Sarbanes-Oxley -- Wave 2 opportunity

I attended a Sarbanes-Oxley (SOX) related conference this past week. Among other things, I wanted to learn about businesses that had been formed or refocused as a result of SOX and what opportunities remained. The SOX market opportunity alone is reported to be a $6.5B market. In addition, I wanted to get a feel for implications on Altus' portfolio companies. Ed Sims posted recently on the excesses of SOX to get another perspective. The summary of my observations follow:

• A lot of existing companies refocused their energies on SOX particularly focused on establishing controls, segration of duties and ensuring proper security was in place. One of the notable companies was Virsa that is now a Kleiner Perkins and SAP Ventures funded company. They appear to be on a hockey stick growth pattern. A lot of the companies I observed had point or "band-aid" solutions but Virsa has a broader (though not all-encompassing) offering.
  
• It's not clear that companies have realized a lot of strategic business advantage in these "Wave 1" applications (i.e., apps focused on controls & security) though they've certainly incurred a lot of expense. There are two types of "Wave 1" apps...
  

1. Business Process Management (and hence compliance) companies like OpenPages. Effectively a glorified PERT chart that tracks the "critical path" of non-compliance.
2. ERP Compliance Management, like Virsa and LogicalApps. One problem with them is that they assume that the entire world is either SAP or Oracle and that all the data that is needed resides in these systems (this is especially true for any company using partnerships to sell their offering). Fundamental departures from real life.
   
   

• From the presentations given by keynoters and talking with senior partners from both big and regional audit firms, it became clearer to me that companies seeking an "exit" (i.e., IPO or acquisition) need to give more thought to SOX than they might have previously thought. In either exit scenario, a company that isn't SOX compliant is going to face obstacles when they try to exit (i.e., delaying or scuttling plans for the exit). The challenge is that when they most need to stay focused, preserve cash, etc. it is also the best time to set up SOX-compliant processes so they can avoid re-engineering processes later. Getting some strategic SOX/governance counsel early on is a good idea. It's the classic "pay now or pay later" scenario.
  

• The firedrill to get Wave 1 processes/applications in place appears to be winding down for most public companies. "Wave 2" processes/applications will focus more on financial reporting transparency that can demonstrate to the investment community that a company has a handle on how they handle issues such as revenue recognition. Whereas Wave 1 was largely focused on blocking fraud, Wave 2 will address situations where there is no intentional fraud but where Operational and Transactional streamlining is needed. This involves actually managing day in and day out transactions for financial reporting and analysis for companies with complex revenue models, like the ones who sell through distribution channels. In other words, streamline your business, get compliance for "free".

• Let me give you an exampe -- Take a company like Symantec. They have a variety of revenue streams ranging from 2 tier distribution into retail (e.g., Ingram is distributor and CompUSA is the retailer), relationships with consumers downloading bits of Symantec servers, enterprise customers, OEM deals, etc. In addition, they have monthly and annual recurring revenue streams. Figuring out how to accurately recognize revenue quickly becomes a nightmare of dozens of spreadsheets, various datafeeds from disparate partners, etc. Throw in properly paying spiffs & commissions, handling price protection and rights of return and you have a gnarly challenge on your hands that is people intensive. The vast majority of companies have some kind of band-aid solution in place that is both costing them a lot of human resource as well as delivering sub-optimal results (i.e., either takes too long and/or has questionable accuracy). Like Virsa, I think the companies that can develop a comprehensive system that makes sense of this will prosper. The system will be closer to a supplier relationship management solution as opposed to trying to connect various spreadsheets with bailing wire and bubblegum. It's one of the reasons I saw some private equity and VC firms in attendance at the conference. Entomo was one of the companies exhibiting at the conference -- they released a whitepaper at the conference that highlights these issues. Click here to get a copy. [Full disclosure: I have advised Entomo on their business] From a customer perspective, the good news is that there is a greater opportunity to realize strategic advantage in Wave 2 applications. For example, an automated solution will help a company reduce inventory, minimize gray market activities and enable them to report revenues on a more timely basis.

