• #Board of Directors
• #orbotix

I find three hour “reporting board meetings” where everyone sits around and goes through a 50 page PowerPoint deck to be tedious. When I first started investing in 1994, this was the norm. I put up with it even though it wasn’t my style because (a) I didn’t know better and (b) I didn’t have any better ideas.

27,351 board meetings later, I know there is a better way. I’ve encouraged everyone I work with to try different approaches. I’ve written about some of my favorites in the past, such as doing an entire board meeting off of one slide with a list of “top of mind” items that the CEO has (this assumes that all the board material – appropriate data about the business, financials, and any department updates, have been previously circulated and consumed by all board members.)

Another one of my favorites is to start a board meeting off with a demo. Today, we had the Orbotix board meeting at our office. We spend the first 15 minutes playing with Sphero, the robotic ball that is Orbotix first product (and available for pre-order now.) We then spent the rest of the board meeting talking about the key issues. Paul Berberian, the CEO, had an agenda which we generally covered, but we were able to have real discussions about real things, rather than just a bunch of “arm crossed people starting at a PowerPoint presentation on the wall.”

This stood out in contrast to another board meeting I had later in the day. I attended this one by phone. It was for a company that is doing superbly, but was a very old school style meeting. 54 slides later the meeting ended. There was plenty of information covered and the management team presented everything really well (as usual – it’s a gang that has their act together), but there were only a few parts of the meeting where we had space jams (think of the Grateful Dead on a 25 minute riff that is the best part of the concert.)

Yup – there are plenty of different ways to skin a cat. Or play with a robotic smart ball. If you are a CEO, don’t be afraid to try different things. And, if you want to see who the real fan of a robotic smart ball is, take a look at the video below (and if you like it, vote it up on LOLDogs.)

My amazing day at the Supreme Court continued to bounce around in the back of my mind all day yesterday.  I was at a board meeting for a company that I’ve been on the board of for almost a decade – it was the best (as in most productive) board meeting we’ve had in a long time. 

I’ve written about The Best Board Meetings in the past.  One element of the best board meetings is a prepared mind. This is the powerful lesson from the Supreme Court. On Monday (at the Supreme Court), I saw eleven very smart people participate in a very complex discussion that they were extremely prepared for.  In one hour they covered an amazing amount of ground.  I attribute this to the work they did in advance of the meeting.

In many board meetings, the material shows up at the meeting, or the board members haven’t read the material in advance, or the board material is not very detailed, or the board material is too detailed.  Basically, either the board members don’t have the material to have a prepared mind in advance of the meeting, or they don’t take the time to do the work to be prepared.

Then, unlike the Supreme Court session where you can dive into substance immediately, the board members and management spend a long portion of the meeting “getting up to speed”.  That’s a total waste of time for everyone in the room.

In my strong board meeting yesterday, everyone was prepared.  The board material was comprehensive, but not overly so.  It came in advance of the meeting (only 24 hours, but still enough time for everyone to read it).  And, rather than go through the material page by page, we picked a handful of key themes and discussed them.  For several hours.  In detail, but at a level that resulted in clarity for the board members and management.

The other key lesson from the Supreme Court is paying attention.  I’ve written about this also in VC Behavior in Board Meetings.  I continue to fall victim to the blackberry checking syndrome.  In the Supreme Court, phones, computers, and PDA’s weren’t allow.  So I paid attention.  And as a result I really followed what was going on and processed almost all of the information.  Even in yesterday’s board meeting I found myself drifting a little and pulling out my iPhone – bad Brad.  It detracted a little from the meeting (my fault), but most importantly it caused me to likely miss a few things I shouldn’t have missed.

I’m at Defrag all day today and am going to try to pay attention.

I was fortunate that two of my early mentors were master dealmakers.  They had different styles and approaches so I learned an incredible amount from each of them.  Before I met them I’d never made an investment, acquired a company, or sold a company.  In the past 17 years since I met them, I’ve done a ton of each.

React to the following:

“We’d like to buy your company for between $35m and $50m.”  That means $50m to you, right?

Or ponder

“We’d like to invest between $5m and $7m at a valuation of between $10m and $15m.”  That means a post money valuation of $22m to you, right?

