I was excited to see Care.com's successful IPO yesterday for multiple reasons.
First, it augurs well for 2014 as another strong IPO year in genearl and for technology companies in particular. A University of Florida professor has a nice analysis of the 2013 IPO market and shows that there were 146 IPOs in 2013 (51 VC-backed, although NVCA claims 82 VC-backed), up from 94 in 2012 (48 VC-backed) which had been in turn up from 81 in 2011 (44 VC-backed). Another excellent IPO analysis from Fortune showed that the real winners of 2013 were the class of 2012 IPOs, which have traded up 64% by year end 2013.
Second, it is another nice win for Boston. Despite a flurry of biotech and enterprise tech IPOs and big M&A events in the last few years, there have not been many consumer wins in Boston and Care.com is a nice one for the region (see my post: "Boston Unicorns").
But what really makes me happy about the Care.com is the people behind the company. The five founders (Sheila and Ron Marcelo, Dave Krupinski, Donna Levin, Zenobia Moochala and Diane Musi) worked with me at Upromise and I think the world of each of them. They started the company with a mission-driven vision and have stayed together as a tight-knit founding team from the onset.
One of the things that makes a startup region successful is when a successful exit happens and an alumni network forms that creates additional successful startups (i.e., the "PayPal mafia" effect). This happened in my first company, Open Market (IPO'96), which spawned a dozen CEOs/founders in the area (e.g., Gail Goodman/Constant Contact, Jon Guerster/Digital Lumens, Eswar Priyadarshan/Quattro Wireless and m-Qube, Ted Morgan/Skyhook Wireless). BostInno did a nice piece on the "Open Market Mafia" and has a whole series they call "Tech Mafia Mondays"). I am so happy to see it happening with the Upromise alumni network as well, which includes CEOs/founders like:
A year ago, I felt 2013 would be the Year of Grit - a year characterized by toughing things out in uncertain times. Well, we certainly did that, and 2013 has ended up looking a heck of a lot better than it began.
2014 is shaping up to be the Year of Results. We begin 2014 with a lot of optimism in the air. In a recent survey conducted by the NVCA, portfolio company CEOs and VCs are feeling as good about the future as they ever have, with a stunning 86% of CEOs who plan to raise capital saying it will be the same or easier to do so as compared to last year. Half of CEOs and VCs are optimistic about next year's exit environment.
A rising stock market makes everyone feel good. The NASDAQ is up 30% this year and achieved its highest level since September 2000. The S&P has closed at a record high 44 times in 2013 and the Dow Jones has achieved 50 record highs this year - both indexes are up more than 20%.
When the stock market is down, we VCs like to say that our little tech companies are not affected and simply keep their heads down and build valuable companies. But when the stock market is up, sentiment swings quickly. We rush to take companies public or sell them to take advantage of "the exit window". It is natural, therefore, that a robust stock market has led to a robust IPO market. More and more companies are eyeing 2014 and research conducted by analyst firm 451 suggests it will be a record year for tech IPOs and also suggests M&A will see a strong increase in 2014 as compared to an already solid 2013.
Now it is time to deliver on all that promise. Aileen Lee's now-famous unicorn analysis listed 39 companies founded in the last 10 years who had achieved $1 billion plus valuations. 12 are private companies (Palantir, Dropbox, Pinterest, Uber, Square, Airbnb, Hulu, Evernote, Lending Club, Box, Gilt, Fab.com). At least another dozen with very lofty private valuations wait in the wings (including Spotify, MongDB, Snapchat, Etsy, Actifio, Automattic, OPOWER, Hubspot, Flipboard, Hootsuite, Appnexus and many others). Not all of these companies will go public or sell out in 2014, but a good number need to in order to deliver on the promise that has been built up in this post-bubble, post-recession era.
And if you are worried about bubbles right now, don't. I wrote a blog post two and a half years ago in response to cries of a bubble that it felt a lot more like 1996 than 1999 right now. In other words, when analyzing unemployment rates and other macroeconomic fundamentals as well as positive structural elements of the tech economy, the rebound was just beginning and had a good 4-5 year run in front of it. Sitting here at the end of 2013, I still feel that to be the case. The fundamentals of a rebounding US economy in combination with the disruptive forces of the cloud, mobile, big data and software eating everything remain strong. The start up economy will overheat at some point, it always does, but that point is not now.
So, buckle up for 2014 - a year where many of those lofty promises of better times over these last few years begin to convert into tangible results.
Last week, I used Aileen Lee's excellent TechCrunch article on Unicorns as a jumping off point to analyze the role of the MBA in creating these unusually valuable companies. This week, I want to take a local lens and analyze these special companies that have been created in Boston. As was the case last week, I was ably assisted by HBS 2nd year MBA student Juan Leung Li.
In order to have a reasonable population of companies to assess, we tweaked Aileen's definition. We looked at the companies in New England (call them "Boston and surrounding") that had exited in the last 10 years (2003-2013) with greater than $500 million in market valuation. Some of these companies had been around for a few years, but we felt this slice would allow us to assess companies that had recently created extraordinary value in a relatively short period of time. In the case of M&A situations, we value the company at the time of the M&A. In the case of public companies, we valued the companies at the market close of 11/15/13.
We found 50 such companies (updated from 43 originally). That is, 50 companies in the Boston and surrounding area that had achieved > $500 million in value during the last ten years. 19 of these had achieved > $1 billion in value (Aileen's cut off, although she had constrained the founding date to the last ten years rather than the exit date, which obviously yields a broader population). A chart showing these 20 companies can be seen here:
Lack of Massive Winners. The perception that Boston has not recently generated massive wins appears to be only somewhat accurate, depending on which sector you focus on. Of the 19 companies that were > $1 billion in value, seven were greater than $2 billion (TripAdvisor, athenahealth, IPG Photonics, Alnylam Pharma, Starent, Boston Biomedical, Acme Packet). That said, only three of these companies are software technology companies - TripAdvisor ($12.5B), athenahealth ($5.0B) and Starent ($2.8B) - and they were founded in 2000, 1997 and 2000, respectively. In other words, there have been no multi-billion dollar valued tech companies founded in Boston in the last 13 years. There are three companies that have achieved >$1 billion in value in the tech sector founded in the last 10 years: Demandware ($1.9B/2004), Kayak ($1.8B/2004) and Fleetmatics ($1.4B/2004), although the latter was founded in Dublin.
