Tuesday, November 27, 2012

Who needs sleep anyway

Sleep. What a concept. As an entrepreneur it's more rare than cash, and harder to come by.

As Mark Suster wrote in his recent blog post about Entrepreneurshit "It’s 4.50am. Sunday morning. And I couldn’t sleep. I have much on my mind since I just returned from a week on the road. 5 days. 3 cities."

Most nights I lie awake for 2-3 hours in the night. The gerbils running on the treadmills in my mind never stop. Problems. Opportunities. Equations. Spreadsheets. People. Endlessly running.

Until recently I worried about the sleep too. One more thing to add to the list - now let me worry about not getting enough sleep and what's that going to do to me. My health, my ability to be smart and articulate in the big customer summit tomorrow. Aaargh!

But I recently learned that waking in the night is actually one less thing I have to worry about in those waking moments - it's quite normal and may even be our natural sleep pattern.

In the days when we went to bed and got up with the sun, it turns out we would sleep in two sleeps - the first for four hours... then a period awake... and the second sleep for four hours. There's a great description of the research in the BBC News report The myth of the eight-hour sleep. So maybe it all makes sense now. I am supposed to lie awake solving the problems of the day - but I need to get up and make a "hott drinke" as I do my email:

"And at the wakening of your first sleepe You shall have a hott drinke made, And at the wakening of your next sleepe Your sorrowes will have a slake." Early English ballad, Old Robin of Portingale 

And on days like today, when I have had a couple of short nights, and I know YY has had less than 5 hours of sleep after a red eye flight in to NY to join me (for a series of really cool meetings this week) I tell myself we can sleep when we're dead - coffee and adrenalin will pull us through.

And I believe it, until I go away for 3-4 days to a tropical island and end up sleeping 10+ hours a night, every night (something I do a couple of times a year) and then I know all those days when I thought I didn't need to sleep I was kidding myself.

Ah, the necessary self delusion of the entrepreneur.

Monday, November 26, 2012

Loyalty Matters

Seems like an old fashioned concept doesn't it?

Loyalty. A word from the old feudal world being "of good quality, faithful and honorable" and "carrying out legal obligations" - with deeper origins in the Latin legalem, or law.

Loyalty was expected in the past. You would be loyal to the company that employed you, and the company would be loyal back and employ you for your whole career. A 1950's dream that no longer exists in our current global competitive environment, as pensions get wiped out and companies downsize in the blink of an eye. It's a word than can carry negative overtones today - being loyal sometimes being synonymous with being blindly loyal, something many people would be uncomfortable claiming as one of their key characteristics.

And yet it is a concept that is very powerful when creating and growing a company, and something I look for when hiring key employees - can they be loyal, is it in their nature?

When people are loyal to each other - up, down and across an organization - they can move quickly, make mistakes and recover. They can make difficult decisions, knowing that they won't get stabbed in the back if they are wrong. They can take risk, knowing that their boss, or their peer, or their employee, will support them and help them recover if the risk was too great.

As a CEO, building a loyal culture can make a big difference in how much risk you can take with the business, how fast you can drive growth and change. In the extreme case the figure of the cult CEO, like Marc Benioff at Salesforce.com, can inspire loyalty in employees and help them feel empowered to take more risk, run faster, push the edge of what's possible because they are loyal to a risk-taking leader. And obviously nothing creates loyalty like success.

I'm old fashioned. I think loyalty within a company matters. When people are loyal to the company, the goals and dreams of the company, and each other, they can make magic happen. Like trust, loyalty is efficient. It makes a working system where everyone can focus on the task at hand, not watching their back or their own personal interests. But to build a loyal culture you have to take care of each individual's growth interests as well as the company's.

As a leader you can build loyalty when you:

- create an experience that is fun, intense and a growth experience for every individual

- are fair - even-handed and open in how you deal with people, pay and promotion

- have your team's back, especially in times of adversity

- stomp out politics - put the company first at all times

- be direct - if you don't agree say so, if you think an idea is dumb say so and respectfully explain yourself, if you think an idea is great say so

- act quickly - if someone is not cutting it tell them so, tell them why, and move them on - and if you have to let them go for performance reasons, help them through it so they land in a better job for them - that creates long term loyalty in both the employees who are staying and those who are leaving

- don't be afraid to exercise authority if you need to - people understand in the end that your job as a leader is to drive forward and make decisions, even if they are unpopular

- be decisive

- be courageous

- be accessible and human

 and the most important

- be loyal to your team - loyalty begets loyalty

Wednesday, November 21, 2012

Autonomy, Revenue Recognition and the Duping of HP

HP's acquisition of Autonomy, and subsequent write down of $8.8B amid allegations of fraud by the Autonomy management team, is going to show up as a business school study one of these days, and so it should.

