Out of the Back Office

Bookings vs Revenue vs Collections

Friday, August 27, 2010 by Cynthia Mignogna

Fred Wilson had a fantastic blog post a few weeks ago discussing Bookings vs Revenue vs Collections. As a Boston-based venture capital firm that focuses on expansion stage technology companies (primarily in the SaaS space), we encounter a great deal of confusion in this area as we speak with prospect CEOs, as well as our newer portfolio companies.

It's important to understand the difference between these items, and it's just as important to track these items regularly. If you're looking for investors, you'll definitely want to make sure that you can provide this data for your company, and that you can explain the trends within the data.

Bookings are not a GAAP defined term, and thus, the definition might vary by company. Typically, bookings correspond to the value of a contract signed during a certain period. Where this gets tricky is making sure that whatever data you are reporting for bookings is apples to apples. It's not a good idea, and it is also very misleading, to combine the value of a 12-month contract with a 24 month contract booked in the same period and report the sum of the two contracts as your company's bookings for that period. Even if you have booked a multi-year deal, the amount that your company reports for bookings in that period should typically be limited to the value of the first 12 months of the contract. When you're presenting bookings numbers to a VC, be prepared to explain exactly what your company's bookings policy is.

Revenue is a GAAP defined term, although many startup companies might not be reporting revenues 100% correctly. In the most simplistic sense, revenue happens when a service or product is actually delivered. For most SaaS companies, revenue is recognized ratably over the life of the subscription. As I mentioned, many startup companies may not yet know whether the revenue they are reporting is correct under GAAP...what is important is to understand how you're reporting revenue, be able to articulate how you're reporting revenue, and show that you've consistently followed this methodology for the periods that you are presenting to a VC.

Collections are simply when you receive cash from your customers. This may or may not correspond to when you've recorded a booking or when you've recorded revenue.

A fourth item which often causes confusion is Billings. Billings are simply the amounts that you've invoiced your customers. They may or may not correspond to bookings (in the case where you've booked a 12 month contract but are billing the customer monthly), and they may not correspond to revenues (when you've billed a customer up-front, but will be delivering the product or service in the future). Your company's billings amounts within a certain month might not be for consistent time-periods. For instance, you might bill 1 customer for 12 months up-front, and another customer for 3 months up-front. This doesn't mean that the amount you calculate for billings is incorrect...but it does mean that if a VC asks for your billings data that you should really make sure that you provide specifics about what exactly is being billed. The VC might be running analysis on the data unbeknownst to you, and the outcome could be radically different depending upon the assumptions they've made around the periods billed within the dataset.

Hopefully these tips are helpful whether you're seeking expansion capital or growth capital, or if you're just trying to understand the complexities of your companies' revenue cycle.

Please check out Fred Wilson's post on this topic as well. I highly recommend it!

Where's the Ethical Line for a CFO?

Tuesday, August 17, 2010 by Cynthia Mignogna

This past week, one of my former employees asked my advice on how to best handle a sticky situation with their new CEO. As a CFO, or any finance professional, this is the last situation that anyone of us would wish to experience. It is, however, a test of an oath that many of us have taken as a key component of our profession.

At OpenView Venture Partners, we provide management consulting services to our portfolio companies, often entailing career coaching, counseling, professional development and mentorship. The variety of circumstances that we've encountered with our portfolio companies and their management teams have run the gamut...none, thankfully, have included ethical challenges for the finance leaders of our portfolio companies. We hope to keep it that way!

Unfortunately, the world is not a perfect one, and it is more than likely that most finance professionals will find themselves faced with a situation that clearly crosses or pushes against ethical boundaries.

The CFO, or the finance leader in an organization, is expected to be the moral compass of an organization. There are several aspects to this; some aspects where the expectations of the CFO's influence are crystal clear, and other aspects where the CFO must be able to influence the natural and healthy conflict of an organization in a positive and constructive manner.

The natural and healthy dynamic can be seen where the CFO functions as the yin to the yang of other members of the management team who may push the envelope as part of their drive to grow a business, meet targets and influence customers and investors. These are the situations where...

the sales team pushes on revenue recognition criteria in order to try to close a deal,
the CEO might want to embellish key facts in an investor presentation,
marketing might get ahead of product features in their rush to influence customers or make headway with competitive positioning.

Here, the CFO is expected to be the voice of reason and the gate-keeper. This does not mean that the CFO automatically or capriciously says "no" to any idea or strategy that other members of the management team may have. What it means is that the CFO is expected to understand the end-goal and find a balanced and ethical solution that can help meet those goals.

By the same token, it is also the CFO's job to ensure that a company is abiding by all statutory and legal requirements, presenting financial results accurately and fairly, and ensuring adherence to codes of conduct, governance, policies and controls. This is where a CFO or finance leader's ethical standards and backbone may be tested...and it will not be comfortable for most individuals when it occurs.

Let's walk through some examples.

Your CEO wants you to falsify your company's bookings numbers. The argument is that these really aren't GAAP financial measures, and your investors may pull your funding if you don't put lipstick on the pig. You know that your company doesn't have signed contracts to back up the bookings numbers.
You've found that your company has a potential sales tax liability of a material amount that you've never filed, paid or recorded. You've alerted your CEO and he or she doesn't want you to estimate or disclose the potential liability since it will impact his or her bonus (not to mention your previously reported financial results)
Your CEO doesn't want to implement a code of ethics or whistleblower policy and thinks it's too much work, too much hassle and really only applies to big companies. You are aware that there is a potential issue that an employee may report.
Your CEO doesn't like the revenue that you've calculated after applying GAAP revenue recognition principles, and would like you to find just a bit more in order to make sure that the company meets its annual or quarterly targets (and so that bonuses can be paid out).

