Ten Characteristics of Great Investors

Fred had a great post today called Ten Characteristics of Great Companies.  This link includes the comments, which numbered over 70 when I last looked.  Great discussion overall, especially for Fred’s having come up with the list on a 15-minute subway ride.  Fred used to write a series of posts about VC Chiches, and I would periodically write a Counter-Chiche post from the entrepreneur’s perspective.  This post inspired me to do the same.

So I’ve taken 15 minutes here, pretended I’m on the subway, and here is my list of Ten Characteristics of Great Investors, in no particular order:

1. Great investors know how to give strategic advice without being in the operating weeds of a company
2. Great investors get to know whole management teams, not just CEOs — in fact, great investors become part of the extended management team of their portfolio companies
3. Great investors invite you to do diligence on them by giving you a list of every CEO they’ve ever worked with and asking you to pick the ones you want to talk to
4. Great investors ask great questions
5. Great investors don’t publicly take credit for the success of their investments, even if they were major drivers of that success
6. Great investors show up for meetings on time and don’t spend the meeting using their smartphone
7. Great investors treat their portfolio companies’ money as if it were their own money when spending it on things like lawyers or travel
8. Great investors look for connections to make between their portfolio companies or relevant people but have a strong relevance filter and don’t send junk
9. Great investors never have a ready-made list of the ways they add value to companies — and they specifically never talk about the help they give in recruiting executives or making sales/bus dev introductions
10. Great investors recognize when they have a conflict around a portfolio company and are clear to represent their separate points of view separately

I’m not sure I’ll be invited to present this anywhere, but there it is for discussion.

Book Short:  Sloppy Sequel

SuperFreakonomics, by Steven Levitt and Stephen Dubner, wasn’t a bad book, but it wasn’t nearly as good as the original Freakonomics, either.  I always find the results of “naturally controlled experiments” and taking a data-driven view of the world to be very refreshing.  And as much as I like the social scientist versions of these kinds of books like Malcolm Gladwell’s The Tipping Point and Blink (book; blog post), there’s usually something about reading something data driven written by a professional quant jock that’s more reassuring.

That’s where SuperFreakonomics fell down a bit for me.  Paul Krugman has described the book in a couple different places as “snarky and contrarian.”  I typically enjoy books that carry those descriptors, but this one seemed a bit over the top for economists — like a series of theories looking for data more than raw data adding up to theories.Nowhere is this more true than the chapter on climate change.  It’s a shame that that chapter seems to be swallowing up all the public discussion about the book, because there are some good points in that chapter, and the rest of the book is better than that particular chapter, but such is life.

As with all things related to the environment, I turned to my friend Andrew Winston’s blog, where he has a good post about how the authors kind of miss the point about climate change…and he also has a series of links to other blog posts debunking this one chapter.  If you’re into the topic, or if you read the book, follow the chain here for good reading.  My conclusion about this chapter, being at least somewhat informed about the climate change debate, is that the book seems to have sloppy writing and editing at best, possibly deliberately misleading at worst.  (Incidentally, the reaction in the blogosphere seems highly emotional, other than Andrew’s, which probably doesn’t serve the reactors well.)

But I’ll assume the best of intentions.  Some of the points made aren’t bad – there is no debate about the problem or the need to solve it, the authors express legitimate concern that current solutions, especially those requiring behavioral change, will be too little too late, and most interestingly, they show an interest in alternative approaches like geo-engineering.  I hadn’t been familiar with that topic at all, but I’m now much more interested in it, not because it’s a “silver bullet” approach to dealing with climate change, but because it’s a different approach, and complex problems like climate change deserve to have a wide range of people working on multiple types of solutions.  I met Nathan Myhrvold once (I almost threw up on him during a job interview, which is another story for another day), and it makes me very happy that his brilliance is being applied to this problem as a general principle.

As I said, though, beyond this one chapter, the book is good-not-great.  But it certainly is chock full of cocktail party nuggets!

Investment in the Email Ecosystem

Last week, my colleague George Bilbrey posted about how (turns out – shocking!) email still isn’t dead yet.

