Levine is the third partner to join AH in recent months. In January it named HP and Opsware veteran Mark Cranney as a partner for market development. And in March it added IronPort’s Scott Weiss.

“Adding Peter makes us smarter at the firm on a certain class of products where he is much more experienced and goes much more in depth than we do, in areas like virtualization and storage,” AH co-founder Ben Horowitz told me. A key area of expertise is one that Levine developed specifically at Veritas, he said, that of working with manufacturers of infrastructure products. “Veritas was probably the most successful company in the history of enterprise software at the OEM model except for Microsoft,” Horowitz said. “It’s a very complicated thing to do–and a very complicated thing to do correctly–so he brings a specialized skill set to the table.”

Horowitz also said Levine will help AH expand its reach and find deals in places where it hasn’t had a presence before, places like the Massachusetts Institute of Technology where Levine is a lecturer. One example: Bromium, a stealth startup that AH says it is investing in. While Horowitz didn’t disclose the amount the firm is investing, he did describe Bromium as a “security plus virtualization company.”

“It’s the kind of deal we wouldn’t have known about without working with Peter,” Horowitz told me.

“We’re at the second generation of what you can do with virtualization,” Levine told me. “Companies like Citrix and XenSource did a lot of the hard rock-breaking to get chipset support from companies like Intel to support virtualization, and once they did that there was an opportunity to take virtualization to the next level. Bromium is a company that takes advantage of all that.”

Levine is continuing in his role as a vice president of Strategic Development at Citrix and will continue teaching a class on Technology Sales at MIT’s Sloan School of Management. Previously, he was senior vice president and general manager of the Data Center and Cloud Division at Citrix, having joined that company in 2007 by way of its $500 million acquisition of XenSource, a provider of open-source virtualization sofware, where he was CEO. XenSource’s customers included Microsoft, Symantec, HP, NEC and Dell.

This will be Levine’s second go in the venture capital ring. He spent three years as a general partner at the Mayfield Fund and in that capacity served on the board of Consera Software, which was purchased by HP. He sat on the advisory board of VMWare and was an investor in Actona, which was ultimately acquired by Cisco Systems.

Levine first rose to prominence as an early employee of Veritas Software, and during his 11-year stint there helped to grow it to 5,000+ and more than $1.5B in annual revenue. His last job at Veritas was executive VP, where he was responsible for worldwide marketing, OEM sales, business development and several product divisions. Before that, he was a software engineer at MIT and worked on Project Athena, an early-1980s research project to build a campus-wide distributed computing network that turned out to be a forerunner of the kind of corporate networks we now use every day.

It was a complaint that Sunny Gupta heard often around the time that the company he was working for, Opsware, was being acquired by Hewlett-Packard. “CIOs kept pulling me aside and telling me their jobs were changing,” he said. “A job that used to be about managing technology was quickly becoming one of managing costs.”

It was a rare opportunity to launch a service that numerous big companies were clamoring for. His response is Apptio, a cloud-based service that tracks IT costs and other metrics for CIOs who are constantly under pressure to justify their budgets to CEOs. Backed by $41 million in venture capital funding from Greylock Partners, Madrona Venture Group, Shasta Ventures and Andreessen Horowitz–the venture firm run buy Gupta’s former Opsware colleagues Marc Andreessen and Ben Horowitz. It’s growing like crazy, and customers include Cisco Systems, Starbucks, Facebook and J.P. Morgan Chase. Cisco liked it so much it joined with the venture firms in a $16.5 $20 million Series C round of funding that closed last November, and it also resells Apptio to its customers.

I caught up with Gupta by phone while he was on a trip to London to talk about Apptio’s business and how it’s shaping up.

NewEnterprise: Sunny, let’s start at the top. What does Apptio do?

Sunny Gupta: IT has a lot of raw materials like labor, hardware and software. A lot of these things are tracked at the company level. But the CIO’s job is managing the IT products. We aim to help the CIO really understand the cost structure of all their IT assets. We do this by producing what we call a Bill of IT. It captures the supply and demand of IT resources to the business. It helps the CIO show what the levels of demand and spending really are. We also help them with planning and budgeting and forecasting. And then we help them make cost-reduction decisions and benchmark their performance against other companies in their industry.

How many customers do you have?

We have about 60 customers, and we are managing more than $50 billion in IT spending.

So every company does a return-on-investment analysis on its IT spending. This sounds like it’s a lot more detailed than that.

You can think about it as a detailed ROI, but the way our customers think about it is as an ongoing management system that tracks the fully loaded cost structure of the products and services they provide to their businesses on a month-to-month basis. It tracks costs, but also utilization, so you can see how the resources are being used, and whether or not it makes sense to, say, consolidate a data center.

You said Facebook is a customer. Can you tell me a little about how it’s used there?

The CIO there uses Apptio to track monthly telecom expenses, and to help understand costs and to make decisions around getting the most out of what they spend.

A lot of companies are struggling with decisions about moving their IT to the cloud or keeping it on-premise, or some mix of the two. How does Apptio fit in a situation like that?

We’re seeing a lot of hybrids. At the large companies, the biggest portion of their costs are still in-house. Without naming names, some of our largest customers have 50,000 or 100,000 servers. These are systems that have been in use for a long time and they’re critical to the business. But we also see large enterprises adopting external cloud services. It may be Amazon Web Services or something from Rackspace, or they may be using a software-as-service like Salesforce.com. The trick is to get a handle on what the costs are and if you think it might be time to move something to an external provider so you can make an objective decision.

A lot of the time a CIO has to decide between something that’s really good and really expensive or something that’s good enough and less expensive. Can you help in cases like that?

That’s one of our prime use cases. If you talk to Rebecca Jacoby, the CIO at Cisco, she says she’s stopped asking “Why not IT?” and started asking “Why IT?” If what you have is good enough based on the cost structure and utilization, you get the granular visibility into all those metrics so you can make decisions. For example, it may be that you don’t need as much storage as you think you do, and so the best move isn’t to switch to the cloud but to stop paying for some of the storage that you’re not using. For the first time, executives are able to make business decisions around technology based on true business metrics. We find on average that customers are able to save 5 to 6 percent of their spend, and over 12 to 18 months they can reduce it by 10 to 15 percent.

What’s involved? If it’s a cloud based service, I presume there’s nothing to install at the customer site.

It’s fully cloud-based, so there’s nothing to install. It takes the financial data from enterprise resource planning software, like SAP or Oracle, and it also takes IT operational data, support tickets and other data. It combines them with the financial data. Once you have all that data you can start working on what-if scenarios and make decisions about what to do–or not do–next. If you want to control or reduce costs, having that detailed visibility is the first step.

How’d they do it? The obvious reason is that the two partners are incredibly successful entrepreneurs – Andreessen co-founded web-browser pioneer Netscape Communications Corp., hiring Horowitz as one of the company’s first product managers, and the pair founded software company Opsware Inc., selling it to Hewlett-Packard Co. for $1.6 billion. As a result, entrepreneurs trust their expertise, so they get access to the best deals.

Read the rest of this post on the original site »

One of the most difficult decisions that a CEO ever makes is whether or not to sell her company. Logically, determining whether selling a company will be better in the long term than continuing to run it stand-alone involves a huge number of factors, most of which are speculative or unknown. And if you are the founder, the logical part is the easy part.

Indeed, the task would be far simpler if there were no emotion involved. But selling your company is always emotional and deeply personal.

Types of Acquisitions

For the purpose of this discussion, it is useful to think about technology acquisitions in 3 categories:

• Talent and/or Technology–when a company is acquired purely for its technology and or its people. These kinds of deals typically range between $5 and $50M.
• Product–when a company is acquired for its product, but not its business. The acquirer plans to sell the product roughly as it is, but will do so primarily with its own sales and marketing capability. These kinds of deals typically range between $25M and $250M.
• Business–when a company is acquired for its actual business (revenue and earnings). The acquirer values the entire operation (product, sales, and marketing) not just the people, technology, or products. These deals are typically valued (at least in part) by their financial metrics and can be extremely large (e.g. Microsoft’s $30B+ offer for Yahoo!).

This post is most applicable to business acquisitions with some relevance to product acquisitions and will be fairly useless if you are selling people and/or technology.

