February 26, 2007

How should Microsoft capitalize on its place in the food chain?

Posted in management at 7:26 pm by scottmaxwell

I read Don Dodge’s post on Microsoft not suffering the innovator’s dilemma and had a similar reaction to Robert Scoble’s. I am a big fan of Microsoft and use their software every day on my Mac. It is great software from a great company full of great people.

That said, the issue is not whether they are suffering the innovators dilemma (all large companies suffer), the issue is what they should optimize their innovation given the limitations that large companies have (the innovators solution can help, but does not nail the solution in my opinion). Well run small companies will beat large companies if their angle of attack is right (see my “How David Can Beat Goliath” series on the topic), but well run large companies can stay relevant (and important) if their angle of defending attack is right. My sense is that Microsoft is trying to win all of the games all of the time rather than focusing on playing the games that it will win!

Microsoft needs to optimize its place in the “food chain” by considering what its natural advantage is, where it is disadvantaged, and how they should capitalize on this advantage. Microsoft has several natural advantages from its location at the extreme end of the food chain (see list here) and also has natural disadvantages (some listed here but written more from the reverse perspective). The net of it is that it is extremely difficult (impossible?) for the large companies (even the great ones) to create, develop, and test out the hundreds (thousands?) of innovative ideas that it takes to get one or two “hit” products/companies because most of the best ideas grow from the other end of the food chain!

Net, net, if I were the decision maker at a large technology company like Microsoft, I would put aside 2-3% of my market cap each year to purchase the innovative companies that have grown (and evolved) to the point that Microsoft can either

  • Put them through its current technology, sales and marketing, and customer service engines to supercharge their performance, or
  • Develop them (in whole or in part) independently to create new technology engines, new sales and marketing engines, and/or new customer service engines (depending on the uniqueness of these engines).

if they did this with the proper focus and magnitude, then we all would look at them as more innovative, even though a lot of the innovation would have been incubated by external parties (at the other end of the food chain).

(Yes, Microsoft will say that they are doing something like this, but they are not doing it with either the focus or the magnitude that is necessary to win the innovation game, at least right now.)

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February 25, 2007

Metrics for User Engagement

Posted in marketing, Metrics at 7:47 pm by scottmaxwell

If you run an e-commerce website or have an otherwise clear conversion metric (e.g., filled in contact information, registration), then you probably have a small number of very clear metrics that you are using to monitor and manage to. But if you have a community, social, or entertainment oriented website, then your key metrics may not be as clear. Number of page views or Alexa ranking might be an acceptable starting point, but as you get more views and visitors, what are the truly best metrics for determining how “engaged” your users are with your site?

Eric Peterson has been running a really good series on measuring user engagement. His approach one of problem solving and also pointing out diverging points of view as he works through the issues in his series. Clearly, the issue is not fully resolved, but Eric (and others he points to) does a great job thinking through the issues as he works through the series:

Part I
Part II
Part III
Part IV
Part V

I like Eric’s definition of engagement (as well as the more detailed components that I am not listing here):

Engagement is an estimate of the degree and depth of visitor interaction on the site against a clearly defined set of goals.

I also like the thinking that Eric has done on the topic. While there is probably a long way to go before there are some common metrics that are shared across companies (that I am sure that Eric and others will continue working on), his thoughts are developed enough so that you can incorporate them now and probably get significant benefit from them (you don’t need industry standards to get benefit from them and many of the metric refinements will most likely be highly correlated anyway!)

The one, perhaps most important, issues that I would like to see Eric cover as he continues his series is How do you change your site to better engage the visitor? The obvious answer is that you should change things such that your engagement metric goes up, but you should also be using the components of the engagement metric to better understand what the users really want to do and then modify your approach as well as your goals (and metrics), so that they are more aligned with what your users want to do on your site!

10 best ways to burn capital

Posted in Economic Model, finance, management, Planning at 6:35 pm by scottmaxwell

Sometimes seeing how best to achieve the opposite of what you want to achieve can help you to clarify what you should do:

10 best ways to burn capital

  1. Hire a complete set of senior managers ASAP after forming your company. The great thing about senior managers is that they will want to hire other managers and you will end up with more layers of management to spend money on!
  2. Hire the senior managers from large companies. They are even more inclined to spend money on additional management layers as well as many different staff functions.
  3. Locate your team in an expensive city. Your staff will need more cash comp to live, so your salaries will be higher. Also, your rent (and everything else) will be higher!
  4. Ramp up your staff quickly in anticipation of high demand. Your current staff will spend more of their time recruiting and training (lowering productivity) and your new staff will have a lower utilization as well. If you do this really well, you will build a long-term culture of not being productive that will last through all phases of your company’s evolution.
  5. Use your marketing resources on branding and try to brand what you don’t have. Focussing your marketing efforts on lead generation and product marketing will have too much capital efficiency to meet your goal of burning capital.
  6. Use your sales resources on field sales and large company partnerships. These are the activities that cost the most and take the longest to turn into revenues. Activities like telemarketing, inside sales, and developing the natural business partners are too capital efficient!
  7. Put a large development team in place and then focus your development staff on the core technology and ignore the packaging and UI considerations…then hire some professional services, training, and customer service staff to help your customers implement, configure, train, and resolve issues.
  8. Do not hold staff meetings or company-wide meetings or other communication methods to help focus your team (e-mail, IM, etc.). This will create too much clarity and resolve too many questions.
  9. Get backing from 2 or more VCs with very large funds…the larger the better! They have a need to deploy more capital and will own more of your company over time, so will be less resistant to these ideas.
  10. Never, ever, ever put in place management systems such as budgeting, metric management, or incentive systems that drive the right activities. If you do put in place the management systems, be sure not to focus them on the key drivers of your business.

February 23, 2007

10 best ways to lie with metrics

Posted in management, Metrics at 2:31 pm by scottmaxwell

We spend a lot of time with our portfolio companies trying to identify, manage, and track meaningful metrics that, when managed well over long periods of time, will assist in the building of a great company. ( I had a summary post last year on the topic.) As I meet with companies, read press releases, and hear presentations at companies, I find that many would rather present “feel good” metrics rather than metrics that give an accurate picture on the state of their company, including all of the positive and negative trends (or, more importantly, do the hard work of managing to get strong, positive trends for the key drivers of their business). If you want to make your metrics “feel good” (rather than “key drivers”), this post is for you:

10 best ways to lie with metrics

  1. Gather a lot of metrics and then only present the metrics that are positive. If you gather enough data, you will always have metrics that show positive trends. One good way of finding positive metrics is to look for the negative statistics and then look for the bright side. For example, if you lose a few great employees, focus on your costs being below budget. (When you show different statistics over time, you should also congratulate yourself on adjusting the metrics to new ones that are better indicators of your business…this will demonstrate that you are a “learning organization.”)
  2. Gather and present some metrics that are really easy to manage (this will allow you to consistently show some metrics over time that can have really good long term trends). For example, show “leads” or traffic, as you can always come up with ways for buying more (but be careful not to present lead quality, cost of leads, or ROI, as these are more difficult to manage to).
  3. When you are presenting, use many metrics. This will impress the audience that you are truly on top of your business.
  4. Use extremely precise numbers. For example, don’t say “about 100,000 downloads” or “growing roughly 100%,” say “101,243 downloads” or “growing at 102.4%.” The more precision that you use, the more your audience will think that you are a brilliant manager.
  5. Present your metrics quickly. The more quickly you go through your metrics, the less time your audience will have to consider the validity of your metrics.
  6. If your audience asks for some metrics that don’t make you look good, tell your audience that “we don’t break out those numbers” or “our systems don’t allow us to get that data” or “we put our resources against product development and marketing, so we have a very lean staff that doesn’t allow us to gather those numbers” or “I will get back to you with that information.”
  7. Hire a graphic designer to turn your metrics into really good looking charts (3D, movement, many colors, graphics, etc.). Your audience will focus more of their attention on the quality of your slides rather than the data you are presenting. The net effect will be very positive.
  8. Keep some of the metrics “in your pocket” so that you can share some of the metrics “off the cuff.” This really impresses the audience. A good way of doing this is leaving the most recent data out of your presentation and then sharing the most recent data orally.
  9. Prepare each of your functional heads with some of the more detailed data that supports your “feel good” metrics so that during your presentation you can say ” <name of functional head> would you like to expand on this?” the more your team members seem to be behind your metrics, the more believable the data.
  10. Never, ever, ever educate your audience on the small number of key drivers for your business. The simpler and clearer that you are, the easier the audience will grasp and remember how to think about your business and the more frequently they will ask for the same data. This education will completely destroy your future ability to keep your metrics “feel good!”

Note: You can get some additional great ideas on how to obfuscate the truth from the book How to Lie with Statistics, a classic!

