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

Democratizing your Culture

“Democracy is the worst form of government.  Except for all of those other forms that have been tried from time to time.”

– Winston Churchill

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Culture is the center of the start-up.  It is the pulse.  It is the soul.  It is the binding that gets teams through hard times.  It is the intoxicant that enables teams to share the highs with each other – making them even higher.

At BloomReach we have our own core values, written in February 2009, before my cofounder Ashu or I had raised any money, figured out our product, determined what market we were going after or hired our first person.  That’s how important it was to us.

The most interesting question around culture is not, “What is your culture?”  It is, “How do you make your culture real?”  Thousands of enterprises have come before your start-up or growing business.  Most of them have terrific culture and values documents.  But they are not real.  They are not authentic to the team or to the business; and they don’t manifest in ways that are practical to the work lives of employees.  The pseudo-cultures think that the key to great culture is a lot of parties, free food or cool schwag.  It’s not.

The key to making your culture real is to democratize it.  The aspirational goal of your culture should be to make it genuinely co-owned by every member of your team.  That can be counter-intuitive because so much about companies is top down – the titles, the strategic direction, the planning, the compensation and the decision-making.  But culture needs to be built bottom-up.  It can’t be the responsibility of the HR team or even the CEO.

It has to be an organism that grows and shrinks with the ebb and flow of your business and the personalities of your team.  It has to be truly democratic.  So how do you democratize your culture?  A democratic culture draws from the pillars of a democratic society.  It starts with citizenship.

Here are 10 ways we do it:

  1. The BloomReach Citizenship Document:  We maintain a document of dozens of initiatives – broken up between “Fun” and “Company Building” in a Google doc spreadsheet.  Each initiative has an owner and a team.  Initiatives can be “improve remote office communication,” “organize fitness activities,” “organize peer awards” (more on that later) or “create volunteer events.”  No one approves these initiatives.  The only ask of a new BloomReacher is that he or she do something that goes beyond their job description to contribute back to the company.  Many of their contributions are memorialized in the BloomReach citizenship document.  It serves as a repository of our “democratic traditions.”
  2. Hackathons and Business Challenges:  We’ve had a tradition at BloomReach of either running hackathons (24-hour efforts to build and ship something cool) or running the BloomReach Challenge (where the entire company is divided into cross-functional teams to dream up business and product ideas). Hackathons and business challenges encourage people who never get to work together and often don’t know each other to get creative and get to know one another.  It also reinforces that just as the rewards belong to all of us, the challenges belong to all of us.  Eighty out of 170 people participated in our last hackathon and several new product features came out of it, promoting the energy and creativity that are “must-haves” in any start-up.
  3. The Open Floor Plan: Democratizing your culture starts with open communication among teams.  Just as in any democracy, there must be freedom of expression. The open floor plan creates energy, expression and sends a clear statement that the environment values everyone equally.  Yes, it can lead to some loss of individual productivity, but the cultural gain across the organization outweighs all of that.
  4. One Set of Rules:  Are you flying first class and expecting others to travel coach? Is an exec allowed to spend exorbitant amounts of money on a team dinner that a team itself would not be allowed to spend on its own?  All of these send clear signals – that the culture does not value the contributions of every member of the team equally.
  5. Peer Awards: Peer awards are fantastic.  They reinforce that the highest honor anyone can receive is an unsolicited award from a teammate.  For us, peer awards are a big deal.  Anyone can give them as a thank you to a colleague, along with a $150 gift certificate.  It comes with an Oscar-like thank you speech and creates the essential quality of a democratic culture –the willingness to go to great lengths to help a teammate in need.
  6. Bonuses on Company Performance:  A key to democratizing your culture is the idea that “we rise and fall as one company.”   And there is no credibility to that claim if the compensation of individuals is meaningfully at odds with how the company performs.  Of course, one should find mechanisms to recognize extraordinary performance but a democratic culture means democratic compensation features.  Because base compensation and equity are often variant on time of joining and role, a target bonus percent purely based on overall Company performance helps equalize the compensation mix.
  7. Independent Ownership of Decisions: A pillar of the democratic culture is the idea that each individual is an adult, capable of making good decisions as an owner of the business.  At BloomReach, we borrow from the Netflix model of limiting “policies” – no vacation policies, no expense policies and no over-legislation of behavior.
  8. Self-Scoring of OKRs (Outcomes and Key Results): Nothing is more typically top-down than individual performance.  On the other hand, self-scoring of team OKRs enables teams to (in a non compensation-impacting way) score themselves in public and share those scores openly.  It holds each team accountable to each other.
  9. 360 Feedback: We try to keep our performance-feedback process simple.  However, one of the key changes we’ve made is to incorporate 360 feedback (particularly, feedback from peers).  Top down feedback reinforces that the only thing that matters is pleasing your boss.  In truth, high-impact initiatives involve teams collaborating with each other fruitfully.
  10. Hanging out together:  You can’t force friendships.  But you can put people in a position to get to know each other genuinely.  We do that with a lot of company-sponsored initiatives like soccer teams, volunteer events and running relays.  I’m proud of the number of BloomReachers that hang out with each other.  Social relationships build camaraderie.  And camaraderie creates loyalties that go beyond loyalty to the company. (Ok, there are some parties involved.)

