimum, is about given skills and experience how effectively person accomplishes his or her goals. Whereas potential is about what person could do if the person could a) acquire skills b) gain access to more opportunities c) get mentoring. We all have seen under-performers who have more potential. In my experience, most of these people don’t opt to underperform but they are put in a difficult situation they can’t get out of. We routinely see managers not identifying this as a systemic organizational problem but instead shift blame to employees confusing potential for performance suggesting to them, “you could have done so much but you didn’t; you’re a slacker.” A similar employee with equal performance but less potential would not receive the same remarks on his/her performance.

Treating potential as an innate fixed attribute

One of the biggest misconceptions I come across is managers looking at potential as innate fixed attribute. Potential is a not a fixed attribute; it is something that you help people develop.

These out-performers who are not labelled as “high potential” are mostly rewarded with economic incentives but they don’t necessarily get access to opportunities and mentoring to rise above their work and a chance to demonstrate their potential and make a meaningful impact.

Fixating on hi-potential out-performers

Not only managers fixate on hi-potential out-performers but they are also afraid that these employees might leave the organization one day if they have no more room to grow and if they run out of challenges. As counterintuitive as it may sound this is not necessarily a bad thing.

We all live in such a complex ecosystem where retaining talent is not a guarantee. The best you can do is develop your employees, empower them, and give them access to opportunities so that they are in a flow. As a company, create a culture of loyalty and develop your unique brand where employees recognize why working for you is a good thing. If they decide to leave you wish them all the best and invest in them: fund their start-up or make them your partners. This way your ecosystem will have fresh talent, place for them to grow, and the people who leave you will have high level of appreciation for your organization. But, under no circumstances, ignore the vast majority of other employees who could out-perform at high potential if you invest into them.

(Cross-posted @ cloud computing)

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Social business maturity and digital transformation http://www.cloudave.com/35371/social-business-maturity-digital-transformation/?utm_source=rss&utm_medium=rss&utm_campaign=social-business-maturity-digital-transformation http://www.cloudave.com/35371/social-business-maturity-digital-transformation/#comments Thu, 31 Jul 2014 15:40:06 +0000 http://www.cloudave.com/?guid=f08b3327d7732fd6b39bb6e426567edb Social enterprise -- communication, collaboration, and knowledge sharing across business silos and departmental boundaries -- is a core part of digital business transformation initiatives. Research from IDC sheds light on this topic.

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In our continuing discussion of digital transformation, we must consider the aspect of communication across departmental silos.

Almost by definition, any organization that undertakes business model change, a key component of digital transformation, must simultaneously find ways to encourage collaboration among various departments that previously did not work together closely. The absence of extensive communication and knowledge sharing leads to bureaucratic-style behavior, reduced efficiency in getting things done, and poor responsiveness when customers change their expectations.

Because communication and collaboration are central to social business, these activities are often part of broader digital transformation initiatives. Fellow ZDNet commentator, Dion Hinchcliffe, explains that many companies do not pay sufficient attention to collaboration as a support for broader transformation efforts:

Ironically, given that the workforce is the single biggest investment that most companies make, actual investment in collaboration tools remains as spotty as ever…. collaboration is still considered a “figure it out yourself” process in most organizations, with limited planning and little training in either better ways of collaborating or education on the technologies themselves.

With this background, let’s review research from IDC that describes a social business maturity model. This IDC framework explains the process by which an organization can gradually integrate social business into its daily activities. Bear in mind, our focus here is on social business as a component of digital transformation. Although many companies sell social business products and tools, right now, we are looking at social business as a support to broader transformation.

Experience matters

IDC’s social business maturity model starts with the premise that workflows and processes related to social business are different depending on the user’s role and relationship to the organization. As shown below, the report identifies customers, employees, and partners as three archetypes, labeled as “experiences”:

IDC-social-business-experiences

Although the language of experiences is rather vague, IDC does offer an explanation (emphasis added):

Customer experience management refers to the entire process relating to the interactions between a customer and the organization that the customer engages with over the lifetime of the relationship.

Employee experience management refers to the interactions of employees across the lifetime of their relationship with a company. It includes the orchestration of internal business processes to create a flow that is planned and architected in a manner that makes the interaction from the employee’s or the job candidate’s side as easy, quick, transparent, positive, and full featured as possible throughout the employment journey as well as the ongoing task of performing their job assignments

Partner experience management refers to the orchestration of interactions partners and suppliers have with other businesses (B2B) to deliver optimized workflow.

Social business maturity

The core of IDC’s maturity model is a series of steps through which a business passes on its way to achieving greater adoption of social business processes and activities. By benchmarking itself, a company can use models like this as a roadmap for determining a path forward.

IDC-social-business-maturity

Digital transformation is a broad concept with ramifications in areas such as business model, culture, and talent management, because undertaking a digital transformation initiative means creating significant change over a sustained period.

Given the breadth of this kind of transformation, isolating components such as social business makes the problem more manageable. For this, models such as IDC’s can be useful when applied systematically and consistently.

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

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Privacy is Dead and We Killed it http://www.cloudave.com/35373/privacy-dead-killed/?utm_source=rss&utm_medium=rss&utm_campaign=privacy-dead-killed http://www.cloudave.com/35373/privacy-dead-killed/#comments Wed, 30 Jul 2014 16:05:14 +0000 http://www.thefutureorganization.com/?p=10634 Privacy…everyone keeps talking about it and apparently everyone is concerned with it, but does it matter? I recently watched the documentary, “Terms and Conditions may Apply,” which provides a fascinating look at how organizations such as Facebook, Google, Apple, and others have changed the way they look at and approach privacy. After watching the movie […]

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Privacy1

Privacy…everyone keeps talking about it and apparently everyone is concerned with it, but does it matter? I recently watched the documentary, “Terms and Conditions may Apply,” which provides a fascinating look at how organizations such as Facebook, Google, Apple, and others have changed the way they look at and approach privacy. After watching the movie it had me wondering, “does privacy even matter anymore?”

Most of use Facebook, have iPhones, use Twitter, search on Google, and use the hundreds of other tools and platforms on the web. All of these companies have “terms and conditions” documents that pretty much none of us read. In effect everyone that uses these technologies has signed away their privacy yet we still see people saying that they want more privacy. What gives? I think we’ve clearly reached a point in today’s world where privacy is pretty much a lost cause. Our information is already out there and regardless of how hard we scream that we want it back or want it to be secure, it’s not going to happen…ever. If anything we are seeing a shift towards more openness, more transparency, and less privacy.

Most people (in my opinion) don’t event know what information they are giving up or to whom. For example, in their recent Privacy Index, EMC found that 51% of respondents were not willing to give up their personal information for a better experience (27% were), however, how many of these people realize that they are already doing this multiple times over every single day? In fact it’s safe to say that if you want privacy then you probably shouldn’t be using the internet. It doesn’t appear that businesses or governments are going to protect us either. I’m not quite sure how we got to this point, one minute I was filling out my profile to join Facebook and the next minute some company I’ve never heard of has hundreds of data points on me.

Are we too far over the line to head back to the other side? Is it even possible to do so?

I’ve just talked about social media data above but what about your health records, browsing habits, purchases, financial data, or employment information? Although some of these forms of data might be considered to be more secure than others many social media users are actually publicly sharing this information online on their Facebook pages, Twitter accounts, Instagram photos, Foursquare check-ins, Linkedin profiles, or anywhere else you can think of. So it’s not just the fact that companies have information about us that we don’t know they are collecting it’s about the fact that we are opting in to this lack of privacy and in many case go above that by actually purposefully sharing private information.

