CEOs Optimistic for 2010

November 6, 2009

73% of CEOs Project Moderate or Strong Growth in 2010

Note – Every quarter, ExpertCEO asks its members to report on their previous quarter’s performance and share expectations for the future.  The results are presented in aggregate (ALL) and by industry segment for Technology/Media/Internet.  Although slightly more optimistic, the Technology segment’s performance and outlook tended to closely match that of the entire survey population.

The future looks bright for a vast majority of CEOs based upon the results of ExpertCEO’s third quarter economic outlook survey.  73% of all respondents expect their business to grow in 2010 and that number jumps to over 80% for the Technology segment.  For the most recent quarter completed (ended 9/30/09), only 19% of CEOs said actual results exceeded forecast.  It should be noted that this sense of optimism for 2010 is also reflected in another survey recently conducted by ExpertCEO – the CEO Compensation Survey, where 80% of CEOs expect to receive a bonus in 2010, vs. only 45% who expect to receive a bonus in 2009.

2010 Outlook

Results reflect a sense of optimism among most respondents, with 73% of CEOs projecting growth in their business in 2010.  Only 19% expect business to remain flat, while 8% anticipate a contraction in their business in the coming year.

Third Quarter Performance

54% of respondents either met or exceeded their forecasted goals in Q309 and a similar percentage saw growth in their business as compared to the previous year’s quarter, while 45% did not meet their forecast.  The Technology segment fared better with almost 70% seeing growth in business from Q308 to Q309.

Fourth Quarter Forecast

The glass is almost 2/3 full for CEOs, with over 60% of respondents anticipating growth in their business, this number jumps to 80% for the Technology segment.  That being said, one third of respondents still expect their business to contract in the fourth quarter.  Less than 5% say business will remain flat.

As for the overall economy, CEOs are split nearly 50/50 as to whether there will be an improvement in the fourth quarter or not.  Yet, no one felt highly confident that the economy would get back on track this quarter.

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Optimizing Board Meetings

December 15, 2008

Making board meetings productive is a challenge at or near the top of every CEO’s priority list.  This holds for all senior executives, whether they lead non-profits, small, privately held companies, or large, public companies.  (Wouldn’t you love to be a fly on the wall at GM board meetings these days?)  An interesting discussion thread on ExpertCEO addresses these topics.  The original thread is excerpted below:

Lyle Lovett has a line in a song: “She wasn’t good, but she had good intentions.” With two funding rounds, my board consists of VCs and an outside director. Most have a tendency to get micro-focused (for example, it’s not uncommon for them to focus on a sub-topic like lead generation.).

I attribute this behavior partially to natural early-stage investor focus … but it is also due to the junior nature of some of the directors. Plus, all too often their focus on managing their investment overshadows their broader responsibility as a director.

As we are beginning to scale our business, I want the board dialogue to elevate as well. I’m looking for ideas on how to invoke and/or manage this desired change.

I have an opportunity to add a second outside director, and I want to select someone who can help elevate the discussion.

There are a number of topics covered in this post, several of which are blog-worthy in and of themselves.  For now, I want to focus on one issue that seems to be of concern of many, if not most, CEOs: finding the proper balance in board meetings between operational issues and strategic issues.

I’ve experienced this challenge as a CEO, as an investor, and as an independent director.  Note that I carefully used the word balance.  It’s not realistic to think that board meetings won’t get into any operational details, especially if the results for the month or quarter aren’t meeting expectations.  By the same token, it’s important to expect that the board should be able to step back and focus primarily on big issues and not try to micromanage the CEO or run the company.

One concrete suggestion was made by a CEO who has established written ground rules for his board that address a) their preparation for meetings; b) the quality and relevance of contributions during the meeting; and c) their ability to remain concise, objective, and constructive when commenting on the CEO’s efforts to date.  And he has created a feedback mechanism – a 1-page evaluation that is completed at the end of each board meeting by all of the directors for each director.

