Thursday, October 08, 2015

The importance of doing reference checks (2/2)

This is part two of Jenny's article about the importance of reference checks. If you haven't read the first part yet, start here.

Last time we spoke about WHY you should do reference checks and what impact a bad hire can have on your organization. In this second part I’d like to share my personal experience as well as some outcomes that have recently been discussed within the Point Nine family around the HOW.

General thoughts on the HOW:

  1. If you do reference checks, make sure they are one of the last steps of your recruitment process. Because if you do them right (I’ll explain further what that means) it will cost you time. You want to make sure that time is invested in the right candidate.
  2. The number of reference checks people do varies greatly between 1 to 15 checks per person. You want to find inconsistencies within the feedback you receive about the person. Depending on how senior the candidate is, ask for more references. A good start is 2 references for junior/entry roles that you want to increase to 3 to 5 references for middle management positions and 6 to 10 references for a senior leadership position.
  3. Make sure you have a mix of suggested references by the candidate as well some that you happen to know or you proactively approach to give you feedback. A good way to start is with the suggested ones. You can ask those guys who else they find you should talk to. Make sure you still top that up with your own research e.g. via LinkedIn or your personal network.

Now how to do them well?!

  • Have questions prepared. Make sure you know what to ask rather just go for the “So, tell me something about John” kind of question. Ask specific questions about the candidate. Remember, you want to find inconsistencies! Don’t be okay with foggy answers, worst case rephrase the question.
  • Try to establish a relationship with the reference you are talking to. Do a video call if possible and try to avoid written references. Take your 2-5 minutes small talk time at the beginning. Why? It’s much harder to lie into your face when I like you :)
  • Don’t only ask direct peers. It’s much more interesting to talk to people e.g. that got fired by that person (they are usually much more honest and open) or in general someone that has worked below him and got directly impacted by that person. A good mix of people above, around and below works quite well!
  • Obviously try to avoid asking someone at the current company the person works unless he got recommended by the candidate.
  • A good way to challenge the integrity upfront is to ask the following question once you’ve received the suggested references: “Would you mind If I talk to Peter, Fran and George as well”? Watch the reaction closely!
  • Always remember: You hire someone for his strengths not lack of weaknesses so tailor your questions about the strengths you are looking for and make sure that you weigh the feedback you receive according to what you really need. Example: Reference says: “Steve, in his role as Head of Sales, was too pushy in his general approach and sometimes went too fast for the Executive Team and the organization, so it was really hard to follow”. This is generally not the best feedback, but if your company is currently trying to attack a market, someone like Steve might be just the right fit for this period of time ;)

Here are some random questions that might be helpful for your day to day reference check. I usually use a mix of those and tailored ones to the specific candidate and role. Remember we’re trying to find inconsistencies, so use a good mix of questions for every reference check.

Some general questions that I find helpful:

  • What is your relationship with Peter like?
  • What was it like to work with Peter?
  • What was Peter’s management style like?
  • Can you describe a tough/very challenging moment Peter was in and how he has managed to get ouf it?
  • If you think about the time you and Peter have worked together, what’s the first memory that pops up your mind?
  • Would you say Peter is more a team player or does he excel more when he’s on his own? Can you give a specific example for it?
  • Would you describe Peter as a hands on person?
  • Do you regret that Peter has left your company? Why?
  • Should I hire Peter? Why?

There is plenty of reading out there with good stuff on that topic. One post that I can highly recommend is Mark Suster’s post “How to make better reference calls”.

What are your thoughts? What are your favorite questions that you use in reference calls to cut through the bullshit politeness?

Tuesday, October 06, 2015

The importance of doing reference checks (1(2)

This is a guest post by Jenny Buch, who recently joined us as a Talent Manager. It's the first in a series of two posts. The second one will appear here soon. 

To follow up on the recently posted interview with Netflix CEO Reed Hastings, I’d love to share my experience about reference checks with you.

So, many of you probably made the experience of hiring someone that you would have stated as “a really promising candidate” upfront. But after four months into the job it turns out that the hire was actually a total fail, that your staff is thinking you’re an idiot for bringing him on board (even if they don’t tell you) and that you now have to pay the debts by firing that person and start a whole new time consuming hiring process again to reduce the mess you’ve just done to your organization.

