When Microsoft Threatened to Sue Us Over the Letter “E”

By 1997 E.piphany was a fast growing startup with customers, revenue and something approaching a repeatable business model. Somewhere that year we decided to professionalize our logo (you should have seen the first one.) With a massive leap of creativity we decided that it should it should have our company name and the letter “E” with a swoop over it.

1997 was also that year that Microsoft was in the middle of the browser wars with Netscape. Microsoft had just released Internet Explorer 3 which for the first time was a credible contender.  With the browser came a Microsoft logo.  And with that same massive leap of creativity Microsoft decided that their logo would have their product name and the letter “E’ with a swoop over it.

One of E.piphany’s product innovations was that we used this new fangled invention called the browser and we ran on both Netscape and Microsoft’s. We didn’t think twice about.

That is until the day we got a letter from Microsoft’s legal department claiming similarity and potential confusion between our two logos.

They demanded we change ours.

I wish I still had their letter. I’m sure it was both impressive and amusing.

I had forgotten all about incident this until this week when Doug Camplejohn, E.piphany’s then VP of Marketing somehow had saved what he claims was my response to Microsoft’s legal threat and sent it me.  It read:

Response Letter to Bill Gates

Dear Bill,

We are in receipt of your lawyer’s letter claiming Microsoft’s
ownership of the look and feel of the letter “e”.  While I understand
Microsoft’s proprietary interest in protecting its software, I did not
realize (until the receipt of your ominous legal missive) that one of
the 26 letters in the English language was now the trademarked
property of Microsoft.

Given the name of your company, claiming the letter “e” is an unusual
place to start. I can understand Microsoft wanting exclusive rights to
the letter “M” or “W”, but “e”?  I can even imagine a close family
member starting your alphabet collection by buying you the letters “B”
or “G” as a birthday present.  Even the letters “F” “T” or “C” must be
more appealing right now then starting with “e”.

In fact, considering Microsoft’s financial health and legal prowess
you may want to consider buying a symbol rather than a letter.
Imagine the value of charging royalties on the use of the dollar “$”
sign.

I understand the legal complaint refers to the similarities of our use
of “e” in the Epiphany corporate logo to the “e” in the Internet
Explorer logo.  Given that the name of my company and the name of your
product both start with the same letter, it doesn’t take much
imagination to figure out why we both used the letter in our logos,
but I guess it has escaped your lawyers.

As to confusion between the two products, it is hard for me to
understand why someone would confuse a $250,000 enterprise software
package (with which we require a customer to buy $50,000 of Microsoft
software; NT, SQL Server and IIS), with the free and ever present
Internet Explorer.

Given that Microsoft sets the standard for most things in the computer
industry, I hope we don’t open the mail next week and find Netscape
suing us for using the letter “N”, quickly followed by Sun’s claim on
J”.  Perhaps we can submit all 26 letters to some sort of standards
committee for arbitration.

Come to think of it, starting with “e” is another brilliant Microsoft
strategy.  It is the most common letter in the English language.

Steve Blank

Epilogue
Given later that year Microsoft ended up being a large multi-million dollar E.piphany customer all I can assume is that cooler heads prevailed (more than likely our new CEO,) and this letter was never sent and the threatened lawsuit never materialized.

Ironically, since the turn of the century Microsoft has done great things for entrepreneurs. Their BizSpark and DreamSpark programs have become the best corporate model of how a large company can successfully partner with startups and students worldwide.

But I am glad we helped keep the letter E in the public domain.

At times not losing is as important as winning

At times not losing is as important as winning.

Customer Validation
E.piphany was an 11-month-old startup with 31 people and on fire. We had closed four $100,000 deals for our customer relationship management software.

Joe Dinucci, our VP of Sales, was hot on the trail of our next big order. He had just demo’d our product to his friend, the CFO of Autodesk. After seeing the demo, the CFO walked Joe over to the office of Autodesk’s VP of sales, and said to her, “I think this product might solve your sales reporting problem.”

After a demo she agreed it would.

Joe came back to our company excited. If we won the Autodesk account it could be worth half a million dollars or more.

They Have A Problem and Know It
At the time Autodesk’s sales organization was frustrated with their IT department. It took weeks or months for Sales to get financial, sales results and customer reports from IT. Autodesk’s VP of Sales fit the profile of a earlyvangelist: she understood she had a pressing problem (couldn’t get timely data needed to forecast sales), she was searching for a solution (beating up the Autodesk CIO on a weekly basis to solve her problem), she had a timetable for a solution (now) and her company had committed budget dollars to solve this problem (they spend anything to stop missing forecasts.)

A Match Made in Heaven
For the next several weeks, the entire E.piphany engineering department worked with Autodesk’s sales operation team to build a prototype using real Autodesk data. Joe made a compelling ROI (Return On Investment) presentation to the VP of Sales and the CFO. E.piphany and Autodesk seemed like a match made in heaven and it looked like we had a $500,000 deal that could close in weeks.

Not quite.

The CIO
The CFO casually mentioned that as IT would install and maintain the system, they would have to recommend and sign off on an E.piphany purchase. As the CIO worked for the CFO, Joe paid what he thought was a courtesy call on Autodesk’s CIO.

The CIO didn’t say much in the presentation (warning, warning) and he passed Joe on to his manager of data warehouse development. What Joe didn’t know was that months ago, this IT group has been tasked to solve Sales’ reporting problems and was struggling with the complexity and difficulty of extracting data from SAP.

Joe was aware of the tense history between Autodesk sales and its IT department, but given how happy the VP of Sales was with E.piphany’s prototypes plus Joe’s personal relationship with the CFO, he didn’t see this as a serious obstacle. Joe believed the IT organization had nothing but technical piece parts to compete with E.piphany’s complete solution. Given E.piphany had a vastly superior solution, Joe believed there was no logical way they could recommend to the CIO to deploy anything else but E.piphany.

Wrong.

