Aligning Business and Software Development Needs

July 12th, 2010

DaggerBoard is frequently approached by early stage companies with questions or issues surrounding product development. These issues range from: (1) We can’t seem to get products properly defined, to (2) Our releases are always late, to (3) Our software has so many bugs that our customers are unhappy with us, to (4) Why does product development cost so much? Defining, developing and releasing quality products should become an easy cycle, so that the company can focus on the harder tasks of selling into new marketplaces. Following a few simple guidelines that align the business and software development needs is frequently all that is required to accomplish this. Since today we are in the era web-based applications, my discussion will focus primarily on this type of company and software.

In establishing appropriate product develop and business alignment, first consider the stage of development of the company. The diagram below portrays the 6 phases typically associated with the start-up lifecycle. The right level of development processes and structure needs to be put in place for each stage. In the early stages it is key to be fast moving, flexible and maximally cost efficient. Stay small and lean, adding only enough infrastructure and process to ensure that your products are properly defined and sufficient quality levels are achieved. Only as you find success in the market place and revenues increase, should processes and practices be added to handle the growing size and complexity of the engineering organization.

Figure 1. Start-up Company Growth Phase

The main areas to consider for product development relate to Processes and Practices, Tools and the Organization (see Table 1). Processes and Practices encompass those areas relating to defining, developing and maintaining your product. The Tools selected should align with the key decisions you make on Processes and Practices. Tools should help, and not get in the way of, product development. Likewise, Organization decisions should support rapid delivery of quality software. It is important to understand that the organization must evolve as the company progresses through its stages of growth.

Some Key Considerations For Product Development

Thinking about when to implement the elements in these 3 key product development areas by company growth phases provides additional insight (see Table 2). Deciding early on your preferred development methodology is important for team productivity. Most web software companies are adopting some form of Agile methodology. Similarly, the greatest point of leverage for almost all future product development occurs with architectural decisions made during the inception, prototype and initial release phases. So careful attention should be paid early on to this area. The same can be said about putting forth the effort to have good requirements definition from Product Management and proper Design of the code so that it fits within the Architecture. I’ve seen too many development organizations think that they knew exactly what needed to be done, were eager to get going and jumped directly into coding. What inevitably results over time is unsupportable spaghetti code that has to be re-factored and slows down future development. The other significant area I recommend implementing early is defect tracking and formal release criteria. This is key to ensuring your initial release is sufficiently tested, has acceptable quality and you know what level of quality you are delivering.

Table 2. Evolution of Product Development in a Start-up

Organizationally, the early phases of a start-up are frequently the most exciting. Usually, the team is small, focused, highly productive and in constant communication. IT support may be done by the engineering team for itself, but development can frequently be accelerated with some support by an experienced IT person to help set-up workstations, servers, Amazon Web Services and the Tools selected by the engineering team. QA and test is generally done first by the development team, and then by everyone else in the company.
During the early start-up stages Tools can be kept to the minimum essential to accomplish initial product release. There are two main objectives during this period:

• Provide the engineers with the Tools necessary to properly develop the functionality and performance required by the software. In some situations this may be as simple as an IDE for all developers. In others there may be database, specialized performance/scalability testing or database administration software.
• Ensuring that the code base you develop is under control and safe. This specifically means putting in place a source code repository, version control and back-up systems. Builds are generally done by a designated software developer using these tools. At any moment in time you should be able to recreate any release that has been made.

Next month we’ll look deeper into software development for the later stages in the life cycle of a start-up…

Funding Readiness – Findings from HIFin Assessments

June 11th, 2010

For an early stage high-tech entrepreneur, fund raising is always an interesting topic.  For some (especially in the current environment) just the mention of the topic raises the blood pressure and invokes lots of difficult questions.  How disruptive will it be on operations?  Venture funding or Angel?   Will investors take control?  What should I cover in my pitch?

