Angel Mehta: Whenever I meet 'thought leaders', I get interested in how the person's business philosophies evolved. Walk me through the early years...how did you meet Geoff Moore? Were you always focused on technology...or rather, did you always expect it to be the focus of your career?
Tom Kippola: In the very beginning?…Well…Back when I was even pre-teen, I loved technology and what technology could do for people. I was the kid on the street that would look at a new technology and go show all the other kids on the street what it could do for them. So it was the fascination with the benefits of technology - not with the technology itself…that's sort of been a guiding principle throughout my entire life. It was the guiding principle in terms of the college I decided to go to, what I decided to study in college, what I decided to do after college. I started out in electrical engineering but did not finish that way. I finished with sort of a degree that I made up myself…which was an amalgamation of electrical engineering, business and psychology.
I spent a few years in the VAR channel, selling PC's and PC networks and then in the early 90's I ran marketing for a small expert system software company that was experiencing all the classic Chasm problems…so I was feeling them firsthand about the time the book "Crossing the Chasm" showed up on the market. That's when I fell in love with the book because I felt that the book had a lot of the framework that my company needed to think through our challenges.
Just to fast forward, I left that company started my own tech strategy consulting business - focused on software companies. Geoff Moore and I met later that year…that was 1993. He was speaking at an event…and he and I and four or five other people had dinner afterwards and Geoff and I found that we were finishing each other sentences. He proposed rolling my consulting business into what eventually became the Chasm Group. So that's the lineage.
Angel Mehta: Why did you not finish the Electrical Engineering degree? What was the interest in psychology?
Tom Kippola: What I found by my 3rd Year in Electrical Engineering is that every single class you take, whether it's a Calculus class by name or it's a circuits class…it's really a Calculus class. Semi-conductor theory classes are Calculus classes. Every class is a calculus class. I was more interested in the application of technology then I was in the bits and bytes of technology. So I branched off.
Angel Mehta: How significant was money in the equation?
Tom Kippola: Money was part of the equation, no doubt, but I think for me I always felt that I wanted a career that allowed me to become self-actualized and make a lot of money at the same time. I didn't want to settle for second best on either of those axes. I had friends in high school and college that became lawyers who felt they were going to make a lot of money, but weren't sure if they were going to love what they did. I had other friends who went off into the arts and knew they were going to love what they did but not necessarily make a lot of money. I wasn't going to sacrifice either. I wanted both.
Angel Mehta: At this point, you're well positioned as a 'thought leader' in the industry….so who were your mentors? Early on, who or what influenced the way you think about technology, business strategy, etc.?
Tom Kippola: My mentors were largely through books. My favourite book early on was Bill Davidow's "Marketing High Technology", which he wrote probably in 1986. Bill Davidow was the Senior Vice-President of Marketing at Intel…he was the guy responsible for coming up with the whole 'Crush' campaign that allowed Intel to beat out Motorola and Zylog and become the de facto standard microprocessor in the PC. So he was a great influence…through that book, I mean.
Angel Mehta: Let's talk about Voyager. You're known as a 'Venture Partner.' A lot of people don't know what a venture partner does because different firms come up with their own architecture. What exactly is your role?
Tom Kippola: You're totally right…the term 'venture partner' is used differently at different firms and it's even used differently within Voyager. At Voyager, we think of the venture capital process in two buckets. There are all the things that you do for the limited partners on one hand, and there's all the things you do for the portfolio companies on the other. We split up the portfolio company processes into 'finding, funding and feeding'. Finding new investment opportunities, determining whether to fund them and determining what terms to fund them on…and then there's 'feeding.' Once you've funded the company, it's rolling your sleeves up and sitting on the Board…helping the firm develop strategy, helping them recruit top executive talent, helping them get access to partners or customers.
I've been a venture partner at Voyager since Q2 2000, but when I started out I was spending all my time on the finding and feeding roles…but not in the funding piece. We have plenty of people in the firm that have come up through the finance ranks and are very good at that side. My expertise is more on the very front-end or the very back-end - not in the middle.
About 9-10 months ago, I went back to the partnership and said look, "We have a lot of people in the firm that can do 'finding' very well. My core expertise is helping build strategy for tech companies. This is a challenging time for tech start-ups. I think I ought to be out with the portfolio companies helping influence and advise them on strategy". So now I spend probably 75% of my time just working with the CEO's and VP's of Marketing of the portfolio companies with their strategy. So at least at Voyager, that's what a 'Venture Partner' does.
Angel Mehta: Have you ever had a case where there is a conflict between one of your clients at the Chasm Group, and a portfolio company of Voyager?
Tom Kippola: It's never happened…We firewall things here. I'm not going to consult with Company A while working with the venture fund to build competitor B. I'm not going to do that.
Angel Mehta: Out of curiosity, is differentiation still an issue for Voyager? Clearly it was in the bubble because there was so much competition for hot deals but now that there seem to be so many more deals chasing money?
Tom Kippola: Sure. I think there are a few different ways we compete. One, is we're a firm that is headquartered in Seattle with an office here in Silicon Valley. In Seattle, there are two or three firms that are headquartered on the ground and compete to be the Top Dog in town , so it's a small pond. There are certainly firms here in Silicon Valley that are getting on planes and flying up to Seattle to compete for deals up there, but in the end, a good entrepreneurial team will want at least one VC that's on the ground…
Angel Mehta: In their backyard.
Tom Kippola: In their backyard. So Voyager is positioned as certainly one of the premier if not the premier high-tech VC firm in Seattle.
Secondly, most of us come from operating backgrounds. Tony Audino came from Microsoft where he was Director of Marketing for DOS. Bill McAleer was the CFO with Aldus and Engineer of the Aldus and Adobe merger. So we've got guys that understand many of the 'roll your sleeves up' operational aspects of building companies.
Angel Mehta: I'm always interested in opinions as to what makes a better venture partner - coming up through a background in finance, technology or business strategy? Does it matter?
Tom Kippola: It depends on what the venture partner is ultimately going to do. There are some venture partners that have very narrow definitions and some may be so narrow that their role is a portion of the funding process. I haven't met anybody with that description yet but I could see where somebody might be a venture partner that's JUST focused on funding and financial issues. However, I think more often than not a venture partner is going to be focused more on the feeding activities and there are many; there's strategy, there's recruiting, there's sort of CTO CIO-type stuff so I think coming up the operating background from one of those skillsets; strategy/marketing or recruiting or IT or sales is probably the best route to come through because you've been there and you've done it and you can take that skillset and that pattern recognition and spread it across the portfolio.
Angel Mehta: Would you rather back a company in Seattle then in the Valley?
Tom Kippola: I don't know if you can really break it down that way.
Angel Mehta: The variables….
Tom Kippola: Exactly - there are so many of them.
Angel Mehta: Ok, so let me rephrase - is it an advantage…
Tom Kippola: To back a company in Seattle? I think there are advantages and disadvantages to both geographies. There was an article I read a year or two ago where it was alleged that Bill Gates contemplated whether he was going to headquarter Microsoft in Seattle or Silicon Valley and he chose Seattle because he felt that his workforce was going to be more loyal, whereas the workforce here in Silicon Valley is more likely to jump to the next new thing. So from that perspective, there is more of that transient workforce here and less of it up in Seattle.
Angel Mehta: Given what you see day in day out with Voyager's portfolio or even with the work you do at Chasm Group, would you say that you see software companies facing the same hurdles and making the same mistakes over and over? Could you characterize some of the problems you are seeing consistently, and how you coach the portfolio companies to deal with those issues?
Tom Kippola: Absolutely. And you're right, these problems are problems that I see across the board with small software companies. They're not unique either to the Voyager portfolio or my Chasm Group clients. Easily #1 is 'Lack of Focus', from two perspectives. First, when technology companies build a new offering, they tend to be very enthusiastic about the technology and the fact that the technology might have lots of applications for lots of different groups of people. The thing is, any one particular prospect is not enamored with the fact that there are lots of applications for lots of other companies. All they care about is WIIFM.
Angel Mehta: 'What's in it for ME?'
Tom Kippola: Right. I think one of the biggest challenges that young software companies have is determining who their initial target customers are going to be and then being able to translate the benefits of the technology for that particular customer profile, and then finally, building the entire strategy behind to support that. They need to make sure that there is a whole product solution that can deliver on the value proposition…make sure that there are partners and allies that snap into that whole product…make sure that the distribution channel and the pricing strategy are optimized for that particular customer. THAT'S the #1 challenge that I work on for Voyager's portfolio. Once you can figure out where to focus the company, a lot of the dominos fall with regards to the other components of strategy.
Another issue I see over and over again is that a lot of early stage technology companies assume that the optimum distribution and selling model is an indirect model. They may be right, but it might be five years away from where they are. They usually have to start out with a direct sales channel first, just to create enough momentum in the market and to control enough of the selling experience in order to get enough customers. You have to do that just to ATTRACT indirect distribution channels, not to mention making sure that there's enough demand out there from the ultimate prospects so that when the indirect channels walk into those prospects, the prospects do not have to be completely evangelized by the indirect channel. I've seen venture capitalists wash down tens of millions of dollars over the last year and a half based on that problem alone. In other words, a company tries to go indirect really early, they sell zero customers and waste 18 months only to have to retrench and formulate a direct sales strategy and spend a lot more money funding the company again.
Angel Mehta: It's odd because I have a really hard time absorbing that, only because it always seems to me that the concepts contained in the 'Chasm' and 'Tornado' books are common knowledge up and down the industry - particularly in the valley. But you seem to be saying that it's anything but. So what are the implications, then, from your perspective, for the chief sales executive?
Tom Kippola: Here's what I think happens, and this is something else that you and I have talked about before. When people come through a certain set of experiences - say, a VP of Sales who has been a VP of Sales for two companies in the past and was a Director of Sales in a third company before that. That person's experience set is a 3-company experience set.
Angel Mehta: Right.
Tom Kippola: Which will probably help them a lot if the fourth company they go in to has similar characteristics. However, if that VP of Sales candidate has spent his or her entire career selling post-Chasm technology products and they're suddenly thrust into a pre-Chasm company, their skillset is probably not that relevant because in a pre-Chasm company you have to evangelize a new category before you can actually get a customer to buy it. In a post-Chasm category there's already demand for the product category…prospects are CALLING the vendors and saying, "Come on in, show us why your product is better then your competitor's product. We're going to buy one of these three…show us why we should buy yours."
Angel Mehta: There's another common problem for portfolio companies that I wanted to ask you about, in terms of dealing with questions about viability. How would you coach an early stage company to deal with that? Could all the focused marketing in the world or all the correct messaging really overcome the objection of, 'are you going to be around in twelve months?' How does Voyager get involved in helping the portfolio companies to deal with that in various prospects?
Tom Kippola: I think there are two answers to that. One, is at the end of the day you need for your first 2 or 3 customers to be somebody that's willing to take on a lot of risk. They need to have that kind of risk assumption profile. Equally, if not more important, you need to find somebody who needs to get from Point A to Point B and potentially the only path for them to get from Point A through to Point B is with some new product from some new vendor. So it gets back to what we call the 'compelling reason to buy'. How COMPELLING is that reason to buy. Is it an urgent 'must have' compelling reason to buy?
Angel Mehta: Which is the crux of selecting a viable business plan, when you think about it. Still, so many would-be entrepreneurs, not to mention venture partners, are finding it hard to identify that one segment that is both underserved and has very clear pain. Do you see any segments that exist right now with those two qualities?
Tom Kippola: Yeah, I see tons of them. I'll give you an example. There's a company that we're invested in at Voyager that is a homeland security play. Imagine a local police officer that gets an APB that there is a terrorist suspect believed to be within their precinct. The way that APB goes out is either verbally through a radio, or it goes out through some kind of text. Well, if a description of a terrorist suspect is going out verbally or in text…I mean you could look at the text and say, male 6' tall, 35 years old, blah blah - but that's not enough information to be able to quickly figure out whether the person standing in front of you or the car that you just pulled over is the terrorist suspect. But: what if you could have a photo immediately right at your finger tips along with the description? That kind of benefit is something that local, State and Federal authorities are looking to have as part of homeland security.
So I think that's an example right there of something that's very compelling because the alternative to not catching that terrorist suspect might be that somebody dies…or a lot of people die.
Angel Mehta: Which means the consequences to that local law enforcement district are huge, just in terms of political consequences…
Tom Kippola: Exactly. It's like, 'We had the text description of the bad guy, we actually pulled him over, we were looking at his face, and said, 'Nah that's not the guy'. That's not acceptable.
Angel Mehta: Does that kind of mistake really happen?!
Tom Kippola: Yes. You'd be surprised.
Angel Mehta: Back to the point…you know I've heard from a lot of venture partners that the reason deals aren't getting done is because there's just a lack of compelling spaces….that every segment that could be automated already is…
Tom Kippola: I don't buy it. I don't buy it at all. Sure, there's a lot of technology out there…there is an abundance. But what I find rare is companies taking their technology and matching it to a benefit in the marketplace where there is an urgent and important reason for that prospect to solve some problems. There are plenty of opportunities for that, Angel…plenty.
Angel Mehta: That are not currently being served?
Tom Kippola: I would say there are technologies out there to serve those needs but the companies haven't….[pause]….
Angel Mehta: They haven't matched up yet.
Tom Kippola: They haven't matched up, no. They haven't translated the technology into solutions for those needs. You might have a category, for example, where there are 20 competitors but only one or two have figured out how to take their technology and aim it on helping local police forces catch bad guys through giving them pictures instantly.
Angel Mehta: So let's go back to the whole concept of mapping executive skills and competencies…this is a big part of what Sterling-Hoffman gets paid to do with every search, so it's interesting to me. What advice would you offer to other venture partners as to how to evaluate whether a CEO or entrepreneur's personal competency zone is correct for any given opportunity.
Tom Kippola: The way I think about it is to first simplify it. Break it down into post-Chasm versus pre-Chasm. Pre-Chasm, companies are essentially running an experiment. You're not scaling the business. The goal of crossing the Chasm is to essentially conclude the experiment with findings that suggest that a workable, replicable formula has been found that can be scaled. Once a company has found the secret formula, then it's a matter of bringing in executives that can scale the recipe. To use another metaphor, pre-Chasm is the search for the recipe, post-Chasm is to bake that recipe over and over again. That's not to say you're not going to have to find derivative recipes to go after other solutions and other markets - you will. But the biggest thing that small companies are trying to figure out is, quite frankly, a recipe for something that people are willing to eat.
Angel Mehta: and eat over and over again…
Tom Kippola: Right. Eat in quantity.
Angel Mehta: Let's take that concept to the CEO - how does he/she identify whether the team is appropriate? What are the warning signs that would indicate otherwise?
Tom Kippola: Pre-Chasm, you want executives that understand that it's an experiment. The team has to be a very strong learning organization so you need mindsets that are willing to run a structured experiment …or even run through some unstructured experimentation with the goal of eventually finding a recipe that works. It requires individuals who are willing to think out of the box, act out of the box, but do so in a somewhat structured way. I say somewhat 'structured' because you don't want a business that's completely unstructured otherwise it starts going off in way too many directions… too far too fast.
Angel Mehta: How do you achieve that balance though? It just seems to me like a near impossible challenge to do that without running out of money!
Tom Kippola: It's incredibly difficult, but I don't think it's impossible. As evidenced by companies who have succeeded. Now, you might come back to me and say, "Tom, look at how many companies have failed".
Angel Mehta: Tom, look at how many companies have failed! [Laughter]
Tom Kippola: Which suggests that it is tough, but that's the business Chasm Group is in or Voyager is in - to help companies be able to identify that recipe more efficiently so that they can get to a point where they can start scaling more quickly.
