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Evil VC Seeks Minions for World Domination

Posted by Bob Warfield on January 30, 2014

EvilSeeksMinionsIf we substitute “Venture Capitalist” for “Evil Genius”, the placard on the right describes the Silicon Valley Startup Culture perfectly.  Yes, you young hopefuls, your friendly neighborhood (that’d be the Sand Hill neighborhood) VC really does expect you to sacrifice your lives in a play for world domination.  They don’t care about building a nice little $100M a year software business–that’s peanuts, doesn’t move the needle on the fund.  Son, it’s just not enough tonnage.  Must be prepared to work 24-7 for fascist psychopath for close to no pay.  Yep, that’s about the size of it.  They won’t even try to hide the fact–they write about how you should accept as little pay as possible.  In 2008 Peter Thiel went on record saying the best predictor of startup success is low CEO pay.  Really?  That’s the best predictor VC’s have come up with?  Thiel is not the only VC to suggest it, not even close, and they’re largely successful at getting what they want–75% of founders pay themselves less than $75,000 a year.

What about that business of “Messy death inevitable?”

I suppose it’s a function of how you define “Messy”, but the “death inevitable” part rings true.  VC’s these days want startups capable of reaching $1B in revenue.  The reason, as one explained to me over drinks, is that they make their exit when the startup IPO’s.  But in order to IPO at a reasonable valuation, they have to be able to paint a picture for those buying public shares that the company has years of growth left.  That’s how the Greater Fool theory works–you can never let people discover they’re the last ones and the valuation has peaked.  So what happens to $1B Unicorns?  First, by quantifying things at $1B, we learn that the Utility Curve for VC’s is drastically different than for most Founders.  Offer Most People $10M after 10 months of effort when they’ve never made even $1M, and an awful lot of them will say, “Yes.”  The VC’s will resoundingly say, “No,” and they’ll tell you that anyone who says “Yes” never should’ve raised VC in the first place.  BTW, I have been through that scenario personally and I can tell you it was a harrowing experience.

Getting back to that $1B Unicorn, the odds are not at all good.  Only about 0.07% of Consumer and Enterprise VC-Backed companies become those Unicorns.  That means, Dear Impressionable Young Founder, that your odds are one in 1428.  The odds of winning on a single number at roulette are nearly 40x better, and you don’t have to bet years of your life on the roulette number.  One in 1428 odds of achieving World Domination.

That Messy End will come about because of the inevitable terms in your legal documents with your financiers and because of how the system operates.  Consider if you had worked hard to achieve a modicum of success and sold a company for millions but none of the founders or employees got anything at all out of it except a job with the buyer while the VC’s saw a positive (but inadequate in their eyes) return.  Wouldn’t that be a messy end?  The key term in your documents that leads to tears is the “Liquidation Preference.”  Supposedly the market standard is 1X but I’ve seen numbers as high as 3X in some cases.  Now let’s suppose you’ve got a company that is sold for $50M.  That’s a lot of money: many would regard that as a successful company.  But, it’s only successful to the investors to the extent it generates a return on their investment.  Suppose they’ve put in $40M and have a 1X liquidation preference.  That means they get back their $40M right off the top.  Now there’s $10M left to split between the investors, founders, and other employees.  You’re probably diluted pretty good at this time, so let’s say non-Investors are getting $4M.  Suddenly your $50M sale is getting you more like $1M than the $5M you and your co-Founder expected.  It gets worse–with a 2X or 3X liquidation preference, you get nothing.

Make no mistake–the VC’s feel perfectly justified in all of this and see it as emminently fair.  Fred’s example from that link sure sounds fair, but as some of his commenters point out, it attaches no value to the sweat equity of the Founders and employees.  They may have worked years of their lives at sub-standard pay ($75,000 a year?) and not be entitled to a dime in a scenario where VC’s are getting all of their money back.

“NO Weirdos?”

Yes, the VC’s prefer to invest in the Old Boys Club.  Minorities and women will have a tough time breaking in, not that they are Weirdos in any sense, but the homogeneity of the VC Startup Club and especially of the VC’s themselves is strong.  You need to have gone to the right school and have the right background.

The VC’s BTW, are (mostly) not really Evil.  But they have certainly done everything in their power to create a set of rules that overwhelmingly favors their own success, even at the expense of Founders.  Looked at in the cold light of reason, it’s hard to argue it isn’t pretty much as the plackard about Evil Geniuses suggests, at least metaphorically.  Why then do Founders seek Venture Capital?

After talking to lots of Founders seeking advice (I’m on my 7th Startup, have founder 4 of the 7, and have had 3 happy liquidity events), I have concluded the primary motivator for Founders seeking VC is that they want to reduce their risk.  It’s ironic.  VC’s these days don’t accept Founders until they’ve forced the Founder to remove as much risk as possible.  You have to create a Product, find an Audience, and demonstrate Traction before they’ll put a dime in.  Or, you have to give away a surprising amount of your company for surprisingly little capital if you go the Incubator or Angel route.  Yet, these Founders are largely worried about two things they believe can reduce their risk.  First, they want knowledge.  They want people who have succeeded to tell them how to succeed.  Second, they want connections.  The Incubator promises to put them in touch with the VC’s when the time comes.  The VC’s promise more VC’s, talented executives, and many other contacts.  Founders want to be part of the Network.

Experienced Founders are less about the connections or knowledge, they’ve realized they can get connections and knowledge more easily in Silicon Valley than almost anywhere in the world.  Scratch the push for connections and knowledge up to inexperience on the part of young Founders.  Experienced Founders just want the VC’s check.  They want to get where they’re going faster and with the certainty that plenty of money in the bank promises to bring.  VC’s hate to be courted simply for a check.  It eliminates their view of how they differentiate their firm and belittles the possibility they will make a contribution from the Board.  Yet, even many VC’s share the view of many experienced Founders that aside from Cash, VC’s often add negative value.  No less a personality in the VC world than Vinod Khosla says 70 to 80% of VC’s add negative value.  If you look at the impact forcing a company to take unlimited risk in the quest to becoming a $1B Unicorn has, I would suggest that many companies that could have been successful by any non-VC standards and happily profitable got pushed too far and left behind a smoking crater when they fell short of joining the Unicorn Club.

One of my favorite bloggers is Seth Godin.  He writes about this odd conundrum perfectly in his short post, “How much does it cost you to avoid the feeling of risk?”  He’s talking about the risk of putting yourself out there, and it’s no different for Founders.  The VC’s are asking you to do most of the work of creating a successful company before they put any money in.  They’re asking you to do it on your dime.  Unless you have it thoroughly in your heart and soul that  you won’t be happy until you’ve created a Facebook or Google-sized success, forget the VC.  Finish the remainder of the work to create a profitable company instead of raising VC.  That’s the real essence of reducing your risk.

Turning your happy little company into a VC Startup is the first step on the ladder of radically increasing your risk because you’re committing yourself to swinging for the fence.  No bunts, no singles, doubles, or triples.  Swing for the fence, and if you miss, you’re a failure.  Make no mistake about it:

VC’s increase your  risk.

Posted in bootstrapping, business, strategy, venture | 2 Comments »

How Moore’s Law Put Apple in the Driver’s Seat and Cost Steve Ballmer His Job

Posted by Bob Warfield on January 24, 2014

With the Mac’s 30th anniversary, lots of folks are writing all sorts of articles about it, so I thought it only fitting to bring up my own thoughts on what happened and how Apple got control away from Microsoft.  It’s not a theory I have seen anywhere else, but it’s the one that makes the most sense to me.

Recently, I spent the afternoon upgrading my PC.  I added 2 higher capacity SSD disks, a new graphics card, and a new power supply.  I had planned to add a CPU with more cores, but I couldn’t find it and frankly, I didn’t look all that hard because I knew it wasn’t going to matter very much.

Upgrading my PC is something I used to do like clockwork every 2 years.  I looked forward to it and always enjoyed the results–my computer would be at least 2X faster.  While it didn’t always feel 2X faster, the previous machine (when I still had access to it or one just like it) always felt a lot more than 2X slower.  Life was good in the upgrade heyday for the likes of Microsoft and Intel.  Steve Jobs was this idiosyncratic guy who made cool machines that you couldn’t upgrade easily.  Everyone knew Microsoft had stolen a lot of Apple’s ideas but it was okay, because heck, Apple stole a lot of ideas from places like Xerox PARC.  There were Mac users, but they were a tiny minority, so tiny that Jobs was actually fired from his own company at one point.

Fast forward to my recent upgrade experience.  I hadn’t done an upgrade in 5 years, didn’t feel like I had missed much, and didn’t spend nearly as much money on the upgrade as I had in those times past.  Before that prior upgrade it was probably at least another 3 or 4 years to get to an upgrade.  That one 2 upgrades back was largely motivated by a defective hard disk too, so I’m not even sure it counts.

Times have sure changed for Intel, Microsoft, and Apple too.  Apple is now the World’s Most Amazing company.  Microsoft is in the dumper, Steve Ballmer has lost his job, and Intel just announced they’re laying off another 5000 people.

What happened?

People will say, “That Steve Jobs was just so brilliant, he invented all these new products around music, telephones, and tablets, that nobody wants PC’s any more.”  In other words, Apple out-innovated and out-Industrial Designed Microsoft.  They even changed the game so it isn’t about PC’s any more–it’s all about Mobile now.  We’re firmly in the Post-PC Era goes the buzz.  VC’s are in a rush to invest in Mobile.  It’s Mobile First, Mobile is Eating the World, mobile, mobile, mobile, yada, yada, yada.

But I don’t know anyone who has quit using their PC’s.  Quit upgrading?  Absolutely!  Putting a lot of time on their mobile devices?  Yup.  But quit using PC’s?  No.  Absolutely not.   There are many many apps people use almost exclusively on PC’s.  These are the apps that create content, they don’t just consume it.  One could argue they are the ones that add the most value, though they are not the ones that necessarily get the majority of our time.  Some people are totally online with Office-style apps, but they still much prefer them on their PC’s–no decent keyboard on their tablet or phone.  Bigger screens are better for spreadsheets–you can never see enough cells on the darned things.  And most are still using Microsoft Office apps installed on their PC’s.  CADCAM, which is my day job, is totally focused on desktops and maybe laptops.  Graphic Design?  Photoshop on a PC (well a Mac, and probably a laptop, but they sure don’t want to give up the big gorgeous monitor on the desk much).  Accounting and Bookkeeping?  That’s my wife’s daily work–Quick Books.  Enterprise Software?  Yeah sure, they got mobile apps, but mostly they’re desktop.  Did people unplug all the desktop clients?  No, not even close.  They simply killed the 2 year upgrade cycle.

