Several months ago, I posted about Pascal Levensohn’s great white paper titled “After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies.” This is a must read for any entrepreneur who is raising or has raised venture capital, as well as every VC.
Pascal is now working on a new white paper titled “Ten Signs That It’s Time to Make a CEO Change In A Venture Backed Company.” He reached out to a number of VCs, including my partner Heidi Roizen, and asked the question, “What are the five most important signal indicators to you that it’s time to replace the CEO of one of your portfolio companies?”
Heidi did a great job of responding and covered most of the areas that I would have. So – rather than coming up with my own list, I thought I’d republish Heidi’s answers (with my editorial changes). Following are the answers from a VC perspective.
Following are three more that are not really signs that you should replace the CEO, but rather are signs that you should have ALREADY replaced the CEO (and that you are now likely in deep shit.)
Pascal also asked a second question, which I’ll address in a later post. I’m looking forward to Pascal’s new paper – if it’s half as good as the last one, it’ll once again be a necessary read for entrepreneurs, VCs, and board members.
Larry Gregory has put together an interesting VC panel for the upcoming Microsoft PDC in Los Angeles in mid-September. Rather than the typical VC panel – where we get to sit in front a room for of people and prognosticate about whatever we feel like (regardless of whether or not we have a clue) – Larry is going to use the panel as part of an innovation exercise around Microsoft Vista.
The panel description is as follows:
Venture Capital Workshop: Incubating New Ideas: Compete for the best Windows Vista-based solution idea and hear what leading venture capitalists find compelling. Enterprise developers can voice their interests and hear how the startup community is approaching those areas today. ISV developers can test new solution ideas and understand the venture capitalist perspective on viable business opportunities. Come prepared to participate, have fun, and win prizes!
We’re going to break up into seven subgroups (Business Intelligence, Collaboration, Consumer, Infrastructure, Mobility, Security, and Verticals/LOB – I’ve got Collaboration), with each group coming up with ideas around their topics. The VC in each group will then pitch the best idea to the balance of the VCs. I expect each panel (minus the pitching VC) will be pleasantly brutal to their cohort.
I doubt the prize will be a free copy of the Google Earth upgrade. Whatever it is, I expect it’ll be fun. I’ll be there – hunt me down if you are at PDC and want to say hi.
In the “best entrepreneur gossip blog post” of the day category, Alan Meckler and the guys from LightReading.com give a public example of the issues in the intellectual exchange that Tom Evslin and I had around Serial Monogamy and No Shop Agreements.
Alan bitterly congratulates the LightReading.com guys for their sale to CMP for $30 million. He then goes on to say how the LightReading founders shafted him out of a deal to invest in the company after he “helped create it.” His feelings are obvious when he ends with ‘Stephen and Peter obviously made the right choice in being dishonest.”
The comments are interesting, especially #7 by Stephen Saunders, the President or LightReading. He challenges and clarifies all of Alan’s assertions, including the offer for investment (which Stephen claims was crappy – and different than the terms Alan claims (I’d love to see that term sheet) which is why they didn’t take it) and the amount of time that Alan spent with them (15 minutes vs. Alan’s claim of hours of time).
Now – I have no clue what the truth is, nor am I interested in taking sides. Alan tries to have the last word (it is his blog after all) and states that he’d rather be tarred with sour grapes than dishonesty. Of course, anyone can assert that anyone else is dishonest, so a data point of one from the accuser is a weak tarring.
Nonetheless, this is a great example of the issue Tom and I cross-blogged about.
Fred Wilson has a great weekly series called VC Cliche of the Week – this week’s post is on meeting the numbers. It’s worth a slow and thoughtful read.
I have one constructive thought to add. I’ve been involved in over 100 startups at this point and have seen many more. I can only remember a few instances where the company exceeded its revenue numbers in its first year of product ship. Many companies make their expense, EBITDA, and cash forecasts by adjusting spending, but that’s fundamentally different than making the top line and the bottom line numbers early in the life of the business (again – let’s focus on year 1 of product ship – not after the company has had several years of products in the market.) I’ve found that for year 1, the correlation between the sales plan and reality is completely random.
As a result, I generally take a different approach to year 1 of sales / revenue. Rather than hold a company to a revenue plan in year 1, I try to focus on the cash spend in year 1 (Fred highlights cash flow as the “ultimate measure” – and focusing on managing the negative cash flow is equally effective as managing the positive cash flow.) An early stage company needs to spend a certain amount to make progress, but managing the expense line should be straightforward. As revenue comes in (especially high gross margin revenue), it becomes easy to step up the spending, especially on variable cost (more demand generation) or highly leveraged items (more sales people) that impact future sales.
This tends to be a continual, iterative process – I’ve had cases where revenue starts accelerating later in the year, at which point the spending increase starts. If you use the fiscal year as the measurement, the annual revenue number is missed, but Q3 or Q4 revenue may be greater than plan. I’ve also had cases where the revenue mix results from various product “types” (or “editions”, or “versions”, or “vertical markets”) are radically different than the forecast (which often drives the allocation of variable spend.) Of course, if you wait too long to start investing incremental dollars you “might” miss an opportunity, although I rarely find that to be the case with an early stage company that is spending “pre-revenue” or “early revenue” at an appropriate level.
It’s a complicated dynamic and reinforces a couple of things. First, management and the board need to have similar expectations about what “making the numbers mean” in year 1 and have to deal effectively with any changes in the top line plan. This is especially true around expectations of the sales organization (and corresponding comp). Next, the CEO needs to have “controlled confidence” – there comes a point at which one can confidently say “let’s go for it.” Reporting and communication have to be timely (e.g. financials within 15 days of the end of the month, monthly board meetings/calls after the financials come out.) And finally – as Fred points out – management should be honest about the actual numbers at all times – there is never any value in lying or gaming things.
