Too Many Would-Be Entrepreneurs Are Thinking About Their Ideas, Companies, and Investors All Wrong

As so often happens, the serendipitous intersection of one too many notes from the same chord in a short time have prompted me to post.  In this case, I am seeing a lot of evidence that would-be entrepreneurs just don’t think about their ideas, their companies, or investors as they should.

Case in point: I recently had dinner with a friend to do some catching up.  He explained that another mutual acquaintance had an absolutely brilliant idea for a startup.  My friend really wanted to be a part of it, and he confided that they were thinking of going the Y-Combinator route.  I’m sure it’s annoying to my pals (especially the ones who are themselves Angel or professional VC investors), but any conversation that focuses more on the investors than the idea and business models immediately launches me down a set path that the recipient often finds a little bewildering if not downright antagonistic.  Despite all that, I asked my friend why he wanted to go with Y-Combinator?  Why get any invested capital at all?

He spent quite a while, too long really so it only lit my fire brighter, talking about the $30,000 they would receive in exchange for 15% of the company.  I asked him to explain what the $30,000 would allow him to do that he couldn’t otherwise accomplish on his own.  After all, $30,000 is really not very much money.  This goes to the heart of one way Entrepreneurs don’t think right about their plans.  If $30,000 seems like a lot of money to you, if it seems like an enabler of some kind, it’s my belief you’re using it to solve the wrong problems, and that in fact, they aren’t real problems to start.  You’re thinking of using it to quit your Day Job, to hire others, or to pay for advertising.  You don’t need to do any of that, as it turns out.

Let me explain–I’m a firm believer in Bootstrapping ala 37Signals.  Their formula is pretty simple–you can build a company on 10 hours a week while you keep your day job.  David HH wrote a great post on this not too long ago entitled “All or Something “.  The gist is that you don’t need to adopt an all-consuming commitment to get something interesting done.  The intro to his article is worth reading carefully:

One of the most pervasive myths of startup life is that it has to be all consuming. That unless you can give your business all your thoughts and hours, you don’t deserve success. You are unworthy of the startup call.

This myth neatly identifies those fit for mission: Young, without obligations, and few if any extra-curricular interests. The perfect cannon fodder for 10:1 VC long shots.

They’re also easier to rile up with tales of milk and honey at the end of the rainbow, or the modern equivalents, “compressing your working life into a few years” and “billon dollar waves”.

But running your life in perpetual crunch mode until the buy-out or bullshit-IPO fairy stops by your door is not surprisingly unappealing to lots of people.

In fact, what you do might even be better and more successful if you take your time by only working 10 hours a week on the idea.  I’ve seen this for myself with my CNCCookbook bootstrap.  The problem is you think you know exactly the right thing to build and if you could only get it done, riches would be yours overnight.  The reality is that nobody knows exactly the right thing to build in a vacuum.  You benefit by interacting with the market, and it takes time for the market’s message to come back to you and be properly infused in what you’re building.  You can’t infuse it at a 100 hour a week pace because it simply doesn’t come to you fast enough.  It requires a feedback loop and a little more gradual change.  This applies not just to the product itself, but to achieving a content-audience fit and then growing that audience to an interesting stage.  If you think otherwise, then you’re not being realistic.  You’re looking for that long-shot of completely unbridled demand that will seize your company and carry it in the vortex to the Land of Oz.  You’re looking for that 10:1 VC long shot.  Unfortunately, you don’t have a portfolio so that the 10 that didn’t work before the 1 that did doesn’t sink you.

Here’s the other issue–if you can’t overcome the kinds of problems $30,000 will solve without the $30K, you may not have the right idea or you may not have the right team for the idea.  Creating a successful multi-million dollar company is a big accomplishment.  If all it took was $30K, a little advice, and some networking, there’d be a lot more people with their own multi-million dollar companies.  There’s a set of skills your team must have.  There’s a set of qualities your idea and market must have.  Without them, $30,000 won’t begin to fix the shortfall.  $30K is just a convenience, not a solution.  It’s not even aspirin, it’s a vitamin pill.

So $30,000 is actually not really very useful to someone that is focused on the 10 hour a week plan.  Certainly it isn’t worth giving up say 15% of your company and potentially a lot more than that in terms of control and heartache that will still be there long after the $30,000 has been spent.  To his credit, my friend did get off the $30K after a little while and suggest that having all that networking and mentoring would be worthwhile.  That’s actually something I see as being much more valuable, but in truth, it actually isn’t all that hard to come by in Silicon Valley.  After all, the networking is one reason why we put up with so much cost to live here, isn’t it?  If you think you need an incubator to be mentored, to ask questions, and to learn how to do it, ask yourself how that’s any different than signing up for a bunch of the Anthony Robbins-style self-help seminars?  You know the kind–some flashy personality is telling you they have all the answers and they’re willing to share them so that you too can be a multi-bazzillionaire loved by everyone.  All for a price.  Guess what, this works for some people, but for most, they could’ve had the same answers without much effort.  I told my friend I’d be happy to help him understand how to launch and build a business having founded 4 software companies and been involved in 7 software startups.  I also told him the cautionary tale of those making their livings off such advice.

Hacker News is a good place to find such people, and I’m not picking on HN for it, that’s just where the paying customers are for these peddlers.  I call them the Entrepreneur’s Self-Help Gurus.  Don’t get me wrong–there are some dynamite folks out there who can and will help you, but I’m referring to a different sort of group.  These are folks who did something that if examined closely, was not an especially big deal.  Yet now they’re making more than they ever did on the not-especially-big-deal telling other people how they did it.  ”I’ve got the secrets, and I’ll share them for just a small fee.”  Perhaps they created a software company in an odd little niche, never cleared more than $100K with it, but now they’re making $200K and more telling others how to do it.  To me, there is something wrong with that picture.  Just for kicks, I signed up for a bunch of the more popular pay-for-content mailing lists.  You can get them on sale all the time from AppSumo, for example.  After going through about four of them promising everything from SEO expertise to how to get 10,000 Facebook followers, I finally quit.  I hadn’t managed to learn a single useful thing from them.  In fairness, if I had been at the very beginning of my journey, they might have helped a little, but everything they had to say that was useful was available for free on some blog somewhere on the Internet that I had already read.  FWIW, I keep a clipping blog of such information I call Firehose Press.