The list goes on and on…most important, you should be asking – what are the typical shortcomings and how do I improve my odds of success?

So, the partners at DaggerBoard took it upon ourselves to develop a standard framework to improve the entrepreneurs readiness and to avoid the common shortcomings in an institutional funding pitch.  We call the methodology the Hierarchy of Institutional Financing (HIFin™).   The framework is based on 6 critical dimensions essential for a funding pitch and it was developed in concert with our experience along with advice from leading angel investors, venture capital professionals and feedback from CEO’s that have been through the process.

To date we have analyzed hundreds of investor pitches since we began the practice and wanted to share some of our aggregate findings across the primary 6 dimensions that illustrate where many pitch decks are doing well and where others are falling short.

Highest Scoring Categories:

  • Market Size & Value Proposition – the addressable market being targeted, trends that impact the company, and applicability and power of the value proposition
  • Leadership & Team – the experience and completeness of the management team, board and advisors, as well as CEO’s compatibility with an outside investment

In general entrepreneurs do a good job sizing the addressable market and discussing their unique value proposition.  It’s also no surprise that describing the executive team and advisors comes in with one of the highest rating.

Moderate Scoring  Categories:

  • Product & Go To Market Strategy – the completeness of the product offering, technical validity, customer adoption, go forward roadmap and go to market approach
  • Competition & Ecosystem – the company’s ability to establish, defend and differntiate its selling proposition and IP versus competitors and adjacent players and clearly define partnership opportunities and threats

Its important to point out that the assessment model deliberately couples Product & Go To Market Strategy.  Too often a pitch deck is filled with details on the product but has little on the GTM strategy.  These two dimensions are critically linked and without a solid GTM strategy the product falls short in far too many funding pitches.  It is critical for entrepreneurs to clearly describe how the product will get to the buyers in the product portion of the investor pitch.

With respect to Competition & Ecosystem, entrepreneurs normally do well in dissing the competition and almost always include the competitive grid showing superiority.  However, they normally fall short in describing the ecosystem.  The ecosystem being the “related sectors” where potential competitors, acquirers, partners or alliances exist.  This is especially important new markets (versus disruptive replacements) where investors may be struggle to understand the market domain.  An illustrative landscape diagram of the adjacent sectors and companies in them is ideal.

Lowest Scoring  Categories

  • Terms & Valuations – the valuation expectations relative to industry trends/norms, the suitability of the existing and future capital structure as well as the likelihood for a liquidity event with tangible return
  • Financials – the detailed assumptions and validation behind the revenue models and financial projections as well as the match between funding expectations and requirements.

We generally recommend that valuation be done verbally and not included in the deck.  However, the entrepreneur must be ready to discuss and support valuation expectations with solid arguments.  By the way, one outlandish exit transaction is not adequate support.  Too often we find the entrepreneur poorly equipped to support their valuation position.  As this category is the pinnacle of the HIFin model,  strong arguments in each the five earlier dimension will drive optimal valuation results.

The most surprising part of our findings is that financials scored the lowest!  In our experience, far too many of the entrepreneurs are not properly prepared to discuss and support the financial expectations of an institutional investor.  You need a well thought out financial model that includes 3-5 year revenue projections, quarterly projected P&L statements and projected balance sheets – no exceptions.

Bottom line – when you make the commitment to raising institutional also make the commitment to score High on the HIFin model and your odds of success will greatly improve!

Promote Women to Increase Profits

May 26th, 2010

Women currently earn 57% of all bachelors’ degrees, 50% of professional and doctoral degrees and hold half the nation’s jobs.  Yet, women remain grossly under-represented in leadership positions where they hold only 18% as reported by The White House Project Report, 2009.  The numbers are even worse in technology companies with the top 200 California public companies only having 8% women in leadership positions.    Before you start justifying these numbers with “women aren’t ambitious, don’t want it, don’t have what it takes…” consider the following.  A recent study by Catalyst reports that women and men have equal desires to be CEOs.  Women and men also report similar levels of work satisfaction, reasons they would potentially leave their companies and strategies for advancing.  Nor are the lackluster numbers for women in senior management due to unsatisfactory performance when they do reach the top.  In fact, the opposite is true.

