Wednesday, February 27, 2008
A very serious risk has emerged for some venture backed companies as a result of the credit crunch gripping the markets. Today some small VC backed companies have found that their cash is no longer liquid and this is the worst kind of crisis to a young company.
This crisis is coming up as a result of investing in Auction Rate Securities (ARS) - marketed to the companies as being virtually equivalent to a money market account, but they are not.
Per the excerpt from Venture Wire today:
While perhaps the most optimistic VC of the panel, Perkins said VCs need to be aware of the "cracks of the economy" that might affect the industry, such as the failure of auction-rate securities. Several start-ups hold these obscure financial instruments, which many considered nearly as good as cash but are now illiquid after many bond auctions failed recently. Lawler said his firm surveyed his group of 60 portfolio companies and has so far identified 12 that have some amount of cash in auction-rate securities. "I've been in business 22 years and I've never seen anything like it."Who'd have thought that Triple-A rated short-term securities you'd invest in would be completely illiquid," he said. "That's an indication something is up... Normally when you think about credit, you don't think about it affecting classic venture investing, but here it is coming out of left field and it hurts."
News travels fast in the VC community, especially between investors and CEOs, so we were contacted by more than one of our investors to check that our cash was not at risk. One of my investors shared this excerpt from an internal communication to explain what's happening and how they are trying to help their company through it (names obscured for obvious reasons). I posted earlier that all venture money is not equal - this is an excellent example of where having good investors who step up and tap into long standing relationships to get you through a crisis can make all the difference.
"I wanted to make you aware of a situation I’ve encountered at one of my companies, XYZ. The co’ has its cash invested in auction rate securities (ARS). These are securities whose underlying assets are long term bonds but that come up for auction at regular intervals (7 days, 28 days, etc). Recently, many of these auctions have failed, meaning that no buyers are available to buy the securities, and underwriters did not step up to pick up the slack. When an auction fails, the holder of the security gets reset to another 7 day or 28 day term and continues to receive interest. It does not indicate a credit default. However, there is no liquidity for the holders of these bonds. Unfortunately, the auction rate securities vehicle was promoted to the CEO by their money manager at Comerica “as safe and liquid as money market”. This has been true for the 20 year history of this vehicle however, last week the auction market dried up and liquidity is stopped. "
"The bottom line for XYZ is that although everyone believes that the cash is safe, it is illiquid for an unknown period of time. XYZ has $5.1m invested in auction rate securities, particularly in preferred shares of closed-end mutual bond funds. The securities are AAA-rated preferred shares backed by 200% collateral from the mutual funds. There have been auction failures the last few days and it is unknown when liquidity will return to this market. [The company] has 3 weeks of cash available in a money market account that is liquid but will need more cash if the illiquidity in auction rate securities continues. The three investors (A, B and C) and CEO are pursuing loans at both SVB (their current debt holder) and Comerica (their money advisor) collateralized by the auction rate securities. However, I don’t know if we can accomplish this action. We’ll be monitoring this situation day by day. It doesn’t appear that this illiquidity will go on for long but no one can tell for how long. A secondary market is emerging for the auction rate securities, but at a discount. That discount could be as high as 10% off face value so using the secondary market would be a less attractive alternative. However, it could provide a worst case option of liquidity for the remaining $5m should the auctions continue to fail."
Cash is your lifeblood as a startup - my heart goes out to the CEO/CFO teams trying to deal with this illiquidity.
One of my board members, Raman Khanna of Onset Ventures, sent me a terrific article on how to run a SaaS business - Bessemer’s Top 10 Laws for Being “SaaS-y”
It's a really good list - and one where we've learned over the last 3 years to follow almost all these rules - in my words they are as follows - and the article gives some depth on each one:
1. It's the 1 year committed annual value of your contracts that matters - anything else and you're fooling yourself
2. Your sales people need to be booking $100k/month in annual contracts
3. Separate the hunters from the farmers - hand accounts off quickly
4. You need to sell direct, mostly
5. Stay in North America - there's enough market
6. Stick to one datacenter
7. Stick to one version of the code (a great advantage of the SaaS model)
8. Be savvy and use online marketing
9. Constantly manage cash vs. growth
10. No I mean it, really manage your cash carefully
Bonus: You can ignore only one of these rules
Wednesday, February 20, 2008
Michael Arrington at Techcrunch wrote a somewhat defensive piece on Silicon Valley vs. Seattle yesterday An outsider's flawed view of silicon valley. I happen to agree with much of what Mike says - as I posted on back in October - but I found the comments the most amusing reading.