The IT Revolt
Unbeknownst to Joe a revolt was brewing in Autodesk’s IT organization. “Sales keeps asking for all these reports and now they are telling us what application to buy?  If we deploy E.piphany’s entire solution, we’ll all be out of jobs. But if we recommend software tools from another startup, we could say we’re solving the needs of the Sales VP and still keep our jobs.“

Late in the afternoon, Joe got a call from a friend in Autodesk’s IT department warning that they were give the order to another startup. And the CIO would approve the recommendation and pass this to his boss, the CFO, the next day.

We’re Going to Lose
Joe arrived in my office, his face making it clear he brought bad news. E.piphany was now about to lose a half million-dollar Autodesk sale. Joe looked at his shoes while he muttered his frustrations with internal Autodesk politics.

We had a long discussion about the consequences if we lost. It was one thing for a startup to lose to a large company like Oracle or IBM. But to lose the sale to another startup with an inferior product would have been psychologically devastating to our little startup. E.piphany’s product development team had spent weeks inside the account, and they believed the deal was all but won. The competitor would trumpet the sales win far and wide and use the momentum to get more sales.

We couldn’t afford to lose this sale. What could we do?

The Third Way
It struck me that there might be more than two outcomes.Sales had defined the problem as a win or lose situation. But what if we added a third choice?  What if we formally, publicly and noisily withdrew from the account? The worst case was that we could tell our engineering team that we should have won but the game was rigged. While we certainly wouldn’t win the business, withdrawing would solve the more emotionally explosive issue of losing. (And In the back of my mind, I believed this third way had a chance of giving us the winning hand.)

At first Joe hated the idea. Like every great sales guy, he was eternally optimistic about the outcome. However, I wasn’t in the mood to put the company’s future at risk on the testosterone levels of our sales guy. Withdrawing by claiming that Autodesk’s IT staff had already decided that it was “any solution but ours” was making the best of a deteriorating sales situation.

Joe called his friend the CFO, waiting until after 5pm, when he was sure he wasn’t in his office, and left him a message: “Thanks for introducing us to the VP of Sales and your technical staff. We really appreciate the opportunity to work with you. Unfortunately it looks like this deal isn’t going to happen. You have a bunch of smart guys working for you, but they are determined to make sure that the status quo won’t change. We have limited resources and can’t continue to give demos and hold meetings when the outcome is predetermined. My guess is we’ll be back in six to nine months when the VP of Sales is still unhappy. I’m going to call her and let her know that we can’t put in the system that she wanted, but I thought I’d check-in with you first. Thanks again for the opportunity.”

The “Take Away” Gambit
This is known as the “take-away” gambit. I believed that by pulling the deal away, there was at least a 50% chance the CFO would do what I knew he didn’t want to – go to his CIO and help him make the “right” decision. I understood that a potential downside consequence of this maneuver was an uncooperative IT organization when we tried to install the product, but by then their check would be in the bank, and I had a plan to win them over.

Joe was concerned that we had just lost the account, but he made the call and left the message.

Two hours later Joe got a call back from the CFO who said,, “Wait, wait! Don’t pull out. Why don’t you come up and meet with me tomorrow morning. I’ve chatted with my staff and we’re now ready for a contract proposal.”

Autodesk became our third paying customer. Over the next year they paid us over $1million for our software.

After a full-court charm offensive, the IT person who wanted anyone but us became our biggest advocate. She keynoted our first user conference.

Lessons Learned

  • In complex B-to-B sales, multiple “Yes” votes are required to get an order.
  • A single “No” can kill the deal.
  • Understanding the saboteurs in a complex sale is as important as understanding the recommenders and influencers
  • We needed a selling strategy that took all of this into account.
  • In a startup not losing is sometimes more important than winning.

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Lying on your resume

It’s not the crime that gets you, it’s the coverup.
Richard Nixon and Watergate

Getting asked by reporter about where I went to school made me remember the day I had to choose whether to lie on my resume.

I Badly Want the Job
When I got my first job in Silicon Valley it was through serendipity (my part) and desperation (on the part of my first employer.)  I really didn’t have much of a resume – four years in the Air Force, building a scram system for a nuclear reactor, a startup in Ann Arbor Michigan but not much else.

It was at my second startup in Silicon Valley that my life and career took an interesting turn. A recruiter found me, now in product marketing and wanted to introduce me to a hot startup making something called a workstation. “This is a technology-driven company and your background sounds great. Why don’t you send me a resume and I’ll pass it on.” A few days later I got a call back from the recruiter. “Steve, you left off your education.  Where did you go to school?”

“I never finished college,” I said.

There was a long silence on the other end of the phone. “Steve, the VP of Sales and Marketing previously ran their engineering department. He was a professor of computer science at Harvard and his last job was running the Advanced Systems Division at Xerox PARC. Most of the sales force were previously design engineers. I can’t present a candidate without a college degree. Why don’t you make something up.”

I still remember the exact instant of the conversation. In that moment I realized I had a choice. But I had no idea how profound, important and lasting it would be. It would have been really easy to lie, and what the heck the recruiter was telling me to do so. And he was telling me that, “no one checks education anyway.” (This is long before the days of the net.)

My Updated Resume
I told him I’d think about it. And I did for a long while. After a few days I sent him my updated resume and he passed it on to Convergent Technologies. Soon after I was called into an interview with the company. I can barely recall the other people I met, (my potential boss the VP of Marketing, interviews with various engineers, etc.) but I’ll never forget the interview with Ben Wegbreit, the VP of Sales and Marketing.

Ben held up my resume and said, “You know you’re here interviewing because I’ve never seen a resume like this.  You don’t have any college listed and there’s no education section.  You put “Mensa” here,” – pointing to the part where education normally goes. “Why?” I looked back at him and said, “I thought Mensa might get your attention.”

Ben just stared at me for an uncomfortable amount of time. Then he abruptly said, “Tell me what you did in your previous companies.” I thought this was going to be a story-telling interview like the others. But instead the minute I said, “my first startup used CATV coax to implement a local-area network for process control systems (which 35 years ago pre-Ethernet and TCP/IP was pretty cutting edge.) Ben said, “why don’t you go to the whiteboard and draw the system diagram for me.”  Do what? Draw it?? I dug deep and spent 30 minutes diagramming trying remember headend’s, upstream and downstream frequencies, amplifiers, etc.  With Ben peppering me with questions I could barely keep up. And there was a bunch of empty spaces where I couldn’t remember some of the detail. When I was done explaining it I headed for the chair, but Ben stopped me.