The Logical

When analyzing whether or not you should sell your company, a good basic rule of thumb is:

IF
a) You are very early on in a very large market
AND
b) You have a good chance of being number one in that market

Then you should remain stand-alone. The reason is that nobody will be able to afford to pay what you are worth, because nobody can give you that much forward credit. For an easy to understand example, consider Google. When they were very early, they reportedly received multiple acquisition offers for more than $1B. These were considered very rich offers at the time and they were being offered a gigantic multiple. However, given the size of the ultimate market, it did not make sense for Google to sell. In fact, it didn’t make sense for Google to sell to any suitor at any price that the buyer could have paid. Why? Because the market that Google was pursuing was actually bigger than the markets that all of the potential buyers owned and Google had built a nearly invincible product lead which enabled them to be number 1.

Contrast this situation with Pointcast. Pointcast was one of the first Internet applications to catch fire. They were the buzz of Silicon Valley and the technology industry in general. They received billion dollar acquisition offers that they passed on. Then, due to flaws in their product architecture, their customers started to turn off their application. Overnight, their market collapsed and never returned. They were ultimately sold for a relatively tiny amount.

So, the judgment that you have to make is a) is this market really much bigger (more than an order of magnitude) than has been exploited to date? b) Are we going to be number 1? If the answer to either a) or b) is no, then you should consider selling. If the answers to both are yes, then selling would literally mean selling yourself and your employees short.

Unfortunately, these questions are not as simple to answer as I’ve made them out to be. In order to get the answer right, you also have to answer the question: “what is the market really and who are the competitors going to be?” Was Google in the search market or the portal market? Clearly, in retrospect, they were in the search market. Most people thought they were in the portal market at the time. Yahoo was a tough competitor in the portal market, but not so much in the search market. If Google had really been in the portal market, then selling might have been a good idea. Pointcast thought that their market was much larger than it turned out to be. Interestingly, Pointcast’s own product execution (or lack thereof) caused their market to shrink.

Let’s look at the case of Opsware. Why did I sell Opsware? Another good question is why didn’t I sell Opsware until I did?

At Opsware, we started in the Server Automation market. When we received our first inquiries/offers for the Server Automation company, we had less than 50 customers. I believed that there were at least 10,000 target customers and that we had a decent shot at being number one. In addition, although I knew the market would be redefined, I thought that we could expand to networks and storage (Data Center Automation) faster than the competition and win that market as well. Therefore, assuming 30 percent market share, somebody would have had to pay 60X what we were worth in forward credit to buy out our potential. You won’t be surprised to find that nobody was willing to pay that.

Once we grew to several hundred customers and expanded into Data Center Automation, we were still number one and were more valuable stand-alone than any of the prior acquisition offers. At that point, both Opsware and our main competitor Bladelogic had developed into full-fledged companies (world-wide sales forces, built out professional services, etc). This was significant, because it meant that a large company could buy one of us and potentially execute successfully (big enterprise companies can’t generally succeed with small acquisitions, because too much of the important intellectual property is the sales methodology and big companies can’t build that).

At this point, it became clear that BMC was going to buy either Opsware or Bladelogic. As a result, the calculus, or whether Opsware was going to be number 1 in the market, needed to be redefined as follows:

1. We had to be number one in the Systems & Network Management market rather than the Data Center Automation market, because like the word processor market, the Data Center Automation market was going to be subsumed by a larger market that contained it.
2. In order to be number one, we had to beat BMC+Bladelogic which was a significantly more difficult opponent than either company stand-alone.

Finally, the market itself was transforming due to an underlying technological shift: virtualization. Virtualization meant that the entire market needed to be re-tooled, so we were embarking on a new R&D race to build the best management for virtualized environments. This meant deferring earnings for a very long time.

Based on all of these factors, it made sense for us to at least consider the possibility of acquisition and run a short process to understand the interest in the M&A market. Through that process, 11 companies made acquisition offers of some form. This told me that we were at a local maxima in terms of the market price for Opsware. I.e., the set of potential buyers was convinced that the market was very important and there was no extra premium that we could hope to achieve through better awareness. In the end, based on a lot of analysis and soul searching, I determined that the current local maxima was higher than we could expect to achieve in the next 3-5 years and I sold the company to Hewlett Packard for $1.65B. I think and hope that was the right decision.

The Emotional

The funny thing about the emotional part of the decision is that it’s so schizophrenic.

How can you ever sell your company after you’ve personally recruited every employee and sold them on your spectacular vision of a thriving, stand-alone business? How can you ever sell out your dream?

How can you walk away from total financial independence for yourself and every member of your close and distant family? Aren’t you in business to make money? How much money does one person need?

How can you reconcile Dr. Stay-the-Course and Mr. Sell-the-Thing? Clearly they are irreconcilable, but the key is to mute them both.

A few keys on muting the emotions:

• Get paid (a salary)–Most venture capitalists like entrepreneurs that are “all in”, meaning that the entrepreneur has everything invested in the company and will have very little to show for her efforts if the company does not succeed. As part of this, they prefer that the founding CEO have a very low salary. In general, this is a good idea, because the temptation to walk away when things go poorly is intense and total financial commitment helps one keep his other commitments. However, once the company starts to become a company rather than an idea then it makes sense to pay the CEO at market. More specifically, once the company has a business (as defined above) and becomes an attractive acquisition target, it makes sense to pay the CEO, so that the decision to keep or sell the company isn’t a direct response to the CEO’s personal financial situation as in: “I don’t think that we should sell the company, but I live in an 850 square foot apartment with my husband and two kids and it’s that or divorce.”
• Be clear with the company–One question that every start-up CEO gets from her employees is: “are you selling the company?” This is an incredibly difficult question. If she says nothing, the employee will likely interpret this to mean the company is for sale. If she says “at the right price,” the employee will wonder what that price is and may even ask. If the company ever reaches that price, the employee will assume the company will be sold. If she dodges the question with the standard “the company is not for sale,” the employee may feel betrayed if the company is ever sold. More importantly, the CEO may feel like she is betraying the employee and that feeling will influence her decision making process. One way to avoid these traps is to describe the analysis in the prior section: if the company achieves product/market fit in a very large market and has an excellent chance to be number one, then the company will likely remain independent. If not, it will likely be sold. This is one good method to describe the interests of the investors in a way that’s not at odds with the interests of the employees and is true.

Final Thought

When faced with the decision of whether or not to sell your company, there is no easy answer. However, preparing yourself intellectually and emotionally will help.

]]> http://allthingsd.com/20110118/should-you-sell-your-company/feed/ 1 http://allthingsd.com/20110114/meet-andreessen-horowitz%e2%80%99s-newest-partner-mark-cranney/ http://allthingsd.com/20110114/meet-andreessen-horowitz%e2%80%99s-newest-partner-mark-cranney/#comments Sat, 15 Jan 2011 00:01:41 +0000 Arik Hesseldahl http://newenterprise.allthingsd.com/?p=1838 Venture capital firm Andreessen Horowitz has named Mark Cranney–a veteran tech executive with more than 20 years of experience in senior positions at Hewlett-Packard, Opsware and Parametric Technology–as its newest partner today. He’s been entrepreneur-in-residence at the firm for about seven months.

His role will be a little different from that of most other VC partners. As AH’s partner for “market development,” rather than evaluate new deals he’ll spend his time on developing the sales and go-to-market strategies of companies that the firm has already invested in.

AH co-founder Ben Horowitz said it’s all part of the firm’s preference for founders becoming CEOs. “The thing that’s most difficult, especially for a technical founder, the most difficult thing to learn is sales. It’s the most difficult thing to learn operationally,” Horowitz told me. “If you don’t have experience with sales, it can cause you to fail as a founding CEO.”

It turns out that Cranney knows a thing or two about sales, and his history with Horowitz and AH’s other co-founder Marc Andreessen runs deep. Cranney spent four years as vice president of worldwide field operations at Opsware, which Andreessen and Horowitz sold to HP in 2007 for $1.65 billion. During that time Cranney’s team grew from 10 to 350 and sales grew from $18 million to $150 million. Horowitz wrote last year about how he came to hire Cranney at Opsware and how he possesses what Horowitz calls “the right kind of ambition.”

Cranney said that sometimes new companies get so focused on selling their new product or service that they forget to consider the larger backdrop of what’s going on inside a potential customer’s operations. “You want to help them avoid looking like a hammer in search of a nail,” Cranney told me. “There’s a systematic way of helping companies identify what’s going on in particular industries and companies and how they can tie what they do to projects already underway.” He’s also building out a network of contacts at large companies–including the Walt Disney Company, FedEx and JPMorgan Chase–that could become potential customers of the companies in the AH portfolio.

