Jim Lejeal just wrote a good post on his thoughts on what qualities make a good independent director. It’s worth a read. I’ve served on several boards with Jim and on the boards of two of Jim’s companies – he knows of what he speaks.

I was at a Rally Software board meeting where we spent a chunk of time finalizing and approving the 2005 operating plan. A big part of the discussion – not surprisingly – was on the sales ramp and the corresponding expense base (and timing of opex growth throughout the year based on a prediction of sales growth and performance.)

Rally started shipping their product in mid-2004. So – 2005 is their first full year of product ship. They have a nice, active customer base that is growing as expected. The growth curve is ambitious (but achievable) for 2005 – f they make plan, they’ll have a great year. However, their operating expense ramp (pre-board meeting discussion) assumed they made the sales plan. The guys running Rally are responsible and know how to sandbag a plan, so we’re confident that they won’t pull the trigger on hiring if they don’t see the sales ramp happening. The going in proposal (and plan) assumed they hit their numbers relied on management backing off hiring if they missed their numbers.

I’ve been involved in over 100 companies. None of them ever have made their operating plan on their first year of product ship. Occassionally they outperform, but they almost always underperform for some reason. The reasons are often logical and non-fatal, but the dynamic that gets created is one where the business is always “behind plan.” This sucks.

I made the strong point that I actually care LESS about “making our 2005 revenue plan” then I do about learning why people are interested in what we do, why they turn into real prospects, why they become customers, and why they buy more stuff from us. I know – with certainty – that our 2005 revenue forecast is wrong – we just don’t have enough data to have any precision on it. So – I want to learn the “why” in 2005 – not that “what.”

We do have a sales force to comp, a team to motivate, and a plan to achieve. So – the “what” is important. However, in my experience, the way to calibrate things is to set up the operating plan so you are in a position to increase opex as you are successful vs. having to back off spending (or hiring) if you fall short of plan. I’d rather go to a board meeting mid-year where the management team says “we’ve hit our revenue ramp so far this year so we want to pull some head count adds forward” vs. the meeting that says “we missed our revenue ramp so we’re holding off hiring folks in the plan.” The nuance is subtle but the dynamic is important – as you succeed, you get to apply more resources; if you don’t reach your goal, you haven’t assumed more resources (e.g. we can’t hit the goal because we need the resources.)

It also reinforces the focus on the “why.” If we fall short of plan, we’ll focus on “why.” If we exceed plan, we’ll rejoice, talk about “why”, and add more resources. However, we won’t spend a lot of time agonizing over “what we should do because we missed plan.”

The first full year of product ship for a software company is a very defining year. I’ve seen way too many of my VC cohorts believe that the operating plan and forecast is gospel and spend all their time in year one of product ship (and usually year two of the business) focusing on the quantitative financial metrics rather than understanding how things actually work in the business. Financial planning is imprecise early in a business – a smart executive team understands this and sets the right expectations and parameters around it.

I got the following question via email today:

All things being equal and all things being perfect, is it better to have more or less ‘angels’ in the mix? I can come up with reasons for both more and less. Also, it seems to me that more and less are very relative – but, in this case, Ohio has a limit of 25 investors before exemptions no longer apply (we’re still investigating that one), so that is the absolute upper limit. I’m thinking “more” is in the range of 4 – 10 and “less” is in the range of 3 or fewer — allowing more growth later, if needed.

My quick answer is three or nine, since three is my favorite number (and multiples of three are good, especially 3 * 3.) Before I started doing venture capital, I participated in about 21 angel financings (and led about 9 of them.) As a VC, I’ve had angel investors either prior to our investment or as part of our investment (when we invest in the Series A or first round) in about 51% of the investments I’ve done. It turns out that either a small number (three) or a moderate number (nine) is best (or – to be simple, 3 <= angels <= 9.) Angel rounds need a lead investor, just like venture rounds. Most lead angels drag along a couple of their friends. I like to look for this lead group to take between 40% and 100% of the deal. So - if you can get a small angel group to take the entire deal, you can probably get away with three-ish angels. If you are at the 40% level, you are probably at nine-ish angels. Remember that angels can (and should) bring a lot more than money to a deal, so the actual number is less important than the value you are getting. You won't get 100% participation (at best - you'll get 50% - more likely less than 33%) - most angels talk a good game but few deliver because they've got other priorities and interests. This is another argument for a larger number (nine-ish.) So - while there is no right answer, a multiple of three feels pretty good to me.

