What are your private stock options worth?

What are your private stock options worth?

With the majority of all software equity still held privately—typically in the form of stock options—let's investigate what drives the value of these options.

For good measure, here is a primer on the two main types of options and their tax treatment:

Before we begin, there are a few realities we must acknowledge:

  1. Most software/tech employees do not have a finance background.

  2. The financial IQ of software/tech employees < their IQ.

  3. It's not always comfortable to ask about things you don't know about, e.g. preferred shares, dilution, post-money valuations, 83(b) elections, secondary markets, etc.

  4. Lots of software/tech employees get screwed when it comes to equity.

One might also recall that the current market cycle—a rampant bull market fueled by low interest rates and flippant increases to the money supply—is nicely balanced with some sobering advice from Latin archives:

"Something is only worth what someone is willing to pay for it."   - Publilius Syrus, 50 B.C.

Let's start with an example using Square's private stock sale prices:

  • Series A: $0.216

  • Series B: $0.982

  • Series C: $5.798

  • Series D: $11.014

  • Series E: $15.463

These prices represent what VC investors were willing to pay for preferred shares. Reminder: you, the employee, don't own preferred shares. However, preferred share prices indicate what the most recent investors are willing to pay to own a piece of the company. This is the price that private companies use to extrapolate their valuation by multiplying it by the # of shares, e.g. Square had about 388M fully diluted shares after their Series E so, math: 388M x $15.463 = $6 billion. 

But this doesn't answer the question: What are your private stock options worth?

When appraising value for private options, we must first acknowledge the macro forces that impact valuations:

  1. The fundraising climate [see chart below]

  2. The federal funds rate

Along with company-specific forces:

  1. Revenue multiples and cash flow

  2. Recent exits and secondary market considerations

MACRO FORCES

1. Let's start with the fundraising climate

saas-fundraising-seed-series-c

Dollars peaked in 2015 with $4.2B venture dollars entering SaaS company bank accounts (SVB = happy). In 2017 we are on track for a bell curve-shaped result of around $3B. The general trend is a relatively large pool of capital is being invested in a smaller pool of companies. As one might expect, round sizes have increased.

Based on the data, the fundraising climate is good which increases your company's chances of executing toward an outcome.

2. The federal funds rate

The federal funds rate is about 1.25%. That is historically low, as it has been, since 2008. This is important because it induces our federal banks to move money freely which has all sorts of second order effects, e.g. credit availability, consumer interest rates, spending.

The federal funds rate is low (credit friendly) which is generally a good thing for the value of your stock options.

COMPANY-SPECIFIC FORCES

1. Revenue multiples and cash flow

The reason cash flow is important is its a primary driver of the multiple your company can earn. Based on the research from April 2016, companies that are FCF positive (or nearing it) are valued at 6-10X sales. Companies that are NOT profitable from a cash-flow perspective are earning a meager 2-4X sales for their valuation, i.e. the company is worth 50% less because their businesses are less efficient.

So ask yourself:

  • Is my company cash flow positive or nearing it?

  • At the last fundraising round, what was our valuation and implied revenue multiple?

    • e.g. if the latest round was at a $700M valuation with $90M in revenue, the multiple would be 7.8 (fairly strong).

This will give you a rubric to assess the value of your stock options.

2. Recent exits and secondary market consideration

One must make a study of market activity to stay abreast of current valuations. Every data point is a signal. A story. For example, when Oracle acquired Moat for $850M in April of 2017, it sends a signal. At the time Moat had revenues of $78M so the multiple was 10.9 (or thereabouts). This implies a very strong signal for SaaS companies, especially in the ad tech space.

Similarly, when Cisco acquired AppDynamics for $3.7B in January of 2017 it had revenues of approx. $211M. This implies a multiple of 17.5 which is extraordinary. Another signal. 

So ask yourself:

  • What companies have been acquired in my industry?

  • What was the revenue at time of acquisition?

  • How does this revenue multiple compare to my company?

A note on secondary market considerations

One of the least talked about equity topics is secondary markets. If you own private shares, there are other people—entire firms, actually—that are willing to purchase your private shares from you. There is some legal paperwork involved, and some approvals, but the process is pretty straightforward: you sell them your private exercised shares in exchange for money.

Who is currently providing liquidity in the secondary space?

There are more, but these are the ones we have heard good things about.

Secondary prices will often trade at a discount to preferred share price. For example, if your company is about 1 year away from IPO and the current preferred share price is $20, you might expect the secondary provider to come back to you with a 25% discount, or $15 per share.

This puts you in a position: money now vs. potential money later. We have included this last note on secondary markets because we respect the age-advice mentioned earlier:

"Something is only worth what someone is willing to pay for it."   - Publilius Syrus, 50 B.C.

 

 

My 4 biggest professional blunders and what I learned from them

My 4 biggest professional blunders and what I learned from them

There comes a time in every person's professional career when you look back and think, "What the F&*% was I thinking?"  This article is an attempt to share my four biggest professional blunders and what I learned from them.

Studies have shown that the human attention span is 8 seconds, so I better give you my 4 biggest blunders up front:

  1. Really, really bad hiring decisions (I'll elaborate)

  2. Short-term, paid "proof of concept" contracts. I still have PTSD.

  3. Failing to convert a vision into an operational plan

  4. Undercommunicating as a leader

1. Really, really bad hiring decisions

Attracting and hiring top talent is hard. 

The unprecedented influx of venture capital—fueled by low interest rates and downright flippant increases to the money supply—has throttled hiring competition to new heights. When quality is scarce, there's a temptation to lower the bar; especially if bandwidth is tight.

We've all heard our peers describing a recent interviewee: "Yeah, I felt like she was a strong candidate—not necessarily as strong as the rest of the team, but very capable with a nice personality and culture fit. I think she could do the job."

Welcome to blunder #1: really, really bad hiring decisions. I'll spare you the sticky details and simply share what I learned with the benefit of hindsight:

  1. Skills & behavior beat "experience" every time

    • Instead of asking about their past roles, drill into their actual skill set to determine how/if they've added value; ask about past situations or scenarios to understand how they think, decide and act. Six years at Goldman Sachs? Good for you. What did you actually DO.

  2. You can't out-hustle stupidity

    • Don’t get me wrong: work ethic is a cornerstone of workplace values, but a candidate must be able to adapt, learn, and grow quickly and certain folks just don’t have a growth mindset. Despite their honest intentions and “hustle”, these candidates soon become relics reliant on old tricks.

  3. "Personality" is subjective and often misleading

    • Big personalities can distract from glaring skill gaps. For example, a candidate with great energy, optimism and a sense of humor can woo you only for so long until you uncover the truth: they have zero organization or operational skills.

2. Short-term, paid "proof of concept" contracts

DISCLAIMER: This single mistake almost sank the company when churn spiked to 9% per month.

In 2014, I was working for a respectable enterprise software company that slowly shifted the way we structured commercial agreements: instead of the typical 12 or 24 month contract, our sales team began to offer paid POCs ("proof of concepts") arrangements where the customer would agree to a term—usually 3 months—and a price: typically $5-20k per month.

To truly understand the severity of the situation, this single issue resulted in churn increasing from an acceptable range of 0.5%-1.0% per month to 5-9% per month. For the finance folks reading, you know that churn of 9% per month (or even 5%) is armageddon. Churning 9% a month equates to bleeding out 68% of your revenue in a single year. Churn wasn't a "leaky bucket"—the damn was breaking loose.

What I learned:

  1.  Within 4 short months, the "POC" contract structure accounted for 80% of new deals: this shows how quickly things can shift on you without proper sales ops oversight.

  2. It was hard to get customers to ROI positive in 3 months due to lack of resources on the customer's end.

  3. The POC success rate was 55%—in other words, 45% of POC contracts did NOT convert into long-term customers.

  4. AE compensation structure was the root cause: since all of our accounting and comp was done on a MRR ("monthly recurring revenue") basis, an Account Executive made the same commission on a 3-month deal vs. a 12-month deal.

  5. "Easy come, easy go."   —George Strait

3. Failing to convert a vision into an operational plan

One of the greatest callings of a leader is to set a purposeful vision and devise an operational plan with his or her team to attain it. Many execs are fairly adept at painting an attractive picture of the future, but its much harder to translate that vision into a cogent operational plan.

All too often the "vision" for the company ends up a shell of its former self, relegated to hyper-designed wall posters and the "About" section of a marketing website. But the best leaders know how to ingrain the vision into the DNA of their company.

What I learned:

  1. Step one is inspiring the team to create a vision they're passionate about. Step two—and arguably the harder step—is project managing the vision towards an operational reality. In hindsight I would have delegated this to an aspiring team lead to source and prioritize the operational requirements.

4. Undercommunicating as a leader

We live in a world with low signal-to-noise ratios. NOISE is everywhere and “urgent” now seems to have become a feeble attempt to coerce action in a last attempt. Slack, email, Hipchat, Messenger, text. . 

Fundamentally we are working in perhaps the most networked and collaborative work generation of all time, but most connectivity has not translated into empathy or even a basic understanding of coworkers. Face it: you don’t know what most of your coworkers actually do all day. And should you?