Or what do you think when someone says “about $10m” instead of “between $9m and $11m”?

Given the extensive negotiation theory that exists, I’ve never understood why people talk in ranges when they are proposing a deal. While I understand the hesitancy of many to put the first number out there, I’ve never understood why this often translates into a range. When you put the range out there, you are by definition showing your negotiation flexibility at the very beginning of the negotiation. 

While I understand that some people will assert that the range softens up the first volley in a negotiation and also indicates what the negotiating range might be, everyone I know that is a strong negotiator ignores the range and views the starting point as whatever number is most advantageous to them.  All the range ends up doing is reinforcing that the range giver is tentative and uncertain about their starting position.

Now, let’s translate this into something useful for the entrepreneur raising money.  If you tell me you are raising $3m to $5m, then I don’t really know what you need (or want) to raise since there is a big gap between the two.  Instead, if you tell me you are raising $3m, then I can have a discussion with you about how much I think you should actually raise.  And – if you have more demand than expected, you can always raise more.

So, before tossing out a range in any negotiation, think again about the starting position you are trying to establish.

There was plenty of chatter about my post The Best Board Meetings.  One idea popped up a few times and was well articulated by John Boyd in his post What Makes a Good Board Meeting?  In it he talks about what is expected from a VC in a board meeting, rather than just from the CEO / entrepreneur.

“So one thing I would add is nothing is worse than a board member that just gives "good body temperature". i.e. I think it’s important for investors to have well articulated views and data to support their advice on strategic choices the company faces. I think it’s also important that when a CEO asks for investor help on an issue, it’s incumbent on the investor to tap his/her own extended network to get the best help possible.  My point is, while a lot is expected of the CEO, the VC board members need to step up too and a lot of times they don’t.”

I love the phrase “gives good body temperature” – that captures the behavior of so many VC attendees at board meetings (including partners, not just associates.)

Worse, though, is the endless addiction to a blackberry / iPhone or laptop during a board meeting.  I long ago stopped taking my laptop to board meetings because I knew I had no ability to ignore it.  I still find myself regularly taking out my iPhone during board meetings.  I don’t do anything on paper so I’m often taking my iPhone out just to write notes to myself for tasks to do, but I always end up scanning my email due to “poor impulse control.”  While it’s rude to everyone in the room, it’s even worse because no matter how good I think I am at listening while reading my email, I’m not.  And I’m certainly not participating.

Yesterday, during a board meeting, I tried something different. I put a piece of paper and a pen in front of me and whenever I had a thought I wrote it down.  When I reflect on the meeting from yesterday, my level of engagement (which I like to think is usually high) was as complete as it gets – I was “in the board meeting” for the entire board meeting, except for the two minutes when I took a call from Amy (which will always supersede whatever I’m doing, except sex, but since I only have sex with Amy, this won’t be an issue.)

So – starting now, I’m going to banish my iPhone from board meetings.  I encourage my VC colleagues to give this a try.

Over the past 15 years I’ve been to thousands of board meetings.  Last week I had four; this week I have two.  I’ve spent a lot of time – often during board meetings – thinking about how to make them better and more effective.

Yesterday, Fred Wilson (who was at the Return Path board meeting in Boulder with me) wrote a great post titled Face To Face Board Meetings.  Fred and I have been on a number of boards of the years and I strongly agree with his post.  To be effective, board meetings need to be (a) in person and (b) there is immense value in a board dinner the night before a board meeting (maybe not every meeting, but at least once a quarter).

While board meetings have a different tempo at different stages of the life of a company, I’ve developed the point of view that the vast majority of the board meeting should be “forward looking.”  Ironically (and frustratingly), the general culture of many VC-based boards – especially larger ones – is “backward looking”.

What I mean by this is that most board meetings are 80% status updates, 10% strategy / issues, and 10% administration.  I’m fine with the 10% administration, but the 80% / 10% split on status vs. strategy should be reversed.  There are plenty of different ways to organize the “strategy” (I’m using “strategy” as shorthand for “forward looking discussion”) and strategy includes a blend of short, medium, and long term issues, as well as plenty of “tactical stuff” (for those that think “strategy” is too specific a word), but I imagine you get the idea.

My favorite board meetings have the following characteristics.