I believe that a democratic culture solves the single most difficult conundrum of growth: scaling while maintaining extraordinary commitment.  We have a long way to go to continue to evolve what being a BloomReacher means.  I am sure, however, that the answer to every impending decision lies somewhere in the historical tradition of the only system that has ever really worked: democracy.

Photo courtesy of “DEMOCRACY” by SUXSIEQ under CC BY 2.0

Hiring a Great Executive Team

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One of a CEO’s hardest and most important jobs is building an executive team.  Have a great executive team? You can power through the darkest of hours. Have a dysfunctional, less-than competent or highly unbalanced executive team and you’re in for a world of hurt.

Don’t Rely on a Retained Search Firm: I’ve never been very successful in hiring execs through retained search firms. (We are 0-3 on searches done through retained search firms at BloomReach). That could be because our standards are insanely high. It could be because we are super-sensitive to “fit” – something that is very hard for a retained search firm to get right. Or it could be because retained search firms focus primarily on people in the market, who may by definition be lower quality candidates. I’m not saying you should not hire an outside firm but it is essential that you use your network to identify the absolute best candidates also– then sell them like hell independent of an outside firm. This will result in a smaller pipeline, but a much higher quality one.  Remember, it is your responsibility to find the best candidate.  Not the firm’s.

Know when to bet and when not to: The most common comparison point for CEOs evaluating candidates is between the “experienced hire” and the “up-and-comer.” Some companies believe in one philosophy or the other. I think the answer is situational. We have members of the BloomReach executive team for whom this is very analogous to what they’ve done before. We have members that were total bets that worked out. We have people we have promoted from within. We have people that we have added recently and those that have been with us for 4-plus years. A good rule of thumb for me is, if you believe that the job requirements are highly creative, unique to your business, an area you want to “invent” and spend meaningful founder-time on, then hire the up-and-comer or grow the person internally. They will be more open minded, have less baggage and will be more able to think out of the box.  If you believe you have more to learn from the best-in-class companies in your industry for that function, or if you as a CEO/founder want to spend a little less time on that function, hire for experience.

Hire for Raw Smarts and Intense Motivation: Most start-up journeys involve navigating uncharted waters. I have always made mistakes when I have hired based on resume. Every candidate is only as good as the situation they are placed in. And in most start-ups, that situation relies on versatility, intelligence and sheer (street) smarts. The ivory-tower candidates are better served working in larger corporations or universities than in your chaotic start-ups. Motivation counts as much as intelligence. The ideal candidate is one for whom their success at your company is a defining career moment; where their passion and commitment approximates your own.