They include the usual "I agree plus..." and "all the reasons you're wrong" type of comments, but I took note of the number of comments that found the post arrogant. I don't typically find the entrepreneurs in the valley arrogant - except for those who made it big because they were lucky and think it was because they were smart - and yes there are a few of those. There's a high level of confidence, and sometimes hubris, but arrogance tends to kill off startups really fast so the arrogant people don't last long in the system. You either have a good idea and can execute, or you don't, and if you don't no amount of arrogance will carry you through.
I do think that we have access to the best technical talent in the world here - that is then combined with passion, drive and singlemindedness - combined with the capital and infrastructure that is without equal - and that is what makes silicon valley different from the rest.
Tuesday, February 19, 2008
I really want to believe times have changed and that women are not assumed to only be good if they are in PR. I picked up the term "pink ghetto" from a candidate I was interviewing for VP of marketing communications back in the early 90s. She had spent her early career at Apple, in PR, and was wanting to come to a company (I was VP Marketing at Synopsys at the time) that did not pigeon hole women as only being suitable for PR.
Well, imagine my somewhat amused horror as I read the post from The Secret Diary of Steve Jobs last week on Andrea Jung. It's an amusing rant (as usual) with enough of a grain of truth (as usual) that it makes you stop. The paragraph in question is:
She gives me this look and says -- get this -- she says that she works for the shareholders and that I work for her. That's she's my boss. I'm like, Lady, I've never had a boss in my life and I'm not about to start now and honestly I am going to friggin kill Al Gore for convincing me that we needed a woman on our board even though I told him there's a reason why you don't see many women running tech companies and it ain't for lack of trying. I mean they're fantastic at stuff like PR and maybe marketing as long as when you say marketing you really just mean a fancy word for PR. Advance work, making sure the hotel has the right water in my room at exactly the right temperature -- stuff like that, stuff where I don't actually have to really deal with them except to give them orders, and then when I tell them to leave, they do.
Because I know this opinion is still thought (though rarely openly voiced) I often coach young women to manage their careers not to get caught in the pink ghetto. To plan out stages through different types of marketing and eventually into sales - to be sure to touch product marketing, program management, business development, communications and sales as a progression through building a well rounded skillset and career. Or if they love communications (as I have know both men and women to do) to be spectacular at it so they get to drive strategy. I'm happy to say that I have had a number of women come work for me in marketing over the last 20 years who are in high-tech and now have titles like CEO, COO, VP marketing, sales manager - and VP communications.
But I should also confess that I never had the communications job myself, both because I did not want to get trapped and because I don't think I would have been any good at it anyway.
Thursday, February 14, 2008
The Harvard business review has published an article How Star Women Build Portable Skills and it is summarized as:
"According to Groysberg, talented women who switch firms maintain their stardom, and their new employer’s share price holds steady. Groysberg provides two explanations for this discrepancy:
• Unlike men, high-performing women build their success on portable, external relationships—with clients and other outside contacts.
• Women considering job changes weigh more factors then men do, especially cultural fit, values, and managerial style.
These strategies enable women to transition more successfully to new companies. And that has crucial implications for all professionals. By understanding successful women’s career strategies, women and men can strengthen their ability to shine in any setting."
I found this article chasing links through Bob Suttons's blog and his book The No Asshole Rule.
Bob's conclusion is that if you want to hire superstars hire women, not men. I can imagine that when studied over hundreds of people this advice would be useful since so often superstar men fall into the ego trap and both act as, and want to be treated as, superstars - which leads to bad behavior in teams. However, I think it is an over generalization. I've hired superstar women (YY Lee is COO at FirstRain and this is the third time she's come to work for me) and they're spectacular and very portable - so I agree there. And I have hired superstar men, some of whom are very difficult and destructive to work with, but a few of whom were/are not.
