Aug 302004

Political versus Corporate Leadership, Part I: Realist or Idealist?

It’s election season, the GOP convention is literally in my backyard, and while this is not a political blog, I can’t help myself. As we as Americans grapple with the question of who we want to be our next leader (or at least those people who live in the 11 annointed swing states do), I have had a lot of thoughts lately about the question of what makes a good leader, and what the differences are between successful leadership in politics and successful leadership in business.

James O’Toole’s article on President Bush on page 31 of the September issue of Fast Company (no link available yet) brings up a really interesting point in comparing Bush to former president Ronald Reagan. He asserts that “what made Reagan effective and respected was that his actions followed consistently from a positive worldview.” (I’d also argue that the positive worldview as a starting point had something to do with it, but that’s beside the point.) He goes on to say that Bush has an “implementation problem” in that he “has vacillated between contradictory approaches to leadership: realism and idealism.” His central thesis is stated very clearly that

“Realists and idealists can both be effective leaders. But one cannot be both at once…The leadership lesson for GW – and for any leader – is simple: Followers don’t much care if leaders are realists or idealists, but they distrust inconsistency.”

This may or may not be true in the political arena, but I know it’s not true in business. Jim Collins’ watershed books Built to Last and Good to Great — both must reads! — describe the ideal CEO as someone who can simultaneously be optimistic and idealistic about the future of the company while simultaneously recognizing and dealing with the realities of the short-term situation. Ironically for this posting, Collins calls this the Stockdale paradox, after retired Admiral James Stockdale, a military leader and erstwhile vice presidential candidate of Ross Perot in the 1992 election.

As CEO, I have to constantly be selling the vision of the company — what we’re trying to become and how we’re going to get there — in broad strokes to my investors, board, management team, employees, and even customers. It’s that vision that keeps the whole machine running and keeps everyone focused and excited and working hard towards our long-term goals. But I have to be equally vigilant about the mundane realities of the current quarter, making our numbers, containing costs, and running the machine. If I did either one without the other, I think the whole system would break down.

Is Bush’s problem, as O’Toole asserts, that he articulated two different types of reasons for the war in Iraq — one rooted in Realism (WMD) and one rooted in Idealism (freedom and democracy)? Same goes for his states reasons for the tax cut — Realism on the one hand (to stimulate the economy) and Idealism on the other hand (shrink government). I agree that the Bush Administration has occasional implementation problems and doesn’t have nearly the “following” that Reagan and other more successful leaders in the past have, but I don’t think they’re caused by combining Realism and Idealism in the President’s leadership style. I think the leader of the free world has to do both well, each at its appropriate time, in order to be effective at his job.

Next up in this series: Admitting Mistakes.

Aug 252004

Wrap-up on Preferences?

In this Olympic Season, Brad gets the gold medal and possibly world record for longest post with his excellent posting on Participating Preferred securities. Fred gets the silver with his contribution on The Double Dip. Dave Jilk and others share the bronze for their many comments.

I won’t add more to the debate but will try to close it by tying together a few of these postings. Fred and Brad both wrote subsequent postings on the related themes of If It Looks Too Good to Be True, It Probably Is and Fantasy vs. Reality. These comments could easily be applied to my thoughts on VCs being silly about bidding up crazy long shot concepts and committing Venture Fratricide.

And of course, it begs the new media version of the age-old question: if a web service costs $25 million to build and then falls into the ether while investors and management sheepishly turn their backs, does it make any noise?

Filed under: Entrepreneurship

Aug 222004

New Media Deal

Americans have long operated under an unwritten deal with media companies (for our purposes here, let’s call this the Old Media Deal). The Old Media Deal is simple: we hate advertising, but we are willing to put up with an amazing amount of it in exchange for free or cheap content, and occasionally one of those ads slips through to the recesses of our brain and influences us in some way that old school marketers who trade in non-addressable media can only dream of. Think about it:

– 30 minutes of Friends has 8 minutes of commercials (10 in syndication!)
The New York Times devotes almost 75% of its total column inches to ads
– We get 6 songs in a row on the radio, then 5 minutes of commercials
– The copy of Vogue‘s fall fashion issue on my mom’s coffee table is about 90% full page ads

The bottom line is, advertising doesn’t bug us if it’s not too intrusive and if there’s something in it for us as consumers.