1. All board material goes out 48 hours in advance, including a detailed financial package and operating review of the business.  This material includes any administrative stuff (draft 409a report, options grants, compensation stuff, audit stuff, prior board meeting minutes.)  Everyone reads this in advance – if the materials go out 48 hours in advance there’s no excuse to have not read it.
2. There is a dinner the night before that is at least the board and the CEO.  Sometimes it includes non-CEO founders; other times it includes various members of the leadership team.  This is a casual dinner (e.g. not expensive or full of pomp and circumstance) – a chance for everyone to catch up with each other.  If the board meeting is an afternoon meeting, sometimes you can pull off a lunch prior to the meeting that acts as a proxy for the dinner, or a dinner after, although I find the dinner after to be much less helpful.
3. The first 30 minutes of the meeting are administrative.  Everyone settles down, you go through any formal board business, discuss it, and get it done.  Often it takes five minutes (which gives you an extra 25 minutes for the strategy stuff); sometimes it takes the full 30 minutes.  I can’t think of a case where it has ever needed to take longer.
4. The CEO then puts up one slide summarizing prior period financial performance and asks if anyone has any questions about the board package.  This discussion takes however long it takes.
5. The CEO then puts up one slide with the issues he’d like to discuss.  These are bullet points that are crisp yet detailed enough to know what the issue is.  This is then the bulk of the meeting.

Some CEOs are capable of running a 2+ hour discussion off of one slide (I love these guys).  Others need slides to prompt them through the setup for each topic (which is fine).  Either way, the setup for each topic should be brief (five minutes at most) and the bulk of the activity should be a discussion.  The CEO and management team is looking for board feedback, input, advice, and guidance.  Ultimately, the CEO has to synthesize this and decide what he wants to do, but by engaging the board in an active discussion, the team will generally get useful input as well as discover where there might be additional domain expertise around the table on the particular issue.

I’ve found that the more time that is spent on #5, the more impactful the meeting is.  Obviously, it’s difficult for people on the phone to engage as effectively, which draws them into physically attending the meeting, or not participating.

I’ve got a lot more thoughts on this, but realize I’ve got to get off my ass, get in the shower, and head over to the Boulder Theater for TechStars Investor / Demo Day.  More on this another time.

Q109 is over.  The numbers are starting to roll in.  After all the gloom and doom at the end of 2008, I’m very pleased with the performance of most of the companies in our portfolio.  As I mentioned the other day, some struggled, but many met or exceeded their Q109 plans, and several of them destroyed them (sandbaggers, how I love thee.)

There is nothing easy about operating a young company in any environment.  It’s especially difficult in a downturn (or a recession, or whatever you want to call this.)  If you haven’t managed to turn off TV news, stop reading the newspaper, and are still listening to NPR instead of the XM Chill station in the morning, you are likely continuing to get whipped around emotionally.  So are the people in your company that are listening to all this crap every day.

So – do something that is always important to do, but even more so in a downturn.  Overcommunicate.  Especially your victories.  Celebrate them.  If you made your Q1 plan, make sure everyone in the company knows it.  While it was likely a team effort, there were probably a few people that clearly went above and beyond in the quarter.  Highlight them – not to the detriment of everyone else – but as a rallying cry for everyone for Q2.  Make sure everyone in your company (and your partners, and your customers, and anyone else that matters) knows what worked and – as importantly – why it worked.

There’s an old adage that contrasts positive and negative news.  The premise is that a unit of positive news is worth less than the cost of a unit of negative news.  For example, consider the performance of the DJIA every day at the close of the market.  Now, assign +1 of “emotion” to every day it is up and –5 of “emotion” to every day that it is down.  Over the approximately 250 days per year that the stock market is open, assume the DJIA is up 125 days (+125), down 125 days (-625), and ends the year flat.  Even though the DJIA is unchanged for the year, you have 500 units of negative “emotion”.  Sucks, doesn’t it.  Didn’t I say earlier you should stop watching TV news (that includes looking at the stock market.)

Now, apply this to your company.  Everyone is getting hit all over the place with negative sentiment.  When you have it, give them some positive. Remember that you need a lot more positive to counteract the negative.  This doesn’t mean you shouldn’t be front and center with the negative – your team expects to hear the good and the bad.  Just don’t forget to celebrate the victories.