“As long as you’re a the whiteboard, why don’t we go through the other two companies you were at.”  I couldn’t believe it, I was already mentally exhausted but we spent another half hour with me drawing diagrams and Ben asking questions. First talking about what I had taught at ESL – (as carefully as I could.) Finally, we talked about Zilog microprocessors, making me draw the architecture (easy because I had taught it) and some sample system designs (harder.)

Finally I got to sit down.  Ben looked at me for a long while not saying a word. Then he stood up and opened the door signaling me to leave, shook my hand and said, “Thanks for coming in.” WTF? That’s it?? Did I get the job or not?

That evening I got a call from the recruiter. “Ben loved you. In fact he had to convince the VP of Marketing who didn’t want to hire you. Congratulations.”

Epilogue
Three and a half years later Convergent was now a public company and I was a Vice President of Marketing working for Ben. Ben ended up as my mentor at Convergent (and for the rest of my career), my peer at Ardent and my partner and co-founder at Epiphany.  I would never use Mensa again on my resume and my education section would always be empty.

But every time I read about an executive who got caught in a resume scandal I remember the moment I had to choose.

Lessons Learned

  • You will be faced with ethical dilemmas your entire career
  • Taking the wrong path is most often the easiest choice
  • These choices will seem like trivial and inconsequential shortcuts – at the time
  • Some of them will have lasting consequences
  • It’s not the lie that will catch up with you, it’s the coverup
  • Choose wisely

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Unrequited Love

If there’s only one passionate party in a relationship it’s unrequited love.

Here’s how I learned it the hard way.

The Dartmouth Football Team
After Rocket Science I took some time off and consulted for the very VC’s who lost lots of money on the company. The VC’s suggested I should spend a day at Onyx Software, an early pioneer in Sales Automation in Seattle.

In my first meeting with Onyx I was a bit nonplussed when the management team started trickling into their boardroom. Their VP of Sales was about 6’ 3” and seemed to be almost as wide. Next two more of their execs walked in each looking about 6’ 5” and it seemed they had to turn sideways to get through the door. They all looked like they could have gotten jobs as bouncers at a nightclub. I remember thinking, there’s no way their CEO can be any taller – he’s probably 5’ 2”. Wrong. Brent Frei, the Onyx CEO walks in and he looked about 6’ 8’ and something told me he could tear telephone books in half.
I jokingly said, “If the software business doesn’t work out you guys got a pretty good football team here.”  Without missing a beat Brent said, “Nah, we already did that. We were the Dartmouth football team front defensive three.”  Oh.

But that wasn’t the only surprise of the day. While I thought I was consulting, Onyx was actually trying to recruit me as their VP of Marketing. At the end of the day I came away thinking it was a smart and aggressive team, thought the world of Brent Frei as a CEO and knew Onyx was going to succeed – despite their Microsoft monoculture. With an unexpected job offer in-hand I spent the plane flight home concluding that our family had already planted roots too deep to move to Seattle.

But in that one day I had learned a lot about sales automation that would shape my thinking when we founded Epiphany.

I Know A Great Customer
A year later my co-founders and I had formed Epiphany. As other startups were quickly automating all the department of large corporations (SAP-manufacturing, Oracle-finance, Siebel and Onyx-Sales) our first thought was that our company was going to automate enterprise-marketing departments. And along with that first customer hypothesis I had the brilliant hypothesis that my channel partner should be Onyx. I thought, “If they already selling to the sales department Epiphany’s products could easily be cross-sold to the marketing department.”

So I called on my friends at Onyx and got on a plane to Seattle. They were growing quickly and doing all they could to keep up with their own sales but they were kind enough to hear me out. I outlined how our two products could be technically integrated together, how they could make much more money selling both and why it was a great deal for both companies. They had lots of objections but I turned on the sales charm and by the end of the meeting had “convinced them” to let us integrate both our systems to see what the result was. I made the deal painless by telling them that we would do the work for free because when they saw the result they’d love it and agree to resell our product. I left with enough code so our engineers could get started immediately.

Bad idea.  But I didn’t realize that at the time.

It’s Only a Month of Work
Back at Epiphany I convinced my co-founders that integrating the two systems was worth the effort and they dove in. Onyx gave us an engineering contact and he helped our team make sense of their system. One of the Onyx product managers got engaged and became an enthusiastic earlyvanglist. The integration effort probably used up a calendar month of our engineering time and an few hours of theirs. But when it was done the integrated system was awesome. No one had anything like this. We shipped a complete server up to Onyx (this is long before the cloud) and they assured us they would start evaluating it.

A week goes by and there’s radio silence – nothing is heard from them. Another week, still no news. In fact, no one is returning our calls at all. Finally I decide to get on a plane and see what has happened to our “deal.”

Instead of being welcomed by the whole Onyx exec staff, this time a clearly uncomfortable product manager met me. “Well how do like our integrated system?” I asked. “And by the way where is it? Do you have it your demo room showing it to potential customers?” I had a bad feeling when he wouldn’t make eye contact. Without saying a word he walked me over to a closet in the hallway. He opened the door and pointed to our server sitting forlornly in the corner, unplugged. I was speechless. “I’m really sorry” he barely whispered. “I tried to convince everyone.” Now a decade and a half later the sight of server literally sitting next to the brooms, mops and buckets is still seared into my brain.

I had poured everything into making this work and my dreams had been relegated to the janitors closet. My heart was broken. I managed to sputter out, “Why aren’t you working on integrating our systems?

Just then their VP of Sales came by and gently pulled me into a conference room letting a pretty stressed product manager exhale. “Steve, you did a great sales job on us. We really were true believers when you were in our conference room. But when you left we concluded over the last month that this is your business not ours. We’re just running as hard and fast as we can to make ours succeed.”