People will say Microsoft was just too slow, copied without ever innovating, and missed all the key trends.  There is no doubt that all those things were true as well.  But think about it.  Apple has always been great at Industrial Design and Innovation.  Microsoft has always been slow and missed key trends.  Remember the old adage that it takes Microsoft 3 releases before they have a decent product.  That’s been true their entire history.  Something had to be different for these two companies and their relationship to the market.  Something had to fundamentally change.

What’s wrong with Microsoft and Intel has little to do with people quitting their use of PC’s and switching over to Mobile.  It’s not a case of choose one, it is a case of, “I want all of the above.”  There are essentially three things that have happened to Microsoft and Apple on the desktop:

#1 – People stopped upgrading every two years because there was no longer a good reason to do so.

#2 – People who wanted a gadget fix got a whole raft of cool phones and tablets to play with instead of upgrading their PC’s, and Microsoft botched their entry into the mobile market.

#3 –  People who wouldn’t consider spending so much money on a computer that couldn’t be upgraded when it would be clearly obsolete in 2 years suddenly discovered their computer wasn’t obsolete even after 5 years.  So they decided to invest in something new:  Industrial Design.  I can afford to pay for fruit on my machine, just like I used to pay for polo players on my shirts back in the Yuppie Age (I like cheap T-shirts now).  It’s the age old siren’s call:  I can be somebody cool because of a label.

#1 was an unmitigated disaster for Microsoft, and the carnage continues today.  #2 was a botched opportunity for Microsoft they may very well be too late to salvage and it created a huge entre for Apple.  #3 cemented Apple’s advantage by letting them sell high dollar PC’s largely on the basis of Industrial Design.

That’s the desktop PC market.  The server market has been equally painful for Microsoft, but we’ll keep that one simple since Apple doesn’t really play there.  Suffice to say that Open Source, the Cloud, and Moore’s Law did their job there too.  The short story is that there is still a certain amount of #1 in the server market, because machines don’t get enough faster with each Moore’s Law Cycle.  They do get more cores, but that largely favors Cloud operations, which have the easiest time making use of endless more cores.  Unfortunately, the Cloud is hugely driven by economics and doesn’t want to pay MSFT for OS software licenses if they can install Open Source Unix.  Plus, they negotiate huge volume discounts.  They are toe to toe and nose to nose with Microsoft.  So to those first 3 problems, we can add #4 for Microsoft’s server market:

#4 –  Open Source and the Cloud has made it hard to impossible for Microsoft to succeed well in the server world.

Why did people quit upgrading?

Simple put, Moore’s Law let them down.  In fairness to Gordon Moore, all he really said was that the number of transistors would double every 2 years, and that law continues in force.  But, people used to think that meant computers would be twice as fast every 2 years and that has come to a bitter end for most kinds of software.

If you want to understand exactly when #1 began and how long it’s been going on, you need look no further than the Multicore Crisis, which I started writing about almost since the inception of this blog.  Here is a graph from way back when of CPU clock speeds, which govern how fast they run:

Notice we peaked in 2006.  What a run we had going all the way back to the 1970’s–30 years doubling performance every 2 years.  That’s the period when dinosaurs, um, I mean Microsoft, ruled the world.

Oh but surely that must have changed since that graph was created?  Why, that was 7 or 8 years ago–an eternity for the fast-paced computer industry.  In fact, we are still stuck in Multicore Crisis Tar Pit.  A quick look at Intel’s web site suggests we can buy a 3.9 GHz clock speed but nothing faster.  By now, we’ve had 4 Moore Cycles since 2006, and cpu’s should be 16X faster by the old math.  They’re not even close.  So Moore’s Law continues to churn out more transistors on a CPU, but we’re unable to make them go faster.  Instead, the chips grow more powerful by virtue of other metrics:

-  We can fit more memory on a chip, but it runs no faster.  However, it has gotten cheap enough we can make solid state disks.

-  We can add more cores to our CPU’s, but unless our software can make use of more cores, nobody cares.  It’s mostly Cloud and backend software that can use the cores.  Most of the software you or I might run can’t, so we don’t care about more cores.

-  We can make graphics cards faster.  Many algorithms process every pixel, and this is ideal for the very specialized multi-core processors that are GPU’s (Graphics Processing Units).  When you have a 4K display, having the ability to process thousands more pixels simultaneously is very helpful.  But, there are issues here too.  Graphics swallows up a lot of processing power while delivering only subtle improvements to the eye.  Yes, we love big monitors, retina displays, and HD TV.  But we sure tolerate a lot on our mobile devices and by the way, did games really get 2X visually better every 2 years?  No, not really.  They’re better, but it’s subtle.  And we play more games where that kind of thing doesn’t matter.  Farmville isn’t exactly photo realistic.

Will Things Stay This Way Forever?

Microsoft got shot out of the saddle by a very subtle paradigm shift–Moore’s Law let them down.  Most would say it hasn’t been a bad thing for Microsoft to become less powerful.  But it is a huge dynamic that Microsoft is caught up in.  Do they realize it?  Will the new CEO destined to replace Steve Ballmer realize this is what’s happened?  Or will they just think they had a slip of execution here, another there, but oh by the way aren’t our profits grand and we’ll just work a little harder and make fewer mistakes and it’ll all come back.  So far, they act like it is the latter.

And what of Apple?  They’re not the only ones who can do Industrial Design, but they sure act like that’s all that matters in the world.  And Apple has made it important enough that everyone wants to do it.  Don’t get me wrong, I love Industrial Design.  One of the reasons I like Pinterest is it is filled with great designs you can pin on your board.  Is Apple really the only company that can do competent Industrial Design?  Do they have a monopoly on it to the extent that justifies their current profit margins?  Color me skeptical.  Think that new Mac Pro is more than industrial design?  Is it really that much high performance?  The Wall Street Journal doesn’t think so.  How about this hacker that made a Mac Pro clone out of a trash can:

GermanProHack2

GermanProHack

Is it as slick as the real thing?  Aw heck no.  Absolutely not.  But it was made by a hobbyist and professionals can do a lot better.  Companies like BMW are getting involved in this whole design thing too:

BMWAngleView

How Can Apple and Microsoft Win?

Apple has the easier job by far–they need to exploit network effects to create barriers to exit for the new mobile ecosystems they’ve built.  They’re not doing too badly, although I do talk to a lot of former iPhone users who tried an Android and believe it is just as good.  For network effect, iTunes is fabulous, but the video ecosystem is currently up for grabs.  Netflix and Amazon seem closer to duking that out than Apple.  Cook should consider buying Netflix–he may be too late to build his own.  Tie it to the right hardware and it rocks.He should consider buying Facebook too, but it may not be for sale.  Network effects are awesome if you can get them, but they’re not necessarily that easy to get.

Meanwhile, Apple will continue to play on cool.  I’ve been saying to friends for years that Apple is not a computer company, it is a Couturier ala Armani.  It is a coachbuilder ala Pininfarina.  It is an arbiter of fashion and style, but if the world became filled with equally as fashionable artifacts, it isn’t clear Apple could succeed as well as it does today.  Those artifacts are out there.  Artists need less help than ever before to sell their art.  Fashion is a cult of personality, packaging, and perception.  We lost the personality in Steve Jobs.  That’s going to be tough and Apple needs to think carefully about it.  They seem more intent on homogenizing the executive ranks as if harmony is the key thing.  It isn’t.  Fashion has nothing to do with harmony and everything to do with temperamental artistes.

Another problem Apple has is an over-reliance on China.  They’ve already had some PR problems with it and they are moving some production back to North America.  But it may not be enough.

Most people don’t realize it, but $1 of Chinese GDP produces 5X as much carbon footprint as $1 of US GDP produced here in America.  In a world that is increasingly sensitive to Global Warming, it could be a real downside if people realized that the #1 thing they could personally do to minimize it is to quit buying Chinese made products.  Apple can fix human rights violations to some extent, but fixing the carbon footprint problem will take a lot longer.  Apple is not alone on this–the Computer and Consumer Electronics sectors are among the worst about offshoring to China.  But, if the awareness was there, public opinion could start to swing, and it could create opportunities for alternatives.  And fashion is nothing but public opinion.  Ask the artists that have fallen because the world became aware of some prejudice or some viral quote that didn’t look good for them.  That’s the problem with Fashion–it changes constantly and there’s always a cool new kid on the block.

Microsoft has a much tougher job.  The thing they grew up capitalizing on–upgrade cycles–no longer exists.  They have to learn new skills or figure out a way to bring back the upgrade cycles.  And, they need to get it done before the much weaker first generation networks effects of their empire finish expiring.  So far they are not doing well at all.  Learning to succeed at mobile with smart phones and tablets, for example.  They have precious little market share, a long list of missed opportunities, and little indication that will change soon.  Learning to succeed with Industrial Design.  Have you seen the flaps around Windows 8?  Vista?  Those were mostly about Design issues.  Microsoft doesn’t worship Design with a capital “D” as Apple does.  It worships Product Management, which is a different thing entirely, though most PM’s fancy themselves Design Experts.  Microsoft is just too darned Geeky to be Design-Centric.  It’s not going to happen and it doesn’t matter if they get some amazing Design Maven in as the new CEO.  That person will simply fail at changing so many layers of so many people to be able to see things the Design Way.

Operate it autonomously from the top the way Steve Jobs did Apple?  The only guy on the planet who could do that is Bill Gates and he doesn’t seem interested.  But, Gates and Ballmer will make sure any new guy has to be much more a politician and much less a dictator, so running it autonomously from the top will fail.  Actually, Bill is not the only one who good do it–Jeff Bezos could also do a fine job and his own company, Amazon, is rapidly building exactly the kinds of network effects Microsoft needs.  The only way that happens is if Microsoft allows Amazon to buy it at fire sale prices.  Call that an end game result if the Board can’t get the Right Guy into the CEO’s seat.

The best acquisition Microsoft could make right now is Adobe.  It still has some residual Old School Network effects given that designers are stuck on Photoshop and their other tools.  Plus Adobe is building a modern Cloud-based Creative Suite business very quickly.  But this is a stopgap measure at best.

Can the upgrade cycle be re-ignited?