It seems like going forward we have two choices. We can either accept that privacy is dead and that we now live in an open world or we can challenge this notion and continue to fight for privacy. The second option seems to be a bit of a paradox though. We want more security and more privacy but at the same time we want:

  • our corporations to be more open and transparent
  • to use social technologies without we don’t want being able to see our information
  • to be able to buy and use free products and services without giving up anything in return
  • to opt into using things like Google and itunes without reading the terms and conditions agreements, assuming that they have our best interest in mind

What’s scary is that we’ve gotten to a point where many of the things we do and the tools we use are such a big part of our lives that we HAVE to use them today. Are you really going to delete your Facebook account, stop using Google, no longer buy products online, or ditch your iphone? No, you’re not because everyone else that you know on this planet is using those same things as well.

So is privacy dead? It sure seems that way, and we are the ones who killed it without even knowing it.

(Cross-posted @ The Future Workplace)

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At About $2m in ARR, Every Great Hire Will Be Accretive. http://www.cloudave.com/35267/2m-arr-every-great-hire-will-accretive/?utm_source=rss&utm_medium=rss&utm_campaign=2m-arr-every-great-hire-will-accretive http://www.cloudave.com/35267/2m-arr-every-great-hire-will-accretive/#comments Mon, 28 Jul 2014 18:54:00 +0000 http://saastr.com/2024/07/25/at-about-2m-in-arr-every-great-hire-will-be-accretive-dont-wait/ Recently, I was talking to the CEO of a pretty successful SaaS company doing ~$3m in ARR, growing nicely, in a good space.  Doing just fine. And he was proud he’d just hired a VP of Sales at a below-market rate. Dude.  I told him.  That’s a negative.  Because at your size and growth rate, […]

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Screen Shot 2014-07-21 at 2.14.14 PMRecently, I was talking to the CEO of a pretty successful SaaS company doing ~$3m in ARR, growing nicely, in a good space.  Doing just fine.

And he was proud he’d just hired a VP of Sales at a below-market rate.

Dude.  I told him.  That’s a negative.  Because at your size and growth rate, It Just Doesn’t Matter.  If she’s any good.

Because it turns out, once you hit just $2m in ARR, and maybe even much earlier — every great hire will be accretive.  Will make you more money than you pay them in cash.  I guarantee it, in fact.

Let me explain the math.  Let’s assume you are at $2m ARR, to make the math simple:

  • You hire a Great VP of Sales.  Accretive in 90-120 Days.  For say $300k OTE.  A great VP of Sales, within one year, can easily close 20-50% more business than you would have without him or her.  Even just 20%, the bottom end of the range … is $400,000 in additional revenue ($2m x 20%).
  • You hire a Great VP of Marketing.  Accretive in 90-180 Days.  Let’s say you’re at $2m ARR again, growing 80% YoY.  And you don’t have a great VP of Marketing yet.  Well, make that hire, and you really don’t think you can get another 20-30% improvement from your existing lead flow?  By properly communicating and marketing to them?  By doing better webinars, better city tours, better whatever?  Of course she or he can.  Another 20% is again … an additional $400,000 in revenue.  Even just a 10% improvement in your lead-to-revenue performance, even just another 10% in true qualified leads … will more than pay for the hire.
  • Every Great Sales Rep is Accretive at $2m in ARR.  In Just 2 Sales Cycles.   Even just at $1.5m-$2m, there’s enough momentum in the business, enough repeatability, that a great rep can really have an almost instant impact.  Take his or her leads, and make 20%-30% more out of them than a mid-pack or mediocre rep (and maybe more.  The best reps often can yield 50-100% more than the mid-packers from a given set of leads).  So that incremental Great Rep takes his or her say 500 leads a year, and instead of turning them into $350,000 like the last guy … she turns them into $500,000.  Again, more than pays for herself.  And fast.  And that’s just first year ACV.
  • Every Great Engineer is Accretive at $2m in ARR.  In Just One Full Release Cycle.  You think engineers are cost centers, at least from a financial model perspective?  Not if you are selling into the enterprise.  What you’ll learn is that if you can get one more Needed-it-to-Close-the-Big-Deal feature every 3-6 months … that great engineer will pay for herself.  You need to lose a few five or six figure deals to a feature gap to get this, to see it.  But once you do, it will become crystal clear.  If you just had that one extra great engineer, you would have closed Google.  More than pays for herself, again.
  • Great Customer Success Managers Can Be Accretive Managing Just $800k-$1m in Existing ARR Within 9-12 Months.  A lot of mature SaaS companies use the metric of ~$2m in ARR per customer success rep.  But if you get a great team — you can hire a lot more aggressively than that.  A mediocre CSM might say retain 100% of your mid-market revenue on a net-of-churn basis.  But a great one might, by really creating true customer success, with upgrades, can get that same customer base to renew at 110-120% of last year’s ACV.  That incremental 10% … pays for the CSM right there (10% of $1m = $100k).  And that’s just one year’s worth of ACV.  If that customer lasts 3-5 years, and you see Second Order revenue from it … the ROI will be very, very high.  Even with a great CSM managing as little as $800k in ACV, he or she can be very accretive.  A great one.
  • Picking Up the Phone Can Be Accretive in 90 Days.  It’s even true in customer support.  No one picks up the phone.  It’s too expensive.  They want to do email tickets.  Which customers hate, 9 times out of 10.  They want someone to answer the da*n phone.  Imagine you save just 10 customers over the course of a year at a $4k ACV by picking up the phone.  That’s less than one saved customer a month.  And voila! — you’ve more than paid for an extra customer support rep right there.

I didn’t figure this out until $4m in ARR.  Once we got there, I saw all of this.  I told every manager at EchoSign to hire everyone they wanted.  No headcount limits.  No budgets.  Only so long as they were truly Great.  And hence, accretive.

Because I waited until $4m in ARR, with hindsight, I wasted a lot of time from $1.5m to $4m in ARR.  Because we should have just hired every single employee that was Great, no matter if it seemed expensive on paper.

This only works in you have 12+ months in cash.  Because these accretive employees need time to close their deals, build their features, launch their campaigns.  So don’t make all these hires if you have < 9 months of cash in the bank and are too worried about money.

And this only works if the hires are truly great.  That extra rep, if she or he is mediocre, is mid-pack … may play a role in your org.  But she’ll just be taking leads from another theoretical or existing hire, she won’t be increasing revenue per lead.  The mediocre, incremental rep or engineer or CSM isn’t accretive.

But at $2m ARR, maybe even $1.5m ARR or even less if you have a repeatable process … everyone great is accretive.  If you meet one — hire him or her.  That day.  And just pay market.  Don’t quibble over salary for the great ones.  Because it doesn’t matter really, what you pay – if he or she is a profit center.