Most agree that informational transparency yields diminishing returns, but what most fail to consider is the concurrent amplification of opportunity cost carried by our scattered cognitive focus.

Similar to how a microprocessor’s speed is hindered by insufficient RAM, our brains are cognitive function is hindered by often unnecessary data sharing in the name of transparency.

The average human checks their smartphone 150 times per day.

We receive, on average, 52 notifications per day via our various digital channels. . . Another name for notifications is DISTRACTIONS which—for a human brain that’s decidedly bad at multitasking—is kryptonite to productivity.

What I learned:

  1. If Slack channels aren't thoughtfully organized and deployed, collaboration will become even harder due to the redundancy with email and other channels.

  2. Despite how overwhelming it might feel, you must at times join the cacophony and yell into the abyss for the sheer benefit of being heard and others knowing what your team is doing. When in doubt, overcommunicate. Send that update, schedule that meeting, ping that channel.

  3.  Take the time to ask your executive peers what information they wish to receive and what information they want pushed (proactive; synchronous) versus pulled (passive; asynchronous). This will go a long way toward solidifying your relationship with other leaders.

DMT &amp; the exploration of human consciousness

DMT & the exploration of human consciousness

DMT is considered to be one of the most powerful psychedelic compounds in the world.

"DMT" refers to dimethyltryptamine, or N,N-Dimethyltryptamine. It is also known by the street names:

  • fantasia

  • dimitri

  • businessman's trip (referring to the short duration when inhaled)

In recent years DMT—specifically ayahuasca—has gained popularity in certain executive tech circles as a means to unleash creativity by exploring higher realms of human consciousness and spirituality. DMT has also been referred to as "the spirit molecule" due to the transcendent nature of the experience. 

In 2011, Dr. James Fadiman, Ph.D. published The Psychedelic Explorer's Guide which advocated for the use of micro-dosing LSD, Ibogaine and other psychedelics which has also created some recent excitement, e.g. The Tim Ferriss Show's interview with Dr. Fadiman, and Business Insider.

How do people consume DMT?

When smoked or injected, a DMT trip is known for its intensity and speed at the onset, described by one doctor as "a psychedelic bungee jump - a raw leap into a rapidly changing environment."

When taken orally as ayahuasca tea, the experience is MUCH more gradual and long-lasting: it takes 30min to set in, and the trip lasts 3-4 hours.

How do people describe the trip?

  • "Like clockwork, there's a burning sensation on the back of the neck. Then, a hum. It would get louder. And louder. Until it broke apart everything that I thought I was or knew. It got louder and louder until you had to surrender to the sound. Then you were there… pure consciousness."

  • "I felt a warm, golden feeling in my chest, then tremendous pressure behind my sinuses. 

  • “I thought I died.”

  • "The linearity of time is absolutely useless in these states. You are at the God head."

  • “More and more layers of my humanity start peeling off. Eventually you get to the last layer. It's hard to describe but the last layer is what defines you as a human being… and you go keeckkkk, and you're no longer a human being. You leave your body behind."

  • "I completely lost my sense of self but rather I was a witness suspended within a hyper-colored dome the size of a small planet."

  • “You feel the coldness going through your veins. It's like ice going through your veins.”

  • “A thousand years of experience in 15 minutes. To say the least it was profound.”

  • "DMT should not be viewed as a recreational experience. It is profound. It is life-changing. And it can shake your consciousness in indelible ways."

What do the hallucinations look like?

There have been many attempts to capture the psychedelic visual experience. Here is a small sampling of them (click to enlarge):

Historical fun fact

After DMT had been ostracized for nearly a generation during the LSD crackdown, the University of New Mexico green lit a study in 1989 for Dr Rick Stassman to conduct a DMT human trial. It started with an ad in the local paper which we've managed to track down (see screenshot below). DMT is currently a Schedule I narcotic, so the idea of administering DMT to grad students is entertaining to say the least.

Important: Set & Setting

In all of the research we reviewed, the participants consistently referred to the "set & setting" as a critical precursor to the DMT experience. Your "set & setting" means a few things:

  • Your internal self

  • The things that you have learned

  • The capacities that you have achieved

  • The conditions of your own psyche and psychology

  • The environment you are in, such that:

  • “It's the medicine plus the set & setting that creates an effect of trust and comfort and of resourcefulness.”

  • "This is what makes it possible to make some big leaps and receive some big gifts. And if that's not there you just get terrified."

In other words, your mental state and physical environment are correlated with the DMT experience itself. If you'd like to learn more about DMT and the exploration of human consciousness, below are a few resources for your consideration.

Resources & References

Smart people who contributed to DMT: The Spirit Molecule, an excellent documentary on Netflix and YouTube.

  • Dennis McKenna, PhD - Ethnopharmacologist

  • Dave Nichols, PhD - Medical Chemist

  • Graham Hancock - Writer

  • Christian Meuli, MD - DMT Volunteer, Family Physician

  • Charles Grob, MD - Psychiatrist

  • Leanne Standish, ND, phD - Naturopathic physician

  • Ralph Metzner, PhD - Psychologist

  • Rick Strassman, MD - Psychiatrist (spoke of his theory that the pineal body in the brian was part of naturally recurring mystics states)

  • Joel Baskt, Rabbi

  • Steven Barker, PhD - Pharmacologist

  • Terence McKenna, Writer - Psychonaut

  • Ralph Abraham, PhD - Mathematician

  • Patricio Dominguez, DMT Volunteer, Shaman

  • Robert Weisz, PhD - DMT Volunteer, Psychologist

Quotes from said smart people

  • “Theoretically any living organism/matter could synthesize into DMT.”

  • “I can't think of a more powerful tool to explore the question of what is human consciousness?”

  • “The DMT flash makes it clear that disembodied consciousness is a possibility.”

  • “The whole tension of history, and the tension of life, seems to be about the shedding of the body.”

  • “Why is it that in the entire western world that the substances that have found to be so interesting by hundreds of cultures for thousands of years are prohibited.”

  • “Our society values alert, problem-solving consciousness, and it devalues all other states of consciousness. Any kind of consciousness that is not related to the production or consumption of material goods is stigmatized in our society today…of course we accept drunkenness.”

Mind-bending quote

  • “I do believe that there are higher levels—transcendent levels—of reality, and I'm actually now really starting to believe that the brain is not the source of consciousness, but it's more like a radio tuner for something way bigger.”

DMT search trends in the US

People in Colorado, Montana and Vermont seem to be very interested in DMT according to their search volume. They've ranked the highest in the country over the last 10+ years.

If Seneca was a CEO

If Seneca was a CEO

"Life is the fire that burns and the sun that gives light. Life is the wind and the rain and the thunder in the sky. Life is matter and is earth, what is and what is not, and what beyond is in Eternity." —Seneca

Who was Seneca?

Seneca was a Roman Stoic philosopher born in 4 BC. He was widely known as a brilliant statesman and advisor to emperor Nero. Considered one of the most influential philosophers of the Roman era, Seneca's ideas and legacy have been captured by the likes of Epictetus, Dante, Chaucer, Petrarch, Montaigne, and John Calvin among others. He probably looked something like this:

Photo credit: The New Yorker magazine

Quick primer of Stoicism

To understand Seneca—and what he might be like as a CEO—we first need a quick primer on his school of philosophy: Stoicism (source: Stanford Encyclopedia of Philosophy which I've found to contain much clearer descriptions without Wikipedia's tint of public opinion.)

Stoicism started in 301 BC when Zeno started teaching at Stoa Poikile, or "Painted Porch" which was basically a colonnade above the Agora in Athens. It probably looked something like this:

Stoicism primarily focuses on personal ethics guided by system of logic and its views on the natural world. It teaches:

  • philosophy should be a way of life: a daily practice or exercise instead of "academic"

  • they prize four cardinal virtues: wisdom, courage, justice, and temperance

  • we can overcome destructive emotions with self-control and fortitude

  • the path to happiness for humans is found in accepting what we have been given in life

  • the universe is governed for the best by a rational providence grounded in logic

  • contentment is achieved through a simple, unperturbed life in accordance with nature

  • human suffering should be accepted and has a beneficial effect on the soul

  • study and learning are important

Okay, back to Seneca

If Seneca was a modern-day CEO, he would first have to learn English. Latin just wouldn't cut it. This would be an important first step so Seneca could begin teaching us awesome things, and leading his hypothetical company as CEO.

4 things CEO Seneca would be really good at

  1. Storytelling: Seneca had a knack for sharing short, insightful stories with staying power. What a great skill for a CEO! Seneca often drew from his eclectic experiences to impart bite-sized nuggets of wisdom most evident in his 124 letters that he wrote to his buddy, Lucilius. If you're new to Seneca, I highly recommend reading these letters as the best way to understand his philosophy. You could also go the podcast route, compliments of Tim Ferriss.

  2. Emotion Management: Ever the Stoic, Seneca practiced emotional self-awareness and control. Seneca taught what Marcus Aurelius later called the Discipline of Will, or the humble acceptance of what is outside our control. In short, Seneca had a highly-developed sense of emotion management and wrote about the damage of uncontrolled anger and its pathological connections.