Well, what do you do?

Some finance professionals will cave, and this is unfortunate for the profession. Hopefully, this won't be you. First and foremost, you must remember that you have an obligation to follow the ethical codes of this profession, the ethical codes of your company, the whistleblower policies of your company, and the laws and regulations of the countries in which you operate. If you can't do this, sorry, but you are in the wrong profession...find something else to do.

1. You have a responsibility as a finance professional to raise an ethical or illegal issue to your CEO (or to your immediate manager if you don't report to the CEO). Present the facts of the situation clearly and objectively. Explain the ethical issue(s) and ramifications involved.  Give the CEO or your immediate manager an opportunity to remedy the situation. Document the details of the issue and your conversation, as well as the outcome. Hopefully, this conversation is productive and things will be remedied appropriately.

2. If you have raised the issue to the CEO, and have been met with a refusal to correct the situation or continued pressure to commit a wrong-doing, as the CFO you have a responsibility to escalate the issue to a member of your company's Board of Directors (or Audit Committee Chair). (Before you do so, you should inform your CEO that you will be taking this step and give the CEO one last chance to remedy the situation.)   Hopefully, however, your CEO comes to his or her senses before this conversation has to take place. If not, hopefully your Board member can work with you and the CEO to help resolve the issue.

3.  If after speaking with a member of your Board or your Audit Committee Chair, the situation still has not been remedied, you should raise the issue to the partner at your company's external audit firm and/or the partner at your company's law firm. Many times, the partner can help to provide an additional 3rd party objective view on the situation that can be helpful to your company.    If your company has a whistle-blower policy or hotline, you should utilize that at this point. Again, make sure that you have thoroughly documented your actions and conversations.

Many, many times, an issue will be resolved during the course of these discussions. This does not mean that the situation won't become an uncomfortable one for the CFO. It may become quite difficult, and perhaps intolerable. You may create a breach between yourself and the CEO that cannot be remedied. From a practical perspective, you may find that your job may become so difficult that you will have no choice but to leave in order to preserve your own ethical code.

Only you can decide how far you will push an ethical issue to resolution in a difficult environment. The key is that you make an attempt to resolve the situation, and that you do not commit wrongdoing despite whatever pressures may be upon you to do so.   Remember, once you've crossed that ethical line in order to keep a job, your career probably doesn't have long to live anyway. It's much easier to explain why you left a position with your ethical standards intact than it is to try to salvage a career after you've been found guilty of a wrong-doing.

Food for thought...where's your ethical line?

Finance for a Non-Finance Manager

Thursday, August 12, 2010 by Cynthia Mignogna

Are you a non-finance manager who is learning to read financial reports for the first time?

Are you a startup CEO managing a finance professional for the first time?

Do you attend management team meetings where financial results are discussed and you don't feel you can adequately participate?

You're not alone! As a Boston-based venture capital firm that focuses on expansion stage tech companies, we work with management teams who are often hiring their first finance professional.

Check out this video where FinanceDog's Joe Knight explains the basics of what you need to know.

For instance:

Do I need to understand debits and credits?

What is the difference between accounting and finance?

Am I playing a game without understanding the score?

Do the employees in my company understand how to drive the right performance to affect the right metrics that will help them reach their incentive goals?

Is there enough transparency around our company's financial results?

You really don't need to be a financial wizard or a CPA to be able to understand how to interpret financial reports, how to use financial metrics to drive improvements in your organization, and how to present and explain your company's financial results and projections to venture capital advisors.

You do need to understand the basics...it's never too late to learn! Check out this video and let us know what you think!

Working Capital? Or Venture Capital?

Wednesday, July 28, 2010 by Cynthia Mignogna

Often startup and expansion stage companies are faced with a need for either short-term or small amounts of working capital. In these cases, venture capital or expansion capital is sometimes not the best answer (too expensive and too many strings) for management teams.

In these instances, we encourage our portfolio companies and even prospective investments to establish banking relationships and seek out more flexible types of debt (credit lines, term loans) that might make more sense for them than raising another equity round or coming to us for a bridge loan.

As with many relationship-based transactions, it's always best to build a relationship in anticipation of future needs. Sometimes this isn't always possible to do early enough, but it sure is more difficult to negotiate a loan on favorable terms with a bank that doesn't know you from Adam when your company is already running short on cash.

As the Finance Principal at OpenView Venture Partners, I often assist our portfolio companies in establishing and building relationships with banks, as well as helping our portfolio to negotiate debt agreements when necessary. The August 2010 Journal of Accountancy published a great piece, How to Effectively Negotiate Loan Covenants, that reflects many of these same tips.

Preparation is key in covenant negotiation. Covenants are not a one-sided dictate from the bank. While covenants are meant to protect the bank's interests, it is also in the bank's best interest to develop a debt instrument that makes sense for your company. For this reason, you should go into the initial discussions with a good idea of the types of covenants that might negatively impact your business. Examples might be restrictions around mergers and acquisition strategy, the effect of income-based covenants if your company is incurring more or more fluctuating losses than prior periods, etc.

