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Wednesday
Aug012018

Turning Over Another Card Is for Poker, Not Technology Investing

I was with a co-investor recently and we were discussing our mutual investment.  It is a situation where we have been frustrated with progress, both in terms of developing a scalable product and in getting early customer traction (these are certainly correlated).  My colleague made the statement that if one thing or another happened, he was willing to put more money into the business in order to “turn over another card.”  Poker and venture investing may have some analogies: certain pots are outsized; you need to be in the game in order to win; try to lose small but win big; you need patience; you can’t afford to play every hand even when playing loose.

In my opinion, however, poker (and particularly games where you keep paying to see all the cards like Texas Hold’em) and venture investing are very different – at least for us when we invest in business-oriented software.  We invest in leaders and their teams, large potential market opportunities, products that are at least at the minimal viable product stage, and companies with customers and hence early revenue traction.  Our successful portfolio companies build value over time through growth and most often exit at a scale which is 20x to 50x the revenue at the time we invested if not more.  We can be wrong in our investment decisions and that is part of the venture business, but when we are wrong, we should accept it and fold.  A business that is far off track rarely rights itself.  

Two key differences between a poker hand and a venture investment. 

First: In poker, it’s about beating the others versus an absolute hand and even a mediocre hand can win the pot.  In venture, it is generally the case that a mediocre business brings a mediocre return and a great business, sustained over a meaningful period, creates real value.

Second:  In poker, the last card turned can make the difference between a winning and losing hand.  Thus, the logic of waiting to turn over another card can make sense in many scenarios.  In venture, you know pretty early if you aren't playing with a strong hand and you also know that the longer time goes on, the less likely it is that the management team is going to find the card that changes the outcome.

As the song the Gambler says: “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.”  In B2B venture investing, you just need to fold ‘em earlier and save your money for doubling down on the winning hands.  Paying to see another card is often the sucker bet.

Of course one other critical difference between poker and venture investing is the hard working entrepreneurs and employees, who have overcome long odds to build a compelling product, attract initial customers, and pursue a vision exciting enough to attract investors in the first place.  In situations where it may not make sense to pay to turn over another card, we certainly don’t fold and simply leave the table.  We work closely with management to find a soft landing or a navigate a path to a clean wind down of the business. 

Wednesday
Jul182018

The Compounding Effect of a CEO’s Day-to-Day Decisions

A colleague of mine recently stepped away from his day-to-day role as a partner in a venture fund and into an interim six-month role as Executive Chair in one of our portfolio companies.   It was a necessary move to stabilize what will likely be a very good company and it was a great move for him because it gave him a much deeper experience of being an operator.   This will likely give him a lot more empathy for what our portfolio CEOs are going through and will also likely make him a better investor and director.   One of his observations, which rings so true and so obvious yet non-obvious, is how much happens inside a company that the board never hears about and how many decisions are made that the board never sees.   How you make decisions as a CEO and how you influence how your team makes decisions may be one of the greatest drivers of the ultimate success of your business.

Small decisions matter.  The next hire; the selection of a law firm; the pricing of a major contract; promising a customer functionality that is not on the roadmap; changing the commission plan mid-year; shuffling the organization structure; asking the team to work the day after Thanksgiving.  Each choice both reflects and influences the culture, the economics, the quality of the work, and the overall environment.  It’s hard as an investor to know how such decisions will be made by the CEO, and it’s really hard to screen for future decisions, yet trying to do so is critical.  As a result, many investors and  board directors put much weight on understanding how decisions that are visible to them have been made, because understanding how a few visible decisions are made provides an window into all of the unseen decisions.  It’s all of these small decisions that compound and either become a drag on a business or hopefully enable a company to accelerate.

When I meet CEOs of potential portfolio companies, I focus much more on decisions they have made than on experiences they have had.  Understanding why they made the decisions they did in a number of scenarios provides a window into how future decisions far away from the view of an investor or director will be made, giving some indication of whether the compounding effect of those decisions will accelerate performance or not.

