Chasing stock price=recipe for disaster

Let's talk about Reed Hastings for a minute. Hero one day, goat the next?

This guy fascinates me. We talk to Netflix employees all the time and what we've found is that the entire company is geared towards driving the stock up. That's all well and good...to a point. But if there is one thing I've learned in the last 18 years hanging around growth technology companies, it's this: pay more attention to your business than to your stock price.

Employees need to be motivated every day. And if they're sitting around staring at the ticker, what are they NOT doing that some other upstart player in their market IS doing? A lot. Classic case of the hungry eating the young of the lazy and decadent. Happens all the time and is baffling. it's so easy to arrest this. CEOs should personally interview every employee up to the first 50 and should ingrain this concept into their heads: come here to WORK. Come here to get stuff done. Check your politics at the door and let's go build a huge company, hire a bunch of people and kick someone's ass every single day. Stock will reward us in time, and will be sustainable wealth.

One interesting thing to do is to watch the inevitable wall-hitting that occurs when companies go public. You can almost set your clock to it and they get crushed within 2 years as key people unload the stock and go cash in not just shares but resumes for bigger jobs they're usually unqualified for. Then a bunch of piled up work gets undone and BAM! You miss a quarter and are smoked. Analysts don't trust you anymore, investors are mad and dump you, etc. Hard to recover from this. In my view, it's all rooted in the go-go mentality of jacking up stock vs focusing on building a long term winner.

So Reed Hastings is the poster child of this mentality. Now that the stock has fallen back to earth and he's bounced around on strategy, making multiple public apologies (huge that a rock star CEO can admit when he screwed up but will it help?), alienated legions of customers, etc....what's next for Netflix? Watch for a huge brain drain out of the company and the beneficiaries will be the growing horde of digital media companies wanting to sell subscriptions to consumers for whatever. Too many of them to count, and a lot of Netflixers chomping at the bit to cash in those options and those resumes.

I am personally rooting for Mr. Hastings. I love what they did in general. A neat startup success story overall and good guy. But we'll see if that pro-stock-price culture becomes their undoing.

HP

OK so my last blog turned out right in the Leo area. Employees didn't like him, flip flopped on strategy, no one wanted the PC biz, on and on. But at least he wasn't a sleezebag like someone else (predecessor)....

Another big search firm, big company board misfire in a growing lineup. But the Board had the courage to admit their mistake and make a change vs let the company languish further. That is something worth cheering. Too bad they couldn't find a suitable internal candidate but that just speaks to the former CEO's failings in org development because Leo didn't have time to find the men's room, much less really develop anyone, before it became clear he was in over his head.

So let's discuss Meg for a minute. I personally like this hire for a few reasons:

1. She's got something to prove after being humiliated by a far left activist lawyer named Gloria and beaten by the same politician who created the pension mess CA is facing right now. You gotta be pissed when you lose out handily to an old world radical, even if he's doing some good things at the moment (some...).

2. She's smart as a whip. And I'll take smart over any other factor at the end of the day. Why was Apple so successful? Jobs is just smarter than his competitors. That's really the bottom line.

3. Female with a track record of success where Fiorina came from Lucent, one of the worst managed companies in the history of mankind and rotten to the core ethically. Gotta love seeing more female CEOs out there in technology.

4. Internet paradigms constantly shifting and ultimately wag the IT dog if you really think about it. Cutting edge Internet companies are often followed by enterprise customers so this DNA actually maps better than people think. Certainly better than construction software (Autodesk) going to Internet company (Bartz/Yhoo). So she can set a winning vision with that background and you just hope she empowers a senior leadership team to go get it done at the BU level because her GM credentials are iffy at best, at the $100B level. But this DNA is as good as any. What would you do? Go to IBM? Great company, not sure there's a fit for SV culture. EMC? No one there. DELL? No one there. Intel? Anyone left at Intel just didn't get a call worth taking...Apple might have been good but they don't have a lot of great P&L people. Interesting that they didn't at least poke around here. Always thrilling to poach from a huge winner.

