Dave Kellogg is the former CEO of Host Analytics and prolific blogger. Join him as he takes you through lessons learned from Host Analytics on the top questions every SaaS CEO wrestles with.
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David Kellogg – Former CEO @ Host Analytics
FULL TRANSCRIPT BELOW
Morning. Morning. Thank you all for attending this morning. For this session, where we’re going to talk about really the five kind of questions that keep CEOs up at night. Or the five questions that really never get put to bed in growing a SaaS start up. So thanks for joining us. You know, my belief is you’re either a CEO or you work for one. And I think there’s value for both groups here today. If you’re a CEO or a co-founder or a board member I’m hoping you can get some fresh perspective on these kind of age-old questions. And if you work for a CEO, whether you’re on the e-staff or really any position in a startup, I’m hoping that by understand how the CEO thinks and how the CEO looks at certain issues that you’ll be better able to add value and it will help your career. And I would ask that in the coming six months or so, if there is a moment, if something resonates in the presentation and you think, “Gosh, I took that from Dave’s presentation, I applied it in the workplace, and it helped me.” Send me an email. My contact information is on the blog, Kellblog.com. I’d love to hear those stories. I’d love to hear what resonates.
So let’s jump in. A quick self-introduction, I’ve been CEO of two different companies in the zero to 100 million dollar range. Most recently Host Analytics, which we sold in a private equity transaction in December. So I’m currently just blogging. I’ve also had more than 10 years of CMO experience, including a good run at Business Objects where I ran marketing as we grew from 30 million to over a billion in revenue during a nine-year period. I sit on boards. So I am or have been an independent board member on four companies. Also combined, by the way, for a total of more than 10 years. At Aster Data, which is big data, Granular, AgTech SaaS, Nuxeo content management, Alation data catalogs. And what I’m hoping to do is provide you with a pretty unique perspective because, look, I’ve had 10 years experience kind of looking up at the CEO as a direct report. I’ve had 10 years experience being the CEO with kind of everyone looking at me. And I’ve also had 10 years experience on boards, looking across the table at CEOs. And I want to bring that kind of collective experience to the talk today to help you understand how CEOs think about things. And some of the big questions that they worry about.
So the five questions we’ll talk about today are, first, when do I next raise money? Startups are like sharks. They’re constantly in motion and constantly thinking about their next meal. This is a question that never gets put to bed. And we’ll share some thoughts on how to think about it in a minute. Do I have the right team? Another question that never gets put to bed, both because it’s subjective and everybody has an opinion. And also because some people are good at different phases of the company. That’s a reality we must deal with. And just because someone was a right member of the team last year doesn’t mean they’re a right member of the team next year. So another big question that CEOs spend a lot of time thinking about and so do boards. Three, how can I better manage the board? CEO is a funny job, right? Many of us, I mean in some ways it helps if you founded a company young and you didn’t have 15 years of corporate experience working for a boss.
Because if you do, if you’ve spent your time kind of climbing the corporate ladder, one day you’re CEO and you don’t have a boss anymore. Right? It’s not a manager-employee relationship. Right? First you’re working for a committee, not a person. And, second, if you ever went to that committee going, “Gosh, I wonder what we should do next quarter.” Right? They would look at you and say, “I think you should help us find a new CEO.” Right? “Because you’re supposed to know what we’re supposed to do next quarter.” Right? Your job is to run the company. So it is not a manager-employee relationship and managing that is difficult. The fourth issue is to what extent should I worry about competition? This is actually, I think, the most subtle question. Because it evokes a lot of very passionate answers. All of which, to me, are partially informed. It reminds me of the story of the three people and the elephant. The person grabbing a leg thinks it’s a tree. Person grabbing the tail thinks it’s a rope. And everyone’s very passionate about their conclusion, but they’re all only seeing part of the picture. So we’ll talk about this one.
And then the last question is are we focused enough? To which the general answer is probably not. And the point we’ll make is we need to separate kind of vision, which is kind of an end-state goal for the company, from strategy which is kind of a systematic path to get there. And that’s the way to really think about that issue and to think about focus. So let’s jump into the first question, when do I next raise money? Every CEO worries about this question all the time. Okay? And my only kind of glib answer is, “When? Now. How much? As much as you can. Right. From whom? The best VCs who will fund you. And on what terms, if I could add one. The best you can find.” And the reason that’s only kind of glib is, let’s look point by point.
When? Well in 2002, I know it was a long time ago. But in 2002 there were only two types of startups in existence. Right? Those that had raised a large amount of money at a ridiculous valuation prior to April 2001 or dead. Right? There was no other type of startup in 2002 when the internet bubble burst. So these decisions can have a big impact. Always remember the famous quote from Don Valentine, the founder of Sequoia, “All companies go out of business for the same reason, they run out of money.” Right? And, as CEO, one of your first and foremost responsibilities is to keep the organism alive. And the way you do that is to keep fuel or oxygen, pick your metaphor, in the tank. So that’s why you want to raise now. How much? There’s a tendency, you’ll find this kind of teeter-totter where people want to push back financing because, if we can get a couple of more good quarters we can reduce dilution. So there’s this tendency to always want to do it later because, as an optimistic entrepreneur, we believe in the bright future. And raising money later is always better than sooner. But that’s only true if everything really turns out rosily. And this can backfire on you. So that’s why both the how much and the when should be pulled forward.
From whom? You know, notwithstanding the real value that top-tier VCs offer, whether they have programs to support the startups or the value and wisdom of a wise board member. Notwithstanding that real value, there’s also big brand value in the VCs you pick. So all other things being equal in a financing round, you can have somebody who’s very nice and very smart from a no-name firm or somebody who is equivalent from a big-name firm. Your future fundraising will be much easier if you pick the second person. Right? Your day-to-day operations might be equivalent, your next round will be easier. So that’s kind of the micro view on fundraising. If you step back and take a more kind of macro view on it, you should try to raise money about every two years. Why is this? Because unless you’re blessed, and some people are blessed they can make five phone calls and raise a 50 million dollar round. But if you’re not one of them, if you’re not blessed, and raising a round is going to be real work? Say three to six months? There’s a distraction factor on the CEO with all that time gone. So that’s the one scale is saying, “Big distraction, we can’t do this every year. I can’t spend a third to half my time raising money.”
On the other hand is the dilution argument which is, “The later I raise money, I could do it at a higher valuation. Get less dilution because the company will be bigger.” And look, if you raised three years worth of money there’s a very strong argument that the portion of that capitol needed in year three could have been raised with a higher valuation. So when you net all that out you kind of come down to two-year cycles. You know, one interesting thing about this phenomenon is you can often take the size of somebody’s round and divide it by eight to 10 and get a pretty good approximation of their burn rate. Because most people think in these terms. So, how much money should we raise? Everybody should have a driver-based model for their company that has all the key drivers. Right? Number of reps, types of reps, productivity by types of reps, attrition, ramping, net and gross dollar retention rate, gross margin. Right, there’s about 10 or 15 drivers you need to fully model a SaaS company. And you should build that model and use it to figure out how much cash you need to last two years. And not in your best scenario, but in an okay scenario.
Now the most important thing, in this crazy environment, is just because you raise it doesn’t mean you have to spend it. Right? You might go out thinking you’re going to raise 25 million and, in this world, find out that you can raise 50. Should you take the 50? In my opinion, yes. Why? See prior slide. Right? But the problem is now you’ve got 50 million dollars and you’ve got a board member, presumably, who wants to see you deploy that. He or she underwrote a model where that 50 million gets spent. And this is going to create some tension. And my advice to resolve that tension is understood that, yes, they underwrote a model. But you’re now three months later, six months later, executing in reality. And if you’ve just hired a cohort of 10 sales reps six months ago and everybody’s failing? Don’t go hire 10 more. Right? Even though the model says you were supposed to. Right? Let reality drive the trigger on the spend, not the model that got underwritten six months ago.
And the last point, and this is a big one, is can you afford not to fight in the VC arms race? You know, 20 years ago VC was more like the race track. But I think they sat around and everybody bet on their horse and they watched the race and they saw who won. And now, you know, somebody figured out along the way that if they could kind of give their horse steroids in the form of extra capital that they could actually increase the odds of their horse winning. And the first guy did that then the second guy did that and then the third guy did it. And now you have these 100 million dollar private rounds. Right? Where, in effect, Sand Hill Road is trying to kingmake. They’re trying to pick winner by deciding this is the company who’ll get the most funding. And my advice for you, and the perverse thing about this, is the better your category the more likely that is to happen. Right? If you’re selling some very focused, vertical SaaS app you’re unlikely to find a spending arms race. Right? But if you’re in some horizontal platform category people may throw hundreds of millions, maybe even billions, of VC at the category. And you don’t get to not play.
So, if you find yourself in this situation, it’s probably a sign that you’re in a really good category. But you either need to play to win and go out-raise the other guy. Or you need to find pivot into some sub-segment where you’re not directly competing with them. It’s a very hard decision. But, you know, how much can you outsmart the other guy? Because this is Silicon Valley. The other guys are smart too, right? You might be smart, they’re smart. Can you outsmart them if you have 20% less capital? Maybe. If you’ve got 50%? Maybe. If you have a third? I don’t know. Right? Maybe even 50% I don’t know. How much are you relying on somebody who I’m assuming is already very smart? So you have to watch this factor when you think about funding.
So second question, do I have the right team? Boards focus on this question a lot. VCs view themselves as kind of experts in people. Everybody gets to have an opinion about people, whether you’re a financial VC or an operating VC. So this is a question that attracts a lot of attention. And I always like to look at it through two perspectives. The first is for you, for the CEO. Do you have the right team for you? And then, second, do you have the right team for the board? And let’s talk about them one at a time. So I have a couple of kind of joking, tongue-in-cheek laws up here that come from friends of mine. But the first law is pretty simple. My friend Greg Lorden always said, “There’s two types of people, those who bring energy and those who take energy.” And we all know who those energy takers are, right? They walk in the room and they somehow suck all of the oxygen out and they kind of bring everybody down.
My advice? Get that guy or gal out of the room. I don’t care how you do it. I don’t care if you demote them. I don’t care if you keep them as a direct report and dis-invite them to the meeting. I don’t care if you hire them a coach. But your team needs to be full. And you have a very hard job and you should be surrounded by people who bring energy. The second principle is do you want to meet with them? You know, one day I was at MarkLogic, probably 10-plus years ago, and we’ll make up the position. I had a meeting at 11 o’clock with the VP of Product Management. And I went, “Ah, God, I don’t want to do that meeting.” And I stopped and I went, “That’s crazy. Wait a minute, you’re the CEO of a company. You’re supposed to meet with the head of product strategy, which is one of the most important things in the company. And you don’t want to meet that person. What the heck does that mean?” Right?
And what it means is bad, right? Because there’s probably a reason why you don’t want to meet with them. For me the top reasons are they can’t keep up with the conversation. Or their answers are always gobbledygook when I ask questions. Or, what’s another good one? Oh, they don’t follow through. They say, “Yeah, we’re going to do things one, two, three, four, and five.” And you meet them a month later and nothing happened. Right? That’s how you lose interest in meeting with a direct report. And I view the non-desire to meet with one as a huge warning sign that you should inspect. Another thing is how well do they work with each other? Another friend of mine has this expression from Machiavelli that, “Warring princes means one thing, a weak king.” Right? And if you’re CEO of the company you cannot allow warring princes in your company. Everybody sees it. The whole company knows if two e-staffers are at war. I’ve had entry-level accountants crying in my office because their two VPs have been fighting. Right? The whole company sees it. And it’s your job to make sure it doesn’t happen.
So, when you have warring princes, my advice is to be very quick to say, “This is unacceptable. I will not tolerate this.” You can do 360 degree feedback surveys. You could bring in a coach. You could do whatever kind of intervention you want. But my advice is make sure that no one wins, that there is no winner. That you chose to fight, you might still be with the company but you are not going to win. And make sure that you’re committed enough to fire them or demote them out of the position to make it stop. And one time I had a conversation when this was happening. I said, “You know, I’m seriously considering firing you because you’re at war with one of your peers.” And the person said, “Are you going to fire me for fighting?” I said, “No, I’m going to fire you for insubordination because I asked you not to fight. I told you not to fight and you fought anyway.” Right? I’m deeply committed to ending this conflict. Another thing to think about, do you have the right team? If they’re fighting with each other something’s wrong.
And then finally delivery track record. Some people are really good at explaining why stuff didn’t happen. Well, let me tell you, build software is really hard. It’s like, “I don’t want to hear that. I want results.” Right? I want people who deliver results not explanations. So, as CEO, I think this is a good checklist for do you have the right people. Now let’s take a look at the board view on this question, which is very different. Because what the board wants is for you to be a little bit uncomfortable with your team. The board wants you to be challenged by your team. Right? The board wants you to hire “better than you” or more experienced than you. Why? Because by and large, if you’re on the e-staff of a startup, that’s not the place to learn how to do your job. Right? The board doesn’t want people learning how to be VP of Sales. The board doesn’t want people learning how to be VP of Marketing.
So the way the board thinks about this will be like, they may look at somebody and say, “Well your VP of Sales is good for this year, but they have a sell-by date of next year.” And this notion of having a sell-by date, it may not be polite but often board members have it. And, if they have it, I’d advise you to understand what they are. And to try and reframe the issue. That it shouldn’t be that John or Mary is with the company or not, by the sell-by date, it’s in that role. Because as CEO I believe you want to keep these people in the company but, in fact, they may have a sell-by date for a certain role. But I would add one proviso, “If they cannot develop skill Y.” So try to reframe this in the minds of your boards. Ultimately the board wants to see you hiring kind of a mix of veterans and up-and-comers and ultimately, ultimately they come down to really one question. “Does Sarah, our CEO, bring in A players? Or does Sarah hire people that she’s comfortable with?” And certainly the boards wants to see type one.
Three, how can I better manage the board? You know, I think the place to start in thinking about this is there’s a universal desire amongst VC directors to add value. And one of the things VCs do is pattern match. And if you don’t channel their energy you are likely to be pattern matched to death. And I propose a better solution, which is to try and take control of the situation. The other thing VCs will tend to do is that the more financial, ie less operational, they are the more they care about two things: numbers and people. By the way the intersection of which is called comp committee. Right? So try to drive those people towards your comp committee. I would make board meetings a board meeting topic, very few boards do this. And just take an hour to say, “What kind of board meeting do we want to have?” One of my favorite questions, ask each director in their entire career who managed the board best and what did they do? Right?
One answer I heard, “This guy got the slides out five days in advance. Called every director individually, walked them through the deck.” To me that’s terrifying because I’m like, “Why bother to have a board meeting if you’re going to do that?” But, at the same time, it was really good to know that that was his view of perfect board management. Right? The other thing, just as a quick aside there, if you’re getting the board slides out 24 hours or less before the board meeting? You’re not looking good, almost regardless. But what are the assumptions here? Are we assuming the board has read the slides or not before the meeting? Do we assume, as I do, that the board meeting is a chance for the board to inspect the executive staff? Put them up in front of the board and let them answer questions about their business. Some directors might want that, I’d be one of them. Some don’t. You need to know.
But the real way to do this is to kind of reverse the paradigm. And when I went to Berkeley many many years ago there was a local band called Psychotic Pineapple and their big hit was “The Devil Has Work For Idle Hands.” And whenever they hit the chorus everybody would go like this and they’d all put up their idle hands. And that’s the way I think of the board. Right? The devil has work for idle hands, ie a good dog is a tired dog. Right? If I’m not keeping the board busy helping me drive the company they’re going to come in with ideas and ways to help that I may not find helpful. So why not be proactive. Right? At every board meeting put up the pipeline, “Who knows somebody?” At every board meeting look at the boards of the customers. “Who went to business school? Some guy on this board. Hey, we’re struggling with metrics. Which one of you is a great, metrics-driven CFO?” Right? “Hey, who wants to make a committee with me to go solve this topic?” Or, my favorite, comp committee. Often a nightmare. Can we reframe comp committee from this gauntlet that I need to run to a collaborative exercise where me and two board members are trying to make a proposal that appropriately rewards the executives and keeps them with the company? Right? Get them working for you.
Number four, to what extent should I worry about competition? And in some ways this one’s weird. Because it’s like, “Is this a trick question?” Like, “They’re trying to kill me. There’s a bunch of people across the street who’ve raised 75 million dollars or 150 million of venture capital and they are trying to kill me. Of course I should worry about them.” Right? Sun Tzu, “If you know the enemy and know yourself you need not fear the results of 100 battles.” Right? And then one day I was at Salesforce, I did a year at Salesforce in the middle of all that, and I was mentioning Zendesk. I was like, “Hey there’s these guys called Zendesk and they might be a problem for like our customer service business.” And I got the kind of uh-oh moment where like, “Oh.” And then Benioff said a proverb, “Dave, never lead from a position of fear.” And I’m like, “Oh shit. Did I sound scared?” I wasn’t scared. Right? I was just trying to point out the we have this competitor. Right? But basically what we had here was a proverb conflict. Right? And you know, it’s Silicon Valley, I love management by 2,500 proverb as much as the next guy. But we’ve got two proverbs in conflict here and what are we going to do about it?
And the answer is I think this whole issue is semantically equivalent to an issue I call “drivenness.” Where people say, “What kind of company are we? Are we vision-driven? Or are we customer-driven? Or are we competitor-driven?” Or sometimes you’ll even hear functional. “Are we sales-driven or marketing-driven or product-driven?” Right? The last three I just exclude as politics, period. Because what you’re saying is that you want your function to be more important than the other functions. So I throw those out. But let’s go to the first three. Should we be vision-driven? You know, what Mark would have said in that moment, “We need to blaze our own path. Don’t worry about the competition.” You know? That’s vision-driven. Should we be competitor-driven? Right? Developing detailed plans for how we’re going to kill competitors. Or should we be customer-driven? And the answer is avoid this fake, either-or framing. Which is you need to speak like you’re vision-driven. So, when you’re talking to customers and analysts and the markets, talk about the desired end state. Talk about the vision. Don’t talk about competition. When you’re building your company culture, in my opinion? Make it customer-driven. We want everyone to be genuinely concerned with and genuinely curious about customers problems and helping them solve them.
And, when you’re building your strategy and setting goals? Be competitor-driven. There’s five guys trying to kill you. What’s your plan to kill them back? Right? And who is going to own pieces of that plan? So, to me, this not a binary answer. It’s we need to be all three. And, if you just, because I think the default answer is just focus on the vision. And that can be very dangerous. Because if you have competition who’s focused on their vision and focused on killing you? It can be a fairly painful experience. You know? Number five, are we focused enough? And the default answer to this is probably not. There’s an enormous number of factors that serve to de-focus Silicon Valley companies. Right? I mean, sadly, one of the worst answers for “What are you going to do next year?” Is, “More of what we did this year?” Right? Because we’re in a two percent penetrated market that we think has a 10 billion dollar TAM. And we don’t need to add new products or add new anything. We just need to go grab share in this huge market. And people hate to hear that. Right? So I think you need to understand that because I think your first goal, if you are in a hard market should be precisely that. To do more of what got us here next year.
But what about the focus? And, when I think about focus, I always go back to the movie Aladdin where the Genie goes, “Incredible, cosmic power. Itty-bitty living space.” Right? And this is my paraphrasing of Jeffrey Moore, with all due apology, which is “Startup strategy should be phenomenal, cosmic vision, type-A focused execution.” Right? That’s what you need to have. Keep the big, big vision. Don’t lose sight of it. But when you’re making next year’s plan? Let’s be focused. Let’s have achievable goals that we can win. Remember Amazon, right? The first product they sold was the book. And their big first move after books was CDs. Right? Little products that easily shipped. Let’s debug the model and make it work before we start trying to ship soccer goals around. Right? I remember I bough my first soccer goal on Amazon and I’m like, “Wow.” I couldn’t believe it. Because I’m like, “These are the guys who started in books.” And, of course, I mean look at all the stuff they’ve done since: AWS, Mechanical Turk, the fulfillment model. Right? But they did it systematically. Ditto for Facebook, right? Facebook was Harvard students then Ivy League students then all university students and then kind of all people. Right? Let’s be systematic. That vision is not the same thing as strategy. Vision is a view on how the world should be. It’s an end state and strategy is a systematic plan for getting there.
Since we have time I thought I’d throw in a bonus question. Which is, are we winning? And I think this question is really important for your startup and for the morale of the people in it. Because everybody wants to feel like they’re at a company that’s winning. And look, the board wants to feel like they’re winning. The number one cause of CEO death is misalignment with the board. So isn’t it important to have these kind of big questions discussed with the board. Whether those be about the team and about people’s sell-by dates, don’t let those just sit in people’s heads as assumption. Let’s get them out on the table. Well, let’s get another big thing out on the table. What is winning? And I first heard this question from a book called “Strategy is Destiny” by Robert Burgelman at Stanford. And his whole argument was pretty simple. If we say strategy is the plan to win that immediately begets the question, “What is winning?”
And that’s a very healthy question to have between you and your board. And you may be surprised at the answers you get, particularly from founders. Because sometimes they’ll surprise you. “It’s to make more money than my roommate at MIT.” Right? Or it’s death to the evil emperor of Microsoft. Or it’s like you may find some underlying mission that you like, “Oh I just thought we were trying to build an 100 million dollar company.” Right? And you may find these motivations. So it’s a good thing to get out there and get surfaced. And there’s so many different answers that you find when people speak honestly. It’s just a fascinating conversation to have. So, look, in conclusion let’s wrap this up. Everybody worries about these five questions. They’re kind of the five questions that never go to bed. In some ways they define the startup CEO job. These are five questions that you need to worry about a lot, particularly the first two. All of them, but certainly, “Do I have enough money?” And, “Do I have the right team?” Right? That’s got to take a lot of your time as a startup CEO. I encourage you to ponder them, too, with your board, your advisors, industry watchers and more.
And I’ll end with a quote. One of my favorite quotes on management from Peter Drucker. Which is you know, “The temptation for a startup CEO is to spend all their time on management.” Right? “And management is about doing things right.” And there’s nothing wrong with that. The trains need to run on time at your company. But leadership is about doing the right things. And, if you focus on these five questions, I think it will help you find the right balance between the two. So thanks a lot for attending today. See you next time. Take care.