Essential Role of Immigrants. Here was a statistic that blew me away: over half of these companies (51%) had an immigrant founder. In my research related to my Senate testimony on immigration reform, I noted that 40% of Fortune 500 companies had an immigrant founder. Apparently, successful Boston-based startups have an even greater concentration of immigrant influence.
Strong Diversity. The breadth of the Unicorns is impressive, reinforcing the view that Boston's startup ecosystem is one of the most diverse in the world. Of the 50 companies that achieved > $500M in value, 23 were life sciences (plus materials science), 22 enterprise technology and 5 consumer technology. To see the companies in their various segments laid out, see the chart below:
Much of this data refutes the belief that all the major startup winners have been created in Silicon Valley. In fact, the vibrant life science sector is now arguably more heavily concentrated in Boston than in any other cluster at any other time in history. That said, Boston has definitely come up short in the race to build massively valuable tech companies. And if you want to build a consumer Internet company, there are few role models.
However, I am quite optimistic about the future. As evidenced by this review of the Boston startup ecosystem, the quality and robustness of the environment has improved greatly in the last few years. As for big winners, the pipeline looks pretty good. Globoforce and Care.com have filed to go public and companies like Acquia, Actifio, DataXu, Dyn, Hubspot and Wayfair and are all reputed to be on a similar path in the next year or two.
If you want to see the entire spreadsheet with the underlying data, you can click here.
I like being a contrarian. As a kid, if a certain TV show was popular amongst my buddies, I’d purposefully ignore that show and search for other shows that were less well known (e.g., Hogan's Heroes was a personal favorite that never hit mainstream). When someone declares something is conventional wisdom, I look to poke holes and challenge the underlying assumptions.
Recently, the conventional wisdom in Startup Land has been that young, technical founders are the prototype for creating valuable companies. The formula, this theory goes, is to find a hacker in a hoodie and bring out the wheelbarrow of cash to back them. Think Mark Zuckerberg/Facebook, Drew Houston/Dropbox, David Karp/Tumblr and – the most recent poster boy darlings of Startup Land – the SnapChat founders.
I have always thought that stereotype was skewed. Don’t get me wrong – I love young founders. At Flybridge, we have invested in many of them (e.g., Eliot Buchanan and Dan Choi at Plastiq) and we plan to continue investing in many others. But in my twenty years living in Startup Land, I have found that there is no single model or archetype for success. Success comes in many flavors and combinations. And, in my last five years on the HBS faculty, I have become more convinced of the value of the MBA entrepreneur.
Thus, I was thrilled to read Aileen Lee’s terrific analysis of unicorns (companies that have been created in the last 10 years worth more than $1 billion) and have it shatter this piece of conventional wisdom. Aileen systematically analyzed the common characteristics behind this cohort of 39 companies and found that “inexperienced, twentysomething founders were an outlier. Companies with well-educated, thirtysomething co-founders who have history together have built the most successes.”
Aileen’s analysis didn’t provide any data on the role of MBAs in the unicorns. So, in partnership with HBS second year Juan Leung Li, we did some of our own digging. Here's what we learned:
33% of the Unicorns had at least one founding member who had an MBA. Examples include Kayak (Steve Hafner/Kellogg), Workday (Aneel Bhusri/Stanford and Dave Duffield/Cornell), Yelp (Jeremy Stoppelman/HBS) and Zynga (Mark Pincus/HBS).
82% of Aileen's Unicorns had at least one founding member or current executive team member with an MBA. Examples of unicorns where MBAs were hired to help build the company include Evernote (COO Ken Gullicksen/Stanford), Facebook (COO Sheryl Sandberg/HBS), Twitter (COO Ali Rowghani/Stanford).
Of those that had MBAs, the leading schools represented were: HBS (21%), Stanford's GSB (17%) and Wharton (10%).
This week, John Byrne of Poets & Quants published a complimentary analysis, ranking the top 100 MBA Start-Ups. In this analysis, he found some terrific companies that have been MBA founded in the last 5 years, such as Okta, Rent the Runway, Warby Parker and Wildfire. Among this MBA founder list, HBS (34%), Stanford (32%) and MIT (11%) came out on top.
Why all the momentum with MBAs and start ups? Simply put, the major schools have radically changed their curriculum. These schools and others have become super-focused on training their MBAs to be effective executives across a range of company sizes, from start-ups to large enterprises. For example, HBS now teaches two courses to help train students to be effective start-up executives: Launching Technology Ventures (which I teach) and Product Management 101. MIT is considering offering their own version of these classes in the spring or next year and Stanford has a plethora of strong course offerings for future start-up executives.
So the next time someone tells you that you need a hoodie to be a great start up entrepreneur, don't be afraid to flash your MBA diploma with pride.
To see the detailed spreadsheet that Juan Leung Li did, click here.
The art of Product Management continues to evolve. I've enjoyed spending time with many VPs of product in the last year since I co-authored an HBS note on the role of the Product Manager to develop more insights, materials and case studies on that revolution.
Earlier this week I taught a seminar on product management to MIT Sloan students as part of their "Sloan Innovation Period (SIP)" curriculum. Although it's not exactly the EdX experience, in the spirit of open courseware, I thought others interested in the topic might enjoy the materials I used for the class, which are here:
I spent last week visiting Israel with a group of fellow venture capitalists touring Start Up Nation - a trip sponsored and organized by CJP. We had a terrific time - despite being in the midst of a pretty tough neighborhood, the country's innovation economy is absolutely booming. A recent report named Tel Aviv the second most vibrant start up ecosystem in the world, behind only Silicon Valley.