Another comment, posted by a successful former CEO and current VC identifies the best board meetings, meaning value to the CEO and the company, as those that focus on strategic issues first, governance second, and operational details third. He goes on to state that several of the boards he’s on set aside a strategic topic or two as the main agenda item. Operational metrics are provided for review, but are not formally presented.  Instead, there is a short session allotted for directors to ask any questions they may have related to the operational metrics. This method matches the oversight process with the philosophy that boards are supposed to govern and guide the long-term direction of the company, not run the business.

Almost all the participants in this discussion agree that having one or two well-qualified current or former CEOs on your board is critical to balance the financial focus that VCs and other investors offer.  These individuals provide operational and company-scaling wisdom that can also help you predict what’s around the next corner.

My own observations, having attended, led or participated in hundreds of board meetings:

a.    If performance is bad, it will not be a positive board meeting – no matter what else is on the agenda.  Directors will want to drill down into the minutia of operations, compensation, individual customers, lead generation statistics, etc.

b.    Conversely, if performance is great, the board meeting can be conducted on a higher plane dealing with strategic issues.  Bring the issues to them for input, and be clear about how they can best assist as plans are formulated.

c.     The role of the independent director in smaller, venture-backed companies is important, whether counseling the CEO or bridging communication between the investors and the operating executive.  Key decisions on fund-raising and acquisitions, however, tend to be governed by shareholder agreements, not director votes.

Finally, IMHO, the number one thing a CEO can do to improve board meetings happens BETWEEN meetings.  CEOs must have frequent and open communication with the board–brief weekly emails detailing the status of important items at the company; immediate communication with the board about important issues and problems that arise in the company; periodic updates when good things happen; and minimal censorship of management team presentations (except for length).  If the board feels well-informed–that the CEO is timely, open and honest with company status–they are likely more willing to feel comfortable thinking about the big picture.

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The Future of SaaS*

November 30, 2008

ExperCEO has had a number of interesting discussions on a variety of topics that impact CEOs.  One that I have found most useful is titled “The future of SaaS*” (Software as a Service).  In it, a member, who is the CEO of a venture-backed software company, poses the following (paraphrased by me):

“The basic economics of the software business are the same today as they’ve always been (development complexity and costs, sales and marketing and administrative costs).  In the past, corporate buyers covered these expenses by paying for the lifetime value of the product up front via an enterprise software sale.  However, the customers now want to pay periodic subscription fees rather than the enterprise license fees. In the early stages of a software company with a SaaS business model, there is a funding gap.  This gap is the additional cash required while the reoccurring revenue stream from the SaaS customers builds to the point of cashflow breakeven.  How does the entrepreneur deal with this “gap” while not giving away the store to outside investors?”

During the “bubble”, and even as of a few months ago, the venture capital community poured funding into SaaS businesses because they valued the predictability of their reoccurring revenues; and the VCs were willing to invest at a high enough valuation, so that the gap could be bridged and there would be enough equity left to provide a strong financial incentive for the entire management team. Salesforce.com and Netsuite, two high profile, successful companies offering SaaS solutions, each received about $100 million in investment prior to their IPO.  The stakes are high.

The venture capital market has changed, and while VCs still profess to like the SaaS business model valuations have been reduced dramatically along with funding levels.  The entrepreneur must be more creative in order to build a successful SaaS company and reach cash flow breakeven.

What are some of the ways this can be accomplished?  Here are some of the key concepts discussed on ExpertCEO:

  • Services revenue: Heavy reliance on profitable, professional services which brings in cash flow up front – it’s a services company, after all.
  • Streamline customer acquisition: An extremely efficient customer acquisition process using Internet tools such as  Salesforce.com, Marketo, Insideview and Webex, etc.
  • Cost savings:  Reduce development costs with effective off-shoring relationships, new development tools and methodologies.
  • Eat their own dog food:  Make use of other SaaS companies for efficient accounting and administration such as Netsuite, intacct and Adaptive Planning.
  • Up-front payment: Selling multi-year subscription agreements with a significant discount for up-front payment

The SaaS business model is not a new concept.  In the 1970’s and early 80’s it was called “Computer Timesharing”.  The technology has changed dramatically, but the fundamentals haven’t.  The first company I founded, Ross Systems, had a highly profitable business without any venture capital, and we did it with a combination of services and premium pricing.