Unrequited Love
I realized that mistake wasn’t my vision. Nor was it my passion for the idea. Or convincing Onyx that it was a great idea. And besides not being able to tell me straight out, Onyx did nothing wrong. My mistake was pretty simple – when I left their board room a month earlier I was the only one who had an active commitment and obligation to make the deal successful. It may seem like a simple tactical mistake, but it in fact it was fatal.  They put none of their resources in the project – no real engineering commitment, no dollars, no orders, no joint customer calls.

It had been a one-way relationship the day I had left their building.

It would be 15 years before I would make this mistake again.

Lessons Learned

  • When you don’t charge for something people don’t value it
  • When your “partners” aren’t putting up proportional value it’s not a relationship
  • Cheerleading earlyvangelists are critical but ultimately you need to be in constant communication with people with authority (to sign checks, to do a deal, to commit resources, etc.)
  • Your reality distortion field may hinder your ability to realize that you’re the only one marching in the parade
  • If there’s only one passionate party in a deal it’s unrequited love

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The $10 million Photo and other VC Stories

While on vacation I had a phone interview with Kevin Ohannessian of Fast Company who wanted a few “funding stories.”  Here are two of them. Apologies for the rambling stream of consciousness.  The original interview in Fast Company can be seen here.

Throw in the Photo and You Have a Deal
When we were trying to raise money for E.piphany, my last startup, I was negotiating with a venture capital firm called Infinity Capital. They really wanted to invest, but it was the beginning of the bubble, and I wanted (what was then) an absurd valuation. All we had were six slides, and I wanted a $10 million post-money valuation. But it was my eighth startup and my partner Ben was even more experienced: ex VC, ex Harvard Computer Science professor, genius at building products and teams. I had sat on a board of an Electronic Design Automation company with this VC, and we had gotten to know each other. So when I wanted to start a company he wanted to fund us. We had gone back and forth with them on valuation, but this was a new firm and they wanted to close a deal with us.

After about our fifth meeting I’m in their conference room. I say, “Why can’t you guys do a $10 million post money valuation?” Picking the biggest number I could think of for three founders without a product a semi-coherent idea and badly written slides. Finally they admitted, “Steve, we’re a new fund; everybody will think we are idiots if we do that.” I said, “All right. Can you do some other number close to my number?” So I stepped out of the room as they caucused, and they called me back in 10 minutes later and said, “So listen. We can do $9.99 million.” I’m trying to play poker with the deal, and one of the partners at the time was a great photographer–the firm had big prints of his on the walls. I was really in love with the one in the boardroom. So without thinking, when they made me that offer, trying to keep a straight face, I reached behind me, grabbed the photo off the wall and slammed it on the desk, and said, “If you throw this photo in, you got the deal!”

The $10 Million Photo

The look on their face was utter astonishment. I was thinking it was because I was being creative by throwing the photo in, but then I noticed that this cloud of dust was settling around me. I turn around and looked at the wall and it turned out the photo had been bolted into the drywall. And there was now a hole–I literally ripped a part of their boardroom wall off as I was accepting the offer. Without missing a beat they said, “Yes, you can have the photo. But we’re going to have to deduct $500 to repair our wall.” And I said, “Deal.” And that’s how E.piphany got its Series A.

Invest in the Team
Before we closed our Series A with Infinity, I had called on Mohr, Davidow Ventures, the firm which had funded my last company, Rocket Science. The senior partner at the time was Bill Davidow, a marketing legend and a hero of mine who had also funded other Enterprise software companies. I went in and pitched Bill the idea about how to automate the marketing domain. He gave me 15 minutes, then as politely as he could do it, walked me out the door and said, “Stupidest idea I ever heard, Steve. Enterprise software means across the Enterprise. Marketing is just one very small department.” As he was walking me out, I remember as I physically crossed the threshold of the door that: A. He was right, and B. I figured out how to solve the problem of making our product useful across the entire enterprise. So E.piphany went from a bad idea to a good idea by being thrown out by a VC who gave me advice that made the company. He has reminded me since, “Sometimes you invest in the idea, but you should always be investing in the people. If I would’ve remembered who you were, I would’ve known you would figure it out.”

(Kleiner Perkins would do the Series B round for E.piphany. After our IPO Infinity’s and Kleiner Perkins’ investment in Epiphany would be worth $1 billion dollars to each of them.)

I still have the photo.

Back from vacation soon.
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Checklists for Chaos, The Path to Success

In a startup the search for a business model is chaotic, unpredictable and uncertain. Yet the Customer Development process uses a series of checklists to ensure that you walk through the Customer Discovery and Validation steps. In addition it explicitly calls for synchronization and confirmation of the steps by the entire team.

Surely a checklist and discussion gets in the way of progress in a fast moving startup? Here’s how using it helped E.piphany rather than hindered it.

Tell Them What You’re Hearing
When E.piphany was a small struggling startup in Mountain View, we had a weekly Friday afternoon beer and wine fest, no different than what hundreds of other startups were doing. (Insurance companies in the valley should check the accident rates for Friday traffic.) The company headcount was mostly engineers accomplishing the impossible on a regular basis while a few of us were outside the building trying to do what we would call today Customer Discovery and Validation.

A Checklist for Chaos
While all startups are chaotic, we had been through enough of them (E.piphany was my 8th) to realize that we could understand our potential customer better if we had a standard checklist and process of how to approach complex enterprise sales. These started with the business model hypotheses in Customer Discovery (who’s the customer, channel, pricing model, etc.)

Customer Hypothesis Checklist

I remember that for the first few weeks of the company, my partner Ben and I would give the usual rah-rah platitudes about how great things were going to motivate the engineers.  Then one week Ben turned to me and said, “Why don’t you really tell them what you’re doing and what you’re hearing.”  Uh oh. Thinking about all the ups and downs of sales in a startup and twists and turns in strategy and positioning I wondered if it would be demoralizing. “Do you think they can handle the truth?”  We talked about it and realized our motto for our weekly meeting would be, “Don’t panic when we change the strategy. Only panic if we ask you to rearchitect the product.”  (Today’s version would be “Don’t worry when we pivot the business model, only panic if we ask you to develop the product with a Waterfall methodology.”)

