BeyondVC

Tis the holiday season and with the end of year comes budget planning for 2008. So that means it is time to get all of your key management members together to start reviewing 2007, what worked well, what did not work out, and to hammer out goals for next year. In the spirit of giving, I thought I would share with you one piece of advice – don’t sacrifice the long term value of your business for the short term. What it comes down to is how you allocate your dollars in your budget.  Every dollar you spend in one functional area is a dollar taken away from another department.  If you spend too much on sales today, you may not have enough in R&D and vice versa. It is careful when budgeting to think about 2008 but also to plant the seeds for 2009 as well.

Let me give you a few examples from recent meetings with portfolio companies or friends seeking advice. I was recently reviewing a 2008 budget and was quite excited about the bookings and revenue ramp that the management team had presented. However, as I dug into the model the one point I recognized was that it was all driven by additional sales headcount. That is ok, but what I did not see was any investment in building out our channel or OEM business. Granted, the management had to finely balance their cash spending with their revenue forecast, but my concern was that if we did not invest today to build for the future 12 months out, we would not have any sales leverage in our business. After discussion, we were in favor of sacrificing some near term revenue in order to get the key headcount to start building the channel and partnership model. Yes, these opportunities always take time to build, but if done right can help fuel rapid sales growth 12-18 months down the line. Without any upfront investment, the company was stuck with a 1:1 sales model meaning that bookings and revenue were directly correlated to each additional headcount.

Another example came from a breakfast meeting I had today.  I was catching up with an entrepreneur I have known for awhile and getting an update on his business.  We were discussing the various product lines at the company, and how each line was respectively performing.  What was clear was that the market the company initially set out to conquer had become commoditized, and that his business did not diversify quickly enough to offset this trend.  In other words, he said that while the company was doing well, his biggest regret was not investing enough in the future.  Even though they saw their core market slowly dying, they milked the cash cow as much as they could but did not do enough to build new product lines. It was a classic case of "the exit is around the corner" where the management and board focused too much on prettying up the revenue growth and profitability lines at the expense of positioning the company solidly for the future.  When the exits didn’t materialize, the team had to go back to the drawing board and start building out a new product line.  If they had done that 2 years ago, they may have sacrificed some revenue but they would also be better positioned today.

So the lesson is both cases is to carefully balance your revenue goals with making the right level of investment for the future whether it be in diversifying your go-to-market strategy or building out a new product line.  Yes, we live in a short-term world where every investor is focused on the next month or quarter, but it is imperative for any technology company to balance today’s needs with the future opportunity.  I hope these examples spur some vibrant discussion amongst your management team as you put together your goals for 2008 while keeping an eye out for 2009.

I have written many recent posts on Internet and web-based models, but I still do spend a good portion of my time with companies selling in the enterprise.  After a series of meetings over the last few days with startups and some of my portfolio companies, I wanted to highlight one important fact – it is hard to sell scalability.  In addition, it is important to highlight that you only have one chance to make a first impression.  So what the hell does all of this mean ?

Every interaction with your sales prospect or customer is a chance to impress.  What that means is if your user interface is weak or if your product is hard to install or if during a POC process it takes you 3 days to get set up while it takes a few hours for your competitor, you have most likely lost the sale.  If your product is hard to use or set up, then how is the customer going to believe that your product is more scalable?  So take a word of advice, the companies that tend to do well are the ones that have nailed down the first impression – strong and clear value propostiion, great UI, and easy to use and install.  Leading with scalability is a losing proposition.  If someone offered you the opportunity to buy a Ferrari or a Ford Pinto at a similar price, I am sure most people would opt for the Ferrari.  If I told you later on that the Ferrari had a Ford Pinto engine and the Ford Pinto had a Ferrari engine, I would imagine that most would still go for the looks and the Ferrari.  For many buyers in the IT space, first impressions mean a lot and once a sales prospect falls in love with the Ferrari, it will be hard to keep pounding the table saying that your Ford Pinto will outperform the Ferrari by an order of magnitude.  Many times by then you have probably lost the sale. I am not saying that scalability doesn’t matter because it does.  Every customer expects you to scale and every competitor will say they scale. My only point is that if you can scale like no tomorrow but what the customer sees and touches is subpar, you are going to have a hard time generating sales.

One final point-having awesome sales engineers is key to success for any company selling in the enterprise.  These positions are hard to fill as you are typically looking for someone who is not only technically savvy but also strong in sales as well.  Great SEs help you close sales, make the sales prospect feel comfortable, work out the initial kinks in your technology, and provide great product feedback for your roadmap.