There is a risky play that caters to Microsoft’s strengths, and that would restore the upgrade cycle.  Doing so requires them to overcome the Multicore Crisis.  Software would have to once again run twice as fast with each new Moore Cycle.  Pulling that off requires them to create an Operating System and Software Development Tools that make can harness the full power of as many cores as you can give it while allowing today’s programmers to be wildly successful building software for the new architecture.  It’s ambitious, outrageous even, but it plays to Microsoft’s strengths and its roots.  It started out selling the Basic Programming Language and added an Operating System to core.  Regaining the respect of developers by doing something that audacious and cool will add a lot more to Microsoft than gaining a couple more points of Bing market share.  Personally, I assign a higher likelihood to Microsoft being able to crack the Multicore Crisis than I do to them being able to topple Google’s Search Monopoly.

Let’s suspend disbelief and imagine for a minute what it would be like.

Microsoft ships a new version of Windows and a new set of development tools.  Perhaps an entirely new language.  They call that ensemble “MulticoreX”.  They’ve used their influence to make sure all the usual suspects are standing there on the stage with them when they launch.  What they demonstrate on that stage is blinding performance.  Remember performance?  “Well performance is back and it’s here to stay,” they say.  Here’s the same app on the same kind of machine.  The one on the left uses the latest public version of Windows.  The one on the right uses the new MulticoreX OS and Tools.  It runs 8X faster on the latest chips.  Plus, it will get 2X faster every year due to Moore’s Law (slight marketing exaggeration, every other year).  BTW, we will be selling tablets and phones based on the same technology.  Here is an MS Surface running an amazing video game.  Here is the same thing on iPad.  Here’s that app on our MulticoreX reference platform that cost $1500 and is a non-MulticoreX version of the same software on a $10,000 Mac Pro.  See?  MulticoreX is running circles around the Mac Pro.  Imagine that!  Oh, and here is a Porsche Design computer running MulticoreX and here’s the Leatherman PC for hard working handy men to put in their garages, and here is the Raph Lauren designed tablet–look it has design touches just like the Bugattis and Ferraris Mr Lauren likes to collect!

ShelbyGT500KR

Performance is back and it’s here to stay!

Can it be done?

As I said, it is a very risky play.  It won’t be easy, but I believe it is possible.  Microsoft already has exactly the kind of people on staff already that could try to do it.  We were doing something similar with success at my grad school, Rice University, back in the day.  It will likely take something this audacious to regain their crown if they’re ever going to.  They need a Skunkworks Lockheed SR-71 style project to pull it off.  If they can make it easy for any developer to write software that uses 8 cores to full effect without hardly trying, it’ll be fine if they have no idea how to do 16 cores and need to figure that out as the story unfolds.  It also creates those wonderful lock-in opportunities.  There’ll be no end of patents, and this sort of thing is genuinely hard to do, so would-be copiers may take a long time to catch up, if ever.

This is not a play that can be executed by a Board that doesn’t understand technology very well or that is more concerned about politics and glad handing than winning.  Same for the CEO.  It needs a hard nosed player with vision who won’t accept failure and doesn’t care whose feathers are ruffled along the way.  They can get some measure of political air cover by making it a skunkworks.  Perhaps it should even be moved out of Seattle to some controversial place.  It needs a chief architect who directly has their fingers in the pie and is a seriously Uber Geek.  I’d nominate Anders Hejlsberg for the position if it was my magic wand to wave.

It’s these human factors that will most likely prevent it from happening moreso than the technical difficulty (which cannot be underestimated).

Posted in apple, business, multicore, platforms, software development, strategy | 2 Comments »

Everything You Need to Know About Email Marketing in One Tiny Little Post

Posted by Bob Warfield on December 13, 2013

seths.headTake the time to go read Seth Godin’s post about the 8 things you really need to know about email.  It’s short, totally to the point, and exactly the way my bootstrap business CNCCookbook tries to pursue email.  It has worked great for us and I get tons of love letters back as a result.

If you have all of Seth’s bases covered, you will too.  As I mentioned recently, we use Mailchimp (sounds like he does too) to automate as much of the email process as possible.  Interestingly, I have not heard a word from them about my post on their becoming less user friendly over time.  That’s got to be a first.  OTOH, as Seth points out, they’re just a tool and not really the important part of the equation.

 

Posted in bootstrapping, business, Marketing | Leave a Comment »

Sales Gets Too Much Credit and Too Much Cash for Selling

Posted by Bob Warfield on November 25, 2013

PutinCookiesOh boy, time for even more controversy.  Did he really just say that Sales gets too much credit?  Shouldn’t everybody be thinking that Sales is Job #1 for Everyone the way NetApp’s Tom Mendoza or countless other former Sales VP’s would?

It’s shocking, I know, for me to say what I just did and I don’t mean in any way to demean Sales. But all too often Sales wants to sit at the top of pantheon, call all the shots, take all the credit, get the biggest comp packages, and generally act like everyone should be working for them.

Boards and Investors eat this up because they’re short-term aligned, just like Sales, but we’ve seen countless times in American Business that there are problems with entrusting everything to the short-term mindset.  Just remember one thing–Steve Ballmer was a Salesman first and foremost, but it was on his watch that Microsoft lost their way.  It isn’t that Ballmer was necessarily a bad guy, or even a bad Sales Guy.  He’ll be the first to point to the steady growth in Microsoft profitability over his tenure.  Yet, there’s something desperately missing from these facile proclamations like Medoza’s in the Forbes article:

In the end, companies exist for one reason: to sell their product or service.  If the company can’t sell its product or service, it will fail–and all of the employees and managers will have to go do something else.  Everything that anyone in the company does, at any time, is secondary to the job of selling.

A company that gets too focused purely on selling their product or service runs the risk of losing sight of the partnership between Company and Customer.  They risk taking that Customer for granted and assuming there’s always more where that came from.  But we live in a world of frictionless communication, where we can cross 6 degrees of separation to pull a reference on any product, company, or person with ease.  We live in a world with a long memory, where bad service and bad product anecdotes live on perpetually on the Internet.  We live in a world where recurring revenue is King.  In short, we live in a world where Customers are Empowered and Sales is increasingly weakened.  The balance is inexorably moving to Customers.

It would’ve been more accurate and more enlightening if the Sales department could’ve been named “Closing” instead of “Sales.”  It’s what most of them do, it’s how they think, and it’s typically when they enter the process.  Of course as soon as you go down this line of discussion, the Sales Exec will back up and start talking very smoothly about a focus on Sales and Customers, but that’s a defensive ploy and largely semantics.  Sales is incented for short term performance, but the war is won in the long-term.  Sales are Closers which by definition is a short-term exercise.  Their employers can’t afford to pay them the rates they get to start any earlier in the Sales Funnel.  They wait for buying intent or, to use the jargon for it: they wait for qualified leads.

Ask yourself what’s harder:  convincing people who already want to buy a product like yours to pick yours, or convincing people they need the product in the first place?  Both are critically important, but a surprising amount of the work involved in either challenge has little to do with Sales.  If a company has no budget for your product category and Sales has to go in and create budget, that sends the sales cycle through the roof.  Especially in tough times like these where “creating budget” means a year of meetings and delays.  Sales is simply to expensive a tool to do that work.

Sales relies on Marketing to do its job right to get the word out so people create budget and then actually contact the company and become sales leads. Without leads, Sales accomplishes little selling. Sales relies on Product to build Products that are worth buying. Without something to sell, there can be little selling. Without decent word-of-mouth and references from Delighted Customers, it is a long uphill battle to sell and competitors eat your lunch.  Without great references and a great brand, what do you have left to compete with except price?  That’s a tough place to be in and still pay for expensive sales people.

Perhaps most of all, real scratch-golfing, Rolex timekeeping, Bally-loafer-shod, and Armani-suit-clad Salespeople rely on Market In-Efficiency for their success.  They need to be Information Gatekeepers.  They have to force you to go through them to learn anything.  They’re the guys who will insist prices not be published so they can negotiate.  They don’t like Content Marketing, they want the lead forms filled out in triplicate before they give a prospect the time of day.  The White Papers you’ll typically get are long on hype and short on substance.  Their sole purpose is to get you into a meeting with the Salesperson.  They’re the promise-them-anything-to-get-the-sale then move on to the next one gang.  I don’t mean to say it like it’s a Bad Thing, but it does promote a certain myopic perspective that is not especially well-aligned with a focus on Delighting Customers.  Ask any CIO who is in the business of buying expensive Enterprise Software what they think and they’ll point to scar tissue and tell you quickly that more transparency is always a good thing.

That’s why I tend to bristle anytime someone argues purely that Sales is Job #1.  At best I’ll settle for having Job #1 be Delighting Customers.

In the end, everyone has a role to play–the Closers, the Marketers, the Makers, the Customer Service people (or Customer Success is an even better way to think of it), and the Bean Counters (if nobody took record of the sale or billed the customer, there was no sale, just the cost of product going out the door).  It’s a Team Effort, and it’s very important to keep some perspective on that, particularly the Customer’s perspective if you expect to succeed in the long run.

Posted in business, strategy | 1 Comment »

Why Pay for Mediocre Marketing Advice When Good Advice is Free?

Posted by Bob Warfield on November 22, 2013

snake-oilOkay, it’s time for somebody to call BS on a practice I’ve seen for a long time.  This will probably get me some negative press, but it needs doing.  The practice I’m tired of goes something like this:

-  Entrepreneur starts up a bootstrapped business.  Enjoys modest success and quits Day Job.

-  Suddenly, they are the World’s Foremost Expert on Marketing, and they want to sell that expertise.

-  Often the expertise costs more than the product that let them quit their Day Job and often they make more on the marketing advice than on their “real” business.

I see this happen countless times, and it just strikes me as wrong.  Sure you made a few bucks with that obscure product that teachers love.  Sure you’re on a jihad against unicorns or who knows what.  Sure you quit your Day Job.  But are you really that big a deal that people should be beating down your doors to buy your marketing advice?  Well maybe.  Perhaps you even say you’re kind of a big deal, and in that particular case, you probably are.  But a lot of these folks just haven’t enjoyed that much success.

Ask some basic questions:

1.  What was their signature success that qualifies them to be your marketing mentor?

2.  How big was that success really?  How does that compare with what you hope to achieve?

3.  How many times have they succeeded like that?  Silicon Valley is filled with one trick ponies.

4.  Did they succeed only in frothy bubbly times, or do they have some success when times were tough?

5.  Did they product a big liquidity event or earn a great income year after year?

6.  If their core business is so great, how come they have time to be selling marketing advice?  Why are they selling marketing advice?