I finally realized, that what these people were selling, was not the information, but the confidence to use the information.  That’s not something I really needed, and I hate to be a wet blanket, but if that’s what you need, are you sure you’re ready to be an entrepreneur?

One more thing on the subject of networking–you can go have coffee with so many extremely talented and successful people in Silicon Valley at the drop of a hat that it’s ridiculous.  People here are incredibly generous with their time.  Heck, if Y-Combinator fascinates you, go look up the Alumni and go ask them what they learned there and what they got out of it.  You just need to find a friend of a friend to introduce you and most decent people will share a cuppa joe with you.  Why not?  I often do.

Okay, so maybe the networking mentoring isn’t the thing.  What about all those juicy introductions to VC’s?  I have several problems with this one too, being the VC Curmudgeon and all.  It isn’t that I haven’t dealt with the VC’s.  In fact, they’ve been involved with every company I’ve been with until this latest one.  Let’s start with the intro process.  It’s not hard.  You need a CEO who they would want to talk to and an intro from someone they know.  If you have such a CEO, they can get that VC intro from someone they know.  VC’s actually want to meet people, they just want to meet people who won’t waste their time.  Same with Angels only it’s even easier to meet one of them and you might not need that CEO quite yet (but you will, so may as well find them so they can help you from going too far astray).  You don’t need Y-Combinator to meet these people.  What you need to meet a VC is pretty simple:

-  A product finished enough to be sold.

-  Real paying customers who will say extraordinary things about your product.

-  Traction.  The amount varies with the space, but there needs to be evidence that pouring gasoline on the fire will make it bigger in a hurry.

Too many entrepreneurs think investors want to give them cash to make some or all of those three things happen.  I won’t say it can’t work that way, but it works less and less that way every day in the Valley.  Y-Combinator, for example, used to invest more than $30K.  Most of the VC startups I’ve done raised a couple million dollars on a slide show and a team.  Those days are long gone.  You’re going to have to bootstrap to a greater or lesser degree (and mostly greater) anyway, so you may as well get started learning how to do it, even on 10 hours a week.  In fact it’ll be better if you limit yourself to 10 hours a week–it will teach you to focus.  The realization that I had to bootstrap to raise VC is what set me on the bootstrapping path, by the way.

Too many entrepreneurs think they need something to be able to be entrepreneurs.  They need money, advice, connections, confidence, permission, or at the very least, a guru they pay to tell them how it’s done.  But here is the amazing thing: you don’t need any of those things.  You can do everything that needs to be done in 10 hours a week to build a very successful multi-million dollar a year company.  Do that first, ahead of worrying about investors, and you will be 10x better off.  Because, here’s the thing, if that company explodes with a growth rate beyond your wildest dreams and you need a lot of capital right now just to keep the site up and running, that’s not a crazy home run extraordinary case for the VC’s.  That’s what they expect to see.  That’s what they’re looking for to get their checkbooks out.  That’s table stakes and we’ll see where it goes from there, whether you can monetize it, whether you’re the right ones to run it, and whether it is a passing fad.  If you have a deal at that stage, congratulations.  You’ll have to beat the VC’s off with a stick, and you’ll be able to dictate your terms.

But what if you don’t have one of those?

Don’t despair.  Remember:  an Enterprise Software Company that puts together a steady-but-not-sexy business and manages to get to $100M in revenue and an IPO is often seen as a failure in VC portolios.  They want the $1 Billion deals.  But you?  Heck, you’d be thrilled to be the 100% owner of a $15 million dollar a year software business with 20 employees that was throwing off cash like crazy and whose customers loved you.  That is unless you are that rare Zuck/Gates/Ellison/Brin type that really does care more for power than money or lifestyle, of course.

One last reference to recent influences that spurred this post.  I saw Jake Lodwick’s post in Pando Daily, “An Acquisition is Always a Failure.”  I understand exactly where this guy is coming from having had 2 of the companies I founded acquired.  Surpass was acquired by Borland and that was the Quattro Pro product and Integrity QA was acquired by Pure Atria.  Surpass was a great acquisition.  I joined Borland, we sold over $100M of Quattro Pro the first year, I moved up through the ranks to eventually run R&D for Borland in its heyday, and it was a fabulous company to be a part of.  I learned a lot.  Pure Atria was a great company too, but it didn’t last.  Six months after I got there it was gobbled up by Rational.  They already had a product with a brand that competed with Integrity QA’s product and it was based in Boston, not Silicon Valley.  Despite Integrity’s product being one of the most innovative things I have ever worked on (Genetic Algorithm-Based Software Testing), it basically never went anywhere because politically, it was stuck in a closet where there was no light.  It exists today as an IBM product called TestFactory, but it’s growth was stunted and it never recovered.

It’s fascinating to read the comments in Lodwick’s article and contrast them with where Jake is coming from.  He says:

Whereas we’d once been free to work on whatever seemed interesting, we now found ourselves in vaguely defined middle-management roles, sitting through pointless meetings where older doofuses who didn’t understand the Web challenged our intuitions and trivialized our ambitions.

That was basically my experience working for Oracle, where I learned a lot, but couldn’t accomplish much.  Similar with Rational.  Big Companies do work much differently than smaller ones, or as Jake says:

They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders. It wasn’t long before I was ejected like a virus.

Then he describes the frustration of being loose with money, but without company all founders who get acquired feel:

With a fat bank account, I was pretty set to do whatever I wanted for a long time. The sale afforded me the ability to make art, invest in other companies, and unwind. But it didn’t take long to realize that my new life was a hell of a lot less exciting than running an independent company had been.

So true.  Then we have the commenters, and as I read through them, it’s hard to see them as being focused on much but the money, whether this is an indictment of what they need to do (investors need an exit/cash out), or whether there aren’t a few examples where an acquisition made a thing far greater than it otherwise would have been (Android).  Most of them missed Jake’s message and wisdom entirely.