I was with my uncle Charlie at EDS yesterday catching up on a variety of things. I always pick up a handful of pithy thoughts from him – it’s one of his “special magic leadership” traits – boil the thought down to a simple, clear idea.

We spent a lot of time talking about cost leverage, as it’s one of the ways that EDS gets healthy over the long term. Charlie’s pithy thought of the day is that there are healty cost reductions and unhealthy cost reductions. You can always cut of an arm and a leg and lose 50 pounds. Or – you can start jogging and doing pushups.

Too many companies and executives – big and small – only know how to cut off body parts.

After posting Sales Tools – Keep Them Simple (e.g. A Heat Map) I got a couple of comments saying “show an example.” (Now that’s a great example of NOT keeping it simple – I’ll verbally describe things instead of graphically showing you the example – duh… sorry about that. I bet you wouldn’t believe me if I told you that I’ve read Tufte’s The Visual Display of Quantitative Information.)

The heat map above shows you that we have Company_1 and Company_3 as customers, we’ve pentrated Company_1 really well but have some work to do on Company_3, we should be making good progress on Company_2, and we’ve got a long way to go on Company_4 and Company_5. I also think MikeL should spend some time with JimR figuring out how to pentrate a Division_2 type customer and MaryB should probably spend some time with JimR also talking about Division_3 type customers, especially in Europe.

Now – envision this as 20 companies instead of 5 and 10 sales people instead of 3 and you can see how you could quickly see patterns that would be hard to otherwise see in a traditional sales pipeline report.

I was sitting in a meeting yesterday with one of our companies and saw a very compelling sales presentation. The company has developed good sales momentum in a specific vertical market (life sciences) and the CEO has focused the sales organization (6 direct sales people) on this market.

Rather than show leads by sales person with contrived forecast numbers and ratios, the CEO showed a heat map of the top 40 target customers (in two separate charts – top 20, second 20). For each company, he sorted by number of potential seats, listed the sales person that owns the account, and the geographic location of the company.

The interesting data was the heat map. All existing customers were colored blue. There were three columns for each company for each division that we sell into (there are three distinct ways that we can get to a customer.) Each cell was then colored either green for active, yellow for not active, and red for “the company told us to go away.” Fortunately, there we no reds yet.

In 30 seconds, I got a better view of the current sales activity for this company than I do for most of my companies. I saw which of the top 20 prospects were actually customers and how much we had penetrated the additional prospects. In addition, this heat map provided a clear framework for a detailed pipeline review. It also gave me real confidence that the CEO was following through on his assertion that they wanted to own this vertical market.

It was a simple tool – reminding me that all the Salesforce.com reports in the world aren’t a good substitute for a CEO who knows his target market and thinks about it constantly.

I had a meeting yesterday with the VP of Consulting for one of my companies. The ostensible agenda for the meeting was to discuss how to accelerate their consulting / professional services business, which is a small, but growing and highly relevant part of what they do.

As we got into the discussion, I realized that the construct of “consulting and professional services” was bothering me. A pet peeve of mine is that “consulting” and “professional services” are fundamentally different things, even though many people and companies interchange them. I once had a company that had a group called CompanyX Consulting and Professional Services – I could never figure out why we didn’t call it one thing or the other (CompanyX Consulting, or CompanyX Professional Services.)

Professional Services is easier to define – in my little universe it’s what software companies do to implement and support their software products. One of my companies – Channelwave – provides professional services as part of their PRM software product. When you buy Channelwave’s PRM product, you also purchase professional services from them to help deploy and implement their product. This activity is almost always in support of a pre-existing product that addresses a well-defined need.