Catalyst reports that companies with the highest representation of women in their top management are more profitable than those with the fewest women at the top.   This result has been confirmed with studies by McKinsey and Company, Pepperdine University and Harvard Business Review analysis.  The bottom line:  promoting women in business is good for business.

You might protest that finding quality women is difficult for a software company since only 12% of engineers are women.  Google has set a goal of 25% of their engineers should be women.  Why?  They know that Marissa Mayer, VP Search Products and User Interface, Susan Wojcicki, VP Product Management, and Jean Fitzpatrick, VP Engineering for Search, bring unique perspective on what Google’s customers want, half of whom are women.  Not only that, Google knows these executive women change, for the better, the dynamic of how work gets done at Google.

I co-founded and ran a software company, Acucorp, Inc.  Our senior executive team had three men and three women.  Under them, we had equal numbers of men and women as managers.  We were unusual.  We thrived in a dying market with a 14% pre-tax profit and eventually sold our company to our number one competitor at a high price.   We had a very loyal customer base giving us 90% of our revenue as recurring revenue.  Was it the women?  You won’t know unless you try promoting women for profits.

If It’s Not Changing It Must Be Broken

April 19th, 2010

Having run and worked with many companies that are experiencing growing pains, one thing that is very clear to me is that the CEO must be constantly changing the focus of the company as the organization goes through the various stages of maturity.

Just as in child rearing, different approaches are needed for a company in the infancy, adolescent, teen and adult stages of maturity.  A parent would not use newborn tactics with a teen and a CEO must be sure to adjust the operating practices as a company matures.

I recall one particular off-site meeting with the executive team of Cardiff Software in which there was some discontent with the ongoing changes being driven across the company.  I countered the resistance with the title of this post – “if its not changing it must be broken”.  Change is an essential element of a healthy growing company and it is the CEO’s responsibility to drive change in order to build a successful organization.

The CEO needs to be reinforcing the (1) the overriding mindset, (2) attributes of the core staff, (3) the financial thrust, (4) and the core concentration of marketing, sales and R&D as the company grows from infancy to adulthood.

Infancy Stage (under $5M in sales) – During this period the overriding mindset is to prove the business viability.  The core executive team needs to be able to articulate the vision of the company and be ready, willing and able to do any task at hand to establish the business.  From a financial perspective, it is all about cash flow and ensuring the company has ample runway to get to break even.  In most cases, marketing resources are educational in nature by effectively reaching the influential leaders to legitimize the segment and offering.  It is also imperative that R&D be nimble and iterative – with quick adjustments to the offering based on the priorities of the early customers.  Finally, sales staff needs to be creative and nimble with greater concentration on business development to get to the right decision makers and get deals done.

Adolescent Stage ($5 – 10M in sales) -  In the Adolescent stage, the overriding mindset changes from viability to scalability.  It is essential to prioritize resources on tasks that will grow the business in a repeatable way.  The core executive team can no longer be the “free wheeling” creative types predominant in the infancy stage, but must be “change agents”.  At this stage you should expect to experience limited turn-over from staff who are resistant to process and prefer to operate in the past.  The financial focus is on EBITDA.  For every percentage point of revenue growth, the operating expenses must grow at a slower rate.  Meanwhile, product development must be formalized and a clearly documented product roadmap must be committed to across the company.   Normally, marketing concentration (separated from sales) is focused on lead generation to feed the growing sales team.  The core product and business model is working and sales leverage is top of mind.  As such, alliances, OEM’s and expanding channel partners are top priority.

Teen Stage ($10 – 25M in sales) – At the teen stage its about expansion into new markets.  This requires a greater understanding of the ecosystem and a look beyond the point solution that may have started the company.  In the Teen stage, turn over among the leadership team is expected.  The “generalist or visionary” skill set is no longer viable, now it’s about specialization and having experienced and tightly focused resources working on many facets of the expanding business.  In the teen stage, the CEO’s role of keeping the team integrated and aligned on the top imperatives is critical.  Experienced financial leadership and consideration of  inorganic growth as well as preparation for an exit is important.   Within marketing, raising the visibility of the company with industry analysts and partners is paramount.  Meanwhile, the R&D team should be pro-actively managing product extensions and product lines and direct account presence to drive greater adoption in new markets.

Clearly, each company has its own unique position and these guidelines may not be universal, however its the CEO’s responsibility to initiate the changes to mature the business as quickly as possible.  I hope this framework allows you to better identify your companies position, identify the necessary changes and drive your organization to adulthood!

Reflection in the mirror. CEO, are you running a lifestyle business or building a growth organization?

March 15th, 2010

It amazes me just how many small self (friends and family) or angel-funded software, internet and SaaS companies are out there that seem to just be flat-lined or oscillating in the $3 to $10M revenue segment. They are in every market sector you look at –  XYZ software, a business in the (fill in your favorite) billion dollar market-  B2B and B2C alike.

But why? Is there a common thread? Why do some break through and others just seem to linger, or sustain? There exists plenty of great academic reading, and thought leaders, that will explain the impact of the business life cycle, market timing and more. Take your pick; they all have valid points. I think, from a practical standpoint, that most times it all comes down to the CEO. It’s for good reason that they say “the company is a reflection of its CEO.”

The start up phase $0 to ~2M, is a ‘fly’ or ‘crash and burn’ zone. Companies come and go. Determined business owners can, and will, scale their business on sheer determination and survival instinct. At some point thereafter, they achieve a certain revenue threshold where the company settles in to a comfort or sustain zone; one that matches the initial organization’s (and more specifically the CEO’s) capabilities.

Many refer to this as the first major inflection point of a software company. To me, it’s the point at which the CEO has to make that decision – Lifestyle or Growth. That is when it is time for a look in the mirror, and to make some hard choices.  Interestingly, I think many companies get stuck at this inflection point because the CEO either does not recognize this or does not know how to tackle the next stage of growth.

Deciding to create, or to run, a lifestyle business is great. However, if you opt for a path of continued growth; it takes both recognition that you have reached this stage and a strategic decision to adopt change that will help you push through.

What has to change?

  • The team around the CEO will likely need to evolve. The people that helped start the business are not necessarily the same ones you need to build the business to the next level. Understanding what/who you need is very important.
  • Measurement and metrics have to be revisited. The way success was defined and assessed in the early days is not necessarily applicable anymore.
  • Processes will become more important. The business can no longer be subject to human (resource) bottlenecks or operate without repeatable and understood protocols.
  • And, perhaps most importantly, the CEO will have to evaluate his role and area of focus. Accountability and responsibility to the business, and the rest of the team, oblige.

Change is good, if you want to stay on the growth track. Embrace it.

Preparing for the Exit – CEO’s Need to start Early

March 8th, 2010

The “when” and “how” of the exit stage of a business poses one of the biggest opportunities and challenges for a software company CEO. Unfortunately, many address the exit much too late – and often only when they get an acquisition offer that forces them into a reactive mode, wondering if the offer at hand is the best outcome for shareholders. This failure to adequately assess the time and preparation required for a successful exit can result in substantial value being left on the table or worse – an unsuccessful outcome. Yet this does not have to be the case. The outcome of an exit event can be dramatically improved by adopting some key strategies well in advance that prepare the venture to be both appropriately positioned for exit and ready to act when dictated by industry shifts and/or consolidation events.