A few take aways from the trip provided us with some insight into why such a tiny country (population of only 8 million) is doing so well:
Big Winners are Emerging. There used to be a perception that Israeli start-ups had great technology, but were weak at growing sales and marketing and so had to sell out to bigger companies early in their lifecycle, precluding the opportunity to build very valuable companies. The success of Waze ($1B sale to Google), Wix (IPO filed), Outbrain (IPO rumored to be quietly filed or in process) have entrepreneurs on the ground thinking big. The Times of Israel reports these success stories are inspiring Israeli start-ups to focus on the IPO path rather than M&A as a potential path to greatness. I see this through the lens of our portfolio company, tracx, whose ambitions to build a great SaaS social intelligence company seem to rise with the country's ambitions.
Start Up Heroes. A culture is defined by its heroes. The American entrepreneurial narrative has been shaped and amplified by the oft-celebrated heroic journeys of Bill Gates, Steve Jobs and Mark Zuckerberg, among others. The Israeli narrative has gone from celebrating its war heroes (think Moshe Dayan, Ariel Sharon, the Mossad) to celebrating its entrepreneurs. I think we were told no less than a dozen times that Warren Buffet's largest international investment was in an Israeli company ($6B for Iscar) and yesterday it was reported that he is acquiring his third Israeli company. The country is bursting with pride at its latest Nobel Prize winner in Chemistry (now numbering 11 Nobel laureates in its 65 year history). Everywhere you go, Israelis want to tell you how smart and entrepreneurial they are! Unlike any culture I have ever seen, this country gets the value of raw intelligence.
Partnerships Matter. Knowing their position as such a small country, Israeli businesses are always looking to partner outside of Israel. Native Israeli venture capital represents only 25% of the VC capital invested in the market - most of the money is coming from global firms like Battery, Greylock, Lightspeed, Sequoia and others. The two recent partnerships from Israel's elite technical university, Technion, are manifestations of this open approach. First, the ambitious partnership with Cornell to build a new engineering school in New York City - called Cornell Tech - which appears to be off to a strong start, helped in part by a $133M gift from Qualcomm founder Irwin Jacobs. More recently and announced while we were on campus, Technion announced a joint venture with a Chinese university to build a new campus in Guangdong thanks to a $130M gift from Chinese billionare Li Ka Shing, a large investor in Waze, matched by the Chinese government.
I make a lot of lists. It’s an old habit that started when I
was in grade school. Lists of to dos,
lists of goals, lists of workouts. Lists, lists, lists. I’m also a nostalgic person and so I tend to
save a lot of these lists and use them as touch points for storing memories and
keeping track of the passing of time.
Every now and then I’ll come across an old list and re-read it. Some of them make me think deeply and others
make me laugh at my younger self’s absurdity.
Recently, I came across a list in my desk labeled simply
“Mentors”. I’ve had a lot of mentors in
my life – many who may not even know they played this role for me. I’ve always kept an eye on them and noticed
the choices they’ve made and how they’ve carried themselves personally and
professionally. A number of years ago, I
drew up a list of my mentors as it helped crystallize for me who I admire, why
I admire them and what I can learn from them.
It was fun to stumble upon that list again and reflect on my choices.
Reverse mentors are people younger than you who you admire
and learn from. Everyone on my mentors
list is older than me. That was my
traditional definition of mentor – someone ahead of you in life that inspires
you, helps guide you and show the way to live.
But when I read Barb’s reason for seeking out reverse
mentors – younger folks who she learns from in this rapidly changing, digital
world – it really resonated with me.
Entrepreneurship, technology and innovation are profoundly influenced by
the young. If you’re not tapping into their knowledge base and seeking their
insight on trends and opportunities, you’re missing out on a valuable
resource. Upon reflection, it’s one of
the reasons I so much enjoy the teaching I do at Harvard Business School. I learn a tremendous amount from the students
and they are always helping me think about the latest disruptive ideas,
technologies and companies that are emerging or challenging how to best go
about building start-ups to tackle these opportunities.
So now I’ve got my reverse mentor list. I’m tucking it away in my desk for another
few years and look forward to tracking the careers and choices of those on it.
Every year, I give an open talk to the returning students at Harvard Business School on what makes the Boston start-up scene special. I do it for two reasons: 1) as an advocate for the local innovation ecosystem, I want to make sure all these smart, talented folks from around the world can access and plug in to the amazing local resources available to them; 2) Boston is a microcosm of the ingredients for a successful start up community, a topic of great interest to policy makers and leaders all over the world (for more on this topic, see Brad Feld's excellent book, StartUp Communities). The city of Boston is a relatively small one (the 21st largest city in the US with a population of 600k and a combined metro area that ranks it 10th), yet it is consistently ranked as one of the most innovative clusters in the world.
I have written in the past that in the IT sector, Boston suffers from not having more "platform companies", such as Facebook, Google, Twitter, LinkedIn. As the above presentation shows, only a few companies in Boston are of the scale where they are platforms for other startups to plug in to and large enough to create their own industrial clusters. Hopefully, that will change in the coming years.
I’ve been thinking a lot lately about the unsung hero of
many start-ups: the other founder. A lot has been written about the founder/CEO
and her growth and evolution as a company grows. But little is written about the (nearly
omnipresent in my experience) co-founder – the #2, behind-the-scenes partner
who teams with the founder/CEO from the very beginning to build the company. In the image above, most everyone knows the name and image of Larry Page - cofounder and now CEO of Google. But how many folks know Sergey Brin (on the right) and the role he has played in building Google to its massive success and a market capitalization of nearly $300 billion? Sergey Brin is the other founder.
I’ve probably been thinking about this topic a lot lately because
I’ve been recently meeting with the other founder at a few of my portfolio
companies. The conversations we’ve been
having have a consistent set of themes.
The other founder usually begins with a particular range of
responsibilities that compliment the founder. They may run a
function, such as product or engineering, or they may have a broader
operational role and carry a COO title.