Well, even though things like these sometimes just happen and can have many reasons, there are ways to dramatically reduce the likelihood. One of them is to have a strong hiring process in place with its most important asset, you can guess it – reference checks!

Or, to say it with Christoph’s words “In God we trust, all others bring references”

Reference checks have been quite common in the US and most of the English speaking countries ever since but are still fairly new to many of the European countries. This is due to cultural differences and different common practice that was established in each country years ago. So why changing that good old practice and do references checks? Here is why:

There is only so much you can get out of a certificate, a CV or an interview. Your goal is to get to know your new “promising candidate” as best as you can within a short period of time to make sure you don’t mess things up! Today, and especially in the startup scene, there’s a different need for different skills than there was when “written references” were the way you did it. Here are some classics of the “must have skills” for any kind of candidate that can only really be proved by a good reference check:

  • Interpersonal skills: Interpersonal skills for any kind of role matter much more these days than they did in the past (or to state it correct: people are more aware of them, they’ve always mattered). The interview situation is not the best way to find out whether or not your candidate is actually a great fit since some candidates are extremely good at selling themselves during an interview.
  • Integrity: Today, an intern can become the CFO. Maybe the company sucks and he only became CFO because he went to the same university as one of the founders. As Ben Horowitz likes to say in his amazing book “The Hard Thing about Hard Things”. “There are two kinds of companies in this world. One where matters what you do and one where matters who you are. You can either be the first one or suck.” You want to make sure that his previous company was out of the first category and that besides his great university connections, he actually was the best candidate for the role and that’s why he got it - because he knows shit, works hard and is an awesome guy. I’m not saying that hiring from your university environment is bad, but it shouldn’t be the only reason for a hire - which it is sadly in many startups these days.
  • Right kind of ambition: You are looking for people with the right kind of ambition. So people that love your idea, bring a “get shit done mentality to work” and that thrive to make your company successful. As a side effect it will help them grow their career - not the other way around.
  • Right kind of person: You are not looking for “the Facebook Head of Sales” or the “CMO from Google”. Even though those guys do an amazing job at their current companies, every company is different and every time in every company is different. You need to find the right candidate for your company at this time. So one of your challenges is to make sure that your candidate has the right skillset for YOUR COMPANY.

I guess I don’t have to tell you how big the impact of a bad hire can be for your organisation. Simply do the math. Really do it! Sit down and calculate how much time and money it takes you to get rid of the wrong hire and find a new person and tell the people that you are sorry rather than using this time to talk to 5 people for 10 minutes upfront. If you do that math correctly you’ll figure out that doing reference checks is going to be the easy, cheap and most efficient way for busy startups to get the right people on their rocket ship!

Saturday, October 03, 2015

PNC SaaS Founder Meetup, Edition #4

Jack Newton, co-founder & CEO of Clio, at
the 1st PNC SaaS Founder Meetup in 2012
About three years ago we thought that it would be nice to organize a little meetup for the founders of our still quite young but growing SaaS portfolio. The idea was that by putting all of the SaaS founders in one room for a day, we'd give them an opportunity to compare notes, share war stories and learn from each other. The result has been nothing short of amazing. After the meetup, many of the attendees told us that they've never attended an event which was nearly as useful as this one, and everyone left the meetup energized and eager to implement all the new learnings.

The success of the first meetup, which took place in San Francisco at the end of 2012, encouraged us to do another, bigger event in 2013 in Berlin and an even bigger one in 2014, again in San Francisco. By now it has become a tradition, and last week the 4th annual PNC SaaS Founder Meetup took place in Berlin. Thanks to all the great people from our portfolio and our guest speakers it has once again been fantastic. Here are some (visual) impressions.

One of the reasons why the event is so effective is that it gives early-stage SaaS founders an opportunity to learn from later-stage SaaS founders and other SaaS experts who have already been through many of the challenges faced by the early-stage guys. Especially for founders from Europe and other places outside of the Bay area, this is a pretty unique opportunity to learn from some of the best people who've done it before. Therefore we're incredibly grateful to people like Mikkel Svane (co-founder & CEO of Zendesk), Jack Newton (co-founder & CEO of Clio), Paolo Negri (co-founder & CTO of Contentful), Olly Headey (co-founder & CTO of FreeAgent) and many others who participated in the first meetup in 2012 and keep coming to the PNC SaaS Founder Meetups ever since. Thanks guys, the startup world is a better place with you in it. :-)

PS: If you're a co-investor or friend of Point Nine and wondered why you didn't get an invitation this year: It's nothing personal, we've made it a portfolio-only event this time.

Wednesday, September 30, 2015

Introducing Jenny Buch, Talent Manager at Point Nine

Once a startup has released the first version of its product, raised some funding, started to get the word out and is getting some traction, the biggest challenge almost always becomes hiring. No matter how great the founders are and how much good advice they get from investors and advisors: You need people to get shit things done. And before long, you need more people (AKA managers) to help other people get shit things done, too. Recruiting great people can be extremely time-consuming and difficult, but if you don’t manage to build a great team, you are guaranteed to fail.

Or, as Michael Wolfe put it in his awesome talk at our 4th annual SaaS Founder Meetup last week:

All companies start differently but end up the same:
Success depends on hiring and managing a great leadership team.

Given that hiring is the #1 challenge for almost all of our portfolio companies, it has always bugged me that we’re not better at helping our founders find great people. It’s not like we haven’t been trying it and sometimes we’ve been able to find someone in our network for an open position at a portfolio company. But I’ve always wished that we’d be able to provide much more help.

Jenny sent me two pics ... and
forgot to tell me that I should pick one. ;-)
That’s why we’re thrilled that we’ve hired an experienced recruiter with a strong network, Jenny Buch, to focus on this challenge full-time. In her role at Point Nine, Jenny will (besides taking care of internal HR issues) advise our portfolio companies on anything related to recruiting, culture, employee engagement and HR strategy and will help them hire awesome people. In her previous roles, Jenny has recruited dozens if not hundreds of people for fast-growing tech startups and we can’t wait to see her magic unfold in the Point Nine family.

Welcome, Jenny!

PS: Hiring a talent manager isn’t a new idea in the VC world, and large firms like A16Z have built big teams to support their portfolio companies in a variety of areas. We can't compete with that, but we’re a little proud that we’re one of the first (the first?) micro VC funds to invest heavily into this role. :)

Monday, September 28, 2015

What animals are WE hunting?

[This article first appeared as a guest post on VentureBeat. Thank you for publishing it, VentureBeat. I'm re-posting it here with a few small edits.]

Of all posts that I’ve written so far, the one in which I asked what kind of animals you’re hunting was one of the most popular ones. That begs the question: What kind of animals are we hunting?

Paul Graham wants to farm black swans. Dave McClure likes ugly ducklings, little ponies and centaurs. Almost all large VC funds are looking for unicorns, while some people argue that investors should hunt dragons and others talk about decacorns.

If you have no idea WTF I’m talking about, here’s a quick refresher. The term unicorn was coined by Aileen Lee about two years ago to describe those rare and magical tech startups that have reached a valuation of $1 billion or more. Since then, $1B valuations have become somewhat less rare and there are now several private tech companies valued at $10 billion or more, for which the industry has come up with another name: decacorns. Before unicorns were called unicorns, people used to call these rare outlier companies, which create massive returns for their early investors, black swans (or homeruns – back then, it wasn’t mandatory to borrow terms from the animal kingdom). Duckling is Dave McClure’s name for companies that don’t become quite as as huge, and ponies and centaurs is what he calls the ones that have reached valuations of $10 million and $100 million, respectively. Finally, a dragon is a company that returns an entire VC fund.

So – what I mean by the question in the title of this post is what kind of exits we are aiming for. It’s a question which every VC needs to think about: If you have, say, a $250M fund and your goal is to return $1B before costs, should you aim for one huge outlier, e.g. a $10B exit in which you own 10%? Or are you better off shooting for 20% stakes in 50 companies which exit at $100M each? Or something in between?

