The format of the meeting was a discussion between myself and eight executives. They wanted to know how we, InterWest, identified innovative ideas and/or sponsored innovation inside our portfolio companies.

It was easy to answer the latter – we don’t.  We are investors in ideas we believe are innovative but we are not the creators of that innovation – at least not typically. It is the entrepreneur and the team that are the innovators.

The first part of the question was how we identify innovation. The answer to that is actually fairly straightforward; we see a lot of different technology and business models. As a result, after a little due diligence, we can usually determine if something is unique or different.

The more difficult question we, as a firm that makes early stage investments, have to address is “so what?”. The fact it is innovative isn’t sufficient for us to make an investment. We need to convince ourselves that the innovation is relevant  – will companies or people use it –and is there a large and addressable market for it.

The next question I was asked was how I thought innovation occurs in existing companies? I responded by saying I felt most innovation in large companies occurs at the “intersection of fear of status quo, opportunity and talent.”

Opportunity = a person or a team of people identifies something they believe a business or consumer needs.

Talent = the person or team has experience, expertise, drive, etc. to pursue the opportunity because they want to make money and/or make a difference.

Fear of Status Quo = the person or team is fearful that they will lose something if they don’t change what they are doing.

When these three elements come together, innovation can occur.

The first two elements can exist in abundance in large organizations. However, what is typically missing is “fear of status quo”.  The lack of fear of status quo– are we going to survive if we fail to change- is fundamentally why I believe large organizations typically have a challenging time with innovation.

In fact, it is typically the “fear of doing something new and making a mistake” that paralyzes most large companies from making significant changes.

Big changes inside existing companies and organizations can lead to loss of power, loss of jobs, loss of financial stability. For these reasons, I believe as companies get larger, more and more infrastructure is built to support the status quo v tearing it down; large companies that were once incredibly innovative become less and less innovative from within and begin to look externally to acquire “proven” innovation.

So, I said to the group of insurance executives in front of me, if you really want to inspire innovation, I believe the best thing you could do is as follows:

1. Create a separate entity and capitalize it
2. If you are worried about carrying the company on your books due to upfront losses, use outside capital to minimize ownership
3. Create a call option with a first right of refusal to purchase that enables you to buy the company at some point in time at some multiple of revenue, EBITDA, etc.
4. Take a few people with talent and drive who have suggested some creative ideas and/products and place them into the new entity and give them equity incentives.
5. Let fear of failure and the promise of reward motivate the new entity’s executive team.
6. Let the new entity run unencumbered by any of the policies, politics, or structure of the larger company.

We finished the meeting and I thought to myself, while I really believe in what I said, I didn’t have a lot of confidence this team of executives – nor any team of executives from a successful company – would really take action against it.

From my experience, the power of “the status quo” is simply far too great. Even when a company is under duress, seldom will it do something that may jeopardize the status quo. When a company is doing well or even just skimming along, it is virtually impossible to introduce significant changes even if it is to the benefit of the company in the mid-long term.

So, this is one of the reasons why I continue to have tremendous confidence in start ups. Even when large companies have the capability of creating innovation that could challenge a start up, they seldom do because of status quo. And, if you combine that technical innovation with business model innovation, an incumbent company has little chance of competing with it.

So…here’s praise for the “status quo”…it will continue to be the kryptonite of large incumbents and the defensible shield of start ups which is what we as venture capitalists count on when we invest.

Congratulations on your recent acquisition of Kenexa for $1.3B. The HCM application market has been steadily heating up and with SAP’s recent acquisition of SuccessFactors and Oracle’s purchase of Taleo, this looks like a good counter move.

Your announcement coupled with the recent news that Apple has become the most valuable company in the world prompted me to write this.

As I thought more about Apple and IBM and their respective positions in the current technology markets, I realized just how different the two companies are today from two decades ago.

Twenty years ago, when I worked for Apple as a young engineering director, IBM was “the” business information technology brand. Apple was nowhere – except in niche areas such as graphic design.

Under Steve Job’s leadership, beginning with his return to Apple in the mid-90’s, Apple emerged from near oblivion to become one of, if not ‘’the’, most powerful consumer – and business – technology brands.

Today, Apple’s products are used pervasively by people – at home and at work -  throughout the world. Apple has become the leading mobile platform developers target for consumer and business applications.

IBM, in the early 90’s, was faced with its own set of challenges stemming from poor financial controls, lack of innovation and other issues. Gerstner is appropriately credited with solving these and his successors – Palmisano and Rometty – have continued that success.

Now, IBM’s stock is at a near all time high, more than doubling over the past 3 years.  The Company invests in all the right buzz areas: Cloud Computing, Analytics, Mobile, etc. Wall Street is singing IBM’s praises.

Yet, in spite of all outward appearances, I respectfully submit that IBM may be headed toward another very rocky and challenging stretch of waters.

Looking beyond the current stock price, when you scratch below the surface, it is not hard to see some serious warning signs; very low organic and acquisition revenue growth, a culture of entitlements, executive tenure, a continued lack of internal innovation and an obvious inability to recruit and retain the most talented entrepreneurs.

Why should IBM take note of this letter? I offer this from a perspective derived from my own experiences.

For more than 30 years, I have been fortunate to be a first-hand participant in the formation and growth of some of the most successful technology companies.

I began my career in 1981 with AT&T where I focused on the technical side of the data networking products. I later joined a then little-known start-up called Oracle where I founded and ran its Unix Product Line organization. From there, I co-founded and successfully sold an Internet-based software start-up. In 1992, I joined Apple to run its Unix and object technology engineering divisions and then joined Siebel Systems – where I spent a decade of my career – and ultimately ran its Products division including the OnDemand and SMB organizations. When Siebel Systems sold to Oracle, I decided to redirect my focus.

Today, I am a venture capitalist with InterWest Partners investing in early stage SaaS, analytics and mobile companies in the B2B markets. These companies include: AppMesh, Aria Systems, CubeTree – acquired by SuccessFactors and then SAP, Doximity, Get Satisfaction, Marketo, SignalDemand and Workday.

With some luck, these companies may take their place as significant players in the information technology industry.

In every case, I have found one consistent theme: great companies live and die by the talent they recruit and retain, the brands they create and the culture they foster from within.

Talent is the Asset

“The most valuable assets of a technology company walk out the door every night.”

Anonymous

Gerstner refocused IBM in the early 90’s. Since then, IBM has executed a revenue growth and innovation strategy primarily through acquisitions. Some of IBM’s most notable product successes have resulted from such acquisitions (e.g. Cognos, PriceWaterhouse Consulting, Tivoli, etc.).

More recently, IBM’s acquisitions of Coremetrics, Lombardi Software (a former InterWest investment) and now Kenexa have continued that strategy.

Yet, how many people responsible for those innovations and innovative companies – the founders, senior executives and/or employees of the acquired companies – have chosen to stay long term with IBM and become key IBM innovators and executives? How many senior executives from these acquired companies are now senior IBM executives in any area: Engineering? Marketing? Sales? Service? Support?

In my discussions with various IBM managers, it is my understanding about 1.5% of the company’s 400,000+ employees are considered “executives”. About .5% are VPs. IBM VPs who come from acquired companies represent a very small fraction of this percentage.

As Apple has demonstrated, the ability to continuously innovate is a critical success factor to support the longevity and relevance of technology companies. Yet, in IBM’s case, how many innovations have resulted from an acquired company’s staff after the acquisition? I don’t have the specific data but I do not believe it has been many.

A recent comment from an executive whose company was acquired by IBM:

“It takes many, many years to be promoted.  Acquisition executives have either no chance or no interest.  The lifers will continue to lead.”

When I have interviewed “IBMers” for positions in my portfolio companies, many have struggled with identifying their personal accomplishments within IBM and what changes and innovations they have developed and/or drove.

IBM’s culture to seemingly promote via tenure v.personal innovation and performance, in my opinion, is a culture more closely associated with academia, governments and unions, not innovative and successful technology leaders.

Recruiting

What percentage of today’s top computer science and engineering graduates from the best computer science schools go to work for IBM? Which of these students are familiar with and use IBM products? If they do initially go to work for IBM, how many of them stay for a career?

I invest in start-ups and relatively small private companies.  So, I may have a biased perspective but I believe these are the companies where today’s top college business and technical graduates want to work. Even in today’s fragile economy, gone are the days when young people are looking for a company where they can work for 30 years and retire.

Graduates from MIT, Carnegie Mellon, IIT, Caltech, Harvard, Stanford, etc. want to work in innovative companies such as Box.net, CornerStone OnDemand, FaceBook, Google, MobileIron, Salesforce.com, Twitter, and many other start ups and small but significant public companies where they can be involved in developing innovative new technologies and businesses across the entire IT spectrum.

None of the young people, in business or technology, I meet and work with every day use anything IBM produces, at least not directly.

Yet, they all know and use products and applications from companies such as Amazon/AWS, Apple, Box.net, Facebook, Google, Salesforce.com.

If they are technical, they rely upon open source solutions such as Cassandra, CloudDB, Hadoop, Ruby on Rails, and MySQL. Mention IBM brands/products like DB2, Cognos, Rational, Tivoli, etc. and they may have heard of them but they have never used them and have seldom seen them in use.

These people are the future technology/business leaders and decision-makers of the world. They, and others who work with and/or follow them, will shape the future of technology and how it is applied in the world.

My portfolio companies compete for talent against the most innovative companies on the planet. It is telling that to my knowledge we have never lost anyone we have wanted to recruit to IBM.

Brand and Account Control Erosion

IBM should also be concerned that the CIO and IT in general are experiencing diminishing control over the technology that employees use within the enterprise – with the exception of pure infrastructure, but even that strangle-hold is loosening.

New technology solutions – SaaS (Box.net, Marketo, Salesforce.com, etc.), Mobile (BYOD), etc. are eroding IT’s dominant control over employees and the technologies they use. IBM has always aligned with IT, not end users.

As the “consumerization” of IT continues, in my opinion, IBM might consider modifying its strategy such that it creates mindshare with the direct end user. Otherwise, its brand will have significantly less importance in the enterprise and the account control tactics it has used historically will fail to produce the desired results.

Today, I see no such strategy from IBM.

Innovation Through Acquisition

Most industry pundits who follow IBM would agree that the near-death experience IBM faced in the 90’s resulted directly from poor financial controls, an entitlement culture (e.g., pensions), betting too long on old technology (e.g., mainframes) and not betting enough on new technology (e.g., software).

The infamous business strategy originally put in place by Gerstner that primarily relied upon acquisitions for innovation – coupled with strong financial controls  - continued under Palmisano. And, if the recent announcement of Kenexa is any indicator, it appears to still be firmly in place under Rometty.

According to some IBM insiders I have spoken with, today IBM is “run by Finance.”  The issue with this is that a ruthless focus on financial controls encourages anti-innovation and anti-risk.

For that reason, IBM has focused on acquiring companies that have reached a certain revenue size and that, by definition, ignores innovative technologies that might be significantly disruptive to IBM competitors.

To be fair, IBM has occasionally acquired some very small companies, and has purchased companies just for technology.  But, those have been rare, and commercializing those acquisitions, even established companies, have been inconsistent in their results.

And, of course, all these acquisitions are put under leaders that are IBM “lifers”, not the actual creators or managers of these innovations and companies.

According to a current IBMer:

“The old guard don’t know what they’re buying and the acquired staff have learned to achieve in a different way, and on different things, than IBM management does.

As far as I have been able to see, supporting acquisitions to drive revenue and margin growth is the biggest contribution Palmisano made to IBM.

However, acquiring innovation seems to be, by far, the lesser of objectives.  The most important objective is acquiring current revenue and the basis for near-term revenue.  The second is to fill a hole in a product roadmap. It’s too bad, because thoughtful acquisition and integration could lead to much higher ROI.”

In the past, IBM has had a successful track record of introducing major new technology innovation through its investment in IBM Labs – I can personally think of the relational database, Ted Codd and DB2 as having a direct influence over my life, for example. Most recently, Watson came out of a significant effort inside IBM Labs to develop exciting new search, predictive analytics and voice recognition technology.

If IBM’s innovation strategy is to continue to experiment from within and acquire proven innovation from outside, that is both rational and reasonable. However, to make that work, the Company needs to retain the outside innovators who have significant expertise in areas likely to be outside the scope of existing IBM management. For example, people who have deep expertise with new business models, go-to-market techniques and business development.

If only the “IBM old guard” is making important decisions around development priorities, delivery models and go to market creativity, then the newly acquired company talent will have little impact upon those decisions. This will naturally sub-optimize the outcome of those acquisitions for IBM and may likely lead to the departure of the staff of the acquired companies as they become frustrated.

Execution

From my more than 30 years of experience, I believe that the data shows that the best technology companies execute the best. IBM’s current culture does not appear to reward execution – well, at least not the type of execution I am familiar with.

Here is a statement from an executive whose company was acquired by IBM:

“IBM senior management is great at making speeches: ‘We need to [some obvious goal]’ and therefore stated with the expectation that it’s someone else’s job to figure out specifically what to do.”

Other conversations with former senior executives from acquired companies lead me to believe that there is little motivation on the part of IBM development to make fundamental operational improvements to improve near-term development objectives for acquired companies.

Apparently, the same holds true for go-to-market teams.  According to my sources, these groups are focused on near-term results.  So, they do not invest sufficiently in sales enablement and technical enablement for newly acquired product lines.

IBM management makes a trade-off of using the same staff for either supporting knowledge transfer or supporting near-term transactions.  The heavy bias is always toward the latter. So, the near-term numbers will commonly be made by acquisitions, but longer-term, it’s much more challenging to sustain growth in new markets or with new channels (including IBM channels).

As such, IBM is focused on near-term execution with acquisitions, and does not appear to establish the basis for sustained value extraction from the acquisition.

Obviously, acquisitions have to pay for themselves, with a combination of taking advantage of IBM’s strengths and to reduce certain costs, but perhaps the time horizon needs to be a little longer.

In addition, the “I” for the ROI should include not only the initial price of the acquisition and some select retention agreements, but also, perhaps a near-term drop in revenue (due to a focus on sales training and channel recruitment) and some additional IBM legacy staff to be trained.

The data shows that IBM is good at retaining almost all acquired staff for a short while using strong financial incentives. This is very good for helping to make the near-term numbers. However, to sustain the revenue, the acquired staff should be motivated to stay longer-term, to continue to provide the foundation for revenue growth.

Suggested Reforms

So, now that I have been critical of IBM, I would be remiss if I didn’t offer several relatively straightforward suggestions to consider:

Hire and Retain Great Talent

Universities - I would consider developing and rolling out a program to recruit the best and brightest from the best schools with a combination internship/scholarship. I personally designed one between my portfolio companies and Caltech and would be glad to share it, if IBM is interested in a framework to consider.

Acquired Companies – Develop and roll out a program to retain the best and brightest from your acquisitions.  Give them multi-million dollar budgets to create products/solutions/businesses and have them report directly to the CEO each quarter on their accomplishments. The CEO could then mandate which of these will be commercialized and hold the GM accountable for delivering.

Reward Execution

From a number of conversations I have had with different IBM personnel, the following is the best proposal I heard to improve execution from within IBM.

“I would propose that she (Ginny) reorganize the company, fundamentally, into real business units that included development, support, sales, marketing and manufacturing (where applicable).

I would use that opportunity to reach into the acquired management pool to leap-frog them into positions of responsibility and accountability.

I’d modify the risk-reward system to provide big pots at the end of a successful rainbow with equity/cash, but on the other end of the spectrum, terminate employment for the GM’s who missed their objectives and not just move them to another make-work role to reward them for their years of continued service.”

IBM continues to score well on being a good place to work and makes headlines of being a well-led company.  Use that in your favor to recruit out of college and industry – direct and indirect through acquisitions – and give them the ability to innovate.

Recharge the IBM innovation engine.

When Ms. Rometty looks back several years from now, when she steps down, it would be great to see her leave behind a financially strong company recognized equally as well for its technology and business innovation.

By making these simple changes, I believe IBM can use its substantial resources to sustain its financial momentum to lead the technology industry for another 100 years.

I wish you much success.

Sincerely,

Bruce Cleveland

General Partner

InterWest Partners

Consequently, for brands and retailers, gaining access to consumers was relatively straightforward. All they had to do was to identify the demographics of the audience viewing content on these finite sources and pay the TV and/or radio network to deliver targeted messaging – ads – against that content.

Then, as well as now, quality content has been one of the biggest challenges facing TV and radio networks. Since inception, these networks have competed for content to ensure they had an appropriate target audience that advertisers would pay to access.

For those who don’t remember, in the 1940’s and 1950’s consumer product companies (e.g. P&G, Colgate-Palmolive, etc.) even sponsored content – soap operas – to secure viewers for their advertising.

Today, consumer brands and retailers have virtually unlimited access to consumers. In addition to traditional TV and radio network programming, they can use social media, email, Internet-based advertising, and other paid and earned media alternatives to easily access consumers – and relatively inexpensively.

And, with the advent of user-generated content, boutique studios, and inexpensive and relatively easy to use technology to create a high-fidelity experience, content itself is no longer in such short supply. Social media sites such as Facebook, Pinterest and YouTube, for example, generate tremendous DAU (Daily Active Usage/Users) rates which rival and/or exceed the best reach, frequency and impression scores that TV or radio networks have to offer.

Now, with so much available content and universal access, the battle for viewers has turned from access and content to “attention”.  Add to this “time-shifted viewing” (DVR), where viewers can skip ‘boring’ advertising, the stakes have been raised even higher for brands and retailers that want to capture the attention of consumers and engage with them.

Brands and retailers face a complex set of issues in that they must now be able to accurately determine:

1. Which viewers are interested in which particular content?
2. When are viewers actually engaged with content so they can deliver a message regarding a product or service.
3. How to keep the viewers’ attention when a message is delivered.

Consequently, InterWest has invested in several start ups that are helping companies to address these issues: Brand.net, Get Satisfaction INVIDI, and Spredfast.

Brand.net – allows a brand or retailer to use online targeting technology to selectively determine which ad to deliver on which website at which particular time. This is critical to brands and retailers that want to control an integrated marketing campaign across TV, Print, Radio and Online.

Get Satisfaction – which powers more than 65,000 communities such as Intuit, Microsoft, P&G, Walmart, and many others to help convert initial brand awareness into direct customer engagement and revenue.

INVIDI – - enables television service providers to simultaneously deliver multiple and distinct commercial streams to different households or individual set-top boxes during a single commercial break. Simultaneously, INVIDI enables these providers to control reach, frequency and separation of the commercials.

Spredfast - allows companies to measure the impact of networks like Facebook, Twitter, LinkedIn, Blogs and YouTube and to coordinate activities across multiple teams and business locations.

In addition to the importance of identifying who and when, brands and retailers are learning that if they are fortunate enough to actually capture the initial attention of a prospective customer they need to keep that attention. People have so many options to interactively tune in and out that simply capturing someone’s attention is no longer sufficient.

As a result, the nature of the content of advertising has changed radically over the past decade. Today, in order for ads to be effective, they must also be a form of entertainment.

The NFL SuperBowl has become the singular event where new ads, designed to entertain, are rolled out.  In fact, the ads have become one of the highlights of the SuperBowl.Brands such as Apple, Budweiser, Doritos, E*Trade, Go Daddy, and Old Spice – to name just a few – are hilarious and entertaining and therefore memorable.

Even B2B companies have resorted to consumer tactics to capture attention and drive engagement with their brands. The Computer Associates’ national ad campaign featuring a persistent software salesman – “So…how much software do you want to buy?” – comes to mind.

In fact, at InterWest Partners we recently redid our website and included an animated whiteboard video  (click on “Why InterWest?). Rather than the typical way most venture firms describe themselves, we elected to use this media format to engage entrepreneurs and quickly tell our story in a unique, light-hearted way.

One of my partners is Keval Desai. Keval was formerly a product executive at Google and has postulated, and I believe he is spot on, that the need to know – in real-time – precisely who is engaged and their demographics will allow technology to dramatically transform Madison Avenue just as Wall Street was transformed through the application of technology decades ago.

This transformation won’t be a cure for consumer ADD but it may drive it into remission.

The purpose of the article was to point out that every decade or so a new computing platform emerges. Market leading incumbents typically have the most to lose when these shifts occur and typically have the most difficult time making the transition due to legacy architectures and revenue streams dependent upon preserving the status quo.

Apparently, the article seemed to generate a good amount of controversy – for and against. However, my major points were lost on some as they focused on an erroneous statement I made in the article. The problematic sentence was,

 ”The recently announced Salesforce Touch application development environment doesn’t support native iOS or Droid – it is HTML5.”

As many pointed out to me – some politely, others not as much – this isn’t true. Unfortunately, I didn’t catch this error until today after I finished reading several responses that were in reply to the article. The sentence should have read,

“The recently announced Salesforce Touch is HTML5, it is not native iOS or Droid unless you code your own application using their toolkit.”

I don’t know why I didn’t catch this in the editing process but I have since gone back and apologized “mea culpa” in the TechCrunch article to those who pointed it out. My sincere apologies to Salesforce and others who I offended.

So, as you can probably tell I stand by the central theme of the article.

I believe mobile computing is a major architectural shift and Salesforce’s Force.com platform is not optimized for offline (mobile). To their credit, Salesforce does have some mobile solutions – several in fact – but there are issues associated with each of them. And, the fact there are several solutions helps to make my case. If I am a Salesforce customer/user, which route do I choose? Will all the functionality I need be available irrespective of which direction I take?

And, for a company that has touted since its inception”No Software”, try reading the Touch Platform Guide -  seems like a lot of coding is required if you want to create a Touch application with the full-functioned features of CRM you may need.

So, loyal readers, my question remains: Does this represent an opportunity for a new CRM company to emerge that is entirely mobile first? I would be interested in your comments.

To my FB Friends:

With the upcoming election, I realize many here feel compelled to state their POV from either side of the political spectrum. I have read many of these posts over the past several months.

Just realize, that some – many? – of the people who you are sharing your POV with, may not agree with you. In fact, some may be vehemently opposed to your opinions — and no, they aren’t idiots for having an opposing POV. As a result, these comments can come across as personally insensitive, offensive, etc. – because at the root level, you are attacking someone’s – supposedly your friend’s – core beliefs/values.

No matter what any of us say here or which articles we share to support our POV, we are not going to convince someone to switch parties, change our beliefs, etc. I try to be respectful of other people’s opinions – even if I don’t always agree with them. Sometimes I fail – and my kids are always quick to point out when I do. But, I have always tried to live by the following: I don’t expect others to believe what I believe in and I don’t ask others to pay for or support what I believe in.

This philosophy has tended to work out pretty well.

No matter which way the election turns out, hopefully, this approach will allow us to remain FB friends.

I don’t know if you, too, are growing weary of the missives being thrown from both sides but based upon the informal feedback I’m getting a lot of FB users are hiding a lot of their supposed friends – at least during the election run up - just to rate limit the rants.

I will probably join them if it continues. Sheesh.

End of rant.

That said, The CMO completed a survey in February 2012 and found “…that marketers continue to increase spend on social media. In the next 5 years, marketers expect to spend 19.5% of their budgets on social media, almost three times more than the current level! Within a year, marketers expect to spend 10.8% of their budgets on social media.”

Unless the results change, however, marketers are going to lose interest in this “shiny new toy” and eventually drop or at least significantly reduce their investments in social media.

That would be a mistake.

The problem doesn’t lie with FB et al per se. The underlying problem, in my opinion, and what has recently been corroborated by research is that your social media strategy needs to include authentic customer engagement and not be viewed and used as yet another one-way digital advertising channel.

To help make this case, one of my portfolio investments, Get Satisfaction!, will hold an event on Thursday, July 26th to unveil recently completed research in this area.

For context, Get Sat powers more than 65,000 external communities around the world (e.g. brands like P&G, Walmart, etc) and enables those companies to capture consumer comments as well as answer support and other product/service questions. Companies can embed Get Sat widgets in their website, FB pages, mobile apps, etc – anywhere customers are likely to engage with a brand – and these widgets directly stream this feedback data into a CRM or support system. Companies typically Get Sat to off load their support organizations because knowledgeable users often can answer questions that other users might have faster and better than the company’s own support team.

Get Sat sits right in the heart of the social media tsunami so it’s important for them to have a strong understanding of what is going on in the market. As a result, they recently completed a large market surveyto help them prioritize their next feature list of product offerings.

What the study revealed is that there is a huge gap between how consumers want to engage with brands through social media and how companies are currently using social media. The data shows that the billions of dollars that brands are currently investing in social is virtually a complete waste unless companies also invest in creating a moderated, branded customer community that enables actual customer engagement as an integral part of their social strategy.

While self-serving, Get Sat did not set out to prove this hypothesis, it just came out as a part of a much broader study.

I thought the data would be intriguing to many companies so I encouraged the company to share the results publically.

So, next week, on July 26, 2012, Get Satisfaction and us (InterWest Partners) will share the study and the data. The study was conducted by The Incyte Group – I used them at Siebel Systems to help us identify key markets and unique product/market offerings. Incyte surveyed thousands of U.S. consumers to understand their preferences when researching a brand’s products and services on the Internet.

Wendy Lea, the CEO of Get Satisfaction and Ray Wang, from the Software Insider, are going to host the event. And, some of the industry’s most forward-looking marketing executives will be there as well. It will take place at the Sofitel Hotel in Redwood Shores from 4:00 – 6:00 p.m. I encourage you to attend and see the data for yourself.

You can register here.

Dave makes two points. The first point is that most venture capitalists are hypocrites. They expect entrepreneurs to build large, global companies while they as venture capitalists have never personally held an operational role nor built and scaled a large, global successful company.

I think it is this issue that tends to cause a lot of friction between entrepreneurs and venture capitalists and it is this point I am going to focus on here.

Whether they admit it publically, most entrepreneurs look at vc’s as a necessary evil – the vc’s have the money entrepreneurs need to launch their business and in order to get it, entrepreneurs are obliged to put up with someone who is going to meddle with their business – or even take it away from them.

A classic example of how this “meddling” manifests itself is when the company is hiring its executive team. As part of this process, most venture capitalists want to meet with and interview the candidates – many of these same venture capitalists have never held an operational role or maybe they have held an operational role but they were only an individual contributor.

We vc’s expect the VPs of our portfolio companies to have years of experience and to demonstrate significant expertise in their field. Yet, we don’t apply the same criteria for ourselves. Do we really think we have learned enough about an executive operational position sitting in board meetings to actually “interview” candidates – as if we have the domain expertise to hold and perform their job?

Should we meet the candidates and sell them on why we invested in the company and why they should join? Yes, absolutely! Interview them for their operational expertise? Sorry, but for most of us, I would say we aren’t qualified and if we had any sense we would willingly turn that job over to other people who are experts in that role; people who we trust to do the interview on our behalf.

When I first decided to flip from the operating side to the investing side, I thought that my operating background would give me an advantage as an investor.

After all, I had run engineering, products, marketing, sales, alliances and finance functions in companies that ranged from pre revenue to $2B+. And, over the course of my operational career I had been an individual contributor, manager, director and senior executive working for some of the most successful entreprenuers and companies in Silicon Valley – Apple, Oracle and Siebel.

However, I have found that while my prior operational  experience has been useful at various times and some entrepreneurs have even “valued” my input, I have also made the mistake of making some of our best portfolio CEOs angry with me by “offering” unwanted, unwelcome and/or irrelevant advice – what I have come to call practicing ”drive by” management.

If a venture capitalist is to be of much operational value to an entrepreneur, I think we should have personally held or managed a variety of different operating roles – engineering, products, marketing, sales – in a variety of different stage companies. We need to have been an individual contributor, a manager and a senior executive to really understand what it took to make those companies successful.

Each phase/stage of a company requires a different set of skills.

If the only operational roles we have held were in large established companies, we have no personal experience with what those companies faced when there were only a few people in them. If we were an individual contributor inside a start up that became a big success, we may not have been privy to many of the issues the senior executive team faced in the early days.

If we have years of experience on the operating side in a variety of roles, we need to be willing to adapt and throw everything we know out the window because the things we experienced “way back then” are different than the things that are going on now (e.g. social media, mobile, etc.). Different time and different place. We have to be open to and want to continuously learn.

Finally, even if you have all of these “requisite” operational skills and background, the one thing I have found consistent across start ups is that the best teams really don’t want your operational advice – or at least they only want it when they ask for it — not when you may think they need it. They have their own point of view on what needs to get done and, quite frankly, they are in a much better position than their investors to understand the issues in front of them.

I personally know many venture capitalists who have made fantastic investments in superb entrepreneurs yet have never held an operational role. And, the fact they haven’t held operational positions doesn’t mean they aren’t highly sought after by enterpreneurs.

These investors have built great “personal brands” due to their uncanny ability to spot companies and teams that become winners- if an entrepreneur can can get them to invest in their company it carries social status among their peers. Everyone wants to be associated with great brands, personal or otherwise. Not all the great investors may have operational expertise but they seem to find a way to identify those who do – or can learn – and they then apply a light touch when it comes to the actual management of the company.

I agree with Dave McClure, as an industry, the venture capital community should strive to do better. I think we should have more investors who started out on the operational side and built large, global and successful companies — at least we will then have the credibility and experience to provide guidance – when asked.

However, once we’ve made an investment, I have come to learn that it is important we are prepared to get out of the way and let the team we bet on call the shots – this has been one of the more difficult elements of my transformation. After all, great operational executives lead…they don’t follow…at least not for long.

I think I meet Dave’s test for operational expertise but even with all that background, I know I am definitely still learning how to be a good venture capitalist.

The premise behind MyLikes is simple: we are more likely to trust the recommendations of our friends, colleagues and advisors more than we trust consumer ads and the opinions of people we don’t know (with the exception of Hollywood celebrities and sports stars because, of course, we all know they are completely believable, role models for our children and extremely well educated – sarcasm intended).

Here is some data that supports this thesis (source: Lies, Damned Lies and Statistics):

1.  83% of consumers globally are likely to visit a website are likely to visit a website recommended by a friend on Facebook, and more than half say comments posted on retailers’ Facebook and Twitter pages, whether positive or negative, also influence their opinions (2011 Global Consumer Shopping Habits Survey – Channel Advisor)
2. Consumer opinions posted online (70%) are more trusted than information on TV (62%), newspapers (61%) and online banner ads (33%) (Nielsen)
3. In Europe over 50 percent of respondents aged 16 – 64 with access to the Internet, use social networks to assist with shopping decisions and of those that would be likely to follow a retailer on a social network, 35 percent stated they use social media platforms to read reviews or rank products and services (IBM)
4. “Customers who engage with companies over social media spend 20 percent to 40 percent more money with those companies than other customers.” (Bain & Co)
5. A study in South Korea (a mature social media market) found that social impacts sales among moderate and heavy users.  Recommendations shared among moderate social media users increased brand sales by 5%.
6. However, heavy social media users also listen to negative chatter.  Brands talked about negatively experienced a 14% sales drop among this grow (Harvard Business School)
7. The heaviest Facebook users are also the biggest spenders online - the top 20% of users spend $67 per quarter, compared to $27 for non Facebook users (Comscore)
8. According to a Kantar Media study in the US, 35% of social media users say Twitter has influenced their purchasing decisions (Twitter links also result in more clicks than Facebook)
9. Even concentrating on smaller social networks can be commercially beneficial.  Radio Shack in the US found that customers checking into their stores on Foursquare spend 3.5x more than those that don’t
10. Super fans and advocates on your social channels are 50% more likely to create content that influences a purchase (ComBlu)
11. The picture is the same if you look at individual industries.   In the ‘quick serve industry’, consumers exposed to social media have a 7x greater likelihood of ‘higher spend’ (WPP / Ogilvy)
12. Meanwhile, 60% of consumers say they factor other travellers’ online reviews into their plans when booking a vacation / holiday (eyefortravel / Simpliflying)

What I like about the concept of MyLikes is they allow you – anyone – who has created a group of followers/friends through FB, Twitter, etc. to promote certain brands and content you trust to your personal community. In exchange, you get paid for making these promotions. Since it is easy to see what is “sponsored” content you aren’t duping your family, friends, colleagues and they, hopefully, see interesting content and/or products they might have missed if you didn’t share it with them.

I feel this has a beneficial effect for advertisers/brands in that there is typically implied trust between people who know each other; it is not likely we are going to spam each other and we are not likely to promote something we don’t believe in ourselves. I think it is this fact that makes the sponsored content received through this exchange that much more valuable to advertisers/brands.

To learn more, I wanted to try MyLikes for myself  - just to better understand how the process worked. It was a breeze to set up my MyLikes account and to link it to my PayPal account (you get paid when the sponsored content you send out via Twiiter/FB, etc. is clicked on so you need a place where MyLikes makes the payment.)

During the process, MyLikes asked me what types of conversations I typically engage in. In my case, it’s all about business issues and technology. But, if you are primarily interested in things like fashion, entertainment, celebrities, etc.  they can capture that.

Once I completed the sign up process, I was presented with a list of sponsored ads and the amount I would be paid if I sent them out to my network.

I realized that as I was going through the various sponsored ads, I immediately rejected anything I thought wasn’t relevant to the community of people I engage with.  For example, while interesting, I wasn’t about to send out the Sports Illustrated swim suit sponsored ad since this is inappropriate for my brand and for the professional community I interact with. For others, this content might be ok.

I did have a few things that I would suggest MyLikes consider changing over time:

• I would prefer that MyLikes only present me with content I would find highly relevant for my community. Right now, I need to scroll through a serialized list of sponsored ads that aren’t limited just to the areas I would find relevant.
• I would like to see them add the ability for me to rate each ad as to whether or not they are relevant to my community and to use this to filter which ads I am presented with.
• Having to go to MyLikes and select sponsored content feels non-intuitive to me. Instead, I would prefer to find content anywhere that I want to post to my social networks and at the moment of posting be prompted if I want to make it a sponsored post and select the advertiser from a small list of sponsors with whom I trust or new ones who want to compete for access to my network.

The real power of MyLikes’ approach, I feel, is the fact I am self-policing. No one needs to tell me what is appropriate or inappropriate for the community of people I engage with. If I were 15 years old with a bunch of friends, my idea of what is and isn’t appropriate would be a lot different.

This self-policing fact means that the “value” of the content I selectively choose to share with my community should be a lot higher with advertisers than ads generated through the popular ad networks. In other words, CPM rates for MyLikes should be a lot higher because publishers of the sponsored ads are filtering the ads for relevance.

There are other start ups that have been built around a “digital word of mouth” premise (e.g. Zuberance, Amplifinity, etc.). They, however, are primarily focused on providing tools/services for the brands and/or their agencies  to manage their communities. MyLikes, on the other hand, is focused on disintermediating the brands/agencies and putting power into the hands of consumers to decide what brands and what messaging is important.

Just as traditional brokerage firms were disintermediated by new firms such as Schwab and eTrade, there may be an opportunity to disintermediate the traditional advertising firms with these new approaches. We are only in the beginning stages of this transformation. It will be interesting to see where this ends up.

In the meantime, I posted my first MyLikes sponsored ad today. Now, all I have to do is wait for the big bucks to roll in!

Each of these teams is passionate about the products they are creating. However, many, in my personal opinion, share something in common that may prevent them from growing their companies as fast as they might otherwise.

Most are so intent on building their products for and then marketing/selling to daily practitioners they forget about creating a version of the product or a set of features in the product for the people who aren’t likely to use the product very often, or at all; the people who must approve the expenditure.

These are typically the CEOs, CFOs, CIOs and/or other senior executives.

This group may not necessarily appreciate the specific product features required by the personnel who will use the application/product on a regular basis but I believe it is critical to ensure that the product contain features that are directly applicable to them.

Without such features, it makes the initial sales process more difficult than it needs to be and – in the case of recurring/subscription business models – it puts the yearly decision for the company to continue to use the application and sign the contract up for unnecessary scrutiny.

Most of the people who sit in these approval roles are measured by and interested in key operational results of the business. Consequently, I believe there are 3 features every business application should contain:

• The ability for key executives- or their staff – to set thresholds within your application that they consider to be KPIs (key performance indicators) and to have the application automatically notify them via email when those thresholds are met/unmet and the reasons why.
• The ability to deliver graphs/charts that can be easily configured to identify and highlight critical elements of the business that your application helps operationalize.
• Usage reports that can be delivered periodically that  include user login statistics along with key operational results.

You want your application to touch key senior executives on a regular basis. That way, they are reminded about your company regularly (increasing your brand presence and importance) and realize that your application is providing their company with value. Without these fundamental application elements, you are in fact leaving it up to the skills of your daily practitioners to convey the value of the application(s) up the management chain.

While many may be quite good at doing this, others may not be quite as adept. As a result, in the case of software companies that use recurring revenue models, you are putting your annual contract renewal in the hands of lower-level personnel.

If you want supporting evidence of what I’m talking about, pick any start up and go to their website. While you are there, I am confident you will see comprehensive product feature overviews and use cases, etc. for daily practitioners. However, seldom will you find any discussion regarding product features for senior executives and/or material for the daily practitioner to “sell” their upper management on why they need your application.

So, if you build business application software, I would encourage you to look critically at your product and your website and ask yourself if you are really addressing everyone from the lower level practitioner who may need to use your product daily to the senior executive who may never use your products directly.

With a few relatively simple changes, you might help to accelerate your company’s revenue growth and decrease your churn rates.

We are shamelessly proud to have been the first investors in Marketo when Phil and his team had nothing more than a vision and a powerpoint presentation.  Today, with more than 1500 customers in the US and Europe, Marketo has done a great job helping companies to transform the role of marketing.

Ok…enough of the Marketo plugging and to the topic I really wanted to write about.

When I showed up, I expected the typical hotel-based seminar with 50+ attendees and a couple hour sales pitch on Marketo. You know, a dull powerpoint on the company and the requisite product demo. Instead, I found something radically different.

First, instead of 50 people, there were about 500 people crammed into a standing room only conference room. And, instead of a 2 hour sales pitch, the company had broken the event into two parts – morning and afternoon.

In the morning, they held a customer-only event training customers on how to better use features of the Marketo application suite and to capture direct feedback for product marketing. In the afternoon, they invited prospects and customers to commingle and focused on customer use cases that exposed best practices and industry conversion metrics to everyone, making it feel far more like education and training than a sales event.

Most interesting to me, was that I was sitting next to a few customers who each had a laptop running. However, instead of checking their email and FB posts as I typically see at these events, they each had their own version of Marketo up and running and were learning how to better use the application and showing prospects what they were doing.

Of all the years I spent at Oracle, Siebel, etc. I never attended a single event where customers could actually run their own version of their software during an outside event – not even at our own User Group sessions.

The end of the event was capped off with a nice party-like, cocktail atmosphere where Marketo employees, partners, customers and prospects could all interact.

I thought that Marketo’s use of the time to combine training with sales in an education format – where customers could follow along with their own implementations was just outstanding. Customers, in effect, were selling prospects on behalf of Marketo – is there anything more powerful than that!

It was extremely effective — and something that could not be done prior to SaaS. Thanks Marc Benioff!

So, just when I thought that physical sales seminars might be going the way of the dinosaur, the duck-billed platypus and the pet rock, I think the way Marketo delivered the Revenue Rockstar event might be a fork in the evolutionary path that keeps physical seminars relevant and alive.