Until now, most SaaS companies wanted to keep prices low in order build their customer base and, like Milo Minderbender in catch 22, it would be made up with volume – and the investors would bridge the gap.  This was great for customers but hard on the cash flow.  With the new realities of funding, business models may be changing.  Perhaps prices will need to rise or other factors like those listed above may need to come into play so that customers can gain the benefits of SaaS while entrepreneurs can retain enough financial upside to make their efforts worthwhile.

 

*Wikipedia – Software as a Service (SaaS) is a model of software deployment where an application is hosted as a service provided to customers across the Internet. By eliminating the need to install and run the application on the customer’s own computer, SaaS alleviates the customer’s burden of software maintenance, ongoing operation, and support. Conversely, customers relinquish control over software versions or changing requirements; moreover, costs to use the service become a continuous expense, rather than a single expense at time of purchase. Using SaaS also can conceivably reduce that up-front expense of software purchases, through less costly, on-demand pricing. From the software vendor’s standpoint, SaaS has the attraction of providing stronger protection of its intellectual property and establishing an ongoing revenue stream. The SaaS software vendor may host the application on its own web server, or this function may be handled by a third-party application service provider (ASP). This way, end users may reduce their investment on server hardware too.

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Book Review: Entrepreneur Journeys

November 17, 2008

Wise entrepreneurs learn from both the failures and the successes of their peers, so I was glad to hear about Sramana Mitra’s latest project, a book called Entrepreneur Journeys. Sramana writes a column for Forbes, runs a strategy consultancy and blogs about the intersection of technology and entrepreneurship, so she had a lot of raw material from which to craft this collection of interviews with successful CEOs.

In her book, Mitra draws on her strengths and experiences as the founder of three tech companies, as well as relationships she’s built over more than a decade with successful start-up executives, venture capitalists and journalists.  Entrepreneur Journeys details her conversations with a number of company founders, melding their stories with her analysis of common themes and key strategies or decisions that were critical to their ultimate success.  The anecdotes in this book are grouped by topics nearly every CEO can relate to, such as:

•    Bootstrapping vs. institutional funding:  Sridhar Vembu, CEO of AdventNet, and Jerry Rawls, CEO of Finisar

•    Taking on industry giants:  Steve Hafner, CEO of Kayak; Gautam Godhwant, CEO of SimplyHired; and Russ Fradin, CEO of Adify

•    Distruptive business models:  Philippe Courtot, CEO of Qualys, and Steve Singh, CEO of Concur

I won’t spoil the read—you can find Entrepreneur Journeys at Amazon.  For those of you who are veteran CEOs, you find resonant material and much to admire in the paths of the determined, and ultimately victorious, executives whose tales fill this first volume of a planned series.  If you’re contemplating a technology start-up, or in the early phases, there is much to digest, consider, and leverage.

A few takeaway messages:

•    For most early stage start-ups, MItra believes bootstrapping, rather than venture funding, is preferable.  My reaction is that, while this may often be the case, financing strategy is a difficult and sometimes dangerous thing about which to generalize.  I agree entirely that the process of competing for venture capital is a) arduous; b) requires a willingness to have one’s bedrock assumptions challenged, and c) may not always lead to the same long-term outcome as if a business is built and grown with severely constrained capital.

•    Each of the individuals profiled could be described as an “unconventional mind”—someone who displayed a willingness to buck the system, whether taking on the established category killer, traditional notions of industry economics, etc.  I note that many were in one way or another outsiders, whether immigrants or just plain geeks.  Perhaps a critical factor in these success stories is a level of comfort operating without the implicit societal approval, in order to imagine and then achieve an outrageous goal.

This essence of entrepreneurship—an unshakable belief in the art of the possible—has obviously fueled the companies and executives profiled in Entrepreneur Journeys.  A myriad of others—ours and yours–have stories yet to be written.

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The Power of the Peer Group

November 13, 2008

I invited one of my employees at ExpertCEO, Nathalee Ghafouri, to be a guest blogger.  Nathalee is ExpertCEO’s Marketing Manager and she is an integral part of our organization.  In this entry, she shares her passion for social networking and how it can apply to both the academic and professional world.

