"The Top 5 Questions Every CEO Wrestles With Dave Kellogg, ex-CEO Host Analytics": SaaStr Classic

So let's jump into the first question. When do I next raise money? Every CEO worries about this question all the time. Okay. And my only kind of glib answer is when? Now? How much? As much as you can. Right. From whom? The best VCs who will fund you and on what terms. If I could add one, the best you can find. And the reason that's only kind of glib is let's look point by point. When? Well, in 2002. I know it was a long time ago, but in 2002 there were only two types of startups in existence. Those that had raised a large amount of money at a ridiculous valuation prior to April 2001 or dead. There was no other type of startup in 2002, when the Internet bubble burst. So these decisions could have a big impact. Always remember the famous quote from Don Valentine, the founder of Sequoia, all companies go out of business for the same reason, they run out of money. Right? And as CEO, one of your first and foremost responsibilities is to keep the organism alive. And the way you do that is to keep fuel or oxygen, pick your metaphor, in the tank. So that's why you want to raise now. How much? There's a tendency, you'll find this kind of teeter totter where people want to push back financing because if we can get a couple of more good quarters, we can reduce dilution. So there's this tendency to always want to do it later because as an optimistic entrepreneur, we believe in the bright future and raising money later is always better than sooner. But that's only true if everything really turns out, Rosalie. And this can backfire on you. So that's why that both the how much and the when should be pulled forward. From whom? You know, notwithstanding the real value that top tier VCs offer, whether they have programs to support the startups or the value and wisdom of a wise board member. Notwithstanding that real value, there's also a big brand value in the VCs you pick. So all other things being equal, in a financing round, you can have somebody who's very nice and very smart from a no name firm or somebody who is equivalent from a big name firm. Your future fundraising will be much easier. If you pick the second person, your day to day operations might be equivalent, your next round will be easier. So that's kind of the micro view on fundraising. If you step back and take a more kind of macro view on it, you should try to raise money about every two years. Why is this? Because unless you're blessed and some people are blessed, they can make five phone calls and raise a $50 million round. But if you're not one of them, if you're not blessed and raising a round is going to be real work, say three to six months. There's a distraction factor on the CEO with all that time gone. So that's the one scale is saying, big distraction. We can't do this every year. I can't spend a third to half my time raising money. On the other hand is the dilution argument, which is the later I raise money, I could do it at a higher valuation, get less dilution because the company will be bigger. Look, if you raise three years worth of money, there's a very strong argument that the portion of that capital needed in year three could have been raised at a higher valuation. So when you net all that out, you kind of come down to two year cycles. One interesting thing about this phenomenon is you can often take the size of somebody's round and divide it by 8 to 10 and get a pretty good approximation of their burn rate because most people think in these terms. So how much money should we raise? Everybody should have a driver based model for their company that has all the key drivers. Right? Number of reps, types of reps, productivity by types of reps, attrition, ramping net and gross, dollar retention rate, gross margin. There's about 10 or 15 drivers. You need to fully model a SaaS company and you should build that model and use it to figure out how much cash you need the last two years. And not in your best scenario, but in an okay scenario. Now, the most important thing in this crazy environment is just because you raise it doesn't mean you have to spend it. You might go out thinking you're going to raise 25 million and in this world find out that you can raise 50. Should you take the 50? In my opinion, yes. See prior slide, right. But the problem is now you've got $50 million and you've got a board member presumably who wants to see you deploy that. He or she underwrote a model where that 50 million gets spent. And this is gonna create some tension. And my advice to resolve that tension is understood that yes, they underwrote a model, but you're now three months later, six months later, executing in reality. And if you've just hired a cohort of 10 sales reps six months ago and everybody's failing, don't go hire 10 more, even though the model says you were supposed to. Right. Let reality drive the trigger on the spend, not the model. That got underwritten six months ago. And the last point, and this is a big one, is, can you afford not to fight in the VC arms race? You know, 20 years ago, VC was more like the racetrack. I think they sat around and everybody bet on their horse and they watched the race and they saw who won. And now somebody figured out along the way that if they could kind of give their horse steroids in the form of extra capital, that they could actually increase the odds of their horse winning. And the first guy did that, the second guy did that, and the third guy did it. And now you have these $100 million private rounds where in effect Sandhill Road is trying to king make. They are trying to pick winners by deciding this is the company that will get the most funding. And my advice for you, and the perverse thing about this is the better your category, the more likely that is to happen, right? If you're selling some very focused vertical