I think much of the responsibility also lies with the hiring manager. If you hire a superstar and allow him to behave like a jerk unchecked you are as much to blame as he is. However, if you hire a superstar with an up front, frank discussion about your culture and what behavior is and is not acceptable you can give him the opportunity to play by your rules. Then, if he says he won't don't hire him, or if he comes on board and clearly doesn't respect the culture, you or other team members let him go. It's just not worth it - go find someone who can give your company the talent you need and help build the culture at the same time.
Tuesday, February 5, 2008
We've just finished our year and are talking the sales team off site for a couple of days to kickoff the new year. Sales kickoff's are challenging to get right. You have to find the right balance between motivation, hard core training and fun to send the sales team off prepared and fired up to nail the year.
It's especially challenging in a fast-paced, high growth company because so many things are usually changing at once. Product, process, goals etc. and thoughtful orchestration is needed to keep up the pace and excitement but ensure that the team get the right meat-and-potatoes information.
My rules-of-thumb on how to strike the right balance at a sales meeting are:
1. Motivation - schedule in the time at the beginning and at the end to motivate the team. Share the vision of the company, both for the year and for the next 10 years so they can share it with their customers, friends and family. Sales people carry the brunt of the pressure in times of growth - make sure they know why they're doing it beyond making money.
2. Review performance - review the last year both good and bad. Share the plans in advance and then tell the truth of which were achieved and which weren't. It's important to set aggressive goals (for all those over achievers who join sales), make them, but also fess up when you don't make them to keep integrity with the process.
3. Set objectives for the next year - obvious right? - but I believe it setting objectives around customer momentum like number of new customers, number of major customers, average increase in penetration of last years new customers, ASP etc. And of course the old faithfuls bookings, revenue and cash collection.
4. Train on process. Yes, this can be boring but it's essential the sales team knows how the customer pre- and post-sales support process really works. They are part of the team setting customer expectations so they need to work with the customer support team (in our case a solutions consulting team) so ensure the customer's experience is smooth.
5. Train on product. Pretty straightforward - but sales teams often only retain what they really need to know so it's important to cover the year that's coming, but also to put clarity and emphasis on the next 90 days. What is in their bag? What exactly should they say? What exactly can they sell and we deliver so they can make their quota?
6. Plan in problem solving breakouts. This not only breaks up the deathmarchofslides but also it creates an opportunity to get great ideas from the sales team. I like to break up into teams of no more than 6, with mixed disciplines in the teams, and give them a real problem facing the company to discuss, come back with ideas for solutions, and then present those solutions to the group.
7. Include the key corporate team members. This is important not only because usually the corporate team gives alot of the training, but also so that they corporate team can walk a mile in the sales teams shoes, hear the issues and barriers and develop and appreciation for how hard it is to consistently sell almost any product.
8. Work through any elephants on the table. If you have an issue coming from engineering that you know is being discussed in sales, but it's uncomfortable to talk about get it on the table. There's always one. I've seen issues like contract process (contracts was a block hole to sales and took too long), quality (sales knew there was a problem, engineering did not want to talk about it until it was fixed) etc. The sales team will have better confidence going into battle knowing the truth than suspecting it but the company not acknowledging it.
9. Talk through the air cover they'll have in the year. Marketing - often the butt of sales jokes - but able to create demand, awareness and leads and essential to soften a market for sales.
10. Have fun. I don't mean mindless fun - I mean teambuilding fun. We're going to Atlantic City today - it's cheap and cheerful for training and gets everyone away so they can focus. And while we're there we'll do some team building functions: maybe bowling, maybe poker lessons - still to be planned but we'll be mixing the team up so we play together as much as we work together.
And we'll kickoff 2008 with intensity!
Monday, February 4, 2008
There's an article in Seeking Alpha today RightNow proves "Software as a Service" isn't perfect - but as often the case the article confuses the revenue recognition model with the service delivery model.
Joe Panettieri is right - SaaS has had been advertised as immune to downturns - but this is only the case if it is pure SaaS - that is both the delivery AND the revenue recognition are treated as subscription (see my primer on revenue recognition here).