Whitman is a risky choice. But I'll take a risky choice over another usual suspect or a tired horse kind of hire any day of the week. I'll root for them, in part because Ray Lane is one of my favorite people in the Valley and I'd love to see him turn this ship around. HP's a BUY in the low 20's, Greece or no Greece...I'd short Apple above $450 and buy HP under $25 any day of the week.

Good luck to all!

Founders=soul of a company

When you think about Steve Jobs, you have to think about so many other companies where Founders have been pushed out. I have to believe it happens more often than not and it's unfortunate. Without entrepreneurs, the technology scene just doesn't happen. Innovation dies, Silicon Valley dies. But one prominent venture capitalist famously said "it's never too early to fire a Founder." Is that right?

I work with a lot of entrepreneurs and help them through the wrenching transitions in hiring new CEOs to "scale the company". And there are some interesting patterns. Here are a few:

1. The idea people have a tough time prioritizing and communicating. Entrepreneurs are idea people. They don't operate on the more methodical wavelengths that their backers want them to, so you find tension here, when a deal doesn't happen with a strategic, the engineering milestones slip, whatever it is. The symptoms are many and varied.

2. They keep thinking that even though they took someone's money, it's still "their company." This mindset is a killer. And you see this more often than not, unfortunately. It's the kiss of death.

3. When it works, it's because the Founder has been well treated and people are constructive. The message should be "aren't your talents better utilized doing X, Y and Z (product vision, new technology development, long range strategy, etc.)?" Vs "dude, you aren't getting it done. We're bringing someone else in, get out of the way or you're out of the company." That can destroy so much value and so many VC's are clumsy with this transition. They don't even realize that even if the entrepreneur stays, he or she will never trust them again and they've just destroyed the morale of the heart and soul of a company.

I could go on and on here. But the point I'm trying to make is that entrepreneurs need firm coaching but with some empathy to understand what is really going on when they give up control, and to embrace the situation positively in gearing up to bring new management on board to complement their efforts, vs "diminish their roles." In Jobs' case, let's be honest. He was a big SOB early and often, a primadonna of the highest order, etc. So he had to go off and screw up NeXt to grow up before being worthy of running Apple. It didn't help that the Board blew it in hiring two losers in a row who knew absolutely nothing about consumer electronics (a soda pop guy and a chip guy??? What were they thinking!?).

What's the lesson here? There are a lot of lessons. But the bottom line in my view is to try and hang onto entrepreneurs, utilize their talents and work through transitions constructively, even if it takes more effort and time than you want it to, or you lose the soul of a company.

Oil prices lower=big windfall

So oil is at $80. Not good if you're a biofuels company but REALLY good news for everyone else. This will amount to a big windfall for strapped US households and all kinds of businesses, and will be one of the real stories exiting Q3, if crude stays down below 90. Then major questions will be how much momentum did the economy suffer over the debt ceiling impasse, what is housing doing and will jobs finally stabilize? Here's hoping we thread these needles and go into 2012 with a reasonable sense of optimism that we're not in the equivalent 1973 or even the mid-30's with a long uphill climb back to prosperity. The innovation ecosystem requires the exits gravy train to get back on the rails sooner vs later, despite all the optimistic talk in technology.

State of the market

Pretty interesting last couple of weeks with debt debate and a bunch of other going's on back in the real world (everything outside of DC).

Here are some predictions:

1. We'll find that Q3 GDP was hurt by the debt debate and uncertainty there.

2. Market won't find new catalysts and dog days of summer will go on, so blockbuster IPO's may be tough to come by this quarter. You may see some delayed offerings.

3. Q3 earnings will be fine, S&P valuation will look cheap. Buying will resume.

4. IPO window will open again briefly Q4.

5. New bubbles forming beyond social networking. No popping of digital valuations until the first company throws up on revenue growth forecasts. I believe this will happen around mid 2012. Hopefully it won't be as bad as March 2000.

