In this blog I look beyond the obvious and try to find out why people and companies do what they do - and what it means for the rest of us. 
There are 3 core “legs” a business must stand on to survive, and hopefully, thrive. They are Sales, Engineering, and Marketing. There are a ton of other important areas within a business, of course, but these stick out as keys to life or death, in my experience. Rarely does someone fail because of poor facilities management or toilet cleaning or even accounting. It just doesn’t happen anymore.
Engineering is critical – lest we have nothing to sell or market. Most technology companies start as engineering exercises and treat sales as secondary – and often treat marketing as evil. Engineering-dominant companies often have the problem of building a solution to a problem that doesn’t necessarily exist. More on this later.
Sales is critical – but startups often overinflate the value of revenue. Don’t mistake my comment – I love revenue. What I mean is that it is far more important early on to gain knowledge about the market versus revenue from it. Knowing why the customer buys or doesn’t has much more meaningful leverage points for the business in the future. Boards and VCs will shoot you for thinking like this, but they are part of the problem (more on this later as well). If the board isn’t loaded with idiots, they would rather have you figure out what happened last quarter so you can accelerate REAL revenue acquisition. No one will care that you missed your $1M target last quarter if you can hit $10M two quarters from now. Getting it right faster is much more valuable in the long run than hitting flawed numbers.
Marketing is perhaps the most misunderstood leg in the stool. It’s the most underinvested and as such tends to be a place where the mediocre reside. Marketers have done a poor job in enterprise technology by following instead of leading.
In order for the 3 legged stool to remain stable, all 3 legs have to be growing at the same relative rate. If one leg grows too fast, the stool will tip over. If one leg grows too slow, the result is the same.
Think about this: Engineering is a cost center. Sure, you need a product to sell to garner revenue, but that revenue is indirect – or not directly associated with Engineering. Sure, we praise the engineering team at our sales meeting for giving us great stuff to sell, but who are we kidding? The sales folks get the credit, the money, and the glory 99% of the time. No matter what you build, the way that you build it is treated as a cost center. Cost centers are the first to get squeezed when anything negative happens.
Sales gets the glory because revenue is the easiest means of judging our success. Rarely do we have brilliantly engineered products that sell themselves – outside of consumer markets, that is. In “enterprise” technology companies, things have to be sold. Only when you are a runaway success, or virtual monopoly, can you start “taking orders” instead of selling. Thus, like the president, sales gets too much credit for success and too much blame for failure. Since $$ is easy to metric, boards and VCs will always push it.
Marketing is nebulous in enterprise technology markets. It’s a cost center, but it doesn’t produce products. It can’t normally metric against $$$. All the problems, none of the glory. That’s why it’s been easy for CEOs to overlook marketing as an afterthought or for the VP of sales to treat marketing like second class citizens who “can’t sell,” and thus are banished. Those who can’t, teach, as it were.
The Facts of Business Life in Enterprise Technology:
- Engineering is a mandatory investment. We need something to sell. It would be great if it’s the best thing ever, but it’s not that important. What is important is that it solves a legitimate, ubiquitous problem that people will spend money to solve.
- Revenue is NOT the most important metric. Revenue matters a lot – but it’s not the most important.
- Valuation is the most important metric. Valuation is based on a set of enormously unscientific principles, emotion, and feeling. Revenue, if you have it, plays a role as ONE metric to be applied against the VALUATION MULTIPLIER.
What functional “leg” represents the biggest impact to valuation? Marketing. This is a fact.
Until you are an established public company placed into a “bucket” (that you can often never get out of regardless of its applicability), you have the opportunity to enhance your valuation multiplier. The way to do that is to increase the value of the multiplier. Duh. Your revenue is your revenue – your earnings your earnings. Those can go up or down, but neither will have the ability to dramatically increase valuation like the multiplier can.
$1M x a multiple of 10 = a value of $10M bucks.
$1M x a multiple of 100 = a value of $100M bucks.
Same revenue – much different valuations.
See where I’m going with this? CEOs focus on revenue too heavily early on because it’s what the board (and themselves) uses as the metric for success or failure. What they should focus on is valuation. Valuation has a lot more, well, value than just revenue.
EqualLogic was running at about $70M in sales, almost break-even when Dell paid $1.3B clams for them. Dell’s multiple on revenue is about .5. That means Dell sells $60B of stuff, and is valued by Wall St. at around $30B. For every dollar of revenue, Dell gets $.50 of valuation. If you use earnings instead of revenue, they are valued at around 20x. That means for every dollar of bottom line earnings, they get a multiplier of 20.
EqualLogic was valued at 200X revenue versus Dell at .5x revenue – or 400 X higher. Since EqualLogic had no earnings, their multiplier on that metric is infinite. Infinite versus 20.