  3. Education: Seneca believed that if you aren't constantly learning, your capacity of a thinker will atrophy. Therefore, he committed himself to disciplined self-improvement and education. As a CEO, one might expect Seneca to build a world-class "Learning & Development" function within his company to operationalize this competitive advantage.

  4. Gratitude: Some writers regard Seneca as the first great Western thinker on the complex nature and role of gratitude in human relationships, e.g. The Psychology of Gratitude, Emmons and McCulloch. As a CEO, Seneca would find a way to bring gratitude into the day-to-day work of his employees: What are you thankful for? As a company, what do we thankful for? Seneca understood that gratitude is the antidote for arrogance and entitlement—two destructive corporate ailments. Seneca was also ahead of his time: in the recent "Grateful Heart" study—published in the American Psychological Association—Paul Mills actually proved that gratitude materially improves heart health.

What to do with this information

Based on this partial list of Seneca's talents, one could reasonably expect Seneca to thrive as a modern-day CEO (once he learned Latin, of course). If you wish take action and incorporate some of Seneca's teachings into your role as a leader, below are three suggestion:

  1. Download The Tao of Seneca podcast on Audible and begin listening to Seneca's letters—if you prefer to read them, they are also publicly available for free via WikiSource.

  2. Next time you are in a position to offer direction or guidance, consider employing Seneca's unique style of storytelling, often starting with an eclectic or trivial experience or observation.

  3. As a leader, think about how an off-beat value like Gratitude manifests in your company culture—is it even present? How could you inspire your employees to embrace a perspective of gratitude? Example: One DBT reader recently concluded his weekly C-level meeting by going around the conference table and having each exec share what they were professionally grateful for.

Seneca died in 65 AD (suicide, long story) shortly after the Great Fire of Rome. Thankfully his life's work didn't burn in the carnage.

Leaders that Listen

Leaders that Listen

Most working professionals have read Stephen Covey's landmark book The 7 Habits of Highly Effective People. It is considered a cornerstone of the knowledge worker's curriculum. However, most leaders neglect Habit 5:

Seek first to understand, than to be understood.

Sounds simple right?

But its not. Based on personal experience and countless first hand accounts, many leaders fail to embrace empathic listening to develop a genuine understanding of their direct reports.

As Covey describes the challenge:

Communication is the most important skill in life. You spend years learning how to read and write, and years learning how to speak. But what about listening? What training have you had that enables you to listen so you really, deeply understand another human being? Probably none, right? 

As you'll witness in this inner monologue, the inherent hierarchy of the relationship compounds the problem:

As a boss I am expected to assess situations, give advice, make decisions, and coach my direct reports. This is my job as a manager.

Why would a manager actually take the time to listen beyond understanding a problem? They don't because they don't have to. They are paid to assess and decide, not listen and reflect.

It is at this crossroads where the good managers are surpassed by great leaders. Recall that leaders lead people. Managers manage tasks. True leadership is built upon character and emotional intelligence to work through people. Managers direct people through work.

As highly-paid task masters, most managers listen autobiographically and then respond in one of four ways: 

  • Evaluating: You judge and then either agree or disagree.

  • Probing: You ask questions from your own frame of reference.

  • Advising: You give counsel, advice, and solutions to problems.

  • Interpreting: You analyze others' motives and behaviors based on your own experiences.

This tactical, superficial exchange often leaves the individual contributor feeling misunderstood with an overdose of advice, not to mention the risk of terrible advice due to minimal understanding.

Trust is lost.

Since the immature manager lacks the patience or skill needed to truly listen and understand, they often resort to pontificating which makes them feel important. In fact, immature managers are often so eager to conquer situational challenges that emotions and context becomes casualties of war.

Want to buck the trend? In your next 1:1 with your direct report try the following:

  • Put your agenda aside

  • Give them 100% of your attention

  • Try to identify the emotional underpinning of what they're sharing with you

  • Try to identify how they FEEL

  • Rephrase how you think they feel back to them, e.g. "It sounds like you're feeling pretty anxious about this renewal coming up next month."

  • Be comfortable with long pauses

  • Take the time to reflect on what they've shared with you

  • Resist the urge to evaluate and judge.

  • Resist the urge to probe into the tactical details.

  • Resist the urge to give advice.

  • Resist the urge to analyze.

Do nothing except talk about how they're feeling. Admittedly, all of this is quite counter-intuitive amidst a hectic workday, but trust me: if you've done this effectively, they will eventually ask you for your perspective: "How do you think we should handle the renewal?"

BINGO.

Since you've taken the time to listen empathically and develop a genuine understanding of their situation, trust has been earned.

You have just taken the first step from being a good manager towards becoming a great leader.

 

3 ways to improve renewal rates

3 ways to improve renewal rates

Whether we're talking about churn, retention or renewal rates, the fundamental aim is the same: keep the revenue you already have.

The gravity of this challenge can not be overstated: if you aren't able to improve your renewal rates to a sustainable level, your business will bleed out and die.

Okay, maybe that was a bit dramatic but you get the point: the stakes are high. Failing to improve renewal rates can result it:

  • Decelerating growth

  • Poor unit economics

  • A battalion of former customers that never found value in your product and talk about it

  • Low employee morale

  • Severe fundraising problems

  • Bankruptcy

Over the last 10 years, the proliferation of software solutions, business models, and pricing strategies has resulted in a plethora of new revenue retention metrics, so let's first align on our terminology. I am defining renewal rate as:

Renewal Rate = 100% - Lost ACV/(Lost ACV + Total Renewed ACV)

[ACV: Annual Contract Value]

Let's do an example where we have $5M ACV up for renewal in Q1-2017 and your team is able to successfully renew $4.6M of it, but alas $400k is lost to the churn monster:

Renewal Rate = 100% - Lost ACV/(Lost ACV + Total Renewed ACV)

Renewal Rate = 100% - $400k/($400k + $4.6M)

Renewal Rate = 100% - $400k/$5M

Renewal Rate = 100% - 8%

Renewal Rate = 92%

Easy enough, right? Good. Related to this, if you're interested in seeing all the different ways that SaaS companies report these metrics to the Street, I highly recommend bookmarking Pacific Crest's report: Public SaaS Company Disclosure Metrics for Retention and Renewal Rates.

It's become fashionable to report on "net" revenue metrics. "Net" metrics are created by simply combining two numbers, typically expansion and churn. The risk here is that expansion from existing accounts can mask a churn problem. Or as I like to say, "Nets can cover things up."

Therefore, "net" metrics are out of scope for this article as they increase the complexity of something simple: keeping the revenue you already have.

3 Ways to Improve Renewal Rates

  1. "Screen the team." This strategy has to do with the rigor your company applies to screening customer teams during the sales process. Given the hundreds of software options in the crowded cloud, the real battles aren't being fought over technology, but rather program resources. Similar to organizing an effective sports team, your Sales Engineers and Account Executives must evaluate:

    • Does this potential customer have the right players on the field?

    • If not, how do we make a business case for additional resources whether that be internal or external agency help?

    • Do they have access to developer resources? If so, how many hours per week? How many sprints per release? How many stories per epic? Specificity is key here.

    • Who is going to own the day-to-day adoption and evolution of the program to use your software, i.e. who is the program manager?

    • Does the potential customer have strong executive sponsorship and a desire to make this work?

  2. "ROC your renewals." If you aren't familiar with ROC curves, now is a good time to start. The goal of this strategy is to perform data science analysis to identify the 1-2 customer attributes and/or behaviors that are highly correlated with retention success, e.g. renewal rates, and then mobilizing your entire company—marketing, sales, customer success, design, engineering, everyone—to prioritize and improve these metrics:

  3. "Pay the retention piper." Incentives matter. No matter how inspirational your company or product vision is, the behavior of your employees are primarily driven by how they are compensated. If your Account Executives are comp'd 100% on growth, they will spend 100% of their time closing new business (and 0% on retention). If your Customer Success Managers are comp'd 100% on usage metrics, they will spend the vast majority of their time on improving usage (and little time on lead generation, customer references, etc). 

 

 

S&amp;M vs. R&amp;D: Where does your company stack up?

S&M vs. R&D: Where does your company stack up?

Perhaps the biggest decisions C-level executives make is resource allocation:

  • Should I double down on hiring more Account Executives?

  • Should we invest in hiring more top-tier PMs to guide product development?

  • What are the cost implications of migrating our backend to H-Base/AWS? 

  • Does sales really need $350k for SPIFFs next quarter?

Therefore, let's create some guide wires with the data that's publicly available to understand how Sales & Marketing costs typically compare to Research & Development costs:

Source: Tomasz Tunguz

Notice the spike in the S&M-R&D ratio in year two: this is usually the result of the founding pair hiring some sales muscle once they've established product fit, sometimes prematurely. You can use this chart to benchmark your levels of relative investment over time.