Before having the first conversation with your banker, understand your banker's internal regulatory requirements, and make a list of covenants that you would expect the banker to require from you. Understand how they are constructed and why they might be relevant for your company.

Next, develop a set of realistic covenants from your perspective. Review your financial statements and projections, as well as your strategic plans, to make sure you understand what covenants will and won't work (and the sensitivity of them). Make sure that you have been diligent in your analysis of your financials and how sensitive your proposed covenants might be to any realistic variations in your projections.

Then, begin a hypothetical discussion with your banker. Once covenants are on paper in a draft agreement, it becomes much more difficult to negotiate them. Try to work through the banker's and your own expectations before pen is even put to paper.

After you've reached an agreement, the docs are signed, and the bank funds the loan, congratulations! But, the relationship doesn't stop there...don't ignore your banker!

Proactively work to keep a two-way communication open. This is just good business practice, but it also will be important if the day ever comes when your company is faced with a breach.

Speaking of breaching your loan covenants, it would be wise to implement a covenant monitoring system so that you have an idea when your company might be cutting it close so that you can implement the financial or operational measures necessary to try to avoid the breach.

Despite your best planning and monitoring, however, sometimes an unforeseen business occurrence will arise that results in a breach. Hopefully, since you've been talking with your banker on an ongoing basis, this isn't going to come as a surprise. Your banker's reaction and the severity of the breach will determine the severity of the penalties. Here again, negotiation is key in order to mitigate the penalties...and it will be a lot easier if you've built a strong relationship with your bank beforehand.

For more tips, check out the article in full.

Founding CEO: What's Their Real Job?

Friday, July 23, 2010 by Cynthia Mignogna

Here is a really interesting article in Business Insider from Steve Blank this week about CEO compensation and how it should be linked to business growth strategies.

Blank posits that both founders and VCs have the wrong model for founding CEO equity compensation.

Founding CEOs often believe that the value they bring is their idea, as well as the time and energy they put into their company. To them -- since they had the original thought, built the product, found the first customers, and worked hard -- they should be entitled to vest all of their equity over time and run their own company.

VCs often feel that if a company has grown past the founder's ability to manage it and hasn't yet had a liquidity event, that the VC should be able to remove the founding CEO and "walk them out the door with only the stock they vested to that day."

Blank believes that the founders' real job is to find a repeatable and scalable business model, and that it's going to be found in the first few years. If there is no repeatable, scalable business model, there is no company. As a result, Blank believes that the founder's value is nonlinear over the traditional 4-year vesting model and is heavily scaled to the first few years of chaos. Founding CEOs are not often the right CEOs to turn a startup into an established company. Therefore, CEO equity comp should be directly related to the period of when a founding CEO is focused on finding a repeatable and scalable business model.

If this model hasn't been attained after the VC invests, then the CEO should be replaced and entitled only to the amount of equity vested at the time of exit. If the founding CEO does lead the company to a repeatable and scalable business model, then they should be fully vested and appropriately compensated if they are removed, with those metrics agreed upon upfront by the Board, investors and the CEO.

As a Boston venture capital firm that invests in expansion stage tech companies, CEO compensation and equity is a common topic of discussion for us. After reading Steve Blank's ideas, what do you think?

Are You a New CFO or Are You Hiring One?

Thursday, July 15, 2010 by Cynthia Mignogna

Deloitte just published a great whitepaper, "Taking the Reins: Managing CFO Transitions."

As a Boston venture capital firm that provides recruiting support and strategic consulting services to our expansion stage portfolio companies, we are often asked to recruit or help coach new CFOs.

While Deloitte cites a failure rate of 40% for executive transitions within the first 18 months of hire, this newly released whitepaper has some helpful tips specifically for CFOs to help smooth what can often be a tough transition.

First, get to know the business. Often this means listening, rather than jumping in and making change for the sake of change. Understand the business model, the culture, manage up effectively, build relationships across the executive team and mind the gaps (you most likely will find that you will need to build some skills that you haven't relied upon before).

Second, choose what to do. Build a 180-day plan and, most importantly, choose what not to do. Set benchmarks and focus.  Establish a longer term vision and communicate it.

Third, make a difference.   After the honeymoon (which can be very short), it's all about execution and taking the finance organization to the next level.    Align your best talent with the most important initiatives, learn to delegate and adopt proven best practice processes (don't re-invent the wheel). Increase teaming, transparency and accountability.

Across all three of these major phases of transition, it is crucial for CFOs to effectively balance and manage time, talent and relationships.   A first-time CFO may need mentoring to figure out this balance as they step into the role for the first time. Even an experienced CFO, however, will need to finetune their skills in balancing this triange (time, talent, relationship) as they transition into a new situation.

Check out the whitepaper for more helpful tips!

Do You Know What's Ahead for Financial Statements?

Thursday, July 8, 2010 by Cynthia Mignogna

As a Boston-based venture capital firm that focuses on expansion stage technology companies, we don't often opine on accounting matters...this is much better left to auditors. The tricky issue here is that not all expansion stage companies have grown to the stage where they can afford an audit firm, and are actually pretty focused on their businesses...often blissfully unaware of upcoming technical pronouncements in the accounting world.

If you haven't been paying attention to the ongoing discussions of the replacement of GAAP in the US with IFRS (International Financial Reporting Standards), or some semblance thereof, I can't blame you. Public companies will be hit with this first -- when and if the transition date is determined -- with private companies following at some later point. If you're an expansion stage company, you should, however, at least be aware that GAAP as we know it here in the US today will most likely be reaching the end of its lifetime in the next few years.