He’ll be focused on helping companies in the AH portfolio build their sales talent, and help them grapple with tricky issues like moving from “freemium” to premium business models, working with partners, identifying customers and responding to competitors.

One company he’s already worked with is Apptio, which helps companies manage their IT costs. It’s also notable for being the first investment that AH made. “They’ve had explosive growth in the last year and have been staffing up their sales teams,” Cranney said. “They had been a little concerned that these teams weren’t ramping up fast enough,” he said. Cranney helped Apptio develop a sales training program.

Besides Opsware, Cranney’s prior jobs include time at Aster Data, where he was executive VP of worldwide field operations, and a position as vice president for the Americas at Hewlett-Packard’s software and solutions business. He was also a vice president at Parametric Technology.

It’s another sign of growth at Andreessen Horowitz, which debuted in 2009 with a $300 million fund, then raised a bigger one of $650 million in November. It has recently taken positions at Groupon and Facebook on the consumer side. Its enterprise investments besides Apptio have included stakes in Okta and Fusion-io.

]]> http://allthingsd.com/20110114/meet-andreessen-horowitz%e2%80%99s-newest-partner-mark-cranney/feed/ 0 http://allthingsd.com/20110107/live-twitter-ceo-dick-costolo-at-dces/ http://allthingsd.com/20110107/live-twitter-ceo-dick-costolo-at-dces/#comments Fri, 07 Jan 2011 23:49:28 +0000 Peter Kafka http://mediamemo.allthingsd.com/?p=27773 Twitter has crossed the threshold from Web novelty into something substantial. Now Dick Costolo’s job is to turn it into a business–one big enough to justify the sky-high valuation investors have given the messaging company.

He’ll talk to Kara Swisher about the company’s efforts to sell advertising on the service, and if we’re lucky, he’ll give us a glimpse of his improv comedy roots, too. Don’t be shy, Dick!

Dick starts off by insulting Kara’s vest. “Matador casual,” he calls it. Good one! Kara responds by asking him why he’s hanging out at CES.

The same reason everyone else is, Dick says: To talk to industry people. For example, he’d like to get device makers to preload some features like “Fast Follow.”

Kara wants to know if Dick would like a “Twitter button” installed on phones. No, says Dick. But he’d like Twitter to work the same way on different platforms.

So how do you make that happen?

Dick: We’re assigning a product team to make sure that this happens.

Kara: And you’re talking to TV people, too? What’s that about?

Dick: Yep. Because mainstream TV viewing, more and more, they have a device in their hand when they’re watching TV. Like on “Glee.” The characters tweet while the show is on. [This baffles Kara.] When “Glee” starts, tweets per second for “Glee” shoot up, and stay up 100 times that level until the show ends, and then they drop.

That has interesting implications. Like, it takes the DVR out of the mix, because you have to watch in real time to make it worthwhile.



But we don’t know if all of this means Twitter while you watch TV, or Twitter actually on your TV screen.

Kara: Is it important for you to be on the screen?

Dick: We’re already on the screen. But we don’t know if that will be the mainstream experience.

Kara: We had Steve Levitan from “Modern Family” talking about how the Web doesn’t help him, but that he and his team like Twitter.

Dick: Sure! “I was having a conversation with Conan O’Brien, as one does” and he was talking about the importance of Twitter to him, and how the 140 character limit is the right length for a joke. It’s definitely the case that network TV people like Twitter, because it gives them feedback, like they’re in the theater, watching how the shows play out.

Kara: Keep talking about celebrities! I love celebrities.

Dick: Sure! The folks that we’ve hired to work with talent and agencies, etc., we think of those people has high-value publishers. They have a huge following. A lot of people are on Twitter just to hear what those folks have to say.



The interesting thing about the top 200 to 300 tweeters–a lot of them are musicians, actors, etc. LeBron James, etc. I think Lady Gaga is number one. But! They’re not all celebrities. There’s CNN Breaking News. And the New York Times. And other brands like Gary Vaynerchuk, who aren’t really that known outside that world.

And Twitter is disaggregating some of those businesses. Like a third of all the players in the NFL playoffs are using Twitter actively. And many players have more followers than their teams. [Here Dick explains football to Kara.] That’s fascinating.

Kara: Let’s go back to phones. Whats the most important device? Tablet? PC? Phone?

Dick: Mobile is a more and more and more common use of Twitter–40 percent of all tweets created on mobile devices. That might seem low, but it was 25 percent a year ago. 50 percent of active users are also active on mobile.

But Twitter ought to work platform to platform. We want to be agnostic.

Kara: What about what’s coming out from Palm? Working with them?

Dick: Not yet.

Kara: What about games? Talking to those guys?

Dick: Yep. Like with Microsoft on their Xbox, you can see integrating tweets into people who have discussions on Xbox.

Dick: You lost interest in the answer to your question. [True!]

Kara: You’re so annoying.

[Some laughter. Not a lot, though!]

Dick: Anyway, the important thing for us is consistency across device to device to device.

Kara: Speaking of working consistently, how’s that going for Twitter?

Dick: Right. So, we raised a bunch of money. We’re hiring “tons of engineers and operations engineers” in the last year. We hired 100 people in Q4, out of about 350 total. And we’re working very hard on erasing our “technical debt.”

Kara: “That’s a great word for fuck-ups”



Dick: Anyway, we’ve got a guy assigned to this pretty much exclusively. And there used to be a tolerance for this, and now there isn’t. If someone fires a pistol next to your ear every hour, after a while you stop flinching when you hear it. It’s crucial that we do this, both for our users and our engineers, who shouldn’t have to get up at 3 am all the time.

Kara: Time for a vision question, which stumps Yahoo. What is Twitter? What is your vision?

Dick: “We want to instantly connect people everywhere to what’s most important to them.”

See, that’s a good statement. We’re not just a social network that’s connecting people. It’s connecting for a purpose.

So some people meet girlfriends on Twitter. And other people get tickets to shows they like on Twitter. Etc.

And you don’t have to tweet to get a lot of value out of it.

Kara: What’s the percentage of people who just read Twitter, and don’t tweet themselves?

Dick: Rising. And we have to make that easier to do. “We’re going to spend a lot of time making that consumption experience much better.”

Kara: What’s your business plan?

Dick: To continue to raise money!

[hohoho]



Dick: I’m going to steal Jeff Weiner’s line. We’re a technology company that’s in the media business. Our business model is an advertising model [cough, cough, that's familiar! You're welcome!] So we’re selling ads, and we’re letting people promote their accounts, etc. And we really don’t have to do anything else. Our engagement rates on these ads are ridiculously high. When we saw our stats this last spring when we launched, the numbers were so big we thought we were measuring it incorrectly.

Kara: Is that a big enough business to be a standalone company and/or IPO?

Dick: It’s enough to be a standalone company.

Kara: Sell or IPO?

Dick: We want to be a standalone company. It’s my sincere hope. We’ve accomplished 1 percent of what we want to do.



Kara: You like to sell companies, though.

Dick. Yes, I had two companies that I sold. But that doesn’t mean we’ll sell this one. I’ve had two kids too. But I shouldn’t get a reputation for having kids.

Kara: What’s up with people buying and selling secondary shares of Twitter. It’s an issue for Facebook. What about you?

Dick: We keep an eye on it, and talk to employees about it. But I just think that there are other people that are focusing on it and paying attention, and I’ll let them talk about it. But I just don’t think about that stuff on a day-to-day basis.

Questions and Answers

Q: [sorry missed it].

But answer seems to be about whether Twitter is a platform company or not. Dick quotes Ev Williams by saying they’re not a platform company–they’ve had an API. They want people to be able build off Twitter and build into Twitter. Which requires a more robust API.

Kara has more questions. How do you look at yourself as a leader?

Dick: As a very bald leader.

Kara: But you’re very different than Evan.

Dick: Right. Two components. Three founders at company: Ev, Jack, Biz. They all come at it from a different angle. Jack thinks about simplicity and elegance and the mobile experience. Ev thinks about the user. Biz is “the protector of the brand and the guardian of the culture.”

Kara: He’e the guy who goes on Colbert.

