Not-so-Counter Cliche:  Forecast Early and Often

There’s no "counter" in this week’s counter cliche, although this is a cross-post to two of Fred’s recent postings.  In his VC Cliche of the Week, he talks about the need for early-stage companies to forecast often, and he was nice enough to cite Return Path as his case study.  I thought I’d give some color on this from our perspective here.

Forecasting is a pain, so we adopted the model of as 12-month rolling forecast with quarterly reforecasts (and correspondingly quarterly incentive comp structures) out of necessity.  For early stage companies in emerging industries, there are simply too many moving parts in the business to provide enough visibility to produce an accurate 12-month budget.  There are really four factors at work here:

– Investment:  you make investment decisions every day in the business, and you can get pretty good over the years at predicting the return on the investment, but predicting the timing of the return can be very difficult.  Products "ship" late, customer seasonality can factor in, marketing campaigns can take longer to pay back than you expect.

– Competition:  you have by definition even less of an idea what competitors will do, or for that matter, when new competitors will arrive on the scene.  Any competitive activity can impact pricing and lengthen sales cycles in ways that are hard to predict.

– M&A:  any acquisition you make throws the entire budget into chaos both on the revenue side and the cost side.

– Recurring revenue:  for any business that has a recurring revenue model, missing your numbers in a given month or quarter makes it nearly impossible to get back on track for the rest of the year since next quarter’s number depend on making this quarter’s numbers.  This is what Fred calls the New York Jets syndrome – once you lose 7 games, you know you’re not getting into the playoffs.

So forecasting early and often is a great solution to this problem, and it’s a particularly effective tool to keep the team motivated.  And there’s no shame in doing this.  Even large public companies consistently set new guidance to Wall Street at the end of every quarter for the following quarter and remainder of the year.  But it is a little bit of a pain, so I’d recommend that CEOs and CFOs who want to adopt this model follow a few practices we’ve learned over the years:

– Make sure you have an incredibly flexible Excel model that supports the process.  You can’t reinvent the model four times per year.  It has to be able to handle multiple scenarios with easy-to-use toggles, and it has to be able to accept "actuals" as well as forecasts (see note on comparisons below).

– Manage expectations properly with the Board and with the team.  As long as everyone knows what the process is, you can avoid a lot of confusion.  The critical thing here is that neither constituency should feel like the system is being gamed or that numbers are being sandbagged.

– Compare to originals.  Our model produces "waterfall" comparison charts showing how a given quarter’s forecast changed over the quarters leading up to it, and then how the forecasts compared to actuals.  This is important mostly to produce learnings about how to forecast better in the future.

– Plan to work your way out of the process over time.  Do quarterly budgets for a year or two, then move to semi-annual budgets for a couple of years, then try moving to full-year budgets.

I think it was unintentional on his part, but Fred’s other posting today, about M&A in the Internet space, is also relevant to this topic.  It’s worth looking at the graphs in the original posting, but the basic point is that the preponderance of Internet companies either get acquired early on in their life (e.g., for less than $50mm) or once they have achieved escape velocity (e.g., for more than $500mm).  He says that the space in between, or "the valley" on his chart, is where a lot of solid VC-backed companies sit and where good solid returns are made.  I’d just add to it that "the valley" is exactly where it’s critical to forecast early and often, as that’s where businesses are working their hardest to grow from proof of concept to escape velocity, often with limited visibility 12 months out on their budget.

• This is going to be BIG! – I noticed that you are also not using LinkedIn
  Charlie O’Donnell from Union Square Ventures has a great post about LinkedIn, its limitations, and some things it could do to be MUCH cooler and more useful.
  (tags: VC Technology Media Social_Networking)

• Seven Characteristics of Highly Effective Entrepreneurial Employees
  Good quick point of view on what makes a great employee in a startup.
  (tags: Entrepreneur VC)

Buying Back Your Own Left Leg

There has been much written about the spectacular sale of Pixar to Disney for $7.4 billion this week.  The fact that Steve Jobs is now Disney’s largest individual shareholder is amazing news on many levels.  Fred has a great posting on this today from the investor perspective.

Another angle that I find interesting about this transaction is that it reminds me to some extent of Yahoo’s purchase of Overture a couple years back.  Yahoo OWNED the search business.  For years.  Invented it.  Synonymous with it.  Then they let others lap them they became more of a diversified online media company, and voila!  Others focused, innovated, and created a massive business in paid search.  Yahoo lost its own leg and had to pay $1 billion or so to buy it back.