7.  If this advice is so special, are the other marketing luminaries quoting them?  Are they even part of that set?  Or are they just being quoted by their customers?  You know, the people that buy these things because they don’t know?

Young Entrepreneurs are vulnerable.  They’d have to be to give up a big chunk of their company for very little cash just so they can be part of an incubator they can learn from.  That’s another one of these deals that’s in the same category for me–you’re paying a lot for some advice that seems mediocre relative to what you can get absolutely for free.  Yeah sure, maybe you’ll make contacts that matter.  Guess what?  It’s not that hard to make contacts and there are cheaper ways to network.  Most successful people are surprisingly generous with their time and advice if you approach it right.

OTOH, maybe this incubator thing is just something you do so somebody will hang a credential on you that dispells some of your insecurity. You think that credential is so others will respect you, but mostly people respect success, not the promise of success.  A lot of this stuff is just getting in the way of getting on with it.  There is no group you can join, no person you can talk to, no degree you can get that will guarantee success.  It’s all up to you, and one of the first things you have to learn is how to sift through all the inputs and get what you really need while ignoring the rest.

I just hate to see people being taken advantage of out of ignorance or insecurity.  I’ve done 7 startups now, founded 4 of the 7, had 3 successful Big Exits (2 acquisitions and an IPO), 3 failures, and 1 very happily still going company.  That’s a pretty reliable track record where small business is concerned.  You don’t get that many hits accidentally.  I did my first run straight out of college in Houston, Texas at the tender age of 23 where there weren’t any incubators or anyone to ask for advice.  Most people thought I was weird or nuts for trying to start a software company instead of getting a real job.

When I was first getting my current bootstrapped company, CNCCookbook, going, I bought a bunch of those marketing products I’m railing against.  6 or 7 of them.  Each one was $75 to $300.  There was LOTs of information there to read.  Lots of formulas for success.  I was hungry to find the knowledge that had to be valuable because it wasn’t available for free.  I had everything from how to get 10 zillion followers on Facebook overnight to the you-betcha-sure-thing Guide to SEO.  But a funny thing happened.  Not one single one of those expensive products taught me anything I hadn’t already learned for free–not one of them!

We live in the age of Content Marketing, Inbound Marketing, or whatever you want to call it.  Many people are giving away extremely high quality information for free, just to get your attention, so they can sell you a real product or service.  You don’t need to pay a bunch of money for Joe-Average-Entrepreneur’s-Startup-Secrets-Snake-Oil-Course.  Real success stories are dying to tell you everything they know.

How can they do that?

It’s a time honored tradition in modern marketing.  So long as they have something else to sell, they give away valuable content free to earn your trust, interest, and attention.  I’ve used this method to build my CNCCookbook web site up to 2 million visitors a year–huge for the CNC Machining niche market.  It’s not that hard to do, but it takes some time, it takes some determination, some love for the subject matter, and the ability to write.  Personally, I think establishing contact with an audience via your content is a critical first step every startup needs to take–even before they have anything to sell.  I didn’t invent this idea–really talented marketing people did, and they’re out there today desperately trying to give away their best ideas to you!

Where’s the good free stuff?  Metaphorically, it is falling from the Internet sky on marketing blogs everywhere.  Seek out the most successful marketing software companies.  You know, the ones that really get content marketing.  There is a vast amount of great information pouring forth from their blogs.  You can even get materials a lot like the “marketing courses” these other guys sell by signing up for a white paper–no charge, they just want you to fill out a contact form.  You gotta believe marketing people who can successfully sell marketing software to other marketing people might just know a little something about marketing!

Here’s my short list of great blogs from marketing software companies:

KISSmetrics

Unbounce

I love split testing

MailChimp

ManageWP

SEOMoz Daily

Buffer Blog

Totango Blog

WordPress.com Blog

ComScore Voices

Get Elastic

Next, find companies selling marketing services such as SEO or other services.  Or they may be marketers that don’t sell anything to other marketers, but they’re just driven to write.  I guess I consider myself in that category.  I love to share information and ideas.  Again, there’s a ton of them with great blogs:

Analytics Talk

Chris Brown’s Branding and Marketing

Convince and Convert

Digital Marketing Blog

Futuristic Play by Andrew Chen

Heidi Cohen

Seth Godin

Quick Sprout (He’s Kind of a Big Deal)

IdeaLaunch

Jeff Bulla’s Blog

Marketing Tech Blog

Marketing Experiments Blog

SaaS Growth Strategies

Spatially Relevant

These people know each other.  They quote each other.  They respect each other.  If you want to learn from an expert, see who the other experts listen to.

Entrepreneur Resources abound too.  Get the word from fellow entrepreneurs and VC’s, but don’t pay for it.  You’ve got Hacker News full of from the horse’s mouth information by entrepreneurs and for entrepreneurs.  You’ve got more and more VC’s going on line to tell you what they think.  You’ve got tons of bootstrappers from 37Signals to SmugMug on down to guys like me, all telling you what they think and how they did it.  And they’re telling you all of that for free, or in some cases for the modest price of a cheap book like 37Signals or Seth Godin.

Stick all of those feeds into your RSS reader, then go find more.  Click through the links in the articles from these blogs–they lead to other rich sources of information.  Fill it up until you’ve always got a few hundred unread articles.  But try very hard to at least scan everything until you’ve got a good feel for what you’re missing if you don’t read.  While you’re scanning, start a ToDo list.  These are ideas from the articles you want to try and topics you need to research more fully.

Too much to read?  What’s the matter, you don’t have time to actually learn what it takes to be successful?  You need to be like a sponge early on, and none of those wanna-be-pay-me-for-my-sure-thing-courses are going to make that any easier than just reading this stuff that’s available for free.  In fact, they’ll make it worse.  They will also bury you in content, then they’ll send you endless emails trying to sell you even more content.  The difference is you are paying them your cash before you even know what you’re really getting.  Plus, you’re reading from one or a few sources and you don’t get to see what correlates and corroborates and resonates across many sources.  These guys I’m pushing above are giving it away for free and you can scan it and delete it if it isn’t of interest.  You’ll get the Gestalt view of it.  You’ll get a gut feel for how it all fits together.

What could be a more valuable way to invest your time?

Still not enough time?  You can add my own clippings blog, Firehose Press, to your RSS Reader.  Those are articles I culled from the Firehose–I subscribe to about 200 blogs–on marketing.  Articles that were good or that moved me to add something to my own personal ToDo list.  It gets updated less and less frequently because once I’ve learned the lesson, I don’t bookmark the same lesson over and over again.

Once you reach the stage where your ToDo list is getting long and you are skimming and deleting more than you’re seriously reading, you’ve lifted the plane off the runway.  Hopefully you’re reaching and audience and your next challenge is to get better at it.  You’ve now got an RSS Feed that’s filled with new ideas for your hopper every single day.  New A/B tests to try.  New tactics and strategies.  New ideas for content.

Good for you.  Instead of buying fish, you’ve now learned how to fish.  Go forth and be prosperous.  But don’t package up what you learned into some cheezy course or seminar.  You got there standing on the shoulders of others.  Help the next guy–reach down, grab their hand, and boost them up.

Posted in bootstrapping, business, strategy | 5 Comments »

Jump Starting a Small Business With Cloud Services

Posted by Bob Warfield on November 18, 2013

PennyPincherSo you want to start a small business, perhaps a bootstrapped tech company?  Good for you, I enjoy mine immensely.  Let me suggest you adopt a rule that I’ve used for a long time:

If it’s available in the Cloud, use the Cloud Service.  Don’t roll your own or manage your own server, even if it is a server in the Cloud.

The thing about a good Cloud Provider (or SaaS service, if you prefer), is that their service is their business.  If they’re doing it right, they can afford to know a lot more about it, do the job a lot better, and deliver it a lot more cheaply than you can.  Meanwhile, you have plenty of work to occupy your time.  Keep your focus on doing those things that uniquely differentiate your business and delegate the rest to the Cloud whenever you can.

That’s the high-level mindset.  Using this approach I have consistently taken companies that had significant IT burdens and gotten them down to where it takes a talented IT guy maybe 1/3 of their time to keep things humming along smoothly.  This for sites that have millions of visitors a year–plenty for most small businesses.  BTW, my instructions to the IT guy were to spend that 1/3 of time automating themselves out of a job.  They’ll never get there, of course, but all progress in that direction is helpful.

Why So Much Cloud Emphasis?

Let’s drill down on why I think that’s the way for small businesses to go.

First, there’s no need to deal with hardware and so that whole time-consuming effort of ordering the servers and setting them up is eliminated. You can turn cloud-based services on or off in seconds.

Second, the cloud-based services know how to manage their services because that’s all they do.  Suppose you choose to base your web presence on WordPress. You could deal with setting up the WP server on an Amazon instance and still be in the Cloud, but now you have to manage it (keep all the security updates going, run backups, optimize for speed, etc.). That takes time and expertise.

Or, you can let a service like Page.ly, ManageWP, or WordPress.com do all that heavy lifting for you.  Now you don’t even have to think about it much—it just happens and they follow industry best practices it would be hard for a small business to emulate.

Third, you can scale up and scale down. Small business traffic is very bursty. One day some big site like Techcrunch writes about you and your site is melting down—nobody can access it. You needed to scale up fast! The next day you’re back to your normal small business traffic. If you had invested the time and money in big scale, it’s wasted on those days laying idle. But, if you choose the right cloud-based host they can scale up and scale down automatically for you.

BTW, this is critical for good Google results as they penalize slow sites on SEO.

Okay, How Can My Business Use the Cloud to Best Effect?

I’ll cover this one by what I see as the critical business phases:

1. Reach your audience

Job #1 has got to be creating a web presence that lets you reach your audience. You need to do this even before you have a product to sell them, because you’ll need to take advantage of the time you spend building product to optimize that audience touch point. Towards that end, you’ll want the following:

-  Web Site with Blog: I highly recommend building that around WordPress using a WordPress Cloud Hosting service. It lets you leverage the huge WordPress ecosystem which means lots of off-the-shelf plugins and know how to make your web site sing with minimal effort on your part.