Angel Mehta: Okay. Here's something else I always wonder about authors. You've participated in writing a couple of books, 'The Gorilla Game', for example. It's been a few years, we've been through some challenges as an industry, clearly. So how have some of your perspectives changed since. If you could go back and revisit certain principles and republish them based on what you know now…
Tom Kippola: First of all, probably the #1 reason I wanted to participate in 'The Gorilla Game' is that I felt that the world needed a book that helped tech investors understand the linkage between certain competitive advantages that are available to tech firms and the ultimate stock price that those firms could enjoy if they were able to leverage that advantage over time. So being able to link advantages that are related to proprietary architectures, high-switching costs that create network effects…those elements manifest over time in an ever-increasing stock price. That said, I think that one of the things that we will do in Version # 3 (Version 2 was out in Q3 '99) is have a chapter on valuation. Right now, the book works if you take markets as a constant. Geopolitical or oil concerns or what I heard in a conference a few weeks ago - 'STINKO: Scandal, Terrorism, Iraq, North Korea and Oil.' Those have an impact on stock price and so readers or investors need some tools to help them understand not only gorilla game theory but whether or not a market is currently trading out of bounds in terms of historical valuations so that they can make some of those decisions, as well.
Angel Mehta: Any idea as to where all the tornadoes went?
Tom Kippola: [Laughing]…I think what's interesting about tornados is that often, they come from places that were not previously predicted because they sort of sweep through an industry where technology may have been purposed for one particular use and it gets repurposed into something else and all of a sudden it becomes a tornado. The Internet, as we know at least in this country, is originally a government network. Even if they were making it public, people felt and forecasters said, "This is going to be a research thing, researchers will use this". Of course, we know that's changed.
That said, I do believe that the whole wireless data movement has a lot of opportunities for tornados. This device that I'm holding right here (Shows a Blackberry), made by a Canadian company…
Angel Mehta: I know them well….RIM.
Tom Kippola: This 'Blackberry' is something that has become mission critical for me because it allows me to use little scraps of time that were previously wasted. Yesterday, I went to meet a client of mine at noon and the client didn't show up in the lobby until a quarter after. Normally I would sit there and fidget, pull some things out of my briefcase, maybe make one cell phone call but instead I was able to rattle off about eight e-mails. I am now able to use that time.
Angel Mehta: Let's talk about surprises. The way I see it, you've got exposure to not only Voyager's portfolio but also the intellectual capital of the Chasm Group - which to me indicates that you've got a tremendous knowledge base in terms of having seen patterns and common problems. So I'm really interested in the last time you remember feeling caught off guard, or the last time something surprised you. When was the last time that happened?
Tom Kippola: Hrmm….that's a good question. I think that one of the things that I'm most surprised about is, over the last 4 or 5 years, a lot of senior executives from large high-tech companies took Board seats with small companies and ended up treating them more as a luxury than a duty. They kind of wanted to just join a club for a little while…get a little stock…get a little pop when the company went public. They were along for the ride and they didn't really add a whole lot of value.
Angel Mehta: We see that all the time…
Tom Kippola: Yeah….whereas I think a Board seat is really a duty. When you sign up for a Board seat, you have to realize that you are one of the 5 or 6 or 7 representatives that sit around a table and speak for dozens or hundreds or thousands of employees who don't have a voice at that table, but are putting their life into that company. I think that some of these Board members with very strong pedigrees didn't treat it like a duty, didn't put the effort in, were sort of casual about it. I was surprised by that because I just think there's so much at stake in a small company, what with how much money is being raised from venture capitalists as well as the hopes and dreams of the entrepreneurs. I would have expected a larger number of these senior executives and ex-senior executives who sit on Boards to treat it more like a duty. That's been both surprising and disappointing to me.
Tom Kippola is a Venture Partner at Voyager capital, Managing Director at the Chasm Group, and co-author of 'The Gorilla Game'. He can be reached for feedback at: tkippola@chasmgroup.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm that focuses on VP Sales & VP Marketing searches exclusively for enterprise software companies. To send feedback to Angel, email: amehta@sterlinghoffman.net