February 17, 2007

Managing XAAS systems- Disk Failure

Posted in Data Center, management, Product Development at 10:18 am by scottmaxwell

If you have a XAAS datacenter (or any other type!), then this post by Werner Vogels is probably of interest….good data on the failure experience with hard drives. He also points to his S3 storage service…I am starting to hear some feedback from entrepreneurs that suggests that the service has a lot of merit.

Pretty important topic, as the last thing you want to be telling your customers is “sorry, a hard disk failure caused a loss of your data.” The second worst thing is “sorry the system is down do to a hard disk failure, but we hope to have some of your data restored in a few days.”

Clearly not as sexy an issue as UIs and feature/function, but equally (more?) important!

February 15, 2007

A metric for messaging

Posted in CEO, marketing at 6:34 pm by scottmaxwell

Firas Busnaq recently sent me a link that completely clarified why I can’t read some of the technology company websites and understand what the companies actually do. It turns out that they are using an automated system for generating their branding 🙂
Getting your message to stick is one of the inexpensive and most important activities that you can do. if you think that you do have your messages clearly articulated and as simple as possible, here is a test that will give you a metric for your messaging:

  • Write down your messages on a piece of paper (btw, if you need more than a postcard, simplify your messages!)
  • Ask 3 board members what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
  • Ask 3 of your most senior people what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
  • Ask 3 salespeople what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
  • Ask 3 customer support people what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
  • Ask 3 customers what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
  • Clearly, the top score would be 15 points on this test. If you score less than 10 or less than 2 points for any of the groups that you interview, you should work on simplifying your message, making your message “stickier” by making it resonate better, or work on your message delivery systems! (btw, in my experience this test results in negative numbers the first time it is given…a score of -15 is not uncommon for the first test if you are accurate in your scoring)

    The more you can push the score toward 15 with a relatively random sample of people closely related to your company, the more clarity your message and the easier the message will diffuse to your prospects!

    Note: if you don’t have a company large enough to connect with 15 people, then interview the group that you can…you are actually in a better position to get your messaging right as early in your company development as possible…

How to focus- an accidental approach…

Posted in Execution at 5:14 pm by scottmaxwell

I have written several times about the need for focus. ( Here, for example.) Since writing on the topic, I continue to notice that most people I meet need this advice.

Today I discovered a new approach to creating focus: Today most of my e-mail inbox disappeared from both my e-mail client and the server. User error? Bug? System out of capacity? I spent about 30 minutes trying to figure it out but then I realized that I didn’t have to keep struggling to catch up on e-mails (a constant and increasing source of frustration)…I didn’t have any e-mails to respond to…at that point I stopped trying to figure out how to fix the problem. Losing the e-mails solved a different, ongoing, and increasing problem that I am having with e-mail…that is, trying to be responsive to everyone that sends me e-mails.

All of a sudden, a tremendous amount of time freed up and I was able to focus a lot more of my attention on the core of what I like to do…work with my portfolio companies (spoke with 4 today), talk with entrepreneurs (spoke with 3 today), worked on longer term projects (2 today), and periodically write in this blog (first post in a long time)…it was a great opportunity to focus!

I have not figured out how to institutionalize this approach while still being responsive, but if you have any ideas please let me know…

***
endnote: I really did lose my e-mail inbox with about 8 weeks of e-mails that I have not caught up on. If you sent me one that I have not responded to, I apologize!

January 3, 2007

Announcing Mark Barry!

Posted in Execution, VC Roles at 9:02 am by scottmaxwell

We announced this morning that Mark Barry has joined OpenView Venture Partners. Mark comes to us from Microsoft’s Emerging Business Unit where he was a founder and Managing Director. We have been working with Mark for approximately five years and he and the entire Microsoft team have been extremely valuable contributors to many of our portfolio companies. We now have the opportunity to have Mark’s full time and attention focused on our portfolio companies, which will dramatically amplify his impact!
Why we asked Mark to join us…

We asked Mark to join us for five primary reasons, all relating to increasing our ability to add substantial value to the companies that we invest in:

  1. Mark has a deep passion for technology and its applications and an extreme desire to assist emerging growth technology companies meet their objectives.
  2. Mark has a global network and a proven track record of working with emerging growth companies around the world. Our model of investing is global in nature. Our belief is that all successful technology companies need to expand globally over time, so the location where they start is not as important as succeeding in the major technology markets around the world. Mark will be a major contributor to this effort and has shown no fear jumping on planes to meet and assist the best companies globally.
  3. Mark has deep functional expertise in both Sales and Customer Service. In Mark’s 16 years at Microsoft and 9 years prior to Microsoft, Mark grew professionally as a salesperson, sales manager, senior sales manager and as a senior customer support manager and won multiple awards in the process. This experience is invaluable to our portfolio companies as they work to scale during the expansion stage.
  4. Mark has substantial experience with extremely professional approaches to developing strategy, organization and processes as well as all of the ingredients associated with their successful execution. Microsoft is one of the best companies in the world at execution, and many of the tools that Mark learned and deployed successfully at Microsoft will be extremely valuable to assisting our companies as they scale.
  5. Mark is a great guy!