SaaS app, you're unlikely to find a spending arms race, right? But if you're in some horizontal platform category, people may throw hundreds of millions, maybe even billions of VC at the category. And you don't get to not play. So if you find yourself in this situation, it's probably a sign that you're in a really good category. But you either need to play to win and go out raise the other guy, or you need to find pivot into some sub segment where you're not directly competing with them. It's a very hard decision. But, you know, how much can you outsmart the other guy? Because this is Silicon Valley. The other guys are smart too, right? You might be smart. They're smart. Can you outsmart them if you have 20% less capital? Maybe if you've got 50%. Maybe if you have a third, I don't know, maybe even 50%, I don't know. How much are you relying on outsmarting somebody who I'm assuming is already very smart? So you have to watch this factor when you think about funding. So second question, do I have the right team? Boards focus on this question a lot. VCs view themselves as kind of experts in people. Everybody gets to have an opinion about people, whether you're a financial VC or an operating vc. So this is a question that attracts a lot of attention. And I always like to look at it through two perspectives. The first is for you, for the CEO, do you have the right team for you? And then second, do you have the right team for the board? And let's talk about them one at a time. So I have a couple of kind of joking tongue in cheek laws up here that come from friends of mine. But the first law is pretty simple. My friend Greg Lorden always said there's two types of people, those who bring energy and those who take energy. And we all know who those energy takers are. They walk in the room and they somehow suck all of the oxygen out and they kind of bring everybody down. My advice, get that guy or gal out of the room. I don't care how you do it. I don't care if you demote them, I don't care if you keep them as a direct report and disinvite them to the meeting. I don't care if you hire them a coach. But your team needs to be full and you have a very hard job and you should be surrounded by people who bring energy. The second principle is, do you want to meet with them? You know, one day I was at MarkLogic probably 10 plus years ago, and we'll make up the position. I had a meeting at 11 o' clock with the VP of Product Management and I went, oh God, I don't want to do that meeting. And I stopped and I went, that's crazy. Wait a minute. You're the CEO of a company. You're supposed to meet with the head of product strategy, which is one of the most important things in the company, and you don't want to meet that person. What the heck does that mean? Right? And what it means is bad, right? Because there's probably a reason why, why you don't want to meet with them. For me, the top reasons are they can't keep up with the conversation or their answers are always gobbledygook when I ask questions or what's another good one? Oh, they don't follow through. They say, yeah, we're gonna do things 1, 2, 3, 4 and 5 and you meet them in a month later and nothing happened. Right? That's how you lose interest in meeting with a direct report. And I view the non desire to meet with one as a huge warning sign that you should inspect. Another thing is how well do they work with each other. Another friend of mine has this expression from Machiavelli that warring princes means one thing, a weak king. Right? And if you're CEO of the company, you cannot allow warring princes in your company. Everybody sees it. The whole company knows if 2e staffers are at war. I've had entry level accountants crying in my office because their two VPs have been fighting. Right? The whole company sees it and it's your job to make sure it doesn't happen. So when you have warring princes, my advice is to be very quick to say, this is unacceptable. I will not tolerate this. You can do 360 degree feedback surveys, you could bring in a coach, you could do whatever kind of intervention you want. But my advice is make sure that no one wins, that there is no winner, that you chose to fight. You might still be with the company, but you are not going to win. And make sure that you're committed enough to fire them or demote them out of the position to make it stop. And one time I had a conversation when this was happening. I said, you know, I'm seriously considering firing you because you're at war with one of your peers. And the person said, are you going to fire me for fighting? I said, no, I'm going to fire you for insubordination. Because I asked you not to fight. I told you not to fight and you fought anyway. I'm deeply committed to ending this conflict. So another thing to think about, do you have the right team? If they're fighting with each other, something's wrong. And then finally, delivery track records. Some people are really good at explaining why stuff didn't happen. Well, let me tell you, building software is really hard. It's like, I don't want to hear that. I want results, right? I want people who deliver results, not explanations. So as CEO, I think this is a good checklist for do you have the right people? Now let's take a look at the board view on this question, which is very different. What the board wants is for you to be a little bit uncomfortable with your team. The board wants you to be challenged by your team. Right? The board wants you to hire people, quote, unquote, better than you or more experienced than you. Why? Because by and large, if you're on the E staff of a startup, that's not the place to learn how to do your job. The board doesn't want people learning how to be VP of sales. The board doesn't want people learning how to be how to be VP of marketing. So, and the way the board thinks about this will be like they may look at somebody