Sonoma County: News and Notes

This is another reminder that on May 12th I am presenting at a Workshop for Small Business Week with the Santa Rosa Chamber of Commerce. My topic is “The Way to Wealth Formula” and I am paired with Cynthia Riggs who is presenting “The Fastest, Easiest Way to Write Your Business Plan”. There are other friend of mine presenting as well! George Merrick of Interface Financial Group is leading a panel Discussion on Alternative ways of funding a business. John McHugh of Winning Workforce is presenting :6 Things You Must Know to Hire and Keep Talent-Do you Know Them?” on Thursday May 15th. Follow this LINK to the main page describing all the Workshops! There is a cost benefit to signing up early!

As it is getting into earnings season, I will be starting my Sonoma County Tech earnings reviews with Calix. The numbers were down a bit again this quarter year over year. That marks the 2nd quarter in a row. The call was very non-descript and for a company of $300M+ the CEO opening remarks were the shortest that I can recall. I am going to review the call and then make a couple of general comments at the end. There were 3 themes on the Call:

– BroadBand Stimulus
– Ericsson and International
– Tier 1 Traction

On the BroadBand Stimulus (aka BBS), I think Calix announced for the first time some changes in the way this should be viewed. The idea of this Stimulus package was to encourage spending in rural America for Broadband Service. This has been a troubled program from a results standpoint since it has been announced. What Calix said was that the spending was not incremental but a substitute for original spending. What this means is that companies took the money and used it to fund programs that they were going to do anyway. I have been saying this for years. My bigger concern was that any uptick would just come out of future spending. You should think about spending in these areas like you would about spending on roads. Are you likely to build unnecessary roads just because someone will give you money? Are you more likely just to build and rebuild the roads that you know you need? The latter is what has happened. What will help this market is a return to building homes that need new connections. Given the low inventory in Real Estate that I talked about last week, it would seem to be a matter of time.

Calix made a deal with Ericsson a couple of years ago to buy Ericsson out of its troubled Access Business. The quid pro quo would be that Ericsson would use Calix as a partner and sell its Access Gear. This still might work out, but International was down in Q1 year over year. Since this deal was focussed first on International, it is somewhat troubling that growth has not happened. My view of this part of the business is different. Ericsson will act in its own best interest. There will be places that it makes sense for Ericsson to use Calix, but it certainly will not be a focus in most places. Access products are not high margin already and to have your Sales Team spend time selling someone else’s products in a high pressure sale makes little sense. Most selling in this market is costly as it takes a long time and dedicated people to cultivate a new customer. If the customer asks specifically about a product, you will pursue it. But spending Millions of Dollars to make someone else money is not going to happen.

On Tier 1 traction, nothing was said. That in itself speaks volumes. Remember companies need to announce “Material Events”. Signing a big contract with a large carrier would be a “Material Event”. A Material Event is one that is likely the financial results of a company in a meaningful way in the future. In Calix’s case, a contract that was worth $100M per year would definitely be a Material Event. What the Analyst is looking for instead is a wink and a nod that something is happening. But in reality, there is no way to signal such an event for Calix. I am sure they are talking to all the large carriers but things like this are binary events. They are either done or not done. Almost done is not done. The reason is that the competitors will have friends in the customer and things can slip away at the last moment.

Now that I have covered all of that, I want you to think about something. I know A LOT about the business that Calix is in. I see the dynamics of the business. I have friends who work there. I think I can make reasonable predictions about the future of the business, assuming no radical changes. But if you are an investor, how much do you know about the stocks you are investing in and the market the company participates in. How much do you think the analysts that you talk to know? Are you investing or are you gambling? I want folks to think seriously about that.

Have a great week!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

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Red Condor: Integration with St. Bernard and Sales Momentum

On August 1st 2010 Red Condor became part of St. Bernard Software. There was a significant integration effort for both sides given the size of the firms involved. At the time St. Bernard had around 100 Employees and Red Condor about 25. This was not the first integration for St. Bernard but the last significant one had been almost 10 years earlier.

Immediately the G&A functions were combined and the Red Condor folks stayed through a transition period. My only problem on that front was the loss of credit card purchases for the SaaS solution. We wanted to have a hand’s off approach to small deals. Customers could self-provision a trial and pay through PayPal. Given St. Bernards appliance background, this did not match with what they did. The problem was that it drove up our cost of sales for very small customers. It is also one of the challenges in integration. The business strategy work that is done generally looks at the market and customer synergy of products and services. The difference in billing was not considered an issue, but of course it was. SaaS products – especially for smaller businesses – often require a very low cost of sales. This is all a part of integration and people need to take more than a superficial look at all business processes when two companies combine.