Here’s the thing.  At one point Jake talks about getting $50,000 checks each month.  Do the math carefully before you decide you need a VC-scale company to make enough money.  I went through one of those VC-backed Enterprise Software IPO’s, and while I made good money, it was #3 on my hit parade of exits.  Owning a business 100% that plops $50K checks on my desk each month would’ve been a much better deal, and this is to say nothing of all the deals that crash and burn because the VC was driving for a 10:1 Long Shot.  You have to live through a lot of Ramen noodles on the long shots, then maybe you’ll see that big payoff.  Or maybe you’ll have been diluted out of your mind and it won’t be such a big deal.  I’d have been much better off owning that $50K/month business that I could keep on running that doing the IPO I did.

In the end of the Day, as an Entrepreneur, you need to get crystal clear about a few things:

-  How much money do you need to get from your venture?  If $1M a year is a happy number, the chance is a bootstrap is much less risky than a VC deal.  Remember, income equates to investment portfolio about 20X.  That $1M a year income stream requires a $20M liquidity event after taxes before you can live like that without working.

-  How much control do you have to have?  Hey forget whether you’re an ego maniac.  I’m talking of control more akin to artistic control.  The control to deliver on what you do well.  On why everyone always says they love you, but that Boards, CEO’s, and Professional Managers are only too quick to override if it suits their agenda.  If that artistic control to do what you do best is important, adding people who own significant parts of your company can only dilute that control and maybe even result in your being “ejected like a virus.”  OTOH, if you want Bill Gates or Steve Jobs-style control over an industry, you’re gonna need VC’s.  If you want to change the world with Electric Cars and Private Spacecraft like Elon Musk, you’re gonna need VC’s.  Just be really honest with yourself about what you need versus what might be nice to have.

-  Most importantly, how will your venture change your life?  What does it have to accomplish to make you happy?

Too many entrepreneurs get signed up for the promise of (to quote David HH’s article), “compressing your working life into a few years.”  Sounds great, but it better be just a few years to put up with the amount of BS that kind of pressure cooker entails.  And the truth is, it is never just a few years.  It’ll be 10 long years to reach the conclusion, assuming it is a happy one.

Why not start out with a venture that makes you happy every single day you pursue it?  If it has VC potential, you’ll know soon enough and you can decide then what path to take.  If it doesn’t have VC potential, you may still wind up realizing everything you’d hoped for and more.  Even better, it may be at much lower risk.

 

Om Malik Boycotting Google Keep Because of Google Reader

Om’s boycotting Google Keep, and he’s damned right–every word he wrote.

Here’s the money quote for me:

It might actually be good, or even better than Evernote. But I still won’t use Keep. You know why? Google Reader.

I spent about seven years of my online life on that service. I sent feedback, used it to annotate information and they killed it like a butcher slaughters a chicken. No conversation — dead. The service that drives more traffic than Google+ was sacrificed because it didn’t meet some vague corporate goals; users — many of them life long — be damned.

Looking from that perspective, it is hard to trust Google to keep an app alive.

Google is now squarely in the Evil Doing Business, and it will cost them over time to get back out of that penalty box.  Regardless of how well Google Reader may have been doing in terms of revenue and strategic objectives, it was doing what it did for the wrong people to be messing with, starting with Om Malik.  I say that because the primary users were the very people who write the news on the web.  That’s a tough audience to make angry.

If Google was as smart as they claim to be, they’d issue an apology to everyone involved and make Google Reader promise to keep Google Reader happy and healthy for at least 5 more years before evaluating the decision again.

Google’s Story That Google Reader Traffic Declined Is BS When You Put That Traffic Alongside Google+

It wasn’t hard to read between the lines–I’ve been calling Google’s decision to drop Google Reader a Microsoft-esque decision made to try to push customers to their other products, and especially to Google+.  Google’s story that it needed to be done because of declining traffic is BS when you look at the real numbers.  Buzz Feed took care of that for us very nicely:

Not only was it not declining, it was actively growing, while Google+ stayed flat.  Cancelling projects like this is what happens when politically unpopular projects start to make the higher up’s projects look like failures.  It’s one of the many ways Big Companies manage to shoot themselves in the foot every day.  It isn’t a stretch to believe that somebody got concerned there might even be a resurgence in Google Reader’s popularity underway.

Check on Your SaaS Company’s Hosting Provider, Avoid Firehost

My CNCCookbook blog is experiencing it’s second outage so far this month.  That’s a cause for visitor unhappiness and potentially lost business.  I use Page.ly, because I believe in SaaS services.  CNCCookbook is bootstrapped, and I try not to spend any of my time at all doing something that I can easily have done for me by a SaaS provider, like hosting a WordPress blog.  Page.ly has been pretty good in most respects, though far from perfect in terms of outages.  Frankly, there have been too many outages and having two in one month is starting to be a bit much.  Their story is that their hosting provider, FireHost, has created both of these problems.

It’s even affected the Page.ly blog, as it did the last outage too.  Ironically, I wouldn’t be posting this blog except that Page.ly’s blog went to the same screen I’m showing here when I attempted to comment that maybe it was time they thought about Firehost alternatives.

Whatever’s going on at Firehost, and however much it saves Page.ly to use Firehost instead of some more reliable service, it’s not worth it guys.  It’s making you look bad, and through extension, that makes my business using your service look bad.  The good news is if it continues, it is very straightforward to migrate to Page.ly’s competitors.  I also have experience with WPEngine from a prior company, and found them to be more performant and a nicer service, but quite a bit more expensive.  Perhaps some of that expense is going to a better hoster for their service.  At CNCCookbook, we use Amazon for our own services and I can’t remember the last time we had an outage.  Maybe once have we had one, and it involved the simple expedient of rebooting our EC2 instance.

In the end, if I do move the CNCCookbook blog, I will be checking who the new provider uses as their hoster.  If it’s FireHost, there’s not much point in moving.  Some service should start aggregating up time data on the hosting services.  It would be good to know who your SaaS provider uses–unless they’re huge they probably don’t have their own servers–and how reliable that provider has been over time.  While it may not seem like it, it will be in every SaaS company’s best interests to cooperate with such data collection simply because it shines a light on the hosting providers that will require them to rise to the next level of reliability.  As it stands, they’re a step removed and much harder to track.

Sorry Page.ly and Firehost–no links for you.  Not happy today.

Charging for Your Product is About 2000 Times More Effective than Relying on Ad Revenue

I was reading Gabriel Weinberg’s piece on the depressing math behind consumer-facing apps.  He’s talking about conversion rates for folks to actually use such apps and I got to thinking about the additional conversion rate of an ad-based revenue model since he refers to the Facebooks and Twitters of the world.  Just for grins, I put together a comparison between the numbers Gabriel uses and the numbers from my bootstrapped company, CNCCookbook.  The difference is stark:

	Ad-Based Revenue Model			CNCCookbook Selling a B2B and B2C Product
	Conversion from impression to user	5%		Conversion to Trial from Visitor	0.50%
	Add clickthrough rate	0.10%		Trial Purchase Rate	13%
	Clickthrough Revenue	$      1.00		Avg Order Size	$ 152.03
	Value of an impression	$ 0.00005			$      0.10	=	1,976.35	times better

Let’s walk through it.

Both sites have visitors who convert to something more.  In the case of the Ad-Revenue model, presumably it is a person who creates an account on a Facebook or Twitter-like site, thereby becoming a user.  Gabe says that conversion rate for a really strong property might be 5%.  It can be much lower, like 1 to 3%.  I went with the optimistic 5%–the model is already too hard to contemplate 1%.  In the case of CNCCookbook, the conversion is from visitor to Trial user for the software.  We have a 30 day free trial on all our products.

From becoming a User or Trial User, the next conversion rate is monetization.  For the Ad-Revenue model, I did a quick search for clickthrough rates on display advertising and came up with 0.1%.  Sure, you might get your Users to click on more than one ad over time, but let’s just keep these numbers simple.  They’re not going to click on 2000 ads to even the score, after all.  For CNCCookbook, we have a very high conversion rate from trials–about 13%.  I view that as a commentary on the high quality of our software–people like it if they try it.  I understand conversions in the 5% are more common, so you may be forgiven for deciding the ad revenue model is only 1000 times less effective than charging for a product.

Okay, given those conversion rates, we take the average revenue per transaction and multiply all that on through to find the value of an impression.  What is it worth to you to bring another visitor to your site?

In this analysis at least, it’s pretty easy to see why bootstrappers need to be charging for their products and not relying on ad revenue.  Unless you just happen to have an amazingly viral product, it’s just too hard.  You have to rack up way too much traffic to get to interesting revenue levels.

Or, to put it like 37Signals:  Charge for your products, Dummy!

How Many Software Companies Monitor Their Software as Well as Tesla Monitors its Cars?

The unfolding story of how the New York Times’ negative review of the Tesla Model S may have actually been faked is a cautionary tale for software vendors.  Basically, there is enough instrumentation and feedback built into the Tesla S that Elon Musk was able to “shred” the review, as Dan Frommer writes.  The graphical plot of exactly what was happening with annotations is particularly damning:

It’ll be fascinating to see how the NYT responds.  Hard to imagine how they do anything but investigate Broder and ultimately move him along elsewhere.  To do much else would imply very little journalistic integrity.

My question for you is that since you’re reading this blog and are likely somehow involved in high tech hardware or software at some level, how does your product compare in terms of how well it can monitor what your users are doing with your product?

I’m fascinated with the idea of closing the feedback loop for the good of customers.  Yes, it’s great Musk can catch the NYT in a bogus review, and perhaps you will catch a reviewer too, but the potential for improving your customer’s experience is of much greater value to your product.  This may seem like a Big-Company-Only idea, but I’m pursuing it with a vengeance for my SaaS bootstrap company (CNCCookbook) because I need precise feedback that pinpoints where I can do the most good for my users with the scarce resources I have available.  I can tell you from experience that the tools are available and straightforward.  You can have the data for very little effort invested.

The next thing I am after is to automate responses to that data.  I’ve been reading the blog of a company called Totango with some interest.  They essentially want to provide SaaS automation for a Customer Success team.  Various folks have written about the importance of Customer Success and I’m also a big believer.  My thoughts at this point are to start out relatively simple.  I want to understand the early lifecycle of my products and be able to trigger automated actions based on that cycle.  For example:

Step 1:  Installation

Monitor the first time the customer has successfully logged into the product.  Offer increasing amounts of help via emails once a day until they achieve this milestone.  The emails can start with self-service help resourcs of various kinds and eventually escalate to offering a call or help webinar.  The goal is to get the customer properly installed.

Step 2:  Configuration

This seems like part of installing, but in fact there is significant post installation configuration needed for CNC Manufacturing software.  Same sort of thing: provide daily emails with increasing levels of help until the system determines that the user has properly configured the system.  Also, this is an opportunity to collect information.  We provide canned configuration for the most common cases and finding out what the next tranche of cases to target should be is very helpful.

Step 3:  The Path to Power Usage

It’d be great if everyone who signed up for our 30 day free trial actually got to see and understand all of the features that set our product apart.  I’ve seen some other products like Dropbox (Full disclosure: they give me another 250MB of storage if you use that link and then sign up. If you’d rather I didn’t get the extra storage, use this link instead. If you sign up, they’ll give you a link where you can get 250MB free too.) walk customers through a usage maturity exercise.  They’ve somewhat gamified it by giving out some of their “currency” in the form of extra storage if you complete the tasks.  My goals here would be to get everyone to see as many of our unique functions as possible during the 30 day trial.

Step 4:  The Holy Grail: Referrals

If all this goes well, the customer gets through the Trial, understands the unique capabilities of our products, and likes the product well enough to buy it, then the final stage in this incarnation is to ask them to refer others they know who might like the product.

That’s a pretty simple roadmap for how to create some closed-loop feedback of telemetry and drip email that improves your customer’s experience.  So I’ll ask again:

Is your company setup to monitor your users as successfully as Tesla monitors its drivers?  Why not?  I’ve used a lot of software where it is pretty clear they’re not monitoring much at all.  I’ve even talked to some of them to encourage change, and they seem receptive.