Back in high school, my sister used to tease me for having “study parties” to prepare for AP physics exams.  She called me a nerd, and

Whether for executives or students, peer groups can be powerful.

Whether for executives or students, peer groups can be powerful. From: Flickr UBC Library Graphics.

maybe I was, but I also knew that without those “study parties” I would be lost.  I knew that I could handle the concepts of physics, but that I was awful at the math.  By meeting with my classmates, I could explain the theory, and they could explain the calculations.  It was all about give and take.  I’ve understood the value of peer groups for a long time, so I am really passionate about building the community at ExpertCEO, an online network for senior executives and the community that inspired this blog.

Harnessing the power of the crowd is one of the chief tenants of Web 2.0 and even as we progress into Web 3.0 (or whatever is next), user-generated content is no passing fad.  The world has definitely realized that the combination of peer groups and the Internet makes socializing easier and more fun-hence the explosion of social networks-but business networking online is just starting to become the norm.  With LinkedIn profiles now ubiquitous, Yammer being named the king of the TechCrunch 50 and more and more companies taking advantage of Facebook and Twitter, the time is right for senior-level executives to put the trend to work in their everyday decision-making.

To go back to the study group example, imagine you’re at a physics study group, but of the five people there, no one knows how to solve a certain problem.  If this was 15 years ago, you’d be stuck without an answer, or you’d have to wait for the teacher’s office hours.  But with the rise of communities on essentially any topic, I’m confident that today you could find the answer by asking a peer online.  The power to share knowledge is infinite.  It’s this concept that drives ExpertCEO-if you can’t get the answer from your intimate peer group (or maybe you’re embarrassed to ask), you can capture the wisdom of the crowd.

Using advice from the site, ExpertCEO members have improved cash flow, avoided legal trouble and gotten advice on how to weather this current economic storm.  The power of the peer group has been proven by students and is working for ExpertCEO members.  Can you put it to work for you?

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What Keeps CEOs Awake at Night?

November 6, 2008

A lot has been written about the financial crisis, and even more about what companies should do. The layoffs have begun; discretionary spending is being slashed, as plans are getting revised with an eye on cash conservation , and those with liquid resources are eagerly identifying potentially opportunistic acquisitions.

I attended the Venture Beat event on October 29 where these tactics were discussed at length by investors and by entrepreneurs.  This kind of talk is very focused on process and doesn’t really convey the intense emotional issues that confront a CEO having to manage in this difficult environment.

Last week, we at ExpertCEO decided to try and put a human face on these discussions, so we polled our members to find out “what keeps them awake at night.”  Not surprisingly, “running out of cash” was the number one response with 56% of respondents indicating that this was their worst fear.

Why is this so scary?  Because the results that could ensue are far greater than simply the financial impact on the company. Many CEOs have spent years building a company and have a large percentage of their net worth, not to mention identity, tied up in it. The employees of these companies have families, mortgages, tuitions and careers that will be directly affected by these decisions.  Running out of cash results in cascade of events–a complex process of laying off respected people who rely on employment to meet their obligations, letting down customers who may depend on a company or its product, and possibly acrimonious negotiations with investors, landlords, lawyers, etc.
Here are the results of the poll:

What keeps you up at night (check all that apply)

My own job security (4%)
Laying off employees/poor morale (34%)
Missing the sales forecast (43%)
Running out of cash (67%)
Competition (15%)
Nothing, I sleep like a baby (14%)
Other (16%)

Which of these concerns you the most

My own job security (7%)
Laying off employees/poor morale (10%)
Missing the sales forecast (18%)
Running out of cash (56%)
Competition (4%)
Other (5%)

Conclusions: The fact that so many CEOs are worried about running out of cash (and missing their sales forecast which is related) indicates the state of mind of our CEO member community.  It also confirms their likely actions – cost reductions, layoffs, deferred purchases; with the resultant impact on the economy.  This poll is just another piece of corroborating evidence of the financial crisis.