Sharing the Checklist
Soon after, our Friday’s meetings would start with me describing the highs and lows of the week: who we called on, what they said and what happened (essentially walking engineering through the series of checklists as we went through Customer Discovery and Validation. And what I had to report was mostly us getting a “not interested” or “we don’t get it” from a prospective customer.

Almost immediately the most unexpected things started happening at our Friday meetings.

Don’t Treat Them Like Mushrooms
First, I thought that not pumping up engineering every week would demotivate the team. Reality turned out 180 degrees from what I expected. Engineering was much smarter. When it became clear that my partner and I were not going to treat them like mushrooms (keep them in the dark and feed them sx!t) but let them know what was really going on, they engaged on a much different level.

You’re Explaining it Wrong
Second, as I was reporting on my sales calls a few of the engineers realized that I was describing technical professionals in large companies who were just like them. When I detailed how I was explaining the product, our own engineers said, “You’re explaining it wrong. Even I wouldn’t buy it from us if you told me that.” The first time I heard that I was speechless. Who the hell were these engineers telling me how to market and sell our product?  My first instinct was to cycle through all the “my business card says I’m the expert here and you just write code.”

Then I realized – they were right. Our engineers were just like the customer, and if they didn’t think our product description made sense, no one else would.  So in front of the entire company, I threw out our positioning and we started to discuss how to better articulate what we were doing. (I think we invented our meta-data architecture diagram that Friday.) It was great to realize that instead of just me trying to figure out customer feedback, that every Friday I’d have the collective wisdom of engineering engaged.

Confirming the Checklist
Synchronizing our Discovery and Validation had a third benefit. Engineering now felt that they had a stake in making the process better and took a great interest in that mysterious and elusive “customer.”  Soon engineers were spending lots of time talking to customers. More importantly they had a vested interest in getting the process right.

Synchronizing the Discovery and Validation checklists with the entire company made us collectively smarter, faster and gave us a shared understanding of our objective – build great products that customers wanted.

Checklists and synchronization were part of the reason why we grew from $0 to $125 million in three years.

Lessons Learned

  • Customer Discovery and Validation in any type of startup requires a series of checklists (see Appendix B of the Four Steps to the Epiphany)
  • The checklists require the team to share their findings for confirmation and synchronization

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Less is More, More or Less

In Customer Development the goal of a minimum feature set is to pare the features of the first product release to the minimum necessary for early customers.

But finding what those “minimum” features are can be an adventure.

All the Data and Not a Drop to Think
We started Epiphany to solve the “too much data but not enough insight” problem. During the 1990’s large corporations had bought different software applications to automate each part of their enterprise – finance, customer support, manufacturing, sales, etc. Yet the data these applications collected were accessed via reporting tools from the IT organization. More importantly, the data existed in “virtual silos” with each functional system walled off from the other. The finance system didn’t talk to the sales system which didn’t know the manufacturing system even existed. (Queries like – compare the sales data of green dresses versus the blue ones, with how many of each does manufacturing have in inventory, and what does finance say the gross margin by region of these product are – would be hard to answer because it required combining data from three incompatible applications.) It might take days or even weeks to get a report. And if that question led to another one, add more days or weeks to get the next answers back. And once you got the data you asked for, it still took weeks or months for a marketer to tease out any customer insight and trends from the data. And if you actually want to respond to shifting customer behavior by running a new marketing campaign (ads, email, etc.,) it would again take weeks or months.

An Epiphany
Initially our engineering team designed three products to solve these problems: an On-Line Analytical Processing (OLAP) tool – think of it as a multi-dimensional Excel to search through reams of customer data, data mining tools to search for patterns in customer data, and a campaign manager to combine all the data and generate customer specific ads/emails. And underneath these products was our own data warehouse (a place to store all this different data) and our own tools to Extract, Transformation and Load (ETL) customer information from existing enterprise applications like SAP, PeopleSoft, Oracle Financials, etc. And back then the radical notion was that you could view this information anytime and anywhere through this new technology called a web browser.

You’re An Idiot
As a founder my first job was Customer Discovery – getting out of the building to listen to customers and see whether our understanding of what problems customers had was correct, and if so whether our product as spec’d would solve that problem.  Over time one of our hypothesis was that our product should be a great fit for companies who had lots of customers, tons of data on them and wanted to quickly come up with new marketing campaigns.

We had put together an advisory board, and one of our advisors was the VP of Database Marketing at Schwab. She was incredibly generous with her time and said that our system might work in their application. She introduced me to five other Database Marketing executives who essentially said, “If you get a system working at Schwab, we’ll have to buy one as well.” You couldn’t get much better than that. I thought we had found our first Earlyvangelist and first market.

But each time we met and she looked at the technical details of our system, and politely told me I was an idiot and my engineering department was even dumber. It took two meetings before I finally got what she was trying to tell me – we understood her problem all right, but our architecture was missing the most important feature to solve it. Our database schema didn’t include “householding” and without this feature was she could never buy our system. (Householding means recognizing that two or more people at the same physical address live together. This feature was crucial to direct marketers who did not want to send multiple ads to the same address.) Our data warehouse didn’t have the concept of householding in its schema. And no amount of sales and marketing hand waving was going to fix the problem.

Founder Too
My engineering co-founder and I had a great relationship. If I thought I discovered a customer with a feature we were missing he was coming out to hear it himself.  Just don’t waste his time on the first “getting to know you” meetings. We had agreed that Schwab and the database marketing application sounded like the right fit for the technology so he was as eager as I was to figure out what we were missing. So now, a week later, he’s in San Francisco with me listening to the Schwab VP of Database Marketing and her engineering team go into a deep technical dive about what our software needed to do. My partner asked five or ten questions, everybody nods and the meeting was over.