6. Clean Technology/Advanced Energy will kick up again (see below) by Q1 of 2012.

Right now, the people market is dominated by financial motivation and career growth, which is good. But be careful, that greed could turn to fear if the realities of the world economy finally hit technology/digital media. People will become guarded and cautious again. So what's the takeaway? Grab talent while you can!!!!

Other observations:

1. Buy when everyone else is selling. So people should invest in clean tech again. Technologies are maturing, commodities look pretty good, oil prices solid. The fundamentals actually look reasonable for this space. And valuations are back down to earth. It's a way better time to invest here than it has been in frothier times. And yet capital is hard to come by for too many companies. Ironic!

2. Don't be surprised if this whole euphoric feeling around technology hits the wall in the next 12 months. I hope I'm wrong but the "spidey sense is tingling." Great companies will get built regardless, but the driving forces right now in too many situations remain monetary vs passion for a space, product, company, etc. Make sure you and your teams, no matter what you do for a living, are prepared to ride out some seriously turbulent times. Those who do will be rewarded in the long run.

Prescription for success for CA and U.S.

Here are five things the state needs to do in coordination with the Federal Gov't in order to "save our state" and as we all know, where CA goes, so does the country...

1. Comprehensive tax reform--reduce the burden on production supply and output, for starters.

2. The federal and state budget deficits: a comprehensive, long term and credible plan to reign in deficits is critical to get people really investing in CA and the US.

3. H1-B visa/green card reform: we will be begging for immigrants as the boomers retire and the labor force is strained to support a large demographic suddenly "unproductive" and yet drawing considerable resources at an awkward time in our country's history. Japan and China have similar problems and they're serious. We need to be able to attract the best and brightest and while India and China churn out engineers by the hundreds of thousands, US students want to study Liberal Arts. So we have to go abroad to get key technical talent. It's an unfortunate reality.

4. Energy security for CA and the US are critical for a million obvious reasons ranging from climate change to basic economics and military security.

5. We need to stimulate business investment in the U.S. Let's give corporations a tax break, perhaps tied to investment, to repatriate the trillions of dollars they have in foreign accounts.

I could add reign in unions and entitlements but that one is so obvious it's barely worth posting...

My two cents...

End of the week notes

So LinkedIN is back above $90, Pandora back close to $20. Very exciting for the digital media space. Very enthusiastic for our friends at KP, Sequoia, NEA, Accel, Lightspeed, Greylock and on and on. We are quite sure that the next big story is that venture, by end of 2011, will handily beat the S&P over the last decade and cries about the death of venture over the last few years and how broken the industry has been, while in some ways true, will prove to have been way overblown. The second and third tier players needed to go away and that is happening. We'd like to see some specialists re-emerge and can see some on the horizon. We'd also like to see more angels get organized and that seems to be happening. Innovation lives regardless of debt ceilings, terrorism, politics or sovereign debt. And venture firms continue to make this happen, along with of course the idea people, where it all begins. There will be oversubscribed funds raised over the next 12 months, especially given the exits that are happening right now. The only question will be, how disciplined and whether this creates a capital oversupply problem again. We'll see!

So here's a parting thought for now, for our entrepreneurial clients: THANK YOU for what you do for our society. Not only do you solve important problems but your work and passion lead to job creation and is the foundation of what our country was built upon.

Notes from the field....

Interesting times....are we in pause mode? Looks like we dodged a bullet in Greece but when does the other shoe drop and another PIGS country flop? When do Germany, France and UK, Sweden, etc. give up on these people and push them out of the EU? Or will the albatross' drag them all down?Fusion IO worth almost $3B, LinkedIN recovering from free fall mode, Zynga coming out, Groupon coming out, KiOR worth $2B, Imperva in S-1 registration. Interesting companies and opportunities across the board. Is this IPO market open or closed? I say it's open for viable business models and if it stays open another year, the VC industry at the top level, is set. Returns will outperform S&P and innovation will continue to get funding.