-  Analytics and A/B Testing: Get hooked up with Google Analytics via a plugin for WordPress so you can monitor what people do on your site and use that feedback to improve your Audience attraction and engagement. A/B Testing lets you try pages side by side to see which one works best. It takes time to optimize, so don’t wait until you’re ready with product. Start day one trying things to see what works.

-  Social Media: Get your Facebook, Twitter, and LinkedIn pages going ASAP. If nothing else, you need to nail down your presence and brand in those places. Use WordPress plugins to automate the interconnection of Social Media with your web site.

-  Domain: Don’t bother picking a company name until you nail your custom web domain. Read up on SEO aspects of that to make sure the domain is helping you pull traffic. Get yourself a DNS service such as DNSMadeEasy or one that Amazon provides. This will let you tie together disparate Cloud Based services under your brand and domain.  The DNS decides what computers actually get the message when someone types in a URL.  It’s like the central switchboard of your web presence and you’ll use it for all sorts of things.  It’s also your lifeline if some emergency strikes a Cloud provider and you need to bypass them to get to an alternate of some kind.

-  Email: Gear up both your firm’s employee email plus an email service you can use to email customers.  Start building your mailing list day one so you have as big a list as possible available to help when you’re ready to launch. I like services like MailChimp for the mass mailings and services like Google Apps for employee email. Be sure your email service includes easy integration to your WordPress blog and start a weekly email newsletter from day 1.

-  SEO: Learn to master your own SEO activities. It affects every aspect of your web presence. You have two audiences—people and the machines that are performing search at places like Google or Bing. You can’t afford to fail either audience. There are a variety of Cloud Services that can help you with this such

-  Surveys: You need all the feedback you can get to guide your efforts to reach your audience. I like SurveyMonkey and Qualaroo.  Survey Monkey does complex surveys.  Qualaroo does neat little spur of the moment unobtrusive surveys.  Both are extremely useful.  I use Survey Monkey for targeted surveys that go out via email and blog posts.  You get a survey when your free trial ends.  I use them to research market topics.  They’re great for creating interesting content–people love to read survey results.  Qualaroo is on key web pages asking:

“Would you recommend this product?”  on the download page

“What articles should we be writing?”  on the blog

“What can we do to make this product more likely something you could buy and use?”  on the pricing page and elsewhere.

-  Customer Service:  Customer Service isn’t just about fixing product problems.  It’s about giving your audience a way to reach you and a way to reach each other to engage.  As such, it’s worth setting these systems up from Day 1.  For my businesses, I want a Customer Service solution that offers a pretty big menu:

Trouble Ticketing.  This is the classic Customer Service app but it’s the one you’ll use the least often if you’re doing it right.  Consider Trouble Tickets to be a failure.  A failure to prevent the problem before it started.  A failure in documentation or user interface/experience.  A failure to communicate.  The customer’s point of last resort.  You have to have Trouble Ticketing, but you want to do everything in your power to make sure Customers never have to use it.

Idea Storming:  I love giving customers every possible way to provide feedback.  Ideation is the ability to put an idea on an idea board and vote on it.  Give customers a fixed scarce number of votes and then pay attention.  Whatever rises to the top on the voting is something you need to deal with.

Forums:  Own your own forums even though there are lots of forums out there.  Make them private and require some form of sign up.  This is your exclusive User Club.  Be very responsive on the forums.  Go there first and Trouble Tickets second.  If you help someone with a problem on the forums, others can see the answer and potentially be helped in the future.  If you help someone by closing a Trouble Ticket, you only helped them and the effort is not leveraged.

Knowledge Base:  You want a KB integrated with the rest of the Customer Service experience so that as someone enters a Trouble Ticket, they are directed to KB articles that can potentially help.

I use a service called User Voice to do all those things except the forums.  I use a free BBS service for that.

2. Build your product

If you’ve got a software company, or perhaps an e-commerce company, you’ve got to build some software.  There are helpful Cloud services here too:

-  Source Control: You need source control day one.  Being without it is like jumping out of an airplane without a parachute.  I like Github but there are lots of others.

-  Bug Tracking: For bug tracking and the like, Atlassian and others have this base covered. Don’t confuse it with Customer Service software, which I will cover under E-Commerce.

-  Online information resources: There are so many here I can’t begin to count, but we live in an age where there are literally thousands of developers helping each other online in all kinds of ways.  StackExchange can answer almost any technical question you might have. Online forums are there too for more specific areas.

-  Consulting: Need quick design work but don’t have a designer on staff yet? Need a specialized piece of code written that’s just part of your solution but nobody knows how? Need a little extra testing help or maybe some tech writing? There are tons of services like Elance that can get you some high quality temporary help.

3. E-Commerce

For this stage, you have a vibrant audience, big and growing email list, and your product has had a successful free Beta test. Time to start charging. Here are some things you may need to take the order, process payments, and handle the accounting:

-  Shopping Cart: If you chose WordPress, there are tons of plugins to help. But, they’re not the only game in town either.

-  Payment Processing: Who will process credit cards for you? Lots of possibilities ranging from Paypal to Stripe.  Be sure your processor covers International sales and any special needs you may have, like recurring payments for subscription services.

-  Accounting: A lot of these services can connect to QuickBooks to make your bookkeeping easier.  Scope that out in advance.

How Do I Choose the Right Service?

With so many different kinds of Cloud Service, it is hard to be specific. So, I’ll talk about the generic:

- Look for an online and vocal fan club for the service. It doesn’t take long with Google to see which services are loved and which ones are marginal.

- Look for companies similar to yours that use the service proving someone else has tried it and succeeded. Try to contact those companies and see what they think of the service. I’m not talking competitors—they won’t help. But there are always similar kinds of companies that don’t compete at all.

- Make sure you have a roadmap for what you need your services to be able to do for at least the next 2 years. Get your developers and others to review the proposed service against the roadmap and make sure you won’t have to switch down the road. It’s a good exercise to have that Roadmap available anyway—it’s just a wish list of everything you want to do for Marketing, E-Commerce, and Product over the next 2 years.

- Get your developers to look carefully at the published API’s for the services. Even if you won’t be using any API’s early, someday you might. The quality of the API’s is an indication of how well architected the service is too.

Conclusion

You can build a pretty amazing online Customer Experience if you make full use of available Cloud Services as described.  If you have build all of it, set up the servers, do the backups, install all the updates, and so on, you’ll be wasting a lot of your time that could be spent doing other things.

Posted in bootstrapping, business, cloud | Leave a Comment »

Does Your SaaS Company Have to Have a Sales Force?

Posted by Bob Warfield on October 7, 2013

used_cars_SalesmanAny time absolutes are being bandied about, I have to do the fact check.  Sorry, it’s just an automatic reflex.  We live in a world that is largely gray and seldom black and white.  This was never more true than in the world of startups.  Entrepreneurs need to see both sides of every coin before they cast their lot in any particular direction.  BTW, I get Jason’s posts directly via email thanks to Google+ (bloggers, take notice), so I seem to disagree with him fairly often.  It’s really more that his posts get to the top of my queue more often than others–I love a great deal of what he writes.

Fellow Enterprise Irregular Jason Lempkin just penned a post, “Curse of the Middlers:  Why Happiness Officers Can’t Stand in for True Sales Professionals.”  It’s a decent article if you start out a priori thinking you must have a Sales Force, but it never really delves into the question of whether you need a Sales Force.  That’s a pretty darned important question that goes to what your basic business model is going to be.  There’s a little bit of hand waving about the possibility of companies like Atlassian or 37Signals which have not needed sales forces.  Jason basically says:

Well maybe you can.  More power to you.  As long as there is enough momentum in your business to hit your revenue goals without a true sales team, then by definition you don’t need one.

I don’t think this is right.  It isn’t a question of whether there is enough momentum and it certainly isn’t the case that adding sales can always increase momentum.  Sales is not something you can necessarily add to any business and expect it to make a difference.  It is integral to what the business model is in the first place.

Let’s drop back a few paces and you’ll see what I mean.  I was with a startup one time who had the luxury of having Geoffrey Moore (Mr Chasm Crosser) come in to advise us about the business.  If ever there was a guy who understands the arcane alchemy of how to combine products, markets, marketing, and business models in successful combinations, it’s Geoffrey.  His view of the whole Sales thing is that it is a question of ASP’s.  Below a certain ASP, a Sales Force won’t work.  The numbers we talked about were along these lines:

0 – $15,000:  Forget the Sales Force.  Focus on reducing the friction to purchase.  This is where the Atlassians and the 37Signals thrive.  These are pure Marketing plays, and there are zillions of successful businesses that work this way.  One could argue most successful businesses do.

$15,000 – $100,000:  No Man’s Land.  It’s too much money to expect the buy to put on their credit card, yet it is too little to field a Sales Force profitably.  You can argue Telesales works here, and it can towards the upper end.  This is also traditionally good territory for Dealer networks, which is yet another business model.

Over $100,000:  Prime Sales Force Territory.  When I worked for Oracle, Sales used to tell us product people that if they couldn’t charge at least $100K, they wouldn’t even look at the product, even as an add-on to something else.

Looked at in those terms, it becomes fairly straightforward to understand whether you need a Salesforce or not.  Let’s consider some potentially extenuating circumstances, and also consider as an entrepreneur whether you want to try to steer towards one of these or some other (realizing you probaby wouldn’t ever want to steer towards, “No Man’s Land”).

I Just Started My SaaS Company and No Way Am I Getting $100K.  None of Them Do.

Yep, it’s true.  Welcome to the world of needing reference accounts.  You don’t start with $100K sales day 1.  Not even year 1.  If you have an offering capable of commanding such sales,  You won’t be ready to take them down until you’ve gotten enough credibility through reference accounts to satisfy they buyers you’re worth betting on.  The last Big Sale + Sales Driven company I worked for was Callidus.  I was with the company from $12 million in revenue through IPO.  You could see tangible results each time a bigger customer was signed up.  Nobody ever liked being your biggest customer unless there were no alternatives or it was such a screaming deal they couldn’t lose.  But, as soon as you could point to someone bigger, suddenly you had almost infinitely more credibility.  Steadily climbing that ladder of bigger and bigger sales is important to a Sales Driven company.  Until you get there, you won’t be very capital efficient, which is a big problem when Bootstrapping Enterprise SaaS that has a Sales Force.

What if I Tilt Slightly Up-Market?