Image from here

(Cross-posted @ saastr)

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A Great Discussion with @skuper @davemcclure @msuster on Changes in the VC Industry http://www.cloudave.com/35314/great-discussion-skuper-davemcclure-msuster-changes-vc-industry/?utm_source=rss&utm_medium=rss&utm_campaign=great-discussion-skuper-davemcclure-msuster-changes-vc-industry http://www.cloudave.com/35314/great-discussion-skuper-davemcclure-msuster-changes-vc-industry/#comments Mon, 28 Jul 2014 18:50:56 +0000 http://www.bothsidesofthetable.com/?p=6327 I recently attended and presented at Dave McClure’s PreMoney conference in San Francisco. I go every year because I love events hosted & moderated by insiders involving discussions by insiders because it maximizes the amount of real discussions people have. What you’ll see if you watch the video is an unscripted and unfiltered look into […]

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I recently attended and presented at Dave McClure’s PreMoney conference in San Francisco. I go every year because I love events hosted & moderated by insiders involving discussions by insiders because it maximizes the amount of real discussions people have. What you’ll see if you watch the video is an unscripted and unfiltered look into how Scott Kupor & I see some of the changes and challenges of the venture industry.

tl;dr version

  • Scott and I agree on nearly everything: The VC structure is changing and there appears to be a bifurcation into small & large VCs with an impact on “traditionally sized” VCs. I wrote my version here and Scott wrote an excellent write-up of his views here.
  • We both agree that the later-stage valuations are being driven up to a point that feels irrationally priced [he uses b-round SaaS valuations as an example and I am willing to be even more broad based]
  • We both are concerned about non-traditional capital entering the late stages and the impact that may have in the next downturn in the economy to the startups who merely trying to optimize for short-term valuation maximization

The only point we didn’t seem totally aligned on was what we happening to the “middle of the VC market.” I believe Scott’s argument is that the market is following many other services markets where you have small, expert, boutique small firms and a handful of mega players as we see in banking, law, accounting, entertainment agencies, et. I don’t totally agree with that view. Most of those industries are fee-based and are competing on revenue growth. Venture is a returns based and I believe has different characteristics.

I believe the middle isn’t being “gutted” but rather is being supplemented by “opportunity funds” and “growth funds” that sit side-by-side “core funds” allowing the firms to stay small and nimble while still being able to grab prorata rights of their best early-stage investments. I believe most LPs still want discipline in fund sizes, fees and focus. But my guess is that if Scott and I ever sat down and discussed this we wouldn’t disagree very much either and what Andreessen Horowitz has achieved in the venture industry in less than a decade is nothing short of remarkable.

So here are the two videos of Scott, Dave and  I discussing the changes with my brief notes below if you prefer not to watch the videos. Each of the two videos is about 10 minutes long

Video 1 is here:

  • Late stage valuations are in a mini bubble. It doesn’t mean that these won’t produce great companies but the prices people are paying for today’s value exceeds what the underlying value of the business is worth and does not account for the risks the investor is assuming. (not in video but late stage valuations have grown 24% compounded years for the past 4 years which is higher than any segment. Four years ago people paid $66m median pre-money valuation and are now paying $155m. This can’t all be driven by increased company performance).
  • Scott pointed to B-round SaaS valuations in excess of $100 million in $15m+ financing rounds with companies with very limited proof of customer traction or revenue. He said that a16z prefers to invest earlier stage in these types of businesses.
  • Mark pointed out that on the one hand 6 months ago one of Silicon Valley’s best known ibankers told him that SaaS public valuations were the most over-valued since the dot com bubble in 2000. Yet Mark also pointed out that the recent corrections in the public market valuations and the scrutiny new IPOs have undergone is a health sign.
  • Both Scott and Mark discussed the challenges of non-traditional VCs entering the market where valuation / returns may not have the same importance as it does to a purely financial investor. While this is temporarily a good thing for entrepreneurs it will turn sour when we go through the next inevitable downturn. We are 5 years into a bull market and all economic markets run in cycles. At some point the music will stop and we’ll find out which strategies were prudent.

Video 2 is here:

  • In part two of the group discussion Dave asked us about the trend of founders and early investors being able to liquidation some of their position in later-stage venture rounds.
  • Scott and I both agree that this is a continuing trend because as companies stay private for longer before an IPO there is an interest for all early-stage shareholders to consider realizing some of their gains
  • We pointed out; however, that some of the recent trends have moved in the opposite direction notably Uber trying to crack down on who can sell stock and to whom.
  • Scott & I both agree violently that companies do care (and should care) who holds their stock for many reason and that also having a sensible plan for how founders can liquidate stock or every how early-stage investors can liquidate stock is important. Dave was a little bit less convinced on this issue but perhaps that’s driven by his stage and his potential desire to get early liquidity for his fund or for founders in general where Scott & I are both very long-term investors in companies. Either way it turned into a heated debate.
  • Scott spoke about the a16z ethos to put more of the fees investors pay into “services” rather than partner pockets. Mark didn’t get a chance to talk about that topic but since he’s writing about himself in third person here he can confirm that is 100% the strategy of Upfront Ventures.
  • Mark talked about the nature of “opportunity funds” and “growth funds” set up by great firms such as Union Square Ventures, Foundry Group, FirstMark, Greycroft and others and how they economics and structure of these funds often creates strong alignment between LPs and VCs and allows early-stage funds and traditional VCs to compete more effectively in later-stage rounds for prorata of existing, well-performing portfolio companies.

And we ended. But here is the deck I used to present before our panel if you haven’t seen it already:

 

(Cross-posted @ Both Sides of the Table)

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Digital transformation and consulting/outsourcing firms http://www.cloudave.com/35258/digital-transformation-consultingoutsourcing-firms/?utm_source=rss&utm_medium=rss&utm_campaign=digital-transformation-consultingoutsourcing-firms http://www.cloudave.com/35258/digital-transformation-consultingoutsourcing-firms/#comments Fri, 25 Jul 2014 16:30:05 +0000 http://www.cloudave.com/?guid=1e25a6a0e8185ad404aad87d27487d1c Changing technologies, client expectations, competition and an evolving market environment have forced business process outsourcers to adapt. Here's what you need to know.

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As part of an ongoing examination of digital transformation, I plan to discuss how different industries are evolving in the face of changing customer expectations, competition and technology. Today, let’s look at the IT outsourcing and professional services industry.

To examine the impact of digital transformation on the consulting business, I looked at research from independent analyst firm HFS Research, which covers “Business Process Outsourcing and IT Services.”

Research reports from HFS show several interesting conclusions that explain what’s happening with consulting in regards to digital transformation.

Client expectations have evolved

A fundamental driver of change in the consulting business is the reality that cost savings alone are no longer sufficient to satisfy outsourcing clients.

Historically, consulting clients wanted to reduce cost and increase efficiency, both of which were satisfactory goals. Today, these customers want consulting partners to help with innovating and improving processes. Automation and efficiency without improvement are no longer sufficient goals.

Largely, this shift mirrors what’s happening with IT in general. Simply reducing IT spend by a percent or two does not add strategic value to an organization; that benefit only happens when IT drives real business change and improvement.

Also read: CIO strategy workshop: Intel’s IT leadership and transformation pyramid:

This chart, from an HFS report, clearly presents the growing importance of transformational improvement to clients:

BPO client expectations

Realizing innovation goals

Despite the desire to innovate, research from HFS concludes that clients recognize they need support in making changes, as shown below:

Clients need assistance with innovation

Together, the two HFS charts show that BPO clients want to incorporate data, analytics, cloud and other technologies in a creative mix that will improve their business. However, they view this as something for the future and do not possess sufficient in-house expertise to make it happen.

Services firms must keep up

The research shows that clients expect their service provider to help them innovate and push transformational change. For consulting firms, this is the crux of the challenge — to help your clients evolve, you must do it first.

As a result, services providers must adopt their own transformation efforts to keep up with client expectations. These internal efforts center on using cloud, social, mobile and data (analytics) to drive change in both the operations and business models. At the same time, we should recognize that digital transformation today is a buzzword; more than anything, it describes a future state or set of goals. In other words, it’s still early days for digital transformation.

