Loss Aversion is a Path to Mediocrity

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The story of great companies degenerating into good ones is a common one. What happened to Nokia in the cell phone industry or Dell in the computer industry? What happened to Circuit City or AOL? Even closer to home, what about companies that at one time were going to disrupt the world and went from almost great to truly mediocre? Groupon? Zynga? While different aspects of business strategy and execution were certainly at work, the one consistent factor across companies who were “almost great” or “formerly great” is that they develop a culture of loss aversion. In a strange way, the most risk-seeking of individuals, start-up entrepreneurs, can very quickly forget the greatest asset they had in building their companies – a willingness to take irrationals risks, and tolerate losses if they fail. They can quickly become loss averse and set their companies on a path to mediocrity.

Where does loss aversion come from? The author Daniel Kahneman in his book “Thinking, Fast and Slow” writes at length about loss aversion. One of his key observations is that human beings behave in irrationally risk seeking or risk averse manners (versus the probability-weighted expected value). If presented with the choice of winning a $1,000 with a 10% probability or making $120, many would be risk seeking and go for the $1,000 choice (though the expected value is lower). With losses, the opposite is true. If there is even a small chance they may lose what they have earned, people will go to great lengths to protect against the loss. They will buy insurance for exorbitant amounts. Companies will make bad long-term choices in favor of shorter term ones to protect against missing their quarterly earnings and taking a loss on the value of their stock. They will be loss averse.

The interesting thing is that many of the best companies start by being risk-seeking. They dream of amazing things – they take risks on markets, people and products. They take risks that most existing companies would not deem feasible and when those risks pay off, they pay off in significant gains. And yet, as those companies become more successful they become fundamentally risk averse. That risk or loss aversion manifests in so many ways: they under-invest in new products; they are unwilling to hire people with less experience; they spend money on risk-mitigation systems; they build in all kinds of cushions into their forecasts and they take their marketing in a conservative direction. Why do the most risk seeking of individuals, entrepreneurs, become loss averse? For a variety of reasons:

  • Short-term gain, long-term loss: As companies grow, the consequences of loss aversion are often not felt immediately. They are felt over time as investments become non-productive. But in the short term, it can often feel like the conservative decision is the winner. The experienced hire might not be the right one long term, but often looks better in the short term.
  • Fear of losing everything: It’s so hard to build a successful startup, that the pain of losing everything is nothing short of emotionally scarring. Aspiring to greatness, seeing that goal come into view and then failing is a devastating fear that pushes many leaders in a more conservative direction.
  • Baggage of success: Even a reasonable modicum of success comes with baggage. Scaling the product seems to need an unending number of people. Scaling sales and marketing seems to need an unending amount of investment. Scaling the operations can feel like the hard 20% that takes you from 80% “good enough” to 100% “great.”

We try hard at BloomReach to prevent loss aversion from naturally setting in (and don’t always succeed). We allocate a certain percentage of our R&D efforts to more experimental projects. We identify certain roles where we are willing to promote people without the experience for the role. We establish a cultural value in “thinking” – and promote out-of-the-box thinking in a range of areas. We actively have conversations about whether or not we are making the right trade-offs between “innovating” and “scaling.” We discuss failure openly. We try to ensure that the short-term choices we make are leading us to the long-term destination we are trying to reach. It gets harder and harder to make these choices as we grow and scale. And yet it becomes ever more important. Loss aversion seems to compound as one grows. Each individual becomes loss averse. Each team inherits each individual’s loss aversion and layers on a new layer of it. Each function hedges on the other functions, feeling like they cannot take risks without the cooperation of other functions. And then the CEO and founders inherit all of that loss aversion and add a new layer of conservatism for presentation to the Board and shareholders.

Loss-aversion is among the most corrosive behaviors at a startup that is aiming for significant impact and growth. The road to mediocrity is paved with a thousand “rational” decisions. Lets make sure we all make a couple of well-timed irrational ones.

Image from Risk-Onyx Edition by Derek Gavey licensed under CC by 2.0

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The Perfect Board Meeting

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The board meeting needs re-imagination. At most companies, board meetings are either a source of angst for entrepreneurs and investors alike or a source of boredom for those who sit through hours of administrative minutiae. They are either too eventful or not eventful enough. Board meetings are an important communication vehicle and an important force in galvanizing the founders and the management team to step back and evaluate the business from the outside-in.

The perfect board meeting is a problem-solving session. It is a place where smart people with the “inside view” (the management & founders) and people with the “outside view” (investors and independent board members) can come together to solve the thorniest problems in a positive manner.

But lets start with the worst kinds of board meetings:

  • “Peacock” board meetings: The peacock board meetings are spent with each individual around the table showing off. Investors may show-off how much pattern matching capability they have. They may be positioning against each other. Management shows off what an amazing job they’ve done. Neither party has a conversation, and the parties leave keeping a mental score of who won. Peacock board meetings are not only counter-productive, they set up the kind of adversarial relationships that are ultimately destructive.
  • “Show your work” board meetings: In the “show your work” board meetings, every member of the management team comes through and fires up their powerpoint presentation. By the end of the session, everyone is bored and it feels like Physics 101 in a lecture hall of 500 people. No one gets anything out of the exercise and reading the textbook would have been just fine. In these meetings, everyone leaves with a lot of data, but very few people leave with any wisdom.
  • “Administrative” board meetings: Many public boards have become largely administrative – focused on stock compensation plans and auditing guidelines. The boards no longer focus on the key strategic issues of the time. Instead they are focused on liability-protection and ensuring that the company doesn’t screw up, not concentrating on what it takes to enable the company to succeed.
  • “Beat-down” board meetings: In the beat-down board meetings, members spend their time beating on the team. It becomes a venting exercise for the investors and an exercise in spin for the management. Beat-down board meetings destroy trust and ultimately cause decisions to be made for political reasons rather than value-creation reasons.
  • “Tangent” board meetings: Tangent board meetings involve one or more board members hijacking the agenda to discuss a tangent. Often that tangent involves discussing something largely peripheral to the prospects of the business for really long periods of time. Tangent board meetings cause others in the room to check out and represent a terrible waste of time.