Jason has another good post, “Why Tilting Just a Smidge from Self-Service Can Grow Your Revenue 30x.”  I like the post a lot and think about its ramifications for my own company, but I’m skeptical of a lot of the numbers in there.  For example, Jason says single seat SaaS churns at a rate of 2.5% to 4%.  Annualized, that comes out to 24-36%.  He goes on to say that 5 seat deals churn at 1-1.5% a month and that over time the churn will be negative because some customers will add seats faster than other customers churn.  My problems with this are four-fold.

First, Jason shows the single seat numbers with churn factored in and concludes you keep the customers for 8 mos and that therefore they are only worth $240.  He gets there by arguing the customers are only around for 8 mos on average.  But there’s a better way to do the math since one of the great charms of small ASP businesses is they have a lot more customers.  They don’t have just one or a handful like a Big Ticket company.  If we model it that way, I get an ASP for the year of $290 to $324 per seat.

Second, Jason shows no churn on the 5-seat deal after having said there’ll be 1.5% per month.  Let’s be fair and factor in the 1.5%–that means a seat is worth $331.74.  That’s starting to be a lot closer to the $324 a seat a good single seat sale company can achieve.

Third, Jason conflates the number of seats sold with the likelihood the deal will close.  He’s up front about saying that he thinks Sales will make a deal more likely to close no matter what in the Happiness Officer post.  As he says, “More deals will both open, and close, when you have a trained sales professional working with your prospects.”  But this is a problem of how you measure it.  If you count the deals closed as the percentage of Sales Leads closed, he is right.  A good sales force will do very well on that metric.  But, Sales Leads is the wrong metric for this comparison because they have already self-selected buying interest.  they were qualified six ways to Sunday else the VP of Sales excoriated the VP of Marketing for sending him crappy leads.  We should drop back and count all visits to the company’s web page and then take the percentage of those closed to get a real Apples-to-Apples comparison.  Looked at another way, there’s always far fewer but bigger transactions with a Sales Force.  For purposes of this example, it simply means it isn’t quite right to throw down 5 seats against 1 seat and call that Apples-to-Apples.  If we had to throw down # of seats, it should be adjusted by the relative close rates.  But we don’t know what they are, so I’ve got to stick to comparing single seat numbers.

Fourth, Jason says churn will be negative over time for Sales Driven SaaS.  You should be so lucky.  If that were common, why do so many SaaS IPO candidates get looked at so carefully for churn?  Why do we see so many articles about SaaS unprofitability that call out churn?  Why do so many get called on the carpet over it?  At the same time, he takes it as an article of faith that the churn rates for single seat sales must be much higher.  Why?  Where’s the data?  Let’s talk about great brands selling to individuals that have very little churn.  I’ll just start right at the top and mention Apple.  Don’t like Apple?  Well how about Google?  Dropbox?  37Signals?  Atlassian?  SmugMug?

We shouldn’t confuse nice to have impulse purchases, which can happen to Sales Driven SaaS too, with powerful brands, products with lock-in, products with network effects, and products that are just too good to be without.

Here’s what I will readily agree to:

Tilting slightly up-market may increase your multiple-seat sales revenue by 30X.

Here, I’ll use language similar to Jason’s about this case:

Well maybe you can.  More power to you.  As long as there are enough multiple-seat opportunities for your business, you might benefit from a true sales team.

It’s really a function of whether whatever team features your software offers make it interesting enough to the team that they’ll bite.  If they do, it’s great news.  Just make sure they’re closing big enough deals (back to that Geoffrey Moore business) and that they’re not deals you could’ve closed anyway without them.  For my own business, I already offer volume purchase discounts on 3, 5, and 10 seats and they sell well.  I will be adding some Team features to see how much that accelerates, but until I get some really BIG deals, I just don’t need a Sales Guy to close a few multi-seat deals.

Note that at some point, you will automatically be able to add a Sales Force.  You’ll be dealing with enough large companies that they will insist on the kind of care and feeding a Sales Force can give them, and it’ll be worth it to oblige.  Just don’t think that has to happen too early.  It certainly didn’t happen very early for Amazon Web Services or for Google.

But Won’t Sales Always Increase the Dollars I Can Sell For?

This is another one I have to differ with.  Jason spells it out pretty clearly when he says, “Sales professionals know how to maximize the revenue per lead.”  Hang on, do you really think an individual sales guy knows how to maximize revenue per lead better than say the people at Walmart who maximize revenue per shopper?  What about the people at Amazon who do the same thing?  Substitute the people that design promotions for any E-Commerce site.  Why would we assume every Sales Rep can automatically do a better job?

OTOH, having come out of the Sales Compensation business with Callidus, I will tell you that one of the most effective ways to improve the bottom line is to change the sales comp plans to give them less flexibility in what they negotiate.  Gaining alignment between an individual sales person and overall revenue and profitability is extremely difficult.

The way to look at this is to consider who in the organization will be responsible for maximizing revenue per lead (or profit if that is more important as it sometimes is).  If nobody is responsible for maximizing sales per lead, then Jason has a point.  The Sales Guy has an advantage: he can look the customer in the eye, and if he is good, he will see how much money is in their pocket and take most of it out.  The Marketing Guy has an advantage:  he has lots more transactions than a Sales Driven company, he can measure the results of experiments much more accurately with analytics, and over time he can hone a promotion strategy that maximizes revenue per shopper.  The only way to tell who actually does better would be to compile metrics of the profitability and revenues of sales-driven vs revenue-driven companies.

Once you start thinking of the Sales Guy as the one who offers promotions by negotiating price, you’ll be a lot wiser to the issues where their agenda (make quota, go to club, buy a new car, yada, yada) may not be that well aligned with the overall company’s agenda.  For example, I find there is a certain frequency with which I can offer my marketing-driven promotions.  If I have them too often, all I am doing is lowering my average selling price.  If I have them too infrequently, I am lower my close rates as some people will only buy if they get a deal.  Can you really coordinate your salespeople to such a cycle?  Some you can, some you can’t, but you will have to work at it hard in either case.

One aside is that there is a natural tension between Marketing and Sales.  It is very hard to get an extremely high quality Marketer to join a Sales-Driven company (hard to get very high quality product people too, hence Enterprise software is often not the paragon of software virtue).  They don’t want to be under the thumb of that Sales Guy.  They don’t want to be constantly blamed when numbers are missed.  But eventually, if the CEO is good enough, he will create a situation where the company can attract and retain both and he’ll see to it that they work and play well together.  Interestingly, I have seen this work best when you have a CEO that was a Sales Guy who isn’t on his first CEO gig.

One last point here–the role of Sales is to make the market they’re in less efficient in hopes of increasing profitability.  That’s the real reason why you can’t get much real information without filling out a lead form.  This approach works, unless someone is disrupting you by making the market radically more efficient.  That brings me to my next point:

Important Counter-Example:  Lack of Sales Force as Disruption

The history of the modern computing landscape is one of increasing efficiency disrupting sales forces that wanted the markets to be inefficient.  That’s how mass markets emerge in new fields–they kick down the doors, offer unprecedented lower price points, and tell people things they never knew before.  Think IBM or DEC scratch-golfing Sales Guys having to go against the neighborhood computer store.  That was a painful disruption that neither survived when it came to the PC market (or indeed, their whole market for DEC).  They had to retreat up market.  Think the neighborhood computer store, which essentially was just smaller time sales people, competing with online sellers like Dell.  One more turn of the wheel and those guys were in trouble.

Once a market encounters meaningful disruption of this kind, it is extremely hard to put the genie back in the bottle.  After all, how do you argue that more information and lower prices are bad to customers?  The only defense is to retreat up-market.  The disruption involved in trying to change a Sales-Driven company into a Marketing-Driven company is at least as bad if not worse than going from On-Premises to SaaS.  I’m not sure I know of any successful examples where someone pulled it off.

Entrepreneurs, take note: if you can figure out how to take a crusty sales-driven market and turn it into something coin operated (insert credit card here, pay low fee, get product now), you can go disrupt a market.

So I Shouldn’t Ever Need a Sales Force?

Not so fast!

There is the matter of what your ASP’s will be–at a certain point ($100K for sure, maybe less), you will have to use a Sales Force.  To a certain extent this will be governed by the nature of your product.  Can it add enough value to relatively few people?  Will Enterprises require an all-or-nothing decision?  Such factors will dictate.

But suppose you have a blank sheet of paper.  You want to start a brand new SaaS company.  What should you aim for?

The choice here, for me at least, is easy–I’ll take the low ASP marketing-driven ideas every time.  We live in a time when you have to bootstrap on your own dime as far as possible before you can get any outside capital.  Cash flow is king.  Insights into where to double down and where to fold are king.  The web is there as a relatively frictionless resource to get the word out about your offering.  I don’t want to wait for sales cycles.  I don’t want to wait to close large enough sales to have built credibility.  I want the insights that come from analytics on large numbers of transactions today.  I want my customers lifecycle from prospect to happy subscriber to be one integrated UX on the web.

That will maximize my chances of growing a company to cash flow positive.  That will maximize my early growth potential.  Down the road, I will be able to look at whether I want to raise capital and whether I want to try to fire up a sales force to sell Team Editions.  Meanwhile, I’ve got a web company to focus on.

Posted in business, Marketing, strategy | 9 Comments »

Will Context Eat the Software Industry?

Posted by Bob Warfield on September 23, 2013

ManBehindCurtainI read with interest fellow Enterprise Irregular Michael Krigsman’s recent post, “Context Will Eat the Software Industry.”  Kudos for the excellent link baiting paraphrase of Marc Andreesen’s “Software is Eating the World.”  Andreesen is right, but I’m not so sure about Michael’s hypothesis.

He is centered in some thinking about Content Marketing and why some Content Marketing, specifically Enterprise Content Marketing, is not so hot:

The best content speaks directly to the reader, listener, or viewer. However, creating great content requires a nuanced understanding of the audience, which precisely explains why most enterprise content sucks. Content without empathy misses the target and quickly falls into the trap of jargon and sameness.

To see the effect of bland content marketing, try a test. Examine marketing materials for directly competing products from the major enterprise software vendors and try to discern significant differences in messaging and positioning. You’ll likely discover that the major vendors tend to look similar; remove the product name and see how the competitors all sound similar. I tried a variant of this test and the results demonstrated how bland enterprise marketing become as it regresses to the least common denominator.

From this he sees Content that is increasingly targeted to specific readers (e.g. targeted to Context) as the answer.  Let’s talk about that.