UPDATE: I got a few emails from readers who thought that I meant scale doesn’t matter.  It does, just not as the lead-in for why your product is better than your competitor.  It is hard to see, touch, or feel scale in a sales meeting and what you are left to do is make sure that every sales prospect engages with you in a proof of concept so you can demonstrate scale.  And yes, if you can’t install it easily and if the customer can’t use it easily, then scale does not matter.  You have to show them how your product solves their problem and why it is easy to use.  Sometimes engineers can spend too much time on having the fastest engine and not enough time on designing a beautiful body.  Scale matters but not as your main selling point.

I never made it to the Web 2.0 conference yesterday, and you know how I feel about that label :-).  Anyway, I happened to be in San Francisco for a portfolio company board meeting and some other events.  After a Nokia boat cruise with many of the team that launched the awesome Nokia Internet 810 tablet (I will get myself one of those), I had the opportunity to go to a MySpace party to celebrate the opening of their San Francisco office.  I had a great time and while I ran into many friends from the Bay Area, what I enjoyed most was bumping into many of the original New York entrepreneurs that I have known over the last 10 years.  In a scary way, it felt like it was 1997 all over again, and we were at a networking event in New York talking about their first startups.  The only difference is that it is 10 years later, and we have greyer hair.  Jeff Stewart who was part of the Proxicom rollup and founded Mimeo and now Monitor110, said that everywhere he turned he ran into another New York entrepreneur.  Standing next to me was Andrew Erlichson founder of Flashbase (sold to Doubleclick) who I funded years ago and now CEO of Phanfare, across the room was Andrew Weinreich of sixdegrees and now meetmoi, and on the other side of the room was Jason Calacanis of the Silicon Alley Reporter and Weblogs and now Mahalo.  While he is in LA now, I still count him as an original New York entrepreneur.  Jeff and i tried to organize a group picture but just could not make it happen.

You may be thinking to yourself who cares or why is Ed namedropping?  There is a simple answer – I have known many of these guys for the last dozen or so years since the first Internet wave, and it is simply awesome to see everyone still plugging away, following their passions, getting smarter and better, and continuing to build the New York entrepreneurial ecosystem.  I know we are no Silicon Valley, but it is great to see these entrepreneurs all working on their second and third companies.  It was also great to hear their stories of raising their first or second or third rounds of capital for their most recent companies.  When I started as a VC in 1996 and first met many of these entrepreneurs, it was clear that we were all starting from scratch.  We didn’t know what we didn’t know.  We didn’t have entrepreneurs working on their second and third startups back then.  What we had was energy and passion.  And yes I agree that the whole Silicon Alley movement was pure hype and ridiculous but for those of us who have stuck around we have learned a lot and we are on the cusp of doing some great things.  We now have energy, passion, and grey hair which is a great combination.  I said it before in my NYC 2.0 pitch a couple years ago, but I believe that everyday our world here is getting more and more important as the media companies and advertisers try to make sense of this new era of communications.  As companies like Google and AOL and others continue to build a bigger and stronger presence here, it will continue to make us better.  True to form, I have already seen my first couple of spinouts from the Google New York office, and I expect to see many more.  But it is many of these guys that I hung out with above who were some of the original pioneers in New York that have helped blaze a path for many of the new entrepreneurs we are seeing today.  When the bubble popped, they didn’t quit and go home.  They continued to fight and continued to build new companies and for that we should all be thankful because today the New York ecosystem is building and getting stronger.  The funny part is that it took me being 3000 miles from home to have this revelation again.

Before I dive into this post, I want to apologize to those who may be sensitive to the non-PC nature of this. Anyway, as always, I have met and spoken with a number of startups during the past week.  There are obviously all different types of companies with different funding needs but the ones that have stood out negatively for me are the startups that come in with a pre-baked senior management team and no product.  In other words, I have major concerns when I see SVP of this and SVP of that and I wonder to myself who is going to do all the work if everyone is a Senior VP.  When there are too many chiefs and not enough indians, I worry about how decisions get made and wonder if egos and titles are more important versus getting product out and customers on board.  Sure, some of these teams were quite impressive but in a startup environment keeping your burn low until you get your product in the market and refined is imperative.  In addition, more often than not, business models may change slightly or drastically and what you initially set out to build and deliver may not be the same in the future.  What that means is that your SVP of Marketing may not the be right person 12 months from now.  So do yourself one favor when starting a company-get the right people on board to get the product delivered and the first few customers and as you get feedback from the market and your team, figure out your next hiring needs.  Don’t worry about titles and focus on building an insanely great product.  Having too many chiefs and not enough indians can burn lots of dollars and also scare away potential investors.