So lets get to the perfect board meeting – a meeting between equals, engaged in helping solve the most important issues of the day. The meeting may start with minutes and resolution approvals, but it moves on quickly from there. Next up is a reminder of what was discussed previously, how that ties into today’s agenda and what key decisions have been made by the company. Remember, board members are busy and on a lot of boards. It’s your job to remind them what was discussed and agreed upon. The key performance indicators and operating highlights are discussed – but not in a lot of detail, because they can be sent out in advance. It is important, however, that you not assume that every board member has read all of your material in advance. They likely haven’t; and a common baseline is needed to have a valuable strategic conversation. If you’re spending more than half your Board Meeting baselining, however, that’s too much.

Board members will typically care a lot about sales metrics, revenues, the executive team and financing. You’ll feel like you’re spending a disproportionate amount of time on those topics versus other things that you may care equally about (like product, engineering, culture or marketing programs). Get used to it. Your board meetings are not intended to be balanced portrayals of your mental space. The core of the board meeting should be centered on key strategic questions that you are struggling with: Which market to go after? When to raise money? What are the critical hires to make? How to deal with a macro threat? These are tough questions to discuss with a team of people who are not thinking about them every day the way you are. You will feel like you’re doing a lot of education. That’s OK. If you tee up the discussion well, you’ll get a forest-from-the-trees perspective from a number of the people in your boardroom. They will ask you questions that make you re-evaluate your priorities and your intuition. The best board members will not tell you what to do. But they will offer strong opinions. It’s your job to consolidate those points of view, arrive at a decision and ultimately communicate it back to them (except for the small number of things that actually require a board vote).

The best board meetings are passionate, respectful and inclusive. They are open to the key leaders in the company. They allow for disagreement without personal attacks. The best board meetings are also stage specific. I remember our first board meeting 6 years ago with Ajay Agarwal from Bain Capital Ventures. It was entirely focused on hiring engineers. We’ve since had board meetings focused on people and culture, or financing strategy or go-to-market productivity metrics or strategic priorities or vertical expansion. The topics have to reflect where you are as a business. The best board meetings are continuations of conversations – ideally, you’re speaking to your board members with enough regularity (typically more in the early life of a company than later) that they are not re-learning the business every time.

The best board meetings are brutally honest about the challenges the company faces – typically surfaced by the founders/management and not the investors. The best board meetings keep to the agenda and avoid the many rat-holes. The best board meetings have some amount of cheerleading built into them. Company-building is a marathon and every good marathoner needs cheering along the race. The cheerleading helps the investors stay positive through difficult times and more importantly, it will help you and your team feel like you are all on a special journey. The best board meetings are forcing functions for internal communication and re-evaluation.The process of identifying important topics and preparing materials should cause you to keep perspective on the company’s priorities in the middle of the inevitable operational fires. And they provide an opportunity to reflect those priorities back to your larger team during all-hands meetings or through other company communication vehicles.

By no means has every board meeting we’ve conducted at BloomReach been perfect. I can remember plenty where we were guilty of the “show your work” Board meetings. But we’ve gotten a lot better.

And it goes without saying that the prerequisite to the perfect board meeting is perfect board members. Pick wisely and the rest is learnable.


Image from Board Meeting- Franklin Canyon by tiarescott licensed under CC by 2.0

10 Steps to make sure you next Board Member doesn’t Destroy Value

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As part of my work with Founder Collective and angel investing in general, I often get calls from entrepreneurs asking “who should I take money from.”  It’s a fairly innocuous question but one that most entrepreneurs get pretty wrong.  The usual criteria for venture-capital-firm selection (and the likely addition of an external board member) goes something like this:

  1. Maximize valuation.
  2. Maximize valuation from as good a brand name firm as possible.
  3. Maximize valuation from as good a brand name firm as possible and make sure that the selected firm/partner adds value to your business.

The problem: those are the wrong priorities.  The No. 1 criteria for the selection of your next investor and/or board member should be: can I answer (with 100% confidence) that my new partner will not destroy value in the firm I created.  Here’s why the question makes sense:

The success or failure of your entrepreneurial venture pretty much comes down to you and your team.  If you succeed, it’s because you and the team nailed it. Maybe the failure was the result of your own screw-ups.  Maybe it was driven by macro events.  Either way, it comes down to you.  On the other hand, investor impact on your venture is highly asymmetric.  If you succeed, your investors may have added some value, but its highly unlikely that the value they added was even close to being among the top five contributors to your success.  Of course, their capital was helpful and important, but in a world of capital abundance for good companies, it likely wasn’t their capital that made the difference.  On the other hand, investors can absolutely screw up your company.  They can lose faith in it during bad times and in the tight VC community, that perspective can get picked up by potential future investors – accelerating your demise.  Investors can force an exit for reasons that are driven by personal considerations (like wanting to put a “win” on the board), even when that may be at odds with maximizing the longer term potential of your firm.  They can create politics and become high maintenance board members – distracting you from core execution. I have seen board members bail on their founders, or recapitalize the company in their favor, or side with one part of the team over the other, or fail to approve routine investments and paralyze execution. The horror stories are many.

