No matter how great of a company you have, no matter how successful you could potentially become, you will miss a quarter or two…or more.
Aaref Hilaly, Partner at Sequoia Capital, knows the gut-wrenching feeling of missing quarters, sometimes even horribly. That being said, he’s been able to come out of it on top and built amazing companies. And at Sequoia Capital, he works with a lot of SaaS companies who’ve gone through the same.
Aaref discusses best practices for managing your board of directors and how to be proactive in communicating when things go wrong. For starters, don’t manage your board (even though that’s in the title of this talk), engage with them. The board meeting is there for you, the entrepreneur, not the investors. And contrary to what we often talk about at SaaStr, always focus on product over metrics.
Remember, the important thing isn’t the fact that you missed, it’s how to you react to misses that’s important.
You can see Aaref’s slides here.
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Julia Zisman: Thank again for joining us for this last session for the Hyper Tactical stage. Again, my name is Julia Zisman, I work for Oracle. We’re here at the SaaStr Conference to help startups grow their business.
For those of you that weren’t in the last session, we’re currently operating a $300 credit for a lot of our technical products. If you’d like to hear more about that, please come visit our booth across the hall after the session.
Right now, I’d like to introduce Aaref Hilaly with Sequoia Capital. Aaref is a partner focused on early stage SaaS and investing in early stage SaaS and enterprise companies.
Aaref Hilaly: Thank you.
Aaref: Good afternoon, everyone. How to manage up and have a happy board even you miss a quarter?
We all know that bad things can happen to good people. After all, cars crash, cats die, elections have unexpected results. But in the context of your business, one of the worst things that can happen is for you to miss a quarter. When you do that, it’s almost like a break of the implicit agreement that you have with all the stakeholders in the business.
Whether it’s employees or board members, people start having doubts. Doubt creeps in like a cancer. People start wondering to themselves, “Does this founder know what they’re doing? Is this thing really going to work? Should I be doing this, or should I be doing something else?” It’s a real issue.
I spent 10 years as an entrepreneur before joining Sequoia. At my first company, a software company called CenterRun, I can tell you, we missed a lot of quarters. I was a completely clueless founder. It was one of my first jobs out of graduate school.
My second company, which was a SaaS company called Clearwell, I was a much more confident CEO. Again, I can tell you, we missed a lot of quarters.
Today at Sequoia, we’re very fortunate to work with a number of really great SaaS companies, some small, some now pretty substantial. Collectively, as a group, again, I can say, they have missed a lot of quarters.
It’s not because these companies aren’t great or that the founders aren’t spectacular, or that they don’t have compelling market opportunities, it’s because life is unpredictable and stuff happens. At some point, you will miss.
No matter how great you are, no matter how ultimately successful your business will be, this day will come when you will miss your numbers, and you’ll have to deal with it.
In the next 15 minutes or so, what I wanted to do is just quickly run through a basic survival guide for what to do when this happens. There are only four key lessons that I have for you.
Two to be done before you miss, which you could be doing today, and then two to do at the time that it happens. There are also a number of pitfalls which I’d suggest that you work hard to avoid.
Let’s start with the first lesson. The first lesson is, “Don’t manage the board, engage them.” I realize that the title for this talk is, “How to Manage the Board.”
Several of you may be thinking at this point, “Well, if your advice is don’t, then why have I bothered coming in the first place?” but this is actually a really important point.
It’s something that I realized at my first board meeting at my first company, CenterRun, which was February of 2001 where myself and my co founders on the right there–on the left, rather.
We were, let’s just say, inexperienced, and a board member, Mike Moritz at Sequoia was very experienced. To give you a sense, in addition to sitting on the board of our company which was a six person startup, at that time, he was on the board of Yahoo, Google, Flextronics, and PayPal.
As I approached my first board meeting, I can tell you, I was pretty terrified. I’d never done a board meeting before. It was just myself and Mike on the board. I’m going to sit down, and what am I going to do here?
I created a presentation that mapped out all the stuff that we’d been doing in the months since Sequoia invested in the company. He comes in, and I start walking through my slides.
After about 10 minutes, he starts doodling on the side of the page. I’m presenting, and I’m thinking, “Hmm, is he taking notes?” I’m looking over, and then a couple of slides later I see, “Oh, no. He’s drawing cartoon characters.”
Aaref: I was thinking, “OK, well, not what I would have expected, but all right, let’s just keep going.” Then, I had a friend in the room at the time, John Lilly, who is now an investor at Greylock.
When Mike wasn’t looking, he slips me a note. As I’m presenting, I open this note, and the note says, “You’re losing him. Do something.”
