Building a Culture of Profitable Growth

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Silicon Valley is embracing the new reality of constrained VC markets, lower exit multiples for technology businesses, and a much more balanced perspective on risk versus return. As the cost of capital has gone up, both sides of the entrepreneurial ecosystem (investors and founders/CEOs) have taken predictable positions. Investors are a lot more bearish on funding, in large measure because the assumptions that underlie their Internal Rate of Return models are uncertain and they are busy funding portfolio companies. Founders and CEOs are engaged in belt-tightening – as we’ve seen from fellow SaaS companies Optimizely, high-flier Zenefits and a range of others. Internet businesses have arguably fared worse. A lot has been written about the rapidly narrowing mismatch between public and private company valuations.

The point of a business is to make money, and too few Silicon Valley businesses, including us at BloomReach, do.  As one CEO told me, effecting a culture change from unprofitable growth to profitable growth is “the hardest thing I’ve ever done.”

At BloomReach, we have set the course to achieve the triple play — the kind of recurring revenue scale that provides an ability to tap public markets, best-in-class growth rates, and profitability. We believe that’s what creates long-term sustainable value.  We just raised $56 million in capital, so some might ask – why are you worried about driving to profitability now? Now is exactly when we should be worried about it, so we control our own destiny and don’t have to make tough choices to achieve the triple play. Fortunately, we have the benefit of a natural history of capital efficiency and strong unit economics to help get us there, but I fully expect it to be really hard – maybe the hardest thing I’ve ever done.

Building towards profitable growth requires a metamorphosis in the culture of one’s business in so many ways.

  • Hiring: We intend to use the favorable hiring environment to hire extraordinary people, but we’re fully committed to raising the bar from an already high standard. The natural instincts of a growth-only business are to hire as fast as possible and against a “headcount plan.” That’s not what gets one to profitable growth. Every hiring manager must ask the question — “Is this incremental hire going to move the needle on growth or profitability? Is it going to meaningfully upgrade my team?”
  • Shorter-horizons on investment: There are a ton of good investments to be made, and in a non-capital constrained world, the question is — “Is this investment going to get us a return?” In a capital constrained world, the question is —  “Is this investment the lowest risk, shortest horizon, highest return choice?” Are your marketing programs the ones that have a history of results? Are your product investments sufficiently oriented to where the revenue is rather than where it might be? What’s the risk of achieving those returns?
  • Investments in productivity and cost-control: You only get to profitability if you spend less than you make. And focusing only on the top line is like fighting with one hand tied behind your back. The natural ethos of Silicon Valley is to build and sell great products. That’s important in any market environment. But what about productivity tools for your customer success team? Or initiatives that help bring down your Amazon Web Services spend? Do you celebrate those victories with the same passion as a new feature or product?
  • Leveraging teams in every geography: At BloomReach, we have teams in India, the U.S. and the UK. There is a cost to effectively leveraging teams globally, but doing so can make a huge difference in effectiveness and the cost structure. We built a significant product (BloomReach Commerce Search) in India. Of course, teams will always have good reasons for why proximity to HQ or the market matters. But the reality is, if you don’t leverage geographic diversity – you compound the profitability challenge.
  • Alignment within your executive team and your overall leadership: You’re not going to get to profitable growth if you’re doing it alone. As we started the journey towards profitable growth, our CFO pulled us all together to map out a range of scenarios (around growth vs. profitability) and we committed together to the mission of profitable growth. An aligned leadership team goes a long way towards good decision-making.
  • Just say no: At times, the decisions to not spend are really painful — a hire you’d really like to make, a trip you’d like your team to take, an initiative you’d really like to start. You’ve done all the context-setting possible but there will come a point on your journey where you’ll just have to say, “No.” It will be highly unpopular, but it’s necessary.
  • Answering the question,“Is the company in trouble?”: Not growing headcount super-fast can somehow feel the same as reducing your employee base. The psychology of the change from growth-only to profitable growth, requires over-communication of the message that growing costs at a slower rate than revenue growth is exactly the way for a successful company to win.  This is particularly true when certain teams are working on growth-oriented initiatives and others are working on profitability-oriented initiatives (important for each set to stay focused on their objectives).
  • Over-index compensation and culture initiatives on the great people you have: If you have a  dollar to spend, spend it on the key people you have that help make you great, and the environment around them that helps them succeed and thrive. At BloomReach we invest a ton in culture and citizenship. I’d rather hire a little slower and over-index on the proven winners than over-hire but sacrifice culture.
  • Getting rid of the growth-only mindset or marginal-contribution people: There are some people in your business who are only well suited for a growth-only mindset. You’re not going to change them. It’s time for them to move on. There are others who are OK performers, but not great – move on from them.
  • Don’t over-correct: In a drive towards profitability – your team can interpret your goals as only about profitability. That’s a mistake. Growth still matters a ton, it’s just got to be accomplished in a smarter manner.