And yet there is nothing fundamental you can really do to protect yourself legally. Once your potential investor is a major shareholder, they have the ability to do enormous damage within the confines of even the most iron-clad shareholder agreement.  Which brings me to the golden rule of board member selection: validate that you can totally trust your next board member – even in the most difficult of circumstances.  First make sure there is no chance they destroy value; then optimize for price, brand and value-creation.

How do you validate that you can trust your next board member if you weren’t college buddies or business colleagues with them? Here are 10 steps to ensure your next Board Member will not destroy value:

1.  Don’t run a shotgun investment process.  Get to know potential investors before you ask them for money.  And just as they will likely disqualify you if they believe you’re not the right leader or team, disqualify them if you feel like you’re not on the same wavelength.  Do it pre-fundraising; when you’re not in the heat of the deal.
2.  Ask your angel investors who they trust. They’ve likely seen many more deals than you have and they have a vested interest in protecting their investment.
3.  Talk to other entrepreneurs who have taken money from your potential investors (ask them for references of companies where things went badly). Entrepreneurs can be pretty candid with other entrepreneurs.
4.  If you can, err on the side of investors who have proven themselves.  Minimize discussions with associates or principals.  Much of the “bad behavior” comes from individuals within the firm that don’t fundamentally have career security or partnership pull.
5.  Think about how your potential board member conducts himself or herself during the investment process. Are they overbearing? Are they largely unengaged? Is the due diligence painful or are their questions genuinely good ones? Are they transparent?  Do they seem open to your perspective or rigid in applying their pattern-matching experience?
6.  Invite them to meet your team and ask your team members what they think – often the team can see the bigger picture because they have not participated in 15 investment pitches.
7.  Stick to reputable firms if you can – you always want to take money from people who worry as much about their reputation as you worry about yours.
8.  Meet your future board member over dinner or a drink outside the confines of their office or yours.  Do you find yourself having to “spin” as you talk to them (bad sign) or can you imagine them being your first call when the going gets tough (good sign)?
9.  Don’t get bullied into artificial timelines. No reasonable investor that wants a 10x return walks away from a term sheet because of an artificial deadline. Take your time and do your diligence.
10.  Trust your spidey sense. Pay attention to the small things. Are they throwing in last minute diligence items late in the process? Are they introducing you to a new partner after they told you the partnership was on board? Are they displaying data analysis paralysis?  Are they failing to deliver on an intro they said they would make?

I have the good fortune of having an amazing group of investors and board members at BloomReach, from Bain Capital Ventures, Lightspeed Venture Partners and NEA.  In addition to not being value destroyers, they are tremendous value creators – they’ve helped with recruiting, thinking through strategic forks in the road, customer introductions, challenging our thought process and picking us up when times are tough.  I can count on them for crisp advice and yet also count on them to trust us to steer the ship.  I wish that kind of partnership on all of you.

Image from explosion by Talid Khatib licensed under CC by 2.0

How do you build switching costs into your business?

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I talked about whether network effects were overvalued in my last blog post. I talked a lot about the value of those network effects in increasing switching costs. Yet most of the examples I used were companies like Uber, Facebook and Microsoft. What about enterprise businesses? Many of the best enterprise businesses in the world have extraordinarily high switching costs, even without significant network effects. It goes without saying that any strong business needs to deliver significant value to retain customers, but beyond that, how do you go about building switching costs into your enterprise business? In this post, I will walk through five kinds of switching costs – Level 1 through Level 5.

Let’s start with why switching costs are important. They are about increasing the predictability and lifetime value of your customers. As you increase the switching costs, the lifetime value of your customers increase, and therefore your ability to invest in acquiring those customers at a higher cost increases with them – feeding the virtuous cycle of more customers, more revenue, more growth and more ability to drive growth. High switching costs are often (though not always) accompanied by high customer satisfaction. If your customers stay with you, their happiness will transfer over to help you sign more customers. If they are all switching out – prospects will question the value of your solution.

I believe there are multiple switching-costs levels:

Level 1 (“My lawyers will sue you if you leave me”): Level 1 companies build switching costs contractually – by signing multi-year contracts with onerous termination provisions. Many legacy software businesses and network providers sign multi-year agreements that prohibit them from switching away from the antiquated platform they have. Customers may not like the software – but the switching costs are so high that they stay. Level 1 switching costs don’t last – they just buy time until the contract expires; and they are increasingly hard to achieve in a SaaS world.

Level 2 (“I love you too much to switch.”): Emotional buy-in is definitely a form of switching costs. Not many enterprise products have the kind of emotional tie-in with their users that Consumer businesses like Apple have, but there are some enterprise products that have the “love” factor. Tableau is one such example – the Tableau user base loves the empowering nature of data visualization. Adobe’s creative suite products elicit similar responses. Graphic designers and other creative artists swear by the suite. You know you have a L2 business when your value proposition doesn’t require an analytical frame of mind to justify your product’s purchase. People buy it because they love it.

Level 3 (“My data and/or business logic is in your systems.”): Salesforce has Level 3 switching costs. The functionality of Salesforce CRM might be good, but even if someone else came along with a better product, the data investment that most companies have made to make Salesforce their customer data “system of record” is significant. Amazon Web Services has a similar story — having caused businesses to leverage Amazon as the data store for their applications makes it painful to switch. Replicating and migrating the data is possible, but just not worth it unless the service is really subpar.

