Pain in the Art of Shipping

Steve Jobs is credited to have said, “Real artists ship”, meaning that those who create — be it technology, music or a sculpture — make their art available (in galleries or store shelves) for people to consume, critique, enjoy or reject.

Anyone who creates makes themselves vulnerable to the pain of evaluation only when they cross the point of no return — the shipped item.

Hi-Tech Procrastination

The fear of putting out a product that will not be broadly loved and adopted paralyzes many leaders — particularly engineers — to continually tinker and “improve” it, fearing that they only have one shot at success. VC Fred Wilson has written about his admiration for founders and CEOs who insist their organizations meet ship dates, even if sacrifices are made, including pulling features.

Here are three things to keep in mind to focus your team on being fanatical about hard ship date deadlines.

The Last 10% is the Hardest

“The last 10% is so much harder than the first 90% of any project. That is true whether it is software, an event, a construction project, or really anything that requires a lot of planning and then a lot of execution,” writes Fred Wilson. That has absolutely been my experience in at least two dozen product launches. And for early stage companies, not only is perfection the enemy of the ship date, it could be the enemy of the company surviving be it in the form of revenue/cash flow or attracting additional funding from investors.

If you understand how hard the last 10% is, you can deepen your commitment to the ship date when you approach that milestone. My colleague, John Murray, has launched some of the biggest products in technology for companies like Verizon. His pre-launch planning and feedback mechanisms are so comprehensive, you realize that your launch is not an end but a beginning. He has an extensive post-launch checklist to automate feedback starting with your Go-Live moment. Knowing that there is much work to be done post-launch will help free you from the casino, all-or-nothing mentality of your product launch.

Start with Some Friendlies

The reality is that no matter how much of an expert you think you are on the industry or on what the product needs, you won’t really know until you get the product into the hands of customers.

Find some early adopters or “friendlies” and get them using the product as soon as it passes the “it won’t embarrass us” milestone. Chances are, many of the things you thought you absolutely had to have, are not really needed.

If your product fixes a broken business process where there are real, measurable consequences to inaction… is driven by a mandate associated with governance or regulatory control… serves and under-served problem that includes burning pain for your customer, they are more than willing to overlook some warts to get their hands on it.

Furthermore, assuming you are responsive about fixing the bugs and filling in the missing gaps identified, you will be viewed as a responsive partner and they will quickly forget about the shortcomings they had to deal with when they first got their hands on it.

Launch is Not All-or-Nothing Proposition for Product Success

“Most entrepreneurs are so passionately focused on their product and the features they have developed and delivered, they often ignore the cost and difficulty users may have to effectively use their solution. Research suggests that with less than a 10x gain/pain promise, clients will likely default to a no decision rather than buying an early stage product without market credibility,” writes Ken Goins in How to Create a Compelling Value Proposition.

What this means is that:

(a) Your product may work well once the user has overcome an initial learning curve but you may have intimidated a large audience who are intimidated by initial complexity or sophistication. John Murray talks about how product teams need to spend significant hours figuring out how to get the subscriber over the “Fear-of-the-Button” and to start the activation process, for example.

(b) Your product is fine but your messaging value proposition messaging and marketing is not compelling enough to move users. The below chart from Ken Goins illustrates the Pain/Gain Ratio concept.

Net/Net: you don’t know where your product will need improvements to attract, retain, scale and grow. Make the best product you can for your explicit launch date. Focus on product-market fit and a compelling value proposition to drive decisions. Plan for relentless and ongoing product feedback. Respond with speed and over-communication. The pain in the art of shipping will be lessened.

Greg Smith is TechCXO’s Managing Partner for the Product & Technology Practice. See his full bio here. Or, learn more about interim CTOs and CiSO-as-a-Service.

Customer Success and Intentional Revenue

Customer Success and The Case for Intentional Revenue™

In my career, I’ve worked with and consulted many technology firms from small to large on customer renewal issues. Most have had at least a reasonable level of success, and many have gone on to do very well. Over the years I’ve collected a set of notes. I tried to understand why some have exceeded expectations and why some have fallen short. A lot has to do with consistent execution and growth, but then I looked at the numbers further – is it only about sales? About good products? Good after-sale support? It’s that and more. I’ve come up with a model that I call Intentional Revenue™ which has three elements.

Customer Desired Outcome

First, you build, sell, install and support a customer so they reach their desired outcome. You’re not selling a “product” or even a “solution”. A simple analogy – you’re looking for a new car and are considering a convertible. Reliability, power, space and value are important. But the end result is not a car. You’re buying into a lifestyle where you can put the top down and relax in the sunshine.
Your customers are the same. If a customer needs a new billing system, they’re not buying it from you because they like billing systems. They are buying because it solves a problem. They are buying relief from their current system. That’s the outcome they are looking for.

This all sounds simple. But in my experience, the value chain in technology solutions is often broken. Sales can oversell or over-commit. Products can be faulty or not deliver promised functionality. Implementation services seek sign-offs rather than delivering value. And support focuses on closing tickets not resolving the issue.

I’ve tackled and solved many problems in these areas. Often sales coaching will help along with deal reviews. Product reviews against consistent, communicated roadmaps also ensure alignment. Implementation services focused on success and not milestone achievements are critical. Support surveys that measure results, not closure rates, provide positive feedback and reinforcement.

The Intentional Revenue™ goal is to achieve 100% alignment between a sale and achieving the customer’s desired outcome. For every customer.

Renewals

The key to long-term success for startups or mature companies is customer renewals. Software or technology is usually sold in one of three ways:

– Perpetual License (fee paid for permanent ownership; annual support is usually extra)

– Term License (fee paid for license and support for a fixed term)

– SaaS (fee paid to host a solution, for support and licensing, usually for a fixed term).