The journey to bring the triple play to BloomReach is going to be a tough road, and it is one that is paved with good, balanced decisions. When the temptation to spend the extra money with an uncertain result comes up, remember that the ultimate choice you have to make is – do you want to subject your company to the whims of fickle financial and venture markets or do you want to control your own destiny? I want us to control our own destiny.

Image from Balance Scale by Sepehr Ehsani licensed under CC by 2.0

Operating in the Tech Bubble

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“Every incremental day that goes past I have this feeling a little bit more.  I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now.  Unprecedented since ’99.  In some ways less silly than ’99 and in other ways more silly than ’99.”

–       Bill Gurley to the Wall Street Journal, September 15, 2014

I may be in the minority but I remember 1999.  In 1999, I was part of a bubble that made the dot-com bubble look small.  Sure, those were the days of imploding and Amazon’s stock going from $107 to $7 per share.

But I was a part of the telecom bubble, borne out of excessive spending by telcos on spectrum, fiber optic cable in the ground spanning the world, and a massive data center build out.  About $2 trillion was lost in telecom market capitalization by 2001, by both well-established companies (MCI, AT&T) and startups (Exodus, Level3, Global Crossing).  It was a period when companies were valued as a “multiple of gross PP&E” – or basically, the more money you spend on assets in the ground – the higher your valuation.  At least with eyeballs you are dealing with customer acquisition, with PP&E, you’re talking about outdated optical equipment.  During that time, I helped start FirstMark Communications – a startup for which we raised $1 billion, including $600 million from private equity firms (KKR, Goldman, Morgan Stanley and Welsh Carson) and $400 million of debt.  The story did not end well.

Which brings me to 2014, and the recent spate of articles cautioning startups that the current tech valuation levels might not last and warning startup founders to be careful about raising hundreds of millions of dollars on companies with extraordinarily high burn rates.  That is good advice, but hard to accept for entrepreneurs who have never really operated in the dark days; and much easier said by investors than done by entrepreneurs when every force around them pulls in the opposite direction.

Let’s put aside the question of whether or not there is a tech bubble and ask the question – how should a CEO or founder operate in the midst of one?

Gurley says the answer is being “pragmatically aggressive.”  I think the real answer is that there should be very little difference in how you operate your business in a bubble world or a non-bubble world.  Sure, the cost of or access to capital might be different in the two scenarios but the truth is that for most software, Internet or other low-capital-asset businesses, the cost of capital is far less correlated to success than the use of that capital.  Let’s take two cases: You are operating in “normal times” and you need to spend $100 to acquire a customer, versus you are operating in “bubble times” and it costs $200 to acquire a customer.  Given that most business cycles, up or down, last three to five years and the lifetime value of your customers likely does not change in the two cases, you should be willing to spend roughly the same amount in both cases.  The fact that you can raise $50 million at a $500 million valuation versus raising $50 million at a $250 million valuation should not impact your fundamental decision-making.  If the “normal” case only allows you to raise $25M, then you really have to ask yourself whether the incremental $25 million really changes your calculation.  In a world of natural capital abundance for good businesses, I would argue it mostly should not (i.e. if you can only raise half the money today, but if you deploy it to good use, more capital will likely be available downstream for you anyway).  There may be a difference in ultimate founder / early investor ownership but not likely in ultimate outcomes.