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Sales Management

October 30, 2008

I attended a computer history museum event earlier this week.  Dixon Doll, a General Partner at DCM interviewed Sam Wyly — a pioneer in the computer industry – and then steakhouses, oil, crafts retailing and other investments.  He is (or at least was until the market meltdown) a certified billionaire.

I just finished reading his book titled “1,000 Dollars & and Idea”, and a number of things interested me about his early days as an entrepreneur in Texas, especially the way he built his business by taking huge risks.  Certainly, it was a different era when he launched his first start-up, and much has changed in the last 50 years, but there are also some universal themes that resonate, regardless of the intervening decades.

One particular section of his book caught my attention–his recollections about his early days as an IBM sales rep.  In the 1950’s and early 1960’s, IBM sales reps had a strict dress and behavioral code. The excerpts below are paraphrased from the book:

•    IBM salespeople were not allowed to drink alcohol, not even wine.
•    The company dress code was a dark suit, white shirt, tie—always a tie—and a HAT.
•    You were fired if you lost an account to a competitor, no matter how hard you’d worked or how good your effort had been.

Aside from these restrictions, IBM sales reps were treated like royalty.  Tom Watson, Sr. invented the 100% Club, and he paid the successful salesmen (and they were all men) huge sales commissions.

IBM even had a song that reps sang at their sales meetings.  You can see the words – http://www-03.ibm.com/ibm/history/multimedia/everonward_trans.html

So what’s changed from a sales management standpoint since then, and what’s stayed relatively constant?

•    Many tools have evolved to increase sales productivity, most significantly – sales force automation applications like Salesforce.com.
•    Techniques have also moved toward finer-grained specialization, with inside teams focused on lead gen that maximizes the effectiveness of the most senior sales-generating professionals.
•    The Internet has reduced (but not eliminated) the need for travel to prospects with web and video conferencing, etc..
•    Can you guess the one constant? The folks who reliably beat their quotas—the top performers—are still treated like royalty, and when they’re not, they quickly move to someplace where they will be!

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Budgeting

October 27, 2008

Halloween’s approaching, and given the recent economic upheaval, the kids at your door aren’t the only scary thing this time of year—completing your company’s budget (if you’re a December fiscal year end) has got to be high on the spooky list.  Capital constraints and the financial crisis mean more early stage companies need to become cash flow positive as soon as possible, and more established firms need to weigh the risks and rewards of new opportunities.

Developing a revenue and spending plan that meets the conflicting objectives of all constituents—investors, management, employees, and customers has never been an easy task.  Yet certain constants can make the process more manageable, and I’ll touch on a few of those here.

Set Objectives – Having a really clear sense for your critical objectives before you commence the process, and communicating those priorities clearly among the process participants will reduce the pain considerably.  Reaching a meeting of the minds at the board level prior to creating that first draft will minimize the number of iterations and time to reach the goal.

Provide Guidance – The ‘who’ and ‘how’ of the budget cycle can have a profound influence on how successful the exercise turns out, and how painful it is to complete. Identifying early the key executives whose input is most valuable is essential. Generally, a high-integrity budget will result from the combination of a top-down and bottoms-up process, not exclusively one or the other.  Providing them with clear, up front guidance, such as top line growth, profitability and cash flow objectives increases the likelihood that their initial responses will form the key components of a reasonable first draft.

Useful Tools – Most small companies use spreadsheets for budgeting.  When I was the CEO of Pillar (later acquired by Hyperion / Oracle), we pioneered the use of online budgeting and planning solutions, but they required a substantial investment of time and money to implement.  More recently, SaaS solutions streamline the budgeting process and improve collaboration while enabling you to develop a more logical budget.  One example of such a tool is Adaptive Planning (www.adaptiveplanning.com) (full-disclosure—I’m such a fan of Adaptive’s solution I joined the board of directors).

Cushion – In the very best of times, building cushion into a plan is a wise strategy – but its more critical now.  Providing some cushion in the sales forecast and operating expenses gives you the flexibility to deal with inevitable glitches without suffering the embarrassment of “unfavorable” performance lines in your board presentation.