In these cases there are revenue opportunities beyond the initial sale. Implementation services and education are almost always added to the license costs. There are fees from ongoing support. And there are fees for major upgrades and updates (if not covered by the license agreement).

Customer Lifecycle Management

Customer Lifecycle Management is a discipline in itself. If a customer doesn’t get their desired outcome, their likelihood to renew decreases. A customer will also renew for a short period and look for a replacement if they feel neglected or abused.

Additionally, with renewals, there are two aspects to consider: rate and yield. The renewal rate is the percentage of customers who renew after their first term. Or, those who renew maintenance if they have perpetual licenses. Cell phone and cable services have high churn (non-renewal) rates. B2C software also can have high rates of churn, often approaching 50%. Enterprise software and mission-critical technology have higher renewal rates. But they are rarely 100%.

Renewal yield refers to the capacity or dollar value of each renewal. Let’s say that you sold the customer 500 seats of software, or 500 units of hardware, but they only used 200 of them. They are unlikely to renew for 500. It is more likely the customer will agree to 250 which covers their current usage plus some growth. That would result in a renewal yield of only 50%! It’s also possible to exceed 100%, if you sell more capacity during a renewal cycle. That’s usually a great sign that the customer is getting value and their desired outcome.

It’s much easier to tackle high renewal yields and rates if you think about it up front. I once took over a large portfolio of products. The products had fast declining yield (<50%) and slipping renewal rates. I was able to get the renewal rate to 100% and the yield over 90%. It requires a lot of effort if you’re trying to do it right before a customer renewal.

The Intentional Revenue™ goal is to achieve a 100% renewal rate and 100%+ of renewal yield.

Recommendations

How likely is your customer to recommend you to others? Referrals are a huge source of leads and future business. Of course, negative recommendations are not desirable.

Again, if your customer doesn’t renew, they didn’t achieve their desired outcome. They are not going to give you a recommendation, either. There are times a customer will get their outcome, renew, but not recommend. What’s up? The customer’s treatment before, during or after the renewal cycle is the culprit. The perpetrator might be your CEO or a support technician.

There are ways to measure Likelihood to Recommend (LTR). One of the most popular measures is Net Promoter Score®. Regardless of the method you use, if you’re not getting recommended, you’re leaving money on the table.

The Intentional Revenue™ goal is to have 100% of customers likely to recommend you to others.

The Proof

You might argue that this works well for one type of product, or for one type of company. I’ve modeled out success for: (1) mature technology companies with term licenses; (2) mature companies that sell perpetual licenses; (3) startups, and (4) growth companies that sell SaaS or term licenses.

Some firms have strong sales teams but aren’t as strong in customer renewals. Others are great at renewal yield but not rate or vice versa. Some are “best in class” at the higher range for each. The model also includes all Intentional Revenue™ principles.

For the first few years of the model, the differences aren’t noticeable. But Intentional Revenue™ plays the long game. Here are the gains you could achieve over 10-years with the Intentional Revenue™ model:

[table id=8 /]

These are illustrations and your numbers may differ. But in all cases, there are tangible revenue improvements. The annual revenue run rate at the 10 year mark is close to double the typical case. This is even in a conservative scenario (mature perpetual). Small improvements in renewal rate, renewal yield and bookings growth deliver big results. If you aren’t already achieving the metrics laid out here, there is room for improvement.

Finally, this is not about selling. Nor about products. Nor about services or support. It is a holistic approach that requires all functions to work together.

How do you get started? Give me a call! My practice offers 3-day onsite assessment workshops to get you underway.

Mark Lukianchuk is a transformational global technology executive with a proven record of innovation and execution in the Software, Payments and FinTech spaces. He can be reached at (404) 777-4774 and mark.lukianchuk@techcxo.com

4 Ps Ripe for Fractional Engagments

4 “Ps” Ripe for Fractional Engagements

TechCXO specializes in providing fractional executives for a variety of positions. Our on-demand executive model is typically 50-75% more cost and time-effective than a full-time, in-house function. But not every company needs a fractional or interim CEO, COO, CTO or CFO.

In addition to the C-Suite, there are 4 other areas that would benefit greatly from expert assistance but not necessarily require a full-time employee. I mentioned in my last blog about the need for intentional processes.

As it happens, these 4 areas also start with the letter “P”:

• Project
• Program
• Product
• Portfolio

Project Work

The logical first opportunity is with project work. According to the PMBOK® Guide from the Project Management Institute the definition of a project is “a temporary endeavor undertaken to create a unique project service or result.” Projects are temporary and close down on the completion of the work they were chartered to deliver.

When your company hires a project manager, you are banking on the fact that the role will be needed indefinitely. What if the project is short term? What if you don’t need to hire a full time PM? TechCXO provides qualified, experienced partners and project managers to scale your efforts up and down as needed. We can help you with all phases of a project, from definition through implementation.

Program Work

A program is more extensive than a project in that it is more concerned with benefits rather than tasks. Programs can span multiple business units or disciplines. They can be comprised of multiple projects. Even if you have project managers on staff, often they do not have the level of experience necessary to juggle a more complex program. Even if experienced they may not have the available bandwidth to dedicate. This risks program success. TechCXO provides partners and staff with the level of expertise needed to design, implement and manage more involved programs.

Product Work

The third area is product. You already have product managers on staff. Are they delivering according to best practices? Are your products late, buggy or worse, canceled? An experienced third party can help you look objectively at any product problems and recommend a solution. TechCXO provides both technical and business-level product assistance via its skilled partners.