Dick: And he’s great at it. Anyway, those guys are great. My focus is on operational greatness. I try to emulate operators like Ben Horowitz (Opsware) and Susan Wojcicki (Google).



Q: What’s up with that internal page rank for each user? asks Ben Parr from Mashable.

Dick: Your’re not exactly right. We play around with stuff like that. But there’s nothing robust that we would think of productizing anytime soon, and we don’t use it for things like resonance, which we use in ads.

Q: [Sorry, couldnt quite understand.]

Dick is talking about WikiLeaks in general, says there was something specific about WikiLeaks today that he can’t talk about. In general, he hates government mandates to keep things quiet. And he hates that a woman in China was punished for retweeting something. He reiterates Twitter’s desire to connect people with useful information. “We’re going to lash out at things that prevent us from doing that, as aggressively as we can.” The proof is that we’re banned in China. “We’re not going to sacrifice what we’re trying to do to, you know, get into this country over here.”



Q: How will you work with brands in the future, vs. advertising?

Dick: Our promoted suite of stuff doesn’t simply let advertisers use a giant bullhorn. This stuff has to be organic. “It almost is like a quality-assurance program.”

[Some context for what Dick wouldn't talk about: Feds Subpoena Twitter Seeking Information on Ex-WikiLeaks Volunteer].

Dick is now talking about Twitter and international growth and language. Twitter is growing fast in the U.K. but not in Germany. Why is that? Because German has really, really long words. “There’s a bunch of stuff we want to do, and have to do” just to make things usable in those languages.

Last question, from Kara: What’s the most interesting thing you’ve seen at CES?

Dick won’t give a one-word answer. CES is a “quantum conference.” Some years are transformational, some are incremental. “This seems like it was an incremental year.”

And we’re done! Thanks all for your patience. We’ll have video up over the next few days, which should help fill in the gaps left by my lousy note-taking.

• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 

]]> http://allthingsd.com/20110107/live-twitter-ceo-dick-costolo-at-dces/feed/ 3 http://allthingsd.com/20101104/the-not-marc-and-ben-gp-aka-john-ofarrell-at-andreessen-horowitz-speaks/ http://allthingsd.com/20101104/the-not-marc-and-ben-gp-aka-john-ofarrell-at-andreessen-horowitz-speaks/#comments Thu, 04 Nov 2010 17:04:01 +0000 Kara Swisher http://kara.allthingsd.com/?p=36741

He’s not Andreessen and he’s not Horowitz, the pair of brand names of the high-profile Silicon Valley venture firm that just announced a new $650 million fund to add to their $300 million already at work.

But as quiet as John O’Farrell has been, he is the third general partner–and there are only three for now–of what seems to have turned into the hottest VC outfit of late.

Launched in mid-2009 by Netscape Founder Marc Andreessen and his longtime business partner Ben Horowitz, both have since made a series of splashy investments, written splashier blog posts and served on the splashiest–well, controversial–of boards.

O’Farrell just arrived to the party in late June.

But he had worked closely with Andreessen and Horowitz at Opsware executive, through some decidedly rocky times until they pulled off a remarkable recovery for the software company and sold it in 2007 to Hewlett-Packard for $1.6 billion.

The Irish-born O’Farrell–who has an interesting background in the cable business too–moved onto Silver Spring Networks, a smart grid start-up. He assumed he would remain an operating exec.

But when he got the call from Andreessen and Horowitz, he said he could not resist the offer.

Here is O’Farrell talking about the firm in a video interview BoomTown did earlier this week.

In it, note at the end how he is deftly answering–but not–a question I had about an investment it might make in Twitter:

]]> http://allthingsd.com/20101104/the-not-marc-and-ben-gp-aka-john-ofarrell-at-andreessen-horowitz-speaks/feed/ 0 http://allthingsd.com/20101008/in-defense-of-standards-ethic-and-honest-financial-reporting-at-hewlett-packard/ http://allthingsd.com/20101008/in-defense-of-standards-ethic-and-honest-financial-reporting-at-hewlett-packard/#comments Fri, 08 Oct 2010 23:22:29 +0000 Ben Horowitz http://voices.allthingsd.com/?p=30872

“I’m not afraid
To take a stand”
—Eminem

Disclaimer: my business partner, Marc Andreessen, is on the board of directors of Hewlett-Packard (HPQ). I note that I have no inside information, and this blog post is based purely on published material. In 2007, I sold Opsware, the company that I founded and ran to Hewlett-Packard for $1.6B. I worked at Hewlett-Packard from 2007 to 2008 as an executive in the software business.

Recently, my old company Hewlett-Packard has been in the news–and not in a good way. I’ve been watching the coverage from the sidelines up to this point, but felt increasingly compelled to join the conversation and share my point of view. So here goes.

After firing their CEO, Mark Hurd, the HP board has been accused of everything from incompetence to being prudes. The criticism comes from credible, important journalists and bloggers such as Joe Nocera from the New York Times (NYT), prominent economics blogger Felix Salmon, and former GE (GE) CEO Jack Welch. In addition, HP competitor Larry Ellison lambasted the board and even went so far as to hire Mark Hurd to be President of Oracle (ORCL).

So why in the world did the HP board fire such a high performing CEO? Don’t they care about profits and shareholder value? Aren’t those the most important things? Who cares about his personal shenanigans? Did Mark and his marketing contractor even have sex?

While I am pretty sure that there is much more going on behind the scenes than has been broadly reported, as there often is, let’s look at what has been reported:

* Mark Hurd falsified expense reports.

* The false expense reports are related to a contractor named Jodie Fisher, a former softcore porn movie actress and Playboy model with no relevant marketing experience, who HP was paying up to $5,000 per marketing event.

* At the time of his departure from HP, Hurd issued a public statement saying that he’d violated HP’s Standards of Business Conduct:

“As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP and which have guided me throughout my career. After a number of discussions with members of the board, I will move aside and the board will search for new leadership. This is a painful decision for me to make after five years at HP, but I believe it would be difficult for me to continue as an effective leader at HP and I believe this is the only decision the board and I could make at this time. I want to stress that this in no way reflects on the operating performance or financial integrity of HP.”

Let’s start with the issue of falsifying expense reports. This factor has been largely dismissed in the press with characterizations like this from Joe Nocera of the New York Times:

“When pressed, H.P. said that Mr. Hurd had fudged some expense reports.”

Nocera goes on to argue that there must have been an alternate motivation to dismiss Hurd, because clearly no CEO would be fired simply for “fudging” an expense report.

When I first read of the expense report issue, my reaction was the opposite of Nocera’s. If the Chief Executive Officer of a public company falsifies any official financial statement, he must be fired. In my mind, this is non-negotiable. We are not talking about a low-level employee tossing an extra receipt into his expense report. We are talking about a public company CEO who is paid tens of millions of dollars a year and is responsible for the integrity of the company’s financial statements fraudulently reporting his own expenses. Why is this a problem?

Every person who invests in Hewlett-Packard does so on the basis of HP’s financial statements. Every pension fund, every retiree, every charitable organization, every employee who joins and is compensated via stock options. When they do so, they trust that the statements are true and that the numbers are accurate. The person they trust to ensure accuracy is the CEO.

If the Chief Executive is willing to compromise the integrity of the company’s financials for any reason, then it is impossible to trust any statement. Every day, there are many potential reasons to falsify financial statements. Here are four examples:

* If you miss the quarter, shareholders will lose money.

* If revenues aren’t high enough, you’ll be forced to lay-off hard working, valued employees.

* If you grow slower than a competitor, you may jeopardize your job.

* A shareholder that you’ve been having an illicit affair with doesn’t want the stock price to go down and threatens to tell your wife.

If a CEO is prone to compromise for any reason, he will have every reason. This time it was his expense report. Next time will it be a marginal accrued liability? A deal that came in at 12:01 am on the last day of the quarter? This is a slippery slope that a public board simply cannot tolerate.

What reason was so powerful that it caused Mark Hurd to break his ethical standard, falsify an official financial statement, mislead the board, and ultimately be fired? It seems that this was done to cover up a “close personal relationship” with a woman named Jodie Fisher, who later accused him of sexual harassment, then subsequently withdrew her claim after Hurd personally paid Fisher a large sum of money.