The practice of revenue recognition in software, and how you can be misled by it, is simply not well understood by enough senior management and board members. And as companies shift their software products from license to subscription revenue it becomes imperative that board members do understand it or they can be easily misled.

In the Autonomy case, it appears they did two things that, while not illegal (I think HP will have a hard time proving fraud) are questionable...unethical...short term thinking... pick your poison.

The first is recognizing revenue up front. I interviewed a VP sales candidate from Autonomy a couple of years ago. He was proud of how they were growing their revenue so fast -- and I was horrified. They were signing long deals - 6+ years long - and structuring them so they could take the license revenue up front.

As he proudly described to me, he had recently won a very large contract with a global bank to use Autonomy to analyze internal data following the 2008 recession. Sign a 9 year deal, structure it so you take the license revenue up front and maintenance over time (here's a primer on revenue recognition if it will help), report the revenue on your call as a great deal and never tell anyone that it's 9 year's worth, because you are not required to tell them. Pay the sales team commission, the stock goes up, everyone's happy. Except the analysts who smell a rat but can't prove it -- they will be cautious on your stock.

Software revenue recognition rules are sufficiently complex now that this is not hard to do, it's all in how you write the contract terms. And because it's not illegal the auditors, like Deloitte, will not technically cry foul. As Dennis Nally of PwC told the FT last year:

“There are professional standards out there [and] an audit is not designed under those standards to detect fraud,” he says, pointing out that detecting fraudulent behaviour rests on other indications including a company’s governance, management tone and control systems."

I agree, it's all about management tone.

The practice of overly aggressively recognizing revenue up front is not new. Cadence did it for years to inflate their value, and nearly pulled it off.  Before Cadence crashed in October 2008, they were in negotiations with KKR for KKR to take the company private. My network told me (so it's hearsay) that the deal broke apart on $1 per share. KKR offered $24, Cadence management and board held out for $25. But it was not long afterwards that the board figured out just how much Cadence had been advancing revenue and fired the entire management team.

It takes character and spine to convert your business from up front license revenue to ratable revenue. If you start the business as a SaaS business (like salesforce.com, or FirstRain) your revenue starts out low, but it grows exponentially and you never have to make the switch. But to switch from license to subscription means at some point you have to slow down your growth rate. Both Oracle and SAP are dealing with this right now, and the Autonomy management team must have decided it was easier (and more personally lucrative) to sell to a mug than deal with it themselves.

The second practice reported by AllThingsD is channel stuffing. Again, not fraud but really short term because it creates a future problem every time.

Channel stuffing is selling product on to distributors before they have found a buyer. So this means you sell to your distributor (who is never going to use your product themselves), they pay you, you take revenue and it sits on their shelf until they can find a buyer. This is unforgivable in software.

This practice developed in hardware years ago because the distributor wanted to have the product ready for delivery so they'd buy it from the supplier, but these days, with modern reporting systems, there is no need because your product can sit on your distributor's shelf while you still own it, and in software there is no reason at all to do it.... unless you are trying to inflate your revenue in the near term and you are willing to bet your revenue will grow fast enough to cover the stuffing.

In the end this is about business judgement and advice. As Reuters headlined a story this morning: In HP-Autonomy debacle, many advisers but little good advice.

Autonomy had the best advisers in the business. They don't come any better than Frank Quattrone, George Boutros and the Qatalyst crew. I have worked with them on both sides of deals, on my side selling and against me when I was buying, and they know how to develop the case to extract maximum value for the asset they are selling.

Time will tell now whether this colossal acquisition write down was the result of fraud -- and so reputations will be destroyed on both sides -- or whether it was an overly aggressive tone at Autonomy that inflated the value. But the resulting destruction of value and reputation is the same in both cases.

Thursday, November 8, 2012

What makes a great venture capitalist

The venture capital world lost a master last week. Paul Wythes of Sutter Hill died at age 79 - he was a pioneer of the industry in California and a gentleman.