Level 4 (“Your business depends on my business.”): Google might be the best example of this. Advertisers don’t have to love Google to stay with Google. For many of them, their business depends on Google. No CMO wants to show up with plummeting revenues because they turned off 20% of their customer acquisition, even if a marketplace (along with decisions Google makes) sets the price of their relationship. Oracle’s database business or SAP’s ERP business are a different form of “dependency.” Many of the world’s largest businesses run their entire operations on Oracle and/or SAP. Sure, they could switch if a better solution comes along, but the business disruption and the personal career risk would be so large that the threshold for switching is extremely high.

Level 5 (“You are my platform.”): The word platform might be the single most misused phrase in technology. There are, however, true platform businesses that enterprises build enormous amounts of business process and application logic on top of. Platforms may add value because of the network of applications that are built on them (that then add value to new applications) or because the key competitive advantages of the enterprise are tied into the platform they are on. Intel is a prominent example of such a platform. When a server manufacturer decides to build on the Intel architecture, you can assume that switching chipsets isn’t happening anytime soon. The distinction between L5 and L4 is subtle. In L4, my business depends on your business. In L5, my business and your business are so intertwined that the two have become indistinguishable.

So how should a startup think about these various kinds of switching costs? First, by caring about them. Too many startups are too focused on customer adoption, and too unfocused on switching costs. That’s just deferred and increased pain. Often the software that’s easiest to adopt, is also easiest to throw out. It might be worth having a product that has a longer sales cycle to materially increase switching costs. Second, the vast majority of startups aspire to get to Level 1-2, and rarely think through a path to achieve L3-5. Often, the longer one waits, the harder it can get to achieve that path. Finally, the key thing to remember about building switching costs is– if it makes sense for a customer to switch, they will switch. Obvious, right? Too many entrepreneurs and executives are too steeped in their own Kool-Aid to put themselves in the customer’s shoes and ask themselves the hard question: Is my product really worth it?


Image from old light switch by Paul Cross licensed under CC by 2.0

Are Network Effects Overvalued?

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“In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people.”

-Wikipedia

Network effects have always been the utopian goal of any technology business. Unlike the typical case of diminishing economies of scale – where the cost of acquiring the marginal customer increases as you saturate the early majority of your market – network effects create increasing economies of scale. The incremental user will often pay for access to a bigger network –so margins actually can improve as user bases grow. Network effect “lore” has become the dominant paradigm for start-up building in Silicon Valley.

Everyone knows the story of Facebook vs. MySpace. MySpace had a much larger user base but Facebook focused on the “Social Graph” (and a much better product) and ultimately dominated the network. Paypal followed the precedent of Visa and Mastercard and acquired tons of merchants, believing in the network effects of more merchants leading to more users leading to more merchants leading to more revenue. Most recently, Uber has raised $1.4 billion of capital on the belief that it needs to grow its user base, provider base and served cities to have the largest two-sided marketplace around – on the assumption that the network effects this creates will ultimately create world dominance. eBay understood this very well – optimizing for maximizing the number and diversity of listings and buyers and ultimately dominating the auctions market. Microsoft did it by building the Windows platform and acquiring both developers and users on the platform – crushing Apple in the early years.

The recipe seems simple right?

  1. Find a possible two-sided market.
  2. Invest aggressively to create early supply and demand.
  3. Identify what it would take to have hundreds of millions of consumers, suppliers or other value-creators enter the marketplace.
  4. Raise insane amounts of money to be able to acquire those hundreds of millions of market participants.
  5. Let your network effects turn you into the monopoly that you deserve to be.

Interestingly – the desire to create “network effect” oriented businesses has particularly accelerated as the costs of distribution on the Internet have decreased. It now seems possible (particularly given that capital availability has increased) to actually acquire hundreds of millions of market participants in a way that seemed impossible previously.

But what if those network effects are just fundamentally overvalued? What if the same factors that make it possible to build a network effect, also make it possible to break a network effect?

The core assumption underlying network effects is that switching costs for market participants grow as the size of the network increases. It’s hard for a user to switch their windows laptop for a Mac, because all of the applications they love were written for Windows. One can’t get off the iPhone because all of your devices, music and videos were built for it. It’s hard to get off Facebook, because all of your friends are on it. But maybe those switching costs are fundamentally overvalued – and that actually, its just as easy to get large numbers of users to switch to a new service (even for a network-effect driven business) as it was to acquire them.

Ultimately, users had no trouble switching from Windows to Macs – when Macs became clearly better. And while iPhones had the early lead in the smartphone category – Android has 62% market share versus Apple iOS which has 38%. And empirically – if the Facebook network effects were that strong and switching costs were that high – why would Facebook have paid $20 billion for WhatsApp and $1 billion for Instagram? Why did anyone even start using WhatsApp or Instagram, if the network effects were really that strong? Sure, the use cases and core users of those services might have been different from Facebook but they are adjacent enough that plenty of people would have suggested that the network effects of Facebook would carry it into those use cases much more naturally than a new start-up could emerge.

Switching costs (even for well formed networks) are just fundamentally weaker in the Internet age. While networks of developers, users, friends or merchants might provide substantial initial value, they can ultimately be defeated by a much better product. Pre-Internet, it would have been impossible for an amazing new product to get sufficient distribution to defeat a large network-driven competitor. Today, that new product has substantial access to capital and several billion Internet users that it can reach without ever opening a second office.

