People First

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People First

When you strip everything else away, building a company comes down to people. It’s not just a business of investing in products and services; it’s about investing in the team. And I want to share one Startup Secret above all before we go further.

Startup Secret: You are actually your biggest investor. It is not about how much money you go and raise through every stage. I’m lucky enough to write checks for founders. What I don’t do is what you do, which is invest your life. When you decide to start a company, you are putting your life behind it. That is a massive investment, by far bigger than any check anybody writes for you.

So don’t set out to create a billion-dollar company by finding an idea. Instead, set out to solve a billion-dollar problem, and think mindfully about where you’re going to involve your talents, your skills, and those of everybody else you bring along, to build an enduring company. And never take one area for granted: your human capital is always the most important capital in your business. Figuring out how to constantly develop, evolve, and if necessary upgrade your team is a critical part of the success of the business.

There are lots of attributes you always need, and one you can never have too much of in a startup is EQ. Good entrepreneurs build great networks and relationships, and the number one relationship is with your potential customers. If you can’t do that, forget it. You have to learn very early how to understand the customer’s view of your product or service and build a relationship that is truly intimate, so you can figure out what they actually need and what you can do to meet it.

Stephan Schambach and Demandware: Building the Team and Bringing the Customer Inside

Stephan Schambach came from East Germany, dropped out of college, co-invented e-commerce and the shopping cart (they weren’t the first to patent it and didn’t know what that meant), and built Intershop, which went public on the Frankfurt Stock Exchange in 1998 and later added a NASDAQ listing. After the dot-com bust, big retailers stopped investing in e-commerce and the bottom fell out of the client-server enterprise software business. For three years all he did was restructuring, one after another. The company survived, but he realized he had overlooked a change: companies were questioning the return on investment of buying, owning, and operating complex enterprise software. Salesforce.com was very new. Around 2003, when Linux got more stable and blade computing became a trend, he wondered whether cloud computing could power a mission-critical application. For the entire year of 2003 he tried to turn his old company around into a cloud company, and it was frustrating. He was the biggest shareholder and controlled the board, but he could not marshal the resources to build a very different product with a different business model. Others had the same problem; they died or were acquired by Oracle. Eventually he took the tough decision to leave his own company and start from scratch, because if he didn’t do it, someone else would, and he’d regret never taking the opportunity. That became Demandware, which helps the world’s greatest brands increase their online revenues on a cloud platform with a shared innovation and success model. Most of the fashion brands and many other consumer brands use Demandware day to day, and it’s mission-critical to how customers perceive the brand and to revenue and profits.

Stephan’s key success criteria for B2B cloud startups:

• An unmet need turned into a vision and eventually a strategy. The traditional “build and run” model meant buying enterprise software, installing it, and customizing it through consultants. Customers enjoyed total control but regularly messed it up, or the consultants did, and it became enormously costly to stay current and keep innovating. Outsourcing and ASP models just moved build-and-run into a hosted facility, producing the same problems, made worse because what separated you from your service was now a two-inch-thick contract, and what wasn’t in there you couldn’t get. Demandware’s cloud model put the controls in the hands of the business people (they sell to merchandisers, not IT), retained customization advantages, and provided a shared innovation model with automated software updates, learning from the vast amount of data all customers create, and systematically turning that into enhancements and revenue increases. Done correctly, cloud services can power mission-critical applications that can never have an outage.

• A really good nucleus of a team. You cannot have the team complete for all time, but you need a strong nucleus to make headway on the product and early customers. At the day they got the term sheet signed there were basically four of them, and with the exception of Tom, their early sales VP, everybody is still associated with the company.

• A shared innovation and shared success model. Customers today expect you to solve their business problems, not dictate what you build and then hand over a CD. Demandware charges a revenue share instead of a license fee, so every employee knows that whatever they contribute, as long as it helps increase revenues, helps everybody in the ecosystem, not just the company and not just the customer, but every partner participating.

• Some unfair advantage. For Stephan it was that he had done this before and could pull a team of engineers from his old company, and he secured a contract to use part of the intellectual property of his last company. That saved about a year to a year and a half in company building and R&D, and he doesn’t believe they would have attracted financing without it.

• One or more trends working in your favor. E-commerce grows 14 to 16% a year, cloud software about 18% a year, and global retail, of which e-commerce is only about 6%, is destined to grow. If a trend is against you or shrinking your addressable market, you have a problem.

• Smart money, and lots of it. Demandware took about $63 million of investment, in the corridor of $60 to $80 million that an enterprise cloud company needs, because everything is backend-loaded: you develop the platform, then get a few non-paying or too-small customers who let you experiment, then face a long sales process before real businesses trust a little startup to run their e-commerce site (that’s where the gap is), and then customers pay piecemeal as they go. The flip side is that today the service is so sticky that none of their customers would consider re-platforming, giving excellent forward visibility on revenue. From Northbridge and General Catalyst, the biggest help by far was attracting talent, because Stephan didn’t have a network in Boston, plus strategy and board work later, like deciding when to think about going public.

The deepest lesson from Stephan is what he did with the customer. Once they understood how powerful the revenue-share model was (their revenue is directly affected by whether their customers grow), he brought in people with actual merchandising experience. He still remembers the first week they had Harvey Beerman, a merchandiser and buyer with an abrasive retail culture, in the company. He was immediately in fights with the engineers, and some of the best people came to Stephan wanting to quit. It was a culture shock to an organization that until then was totally technical, but it was the right thing to do. It transformed the company to a point where every engineer understands exactly what they’re doing and how they can contribute to a better customer experience. The takeaway is not only that the business model was innovative, but that they managed to bring the customer inside the company and make them part of the DNA. It’s easy to talk about getting out of the company and going into the customer. It was much harder to bring the merchants into the company. Demandware built a “retail practice” group of about 40 people who provide consulting and advice on how to use the cloud service best, for free. It was tough to justify internally because the return was hard to measure exactly, but it was one of the best investments they made.

Culture: No Rules, Only Principles

Culture is the one thing you don’t pivot, because it’s really hard for people to join a company if they don’t understand what it stands for, and if it changes after they join, they’ll leave.

Stephan on culture: they started out very much engineering-driven, and the change toward focusing on the success of their customers was the hardest thing to do but the most rewarding. Other than that, he believes their culture isn’t very different from other B2B cloud companies; the customer-success focus is what makes them special.

Gail Goodman on Constant Contact’s culture, developed early around a couple of key concepts. First, a fanatic focus on the customer. They learned early that they are not their customer: 70% of their customers have 10 or fewer employees, half have five or fewer, and Constant Contact is more tech-savvy and marketing-savvy than they are, so their own judgment about what customers will want is poor. You have to go talk to them, and define your success by their success, especially with a monthly recurring revenue service where “cancel anytime” means you have to keep driving usage. Second, no jerks (in stronger words). You start with the things you hated at the last company: individuals who were difficult to work with but tolerated because they were rock stars, which is really destructive because one person can dishearten everyone around them. Those two became their anchors, and it was about eight years before they wrote down their core values, after a huge debate at an Ernst & Young event over whether writing down core values was itself a violation of their “no corporate BS” value. Her CEO group told her she was full of it, so they wrote them down.

The principle is the same one we always used building companies: there are no rules, there are principles, and the principles stand out. Even though Gail says she didn’t drive the culture, as a leader she clearly held people accountable to customer success and to “no jerks,” which is a consistency she decided to enforce, so she did drive culture.

John Hirschtick on culture: he wasn’t a believer in writing stuff down. It’s how you live and behave and what you say. People figure out over the long term whether something is just a line for one company meeting or something you live, because in a small company they see you through hundreds of situations over years and they know what you stand for. At SolidWorks they cared about hiring, and said at every company meeting, “hiring is the most important thing you do; if you’re not raising the bar, we won’t have a great company tomorrow,” to five people, 50, and 500. They also picked one thing to be tough about: buying their subscription service. “If the customer is on subscription, they can call me on my cell phone for support.” He said that a lot of times, had two million users, and never got one call, but it was a way of speaking: “We’ll do anything for them. If you’re not on subscription, get out of my face.” Companies that were tough about something specific were good companies. Also, cultural leadership doesn’t correspond to organizational leadership. Scott Harris, one of his co-founders, and Charlie Knockman, a low-level software engineer, were both cultural leaders. John kept a mental org chart of who the cultural leaders were, who had that kind of capital, and when there was a rough transition, he’d brief them in advance and let them set the tone by how they reacted.

The Compassionate, Direct Culture: Arguing to the Capital-R Right Answer

An audience member asked how to balance being a “ruthless” leader who tells people “don’t do this” with not being a jerk. The answer is a balance of both, and it’s really important in who you hire, who you fire, and how you set your culture.

John: “We’d get people coming from other companies who’d say, ‘We thought you were nice guys, but you argue so much.’ And we did, but you’re always arguing about what’s the right thing for the customer and the right thing for the business, and you’ve got to make decisions. These touchy-feely consensus places aren’t doing anyone a service. People are going to argue and debate, but at the end of the day, and this is part of the MIT culture, you try to find the capital-R Right answer. It doesn’t matter who thought of it or who gets credit, and we’ll argue like crazy to get to it, but we won’t do it in personal attacks; we’ll do it with respect, dignity, and speed.”

I love John’s picture of the wall for this reason too, because it identifies what good cultures look like. Everybody being the same, that brick wall, is not going to yield the capital-R Right answer because everybody thinks the same. But where every piece is fit with a different experience, and someone can bring something different, and you can have a respectful debate, you can build something unique and strong as a result of all the best experiences in a team.

Stephan’s discipline as a leader: as a board member it was easy, because Stephan never let any of us get complacent about the marketplace and the challenges. He was always the guy saying, “Yes, we may be doing great now, but we’ve got to think about this.” Part of that is just him; he worries about the future and sees things there. (Today Stephan is chairman, not in an operating role; they hired the CEO about four years ago. In his first public company he decided being an operating CEO of a public company wasn’t what he wanted long term.) There’s often a difference between great operators and people who are more in the creative, vision, strategy, and marketing side; the latter may not be the best operators, but operators often don’t see what’s coming, which is why teamwork is so important. You’ve got to have both.

An employee of Gail’s added: people can’t confuse being direct, or giving hard feedback, with being a jerk. The thing about the 10,000 hours that everybody skips is that it’s not 10,000 hours by yourself; it’s 10,000 hours coached by experts who teach you what’s working and what’s not, whether that’s your customer or a real coach. The CEO has to treat the most valuable commodity, time and urgency in the organization, as precious. The day they’re afraid of giving feedback because they’re worried about being a jerk, or afraid of being decisive because someone might be upset, is the day they begin to fail.

Getting Everyone Marching in the Same Direction

How do you get people aligned when your VP of Engineering and VP of Marketing are each dug in?

John: the image is leadership capital. When you run an organization, you build up leadership capital like a form of capital. There are times you draw on that account and say, “We’ve heard everything; this is the way it’s going to go.” CEOs have to do that, and the culture’s expectation is that it won’t always go the way any one person wants, maybe not even the way you want as CEO, but you pick the right way. You can’t just walk in and lead people to greatness; you build it up day in, day out, in how they watch you behave, make decisions, and treat people. Then when the tough day comes, you make the decision and let people know. You’ll lose some people, but the fear of losing people is highly overrated: “Half the team will leave if you make that decision.” Maybe you lose a small number, but those fears are usually overrated, and you say it’s for the better.

Stephan: sometimes, instead of fighting many battles, focus on agreeing on vision, strategy, and values as a management team, systematically, and take the time, because afterwards everything else is much clearer and easier.

Gail: exactly the same. If you have great strategic alignment, have the battles at the top of the strategy pyramid, and you’ll have fewer battles in the middle. One of their best practices is a regular review of strategy, mission, vision, where they play, who they serve, and how they win. At the beginning they just used Good to Great and did their Hedgehog (the intersection of three circles: what you’re passionate about, what your economic driver is, and what you can be world’s best at). For six years all they had was their Hedgehog, but it informed everything and lasted about eight years before they got fancier. When you drive a lot of alignment that way, and have a shared vision (like “making the world safe for small business”), a lot of the other decisions become much more straightforward, and the incremental decisions that feel like big swing votes get a little less big.

The founder who becomes the operator quickly falls into the trap of doing what they find easiest, which is usually exactly the wrong thing to do. You need to promote whoever can do marketing or sales or whatever, so you’re not doing it, so you have time to step back, as Gail did.