Who is Jodie Fisher? According to press reports, Fisher is a former Playboy model, reality show contestant, and softcore porn movie actress with no work history relevant to her job with HP. She was hired by Hewlett-Packard and paid up to $5,000 per meeting to meet with Fortune 50 CEOs.

The mainstream press has reported these facts as mundane, ordinary, and hardly worth concern. I disagree. HP employs over 300,000 people. Every single one of HP’s employees is keenly interested in the qualities, skill sets, and behaviors that HP values most. Financial compensation and access to the CEO are the most important ways that HP communicates what it values to its employees. Jodie Fisher had more access to the CEO and was paid more than 99.9% of HP’s workforce, despite having no traditional qualifications.

It’s important to note that this was not Hurd paying for his personal extracurricular activity out of his own pocket. This was the Hewlett-Packard Corporation paying a softcore porn movie star with no relevant work experience more than it pays Harvard graduates with 20 years of industry experience. This was the company spitting in the face of the people who worked hard and sacrificed every day to help the company win in the market. It was completely and categorically unacceptable.

Finally, Hurd admitted in a press release to violating the company’s standards of ethics and integrity. So what? Why do companies have standards and ethics anyway? Shouldn’t they just be concerned with profits? Do we want choir boys or shareholder value?

There are many who take the view that business is singular in purpose–to increase shareholder value. They further take the position that constraining that purpose in any way is inefficient and counterproductive. The mainstream press seems to have broadly adopted this position in its attacks on HP. The Wall Street Journal Op Ed page even complained that businesses were being held to an unfair standard when compared to politicians.

I do not subscribe to this view. Running our companies with no moral or ethical standards is bad for society, bad for the country, and ultimately leads to criminal behavior.

Companies should not merely be thought of as money generating machines. Business can represent human society at its best. A business is a group of people working together to deliver value to the world and improve people’s lives. When done ethically, business quite literally changes the world for the better. However, if the dark side of human motivation is not mitigated with standards and ethics, business can destroy.

We saw this unfold at Enron, a company that was, in its time, celebrated for its impressive profits. Underneath the profits was a culture designed from the ground up to completely ignore any ethical standard including a dazzling display of ethically questionable sexual activity among its executives. These activities, such as promoting secretaries to executive positions in exchange for sexual favors, parallel Hurd’s behavior with Jodie Fisher. In Enron’s case, the bad behavior bled over into first line employees who conspired to create blackouts in California in the name of profits and in the absence of ethics. Ultimately, Enron imploded in a swirl of criminal behavior that bankrupted the company, but not before destroying tens of thousands of peoples’ life savings and damaging millions of innocent victims. After the fact, the press bemoaned the culture that lead to the destruction. However, the same reporters instantly forgot the cause as they cavalierly dismissed Hurd’s ethical breach.

In closing, I point out the impressive courage of the HP board of directors to ignore popular opinion and do the right thing. It is not an easy thing to fire a popular, highly successful CEO. It’s even more difficult when you know that you will be roundly criticized for tolerating that same CEO’s failure to develop internal successors. Despite those factors, Hewlett-Packard’s board of directors stood tall and protected the company, its shareholders and all of us from a dark and destructive journey. As a member of the business community and as a citizen, I am extremely proud of and grateful for their actions.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

]]> http://allthingsd.com/20101008/in-defense-of-standards-ethic-and-honest-financial-reporting-at-hewlett-packard/feed/ 0 http://allthingsd.com/20100830/the-right-kind-of-ambition/ http://allthingsd.com/20100830/the-right-kind-of-ambition/#comments Mon, 30 Aug 2010 17:50:21 +0000 Ben Horowitz http://voices.allthingsd.com/?p=28972 “Some say that I’m they favorite
But I aint hearing none of that
I’m about my team ho
Young money running back”
—Drake

“Stay in your place
While I sit here and rule
I’m king of a cow
And I’m king of a mule”
—Yertle the Turtle

In my last post, I mentioned that you should strive to hire people with the right kind of ambition. Surprisingly to me, I received a large number of responses from readers questioning whether or not this was good advice. Here’s how one commenter phrased it:

I agree with much of this post but I disagree with the following:
“As defined by Andy Grove, the right kind of ambition is ambition for the company’s success with the executive’s own success only coming as a by-product of the company’s victory.”
That may have worked in the past but I believe today, the company’s success and the executive’s success should go hand in hand, not one coming as a by-product of the other, particularly as described above.
Curious why should an employee be motivated first by a company’s success? Would this work in all departments—i.e. sales?
In addition to comments like the one above, my business partner Marc Andreessen suggested that I write a post on how to screen for the right kind of ambition. In response, this post aims to clarify why you should care about senior managers having the right kind of ambition and give some tips on how to screen for them in an interview.

Why should senior managers have the right kind of ambition?
At a macro level, a company will be most successful if the senior managers optimize for the company’s success (think of this as a global optimization) as opposed to their own personal success (local optimization). No matter how well the CEO designs the personal incentive programs, they will never be perfect. In addition, career incentives like promotions and territory ownership fall outside the scope of bonus plans and other a priori management tools. In an equity-based compensation structure, optimizing for the company’s success should yield better results for individuals as well. As my Opsware head of sales Mark Cranney used to say, “Two percent of zero is zero.”

It is particularly important that managers have the right kind of ambition, because anything else will be exceptionally de-motivating for their employees. As an employee, why would I want to work long hours to advance the career of my manager? If the manager cares about his career more than the company, then that’s what I’d be doing. Nothing motivates a great employee more than a mission that’s so important that it supersedes everyone’s personal ambition. As a result, managers with the right kind of ambition tend to be radically more valuable than those with the wrong kind. For a complete explanation of the dangers of managers with the wrong kind of ambition, I strongly recommend Dr. Suess’s management masterpiece Yertle the Turtle.

Screening for the right kind of ambition
As with any complex character trait, there is no way to perfectly screen for the right kind of ambition in an interview, but hopefully some of these thoughts will prove useful.

At a macro-level, everybody views the world through her own personal prism. When interviewing candidates, it’s helpful to watch for small distinctions that indicate whether they view the world through the “me” prism or the “team” prism.

People who view the world through the me prism might describe a prior company’s failure in an interview as follows: “My last job was my e-commerce play. I felt that it was important to round out my resume.” Note the use of “my” to personalize the company in a way that it’s unlikely that anyone else at the company would agree with. In fact, the other employees in the company might even be offended by this usage. People with the right kind of ambition would not likely use the word “play” to describe their effort to work as a team to build something substantial. Finally, people who use the “me” prism find it natural and obvious to speak in terms of “building out my resume” while people who use the “team” prism find such phrases to be somewhat uncomfortable and awkward, because they clearly indicate an individual goal which is separate from the team goal.

On the other hand, people who view the world purely through the team prism will very seldom use the words “I” or “me” even when answering questions about their accomplishments. Even in an interview, they will deflect credit to others on their previous team. They will tend to be far more interested in how your company will win than how they will be compensated or what their career path will be. When asked about a previously failed company, they will generally feel such great responsibility that they will describe in detail their own misjudgments and bad decisions.

When we hired the head of worldwide sales for Opsware, using this screen proved to be quite valuable. We interviewed over 20 candidates for the position before hiring the aforementioned Mark Cranney. Since this was a sales position, I should mention (in reference to the commenter above) that ambition for the company above ones own goals is particularly important for the head of sales. The reasons are many:

• The local incentives in sales are particularly strong and difficult to balance without the right kind of leadership
• The sales organization is the face of the company to the outside world. If that group optimizes for itself, your company will have a major problem
• In hi-tech companies, fraud generally starts in sales due to managers attempting to perfect the ultimate local optimization

Throughout our interview process, candidates would take sole credit for landing extremely large deals, achieving impressive goals, and generating company success. Invariably, the candidates who claimed the most credit for deals would have the most difficult time describing the details of how the deal was actually won and orchestrated. During reference checks, others involved in the deals would tell a much different story.

When I spoke to Mark, on the other hand, it was difficult to get him to discuss his personal accomplishments. In fact, some of the other interviewers felt that Mark was standoffish and even obnoxious in the way he bristled at certain questions. One interviewer complained: “Ben, I know that he increased the size of the Nike deal from $1M to $5M, because our contact at Nike told me that, but Mark wouldn’t go into any detail on it.” When I interviewed Mark, he really only wanted to discuss how his old company PTC won. He went into great detail about how his team diagnosed weaknesses vs. the competition and how he worked with the CTO Hugh Hempleman to advance the product. He then talked about how he worked with the CEO Dick Harrison to revise the way the sales force was trained and organized.

When the conversation turned to Opsware, Mark had already interviewed sales reps at our number one competitor’s company and knew what deals they were in. He relentlessly questioned me on how we were going to win the deals that they were in and how we planned to get into the deals that we weren’t in. He wanted to know the strengths and weaknesses of everyone else on the team. He wanted to know the game plan for winning. The topics of his potential compensation and career advancement didn’t come up until the very end of the process. And then he only wanted assurances that compensation was performance and not politically based. It was clear that Mark was all about the team.

During Mark’s tenure, sales increased more than tenfold and our market capitalization increased twentyfold. More to the point, voluntary attrition in the sales organization was extremely low, customers were managed fairly and honestly, and our legal and finance teams often commented that first and foremost, Mark protected the company.

Final Thought
While it may work to have individual employees who optimize for their own careers, counting on senior managers to do all the right things for all the wrong reasons is a dangerous idea.

]]> http://allthingsd.com/20100830/the-right-kind-of-ambition/feed/ 0 http://allthingsd.com/20100530/how-andreessen-horowitz-evaluates-ceos/ http://allthingsd.com/20100530/how-andreessen-horowitz-evaluates-ceos/#comments Sun, 30 May 2010 20:22:45 +0000 Ben Horowitz http://voices.allthingsd.com/?p=25596

“I mean damn, did you even see the test
You got D’s, motherf*$@%&, D’s! Rosie Perez”
– Kanye West

No position in a company is more important than the CEO, and as a result, no job gets more scrutiny. Sadly, little of this analysis benefits CEOs, as most of the discussions happen behind their backs. This post is a step in the opposite direction. By describing how Andreessen Horowitz evaluates CEOs, I am at the same time describing what I think the job of the CEO is. Here are the key questions we ask:

Does the CEO know what to do?

Can the CEO get the company to do what she knows?

Did the CEO achieve the desired results against an appropriate set of objectives?

1. Does the CEO know what to do?

One should interpret this question as broadly as possible. Does the CEO know what to do in all matters all of the time? This includes matters of personnel, matters of financing, matters of product strategy, matters of goal sizing, matters of marketing. At a macro level, does the CEO set the right strategy for the company and know its implications in every detail of the company?

I evaluate two distinct facets of knowing what to do:

Strategy–At Andreessen Horowitz, we like to say that in good companies, the story and the strategy are the same thing. As a result, the proper output of all the strategic work is the story.

Decision-making–At the detailed level, the output of knowing what to do is the speed and quality of the CEO’s decisions.

The Strategy and the Story

The CEO must set the context that every employee operates within. This context gives meaning to the specific work that people do, aligns interests, enables decision-making and provides motivation. Well-structured goals and objectives contribute to the context, but they do not provide the whole story. More to the point, goals and objectives are not the story. The story of the company goes beyond quarterly or annual goals and gets to the hardcore question of why? Why should I join this company? Why should I be excited to work here? Why should I buy your product? Why should I invest in the company? Why is the world better off as a result of this company’s existence?

When a company clearly articulates its story, the context for everyone–employees, partners, customers, investors, and the press–becomes clear: When a company fails to tell its story, you hear phrases like:

“These reporters don’t get it.”

“Who is responsible for the strategy in this company?”

“We have great technology, but need marketing help.”

The CEO doesn’t have to be the creator of the vision. Nor does she have to be the creator of the story. But she must be the keeper of the vision and the story. As such, the CEO ensures that the company story is clear and compelling.

The story is not the mission statement; the story does not have to be succinct. It is the story. Companies can take as long as they need to tell it, but they must tell it and it must be compelling. A company without a story is a usually a company without a strategy.

Want to see a great company story? Read Jeff Bezos’s three-page letter he wrote to shareholders in 1997. In telling Amazon’s story in this extended from–not as mission statement, not as a tagline–Jeff got all the people who mattered on the same page about what Amazon (AMZN) was about.

Decision-making

Some employees make products, some make sales; the CEO makes decisions. Therefore, a CEO can most accurately be measured by the speed and quality of those decisions. Great decisions come from CEOs who display an elite combination of intelligence, logic, and courage.

Courage is particularly important, because every decision a CEO makes is based on incomplete information. In fact, at the time of the decision, the CEO will generally have less than 10 percent of the information typically present in the ensuing Harvard Business School case study. As a result, the CEO must have the courage to bet the company on a direction even though she does not know if the direction is right. The most difficult decisions (and often the most important) are difficult precisely because they will be deeply unpopular with the CEO’s most important constituencies (employees, investors, and customers).

In my personal experience, the best decision that I made in my career–the decision to sell the Loudcloud business to EDS and become Opsware the software company–would have lost by landslide had I put it to a vote with my employees, my investors or my customers.

As CEO, there is never enough time to gather all information needed to make a decision. The CEO must make hundreds of decisions big and small in the course of a typical week. The CEO cannot simply stop all other activities to gather comprehensive data and do exhaustive analysis to make that single decision. Knowing this, CEOs must be continuously and systematically gathering knowledge in their day-to-day activities so that they will have as much information as possible when the decision point presents itself.

In order to prepare to make any decision, the CEO must systematically acquire the knowledge of everything that might impact any decision that she might make. Questions such as:

What are the competitors likely to do?

What’s possible technically and in what timeframe?

What are the true capabilities of the organization and how can you maximize them?

How much financial risk does this imply?

What will the issues be, given your current product architecture?

Will the employees be energized or despondent about this promotion?

Great CEOs build exceptional strategies for gathering the required information continuously. They embed their quest for intelligence into all of their daily actions from staff meetings to customer meetings to 1:1s. Winning strategies are built on comprehensive knowledge gathered in every interaction the CEO has with an employee, a customer, a partner, an investor, and so on.

2. Can the CEO get the company to do what she knows?

If the CEO paints a compelling vision and makes fast, high-quality decisions, can she then get the company to execute on her vision and decisions? The first ingredient in being able to do this is leadership, as I outlined in a previous post, Notes on Leadership.

In addition, executing well requires a broad set of operational skills. The larger the organization, the more elaborate the requisite skill set.

In order for a company to execute a broad set of decisions and initiatives, it must:

Have the capacity to do so–in other words, the company must contain the necessary talent in the right positions to execute the strategy.

Be a place where every employees can get things accomplished–the employees must be motivated, communication must be strong, the amount of common knowledge must be vast, and the context must be clear.

Is the CEO building a world-class team?

The CEO is responsible for the executive team plus the fundamental interview and hiring processes for all employees. She must make sure that the company sources the best candidates and that the screening processes yield the candidates with the right combination of talent and skills. Ensuring the quality of the team is a core part of running the company. Great CEOs constantly assess whether or not they are building the best team.

The output of this capability is the quality of the team. It’s important to note that team quality is tightly tied to the specific needs of the company in the challenges that it faces at the point in time that it faces them. As a result, it’s quite possible that the executive team changes several times, but the team a) is high-quality the entire way and b) there is no attrition problem.

Is it is easy for employees to contribute to the mission?

The second part of the evaluation determines whether or not the CEO can effectively run the company. To test this, I like to ask this question: “How easy is it for any given individual contributor to get his or her job done?”

In well-run organizations, people can focus on their work (as opposed to politics and bureaucratic procedures) and have confidence that if they get their work done, good things will happen for both the company and them personally. By contrast, in a poor organization, people spend much of their time fighting organizational boundaries and broken processes.

While quite easy to describe, building a well-run organization requires a high level of skill. The skills required range from organizational design to performance management. They involve the incentive structure and the communication architecture that drives and enables every individual employee. When a CEO “fails to scale,” it’s usually along this dimension. In practice, very few CEOs get an “A” on this particular test.

Netflix’s CEO Reed Hastings put great effort into designing a system that enables employees to be maximally effective. His presentation on this design is called Reference Guide on our Freedom and Responsibility Culture. It walks through what Netflix (NFLX) values in its employees, how they screen for those values during the interview process, how they reinforce those values, and how they scale this system as the number of employees grows.

3. Results against objectives

When measuring results against objectives, start by making sure the objectives are correct. CEOs who excel at board management can “succeed” by setting objectives artificially low. Great CEOs who fail to pay attention to board management can “fail” by setting objectives too high. Early in a company’s development, objectives can be particularly misleading as nobody really knows the true size of the opportunity. Therefore, the first task in accurately measuring results is setting objectives correctly.

We also try to keep in mind that the size and nature of the opportunity varies quite a bit across companies. Hoping that VMware (VMW) can be as capital-light as SolarWinds (SWI) or trying to get Yelp to grow as fast as Twitter doesn’t make sense and can be quite destructive. CEOs should be evaluated against their company’s opportunity–not somebody else’s company. Let me share a funny story, which illustrates a CEO really owning delivering against results. This story is from Robin Li, CEO of Baidu (BIDU). He shares that on the day of Baidu’s IPO–usually one of an entrepreneur’s most exhilarating days of his entire life–he sat at his desk terrified. Why? Listen to how Robin owned delivering results:

In 2004, we raised our last round of VC money led by Draper Fisher Jurvetson…and Google, one of our great colleagues. Then a year later, in 2005, the company went public. The ideal price was $27 [the stock's initial offer price] and it closed on the first day at $122. It was great with us for many of the Baidu employees and for all of the Baidu investors. It was a very miserable thing for me because when I decided to take the company public, I was only prepared to deliver financial results that match the price of $27 or maybe a little higher, $30, $40. But I was really shocked to see that the price went to $122 on the first day. So that meant I needed to deliver real results that matches an expectation much, much higher than what I had prepared to do. But in any case, I thought I had no choice. So I put my head down and focused on operation, focused on technology, focused on the user’s experience, and I delivered.

Once we’ve taken all of this into account, we see that black-box results are a lagging indicator. And as they say in the mutual fund prospectuses, “past performance is no guarantee of future performance.” The white box CEO evaluation criteria–“does the CEO know what to do?” and “can the CEO get the company to do it?”–will do a much better job of predicting the future.

Closing Thought

CEO evaluation need not be a byzantine, unstated art. All people, including CEOs, will perform better on a test if they know the questions ahead of time.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

]]> http://allthingsd.com/20100530/how-andreessen-horowitz-evaluates-ceos/feed/ 0 http://allthingsd.com/20100317/the-case-for-the-fat-startup/ http://allthingsd.com/20100317/the-case-for-the-fat-startup/#comments Wed, 17 Mar 2010 19:00:09 +0000 Ben Horowitz http://voices.allthingsd.com/?p=22721 Much has been written and said about the current economic downturn and the resulting lessons on how to run high-technology companies. Quite famously, Sequoia Capital, the premier venture capital firm in Silicon Valley, held a mandatory all-CEO meeting in fall 2008 during which it advised them to “Cut spending. Cut fat. Preserve capital.” (You can see the presentation here.)

The presentation catalyzed a movement. Start-ups everywhere adopted a lean, low-burn, low-investment model. To this day, companies seeking funding at our venture firm, Andreessen Horowitz, proudly proclaim in their pitch decks that they are raising tiny amounts of capital so they can run lean.

On the one hand, it is a fact that capital invested is negatively correlated with returns in the venture capital industry. Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors.

So what’s a start-up to do? Much of what has been written and said about lean start-ups makes good sense. However, that advice is often incomplete, and some of the things left unsaid are the least intuitive. In this article, I will articulate some of those things left unsaid in arguing the case for the Fat Start-up.

Here is my central argument. There are only two priorities for a start-up:
Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

What the hell do I know?

“Al Pacino couldn’t be no gangsta, DeNiro in ‘Casino’ he no gangsta
Wanna be, wanna see, wan’ get a shovel
dig Tookie up n*&%^!, cause he know gangstas”

–The Game

At this point, some of you are asking yourselves, “What the hell does Ben know? If he were really smart, then he’d know that thin is in.” It turns out that I have some experience in managing a fat start-up through the dot-com implosion of the early 2000s. This chart offers a brief summary of equity market history when I was CEO of Loudcloud and Opsware (click to enlarge):



Note that the Nasdaq index is very highly correlated to the start-up funding environment. During the two years I was CEO of Opsware, the Nasdaq fell 80 percent, far more than it has fallen during the current 2008-10 downturn. So the 2000-02 environment was at least as traumatic as this one for Silicon Valley companies–and arguably much worse.

Here is a brief summary of Loudcloud/Opsware’s fund-raising history during that time:

• September 1999: Loudcloud founded
• November 1999: Loudcloud raises $21 million at a $45 million pre-money valuation (Benchmark Capital is the lead investor)
• January 2000: Loudcloud borrows $45 million from Morgan Stanley (MS)
• June 2000: Loudcloud raises $120M at a $700M pre-money valuation
• March 2001: Loudcloud goes public on Nasdaq, raises $160 million and is valued in the public markets at approximately $480 million. Total funds raised to this point: $346 million.
• August 2002: Loudcloud sells the managed services business to EDS (this was the only actual business we had at the time) for $63.5 million and becomes a software company (and changes its name to Opsware).
• September 2002: Opsware trades for 35 cents per share or approximately a $28 million market cap.
• September 2007: Hewlett-Packard (HPQ) acquires Opsware for $1.6 billion

During this period, Loudcloud/Opsware had over 20 direct competitors. Almost all the competitors from the Loudcloud era went bankrupt, including MFN/SiteSmith, Exodus, LogicTier, Williams Communication, Global Crossing, WorldCom/Digex and Storage Networks. Those that survived got bought with valuations of less than $100 million (e.g., Totality) or still have very low valuations (e.g., Navisite).

How did we do it?

“I had a dream I could buy my way to heaven
When I awoke, I spent that on a necklace”

–Kanye West

So how did we navigate through the great dot-com crash, crush the competition, emerge as the No. 1 company in our space and sell the company to HP for $1.6 billion? Did we “cut spending, cut now, and preserve capital?” Did we make cash preservation our No. 1 priority?

No, we didn’t. To underscore the point, here are Loudcloud’s average monthly cash burn figures for the quarters ending in:

• Apr 2001:  $39 million
• Jul 2001:  $35 million
• Oct 2001:  $29 million
• Jan 2002:  $25 million
• Apr 2002:  $22 million
• Jul 2002:  $19.4 million

As you can see, we were aggressively investing in the business throughout 2001 and 2002. While we did reduce our cash burn, we did not make cash preservation our No. 1 priority. As it was, over the course of the transition from Loudcloud to EDS, we sadly laid off 400 employees and transferred another 150 to EDS. However, we didn’t scrimp and save our way to a $1.6 billion acquisition: Instead, it’s what we chose not to cut that ultimately got us there.

Loudcloud was a Web-hosting business. Today, we’d call it a “cloud services” business, but people weren’t quite ready for the “cloud” in 2001. We supercharged our hosting business with software (called Opsware) that automated our Web-hosting operations. The other cloud services businesses of our day also had software investments. However, as the macroeconomic climate changed, they all “cut deep and cut now.” In the end, they ended up putting their software in maintenance mode and stopped building new features.

As we weighed a decision to make the same deep cuts in our own software R&D efforts (a move advocated by the intelligentsia of the day, as well as nearly every MBA we had working in the company), I faced a hard decision: Cut deep and get to cash flow break-even quickly or continue to invest heavily in software?

In the end, I decided to run fat so that we could continue to invest in the Opsware software. At the end of the day, I realized that much larger companies like IBM (IBM) could hire smart people and train them. But without a lasting technology-based advantage, it would be increasingly hard for us to defeat them and build our customer base despite early wins with Ford (F), Fox Sports, and the U.K. government (to name just three of our early customers).

Running fat meant that I laid off zero software engineers so that we could keep on investing in our technology, find our product/market fit, and build a lasting technological advantage.

Still, we had to reduce costs or we would clearly go bankrupt. With this new view of the world, I decided that rather than divesting our intellectual property, I would divest our business. Now, that may sound logical the way I’ve described it, but consider these facts:

• We were generating $65 million/year from the Web-hosting business.
• We were a publicly traded company with a market capitalization of close to $200 million.
• All of our investors (pubic and private) believed in and invested in the Web-hosting business.
• We had close to 500 employees at the time. Nearly all of them were supporting the Web-hosting business.
• We had no other business. We had software, but we did not have a software product and certainly did not have a software business.

Despite all of this, we sold the Loudcloud hosting business to EDS and became Opsware the software company. It was not clear that this was a good idea at the time. In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank.

During the transition, we shrank our payroll from 450 employees to fewer than 100. Even with this massive reduction in expenses, it would take another three quarters to reach cash-flow break-even, a milestone we finally reached in Q2 of 2003.

One could argue–and many did–that we should have cut a lot deeper than we did given that we only had one customer. Although EDS was a very large customer (it generated $20 million/year in revenue), a brand new software company doesn’t need 100 people. We could have taken steps to reach cash-flow break-even immediately (clearly, that might have helped us get above 35 cents per share). In other words, we could have “gone lean” by cutting deep, cutting now, and preserving capital.

But rather than do what seemed obvious, I decided to keep on investing. Here’s why: In an economic boom, cash is great, but not necessarily a meaningful competitive advantage. If every company is well funded, being super-well funded doesn’t help you win. In fact, being super-well funded can actually screw you.

But in a bust (like the one we were in), having a lot of cash can be a huge competitive advantage because you can use that cash to put enormous pressure on your underfunded competitors. And that’s what we did.

We spent aggressively to match our best competitor’s product, feature for feature. And we used our public currency to acquire important adjacent functionality (network, process and storage management) that our competitors did not have and couldn’t acquire because they didn’t have the cash (or the equity).

In doing so, we were able to beat a really high-quality start-up (Bladelogic) that did not have the massive technical and cultural baggage that came from exiting the managed services business. Bladelogic was eventually sold to BMC (BMC) for $800 million. But I’m firmly convinced that had we not spent the money, Bladelogic would have emerged as the No. 1 company in the space and gotten the $1.6 billion exit instead of Opsware.

In the end, by continuing to invest aggressively in our technological advantage despite a hellacious funding environment, we were able to turn a doomed business into a winning one.

That is the very short version of how we won the market during the great tech recession of the early 2000s.

So did we learn?

“Hegel was right when he said that we learn from history that man can never learn anything from history.”

–George Bernard Shaw (1856-1950)

Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash. As a result, the top two priorities are always to:

1. Find the product that 1,000 enterprise or 50 million consumers want to buy and grab those customers before your competitors do.
2. Raise enough cash and spend it intelligently so that you don’t go broke along the way.

Clearly, you can’t succeed if you don’t achieve both priority No. 1 and priority No. 2. So why is taking the market more important than not running out of cash? Because the only thing worse for an entrepreneur than start-up hell (bankruptcy) is start-up purgatory.

What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.

You recruited all the employees, you raised all the money and you made all the promises. You either see it through or leave–without your good reputation. No one wants to work for an entrepreneur who quits his or her own company. This is start-up purgatory, where you work just as hard, reap none of the rewards, and watch all your best people leave you. It sucks to be you.

The Bottom Line

Spending a little or spending a lot is a means, not an end. Choose the right strategy to win the market or you may end up going straight to purgatory.

As you listen to the virtues of the lean start-up–lightweight sales, light engineering, and so on–keep the following in mind:

• If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.
• You cannot save your way to winning the market.
• The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition.

Thin is in, but sometimes you gotta eat.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

]]> http://allthingsd.com/20100317/the-case-for-the-fat-startup/feed/ 12 http://allthingsd.com/20090918/hp-names-golden-geek-to-board-of-directors/ http://allthingsd.com/20090918/hp-names-golden-geek-to-board-of-directors/#comments Fri, 18 Sep 2009 12:00:43 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=25018 Silicon Valley luminary and Golden Geek cover model Marc Andreessen is adding another gig to his CV: Hewlett-Packard director. Andreessen, who sold his software company, Opsware, to HP two years ago for $1.6 billion, will begin serving on the board immediately, bringing its total number of directors to 11.

Quite a coup for HP. Andreesen–who co-authored Mosaic, the browser that popularized the World Wide Web–is an icon in Silicon Valley and his expertise is highly sought. In addition to helming his new venture capital firm, Andreessen-Horowitz, Andreesen also serves as chairman of social networking outfit Ning and sits on the boards of eBay (EBAY) and Facebook. HP (HPQ) is lucky to get him, if only because it seems unfathomable that he’d have the time or bandwidth for anything else.

“Marc Andreessen is a software pioneer whose leadership has helped shape the Internet,” an ebullient HP CEO Mark Hurd said in a statement. “Marc’s entrepreneurial background and industry expertise will be a welcome addition to the HP board of directors.”

]]> http://allthingsd.com/20090918/hp-names-golden-geek-to-board-of-directors/feed/ 0 http://allthingsd.com/20080630/superpoke-marc-andreessen-mark-zuckerberg-has-thrown-a-board-seat-at-you/ http://allthingsd.com/20080630/superpoke-marc-andreessen-mark-zuckerberg-has-thrown-a-board-seat-at-you/#comments Mon, 30 Jun 2008 17:17:08 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=2648 BoomTown was right, Facebook has scored itself a “golden geek.” TechCrunch claims that Netscape/Opsware/Ning founder Marc Andreessen will join Accel Partners’ Jim Breyer, Founders Fund’s Peter Thiel and, of course, founder Mark Zuckerberg on Facebook’s board of directors. Which makes perfect sense, really. After all, as BoomTown pointed out back in May, Andreessen is “the man who was Zuckerberg before Zuckerberg was cool.”

]]> http://allthingsd.com/20080630/superpoke-marc-andreessen-mark-zuckerberg-has-thrown-a-board-seat-at-you/feed/ 0 http://allthingsd.com/20070723/ddv20070723/ http://allthingsd.com/20070723/ddv20070723/#comments Mon, 23 Jul 2007 18:00:01 +0000 John Paczkowski http://digitaldaily.allthingsd.com/20070723/ddv20070723/


[ See post to watch video ]

]]> http://allthingsd.com/20070723/ddv20070723/feed/ 0 http://allthingsd.com/20070723/ddv20070723-2/ http://allthingsd.com/20070723/ddv20070723-2/#comments Mon, 23 Jul 2007 18:00:01 +0000 John Paczkowski http://digitaldaily.allthingsd.com/20070723/ddv20070723/


[ See post to watch video ]

]]> http://allthingsd.com/20070723/ddv20070723-2/feed/ 0 http://allthingsd.com/20070723/hp-opsware/ http://allthingsd.com/20070723/hp-opsware/#comments Mon, 23 Jul 2007 13:00:17 +0000 John Paczkowski http://digitaldaily.allthingsd.com/20070723/hp-opsware/ Well, Marc Andreessen must be grinning into his cornflakes this morning. At market open today Hewlett-Packard said it had agreed to acquire Opsware, the enterprise-software company Andreessen founded back in 1999, for $1.65 billion. H-P will pay $14.25 for each share of Opsware, a 39% premium over Friday’s close of $10.28.

At that price, Andreessen–who owns nearly 6.5 million shares–stands to make $92 million off the deal. Which is a nice bit of validation, given Opsware’s inauspicious beginnings as Loudcloud, a managed hosting company remembered more for a string of heavy losses and a lackluster 2001 IPO.

“Loudcloud took off like a rocketship, raised $350 million in equity and debt financing, went public in March 2001, and was rapidly nearing $100 million in annual recurring managed-services revenue when the entire market blew up and virtually all of our competitors and peers went bankrupt,” Andreessen recalls in a blog post announcing Opsware’s sale to HP. “In September 2002, we did a complete restart as a public company–we sold our managed-services business to EDS and turned Loudcloud into Opsware, a software company based on the core intellectual property developed at Loudcloud. Over the next five years, we executed our original vision–automation of large-scale modern data centers and computer systems. … Today we have announced that Opsware is being acquired by Hewlett-Packard for more than $1.6 billion in cash, or $14.25 per share. For Opsware, this means that our vision will now get delivered at much higher scale–being part of H-P’s software business will ensure that our software will be used by a much larger number of organizations and have an even more dramatic impact on the industry than we would possibly have been able to reach by ourselves over the next several years.”

And for Andreessen, whose first start-up, Netscape Communications Corp., marked the beginning of the Internet boom of the late ’90s, it’s proof that contrary to what F. Scott Fitzgerald wrote, there are second acts in some American lives. “One of my favorite facts about this deal,” he wrote, “is that at our acquisition price of $14.25 per share, everyone who bought and held stock in Loudcloud or Opsware in the public market at any time made money.”

]]> http://allthingsd.com/20070723/hp-opsware/feed/ 0