Not only is he right, but the whole premise of defending email from the attackers who call it “legacy” or “uninteresting” is backwards.  The inbox is getting more and more interesting these days, not less.  At Return Path, we’ve seen a tremendous amount of startup activitiy and investment (these two things can go together but don’t have to) in in front end of email in the past couple years.  I’d point to three sub-trends of this theme of “the inbox getting more interesting.”

First, major ISPs and mailbox operators are starting to experiment with more interesting applications inside their inboxes.  As the postmaster of one of the major ISPs said to me recently, “we’ve spent years stripping functionality out of email in the name of security – now that we have security more under control, we would like to start adding functionality back in.”  Google’s recent announcement about allowing third-party developers to access your email with your permission is one example, as is their well-documented experiment with NetFlix’s branded favicon showing up in the inbox starting a few months back.  And Hotmail’s most recent release, which has been well covered online (including this article which George wrote in Mediapost a couple months ago) also includes some trials of web-like functionality in the inbox, as well as other easy ways for users to view and experience their inboxes other than the age-old “last message in on top” method.  Yahoo has done a couple things along these lines as well of late, and one can assume they have other things in the works as well.

I wouldn’t be surprised if many ISPs roll out a variety of enhanced functionality over the next couple of years, although these systems can take a lot of time to change.  Although some of these changes present challenges for marketers and publishers, these are generally major plusses for end users as well as the companies who send them email – email is probably the only Internet application people spend tons of time in that’s missing most state of the art web functionality.

Second, although Google Wave got a lot of publicity about reinventing the inbox experience before Google shut it down a couple weeks ago, there are probably a dozen startups that are working on richer inboxes as well, either through plug-ins or what I’d call a “web email client overlay” – you can still use your Yahoo!, Hotmail, Gmail, or other address (your own domain, or a POP or IMAP account), but read the mail through one of these new clients.  Regardless of the technology, these companies are all trying, with different angles here or there, to make the inbox experience more interesting, relevant, productive, and in many cases, tied into your “social graph” and/or third-party web content.

The two big ones here in terms of active user base are Xobni, an Outlook plugin that matches social graph to inbox and produces a lot of interesting stats for its users; and Xoopit, which recently got acquired by Yahoo and wraps content indexing and discovery into its mail client.

Gist matches social graph data and third-party content like feeds and blogs into something that’s a hybrid of plugin and stand-alone web application.  That sounds a little like Threadsy, although that’s still in closed beta, so it’s hard to tell exactly what’s going to surface out of it.  There’s also Zenbe and Kwaga, and Xiant, which focus on creating a more productive inbox experience for power users.

Furthermore, services like OtherInbox and Boxbe aim to help users cut through the clutter of their inboxes and simultaneously create a more effective means for marketers to reach customers (say what you will about that concept, but at least it has a clear revenue model, which some of the other services listed above don’t have).

Finally, a number of services are popping up which give marketers and publishers easy-to-use advanced tools to improve their conversion or add other enhanced functionality to email.  For example, RPost, a company we announced a partnership with a couple months back, provides legal proof of delivery for email with some cool underlying technology.  LiveClicker (also a Return Path partner) provides hosted analytics-enabled email video in lightweight and easy-to-use ways that work in the majority of inboxes.

Sympact (another Return Path partner) dynamically renders content in an email based on factors like time of day and geolocation – so the same email, in the same inbox, will render, for example, Friday’s showtimes for New York when I open it in my office on Friday afternoon but Saturday’s showtimes for San Francisco after I fly out west for the weekend.  And a Belgian company called 8Seconds (you guessed it, another Return Path partner) does on-the-fly multivariate testing of email content in a way that blows away traditional A/B methods.  While these tools require some basic things to be in place to work optimally, like having images on by default or links working, they don’t by and large require special deals with ISPs to make the services function.

While these tools are aimed at marketers, they will also make end users’ email experiences much better by improving relevance or by adding value in other ways.