Last week, as another step down the GAAP/IFRS convergence path, the FASB (Financial Accounting Standards Board) issued a staff draft of proposed sweeping changes to financial statement presentation. This draft proposal is an output of a joint project of the FASB and the IASB (International Accounting Standards Board)...probably a good clue that the convergence of GAAP to IFRS is realistic.

Perusing FASB exposure drafts can be pretty dry, but here are the highlights:

Financial information is not presented consistently in financial statements (either worldwide or under GAAP)
Financial information is not disaggregated enough to be useful

As a result, FASB is proposing considerable changes to the format of the balance sheet (statement of financial position), statement of operations (statement of comprehensive income), and statement of cash flows as we know them today, so that business and financing activities are consistently presented across all statements and disaggregated into common economic characteristics. A summary table of the proposed format changes can be found here.

What should expansion stage companies do now? Become familiar with the proposed changes. Explore whether your information systems support will accommodate the proposed requirements. Be aware that your current financial team may need to invest in training and education around the proposed requirements when they do appear imminent.

Is Addiction Causing You to Lose Focus?

Wednesday, June 30, 2010 by Cynthia Mignogna

There was a great post yesterday on Harvard Business Review by Tony Schwartz "Breaking the Email Addiction."

Do any of these situations sound familiar?

- Do you wake up in the morning and bring your laptop into bed with you or check it before you brush your teeth?

- Do you check email while you're driving, even though you're four times as likely to have an accident when you do?

- Are you answering email on your iPhone or Blackberry when you walk between meetings or on your way to the parking lot?

- Do you keep answering while you're sitting in your car in your driveway or garage when you get home?

- Do you bring your laptop back into bed with you at night and make one final check before you turn out the lights?

If so, I'm afraid you are an addict.

Schwartz states that we can strategically train our attention and it's critical that we do so to give ourselves more time to think more reflectively, creatively, and deeply in an increasingly complex world.

In the end, it all comes down to focus. And, just as focusing our attention to NOT succumb to the email addiction is important, focusing our attention on the task at hand ensures that we deliver higher performance. Something we can all do more of...

OpenView is a Boston-based venture capital firm that also provides strategic consulting services to the management teams of our expansion stage technology companies. Check out our firm's blog for some great ideas to help your management team focus on what matters.

Is Your Board Doing Enough?

Wednesday, June 23, 2010 by Cynthia Mignogna

There was a great post today by TK Kerstetter on The Board Blog: Lessons Learned from the BP Board: Déjà Vu All Over Again?

Unfortunately, it seems that board members continue to be challenged in fulfilling their responsibilities related to ensuring corporate integrity. Beyond the recent crises of BP and the financial industry, we can look back to the failures of Enron, Arthur Andersen, the dot-com boom and bust, the S&L failures, etc. And in every case we wonder how the board members could have ignored (or done little to prevent) the cultural dynamics that were prevalent in these organizations.

The challenge is not just limited to large corporate organizations -- it exists in small companies as well. As a venture capital firm that focuses on expansion stage technology companies, we try to ensure that we hold the board members and senior management of our portfolio companies to the highest standards of integrity and performance. We recognize that the risks of excess and greed are lower in cultures where fairness, trust, integrity and high performance are actively promoted. We also try to develop relationships with members of the management teams that don't always participate in board meetings, so that we can gain a less filtered perspective on the day-to-day culture of our companies.

Board members need to ask the tough questions. They can't assume that simply because a potential cultural issue hasn't raised itself to the board level that it doesn't exist. They must ensure that a company's executives are operating with utmost integrity. They should engage in active and informed discussions with the company's auditors to ensure that they have a solid understanding of the risks taken and judgments made by management in the preparation of the company's financials. They should address company crises swiftly and fairly (no matter if that crisis is environmental, criminal, or consumer related). And they should ensure that CEO succession planning isn't considered when it might already be too late.

In the end, however, it is clear that board members continue to be challenged by this most fundamental of their responsibilities, and best practices process is never as widely adopted at the board-level as we might wish. The onus is not only on each board member to hold themselves and each other accountable for raising the bar, it is also incumbent upon shareholders and investors to evaluate boards of their companies with a much more critical eye.

Tired of the Leaking Toilet?

Wednesday, June 9, 2010 by Cynthia Mignogna

A few days ago, I wrote a post with some advice about confronting employee performance challenges. As a growth capital firm that also provides value-add support to our companies, we are quite often asked for guidance in addressing employee performance issues.

Generally the performance problems we see most often fall into a couple of common categories:

Mismatch of skills to job requirements
Skills haven't kept pace with company evolution or job evolution
Situational performance issues (employee might be going through personal trauma that is impacting their work performance)
Cultural mismatch (or performance problems related to "soft skills")
Poor attitude

I covered the first three points in my earlier post, so now let's turn to the last two. The last two can be equated to a leaky toilet (or faucet) that may take care of its task perfectly well, but has an ongoing drip that is causing irritation to others, wasting resources (time, energy...or water), and causing structural damage (impact to your team...or rotting floorboards).