Lets do a thought experiment on Uber – today’s infallible star. The theory is that Uber has already dominated the transportation industry, building an amazing network of drivers and users so that no one will ever beat them. But don’t bet against innovation. What if I developed the following strategy? I decided to build the world’s best car service for the city of San Francisco? I provided self-driving cars so that I didn’t need to worry about their network of drivers and had a dramatically reduced cost structure. I had amazing service in my cars (super nice food, drinks, seats). I made the GPS actually work to a level of precision that Uber didn’t. I made the app even slicker and created a loyalty program of my own. I raised enough capital so that I had a sufficient number of cars and an even shorter wait time than Uber. I donated some of my Company’s proceeds to San Francisco charities to foster local buy-in. I focused my marketing maniacally on the communities of people who take cars most often– just in San Francisco. Suppose it was just a much better product for the San Francisco market? What would the switching costs be for a user to download Raj’s Car Service app versus Uber? Would that user be unwilling to do so because Uber has hundreds of millions of users or a large base of drivers?

The ultimate kryptonite for a network-based business is having a better product in an adjacent, but bigger market. Lets take eBay and Amazon. In 2001, as the Internet bubble died a temporary death – Amazon was supposed to be dead and eBay was the clear winner. They were the ones with the network effects from auctions (and no inventory costs). Fast forward to 2014, and Amazon is worth twice as much as eBay. Amazon had the kryptonite. They had a better product (more selection, fixed prices, great fulfillment, great customer service), in an adjacent market (e-commerce) that was so much bigger than the auctions market. Kryptonite.

The quest to build competitive advantage, economies of scale and switching costs is a worthy goal for all of us in technology. But beware the next time someone pitches you an idea on “the Uber of pets.” Ask them why they are trying to build that network? And beware of the trap of investing massively in building the two-sided network – only to have it marginalized by someone with a better product.


Image from network by Simon Cockell licensed under CC by 2.0

Your Office Space is Who You Are

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“Be yourself; everyone else is already taken.”

                                            – Oscar Wilde

Shortly after I graduated from college at Princeton I went to interview at Morgan Stanley in New York City.  Outside Morgan’s Times Square building, I saw the financial firm’s big neon sign – right next to a giant stock ticker and a few flashy ads for sitcoms.  As I walked into the opulent lobby, I found myself getting progressively more uncomfortable.  It took me a really long time to get through security and as I went through it – I felt like I was dealing with a bouncer at a nightclub.  The elevators on the way up were packed. As I walked into the conference room for my interview I looked around.  There were a number of pods with exhausted-looking analysts in cheap suits surrounded by super well-groomed partners working in oak-adorned offices that had soundproof doors – everybody in his or her (rarely) own place.  The conference rooms were decorated with huge glass mementos of a financing event or an M&A event.  They call the mementos “deal tombstones,” appropriate because no one there cared about the prospects of those companies once the deals were closed.  I got the offer, I didn’t want to work there.  I reflected on why that was – it was the office space. It wasn’t who I was.  Too opulent.  Too overstated.  Too hierarchical.  Too contrived.  Too formal.

In a world of increasing virtual communications, ironically, your office space is as important as it ever was.  It represents everything about you – your values, your relationships with people, the kind of people you want to recruit and the priorities you have.  It merits careful design.  We’ve gone through five offices at BloomReach – the first in Palo Alto at the Plug & Play and the next four in downtown Mountain View, culminating with our headquarters at 82 Pioneer Way.

Our office represents who we are – it’s open, reflecting our belief in open communication; its got BloomReach branding in its colors and its lobbies; it has a technology flavor to it with the Web Relevance Engine pictorial on the wall. It has a lot of individualism, reflecting the heterogeneity of the team. Teams and executives are interspersed reflecting the “we” orientation of our culture.  We designed it with the values we believe in: We believe that everyone needs to have a stake in the culture and therefore we created teams to decorate all of the conference rooms and their unique creativity is reflected in the spirit of each one.

We have the requisite foosball tables, ping-pong tables, recreation room, the famous BloomReach painting – and we have mementos charting our young history.  We have the anniversary wall, recognizing the many people who have grown up at BloomReach. The lunch room is bright and well integrated into the rest of the office – providing a place for people to meet up for casual conversations.  The conference rooms are named consistent with our “Get Found” motto.  White boards throughout are intended to encourage our “think” value.  The global clocks represent the global nature of our business.  Basically, the layout, design and decor reflects who we are.  I can see each of our cultural values – “truth”, “we”, “think”, “own” and “no drama” reflected in the office someplace – all without explicitly planning to do so.

On a New Year’s Day two years ago, I walked into our office to see that low-height cubes had been put up.  The idea was to provide more power outlets and more private workspace.  I don’t usually veto things but I exercised my veto on that New Years Day.  Productivity matters, but I felt that energy and openness mattered more.

All great companies have iconic office environments. Facebook just feels like a “move fast and break things” place.  Morgan Stanley was likely designed with the value system that made it one of the white shoe firms on Wall Street.  Victoria Secret has beautiful models on the walls. Urban Outfitters has the cool chic vibe that you’d expect from a company based at the Philadelphia Naval Yard.