Some of the major activities that should be handled 18-24 months in advance of an exit event or engaging an investment banker include the following:

  1. Start the Due Diligence Process – ask your counsel for the most exhaustive due diligence list they have.   Narrow it down for your company and start collecting the information well in advance.  Put all the documents into an online repository – thsi process is extremely time consuming but if you start it early you can chip away at it when you have free cycles.
  2. Develop your Pitch Deck – start assembling your PowerPoint pitch that you would make to a prospective buyer.  Break the deck into sections that correspond to your organization.  As you build the materials, you will identify gaps that you can fill in to solidify your position, promote your strengths and solidify your value.
  3. Map the Ecosystem – gather analyst reports on your market from reputable 3rd parties.  Understand the tangential solutions to your domain and create a visual diagram to represent the playing field.
  4. Score the Ecosystem – once you have identified all the players, dig deeper and look at how each of the players in the market would “fit” with your company.  We recommend scoring analysis in which you can rate each companies fit with your company based on technical, sales and financial metrics.  The laborious process now begins – start filling in the detail for each.  Be consistent in teh scoring approach and look beyond the obvious.
  5. Concentrate on Alliances – if you are not paying attention to alliance efforts with partners, you need to start.   You need to align with the top ranked partners in the ecosystem and build a relationship with them.  Enter into either a technology, marketing or sales partnership alliance.  Remember potential suitors normally buy companies that they have worked with in the past.

Ideally, you should be in the market when the sector is “hot” or a few of the top companies in the ecosystem are at the top of their game.

Many CEO’s are concentrated on the core business operations and spend too little time on these activities in advance or don’t prioritize these activities until they engage an investment banker.

Proper preparation, strategic assessment and alliance initiatives are necessary in advance and will have a material impact on valuation – so start well in advance!

Introduction – Our first post to the DaggerBoard Blog

February 18th, 2010

Hello everyone and welcome to the DaggerBoard Advisors blog.  I am Dennis Clerke, one of the advisors at DaggerBoard.  Along with my partners, we have been working with a broad array of emerging software companies since we started the company nearly three years ago.  My colleagues and I will be posting here on the blog frequently.  We all look forward to discussing many different topics related to building successful software companies.  We hope you enjoy our posts and find it both informative and entertaining.

As the first post, we thought it would be valuable to share some information on our name – no we are not a bunch of knife throwers…

Why DaggerBoard? What is it and what is the link to your services?

First a confession and some background – some of us at DaggerBoard have a real love for sailing and the name for the business comes from that passion.  For those that may not be as familiar a DaggerBoard is a retractable keel that extends into the water and allows the vessel to stay on course.  See the picture on the right.  When the sailboat reaches the destination, the DaggerBoard can be lifted or removed so that the vessel can comfortably navigate into port.  Like a DaggerBoard, the partners at our firm offer “drop-in” executive services for our clients.  We help set the destination and keep the business on course and when the destination is met, we “retract”.

Operating a successful software business and a high performance sailing yacht have many other similarities.  Just as a sailor would not set out for a destination without the right map, equipment and crew; similarly a successful business cannot operate without the proper understanding of the market, a solid team and a definitive plan for success. At DaggerBoard we help our clients define and execute plans for success and we act as part of the crew to reach the desired destination.

Our Crew

There are a lot of advisory services firms that provide a broad range of services in the market and what really distinguishes DaggerBoard from others is our principals and their experience.  Our entire team has had years of experience at the helm of a emerging software business.  Each engagement is led by a former CEO/entrepreneur that has been through the entire lifecycle of launching, growing, financing and selling software companies.  And like many sailors – we are addicted to the journey and anxious to contribute!  We enjoy working with emerging software companies and actively participating in our clients emerging businesses.

The Log – aka Blog

One last sailing metaphor – think of this as software executive’s logbook – where we will share information about passages and lessons that will allow you to have a safe an enjoyable passage.
Check back to hear more from us and find pertinent advice and perspective on issues and experiences that emerging software companies are facing.