Typically, a 5 person company doesn’t need a COO, but it’s a useful catch all
title for the other founder because it sounds better than “vice president of
miscellaneous” or “SVP of whatever falls through the cracks,” which are more
accurate descriptions of their role.
The challenge for the other founder is that as a startup
evolves from “the jungle” (super early stages, chaotic organization, prior to
achieving product-market fit) to the “dirt road” (developing some
organizational maturity and initial product market fit), senior functional
executives often get hired from the outside to take over departments. These executives naturally encroach on the other founder's responsibilities.
For example, at one of my portfolio companies,
the other founder looked after administration, finance, operations, product
and engineering. Basically, everything but sales and
marketing. But then the company hired a VP of
operations. And then a VP of
finance. And finally a VP of
engineering. And suddenly, after
transitioning each function successfully to an outside senior executive one at
a time, the other founder had successively worked himself out of a job.
The board and investors are super focused on making the founder/CEO successful – building an executive team
around them, perhaps even a COO/president to compliment their skillset and help
the company scale. Or, as in the case of Google's hiring of Eric Schmidt, an outside CEO who can guide growth and scale. In these situations, everyone is focused on the impact on the founder - what his role will be, how he handles the transition. Very little board
attention is typically focused on the role, evolution and growth of the other
I would submit that ignoring the other founder is short-sighted. I recommend boards and CEOs spend more time
worrying about the role of the other founder and helping her successfully
evolve over time. Typically they are
intensely loyal to the company and the founder/CEO, valuable sounding boards
for the executive team and the founder/CEO and champions of the company culture
Here are a few approaches or archetypes that I typically see
as the role of the other founder evolves over the life of a startup:
Become a functional owner. The other founder may be “VP of miscellaneous” in the beginning
days of the startup, but be explicit about which functional area she should
expect to own over time. That way, she can develop the skills in that area in a focused fashion and slot in
appropriately when the time is right.
Product management is a popular functional area for the other founder as
the other founder is typically close to the customer and business problem being
solved. Further, the role doesn’t
involve managing tens or hundreds of employees, a skill that is typically
better suited for experienced functional operators. Another one is business development for
similar reasons and because it involves selling the company into an ecosystem
of partnerships, requiring a blend of product knowledge and marketing skills.
Grow into the COO role. One successful portfolio company of mine had
two young, MBA founders. One played the
CEO/cofounder, Mr. Outside role and the other played the COO/cofounder, Mr. Inside
role. Even as the company scaled, the
young COO rapidly learned how to be a successful operator at scale. I have had other companies hire coaches to help the young other founder grow into the COO role. For the right profile, this can be a great role for the other founder.
Drive the next strategic
initiative. As startups evolve into
functional startups, they get very focused on the here and now: shipping the next product release, successfully
closing the next quarter, closing an important partnership. Yet, startups need to always worry about
what’s around the corner and have resources dedicated to strategic initiatives
that can provide non-linear growth. This
is an area where the other founder can be very valuable. Because of the respect he has within the
company and their ability to cut across functions, he is well positioned to
drive strategic initiatives and providing the “startup within a startup”
culture necessary to innovate.
This set of themes is one that I’m personally very familiar with
because I played this role at one of my startups, Upromise.
My title at the start was president and COO – thus I initially played the
Mr. Inside role and rapidly grew into running a large organization. Then, as we hired a skilled operational CEO,
I transitioned to driving strategic initiatives.
I guess that’s why I’m always a sympathetic ear for the
I've been thinking a lot lately about scaling sales.
In every start-up, finding initial product-market fit is a magical moment. Before this occurs, the sales process is a craft or an art - custom-made by the founder or evangelist sales VP. You dive deep into a customer development process, working closely with a few customers who feed you requirements and are willing to trial an imperfect product that is evolving quickly.
But once you achieve initial product-market fit and are down the Sales Learning Curve, suddenly you are faced with a new challenge: how do I scale up the sales efforts? How do I build a repeatable, scalable sales process that is like an industrial machine - not a crafts project?
Across our portfolio and in my own entrepreneurial experience, I have seen three main sales models work successfully in scaling B2B sales: 1) Enterprise; 2) Telephone; and 3) Developer-driven. B2C sales and customer acquisition efforts are a different matter (and one I'll perhaps address in a future blog), but for B2B, those three models are the most common pattern. I'll discuss each one below.
1) Enterprise Sales
The enterprise sales model is a pretty simple one and was the predominant model ten to twenty years ago in the IT industry. If you want to scale sales, you hire more sales reps. Find a new sales rep with industry experience, a rolodex and a strong track record. You assign an annual quota to each rep, train them, feed them some sales tools and assign them a sales engineer (particularly for more technically complex products) and coach them along the way. After 3-6 months, they work their way down the learning curve, close their first deal and are off to the races.
The typical quota for a sales rep varies by type of business model (SaaS vs. perpetual), product gross margin (e.g., 80-90% software products vs. 40-50% advertising products) and company maturity (e.g., a "jungle" stage company would have a lower quota than a "highway" company). Typically you want to see a 3x ratio between the contribution margin per rep (factoring in the lifetime value of the customer, or LTV) and the cost per rep to acquire that customer, fully loaded (i.e., customer acquisition cost or CAC).
For example if you have a 90% gross margin SaaS software product and assign a $1.1M in quota for a rep (i.e., $1m in contribution margin) that makes $250K at target and assume another $50k in benefits and travel costs and $30k in marketing and support costs for a total of $330K, then you have a 3x LTV:CAC ratio in year 1. Another rule of thumb for SaaS companies, some focus on "the Magic Number", which is the ratio of new sales to sales and marketing expenses.
If the customer is a recurring customer, then they are more valuable and a lower quota might be tolerated, although a separate group of account reps are often accountable and paid commissions for the renewal revenue. If the marketing support is greater and the product is more mature, than a higher quota might be assigned. In my former company, Open Market, we had rising quotas each year as we got more mature, from (if memory serves me) $1.1M to $1.3M to $1.5M to $1.7M to, finally, $2M in annual quota. Advertising sales reps, with a 40-50% gross margin, might have $3-5M in annual quota.