Since I started working in “New Media” in 1994, I’ve thought we had a significantly different New Media Deal in the works. The New Media deal is that we as American consumers are willing to share a certain amount of personal information in exchange for even better content, more personalized services, or even more targeted marketing — again, as long as those things aren’t too intrusive and provide adequate value. Think about how the New Media Deal works:

– We tell Yahoo that we like the Yankees and that we own MSFT stock in order to get a personalized home page
– We tell what personal health products we buy so we can buy our Q-tips and Benadryl more quickly
– We tell The New York Times on the Web our annual income in order to get the entire newspaper online for free
– We let PayTrust know how much money we spend each month so that we can pay our bills more efficiently
– We let Google scan our emails to put ads in in them based on the content to get a free email account
– We give their email address out to receive marketing offers (even in this day and age of spam) by the millions every day

Anyway, after a few years of talking somewhat circuitously about this New Media Deal, my colleague Tami Forman showed me some research the other day that backs up my theory, so I thought it was time to share. In a study conducted by ChoiceStream in May 2004, 81% of Internet users expressed a desire for personalized content; 64% said they’d provide insight into their preferences in exchange for personalized product and content recommendations; 56 would provide demographic data for the same; and 40% said they’d even agree to more comprehensive clickstream and transaction monitoring for the same. All of these responses were stronger among younger users but healthy among all users. Sounds like a New Media Deal to me.

Don’t get me wrong — I still think there’s a time and a place for anonymity. It’s one of the great things about RSS for certain applications. And privacy advocates are always right to be vigilant about potential and actual abuses of data collection. But I think it’s becoming increasingly clear that we have a New Media Deal, which is that people are willing to sacrifice their anonymity in a heartbeat if the value exchange is there.

P.S. Quite frankly, I wish I could give spammers a little more personalized information sometime. They’re going to email me anyway — they may as well at least tell me to enlarge a part of my body that I actually have.

Aug 182004

What's Your Preference?

More thoughts on some of Fred’s and Brad’s points about VC deal algebra, valuation, and liquidation preferences for venture-funded startups. My apologies if this gets a little too technical or too long!

On liquidation preference: Preferred stock makes sense, participating preferred makes less sense. Sure, a VC who puts capital at risk in a startup should be entitled to get his or her money out before management and common shareholders who are paid to run the business. But I’ve always had an issue (even when I was in the venture business, although admittedly not as a partner) with the participating preferred security which allows VCs to get their money out first, and then still receive their proportional share of the rest. Fred calls this “a loan with an option,” and that’s the best presentation I’ve ever heard of the security. But what’s always struck me as a bit over the top about this is that it gives VCs downside protection at the same time they’re negotiating even more upside in a deal.

One simple solution to this, if you can negotiate it, is a “kickout” provision which makes the participation feature on the security go away if the company becomes worth a multiple (usually 2x or 3x) of the post-money valuation of the financing. In other words, it gives the VC the downside protection they want but gives you and other shareholders more of the upside if things go really, really well.

On valuation and deal algebra: I completely agree that valuation is a derived number and that it’s completely misunderstood in early stage investing. However, I think that while there may be low correlation between valuation and what the business is worth today, there are a few things that have always bugged me about VC valuations:

While I understand that valuation is more a function of future potential than current value, it sometimes feels like companies get punished for having a track record. Let me clear about my point – it’s not that that I actually think VCs lower valuations unfairly when companies demonstrate poor results. It’s actually the opposite. VCs are quick to bid up the valuation on companies that don’t have revenue or even a lot of operations just because the idea is cool or because the theoretical market is large (Friendster, anyone?). I don’t think VCs as a group do a good enough job of risk-adjusting or future-competition-adjusting valuations for new companies, or they get caught up in what Fred once called Venture Fratricide and just pour money into new sectors en masse. This has the unintended side effect of making management teams of existing companies feel like their ideas aren’t interesting any more because they’re not new and shiny.