The playbook for operating in a tech-bubble involves mostly blocking the noise out:

  •      Stop worrying about how high Uber’s valuation is:  First of all, their valuation does not impact your valuation.  The only thing worse than spending large amounts of money unnecessarily or raising money at outrageous valuations that you don’t deserve is doing so because someone else did.  I get the competitive fire that most founders/ceo’s have about being best-in-class but worry about the hand you’re dealt, not the one you wish you’d been dealt.
  •      Play for long term:  Remember, you are playing for your product vision and potentially towards an exit that takes several years.  Responding to current market forces in ways that diminish the value of the long-term to get a short-term pop almost never works.
  •      Over-communicate to your team: Everyone reads TechCrunch.  I had one engineer ask me at what price I would be a “buyer and/or seller” of BloomReach stock.  Others will be influenced by the events around them and it is important that you continue to explain to your team the various forces that ultimately impact your value and their equity value.
  •      Resist the temptation to massively over-pay or over-hire: The natural conclusion of any self-respecting entrepreneur in a capital-abundant environment is to raise too much capital and then over-pay or over-hire in a super-competitive job market.  Don’t do it. It will create fairness issues with your team downstream; and if you over-hire when the risk profile of your company doesn’t permit it, you will ultimately be faced with painful layoffs.  Explaining the cuts to your team will damage morale much more than the gains incurred by over-hiring or over-paying.
  •      Only raise money at a price that you have a line of sight towards being priced at in “normal” markets: Just because investors are prepared to value your company at billions of dollars doesn’t mean you take their money at those prices.  At some point those investors will want a return; and just the psychological burden of knowing that you need to actually earn out an unattainable price can destroy a founder or a CEO. If you at some point need to do a down round, the financial and cultural costs are massive. Mitigate that risk.
  •      Burn as much money as you would in “normal” environments: Remember the good days will end and you will ultimately be held accountable for what you did with your capital.  Usually, in any high-growth environment, there are only so many things you can execute on in parallel and generate a good return.  Stick to those.

I’m not suggesting that you should not be opportunistic in good times.  Certainly plan your fund-raise to take advantage of the opportunity, negotiate the best possible deals with investors, consider exiting, and (at the margin), be slightly more aggressive.

But mostly, as you are faced with the innumerable pressures to take advantage of the tech bubble, step back and take a walk around your (overpriced) office space.  Then come back to your desk and make the unnatural move:

Don’t change anything.

Image from popped by carterse licensed under CC by 2.0

Be One with Your Customer

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Most companies fundamentally pay lip-service to customer-centricity. The economics make it so. If I spend a $1 on sales and marketing, I might get $5 in ongoing revenue pretty quickly. So it always makes sense to spend money on sales and marketing in the short term. If it spend a $1 on product and engineering, I might get $100 back in long-term revenue for my business. The return on $1 dollar spent on “customer-centricity?” Not clear. And therefore most companies shortchange their customer-facing organizations with people who cost less and add less value. I’ve never believed in that.

At BloomReach, we have some of the brightest people in the world solving problems for our customers. They don’t just take people out to lunch or dinner and say, “I’ll get back to you” when they get a hard question. They understand the product. They understand our business. They understand our customers businesses. They are analytical and organized. Some are technical. Some are business people. And we spent the same amount of money in 2013 on making customers successful as on marketing. There is no better marketing investment than a $1 spent on making a customer successful.

But how do you make a customer successful? If you want to be customer-centric, the key is to be one with your customer, at least for a day. I see tons of technology companies who say they have found a deep “customer pain point.” Or they say they have found a solution that will deliver an improved return on some part of their customers activities. But when you break it down, customers don’t have “pain.” They are not walking around looking for “ROI.” Searching for ROI might be part of what they do, but its not who they are. They are real people. We have great customers at BloomReach and they are some of the smartest, highest integrity business people I have ever worked with. One of our customers is spending time trying to drive search traffic to his website. Another one is figuring out how to convince his boss to redirect spending to a new project. Another is trying to replace the technical people who are leaving his IT organization. Another one is transforming the retail industry. Another one is tired of all the politics around her. Technology is supposed to make their lives better, not add irrelevant meetings to already busy calendars. If you want to build a great customer-centric company, don’t just put window-dressing on poor fundamentals. Step back and ask yourself some basic questions:

1. Are you solving a problem that is big enough to matter to your customer? Too many products fail here. They deliver value, but they don’t deliver enough value to really move the needle in their customers’ lives. For example, a lot of products promise “ 20% improvement in revenue,” but in some micro-part of a customer’s business. Is that worth anyone’s time if it only touches 2% of the Customer’s business? You’re not competing with other products. You’re competing for my time. And I only give my time to things that matter. Think of it like a consumer mobile app – is it cool enough for me to replace another app on my home screen?

2. Is the value of your product transparent to all involved? Too many software projects from old-school software vendors have great business cases that never pan out. Or at least, no one knows if they pan out. You cannot fundamentally live the life of your customer if you cannot clearly measure the ways in which you’re improving his or her life. At BloomReach we do a lot to measure value – we run control tests, we do analyses to correlate operational metrics with results and we develop ROI studies. We only build products that we believe we would buy if we were the customer. Measurement can be brutally hard and it does not make sense to count every nickel and dime, but if your organization does not care about value delivered, your organization is setting your customer up for the board meeting where they get called out. Value does not always mean revenue generated. It could mean just making someone’s life easier. It could mean improving the user experience of your customer’s business. There are a lot of qualitative ways of creating value. But the value should be palpable.

3. Are you prepared to have an honest conversation with your customer? You will at some point disappoint a customer. There will be a bug in your software. Your release date will slip. Someone will handle a customer care situation badly. Your customer will ask for something totally unreasonable. What are you going to do about it? Are you going to stand up and have the tough conversation where you tell your customer you think they are wrong? Or tell them you have totally screwed something up? If you’re not, you can never be one with your customer. Because you would never misguide yourself (at least knowingly).

I told myself before I started BloomReach that I was only going to start a business-to-business focused company if I could assure myself that the CEO of my customer’s company would care about my product. The world is too noisy for technology that doesn’t matter. I think that’s the starting point for being one with your customer. From there, every aspect of your organization should ask the question, “What would I do if I were the customer?” If I’m selling, is it easy to buy from me? If I’m marketing, do the messages pierce through the noise bombarding my multi-tasking customer? If I’m providing analysis, does my customer care about my analysis? Is it trustworthy? If I’m serving a customer, do my actions get my customer ahead in their organization? If I’m building a product, how hard is it to use the product to fulfill its value proposition? If I’m acting on a support request, how long am I making my customer wait?

The journey to being one with one’s customers is a long one, one that we are very much in the middle of. When you think about customers, remember the famous Jerry Maguire quote from the eponymous movie:

“You…complete me.”

Image from We stick together…smile together…be together by Thai Jasmine licensed under CC by 2.0

Act II: Building a Second Great Product Line

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It’s really hard to get your start-up off the ground and find initial product-market fit. Very few companies do. An even smaller percentage of entrepreneurs ever come up with Act II. Act I can take many successful tech businesses really far. Google did $15.9bn in revenue, $14.4bn came from advertising, $10.9bn of that came from Adwords. 20 years into its journey and after we have heard of Google getting into video, android, self-driving cars, maps, Google aps, infrastructure to power websites, Enterprise and so many other businesses – nearly 70% of Google’s revenue (and an even higher proportion of its profits) comes from the same business it entered when it was founded. Despite their diversification efforts of launching into new markets, things aren’t much different at at Salesforce (known for CRM, but also with Service Clouds and Marketing Clouds) or at Cisco (known for networking equipment but present in telephony and cable). Microsoft, after its amazing success with Windows, created an Act II in the productivity space – Microsoft Office. Remember, Act II is not a pivot. It’s a second great business.

Why is Act II so hard? When do you need to invest in Act II and how can you give them a better shot at succeeding?

Most businesses never even attempt to build a second meaningful product. For most start-ups, if you achieve meaningful success and market share with a first product line as we have with BloomReach Organic Search all the forces at work will cause you to double down on that business. Customer feature requests will be intended to enhance the existing product. Revenue growth on a larger base will feel like it more easily comes from growth in the existing product. Your distribution model will be much further along for your initial product, so you’ll put more into it. All of this makes sense if you happen upon an initial business whose market size is MASSIVE. The common element of the database market for Oracle, the networking market for Cisco, the CRM market for Salesforce, the Search market for Google or even the Ride-Sharing marketplace for Uber is that they all tackle markets that could be $50bn+ for the initial product they build.

Success in that initial market can take you an awful long way. But here’s the paradox – most successful start-ups don’t start by having their initial product tackle a $100bn market because to do so involves competing with an incumbent that has seemingly unlimited resources on their terms. The graveyard of start-ups that have directly attacked Cisco in networking, Oracle in databases, Google in search and Facebook in Social Networking is extremely large. So what do you do? You fight on the edges.

You attack Google not at Search but by focusing on doing a better job on a highly profitable part of their business (as Amazon is doing in Commerce) or a by riding a different trend (Apple with Siri and other apps steals Search views from Google). Start-ups employ similar strategies. There are a large number of start-ups focusing on the salesperson rather than sales management in an attempt to gradually eat away at Salesforce. There are noSQL alternatives hoping to gradually eat away at Oracle by dominating certain workloads. But here is the challenge. The exact thinking that leads you to pick a market segment that you can genuinely win, causes you to narrow your market size.

Many of the recent public SAAS companies have all but acknowledged that they need an Act II to take their business to the next level. Marketo bought Insightera to expand from Marketing Automation that is B2B centric to Website personalization. Splunk has rapidly expanded its suite of “Solutions” away from just IT operations to a whole range of other domains. All of this is about expansion of the addressable market. It’s about Act II.

At BloomReach we made the decision to expand our platform from a single successful application (BloomReach Organic Search) to a suite of applications to build a full personalized discovery platform. That is our Act II. It is off to a terrific start and I believe will at least quadruple our addressable market. I’ve learned a couple of things along the way:

  • You can’t rush new products: If you are judging $1 of incremental revenue on your new product at the same value as $1 of incremental revenue of your existing product, you’ve forgotten the trials and tribulations you went through in your first business
  • If you’re building a new product line, make sure it does not need a new distribution channel: You simply can’t take on building a new product and building new distribution at the same time. If your core business is in Enterprise in the US, make sure your second one is too. (It’s totally fine to expand distribution but do so for the same product, not a new one).
  • Set up a separate team to tackle the new product: Focus is the key to execution and a separate team (at least in product/engineering) is the only way to drive focus.
  • Don’t over-resource your new products: Remember most great software products fail because they don’t meet demand. Adding more people to the team doesn’t necessarily fix that problem.
  • Build an appropriate financial plan: I’ve often gotten this wrong – expecting instantaneous results from a product lifecycle that has to go through its paces. You still need early customers. You still need to prove value. You still need to create customer success. You still need to invest in scalable systems. You can’t skip steps.
  • Simplify, don’t extend the marketing: The temptation when you are selling two products is to double the size of your slide deck. Take the opposite approach and simplify.

Building and making Act II successful has been as hard as making Act I successful. I have many more resources ($s, customers, distribution, brand and technology). At the same time, I have many more distractions so I can’t take it on myself or with my co-founder. In fact, making Act II successful has involved creating an entrepreneurial team led by our product managers, tech leads and other execs on the management team. Hiring and mentoring entrepreneurs capable of building your Act II and moving obstacles out of their way is a necessary pre-condition for success.

Building a great company is like building cities. You go back and forth between building the infrastructure (highways, internet, waterways etc.) and building the new neighborhoods. Nothing is more exciting than adding another neighborhood, just make sure it’s somewhere people really want to live.

Image from Red Curtain by Kristy licensed under CC by 2.0

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