We also dealt with integration in Customer Service and Network Operations. Let me start with Network Operations (NOC). NOC folks have a similar technical background as IT folks in a company like Red Condor. In fact, a secondary responsibility for the NOC team was IT support. Prior to the acquisition, I had look at outsourcing Desktop support and potentially a lot of other IT functions as part of the growth plan. The lack of funds stopped that, but I was hopeful that St. Bernard took that over. What really happened is that NOC and IT were combined. Suddenly, NOC was not Network Operations first but instead IT first. That meant customer programs suffered. Security Operations (SOC) was combined with St. Bernard Customer Service. For a long time they stayed separate, due to the 24/7 nature of SOC. The bigger challenge was the lack of understanding of SOC’s role in the performance of the service itself. SOC was responsible for updating the mail filters to catch new Spam Campaigns. Performance tracking, Training, and Tool Updates were all necessary to keep up with the work load. Again, it is all about the two teams and the business processes that they support.

The biggest issue with integration however was in Sales and Marketing. There was significant overlap in one area within Sales and that was Inside Sales to Small Business. Both companies used this technique to call potential customers as well as to close renewal business. Given that the combined company was selling (theoretically) to the same clientelle it made sense to combine the Sales Forces and streamline operations. The challenge here was different in that the Sales Teams had very different views on the state of the Products. The St. Bernard Team could already sell a product equivalent to Red Condor through a prior acquisition. However, they found that mail solutions were much harder for them to sell and generated lower commissions. So unless a prospect or a customer asked about the capability, the Sales Representatives never worked at it. This was missed during the combining of the Sales Teams and after a couple of months the Red Condor Sales Team was terminated to save money. Predictably – small busines sales of the Red Condor product abruptly stopped.

You can imagine that the consequences of these actions were not obvious to the people making the decisions. If there are to be changes at either the acquiring or acquired companies, these issues need to be thought through top to bottom. Ideally much of this would be done pre-acquisition, but the reality of all of this is that it is done post-acquisition. On top of that, there is normally a model of “Synergy Savings” built into the updated business plan before the acqusition. If this new plan is very aggressive in dropping people, processes are likely to fall through the cracks. This deep understanding of business processes is not found often in acquisitions and it is why many of them fail. I have sat in many a room where my new corporate owners ask “Why do you it that way?”. When they are answered, they don’t compare and contrast what might be good about the system. The answer is: “Well, we do it this way so change right now to our system.”

This is true even for companies in the same business. If you are part of either an acquirer or an acquiree, take your time to study the full system impact of change.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

 

Net Neutrality – “The Fast Lane”

The FCC has said that they want to allow content providers and ISPs create arrangements to allow for prefered delivery. Needless to say this has not gone down well in the Net Neutrality community. I have a somewhat different perspective on this and will explain here what the issue is and my view.

The Internet works on what is called a “Best Effort” basis. This means that there are no guarantees about how much bandwidth any connection gets or how long data will take to go across the Internet. There are many technical parameters are involved, but I want to compare it to Plain Old Telephone Service (also known as POTS). When you make a POTS call, you get a guaranteed end to end connection to the person that you are calling. In the wireline world, there were legal requirements for quality. The FCC could apply fines if the phone companies did not meet these quality standards. In the world of the Internet, there are no guarantees.

This Best Effort behavior has worked well for a very long time. It still works well. But there is a change in behavior with the user base and that has to do with video. Streaming video has taken over as the big bandwidth user on the Internet and Netflix is the biggest user of that. Unlike other services this has created a huge imbalance in traffic being sourced and that is against the way the Internet has been constructed. To deal with this, a landmark deal between Netflix and Comcast (actually the largest residential ISP in the US) to connect the two directly and Netflix is paying Comcast for that connection.

FCC Chairman Tom Wheeler said last week that he wants to support these kind of deals and other deals that allow for ISPs and Content Owners to create relationships to deliver content with better quality than Best Effort. The first thing is that Netflix is actually NOT a content owner (in general). Netflix is a content aggregator and provides a very nice way for people to watch video over the Internet. The content (outside of House of Cards) belongs to someone else. The reason I note this is that the Content Owners and the incumbent ISPs already have a relationship in a different domain. That is the domain of broadcast video. In that relationship, the cable companies, telcos and satellite companies pay the Content
Owners to be allowed to carry their content. This exists today and we don’t seem to have a problem with it – Well other than the price of the service and the quality of the content.