Let's round up the stuff we're seeing:

1. Social is completely and totally over funded to the point of lunacy, but monster companies are emerging. Will they consolidate and swallow up smaller players? Someone will need to. This space needs to cool down a little and come back to earth. Facebook at $70B pre? Hope it works! Google has no response to Facebook, Microsoft still clueless, etc. We're rooting for them.

2. Green is changing quickly. Biofuel exits surprised everyone and are providing very good returns for patient investors like KV and Braemar, Lightspeed, KP, TPG, etc. But all we see now are capital efficient plays. We see half a dozen IPO's coming that are pretty exciting companies but new financings look more venture appropriate. Power electronics, plug load power, thermo electrics, consumer related technologies, etc. seem to be getting all the attention. That's good because we can hire killer technology people to run these companies as they're getting bored with traditional technology plays.

3. Virtualization continues to be a monster, so is cloud in general. Next wave is cloud security. Cloud enablement architectures in place now. But security is a gaping hole. Watch for a couple of big security exits in the next six months to renew excitement on the space. Our favorite companies are Tintri, Citrix, Riverbed and a handful of startups. So much room here it's not even funny.

So what's next? We have very cool companies like Weatherbill emerging. Exotic looking plays attacking old and inefficient categories. Saw a company in the food space yesterday that looks quite interesting. The adventure continues.

CEO Success Factors

We've been re-evaluating a bunch of CEO hires and looking at patterns. Who made it, and who did "just OK?" Early results are surprising. Bottom line? The up and comer, first timers seem to be performing right in line and possibly better than the "veterans." For example, I'll take Larry Page over Carol Bartz any day of the week. I'd even take Zuckerberg over a turnaround, slash and burn "operator" in the digital media world, any day of the week.

A big hit for us was Frank Slootman at Data Domain ($2B exit). He was a first time CEO and the two things he has really going for him: incredibly smart and incredibly competitive. Isilon exited at $2B recently, same story. Smart, intense guy running it, wouldn't strike you as a "usual suspect" CEO type. CEO of LoopNet, Rich Boyle, was promoted from head of engineering and sold LoopNet recently for $850M or so. The list goes on and on.

Boards need to think long and hard about risk. How do you define risk? At what point do you say "I'm betting the company on this person?" As opposed to, "how do we avoid a shareholder lawsuit if we get it wrong?" The risk aversion in public company Boards is shocking, disappointing and yet another handicap to US company competitiveness over the long term. That culture of risk aversion needs to end, yesterday.

As for startups, the "usual suspects" orientation really needs to change in my view. When will a return to inspired hiring occur? There are only so many usual suspects running around, many with very questionable "leg drive" after coming off a nice exit, and it's time to re-think the qualities that make up excellent CEOs. Every situation is unique and custom. But the basic thinking should be "who" and not just "what" are we looking for?

Building a Board

I've built a nice Board practice over the last couple of years and have clients ranging from $1B public companies to startups with 50 people. Technology, energy and even health care clients. What have I learned? That it is terribly important to pay attention to building your Board. If you get it wrong, tearing it down could tear down your company. Here are five tips for CEOs and Directors to consider:

1. Don't focus on celebrity Board members. It's not worth the headaches and they'll hijack the dynamic half the time while the other half, not adding any real value. Focus on people who are level headed, focused, will follow through, really WANT to be on your Board and who have reasonable chemistry with others (not too much chemistry, see below).

2. Focus on people with real experience in the domain in which you're operating, either functionally or with industry experience that will move the needle for you. Otherwise they're wasting space and time.

3. Compensate Directors properly. Don't be penny wise and pound foolish. Being a Director isn't as sexy as it used to be, it's not easy money and it needs to be taken seriously. So compensate people accordingly.

4. Make sure no one individual has too much control over the selection of a candidate. Boards are about constructive debates and healthy critiques of a CEO and their management team, etc. Don't hire "yes people." Hire someone who will shoot straight, first and foremost, but do it with class and tact.

5. Take your time and do it right. Be thoughtful. Don't be impulsive and "fall in love with people." Be dispassionate and objective. Treat the hiring of a Director as you would any key executive, including a CEO. Remember, you have to live with this selection and it's nearly as hard to fire a Director as it is a CEO, possibly harder...

Health care I/T=overlooked?

Have a very cool new client called Epocrates, a misunderstood but very exciting young company. Just went public at a solid valuation, is about $120M in revenues, growing solidly. It's mobility meets SaaS and drives huge efficiency gains for pharma clients in delivering key data services to a massive network of doctor/users. It also saves lives...which is pretty cool to say the least.

CEO is an ex-President level exec at J&J, very sophisticated and smart. I believe this company and others like it are proving that the time has finally come for health care I/T. With all the froth around digital media and social, this megatrend will likely be overshadowed. I intend to spend a LOT of time exploring it. Like clean energy, it's a space where you can make money and feel good about what you're working on--that it has some kind of societal benefit that's quite real.

Flash=huge hardware megatrend

If you'd have told me that in 2011, two of our hottest tech clients, out of all the spaces in which we operate, were related to the disk drive industry, I'd have laughed out loud. But Fusion-IO and Pliant have turned out to be big likely winners this year and are on a tear. Basic idea: mechanical storage loses to solid state. $30B up for grabs all of the sudden. Flash technology has caught up in terms of reliability, while vastly superior in speed and energy costs and some very cool software bridged the gaps. We will see big exits for both of these companies in the next 12 months.

So what's the next hardware breakthrough? Just when you think a category is quiet...

$100 oil

It's pretty clear that $100 oil is coming back either now or in the next couple of years. I predict it will settle back down to mid 80's when Libya finally rids itself of Qaddafi but by 2015 we'll see $150/bbl again. The X factor is whether the Saudi people demand a Democratic state and revolt, or there is a major security setback in Iraq. What does this mean for alternative energy? Means biofuels may have turned out to be the dark horse winner of the clean tech investment sweepstakes. I thought the space was dead two years ago because technology hadn't broken through and capital was fleeing the space. I am happy to have been wrong since we have about 30 of these companies as clients...Amyris changed the game. Also means electric vehicles are winners.

Watch gas prices. Gas is most closely competitive with alternative energy. If gas prices go above $6 and stay there, that's very good news for wind and solar and other renewables related to generation. Then the question becomes, will higher commodity prices take the oxygen out of the capital markets and starve these companies right when they need cash for expansion.

Still looming large is what we do with coal. Methanize it cheaply (watch Luca and Ciris) and cleanly and you have a winner.

5 things every new CEO should do/not do

I've recruited too many CEO's to count now. There are some clear do's and do not's as one joins a company. Here are 5, to start:

1. Show some humility. Don't show any arrogance and you don't need to posture. You've been annointed CEO for a reason. Look the part. Be statesman like and balanced. Listen carefully. Get the lay of the land. The team will respect you more for this approach and you will need their support, even if you think they all need to go, to get the rank and file comfortable and keep them focused.

2. Engage Founders and/or the technical team early and often. Without them, there is no company and no edge.

3. Talk to customers, as many as possible. Get on the road and show the team you're willing to put your back into the work.

4. Don't "ready fire aim" with people. Give them a chance. Evaluate them on their own merit after understanding their situation and atmosphere, challenges, etc. Don't take anything for granted or at face value.

5. Give the Board regular updates. They're nervous about the hire, though they might not show it. Every hire has risk, particularly CEO hires. Get them comfortable. AND BE PREPARED FOR YOUR FIRST BOARD MEETING. First impressions are key.