In a report called the Digital Transformation Services Blueprint, HFS presents five implications about digital transformation and services firms:

  1. Digital Transformation will rewrite the underlying economics for services firms.
  2. Digital Transformation will become embedded in every conversation
  3. Digital Transformation requires us to fix many of our old problems before we can realize its promise.
  4. Digital Transformation requires us to look beyond the obvious in what new technologies offer.
  5. Digital transformation requires us to look for new insight among existing processes and tools.

So, how did HFS rank the services providers in this “emerging Digital Transformation services landscape”? In their analysis, the top firms are Accenture, IBM, Cognizant, TCS and Infosys, as shown below:

HFS services firm rankings on digital transformation

I asked the CEO of HFS Research, Phil Fersht, to summarize why consulting needs to adapt:

The services industry is going through a secular change and it will never be like it was, where trillions of dollars were spent maintaining dysfunctional systems and funding huge armies of staff to fumble their way through managing non-standard and often obsolete processes. Those days are fading fast and that pie is shrinking for providers and consultants still feeding off the legacy enterprise operations beast.

Operations leaders don’t have the luxury of ten-year improvement programs anymore – corporate leadership expects to see tangible results in much shorter time frames. You only have to look at the growing number of unemployed CIOs to understand what happens when functions become overly operational and limited value and innovation is achieved.

It’s the same for CFOs, CPOs, supply chain heads and other function leaders – most are under a renewed pressure to continue driving out costs, while delivering ongoing improvements to data quality and having greater alignment with front-office activities. The old “we need to fix our ERP first” excuse just isn’t cutting it as much these days.

This is why 49 percent of today’s enterprise buyers expect to move to a “wide-scale transformation of business processes enabled by new technology tools/platforms” in just two years. Yes, this may be a pipe-dream for some enterprises, but what’s clear is that many of those operations leaders failing to steer their enterprise away from legacy delivery models will get cast aside quickly in today’s tolerance-diminishing business environment.

What’s been exciting about Digital is much of the technology is already available, and it’s the digitization of business processes to enable plug-and-play services, more meaningful data and more seamless business models designed for mobile and cloud business environments.

Digital is not really about digitizing the way we’ve always done things, it’s about digitizing the way things need to be done to be more competitive and effective in the future. Digital is also about progressing our talent to operate with digital mindsets, by adopting analytical, creative approaches to help their enterprises progress from creaking, legacy business practices.

Digital Transformation creates opportunities for new forms of information and insight to be gleaned from the traditional ways we already conduct business today. For example, email trails are being mined via sophisticated analytics to determine patterns of communication that may indicate future problems among partners. Sensors are now being deployed on physical objects to allow them to become part of information context that was impossible before. Smart enterprise buyers are waking up to the possibilities and those services firms failing to come up with solutions are going to fall away fast.

Before concluding, I must note the quality of research from HFS — their full report describes research methodology, breakdown of respondents, and other relevant information. As someone who consumes lots of research, I can say this transparency inspires confidence in the results.

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

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Come to the SaaStr New York Social Wed July 30 at Work-Bench — And Also Learn How to Hire a Great VP of Product! http://www.cloudave.com/35224/come-saastr-new-york-social-wed-july-30-work-bench-also-learn-hire-great-vp-product/?utm_source=rss&utm_medium=rss&utm_campaign=come-saastr-new-york-social-wed-july-30-work-bench-also-learn-hire-great-vp-product http://www.cloudave.com/35224/come-saastr-new-york-social-wed-july-30-work-bench-also-learn-hire-great-vp-product/#comments Thu, 24 Jul 2014 16:04:03 +0000 http://saastr.com/2014/07/21/come-to-the-saastr-new-york-social-wed-july-30-at-work-bench-and-also-learn-how-to-hire-a-great-vp-of-product/ Ok we’ve had a great time in the Big Apple so far.  Last week, we gave a great keynote at the Enterprise Tech Meet-up on How to Hire a Great VP of Sales.  We’ll put the video up soon. And next week, together with Work-Bench, NYC’s leading Enterprise Growth Accelerator, we’ll have our first SaaStr Social […]

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Ok we’ve had a great time in the Big Apple so far.  Last week, we gave a great keynote at the Enterprise Tech Meet-up on How to Hire a Great VP of Sales.  We’ll put the video up soon. Screen Shot 2014-07-21 at 2.52.21 PMAnd next week, together with Work-Bench, NYC’s leading Enterprise Growth Accelerator, we’ll have our first SaaStr Social outside of Menlo Park … right at Work-Bench’s super slick space on Fifth Avenue.  (110 Fifth Avenue). Building on the terrific SaaStr Soiree we did last time on marketing, with Jon Miller, co-founder and VP of Marketing at Marketo, and Brendon Cassidy and Loretta Jones, previously VP of Sales and Marketing at EchoSign … we’re tackling an equally important topic this time … Why You Need a Great VP of Product. We’ll start off at 6pm with a tag team of (x) one of the best VPs of Product I’ve ever known, Jon Stross, co-founder of hot NYC SaaS start-up Greenhouse.io, and (y) his co-founder and CEO of Greenhouse, Dan Chiat.  They’re an incredible team doing millions in recurring revenue and we’ll learn together about how a CEO works with a VP Product; when to hire one; the difference between good and great; ways to divide-and-conquer; and much more. And then we’ll have some cocktails and talk all things Recurring Revenue, as usual! Sign up here.

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Screen Shot 2014-07-21 at 3.23.15 PM

EVENT DETAILS:  It’s time for a SaaStr Social in New York – at NYC’s leading Enterprise Growth Accelerator, Work-Bench!   Drinks will be provided at 7:15pm, but first, there will be a discussion at 6:15pm on one of the key topics SaaS founders don’t always get right — when and how to hire a great VP of Product, how the hire can truly accelerate your business, and what to expect.   Together with Jason M. Lemkin we’ll have a founder combo from one of New York’s rising SaaS star start-ups, Greenhouse.io.   Dan Chiat, CEO and co-founder and Jon Stross, Chief of Product and co-founder, will do an unscripted Q&A with Jason on what to expect from a VP of Product, how to make the hire right, and how a CEO and a VP Product can work together to accelerate things post-initial traction.   Welcome  6:00-6:15pm Discussion  6:15-7:15pm Drinks & Networking 7:15-9:00pm   BACKGROUND: Dan Chiat and Jon Stross: Prior to Greenhouse, Dan co-founded Lab49, building advanced solutions for the world’s leading investment banks, hedge funds and exchanges.  Jon headed product development at leading B2B and B2C companies, including enterprise software leader Merced Systems (acquired for $200m by NICE) and top 200 website and category leader BabyCenter.com. Interestingly, Dan is an engineer by training — but Jon is not. A topic we’ll also dig into. Jason Lemkin: Jason is a Managing Director at Storm Ventures. Storm has been the first or very early investor in many leading enterprise/SaaS start-ups, including his own EchoSign (acquired by Adobe), Marketo, MobileIron, Appcelerator, Sandforce, Guidespark, Pipedrive, Algolia search-as-a-service, and more. Jason has co-founded two successful start-ups selling to the enterprise. Most recently, he served as CEO and co-founder of EchoSign, the web’s most popular electronic signature service, from inception through its acquisition by Adobe Systems Inc. He is author of SaaStr.com, the largest web community of SaaS founders and entrepreneurs, with over 750k views per month and 4 million views on Quora.
VP Product image from here.