Cultural mismatch. Let's take this one first. Challenges with employee performance in this category may be related to a pure cultural mismatch (for instance, think about a really aggressive and analytical personality-type trying to fit into a laid-back and creative team), or the issue might be an employee who just doesn't have the soft-skills to play well with others. Because these sorts of employee performance challenges can be more subjective and more difficult to coach or confront, many expansion stage managers will choose to avoid dealing with solving the problem for as long as possible. In some cases, I think the company's management team hopes that the individual will just quit without ever needing coaching or a conversation.

As a venture capital firm, we hear it all from our portfolio companies and prospects when it comes to employees in this category...."the guy is a genius, but no one can work with him," or "she is brilliant, but she peeves our Board members in every Board meeting." In every case, we also usually hear...."yeah, we know we need to do something, but we just [fill in the blank]..."

Trust me, tackle this one sooner rather than later. This employee is impacting the rest of your team. If the issue is truly a cultural mismatch, it won't change. Help this employee to move on to something that will be a better fit, and will most likely make them much more happy. If it's an issue with soft skills, you need to make a decision as to whether coaching will make a difference. If you haven't tried it, please do. If it hasn't worked, it's time to move this employee on to a new position or environment where their skills will be a better fit.

Poor attitude. This one is beyond the leaking toilet or faucet, and is probably much closer to a cancer. (Again, I'm assuming that you've already determined whether this employee might have a personal situation that is impacting their work performance, and that you've either helped them address it or have determined that they don't have a personal challenge.) This is truly the employee who doesn't give a darn about you, your best practices process, the team or the company. Remove the cancer. Do it quickly. Your team is too small and too valuable to be dragged down by someone who doesn't care. Once the cancer is gone, your team will thank you, you'll be amazed at how much more focused and energized you and your team will be, and you'll wonder why you didn't take care of the challenge sooner.

Are You Avoiding an Employee Performance Issue?

Wednesday, June 9, 2010 by Cynthia Mignogna

Is your head in the sand?

We've all been there. And, if you're there now, you're probably hoping that by ignoring or avoiding an employee performance issue, it might just solve itself and you won't have to deal with it. Well, perhaps the stars will align for you (I wish you luck!), but odds are that you're going to have to face the challenge...and the sooner the better.

As a Boston venture capital firm that also provides value-add services to management teams in expansion stage companies, we've seen the head-in-the-sand approach to employee performance problems many, many times.

Generally the performance problems we see most often fall into a couple of common categories:

Mismatch of skills to job requirements
Skills haven't kept pace with company evolution or job evolution
Situational performance issues (employee might be going through personal trauma that is impacting their work performance)
Cultural mismatch (or performance problems related to "soft skills")
Poor attitude

If you're avoiding confrontation of an employee issue, you may still be in that general state of managerial disappointment and irritation that is common before really trying to isolate the cause of the performance problem.   It's really important to get past this and identify the issue, so that you can construct a plan to resolve the challenge.

Let's take these one at a time.

Mismatch of skills to job requirements. Sounds simple, but this happens A LOT. Is this employee being asked to perform a job that they simply don't have the skills to perform? To avoid running into this situation going forward, check out some of the posts from my colleague Diana Winings, who has some helpful tips for matching position descriptions and recruiting support to your organization's needs. Regardless of how you both got here, however, as a manager, it is up to you to determine whether this employee can develop the skills required for the job. If so, then craft a development plan to help them get there quickly. If not -- or if development isn't feasible -- is there another position that is a better fit for this individual in your company? If not, bite the bullet, and help them move on to something that more fitting. Trust me, it's highly likely this employee already knows they are disappointing you and will probably welcome the help to find something more suited to their skills.

Skills haven't kept pace. This might be an employee who has done a great job for you in the past, is reliable and dependable, with a great attitude and can-do attitude. But, your company may have grown at light-speed in terms of pace and complexity, and the skills that this employee has are no longer adequate for the role. In this case, think hard about a development plan for this employee that might give them the skills to reach the next level.   This situation is different from one in which someone doesn't have the right skills to begin with. In this case, with some targeted coaching, training or mentorship, this employee might just surprise you and bloom into a new level of expertise. If, on the other hand, you've already made a good effort to develop this employee and you are cash and time-constrained, it might be better for the employee (and the company) and for you to help them find a new position that is better suited for their capabilities. Here, again, the problem isn't going to solve itself without you taking some action.

Situational performance issues.   You have a star performer who has suddenly soured or whose work product is becoming inconsistent or nonexistent. My suggestion to you is to have a conversation with this employee and try to flush out the issue. Don't let it linger. First, if this is a personal issue that is impacting work, they may not even be aware of it. Second, if they are aware of the impact to their work, they are probably even more stressed out if they are worried about their job performance. If you have an Employee Assistance Program, this is probably the time to suggest it to the employee (in a diplomatic way, of course). Depending on the employee, they may also need to be encouraged to take some time off to take the time they need to focus on their personal situation. Here again, it is highly likely that this employee may just spiral if you don't provide some mentorship or guidance. Don't put it off.

Cultural mismatch or poor attitude? Check out my next blog post, where I'll talk about how to deal with these.

Do You Have a Lazy Pricing Process?

Friday, May 28, 2010 by Cynthia Mignogna

I ran across a great article this week in the MIT Sloan Management Review, "Raise Your Prices!" with some helpful advice for companies that are not interested in competing based on price, but are more interested in competing on the basis of performance.

As the authors explain, "By competing on performance instead of price, you shift the battle to where your company’s strengths lie — in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits."