RNOW is going through a tough revenue transition. For years they had billed themselves as a SaaS vendor because their service was on-demand (ie. hosted at a data center and accessed via the web), but in reality they were selling perpetual licenses. While unlying growth was strong this was not a problem but last year RNOW decided to start to change to subscription licenses - which would certainly help them compete with Salesforce who have been subscription all along - and which are popular with customers in tougher times.
Now, as I would have predicted, the market demand for subscription has increased beyond their expectations - as the Susan Carstensen says in their earnings transcript "We now know that the market is moving away from perpetual licenses, even faster than we had anticipated. We've seen it in our results and in our pipeline. To give you a good idea of how fast it is happening, compare the full year 2005 to 2006. While our bookings grew 50% and recurring revenue grew 38%, perpetual sales were flat. The trend was particularly evident in the fourth quarter as more and more customers selected the subscription option. We believe this is a direct result in the market's accelerated adoption of on demand especially among large enterprises."
I am very sympathetic to how hard it is to steer Wall St through this transition. Having been through it at my previous companies, and having made the decision that FirstRain would be 100% subscription from the time I took over, I am very aware that the Street still misses the forest for the trees. When you transition your revenue model it creates the appearance of slowed growth, but in reality it may have nothing to do with real growth (customers, annual future revenue commitment) and everything to do with you stopping to practise of taking revenue up front. I've blogged on Cadence's challenges here as they've done the opposite recently and are now paying the price - and Salesforce and Synopsys both now enjoy the incredible revenue visibility that comes with 100% ratable models - even though Synopsys is not SaaS.
Good for RNOW that they have the courage to make the move to 100% subscription and take their lumps.
Saturday, February 2, 2008
I am forced to stay alone in New York this weekend. Forced by a flu that won't quit (it's been 6 weeks now) and doctor's orders not to fly. So apart from a little harmless clothes shopping I decided my indulgence would be to go and see Spring Awakening again.
I like Spring Awakening in the way I liked the original Rocky Horror Picture Show - rule breaking with fantastic music - and that was a long time ago. I saw Rocky Horror seven times on the King's Road in London back in 1976-7. This was long before it was famous, long before the movie was made. The production was in the King's Road Theatre which was scheduled for demolition and the cast spent as much time on scaffolding on the sides of the theatre as they did on stage. Their groundbreaking performance rocked convention, broke rules and led to the movie legend.
I see the same potential in Spring Awakening. As the New York Times says "It is also exhilarating. When was the last time you felt a frisson of surprise and excitement at something that happened in a new musical? For that matter, when was the last time something new happened in a new musical?"
Or as New York magazine says "The new indie-rock treatment of Frank Wedekind’s play about hormonal adolescents has just about everything going for it. The score is exciting, the performers gifted and attractive, and there’s every reason to hope the show will be around long enough that casting directors will need replacements when early middle age claims this bunch. "
Like Rocky Horror, Spring Awakening deals with the subject matter about sexual awakening - this time in teens - and is again breaking rules both in staging, music and it's treatment of the many faces of the emergence of teen sexuality. It combines the story from the frequently banned 1891 play with vibrant, haunting rock music, sung with total conviction and passion by the cast. In contrast to Rocky Horror, this time I see the subject matter through adult eyes, but the first time I saw the new musical I had two 15 year olds with me so I got both impressions - adult and teenager at the same time which was fascinating.
If you like to be moved, transported back to your youth and rocked at the same time this is the musical to see.
Friday, February 1, 2008
I knew I was prescient when I predicted that Synopsys would pass Cadence in market cap in 2008 but I confess I did not realize it would happen so fast. Clearly Raj Seth of Cowen called it right when he read the tea leaves of the revenue makeup (see my primer on revenue recognition), saw the wall coming and downgraded them. It amazes me that any experienced analysts kept a buy on the stock after their last quarter.
Yet again I am forcefully reminded of the power of 100% ratable revenue models. We just closed our year out yesterday (with terrific results) and our revenue is a purely arithmetic calculation based on the prior year's bookings curve, not a function of what happens at the end of the quarter. That creates totally different behavior than when you have to book and ship deals to make the current quarter's revenue.