I think one of the prime challenges for a company selling a SOX offering is "SOX fatigue". A lot of organizations have been in sprint mode for the last year or two and/or they have a desire to move on to something that isn't related to SOX. Like any other enterprise application, demonstration of a strong ROI story will be paramount.

Ireland a role model for how to turn around a country

I had the pleasure of meeting this week with two executives from Enterprise Ireland -- Diane Roberts and Maggie Daleo -- out of their Silicon Valley and LA offices. I originally learned about Enterprise Ireland from a fellow Irish-American -- Bill Shaughnessy (an exec at MSN/Microsoft and all-around great guy). He was as impressed as I was about how Ireland has turned what was a poor country 15-20 years ago into one of the highest per capita countries in Europe that has an economy that's growing like gangbusters. A combination of a commitment to lowering corporate taxes, encouraging foreign investment, providing free college education to those that could get into the limited # of spots and a seed investment fund have been instrumental in making Ireland a success by any measure. Enterprise Ireland is both a seed investment vehicle (the largest in Europe) and a great resource for Irish entrepreneurs via worldwide offices, etc..

Diane and Maggie are two examples of resources in their offices in 34 international locations. They provide assistance in areas such as market research/validation and tapping their strong network of useful contacts and experts that entrepreneurs can draw upon. It was clear that their market savvy would be invaluable to an Irish entrepreneur trying to tap the U.S. market. My only disappointment in the meeting was that I couldn't convince them to open up a Sun Valley office :)

An example of the sort of thing they do is they have an upcoming Irish Technology Showcase where it's a forum to bring together influential potential buyers/partners from the U.S. over to Ireland to learn more about what is being worked on by Irish companies as well as sharing their directions so that Irish companies can respond accordingly. The event is going to be held in October.

Hanging with the Dalai Lama

The Dalai Lama has been in Sun Valley for a few days. We felt like it might have been a once in a lifetime opportunity to hear a Nobel Peace Prize winner speak so we went and heard him speak with our daughter yesterday at the event focused on children. His talk was fairly short (see recap below) but the overall event was inspiring as they highlighted what various kids from around the state were doing to demonstrate the main focus of the visit – demonstrating compassion. One of the fun aspects of the event was they asked for kids to volunteer their own ideas of how to demonstrate compassion. As a proud dad I can say she had more poise than most of the high schoolers when speaking in front of 8,000 people. Here’s what she had to say -- "When people are mean, be nice back." I don't remember many people at Microsoft keeping those words in mind when I was there ;-}

The Dalai Lama started speaking in Tibetan (with a translator) but ended up doing most of his speech in English and only needed occasional help from his translator. He has quite a good sense of humor and has very unique, almost child-like mannerisms. One of the quotes from the official website of his visit is interesting to think about in the context of business (go to the website for more quotes). Perhaps that's what Sergey & Larry mean when they say "do no evil".

There are two types of competitive behavior. One is a sense of competition because you want to be at the top. You create obstacles and harm someone. That competition is negative. But there is a positive kind of competition which benefits the individual, the competitors, and the economy. Let your competitors also grow, without any sense of harming them.

The articles below recap the event if you are interested in more details.

• Recap of speech to the children
• Recap of the Dalai Lama's September 11th speech
  
• Go here for audio and images of the Dalai Lama's 9/11 speech (to be posted on September 13th)
• The Dalai Lama met with CEOs and federal legislators to discuss how to incorporate compassion into the world of business

One thing I heard a lot when we decided to move from Seattle to Sun Valley was "aren't you going to miss the cultural aspects of being in a city?" The funny thing is I've seen the Dalai Lama, countless symphonies with world-class musicians, jazz groups from all over the world, Olympic podium figure skaters doing their Turin 2006 Olympic programs in seats at a distance that would cost thousands at the Olympics not to mention seeing various Emmy/Oscar winning actors. That doesn't even include what I'm going to miss when I'm attending a Sarbanes-Oxley conference -- e.g., the Hemingway festival. The biggest difference is the hassle-factor in the city (traffic, parking, commute time, lines, etc.) in attending events -- we found it so much higher in Seattle that we weren't able to attend most of what was available.

Meanwhile, the impact on my work has been mostly positive. I'm busier than I've been in a number of years and certainly the most since I left Microsoft. One benefit of being away from a traditional office environment most of the time is I have nearly 2 hours back per day in commute time and I'm able to be super focused. How can you not be inspired when you look out your office window at this in the Fall and this in the Winter?

Missing an engineering release date can be a symptom of a larger problem

Ed Sim recounts a board meeting where they uncovered and analyzed why the product development team was missing its deadlines. The conclusion was that sales wasn't properly trained and was selling what they didn't have.

I've discussed the Enterprise Sales Learning Curve (ESLC) before on this blog. When we are working with clients analyzing their Product, Sales and Marketing readiness to find points of leverage where they could improve their readiness levels, there are usually a few high sensitivity areas. Often the ramp rate of new sales people, which is a function of training, and the ability of the product management and development team to learn from one another are two of the highest sensitivity areas in scaling the ESLC. I provided an update on the simulation tool we developed based upon input from Mark Leslie that is very effective at showing this dynamic.

The Best Startup Advice I Have

David Cowan of Bessemer Venture Partners has had a similar experience to Altus Alliance when he recounts "The Best Startup Advice I have". That is, after hearing what Mark Leslie had to say it changed the way we did business. He does a nice job of recapping Mark's principles. For more on Leslie's Enterprise Sales Learning curve, I provided an update in an earlier post.

Vision

Saw this quote today and reminded me of some people I've come across in my career.

“Vision without implementation is hallucination” Benjamin Franklin

Vision is great but you'd better know how to execute or be lucky enough to be surrounded by people who do. The fun part for me has always been putting vision through its paces in the real world. Inevitably, your vision alters and you learn a ton along the way that alters the strategy that will achieve the vision. Mark Leslie's (of Veritas fame) Enterprise Sales Learning Curve framework lays this out in detail. Here's an update on that work.

Term Sheet Series wrap up

I've posted here before on the term sheet series that Brad Feld of Mobius Venture Capital has compiled. Here's the summary of the series with shortcuts to each area. Whether you are a new entrepreneur or a veteran, there are good points and reminders.

Building team trust

Brad Feld has a good post about the importance of building trust on teams. Small teams can be like families. Without trust, a family falls apart. Startups aren't much different.

Are female sales pros staying at home an untapped gold mine?

My answer is yes. I know there are many women who were previously top notch sales pros at places like Sun, Time Warner, IBM, Pfizer, Oracle, etc. who have chosen to hit the Pause button on their career while they have young children. I applaud them for doing that in a world where value is often ascribed to how much money you can bring in the door. However, as kids get into grade school, there are often some spare hours available. My belief is that these spare hours and the desire to earn income and/or have non-parental goals are a big reason why you see the explosion of "Direct Selling" (aka multi-level marketing) companies. There are also many women who go into real estate. However, if you have skills in high tech or pharmaceutical sales where the selling process can be quite sophisticated and you received tremendous training, direct selling and real estate may not appeal to you.

This dynamic combined with entrepreneurs needing to be creative and run a lean operation creates an opportunity. Take Jet Blue. A CBS segment highlights how they leverage "stay at home moms". I have a couple client companies that are both exploring this opportunity. They'd like to find accomplished sales pros who would be willing to work on an uncapped commission-based compensation program. Like Jet Blue, they would be happy to accomodate sales pros who would prefer (or require) a more flexible work schedule/load. Typically, big corporations don't want to deal with those kinds of work arrangements -- at least amongst the high tech companies I've worked with/for. Their idea of flexibility is often that you can work from home a couple days a week but they still expect a full-time load.

Brad Feld is on the board of the National Center for Women & Information Technology and recently commented on why he's involved with that organization given their focus on bringing more women into the IT field. While they appear to be more focused on the computer science part of the IT industry, it's not without precedent to have former sales & marketing people move into product development teams (I saw this at Microsoft a number of times). Perhaps this could be another angle to achieve their goal. Another organization I've heard of is called WorldWIT (WIT stands for Women Insights Technology). They have some blogs related to the topic of balancing work and life issues including Jessica Niehaus' that pointed me towards an article about the "have it all" myth which highlights the number of women in the aforementioned situation.

How would you tap into this "untapped gold mine"? I know they are out there but it's not obvious the best avenue to reach out to them. Send me your thoughts or post a comment here.

Is Microsoft a "biosphere"?

From Wikipedia's description of Biosphere II, "It was used to test if and how people could live and study in a closed biosphere, while carrying out scientific experiments." After spending 12 years working at Microsoft, this sounds pretty similar to what it's like working at Microsoft. It's easy for an employee there to live an existence that is like living in a self-contained planetarium. It's even easier for this to happen if you are in product development (vs. sales & marketing). Like inside the Biosphere II, you can see the outside world though the view is distorted and you aren't often looking outside.

The fortunate/unfortunate reality for Microsoft is that so much is going on inside the company that it's hard to keep track of it all. If you are interested in making the most of what's available internally, it can be a full-time job to track what's going on. Look at someone like Robert Scoble. The guy is fanatical about trying to keep everyone up to date on what's going on inside Microsoft and he regularly admits he can't keep track of it all. Scoble commented recently on how Ray Ozzie was one of the few C-level execs at Microsoft to attend a non-Microsoft event. Microsoft would benefit if there were more Scobles and Ozzies getting outside the Microsoft biosphere to see what's going on in the "real" world. They'd be blind-sided much less frequently if that ethos was a part of every product development group. As a side-benefit, it would also reduce many of the myths about what Microsoft is up to and what drives it. Having been inside the company as long as I was, it was often entertaining to read about the Oliver Stone-esque conspiracy theories about what people thought was going on at MSFT.

Healthcare expenses for small companies

Like most of my clients, I am an owner of a small business burdened with ever-rising healthcare expenses (it's brutal). Forbes has an article about what some small businesses are doing about their healthcare costs which highlights the struggles/trade-offs being made.

Having spent considerable time working in the healthcare field (primarily on the business/technology side), I've seen first-hand the idiosyncrasies and inefficiencies of our healthcare system every year that spends over $300B (yes, billion) on administrative costs alone. It's one of several factors that pushes corporations towards offshoring and outsourcing since the cost of having an employee is very high particularly when factoring in healthcare.

Being an optimist by nature, I think that corporations are going to force reform on the healthcare system that will eventually reduce costs. More controversially, I think you'll see corporations be more invasive with their employees when it comes to life-style choices. I've already read stories of smokers being denied employment. With the growing obesity problem, I wouldn't be surprised to see something like body-mass-index being a hiring factor since there's a direct correlation between weight problems and healthcare expenditures.

Cliche of the week: Meeting the numbers

Fred Wilson has another good "cliche of the week" -- Meeting the numbers. A few excerpts I like:

• I have never felt that venture capital was a particularly quantitative business. And that's coming from a quantitative guy.
• I've heard people use many different metrics in talking about the value of businesses... But for me, there is only one real measure of value and that is cash flow.
• The first thing you must do is instill a culture of meeting the numbers in a Company and it has to start at the very top. If the CEO/founder/entrepreneur doesn't care about meeting the numbers, then nobody else will.

Tales of Enterprise Software's demise are exaggerated

VC Bill Burnham has a good post on why he thinks Enterprise Software still has plenty of legs.

Most startups should avoid venture funding, not pursue it

At least that's what Greg Gianforte, CEO of RightNow Technologies, thinks. I don't think it's that black & white but the points he makes are good.

Here are some links to past posts about fundraising and venture capital that can shed additional light on the issue:

• The Cost of Fundraising
• VC & Angel relations
• Is Venture business a seller's market
• Entrepreneur's view of venture investment
• Fixing Venture Capital
  

If you do end up fundraising, check out this series on deal terms, etc.

Is Zillow reading this blog?

Perhaps Rich Barton is reading this blog. Back in April, I commented on why I thought the odds were against Zillow. The lack of knowledge of the idiosyncrasies of the real estate market was a key issue that I thought would impair them -- it looks like they are starting to plug that gap. Yesterday, they announced additions to their board that included familiar names -- Erik Blachford (ex-CEO of Expedia) and Greg Maffei (ex-CFO of Microsoft and current CFO/President of Oracle) and one name less familiar (Gordon Stephenson). Gordon is the co-founder of a real estate brokerage. Coincidentally, I was one of Gordon's first clients when he got into Real Estate right out of Stanford in the late 80's. We were both in our early 20's looking to build real estate empires coming at it from different angles. I later got distracted/consumed by Microsoft and scaled back my real estate investing but he's been in it ever since.

Washington 3rd in # of VC investments

A few excerpts from the article in the Seattle P-I reporting on venture activity in Washington...

Twenty-six companies in the state received financing, ranking it behind only California and Massachusetts in number of deals...


A diverse group of Seattle-area companies received financing in the second quarter -- ranging from digital content storage maker Isilon Systems to high-speed Internet service provider Ygnition Networks...



Investments also were pretty evenly split in terms of company development -- with six early-stage deals, six second-round deals and eight later-stage deals.

Ten Strategies That May Improve Your Business

VC Jason Caplain has a good list of 10 ways for companies to improve their business. Click here for the full list and commentary behind each one. Here are my favorites...

• Service your competitor's customers when they have problems
• Hire smart people
• Understand who your best customers are and shower them with attention.
• Work with partners, not service providers
• Spend time with others in the market that have "done it before" and pick their brain

Top media brass in my backyard

Every year, right after the 4th of July, Allen & co. has their invitation-only event in Sun Valley where they spend $20M to entertain & educate this elite audience. The media is kept out but they camp out around the edges of the conference. After Davos, I'd guess that this event is the 2nd biggest event in terms of power players in the business world getting together. It certainly tops Davos in terms of composition of billionaires (Gates, Buffett, Brin, Page, Jobs, Murdoch, Dell, Knight, etc.). The main news that came out of the event (other than who attended) was the announcement of Morgan Freeman teaming up with Intel for something they call Clickstar. Major deals such as the ABC/Capital Cities merger were consummated here and the accompanying investment banking fees is what allows Allen & co to drop $20M per year.

You've probably never seen more private jets in one place than what you see at the little Sun Valley airport during the conference. Though they keep it well hidden, there is tremendous security. Michael Stapleton Associates, an explosives-detection security company designated and certified by the Department of Homeland Security to provide anti-terrorism technologies, provides security together with local law enforcement officials and various subcontractors. Though security is tight, it's easy to walk around the Sun Valley Village and see various celebs whether it's Barry Diller rolling by on his mountain bike or Phil Knight walking by in his signature shades.

Most locals who work the conference are discreet about what they are doing but you hear some funny stories from time to time of the high maintenance people when they go on outings such as rafting trips (e.g., you better hand them a glass of wine as they step off the raft). Otherwise, the execs try to do their best to keep it low key as one of the unique aspects is the fact that they bring their families along and the spouses and kids are entertained just as much as the execs.

Open source marketing -- Sugarshots campaign

On an earlier post, I introduced my notion of an Open Source Marketing campaign. iMedia has taken that idea and run with it. The latest article in the series starts to expand what's been done thus far from a focus on media to a broader marketing focus. Since the kick-off of the first campaign with Sugarshots, momentum has picked up including feedback from two people who have talked up Open Source Marketing. Joseph Jaffe who mentions Open Source Marketing in his Life after the 30-second spot book that is climbing the charts of business book sales and James Chertoff who coined the term in his Open Source Marketing manifesto. The article ends with a shout-out to Joseph, James Chertoff and Steve Rubel (who has also spoken of Open Source Marketing and Open Source Press Releases) to weigh in with their thoughts. Hopefull Joseph, James, Steve and others do this along with many others (that includes you).

Partner leverage and reminders

Ed Sim has some good tips and reminders in making the most of partner relationships. Some of these are super critical for startups since partnering can burn through a lot of cycles when resources are most crunched.