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Archive for 2011


Companies Are Sold, Not Bought

Tuesday, April 26th, 2011

“Companies are bought, not sold”

This is a cliche as old as M&A, and there is a lot of truth to it. When I started my last company, from time to time we would get interest in acquiring the business from third parties. My wife would start to get excited if I mentioned this stuff and I always tempered her with a couple of comments. These are my M&A cliches and I want to share them with you now for the permanent record:

  • Selling a company is a “large complex sale”. Just like real sales. That means you probably need 100 meetings to get a buyer. So I always tried to imagine that you need 100 meetings with different people to sell the company. That means that this meeting, no matter how optimistic the potential acquirer might sound, is unlikely to result in a sale and you should remain even-keeled about these things. The thing you should celebrate – and this is what my wife and I always did – is “We are one meeting closer to 100 meetings!”
  • No matter how good a fit you think you are for the business, you have virtually no input into the process. This is where I always thought half of the cliche came from – the key things that have to happen to make this transaction take place are events inside the buyer where you have little or no control. The CFO wants to focus on integration of the last transaction, your champion is job-hunting and suddenly quits, there is a spat about who would manage the acquisition and someone ends up going scorched earth (“If I can’t have it, then no one can!”, the CEO resolves to focus on maximizing profits to hit a number this quarter, the buyers chief competitor announces a new product and they send M&A off to focus on other things as a result, or technology says they could recreate all of your core technology in a week. This kind of thing happens every day. Every day. There are third party forces at work, which you are unaware of, attempting to derail your acquisition. If the buyer gets distracted, the opportunity goes away.

But I am here to tell you that this is the truth, nothing but the truth, but a partial truth.

There are things you can do to make the sale of a company more likely.

First, go kill it. If you build a great business, people want that. It needs to be a blend of great proprietary technology and a large and growing customer base/revenue stream. Duh. I assume you are reading this because you don’t have all of that. Sales is easy when you have the perfect product.

Second, there are things I don’t know about. I have sold two companies now, and I know that there were things I did to make the sale more likely, but there are lots of people with bigger exits, more exits, and more experience here. Good lawyers probably have ten things that they would put on this list.

Third, momentum is your friend. People talk about deal heat all the time. If the deal is moving, make sure you move it along. The faster you move, the less time a naysayer has to insert obstacles.

Fourth, ABC, baby! Always be closing. When Greg Yardley founded Flurry and I was still at Aol, every time we had lunch, the running joke was that he would start the lunch by saying, “Just so you know, I have a fiduciary responsibility to let you know that we are for sale.” That is a little, ok maybe a lot, tongue in cheek, but you get the idea. Greg was doing two things right: Networking with potential acquirers and looking for opportunities.

Because here is the other half of that cliche: You never know when a company will suddenly decide they need to buy something in a space. When that happens, you want to make sure you that you broke bread with a player in the organization recently and told them your story. Otherwise you might not get the call.

Here is the bottom line: In every transaction I have been involved in, the buyer knew someone on our team, had a long term relationship (greater than one year) with that person, and was familiar with our business as a result. When they felt like buying, they called us.

And that is how we sold.

Let’s get an awesome comment thread started. Give me your reaction now!

Judging Startups & Judging Startup Weekend

Sunday, April 17th, 2011

Mike Brenner was kind enough to ask me to be a judge at Startup Weekend this weekend. I passed, but I never really told him why. I was talking to an entrepreneur this past week about his ideas and I better articulated my thinking. I thought I would document it here because I think my conclusions have interesting implications for some of Startup Weekend’s participants:

Judging start-ups at an early stage is a bullshit business. Having said that, lots of people do it. But they invariably take a portfolio approach and invest only in areas they feel like they can understand. Because usually they are guess wrong.

Everybody knows it. The best one can really hope for is to understand if the business might be interesting to you.

Josh Kopelman has probably made as many early stage investments as anyone in the country over the last couple of years and he passed on Twitter.

I probably talk to an entrepreneur or two every week, so I hear a fair amount of ideas. Here is the trick: most ideas, your average idea, it is hard for me to tell if it is a good or bad idea. All I can really tell is if it is an idea that I could, if time were invested, come to a conclusion regarding whether it is good or bad. The answer to most of these is no: I can probably never tell if your consumer Internet app is a good idea. I can usually never tell if your enterprise software app is a good idea. In fact, the closest I can probably come is that most online advertising start-ups, given time, I could probably determine if they are good or bad ideas.

Unless they are in the affiliate space. Then I wish I would be able to figure it out, but I probably won’t be able to.

The good news for founders is that most people think most ideas are terrible. That means nothing.

If Ev had taken JoshKopelman’s rejection personally, no more Twitter.

Josh passed on Deconstruct Media, which I subsequently grew and sold!

Josh is a better judge than anyone else that is going to look at your start-up and he is wrong all the time.

The only judgements that matter are the yes’s that lead to people writing checks – and the best kind of checks are customers.

The last place team after 54 hours could easily be the most financially lucrative. Don’t trust outside opinions. Unless they are right!

Do Fish Drink Water?

Friday, March 18th, 2011

I scraped this answer, but I thought it was so interesting, I am reblogging it:

Fresh water fish absorb water through their skin and gills, saltwater fish actually do drink water.

In saltwater fish, they have to drink because their body’s concentration of salt is lower than the surrounding water. Therefore, they have to drink huge amounts of water every day to stay hydrated.

In freshwater fish, their salt concentration is higher than that of the surrounding water, and, as osmosis dictates, they absorb water through their highly permeable skin. To keep from bursting, freshwater fish actually have to excrete water, up to 10 times their body weight daily, unlike saltwater fish.

The Lure of Mediation

Thursday, March 17th, 2011

UPDATE: I love blogging because from time to time someone corrects my ignorance and I become smarter. I just received a lovely email indicating that AdMeld is now selling directly to agencies. While my source KNOWS STUFF, I am emailing Ben Barokas for comment. Shit, when did I turn into a reporter?

I am amazed at how many companies – ad networks, DSPs, and others, are considering getting into the mediation business these days.

The lure of mediation is obvious: If you see 100% of a sites inventory, you are seeing a much higher frequency of impressions, giving you more opportunities to monetize, you are potentially seeing some users that didn’t have the frequency to reach you in the daisy chain (super profitable), and you have more information about the absolute frequency of users (how many ads they have seen on the site).

This leads to a number of great monetization improvements:

  • You can front-run inventory
  • You have insight into the aggregate value of users
  • You can front-run inventory
  • You can front-run inventory
  • You can front-run inventory
  • You can front-run inventory

The terrible thing about mediation is that with great power comes great responsibility.

I feel like a proper mediation platform offers a few things to publishers:

  • A responsibility to maximize yield for the publisher – i.e. not front-running inventory
  • A responsibilty to offer transparent reporting

Many of the best known mediation platforms – AdMeld, Pubmatic, etc. – explicitly do not sell to non-ad networks. This allows them to report transparently on ad network performance with no risk of conflict and desire to front-run inventory. This also means that there is no difference between maximizing yield for them vs. maximizing yield for the publisher.

If I were an ad network, I would love to offer a mediation platform, because I want to front-run inventory, but the offering is so disingenous to customers, it is hard to imagine that it is a sustainable business.


Are DSPs Building Justifiable Valuations?

Wednesday, March 16th, 2011

I am reading more and more stories about DSPs raising large piles of money:

Lotame: $34m

MediaMath: $24m

DataXu: $19m

TradeDesk: $2.5m

TradeDesk appears to have a nice, sane strategy. If Invite Media was the industry leader and they were worth ~$80m, then all the rest of these companies are a long, long way away from justifying their valuations.

I am hearing more and more stories about how much of the revenue flowing through these platforms is essentially ad network business where the DSPs are taking on risk to run performance campaigns for agencies. While that is really interesting, is that revenue valuable? While it seems like the IPO market is opening, acquisition should still seem like a viable way out. If you build a $200m top-line ad network, I am unsure if anyone will acquire you today.

I wish I had more to say here, but why don’t people comment and we can go from there.




Is Twitter Evil?

Sunday, March 13th, 2011

It is super tragic watching Twitter struggle to find a business model. As has been widely documented, they have made, at some level, a fundamental shift that implies that people should no longer be able to build businesses using the Twitter API.

Frankly, this change in their Terms of Service is nothing less than shocking:

Courtesy of TechCrunch

Now, I am sure that Twitter represents this as “focusing development activity”, but when you look at developer-focused companies (“developers, developers, developers”), developers have always migrated to the most profitable areas and been slowly pushed out of business niches by the integration of functionality. If companies make Twitter clients and fill them with ads, will those end up being more popular than a Twitter client without ads? If Twitter can’t make a client people want to use, what does that mean?

The flip side of this is that, obviously, Google doesn’t let third parties scrape their organic search results and not show the ads.

Twitter is struggling toward some sort of balance, but it is very tough to turn a ship.

6.5 Tricks To Becoming A Better Writer

Thursday, February 24th, 2011

1) Have linkbait titles.

I was recently reflecting on whether all this blogging has made me a better person because, we all know, no one reads this stuff. Similarly, it is unlikely that it has made me a better person in any respect other than that I may be a better writer. Am I a better writer? Well, I read Tim Ferris’ study on titles that get retweeted. I have heard the standard Digg-bait logic for title writing.

2) Appreciation of SEO.

My gut instinct is that most of that stuff about linkbait titles only has value at scale. Am I getting value out of that? I suspect that the only real value I am getting from writing better titles is probably SEO and Tim’s suggestions about writing crazy titles probably diminish the SEO value of a post. Of course, I am knowledgeable enough about SEO to know that the real driver is not my amazing title writing but the number of links to my post/blog. Which is few.

3) Writing a good lead.

I am terrible at this. Most of my posts are stream of conscious rambles – also, generally, rambles that are continuations of things that were going on in my head already, so the first paragraph rarely tells you the preceding story. I would actually say that my tendency is far more to have the first sentence be either a sub-title to the title, an explanation of why I am writing a post with that title, or a bad joke. Mostly bad jokes. The good news is, if this were fiction, I am doing a good job of starting in the middle rather than the beginning, so it is Hollywood.

4) Story Structure

Alas, I rarely even bother with this any more. When I was a high school debater, I was required to do extemporaneous speaking events as well – until I proved so consistently terrible and disinterested in it that I was finally put out of my misery. Every competitor in that game knew the format:

  • Introduction
  • Point 1
  • Point 2
  • Point 3
  • Conclusion with circular reference

I have found that most of my blog posts today are something like:

  • Introduction
  • Point 1
  • Peter out……..

This is a visceral trade-off in some ways. Would people prefer me to bang out a post or three per week (my target is three per week) or would you like a monthly post that is a ten page well-constructed diatribe?

I have opted to ere on the side of volume and pointless-ness. Certainly, that means many posts are simply me getting a quick thing off my chest, but that isn’t necessarily bad. Some of those things are good.

5) Value Brevity

Some days I think I should simply focus all my wittiness on Twitter. Some days I think I should abandon Twitter to capture all the wittiness on my blog. Maybe I should more aggressively stream my wittiest tweets onto Twitter. Regardless, I certainly look at some of my blog posts and how they peter out and think, “If I could get this down another ten characters, it could just be a tweet.” But I like to tell my stories how they are. I do think of myself as an entertaining storyteller and I am loath to ruin a good story simply to get it down to 150 characters.

But I do think it tells you something about the market that if you go google “blogging makes you a better writer”, 4 of the first 8 results are actually “twitter makes you a better writer”. If twitter actually makes you a better writer, we are doomed as a society.

6) Writing makes you a better writer

This is probably the best thing that I have gotten out of blogging – besides the relationships I have built through blogging. Every single writer says, “to become a better writer, you have to write.” I have cranked out almost 400 blog posts. There has to be a pony in there somewhere.

Despite that, I do not think I will ever write a book. I love great writing. I appreciate great writing. I have found that if I work very, very hard I can write very well (few examples of this exist on my blog, but you could look here or here), but I cannot sustain it. And I have bad writing so much that I cannot write a book. You want good writing? Go read Jonathan Safran Foer.

6.5) Annoying writing devices are annoying

Any time people use that “and a half” cliche in list writing, I instantly loathe them. I loathe them. Jeffrey Gitomer? LOATHE HIM. (I cannot link to him but let’s say that every week he tells you X.5 ways to do something in sales.)

I cannot read a post, no matter how linkbait, that starts that way. I encourage you to never, ever do that. It is a stupid thing to say and a stupid device. It reminds me of people that price things with a $0.99 on the end – maybe studies demonstrate its effectiveness, but I find it so smug and I feel like I am being sold the post – and Jeffrey Gitomer knows that no one likes to be sold, they like to buy.

Your transparent use of devices makes me hate you. That is not good writing. It is as unsubtle as a jackhammer.

Was this post facetious? As I mentioned, I ramble. That was not the original intent. I was spending some B-time thinking about what I could do to improve my blog posts, but unfortunately I have been struck with the stark realization that the key to this is time and the only way I can create time to improve my posts is to post less frequently.  My informal polling, as well as research by third parties, indicates that frequency right now is pretty good and I would be hurting myself to lower it. And I am barely keeping up as it is.

So I have decided to settle – a recipe for non-greatness.

Alex Gizis is Worth His Weight In Gold

Wednesday, February 23rd, 2011

Alex Gizis is one of the biggest geeks I know. And I love him for it. This post is about how great it is to know geeks. And more importantly, start companies with geeks.

One of my favorite sayings is that true innovation happens close to the iron. By that I mean that people like myself tend to move the world in one of two ways:

  • incrementally, or
  • impractically

The reason that is true is that I am not close to the iron. I am a suit. People close to the iron can realize much more dramatic change.

I was asked to give an example of this the other day and I used Alex in my example. The example goes something like this:

I have a great idea for a new start-up: We are going to build teleportation devices. Huge market opportunity. I am going to have a market cap bigger than all the car companies, all the airlines, and Fedex… combined. Awesome idea.

Should you join my company? No. I am an insane person. You would dismiss me out of hand.

If Alex called me and said, “Hey Brent, I think I figured out a way to build a machine that teleports matter,” I would quit my job the next day to help him realize it. Because when a guy like Alex tells you that he has ideas that sound crazy, he has figured out how to make them work.

Look at his current company, Connectify. He was playing around with Windows 7 and thought, “I bet I can turn these computers into routers quickly and easily”. Lo and behold, now every Windows 7 box can be a wifi station for free. If I told you, “hey, lets turn every Windows 7 computer into a wifi hot spot and build a mesh network”, I sound crazy. Alex already did it.

I am a suit. My ideas relate to markets and needs that customers have that become more or less apparent to people studying the market. People close to the code see things you can do with the code that no one imagines to be reasonable.

Those are innovations that change the world.

When Bonus Plans Go Wrong

Tuesday, February 22nd, 2011

So last week we talked a lot about structuring bonus plans. Because it is bonus plan season, I have heard some horror stories that I wanted to talk about.

So when a CEO at a big company is setting up his budget for the coming year, one of the top of mind things is “making my bonus”, “making my bonus”, “making my bonus”. Because really, what else is there? You want to set up the plan for success. Typically this means signing up for the smallest number possible. Signing up for a huge revenue and profit target makes getting your bonus hard. It would be way better to sign up for a smaller number, then hit the huge number and take advantage of the monster accelerator to make crazy bank.

And this is true for every part of the organization! You want to retain your best talent. That means paying out big bonuses. The problem is, if you set your goals low, you have to set expenses low. Frequently that means layoffs. You can rarely justify low revenue goals and high expenses. Even in a start-up, your revenue goals still need to increase significantly on a percentile basis year over year though expenses may exceed revenue.

Unfortunately, sometimes this works too well. When public companies lay off large numbers of employees, then pay out large bonuses 12 months later, it is disconcerting. Or when they are “getting set” for next year and do a big layoff and then pay out large bonuses simultaneously, that can be even more disconcerting.

The other situation where this is disturbing is when a company makes goal based on one-time transactions not pre-conceived by the original plan – like selling assets to generate net income.

Not to name names, but a public company that we are all familiar with just paid out on significant over achievement of plan when stockholders and third parties would probably call it anything but the plan they had in mind.


How To Structure Your Bonus Plan

Thursday, February 17th, 2011

I am a huge believer in bonus plans and yet I see far too many small companies not offer bonus plans. Let’s do a quick Bonus Plan FAQ:

Why don’t they offer bonus plans?

I suspect it is because they worry that they will not have the money to pay out at the end of the year.

Why should you offer a bonus plan?

Bonus plans, structured properly, can be motivating. They can align an employee’s efforts with the company’s objectives and can help drive retention.

When I started at, few things excited me more than my boss telling me: “Last year we hit 173% of goal. We are at 143% right now.” When I looked at my target bonus and did the math, I got excited. Low base be damned, that was a big check. It is exciting to crush your goals.

How big a bonus do people need?

The real question here is how large does the bonus need to be to change behavior. I think a 25% bonus creates a huge change in behavior. A 10% bonus makes people happy: That is more than a month’s salary! A bonus smaller than 5% does not create big behavioral changes. A bonus smaller than 2% might as well be zero.

At one place I worked, I was told that the bonus could be between 10% and 45% based on achievement of company goals. Lofty claim, but as every employee there will tell you, despite this claim, the bonus every year was 10%. As my former boss at this employer said to me: For a claim like that to be credible, there has to be a year, somewhere, sometime, when they pay out the 45%. Employees know what is crazy and what is real.

How would you structure a bonus plan?

Glad you asked. Here is a simple approach: Conventional wisdom says that a bonus consists of two parts: Funding the pool, then splitting the pool.

Funding the pool means getting the money to pay out bonuses. If you are just getting started with your bonus plan, I think you do that something like this: You have a revenue target this year of X and a profit margin target of Y. For example, you have a consulting company and your goal for this year is to get to $1m in sales and $200k in profits. That is like consulting company financial model 101. So the salaries you pay out to the company are probably on the order of 1/3 of the revenue: $330k. So if you want to offer a 15% bonus to all of your employees, you need to set aside $50k. This means that monthly you have an “expense” of setting aside $4k for your bonus pool. (15% of monthly salary expense) Including that expense, you want to get to 1m in sales and 20% margin. So we have a starting point for funding the pool. Now, the pool gets smaller for failing to achieve goals and the pool gets bigger for over-achieving. Typically, people talk about having an “accelerator” for over-achieving on goals. Regardless, the model might look something like this.

At less than $800k in revenue or less than 15% margins (whatever some reasonable number is – a number that would be bad but not completely disaster), the bonus goes to zero. At $800k and 15% margins, the bonus pool is funded at 5%. You can then draw some lines from there that help you fund the pool with varying amounts between 5% and 15%. Similarly, you might say: If we exceed $1.2m in revenue with margins at 25% or greater, the pool becomes funded at 25%. If we exceed $1.5m, the pool gets funded at some greater amount (40%?) – we accelerated it. The point is that at some not completely insane number greater than goal, it grows much faster. There is probably a margin component here as well, but my point is that if revenue goes up but margin stays flat, that is still pretty amazing for a small company and the ownership can carve out a little more profit to give back to the employees – that is where the acceleration dollars frequently come from. Typically the idea is that at a certain point, ownership starts splitting incremental profit dollars with employees (maybe 50/50 at peak acceleration).

Pick a number that can be achieved. When CEOs at medium or large companies with boards and investors and things like that pick this number, they pick it like they will be fired if they don’t achieve it. If you pick overly ambitious goals as your target, you set up everyone for failure. Stretch goals are for the accelerator. Realistic goals are for the basic number.

So now you have a pool of dollars – maybe 10%, maybe 20% of total employee salaries. Employee reviews suddenly mean a lot! Somehow you do them, but the point is that your top 10% of employees should get 2x their target percentage. And the bottom 20% get nothing. And the rest get something approximating the target and you have some extra funny money to spread around.

When do you distribute bonuses?

Annual bonuses can be distributed whenever. A lot of companies also use this to drive retention in ways that aren’t fun for employees. Tools like: We do annual reviews 30 days after the period ends (February 1 for people on the calendar year) and then payout bonuses on April 1. So now people would be crazy to quit before April 1 – You leave a free month or more of salary on the table!

What else could I do?

Once you have this framework, you can do a lot of different things. Some consulting companies, rather than having an annual bonus, have a per project bonus based on profitability calculations associated with that specific job. Some people do this quarterly.

Many (virtually every) large companies have different target bonuses for different titles (more senior people have larger targets – 10% for the rank and file, 15% for VP, 20% for SVP, 25% for CEO, stuff like that). This just requires that you accrue money into the pool at slightly different rates for salary by title. If you are big enough to have this kind of striation, then it is probably not hard to do the math.

Finally, many larger companies with more mature plans segment out the corporate achievement from the personal achievement to varying degrees. This recognizes the oft-claimed “I can’t affect how well the company does” whine. So a junior person with a 10% bonus plan may have that bonus funded regardless of corporate achievement. The CEO only gets paid if the company achieves its goal (100% tied to corporate performance). The VP may be 50% personal achievement (funded regardless of corporate goals, tied to his achievement of MBOs) and 50% corporate goals. But remember there is no accelerator for these people – there is just divvying up the pool of cash created by the aggregation of people at their level.

But I can’t affect GOAL X!

You hear this a lot from junior people, but you shouldn’t let that bother you. We gave people utilization targets at previous employers and heard from junior people all the time, “But I can’t control my utilization”. That might sound true on face, but let me tell you this: Our best consultants never had a free moment, yet our most problematic consultants struggled to find people that would take them on. Somehow, performance was correlated with utilization in a highly constructive way. The more awesome your work output was and the more awesome you were to work with for both our teams and our clients, the busier you found yourself.

Secondly, we wanted people motivated to get busy. You should look for work. If you think you are about to run out of things to do, you need to start asking around. If we offer you work, but it is not as “awesome” as you were hoping it would be, we want you to think for a second before you tell us that it is not good enough for you.

Thirdly, if we are struggling to keep people busy, your utilization is probably going to be the least of your bonus worries in a second.

Why did you recommend tying everyone to corporate goals then?

I kicked off this post with the supposition that you didn’t have a bonus plan yet. If you don’t, and you want to introduce one, the most pressing problem is usually arranging to have the cash exist to support one. Tying it to corporate goals is the best way to ensure that achievement of bonuses only happens if there is cash in the bank to support it. If the goals are missed, then the company simply transfers the “bonus reserve” expense into the coffers of profit to make the year whole.

Similarly, I recommended an annual plan because an annual plan gives you time to save cash, makes you less sensitive to AR/AP issues, and is easy to administer. Many people will tell you that more frequent bonuses motivate people more because they are more tangible.

How can ownership game the system?

There are a lot of ways to get ahead in this system if you are ownership. First, you typically don’t pay a bonus to people that join in Q4 of that year – yet you are taking dollars out to fund plan. These dollars later drop to the bottom line. Furthermore, many people quit through the course of the year – those people were having dollars reserved for them the whole time, yet their bonus goes “poof” when they quit.

In large organizations, typically the CFO socks those dollars in a rainy day fund for resolving any conflicts that arise in the bonus process (“OK, I will increase the pool for your division 1% more to help you out”) or if you need some extra money for a hire outside of budget.

This also helps when you have varying bonus goals and you want to move the needle a little more for a guy that gets a big payout. Now you have a little slush fund to help goose his payout a bit without taking money from other people.

Finally, another key trick is that you pay out on people’s base salary paid out, not on their actual base. So if someone joined July 1 and makes $90k/year with a target of 10%, then their eligible bonus at plan is actually 10% of $45k – they only received $45k in pay that year. This actually makes a lot of sense because the business was only accruing bonus dollars for that person for half the year – 10% of the $45k was accrued.