Some of this makes me wonder whether there’s a trend that will lead to disaggregation of the value chain in consumer email – splitting the front end (what consumers see) from the back end (who runs the mail server).  But that’s probably another topic for another day.  In the meantime, I’ll say three cheers for innovation in the email space.  It’s long overdue and will greatly enrich the environment in the coming years as these services gain adoption.

Father/Mother Knows Best?

USA Today had an interesting article today about how founder-led companies perform better than their non-founder-led counterparts, with a 15-year stock price appreciation of 970% vs. the S&P 500 average of 222%.  That’s pretty powerful data.

The general reasons cited in the article include

founders having deep industry knowledge…having a powerful presence in the company…having a huge financial stake in the success of the business…not looking for the next job so can take a long-term perspective…being street fighters early on

I think all those are true to some extent.  And it’s certainly true, as one of the CEOs interviewed for the article said, that it’s not because founders are smarter or harder working.  But to add to the dialog, I think there are two other big reasons founders may be more successful at generating long-term returns for their companies.  One is much more tactical than the other.

1. Founders have a deep, emotional connection to the business.  For many of us, and certainly for the 15-year-plus variety mentioned in the article, a founder’s company represents his or her life’s work.  Whether or not your name is on the door like Michael Dell, as a founder, your personal reputation and in many cases (perhaps in an unhealthy way), your sense of self worth is tied to the success of the business.  I’m not suggesting that “hired” CEOs don’t also care about their reputations, but there is something different about the view you have of a business when you started it.

2. Founders have longer tenures.  The article didn’t say, but my guess is that for the 15 years analyzed, the average tenure of the founder-led companies was 15 years…and the average for the S&P 500 was something like 5 years.  And while 5 years may seem like a long time in this day and age of job hopping, it’s not so long in the scheme of running and building an enterprise.  It takes years to learn an industry, years to build relationships with people, and years to influence a culture.  Companies that trade out CEOs every few years are by definition going to have less solid and consistent strategies and cultures than those who have more stability at the top, and that must influence long-term value as much as anything else.

I’m sure there are other reasons as well…comment away if you have some to add!

A Thankful Moment

While there are certainly some aspects of being a CEO that are full of those proverbial thankless tasks…there are some moments that are just the opposite.  And boy are those rewarding.

I had one this morning.  While I frequently get nice emails or handwritten cards from employees after they interview or start or get a promotion or raise — and those are all great — this is one I can easily blog about because it’s online.

Yesterday was the first official day of work for Neil Schwartzman, who actually joined us many months ago as a consultant running compliance for our Sender Score Certified whitelist but just finally became a full-time employee as we set up a Canadian entity and International entity and whatever our lawyers and accountants told us we had to do in order to be legit about hiring out of the country.

Neil’s thank you post is very entertaining (I promise, our objective isn’t to have employees drinking and slacking off!), but more than that, rewarding in that he says we do a good job at Return Path of walking the walk around ethics, reputation, and high standards in what we do for the email ecosystem.  Now that’s rewarding.

But in some ways, it’s even more meaningful coming from Neil.  Just as he says he took a risk in coming to work with us, we took a risk in bringing him on board.  As a leading voice in the anti-spam community, Neil is exactly the kind of person that spooks out some of our clients who think of anti-spammers as the enemy.  Our view is, as you can imagine, more nuanced.  Anti-spammers who do their job well are a legitimate marketer’s best friend because they are keeping the inbox clean of actual spam.  As we tell our clients, we are a big tent here — the only way we will solve our clients’ deliverability problems is by working WITH the receivers of the world on common language, rules, standards, and metrics — not working AGAINST them.  And that’s where Neil has done such a great job for us so far — bringing his unique perspective on the spam problem and working alongside many others on our deliverability team like Tom Bartel, Tom Sather, Leslie Price, Melinda Plemel to help keep the world safe for email.

So thanks, Neil…and right back at you!