Portfolio Work

Lastly, an often-overlooked area is portfolio. As program is to project, portfolio is to product. As your company grows and you build or acquire multiple products things get more complex. You need to balance spend, manage renewals and run the portfolio as a business. Are you growing your portfolio as you should? You need to be better than your competitors. TechCXO provides a seasoned and independent voice to help you turn on, turn up and turn around any portfolio issues.

The final benefit – TechCXO can do this all on a fractional or project basis. We can get started immediately, without the risk and complexity of hiring a full time employee or independent contractor. All at a considerable cost savings.

Ready to learn more? I’d love to talk with you about your potential needs. I can tailor a project to fit your project, program, product or portfolio requirements.

Generalists in a Specialized World

Who provides competitive advantage to companies? Generalists? Specialists? Both? Neither?

I’m always on the hunt for a good new business book, and I’m currently reading “Range: Why Generalists Triumph in a Specialized World” by David Epstein. As somewhat of a generalist myself (albeit in technology) I can relate to much of what Epstein writes.

In the corporate world, there tends to be a higher value placed on specialization. Need a product manager? A services delivery manager? A sales manager? A requisition is opened for one with 20 detailed job requirements and an applicant must meet all of them to even be considered. In many cases this level of specialization is desirable, possibly even required.

But not always.

Trees or Leaves Problems?

It’s what I call the “forest, trees or leaves” problem.

The English writer and playwright John Heywood first documented the proverb “see the forest for the trees” in 1546. Nowadays it’s usually used in a negative context. “He can’t see the forest for the trees” implies that someone is too close to the problem to see the big picture.

When tackling a very specialized problem, this level of detail is needed. Sometimes it’s not even a “tree problem” but a closer look is needed – at the leaves themselves.

In my experience, when someone is new to an organization, they have the ability to see the forest. After a period of time (around 12 months) they become too engrained in how the company works and can no longer see the forest. They can only see trees and leaves.

The problem arises when trying to solve something strategic in nature. This might be a cross-functional issue that spans multiple teams. It might be something outside the experience base of the team members. Solving this problem means you need someone to look at the forest, and because the team members were hired to be specialists it’s tough to do.

Coming back to the book I mentioned earlier – there’s an interesting quote: “Specialization is obvious: keep going straight. Breadth is trickier to grow.”

Especially if you hire for specialization! You are prioritizing depth over breadth.

T-Shaped and I-Shaped People

Epstein also describes the difference between a “T-shaped person” and an “I-shaped person”. An I-shaped person is a traditional “narrow but deep” specialist. A T-shaped person is one who is wide but has access to depth via others already in the organization.

TechCXO is full of partners with T-shaped expertise, especially those with broad operating experience across multiple domains. I count myself in that list.

A T-shaped person will provide a competitive advantage to companies.

Day-to-day, companies can leverage specialists in the roles where they are strongest. They can bring in a TechCXO partner to assist with wider T-shaped problems that cross functions. They don’t need to have specialized domain expertise as that already exists.

The other advantage to a company: you can get access to a T-shaped executive as needed, on demand. You don’t need to change your hiring practices. You don’t need to sacrifice domain expertise and specialization.

Do you need help in seeing the forest? I and other partners at TechCXO are just a phone call away and can assist you in determining your requirements.

What Got Your Business Here Won’t Get You There – Part 2

Last time we explored how companies at different stages have differing needs. As a reminder, here are some sample challenges across several functions:

[table id=10 /]

It’s relatively simple to know which trajectory your company is on by looking at its financials. What becomes more difficult is in knowing if you are ready to meet functional challenges. How do you know if something is missing?

One of the benefits of working with sharp people at TechCXO is the knowledge and information sharing that we do. A while back Mike Allred and I were discussing ideas on a call and a comment he made reminded me of something I had built years ago – a maturity model for enterprise software. I immediately thought of its applications towards Intentional Revenue™.

What is a maturity model? It’s a process or tool that helps companies assess how effective they are and also provides a guide as to what to do next.

If you don’t know where you are, how do you know where you’re going? And how do you get there?

In IT, one of the grandfathers of maturity models is Software CMM, dating back to the 1980’s and created by Carnegie Mellon University. It’s now called CMMI and is owned by ISACA. It’s extremely thorough and comprehensive.

But there’s a challenge in implementing maturity models. Often, it’s a laborious process and I’ve found that the effort to adhere to it often doesn’t fit smaller companies. Why should a startup waste valuable resources in this way?

The answer is by having a guide as to what to do next. A simple start is often “just enough” to set up a good framework to build on later. Without this framework companies may not know where they have gaps as they grow, which can lead to problems. It also helps smaller companies know what skills and experience they need to acquire as they add new team members.

Since that call I’ve created an Intentional Revenue™ Maturity Model, the basics of which I will share with you here.

Like many models, this one has five levels:

Technically, there is also a Level 0 which corresponds to “unknown”, so consider that for a moment. The initial step for any company – startup to mature – is to know where they stand by first getting assessed. Then you can determine what areas need to be addressed.

If you’re a startup, you’d probably want to ensure you have the basics down pat across the board.

If you’re heading into a growth stage, you probably want to scale up your maturity along with your revenue.

As you become mature, you want to optimize what you have. But these are general rules.

One difference between the Intentional Revenue™ Maturity Model and many others is that you can achieve a high maturity level at ANY stage of growth. The scoring questions use process and qualitative criteria as opposed to specific tasks to perform or quantitative targets.

As an example, defining sales success could start with “hit your target (pass/fail)” which indicates low maturity. A single booking or revenue number defines if a salesperson or territory is successful or not. Obviously, it’s better than not knowing anything at all, but it’s very basic.