Here's a quick self-test from the article:

Does your company continuously focus on improving its products and services in ways that are important to customers and that allow you to raise prices and increase profits?
Do you communicate regularly with customers to find out how you can improve your offerings, and to make sure they’re aware of any unique value you provide?
Do your salespeople speak to the right decision makers and others who care about these value benefits in the customer’s organization?
Does your company involve every department in discussions about product development and pricing strategy in order to maximize efficiency, quality and profits?
Does your company consider pricing when it’s still developing a new service or product instead of when the product or service is introduced to the market?

Did you answer no to any of these? If so, then you probably aren't doing enough to maximize profits in alignment with the value your customers are willing to pay.

The authors recommend a 4-step process to performance pricing that any company can replicate...even an expansion stage company with limited internal resources.

1. Identify Value Opportunities. Examine every product, service and benefit you deliver to customers to better understand all of the ways in which it impacts the customer, and how the offering could be improved.

2. Set Priorities. Decide which products to develop further and how to allocate resources. Usually these priorities are going to be based on impact to your company's competitive positioning, benefit to the customer, and profitability.

3. Align Price & Value. Quantify the specific positive impacts to your customer, and understand the tangible value to your customer (acquisition cost, operating costs, added value to end user).

4. Get Cooperation. Engage your customers in this process. You need to thoroughly understand their needs and how to communicate the value and price of your offering to them.

Seven mistakes of poor pricers?
1. Nothing we do deserves a premium price.
2. Average pricing seems fair.
3. Cost-based pricing is easier to explain.
4. Everyone else prices it that way.
5. Our sales team's incentives are driven by volume, not value.
6. Don't step on anyone's toes.
7. The customer tells us the price.

As the authors of this article explain, there is a distinction between price (what a customer is willing to pay) and pricing (which your company should set in a strategic and leveragable way). At OpenView Venture Partners, a venture capital firm that also provides strategic consulting services to expansion stage technology companies, too often we see companies at this stage selling to customers at whatever price the customer will pay or trying to compete based on price, rather than approaching this key lever of their economic model with more forethought.

Is your pricing process lazy?

Are You Empowering or Inhibiting Your Employees?

Wednesday, May 19, 2010 by Cynthia Mignogna

Here at OpenView Venture Partners, you've probably learned by now that we really focus on providing value-add management consulting services to our portfolio companies.

One area where we spend a lot of time coaching our companies is in the development of management skills. Many times, the founding management teams that have excelled at taking their company from startup to the expansion stage find themselves in new and uncharted territory when it comes time to expand the team around them.

An area that is particularly tricky for experienced leaders and new leaders alike is how to effectively empower employees. While the idea of empowerment is one that expansion stage CEOs and managers readily espouse, the actual implementation can be a bit uncomfortable for the CEO or leader. Successfully empowering employees does mean giving up some measure of control as the company grows and as the startup team expands to include new members with more varied functional expertise.

I ran across a great blog post by Marshall Goldsmith recently, "Empowering Your Employees to Empower Themselves", which gives some really helpful ideas.

Give power to those who have demonstrated the capacity to handle the responsibility.
Create a favorable environment in which people are encouraged to grow their skills.
Don't second-guess others' decisions and ideas unless it's absolutely necessary. This only undermines their confidence and keeps them from sharing future ideas with you.
Give people discretion and autonomy over their tasks and resources

Goldsmith cites the example of one CEO who "received feedback that he was too stubborn and opinionated. He learned that he needed to do a better job of letting others to make decisions and to focus less on being right himself."

This CEO "practiced this simple technique for one year: before speaking, he would take a breath and ask himself, "Is it worth it?" He learned that 50% of the time his comments may have been right on, but they weren't worth it. He quickly began focusing more on empowering others and letting them take ownership and commitment for decisions, and less on his own need to add value."

The particular CEO in question was the leader of one of the largest organizations in the world, however I think that this tendency can be just as common amongst leaders of large organizations, small organizations, cross-functional teams and even smaller workgroups or departments. These leaders don't realize that by stepping back (truly stepping back), they will give their employees an opportunity to build the skills they need to truly empower themselves.

I think this simple tip for any leader or manager of taking a breath and asking whether stepping in to comment on, or take over the decision process is really worth it can be a great first step to truly letting go and empowering your team.

Can the CFO Really Make a Competitive Difference? Part II

Tuesday, May 11, 2010 by Cynthia Mignogna

Last week I wrote about the proven correlation between high performing CFOs and high performing companies. Clearly, these CFOs and their teams did not emerge over night. Each one of them had to master basic finance capabilities before evolving to high levels of performance.

OpenView Venture Partners feels that a structured capabilty maturity model (or CMM) is a powerful tool by which an organization can assess the currrent state of their finance function, as well as map out a path to improvement. For more on this, please read my previous blog.

Beyond just implementing best practices process, or evolving to high performance for the sake of high performance alone, however, we believe in linking the CMM to a company's strategy map.

So what's a strategy map? A strategy map is a diagram that describes an organization’s value creation by connecting strategic objectives with cause-and-effect relationships in each strategic perspective. Find out more about strategy maps in our case study about our Extraordinary Execution Workshop

We believe that this linkage between strategy maps and CMMs ensures that the specific capabilities required to drive a company's strategy are aligned. If those capabilities aren't present, the gaps can then be easily identified. This linkage also gives a company a clear roadmap for prioritizing process and capability improvements in alignment with overall company strategy. Process and capability improvements that might be best practice but where the investment or importance may not align with the company's overall strategy map can be deprioritized to focus on those that are more highly correlated. In other words, linking the CMM to the strategy map helps to focus on the process and capability improvements that matter.