First, in the spirit of Full Disclosure, I want to point out that I make my living as a Content Marketer.  I don’t do it as a service for others, but it is nearly exclusively how my bootstrap company, CNCCookbook, sells its wares.  As a result, I have spent a lot of time thinking about it and trying to get better at it.  I’ve been extremely happy with the results so far.

Now, what about Context?

Context is critical to the extent that there must be content available that speaks to the reader well enough to move them to some action.  If you can do so, you’re Content Marketing.  That action may range from buying a product to promoting a brand (i.e. telling others about it) to (especially in an Enterprise setting) being predisposed to favor or at least not block a brand.  I list those in roughly the order of importance.  While it’s great to have lots of people who’ve heard of you and think positively of you, if they never bother to tell anyone else and nobody buys your products, you’re not going to make it very far.

At this stage, I should point out that Enterprise selling is special.  I have been there, done that, and gotten the T-shirt, frequent flyer miles, and hotel breakfasts that comes of selling multi-million dollar Enterprise Software.  For that world, the costs are such that you don’t just get somebody to whip out a credit card after reading a pithy article on your blog.  Instead, you may get them to exhibit enough enthusiasm that you can regard them as a sales lead.  This will start the corporate CRM gears in motion and somebody from sales will contact them.  One could argue and probably win the argument that the whole point of Sales is to provide a finely honed and real-time sense of Context.  It is the Sales Team that puts feet on the ground inside the customer’s organization.  They get to know the players, the politics, and all the details of the buying decision being made.  That is the essential key context for such a transaction.

Does that mean Context is unimportant for Enterprise Content Marketing?  No, of course not, but it is an important nuance to be aware of and I will come back to it shortly.

The next thing I want to discuss is how Context can be implemented, because that seems to be the gist of how Context might eat the Software Industry.

Here Michael has some choice Bill Gates quotes:

Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting.

and:

A major reason paying for content doesn’t work very well yet is that it’s not practical to charge small amounts. The cost and hassle of electronic transactions makes it impractical to charge less than a fairly high subscription rate.

As Michael points out, micropayments are available from Paypal and many others these days, so that isn’t the problem.  The problem is that, as with making Ballmer CEO for so long, Bill Gates was wrong.  Content isn’t where the real money was made.  In fact, the real money was made by software supplying Context.  You will know what that means more familiarly if you think about names like Google and Facebook.  If you think about Content being where the real money would be made, you’d be thinking of Yahoo, and we all know how that turned out.

Context via Self Selection

This brings up an important first principle of Context, which I will call the Principle of Self Selection:

Context is implicitly applied when people search for content or go to a place where their preferred content is particularly rich.

One corollary of the Principle of Self Selection is that when a Content Marketing team is micro-managed too much to, “Stay on message,” they wind up not creating content that can self-select a broad enough range of Contexts.  I suppose we should not be surprised as the essence of Enterprise Software and the biggest weakness of both the Software and the Companies is that it is overly focused on Centralized Command and Control.  This is perhaps the foremost reason why Social continuously hits brick walls in the Enterprise–something so egalitarian is toxic to hardcore Command and Control.  It encourages too much fraternization with the enlisted and noncoms.  Command and Control is also tragically short on the empathy that Michael points to as being so important.  The higher ups rarely think of themselves as being in the Customer’s Shoes.  The ones that do have typically been the ones I have enjoyed working with the most, but they’re not always the most successful.  I’m not sure anyone ever accused Larry Ellison of having too much empathy.

It has been my observation that most organizations with awesome Sales teams have lousy Marketing.  One wins out over the other, and scratch golfing sales guys are bread to be genetically superior to marketers in the face to face arena.  The marketers simply lose at politics, and it is even worse for the quant jocks that are essential to great Content Marketing.  This is a problem, because when you’re Content Marketing, you cannot simply parrot the party line–you must create real value.  This means your Content Team needs to have some motivated stars who are empowered to do something great.

There is also a subtle mindset difference with Content Marketing.  Let’s call it the Principle of Jiu jitsu:

When Content Marketing, you must give away something of great value to build trust.  In doing so, you cannot overtly sell anything.

It is called the Principle of Jiu jitsu because like the ancient martial art, it gives where the opponent is strong and pushes hard where the opponent is weak.  The opponent is strong at resisting sales pitches.  We are trained to consider whether the spam will be worth it if we give over our email to get a white paper, for example.  In Content Marketing, we give them such fabulous content without the Sales Pitch or demand for email that they give us their email gladly to make sure they don’t miss any future free content.  This is tough for a lot of Sales people to grasp.  They’re used to the idea of using their Jedi mind tricks to machine the prospect into submission, “Sign here, these ARE the droids you’re looking for.”  In fairness, most of them are smart about giving their personal charisma for free to get to deliver the sales pitch, and that is sort of close to what’s being done by Content Marketing, but yet different.  BTW, it’s even tough for most Marketing people to grasp.  They will tell you to do things like remove all the navigation from your landing pages so that once the prospect winds up there, they have no choice but to fill out the lead form.  Sadly, this increases short term lead gen at the cost of long term trust.  Think carefully about your business and your sales cycle.  Is it really as short as you thought, or did it go through multiple iterations, coming on and off the forecast over the course of even a couple of years as the prospect came up to speed?

To capitalize on self-selection we serve up a smorgasbord of content, make sure it is SEO-optimized for search engines, use analytics to identify what’s working, and then double down further with more similar content.  Quite apart from killing software, that approach is only enabled by a bunch of analytics software, not to mention the software at Google that delivers them to your doorstep.  Seeing your content through the SEO lens as well as the reader’s lens is a subtle art that has to be learned over time.

Context via Machination

Of course self-selection is not the only way to establish Context.  There is what I will call, “Context by Machination”, where software establishes Context in real time based on what it is sensing.  Two examples would be Responsive Web Design and Marketing Automation.

Responsive Web Design is simply designing a web site so that it changes based on the device being used to access it.  This is done so mobile viewers have a better experience.  It’s blunt Context, but Context nonetheless.

Marketing Automation is a bit more subtle.  It means a lot of things, but in this case, let’s stick to Marketing Automation as observing what actions a prospect takes and serving up content based on those actions.  Ultimately, the content served up can even be the first call from telesales wanting to see if the budding relationship should be expanded to a full blown sales cycle.  A lot can be gained from this notion of Context.

To give an idea, let me tell a personal anecdote from my college days.  I’m a car nut and would haunt the local exotic car dealerships.  There’s no way I could’ve afforded such a machine as a college student, but I was not deterred.  Inevitably, a salesman would approach and try to determine if I was a serious prospect or or a tire kicking joyrider (that’s me!).  I would be taciturn, and would steadfastly refuse to ask any performance-related question.  Never ever ask how fast the car would go, for example.  Instead I wanted to know such things as, “How reliable are these cars?  What does it cost to repair one?  What’s the insurance premium likely to be?  Can they be driven in the rain?”  The salesman always took these sorts of sober questions as coming from someone who was trying to imagine what it would be like to live with one of these fiery beasts on a daily basis–a real buyer in other words who was over the romance of it.

So it is with what the Marketing Automation people call, “Lead scoring.”  So you read a white paper.  That’s good.  But did you look at the system requirements, for example?  Did you try the pricing calculator out with an interesting number of seats?  Did you look at the salesy content, or just the free value content?

Based on the lead scoring, the system can decide which emails to send to you.

This can be especially potent if you have a completely closed loop software company.  What I mean by that, is a software company where every single contact happens via the Internet:

-  They read your content on the Internet to get interested.

-  The software runs in the Cloud.

-  Customer Service is handled over the Internet.

In a world like that, the lines between Marketing, Product, and Service should rightfully become blurred.  You are always Marketing because SaaS renewals are so darned lucrative.  If they’re in the Product, why have them bail all the way out and go to a separate web site to get Customer Service?  Wouldn’t it be better if the Service people can directly see what’s happening in the Product as it unfolds with a problem?

It creates an extremely powerful combination to combine all three and view them essentially as one User Experience (UX) that has to be optimized for the entire cradle to grave lifecycle.  That’s Context via Machination at its finest.  I haven’t seen any companies that really optimize that end to end experience.  You get the Marketing Automation companies like Marketo and Eloqua at one end, and there are starting to be Product companies at the other like Totango.  It’s an interesting opportunity.  I haven’t even seen many companies that operate in that realm of Contextual Integration, but probably the biggest and best would be Amazon.  Funny how we’re still trying to get to what the CRM world originally called the “360 Degree view of the Customer.”

So, quite apart from Context Eating the Software Industry, that Man behind the Context Curtain’s name is “Software.”  If you don’t have keen Software chops in your Marketing, Product, and Customer Service worlds, you are missing several tricks.

Postscript

Heidi Cohen makes the problems with Enterprise Content Marketing even more obvious with her 3 Surefire Ways to Kill Content Marketing:

1.  Contains Too Much Marketing Hype and Buzzwords

2.  Lacks Truly Independent, Unbiased Information

3.  Is Too General To Be Effective

Yup.  You see all three constantly in Enterprise White Papers, blogs, and other content marketing.

Posted in business, Marketing | Leave a Comment »

You Have to Have an Overseas Dev Team to Scale? Baloney!

Posted by Bob Warfield on September 7, 2013

Baloney1ba·lo·ney 2 also bo·lo·ney (b -l n ) Slang. n. Nonsense. interj. Used to express disagreement or exasperation.

Recently, I was doing something on LinkedIn, and it asked me to endorse various people’s skills like it often does.  One face in particular popped out at me:  Anders Hejlsberg.  I’ve known Anders for many years, so I immediately had to check what it was about.  In this case they wanted me to endorse that Anders knows something about Software Engineering.  Unfortunately, it was a simple Endorse/Don’t Endorse interaction, because I would like to have said that Anders knows about as much about Software Engineering as the Pope knows about Catholicism.  You see, Anders is a Technical Fellow at Microsoft.  But beyond that, he is one of the most brilliant Software Engineers I’ve ever known.  I met him when I was VP of Engineering at Borland and he was the guy that built Delphi, or Turbo Pascal as it was known when I first came to Borland.  He went on to do C# and a whole lot more for Microsoft after leaving Borland in 1996.  Not only is he a brilliant Software Engineer, he is also one heck of a nice guy.

By now you’re wondering, “What does Anders Hejlsberg have to do with Overseas Development Teams anyway?”