This progresses through “consistent measurement aligned with customer success” which indicates a high level of maturity. There is no longer a single metric used but more detailed criteria, measurement, performance management and alignment with how successful a customer is.

The actual measurement process isn’t critical here. The fact that it is consistent and aligned is. So, for a startup, this task could be done in a spreadsheet by a single person. In a mature organization it might require a dedicated team with a more detailed process and reporting requirements.

The outcome and the level of consistency is what determines maturity, not the work to do it.

This is important, and why many maturity models fail to gain traction in smaller companies. They are often too time-consuming and difficult.

No matter what you implement, you need to right-size it to the current stage of the company.

One final thing to consider: capabilities are assessed across multiple domains. In the case of Intentional Revenue™ this is across Sales & Marketing, Product Development, Implementation Services and Customer Support and Success.

A company can score well in several areas and lower in others, which yields a final maturity score that is the lowest common denominator. It’s perfectly fine to not achieve the highest level of maturity in all areas. Effort expended needs to align with expected returns.

Part of any report would also provide recommendations on next steps to proceed to the next level. A reassessment should be done in 12-18 months to show improvement.

I’ll finish off this blog series about the concept of maturity models and Intentional Revenue™ in the next blog entry. Stay tuned for Part 3 in the coming weeks. I can be reached at mark.lukianchuk@techcxo.com or at (404) 777-4774.

What Got Your Business Here Won’t Get You There – Part 1

Recently I’ve had some very interesting conversations about business growth and transformation. In my own personal transformation as a business leader I leveraged the standard on the subject by Marshall Goldsmith, “What Got You Here Won’t Get You There.” Here’s my take on the business equivalent.

Startups have it tough. At the same time, they also have it easy. How can this be?

A CEO I worked for once said that the most important aspect of a startup was to have a differentiated product. That “two guys and a dog in a garage” could be extremely disruptive to mature technology firms. This is true.

But the startup has the luxury of being singularly focused on this new offering. To get revenue. To make their first customers successful and happy. This level of focus makes it easier to guide what they need to do.

In the vein of Intentional Revenue™, consider the challenges of a startup:

[table id=9 /]

Pretty straightforward, right?

When you’re 2 people and a dog in a garage, you wear multiple hats. You do whatever is required in order to ensure these challenges are met. I’m not sure exactly what role the dog has, but I’m sure it’s important.

Compare and contrast this with the challenges of growth and mature companies:

[table id=10 /]

You’ll note some key differences here. There’s a revenue curve which accelerates and then flattens. Mature companies have a much greater focus on “farming” or “harvesting” than “hunting”. What skills and talent that got you started may not work later.

Product Development starts with a great idea and an MVP. But the people who were there at the beginning might get bored when it’s time to optimize the portfolio. Great features aren’t the sole driver of product investment decisions anymore.

Implementation Services transform from “do whatever it takes” to get a customer up and running to “let’s make sure we don’t lose money”. The focus has changed.

Customer Success and Support is a bit more controversial. A startup wants to keep their anchor customer happy. This often means access to the CEO or whomever is necessary. Growth companies want to maintain that level of satisfaction. At mature companies, however, it becomes understood that you can’t make every customer happy. And that’s OK, but you want to keep the customers that matter most satisfied.

So, it’s clear that what got a startup off the ground and through its initial funding stage(s) won’t get you deep into the growth stage and into maturity. How do you meet the challenge? How do you know if something is missing?

I’ll discuss more about the concept of maturity models and Intentional Revenue™ in the next blog entry. Stay tuned for Part 2.

5 Leadership and Management Styles

How style may impact your team’s performance

The five leadership and management styles in today’s business are: The Boss, the Judge, the Missing, the Super Performer and the Coach. Understanding these five leadership and management styles is key to becoming a true take charge leader/manager. Four of the five sub-optimize the human interaction so critical in developing a world class performance culture. A true leader/manager leverages both the organization and individual capabilities to unlock efficiency, effectiveness and true corporate value.

The ‘Boss’ and ‘Judge’

These two styles are authoritarian leadership and management styles and likely to be evidenced by a rigid rules system and an expectation of obedience to authority. This is evidenced by a manager who takes absolute control of a workplace situation, without reference to their team’s views and input would be exhibiting an authoritarian management style which is directive in nature.

Where these authoritarian management style models are allowed to thrive unchallenged, either in the work-place or in society in general, is rigidity and inflexibility more likely to result in entrenched thinking and a lack of response to rapidly changing scenarios.

The ‘Missing’ and ’Super Contributor’

These two management styles are polar opposites of delegating styles. With the ‘Missing’ style, the leader-manager is too busy with their own job and takes a laissez faire attitude, dishing out tasks to employees and leaving the rest solely up to the employee including any decisions about problems that may arise. Their attitude is to think they hire very senior people who know what to do and don’t need supervision.

The ‘Super Contributor’ leader-manager is the polar opposite, working with their people at a very detailed level, often insisting on being involved in every significant interaction, interjecting themselves into every aspect of work activity. Both contribute significantly to team frustration and under-performance.

The Coach

Coaching is the most critical competitive skill that any organization can have. It is the most potent tool available for improving performance, maximizing productivity and achieving revenue growth. Effective coaching is an integral part of how any leader manages. The broader objective is to create a world class entrepreneurial culture in which collaboration and coaching are cornerstones of behavior.

Helping your colleagues and sub-ordinates take responsibility for their own development will build team cohesion and accelerated productivity.