For more on how we work with our expansion stage companies to help drive extraordinary execution in the Finance function using CMMs and strategy maps, check out our CMM for Finance Workshop case study!

Can the CFO Really Make A Competitive Difference?

Wednesday, May 5, 2010 by Cynthia Mignogna

My blog this week is the first in a series of posts focused on driving high performing finance organizations for expansion stage technology companies. You may recall one of my posts a few weeks ago "Are You Driving Extraordinary Execution?", which was focused on our recently published case study about our Capability Maturity Model for Finance Workshop. I'd like to describe a little bit more about the theory we have behind the power of the CMM.

Can the Chief Financial Officer and the CFO’s Organization Really Make a Competitive Difference?

In 2006, Accenture found a 70% correlation between mastery of finance capability & those companies that consistently outperform their industry peers over multiple economic cycles. These companies were not always the largest companies, but they were companies in over 30 industries that outpaced their peers over 3-, 5-, 7- and 15-year timeframes measured by total returns to shareholders, revenue growth, and spread between return on invested capital less weighted average cost of capital.

CFOs and their organizations in high performing companies all exhibit some common characteristics.

Their delivery of business support is integrated with overall company strategy
The CFO plays a critical role in strategy, leadership and execution
They are proactive rather than reactive, and influence results rather than being influenced by them.

Great finance teams like these were not built over night. One other characteristic is common to all of them. Each one of them had to master baseline capabilities before progressing on to becoming a high-performing organization. OpenView Venture Partners feels that a structured capability model is a powerful tool by which an organization can assess their current state, as well as map out a roadmap for improvement.

Capability Maturity Models

Capability Maturity Models (CMMs) were developed by a group of experts from industry, government, and the Software Engineering Institute (SEI) at Carnegie Mellon University in the 1980s. CMMs were originally developed as a tool for objectively assessing ability of government contractors' processes to perform a contracted software project. The concept has evolved for use in areas such as system engineering, project management, information technology, professional services and human capital management.

Not only does the CMM provide a framework for assessing capability and process maturity, but it also is a roadmap to an environment in which practices are repeatable, best practices can be transferred rapidly across groups, variations in performing best practices are reduced, and practices are continuously improved to enhance their capability. An important premise is that sophisticated practices should not be attempted until foundation of practices required to support them has been implemented. This staging of maturity levels provides much of the framework’s power for improving organizations.

Levels of Capability Maturity

Level 1: Non-existent, ad hoc.
Level 2: Repeatable, developing
Level 3: Baseline, defined.
Level 4: Managed, advanced.
Level 5: Optimized, leading.

OpenView Venture Partners' focus on Level 3 is to ensure the right capability, with the right resources, expending the right amount of effort, providing the most value, and at the right time in the company’s development to support the high performance required for a successful expansion stage company. For this reason, while Level 2 might be ‘good enough’ for an early-stage startup, the functional capabilities at this level are typically not adequate to support growth to expansion stage. Conversely, while Level 4 might be right for your company once it reaches pre-IPO or latter stage development, the level of predictability, integration, sophistication and automation required fundamentally do not align with most expansion-stage companies’ strategic priorities.

Next week...how we align the CMM with strategy maps.

OpenView Venture Partners' One Word

Friday, April 30, 2010 by Cynthia Mignogna

A response to my blog last week, One Word, really set me thinking over the past few days. What is OpenView Venture Partners' dumbwaiter pitch, or "one word"?

As an expansion stage Boston venture capital firm that also provides strategic consulting services, financial consulting services, and value-add assistance in implementation of best practices process across all functional areas, I must admit that the possibilities for honing in on that 'one word' that truly defines our firm appeared endless.

In the end, that one word is growth.

Growth...

That one word is really at the core of everything we do.

Growth in shareholder value.
Growth in capabilities and competencies in our portfolio.
Growth in the the capabilities and competencies within our firm.
Growth in our value-add impact to our portfolio companies.
Growth in our portfolio.
Growth in the number of prospects and individuals in our community who we can impact in a high value way.

Growth.

One Word?

Wednesday, April 21, 2010 by Cynthia Mignogna

I ran across a blog post today by Umair Haque on Harvard Business Review that really just cut to the core of a company's aspirations or mission and vision. In fact, the concept behind this blog post cuts to the core of a company's very existence.

The idea is what Haque calls the "Dumbwaiter Pitch." As contrasted with an elevator pitch, the dumbwaiter pitch is that one word that conveys the very essence of a company.

When companies are asked for their dumbwaiter pitch, Haque states, "The most common answer is: humming, hawing, and silence. The second most common answer is an imaginary benefit. The third most common answer is a raw product — just another mass-produced, meaningless commodity. All three answers reveal a business with whose foundation, its economic concept, is confused, muddled, and perhaps even nonexistent."

Think about this long enough, and you'll be hard-pressed to articulate a dumbwaiter pitch for most companies. The funny thing is that nearly every disruptive business has a dumbwaiter pitch. Think Twitter and "alerts." Google and "search."

As a Boston venture capital firm that focuses on expansion stage technology companies, those companies that truly have a dumbwaiter pitch (and a compelling one) are few and far between. They are the companies that have success raising venture capital in bad times as well as good. They quite often are the companies that have a home run.

What's your company's dumbwaiter pitch?