The Incumbent ISPs (as they all are also broadcast video providers at some level) want to flip that script and get paid to carry the content. I see no way that this happens. If you are Disney, there is no way that suddenly you are going to PAY to have someone watch ESPN. The real impact here is on Content Aggregators like Netflix. Depending on how the deals are cut, it looks like this will not be a big negative impact on Netflix. In fact, it may have little to no impact if it makes Netflix pay less money to Cogent (the network they use today). The other big aggregator that we are familar with is Youtube. I think that it will be hard for Google to want to pay for people to watch Youtube unless they decide to make
advertising even more intrusive.

The amount of traffic from a regular website is actually pretty small compared to the size of the pipes that are being provided today. So though people may think that this will be a challenge across the board, there is no reason to think that for now.

So, what does this mean to the average user? Probably nothing. You need to realize that there is a lot of change going on in this area. Companies of all kinds and Regulators at all levels are struggling to find the right way to proceed. A lot of the arguments that are made are hyperbole. They want to influence people to take a specific stand to help their organization thrive. But like anything the answer is probably somewhere in the middle. So listen with a skeptical ear and if you have questions on this topic please feel free to contact me. I know that some of my readers are also experts in this area and I encourage them to write on this and other topics. Feel free to comment here, create your own blog, or I will host
your posts as a guest.

Have a great day and back to business tomorrow!

Jim Sackman

FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Sonoma County: News and Notes

To start, I want to let everyone be aware of the upcoming of Small Business Week. This is a nationwide event set up by the Small Business Agency. The Santa Rosa Chamber of Commerce is having several events to coincide with this. There is a Business Expo on May 8th at the Wells Fargo Center from 4 – 7 PM. There is a Breakfast with Lieutenant Governor Gavin Newsom on May 13th from 7 – 9 AM. Finally, there are a series of workshops that are being done. I am presenting one on May 12th from 9:30 – 11AM. This is a joint session with Cyntha Riggs aka The Biz Diva of Women Building Business. Cynthia’s part of the session will be on a “One Page Business Plan”. My part is “The Way to Wealth Formula.” For more information about these events, contact the Santa Rosa Chamber of Commerce.

As we head into earnings season, I will be updating what I have seen out of Cyan, Calix and Enphase over the next few weeks. Today, I want to update folks on what I am hearing about the two trouble spots in the economy.

The first of these is Water. The good news is that over the first quarter we have had more rain. It looks like we will have some more later in the week. However, this is going to be a long term challenge for Sonoma County (and Napa County as well). The core growth businesses that we have are all water based: Vineyards, Wineries, Breweries, Distilleries and Food Manufacturers. My suggestion is that all businesses look into ways of saving water. Not only will reduction in water usage save money, but it will allow for headroom in our local economy. That is good for all of us. One resource available to all of us is Kevin Kumataka. He is the head of the Green Business Program at the Sonoma County Economic Development Board. He works to make businesses more green and can help point all of us in the right direction.

The second challenge is Real Estate. It is interesting to see how this year is going to play out. I am not concerned about Commercial Real Estate. That business seems to be continuing on quite nicely. I think our current issues are with residential real estate. The primary issue is inventory. Where are the home coming from that will get sold this year? How is the short inventory going to impact pricing? Will higher prices drive more people out of the market? All of this should keep everyone on their toes. There is not a lot of new single family home construction yet and so it is unclear how this will all evolve.

Well, have a great week. Hoping that the Warriors bounce back after being drubbed by the Clippers on Monday.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Red Condor: We get it sold

When I arrived at Red Condor, I knew it was troubled financially. Tim Flood had told me when we got started. I will cover why I joined at the end of this as it is a personal story, but I want to talk about what we had to do to keep things going in
the few months before the company got sold.

Tom Steding was the CEO and he was raising money to keep the company going. My second day on the job was a visit to a VC firm. The challenge was that the business case was no longer what a VC wanted to invest in. The market was
mature and prices were low for the products and services. The existing investors were not going to pony up any more money. So Tom restarted the process going after high net worth and private equity investors. But at that point we were in
the 2nd half of April.