The first step in leadership is about vision. The second step is empowerment. The third step is coaching. While all three are interrelated, coaching pervades all three and supports the others. The goal of effective leadership is to create independence. Effective coaches and leaders:

Act as role models, demonstrating in the first person the skills and behaviors which are critical to successful meetings and conversations
Collaborate and communicate frequently with their teams and individuals to share strategies and tactics, reviewing key account, opportunity and executive briefing plans to construct optimal outcomes
Add value and guidance by providing domain expertise and relevant knowledge and acting as sounding boards for ideas and suggestions
Support team and individual decisions and actions with customers, prospects and colleagues

Rick Nichols is Managing Partner of TechCXO’s Sales & Marketing Practice and a member of the Executive Committee. He can be reached at rick.nichols@techcxo.com or view his full bio.

Wurk Secures $11 Million in Funding to Facilitate Further Expansion and Support the Growing Cannabis Workforce

Leading cannabis Human Capital Management company plans to utilize this capital to bring in-demand technology and services to the market while investing in customer experience

Wurk, the first and leading Human Capital Management company for the cannabis industry, is pleased to announce the raise of $11 million in a funding round led by returning investors Poseidon Asset Management and Arcadian Fund. Existing investors Altitude, Salveo Capital, Phyto Partners and The Arcview Group also participated in the round.

Wurk plans to utilize the capital to enhance the client experience while expanding its cannabis HCM platform, including the launch of managed services. This will provide its growing customer base with dedicated human resource, payroll and tax experts. The company will also implement a robust analytics engine to provide highly sought-after data for the cannabis industry, allowing employers to increase operating efficiencies by benchmarking themselves against industry best practices.

“Our technology ecosystem allows cannabis companies to recruit, retain and optimize the efficiency of their rapidly growing workforces,” said Keegan Peterson, Founder and CEO of Wurk. “Multiple new states came online in 2018, and with a number of markets planning to implement a regulated cannabis program this year, the industry needs these critical business applications in place to support it at scale.”

“After participating in Wurk’s previous two funding rounds, we are thrilled to have the opportunity to invest in the company yet again,” said Emily Paxhia, Managing Partner at Poseidon Asset Management. “As investors focused on the cannabis space, we regularly see the HR, accounting, and tax challenges that startups in the industry face on a frequent basis. Wurk’s solution helps ease that massive compliance burden and creates a huge investment opportunity in doing so.”

TechCXO Managing Partner Rick Nichols is supporting Wurk as COO and Board Member.

Wurk helps cannabis companies manage payroll, human resources, timekeeping, scheduling and tax compliance, and minimizes compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry, while incorporating the local laws and regulations unique to individual states.

About Wurk

Wurk exists to help underserved businesses fortify, comply, and thrive in the face of uncertain regulatory environments. Designed specifically for the cannabis industry, our platform and managed services, allows employers to protect and streamline their operations, while providing an environment where people are a priority every step of the way. The intuitive solution automates the most complicated and risk-prone processes associated with Human Resources. For more information visit enjoywurk.com.

SOURCE Wurk

Equity Incentives for Capital Intensive Startups

The term “capital intensive” doesn’t always mean a need for high levels of working capital for equipment and facilities. For a growing number of startups, the capital intensity comes in the form of equity for talent. Your chances for attracting and retaining the top tier people you need for success are much better with some up front equity budgeting by founders and careful annual thinking about the equity pool you’ll need going forward for both new hires and merit-based awards to existing key contributors.

Equity Still Matters
Even though unicorns and IPOs have become more rare and the appeal of stock options for startups may not be what it once was, I maintain Equity Incentive plans remain table stakes for startups who want to attract exceptionally talented people. More than one founder has tried to dissuade me of this but my experience is that equity and ISOs matter, particularly for those people who have little to no variable component to their cash compensation package, such as a software engineer, versus a sales professional whose total cash compensation increases significantly based on performance.

On many occasions I’ve seen equity awards provide the hook to lure people away from larger, more established companies. There is more inherent power and flexibility in equity awards for recruiting and retention than a lot of founders may realize.

Founders’ Considerations
Founders are generally good at thinking through equity allocations amongst themselves and investors but the modeling of options for key employees (especially those yet to be hired) and those to whom you want to give merit grants is something easily overlooked in the early capitalization structure discussion.

The size of the initial option pool you need available depends on the executive team you have on hand and those you will need. For example, if among your founders you already have your CEO, COO, CTO and other key executive team members, you may only need a pool of 10-12% of fully diluted shares available to create a suitable equity compensation plan. However, if you are yet to bring on several key members of your executive team, you may need 15-17% or more of fully diluted equity in the equity pool. I’ve seen founders caught off guard because they needed to come up with 5% equity for the CEO they really wanted.

The earlier an equity incentive plan reserve can be built into an equity strategy, the sooner it can be leveraged, usually in the form of winning a star employee through the draw of equity upside (either in addition to cash compensation or in exchange for a lower salary).

Budgeting for Equity: The Organization You Have and The One You Want
In addition to the executive team, you will need to think through your organization as it is and how you ideally want it to be. A good practice is to map out an entire organization chart and then do a bottoms up budget for granting equity throughout the entire organization. Budget out at least two years or to the next anticipated equity raise.

One example – and this is merely an illustration as equity grants have many moving parts and variables – is if you anticipate the need for a great software engineering team, you may allocate for your Engineering VP 1%; a senior engineer 0.5% and a line employee 0.25% (of fully diluted shares outstanding). Go through the same exercise for sales, marketing, operations and other functions. To avoid confusion at the time of future dilutive events, it is always prudent to detail option grants as a specific number of shares versus a percentage.

Again, not only do you want to create a pool of equity for new hires, but for merit awards; particularly if your horizons for major events (such as IPO or an M&A transaction) stretch beyond 3-5 years.