What Do You Mean Page 6?
We got back into my car for the drive back from San Francisco to our office in Silicon Valley. 5 miles goes by and we’re talking about the weather. 10 miles goes by and he’s talking about his kids, and 20 miles goes by and we’re talking about my kids.  Finally, unable to stand it any longer, I ask, “Ben, what are we going to do about the Householding feature that Schwab asked for?”  In an innocent and deadpan voice, he replied, “Well just take a look at page 6 of our spec.” I had to think for another couple of seconds until I said, “What do you mean page 6? Our spec only has 5 pages!”

He looked at me and smiled as he said, “Not any more.”

Our first order from Schwab came the next week.

We had just iterated the product and refined the minimum feature set.

A week later we sat down to figure out what other feature we would toss out to make room for this one.

Lessons Learned

  • Founders’ start with a hypothesis of what the minimum feature set is.
  • Your customers teach you which features actually matter by whether they will buy.
  • You swap (not add) features as you learn what will optimize market share of earlyvangelists.

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Why Lawyers Don’t Run Startups

Startups need to have a great lawyer, accountant, patent attorney, etc. But founders need to know how to ask for their advice and when to ignore it.

Why Entrepreneurs Hate Lawyers
I was having coffee with a friend who teaches at the U.C. Berkeley Boalt Law School and runs their entrepreneurship program. Our conversation led us to Scott Walkers post Why Entrepreneurs Hate Lawyers and why we both recommend that entrepreneurs print it out and tape it to their wall.

I remember when I encountered bullet #1 on Walkers list.

You Can’t Sign This Deal
After being in business for all of seven months, one of our first deals at Epiphany was with a software company called Visio, (now owned by Microsoft.) After some heroics from our CTO in extracting data from SAP, the Visio CFO loved our product, thought we could save them a ton of time and money and wanted it installed ASAP. We were excited that we were getting our first six-figure check and a reference customer. Then Visio gave us their boilerplate contract.

We passed it to our law firm who promptly threw up all over it.

“You guys can’t sign this. It has you putting your software in escrow, giving them all of your source code if you go out of business, indemnifying them from all possible lawsuits, not selling to competitors, first rights on a number of irrelevant issues and has a clause about promising them your first-born children.” I stopped listening for a while as it dawned on me that the deal I thought we had was probably now gone. I was feeling pretty deflated. I tuned back in when our lawyer said, “Let us start negotiating better terms with Visio’s company counsel.”

When I was a younger entrepreneur my answer would have been, “Ok. See if you can get us better terms. Call me when you’re done.” This time I said, “Make a list of the issues in bullet form, send them to me and I’ll get back to you.”

Strategy Questions Not Legal Questions
The issues our lawyer had raised about the contract, while correct, were strategy questions the founders needed to answer, not legal questions. Negotiating deal points before we thought through our strategy at best would have cost us a ton of money with little progress.

Looking at the Visio contract the question we were faced with was; how bad would the short term consequences be in signing the deal?  The answer to that was easy – none.  We’d have money in the bank and a reference customer.

The next question was, how bad would the deal points Visio was asking for screw us in the long term?  This was more complex.  Some of them would have limited our ability to sell to other software companies. Those were clearly unacceptable. Some of their other requests were just “comfort” issues like putting the software in escrow to protect Visio in case our startup went out of business.

Finally, there was a class of what I call “business development contract terms.” This happens in every company when a contract is passed around for review and everyone feels they have to mark it up with extraneous demands to feel like they had their say. Most of these points might have sounded great in law school but were impossible for a startup to deliver.

So we had to decide what deal points we could live with that wouldn’t kill our company.  For example, I could agree to put our software in escrow if Visio would pay for all the legal and logistical expenses (knowing full well it was a “see, we’re doing our job” issue the Visio lawyers were insisting on, but one that Visio would never implement.) Other deal points, which my lawyers said were fatal, were also easy to agree to – don’t sell to competitors? We could easily agree to a 90-day non-compete as a sign of good faith (what Visio didn’t know is that we had no bandwidth to take on another customer while we were getting their software installed.)

My co-founder and a few board members brainstormed to make sure we weren’t missing anything. Then we got on the phone.

Why Lawyers Don’t Run Startups
We realized that our goal 1) was to get a deal done, 2) on terms we could live with and 3) it required talking to someone senior at Visio with the authority to make decisions on their side. Only then could we have our lawyer spend any time on the contract.

We called the Visio CFO.

We explained that their boilerplate contract was something we couldn’t sign because it would put us out of business. We said we would be happy to work with him in providing assurances on issues that were of importance to him and his company.

We suggested that we see if we could agree to them in this call. But we wondered if he had the flexibility (meaning the authority) to overrule his lawyer on their standard contract?  (It now became a matter of pride that he could.) We said that if we agreed on the big issues we could send the deal back to our lawyers. (He was surprised to hear about half of the things in his own contract.  “It says what?!”)

We agreed to the major points in a half hour. The lawyers had the final contract done in two days.

Lessons Learned

  • Lawyers provide a service; they are not running your company.
  • If you find a lawyer who talks about solutions not problems, hold on to them.
  • In every company that gives you a contract there’s someone who wants a deal.  When you run into contract issues, call them first for advice.
  • Recognize whether you have a legal problem or strategy problem.
  • The web has great blogs by lawyers who get it.  Read them.

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You’re Just the Founder

At times VC’s forget who their business is built on.

Nice Car
Last week in a car showroom of all places I ran into a VC who I hadn’t seen in ten years. He had sat on the board of my last company and we chatted and made small talk as he was admiring a new car.

It was clear that he had no memory of a phone conversation my partner and I have never forgotten.

Big Name CEO
It was the Internet bubble and after almost three years our startup had found a business model and we were scaling revenue and headcount fast. Our second round of funding was from a firm and VC whose names were household words. This partner lived up to his reputation and helped us hire an experienced, world-class CEO from a large consulting company that we thought would be the guy to take our company to a billion dollars (think Internet-bubble Kool-aid.)

The legendary VC was too busy to sit on our board, so we got another younger partner in his firm with seemingly the right pedigree – engineering degree, MBA, lots of boards, etc. But as we would find out the hard way – zero experience as an entrepreneur.

Now that the big name CEO had tentatively accepted our job offer we were having a board meeting via conference call to approve his compensation package. My co-founder and I gulped as we went through each part of the package; the equity we were offering would make him an equal founder, and his salary, while a huge cut for him was a lot more than the starvation budget we had put ourselves on. However, the new CEO was as hungry to join a hot Internet startup and work with legendary VC and not miss the bubble, as we were in hiring him. We thought he’d be worth it. A point the young VC on our board kept reminding us of.

You’re Just the Founders
When the call was almost over my partner and I mentioned, “We want to remind you guys that we’ve been working at founders pay for almost three years. We’d like to adjust our salaries to reflect the new pay scale.”  We had hoped for parity with the new CEO, but any offer of some kind of raise would have made us feel good. Instead, what we got from the VC, was “Who the hell do you think you guys are. You’re just the founders.”  Then he proceeded to give us a lecture of why we should consider ourselves lucky to get this new guy, he and his firm were the ones that were going to do the heavy lifting and we should be happy that we were going to make our money on the stock, etc.

Never Forget
We never did get a raise. Luckily the company did go public, but I’ve never forgot the conversation.

For the last 12 years as friends and then students have asked me about how to approach this big name venture firm, I’ve managed to steer them to other venture firms in the valley – by suggesting that there were firms who would treat them like they mattered. I’ve averaged about 6 referrals a year.

I figure when I get to 100 I’m even.

Lessons Learned

  • “Founder-friendly VCs” do exist.
  • Having a VC who has been an entrepreneur is a plus, but it’s attitude that matters.
  • If you’re a founder, ask for a pay-parity agreement with a new CEO upfront and in writing.

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Victory From Adversity

Sometimes what sounds like bad news when talking to customers might be your finest hour.

Hypothesis Testing
As we started E.piphany, we got out of the building to test our hypotheses by talking to potential customers in and around Silicon Valley. On one of our most memorable visits, we met with Joe DiNucci, the VP of Marketing at Silicon Graphics who was generous enough to brainstorm the types of problems corporate marketers had. At the time Silicon Graphics – with 2+ billion dollars in sales of 3d workstations – was one of the hottest hardware companies in Silicon Valley.

The conversation seemed to click as he checked off every one of the issues we thought might define our product:  no closed-loop between expensive marketing activities and results, lack of department and corporate wide visibility to real-time sales and marketing data, browser versus client-server application, etc. We came up with a rough estimate of how much Silicon Graphics could save if they had a way to solve these problems, and together did a back of the napkin ROI (Return on Investment) analysis. Next we started enumerating what form a solution might take and what kind of features a product should have. Amazingly we came up with a feature list that was pretty close to the one we were building.  I was feeling like a genius so I went to the next step and I asked Joe: “It sounds like Silicon Graphics might be interested in working with us to be an early customer?”

My Bubble Burst
The answer was not what I expected.  “No not at all.”  Say, what?  Why?  “We also decided that this was an important problem to solve, and since we couldn’t find any vendor selling it, my director of marketing wrote the software to do it. We’ve built and deployed the product throughout Silicon Graphics. It’s called Mine Your Own Business.”

Talk about feeling your bubble deflate fast. I went from feeling the high of believing that I might have an early customer in an innovative company to the low in realizing that they’d never buy anything from us. And worse, what we had envisioned as a product so unique that no one had thought of it, someone had already built. We wouldn’t be the first. We were doomed.

I left Silicon Graphics feelings discouraged. But on the drive back to E.piphany a few things hit me.

  • A credible customer told me that we had hit on a high-value problem
  • They couldn’t find commercial software to solve this problem.
  • It was an important enough problem that they invested effort to write their own software.
  • It had been deployed inside their company and there were real world users
  • I could now point potential investors and visionary customers to the widespread use of the product inside SGI as a proxy for our product

The more I thought about it, the better I felt. This was a validation of our ideas not a negation.

Take No Prisoners
The next day I called the VP of Marketing back and asked him if I could get a demo of their software. Soon I was in the office of John McCaskey, the director of Silicon Graphics Science Industry Marketing who wrote Mine Your Own Business. As he went through the demo, I realized I was looking at working code for a big part of what we had spec’d as our first release.

I told John he ought to join our startup. “How many of you are there?” he asked. “Three, I said. “Including me. Four if we count you.” John rolled his eyes and tried to change the subject. I said, “We’re three now, but if we do this right we could be selling $100 million dollars a year of your software. Wouldn’t you rather be doing that than working at a big company?” That got his attention. “Well who’s funding you?” My turn to pause, “Well no one yet, but every VC thinks it’s a great idea.”

Watching someone rolling their eyes twice is not a good sign you’re going to close the deal, so I grabbed the phone and called Bill Davidow, a legendary VC whose office I had just left. “Bill, do me a favor,” I asked, “Can you tell this guy how big the enterprise software market can get?”  I don’t know who was more surprised, Bill Davidow in getting a call from me (since he had just told me he wasn’t going to invest in our new company – his firm having funding Rocket Science, the previous company I had just cratered) or John having watched me get the VC on the phone on the first ring (pure and unadulterated luck.) Bill was kind enough to spend a couple of minutes educating John about the opportunities for a startup like ours, and enough of a gentleman not to mention he had passed on our deal.

Thirty days later John became the fourth co-founder of E.piphany.

Sixty days later we convinced Silicon Graphics to license us all of John’s code for a dollar. (During the craziness of the Internet bubble E.piphany’s market cap would be greater than Silicon Graphics.)

John’s boss, Joe DiNucci, the VP of Marketing of Silicon Graphics became E.piphany’s VP of Sales.

Lessons Learned

  • Finding that a potential customer wrote their own software (or hardware) to solve a problem is good news, not bad
  • It’s a strong sign that there’s a high-value problem
  • ABR – Always Be Recruiting

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Someone Stole My Startup Idea – Part 2: They Raised Money With My Slides?!

In my 21 years of startups, I had my ideas “stolen” twice. See part one for the first time it happened. This time it was serious.

As a reminder, this post is not legal advice, it’s not even advice. It’s just a story about what happened to me.