Although it is an excellent fit for complex enterprise-class solution selling, many people think classic enterprise sales, as a standalone go to market model, is broken. When you analyze it carefully, unless you can support large quotas due to very large deal sizes, it can simply be too expensive to hire senior sales representatives, distribute them around the country, set up offices and support them. Many are therefore proponents of a sales model that relies more on telephone-based selling, as described below.
2. Telephone Sales
The telephone sales model is based on a group of lower-paid, typically younger sales representatives that sit in cubicles next to each other and grind out call after call. To implement this sales model effectively, there needs to be a tight coordination between sales and marketing to generate qualified leads and to feed these leads to the sales organization. There also needs to be a large target universe of potential customers to justify the volume of calls - the model simply doesn't work if your target market pool is in the hundreds or even thousands.
Sales reps in this model may be closers or simply openers who qualify leads carefully and then hand them off to the closers (in this scenario, the telephone-based representatives are often called business or sales development representatives -- BDRs or SDRs). Many organizations will have two separate groups - a group of SDRs that are nurturing leads and conducting product demonstrations and a group of telesales reps who are closers. It is not uncommon for the SDRs to be right out of college or, at most, have only 2-4 years of experience and be earning base salaries as low as $30-40K. Their quotas may be as low as $400-500K, but their salary at target might be only $80-100K. With no travel budget and no field offices, the numbers pencil out nicely. The telesales team can also be a nice training ground for enterprise sales reps - a path that can be cheaper and less risky than hiring someone externally.
Generating a high volume of leads for the telephone sales rep is the key to making this model work. It is all about (highly qualified) leads, leads, leads. Leads may be through inbound marketing techniques (such as webinars, blogging, white papers or other forms of content marketing) or outbound marketing techniques ("smile and dial" against a list of prospects). The Hubspot folks (who are terrific in this area) estimate that each SDR in their mid-market group needs 150 leads per month to be productive and busy while for the small business team, they target feeding 2000 leads per sales rep per month. This is an appropriate number to figure out and model to help guide whether you need to ramp up marketing (demand generation) or sales (closing) as you scale.
To that point, a well-run telesales operation will be super metrics-driven. You can measure EVERYTHING - how many calls per day per rep, how many connects per call, how many positive conversations that lead to follow-up, how many demonstrations, how many proposals, etc. These measurements help with the "machine-building" process as you can more predictably assess how you are doing at any given time and where you need to focus your resources - more leads, more SDRs, more closers, etc. The best sales VPs of telesales operations are more like accountants than charismatic salespeople. If you hire a charismatic leader as your head of sales, make sure you hire a director of sales operations to support them. I never fully appreciated the value of this role until I saw it in action myself at Open Market where the director of sales operations managed all the numbers and operational details, freeing up the charismatic sales VP to hire, lead and close the big deals.
Alignment between sales and marketing is critical in any sales model, but under the telesales model it is even more critical. Organizationally, SDRs may even work under the marketing organization while the closers work for sales. Whatever the organizational configuration, the definition of a lead, clarity on the quantity of leads being targeted, and alignment on the quality of a lead required before handing off from marketing to sales are all key elements to work through. Marketing automation platforms are particularly helpful here so that you can track someone from website visit all the way down the funnel through close.
Again, there are many who believe even the telesales model is flawed and outdated. Hiring armies of young, inexperienced professionals and training them to become sales reps and operate in a "boiler room" style environment can be expensive. To achieve friction-free revenue (and who doesn't want friction-free revenue?), a third sales model has emerged which I'll call "Developer Driven".
3) Developer Driven Sales
My partner, Chip Hazard, wrote a terrific blog post on the power of developer-driven adoption, something we have seen play out very successfully at a few of our portfolio companies, but most notably 10gen (maker of MongoDB). As Chip points out, if you can architect your product as a platform (build APIs that are accessible to 3rd party developers) and get bottoms-up adoption from the development community, you can drive adoption without investing heavily in sales. Chip's examples are mainly from technical products (his main area of expertise), but this approach can be employed for any product where customers can trial, see value quickly and begin adoption without taxing your sales resources.
To do this effectively, you often need to employ a freemium business model - making it easy for a developer or customer to try your product for free, get set up and quickly self provision (ideally within 5 minutes) without ever speaking to anyone at the company. This provides the ultimate inbound marketing model - customers contact you when they have tried your product and are convinced it provides them with value. Once value is established and the product usage ramps up, you can hear the cash register ringing.
Instead of hiring telesales people, you hire "Community Managers" who arrange hackathons and meetups, actively engage the community on the forums, and shares relevant content through various social channels. When things are really working well in a developer driven model, developers are embedding your platform in their products and each developer becomes a marketing agent for the company. In effect, your developer support team becomes your marketing team.
The magic in developing a go to market strategy is that there is no "one size fits all" approach. Many companies will design their sales and marketing machine as a blend of each of these approaches. Use a developer-driven model to drive trial and inbound activity. Telesales to close high-volume, smaller deals. And then enterprise sales for the select strategic deals with average sales price (ASP) > $100K.
Different phases of your business will see more emphasis on one area than another. For example, many companies embark on a freemium model initially, then depend on inbound upsell, later hire a telesales team to ramp up the upsell process by adding outbound activities, then hire an enterprise team to close the big deals. Dropbox is an example of a company that has followed this path with tremendous results.
The main point is that you need to be as strategic and thoughtful in designing your go to market model as you are in your product or company strategy. Only then can you evolve from a crafts model to a machine.
I include a chart below from a recent board presentaiton from my portfolio company, tracx (a SaaS social intelligence platform) that frames the multi-stage process in a particularly clear manner.