The same could be said of Disney.  There was no other animated film company in America of note for DECADES.  Disney was it.  The mouse ruled the house.  Then others innovated, figured out how to sprinkle their own version of pixie dust on things, while Disney became a global multi-dimensional media and entertainment conglomerate, and poof!  $7.4 billion later, they had to buy their own franchise back to reclaim the animation throne.

Maybe I’m missing something here, but these stories tell me that diversification may be a wonderful thing, but businesses should never forget to innovate at their core and think like insurgents, not like unassailable market leaders.

AOL and Goodmail: Two steps back for email

(posted on the Return Path blog a couple days ago here)

Remember the old email hoax about Hillary Clinton pushing for email taxation? When we first heard AOL’s plans for Goodmail today, we thought maybe the hoax had re-surfaced and a few industry reporters got hooked by it. But alas, this tax plan seems to be true.

AOL has long held the leading standard in email whitelisting. Every email sender who cares about delivery has tried to keep their email reputation high so that they could earn placement on AOL’s coveted Enhanced Whitelist. Now, AOL may be saying that those standards don’t matter as much as a postage stamp when it comes to email delivery.

AOL will begin phasing out its enhanced whitelist in favor of Goodmail’s brand new and untested certification program — which requires a fee for each email sent. This effectively encourages marketers and senders to focus not as much on email best practices but on paying cash for inbox reach. It punishes companies who already do everything right with email by adding another roadblock before they can reach customers.

With senders having to pay a fraction of a cent for each email sent, the fees for companies (and profits for AOL and Goodmail) will mount and good mailers will not always be able to participate — even if they have a pristine email reputation and customer relationship. This is in effect taxation of the good guys with cash – and it does nothing to help the good guys who can’t afford the cost or to deter the bad guys who just plan to spam anyway.

Email getting delivered to the mailbox should be based on the reputation of the sender — not whether they paid for guaranteed delivery. Now AOL is saying that isn’t enough. By charging significant dollars for email delivery, AOL and Goodmail are on the road to creating a “pay to play” model that puts subscriber benefit and sender equality second.

Goodmail reportedly uses some reputation data to determine “good” senders. What data do they use? Is it comprehensive? It is our strong opinion that email delivery should be based on a solid email reputation. That reputation should be based on a comprehensive set of data points including in-depth complaint rates, unknown user rates, spam trap data, permission practices, email infrastructure, volume of email sent and identity integrity, among a long list of other factors.
If Goodmail looks at less data than AOL currently uses … so how can it be better?

AOL stands to make a lot of money at the risk of setting back email as best practices-based marketing. This is bad for senders who care about setting high email standards, bad for consumers’ inboxes and simply, bad policy.

There’s been a ton of coverage of this problem, including this great one today in DMNews.  Look for a lot more reaction from the industry to this once people really understand what’s going on.

AOL and Goodmail: Two steps back for email, Part II

(also posted on the Return Path blog)

There’s been a lot of noise this week since the news broke about AOL and Goodmail, so I thought I’d take the opportunity to change the direction of the dialog a little bit.

First, there are two main issues here, and I think it’s healthy to separate them and address them separately. One issue is the merits of an email stamp system like the one Goodmail is proposing, relative to other methods of improving and ensuring email deliverability.  The second issue — and the one that got me started earlier this week – is the question of AOL making usage of Goodmail stamps a mandatory event, replacing its enhanced whitelist.  To really separate the issues, this posting will tackle the second question, and the next posting will tackle the first question.

I have reached out to Charles Stiles this morning to try to clarify AOL’s position on Goodmail.  Initially, it was reported in the press that AOL was discontinuing their enhanced whitelist on June 30, and that Goodmail stamps were the only option available to mailers who wanted guaranteed delivery, images, and links in their emails via the enhanced whitelist.  But Charles has subsequently made some unofficial comments that the AOL enhanced whitelist will live on as an organically-driven or reputation-earned entity, and that Goodmail stamps will just be one option of many to gain enhanced whitelist status.  This is a critical distinction, and one that AOL needs to make.

If in fact they are not shutting down their enhanced whitelist on June 30 as reported and forcing thousands of mailers to use Goodmail as opposed to organically earning their way onto the enhanced whitelist, then I will help them publicize the correction since I’ve been such a vocal critic.  That would be great for the industry, and it’s my biggest hope that something good will come out of this controversy.

