What Would You Do If You Ran Yahoo?

George Steinbrenner, controversial owner of the Yankees, bought the team for $8.8M in 1973, with just $100,000 of his own money. When he passed away last week, the franchise, according to The Economist, was estimated to be worth some $1.3B. Having grown up a Red Sox fan, I may not like his team or tactics, but one has to admire what Steinbrenner built. He took an asset that had lost its shine and made it incredibly valuable — not to mention putting together one of the game’s greatest teams in the process.

Speaking of assets that have great potential, what would you do if you had the chance to run Yahoo? Talented serial entrepreneur Niel Robertson posed this intriguing question yesterday evening over dinner. (Congratulations to Niel who just publicly announced Series C funding from Google Ventures for his crowd-sourced paid search company Trada.)

From an operational perspective, there’s a lot of blocking and tackling, of course. A little more efficiency on a business the size of Yahoo can generate a lot of return. Or, as Geoff Moore puts it, figure out what’s core and what’s context. But ultimately, operational efficiency alone won’t make you a market leader – if that’s your goal.

You could try to merge with another player: eBay, for example. But that seems complicated  to pull off, and even if you succeeded, to what end?

Great technology companies are great at one, maybe two things. For Microsoft it was the operating system and Office. For Oracle, the database. For Google, search, then search plus advertising. For Apple, mobile, then mobile plus media. The question is, what can Yahoo or MySpace be great at?

Yahoo, certainly, has a lot of assets, and two in particular: access to data that lets it monetize better than almost anyone else, and a very large audience. That audience, properly monetized, could be incredibly valuable.

The ad industry is ripe for consolidation.

Yahoo could offer the best alternative monetization solution to Google. The Avis to Google’s Hertz. Start with the Right Media asset and the access to users via its content and search offerings and build out from there.

Acquire the best behavioral targeting, data, optimization, placement, and conversion solutions around. Deliver the smartest monetization offerings from acquisition to conversion to measurement, first across all Yahoo properties, then across every property on the web. Continue to build out the non-search audience – for example by picking up Demand Media and smaller (1M+ users) offerings. Focus on two core assets: monetization and audience aggregation.

There’s only one George Steinbrenner, of course. The kind of turnaround Steinbrenner pulled off takes an ability to envision a triumphant future in the face of great doubt by others in the present. What would you do if you ran Yahoo?

Meet The New Boss

In the wireless world, people have for years complained about the carrier “tax.” That is, the revenue share one has to give up to the carrier to be on the carrier deck and to extract revenue from customers when on deck or at any sizeable scale if not on deck. Distribution came at a price and revenue was shared with the “boss” – the carrier.

Apple changed all that with the iPhone and its deal with AT&T. All of a sudden the carrier lost pole position. A new company emerged to open up the ecosystem. That, combined with a new form factor device replete with display, touch screen, connected mobility, location, and movement, spawned the development of hundreds of thousands of applications. But Apple is now the new boss. From applications to media (music and now, especially with the iPad, video), Apple is the new king of distribution. Going through the store isn’t just a requirement if you want distribution – it’s a requirement to get on Apple devices at all. That means Apple controls application and media distribution on its devices, which in turn means it controls revenue and any tax associated with that revenue.

Google is taking the Rest of World spot. Without a doubt, consumers love the experience Apple delivers. And for good reason: from hardware to software to media, Apple provides an experience that is best of breed, bar none. But if you’re not going with Apple, you’re going with Android, or if you’re a corporate user, with RIM. Just a few short quarters ago it was “I’m a PC.” Microsoft used to be the one to partner with hardware OEMs. Now, at least for consumers, one is either iPhone or Android. As the consumer becomes more and more mobile, for those who aren’t “I’m an iPhone,” Microsoft is ceding its ownership of non-Apple consumers and pole position as provider of operating systems to all hardware manufactures except Apple to Google.

(As an aside, surely HP must have considered buying RIM. Granted, it would have been an incredibly expensive acquisition relative to PALM, and who knows if such a deal could even work. But it certainly would have complemented HP from a sales leverage perspective and given them immediate traction in the corporate mobile market.)

Then of course, there’s Facebook, playing out this battle on a smaller stage. What more needs to be said than to point at the recent public scuffle between Zynga and Facebook. There was never any doubt about who was in pole position on that one.

Welcome to the new world order. It may look a lot different from a content, user experience, and application perspective, but it sure doesn’t look much different from a business model perspective. Meet the new boss; same as the old boss.

Pac Man

Gotta love Google’s home page today – Pac Man. It’s great that you can actually play the game. Nice.

On CEO Hiring

People often ask me when and why a CEO is brought in.

The short answer is: when the person running the company is unable to hire the most talented people to work for him or her, it may be time to hire one of them to run the company.

That’s because startup success comes down to right market, right product, right time and execution. And execution is all about hiring the right people who can execute.

At a more detailed level, there are two distinct cases:

Doing well. The company is doing well, but needs an experienced executive to help it scale. This most often relates to a quickly growing organization, or specifically to sales, especially in a B2B investment, where the chief executive needs to be the chief sales person. This frequently happens when the founder is a technical/product visionary, has been able to scale the company to a certain point, but is not an experienced sales and operational executive.

Put another way, it’s potentially very expensive learning for a sales organization, investors, and revenue if you’re doing on the job training for six and seven figure deals. That’s not to say that the sales process shouldn’t be learned on the job – every  new product that comes to market has to go through the sales learning curve. But actual selling experience, issues of compensation, issues of hiring and scaling sales teams have all been done before and should not be learned on the job. Only the specifics of selling the particular product should be learned in real time.

What about just hiring an incredible VP of Sales? This can certainly work for a while. But eventually two things happen: the company’s need for sales and operational leadership outstrips the product visionary’s ability to fulfill that need; and, the most talented of executives want to run the company and be CEO rather than report to the product visionary.

I would argue that the latter issue is the real crux of all CEO hiring: When you’re unable to hire the most talented people to work for you, that’s the sign that you need to hire one of them to run the company.

Struggling. In the second case, the company is struggling and needs a change. In this case, a new CEO is typically brought in because the company is struggling – it’s had a hard time raising money, competitors have overtaken it, or bad execution has plagued the company and the money has run out.

In this case, the new CEO’s goal may be to sell the company, or more frequently, to pivot the company into a new market or new strategy. This takes a certain kind of very entrepreneurial CEO, one who has the vision and appetite for turning something struggling into something new and exciting, a natural ability to turn lemons into lemonade. This change isn’t just about executing better or scaling up the organization; it’s about implementing a new direction for the company, raising the capital to support that direction, and executing on it.

Conclusion

Bringing in a new CEO is fraught with risk. As venture capitalists are fond of saying, “the body may reject the organ.” That is, bringing in a new CEO is a bit like heart transplant surgery – a lot of things have to go right for the transplant to work. But a CEO hire done right can have enormous positive impact. Just look at Cisco, VERITAS, and Google, to name a few.

Of course, the ideal scenario is to invest in and back a founder all the way from initial investment to IPO. But put simply, the individuals who can be both founding entrepreneur and scale all the way to public company operational executive are rare. Or, a company may have morphed from one market to another (for example, from consumer to business or business to consumer), requiring a vastly different skill set.

A lot of it comes down to whether the founder continues to recruit the very best people to work for him or her. One of the biggest struggles I have experienced personally and have seen other founders go through is the challenge of hiring in people outside their founding team when their founding team itself is unable to scale – a new head of sales, a more experienced VP of marketing, and so on. Entrepreneurs by nature tend to be incredibly loyal, and the challenge is finding a balance between that loyalty to the original team and bringing in executives who can help scale the organization.

Talented people will always be drawn to those who “change the temperature of the room.” It’s when you find that others are changing the temperature more than you are, hard as it may be, it may be time to make one of them CEO.

Moving The Wall

Even if you have no interest in tennis, Andre Agassi’s autobiography, Open, is a compelling and engaging read. His drive reminds me of that of the very best entrepreneurs: those who move the wall.

This week I met with a friend and entrepreneur who asked me two questions. Did I think that venture capitalists would think his idea a good one and fund it? Second, based on my experience as an entrepreneur, should he keep going?

Whether venture capitalists thought his idea was a good one or not was somewhat irrelevant, I told him. Many of the best ideas are contrarian ones. And smart investors have passed over many of the best ideas.

To the question of whether he should keep pursuing his entrepreneurial endeavor I answered that there was only one person who could answer that question: him.

But I did tell him, from first-hand experience, that to be an entrepreneur, one has to believe. Because for the entrepreneur the wall is the enemy. And one has to believe one can charge at the wall and the wall will move.

What is the wall?
It is all the negatives, the “no’s” that every entrepreneur is faced with on the road to success: no money; competition – especially game changing competition that suddenly pulls the rug out from under your feet; lack of loyalty, lack of direction, lack of customers or users.

But most critically, the wall is self-doubt.

Self-doubt, as Agassi shows in Open, is the ultimate enemy. Entrepreneurship, much like tennis, is a game of decision after decision, and if you let that get to you, you will tense up. Agassi refers to this as pressing. Pressing, he says, “is the tennis term for not letting things flow. Pressing is one of the deadliest things you can do in tennis.”

Entrepreneurs in the groove make decision after decision, seemingly almost without thought. Granted, there is much that goes into those decisions – namely the decisions that have come before them and the hard work to gather data, create great product, recruit great people, know the customer, and, at its core, to have a dream to begin with.

Yet everyone suffers from pressing at one time or another, reverting from operating at light speed, from making decision after decision, from going for it, to being paralyzed. Often, investment capital itself paralyzes the entrepreneur – the perceived pressure of needing to make the perfect decision every time.

The sage Brad, Agassi’s coach, once tells Agassi, “Your confidence is shot and perfectionism is the reason. You try to hit a winner on every ball when just being steady, consistent, meat and potatoes, would be enough to win ninety percent of the time.” That’s great advice for tennis champion and entrepreneur alike.

One night Agassi tells his good friend J.P. that he feels a remarkable confidence in his game, “a new purpose for being on the court.” “So how come I still feel all this fear? Doesn’t the fear ever go away?” he asks his friend. It’s a question I’ve heard over and over from entrepreneurs, in many different ways. Replies J.P., “I hope not. Fear is your fire.”

Ultimately, Open is so much more than a book about tennis. It’s a book about overcoming self-doubt, about finding the perfect balance between caring and not caring that enables the highest levels of performance, about turning fear from a crippling disease into a driving force.

I know what some of you are thinking: that sounds like a page out of a business school interpersonal dynamics text book. But anyone who’s ever faced the wall knows it to be true.

Conclusion
The real insight in Agassi’s book, however, is team. Agassi surrounds himself with a core group of people who coach him, inspire him, give him objective and honest feedback, push him, and fill in his weak spots. People with whom he can be brutally honest and who are – in a supportive way – brutally honest in return. That is perhaps Agassi’s most brilliant stroke.

One of Agassi’s best friends tells him, “Some people are thermometers, some are thermostats. You’re a thermostat. You don’t register the temperature in the room, you change it.” Of course, his friend happens to be telling Agassi this as inspiration for wooing Steffi Graf.

It’s great advice for life and for business. Change the temperature in the room and you will deliver great product, raise money, and recruit great people. Change the temperature and the wall will move.

Delivering on Product Promise

Having not bought a new wireless router since my old Linksys WRT54G v5 in 2006, my hat is off to Cisco for their new Valet Plus wireless router I installed this weekend.

Here’s what I love about it:

1. Easy setup. No CD’s, no downloads. I inserted the included USB key into my computer’s USB port. The Cisco program launched, connected to the Valet, and in just a few minutes I was up and running. It really works as easily as advertised.
2. Easy device setup. My wireless printer was easy to re-configure: I pressed the WiFi Protected Setup button on the printer and the one on the Valet. Voila – printing. Now that’s the way computers are supposed to work!
3. Speed. I live in a metropolitan building where everyone has their own wireless router. A few weeks ago my WRT54G, despite upgraded firmware and my 100Mbps dedicated Internet access from Webpass, stopped delivering a reliable Internet connection. There is just too much wireless in the building. While I still don’t get the kind of speed I do with a wired connection, movies have never downloaded faster and browsing the Internet is nearly instantaneous.

Thank you Cisco. There is nothing more simply compelling than understanding the customer’s needs and delivering on your promise to fulfill them.

Insights From The Big Short

Michael Lewis’ new book, The Big Short, is easily my favorite read in months. If you have any interest in financial markets, want to understand what really happened in the financial meltdown, or just want a thriller of a non-fiction story, this is it.

Lewis, as always, is a terrifically engaging writer, and has been for over 20 years, since he wrote Liar’s Poker. Terry Gross had this story on NPR’s Fresh Air and Steven Pearlstein published a review in the Washington Post.

But there’s no substitute for reading the book first-hand. Lewis tells the story through the eyes of some of the players. Between that and my own fascination with financial markets, and especially inefficiencies in them, this was a page turner.

Insights
Some of the best insights from the book come from reading about the principals at Cornwall Capital Management and Dr. Michael Burry at Scion Capital:

1)      Find asymmetric return upside. It comes in many forms such as timing, market or company.

2)      Connect the obvious dots by analyzing the data.

3)      Have the conviction to take advantage of the opportunity.

In particular, Cornwall Capital focused on options that made a linear assumption about a non-linear event. That is, an event that would move a price way up or way down. And with the resulting ability to make “a small bet with long odds that might pay off in a big way.”

When I say obvious, I mean, the data for many of their investments was right there in front of them – it was all in the open, obvious. The data on the CDS’s was fully available, in the open. But one had to connect the dots.

Then, one had, as the old saying goes, to put one’s money where one’s mouth is, and stay with it. While the “experts” told them they were crazy, those who bet against the CDS’s made a mint. Their strategies were vindicated when the market crashed.

Conclusion
Lewis obviously put in the time necessary to understand the financial instruments fully. Then he went back and made that topic accessible and engaging to the reader.

These two abilities: to simplify the complex and to make the mundane engaging are rare talents found both in Lewis and the best businesspeople.

There’s another reason I loved the book: it told the story of some incredible entrepreneurs. These were people who bet against the common wisdom, used their analysis of available data to their advantage, and stuck with their convictions even when the world told them they were crazy.

Of course, they were betting on a Sure Thing. But that’s for another blog post.

Recruiting

Like raising money, recruiting a great CEO is a chicken and egg problem. Investors often don’t want to invest in an opportunity until there’s proven traction. Yet it’s often difficult to get traction without investment.

Similarly, CEO’s often don’t want to join a company until there’s proof that the company is scaling and the sales model is repeatable. Yet a great CEO is required to scale.

So what does a startup do if it has early-market traction and a great market opportunity, but has not yet proven an ability to scale through a repeatable customer or user acquisition process?

Focus on investors and executives that both recognize the risk and are willing to take it. As one CEO candidate said, “if there were no risk, you wouldn’t need me.”

Spend time with executives who believe they personally can make a difference. Executives who understand the opportunity and the risk, have a vision for the company’s future, and believe that, with their involvement, the company will be that much better off.

When it comes to attracting executives, some amount of selling is required. But if too much selling is required, that’s often a sign that the candidate and the opportunity may simply not be a match for each other.

Sell the candidate into the opportunity, rather than letting he or she self-select out, and there’s increased risk that candidate won’t stick. Those candidates who have a vision for the company and can articulate where they will add value are the ones most likely to be a great match.

Should You Recruit a CEO at All?

Arguably, having to recruit a CEO at all is a problem. Ideally one would only invest in entrepreneurs who can scale as both product visionaries and CEO’s. Bill Gates and Larry Ellison scaled, after all. But Gates had Ballmer and Ellison, at least in the ‘90’s, had Ray Lane.

Scaling all the way from founder to public company CEO is difficult. The skill sets required for founding/early growth and scaling are different, and individuals are often passionate about one but not the other.

Bringing in a CEO is risky. But done right, as in the case of Google, for example, it can really complement technical and product visionaries and free them up to focus on their areas of interest.

Conclusion

Finding an individual with operational excellence, market insight, and product vision combined with a tornado’ing market makes for a great opportunity. If, however, a company is in need of operational excellence to capture a market opportunity fully, the best bet is to find someone who believes in the opportunity — and in himself.

The Brown Swan Theory

Venture investors continue to be attracted to consumer internet investments like moths to a candle. VentureBeat and ChubbyBrain (what a name!) indicated that Internet sector investments surged in Q4 of 2009 by 40% over Q3 to $1.5 billion. Yet the distribution of returns to Internet investors remains both highly consolidated. Granted, Internet sector can mean a lot of things to a lot of people, but it begs the question: Why do investors continue to pour money into the segment?

1. The opportunity for hugely outsize returns: The black swan.
2. Visibility. Activity begets activity, and visible activity especially so. It may not directly impact investment return, but it certainly enhances a firm’s profile (unless the investment is unsuccessful, of course), attracting more black swan opportunities, in a virtuous cycle.
3. Scale begets scale. This point is perhaps least appreciated. Unlike in B2B plays, successful consumer internet companies experience a period of growth during which revenue becomes easier to scale with size, rather than harder. This third point, I believe, is what makes the sector so appealing and fundamentally enables the opportunity for outsize returns.

Scaling A Business to Business Company

In Business to Business companies, even those with a SaaS delivery model, scaling revenue goes from very difficult to difficult, then to easier, then back to very difficult. The very first revenue is hard won. Companies can spend a long time trying to find the right product / market / sales model fit, doing under, to pick a number, a million dollars in revenue per quarter.

Companies that get out of this stage and into, say, a million or more of revenue per quarter can often scale their way to between $10M and $50M or even $100M of revenue per year at a “good” growth rate – with the great ones achieving 50 – 100% year over year growth.

But continuing to grow sales at this rate is historically unsustainable in the long run, and investment bankers looking at potential IPO’s have indicated that a growth rate in the 25% year over year range is more believable.

Why Does Sales Growth Slow?

Scaling sales past the $50M – $100M range requires leverage. It requires not only a very large market, but an efficient sales infrastructure to sell into that market, both in the form of new sales and additional sales to existing customers.

That kind of leverage and efficiency comes from a large channel that can support selling to the market – either directly, through the hiring of large numbers of sales people, or indirectly, through existing channel partners that can reach the volume of customers required to obtain that level of revenue – and growth.

Leverage is hard to get and ultimately reaches a limit, leading to reduced year over year growth.

The Consumer Internet Paradox

The appeal of successfully monetized consumer internet businesses (and the promise of those that are scaling users but not yet scaling revenue) is the long period of hyper-growth these businesses experience.

Consumer internet businesses are relatively easy to start, but it’s hard for them to get momentum. But if a consumer internet company can get the flywheel spinning, monetization at scale becomes easier and easier for a much longer period of time than for business to business companies.

That’s because successful consumer Internet companies — particularly those with a viral user acquisition dynamic — get unbelievable customer (user) acquisition leverage. That leverage comes in the form of existing customers (users) acquiring more user, virtually for free: zero cost user acquisition.

In the business world, scale delivers some leverage in the form of customer references and category leadership, but the company still has to sell the product — existing customers don’t sell the product to other customers. In the consumer world, they do.

Scaling A Consumer Internet Company

The challenge for investors is that investing in a great consumer internet company is very hard to do, because consumers are incredibly fickle and behave as a crowd. The right consumer Internet investment strategy? Invest early in a lot (that is, potentially 100′s of deals) with an ultra high probability of losing all the money (but a a very small chance to make a ton) or invest late,  waiting until real traction is proven.

Conclusion
Nassim Nicholas Taleb is well-known for his Black Swan Theory. Although talks about taking advantage of positive black swan events, he often focuses on rare negative events (“avoid being the turkey”).

In venture investing, the weight is flipped. It’s absolutely essential to identify risks, but first and foremost in generating returns is exploiting rare positive black swan opportunities when they occur.

Just as valid as asking why investors continue to invest in the Internet sector given the low probably of success is asking why they don’t make that high beta investment sector their only one in an asset class invested in for its high beta-ness.

The answer might best be called The Brown Swan Theory: Managing large pools of capital requires a strategic framework that allows for identifying and investing in positive Black Swans when they occur, and for doing it at the same time as demonstrating a path to market outperforming returns on a regular basis.

That’s the easy part. The hard part, of course, is not missing too many black swans.

When It Makes Sense To Take Sales Risk

Why should investors take sales risk?

By default, they shouldn’t.

Sales development is by far the biggest cost in venture-backed startups. Some investors estimate that as much as 70% of venture investment goes toward sales development. Few startups get it right on the first try. That frequently means an indeterminate number of additional rounds of funding to remove sales risk.

People have been selling for a lot longer than the professional venture industry has been around. So why does every company have to learn to sell? On the surface, it seems like getting up Mark Leslie’s famous Sales Learning Curve (SLC) should be easily repeatable. Tens of thousands of startups have taken a hard run at the curve, and some have succeeded. Just teach the right process, or better yet, hire an exec that has succeeded before.

The reason replicating sales success is so difficult is because success just isn’t that easy to replicate.

It’s the reason that the same team doesn’t win the Superbowl every year, that the same investors don’t make all the money year after year, the reason top mutual fund managers eventually break their S&P beating streak.

It’s quite possible, in fact highly likely, that an entrepreneur or sales executive benefited the first time from a great market and a great product. Not that they weren’t incredibly talented, but trying to repeat that success is as likely to depend as much on finding a tornado market as on the talents and expertise of the entrepreneur or executive.

Getting up the SLC is difficult because you have to get a lot right. The right market, product, and team. The right market is one in which customers or users want the offering now. They can’t live without it. The right product is one that delivers on its promise. The right team executes — it repeatedly runs experiments — and is expert at rapidly scaling the few that work.

Repeating the process, once developed, isn’t hard. What is hard is getting to a repeatable process.

There are lots of tools available that can help mitigate risk in the sales development process, including methodologies like High Probability Selling. But once the process is figured out, the best way to replicate it is through great hiring. There is little more frustrating than poor execution due to on the job training in a great market.

When Should Investors Take Sales Risk?
Why invest early when you could just wait, especially in markets where multiples are relatively low?

The answer is that, in many cases, you shouldn’t. There are few companies that are going to go from $100 million to a billion or more. The risks of investing later are: being wrong about where a company truly is on the sales learning curve and the opportunity cost of the money invested in a company that never truly has the capability to go from $100M to $500M or $1B+.

So when should investors make these early bets in relatively low multiple markets in which scaling sales is expensive?

• When the investor can buy a large portion of the company and believes he can get leverage on the early money. By leverage, I mean, backing an entrepreneur who will either be able to run a very low burn experiment to reach the inflection point of the curve, and/or has the ability to raise Other People’s Money (also known as OPM) repeatedly to iterate the sales model until the company moves up the curve.
• When a huge existing market is being radically disrupted or an entrepreneur has the ability to disrupt a market. Or put another way, when human behavior is changing (example: the shift from time spent offline to online) and a startup can take advantage of it.

Conclusion
As Chris Chase wrote in his Super Bowl summary, “Super Bowls are usually defined by conservative play. It rarely pays for coaches to be risky in the game. Little good can come from it. Nobody criticizes the safe play, only the bold one that doesn’t work. But when it works, it’s the stuff from which Super Bowl legends are made.”

One might easily say the same about investing.