GEOITS

This is another gem that I picked up years ago from my boss at MovieFone — the “Great Employment Office In The Sky.”  It’s a simple but powerful concept:

• the organization is grappling with a difficult employee situation, and
• the likely path is that the employee needs to leave the organization either immediately or sometime in the future, and
• it’s impossible for the organization to figure out how to get from A to B for whatever reason, then
• the employee resigns of his or her own accord, or
• the employee does something that leaves the organization no choice but to terminate him or her immediately with no gray area

This has come up time and again over the years for us, and it’s an incredible relief every time it happens.  I hate admitting that.  We try to be swift (and fair) in dealing with tough employee situations.  But the reality is that it’s quite difficult.  The easiest termination situation I have ever had as a manager — ironically the first one I ever did almost 15 years ago — was still hard, because (a) we’re all human, (b) difficult conversations are difficult, and (c) even the most clear-cut situations usually have some element of fuzziness or doubt lurking in the background.

I don’t know why the GEOITS happens.  It probably has a lot to do with employees being perceptive and also recognizing that things aren’t going well.  I am not sure I have a settled or consistent view of karma and larger forces at work in the workplace.  But I’m glad there is a GEOITS at work at least once in a while!

Counter Cliche:  Failure Is Not an Orphan

I haven’t written one of these for a while, but this week, Fred’s VC Cliche of the Week, Success Has a Thousand Fathers, definitely merits an entrepreneurial point of view.  Fred’s main point is right — it’s very easy when something goes right, whether a company/venture deal or even something inside the company like a good quarter or a big new client win, for lots of people to take credit, many of whom don’t deserve it.

But what separates A companies from B and C companies is the ability to recognize and process failures as well as successes.  Failure is not orphan.  It usually has as many real fathers as success.  Although it’s true that Sometimes, There is No Lesson to Be Learned, failure rarely emerges spontaneously. 

Companies that have a culture of blame and denial eventually go down in flames.  They are scary places to work.  They foster in-fighting between departments and back-stabbing among friends.  Most important, companies like that are never able to learn from their mistakes and failures to make sure those things don’t happen again.

Finger-pointing and looking the other way as things go south have no place in a well-run organization.  While companies don’t necessarily need to celebrate failures, they can create a culture where failures are treated as learning experiences and where claiming responsibility for a mistake is a sign of maturity and leadership.  And all of this starts at the top.  If the boss (CEO, department head, line manager) is willing to step up and acknowledge a mistake, do a real post-mortem, and process the learnings with his or her team without fear of retribution, it sets an example that everyone in the organization can follow.

Connecting with Other CEOs

CEOs get introduced to each other regularly.  Sometimes it’s through VCs or other investors, sometimes it’s through other CEOs, sometimes it’s because the two companies are already partners.  I try hard to meet personally or at least on the phone with other CEOs every time I get a chance, sometimes because there’s business to be done between Return Path and the other company; but always because I come away from every interaction I have with another CEO with some learnings to apply to myself and the company.

I have noticed two unrelated things over the years about my interactions with other CEOs who are in our industry, and therefore with whom I spend time more than once, that I find interesting:

First, the personality of the organization frequently (though not always) mirrors the personality of the CEO.  When the other CEO is responsive and easy to schedule a meeting with, it turns out the organization is pretty easy to work with as well.  When the other CEO is unresponsive to email or phone calls, or is inconsistent with communication patterns — one communication through LinkedIn, another via email, another via Twitter — people at Return Path who also work deeper within the other organization have experienced similar work styles.  I guess tone setting does happen from the C-suite!

Second, even when there is alignment of temperament per my above point, there is frequently a disconnect between CEOs and their teams when it comes to getting a deal done.  The number of times I’ve had a solid meeting of the minds with another CEO on a deal between our two companies, only to have it fall apart once the two teams start working through details is well north of 50% of the cases.  Why is this?  Maybe sometimes it’s unfortunately calculated, and the CEO is being polite to me but doesn’t really have any intent of moving forward.  In other cases, it’s a natural disconnect — CEOs have a unique view of their company and its long term strategy, and sometimes the people on their teams have different personal, vested interests that might conflict with a broader direction.  But in many cases, I think it’s also because some CEOs are weak at follow-up, and even if they give their team high-level direction on something don’t always check in to see how progress is or is not being made.  I know I’ve been guilty of this from time to time as well, so please don’t take this post to be self-righteous on this important point. Those of us who run organizations have a lot on our plates, and sometimes things fall between the cracks.  The best way to make sure this last point doesn’t happen is to really ensure the meeting of the minds exists — and for the two CEOs to hold each other accountable for progress on the relationship up and down the stack.