To read more on this topic, here are a few books / blogs I recommend:
Today's IPO by Tremor Video is seen by many as a harbinger for the adtech community (full disclosure: Tremor Video is a Flybridge portfolio company). Rightly so. Tremor is the first public offering of an adtech company since Millenial Media's IPO in April 2012. One can argue how successful the Tremor IPO was, and the broader industry implications, based on the first day's opening price and trading, but the real test of these offerings is what happens next - how companies perform and execute over the next few quarters.
One thing that is clear, though, is that the advertising community would be wise to keep an eye on the "tech" portion of "adtech". I have argued in the past that software is eating marketing. Simply put, technology is radically transforming the marketing function and the role of the marketing professional. The flow of advertising dollars into digital, addressable media is well-documented and well-understood. It is estimated that in 2013, $100 billion will be spent on digital forms of advertising, representing more than 20% of the total advertising market and continuing to grow rapidly in share (see chart above).
Less understood is that managing digital advertising is far more complex than its analog counterpart. Advertising agencies have retained their industry wide hegemony as a result of this complexity. With so many new technology vendors popping up and so many immature point solutions being deployed, the core competence of agencies has gone from being great at relationship managemnent to being great at technology platform management. As DataXu's Mike Baker likes to say, Mad Men have become Math Men.
But, in every industry, software improves and gets simpler and simpler. Technology platforms gain in scale, become more mainstream and training programs become more mature. As all this happens, agency services are required less and less.
So, the lesson that may get loss in the Tremor IPO hoopla? Agencies are being transformed. Technology companies are sweeping into the advertising industry, much like they did in marketing (see Salesforce.com, Eloqua/Oracle, Exact Target/SalesForce, Neolane/Adobe). And the days of getting the job done with thin technology in combination with armies of bodies are over. To be a valued, strategic player in the market, you had better have a thick, differentiated technology stack.
Think about all of the amazing technology innovation that has impacted businesses over the last three years. Since 2011, we have seen an explosion in cloud computing, in mobile, in technology-enabled business services and in globalization. All of us feel more productive as professionals and our businesses feel more productive instutionally. As a nation, the US must be cranking in productivity. Killing it -- particularly after rebounding from a recession, right?
In other words, despite three years of amazing innovation and growth, we don't seem to be gaining in productivity. What's going on?
In 1986, observing a similar phenomenon on the heels of the PC revolution, MIT Economist Robert Solow quipped: "You can see the computer age everywhere but in the productivity statistics."
Those of us that are immersed in the innovation economy may find this hard to believe, but we are not, as a whole, actually more productive when we are in the midst of an innovation cycle boom. New technologies take time to absorb, refine and make mainstream. Computer software can be reprogrammed quickly. Humans can't.
Forrester captured this phenomenon nicely in a chart they produced a number of years ago predicting "the next big thing" in computing:
We can't imagine a world without broadband wireless, iPhone 5s, iPads and the cloud. But we've got a lot of work to do to absorb these amazing technologies and make us all more productive as a whole.
Today is Demo Day for Techstars Boston. I love Techstars Demo Days for many reasons, not the least of which is the amazing community that gathers to hear the brief, well-rehearsed pitches from the various start-ups who have spent months planning for this big event.
As accelerators like Techstars gain in popularity, many entrepreneurs wonder whether they should be applying and, if admitted, joining an accelerator and when they shouldn't. I get this question a lot from my students, particularly as they're graduating and scrambling to figure out where they should start their company, how to raise capital and whether an accelerator is right for them. Here are a few guidelines that I would think about if I were an entrepreneur making such a decisions.
First, broadly speaking, accelerators serve a very valuable role in the entrepreneurial ecosystem. In many ways, as Eugene Chung of Techstars NY points out, they are like finishing schools for entrpreneurs. Like a college, there is a rigorous admissions process. And once admitted, the participant receives an extraordinarily rich education, in this case in the field of entrepreneurship. Also like college, the best accelerators represent valuable networks, where your "classmates" and even other alumni as well as boosters all become a part of your professional support system. Finally, the brand of the network will always be associated with your brand. Dropbox and Airbnb will always be known as "Y Combinator companies", which initially helped buttress their brand, and more in more is helping enhance the Y Combinator brand.
So with that in mind, here are a few reasons when I think an accelerator is a great choice for the entrepreneur:
Outsiders to the Entrepreneurial Community. You are early in your entrepreneurial career and want to super-charge your entrepreneurial network. To be clear, this is not a comment about age - you might be in your 50s and new to entrepreneurship. But, as Launchpad LA's Sam Teller observes, "Across the board, accelerators provide one key value: dramatically expanding your network."
Outsiders to the Particular Community. Every major innovation hub in the world now has an accelerator and most have numerous (Boston alone has over a dozen). If you are from outside that particular community, the accelerator is an amazing way to build a network in that particular city. As Brad Feld points out in his book on innovation ecosystems, there is tremendous power in being connected to a hyper-local, dense entrepreneurial ecosystem. Accelerators are magnets for the leaders in a given community - at Techstars Demo Days, it's always a "who's who" of that particular community. The quality of the mentors at the many events and one-on-one sessions over the are course of the program is outstanding - typically, you can't get access to these people any other way.
New to Fundraising. Accelerators pride themselves, and often measure themselves, on their ability to help their graduates raise capital. For example, across nineteen Techstars classes in its four year history, over 70% of all Techstars graduates have raised capital (Techstars publishes an amazing chart that lists every company in every class and their fundraising status as well as employee count). If you don't have existing relationships with investors, accelerators are great ways to establish instant credibility and an instant network.
That said, not all accelerators are created equal. Just like with a college, your personal and professional brand will always be associated with that particular accelerator, so choose wisely. Some accelerators specialize in certain domains (e.g., Rock Health for healthcare or Learn Launch for edtech). Others have stronger reputations for fundraising vs. product development.
If you want to get a sense of the quality of the particular accelerator you are considering, you should ask around about them - graduates, senior entrepreneurs, VCs, start-up lawyers, bankers and accounting firms will all have their opinions. One tech reporter, Frank Gruber, publishes an annual ranking of accelerators that is pretty good, although it leaves out hybrid organizations that aren't technically accelerators, like Boston's Mass Challenge (which is a contest) and NYC's First Growth Venture Network (which doesn't take any equity).