But publicly-available 10-Ks and S-1s have a misleading quality to them: they bundle very big things into bigger things. Therefore, I've injected six line items in blue to help you isolate the following costs relative to median revenue:

  1. S&M Investment

  2. Sales-Only Investment

  3. R&D Investment

SM Sales RD investments.png

Based on the data, marketing is typically 19-22% of revenue, so I've unbundled the above numbers to show just the 'S' in S&M. The critical achievement here really starts in year 3-4 when the successful companies start to focus on driving sales efficiency per rep thereby eventually reducing Sales:Revenue from ~50% to 30-35% in year 7-8. 

Asking for money

Asking for money

A high-level overview of raising a seed round.

Unless you're flush with cash from a previous gig, most entrepreneurs need to raise money to fund their startup. The goal of this article to help you to accomplish this, or in the least share a few key factors to increase your odds of success at the seed round.

This information is derived from my experience in building a hedge fund, five years at a tech startup, and advising several founders on building their businesses. It is by no means exhaustive, but it is a first-hand account. Let's begin.

To be fair, there are (many) people that have more experience than I do, so I'd encourage you to first bookmark the following:

The above articles represent what I've found to be the crème de la crème of the fundraising literary diet (as far as articles go).

Let's start with some high-level pointers

  • Complete fundraising as soon as possible so you can return to building your product and company (the exception here is if the capital is a pre-requisite to building the business).

  • Once someone gives you the green light, move quickly: proceed to document signing and money transferring as soon as possible..

  • Ethics matter, and reputation is gold—therefore, don't f#$% anyone (especially if you're in Silicon Valley).

  • As Paul Graham says, “If the soda is empty, stop making that awful sucking sound with the straw.” Understand when a door has been closed, and part on good terms. Doors often reopen, especially in later rounds if you've grown successfully.

  • Arrogance will kill a deal. Always remember: you're asking for money.

  • Track your list of potential investors dutifully. Ask them how THEY would like to be communicated with, e.g. over coffee, emailed newsletter, via social media, sending a pitch book in the mail? Don't just email blast your stuff out because that's easier for you.

Set the stage ahead of time

Most human beings, including potential seed round VC investors, can sense desperation. It is sad, somewhat repelling, and a sure-fire way to raise zero dollars. The solution? Set the stage ahead of time.

Before you even THINK about proactively fundraising, contact the top seed and A-round investors with something to the following effect:

Dear Peter Fenton, I'd like to introduce myself to you and highlight what we're working on. [insert stuff about you - why you're a special snowflake] [insert stuff about your idea - why its unique and different]. At this stage of our growth, we are not currently fundraising. Nevertheless, we'd like to at least start a dialogue with Benchmark by providing periodic updates relevant to our business growth.  Sincerely, [You, not sounding desperate]

What happens next? Typically a VC staffer will create a file for you in their system. BINGO. You are now on file and can begin providing business updates (and eventually scheduling a pitch). Remember: set the stage ahead of time.

Work with the best

The best seed round is not necessarily the biggest or most notable investor. That would be nice, sure, but most entrepreneurs don't have that luxury. "The best" is defined by what your business needs for that time in its evolution. Ask yourself, what comes with the money?

  • Introductions to other investors?

  • A strategic advisor?

  • A new board member who's "been there before"?

  • Exposure to other portfolio companies to help figure things out?

  • Credibility?

There are many ways to define the best: perhaps you're looking for the most active VCs of Q1-2016? That would be: Sequoia, New Enterprise Associate, Lightspeed Venture Partners, KCPB, and Accel Partners. Or maybe you're interested in how VCs rank their peers, in which case you'd be looking at the likes of Sequoia, Benchmark, Accel Partners, Greylock, Andreessen Horowitz, etc. Lastly, who is on the VC Midas List for 2016?

But if you haven't yet been invited to sit at the big boys table, you're more likely to be courting close family members, successful friends, and past work colleagues. That's perfectly fine too—just keep asking yourself: what comes with the money? Can they help accelerate your growth beyond the checkbook?

The one cardinal sin

"There's really only one cardinal sin in business: running out of cash." - Ben Horowitz

Understanding cash burn is crucial. Come pitch time, the cash burn part of your financial model must be realistic and robust model including, but not limited to, headcount-driven expenses. Understanding the unit-level drivers of revenue is also critical once a company crosses into the revenue generation stage. Just remember that precision is not necessarily an indicator of accuracy.

Have a backup plan

Backup plans can include tapping debt lines, doing a bridge from insiders, reducing cash burn, and/or, in the worst case, doing a layoff (which is almost like raising a round). In general, having alternatives provide you leverage in the fundraising process.

Ideas: The Currency of Your Brain

Ideas: The Currency of Your Brain

The poor farm boy from Idaho

A young man age 25 came to the sudden realization that he was unhappy with how his life had turned out. He had grown up poor in an obscure Idaho town of 5,000 by the Snake River. After quitting college after year one, he had gotten his first job, and married at 28. He quickly found himself behind on his promises, pennies in his pocket, and creditors were calling.

And then his whole life changed. . .

Six years later—at the age of 31—he's a millionaire. This is the story of Jim Rohn, and if you haven't heard it, its a good one.

What changed?

In short, Jim Rohn met a mentor (named Earl Schoaff) who compelled him to change his life philosophy. Jim learned the importance of curating a personal life philosophy, the power of personal development, and ultimately achieved massive success.

These changes inevitably caused Jim to have new IDEAS which ultimately manifested themselves in behavior and reality. Ideas, in this way, are the currency of our brains.

This tremendous reversal of fortune is captured in Jim Rohn's landmark book The Art of Exceptional Living. If you're so inclined, you can pick up the audiobook here, or read my notes here.

Ideas: The Currency of Your Brain

Today we will focus on IDEAS, and their importance to your life's trajectory. At DBT Ventures, we place tremendous value on ideas and work to nurture our best ideas to full potential. 

Ideas are so intriguing because they influence our actions, and our actions determine how life works out. Therefore, inspecting how we SOURCE ideas is a worthwhile endeavor.

Let's start with an example. Here is Elon Musk's description of an idea he had and his subsequent thought process and action:

"Historically, all rockets have been expensive, so therefore, in the future, all rockets will be expensive. But actually that’s not true. If you say, what is a rocket made of? It’s made of aluminum, titanium, copper, carbon fiber. And you can break it down and say, what is the raw material cost of all these components? And if you have them stacked on the floor and could wave a magic wand so that the cost of rearranging the atoms was zero, then what would the cost of the rocket be? And I was like, wow, okay, it’s really small—it’s like 2% of what a rocket costs. So clearly it would be in how the atoms are arranged—so you’ve got to figure out how can we get the atoms in the right shape much more efficiently. And so I had a series of meetings on Saturdays with people, some of whom were still working at the big aerospace companies, just to try to figure out if there’s some catch here that I’m not appreciating. And I couldn’t figure it out. There doesn’t seem to be any catch. So I started SpaceX."

Source: Tim Urban's blog, Wait But Why: The Cook and the Chef (warning: this blog post consumed me for a week)

Okay, let's re-read Elon's last sentence: "So I started SpaceX." Action. And it all started with an idea: thinking about rockets being expensive, and really digging into that assumption. The rest is history in the making.

Quotes

There a few quotes from Jim Rohn that really describe the value of ideas well:

  • "It is because we lack ideas that we forego success."

  • "If you experience a good idea, capture it! Write it down in your journal."

  • "When the idea is hot and the emotion is strong. . . act. Otherwise, the law of diminishing intent will work against you."

  • "Behavior is mostly influenced by ideas. Ideas are mostly influenced by education. Education is mostly influenced by the people with whom we associate."

Ideas are most impacted by two factors: 1) what we study within our own personal development, and 2) who we associate with. The good news: both of these factors are entirely within your control.

Call to action:

  1. What is your personal development habit? What time do you study and read each day?

  2. Take inventory of your friends and apply Chapter 8 from the book which will remove, reduce or expand the time you spend with positive associations.

 

 

 

What the Twilio IPO means for Customer Success

What the Twilio IPO means for Customer Success

What can we learn from the most successful SaaS IPO of 2016?

A lot.

The Twilio IPO has two powerful lessons for all of us, especially Customer Success folks:

  1. Net expansion is king. Boasting 155% dollar-based net expansion, Twilio was able to readily sell shares to willing buyers at a handsome premium. Investors really care about this.

  2. Customer stories are compelling. Twilio lets their happy customers do the talking which creates an undeniable Go-To-Market competitive advantage.

But before we get ahead of ourselves, let's first acknowledge the recent health of the SaaS IPO market:

"Scared and shitty," says one institutional investor when describing the SaaS IPO market. If this trend were to continue, we're looking at the worst SaaS IPO year in six years. Yikes.

But then came Twilio. . .

Bright-eyed and bushy-tailed, Twilio filed its S-1 on May 26th, 2016. But this wasn't just any S-1. This was one of the most unique S-1s we've ever seen (check it out here).

Why was it so unique?

1. They lead with net retention.

Literally. Before you even get to the f*&%$ Table of Contents, Twilio hits you with this image:

Source: Twilio S-1. DBT commentary: "strong to quite strong"

Revenue growth, sure. Active customer growth, join the club. But 155% net expansion?!