Company Exit Strategy?

Wednesday, April 14, 2010 by Cynthia Mignogna

Many times, expansion stage CEOs are a bit taken aback when we ask them to define their company exit strategy. A common response is, "Exit strategy? I'm building the next Google, or Facebook, or [fill in the blank]."

Often these CEOs are the same CEOs that view finance and CFOs as a necessary evil, rather than a strategic partner. Well, I have news for you. A good CFO is one that partners with the CEO to help define company strategy, including the company's exit strategy. Chances are, while your CPA or controller might be doing a marvelous job at closing your books, preparing financial statements, and filing tax returns, he or she isn't looking forward with a strategic and objective lens providing that much-needed balance to the CEO's entrepreneurial vision.

Who else but the CFO can help the CEO quantify not only the company's target market size, but also the addressable market?
Who else can help the CEO compile and analyze the data around the life-time value of a customer?
Who else can marry that life-time customer value with customer acquisition costs in order to validate the company's base economic model?
Who else can extrapolate and project the company's current cash burn with the projected cash requirements of the company's economic model to quantify the most likely attainable revenue levels of the company (and profitability)?
And ultimately, how else can the CEO obtain an objective view on what his baby is going to look like as an adult? The analogy of a baby sort of breaks down when it comes to the likely exit valuation of a company, but I think you've probably got my point by now.

My friends, as an expansion stage venture capital firm that also provides management consulting services and financial consulting services to our portfolio, we are familiar with the cost justification for not hiring a CFO. Our viewpoint is that if you really want to ensure that you have a home-run and not a swing and a miss, you'd be foolish to avoid bringing in that trusted partner, the CFO, and you'd be just as foolish not to have an eye on your company's exit strategy.

Are You Running Great Meetings?

Wednesday, April 7, 2010 by Cynthia Mignogna

As a venture capital firm that also provides value-add consulting services to our portfolio companies, we are continually looking for ways that expansion stage companies can apply "the best" of best practices methodologies used by more established organizations. We are mindful, though, that best practices that might make sense for a leading edge Fortune 500 organization may not always be the best approach for a lean and young early stage company.

That's why it's always great to find a clip like this, courtesy of the Wall Street Journal, featuring the CEO of American Express, Ken Chenault, as he discusses how he runs meetings. His advice is as relevant to a Fortune 500 CEO, as to an expansion stage manager.

First, Ken believes that every meeting should have a clear objective up front, that the participants should all have a clear understanding of what their behavior should be prior to the meeting, and each participant should have accountability for their role. As Ken says, there should be no "empty" participants.

Ken also believes that there are three types of meetings. Perhaps keeping these buckets in mind will help all of us both manage and participate more effectively in meetings.

1. Broad strategy discussion. In these meetings, a resolution isn't necessarily expected. This is a meeting to air opinions and viewpoints. Participants are expected to have an opinion and express it. For an expansion stage company, perhaps think of this type of meeting as an executive strategy session, with a lot of great minds brainstorming in an open discussion.

2. Determine specific course of action. In this sort of meeting, participants are expected to come prepared with a viewpoint and are accountable for a recommendation. For an expansion stage company, this type of meeting might be one where a particularly troublesome customer situation needs to be discussed by different members of the management team who may have different viewpoints (product, sales or finance), but ultimately a decision about how to correct the situation must be made, and an action plan determined.

3. Constructive confrontation. This meeting is to constructively debate specific concerns and issues, with clear ground rules for debate. At the end of this meeting, dissenting viewpoints have been aired and debated, and whether or not the attendees all agree with the outcome, a course of action is decided, supported and committed to by all participants. Expansion stage management teams often try to avoid constructive confrontation, but these meetings are also important. How often do we hear of members of management teams that don't support a CEO's decision, don't commit to the decision and make their views known to other employees, yet the CEO never constructively confronts that manager about their viewpoint (which could quite possibly be a very valid viewpoint) or elicits their support?

You may want to check out this video for yourself! I know I learned some valuable tips from it.

Do You Know How the HIRE Act Will Affect Your Business?

Tuesday, March 30, 2010 by Cynthia Mignogna

President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law a few weeks ago. There are a number of incentives and benefits to employers, which are intended to encourage hiring and business investment. If you haven't already researched whether your company can benefit from these tax credits, please check into it and consult with your tax advisor.

For instance, employers can take an exemption from the 6.2% Employer Social Security Tax if they hire previously unemployed individuals who have worked less than 40 hours during the 60-day period prior to employment and whose 2010 earned wages meet certain maximum criteria. This can equate to a savings of $6,622 per qualifying worker. There is NO cap or limit on the total amount of tax benefits that can be claimed by an employer.

Another benefit is that employers will receive an income tax credit of either $1,000 or 6.2% of wages paid, whichever is less, for hiring previously unemployed individuals meeting certain criteria.

The Act also extends a provision through December 2010 allowing the write off of $250,000 of capital expenditures for tax purposes (a provision which had expired on December 31, 2009).

In addition, the Act contains new tax and reporting compliance requirements related to foreign accounts, and we would recommend that you consult a tax advisor if your company has foreign operations or hold foreign assets.

OpenView Venture Partners is an expansion stage venture fund that provides financial consulting services and strategic consulting services to our portfolio companies. We are not tax advisors, but we've passed this information along about the HIRE Act since we feel that these tax credits might help to provide immediate cash flow enhancements to your company.