Accelerators are thus not for everyone. If you are already well-connected to a particular entrepreneurial community, have a entrepreneurial track record and network, and are comfortable with your fundraising skills and relationships, then an accelerator probably isn't worth it for you. But if those attributes don't describe you as an entrepreneur, an accelerator may be an excellent choice.
The immigration reform debate is near and dear to my heart and has whipped up the passions of many in the Innovation Economy, including Mayor Bloomberg, Mark Zuckerberg, and countless others. It feels like, finally, we may get some positive movement on this and I'm honored to have the opportunity to help in any small way I can.
I was born and have lived in the Boston area almost all my
life. I went to school here, met my wife
and married her here, built a family and pursued my career here. I am a rabid fan of all the sports teams and
love exploring and connecting with every nook and corner of this community. Never have I been more proud of the
resilience of my home town. Never have I felt more meaning in the statement: "I am a Bostonian."
In the Flybridge partners meeting this morning -- which was
held at one of our homes as our office is a part of the crime scene and in "lock down" mode -- we discussed
where we were when we learned of the horrible events, how we felt, who we know who was touched by it all. We checked in with loved ones throughout the
meeting and fielded kind notes from friends and colleagues.
For those of you who have written, texted, tweeted and
called with words of solidarity and support, thank you. The sensitivity and tenderness that my kids' schools have shown
is another reflection of what an amazing community we live in. We are all more bonded together by this sad experience.
The talk in the town is that next year's Boston Marathon
will be the greatest in history. Many of
my friends who have never ran before are thinking seriously about running in
it. Many vow they will be at the finish
line cheering the runners on. Many more still
vow that the fundraising efforts next year will dwarf years past. The theme throughout the city today is "we will perservere, we will thrive, this will not
slow this great community down."
The world is watching us and we intend to step up.
I gave a talk at Harvard Law School this week to a VC and Entrepreneurship class on raising your first round of financing. It was good fun and forced me to rethink my usual presentation and add some practical elements. You can view the presentation here:
My first time jumping into the start-up world was as a freshly minted Harvard MBA in 1995. As my classmates were rushing off to high-paying, high-powered jobs on Wall Street, I joined a Series A start-up with 30 employees as a product manager, making $65,000 per year - lower than my pre-MBA salary at management consultancy The Boston Consulting Group. Since then I've had a terrific ride, but I often think of that fateful decision when I get asked, repeatedly, by other freshly minted MBAs: "How do I get a job in a start-up?" Or, more generally, "How do I even begin to find and assess start-up job opportunities - I don't even know where to start?"
The start-up universe is a large one and can seem overwhelming and impenetrable to the uninitiated. In order to narrow things down, I recommend following a simple, four-step heuristic. Here's the advice I give:
Pick a Domain. First, figure out your passion in terms of domain. Are you more of a B2C type or a B2B type? What blogs are you reading? What articles in Techcrunch or the Wall Street Journal capture your attention? What companies are your dream companies to work for? Answering these questions will help narrow down a set of domains that you are excited about. It can be more than one, but it shouldn't be more than, say, three.
Pick a City. Next, figure out where you want to live. Again, there may be multiple options, but ideally one or two favorites. Each start-up community has its own plusses and minuses, quirks and idiosyncracies. I find that once young people choose a particular start-up community, they stay there. It's a natural phenomenon - they build relationships over time that lead to one opportunity after the next. Your co-workers in one start-up become your co-founders in another. Thus, young professionals should be thoughtful about choosing a city early in their career because of this "settling in" phenomenon.
Pick a Stage. Next, determine what stage company you prefer to work in. Do you want a company that is still in the jungle phase (hacking through and trying to establish a path to success), the dirt road phase (established initial product-market fit and now trying to execute and scale in a relatively clear direction) or the highway phase (optimizing and scaling along a well-trod path)? This decision should be made somewhat based on risk appetite and somewhat on personal makeup and preferences. If you are a risk-taker and enjoy the challenges and roller-coaster ride, then the jungle phase is for you and you should bias towards seed funded or recently Series A funded companies that are pre-revenue. If you are more conservative, want a good salary and prefer to pick a "safe" winner, then a highway phase company that is pre-IPO or recently IPO'ed is the right choice.
Pick a Winner. Now that you have your target domain, geography and stage, focus on picking out a few winners - the hot companies that everyone thinks has great momentum and potential. After all, why would you want to work for anyone other than the absolute hottest company in a given category? How does an outsider figure out who the winners are in a given domain, market and stage? Ask a handful of insiders. Find the top 3 VCs, angels, tech lawyers and headhunters in your target geographical market and ask them for the two or three hottest companies that match the domain and stage you are interested in. Compile this list, pressure test it, and see what patterns you find. The firms who get the most mentions with the most compelling underlying evidence will naturally rise to the top.
Below is a sample chart that I put together answering the question for someone interested in either e-commerce, mobile or SaaS companies in SF/SV, NYC or Boston. The first company listed is an earlier stage company (either jungle or dirt road) and the second company is a later stage company (either dirt road or highway). This list is illustrative - just to make the point - not in any way attempting to be comprehensive.
(full disclosure: tracx, 10gen and Savingstar are Flybridge portfolio companies)
Once this heuristic is complete, you now have your target list. The next step is to get warm introductions to the target. This is easier than you would think. LinkedIn is an incredibly powerful tool, as are the various alumni databases. VCs are often happy to pass along your resume and background to their portfolio companies - after all, they are doing them a favor by sending them highly qualified talent.
In general, the start-up community is so incredibly generous with its time and has such a strong "pay it forward" culture, that with tenacity and time, you can get to almost anyone. In fact, I recommended you aim high. Use this heuristic to narrow down your search and then list out the 10 people that would be your absolute top choices to sit down for 30 minutes with face to face. Then, go after those 10 people in any way you can (without stalking them or being a nudge!). These networking meetings will help you establish valuable relationships, even if the job fit isn't there.