OOHH YEAAHHHH [picture Randy Savage saying this, naturally]

155% dollar-based net expansion means Twilio's customers are expanding 55% annually net of churn. These are best-in-class metrics by any benchmark. One might suspect that large customers could skew this number heavily (WhatsApp is 15% of Twilio's revenue), but even that isn't necessarily a bad thing because their technology is considered essential (WhatsApp isn't even in a long-term contract).

2. They include compelling customer testimonials in their S-1.

Who does that?! Before you even get to the S-1 summary, you see Travis Kalanick—the f'ing CEO of Uber—raving about Twilio. Your welcome, Goldman Sachs. I-bankers dream of an investor roadshow like this.

And just in case you hadn't heard of Uber, Affirm, Nordstrom, or ServiceNow. . . Twilio includes another full page of customer testimonials to hammer home the point.

Diversity FTW. 

What was the financial impact of all this goodness? In short, they crushed it. Twilio is currently valued at $3.12 billion (as of 7/6/16). The 10 million shares Twilio offered at $15 per share ($150MM raise) is now trading at $37.93 per share, or up 153% in 9 trading days.

Source: Google Finance

For the sake of comparison, what has the NASDAQ index done this year? Answer: -2.96%

Source: Google Finance

See that V-shaped low-point in late June? That was the Twilio IPO. You can see the (partial) impact it had on sentiment and investor appetite for tech/SaaS stocks. So while the NASDAQ was taking a cat nap for the first half of 2016, Twilio is a beacon of warmth in a frigid IPO market.

To recap, the Twilio IPO has two powerful lessons for all of us, especially Customer Success folks:

  1. Net expansion is king. If you are a Customer Success executive, or individual contributor, take pride in the fact that your impact on churn reduction and expansion revenue is a HUGE ARBITER of your company's future success.  

  2. Customer stories are compelling. When your company goes public, what customer's would you put on your S-1? Do you have executive relationships that would go to bat for you?

The most underrated growth strategy in tech/SaaS

The most underrated growth strategy in tech/SaaS

By now most executives have heard of the Net Promoter Score system, aka the #1 litmus test for customer loyalty: "On a scale of 1-10 how likely are you to recommend [your company] to a friend or colleague?"

As we've written about in past DBT blog posts, the NPS responses tell you a lot. . .

Starting from the left in red:

Detractors (0-6) borderline hate you. As unhappy customers the don't say nice things about you at cocktail parties or conferences, and they certainly wouldn't recommend your company or product.

Passives (7-8) are on the fence. They are the swing states of the NPS electorate.

Promoters (9-10) fucking love you. They'd hand out your goddamn business card at the mere mention of your company. Recall, when you asked them "How likely are you to recommend us?" they said 9! or 10! Promoters are super stoked about what you're up to.

So what is the most underrated growth strategy in tech/SaaS?

To illustrate—and as a bit of a teaser—here is how the NPS thing works at most tech/SaaS companies.

  • Company: "Dear [first name], How likely are you to recommend our product to a friend or colleague?"

  • Customer: 9 !!! You guys rock !!! My whole team LOVES your product.

  • Company: [canned response] Thank you for your feedback.

  • Company: [awkward silence]

  • Company: [awkward silence]

  • Company: [random marketing update]

  • Company: [six months later]: "Dear [first name], How likely are you to recommend our product to a friend or colleague?"

  • Customer: 10 !!! It's even better than last time. Honestly, I consider you family. Well done.

  • Company: [canned response] Thank you for your feedback.

  • Company: [awkward silence]

  • Company: [awkward silence]

Meanwhile at the Company's quarterly leadership offsite. . .

Chief Revenue Officer: "Thank you all for coming to this quasi-swanky venue today. We are here—as a leadership team—to figure out our growth challenges and brainstorm how we can grow revenue faster and hit our goals for 2017. I assume you all read the pre-read [blank stares] so we'll go right into the ideation phase. Who wants to go first?"

  • VP Marketing: "What if we did more EVENTS! Like real enterprise caliber events?"

  • VP Sales: "Pipeline generation is weak. We need more support in late stage deals."

  • VP Success: "We could hire more CSMs and Support reps to help customers drive more value."

  • VP Monetization: "We could rethink our pricing and packaging. . ."

  • Everyone: "Haven't we tried that like 3 times already?"

  • VP Monetization: "Or, I mean, Product could build new features that customers really want."

  • VP Product: "I think everyone's shared some great ideas today. I'll have the PMs incorporate all of this at our next release planning."

  • VP Engineering: "I mean, can't the sales people just close more deals? Sorry, why am I here again?"

Chief Revenue Officer: "Thank you—all of you—for the very, very good ideas. Growing revenue is challenging, especially during times like these [strong eye contact with VP Sales]. We just need to roll up our sleeves and get to work."

  • EA who's at the offsite for the sheer purpose of keeping track of time and taking notes: [brazenly] "What if. . . we asked our happy customers. . . to introduce us to people they know. . . who might consider buying from us?"

  • CFO: [looks up from his computer for the first time in 1.5 hours] "Go on. . ."

  • EA: "Well, we've been doing our NPS survey for 4 years now and some of our customers are actually quite happy and gave us a 9 or 10 when we asked them would you recommend us to a friend or colleague. . ."

  • CFO: [eyebrows raised] "Are you suggesting that we ask happy customers if they'd recommend us to a friend or colleague?"

  • EA: [looks around] 

  • EA: [brazenly] "Yes."

[10 seconds of silence that feels like 10 minutes to the EA]

  • Everyone: ". . .That's AMAZING! Holy smokes. It's SO OBVIOUS—why didn't we think of that? We could ask promoters to recommend us to a friend or colleague! I mean, that's the question in the NPS survey, right? Haha, it makes SO MUCH SENSE."

EA be like:

 So what is the most underrated growth strategy in tech/SaaS? You betcha. Customer referrals. Specifically, referrals from promoters (assuming you use NPS), or overall happy customers (if you don't use NPS).

Why are referrals so valuable?

  • 1-2x higher close rates

  • Shorter deal cycles (20-50% depending on complexity)

  • Lower customer acquisition cost (CAC) due to lesser marketing spend / nurturing

  • Higher retention (customers that were introduced from a friend/colleague are more likely to stick around)

  • More referrals: customers that were introduced via referral/promoter are 2x more likely to provide additional referrals—so the whole strategy can grow exponentially if you really get behind it

That's it really. At DBT we've witnessed several tech/SaaS companies make the grave mistake of clinging to what they know: hire enterprise AEs, hire more AEs, close deals, pay generous commissions, grow revenue, attract more investors, start thinking about retention when it dips, freak out when it dips more, hire more Customer Success people, "take a step back", think market share, craft go-forward strategy, growth decelerates, freak out, schedule leadership offsite for the Company.

If you want to equip your team on how to become dangerous with referrals, check this out:

Click here to download the whole PDF

We hope you find this resource helpful to empower your account teams to have more effective conversations with your happy customers to ultimately generate more leads the close quicker and more often to ultimately drive revenue to the heights of your ambitions.

Colorful Leadership

Colorful Leadership

Where love rules, there is no will to power; and where power predominates, there love is lacking. The one is the shadow of the other. —Carl Jung

He had affairs. He was into alchemy. He was even buddies with Sigmund Freud. We're talking about Carl Jung, aka the most interesting person to ever come out of Switzerland.

Jung's impact on the world is hard to overstate: he founded analytical psychology, created the collective unconscious, the archetype, and personality types extraversion vs. introversion (remember that Myers-Briggs test you took in high school?)

Even art wasn't off limits: Jung's teachings inspired the iconography and mythical figures found in some of Jackson Pollock's best art in the late 1940s. He was also an early proponent of art therapy for psychological healing.  #renaissanceman

But what does any of this have to do with leadership?

A lot. Particularly when it comes to understanding other people. Why? People are the pulsing lifeblood of leadership. If you don't understand people, your chances of becoming an effective leader are slim to none. 

Of the countless derivative works attributed to Jung, one of the most impressive—and practical—is the Insights Discovery. Had Jung lived to be 118 years of age, he would have witnessed the founding of The Insights Group in 1993. They are the creators of Insights Discovery which draws heavily from Jung's framework and abstracts complexity through the creative use of COLOR.

Wait, what is Insights Discovery?

Insights Discovery is a professional personality assessment that takes about 30 minutes to complete and costs $150. Honestly, its the best $150 you'll ever spend. 

Why is it valuable?

Because you will learn about yourself, your "preference", your strengths, your blind spots, and how OTHER COLORS might perceive you—and how you can communicate better with them. In addition to learning, the program also suggests actionable next steps.

Enough context building. Let's get to the actual colors and what they mean:

This is the Insights Discovery Wheel. There are four colors [you: thanks Sherlock]:

  • Fiery Red: Let's do it now!

  • Sunshine Yellow: Let's do it together

  • Earth Green: Let's do it in a caring way

  • Cool Blue: Let's do right

Other important characteristics to note:

  • Right half of wheel: Extroversion (Red & Yellow)

  • Left half of wheel: Introversion (Blue & Green)

  • Top half of wheel: Thinking (Blue & Red)

  • Bottom half of wheel: Feeling (Green & Yellow)

Okay, so you take the assessment and you get a dominant color. Mine, for example, is red. But humans aren't 1-dimensional beings and, as Jung would attest, we have layers of conscious vs. unconscious complexity. So all of us have actually have all four colors, but in very different mixes. We have a natural "preference" for some color(s), and make an effort to "dial up" some color(s) within the dichotomy of our unconscious and conscious, respectively.

Here are what the colors are like on a bad day vs. a good day:

As mentioned, I am a RED dominant type. If I don't make a point to be self-aware and manage my own tendencies, I may come off as aggressive, controlling, driving, overbearing and/or intolerant. These are terrible things for a leader to be viewed as.

On a good day, my "Fiery Red" nature is competitive, demanding, determined, strong-willed, and purposeful—traits of a great leader which I aspire to be.

Putting this into action

Step 1: take the assessment (ideally with your whole department or team)

Step 2: learn

Specifically, learning what NOT to do was super helpful for me. As my father used to say, sometimes the best decisions are the ones you DON'T make. Insights gives you a blueprint on what to avoid per color. For example:

YELLOW - Do not:

  • Bore then with details

  • Tie them down with routine

  • Ask them to work in solitude

BLUE - Do not:

  • Be overemotional or exaggerate

  • Be careless or casual with important issues

  • Keep changing things without good reasons

GREEN - Do not:

  • Take advantage of their good nature

  • Push them to make quick decisions

  • Tell, instruct, or command

RED - Do not:

  • Hesitate or be indecisive

  • Focus on feelings

  • Try to take over

It gets better. Here are some "Do's" for each color:

YELLOW - Do:

  • Be friendly and sociable

  • Be engaging and stimulating

  • Be open and flexible

BLUE - Do:

  • Be well prepared and thorough

  • Put things in writing

  • Let them consider all the details

GREEN - Do:

  • Be patient and supportive

  • Ask for their input before making a decision

  • Ask their opinion and give them time to answer

RED - Do:

  • Be direct and to the point

  • Focus on the results and stimulating

  • Be confident and assertive

Conclusion

"Colorful leadership" can help you become a more effective leader by 1) having a deeper appreciation for the true nature of other people, 2) having a deeper understanding of yourself, and 3) putting that perspective into action.

 

The 3 best ways to change your customers habits

The 3 best ways to change your customers habits


"To truly adopt new software, customers have to change their habits. Users must convert their aspiration into new routines." —Tomasz Tunguz

As a partner at Redpoint Ventures, Tomasz is no stranger to the challenges software companies face. As an experienced venture capital investor, Tomasz and Redpoint have studied a variety of factors to determine What is the most correlated business metric with Series A valuations? 

The answer: negative churn. 

For the uninitiated, negative churn means that your existing customers are paying you more (expansion) than they're paying you less (churn), over a given time period. Confusingly, there are many names for this metric, all referring to the same thing: account expansion, negative net churn, net retention, net expansion.

But the takeaway here is: whatever you call it, net retention is the #1 arbiter of Series A valuations. 

In order for expansion to outpace churn, your customers have to adopt your software. And that's where habits come in. As Tomasz shares:

"I learned this selling billing and invoicing software to law firms. It was one thing to convince the managing director of a law firm to pay for the software over a 90 day sales cycle. But it was an entirely different matter to educate, convince and convert individual attorneys to use the software. That took far longer." Source: TomaszTunguz.com

But how?

That's the billion-dollar question that every software company is trying to figure out.

As we've cataloged in past DBT blog posts, achieving successful adoption usually starts with empowering a team to build new habits. Two key words here: 1) team, 2) habits. 

It's no coincidence that Atlassian's ticker is TEAM. As I write the stock is trading at $22.82 with a market cap of $4.78 billion. Revenue and cash flow look like this:

Source: Google Finance, 5/24/16

Source: Google Finance, 5/24/16

Atlassian—a software company designed for teams—is growing substantially and kicking off plenty of cash because they've figured out something important: how to change customer habits.

But how does a company change customer habits? Based on five years of research, I've found the 3 best ways to change your customer habits are:

  1. Keep the executive sponsor engaged post-sale

  2. Make your product's value so undeniable they can't ignore it

  3. Triggers

Before we unpack these strategies, let's revisit the formula for how habits are created in the first place:

Source:The Power of Habit, Charles Duhigg, 2014

The formula, therefore. . . HABIT = cue + routine + reward

It's a virtuous cycle of a prompted action, the action itself, and then a Pavlovian shot of dopamine to keep the cycle going. Boom. Habit created. New routine established. But back to the how. . . 

1. Keep the executive sponsor and developers engaged post-sale

You'd be surprise how frequently the executive who made a software purchase vanishes after the product is bought. Based our DBT research, this occurs in 40% of the time. It's not his or her fault—they're busy. Very busy. Therefore, the challenge is on the account team to keep them engaged post-sale. This strategy is both effective and within your control.

This is doubly true for Product-Led Growth (PLG) companies where the developer is a critical stakeholder and primary user. To keep them engaged you must provide: 1) regular feature & bug updates, 2) clear technical documentation, and 3) accessible feedback loop to help PROD/ENG accelerate product development.

Backstory: The dirty little secret of SaaS companies is that software is incredibly easy to start/buy, but much harder to fully adopt (and therefore harder to reap the benefit of why said software was bought in the first place). Without the executive sponsor's influence, the actual users of the software are faced with a choice: 1) do what they usually do, 2) change.

As you might have guessed, they often chose option one :|

If you focus on a tight Sales >> Customer Success handoff where the executive sponsor and developer stay involved, you will have greatly increased you chances to successfully deploy and change behavior. To do so, we recommend creating a workflow where the executive's goals are clearly documented in Salesforce so the Customer Success team can carry the torch:

2. Make the product's value so undeniable they can't ignore it

This really should be #1 but for the sake of practicality is is #2 because your product's value is (primarily) determined by your product and engineering team. If your product isn't valuable (accordingly to your customers), than this article doesn't really matter because your customers will eventually churn out.

But let's assume your product does create value. Then what?

A few things:

  • Think about the "Reward"—what makes your customers want to keep coming back and using the product? How does the product reward them for the routine the user has completed?*

  • Automate it: make that seminal value moment a thing. Celebrate it. Send them an email. A notification. Highlight the demonstrable show of value.

  • Schedule a Business Review. Pull the usage and results data from your software and showcase the value to the business user AND the Executive Sponsor.

*This is the "Reward" moment for MyFitnessPal (acquired by Under Armour for $475MM in Feb-2015).

3. Triggers

This is the step required to start the new routine. What brings your users back to the product? WHY do they come back? What prompts them to ditch their Gmail inbox and log into your software and DO STUFF? 

It's kind of like running. Personally, if I don't set our my running shoes the night before, I likely won't run. It needs to be easy. I need a trigger to brave the foggy cold air at 6am and MAKE IT HAPPEN. The trigger is often simple, but nevertheless very effective is catalyzing action.

In closing:

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”   —Aristotle

Hopefully you can influence your customers habits to help drive adoption and ultimately achieve negative net churn and thereby earn a lucrative valuation so that YOU = HAPPY.

 

Leadership learnings from Kerouac

Leadership learnings from Kerouac

"The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles exploding like spiders across the stars. . ."

Jack Kerouac attended Columbia on a football scholarship. This was an ironically "All-American" start for a young man who later became a central figure in the notorious Beat Generation which defied formal academics, renounced materialism, and loathed society-anointed "values".

His life doesn't fit the profile of someone we'd typically look to for leadership advice: Jack Kerouac never became a billionaire. He didn't start a tech company or become a Fortune 500 CEO. The only "unicorns" Jack knew of were from his psychedelic encounters while driving across the country with Neal Cassady (if you haven't read On the Road, highly recommend).

But despite his lack of business credentials, Jack was a true visionary who's eccentric lifestyle yields three powerful traits for those aspiring to grow in their leadership career:

  1. Authentic: embrace your "true original" inner spirit

  2. Simple: value the elegance of simplicity over complexity

  3. Spontaneous: harness the creativity—and fun—of life's serendipity

In short, be an ASS*. 

*I couldn't write a blog post about Kerouac and leadership in good conscience without somehow incorporating his special brand of counter-cultural irreverence. So there you have it: be an ASS. I hope Kerouac would approve.

Let's expound on these traits a bit.

AUTHENTIC. What does it mean to be authentic? Why is that important to good leadership? In short, authenticity is the absence of inner bullshit. It is comfort in candor. It is the ability to embrace your "true original" inner spirit while knowing—sometimes in a self-deprecating way—both your strengths and weaknesses. Authenticity isn't just important to good leadership, it is critical. Your peers can sense posturing, conflict and optics a mile away. Being authentic is the antidote to all perceived bullshit. The best article I've ever read on this topic is Tim Urban's Why you should stop caring what other people think. Tim elucidates the idea of your Authentic Voice in a uniquely powerful way to help us all become more true to our inner authenticity.