I will close this post by noting that most of the best relationships we as a company have are ones where the other CEO and I get along well personally and professionally, and where we let our teams work through the relationship details but where we hold them and each other accountable for results.

Business Week just ran an interesting article entitled “I’m a Bad Boss? Blame My Dad,” which unfortunately I can’t link to because Business Week online is for subscribers only. The premise of the article is that our past is always with us…that the patterns of behavior established in our home environments as children inexorably follow us to the workplace.

You may or may not agree with the premise — certainly, there is at least a little truth in it — but the article had another interesting statement:

CEOs often get hired for their skills, and fired for their personalities.

I’ve always felt that Boards and CEOs need to view “personality,” that is to say, the softer skills, as equally important to the classic skills: strategy, analytics, finance, sales, and hard-nosed execution. People who can do all of those things well but who can’t inspire others, show empathy, balance self-confidence with humility, communicate properly and clearly, and operate with a high degree of integrity, will fail as a CEO in the long term. I’m not sure how Boards and hiring committees can adequately screen for those characteristics in advance, but they certainly should!

And for the record, if I’m a bad boss, I blame myself. If I’m a good boss, I am happy to give my parents credit.

There’s been much coverage in the news of Saturday’s passing of President Ronald Reagan, but I will add a new wrinkle by trying to distill down what I know and remember of The Great Communicator’s leadership style into a few simple lessons of note for CEOs.

Lesson 1: Sunny optimism motivates the people you lead, but only when it’s balanced with hard-headed realism. Reagan’s message that tomorrow can be a better day than today was powerful and timely for the American psyche, but he didn’t just assume that because he said it, it would be true. He backed up his message with (a) an understanding that the American economy itself was in the doldrums in the late ’70s, and (b) policies designed to fix the economy. Whether you agree with those policies or not, you have to respect the fact that Reagan as a leader wasn’t just talk — he combined the talk with reality-based action. That’s super important when communicating key messages to a company of any size.

Lesson 2: Simplicity of messaging beats out measured intellectualism in broad-based communications. Reagan’s view of the 40-year-old Cold War when he took office was “we will win, and they will lose.” Much easier to rally around than messages of detente and containment (this quote came from an editorial by former Reagan staffer Peter Robinson in today’s Wall St. Journal). Similarly, the bigger and more diverse the group you’re talking to inside your company or in a speech or in the press, the more important it is to boil your key message down to something people can easily take away with them and repeat at home later to their spouse or friends.

Lesson 3: Nobody’s perfect, and you don’t have to be perfect either. He may have been, electorally, the most popular president of our generation, but Reagan certainly had his many and sometimes glaring faults. History will acknowledge his faults but overall judge him on his performance. It was noted (also in today’s Journal, I think) that Reagan got a lot of little things wrong, but in the end, he will be remembered because he got a few big things very, very right. Perfection is something that most mortals can’t achieve, certainly not in a high profile position like President or CEO of anything, whether a 10-person startup or a nation.

Love him or hate him, the man was one of the most prominent leaders of our time. I’m sure there are more lessons from Reagan’s legacy than these three for CEOs, but this is a start, anyway.

We live on the 35th floor of our building in Tribeca (downtown Manhattan), facing south, about 7 blocks up from the World Trade Center site. From 1994-2001, our view was grand and corporate. For a short time in September 2001, it was horrific. Since then, it’s just been depressing. Seeing such a large gap in the skyline every morning just made us remember what — and who — used to be there.

It’s not getting a lot of coverage because it’s not the Freedom Tower, but the new World Trade Center 7 building is on its way up.

As far as I’m concerned, it’s the most beautiful construction site I’ve ever seen. It’s definitely morning once again in Tribeca!