If AOL is making Goodmail the king — the only way to reliably reach users inboxes — then my complaints stand:  the lack of affordability for many mailers is problematic; the threat of a monopoly is real; and the absence of an organic route for mailers who have clear end-user permission to send email and sterling reputations runs counter to the entire spirit of the Internet.  AOL can accept Bonded Sender or not, although I hope they do some day.  But to tell mailers they have no other option, and in particular no organic option, to use the AOL enhanced whitelist to properly reach customers who are requesting their email is akin to Google telling the world that they will only present paid search results in the future, and that organic search is dead.

Can you imagine how well that would go over?

• Seth’s Blog: Going to meetings
  A great posting about Vendor Love from Seth Godin!
  (tags: Entrepreneur)

Staying Power

I interview a lot of people.  We are hiring a ton at Return Path, and I am still able to interview all finalists for jobs, and frequently I interview multiple candidates if it’s a senior role.  I probably interviewed 60 people last year and will do at least that many this year.  I used to be surprised when a resume had an average job tenure of 2 years on it — now, the job market is so fluid that I am surprised when I see a resume that only has one or two employers listed.

But even the dynamic of long-term employment, as rare as it is, has changed.  My good friend Christine, who was a pal in college and then worked with me at MovieFone for several years before I left to start Return Path, just announced that she’s finally leaving AOL — after almost 11 years.  Now that’s staying power.  But most likely the reason she was able to stay at MovieFone/AOL for over a decade is that she didn’t have one single job, and she didn’t even work her way up a single management chain in a single department.  She had positions in marketing, business development, finance, operations, planning, strategy.  Most were in the entertainment field, so they did have that common thread, and some evolved from others, but the roles themselves had very different dynamics, skills required, spans of control, and bosses.

That’s the new reality of long-term employment with knowledge workers.  If you want to keep the best people engaged and happy, you have to constantly let them grow, learn, and try new things out or run the risk that some other company will step in with a shiny new job for them to sink their teeth into.  Congratulations, Christine, on such a great run at AOL — it’s certainly my goal here to keep our best people for a decade or more!

Counter Cliche:  But It’s Ok If Some of Them Turn Out to Be Frogs

This week, Fred says You Can’t Kiss All the Pretty Girls, meaning that it’s easy for VCs to get a little carried away, get outside their strike zone or core thesis for investments, put money to work in too many places, and make some mistakes.  Sure, some pretty girls turn out to be nightmares when you actually start to date them.

But if you’re a VC, it’s ok if some of the pretty girls turn out to be frogs.  You have a diversified portfolio.  You invest in dozens of companies, and as many VCs have said over time — you lose all your money on 1/3, you more or less break even on 1/3, and you make money on 1/3.  And my memory from working in VC years ago is that 1 in 20 is a magnificent home run.

So yes, you can’t kiss ALL the pretty girls, because some will turn out to be frogs, but you can get away with a lot of frogs and still be a great investor.

Counter Cliche:  Sometimes You Need a Shortstop

Fred’s Chiche of the Week this week is about drafting the best available (corporate) athlete.  I think he’s right lots of the time, especially in startup companies where people need to wear multiple hats.  And it might also be a good rule of thumb in larger companies, when you want to have flexibility to move managers around from group to group and get them to easily take on new challenges or responsibilities.

But sometimes, you just need a shortstop, and if you were the GM of a baseball team, your manager or owner would be pretty ticked off if you went out and hired a decathlete for the job.  Companies who are in the "medium size" stage (and probably larger companies as well, under certain circumstances) are often creating new functions and departments that require people with specialized knowledge or experience, whether domain or functional, to get the business to the next level.  So you may want the most versatile shortstop you can find (maybe one who could play second or third base in a pinch), but at a minimum you need a great middle infielder.

One of my other board members, Greg Sands, described the phenomenon of companies growing out of the startup stage once to me as a comparison to cell development in small organisms.  As the organism grows, cells have to specialize for the organism to adapt to its new environment.  I guess this post could also have been called "sometimes you need a spleen," but that wouldn’t have been appropriately sporting given the original Cliche. 

• Seth’s Blog: Nine things marketers ought to know about salespeople (and two bonuses)
  Great blog posting from Seth Godin on things the rest of us need to remember about how challenging it is to sell…and a couple pointers for the sales team about how to handle the rest of us!
  (tags: Sales Marketing Management selling)