This is step 1.

SIMPLE. Today's business world has an insatiable appetite for complexity. At times, it can make your head spin. To address this challenge, our team recently spent a full-day offsite ruminating on the idea of "exceptional simplicity" to figure our how we can do the simple parts of our job (Customer Success) exceptionally well. One CSM offered up the idea of In-N-Out burger as a tangible example of "exceptional simplicity" in practice: simple menu, consistent, tasty. Does your leadership style or business workflow resemble the menu of In-N-Out or McDonald's?

If your leadership style or business focus resembles the myriad of options on the right, it might be a good time to get back to beat basics. A the saying goes, if you have more than three priorities, you don't have priorities.

SPONTANEOUS. The Beat Generation was know to prize spontaneity, particularly as a catalyst for creativity. For today's leaders, spontaneity can be an incredibly effective trait to harness the creativity—and fun—of life's serendipity.

Why in spontaneity important? Because business is inherently NON-spontaneous. The nature of business is often planful, deliberate, and predictable. Adding a dash of spontaneity to your leadership approach can help you break through the rote monotony of the work day to unleash your team's creativity and passion.

“Whee. Sal, we gotta go and never stop going till we get there.” “Where we going, man?” “I don’t know but we gotta go.” - Dean Moriarty speaking to Sal Paradise, i.e. Neal Cassady to Jack Kerouac; from On the Road (1951)

This isn't to suggest being spontaneous in, say, a sales forecasting meaning. . .

VP Sales: What is your expected new bookings growth in Q3 2016?

You: I don't know, could be anything! We're being spontaneous is our approach this quarter. We'll see what happens and update everyone when the impulse strikes.

{awkward silence}

{VP Sales' face gets redder, twitchy}

VP Sales: You're fired.

To be sure, process and predictability exist for very good reasons in business. By embracing spontaneity, however, you can amplify your special brand of leadership and set yourself apart.

How you can be spontaneous as a leader:

  • Instead of taking your next meeting in a conference room, ask the other person if they'd be open to going for a walk

  • Surprise your team with an unplanned team lunch outside the office

  • Share positive feedback on the fly

  • Instead of your typical team meeting, take your team to a nearby park and draw stuff on construction paper

  • Hire Speechless to deliver their (amazing) improv session with your team

Okay, let's recap:

Leadership learnings from Jack Kerouac. In short, be an ASS!

  1. Authentic: embrace your "true original" inner spirit

  2. Simple: value the elegance of simplicity over complexity

  3. Spontaneous: harness the creativity—and fun—of life's serendipity

Let's make Jack Kerouac proud. Let's go Further.

The way your company is valued has changed

The way your company is valued has changed

TL;DR

  • On February 5th the entire tech/SaaS industry got a wake up call: public cloud companies collectively lost $28B in market value on a single day.

  • Valuation models have changed: markets are rewarding software companies with sustainable growth + a path to profitability

  • How tech companies navigate this tectonic shift will determine the success (or failure) of their businesses

By now most people have heard the news: On February 5th the entire tech/SaaS industry got a wake up call: public cloud companies collectively lost $28B in market value on a single day. 

Even Linkedin (LNKD), a company that did $3 billion in sales last year, got hammered from $205 to $100 per share. So for Linkedin, the week looked like this:

  • Feb 1 valuation: $24 billion

  • Feb 9 valuation: $11.8 billion

  • Market cap incinerated: $12.2 billion

To put that another way, Linkedin lost the equivalent of Nicaragua's GDP in a six trading days.

What the hell happened?

Answer: the way your company is valued, changed—particularly for high-growth, SaaS, cloud-based tech companies. Markets are rewarding software companies with sustainable growth + a path to profitability

How did the overall market perform?

  • the S&P 500 was down 5.9% in the three months ending 3/1/16

  • if you look at the light blue and red lines below, you'll see that certain software and SaaS companies were down 26.2% and 24.1%, respectively

Okay, so that happened. But what does that mean going forward?

  • for starters, cash is king. For emphasis, cash is king.

  • these companies are moving (very rapidly) to reduce costs

  • these companies are moving (very rapidly) to improve cash flow

Why are they doing this?

  • to avoid imminent failure

  • to earn a better valuation (see: below chart)

  • the market is clearly awarding higher EV/Sales valuations to companies that expect to be free cash flow positive within one year

And finally we get to the meat of the discussion. What is one to do in navigating this unique—but not unprecedented—market environment? At DBT Ventures we don't try to boil the ocean, but rather focus on four pillars of business:

Ideas

  • Given the market challenges, a CEO would be wise to prioritize ideas that enable your business to 1) reduce costs, or 2) increase output.

  • Focus should be placed on "getting back to basics" and doing the simple things to perfection

  • Company first, team second, individuals third

Data Science

  • Increase data science effort on unit economics, specifically Customer Lifetime Value and empowering your account teams to understand the economic tradeoffs between how they spend their time (company money) and revenue (customer money).

  • It's a great time to kill exploratory projects and double-down on DS initiatives that are closely linked with tangible business value, e.g. prospect's likelihood to buy, customer's likelihood to churn/expand

  • Perform outlier analysis on all company-wide expenses to identify areas of bloated budget with lackluster ROI

Customer Success

  • Scale, scale, scale—alleviate the dependency on 1:1 support engagements

  • Get a tattoo: scaling ≠ hiring

  • Prioritize roles with higher output metrics with an emphasis on automation and 1:many deliverables, e.g. virtual trainings, online resources, personalized email drip campaigns

  • Attack churn proactively to reduce the headwind on top-line growth

  • Set a goal to reduce CRC to 10-15% of revenue, or less

Leadership

  • Adversity is an excellent opportunity to exude strength, resilience, and adherence to your cultural values and ethics

  • Give merit based comp adjustments to top performers to reduce the risk of attrition

  • Take the extra time to celebrate wins as a function, team, department, and company—this investment will help improve dour morale

  • Reward AEs for contracts with payment upfront which will help cash flow

  • Overcommunicate. Do not turtle shell. Your company needs you now more than ever

  • Recognize that "constraint yields creativity" and "necessity is the mother of invention" such that you green-light projects that improve scalable output

  • Lead by example: now is not the time to be lavish or spendy

  • If your goal is to go public, recognize that the median revenue at IPO is $83 million—set goals to achieve this number while imparting a sense of urgency at the executive level. Mindset: "the last round of funding was our last" given VC money has become more stringent.

Go forth and prosper.

Why most leaders fail to inspire

Why most leaders fail to inspire

"Despite the critical importance of inspiration and persuasion, most executives struggle to communicate, let alone inspire. Too often, they get lost in the accoutrements of companyspeak: PowerPoint slides, dry memos, and hyperbolic missives from the corporate communications department. Even the most carefully researched efforts are routinely greeted with cynicism, lassitude, or outright dismissal."        —Harvard Business Review; conversation with Robert Mckee

Let's start by defining a few esoteric words that Harvard decided to use:

  • accoutrements: an identifying and often superficial characteristic or device (origin: French)

  • hyperbolic missives: exaggerated written bullshit (definition not Harvard approved)

  • lassitude: lacking physical or mental energy; tired

With that said, it's high time we introduce the man of the hour: Robert McKee. But before you meet this living legend, he has two questions for you:

If you can answer Mr. McKee, you're half way to becoming an inspirational leader.

But you never even introduced who Robert McKee is!

Fair point. For starters, Robert McKee is a storyteller. A really, really good one. But what's more, he has an incredible gift for teaching his wisdom to other people.

As a Broadway veteran from Detroit turned screenwriter and educator, McKee adeptly launched his "Story Seminar" while teaching creative writing at USC. Over 50,000 students have absorbed his lectures, and many of them have gone on to illustrious careers: 63 Academy Award winners, 164 Emmy Award winners, 30 WGA (Writers Guild of America) Award winners and 26 DGA (Directors Guild of America) Award winners.

As word got out, the world's most successful companies engaged McKee for help with crafting their story, brand identity, and communications. Nike, HP, Microsoft, Time Warner—all doled out dollars to get a piece of this man's mind. He's consulted Disney, Paramount and Pixar. Pixar?! Yes. When Ed Catmull and Pete Docter want an outside opinion, they pick up the phone and call Robert McKee.

Much of McKee's wisdom is consolidated in his book Story: Substance, Structure, Style, and the Principles of Screenwriting (which, notably, spent 20 weeks on the NYT Best-Seller list).

My favorite quote from that book: "Stories fulfill a profound human need to grasp the patterns of living—not merely as in intellectual exercise, but within a very personal, emotional experience."

But why do most leaders fail to inspire?

Three main reasons:

  1. They favor rhetorical persuasion over emotional power

  2. They haven't mastered the art of good storytelling

  3. They can't really answer McKee's questions above

Whatever your industry, storytelling is a skill you HAVE to hone. To learn more, we recommend digesting the below article.

Wisdom from the Grove - Part 4

In this final post about Andy Grove's High Output Management we will review pp. 150-227 thereby completing this four-part series.

Stay tuned. . .

Wisdom from the Grove - Part 3

For those of you just joining us, this is part 3 of a series inspired by Andy Grove's epic book, High Output Management. You can find Part I and II here and here, respectively. So far we've reviewed pages 1-100. This post will cover pages 101-150.

Intel Plant, Philippines, 2007

We'll start with the awkward stuff. One of the main business decisions in this section—whether or not to open an Intel plant in the Philippines, and if so, where—is showcased to highlight the efficacy of 1) the "mission-oriented" meeting structure, and 2) Intel's decision-making process.

That's all fine and good, especially if you were in Cavite circa 2002 and you hear that Intel is pumping almost $100MM into your local economy.

However—and this is the awkward part—Intel actually shut down the Philippines plant and laid of 1,800 workers only 7 years later. Admittedly, it was during the worst bear market in over 75 years, but its worth noting that even the best management teams can't forecast macro demand forces more than a few years out.

Notes from pp. 101-150 of High Output Management

Let's start with a few quotes to warm up the tires:

  • "We must realize—and act on the realization—that if we try to focus on everything, we focus on nothing."

  • "I have seen far too many people who upon recognizing today's gap try very hard to determine what decision has to be made to close it. But today's gap represents a failure of planning sometime in the past."

  • "What do I have to do today to solve—or better, avoid—tomorrow's problem?"

  • "If you don't know where you're going, any road will get you there."

  • "It is entirely possible for a subordinate to perform well and be rated well even though he missed his specified objective." [Christopher Columbus analogy: he failed his Measurable Business Outcome (MBO)—find a new route to the Orient—but discovered the New World, thereby achieving Queen Isabella's objective: increase Spain's wealth]

Let this be a reminder that the DBT Ventures team members do not take ourselves too seriously. At times, while reading pp. 101-150 of High Output Management, it became fairly apparent that Andy Grove is ALL BUSINESS. Some levity would have helped lighten these dogmatic pages, but nevertheless he adeptly covers four topics:

  1. Planning: today's actions for tomorrow's output

  2. Hybrid organizations: a blend of mission-oriented and functional groups

  3. Dual reporting: when a individual contributor reports to two people

  4. Modes of control: different ways to make other people your bitch

With regards to Planning, most of the material presented is from the perspective of a manufacturer, specifically to forecast environmental demand, establishing current capacity, and creating a strategy to address the gap (or surplus). Andy doesn't do the work for you, but he provides a basic framework for thinking about planning.

Within Hybrid organizations Andy emphasizes something most of us already know: the vast majority of companies are "hybrid" orgs, meaning they have elements of both mission-oriented and functional organizations. No need to really rehash all that here.

Moving on to Dual reporting, we learn that at times it makes sense to have a single IC report to two different people simultaneously, especially if distance/region is a factor. That's about it.

Perhaps the most frustrating of the four, Modes of control delineates Andy's view of how to make other people your bitch. He of course doesn't write it this way, but that is exactly what the intended output is. He contends you can control people's behavior in the workplace via:

  • Free-market forces: price, as determined by counter parties operating under self-interest

  • Contractual obligations: written agreements with considerable overhead required

  • Cultural values: common set of values, objectives and methods

Andy then details the role of management in all of this, specifically how they 1) articulate and 2) embody cultural values. To identify the most appropriate mode of control, Andy presents the below chart along with a "CUA Factor" which stands for Complexity, Uncertainty, and Ambiguity to create a spectrum to reflect the nature of the environment for the worker.

The big takeaway here is: when the work environment is complex (high CUA) and individual motivation is based on self-interest, NO MODE OF CONTROL WILL WORK WELL. This is telling, because it is the representative of many of today's scenarios and illustrates just why management is so challenging.

 

Modes of Control, p. 149

Wisdom from the Grove - Part 2

This is Part II of a series inspired by Andy Grove's monumental business book, High Output Management. This series is designed for busy leaders seeking an edge on their day. Based on your feedback, we'll be breaking down Groves's 227 power-packed pages into 50-page summaries presented in actionable note format. But first, Dilbert.

If you're just joining us, be sure to read Wisdom from the Grove - Part I, the prelude to this post. 

Notes from pp. 51-100 of High Output Management

Before we jump in, its worth noting the structure of this book: 16 oddly-named chapters spanning four parts.

Part I: The Breakfast Factory

  • The basics of production: Delivering a Breakfast (or a College Graduate, or a Compiler, or a Convicted Criminal. . .)

  • Managing the breakfast factory

Part II: Management is a Team Game

  • Managerial leverage

  • Meetings—the medium of managerial work

  • Decisions, decisions

  • Planning: today's actions for tomorrow's output

Part III: Team of Teams

  • The breakfast factory goes national

  • Hybrid organizations

  • Dual reporting

  • Modes of control

Part IV: The Players

  • The sports analogy

  • Task-relevant maturity

  • Performance appraisal: manager as judge and jury

  • Two difficult task

  • Compensations as task-relevant feedback

  • Why training is the boss' job

The reason I've laid out the whole TOC is to 1) provide a lay of the land, and 2) share that this post will cover the last 3 bullet points of Part II which will put us about 50% through the book.

We'll start with a few quotes which highly Grove's prescient perspective:

  • "Beyond communicating facts, a manager must relay his objectives, preferences, and priorities". . .  [these are] "extremely important and a key part of delegation."

  • "How you handle your own time is the singly most important aspect of being a role model and leader."

  • "Because it is easier to monitor something with which you are familiar, you should delegate activities you know best."

  • "If people are spending more than 25% of their time in ad-hoc, mission-oriented meetings, you're likely facing malorganization [disfunction]."—which Grove attributes primarily to the ineffectiveness (or lack of) process-oriented meetings

  • "A meeting to make a decision should have at most 6-7 people, ideally less."

The premise of Part II is management is a team game. Andy supports this with best practices for getting shit done, i.e. humans working effectively with one another.

Wisdom from the Grove - Part 1

This is Part 1 of a series inspired by Andy Grove's monumental business book, High Output Management. This series is designed for busy leaders seeking an edge on their day. Based on your feedback, we'll be breaking down Groves's 227 power-packed pages into 50-page summaries presented in actionable note format.

Notes from the first 50 pages of High Output Management

We'll start with a few quotes to get the motor running:

  • "Let chaos reign, then rein in chaos." I don't even know what this quote means, but it somehow imparts a zen-like acceptance of business craziness with calm control.

  • "The output of a manager is the output of the organizational units under his or her supervision or influence." — Andy highlights this as the most important sentence in the book

  • "Activity is what we actually do and often seems trivial. Output is what we achieve and is significant and worthwhile."

  • "In the softer professions it becomes very hard to distinguish between activity and output. Aim to maximize output. Optimizing for activity can actually decrease productivity.

  • "Output and activity are by no means the same thing."

Andy is a big proponent of increasing managerial "leverage", i.e. focusing on activities with a multiplicative impact on your team's output. Andy later challenges the reader (the former President of Intel challenges YOU) with 13 opportunities to take action on increasing their managerial leverage.

Here are the best five:

  1. Define the three most important objectives for your organization for the next three months. Support them with key results. (For tech readers: yes, this is where OKRs originated from)

  2. Look at your calendar for the last two weeks. Classify your activities as LOW, MEDIUM or HIGH leverage. Generate a plan of action to do more of the HIGH-leverage category. Identify two activities you will commit to reduce.

  3. Define your output. What are the output elements of the organization you manage and influence? List them in order of importance.

  4. Conduct work simplification (reduction of steps) on your most tedious, time-consuming task. Eliminate at least 30 percent of the total number of steps involved.

  5. Walk around more. Andy was a big believer in taking "tours" of other teams and facilities to absorb their process, habits  and challenges. Similar to Steve Jobs, Andy seems to value serendipitous encounters which help encourage the flow of information.

Other select notes:

  • p. 14 - think of your work as production measured by throughput / output. What is your "limiting step" [dependency]? What is your "in-process check" [QA]?

  • p. 17 - for each indicator try to have a "pairing indicator" to measure both effect and counter effect, especially for administrative work, e.g. quantity AND quality

  • p. 24 - "the most valuable indicator of business trends that I've ever seen is a month-over-month 4-month stagger chart forecast [pictured below]

  • p. 28 - don't forget Parkinson's famous law that "work expands so as to fill the time available for its completion

  • p. 35 - "work simplification" entails reducing the number of steps in a given process, usually by 30-50% based on Andy's experience

  • p. 48 - writing reports may seem mundane, but are often an exercise—or medium—of self-discipline; the process enforces discipline, and the writing is often more important than reading them

  • p.49 - Grove advocates ad hoc in-person meetings as the most effective method to conduct managerial business

  • p. 50 - beyond communicating facts, a manager must relay his objectives, preferences, and priorities which is an extremely important and key part of delegation

Here's that 4-month stagger forecast that was mentioned on page 24:

In closing, its worth mentioning that Andy Grove applied many of Abraham Maslow's psychological concepts within the work environment. For that reason we've included the now-famous hierarchy of needs applied to employee engagement.

How would you evaluate your team?