Tuesday
Jun122018

The Fallacy of the Messiah Hire

“There is no Messiah in here!  There’s a mess alright, but no Messiah.”  A memorable line spoken by Brian’s mother in Monty Python’s Life of Brian.  The truth is, I often think of this line when CEOs speak to me of the person they just hired or the new person who just started.

It is always the same – “this person is just what we need to”:

a)      Accelerate growth
b)      Perfect product market fit
c)      Solve our development quality issues
d)      Land the transformative partnership

Don’t get me wrong.  Talent matters and every hire in a small company is critical.  I encourage our leadership teams to focus on consistent hiring practices and to work extra hard to bring A+ talent in the door.  But having too high expectations for a new hire creates a disservice not only for the incoming person but also for the people who are already in the organization.

Why is that?

Messiahs are expected to have almost immediate impact, and if this is not seen, it can be disappointing.  This level of expectation can often be crippling for the new hire.  For most roles in most companies, there is actually much to learn before a new hire can make changes, alter processes, or impact results.  That learning process takes time.  If a “playbook” really existed for the VP Sales or the Chief Product Officer, someone would have published it and made millions.  B2B tech start-ups have similarities, but also have differences and you want to hire people who understand both.  The “to a hammer, everything is a nail” hire can have a huge quick impact if your business is just like the one they came from.  If it’s not, that hammer will not only be hitting nails, but it will also be breaking a lot of glass as well.  Great hires listen, learn, and then adjust.  Their impact grows with time and much of this impact is by making others around them even better at their jobs.

For the team in place, prior to the hiring of the Messiah, the positioning of this new hire can be demotivating.  Was there really so little talent here before?  Was the team just following the wrong “playbook?”  Is this person going to get all the credit for all the good things the team had been doing?  Over positioning the new hire can lead existing team members to either pull back and let the new person figure things out or cause them to undermine the efforts of the would-be Messiah, even making it harder for the new hire to succeed.

CEOs need to be very careful in talking about new members of the senior team and in the expectations that the CEO sets for the new hire.  Strengthening an already strong team is a much better message than bringing in the next savior.  Understanding that change takes time–and more time than one thinks–is a lesson CEOs are constantly relearning and one they must remember when setting new great hires up for success.

Friday
Jan052018

The Operational CFO - Helping Improve the Score

I used to engage in the debate about whether the right structure at a certain stage of business evolution was to bring in a COO.  The argument was that bringing in a “been there and done that” executive to run much of the day-to-day operations was the right move to allow the business to scale.  Such a structure typically enabled the founding CEO to remain as a leader and a visionary, and often to continue to drive the go-to-market processes.  Over time this arrangement proved to be the wrong one more often than the right one, as decision making was often ambiguous.  People wanted to follow the CEO yet they reported directly to the COO.  Often not only the organization but also the culture became bifurcated.  

When a company is at that stage where an infusion of experience, operational focus, and financial discipline are required to take the business to the next level, I am increasingly in favor of an operational CFO.  

What is an operational CFO?  Well they come in different flavors but they are more likely an MBA than an accountant.  Their skills are in FP&A (also known as financial planning and analysis) versus GAAP.  They have business experience and often came to the CFO role from another function.   

What is it that I like about this role?   

  • This person can often serve as consigliere for the CEO
  • There is no role ambiguity.  The CFO can dig into the cost and performance of every function without ever having people stop reporting to the CEO
  • Companies get complex as they grow and the role of FP&A is about finding ways to optimize performance as the business scales 
  • The addition of an operational CFO is unlikely to change the underlying culture except to make everyone more aware of what actions are driving winning outcomes  

Bottom line.  An accountant tells you the score.  An operational CFO helps you to score more and thus increases the odds that you will win.  

Tuesday
Sep262017

Evolving to a Zero Trust Digital World

There is an evolving network security approach called a Zero Trust Network that when abstracted seems like a way to think about digital interactions.