Why do office environments matter so much?  They are a scalable representation of your values. You can’t speak to every member of the team personally, but the vibe of the office that your team walks into sends a message to everyone.  I’ve had candidates appear either super excited or super nervous walking into BloomReach. The office space helps with self-selection of those candidates. It also reflects the tradeoffs you care about.  Office spaces are a pretty good indication of whether the Company you’re interviewing with or selling to is a good choice for you.  I had one sales leader tell me “we shouldn’t sell to Companies that serve coffee in styrofoam cups – they probably can’t afford our software.”  That is a pretty good qualification criteria.


The diversity of office space in Silicon Valley is telling. You have everything from the big campuses at Cisco and Oracle and Google, to the non-descript systems startups with tall cubicles, to the uber-chic urban offices in San Francisco.  Walking into those offices – you see the value system of the founders and the leaders.  Designing the identity of your office should not require more money – in fact if you’re hiring branding consultants to design it, it is by definition not who you are.  There is no wrong answer in designing it – just make it authentic.

Hire a Sales Ninja First, Sales Samurais Later

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Most early stage startups hire sales people way too early.   In fact, in this world of rapid iteration, the impetus to hire your first salesperson fast is even greater.  Your product will only achieve product-market fit with customer input.  Where do you find customers if you don’t have salespeople?  Your first couple of hires might be engineers, but you should probably go hire a salesperson pretty quickly, right?

Wrong.

Actually maybe you need to hire a sales leader or manager, right?

Double Wrong.

In the early days of iteration on product, it absolutely makes sense to get customers involved.  Once you have a hypothesis on both the BIG problem you want to solve and the way you want to get started in that market, you need customers both to validate the problem and to iterate with you on the solution.  At BloomReach, we launched on our first pilot customer in July 2009 not even three months after we’d established our four person engineering team.  Signing up an early customer was an essential way to drive towards execution and away from debate.  It clarified priorities in a way that nothing else could have.  Over the course of 2009, we signed up five-plus pilots and monetized our first paying customer in November 2009.

Where do you get that initial cohort of customers and who gets them?

Ideally, you (the founders) or your product manager (general business person) get them.  No salesperson worth his or her salt is interested in selling your half-baked idea with little to no cash incentive.  You use your network.  You cold call.  You show up in potential customers’ lobbies.  You go to industry trade shows and hang out as people exit (to avoid paying exorbitant conference fees).  You use your school ties.  You do anything and everything to get meetings with the right people.  Then, you pitch your product to your prospect in a way that is both transformative and realistic.  It sounds something like this:

“I am building a product that will drive $X million in revenue, or $Y million in savings or make your life much better in Z way, I’d love you to try it.  If you partner with me on this and we succeed together, we will potentially create an industry-defining transformation in your business.  Of course, we will have plenty of bumps in the road because this is an early product, and we’ll work through those together.”

If your pitch is compelling, the early adopters will self-select in.  You’ll have an initial set of customers to iterate with – all set-up with the right expectations.  You may not be the best salesperson in the world, but you know your vision.  You (likely) are one of the few people to believe in your product.  And your job is not to sell a static product, it is to be part product manager / part salesperson.  The learning around the product’s viability is actually a lot more important than the transactional value of the sale.

Your product needs to get to the point where it is very interesting to 5 out of 10 early prospects in your target segment.  That number will drop materially once you scale out sales and ask for real money.  You may ultimately hire better salespeople than yourself.  However, they are not likely to be able to adjust the proposition on the fly to converge the product with the market and therefore you will miss out on valuable product-shaping opportunities.  In BloomReach’s case we hired our first salesperson in July 2010, after we had already won 10 customers (many of them turned out to be outside of our desired target market but they enabled us to find a sweet spot).  At that point, we hired our Sales Ninja – Hank Lemieux.  As Historian Hanawa Hokinoichi writes of the ninja’s key role:

“They travelled in disguise to judge the situation of the enemy, they would inveigle their way in the midst of the enemy to discover gaps, and enter enemy castles… always in secret.”

This is in contrast to the better known Samurai – many of whom you will need later in your business’ lifecycle as you try to scale.  Samurai are all about their strict rules of honor and combat, much more akin to the “scaling-oriented” salespeople you will need later.

I met Hank at a Tapas restaurant in Mountain View, Calif., and knew by the end of lunch that he was the right guy for us.  He was charismatic, asked a ton of incisive product-oriented questions.  He was not initially focused on the compensation or the position.  He was excited about the problem. He was excited about the technology.  And he was ready to bet on his own ability to take an immature technology to market.  He was a player/coach – happy to coach but unafraid to play.

He didn’t have many questions for me about the sales process (good, because we did not have any) or about average deal size.  Fundamentally, he understood that it was his job to create those, not to expect those out of an early stage startup.  He was all about creative solutions to problems.  He was inherently optimistic.  He really focused on the key people involved and was motivated by market creation.  At the same time, he was a salesperson, not a product manager.  He knew how to qualify, how to probe and how to lead a customer to a logical conclusion that ours was the product to buy.  And he was not afraid to talk about money.  Hank is in a role today as Head of New Product Sales at BloomReach.  He is as effective at bringing our new products to market today as he was then at helping me build out our early sales efforts.

Your Sales Ninja is there to acquire early customers by any means necessary and then to put enormous pressure on your product/engineering team to deliver.  The interactions between your product teams and your Ninja should be tension-filled at times.  He/she is there to represent what it takes to sell and help you develop a repeatable set of processes that can allow you to scale through Sales Samurais.  That does not happen if he/she does not crisply articulate what is/is not working in the market and what it takes to sell.  Without that, you are not ready to sell in a repeatable fashion.