• #entrepreneurship
• #panic
• #urgency

I received the following email earlier this week from an exec at a company that I am on the board of.  He sent it out to his entire company.  I thought it clearly described the different between panic and urgency and explains why – in a business context – panic is useless, but urgency is critical.  I don’t think I could have said this better if I had tried.

In recent weeks, many of my business contacts have discussed the economy and the pressure we are all feeling on a daily basis. They all have a sense of pressure. I am sure many of you can relate. If you are not feeling the pressure these days, then you may want to step outside or turn on the TV, or read a newspaper.

It has brought up a topic to me that has always been a challenge for me. The difference between panic and urgency. Panic is a sudden overwhelming fear, with or without cause, that produces hysterical or irrational behavior, and that often spreads quickly through a group of persons. We have all seen what panic looks like. Panic has no sense of purpose. Panic makes us run away from the problem. Panic gives a sense of hopelessness. Panic says there is no way out. For example, I am claustrophobic. When I feel trapped, I panic.

On the other hand a sense of urgency is different. John Kotter, Harvard professor, stated that true urgency may sometimes involve moving fast. But the most important aspects of true urgency are relentlessness, steadiness and the purposeful pursuit of a goal while “continuously purging irrelevant activities to provide time for the important and to prevent burn-out.” Go back and read that again and let it sink in.

Kotter gives a few suggestions to organizations and leaders:

1. Create a sense of urgency: he believes that organizations need a sense of urgency if they are going to change and be successful. I believe we need a culture of urgency. NOT PANIC. But urgency. We need a relentless, steady, purposeful culture that is pursuing our goals, purging irrelevant activities, and spending time on the important things.
2. Team Members must behave with urgency every day. Anxiety, panic, or anger are bad responses – team members should transmit their urgency in meetings, emails and in everything else they do each day
3. Look for the opportunities that are obscured by emerging crises. Fear can paralyze a business and prevent us from taking necessary action. A sense of urgency can carry us successfully through to success.
4. Deal with the NoNos – those “relentless urgency-killers” who would rather that their complacent existence was left undisturbed. Basically, Kotter is saying that complacency is a feeling that a person has about his or her own behavior, about what he or she needs to do or not do. “This point is also extremely important, because it is possible to see problems and yet be astonishingly complacent because you do not feel that the problems require changes in your own actions. So, we become complacent and lose the sense of urgency.”

Panic makes things worse. Urgency should make things better. I hope you can see that our leadership team is communicating a sense of urgency. Let me be clear, we are not in panic mode. I refuse to panic at work or at home. I hope you see us focused on pursuing our goals. I hope you see us purging irrelevant activities which include expenses, etc. I hope you see our relentlessness and steadiness. I hope you see our sense of determination to achieve our goals.

My challenge to each of you is that you wake up each day and have a sense of urgency both at work and in your personal life. I challenge you to evaluate your surroundings and look for opportunities to drive revenue and to make a difference in your clients. Look for ways to be productive for yourself and for our company.  One key ingredient I know without a doubt you all have is talent unlike some of the singers in the last few weeks on American Idol. I know each of you have the talent for this business. So…

Don’t panic…but be urgent!

• #Sales
• #downturn

In December, I wrote a post titled Give Your Sales People All The Knives.  While I let you draw whatever conclusions you wanted from the post, I thought I’d follow through and give you a little more detail about what I meant by the statement.

I framed the problem with the struggle many software companies have been going through over the past few years (or decades – depending on who’s version of history you believe) around selling perpetual licenses vs. subscriptions.  I inadvertently included the construct of the deployment model (desktop, server, or SaaS / hosted) which, while a key part of the evolution of the software business, was not the part of the problem I was referring to when I suggested you should give your sales people all the knives.

A few people wrote me concerned that I was suggesting that the sales organization should determine the deployment model and that I was suggesting a company shouldn’t differentiate between desktop, server, or SaaS.  Don’t be concerned about this – it isn’t my argument or suggestion.

Instead, I’m focused entirely on the licensing and pricing model (which I’ll simply refer to as the “licensing” model – which includes price.)  I’ve been in more conversations that I care to count about how to price software, regardless of the deployment model.  The licensing model and the deployment model inevitably get tangled up when they shouldn’t. 