Second, it’s interesting to note that while VCs use valuation as a way of placing limits and getting protection on their bet about the future potential of the company and entrepreneur, entrepreneurs have no corresponding mechanism to place limits or receive protection against having a bad VC. (VCs actually have many tools at their disposal to reign in poorly performing management teams once the deal is signed – they can fire them, cram them down, force all their common stock to be on a vesting schedule or subject to clawback.) But make no mistake about it – a bad VC can almost kill a company, or certainly keep it from realizing its full potential, and once that deal is signed, the entrepreneur typically has little recourse. I’m not sure there’s an easy solution to this particular problem either, but it’s one that’s worth thinking through with a good lawyer the next time you negotiate a term sheet with a new venture investor (and certainly one that is easier to negotiate if you either have a good track record as an entrepreneur or multiple VCs interested in your company). I made one suggestion around participation in future financings in my earlier posting on term sheet negotiations — item #8.

The final thing that’s bugged me about valuations stems from what Fred calls the 1/3 rule (1/3 of a VC’s investments work out well, 1/3 go sideways, 1/3 go bad). As a result of the rule, valuations and deal structures can end up being about VCs getting as much upside as possible out of their winning deals to cover their losses from their zero-return deals. What bugs me about this is that entrepreneurs don’t have that same luxury of a diversified portfolio – they are 100% invested in terms of their human capital and often their investment capital in their company. I fully realize that this is the nature of the beast, but I’ve always felt as a result that entrepreneurs should negotiate – and VCs should be willing to give – proportionally much more upside to management in the event that the deal turns out to be a big winner. This point relates back to my first point about participating preferred securities.

Next up in this series…Reverse Engineering Venture Economics, and managing other kinds of investors (Angel and Strategic).

Filed under: Entrepreneurship

Aug 182004

A More Cynical View of VCs

Steve Bayle has a similar posting to my How to Negotiate a Term Sheet posting from a couple weeks ago. While he has a lot of good points, his view is far more cynical than mine. I think an entrepreneur can be friends with his or her investors and board members and that their interests for the company are more often than not aligned. Of course an entrepreneur’s personal career goals may differ from an investor’s goals for the company, but that’s apples and oranges.

As long as both parties behave like grown ups, have a healthy dose of self-awareness, communicate openly, regularly, and clearly, and realize that successful business relationships require no less effort than successful marriages, the entrepreneur/VC relationship can work brilliantly. Call me an idealist (or maybe it’s just that I have great VCs), but entrepreneurship is all about making things a reality, isn’t it?

Filed under: Entrepreneurship

Aug 112004

Toys Wur Us?

(With full credit to my colleague Mike Mayor for the title)

Today’s announcement that Toys R Us was probably going to sell its retail toys business to focus on the better performing and higher margin and less Wal-Mart-threatened Babies R Us business made me a little sad.

It’s really no different than the way Sandy Weill turned American Can into Primerica asset management. Or how Jack Welch sold off GE’s small appliance business and built the company into a financial services powerhouse. Companies transform themselves all the time in search of better earnings and higher multiples.

But although it’s “just another” one of those corporate evolutions, I can’t help the notalgiac reflections on running up and down the aisles of Toys R Us with my parents when I was a little kid, begging them for, well, just about anything in the place. What’s next — Disney turning into a software company?

Aug 102004

Why French Fries are Like Marketing

My friend Seth has a theory about life called the French Fry Theory. The theory is simple — “you always have room for one more fry.” It’s pretty spot-on, if you think about it. Fries are so tasty, and so relatively small (most of the time), that it’s easy to just keep eating, and eating, and eating them.

I’ve always thought that the French Fry Theory can be applied to many things, usually other food items. However, I came up with a new application today: Marketing.

So why are French Fries like Marketing? You can always do one more thing. One more press release. One more piece of collateral. One more page on the corporate web site. One more newsletter. Trade show. Webinar. Research study. Ad. Search engine placement. Vendor. System. Speech. Take your pick.

The world we operate in is so dynamic that marketing (when done well) is nearly impossible to ever feel like you’re completely on top of. There’s always more to be done, and the trick to doing it well is knowing when to say “no” as much as when to charge into something.

My hat’s off to 21st century online-industry marketers. To bring this analogy back to its starting point…their plates are full!

Filed under: Leadership

Aug 092004

Morning in Tribeca

We live on the 35th floor of our building in Tribeca (downtown Manhattan), facing south, about 7 blocks up from the World Trade Center site. From 1994-2001, our view was grand and corporate. For a short time in September 2001, it was horrific. Since then, it’s just been depressing. Seeing such a large gap in the skyline every morning just made us remember what — and who — used to be there.


It’s not getting a lot of coverage because it’s not the Freedom Tower, but the new World Trade Center 7 building is on its way up.

As far as I’m concerned, it’s the most beautiful construction site I’ve ever seen. It’s definitely morning once again in Tribeca!

Filed under: Current Affairs

Aug 052004

Baby and Bathwater Redux

Katie Hafner’s article in the New York Times Circuits section today about spam and false positives is right on the mark. Spam filters are still evolving, and spammers are evolving right with them. Although the flood of spam is largely stemmed by a good filtering app, the results for consumers are still spotty: false negatives are irritating, false positives can be very painful (as the article suggests), and the process still consumes a little too much time. While the article nails the consumer problem, it does miss the corresponding business problem around false positives (see below).

But things are getting better. While I wrote generally about how email is here to stay a couple weeks ago, there are a couple other things I’d point out after reading Katie’s article that are making the email landscape a brighter place of late:

First, even better than the Bayesian style filters referenced in the article are community-based filters. The leading one is run by Cloudmark and is called SpamNet. SpamNet relies on a community of 1 million hardcore email users voting on whether email is spam or not. I’ve used SpamNet for over a year now, and while it’s not perfect, it’s pretty good at reducing both false positives and false negatives to a tolerable level, and it’s very easy to use (but only with Outlook for now).

Second, a few companies in the email industry — Ironport (Bonded Sender) and Return Path included — are hard at work on solutions to the false positive problem that won’t leave false negatives behind. Once these solutions reach maturity (still 6-12 months away), I think consumers will notice a quantum leap improvement in managing their inboxes.

Finally, one thing I’m always trying to encourage people to realize is that this problem is not just an annoyance for them personally…but it’s an annoyance to legitimate businesses everywhere. Businesses who uses email to reach their customers — when customers request the email — are consistently finding that anywhere from 5 to 50% of their emails are blocked or filtered (with an average of 19%, according to our research). Talk about an ROI buzz kill and a CRM nightmare!

So hang onto those babies out there, consumers and marketers alike…the bathwater really will go down the drain soon!

Aug 052004

Challenge Response: Oy!

I don’t think the news about AOL buying Mailblocks and its challenge response anti-spam product is such a big deal in the grand scheme of things. But it does give me a quick opportunity to rant against challenge/response.

First, I don’t think the world is in danger of mass adoption of challenge/response. Earthlink, which in general has much more sophisticated customers than does AOL, has had a hard time gettings its adoption level of this up to the 7-10% level over a period of at least two years. I think it will be even tougher for AOL. I applaud AOL for trying to do more to help members fight spam, but I don’t think this is the answer.

So onto the rant. Challenge/response is a pretty poor solution to spam. Or, rather, I should say it’s an excellent solution to spam with humongous side effects. Some are documented in Pamela Parker’s article in ClickZ about this, but my top three issues are:

1. Challenge/response effectively eliminates everything other than personal email from people who like you. In other words, no emails from people like Fred who don’t have time to respond or work offline, no newsletters, no Wall Street Journal email alerts, no Amazon shipping confirmations, no eBay bid responses.

2. The flip side of the previous point is that for publishers and marketers, challenge/response is a nightmare. Manually responding to dozens of emails is hard enough — that is, if the marketer/publisher can find them and respond to them before they “expire.” But when the volume gets into the hundreds or thousands, it becomes a nightmare cost of being a non-spammer.

3. My final pet peeve? David Daniels nailed it in his quote in Pamela’s article — it solves the problem of too much email by tripling the volume of email (one email, one challenge, one response)!

Overall, it’s a crude solution to the problem, and one that I think will be obviated over time.