and say, well, your VP of sales is good for this year, but they have a sell by date of next year. And this notion of having a sell by date, it may not be polite, but often board members have it. And if they have it, I'd advise you to understand what they are and to try and reframe the issue that it shouldn't Be that John or Mary is with the company or not by the sell by date, it's in that role because the CEO, I believe you want to keep these people in the company. But in fact they may have a sell by date for a certain role. But I would add one proviso. If they cannot develop skill y so try to reframe this in the minds of your boards. Ultimately, the board wants to see you hiring kind of a mix of veterans and up and comers. And ultimately, ultimately they come down to really one question. Does Sarah, our CEO bring in a players or does Sarah hire people that she's comfortable with? And certainly the board wants to see type 1 3. How can I better manage the board? You know, I think the place to start in thinking about this is there's a universal desire amongst VC directors to add value. And one of the things VCs do is pattern match. And if you don't channel their energy, you are likely to be pattern matched to death. And I propose a better solution which is to try and take control of the situation. The other thing VCs will tend to do is the more financial, that is less operational they are, the more they care about two things, numbers and people. By the way, the intersection of which is called comp committee. Right? So try to drive those people towards your comp committee. I would make board meetings a board meeting topic. Very few boards do this. Just take an hour to say, what kind of board meeting do we want to have? One of my favorite questions, ask each director in their entire career who managed the board best and what did they do? One answer. I heard this guy got the slides out five days in advance, called every director individually, walked them through the deck. To me that's terrifying because I'm like, why bother to have a board meeting if you're going to do that? But at the same time, it was really good to know that that was his view of perfect board management. Right? The other thing, just as a quick aside there. If you're getting the board slides out 24 hours or less before the board meeting, you're not looking good almost regardless. But what are the assumptions here? Are we assuming the board has read the slides or not before the meeting? Do we assume, as I do, that the board meeting is a chance for the board to inspect the executive staff, put them up in front of the board and let them answer questions about their business? Some directors might want that. I'd be one of them, some don't. You need to know. But the real way to do this is to Kind of reverse the paradigm. And when I went to Berkeley many, many years ago, there was a local band called Psychotic Pineapple. And their big hit song was the Devil has Worked for Idle Hands. And whenever they hit the chorus, everybody would go like this. Put up their idle hands. And that's the way I think of the board. The devil has worked for idle hands. That is a good dog, is a tired dog, right? If I'm not keeping the board busy helping me drive the company, they are going to come in with ideas and ways to help that I may not find helpful. So why not be proactive, right? At every board meeting, Put up the pipeline. Who knows somebody at every board meeting. Look at the boards of the customers who went to business school. Some guy at this board, hey, we're struggling with metrics. Which one of you is a great metrics driven cfo, right? Hey, who wants to make a committee with me to go solve this topic? Or my favorite comp committee, often a nightmare. Can we reframe comp committee from this gauntlet that I need to run to a collaborative exercise where me and two board members are trying to make a proposal that appropriately rewards the executives and keeps them with the company, Right? Get them working for you. Number four. To what extent should I worry about competition? In some ways this one's weird because it's like, is this a trick question? Like, they're trying to kill me. There's a bunch of people across the street who've raised $75 million or $150 million in venture capital and they are trying to kill me. Of course I should worry about them, right? Sun Tzu. If you know the enemy and know yourself, you need not fear the results of 100 battles. And then one day I was at Salesforce. I did a year at Salesforce in the middle of all that. And I was mentioning Zendesk, I was like, hey, there's these guys called Zendesk and they might be a problem for like our customer service business. And I got the kind of, uh, oh moment where like, oh, and then Benioff said a proverb. Dave, never lead from a position of fear. I'm like, oh shit, did I sound scared? I wasn't scared, Right. I was just trying to point out that we have this competitor, right? But basically what we had here was a proverb conflict, right? And you know, it's Silicon Valley. I love management by 2500 year old proverb as much as the next guy. But. But we've got two proverbs in conflict here. And what are we going to do about it? And the answer is, I think this whole issue is semantically equivalent to an issue I call drivenness, where people say, what kind of company are we? Are we vision driven or are we customer driven or are we competitor driven? Or sometimes you live in here functional. Are we sales driven or marketing driven or product driven? The last three I just exclude as politics, period. Because what you're saying is you want your function to be more important than the other functions. So I throw those out. But let's go to the first three. Should we be vision driven? You know what Mark would have said in that moment? We need to blaze our own path. Don't worry about the competition. That's