Conclusion
Equity compensation for employees and key stakeholders under a formal Equity Incentive Plan remains an important retention and motivation strategy for early and growth stage companies, particularly those with longer horizons to an exit, IPO or gaining traction in the market.

Founders should take care early on in their history to ensure that they have a well thought out Equity Incentive Plan and pool.

In the war for talent, equity may be your biggest capital expenditure and you can make your dollars go much further with some forethought and follow through.

Kent Elmer is Managing Partner of TechCXO. He can be reached at: kent.elmer@techcxo.com. See Kent’s full bio.

Negotiating Price

When it comes to negotiating a price in mergers and acquisitions, there are, of course, two very different perspectives: those of the buyers and those of the sellers.

The buyer wants upside, efficiencies, strategic fit and certain parameters met. The seller wants fair value (or maybe a little more than fair value) for their company. Effective negotiators get deals done by bridging the two perspectives. Below are some useful maxims for the respective sides.

Sellers

Valuation. What’s my company worth? There are many variables to valuation but you can get in a reasonable range to begin negotiations with the right information. First, there are comparables in your industry. If your firm is private, look at market capitalization and ratios for similarly-sized and positioned companies that are publicly traded. NOTE: There is a discounted valuation for private companies versus public companies. In the past, public companies were worth significantly more — the valuation gap ranged from 30-50% plus. That dynamic has changed, but it is important to note that a private company discount still exists.
Along with public company valuations, you can also research M&A and other transactions in your sector for similarly-sized companies. Another standard and popular gauge is the historical revenue per employee calculation.

Strategic Assets + Future Value – We’ve talked before about the importance of the Seller’s Story. Specifically, negotiate a price based on the value your company brings to the acquirer; determine how you can accelerate their growth and/or enhance their value, then negotiate off that prospect. That means highlighting strengths be they geographic, unique market niches, key customers, market dominance, service abilities and more.

Buyer’s Disclosure – We often think of disclosure from the seller’s side, but there is also a buyer’s disclosure that can help the seller’s valuation. Buyers use a logical process for acquisition targets and pull together for their investment banker or consultant marching orders to find companies in a certain space or market sector with the specific attributes. The company will have obtained Board approval to seek companies with these attributes. Ask investment bankers callers what these attributes are – you might even ask for a document the I-bankers have prepared for their client. Do this right at the initial stages of inquiry and then build your story along these sought attributes.

Pay Only for Strategic Fit. Avoid price discussions until you thoroughly understand the acquiree’s business; put you best people on the project team until you validate the strategic value proposition and only pay for that. Remember: No amount of back office rationalization or tax benefits can justify an acquisition; the value always comes from expanding and penetrating new markets.

Buyers

Price: Keep it Simple. Adhere to the KISS rule of simplicity when establishing a price range / multiple for acquisitions price. Keep the variables few and simple. This will increase the likelihood that both parties are focused on the good of the combined entity post closing.

Room for Growth. Set a price with room to grow the multiple in order to make the purchase “accretive” to your company’s value. If the acquiring company is valued at say 10 times net income, the target price of the acquisition should be less than or equal to 10 times earnings. That way the acquisition itself helps increase the value of the acquiring company. Acquiring for more than your valuation will result in negative value to the purchaser. Also, price represents perceived value which should represent the ability to disrupt a new market with new advantages; base pricing on the asymmetrical competitive advantages.

Demand (from yourself) a Post-Deal Plan. Due diligence is not complete until a 6 to 12 month post deal plan is in place. Without it, you don’t really understand strategic fit and can’t justify the deal. Post deal plan should center on quick market wins demonstrating new strategy.

Keep Savings for Yourself. Cost savings through shared assets, like software and licenses; shared services like accounting, legal, HR and marketing; and share operations, such as facilities, belong to the buyer and should not be part of the price negotiation. There is always risk in not achieving the savings.

Outsourced CFO Guide

Companies have increasingly delayed hiring a full-time CFO until they faced a significant financial triggering event. However, with rapidly changing business models and dynamics, companies are keenly aware that expert financial management is a requirement for their business and financial expertise must be represented on their team.

Download the eBook Now

TechCXO pioneered the on-demand executive model, beginning with the part-time, interim and on-demand CFO. When should you to think about an outsourced CFO? There are typically three different reasons that a company would consider outsourcing the CFO function: High-Growth/High Stress; Specific Projects; Transition Issues.

Go in depth on how to work through a selection criteria when considering the on-demand CFO model.

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Where Does Growth Come From?

What is the one thing used to defined success for investors, Board members and executive leadership teams?

ANSWER: INCREASED ENTERPRISE VALUE.

If you can increase enterprise value, almost everyone associated with the organization will be happy. It’s like the expression in sports that winning cures alls ills — increased enterprise value cures (most) ills.

So, what’s the secret to increasing enterprise value? No secret at all, really.

Sometimes we make things far too complicated in business.

The simplest explanation of how to increase enterprise value is that value comes from (organic) growth and growth comes from revenue.

Increased Enterprise Value comes from increased revenue growth

Where does Revenue Growth come from?

The next logical question then is, Where does revenue growth come from? The question is so fundamentally straightforward it almost seems stupid…

But… you would be amazed at the responses you get — from even the most senior sales and marketing people — try it! Ask someone: Where does revenue growth come from?

They might say…

“Sales”…

“Leads” …

“Sales qualified leads” …

“Signed contracts”…

“Paid invoices”….