Reading his obituary in Business Week I was struck by two things he said in an earlier interview that capture key characteristics of a great VC. I have little time for the celebrity VCs who court the press and like to take attention and credit for their companies. I believe the VC who is there with advice when you need him, leaves you alone when you don't and provides unwavering support as you ride the roller coaster is what a founder or CEO really needs.

First, I love the description of Paul's deal flow process:

Wythes described the early days of his industry in the San Francisco Bay area. 

“What I’d do is get in the car and drive down to Mountain View or Sunnyvale -- not so much the East Bay in those days -- and look for signs,” he said. “The sign of the company would say, ‘Technology,’ and I stopped the car, go in and say to the lady in the lobby, ‘I’m so-and-so from Sutter Hill, here’s my card, and I’d like to meet the CEO.’” 

The best chief executives “always spent the time with you,” he said, “because they were smart to realize that someday they may need venture capital.”

He had an unassuming way about him that would be disarming to a CEO. When I did a short stint as an EIR at Sutter Hill he didn't have to spend any time with me, but he did, just because he loved the business of building technology companies.

And even more revealingly he said:

“Venture capitalists don’t create successful companies, entrepreneurs do,” he said, according to Gupta’s book. “Some venture capitalists and some venture-capital firms today think it’s exactly the reverse, but they are the ones that have it reversed. I think if you can be supportive of a company as a venture capitalist, and be in the background, not up front making it look to the world like the venture capital firm made this company successful, it’s much better.”  

Amen to that.

I've been lucky enough to work with two old-school style firms who take the approach Paul described. Mayfield -- and Gib Myers -- funded Simplex and they were quietly unwavering right up to and through my IPO. Oak Investment Partners -- and Bandel Carano -- have funded FirstRain and again have been supportive and unwavering, this time through the challenge of the great recession.

Great VCs know the founders and entrepreneurs are doing the heavy lifting, and they put the company out front and support it completely, right up until the day the company either reaches liquidity, or the VC decides to write it off. There is no middle ground. The Sutter Hill masters know this too.

So when you're interviewing VCs for your deal, remember All Venture Money Is Not Equal, and look for a VC like Paul.

Money is NOT the motivator

It's a common misconception that people are motivated by money, especially when talking about entrepreneurs. Make millions from your stock options!! Drive a porche!! Buy an expensive house in Palo Alto!! But for the 99%, money is an outcome of their hard work, not the reason they work hard.

For sales people, it's all about winning. I've seen sales people compete harder to be visibly #1 and win a $100 Starbucks card than invisibly earn a $10k bonus. Yes, sales people are coin operated - you have to pay them for their performance in a pretty linear way, but the motivation comes from the hunt and the kill -- winning and being #1.

For engineers, it's all about their technology being used and staying current. Nothing is more motivating to an engineer than seeing their work in the hands of hundreds, or thousands, or millions of people. Nothing is more demotivating for most engineers than working in an ivory tower. They want to work with smart people more than be known to be smart. They want to be working on the latest technology, apply it to interesting problems and create cool products. That's why they'll work all night, not because of stock options.

Even the blood-sucking lawyers (I say that with all affection) working in a partnership, charging their clients hundreds or thousands of dollars an hour, care more about how they are paid relative to their partners than how much they actually make, once they're making a lot.

However, it's not that money is unimportant. It's that the lack of it is a demotivator, not the reverse.

The base level problem is whether there's enough. If someone is not making enough money to support their chosen lifestyle you're going to have a problem. Worrying about making ends meet can be hugely distracting away from doing the job. You're not responsible if you have someone on your team whose expenses are higher than the job pays, but you will have to deal with the problem eventually, even if the problem you have to solve is fill the job when the person leaves. You need to know so you can help through advancement, if possible.

But once people are making enough, the key issue is fairness. Everyone wants to be treated fairly relative to other people doing similar work in your company or similar companies. If everyone's pay was openly posted, would it make sense? would it feel fair?

I don't advocate posting pay, because the sheer process of everyone absorbing it and explaining it is distracting, but you need to act as if. Just like you should never send an email you would not want on the front page of the New York Times, when you look at the pay of your team, you need to see that it's fair, or if it's not (which sometimes happens for odd, historical reasons) you should have a plan to continuously move it to be fair. And it is a continuous process because the team, and everyone's jobs, continuously change.

Your HR team will talk about Pay for Performance. This means steer pay people to who are performing, steer it away from people who are not. But in the end remember that pay doesn't motivate. For every one of your employees you have to figure out what motivates them first, and then make sure their pay is fair.

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