vision driven. Should we be competitor driven, developing detailed plans for how we're going to kill competitors, or should we be customer driven? And the answer is, avoid this fake either or framing, which is you need to speak like you're vision driven. So when you're talking to customers and analysts, the markets talk about the desired end state, talk about the vision, don't talk about competition. When you're building your company culture, my opinion, make it customer driven. We want everyone to be genuinely concerned with and genuinely curious about customer problems and helping them solve them. And when you're building your strategy and setting goals, be competitor driven, there's five guys trying to kill you. What's your plan to kill them back? And who's gonna own pieces of that plan? So to me, this is not a binary answer. It's we need to be all three. And if you just. Because I think the default answer in Silicon Valley is just focus on the vision. And that can be very dangerous because if you have competition who's focused on their vision and focused on killing you, it can be a fairly painful experience. So, you know, number five, are we focused enough? And the default answer to this is probably not. There's an enormous number of factors that serve to defocus Silicon Valley companies, right? I mean, one of sadly, one of the worst answers for what are you going to do next year? Is more of what we did this year, right? Because we're in a 2% penetrated market that we think is a $10 billion TAM. And, and we don't need to add new products or add new anything. We just need to go grab share in this huge market. And people hate to hear that. So I think you need to understand that because I think your first goal, if you are in a hard market, should be precisely that, to do more of what got us here next year. But what about the focus. And when I think about focus, I always go back to the movie Aladdin, where the genie goes, right? Incredible cosmic power. Itty bitty living space, right? And this is by paraphrasing of Geoffrey Moore, with all due apology, which is startup strategy should be phenomenal. Cosmic vision. Type A focused execution, right? That's what you need to have. Keep the big, big vision. Don't lose sight of it. But when you're making next year's plan, let's be focused. Let's have achievable goals that we can win. Remember Amazon, right? The first product that is sold was the book. And their big first move after books was CDs. Right? Little products that easily shipped. Let's debug the model and make it work before we start trying to ship soccer goals around. I remember I bought my first soccer goal on Amazon and I'm like, wow, I couldn't believe it. Cause it was like, these are the guys who started in books. And of course, I mean, look at all the stuff they've done since aws. Mechanical Turk, the fulfillment model, right? But they did it systematically, did it over Facebook. Right? Facebook was Harvard students, then Ivy League students, then all university students, and then kind of all people, right? Let's be systematic. That vision is not the same thing as strategy. Vision is a view on how the world should be. It's an end state. And strategy is this systematic plan for getting there. Now, since we have time, I thought I'd throw in a bonus question, which is, are we winning? And I think this question is really important for your startup and for the morale of the people in it. Because everybody wants to feel like they're at a company that's winning. And look, the board wants to feel like they're winning. The number one cause of CEO death is misalignment with the board. So isn't it important to have these kind of big questions discussed with the board? Whether those be about the team and about people's sell by dates. Don't let those just sit in people's heads as assumption. Let's get them out on the table. Well, let's get another big thing out on the table. What is winning? And I first heard this question from a book called Strategy is Destiny by Robert Bergelman at Stanford. And his whole argument was pretty simple. If we say strategy is the plan to win, that immediately begets the question, what is winning? And that's a very healthy question to have between you and your board. And you may be surprised at the answers you get, particularly from founders because sometimes they'll surprise you. It's to make more money than my roommate at mit, right? Or it's death to the evil emperor of Microsoft. Or it's like you may find some underlying mission that you're like, oh, I just thought we were trying to build a hundred million dollar company. Right? And you may find these motivations. So it's a good thing to get out there and get surfaced. So. And there's so many different answers that you find when people speak honestly. It's just a fascinating conversation to have. So look, in conclusion, let's wrap this up. Everybody worries about these five questions. They're kind of the five questions that never go to bed in some ways to define the startup CEO job. These are five questions that you need to worry about a lot, particularly the first two. All of them. But certainly, do I have enough money and do I have the right team? That's gotta take a lot of your time as a startup, startup CEO. I encourage you to ponder them too, with your board, your advisors, industry watchers and more. And I'll end with a quote. One of my favorite quotes on management from Peter Drucker, which is, you know, the temptation for a startup CEO is to spend all their time in management, right? And management is about doing things right. And there's nothing wrong with that. The trains need to run on time at your company, but leadership is about doing the right things. And if you focus on these five questions, I think it'll help you find the right balance between the two. So thanks a lot for attending today. See you next time. Take care.