Employees were completely informed of what was going on. Tom had a meeting every week called “Tea with Tom” that updated folks on the current state of the finances and business. This was both good and bad for me in my position. We
had some folks looking around for jobs that were more stable. But running a 24/7/365 service meant that we needed to have staff to cover all the time and we needed to hire when people left. Tim McAllister and I would review resumes for
new folks to cover the hours. Our first screen was that the person was unemployed. We concluded that we could not, in good concious, hire people away from stable jobs. I figured the worst thing that would happen to the unemployed is that
we would reset their unemployment clock. I worked with Dave Zimkowski on what bills we could pay. We would figure out who was likely to cut us off any pay them. We would repeat this on a weekly basis.

The time to raise money was growing short. By the end of May 2010, we were effectively bankrupt. With the end of the May payroll, we could no longer cover the PTO of all the employees if we closed the doors. This is a legal requirement
and it meant that the BoD would have to cover the costs out of their pockets. Luckily it never came to that. We were in negotiation as well with St. Bernard Software in San Diego to buy the company. The challenge was that the deal would not
close in time for us to cover payroll. Which led Dave Zimkowski and I to beg one of our investors to cover our June operating expenses. I feel very bad about this, because he got nothing for that money out of the eventual deal. But I could not
see any other path to get people paid. So if you worked for Red Condor during that time, you can thank Don Green for personally covering your paycheck.

It was clear that we did not have the runway to get any money raised, so we began to focus on getting the St. Bernard Software deal closed. We delayed paying the executives and worked on diligence. I had to buy access to Sharepoint
Online and pay for it out of my pocket to make a data room. We reached a tentative deal with St. Bernard as an asset purchase. That sucked for our shareholders but at least most folks would get to keep their jobs. Nobody was particularly happy, but we were desparate. We covered 1/2 the operating expenses in July out of Red Condor and St. Bernard covered the other 1/2 as part of the deal. On 8/1, the deal closed and St. Bernard took over.

So, we scratched and clawed and did what we had to. That kind of hand to hand combat with keeping things alive was a very different experience than what I had faced at AFC. There we sat on $1B or so in cash. What we could have given at Red Condor for even $1M. But seeing people who believed in us and the company so much that they stayed was a great thing. As for me, it was always intended to be a temporary thing. When I joined my wife wanted to move to Connecticut and I figured that the worst that could happen was that I would get a couple of months of pay while we figured out that move. It didn’t work out that way, but I found a group of people and a product that I really liked.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Red Condor: Why did it run out of Money?

So, I have talked about Red Condor for a week or two now. I joined the company in April of 2010. I knew it was in financial difficulty at the time I joined and we struggled to keep things afloat until the asset purchase at the start of August of 

2010.

The company raised over $15M. Where did the money go? Why did the company not do better? What can we learn from it?

If we go back in history, Red Condor was started by Jeff Aguilera, Brien Voorhees and Dave Brounstein in 2003. When the company began, Spam Filtering was just coming to prominence as a market. The Founding Team started the
company to provide a better solution for themselves and then began to work on it as a general solution that they could sell to others.

The company ran on a shoe string and the founders worked for free for a period of time. They went to Angel Investors to have enough money to get build the company through commercial launch. They then raised an A round investment in
2006 and another round in 2007. All of that money should have been enough to build an effective company. I have already posted that the product was good and that there was a number of customers. Of course that 3 year delay from
founding to significant funding created the first issue. Other companies raised money more quickly and had a market lead.

What this led to was a problem of focus. To grow the customer base quickly the management team attempted to come up with new plans to grow the company quickly. The problem was that this meant that the market target and customer
focus was all over the map. So instead of a laser beam, Red Condor became a shotgun. What this meant was that the money was spent quickly on many initiatives that led to not very much because there was not a lot of weight behind them.
The right way to build initiatives was to is to align all the resources required to make them work. Set a plan in place and measure success against the plan. Execute the plan for a reasonable amount of time before changing plans. You might
need to tweak things but starting and abandoning them is a waste. You can’t afford throw good money after bad, but it is important that you give a plan enough time to work.

In the end, by the time Red Condor found its mark it was too late. The Spam Filtering market had matured and prices had dropped. The value of companies in the market had declined the investors were no longer going to put money into the
firm to continue it.

What can we learn from this. If your company is having to rethink what it is doing on a periodic basis, there is a significant problem. The worst thing you can do is flail around. It is time to step back and see what you are doing and make sure
that you are being effective. You might need a new strategic plan but acting like an Executive with ADHD is not the solution.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis