A great deal has been written about Groupon’s rejection of a supposed $6 billion offer from Google.  Most of the reports breathlessly describe the explosive revenue and customer growth the company has achieved in two short years and what a breakthrough the model represents (an example can be found in John Battelle's hagiographic blog post).  With over 40 million email subscribers, Groupon’s success is based on consumers responding to their daily deal emails, and sourcing high-quality offers that compel readers to respond. The story CEO and founder Andrew Mason told in his interview with Charlie Rose last week was that when they offered helicopter flying lessons in one of their daily email blasts, they sold 2,500 in one day. This compares to a business that had acquired only 5,000 customers in its 25 year history.

But haven’t we seen this movie before in the world of direct marketing? History has shown nearly every major new direct marketing paradigm sees impressive initial response rates, but depressing response rates over time. For example, when display advertising was innovative in the late-1990s (imagine websites without ads?), publishers saw click through rates in the 1-2% range, allowing advertisers to be charged a high cost per thousand impression (CPM) in the range of $35-40. Today, iMarketer and MediaMind report that display advertising click-through rates are 0.10 – 0.20% and CPMs of $2-3 – less than one tenth what they were ten years ago.  Email has shown a similar sharp decline over time. Average click through rates for the early years of email campaigns in the 1990s were as high as 30-40 percent. Today, they range from three to five percent, again, a 10x drop.

Groupon conversion rates, supposedly, are now in the three to four percent range. What will those same response rates to the same consumers look like in five years? Will daily deals follow a fundamentally different model than every other new direct marketing medium? The benefit of being only two years old is that you don’t have a lot of vintage data to analyze.

What has impressed me about e-commerce stalwarts like Amazon.com and Netflix is that they have stood the test of time and have grown ARPU (average revenue per user) over time.  Consumers continue to have an appetite for books and movies, year-in and year-out, and the volume of new content changes rapidly. In contrast, the merchants in my community and the ones I regularly do business with do not change all that rapidly.
 
That said, Groupon is building a huge consumer database, a massive set of merchant relationships and a super-talented management team. Just as Amazon and Netflix have innovated beyond their initial model, Groupon has the capacity to replicate these results. But if it the company is going to step into the multi-billion dollar winner’s circle, it will need to find a model that stands the test of time, and the reality of depressing response rates over time.

Frankly, I hope they figure it out. Now if you'll excuse me, I have to sneak in a trip to the local indoor skydiving place before the holidays…

One of my favorite business books of all time is Patrick Lencioni’s “Five Dysfunctions of a Team”.  Like all books by Lencioni, it begins with a short fable in a corporate setting of a management team that is operating totally dysfunctionally.  Then, he provides a framework that analyzes the situation and draws out the general lessons as to why teams operate poorly together, and how to systematically combat it.  The pyramid below summarizes his advice.



Each of the layers of the pyramid resonate with me (which is probably why I have this pyramid printed and hung up in my office), but the one that I always come back to and reread is “Fear of Conflict”.  Again and again, I see management teams and boards of directors shy away from conflict.

It is quite natural for humans to avoid conflict.  In fact, our deeply programmed “fight or flight” instincts are designed to protect ourselves and run away when we sense danger.  Interpersonal conflict is a danger we all prefer to avoid as it makes us uncomfortable.  Your stomach gets a little queasy, your heart beats a little faster, and you think, “How do I get out of this situation?”.  So, you tell a joke.  You change the topic.  And you feel a sense of relief.

When I see this happening in management teams and in board rooms, it makes me uncomfortable because I know where it leads.  It leads to mistrust, simmering issues, politics and dysfunctional behavior.  Here are a few techniques I've found help address this issue, particularly in start-ups.

1. Building Trust.  The foundation for handling conflict productively begins with building trust amongst the management team.  It's easy to say, but particularly hard to do in a start-up when people have been slammed together quickly and are so crazy busy, that it's hard to stop and take the time to understand each other more deeply.  One technique I have found very helpful here is to conduct a facilitated, day-long offsite where each management team member takes the Myers-Briggs test to help surface how each party thinks,  processes information and makes decisions.  I did this with my management team at Upromise and again when we were starting of at Flybridge and in each case found it helped us understand each other at a far deeper level.
2. Annual Reviews.  It's easy to be running so hard and so fast that CEOs and boards forget to conduct systematic reviews where a broad range of feedback is collected and tough development issues are addressed head on.  I try to do this at each of my boards and at Flybridge, the general partners conduct 360 degree reviews of each other.  Done correctly, these can be emotionally draining, difficult but very productive exercises where a safe forum for brutal honesty and constructive dialog can be developed.
3. Systematic Post Mortems.  In my early product management days, I learned the value of the post-mortem – the process of gathering all the relevant team members into the room to talk about what happened after a product ships and why errors or schedule issues occurred.  Extending the post-mortem process into all business activities can be very valuable.  It allows a clinical, unemotional examination of what has happened, how everyone operated under pressure, and what process improvements can be made for next time.  Whether it is done post product release, when an executive team member departs because things didn't  work out, after a board meeting in an executive session, or after an investment goes bad, an analytical examination of what just happened is a useful exercise that forces all parties to address difficult issues.
4. Go Direct.  At Flybridge, we have developed a mantra for addressing issues amongst the partnership:  "Go Direct".  When one of us has a concern about how another partner is handling a portfolio company situation or evaluating a deal opportunity, we don't allow indirect conversations.  If two partners find themselves talking about a third partner, we stop the conversation and bring in the third partner so that the issue can be addressed directly, out in the open  rather than it festering behind closed doors.  I learned this lesson as an executive team member at a start-up that was not good at going direct.  The VP of sales would come into my office and complain that he wasn't getting good support from the VP of marketing.  Ten minutes later, the VP of marketing would storm in and complain that the salesforce wasn't properly executing on our strategy.  The entire executive team avoided going direct because it was uncomfortable, so we had false harmony in our Monday staff meetings and deep divisions the rest of the week.

Conflict can be stressful, draining and uncomfortable.  Yet, it is incredibly natural, healthy part of life, particularly in a start-up.  And creating a culture that can handle conflict effectively clearly has a positive impact on performance, as recent research has shown (see i4cp study: "Leaders With Low Emotional Intelligence May Be Depressing Bottom Line").

If you want to avoid your start-up feeling like a Soap Opera, try out some of these techniques, and let me know if there are others you've employed as well.

There has been a great deal of attention paid to the efforts led by Warren Buffet and Bill Gates to their pledge to give awway at least half of their fotunres to philanthropy.  This so-called "Giving Pledge" has garnered the support of 58 billionares, each of whom has signed up publicly to the pledge.

I am no billionare and will never be one, but today's news that the Bush tax cuts for the wealthy will be approved by the Senate has got me thinking that perhaps it's time for a "Millionare's Pledge".  The form of this pledge might go as follows: 

I promise to give away to charity the incremental tax break I will receive from the extension of the Bush tax cuts.

Philanthropy is a central part of our family's life.  We try to be very supportive to a range of non-profits, including our synagogue, Facing History and Ourselves (teacher-training organization), Progressive Business Leaders Network (progressive policy), Endeavor (promoting global entrepreneurship) and many others.  I know of many other families like me who are philanthropically oriented and have very mixed feelings about the tax cut exension. 

The simple calculus, as I understand it, is to take 5% of your annual income (upper income tax rates would have gone back to 39.6%, up from 35%).  So if you make $200,000, that's $10,000 in incremental savings that you would direct to charity in 2011 and 2012 (and perhaps beyond!).  I know it's not nearly that simple with capital gains changes, estate changes, deductions, etc.  But let's keep it simple to make it easy for everyone. 

At this point, it doesn't matter whether you are for or against the extension of the tax cuts, the reality is that they will become law, so what should progressive, philanthropically-minded individuals do now that they have an unexpected windfall?

There are 371 billionares in the US, but 3 million millionares and 6 million taxpayers with income greater than $200,000.  Now that would be a movement.

Who's in?

My father-in-law, Michael Doctoroff, passed away last week of ALS.  It's been a sad series of days in the Bussgang household and we are just beginning to recover and transition back into the real world.  I am finding that when you lose a loved one, it's hard to make the switch back into our frenetic, exciting, optimistic start-up world.  But, we are doing our best and I thought a memorial blog post would be somewhat cathartic.

My father-in-law was a remarkable man.  He was the middle child in a household with three boys, surrounded on both sides by over-achieving Harvard graduates (one became a judge, the other a successful doctor – the dream of every Jewish mother!).  Yet, he charted his own path.  Although on paper he had a marvelous career (corporate executive, professor, author of a management book – pictured above), in truth he never found his true professional calling until 16 years ago, at the age of 60, when he founded Trainers Warehouse out of his basement.

Don't let anyone ever tell you that you are too old to be an entrepreneur, too old to take the risk of starting your own venture.  My father-in-law worked alone and didn't take salary for years and years, eventually building the company into a multi-million dollar leader in the corporate training supplies market.   He raised no outside money, located the office 5 minutes from his house and employed his daughter – now president of the company – and wife as well as tens of others.  Even while battling ALS, he came to work every day to design creative products for trainers to bring fun and fulfillment into the workplace. 

Despite his entrepreneurial success, his career did not define him.  His relationships with his family and friends are what made him most remarkable.  He had an amazing relationship over the course of a 50-year marriage with his wife.  Their love for each other through his battle with the disease has been inspiring to observe.  He had three lovely daughters (my wife being one of them!) who have happy marriages and functional families as well (coincidentally, each of the three daughters married a college classmate).  And he was able to foster great relationships with each of his three son-in-laws – finding special ways to connect with each of us, despite our diverse interests (an entrepreneur-turned-VC, a scientist and an author).  I think it is the mark of a great man (in this case, in partnership with a great woman) who can create such a functional set of relationships across their entire family. Fostering close friendships was also paramount to his existence.  No less than five people came up to me at the funeral to tell me he was their best friend in the world.

In his final months, my father-in-law taught me a lot about grace and courage.  ALS is a horrible disease, slowly weakening your body while your mind remains sharp.  He was funny, irreverent and attentive to those around him to the end.  I don't think I'll ever forget the night he came over our house for dinner, a week before his death, when he drew a bone on his handheld white board (he could no longer speak) and motioned to my dog to see if he could get him to chase after it.  At Thanksgiving, he had his three year old grand-nephew chasing his wheelchair around trying to beat him in tic-tac-toe.

I feel blessed to have had him in my life.

Yesterday, I analyzed the Massachusetts IPO ecosystem.  Today, I look at NY. 

Unlike MA’s robust public company ecosystem, where I counted 33 companies with greater than $1 billion in market capitalization, I was shocked to discover how very few public companies in the Innovation Economy that exist in the Big Apple.  If you restrict the geography to 30-45 minutes driving distance and part of the “scene” (which encourages mingling and productive talent and idea sharing), you have to eliminate CA, IBM and Priceline.  I think that only leaves you with the following companies that have greater than $1 billion in market capitalization:

• AOL ($2B)
• Intralinks ($1B)
• TakeTwo Interactive ($1B)

I’m sure I must be missing a few, but my informal survey of NY VCs, bankers and entrepreneurs didn’t yield any others.  There are a few smaller public companies, like Travelzoo ($660M) and Medidata ($470M), but even the sub-$1 billion market cap list is uninspiring. Given the digital transformation of media and advertising, some may argue that the big media companies and advertising agencies should be included here and certainly they play a very important part of the NY ecosystem, but in terms of pure technology companies with entrepreneurial DNA and technology roots, it’s disappointing to see how few are in NY. 

That said, when you analyze the pipeline of IPO candidates, you begin to see a very different picture.  Not only is it quite robust – there are roughly 30 companies with estimated market values of greater than $100 million – but arguably full of companies that feel more promising and explosive than the MA companies.  The chart below is lifted from the Business Insider list, but I also cross-checked with AlwaysOn, Inc’s various lists and input from local members of the entrepreneurial community.

As far as I know, none of these companies has yet registered to go public.  Everyday Health almost did, but then pulled out and raised a private round of financing instead.  Behind this list, there are tens of other strong NY-based start-ups with real revenue momentum (> $30m) and belong in the > $100 million market capitalization category.  Folks cite:

• 33Across
• Antenna Software
• BuddyMedia
• Clickable
• GLG
• LiquidNet
• MediaMath
• OLX
• Vostu
• Yext

The conclusion is that NY is missing, that robust public company ecosystem does not exist.  Unlike in MA, one doesn't see public company CEOs regularly mingling with their pre-IPO brethren at cocktail parties and industry gatherings.  If you fast forward two or three years, however, the NY-based IPO company pipeline appears quite promising – arguably more promising than MA’s – and bodes well if the investors and management teams have the courage to go all the way.  Then, the CEOs of these companies will need to heed the warning of many wise men and women before them who know that an IPO is not an exit, it’s a financing event.  The best is yet to come.

Bill Gurley’s excellent piece on Silicon Valley IPO Anxiety inspired me to take a companion look at the East Coast, particularly Massachusetts and New York, and evaluate the health of the local IPO economy and prospective pipeline.  Today, I'll cover Massachusetts; tomorrow, New York.

I first came across Bill when he was a Wall Street analyst and covered my company Open Market (IPO 1996).  I always admired his perspicacity, even if he didn’t like our stock all the time!  For purposes of this blog post, I am only focused on companies involving technology, whether software, Internet, health care or energy – which I’ll define as members of the Innovation Economy.  Note also that, for obvious reasons, I leave out any Flybridge Capital portfolio companies in my analysis.

Massachusetts

First, let’s look at my home state of Massachusetts.  By my count, there are 33 Innovation Economy companies with market capitalizations of greater than $1 billion (see chart below).  Some of these are important companies, leaders in their field, and full of great future prospects (EMC, Thermo, Genzyme, Akamai).  Others have seen slower growth, are a bit more tired, and may get gobbled up in the years ahead (Parametric, Novell, Progress).  A number of them are recent IPOs who are growing nicely and may become multi-billion dollar revenue companies in the years ahead (Acme Packet, VisaPrint, Athenahealth).  

Other recent IPOs, like Constant Contact ($720M), A123 ($960M), Insulet ($520M) and EnerNOC ($600M), are sub $1 billion in market cap, so not listed here, but are representative of a number of small market cap players in the community who have > $1 billion potential.  The headquarters of each company is within 30-45 minutes of each other, so the degree of talent concentration and social interaction is very high.  Further, acquisitions in the last 12 months such as Unica (IBM $480M), ATG (Oracle $1B), Netezza (IBM $1.7B), Phase Forward (IBM $685M) and Starent (Cisco $2.9B) show that there’s a vibrant M&A market for small cap technology companies in 2010 and will likely be a catalyst for talent to be recycled.

Yet, when you evaluate the pipeline of IPO candidates, the results in MA are less inspiring.  One interesting ranking comes from Business Insider’s list of the 100 most valuable private digital companies.  Although this is only one and skewed towards one industry sector, it contains only one company from MA in its ranks:  Brightcove.  In an informal survey of a number of Boston VCs and entrepreneurs, the same 10-15 names come up as IPO candidates in the next 2-3 years (the criteria I asked folks in my informal survey was to name companies growing fast, revenue runrate > $30m, profitable or converging on profitable and probably worth > $100M today).

They include (note – all estimates are my own judgment and highly disputable; for obvious reasons, I did not include any Flybridge Capital portfolio companies, so we are not investors in any of these):

• Brightcove ($50-60m)
• Carbonite ($60-70m)
• Communispace ($50-60m)
• CSN Stores ($300-400m)
• Endeca ($80-100m)
• Glasshouse ($90m) – registered for IPO  
• Globoforce ($80-100m)
• Hubspot ($25-30m)
• ITA ($150-200m) – Google acquiring for $700m
• Jumptap ($40-50m)
• Kayak ($150m) – registered for IPO
• Kiva Systems ($80-100m)
• Kronos ($700-800m)
• Litle & Co (>$100m)
• Name Media ($50-60m)
• Vertica ($25-30m)
• Zipcar ($130m) – registered for IPO

There are numerous divisions of public companies that historically resulted from acquisitions – like TripAdvisor/Expedia ($400-500m revenue), Shoebuy/IAC ($200-300m revenue) and Rue La La/GSI Commerce ($150-200m revenue) – but those are not included here as they’re not relevant to this analysis unless they get spun back out.

The conclusion?  There is a robust public company ecosystem in MA, which should serve as an inspiration and catalyst for other local private companies.  Strong public company talent is easily recycled at the most senior levels (see, for example, Akamai’s hiring of former Digitas CEO David Kenny as COO) and when you gather at networking events and see other CEOs who have taken their companies public, it is a wonderful inspiration.  

But, sadly, the private company ecosystem in MA is less inspiring, with only roughly a dozen private companies that could possibly be public companies in the next two to three years and only a half dozen with revenues of greater than $100m.

Tomorrow, I'll analyze the New York market, which yields a quite different picture by comparison.  

I met with a senior executive at a top 5 bank last week and he said something that has stuck with me all week.  When I asked him why he was interested in pursuing entrepreneurial activities after a nearly 20 year career at one firm, he replied, "I've decided the world is divided between attackers and defenders.  Over the last few years, I've grown tired of being a defender.  I want to be an attacker again."

This observation struck me because I heard it echoed by a senior executive at a top 5 media company who said nearly the exact same thing.  "Over the last 5 years, it's been clear that my job has turned into being a defender.  I want to be an attacker, instead."

There's something very profound about these statements.  First, it shows that the disruptive impact of the Internet and the Digital Age is still cascading throughout our economy.  The transformative power of technology is no longer merely impacting the narrow software industry, it is impacting huge swaths of our global GDP.  Second, there still remains unlocked, unrealized entrepreneurial energy embedded in our big companies.  

When mainstream senior executives are itching to abandon safe jobs for more challenging, dynamic environments, good things are bound to happen.  Ask yourself:  in your industry, are you an attacker or a defender?  And what will happen when thousands more talented people decide it's more fun, and rewarding, to be the former?