Mark’s role at OpenView is that of a senior investment professional. In this role, he will be the senior point person on several companies and, at the same time, will offer his functional expertise and network to our entire portfolio.

you can drop Mark a line at mbarry@openviewpartners.com

November 11, 2006

New Office in Boston? Check out the Cambridge Innovation Center

Posted in management at 5:08 pm by scottmaxwell

As part of our OpenView Venture Partners launch, we have built ou and recently moved into a new permanent office in the Fort Point Channel area of Boston.

I want to point out Cambridge Innovation Center, where we have been located for the last couple of years. The center offers office space and services to start-up companies (most tend to be technology oriented) and offers the best service of any group in the Boston area. They are fanatical about making their tenants happy, have many social events to get the tenants circulating, and, really is the best place to start if you are opening an office in the Boston area. They worry about the expansion space as well as the refreshments, conference rooms, reception, internet connections, phones, mail room, server space, and other items so that you don’t have to. The center is located next to M.I.T. in Kendall Square, very close to public transportation. I have been truly amazed by the service levels that the group employs and will miss being there! Even a company as large as Google (one of their most recent tenants) has decided that it is a great place to locate their first office in the area…

If you are considering an office in the Boston area, check them out!

***

Separately, don’t forget to Come visit us when you visit Boston!

October 1, 2006

Announcing OpenView Venture Partners

Posted in CEO, Global Investing, introduction, management, marketing, Sales, VC Roles at 6:34 pm by scottmaxwell

Announcing OpenView Venture Partners

I haven’t posted in a while. Unfortunately there has been little time, as I have been working around the clock with my team to launch a new Venture Capital firm, OpenView Venture Partners, located in Boston, Massachusetts. Today, we officially launched the firm with the closing of our inaugural fund on Friday night. Given my excitement about this new venture, I thought that I would take the time to share our concept and some of the details. (Also, take a look at the new website, www.openviewpartners.com.)

The overarching thrust for the firm is Operational Value Add (in addition to capital) for InfoTech companies, who have reached the expansion-stage of company development (as in “I have a product and some customers, Now What?”), and are located anywhere in the world.

We set the goal of operational value add because, in our experience, this involvement helps improve products, sales and marketing, and customer service. The improvement leads to enthusiastic customers and increased growth rates, profitability, and long term competitive advantage. Net net, the more value we provide, the greater and faster the enterprise builds value.

We developed and refined the approach at our prior firm, Insight Venture Partners (we had been working as its Boston Office). As we evolved the approach, we have found the results to be both significant and significantly different than the approaches used by other firms.

Our Approach

The goal of operational value add is a principle that we have spent a great deal of time operationalizing through a combination of focus, value add resources, and a small fund size. We believe that staying focused, having the best resources, both internally and in our network, and then “putting all the wood behind the arrow” is a great approach for delivering the most value (I gave similar advice to emerging growth companies last year and, again earlier this year). Finally, and perhaps most importantly, we work extremely well and in partnership with our portfolio company senior management (an earlier post on the topic is here). The feedback to date from our approach has been outstanding.

Some details on each of the points:

Focus

Our value add starts with the focus that we have on market and stage. With this focus, we have developed a much deeper understanding of the issues and opportunities facing our portfolio companies and have geared our firm to help address those issues and opportunities. Our focal point includes the following:

  • Our Market Focus is InfoTech, particularly around companies that configure software, data, and/or hardware into packages that provide meaningful value to their users. At this point our list includes software (all flavors from installed to on-demand), internet, information services, and technology enabled business models.
  • Our Stage Focus is Expansion Stage. Expansion stage to us starts when a company has worked out the major kinks in its core product, has begun to address its first market, has a viable approach to reaching the market, and has some customers that use, like, and reference the product. (Generally, a good proxy for this is company revenue in the $500k to $1MM per quarter at a minimum with good historic growth).
  • Our Geographic Coverage is Global. Our belief is that expansion stage InfoTech companies all need to develop a global presence, so the starting location is not as important as the company’s desire to expand globally, particularly in North America (given our North American presence).

We strongly believe that the issues and opportunities that emerging growth InfoTech companies face at the expansion stage are very different than the issues faced by companies in other sectors or in other stages of development. By choosing a sector and a stage, we could then more deeply gear our firm to deliver the most value against that more specific set of issues and opportunities. Separately, we have found that the major issues facing expansion stage information technology companies are independent of their geographic location, enabling us to have a wide geographic coverage (that is, we invest globally) without diluting our value add.

Operational Value Add

Our operational value add programs are described on our website. Our general approach is to determine the key issues facing each portfolio company at the senior management level, compare notes with the management team, help determine the top goals of the company, and then offer each company a “menu” of ways that we might help. The menu includes items such as offering our portfolio companies people on our team for small or large projects, introductions to our network, and/or helping our portfolio companies recruit senior staff and add to the “DNA” of their team.

Our efforts also include a number of functionally specific (sales, marketing, development) “best practice” forums for our portfolio companies. The forums are designed to help our portfolio companies network among themselves and also help to spread “best practices” in each functional area between and among our companies. These forums take the form of one-day events in Boston, each devoted to a particular topic.

My blog is also meant to be an extension of this work. By reading some of the posts in the blog, you can get a pretty good feel for the issues that we work on with the companies and some of the principles that we use to address the issues.

Optimal Fund Size

As OpenView took shape, we thought a lot about the optimal fund size. We believe that a smaller fund is better for both our investors and our portfolio companies, which ultimately makes it better for us. Yet, it was important that the fund was large enough to create a level of diversification and to give us enough time for the portfolio to develop before raising our next fund. Net net, we set the fund size at $100 million, which we believe is the optimal amount to meet our goals.

From a portfolio company perspective, the smaller fund size relative to some of the other VCs means that we will do fewer investments, allowing us more time for each portfolio company. From both a portfolio company and investor perspective, it means that a larger portion of our income comes from creating value in our investments, which results in highly aligned incentives between our portfolio companies, our investors, and us.

Working In Partnership

Finally, and perhaps most importantly, our belief is that we can’t add value without building strong relationships and working in close partnership with our portfolio company management teams. Every member of our team has outstanding professional credentials, great values, and a strong desire to build meaningful relationships with senior management teams. These characteristics, as well as an intense desire to add value, help to create great partnerships between our team and the portfolio companies.

You can Help!

To the extent you are interested and willing to help, there are a few things that you could do that would thrill us:

  1. The team would be very appreciative if you would be willing to mention OpenView Venture Partners and our URL (www.openviewpartners.com) so that the search engines have an easier time picking us up. Version 1.0 of the site just went live, so it will probably take some time for the spiders and indexers to register its presence. Your mention of the site would greatly help this effort,
  2. We are constantly looking for people to add to our network globally. To the extent you are interested in helping our portfolio companies, let us know via e-mail, and
  3. We are always on the lookout for the next expansion stage InfoTech company to meet with (our focus is above). If you know of one, send us an e-mail!

Summary

OpenView Venture Partners is all about Operational Value Add aimed at Expansion Stage InfoTech companies located anywhere in the world. Our approach has been in place and constantly refined for several years now and we take great pride in the references that our current and former portfolio companies offer about us.

If you want to participate in some way or have an interesting company that we should know about, let me know. My new e-mail address is smaxwell@openviewpartners.com. I do my best to keep up with the e-mail, so drop me a line. This post marks the end of the beginning of what we hope will be great for everyone that participates!

A Special Thanks

It is hard to talk about the launch of a new fund without reflecting on and acknowledging some of the people that enabled the success. We had a significant amount of help from our portfolio company senior managers, enthusiastic and extremely high quality investors, and our tremendous network of individuals and companies who have helped us be successful over time. In addition, the team at Sparring Partners Capital did a fantastic job as the fund’s placement agent and the team at Goodwin Procter have done an equally outstanding job as council to the fund.

The group that I would like to single out here are my (now technically former) partners from Insight Venture Partners. The partners have been very supportive over the years as I pushed on different initiatives, and since the idea of OpenView started gaining traction they have been extremely supportive, helpful, and generous with their time. In addition, we have been able to work out an approach whereby we will continue to work directly with our Insight investments until each of the investments has grown and exited, something that is extremely important to us given our value add focus. Thanks guys!

EndNote: I have apologized many times to my network that has had difficulty reaching me over the last several months and appreciate the enthusiastic support and encouragement that has come from everyone. I expect that now that the firm is formed and the fund is closed I will be returning to a more normal schedule of focusing on my portfolio work and network and even updating my blog more frequently 🙂

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