If you have a story about what sort of work along these lines you’re doing, please share it in the comments below.  I’m very curious.  I think we have the potential to personalize the experience for our customers like never before.

Just Got My Vanity Plates from LinkedIn

I recently got a notice from LinkedIn stating that my profile was in the top 1% out of 200 million in terms of how many people had viewed it.  So, they sent me my vanity shot:

It’s a nice letter.  I admit I puzzled over who could be spending so much time checking out my profile–seems like a lot more than 1 in 100 people would be ahead of me in terms of attention and name recognition out of the 200 million on LinkedIn.  I would count most of my LinkedIn contacts for starters.

However, it didn’t take much thought to conclude this was probably due to my bootstrapped company CNCCookbook.  We get about 1.5 million visits a year to the web site, making it one of the top CNC sites and almost certainly the most popular CNC blog.

In other words, my marketing is working.  That’s a good thing in a bootstrapped SaaS company.  What a great Age we live in when a SaaS company can be created by just one man and reach so many.

Big Data is a Small Market Compared to Suburban Data

Big Data is all the rage, and seem to be one of the prime targets for new entrepreneurial ventures since VC-dom started to move from Consumer Internet to Enterprise recently.  Yet, I remain skeptical about Big Data for a variety of reasons.  As I’ve noted before, it seems to be a premature optimization for most companies.  That post angered the Digerati who are quite taken with their NoSQL shiny objects, but there have been others since who reach much the same conclusion.  The truth is, Moore’s Law scales faster than most organizations can scale their creation of data.  Yes, there are some few out of millions of companies that are large enough to really need Big Data and yes, it is so fashionable right now that many who don’t need it will be talking about it and using it just so they can be part of the new new thing.  But they’re risking the problems many have had when they adopt the new new thing for fashion rather than because it solves real problems they have.

This post is not really about Big Data, other than to point out that I think it is a relatively small market in the end.  It’ll go the way of Object Oriented Databases by launching some helpful new ideas, the best of which will be adopted by the entrenched vendors before the OODB companies can reach interesting scales.  So it will be with Hadoop, NoSQL, and the rest of the Big Data Mafia.  For those who want to get a head start on the next wave, and on a wave that is destined to be much more horizontal, much larger, and of much greater appeal, I offer the notion of Suburban Data.

While I shudder at the thought of any new buzzwords, Suburban Data is what I’ve come up with when thinking about the problem of massively parallel architectures that are so loosely coupled (or perhaps not coupled at all) that they don’t need to deal with many of the hard consistency problems of Big Data.  They don’t care because what they are is architectures optimized to create a Suburb of very loosely coordinated and relatively small collections of data.  Think of Big Data’s problems as being those of the inner city where there is tremendous congestion, real estate is extremely expensive, and it makes sense to build up, not out.  Think Manhattan.  It’s very sexy and a wonderful place to visit, but a lot of us wouldn’t want to live there.  Suburban Data, on the other hand, is all about the suburbs.  Instead of building giant apartment buildings where everyone is in very close proximity, Suburban Data is about maximizing the potential of detached single family dwellings.  It’s decentralized and there is no need for excruciatingly difficult parallel algorithms to ration scarce services and enforce consistency across terabytes.

Let’s consider a few Real World application examples.

WordPress.com is a great place to start.  It consists of many instances of WordPress blogs.  Anyone who likes can get one for free.  I have several, including this Smoothspan Blog.  Most of the functionality offered by wp.com does not have to coordinate between individual blogs.  Rather, it’s all about administering a very large number of blogs that individually have very modest requirements on the power of the underlying architecture.  Yes, there are some features that are coordinated, but the vast majority of functionality, and the functionality I tend to use, is not.  If you can see the WordPress.com example, web site hosting services are another obvious example.  They just want to give out instances as cheaply as possible.  Every blog or website is its own single family home.

There are a lot of examples along these lines in the Internet world.  Any offering where the need to communicate and coordinate between different tenants is minimized is a good candidate.  Another huge area of opportunity for Suburban Data are SaaS companies of all kinds.  Unless a SaaS company is exclusively focused on extremely large customers, the requirements of an average SaaS instance in the multi-tenant architecture are modest.  What customers want is precisely the detached single family dwelling, at least that’s what they want from a User Experience perspective.  Given that SaaS is the new way of the world, and even a solo bootstrapper can create a successful SaaS offering, this is truly a huge market.  The potential here is staggering, because this is the commodity market.

Look at the major paradigm shifts that have come before and most have amounted to a very similar (metaphorically) transition.  We went from huge centralized mainframes to mini-computers.  We went from mini-computers to PC’s.  Many argue we’re in the midst of going from PC’s to Mobile.  Suburban Data is all about how to create architectures that are optimal for creating Suburbs of users.

What might such architectures look like?

First, I think it is safe to say that while existing technologies such as virtualization and the increasing number of server hardware architectures being optimized for data center use (Facebook and Google have proprietary hardware architectures for their servers) are a start, there is a lot more that’s possible and the job has hardly begun.  To be the next Oracle in the space needs a completely clean sheet design from top to bottom.  I’m not going to map the architecture out in great detail because its early days and frankly I don’t know all the details.  But, let’s Blue Sky a bit.

Imagine an architecture that puts at least 128 x86 compatible (we need a commodity instruction set for our Suburbs) cores along with all the RAM and Flash Disc storage they need onto the equivalent of a memory stick for today’s desktop PC’s.  Because power and cooling are two of the biggest challenges in modern data centers, the Core Stick will use the most miserly architectures possible–we want a lot of cores with reasonable but no extravagant clock speeds.  Think per-core power consumption suitable for Mobile Devices more than desktops.  For software, let’s imagine these cores run an OS Kernel that’s built around virtualization and the needs of Suburban Data from the ground up.  Further, there is a service layer running on top of the OS that’s also optimized for the Suburban Data world but has the basics all ready to go:  Apache Web Server and MySQL.  In short, you have 128 Amazon EC2 instances potent enough to run 90% of the web sites on the Internet.  Now let’s create backplanes that fit a typical 19″ rack set up with all the right UPS and DC power capabilities the big data centers already know how to do well.  The name of the game will be Core Density.  We get 128 on a memory stick, and let’s say 128 sticks in a 1U rack mount, so we can support 16K web instances in one of those rack mounts.

There will many valuable problems to solve with such architectures, and hence many opportunities for new players to make money.  Consider what has to be done to reinvent hierarchical storage manage for such architectures.  We’ve got a Flash local disc with each core, but it is probably relatively small.  Hence we need access to storage on a hierarchical basis so we can consume as much as we want and it seamlessly works.  Or, consider communicating with and managing the cores.  The only connections to the Core Stick should be very high speed Ethernet and power.  Perhaps we’ll want some out of band control signals for security’s sake as well.  Want to talk to one of these little gems, just fire up the browser and connect to its IP address.  BTW, we probably want full software net fabric capabilities on the stick.

It’ll take quite a while to design, build, and mature such architectures.  That’s fine, it’ll give us several more Moore cycles in which to cement the inevitability of these architectures.

You see what I mean when I say this is a whole new ballgame and a much bigger market than Big Data?  It goes much deeper and will wind up being the fabric of the Internet and Cloud of tomorrow.

Career Advice: When They Replace the CEO At Your Company, It’s Time To Move On

A word of warning: VC’s and CEO’s may hate this post, though more the former than the latter unless you’re the New CEO replacing the Old CEO.  I must also say that the Valley has gotten better in recent years as it has realized that replacing a CEO is no small thing.  Many now conceed that may be easier to train a good Founder to be a CEO than to get a CEO to understand what the Founder has hardwired into their DNA.  Nevertheless, replacing CEO’s is a very common thing in the Valley.  Young entrepreneurs have no idea how prepared their Board is to do so if they hit a rough spot.  I had a VC tell me one time, “Replacing people is what we do, that’s really how we add value.”  What the Young Entrepreneur may not know is that perhaps their Board made the decision to replace the Entrepreneur as long ago as the very first time they gave them money.  I guarantee any smart investor will have thought about it and decided how far they think the Founding CEO can take the company.  A clock may be ticking that the Founder doesn’t even know exists.

I will leave aside the discussion of what the replaced CEO/Founder ought to do.  They’re going to have to figure out how to make peace with the new arrangement and whether to stick with their company.  Ideally, everybody knew it was coming and the Founder didn’t even want to be the CEO.  Equally as ideally perhaps the New CEO and the Board will continue to see some value in keeping the Founder around and that value will be something the Founder is prepared to deliver.  In that case, maybe there is hope and you should disregard this post.  These are matters for the Founder to consider with regards to their career, but if you’re not a Founder, read on because your situation is different.  This is not about whether it’s possible to hire a better CEO or whether there aren’t companies that have done very well hiring new CEO’s.  It’s not about the fate of companies at all, it is about the fate of your personal career.  This is about some math and some personal experience that both speak loudly to my own calculations about career.

First thing is, I have a fair bit of experience with this process.  Out of 7 gigs so far, 3 have involved a CEO replacement and at the most recent one, I was the CEO that replaced the incumbent.  Based on the experiences of the first two I had decided that if the CEO was replaced in future gigs, I was moving on.  This is what I told the Board the first time they came to me and wanted to replace the CEO at the third gig.  What I hadn’t counted on was that they would ask me to step up to the position at a later date.  Somehow, when that happened, I forgot my old plan and launched into the CEO job with gusto.  We showed immediate strong growth and got the customer to where it should’ve been in terms of financial metrics for a SaaS company of our size.  It didn’t matter in the end and the company failed because it couldn’t raise a round (which is the cause of death for most startups).  I should have stuck with my original plan and moved on when the CEO was replaced.

I can walk you through the whole story and point to ample extenuating circumstances for why the company couldn’t raise a round–we needed to raise that round shortly after the 2008 Dinosaur-killing Sequoia memo went out, one of our two VC’s wouldn’t participate because they had investments in competing companies, yada, yada.  It’s all bullshit because these were symptoms and not the disease.  When Boards replace CEO’s they are fixing a Big Problem.  Typically it is a very big problem, although it may not be the problem you think it is.  You’re there, in the trenches, focused on winning at your startup.  Your Board is jaded, they have a lot of other investments, and they’re focused on minimizing their pain while they let their winners run with as much rope as possible.  They are far more subject to Deal Fatigue than you are, and they’ve heard so many presentations filled with facts and figures that they’re much more willing to go with their Gut.  They have the luxury of going from your Board Meeting, which is depressing as heck, to one at another portfolio company that is leaping over tall buildings in a single bound.  Only the very best Board Members can be objective and keep all these experiences separate.  Put your hand in cold water and then into lukewarm water and the lukewarm feels scalding hot.

That Big Problem will be described in rational terms like, “This company has never hit a target yet on Sales.”  But, the reality may simply be that not only are they tired of dealing with missed targets (which may have been overly optimistic, missed by just a little bit, or impacted by Outside Events out of the Company’s control), but they’ve also lost their optimism, and they don’t trust the Old CEO.  That’s a very dangerous Big Problem to try to solve because Deal Fatigue magnifies the scale of every problem.  You see, the VC’s never had the degree of Hope and Fanaticism that I hope you came into the deal with.  They can’t, they’ve seen too many fail and they’re totally bought into the Portfolio Effect.  They don’t have to fight every battle tooth and nail, they just have to know where to double down and where to cut their losses.  You can’t take it personally, it’s their job and their business and they are good at it.

So if the CEO is being replaced, your business is probably facing the very biggest problem the Board can imagine plus a lot of subjective negative momentum that only the Board feels.  It’s both a numbers problem and a relationship problem.  Naturally there must be a relationship problem, because events are leading to a divorce.  Sure, maybe it’s all proactive and there’s no problem beyond a little growing pain.  Right.  And maybe that horse over there is really a unicorn that temporarily misplaced his horn.  There are two cases to replace the CEO:

1.  The incumbent was never going to take the whole trip and knows it and everyone has found a happy upgrade.  This is a Good CEO Transition.

- or -

2. That Big Problem is staring the Board in the face (numbers) and they don’t believe the incumbent can get through it (relationship).  This is a Bad CEO Transition.

This is the time to take a good hard look at the Old CEO and ask yourself whether they were the sort that never planned to finish the job and they welcome an incumbent.  You can tell if you’re any kind of judge of character at all.  The signs will have been there all along.  The Old CEO will be too young and inexperienced.  They will lack ultimate leadership potential and CEO gravitas.  The new guy, meanwhile, will be much more experienced and will carry much more gravitas.  They’ll be exceedingly smooth and confident.  There will be at least an initial sense that the old and new CEO’s like each other.  Those are some of the signs of a good CEO transition.

In a bad transition, the new guy may be a little more experienced at being a CEO or they may be the same or less CEO experience.  They often have a totally different background, “Hey, all we need to do is replace this Engineer with a Sales Guy and we are Golden.”  They often have a track record that has little to do with Startups and everything to do with having been a lesser executive at a much bigger company.  It’s the first CEO gig for an SVP of Sales, for example.  When they’re together, which will be rare, the Old and New CEOs don’t talk to each other much and don’t make much eye contact.  The Old CEO is either completely absent or remarkably quiet compared to his old self.  He’ll have nothing to say about his plans going forward.  ”I just want to take some time off to relax with my family and decide what I’ll do next.”  Lastly, if the New CEO has some kind of amazing comp package, that’s a sign that an otherwise talented exec is being asked to step in and do what the Board views as Mucking out the Stalls.  Those are some of the signs of a bad CEO transition.

If your company has had a tough time making its numbers, if it has been pivoting, if there is unusual pressure for progress, if you’ve either just raised or are about to raise a round, and you see the Bad CEO Transition Signs, get your resume in order.

Why move on if you’re dealing with a Bad CEO Transition?

First, let me direct you to Jason Lemkin’s missive about what the dilutive effects of a new CEO will be.  What he has to say is absolutely true and I’ve seen it from both sides of the table (as the New CEO and as an exec greeting the New CEO).  Virtually everyone except the New CEO and VC’s will be taking a significant equity haircut.  It’s got to come from somewhere and the New CEO is the savior while the Board doesn’t consider itself part of the problem.

Second, consider what happens after the New CEO is hired.  For starters, you know something ugly is out there in the Board’s purview, whether or not you’ve been told what’s going on.  If you don’t already know, nobody is going to let you in on the secret just because there is a new CEO–quite the contrary.  Publicly, there are no Bad CEO Transitions, there are only Good CEO’s brought in amicably for the continued maturation of the company.  Besides realizing there is a Big Problem, you also have to come to terms with the challenges New CEO faces in overcoming that problem.  No matter what anyone may think, CEO’s are punished way too much for failure and rewarded way too much for success.  In other words, New CEO is going to have to make a lot more changes because just changing the CEO doesn’t go very far to solving the Real Problem.  New CEO can’t do it alone.  They are going to need a lot more capital (hence the dilution Jason writes about) and talent.  Unless your problem is one of simple execution, New CEO also faces the problem of educating themselves enough on your company and space so they can begin to formulate a solution.  Once they arrive at a solution, it will nearly always require still more time to hire the right people to help facilitate that solution.

Translation:  There will be no progress on your Company’s Big Problem during the CEO’s first six months and still no progress for probably much longer.

In fact, there may be no measurable progress for more than a year, although a smart New CEO will find something to declare victory on within 6 months.  Meg Whitman wants five years to show much progress at behemoth HP.  The reason it’ll take much longer is that even after the CEO formulates a new plan (what they’re doing the first six months), they must then get all the rowers in the boat moving in that direction and doing so with enough force that it has some measurable impact.  During that time, at least another six months, all sorts of unpleasantness will surface.  Anyone in the organization with a political bone in their body will be trying to romance the New CEO either to advance their own personal position, get New CEO to embrace their agenda for how to make it all better, or often both.  All those battles Old CEO fought to get the troops aligned and moving in one direction are suddenly undone, and the Old Combatants will be back to thinking they were right in the first place and the fact that Old CEO lost his job just proves it.

There is a tiny bit of good news in that if New CEO has been around the block and is smart, he knows darned right well the politicians are out in force and he is taking notes.  When he has a good idea who the worst offenders are, he will replace them with his own Trusted Lieutenants.  That’s good news assuming the Trusted Lieutenants are less political and are genuinely stand-up people who will help the Company succeed.  New CEO will probably also replace whoever runs the part of the company perceived as being the biggest part of the Big Problem.  Of course determining the truth of that is also ripe for political discord.  Sales will argue the Product sucked or that Marketing never got them enough leads.  Marketing will argue Product didn’t listen to their Product Managers, didn’t build enough product, or that Sales didn’t follow up the leads they were given.  Product will argue there’s been Sales Execution problems or that Marketing never really understood their product and wasn’t able to present their beautiful baby in a good enough light.  Finance will skewer anyone that was off budget by even a little bit.  This will all slow down the ability of New CEO to figure out what is happening considerably.  The smart ones may just choose to ignore all the history, focus on the Big Problem, and just start implementing their idea of Best Practices in whatever parts of the organization are most likely to improve on the Big Problem.  This is scary to all concerned because the changes are not motivated by anything in the Company’s history–they’re motivated by New CEO’s history and experience, which is not yet well known or understood withing the Company.  That’s why it will seem like there is no rhyme or reason to the decisions being made–you won’t have the right background to understand them.

If you are unfortunate enough to be in one of the organizations affected by these changes, life will be tough.  Progress in your area will be delayed while this cycle of learning, renewal, and execution winds it way down through various org charts until it has gotten sufficiently far from the source of the pain (the Board is the source) and sufficient time has passed that we can’t afford to keep rearranging the Deck Chairs on every deck.  A lot of the changes will make no sense to you at all, and you may wake up one day to find yourself in a company that bears little resemblance to the one you were so committed to not very long ago.  Whatever your motivations–money, a chance to work on something really cool, belief in the dream, etc.–it may no longer be possible to pursue them.  At best, a lot of time will pass and you’ll look ahead and still wonder when things will get back to “normal”.