Let’s start with why I even bring up the overseas subject.  To put it simply, I needed to pen a rebuttal to Jason Lempkin’s Wall Street Journal article which says essentially that all SaaS companies are probably going to have to have an overseas dev team because its just too hard to hire talented Software Engineers.  In fairness to Jason, he did say “probably”, but he said it so softly it’s clear he doesn’t mean it.  I disagree violently with the conclusion, to put it mildly.

The thing is, most software companies go about developing software all wrong.  They get pushed in all sorts of directions when people who don’t know much of anything about Software Engineering (i.e. non-technical CEO’s, VC’s, and the like) insist things be done a certain way because someone else they’re familiar with did it that way and succeeded.  There may be limited correlation, but there is absolutely no causality.  It’s not like we technical types have a monopoly on that stuff, I’m sure there’s plenty of Technical CEO’s telling their sales and marketing people similarly poorly informed things.  But the thing is, it happens a LOT more often to the technical types.  Plus, we techies often don’t have the backbone and interpersonal skills to stand up very well when a CEO or Board Member gets up a good head of steam about some issue.  Sometimes having technical leads who can’t stand up and disagree is intentional.  I would say that in over half the VP of Engineering jobs I’ve ever interviewed for they were looking for someone who would demurely take stone tablets from some other source–product management, sales, the CEO, or some “visionary”–and just get it done on time and one budget.  And by the way, do it quietly and without disturbing the other functions.  Needless to say, I was “over qualified” for those positions.

A lot of companies do a lot of things wrong, but Software Development is different.  It takes longer to build software.  It’s harder to change direction at the last minute.  And by the way, did you notice?  They’re called “Software” companies.  They’re not called “Sales” companies, “Marketing” companies, or “CEO’s best notion of the moment” companies.  It’s important that you actually be competent at building software in order to have a real “Software” company.

I was recently reading over a list of startup advice (you know how those numbered lists grab the eyeballs) a VC had put forward on Facebook as being excellent.  I got as far as #8:

8) Should you have a technical co-founder if you are not technical? No. If  you don’t already have a technical cofounder you can always outsource  technology and not give up equity.

I quit reading in disgust so I could go on to see just exactly what sort of software this guy builds.  Mostly, he seems to have parlayed a pretty basic web site into a sale to TheStreet.com.  From there, he’s mostly in the business of telling everyone else how to succeed.  There are so many of these Dale Carnegie types out there these days.  He does not appear to be a Software Engineer, though perhaps he has played one on a TV show somewhere.  This stuff makes me nuts.  Companies that think software is easy to build.  A venture ecosystem that needs to invest in lightweight products because the founders have to pay to get it built on their nickel.  CEO’s that couldn’t care less about building something that can actually change the world, they just want to throw something out there as cheaply as possible so they can spend more on this month’s lead generation.  Bubble riding, in other words.

Whatever happened to the days when people actually had to build something of note?  Something that might change the world, even a little bit, and not yet another eyeball aggregator?

Let’s put that rant aside and get back to the question of whether you will have to have an overseas dev team to scale.  I will put my stake in the ground thus:

You have a choice for your software company:  you can either choose to be excellent at building outstanding software or you can choose to build adequate software cheaply.  The latter path will ultimately be even more expensive than the former, but you’ll be left holding junk instead of a real product.

I’ll warn you I’m being very polite when I talk about software being “adequate.”  Software is hard.  It is the most complex stuff we humans build, at least until we start building organisms from scratch by tinkering with DNA.  Many things that people say are harder are basically software, things like CPU chips.  There’s this little problem in the software world–we don’t know how to get lots of Software Engineers to be able to work effectively together.  There are entire disciplines such as Agile Programming that try to deal with this problem.  We’ve known about the problem almost from the beginning of software.  It was well articulated in the relatively ancient Brooks classic, “The Mythical Man Month.”  It turns out, we’re only good at getting 7 to 10 developers working smoothly together.  Any more than that and you’d better be able to break the software down into modules that are very independent.

If that’s the fundamental limit, how do you build great software?  Here’s a hint:  you can’t do it by hiring more people onto the team.   Instead, you must focus on building great software with fewer better Software Engineers.  You must focus on breaking down the software into modules that work and play well together, something that is also very hard to do and can’t be offshored.  That’s hard core architecture that takes brilliant Software Engineers communicating well with all the groups.  I have never seen a product module that couldn’t be built with about 10 engineers provided they’re the right 10 engineers, they’re well managed, and they’re operating in a culture that supports their needs.

Anders, back in the day, built the Pascal software he is famous for almost by himself.  He had a little help, but surely not a giant team half of which was located overseas.  I have done the same with every product built over my career.

When I took over the VP of Engineering job at Borland, it was the darling of the software world.  We had our share of problems, and one of them was profitability.  I was directed to make cuts.  It didn’t take me long.  I zapped all the consultants I could find and reduced the maximum team size to 10 developers or so.  Not one single product slipped schedule as a result of it.

So what’s the deal with this big overseas software push?

In exchange for making the acknowledged weakest link in software development (communication) much worse, we get to hire lots more people.  At one point, Oracle would trade 2 open reqs overseas for 1 open req here on our shores (Redwood Shores to be exact).  They discovered over time what a bad idea that was and ended the practice some time ago.

Companies the size Jason suggests must go overseas, $3 to 4M in ARR, are still way too small to need to go overseas.  They’re still finalizing fundamental architectural underpinnings.

I can already hear the refrain, “That’s nice, Bob.  But I can’t hire enough good Software Engineers, what else can I do but go overseas?”

If you can’t hire, and I don’t doubt there are companies that can’t, you need to look much closer to home to find the problem:

-  Perhaps your company doesn’t value developers and act like the “Software” in Software Company matters.

-  Perhaps the head of your engineering group is not an inspiring figure.  Will walk-on-water developers follow her or not?  Does she know lots of walk-on-water developers who she can bring on?  Why not?

-  Perhaps your product vision is just not interesting to walk on water developers.

I’ve seen all of these problems in varying degrees at various places I have visited.  I went to a video ad company one time that was proud of the density it could pack developers into.  They had long benches and developers were literally shoulder to shoulder.  There was a strong “no telecommuting” policy in place on top of that.  Sales and marketing had conventional cubes, by contrast.  I wonder if management in that company was aware that software development requires intense concentration and focus?  In the heyday of Borland, each developer had their own private office.  Close the door and you could get some serious work done.

By the way, amidst all the hand wringing about there not being enough visas (more evidence we can’t hire enough developers and we must go overseas!), there is more than one study out that says it’s all a sham.  We are graduating more STEM graduates than we can even put to work.  Most of them don’t stay in their field and wages have been stagnant since 2000.  Does that really sound like a market where you can’t hire developers?

I have interviewed at companies where the developers begged me to come on board and save them from Sales and Product Management.  They wanted to be released from dealing with one unrealistic deadline and shoot for the moon set of specs after the other, because they were failing at every single one.  They had no voice in setting any of it up.  I wonder if the VP of Sales turned CEO set his sales quotas up to be unachievable time after time?  If he was, Sales was no doubt failing there too.

Too many customer demands to keep up with?  Hogwash (time for a word other than “Baloney”).  Build an architecture that’s intended to keep up with customer demands.  Build one that is customizable at the outset.  Salesforce did.   I ran engineering for Callidus Software through their IPO.  That companies processes sales compensation for the biggest companies in the world.  If you don’t think sales constantly fiddles with comp plans and that every company does it differently, you don’t know that market.  Our differentiator was that we had the only product that could deal with those customer demands and still scale to the levels giant companies like Sprint and Allstate needed.

Let’s wrap this up.  We will probably agree to disagree, but I want to summarize.

Good software is not expensive to build nor is a good software team hard to hire for.  The reason is simple–you only need 10 really good people to do almost anything.  Once those 10 are working well, start thinking about how to modularize your software for the next 10 person team.  You can start to get real business-changing things done with a lot less than 10 too, that’s just the maximum.

If you have any doubts, try tearing apart the financials for Salesforce.com.  They have managed to build the world’s most successful SaaS company with relatively few developers.  Fewer than their peers according to the numbers: the percentage of expenses that go to R&D is small compared to many other SaaS companies.  The architecture of their product is rich and sophisticated.  That didn’t happen by accident, it happened because they understand what I’ve been trying to say here.  They hired for quality, not quantity.

Bad software, on the other hand, is very expensive.  It is expensive because you’re throwing a wall of bodies at a problem that cannot be solved by a wall of bodies.  They will build something that is ultimately unsatisfying and unmaintainable.  They will not produce good architecture or good user experience.  They will not produce sustainable competitive advantage in one of the few areas software companies can have such advantages.  They will fail and your customers will be unhappy.  Your competition will love it.

Posted in business, software development, strategy | 3 Comments »

The Trend to Part-Timers, Freelancing, and Consultants Over Full-Time Employees

Posted by Bob Warfield on August 8, 2013

FreelancerOffshoring, Outsourcing, the switch to freelancers instead of full-time employees, and all of the other ways big business wants to shed expenses at no apparent cost is a trend that’s well underway.

Shortcuts all have a price of one kind or another. Usually that price is hidden from the bean counters that wanted to do these things for short term profit bumps regardless of the impact on quality, visibility into what was being done on behalf of a company, actually creating value that belongs to a company and is reproducible, making sure that talent is loyal and believes in the company and its goals, and so on.

As for freelancing, when you force someone to stand on their own two feet, when they have to learn to fish for themselves, suddenly, they get a much clearer picture of their real value to the organization and of the organization’s value to them. Successful freelancers are some of the hardest people to recruit on the planet because they know the organization doesn’t bring them much value while they are creating a great deal of the real value.  That’s why you have to pay consultants more.

If you find yourself having to go it alone, it will start out very scary.  You’re going to have to stretch to learn to wear more hats.  You have to learn to market yourself, for example, and to network to find business.  Cast off your fears and welcome those challenges.  Quit trying to join a large organization or get Big VC to back your idea.  You can go it alone more than well enough to come out way ahead.  After all, business wouldn’t be doing this to you unless they didn’t value you all that much.  That tells you something about how they will treat you if they did decide to hire you.  OTOH, you are also undervaluing yourself.

Why make the same mistake as the business whose decision you so disagree with?  Recognize your inestimable value and get to work for yourself.  Enjoy being your own boss.  Embrace the change and use it to improve your life.

Posted in bootstrapping, business, strategy | Leave a Comment »

 
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