In 2009 (and going forward) customers will buy software using both perpetual licensing and subscription licensing, regardless of how the software is deployed.  In addition, customers will buy perpetual licenses but pay periodically (monthly, quarterly, annually) and customers will buy subscription licenses but pay in single payments up front.  If you can parse all of that, this is the exact opposite of the theory of how the software licensing and deployment were intended to line up.  Of course, this is nothing new as software leasing has been around since the beginning of the software business, as have prepaid services.

While I know all of this gives the auditors great pleasure because it means they get to spend more time lecturing companies about revenue recognition and enforcing accounting policies that distort the true financial picture of the company under the guise of complying with GAAP, it’s irrelevant.  Your goal as a company is to create great products that your customers will pay you for.  The goal of your sales organization is to sell these products; they shouldn’t care how the customer wants to license the products.

That’s the essence of what I mean by Give Your Sales People All The Knives.  While it makes good business sense to have a religious point of view about the deployment model (there are fundamental differences between a SaaS deployment model and a software license / behind the firewall / on premise / whatever you want to call it deployment model), customers buy each deployment model a variety of different ways and your licensing model should accommodate.

I regularly hear the argument that the economics aren’t the same.  Baloney – they are approximately the same.  A typical perpetual model is $x in year 1 with 0.2x in year 2 and year 3.  A typical subscription model is 0.4x in year 1, year 2, and year 3.  Tweak this however you’d like; you get a roughly equal cumulative payment stream over four years.  I understand the cost of capital argument – you’d rather get the money up front, but remember that some customers want to pay for the subscription model up front (three year pre-pay for the subscription – or a single check of 1.2x) while others want to pay for the perpetual model in equal payments over three years (0.467x / year). 

Cash flow follows this logic.  The customer wants to pay in different ways to manage their cash flow.  Some want to pay monthly; some quarterly; some annually.  The deployment model doesn’t matter; the license model doesn’t matter – how the customer wants to pay is what drives this.

Fundamentally, the customer is managing two things.  First is cash flow.  If the customer has a use it or lose it budget, they want to pay now.  If they have no (or minimal) budget but really need the software, they want to pay monthly and try to bury the expense in a cumulative budget, or get a budget exception for a small monthly payment.  Second – and more subtle – is how the customer accounts for the purchase.  Many companies (whether they should be or shouldn’t be) want to capitalize the software purchase and put it on the balance sheet to manage short term earnings, especially in down markets.  Others are perfectly happy to have the purchase be an income statement item.  The two issues drive customer purchase behavior much more than your licensing model does.  As a result, I’m suggesting you should set up your licensing model to be flexible to accommodate your customer’s needs, rather than the other way around.

Bottom line – if you make software for a living, regardless of your deployment model, you should be able to provide either a subscription or perpetual licensing model, with any type of payment approach.

Many companies have only been giving their sales guys the brown handled knives (e.g. they are limited to using one type of licensing model.)  Selling software into a downturn is always harder.  Now is the time to give your sales people all the knives. If they don’t carve up enough business, they’ll at least have enough knives to put themselves out of their misery.

As everyone gets fully back to work after the Christmas / New Year holiday season, there was something that you just did with friends and family that will have a huge positive impact on your work (and life) if you apply it going forward.

While it might sound trite, make sure you spend social time with the people you work with.  Or – in English – “play.”

It’s 2009 and we can (and should) be optimistic about the future, but we are still in the midst of an economic down cycle.  I have no idea when the cycle turns positive, but the notion of enjoying social time together with the people you work with applies in both good times and bad.

Most of the people I’ve talked to this morning seems rested, positive, and ready to get going again.  Some of this is a natural dynamic that seems to happen when the clock in Times Square counts down to 0 and the calendar clicks over to a new year.  Some it is because of all the sugar we just ate.  Some of this is because many of us got to spend a lot of time with friends and family that we don’t see as often as we’d like (or – additionally – that we are now finished spending this time with family for a while.)

It’s easy to lose sight of the fact that we spend at least 33% of our lives at work (and often > 50% of our waking time working).  Don’t forget to hang out and have fun with the people you work with.  Lunch anyone?