Does all of this really have to happen?

If you have a Bad CEO Transition, in other words, one to fix a Big Problem, then I’m afraid the answer is, “Yes, that’s pretty much how things play out.”  Whatever happens, it will take a lot longer than anyone hopes to fix things.  Often, things will not play out and the company will be in permanent decline.  None of the three CEO replacements I’ve participated in resulted in a company that was ultimately better off.  Two of the companies are dead (Borland was a $500M a year high flyer and it is still dead having fallen inexorably with Philippe Kahn’s departure), and one still has a chance to get there, but at least from a shareholder value perspective, their high point is a long time back.

What do you do in these cases?

If you are in the right position, likely an executive reporting to the CEO and someone who at least sits in the Board Meetings, you are in a position to see it coming.  Watch for what I call the Three Deadly Sins of a CEO:

1.  They’ve missed their numbers.

2.  The Board is not confident in their plan to fix #1.

3.  They are not taking coaching from the Board.

In every one of the Bad CEO Transitions I have witnessed, these three sins have been allowed to go on for too long.  That is a surefire way for a CEO to get themselves fired.  Make no mistake, every CEO will break all 3 deadly sins at some point.  Many will break 2 at a time.  Some will break all 3.  That latter group has a very limited time in which to show results before the Board will take action.  I would say 6 to 12 months depending on the level of Deal Fatigue the Board is fighting to maintain perspective against.  For startup CEO’s, Deal Fatigue is charged directly against Political Capital and when you run out of PC, you’re toast.  Unfortunately, Deal Fatigue carries on like any other debt, and even the New CEO inherits the Deal Fatigue which is charged against their PC from the outset.

If you are not in a position to judge the subtle nuances of the Three Deadly Sins of a CEO, you may have to wait until the deed is done and the Old CEO is out before you know what’s happening.  In either case, once you know what’s coming, it’s time to prepare your parachute because the plane is going to lose altitude quickly and may very well crash.  If you’re lucky, the Outside World can’t tell there is a Big Problem.  The Board and everyone else will try to put forward the face that it is all a logical progression.  Find your next position on the strength of whatever positive sentiment remains around the deal.  If you ultimately believe the deal will be a success, buy out your options as cheap insurance that you will still profit to a degree.

Perhaps the best way to look at it, if you can be so objective, is to consider whether you would take the job with the company as it stands with New CEO and knowing everything you know about it.  Forget the old Dream that taints your soul and judgement.  Do you want to work at a turnaround?  One way to do that is to assume you have to start vesting your options all over again with a 1 year cliff.  The dilution, confusion, delays, and added risk associated with New CEO are going to amount to the same result anyway.  If you’re like me, and you’ve seen how the movie ends a couple of times, you’ll regretfully move on to find something new and less tarnished.  Unless of course it’s you they’re asking to step up and be the CEO.  My advice if that happens is to only consider that job if you’re a corporate ladder climber at heart anyway.  If you’re an entrepreneur, you won’t be happy and there are easier ways to get to be a CEO with none of the downsides.

What happens if you stay?

There are two winning strategies in turnarounds–you either want to be the first to leave or the last.  The last to leave gets to reap any benefits of the turnaround and having been part of it, may be rewarded more.  But there is the certainty that at best, the Company will wind up back on whatever Dream Success Track you had imagined, but it will happen much much later than you’d expected.  Alternatively, you can go find a new opportunity that doesn’t have the Deal Fatigue and Political Shuffling needed before New CEO can be successful.  BTW, make sure your new opportunity’s CEO has been there for at least a year and tangible results are surfacing in your new company’s press releases lest you be jumping from the frying pan into the fire.

PS  Isn’t the Jobs-Sculley picture strangely prophetic?  Sculley is leaning on the Lisa, which was the more buttoned-down-and-business-like computer and Jobs is leaning on the upstart Macintosh.  That’s not unlike their styles, personalities, and even their track records.  Today there is no sign of Sculley or Lisa anywhere and the Mac is stronger than ever.  Also, the transition from Jobs to Sculley was a Good CEO Transition and the one back to Jobs was a Bad CEO Transition.  One put the company into a funk for years–so much for ignoring this advice to move on when it’s a Good CEO Transition.  Steve Ballmer represents another Good CEO Transition and an argument to have moved on from Microsoft when Gates left.

The Bad CEO Transition (back to Jobs) brought Apple back to life as one of the World’s Greatest Companies, but even that last miraculous transformation took quite a while–years.  If we look at the Return of Jobs as the Best Possible Bad CEO Transition, that’s another way to get the measure of how such things may matter for your career.

A/B Testing Your Sales Reps: Stellar Advice from Jason Lemkin

Jason and I don’t always agree, but Jason is a prolific blogger and a very bright executive you can learn from, so there’ll be a chance to agree somewhere down the road.  This latest post of his is one I loved.  He’s basically describing the problem of hiring your first Sales Rep if you don’t have an experienced VP of Sales to do the hiring.  The advice is simple:

If you only hire one rep, you won’t learn anything.  You’ll have no idea why they succeeded or failed.  If you hire two, you can look at the differences in style and results as well as benefit from the sum of both of their experience sets.

The analogy to A/B testing for marketing seems clear to me.  If you just make a change and roll it out, you have no idea how that change affected your subsequent results.  You can speculate that it drove them, but you really need to have the placebo in your testing to compare it against.  That’s why A/B testing is so important and I was tickled to see it applied to this problem.  It’s very smart advice.

I have known excellent VP’s of Sales who do essentially the same thing.  There is an old saw about how at any given time 1/3 of the sales reps are making their numbers, 1/3 are not, and 1/3 are so new it is too soon to tell.  Every year they fire the group that didn’t make the number so they can hire a new 1/3 and continue the process of Darwinian selection.  If the company overall misses, nobody fires the whole sales team, at least not if they had been making numbers in prior periods.