One definition of a Zero Trust Network is as follows:

Traditional network security relies on a secure perimeter.  Anything inside the perimeter is trusted, and anything outside the perimeter is not.  A zero trust network treats all traffic as untrusted, restricting access to secure business data and sensitive resources as much as possible to reduce the risk and mitigate the damage of breaches.

Zero trust network security operates under the principle “never trust, always verify.”  Users and network traffic are treated as if they’re operating in the open Internet, where a bad actor could be listening in or impersonating a user to gain access.  Network traffic is encrypted to minimize the risk of interception. Attempts to access a sensitive area of the network from another area are screened as if the person (or app) trying to access the network is untrusted.    

Source:   www.virtua.com

Never trust, always verify.  It sounds like a pretty miserable way to go through life.  Many of us live in a “trust but verify” mode in the physical world and in our in-person interactions.  Frankly, it is rare that we have dealings with people who are completely unverified.  You go to a party at a friend’s house and you meet someone new.  Well, your host or someone at the party knows him.  If you want to know more about him, you ask others.  If no one knows him, a red flag goes up.  If we meet an entrepreneur, most often someone in our network knows her or we were likely introduced to her by someone we trust.  That’s business.  Even then, before we give her money, we do a reference check and a background check.  Trust but verify.

In the digital world, we get exposed to so many more people so much more frequently.  Trust is a harder and harder thing to expect.  For example:

  • What percent of your emails each day come from people and sources you do not know?  How careful are you about which ones you open and which ones you discard immediately?  How many obvious phishing emails do you receive each week?   How often do you get an email that looks to be from a known contact that turns out to be phishing?  How many of these do you miss?
  • How many of the LinkedIn invitations you receive are from people you really know?  Do you only accept the ones from people you know well?  Do you assume that someone who has 10+ common connections to you is a legitimate person to add to your network?  Do you think your connections use a high bar in screening their connections?  Many people accept every invitation they receive.
  • The news is full of reports of Russian manipulation of accounts and news on Facebook, terrorist cells on Twitter, and the creation of fraudulent “trusted personas” on LinkedIn by foreign scammers.

One of our investment theses at Osage Venture Partners relates to zero trust enterprise solutions and the identification of specific enterprise data that requires a higher level of security.  Recent investments include AppBus, a unified endpoint security and management solution that is built on top of a zero trust model architecture, and RiskLens, the leading provider of purpose-built cyber risk quantification solutions that enable business executives to focus security efforts on areas of greatest vulnerability.

Beyond pure security-focused investments, zero trust feels like a concept that will penetrate most digital interactions and will open up a whole new set of business models and business ecosystems.  I think we will see a Zero Trust concept taking hold in a number of different areas.

  • People will require a much tighter screen on emails and will only allow truly verified emails to be received.  New emails will go through a multi-stage verification process
  • Multi-factor authentication will become the norm and this will continue to evolve.  All of us will find logging into work networks to be more frequent and more time consuming and increasingly requiring advanced technologies such as facial recognition or behavioral pattern tracking.
  • People’s networks of relationships in social media will tighten and new distinctions will be created for a small set of truly trusted relationships.  LinkedIn needs to add a new classification of someone as “someone I can vouch for” or “someone I trust and respect”
  • New technologies will emerge that will create an increased number of walled gardens of constant verification.  We will elect security over web freedom in the next wave of the internet evolution. 

We are surrounded and under attack by brilliant criminals who roam freely in our digital world, just waiting for us, or our families, or our co-workers to make a mistake.  If this many criminals came into our neighborhood each day, we would move somewhere else.  Most likely into a gated community.  We are entering the zero trust digital age, and soon all of us will choose to live (personally and in business) in internet gated communities.  It’s an increasingly dangerous world beyond the walls. 

At Osage, our investments in AppBus and RiskLens are aligned with this Zero Trust theme.  We expect these may be the tip of the iceberg.