Balance Risk vs. Growth – Regardless of company size, economic downturns exacerbate the natural tensions between managing for growth and pressures to minimize risk and manage cash.  Few seasoned CEOs look back with regret when, in difficult times, they targeted slow growth to optimize cash flow, while the ranks of overly optimistic but unemployed CEOs are legion.

In the end, today’s CEOs have all the responsibility, if only partial authority, when it comes to the budgets they sign up to.  And the CEO’s compensation will be based wholly or in part on the results. The takeaway message: extra focus on the budget development process is especially critical in this challenging environment, so spend the time and use technology wherever possible to optimize the outcome.  Then use your powers wisely to see that the goal is met!

A few relevant links:
To Survive, Net Start-Ups Slow Their Metabolism, this very relevant article by Brad Stone and Claire Cain Miller provides some good advice for start ups.

Tips for Conserving Cash – Penny Herscher describes some tips for companies looking to extend their runway
Missed the Numbers – Harvard professors examine the career consequences to CEOs and CFOs of failure to meet earnings expectations and measure the impact on compensation and job security

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Crisis Management

October 20, 2008

Given the current financial crisis, I’ve decided to share my thoughts about how to best manage through turbulent times. The idea of “plan for the worst and hope for the best” isn’t new, but applying it isn’t always easy.

In times of crisis–either one of your own making or one based upon external conditions like a recession–you need to put together a plan that is a “worst-case” scenario. You have the obvious actions–cutting back your manageable expenses such as marketing and travel; rethinking new hires (since not hiring someone is infinitely easier than firing someone); and examining your current headcount with the thought of a layoff (RIF).

You must also develop a reduced sales forecast. Coming to an agreement on the revised sales forecast is often the most difficult part of putting together this plan. It is the most subjective element of the plan yet it can have the most widespread impact across the organization. A conservative sales forecast may result in the decision to take difficult steps (like laying off a great employee). It’s very easy to rationalize a higher sales forecast in order to avoid these painful decisions.

Speaking from personal experience, I want to share a “worst case scenario gone even worse” story. I was involved with a company 20 years ago that was really struggling, and the team put together a “worst case” plan. The VP of Sales continued to reduce his forecast because we wanted to be ultra conservative, and at the end, we decided to put together a plan with ZERO revenue for the period in question–truly the worst case, or so we thought. Guess what? It turned out that this wasn’t the worst case. We had some significant product returns during the timeframe, so our revenue was actually negative! The moral of this story is: In times of crisis, you need to be brutally realistic when you look at your alternatives and plan your cash flow. And I always counsel that people create pessimistic but not worst-case scenarios—there’s no such thing as the worst case because no way to tell just how bad things can get.

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Welcome to my new blog

October 16, 2008

Welcome to the initial posting of “The Expert CEO.”  I’ve created this blog so that I can share my experiences of 35 years as a technology CEO and founder, board member, and venture capitalist.  Just to be clear, I don’t consider myself “THE Expert CEO” – but I am an experienced one.  The title was chosen to imply that you, the reader, could become more of an “Expert CEO” by reading about key issues CEOs must deal with and valuable lessons they’ve learned.

I’ll focus on a variety of topics of general interest to CEOs and senior executives.  And, I’ll plan to have some guests who will share unique ideas about management.  Sometimes this blog will highlight hot topics discussed on ExpertCEO (www.expertceo.com),  a company I founded in 2007, which is a private on-line community for senior executives to share ideas with peers and solve real world business problems.

I’ve already been inspired by the blogs of top-notch business and thought leaders – a few on my must read feed include, Jeremiah Owyang of the Forrester Group, who covers social networking; Jonathan Schwartz, CEO of Sun; and Matt Blumberg, CEO of Return Path. My friend, Randall Stross, who writes the “Digital Domain” column for the New York Times, wrote a great article on CEO blogging, which is a worthwhile read. Randall is also the author of “Planet Google: One Company’s Audacious Plan to Organize Everything We Know”.

I’m excited to begin the conversation with you.  In my next post, I’ll talk about how to best plan for and manage through an economic crisis.

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