Organic Revenue Growth comes from 5 places

The truth is to (A) Produce Revenue and (B) Achieve Growth, there always has been and always will be five (5) places and five places ONLY of origin. Here they are:

Create More Opportunities
Execute More Effectively Against Those Opportunities to Convert them to Bookings
Ensure Customers Achieve Success (a.k.a. they achieve business outcomes for which they purchased your product or service)
Stay Longer, Buy More
(Customers) Advocate for the Brand and Solution

Revenue growth only comes from 5 places

Shall we break it down to even more essential elements? How about the sources of opportunities? What are they?

The 5 Sources of Opportunities

They are: Sales. Marketing. Partners. Referrals. Customer Success.

Beginning with Marketing, a world-class marketing effort provides 30% of qualified opportunities into the pipe.

The sales organization has to generate its own sales opportunities to the tune of 40%.

The 5 Opportunities Sources

Depending on the business structure and distribution, Partners can provide 0% to 50% but let’s use 10%, as that’s an industry standard.

Referrals are 5% and then Customer Success is 15%. The distinction with Customer Success is that it comes from post-sales implementation and support. These opportunities close much faster than do marketing qualified leads.

Why Does Organic Revenue Growth Remain So Difficult to Achieve?

So if you can break down (1) Enterprise Value; (2) Define Where Growth Comes From; (3) Define Where Opportunities Come From, why does organic revenue growth remain so difficult?

The short answer is “Gaps.”

There are lots of areas for potential breakdowns or gaps within strategy, market, product/market fit, sales strategy, planning and execution and customer success.

Right now you may be thinking about specific issues, such as “the quality of our leads is bad” or “adoption for our platform is not what it needs to be.”

Maybe you have been treating Customer Success in a traditional sense, that is “Customer Success” was delivered via Professional Services (Onboard, Train, Deploy, Enable) and Customer Support (Tickets, Response and Resolution) but it has not become a source of new sales for you in terms of expanding, renewing, cross-selling or upselling your products, services or platform.

The truth is, your revenue generating efforts can break down or not be optimized in dozens — maybe hundreds — of areas.

Wherever there are breakdowns or inefficiencies you are not optimized. The good news is, you can already identify the breakdowns yourself, such as: “Our product/market fit is off.” “There’s a disconnect between what marketing says is a qualified lead and what sales says is a qualified lead” and on and on.

The difficulty, of course, is identifying the specific areas to attack, including defined KPIs (Key Performance Indicators) appropriate for the function, your company and your industry. However, if you can begin by embracing sales as an interconnected system, you are on your way to having a repeatable, comprehensive revenue generating machine.

Here are three maxims to hold:

Revenue production and growth are optimized by aligning Strategy, Messaging, Product, Marketing, Sales, and Customer Success Strategies and Execution.
Companies struggle to manage all go-to-market activities that produce revenue including markets, products, content, messaging, accounts, leads, opportunities, pipeline, conversions, bookings, revenue, customer success, expansion, and advocacy.
A systemic, repeatable, measurable end to end approach can be implemented that will accelerate growth and enterprise value creation.

Connecting Revenue Growth and Enterprise Value

Let’s connect the dots to our original question: How do you make your Board, investors and organization happy? The answer is increase Enterprise Value through (organic) Revenue Growth.

How much increased value does incremental increases in revenue create? Well, there are many variables depending on industries. For example, a SaaS-based company with a recurring revenue model may enjoy large multiples of 10x or more. The same might be true for companies in hot spaces like mobility, IoT, health care, etc.

But, as a rule of thumb, you can anticipate that an incremental revenue increase of $2.5M can create anywhere from $7.5M to $17.5M (or $25M at 10x multiple) in enterprise value. Obviously, for smaller companies, that $2.5M is much more impactful to overall valuation.

Incremental Revenue to Enterprise Value Table

The point is, if you can increase organic revenue growth at significant levels, you can increase your enterprise value to the delight of your Board, investors and entire organization.

Three Profiles of Tech CEOs

In technology, three CEO profiles continually present themselves when it comes to the handling of finances. In each case, the CEO has a blind spot or a persistent, nagging feeling that help is needed. The self-aware executive recognizes that with rapidly changing business models and dynamics, expert financial management is a requirement for their business and financial expertise must be represented on their team. However, their hesitancy continues.

Do any of these sound like you?

The Discomforted – This executive is less certain about company finances and controls than setting the vision, strategy, customer interaction or sales approach but feels they “should” be focused on finances.
The Bootstrapper – Many founders who have created their businesses are totally hands-on and feel no one know their business like they do. These executives are rarely adept at the fine points, such as finding new sources of capital or know what equity investors want.
The Ambivalent – This CEO knows deep down that they are not the right person to be overseeing finances but “doesn’t know what they don’t know” and therefore have become the default finance executive because they don’t see another way out.

View the Infographic Now (PDF)

Tech CEO Profiles Re: Finances

Increasingly, CEOs are outsourcing the finance function on a project, part-time or interim basis to an experienced CFO who often brings highly specialized skills to his/ her assignment. Depending on the circumstances, it may be more efficient and cost-effective to bring in a hired gun.

This approach affords CEOs the flexibility to bring someone on without incurring significant overhead. Consulting contracts usually have very short termination periods and help avoid recruiter fees, too. Thus, CEOs can tap their network to not only find someone quickly and cost-effectively, but they may even be able to find someone with highly specialized skills to help solve their current issues.

To learn more about how to make these part-time and interim arrangements successful, click on the book image to download a free eBook on: The Outsourced CFO: A CEO’s Selection Criteria.

Board Compensation Public-Pre-IPO

Compensation for directors of large U.S. companies just passed a new threshold — $300,000 per year in total fees — up 3.5% according to a new study by Compensation Advisory Partners. Median pay for non-management partners is up from $290K last year. While large companies rely mainly on annual retainers (cash and equity) to compensate large company directors, according to the report, smaller public companies and startups have different structures and significantly lower compensation levels.