(Cross-posted @ saastr)

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Here’s Why a Booming Tech Market May Fool You into Thinking You’re Successful http://www.cloudave.com/35225/heres-booming-tech-market-may-fool-thinking-youre-successful/?utm_source=rss&utm_medium=rss&utm_campaign=heres-booming-tech-market-may-fool-thinking-youre-successful http://www.cloudave.com/35225/heres-booming-tech-market-may-fool-thinking-youre-successful/#comments Thu, 24 Jul 2014 09:46:26 +0000 http://www.bothsidesofthetable.com/?p=6321 Since 2009 we’ve been in an unequivocal bull market. Venture capitalists have raised increasing amounts of money from their investors (LPs) every year. An impressive number of new VCs have been created – most of them with new seed funds. We’ve had an explosion of alternate sources of financing from crowd-sourcing, angels, accelerators, incubators, corporates, corporate […]

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Shelfware

Shelfware

Since 2009 we’ve been in an unequivocal bull market. Venture capitalists have raised increasing amounts of money from their investors (LPs) every year. An impressive number of new VCs have been created – most of them with new seed funds. We’ve had an explosion of alternate sources of financing from crowd-sourcing, angels, accelerators, incubators, corporates, corporate incubators.  And importantly we’ve had revenue. Consumers buying through smart phones, travelers using the new, shared economy and businesses replacing old software with modern cloud-based solutions.

It has been a good run.

But it won’t last forever. It could last 6 more months or 6 more years for all I know. But the economy grows in cycles and always has: Expansion & contraction. For what ever reason we’re wired to have amnesia during the run up and prescient memories of how we ‘knew it all along’ as soon as the slide begins. I do believe that we are in structural change where technology will increasingly play a bigger role in all facets of life so the long run up for tech is promising through all of these cycles. Once you understand both sides of the cycle you start to recognize signs of behavior during each phase.

I’d like to do a few posts on what life looks like on the way up and perhaps how to keep your head on straight and avoid drinking your own Kool Aid because as I often advise entrepreneurs on irrational exuberance, “In a strong wind even turkeys can fly.” It helps to have seen the way down twice before to know many of the signs. And as I always assert,

“Great companies are built in downturns. It’s where the truly innovative separate themselves from the pack. It’s when the game slows. It’s when the noise stops and you can actually get customer attention, press articles and VC meetings. It’s when you separate the wheat from the chaff. And it’s when mediocre companies get pulverized.”

The Lessons of Shelfware

In the software industry we’ve always had a term that’s a bit of an anachronism called “shelfware.” We used the term to describe software that was purchased with great enthusiasm only to be stored on the shelf and seldom used. Of course back then it literally was sold in a package and stored on a shelf!

You’d imagine that companies selling tons of shelfware would quickly meet their deserved fate in the market, yet the spin around a category of software can fool buyers into thinking they “must have this product to compete.” Case studies get done with ebullient CEO’s espousing the benefits of said software even though their organization was barely using the product. ROI studies were published. People attending marquee conferences with rock bands, prominent speakers, Gartner Group prognosticators and lots of other happy customers. Surely there must be some benefit here??

I remember, for example, when business intelligence swept through companies globally. Every consultant was pitching a process for reinventing your organization through BI. And while it’s true that BI implemented properly can truly give executives insights – in and of itself the software was just software. Poorly implemented this category was the definition of shelfware.

Growth markets have a way of fooling us all. When markets start to turn shelfware companies are the quickest to die. There isn’t anything mission critical to bind the organization to keep using the product, their aren’t strong internal champions and projects quickly get shut down. The problem with shelfware is that if you have great sales people, you have raised tons of VC money from prominent investors, you have some marquee clients and you thus likely have some great press about you it can be hard to tell true success from that which is ephemeral.

One thing I thought was super cheesy about Salesforce.com when I was there was their tagline “Success, Not Software” but on reflection I have to admit that it does have nice way of focusing one on the right priorities

I have had a version of this conversation with nearly every startup with whom I’m involved. When I start to see revenue figures I always want to know the details behind the revenue:

  • Who championed the project?
  • For what purpose are they using your software?
  • Who is the executive sponsor?
  • Are they integrating it with other solutions?
  • Have they done a business case on the expected benefits?
  • Did they do a major training program?
  • Do we know how many users are logging in? How frequently they’re using the product? What their initial feedback has been?

I’m always paranoid about shelfware. I’m paranoid about the evaporation of revenue. The pattern has appeared many times in my career: PR success, customer pilots, unclear benefits, the selling company scales up sales & market org quickly to meet demand, revenue takes off through brute force and reaches cruising altitude for a couple of years then the market slows, revenue goes into an absolute nosedive and sales & marketing cuts come way too slowly as the organization thinks it can execute its way out of the freefall.

And what’s worse is that when you have shelfware you often gear your organization around selling the same shit at scale and your innovation pipeline slows down leaving you doubly vulnerable.

What to do to Avoid Shelfware?

1. Have an in-house professional services team that implements your software. It will bring down your overall margins but will produce profitable revenue. Most importantly in ensures long-term success. I wrote about The Importance of Professional Services here. I know, I know. Your favorite investor told you this was a bad idea. Trust me – you’ll thank me a few years from now if you control your own destiny and improve quality through services. If your investor worked inside of a SaaS company for years and disagrees with me then listen to them. If they’re a spreadsheet jockey then on this particular issue I promise you they are FOS. Spreadsheet quant does not equal success, properly implemented software does.

2. Work with customers on business cases (for internal use) and ask for case studies (for you to publish in marketing)

3. Create company measures for success that go beyond financial metrics. You manage what you measure so be careful about having too narrowly defined of performance metrics

4. Have sales bonus plans based on more than just sales targets. Perhaps having renewal rates with a good bonus spiff, have a component of MBO tied to usage performance metrics or spiff certain milestones like business plans. These can’t be the main event – sales are sales after all – but can help shape good behavior.

5. Make sure your board challenges you enough about long-term vision & innovation. Not continuing to challenge yourself on product strategy will lead you down long-term ratholes. And I can tell you from 20 years of experience that if your revenue figures are strong very few boards will challenge you beyond your short-term financial successes and 12-month plan. Run board meetings that force strategic discussions rather than cheering sessions focused on financial metrics.

6. Most importantly – YOU need to care. You need to be focused beyond your immediate two quarters. Let’s face it – that trajectory is already set. But no truly great business has ever been built by focusing the overwhelming majority of senior executive time on the hear and now. That’s management by fire. You own making sure your company has good behavior. Your VP sales can’t and won’t save you – s/he’s too busy ringing the cash register. Your board likely won’t unless you have visionaries who are also egg breakers. Marketing won’t likely challenge you enough on this issue as they’re feeding the beast with more pipeline. You need to listen to your product team, watch your competition and work hard on determining whether you’re truly providing value to your customers.

(Cross-posted @ Both Sides of the Table)

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Eating My Own SaaStr Dogfood: Why I Invested in Algolia Search-as-a-Service http://www.cloudave.com/35231/eating-saastr-dogfood-invested-algolia-search-service/?utm_source=rss&utm_medium=rss&utm_campaign=eating-saastr-dogfood-invested-algolia-search-service http://www.cloudave.com/35231/eating-saastr-dogfood-invested-algolia-search-service/#comments Thu, 24 Jul 2014 00:05:00 +0000 http://saastr.com/?p=5532 Much of SaaStr involves sharing my learnings, mistakes, improvements, etc. as a founder CEO that lived the journey from $0 to $100m in ARR. But do I practice what I preach?  I hope so.  Let’s take a look together. Recently, I was fortunate enough to invest what I believe is an outstanding SaaS company and service, […]

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Much of SaaStr involves sharing my learnings, mistakes, improvements, etc. as a founder CEO that lived the journey from $0 to $100m in ARR. But do I practice what I preach?  I hope so.  Let’s take a look together. Recently, I was fortunate enough to invest what I believe is an outstanding SaaS company and service, Algolia.

Screen Shot 2014-07-01 at 4.44.12 PMAlgolia provides search-as-a-service.  Their goal is to become “the search layer of the internet”.  If you want to add search to your app, instead of building it yourself on top of software on servers you have to deploy and manage … you can just add Algolia and deploy in a day. Not only that, for a subset of search that involves “small documents” or objects, like searching on Crunchbase for companies (an Algolia customer), Hackernews for news (an Algolia customer), search for e-commerce, or movies, or the like … Algolia can be 10x-30x or more faster than the competition.

Ok so that’s what it does.  And that’s cool.  At EchoSign, we spent 3 months building this on top of Lucene.  And we had to maintain it (big pain).  One day and zero maintenance would have been a lot better.  Everything should and will be a service. Try it yourself here on Crunchbase.

And the team is very strong.  They were heads of R&D at Exalead, a leading French search company acquired for over $200m.  So they know search.  But … that’s tablestakes.  Why would anyone invest in a poor team?  No one would. Ok so the product is strong and differentiated, it’s SaaS, and the team is strong.

But that’s not what attracted me to the investment.  Here are the SaaStr themes that did:

1.  Tilting A Smidge Upmarket.  Algolia started off with price points as low as $19 a month.  While Algolia is still very cheap for basic usage, they quickly learned how to accommodate larger and larger customers and deal sizes as well.  To target both the long tail of individual and smaller developer accounts — but also the needs of larger enterprise accounts as well.  Three figure deals are great if you have a lot of them, but add six figure deals into the mix, and that’s the fastest way to $10m in ARR.  I love products and companies that can move just a smidge upmarket, and dramatically improve their average unit economics.  It doesn’t take much tilting upmarket to have a huge impact.  I knew from experience Aloglia could pull this off.  And they already have.

>> More on Tilting a Smidge Upmarket here and here.

2.  Lead Velocity.  Aloglia doesn’t have huge lead velocity yet — they can’t.  Because they’ve really only been in the market for less than a year.  That’s not enough time for a true mini-brand to develop, or for second-order revenue to become material.  But they’ve already crossed 200+ paying customers, many of relatively large deal sizes.  The leads — a combination of organic inbound, and outbound developed — are growing fast enough to support a relatively rapid path to $10m+ in ARR.  Without it, this early lead velocity, I would pass.  But with the lead velocity, it was easy for me to draw a relatively quick line to $10m in ARR … even back when the company was just at $10k MRR.

Now in the early days Lead Velocity isn’t a perfect metric.  It’s too early.  But seeing enough growth to fuel the aspirations of the business model instills confidence. Add a great revenue team to solid lead velocity — then magic happens.

>> More on Lead Velocity here.

3.  Commitment to Real Sales, As Well As Happiness Officers.  The Algolia founders are not classically trained in sales, but I love that they quickly grew to be students of how to scale not just their application, but revenue as well.  From Day 1 they committed to sales, and sales processes, and doing whatever it takes to make enterprise customers successful. Happiness Officers alone are great.  But you need real sales processes to close deals of a real size.

>> More on the Curse of ‘Middlers’ and Happiness Officers here.

4.  A Large but Nonobvious TAM.  Is search-as-a-service really a billion dollar market?  You could argue otherwise.  Today it ain’t.  It’s a few million a year market ;)  But what I’ve learned is market size in SaaS is what you make of it.  What matters is if you can hit $100m ARR in 7 years, not what it is today.  Algolia is on a path to hit millions in revenue this year, its first year as a commercial product.  Once you hit millions, well then … of course you can get to $10 million.  And from $10 million … it’s just one order of magnitude to $100m and an IPO. So yeah search-as-a-service is a terribly small market today, measured in terms of its current market size.  It’s nascent and tiny.  But the revenue growth and lead velocity is there.  It will be a $X00m market in 7-8 years.  The math proves it.  That’s all that matters in TAM and SaaS.  Your growth defines your TAM.  Your TAM doesn’t define your growth.  Not unless you are just replacing one commodity with another, which isn’t what we’re all doing.

>> More on TAM and $100m in ARR here, and why you don’t really know if your market is too small for quite a while here.   Screen Shot 2014-07-01 at 4.42.42 PM

5.  Extreme Commitment.  I was impressed that the founders understood that they were committing to a 7-10 year journey, and what that meant.  There are no Instagrams in SaaS.  It compounds.  It takes time to get the engine going, but once it goes — and it takes years — it becomes unstoppable.  The founders were committed to moving themselves and their families from Paris to the U.S. to make it happen.  To move from mobile to browser-based search.  To serve the needs of both individual developers and large enterprises.  To do what it takes not just this year or next, but across the whole journey.

A great team in an exciting, emerging market with a long-term commitment — I’ll take that bet.  But unless the whole team has the long-term commitment, in SaaS at least — I have to take a pass.

>> More on the 7-10 Year Founder Commitment here, the 7-10 Year Sales Cycle here, and how SaaS compounds here.

The power of compounding revenue is that it compounds.  The challenge is that it’s a lot of hard work and elbow grease to get it there. Algolia has 250 customers now, real in-bound interest, good unit economics — and will have a mini-brand by the end of the year. I’ll take that bet any day.  It’s money where the SaaStr mouth is.

(Cross-posted @ saastr)

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The Changing Structure of the VC Industry http://www.cloudave.com/35228/changing-structure-vc-industry/?utm_source=rss&utm_medium=rss&utm_campaign=changing-structure-vc-industry http://www.cloudave.com/35228/changing-structure-vc-industry/#comments Thu, 24 Jul 2014 00:01:30 +0000 http://www.bothsidesofthetable.com/?p=6302 There has been much discussion in the past few years of the changing structure of the venture capital industry. On the surface the narratives have been The rise of “micro VCs” or seed-stage funds The rise of alternative sources of capital (crowd funding and the like) The poor performance of the asset class (this analysis has […]

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There has been much discussion in the past few years of the changing structure of the venture capital industry.

On the surface the narratives have been

  • The rise of “micro VCs” or seed-stage funds
  • The rise of alternative sources of capital (crowd funding and the like)
  • The poor performance of the asset class (this analysis has largely been wrong as I pointed out here –> most analyses were clumsy rear-view mirror looks at the data)
  • We are in a bubble (with so many private $1bn+ valuations)

15 years ago we were at the peak of Internet hype with the launch of many over-capitalized businesses with a market size & opportunity was limited.

Where are we today?

  • 50x more Internet users (2.4 billion)
  • Online connections that are 180x faster (10.5 Mbps)
  • Always-on connectivity of mobile (164m US smartphone users)
  • We’re all socially connected (so great businesses spread faster)
  • We all have one-click purchase power (Apple, Google, Amazon, eBay)
  • The VC market has right-sized (returned back to mid 90′s levels & less competition)
  • Lower costs to start a business (95% reduction), many more companies created & funded by angels / seed
  • But it still takes VC to scale a business (thus large capital into industry winners like Uber, Airbnb, SnapChat, etc)

It doesn’t take a huge leap to see how well the VC industry is positioned for the immediate future. Limited Partners or LPs (the people who invest into VC funds) have taken notice as 2014 is by all accounts the busiest year for LPs since the Great Recession began.

[Note the full presentation deck with additional slides can be found on SlideShare here or you can simply scroll through it at the bottom of this post.]

slide1

Just 3 years ago there was talk of institutional investors “not being able to write small enough checks.” The new narrative is “will my seed funds be able to fund the prorata of their winners?”

Stated simply – if you seed funded Uber at $4.5m pre-money valuation you certainly would want to exercise your right to continue investing if you had prorata rights.

Seed funds now represent 67% of all funds being created now, which is up 100% from 6 years ago. And while it only represents 6% of the total capital of the VC industry – this is a meaningful shift in structure.

slide2

At the other end of the spectrum large funds have gotten even larger in the past few years which has massively increased the amount of consolidation in our industry as 66% of  LP money into venture is now concentrated in late-stage or full-cycle VCs.

Why is this?

  • Many pension funds are simply too large to write small checks and favor the ability to write $50-100 million checks to funds. If you don’t want to be more than 10% of a fund that implies fund sizes in the $500 million – $1 billion range.
  • Fund of funds (who take money from large pensions, sovereign wealth funds, etc. and break it into smaller sizes) often sell “access.” What they’re really saying is that they have the relationships to be able to invest in Sequoia, Benchmark, Greylock, Kleiner Perkins, Accel, etc. and the bigger funds can’t get in directly.

Of course it’s much harder to identify “emerging managers” who it turns out have been some of the best performers over the past 5-7 years such as Union Square Ventures, Spark Capital, First Round Capital, True Ventures, Greycroft, Foundry Group, Thrive and Upfront Ventures. The challenge is that if you don’t get into the first 1-2 funds you don’t get in at all because they, too, become “over subscribed.”

The pioneering fund of funds realize that their source of differentiation is much more about the latter than the former.

Initially I had worried about the data that showed “Traditional VC” – funds in the $100 – $500 million size – seemed to be shrinking since the Great Recession in both numbers of VCs getting funded and in terms of total dollars in this class of VC and this seemed to fly in the face of the rise of successful emerging funds.

slide3

The more data I collected and the more conversation I had with GPs and LPs the more I realized that there was another major factor at play in the concentration of capital in larger funds – many traditional VC firms were now setting up “opportunity funds” or “growth funds.” The data ends up looking skewed towards larger funds when it actually involves traditional VC funds now geared up to take capture more of the value in private funds before they went public. This is a structural shift in our industry few have talked about publicly.

When you think about the trends of faster-growing startups due to social networking, credit card enable and mobile first consumers – the reality is that many startups are becoming very large financially before needing to go public. In reality many of them could be profitable if they chose to.

But markets value high growth over short-term profitability. And as long as private-market capital is available these companies would rather remain private for longer before going public.

slide4

Thus the amount of money that companies have raised before going public had doubled since the Great Recession. The overall trends in our industry have breathed a new life into the venture capital industry. From a period of veering off target with the laziness & riches of the dot com era our industry has greatly righted itself.

But the biggest changes in our industry have been driven by technical changes themselves to which we are just observers and fortunate beneficiaries. I highlighted how these tectonic technical shifts have altered the VC industry in this post: How Open-Source & Horizontal Computing Spawned the Micro VC Market.

2007 was the watershed year. Facebook went mainstream after the F8 conference and its big push beyond college campuses. Twitter spread through the tech crowds at SxSW and raised its first venture capital round led by Fred Wilson. The iPhone was released.

The seeds of cheap cloud computing, social networking & mobile were planted and then the 2008 financial crisis brought a hurricane that swept much of the old, dead brush from the venture capital industry and ushered in a new phase perhaps best punctuated by Sequoia’s famous and now ironic presentation “RIP Good Times.”

The “big boom” in startup financing started around March 2009 — more than 5 years ago — and hasn’t abated.

Cheap, mobile, social, global, massive, always-on, one-click-purchase has led to the most successful companies of our era hitting unprecedented scale early in their development and has massively shifted the value captured from post-IPO investors to pre-IPO investors as is demonstrated in the chart above.

This has led to the rapid rise of: DropBox, Airbnb, Pinterest, Maker Studios, Uber, Lyft, SnapChat, Tinder, Waze, KickStarter and so many more great standouts that have gone from inception to massive in an unprecedented timeframe.

 

slide5

From a technology perspective our journey is nowhere near over. Even the most somber of industry analysts must acknowledge that the shift from computers being devices controlled by humans to smart devices that are all computers connected to an Internet cloud – the so called “Internet of Things” – is breeding massive new opportunities. Just see the growth of Dropcam, GoPro and Nest for the tip of the iceberg in what is to come.

Of course strongest industry players don’t stand still.

Early-stage VCs have realized that they need to capitalize on this trend, which is why many traditional VCs have set up “opportunity” funds that sit alongside their core funds as a means of capturing more private-market (pre IPO) value. Opportunity funds typically have better economics for the LPs who invest in them.

Traditional VC isn’t being gutted – it’s being supplemented.

Many prominent LPs have also recognized the “prorata opportunity” and have set up “direct investment vehicles” themselves to take prorata stakes in their managers portfolio companies.

The biggest response to the public-turned-private value capture, however, has been the push for public market investors to move into the private sphere.

slide6

 

Public-company tech investors creates competition in late-stage financings and these investors can afford to be less price sensitive if they choose.

The value capture in the private markets has also led some hedge funds and other major non-private-market investors to become late-stage VCs. Many of these investors lack the skills, focus, experience and temperament to make great, patient, long-term, private-market investors. Trying to shoe-horn hedge-fund mentality into venture capital markets cannot portend a happy outcome.

Marc Andreessen captured some of this sentiment in his recent “10 Ways to Damage Your High-Growth Tech Startup” Tweetstorm.

When the tech markets goes through its next inevitable bear cycle every public market investor will return to their day jobs and abandon the hard work of rebuilding and restructuring the remaining companies who are over-capitalized. We saw this movie already after the dot-com collapse and the sequel will be no different. Publics sold many of their positions to secondary investors. It’s hard to work out the cap table with your peers when one of them has no real intent in fixing the problem.

Why do VCs stick around and fix problems in a massively changing financial market? Because this is all VCs do and if we intend to work with all of our fellow VCs and entrepreneurs when the rain ends and the sun shines again our reputations matter greatly.

This “game theory” of mutual interests in collaboration even as we occasionally compete fiercely is what forces much better behavior in our industry than otherwise might exist.

The result of these new market trends of Prorata Takers, Corporate Investors & Public Market Entrant has led to a sharp spike in the valuations of late-stage financings. While this might not matter for the industries best companies, the definition of what is “best” will clearly be stretched as people compete to get in on perceived great deals.

slide7

Venture capital valuations are up across every segment of the industry as can be expected by our 5-years of growth markets but they are up most pronounced in the late-stage financings where the median valuation has risen from $66 million in 2010 to $155 million in 2014 (a 24% CAGR).

But about that “bubble” we always hear about?

It certainly doesn’t yet seem to be the case regarding private tech market companies going public. Not only are they going public later when they are larger & stronger but the valuations upon their debuts are significantly more rational than the public dot com bubble.

slide8

Summary:

Cheap, mobile, social, global, always-on, one-click-purchase =

Unprecedented revenue growth + companies staying private longer =

More opportunities than ever in history for venture capital firms =

Lots of new entrants moving to capture this value =

Amazing opportunities + Risks + Uncertainties for the coming decade.

I look forward to the ringside seat to see how this all plays out.

*********

Very special thank you to Glenn Poppe at Upfront Ventures for all of his research, number crunching, fact checking and calls to VCs & LPs to confirm our theses. And to Pitchbook for making its data available to us.