I paused and I said, “Mike, you don’t look very interested in the slides.” He says, “No, not really.” I said, “Well, what’s on your mind? What should we be talking about?” He says, “Well, I’m much more interested in knowing what’s on your mind. What are you thinking about right now?”
I said, “Well, the number one thing I’m trying to figure out is, do we need a VP of Engineering given the people we have in the building. Then, if we’re going to be releasing our product in six months, when do we hire a salesperson?
“Should we also get a marketing person? Should we get the marketing before sales? At what level of seniority given the size of the company? And what’s the profile? I’ve never hired someone like that before.”
We had a 90 minute discussion around how to build an executive team. I walked out with a much clearer picture of what it is that I was supposed to be doing.
That’s why I say that, really, you have to remember, the board meeting is there for you, the entrepreneur. It’s not there for the investors. It’s a forcing function.
It’s a chance for you to pull yourself up from the day to day and think bigger picture about everything that you should be doing, you need to be doing with more of a 6 to 12 month time frame.
The best guide for what you should be talking about at a board meeting is, “What is most on your mind?” That’s why I say, as a first lesson, “Don’t manage the board. Really think about engaging them.” They’re a huge asset. That’s the first thing.
Now, the second thing is a little bit counterintuitive, relative to a lot of what you hear at SaaStr, and that is “Focus on Product over Metrics.” In other words, it’s not just engaging the board, how you engage them really matters.
What I’d suggest, again, which maybe goes against a little bit of what we hear at SaaStr where there’s such an emphasis on metrics all the time, is really focus on product.
This one came on to me from my second company, which is a company called Clearwell. We started out as an application to analyze email with the vision of, “So much interesting information is captured in email. There must be a way of surfacing that for some useful business purpose.”
For two years, we traded through different potential applications. Then, we finally found product/market fit in an application we’d never really thought about before, electronic discovery.
Basically, we became a vertical SaaS company servicing the legal vertical. Then, we quickly scaled to about 100 million in ARR at the time that we sold the company to Semantic and were profitable.
Jim Goetz was my board member there, and at every board meeting Jim would just push relentlessly on, “What are the use cases? What’s the unmet need? Which parcel of the part are we building out now versus later? Where’s the technical debt? How are we thinking about the trade offs?”
Even when we’d hit product market fit and were growing, the discussions were still about product and what we’d need in 6 to 12 months’ time.
I just think it’s so important and it’s such a risk for SaaS companies because SaaS lends itself to metrics. There are all sorts of wonderful things that you can talk about. You can talk about CAC, or LTV, or payback, or quick ratios.
What happens is people just get lost in the metrics, and they lose sight of what it is you’re doing in the first place.
Then, when you miss your numbers, then suddenly, the metrics don’t look so good anymore, people freak out because they’ve lost their center, their compass to navigate through exactly what the numbers mean.
I would challenge you to train your board members to be able to say, in three sentences, exactly, “What is it you do? Why does it matter?” and “How are you going to win, how are you different, how are you going to beat the competition?”
If they can’t articulate that in a very crisp way, then nothing else matters, because they have not internalized what it is that you’re trying to do. I would focus in board meetings, on product over metrics. Focus on learnings getting back from the market and train your board. Those are the two things that I would do before you miss.
Let’s say that you do those. Let’s say that you engage your board, you’re not managing them. Let’s say that you focus on product over metrics. That’s all great. You’re still going to miss. It’s still going to happen.
You’re still going to have that horrible board meeting where you walk in, with your stomach in knots because you feel like you screwed up, you’ve let everybody down, you promised results and you didn’t deliver.
Now everyone’s looking at you with all these questions. You yourself have all these questions, but you know everyone expects you to have the answer, and you have to deal with that. What do you do?
Let’s start with what you don’t do. What you don’t do is you don’t say, “I know we missed on the sales target but we hit our recruiting plan. We had this great marketing campaign, and we’ve all these leads in the pipeline.
“We’re going to release these amazing new features, and really, everything is great.” That is not a good message.”
Another not good message would be, “Well, I know we missed, but if we just keep doing the same thing, things are going to turn around.”
That again, whether it’s hope or denial, doesn’t work. Doom and gloom isn’t so great, either. There’s one that’s not on the slide. It’s probably the most common now I think about it, which is what I think of as the silver bullet theory of, “If we just do this one thing differently, usually fire the sales guy, then everything’s going to be great.”
Aaref: “Everything will turn around. It’s just going to be perfect.”
All of those cost you credibility, because anyone who’s been in business knows it’s usually not one thing. It’s normally a combination of five or six things that you need to think about.
What I’d suggest, and lesson number three, when the miss happens, is “Own the miss. Take responsibility and stand up to it.” Realize that for any good board member, they’ve seen lots of companies miss lots of numbers.