Large Company Board Comp vs. Small Public Companies and Startups

How does big company Board comp compare to independent directors for startups, early stage companies and smaller companies? According to Chris Thomajan, TechCXO’s Managing Partner in Boston, and author of Board of Directors Management Guide for Startups, startups and smaller companies compensation are considerably lower.

“Early stage companies should expect to pay $2,500 per meeting or $10,000 per year to your independent directors. That number increases the closer a company gets to an IPO and can be in the range of $30,000 per year for pre-public or public companies,” said Thomajan. “Distinctions are also made for the specific role of a director. The chairman of the board or someone with relevant scientific or financial expertise like an audit committee might be paid more than a regular director.

“Independent directors also expect to receive equity grants along with their cash compensation. The amount and frequency of such grants also varies by the stage of the company. However, an early stage company should expect to grant 0.1% to 0.25% of equity with a vesting period of 2 to 3 years. Additional annual grants are also expected,” Thomajan added.

Thomajan also said that unlike a company’s officers, such as a CEO, and their investors who sit on your board, independent directors are typically paid a combination of cash and equity for his/her services. There are several ways to structure the cash compensation, but in general, the director is either paid a flat fee per meeting or a flat fee per year (paid quarterly) that assumes a certain level of commitment.

He also said that while there is a cost to bringing on non-investor board members, the potential benefits far outweigh those costs.

CSMs vs. Sales – The Same Only Different

CSMs and Sales Reps Share More Similarities Than You Think

When you are with a group of CSMs, the word “Sales” often incites contorted facial expressions, bad jokes and inevitably the analogy of the “used car salesperson”.

Although sales jokes might be funny while having a drink with your CSM buddies after work, that perception is for the most part misguided. Keeping it real, there are indeed sales reps that are deserving of the “used car salesperson” reputation, and we have all encountered them. Fortunately, those types of sales reps are few and far between.

I was a CSM (aka customer advocate, account manager) for several years early in my career. Since then I have worked with, interacted with and trained hundreds of CSMs. When I ask a CSM to identify someone they consider to be a good sales rep they have worked with and why, they typically recall a sales rep who genuinely cared about his/her customers, followed by a list of attributes they like about that rep. That list of attributes will invariably be similar to the following:

“Jennifer understands the business issues our solution solves; she understands the customer’s needs; she sets proper expectations with the customers regarding the capabilities of our solution and timeline for implementation…”

CSMs and Sales Reps Utilize Similar Skills

The people in your company who interact with your customers the most (CSMs), and who have (directly or indirectly) the most significant financial impact on your bottom line, have most likely never been trained in customer interaction and persuasion skills.

Most CSMs do not consider themselves salespeople in any way, shape or form and have no desire to become a sales rep. Yet the most effective CSMs leverage many of the same skills and sensibilities as today’s effective B2B salespeople.

Successful CSMs help their customers achieve desired outcomes by engaging with the right people at the customer, provide timely guidance and convincing the customer to follow a proven, successful path to achieve specific outcomes, even though the customer may want to take a different path. To persuade the customer to follow a particular path, the CSM must have credibility and finesse. The customer engagement skills utilized by successful CSMs include:

Building relationships, up and across the customer organization
Gaining trust
Articulating value
Influencing the customer
Guiding the customer through a defined process
Continually moving the ball forward to the desired outcome

Guess what? Those are precisely the skills successful B2B sales rep uses to move a prospect down a sales path to achieve their desired outcome, a signed contract from a new customer.

CSMs Come From a Variety of Backgrounds… But NOT Typically Sales

Most CSMs moved into the CSM role from an operational area such as support, professional services, marketing, development, etc. Right or wrong, most CSMs do not follow the path of moving from a sales role to a customer success role.

As a result, most CSMs have never been trained on the customer engagement and persuasion skills outlined above. Yet, CSMs likely have more interactions with your customers than anyone else in your company.

CSMs are Your Customer’s Primary Point of Contact

Let that sink in for a moment…the group of people in your company who interacts with your customers the most, and the group who has (directly or indirectly) the most significant financial impact on your bottom line has most likely never been trained in customer interaction and persuasion skills.

That should change!

What is the Solution?

Invest in the right skills for your CSMs.

As a practitioner and advocate in the Customer Success industry and a firm believer in investing in your people, I cringe when I see companies put their team members in the highly impactful role of a CSM without the proper training, especially given substantial revenue impact of the CSM team.

If you manage a team of CSMs who are proficient at the customer engagement and persuasion skills outlined above, you are one of the lucky few. If your CSM team has not been trained in customer engagement and persuasion (aka sales) skills, I highly recommend you get them professional training on these types of skills ASAP. More precisely, I do not recommend you train your CSMs on the latest sales “methodology”, but train them on the fundamentals of customer engagement and persuasion.

Coming up next… The Customer Engagement and Persuasion Skills CSMs Proficiency; CSMs Potential Impact on Revenue, Churn and Customer Satisfaction.

Bill Goocher TechCXO Partner and Customer Success expert

Bill Goocher leads TechCXO’s Customer Success practice as Partner, Customer Success. In this role, Bill and his team provide fractional executive and strategic consulting services related to Customer Success. Additionally, Bill leverages his combined experience in Customer Success and Sales to conduct onsite CSM Engagement & Persuasion/Sales Skills workshops customized to the unique needs of his clients. Bill can be reached at bill.goocher@techcxo.com, 727-773-1121 (m). You can view Bill’s full bio here.

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