Customer Development
We were starting Epiphany, my last company. I was out and about in Silicon Valley doing what I would now call Customer Discovery trying to understand how marketing departments in large corporations worked. The initial hypothesis for Epiphany (from my much smarter partner Ben) was that as departments in the enterprise (manufacturing, finance, customer support sales) became automated, the marketing department would eventually get its turn.

I remember presenting our ideas for Marketing Automation to one VP of Marketing in a large Silicon Valley company. His enthusiastic response was, “This will revolutionize marketing departments!” He continued: “I’d like to convince my boss so our company can be your first customer.” I should have been suspicious when he said, “I’d like to take a copy of your presentation to show him.” Caught up in the enthusiasm of hearing what a great idea we had, I violated one of my cardinal rules, and left him a hard copy.

Fast Forward
Fast forward nine months. After talking to tons of customers and almost as many VC’s, we got Epiphany funded as a company that was going to automate Marketing Departments. After a ton of unreturned phone calls, I had written off the enthusiastic VP of Marketing who wanted to show my slides to his boss and moved on with building our company.

By now we had found a few customers and learned a lot more about the market from them and other prospects. Our business model changed as we realized that to become a large company, we needed to automate more than just a few marketers. As we were out looking for our Series B round, our company had gotten the attention of “name of big VC firm here” who wanted a play in enterprise software.

Are These Your Slides?
During the due-diligence process, I sat down with one of the partners who pulled out a set of slides and asked me: ”Have you seen these?”  I quickly leafed through them and replied, “Sure they’re our original slides. Why?” He said, “Look again.” They had all my words from a year ago, but hey wait a minute, there’s someone else’s logo on my slides?! What’s going on?  He said, “That’s what we’re trying to figure out.  These guys just got funded, and they sound a lot like you guys.”  Luckily I had the original slides and could prove who came first. Still the fact was a competitor had raised money using our idea and our slide deck.

And who was this competitor? The VP of Marketing who a year earlier had wanted a hard copy of our slides. He was now CEO of a new company in our market.

I felt like I had just been kicked in the stomach.

Disbelief, Anger, Resignation and Acceptance
My cofounders and I went through the stages of disbelief, anger, resignation and acceptance. Here was a competitor who had appropriated our idea and gotten funded. (Welcome to the Internet bubble.) There was lots of venting as we talked about lawsuits and issuing nasty press releases.

We consciously didn’t ask potential customers to sign a Non-Disclosure Agreement (NDA). In Customer Discovery we were learning as much from them as they did from us. And we figured that unless litigation was going to be our business strategy, NDA’s would have inhibited the back-and-forth that made us smarter. We concluded that, at least for us in this market, an NDA would be a bigger impediment than asset. Now we started asking ourselves, “Did we make a mistake?  Would have getting a signed confidentially agreement deterred this person?” On further reflection, (and their track record since) not in the least. But that still left us with a problem. What should we do about this competitor copying our strategy?

Finally, we concluded, “You can’t drive forward by looking in the rear-view mirror.”

Our competitor was executing on hypotheses we had developed 9 months ago, and their strategy remained static. We on the other hand, had moved on. We had discovered detailed information about what customers really needed and wanted and turned our original hypotheses into facts. We had validated our new assumptions by a set of orders, and we had pivoted on our business model. Our original idea had been nothing more than an untested set of hypotheses. Truth be told, we were no longer the company in those stolen slides.

While the common wisdom said that our success was going to be determined by which company executed better, the common wisdom was wrong. In a startup success isn’t about just execution, it’s how well we could take our original hypothesis and learn, discover, iterate and execute.

Never Get Even, Get Ahead
With a set of orders from brand name customers, we had growing confidence that we had achieved product/market fit. We were within three months of formally announcing our company and products at a major industry trade show. We made sure our competitor knew this. In fact, we made sure they knew what day at the show we were going to announce. Just as we predicted, they picked the day before us for their announcement in an effort to preempt our company launch with theirs. We made sure they heard how shocked and upset we were that they were going to beat us to an announcement in our market.

Our competitor announced on a Monday solidifying their position in the small market we had abandoned because we realized it was unprofitable and would not scale.

We announced the next day, positioned as a player in a much larger and broader market with new positioning, strategy and customers.

Our copycat competitor was now publicly locked into a company and product strategy that was obsolete and untenable.

Over the next two years we left them in the dust.

———

While how you iterate and execute your idea is more important than the idea itself, there are parts of your intellectual property a startup does need to protect. More on this in the next post.

Lessons Learned

  • Your business concept is not a company. Lots of people have ideas. Typically they are just a set of untested hypotheses.
  • Successful companies are about the learning, discovery, iteration on your initial ideas. If someone can do a better job iterating hypotheses and executing than you can, you deserve to fail.
  • No business plan survives first contact with customers
  • The real value is finding the product/market fit.  That’s not found in a set of slides.

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There’s a Pattern Here

After my eighth and likely final startup, E.piphany, sitting in a ski cabin, it became clear that there is a better a way to manage startups. Joseph Campbell’s insight of the repeatable patterns in mythology is equally applicable to building a successful startup. All startups (whether a new division inside a larger corporation or in the canonical garage) follow similar patterns—a series of steps which, when followed, can eliminate a lot of the early wandering in the dark. Looking back on startups that have thrived reflect this pattern again and again and again.

So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups are not small versions of large companies.  Yet the processes that early-stage companies were using were identical to that of large corporations. In hindsight it appeared clear that startups that survive the first few tough years do not follow the traditional product-centric launch model espoused by product managers or the venture capital community. Through trial and error, hiring and firing, successful startups all invented a parallel process to product development. In particular, the winners invent and live by a process of customer learning and discovery. It’s a process that doesn’t exist in large companies with existing customers and markets.  But it is life and death for a new venture.

I call this process “Customer Development,” a sibling to “Product Development,” and each and every startup that succeeds recapitulates it, knowingly or not.

The “Customer Development” model is a paradox because it is followed by successful startups, yet articulated by no one.  Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed.

It is the path that is hidden in plain sight.

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