In short, be organized, focused and tenacious. Aim high, seek out the incremental networking meetings and pick yourself out a winner. Things may not work out, but at least you're putting yourself in a position for a little positive serendipity.
In classic economics, deflation - a downward trend in prices - is a dangerous force that leads to recessions (see: Japan, economic disaster - a case study). In the world of the Internet, deflation viewed as a positive force, leading to massive consumer gains. How can we reconcile these two competing beliefs? And what impact will this deflationary pressure have on the production of high quality content?
I've been thinking a lot about deflation and its impact on the Internet economy since reading two articles in two different newspapers this last week. The first was this article in The Economist about the music business. The article contained a chart showing music industry revenues peaking in 1999 at $27 billion and dropping consistently as a result of the disruptive power of digital music and iPods/iPhones. Industry revenue may have finally flattened out at $16.5 billion, but the bigger story is that over $10 billion of value has been taken out of the music business thanks to over a dozen years of digital disruption. Artists are still producing a ton of music (I would guess music proliferation has grown during this period, although I haven't seen the data), yet the Internet has produced massive deflationary pressure.
The second article that I was struck by was in the Wall Street Journal, depicting the explosion of online video. Titled, "Web Video: Bigger and Less Profitable", the article reports on the rapid growth in online video views (39 billion in December), yet the fact that prices are dropping rapidly due to the oversupply of video inventory. The CPM (cost per thousand views) that advertisers are paying has dropped from $17-25 in 2011 to $15-20 in 2012. Advertisers and content producers are used to this trend. Whenever a new advertising medium emerges, prices are high at first, and then steadily drop as inventory swells (I wrote about this in a post that provided a bearish analysis of Groupon back in 2010). Every content business today faces this rapid drop in CPMs across every category, resulting in severe cost pressures.
So if the producers of music, video and other content are getting hammered on deflation, who is benefiting? Consumers. Consumers are getting access to music, video and other sources of content for less. They're also getting subsidized by business advertisers through social networks and search. McKinsey did a study a few years ago that sized the consumer surplus from the Internet at over 100 billion euros. Interestingly, they concluded that in measuring this surplus, consumers have benefited 85% of the gains from the Internet as compared to 15% for producers.
Thus, while the business press is full of stories of disruptive gains in business transformation, the real story of the Web is the power of the consumer and the massive gain consumers are receiving.
Although I am thrilled with the consumer surplus, I struggle with where this logical chain is eventually leading us. I worry that if there is too much deflation in content, that this consumer surplus will hit a natural limit. That natural limit will be that content producers will stop investing to produce high quality content. After all the inefficiencies have been wrung out of the system, eventually fewer producers of content will be willing to produce great content because the rewards just are no longer there. If this were to happen, consumers would be all the poorer for it.
My conclusion: although deflation has produced awesome consumer gains in the last decade, it is emerging as a real threat to content producers. But at some point, perhaps soon, it will tip to being a negative force that will cause high quality content produers to turn away and pursue other methods of financial gain. If that were to happen, we might regret allowing deflation to run rampant on the Web.
All the focus on the Pope's departure from the Vatican has got me thinking about the meaning of religion. Those ruminations have led me to a surprising conclusion: one of the reasons the force of entrepreneurship has become so powerful in recent years around the world is that entrepreneurship has evolved into a global religious movement.
Similarly, the start-up world has evolved into a set of shared beliefs and values. For example, the notion of Pay it Forward has become a core part of the entrepreneurial ethos. In religious communities, when someone is in need, the community rallies around them. People do kind things to other people just because it is the right thing to do. The start-up world has a similar share value - investors, CEOs and service providers throughout the entrepreneurial ecosystem are always willing to lend a hand, donate time and provide guidance and counsel. When I talk to entrepreneurs I've never met before, I always have a sense that we are kindred spirits on a shared journey. There is an immediate connection and mutual respect, just as I feel when I meet a member of my religion (Judaism).
The canonical texts of the entrepreneurial world are firmly established and widely read. Although they haven't sold as well as the Bible, there are a set of books that nearly every member of the entrepreneurial ecosystem has read, including: Crossing the Chasm, The Lean Start-Up and Four Steps to the Epiphany. Even those who have not studied these books and their derivative works are familiar with the concepts.
The cultural force of entrepreneurship is a powerful one. This force and the cultural norms they impose can vary from the profound (it is no longer ok to look down on the "little guy/gal" in business, young people are now listened to more carefully and given more opportunities to have an impact) to the mundane (it is now ok to wear jeans to a serious professional meeting, it is no longer ok to pull out a Blackberry in a meeting as opposed to the iPhone). The binds that tie the community together are strong. I can walk into a start-up event in Sao Paolo, Jakarta or Little Rock and have the same dialog about the same concepts - just as I can when I walk into a synagogue on Friday night anywhere in the world and feel at home.
The prophets of entrepreneurship have been firmly established. Paul Graham, Steve Blank, Eric Ries and a few others have risen to a status such that anything they say or write is followed closely by hundreds of thousands of followers. The entrepreneurial community reads all the same blogs and debates the same issues around the world. Certain corporate leaders, such as Steve Jobs (who, arguably, was practically deified in the wake of his tragic death) are also viewed with such reverence that they can command massive followings and sway opinion.
I could go on, but you get the point. I'm not sure what to do with this observation, but I think it represents a profound undercurrent that drives the start-up system in a very positive way. I'd be curious if others see it similarly.
Despite being a Wharton and MIT guy, my friend Fred Wilson has been kind enough to attend my class at HBS for the last few years. Yesterday was another terrific one.
Instead of a final exam, I assign my students the task of blogging. You can see the the class blog here, where the students wrestle with the limitations of the lean methodology, challenges in seeking product-market fit, premature scaling and other important startup topics.
I encouraged the students to live tweet the class and it was a huge success. You can see the Twitter stream from the class here. A few highlights/quotes that I thought were particularly salient: