Aaref Hilaly, Sequoia Capital: How to Manage Up & Have Happy a Board, Even When You Miss a Quarter

Thanks again for joining us for this last session for the Hyper Tactical stage. Again, my name is Julie Zissman. I work for Oracle. We're here at the Saster conference to help startups grow their business. For those of you that weren't in the last session, we're currently offering a $300 credit for a lot of our technical products. So if you'd like to hear more about that, please come visit our booth across the hall after the session. Right now, I'd like to introduce Arav Halali with Sequoia Partners or Sequoia Capital. Aarav is a partner focused on early stage SaaS and investing in early stage SaaS and enterprise companies. Thanks.

Thank you. Good afternoon, everyone. So, how to manage up and have a happy board even when you miss a quarter? Well, we all know that bad things can happen to good people. After all, cars crash, cats die, elections have unexpected results. But in the context of your business, one of the worst things that can happen is for you to miss a quarter. Because when you do that, it's almost like a break of the implicit agreement that you have with all the stakeholders in the business. And whether it's employees or board members, people start having doubts. Doubt creeps in like a cancer. People start wondering to themselves, does this founder know what they're doing? Is this thing really going to work? Should I be doing this or should I be doing something else? And so it's a real issue. I spent 10 years as an entrepreneur before joining Sequoia at my first company, a software company called Center Run. I can tell you we missed a lot of quarters. I was a completely clueless founder. It was one of my first jobs out of graduate school. At my second company, which was a SaaS company called Clearwell, I was a much more confident CEO. And again, I can tell you, we missed a lot of quarters. Today at Sequoia, we're very fortunate to work with a number of really great SaaS companies, some small, some now pretty substantial, and collectively, as a group, again, I can say they have missed a lot, a lot of quarters. And it's not because these companies aren't great or that the founders aren't spectacular, that they don't have really compelling market opportunities. It's because life is unpredictable and stuff happens. And so at some point you will miss, no matter how great you are, no matter how ultimately successful your business will be, this day will come when you will miss your numbers and you'll have to deal with it. So in the next 15 minutes or so, what I wanted to do is just quickly run through a basic survival guide for what to do when this happens. And there are really only four key lessons that I have for you. Two to be done before you miss, which you could be doing today, and then two to do at the time that it happens. And there are also a number of pitfalls which I'd suggest that you work hard to avoid. So let's start with the first lesson. The first lesson is don't manage the board. Engage them. Now, I realize that the title for this talk is how to Manage the Board. And several of you may be thinking at this point, well, if your advice is don't, then why have I bothered coming in the first place? But this is actually a really important point and it's something that I realized at my first board meeting at my first company center run, which was February of 2001, where myself and my co founders on the right there on the left rather, we were, let's just say, inexperienced. And our board member, Mike Moritz at Sequoia was on the. Was very experienced. I mean, to give you a sense, in addition to sitting on the board of our company, which was a six person startup at the time, he was on the board of Yahoo, Google, Flextronics and PayPal. And so as I approached my first board meeting, I can tell you I was pretty terrified. I'd never done a board meeting before. It's just myself and Mike on the board. I'm going to sit down and what the hell am I, what am I going to do here? So I created a presentation that kind of mapped out all the stuff that we'd been doing in the month since Sequoia invested in the company. And he comes in and I start walking through my slides. And after about 10 minutes, he starts kind of doodling on the side of the page. And I'm presenting and I'm thinking, is he taking notes? And I'm kind of looking over and then a couple slides. I say, oh no, he's drawing cartoon characters. And so I'm thinking, okay, well, not what I would have expected, but all right, let's just keep going. And then I had a friend in the room at the time, John Lilly, who's now an investor at Greylock. And. And when Mike wasn't looking, he slips me a note. So as I'm presenting, I open this note and the note says, you're losing him, do something. So I pause and I say, mike, you don't look very interested in the slides. And he says, no, not really. So I said, well, what's on your mind? What should we talk about? And he says, well, I'm much more interested in knowing what's on your mind. What are you thinking about right now? And I said, well, the number one thing I'm trying to figure out is do we need a VP of engineering, given the people we have in the building? And then if we're going to be releasing our product in six months, when do we hire a salesperson? Should we also get a marketing person? Should we get the marketing before sales? At what level of seniority, given size of company and what's the profile? I've never hired someone like that before. And we had a 90 minute discussion around how to build an executive team and I walked out with a much clearer picture of what it is that I was supposed to be doing. That's why I say that really you have to remember the board meeting is there for you, the entrepreneur, it's not there for the investors. It's a forcing function. It's a chance for you to kind of pull yourself up from the day to day and think bigger picture about everything that you should be doing, you need to be doing with more of a 6 to 12 month time frame. And the best guide for what you should be talking about at a board meeting is what is most on your mind. And that's why I say as a first lesson, don't manage the board, really think about engaging them. They're a huge asset. So that's the first thing. Now the second thing, the second thing is a little bit counterintuitive relative to a lot of what you hear at sasta, and that is focus on product over metrics. In other words, not just engaging the board. How you engage them really matters. And what I'd suggest, again, which maybe goes against a little bit of what you hear at sasa, where there's such an emphasis on metrics all the time, is really focus on product. And this one came over to me from my second company, which is a company called Clearwell, where we started out as an application to analyze email with the vision of oh, so much interesting information is captured in email. There must be a way of surfacing that for some useful business purpose. And for two years we iterated through different potential applications and then we finally found product market fit in an application we'd never really thought about before, electronic discovery, which is. And basically we became a vertical SaaS company serving the legal vertical and then we quickly scaled to about 100 million in ARR at the time that we sold the company to Symantec and were profitable. And at every board meeting, Jim Goetz was my board member there. And at every board meeting, Jim would just push relentlessly on what are the use cases, what's the unmet need, what exactly which parts of the product we're building out now versus later, where's the technical debt, how are we thinking about the trade offs? Even when we'd hit product market fit and were growing, the discussions were still about product and what we'd need in six to 12 months time. And I just think it's so important and it's such a risk for SaaS companies because SaaS lends itself to metrics. There are all sorts of wonderful things that you can talk about. You can talk about CAC or LTV or payback or quick ratios. And what happens is people just get lost in the metrics and they lose sight of what it is you're doing in the first place. And then when you miss your numbers and suddenly the metrics don't look so good anymore, people freak out because they've lost their center, their compass to navigate through exactly what the numbers mean. So I would challenge you to train your board members to be able to say in three sentences exactly what is it you do, why does it matter? And how are you going to win? How are you different, how are you going to beat the competition? And if they can't articulate that in a very crisp way, then nothing else really matters because they have not internalized what it is that you're really trying to do. So I would really focus in board meetings on product over metrics, focus on learnings you're getting back from the the market and train your board. So those are the two things that I would do before you miss. And let's say that you do this, let's say that you engage your board, you're not managing them. Let's say that you focus on product over metrics. That's all great. You're still going to miss. It's still going to happen. You're still going to have that horrible board meeting where you walk in with your stomach in knots because you feel like you've screwed up, you've let everybody down, you promised results and you didn't deliver. And now everyone's looking at you with all these questions and you yourself have all these questions. But you know, everyone expects you to have the answers and you have to deal with that. So what do you do? Well, let's start with what you don't do. What you don't do is you don't say, I know we missed on the sales target, but we hit our recruiting plan and we had this great marketing campaign and we have all these leads in the pipeline and we're going to release these amazing new features and really everything's great. That is not a very. That is not a good message. Another one, another not good message would be, well, I know we missed, but if we just keep doing the same thing, things are going to turn around. That again, I mean, whether it's hope or denial doesn't work. Doom and gloom isn't so great either. There's one that's not on the slide that's probably the most common now I think about it, which is what I think of as the silver bullet theory of if we just do this one thing differently, usually fire the sales guy, then everything's going to be great, everything will turn around. It's just going to be perfect. All of those cost you credibility because anyone who's been in business knows it's usually not one thing. It's normally a combination of five or six things that you need to think about. So what I'd suggest, and lesson number three, is when the miss happens, is own the miss, take responsibility and stand up to it. Realize that for any good board member, they've seen lots of companies miss lots of numbers. And more important than the miss is your reaction to the miss. I think that's a really important point that's often lost. And so take responsibility. You should be upset. You should show people that it matters to you, that you do take it personally. You should be hard on yourself in terms of what you've done wrong, whether it's things that you did wrong with the benefit of hindsight or things you should have known at the time and take responsibility for that. You also should help the board process exactly what went wrong here and how they should think about it. So, for example, and these are some of the. For example, is it a tactical issue or is it something structural in the market? A tactical issue might be that you actually do have the wrong sales guy. A structural thing would be things like we have product issues that are causing churn, or there's increased competition and that competition is stretching out our sales cycle and causing price erosion. Those things take longer to figure out, but you have to help the board think it through. When I was at Clearwell, I remember we just raised series C at what was then considered to be a high price. And the quarter straight afterwards, we had a horrific miss. I mean, huge, just nowhere near the target that we had just raised money on. And I had a very unhappy new series C investor sitting in the board meeting. I remember he came, he sits down, he sits there like this at the beginning of the meeting, just staring at me. And my head of sales was kind of running through the pretty terrible results from the prior quarter, kind of going through, oh, you know, we did this and did that, and the guy just stares. And then after about five minutes, he interrupts with, what the hell happened here? What do you think happened here? He points at me, ignoring pretty much everybody else. And it was something I'd been thinking about. I hadn't put it in the board presentation, but so I went to the whiteboard and I basically drew out a decision tree and said, well, look, if someone's looking to buy discovery, they have a choice. They can bring it in house or they can outsource it to a service provider. If they bring it in house, then again, they have a choice. They can start with the collection, gathering data, or they can start by processing data. And I went through the kind of like the decision tree of options open to our customer and made the point that, well, right now we only serve one little branch on this tree, but our sales pipeline is full of all sorts, you know, people at all different points on this tree. So if we're going to have a business here, we really need to broaden out and serve more than the one branch that we're doing. And we can do that by not just building new products, obviously, but improving some of our existing and then striking some channel partnerships so that our product could be offered through the channel to people who didn't want to buy, to buy from us directly. And then in order to do that, we had to cut expenses, including cutting some headcount, in order to give us the Runway to do that, Even though we just raised money. And I think going through that, the tone at the end of the meeting was just completely different to what it was at the beginning because people had started to kind of wrap their head around what had happened and try and make sense from it. Now, you could go with what I think back on as being the kind of seat of the pants approach, But I would recommend that you plan ahead and you do what's here and say, control the meeting. So send it out in advance. Send out the fact that your analysis of why you've missed in advance. Talk to people in advance if you need to, but come in, have it be the first item on the agenda and really walk through everything in detail so that people feel like you are kind of tackling it and you're taking ownership for it and you're. And that you're owning it. So that's the second thing. The final thing that I think is really important that is often again overlooked is you should put the board to work. The reason you have a board is to help you in the hard times. If everything's just straight up to the right, then really you don't need them. You could pretty much deal with that yourself. When things go wrong and things get difficult, that you can turn to these people and potentially get some really valuable help and advice. I don't mean give them busy work or demeaning tasks or stuff that doesn't really matter, just to keep them busy. To keep them busy. I mean, things that would really be genuinely helpful. And there are lots of things, I mean, requests like, I don't know, can you introduce me to five potential customers in the financial services vertical so we can see if that's a good market for. For us? Or help me recruit a VP of marketing? Or let's walk through the product together and think about how can we simplify the workflow? Because that'll make a really big difference to engagement and adoption. I mean, these are all things that you could turn to the board about. And again, you really want to think it through in advance. So I would go into the board meeting with a of potential requests and potential asks so that once you've processed it for them, once you've kind of got a common understanding of what's going on, you can have the discussion about how they can help, how they can be involved, because people like to help, people like to feel involved. So. Those are the four lessons again, I would. Before today, before you are anywhere near missing your numbers, I would engage your board, not manage them. And I would really focus on product over metrics. And then when it happens, I would avoid these key pitfalls that we talked about and really own it, take responsibility and put the board to work. The final thing I'll say is that it's been a change for me the last five years after being an entrepreneur, to be on the other side of the table. And instead of being the person living the mess to now showing up at a board meeting and hearing about it afterwards. And the part that has surprised me, I think, is that very often I'm more enthusiastic about a company after they've missed than I am before. And that when the founders do it right, I actually feel that it has strengthened our relationship to have gone through that experience, even though the experience is not pleasant. And I think it's because we all know that building a company is incredibly hard. It's just so hard on so many different levels. And what you realize as you work with a lot of companies is that founders who have the grit and the skill to lead their companies through the hard times are the founders who are much, much more likely to succeed. Thank. You.