More important than the miss is your reaction to the miss. That’s an important point that’s often lost.
Take responsibility. You should be upset. You should show people that it matters to you, that you do take it personally.
You should be hard on yourself in terms of what you’ve done wrong, whether it’s things that you did wrong with the benefit of hindsight or things you should have known at the time, and take responsibility for that.
You also should help the board process exactly what went wrong here and how they should think about it.
For example, is it a tactical issue, or is it something structural in the market? A tactical issue might be that you actually you do have the wrong sales guy.
A structural thing would be things like we have product issues that are causing churn, or there’s increased competition. That competition is stretching out our sales cycle, and causing price erosion. Those things take longer to figure out, but you have to help the board think it through.
When I was at Clearwell, I remember, we’d just raised Series C at what was then considered to be a high price and the quarter straight afterwards, we had a horrific miss, huge. Just nowhere near the target that we had just raised money on.
I had a very unhappy new Series C investor, sitting in the board meeting. I remember he came. He sits down. He sits down like this at the beginning of the meeting, just staring at me. My head of sales was running through the pretty terrible results from the prior quarter going through, “Oh, we did this and did that.”
The guy just stares. After about five minutes, he interrupts with, “What the hell happened here? What do you think happened here?” He points at me, ignoring pretty much everybody else.
It was something that I’d been thinking about. I hadn’t put in the board presentation.
I went to the whiteboard, and I basically drew out a decision tree and said, “Look, if someone’s looking to buy Discovery, they have a choice.
They can bring it in house, or they can outsource it to a service provider. If they bring it in house, then again, they have a choice. They can start with the collecting and gathering of data, or they can start by processing data.”
I went through the decision tree of options open to our customer and made the point that, “Right now, we only serve one little branch on this tree, but our sales pipeline is full of people at all different points on this tree.
“If we’re going to have a business here, we need to broaden out and serve more than the one branch that we’re doing.
“We can do that by, not just building new products, obviously, but improving some of our existing, and then striking some channel partnerships so that our product could be offered through the channel to people who didn’t want to buy from us directly.
“In order to do that, we had to cut expenses, including cutting some headcount in order to give us the runway to do that, even though we just raised money.”
Going through that, the tone at the end of the meeting was just completely different to what it was at the beginning. People had started to wrap their head around what had happened and trying to make sense from it.
Now, you could go with what I think back on as being the seat of the pants approach, but I would recommend that you plan ahead and you do what’s here and say, “Control the meeting.”
Send it out in advance. Send out the fact that your analysis of why you’ve missed in advance. Talk to people in advance if you need to. But come in, have it be the first item on the agenda, and walk through everything in detail, so that people feel like you are tackling it and you’re taking ownership for it, and that you’re owning it. That’s the second thing.
The final thing that is important that is often, again, overlooked, is you should “Put the board to work.” The reason you have a board is to help you in the hard times. If everything is just straight up to the right, then, really, you don’t need them. You can pretty much deal with that yourself.
When things go wrong, and things get difficult, that you can turn to these people, and potentially get some valuable help and advice. I don’t mean give them busy work or demeaning tasks or stuff that doesn’t really matter just to keep them busy. I mean, things that would be genuinely helpful.
There are lots of things. Requests like, “Can you introduce me to five potential customers in the financial services vertical so we can see if that’s a good market for us?” or “Help me recruit a VP of Marketing?” or “Let’s walk through the product together and think about how can we simplify the workflow because that’ll make a big difference to engagement and adoption.”
These are all things that you turn to the board about.
Again, you want to think it through in advance. I would go into the board meeting with a set of potential requests and potential asks so that once you’ve processed it, once you’ve got a common understanding as to what’s going on, you can have the discussion about how they can help, how they can be involved, because people like to help. People like to feel involved.
Those are the four lessons. Again, before today, before you are anywhere near missing your numbers, I would engage your board, not manage them. I would focus on product over metrics. Then, when it happens, I would avoid these key pitfalls that we talked about and own it, take responsibility, and put the board to work.
The final thing I’ll say is that it’s been a change for me the last five years after being an entrepreneur, to be on the other side of the table. To instead of being the person living the miss, to now showing up at a board meeting and hearing about it afterward.
The part that has surprised me is that very often, I’m more enthusiastic about a company after they’ve missed than I am before. That when the founders do it right, I actually feel that it has strengthened our relationship to have gone through that experience, even though the experience is not pleasant.
I think it’s because we all know that building a company is incredibly hard. It’s just so hard on so many different levels. What you realize as you work with a lot of companies is that founders who have the grit and the skill to lead their companies through the hard times are the founders who are much, much more likely to succeed.
(Cross-posted @ SaaStr)