At the end of the day, a dollar is a dollar and a Euro a Euro. How can one be worth so much more than the other? Marketing. Until you are captured and put into a box by the Wall St. analysts, you have limitless perception boundaries. It’s not what you are – it’s what people think you represent. It’s the opportunity for you to possibly do great things – not the things you actually do – that matters. Why was EqualLogic’s dollar so much more valuable? Marketing.
Data Domain sold to EMC for $2.4B for doing about $200M in revenue. 12X revenue was Data Domain’s value multiplier. EMC’s revenue multiplier is about 2.2x (4x larger than Dell’s). EMC’s earnings multiplier is 35x (2x Dell’s – a dollar really isn’t a dollar apparently). Data Domain’s earnings multiplier was in the stratosphere, because they didn’t have much.
Why was Data Domain so much more valuable for each dollar it brought to the party? Marketing.
Engineering is table stakes – it has to be there. Sales, I would argue, are equally table stakes. Marketing is the great variable. Marketing can jack a valuation much faster – and much higher – than any revenue number. Marketing can cover bad engineering. Marketing can drive sales – sales rarely drives marketing.
If you want more proof simply look at the low value exits that have occurred over the last decade. I contend that LeftHand had as good as, if not better, stuff than EqualLogic – but HP bought them for $350M or so. Why 1/4 when all else were on par? You guessed it – marketing. LH could have, and should have, positioned itself as a software company. They were addicted to REVENUE, however, and it cost them. They were under the absolutely incorrect illusion that they couldn’t go public without a bigger revenue number, and as such stayed firmly planted in the hell hole that is hardware. Do you think HP valued them higher for being in hardware? Of course not. They penalized them. LeftHand listened to their board and bankers – who still believe in the 1978 mantra of revenue as the only metric. They didn’t focus on optimizing valuation – even though it’s how they make a living – because that would have meant going against the common wisdom – and it cost them.
True low value exits tend to happen when there is perhaps great engineering, and absolutely no marketing. I made this point in my Israeli rant recently and it holds true here. Great products are meaningless unless the world values them. How many times do we need to see a company with $50M invested sell for $10M or less before we figure this out? The buyer saw value in the IP – but didn’t see any multiplier factor – a direct result of improper or non-existent marketing.
Final point – value isn’t transferable. As soon as Data Domain and EqualLogic were integrated, their value shrank down to the levels of their acquirer, making a dollar a dollar once again. Too many people forget that. The only acquisition that makes sense is done based on the valuation of the acquirer – not the acquiree. EMC did NOT become worth $2.4B more by buying Data Domain on day one – they were worth less. As Data Domain adds revenue and earnings to the EMC pile, that value is multiplied back.
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You are right about Marketing in the enterprise trending to follow. The very nature of enterprise purchasing and selling is conservative. There are very few early adopters buying six-figure or seven-figure storage installations these days, it seems, unless you redefine early adoption as new enhancements to existing technology strains, such as Ethernet, Fibre Channel, storage management and virtualization. The truth is that on this curve, Marketing tends to watch what works for consumer brands, and hope that in a few years, it may work for them as well. Enterprise has been slow to the Web, slow to E-commerce, social media, and there’s no question that some huge companies are still far away from having a high quality CRM solution that tracks orders, lead sources and accurately forecast revenue.
The two most difficult things to obtain from startups that are not public are typically the two things you mention: revenue and valuation. Valuation without revenue is easy, as you just guess! But as soon as you get some revenue, the 10x and 5x and 2.5x calculators come around, limiting what you can raise, and what the VCs can expect to get for their buck. Yet, as you know, ignoring revenue is bad, because revenue is what drives profit and loss, and all loss means … no more company. Revenue has to pay the bills, as VCs won’t come back forever.
Valuation is driven by industry benchmarks, but the emotional side as well. How big is the potential market? What is their momentum? Has this senior team succeeded before? Marketing can help drive early valuations much more than it can drive late stage company’s valuations, but no amount of marketing can solve for products that simply don’t work, or revenue that never shows up. That’s why all three pillars must work to get the successful business with an excellent valuation.
Fair take. I guess I’m advocating that people pay more attention at all levels to marketing as a means of driving valuation at EVERY turn – from doing a VC round to going public or being acquired. We tend to react instead of being proactive in optimizing value. For example, how many companies have you been involved in where the product is created by engineering – with or without product marketing input – only to fail simply because no one bothered to test (research) the assumptions? How many times does a product get released where the reason people bought it had nothing to do with what the creators envisioned? “It’s red” seems like an offensive reason to buy to an engineer – but who cares? All I’m saying is it would have been good to know that “make it red” should be number one on the list, and that we could save a year to get to market by not keeping “cold fusion” as part of the design spec. The same holds true after the fact – sales and marketing are rarely aligned, and it costs the company VALUE. I forget my point, but thanks all the same! Steve
You’ve heard the saying: “You either make something, or you sell it.” If you’re not in engineering or sales, the company does not see your value. Marketing has often been perceived as a strange mix of science and art, and suspected by both sales and engineering.
However, product marketing has ever been the watchdog that prevented engineering going wild with “I’m gonna put a cosmic ray detector feature in the product. Why? Because I can!” Marketing has to point out that no one is going to buy it because of the cosmic ray detector feature.
Equally, marketing keeps sales honest by helping them sell things that actually exist rather than the vapor that the customer has asked for and sales is ready to take an order for.
My good friend Frank Slootman of Data Domain fame had some nice color to add in an email he sent to me on the subject of valuation.
“It’s like buying stem cells. May not be much on paper but they
can totally re-invigorate the larger organism.
Other than that, driving value means inflicting pain on an incumbent.
Their sales force has to be screaming bloody murder. People don’t pay
for gain, they pay for pain, making pain go away.”
And since Frank is the reigning champion of pain based value creation, I defer to his wisdom. Plus, he’s Dutch.
Steve, I more or less agree with your central point that marketing is vital and often misunderstood,and that in the early stages of a company its much more important to understand the value of a product than it is to ring the register. However, I would argue that your examples of DataDomain and Equallogic do not substantiate your thesis. If anything they point to a fourth leg on the stool which would be productization. Productization takes the core technology built by engineering and mixes it with the insights gained from market research and sales. The end result is a product that either defines a market or is superior to other products in its class.
These two companies, DD and EQL, owe their success first and foremost to great productization. I worked with these companies when they first came out of the gate and both differentiated themselves in their stickyness with the end users. Equallogic ultimately sold for more than LeftHand because the product was better. Both companies had world class salespeople and sales management. Both spent extensively and wisely on marketing. Equallogic was just a way, way better product than LeftHand.
Ditto for DataDomain. DataDomain continues to win sales against products that are faster, more scalable, and less expensive. Why? Because its a great product. BTW, DD did something really smart with the product which is that the product incorporated reports that helped the end user understand the lasting value of the product. In other words, DD sold itself back to you. Is that marketing genious, engineering genious, or productization genious?
I’ve certainly seen great technology companies fail because they fail to execute on sales and marketing, but seldom do I see startups with cruddy technology making it big. More commonly I see great engineering with poor productization going nowhere fast!
So, in short, I agree with you, but I think we have to recognize that companies like DataDomain and Equallogic started with visionary products, and all the marketing in the world could not created their valuations without starting with smashing products.
We do agree – completely. I categorize productization as a marketing function. Being able to craft positioning that is interesting, necessary, and compelling out of your technology via knowledge gained in use cases is perhaps the most important value multiplier. Thanks for calling it out. Steve.
For many companies “marketing” consists of marketing collateral creation, demand generation, advertising, tradeshows, web creation and other activities all designed to help the company get “closer” to the ideal customer and shorten the sales cycle. Who would argue that these are all good things that can elevate a company’s value?
With that said companies that really harness the value of marketing, use it early, often before the product is even designed. This may not be feasible for a very early stage start-up but in my opinion, for a company to really truly requires a very strong inbound marketing element. Inbound marketing helps, and is even responsible for defining the whole product, while partnering with the engineering. And the whole product definition appreciates the uses-cases for the product and takes into account all of the factors, including other infrastructure, be it software, hardware, and even the customer’s workflow. There needs to be an appreciation of how the product is going to be sold: the-route-to market. So many errors are made by companies designing great technology but not understanding the barriers between themselves and the end customer. Basic appreciation for the cost of acquiring a customer compared to a product’s worth often goes under appreciated and marketing budgets are blown. Another problem is engineers becoming so infatuated by the mechanism that they’ve created that they fail to appreciate outside factors that influence the mechanism’s value in the real world. I think that marketing has a key role in building this appreciation and selling it credibly to engineering. Not always easy, granted. But when those relationships are forged and the outbound muscle is there, great things can happen.
Engineers working with strong inbound people depend upon them to be that voice-of-the customer in describing uses-cases and describing and prioritizing features that can be appreciated and valued by the end customer. Clearly there can be analysis paralysis and market wins often go to the stealth and quick, companies who were “zigging” when everyone else was “zagging”. A strong CEO or GM with an appreciation for the clock, that has his or her team execute product strategy like a well coached professional sports franchise, knowing where one need to be with respect to the clock is vital. There is a time to lead with you mind and then a time to deliver with your heart.
One thing that ties this post together with your post concerning companies behaving like Ahab and chasing the great white whale is good old-fashioned segmentation. There’s a lot of hot topics and trends in terms of strategic marketing – but at the foundation of all of it lies rigorous and disciplined and yet creative market segmentation and the will and desire to pursue it.
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