Here is the SlideShare deck

(Cross-posted @ Both Sides of the Table)

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Which Companies Dominate the “Internet of Things?” http://www.cloudave.com/35202/companies-dominate-internet-things/?utm_source=rss&utm_medium=rss&utm_campaign=companies-dominate-internet-things http://www.cloudave.com/35202/companies-dominate-internet-things/#comments Wed, 16 Jul 2014 16:37:28 +0000 http://www.thefutureorganization.com/?p=10602 The internet of things is still a very big area of discussion and exploration. The folks over at Appinions (an influencer marketing platform) put together an interesting list of companies that are having a huge impact on the internet of things industry. Based on their scoring system here is what they came up with.   […]

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The internet of things is still a very big area of discussion and exploration. The folks over at Appinions (an influencer marketing platform) put together an interesting list of companies that are having a huge impact on the internet of things industry. Based on their scoring system here is what they came up with.

iotcompanies

 

The companies listed above cover pretty everything you can think of in the IOT space and offer products ranging from smart office equipment and wearable devices to smart home appliances and the ability to create smart automobiles. There’s also another area of the IOT which GE coined as “the industrial internet,” that is connectivity for machinery, manufacturing, robots, and the like. Those leading companies can be seen below:

iot(2)

 

The most interesting thing however is what people are discussing when they are mentioned the internet of things. Appinions put together a nifty little tag cloud for that as well. It should come as no surprise that words like privacy, data security, and big data, are among the most common themes.

tag_cloud

 

I still believe that most people in the world have no idea what the internet of things is or what all of this connectivity means to them professionally or personally. I tried to explore this in an article I wrote for Forbes called “A Simple Explanation Of The Internet Of Things.” Appinions correctly identified that this is still a very volatile market (as is the wearable space) which is still going to see plenty of newcomers, acquisitions, and companies going bust.

You can see their full report here.

(Cross-posted @ The Future Workplace)

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SaaStr Hits The Big Apple: Keynote at Enterprise Tech Meetup this Wednesday, Office Hours, Work-Bench, More http://www.cloudave.com/35201/saastr-hits-big-apple-keynote-enterprise-tech-meetup-wednesday-office-hours-work-bench/?utm_source=rss&utm_medium=rss&utm_campaign=saastr-hits-big-apple-keynote-enterprise-tech-meetup-wednesday-office-hours-work-bench http://www.cloudave.com/35201/saastr-hits-big-apple-keynote-enterprise-tech-meetup-wednesday-office-hours-work-bench/#comments Wed, 16 Jul 2014 16:21:18 +0000 http://saastr.com/2014/07/14/saastr-hits-the-big-apple-keynote-at-enterprise-tech-meetup-this-wednesday-office-hours-work-bench-more/ Today SaaStr’s hit the Big Apple.  I’ll be in town for several weeks, hanging out at Enterprise workspace / accelerator Work-Bench and a few other places around town. We’ll try to do a few events. First, this Wednesday, I’ll be doing the keynote at the New York Enterprise Tech Meetup, at Cooley LLP.  I’ll be talking […]

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Screen Shot 2014-07-14 at 4.05.51 PMToday SaaStr’s hit the Big Apple.  I’ll be in town for several weeks, hanging out at Enterprise workspace / accelerator Work-Bench and a few other places around town.

We’ll try to do a few events.

First, this Wednesday, I’ll be doing the keynote at the New York Enterprise Tech Meetup, at Cooley LLP.  I’ll be talking about one of our favorite topics:  How to Hire A Great VP of Sales (and Not Screw It Up).  Please come by if you can make it.  Sign-up here.

I’ll also be at Work-Bench’s enterprise founder event on Thursday night.

Third, I’ll be doing some office hours in New York.  More details to follow.

We’re also planning a New York SaaStr Social together with Work-Bench in about 2 weeks.  More details to follow.

More updates soon.

IMG_20140714_161922345_HDR

(Cross-posted @ saastr)

CloudAve is sponsored by Salesforce.com and Workday.

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Digital transformation: CIO / CMO and the crisis of confidence http://www.cloudave.com/35185/digital-transformation-cio-cmo-crisis-confidence/?utm_source=rss&utm_medium=rss&utm_campaign=digital-transformation-cio-cmo-crisis-confidence http://www.cloudave.com/35185/digital-transformation-cio-cmo-crisis-confidence/#comments Mon, 14 Jul 2014 08:58:05 +0000 http://www.cloudave.com/?guid=c6667e955220fceea88dcdd2803d3055 A few years ago, Gartner analysts predicted, “by 2017, the CMO will spend more on IT than the CIO.” As you can see from the opening slide on their presentation (registration required) about the topic, Gartner trumpeted this prediction loudly: Although Gartner phrased its prediction to gain attention, the detailed explanatory presentation offers vague and rather inconclusive data to support the core […]

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A few years ago, Gartner analysts predicted, “by 2017, the CMO will spend more on IT than the CIO.” As you can see from the opening slide on their presentation (registration required) about the topic, Gartner trumpeted this prediction loudly:

Gartner CMO will spend more on IT than CIO

Although Gartner phrased its prediction to gain attention, the detailed explanatory presentation offers vague and rather inconclusive data to support the core assertion. In fact, during an episode of CxOTalk, Gartner Fellow, Mark P. McDonald, told me he was somewhat uncomfortable by the whole thing; if you are interested in background about that famous Gartner prediction, the conversation is worthwhile.

Nonetheless, it is clear that marketing technology will consume higher budgets over time, and a quick look at Scott Brinker’s Marketing Technology Landscape super-graphic tells the story. With so many companies and segments related to marketing technology, it’s obvious that this is a rich and important field. Click the graphic itself to see a huge version:

marketingtechnologyjan2014

With the Gartner prediction as background, I was intrigued to learn of two recent research reports, from unrelated sources yet describing similar results, that add color to the breakdown of technology spend outside IT.

Avanade-shift-in-IT-and-technology-spend

The first study, from technology consulting firm Avanade [PDF], explains that 37 percent of “budgets allocated in 2014 for technology investments are now controlled by departments other than IT.” Some important results from the Avanade survey:

  • Business groups outside IT control 37 percent of total technology spend in the companies surveyed
  • 69 percent of business unit leaders believe they can make better, faster departmental technology decisions when IT is not involved
  • 79 percent of C-level executives believe they can make technology decisions better and faster than IT staff

Avanade based its research on a survey of “1003 C-level executives, business unit leaders, and IT decision makers.”

The second study, from CEB [PDF], which describes itself as a “member-based advisory company,” claims that “business executives now spend an additional $0.40 on technology for every $1 managed in the traditional corporate IT budget.” Key points from the CEB research:

  • The business, rather than the CIO or IT, direct 40 percent of total enterprise technology spend (assuming total technology expenditure consists of IT and non-IT combined)
  • CIOs significantly under-estimate (by half) the level of technology spend outside IT
  • Spending on technology-related innovation mostly occurs in the business (75 percent) rather than in IT (25 percent)

The CEB study included 165 organizations responding. A breakdown by function for technology spending outside of IT is shown below:

CEB-shift-in-IT-CIO-spending

IMPLICATIONS FOR THE CIO

It is obvious that technology spending outside IT is happening on a large scale. However, there are two, more subtle, implications:

  1. The CIO and IT department are increasingly at risk for becoming a legacy provider rather than a driver of forward innovation
  2. Business departments outside IT, including marketing and others, will fill the innovation gap created by IT

We are entering a period of digital transformation that will take years to play out. Although fundamentally about business, the digital transformation journey relies on platforms, networks, and technology as crucial enablers. At this early stage, indicators suggest that business leaders have lost confidence in the CIO’s ability to solve problems and deliver innovation quickly and efficiently.

Without CIO leadership and intervention, this trend is likely to continue.

[Disclosure: Avanade is a client]

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

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