Fit Matters: Most unsuccessful executive team members fail because they don’t share the culture or work collaboratively with others on the team. Ask yourself the following question: Would the new exec team member I’m hiring add to or detract from the harmony of the team. If that answer is not obvious, don’t hire them. Run the interview process through your executive team and take the feedback seriously, don’t pre-judge the outcomes.

Master of One Function, Jack of All Others: The standard for our executive team is a clear one. Team members must be masters of the function they are leading (engineering, product, sales, marketing etc.). They must be able to get down to the level of an individual contributor on their team (and answer your hard, detailed questions) and rise to scale it at the same time. Without that, they can’t do the job. They must also be able to add meaningful value to every (controversial) conversation around the exec table. That means Administrative/Finance people need to understand the business. Product people need to understand customers. Customer-oriented individuals need to understand technology. And everyone needs to understand the culture and the business drivers.

Perhaps as valuable are the qualities that don’t matter (except as they influence the above): You are not looking for your best friend; you are not looking for the best resumes; you are not looking for the “silver bullet” whose magical arrival fixes the business; you are not looking for the best financial deal on your hire; and you are not looking to have it be primarily the group of people that helped you get off the ground (i.e. your earliest employees) since the needs of the business will certainly evolve.

In the two years since we have assembled our core executive team, I can say clearly that this is the best senior team I have ever worked with. And I sleep a lot better at night knowing that.

Photo courtesy of “Dragon*Con 2013: JLA vs Avengers Shoot” by Pat Loika under CC BY 2.0

Want to be great? Plan to Overpromise and Underdeliver

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13 years ago, when I was in Business School, I had the chance to listen to a talk given by the legendary investor Warren Buffett.

“The secret to a great marriage,” he deadpanned, “is low expectations.”

As it goes in love, so it goes in business. Most will tell you that the key to success in business is about under-promising and over-delivering. At first blush, it makes sense. In a customer situation, exceeding expectations creates greater customer satisfaction. With investors, exceeding “the plan” creates much less painful board meetings. I get it. Everyone is happier when expectations are exceeded. Here’s the problem though:

An overwhelming desire to over-deliver, creates an overwhelming need to underpromise. And the trouble with under-promising is that expectations have a way of becoming reality. It’s the nature of goal setting. I’ve seen it over and over again. In sales forecasts, it seems like whatever the goal, teams have a way of being within range of that goal. Why do so many Silicon Valley start-ups achieve higher valuations than equivalently situated companies in other locations? One reason is because the expectations of everyone in the ecosystem – investors, employees, and founders, are fundamentally higher. I see that in the pricing of software. Why do some SAAS providers charge $500/month, some charge $10,000 a month and some charge $100,000/month. Sure, a lot has to do with the quality of the product and the market they are in. However, a lot simply has to do with setting the right expectations of “value” with the customer.

Bottom line – expectations have a naturally high correlation with reality.

Now lets map that to start-ups. The best start-ups are about creating the .1% case where you defy all odds to create something disruptive, transformative and dramatically more profitable than anything that is rationally imaginable. So what happens if you’re obsessed with “beating the plan?” You tamp down expectations. You eke your way past that plan and you call it a victory. Everyone (employees, founders, board members) is super-happy in the short term. You might even get a raise or get promoted. The trouble is, you have materially diminished the probability of the .1% outcome.

The great thing about aiming for the impossible is that amazing things often result. At BloomReach, we challenged the notion that we could not sell our first 10 enterprise deals without a marketing launch. I don’t know if we got to 10, but we got pretty close. We challenged the notion that you could not price software on a performance basis. We ended up inventing a new business model in the process.

We set a goal to go live with a large deployment in an insanely short period of time and launched an entirely new product line much faster than we would have had we demanded less from ourselves. Sometimes we missed the mark big time. At times our aggressive release schedules have resulted in subpar engineering designs. Sometimes our insane revenue forecasts have resulted in me having to stand up at Board Meetings to report that we missed our numbers. One of the natural consequences of setting insanely high expectations is that the team can feel like they are “always failing.”

At BloomReach we have tried to address the consequences of BIG expectations in a couple of ways. We try to be straightforward with our team that the expectations are super audacious and internally describe our plans as “The hero plan.” We set OKRs at a level where a score of “80%” is an “on target” score. Anything higher suggests the targets were too low. We decouple people’s compensation from these goals. Pulling off this approach requires a set of investors and board members with an exceedingly long-term vision. We must have the confidence that those board members won’t make decisions based on achievement of short-term, easy-to-meet criteria. It also requires a really aggressive executive team and a super-committed employee base. We are fortunate to have all of those.

I can’t imagine a public company trying to sell this approach. But I am advocating it as a way to get there. Life is too short to under promise. I would rather aim for the sun and hit the moon, than aim for liftoff and barely escape the atmosphere.

Photo courtesy of “Promise, Promise” by Heather Harvey under CC BY 2.0

Entrepreneurs don’t Interview. They Commit.

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I get the call at least once a quarter.  A friend, acquaintance or random person reaches out to me and says:

“Raj, I think its time for me to leave Google (insert household name tech company here).  I need your advice on starting a company.”

The second version of the phone call is from someone who has left their well-paying job and is concurrently interviewing for new ones while “exploring a start-up” and looking for advice on their start-up.

In the beginning I took these phone calls seriously.  I took the caller through the pros and cons of starting a company.  I tried my best to paint an accurate picture of the steps along the journey and the accompanying thrills and challenges.  Pretty soon I realized that almost none of those people ever left that large tech company.  And if they did, they ended up at another one.

Why?

Entrepreneurs don’t interview.  They commit.  But its not for the reasons typically discussed.

The romantic version of the story involves throwing everything to the wind, being the risk-taking, college-dropping-out, dream-believing cowboy that is the stuff of Silicon Valley legend.  The reality is a lot more murky.  The reason you need to commit is because there is no other way truly validate a serious start-up opportunity.

Starting a company takes intense focus and uncertain timeframes.  Unfortunately, it isn’t like being an investment manager.  You don’t get to pick 50 ideas and experiment with a whole bunch of them and let the best one win.  It is an inherently linear pursuit.  A ton of ideas look really good at 30,000 feet and terrible when you get up close.  And the only way to get up close is to dive deeply into your proposition.  Unfortunately that takes 100% of your working hours (and many non-working ones).  Of course, the idea is the easy part.  Having the right team, driving to execution, raising money, validating your proposition, prototyping your product, getting buy-in from your family are important steps.  One hundred things have to go right to start your company – and then you’re just at the starting gates.

In my case, I went through this in the two and a half years before starting BloomReach.  I left my job at Cisco expecting that it might take six months to start a company.  Two and a half years and more than a half-dozen serious start-up explorations later, I started BloomReach.  There were plenty of reasons for the long run up.  Markets that turned south.  Teams that did not gel.  Ideas that sucked.  Prototypes that I hated.  I tried to keep the bar high, believing that if I was going to pour my life into something, it had to work.

During those “two and a half  years in the wilderness,” I had a young kid and a super-supportive wife.   Not everyone takes two and a half years to get to the starting blocks, but the variance on that time frame is massive.

That brings me back to my friends from tech companies.  For highly-qualified individuals, getting an interesting job is A LOT easier than starting a company.  So the time frames never line up.  A person concurrently looking for a job and starting a company will be faced with an inevitable choice – a highly certain, well-paying, pretty cool job versus a highly uncertain, not well-paying dream that is nowhere near fleshed out.  That’s because getting a job is a deterministic endeavor that likely completes in weeks (maybe months).  Starting a company has no defined timetable.

The only way to make that choice is to never put yourself in a position to make it.  If you truly want to start a company, dedicate yourself to that and only that.  Otherwise, kiss your entrepreneurial dreams goodbye.

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