Consulting is a little harder to define, partly because it has a broader range. One of the large clients of my first company (Feld Technologies) was a strategy consulting firm – they typically did work for Fortune 1000 companies. Some of the work was high-end, CxO level consulting and business transformation (before that buzzword became popular) – this was clearly consulting. The Feld Group – now part of EDS – provided “CIO outsourcing” work to Fortune 100 companies – again – clearly consulting as Feld Group took responsibility for managing and running the IT organization for an F100 company.

It gets tricky when you mix both Professional Services and Consulting within the same company. Return Path has a young consulting group (which they refer to as strategic solutions) that helps companies understand how to be more effective with their email marketing. This is not in support of any specific Return Path product, yet in encompasses all of the capabilities that Return Path can bring to a customer, along with others from Return Path partners and complimentary providers. However, within Return Path’s Delivery Assurance products, there is a professional services component – as many deliverability customers want help interpreting and understanding the information they are getting as well as learning how to take action on it. In this case, there’s a clear consulting group that engages with customers independent of the specific products that Return Path sell and a professional services group that helps support the specific Return Path products being used by their customers.

The nuance seems important to me – especially given how severely I react to the phrases being mixed casually. I’m curious how y’all think about this – please comment freely (hence providing me free consulting.)

Oracle announced their “best and final” offer for PeopleSoft today.

I’ve heard the phrase “best and final” a remarkable number of times recently in several deals I’ve been involved in.  Each time, it’s not the best and final as more negotiation occurs and the credibility of both parties is stretched as a deal doesn’t come together.  In my experience, good deals for both parties don’t have “best and final” conditions – the negotiation is a dance that works its way to a deal, often winding and twisting about, but converging if both parties want it to. 

When one party starts saying “best and final”, you usually know you have a problem.  In the case of Oracle, it’s an unwanted (by PeopleSoft management) bidder trying to press another constituency (the PeopleSoft shareholders) to make a decision.  In a public to private or private to private negotiation, it’s usually an attempt by one party to force a set of terms, rather than continue to try to collaboratively negotiate to an outcome that works for both parties. 

When “best and final” gets thrown out, I usually take it as a signal that the deal is going to die.  Of course, deals often die before coming back to life, in which case best and final was irrelevant.  If both parties are trying to get a deal done – behavior on either side that forces a set of terms is usually counterproductive as there are often multiple constituencies involved that have to solve an increasingly complex equation (ah – if price was the only deal term that mattered – life would be so much simpler.)

So – the next time you hear “best and final” – listen carefully to what it really means.

My first company – Feld Technologies – was a transformational experience for me.  I started the company in 1985 out of my fraternity at MIT.  My first major client was a 100 person dental practice in California (run by the step-father of one of my fraternity brothers) – I wrote their office management and insurance billing software that is still in use today (written in DataFlex 2.x- still available today although now version 3.2.)  I recall sending out invoices at the steep billing rate of $25 / hour. You’ve got to start somewhere.By 1992, we had a company that was doing around $2m a year in revenue and had about 20 employees.  We were self-funded (we originally funded the company with $10 so we could split up the ownership of the company – we had 10 shares of stock at $1 each.)  We never raised any other money – the business grew based on our cash flow.

We were always a pretty thoughtful and introspective group – especially since most of us were in our 20’s and had absolutely no experience creating a company.  We were idealistic about a lot of things, but fortunately very good at what we did – at least relative to all the other folks in Boston that were doing the same type of stuff we did at the time (custom database software and network integration services).

My partner – Dave Jilk – and I had a long standing tradition of taking a day off during the week each month and going on a “retreat.”  We’d often go to a bed and breakfast within a couple of hours of Boston and spend 24 hours together talking about the business (both long term “strategic issues” as well as immediate tactical stuff), life, our relationships (we had both gotten married shortly after graduating and subsequently divorced), and our aspirations.  We usually finished the day with a nice long dinner and plenty of booze, at which point we stumbled back to wherever we were staying, got a good night sleep, and drove back to Boston (and work) the next morning.  We tried to do this every month – we probably got in about nine a year – which in hindsight is something that clearly helped us keep our business – and our relationship – from going off the rails.

In 1990 when we had about 10 employees, we decided to start going on an annual retreat.  One of our clients had a family summer house at Lake Winnipesaukee – we’d haul up the entire crew for a long weekend (usually Friday and Saturday as folks would start peeling off Sunday morning.)  I recall these retreats with great fondness – these were some of the best times I had at Feld Technologies.  We always did these in October – so in addition to all the normal bonding rituals that a retreat like this entails – it was often cold – which created a whole new category of potential entertainment and “experiences.”

In 1992 – on October 6th to be precise – we decided to spend the day coming up with the “mission” for Feld Technologies.  When we started this process, there was plenty of scoffing – we were a young crowd and we all thought the “mission, vision” thing – which was very in vogue at the time – was a load of horseshit.

After talking about it for a while, we decided that we could define our mission with a set of precepts.  We all thought this was both more intellectual as well as more rigorous.  This appealed to everyone so we got after it.  A few months ago I sent Dave a note to see if he had a copy of these precepts (I was two hours into a long run when they popped into my mind – clearly I had something stuck in a brain crevice somewhere that really wanted to get out.)  Since I don’t keep my email or files past a few months, I didn’t expect him to have them, but lo and behold, “three zip files later” he’d dug them up.

I didn’t remember the precepts, but had a fantasy they would pass the test of the passage of time.  They do – and while they apply to Feld Technologies – I thought they were worth repeating and commenting on.  While I don’t think any company should have the same set of precepts that we did, I think it’s valuable to use this approach to define the mission of your business.  It’s a different approach than the standard mission, vision thing (which I still think is horseshit even though I’m not nearly as idealistic as I was a dozen years ago) – but I think it can be useful at the right time in the development of a company.

Following are the 10 precepts that – in our words “defined the mission of Feld Technologies.”  The precepts are in italics – my commentary follows.

We must be financially successful to be a business. Now – before you say DUH – recall what happened between 1999 and 2003 (and is still going on today with companies such as Commerce One (in case you are asleep, Commerce One – which was once worth a gillion dollars – is in the process of liquidating because it no longer has a viable business.))  Feld Technologies never had a choice – we had to be financially successful – or we wouldn’t exist.  We had to be positive net income and make a cash profit at the end of every month – if we didn’t – we wouldn’t be able to cover payroll.  Yeah – there were a number of times that Dave and I had to reach into our pockets and loan the business money to cover cash flow for a short period of time – but the money in our pockets came from the profits of the business – so it was a self-fulfilling prophecy – if we didn’t have “overall positive cash flow” on a monthly basis, we wouldn’t last long.  While we were pretty open book about our financials, we wanted to reinforce this with everyone that worked for us, hence precept #1.

Respect. This was a biggie.  Respect applied to everyone in the company, our clients, and our vendors.  When you are running a service business (or any type of business), it’s easy to start thinking that your clients and co-workers are idiots, especially when things don’t go as planned.  We had a zero tolerance approach to this – respect for each other and the people we worked with us.  By the time we were 10 people, this was starting to get more challenging, especially given the range of personalities within the company.  We borrowed the concept of Thinly Disguised Contempt (TDC) from Alan Trefler at Pegasystems and incorporated it into this precept which acted as an anchor for all of us.

We want our clients to love our service. The corollary to this precept was “we suck less.”  The custom software business in the early 1990’s was a bitch – nothing worked very well.  Our clients were deploying mission critical PC-based systems for the first time and it was hard enough to get the networks working properly, let alone the software.  Oh – and you had to understand what the client actually wanted – which was even harder when they didn’t really know what they wanted, and had probably already failed at a few prior projects.  So – our goal became to “suck less” than the previous company that had tried to build a custom system for our client.  While “we suck less” was a fun and memorable mantra, it wasn’t a particularly good precept.  As a group, we decided we’d hang on the mantra – especially in situations that were pressure packed – but that the actual precept would be to have our clients love our service.  “Love” in this case is still a relative thing – so we could achieve this precep
t while still sucking less.

The success of the business along all dimensions is everyone’s responsibility. I remember spending a lot of time talking about responsibility.  At the time, my therapist had a recurring theme going with me about my taking too much responsibility for things.  Fortunately, most of the people at Feld Technologies were naturally responsible people (and the ones that weren’t didn’t last), but by calling this out explicitly, everyone was linked in responsibility for the entire business, rather than just one aspect of it.  This precept created a natural rhythm where things – especially problems – didn’t lie on the floor. Someone quickly picked it up and – even if they weren’t the right person to address it – knew that they were responsible for bring it to the right person’s attention.  After having been involved in over 100 companies since Feld Technologies – I fondly recall us getting this right in comparison to most other companies and cultures (although this may be another case of “we suck less.”)

Our work environment must be comfortable and stimulating. This was another biggie.  I have always been a jeans and t-shirt kind of guy (once a year I go to the Gap and set a single store record for unit purchases – this year it was 60 t-shirts, jeans, and underwear since I’d left a lot of my clothes in Alaska this summer.)  One of our managers liked to wear a tie every day.  We ridiculed him for a while, but then realized that he felt more comfortable in a tie in a work context then he did if he was wearing a t-shirt.  Aha!  This precept didn’t mean “casual” – it meant “comfortable” – both physically and emotionally.  In some ways, we were way ahead of the curve on the whole dress code thing as we believed people should do what they feel is comfortable given the context there were in. Occasionally we’d have some inappropriate moments (I remember showing up in shorts at a client who was a very Bostonian-conservative suit and tie place and realized that I was most definitely NOT comfortable at that moment in time) but overall, we ended up with a work environment that – well – worked.

Strive to be the best. While “we suck less” defined how we wanted to perform in relationship to our competitors, we believed strongly that trying to be the best we could possibly be was a logical precept that wasn’t in conflict with we suck less.  Many “mission/visions” have a “be the best component” – we started this precept intentionally with the word “strive.”  We didn’t actually expect to be the best at everything, nor did we really care if we were.  However, striving to be the best was a key part of our culture.

We want to grow into new areas that we have not yet explored. Feld Technologies was full of super smart people (many of the folks were MIT, Brown, Brandeis, and Wellesley grads.)  Not surprisingly, there was a lot of “intellectual curiosity” floating around.  We also got bored quickly (ever try to spend week after week developing custom business applications for mid-size companies that didn’t really know what they wanted – boring!)  So – we played and explored.  We tried to have as many technology toys around as we could (although in hindsight we were pretty pathetic at this because we were cheap about spending our hard-earned positive cash flow dollars on things we didn’t really need.)  In addition to going out and blowing off steam on Friday nights (remember – we were in our 20’s and we were nerds – we knew how to party), we’d get together and discuss books like Zen and the Art of Motorcycle Maintenance.  We tried to always have learning be part of what we did without having it interfere with either work or non-work time (and this was tricky.)

Work should be a substantive, positive part of our life experience and personal growth. Ok – now we are hanging out in the zone of “let’s make sure work matters, but have balance in our life with work being part of that.”  We all worked really hard.  As a group, it was clear that some of us (including me) were way out of balance – work was “all consuming” rather than “substantive.”  For others, work treaded into negative territory – either it wasn’t fun, wasn’t rewarding, or was just a chore.  Of all the precepts, this one has had the deepest impact on me as I no longer think of work as either (a) my life or (b) simply work. What I do is woven into who I am, which is not just my work.

We want to be our clients’ best computer technology investment. I recall us having a whole bunch of “be the best” type of comments that we were trying to roll into a precept.  We were tired (this is #9 after all) and struggling with how to represent these thoughts as a precept.  We kept coming back to “be the best at what, for who?” which – once we answered the question, we had our precept.  It’s a pretty focusing one, since we lived for our clients (that was who measured us) and their measurement was a directly financial one (if they kept paying the bill we sent them each month, we were doing ok.)  By linking these two concepts, we had a precept that held us financially accountable to our primary constituent.

We will periodically meet as a group to evaluate, question, and re-affirm our precepts and our mission. All the MIT nerds (me included) loved the idea of a recursive precept.  We sold the company in the fall of 1993, about a year after we came up with the precepts in the first place, so ironically we never revisited them.  12 years later, I still think they are pretty good.