The characteristics of your Sales Ninja are vastly different than that of the Samurais you will hire later, or even your eventual sales leader.  If you hire your Samurais too early, they will burn out and leave you.  And you won’t know if it was bad selling or bad product that doomed you.  If your Ninja sets things up properly, you will be ready to take the market by storm.

Image from Ninja_2 by Jeyhun Pashayev licensed under CC by 2.0

Do Financial Plans Matter in Tech Startups?

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In this world of go-big or go-home startups, it seems trendy to focus on the product, focus on the user and focus on the long-term platform you are building.  All of that is super-important.  Interestingly, there is very little conversation on the financial plan.  In the old days, the financial plan was the heart of the business plan that you raised capital on.  In the days when Silicon Valley actually had a bunch of startups working on “silicon,” costs mattered. It wasn’t as simple as spinning up a couple of Amazon EC2 instances and hiring a few developers to get started.  As capital has become more available, startups’ costs have plummeted, and the potential outcomes have become even larger, the question is, “why should any early-stage entrepreneur pay any attention to their financial plan?”  If the product works, money is always available.  If it doesn’t, you’re dead anyway.

It is true that as part of the seed and Series A pitch, financial plans are probably an after-thought to any savvy entrepreneur or venture investor.  You barely have any data with which to project your business, so why should anybody trust any of the numbers you have in a deck?  At board meetings in your company’s early days, reviewing progress against the financial plan when product/market fit isn’t really even there feels totally at odds with reality.  The role of the financial plan isn’t primarily about fundraising or external reporting.  It’s about helping you chart and run your business.

We had a financial plan at BloomReach pretty much at the founding of the business (when the company was just two of us).  Here’s an excerpt from our fundraising deck in February 2009:

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One and a half years later, we pretty much hit or exceeded all of those milestones and showed up to raise our Series B ahead of our plan.   In the fall of 2010, we raised our Series B with a clear 3-year financial plan and materially exceeded those projections by 2012.  While good products, good selling, and good execution helped a lot, our financial plan played a key role in helping drive BloomReach to achieve great things. From the day of the company’s founding, it was always something that we measured ourselves by. Goals have a way of turning into reality.  Even though we were only two people with pretty much no product and no business model and no customers, simply willing the revenue to occur by putting it down on paper, helped it occur.

Start-up financial plans can play a couple of key roles and really matter:

  • As the company grows, the plan helps focus the team.  Nothing speaks to engineers and other analytical individuals like numbers and having the financial plan really drives consistent goal-setting and priority-setting.
  • It sets a culture of caring about revenue.  Believe it or not, there are many early-stage businesses that don’t obsess about revenue (a small number of them because revenue isn’t what matters most then, but for many just because they are poorly run).  Putting the financial plan out there commits you and everyone else at the company to revenue.
  • Trade-offs become clear. No financial plan in its early days is likely to be valid for very long, but it gives you a map to your destination.  If you find a better path, or encounter a new obstacle, it forces you to revisit and edit your map.  It drives home the tough trade-offs in dollars and cents.
  • It sets you up downstream for the all the operational and financial discipline you need to raise money and build a much bigger company:  Because you’ve done it from the early days, it does not feel like a new muscle you need to build when the time that you really need a robust financial plan comes.

In most software businesses, there are only two key numbers that matter in your financial plan – revenues and cash.  Spending a ton of time thinking about the trade-offs between revenue coming in and cash going out is a worthwhile use of a sleepless night or two.  Revenues come naturally to most people in this growth-obsessed environment.  But take the cash number seriously.  Remember that cash buys freedom to fail one more time and being too aggressive about spending cash just means you’re likely to be at someone else’s mercy before you get enough “at bats.”  At every point in BloomReach’s fundraising history we have had about 80% of the cash left from the prior funding round, while seeking the next round – all of which makes fundraising a lot easier. I attribute a lot of that to thoughtful financial planning.

You can take an intense focus on the financial plan too far.  Certainly don’t let the plan be the enemy of good decisions.  Spend money outside of your budget if it will drive a meaningful return.  Choose to miss your plan if you’ll create more long-term value doing so.  Hire a lot more, or a lot fewer people if it makes sense to do so.  Remember, the financial plan is just your GPS system. Don’t hesitate to take another road if there’s an accident in front of you and  you see a shorter path to your destination.  Just be sure to adjust the GPS as you go.

Image from Numbers and Finance by Ken Teegardin licensed under CC by 2.0

The Best Days in a Founder/CEO’s Professional Life

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There are a ton of great days that come along with both founding a business and leading a business.  While the lows might be really low, there is no greater professional joy that creating and building something substantial.  Here are some of the best days:

• The “Firsts:” The “firsts” are awesome. The day you make your first hire is a day of affirmation.  Someone thought your idea was good enough to put their career in your hands. The day you ship your first product, you feel an immense sense of pride for seeing your team deliver on v1.0 of your vision. Your first “user” or “customer” shows you that at least one person believed that you built something of value. The day an investor closes on your first round of external funding validates that people will not only put their career in your hands, but their money, too.  Everything about celebrations at a startup seems to be about “firsts.” So much about what we try to do at startups is create the future; and what better way to celebrate the imminent arrival of the future than to celebrate the “firsts” that help get you there.

As you go through your journey, you start to realize that “firsts” are really important but they are a bit like puppy love. They seem like the most important events in your life, and yet – the consequential milestones are the ones that are yet to come.

• The day someone you bet on grows up: So much about innovation is about betting on people. At BloomReach we’ve made plenty of bets. We bet on a whole new blended analytical product and account management role and when the first member of that team became a manager, it was a terrific day. I’ve made bets on key execs, folks who have not had the scale of roles they today have at BloomReach.  And the day when they stand up in front of your board and your board member passes you a note saying “you’ve built a great team” is a terrific feeling.

• The day that someone else sells your product: As a founder, you’ve likely moved heaven and earth to help accomplish your first sales. You’ve been half product manager, half salesperson. You do that in the beginning to drive momentum but you have this gnawing fear that no one else will be able to sell your product. And then someone steps up to do it. It makes you feel like a million bucks because it means you can begin the arduous process of thinking about scaling.

• The day you can actually predict your business effectively: Startups are about small numbers for a long time. Small numbers of users or customers or employees or early revenues. Big companies are about sizable revenues and margins and predictability. As you go through your financial planning it can feel pretty ad hoc for a long time. In fact, it can feel like a waste of time because you are nowhere near any kind of scale. And then the day comes where you put together a financial plan to forecast the business over 6 months or a year and actually hit it or exceed it. That’s a terrific day. It means you have real metrics to help you drive your business and that means that you have levers to pull to help you achieve your next milestones.

• The days when you give yourself the guilty pleasure of retrospection: It usually comes on anniversaries (5th anniversary) or material financial events ($1 million per month of revenue). On those occasions it hits you – we started with two people in a small office. We have created a real business here, with really valuable employees, great products, great customers and a great future. The “look at where we came from” days are important. They give you perspective as you confront the many challenges you face.

• The day someone tells you they are building “The [INSERT YOUR COMPANY NAME] of [INSERT INDUSTRY]. That is a pretty crazy day. When I started hearing other entrepreneurs talk about themselves building the “BloomReach of Social Networks,” or the “BloomReach of B2B Marketing” – I knew we had done something pretty special. Of course you have to have good marketing along with a good business to deserve it. There is a certain “I have arrived” feeling about the day you hear that.

You start companies mostly for the good days. The highs are so high that they can keep you going for a long time. They feel like that perfect golf shot – the one that makes you think somewhere deep within, that you might be working with more than a good wind at your back and a little bit of luck.

Image from Happy Flyer by Paul Hocksenar licensed under CC by 2.0

The Worst Days in a Founder/CEO’s Professional Life

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People often ask me how things are going at BloomReach. I pretty much give the same stock answer that any halfway decent CEO does – “It’s going great. Awesome. Couldn’t be better.” Of course deep down, there are always the dark days. And in those dark days, it helps to know you’re not alone – that people have been through it before you and that others will go through it after you.  I’m talking about successful businesses here, because there are really only two ways to be unsuccessful in a startup: quit or run out of money. Quitting as a founder is like leaving your child to be raised by others. Sometimes there are good reasons to do it, but not very many and you’ll spend most of the rest of your life explaining why you did.  Running out of money, after you’ve exhausted all of your options means the inevitable – you’re laying off people, calling it a learning experience and moving on with life. It goes without saying that either of those scenarios are almost always more devastating than any of the below.  But there are a lot of bad days in really good companies. Figuring out how to handle them effectively is the key to long-term emotional stability.  Here are some of the worst:

  • Great people leave you: Starting and building a company is an inherently emotional experience. You build your enterprise with a group of brothers and sisters.  You aim to have their personal success intertwined with the company’s success. You invest in them and they invest in your shared journey. And then (for all kinds of reasons), they choose to leave. You fight to keep them (as you should) but don’t succeed. You can feel a sense of betrayal or dismay.  Let it go. Have confidence that the business you have built will attract other great people. If you’ve done things right, the paradox is that every great person can have an immense impact and yet, the business will thrive even without them. Have them leave on great terms – always as ambassadors of your business.
  • Macro events start impacting your business: You built a great business and yet forces beyond your control are negatively impacting it. Maybe Apple came out with a competitive product. Maybe Facebook released a feature that kills your distribution channel. Maybe the financial markets are shut down for further investment. It’s rough. There is absolutely nothing you can do. The temptation is to just hope it gets better or you somehow survive the macro tsunami. Unfortunately, delaying just makes things worse. The right answer is to fully absorb the state of the world and ask the question: “If a new CEO walked in today what would he/she do?” Whatever that is, do it.
  • You lose a big deal or a big customer leaves you: You did everything right. You built and sold a killer product. You engaged the right buyers and delivered a value proposition that was tremendous. You built the right relationships. And then you lose a deal – maybe to a competitor, maybe to a stalled budgeting cycle, maybe for reasons you don’t understand. Once again, you fought hard to keep them but did not succeed. Take a deep breath and analyze the situation. What could you have done better or differently? Sometimes, the genuine answer is “not much.”  Make sure there is nothing systemic going on; part on good terms and move on. 

There are many more challenges that can be more business-impacting (lack of product/market fit or inability to scale for example). However, you don’t feel quite as powerless in those situations as the ones above- there is always a way forward and you can usually explain the challenges you face. Interestingly, it’s exactly the characteristics of founder/leaders that make the above three situations particularly rough. For founders, everything is personal. The product is personal. The team is personal. Customer wins are personal. That is what can make founder-led businesses special. And it is also what makes the dark days darker. On those dark days, try hard not to respond in the moment with an email or a tirade that you will later regret. Try hard not to take it out on your loved ones. Just for those days, be a professional manager, not a founder.

Image from Sad by Kristina Alexanderson licensed under CC by 2.0

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