Anyone that knows me knows I love to talk (I also love to sit quietly and ponder things – ah – the duality of being me.) Another duality – I hate to sit and listen at conferences (I learn by reading, not by listening) but I love to speak at them.
I end up doing random speaking things when it’s convenient for my travel schedule (rather than deliberate ones that I have to travel specifically for.) I just got the invitation for a panel I’m going to be titled Putting it All Together: Business Structures and Financing New Media Ventures at the Law Seminars International Regulatory and Business Issues for New Broadband Services conference on September 26 / 27 in San Francisco (man – that’s a lot of words to describe a conference.)
Apparently I’m going to be talking about (according to the agenda) “What investment is necessary to ensure success in using broadband networks and distributing content over those networks? Who is funding what?”
If you’re going to be in the bay area on these days and need some CLE credits (lawyers = YES, entrepreneurs = NOT LIKELY), come “play.”
About 20 days after the end of each quarter, Ernst & Young/VentureOne releases a survey on venture capital funding. At about the same time, PWC releases their similar survey (MoneyTree). A rash of articles are written over the weekend and usually hit first thing Monday in the business section of newspapers around the country (and – shockingly – in blogs) covering funding nationally, by city, and by market segment.
On Friday, I got a call from Ross Wehner, a Denver Post staff writer who I like. He was calling to get my thoughts on the “numbers for the quarter.” After ascertaining which numbers Ross was talking about (it was a beautiful Friday afternoon in Homer, Alaska – I was not thinking about the E&Y / VentureOne survey), the conversation went something like:
Brad: “Ross – who gives a fuck?”
Ross: “C’mon Brad, you know I can’t print that. What do you think?”
Brad: “The numbers are irrelevant – plus they are probably wrong and misleading.”
Ross: “Well – there were 24 deals in the first half of the year up from 19 in 2004 and the amount invested was $291m up from $192m.”
Brad: “Yeah, but wasn’t Webroot in there?”
Ross: “Yeah …”
Brad: “So – take it out because – while it’s a venture deal, it’s an anomaly and skews the numbers – so 23 deals and $183m. That seems like a statistically unimpressive difference.”
We had a good chuckle (Ross is smart – he gets it) but he still had an article to write. Seriously, does anyone really care about this stuff? Why are E&Y and PWC spending time on this crap instead of doing good audits and getting S-3’s effective for public companies?
Earlier this week, Scoble called out to VCs to ask whether or not they support .NET in response to an eWeek article titled Is .Net Failing to Draw Venture Capital Loyalty? The responses I have seen from Rick Segal, Tim Oren, Ed Sim, and Bill Gurley are primarily qualitative, conceptual, and theoretical discussions about VCs, platforms, and how VCs think about (or don’t think about) investing in platforms.
Rather than go down that path (as I generally agree with everything they said), I figured I’d try to be additive to the discussion by providing quantitative information from my active portfolio companies. All the companies I’m talking about are Mobius portfolio companies – but I’m only going to look at the ones I’m responsible for since I know their technology platforms off the top of my head and don’t have to ask my partners for any information (e.g. I can write this post in 15 minutes on a Saturday afternoon before a run.)
I have 15 companies that I’m responsible for (I don’t sit on all the boards – Chris Wand who works with me has several of the board seats – they are all listed on my web site on the left sidebar if you want to take a look.) 6 of them use .NET in meaningful ways. They are as follows:
In addition to my current companies, I’ve been involved with, a user of, and an investor in Microsoft-related stuff for my entire career. All the software I wrote for my first job at Petcom Systems was written in Microsoft Basic (and Basic Compiler – eek) with Btrieve (10 PRINT “I’m in Hell”: GOTO 10). My first company – Feld Technologies – was in the inaugural Microsoft Solution Provider (SP) program started by Dwayne Walker sometime around 1990. We developed custom database apps with Microsoft Access and FoxPro. I sat on the board of SBT Accounting Systems for a number of years – they were (I think) the largest indirect channel for Microsoft FoxPro products in the 1990’s. I’ve always been a Great Plains (and now Microsoft Business Solution) fan, user, and business partner. I was an investor and board member in Corporate Software (now owned by Level 3) – one of the largest Microsoft LARs on the planet.
While some of my companies use non-Microsoft technologies, plenty use Microsoft technology. Virtually all of them have lots of Windows desktops, servers, and desktop apps running everywhere. I’m not religious about this issue and I don’t really think the platform discussion is that interesting (I’m equally comfortable with Microsoft platforms as I am with non-Microsoft platforms.) As most of my VC brethren who commented demonstrated – we are pragmatic, agnostic, or – in some cases – simply ignorant – about platform issues.
Anthony Nassar, who publishes an ezine called Propel Your Venture, just published an interview with me that he did last month. Simultaneously, VC Experts reprinted a post that Jason Mendelson and I wrote on participating preferred stock called To Participate or Not.
I recently discovered an outstanding article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled “After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies.” Written in 2003, this is one of the best articles I’ve ever seen of the issues and dynamics surrounding the board of a venture backed company.
The paper covers a lot of ground. It starts by exploring how the board adds value to the enterprise (through social, intellectual, and interpersonal capital) and then describes in details the attributes of successful boards, which include:
It then goes on to talk about the role of the board at different stages of development of a company (start-up / seed, early commercialization, and productivity / expansion) followed by a long discussion of the desirable personal attributes of strong boards, such as:
The article then becomes prescriptive and covers the ten common pitfalls of boards:
The article then discusses the key relationships of the board (board / CEO, board / company, and board / shareholders) and finishes with conclusions and recommendations for boards, such as:
Overall, this is an awesome article that I recommend be read carefully by any member of the board of a venture backed company.