For large funds the answer is pretty clear. Although the number of smaller exits is of course much bigger than the number of large exits, the exit value is highly concentrated on a small number of huge winners. This power law distribution of venture returns, which Peter Thiel has spoken about extensively, is what makes it almost impossible to return a large fund without hitting one or more outliers. Or as Jason M. Lemkin put it: VCs need multiple unicorns just to survive.

But what about a small (~$60M) early-stage fund like ours? We spent a lot of time thinking about this question in the last years, and our conclusion – or, let’s say working assumption, because it’s still early days for us – is that (sticking to the terminology described above) we’re hunting for dragons, hoping for unicorns.

In spite of the growing number of unicorns in the last years it’s still exceedingly rare for a startup to reach a valuation of $1B or more. According to Aileen Lee’s research, only 0.14% of venture-backed tech startups become unicorns. We can make around 30-40 investments with our fund, so statistically the chances of hitting a unicorn are very low. That doesn’t mean that we’re not trying hard to beat the odds – and if you don’t believe that you can beat the odds you should never become a founder or a VC in the first place – but it means that our business model is not dependent on having a unicorn in every fund that we raise.

We’re small enough for not being dependent on unicorns, but – and that’s the big difference to angel investing – we’re too big for generating a great performance by piling up a larger number of small exits. If we tried to get to, say, $240M in exit proceeds in chunks of $10M (corresponding with e.g. 20% of a $50M exit) we’d need 24 of these exits. It’s not realistic that 60-80% of the companies, in which we invest at a stage when there’s often just a handful of people and a few thousand dollars in revenues, will go on to become $50M exits though. That’s why we need a few of the animals which in the beginning of this post have been called dragons and which we internally just call “fund-makers”: Investments which return an entire fund, which in our case means, for example, 20% of a $300M exit or 15% of a $400M exit.

The final question is if all of this has any practical implications at all. Isn’t it impossible to look at a seed-stage startup and predict how large it can become anyway? Those are very hard prediction to make indeed, but still, knowing what kinds of exits we need informs several important decisions that we have to make – how many companies we want to invest in, what ownership stakes we’re aiming for, how much capital we reserve for follow-on financings, and so on. It also makes it clear that we shouldn’t invest in companies which for some reason we feel don’t have enough potential to move the needle for our fund.

The very last thing I want to say, just to be sure that I’m not misunderstood, is that I have absolutely nothing against unicorns. :-) In fact, we love ‘em. We’ve found two so far, Zendesk and Delivery Hero, so we’ve seen the beautiful side of the power law distribution first-hand. So: Hunting for dragons, hoping for unicorns.

Thursday, August 27, 2015

6 reasons to be bullish on SaaS

Yesterday I argued that SaaS founders and investors shouldn’t worry about short-term movements of SaaS stocks and said that there are a lot of reasons to be bullish about the Cloud. Here are some of them.

1) SaaS is quickly becoming the norm
In the last years there’s been a dramatic shift in deployment preferences of software buyers. According to a survey by technology evaluation business Software Advice, 88% of buyers with a deployment preference preferred on-premise solutions in 2008. Just six years later, the results were completely upside-down: In 2014, 87% of all buyers with a deployment preference preferred Cloud solutions.

2) Billions of dollars of on-premise revenues are still up for grabs
In spite of this tectonic shift of deployment preferences, IDC estimates that in 2015 the market share of on-premise deployments in the enterprise applications market is still almost 80%. That means that billions of dollars will move from on-premise to the Cloud in the next ten years.

3) Millennials will move up through the ranks
In the near future, more and more IT decision maker positions will be taken over by millennials. For this generation, which grew up with Facebook and Gmail, SaaS will be the default choice. In fact, most of them will laugh at the idea that software could not be Cloud-based.

4) The entire software market will continue to grow
It’s not only about increasing the Cloud’s piece at the expense of the on-premise piece, though. Pen & paper or Excel sheets are still used by myriads of people for all kinds of business processes, especially in SMBs. Building better, Cloud-based solutions for these use cases will significantly increase the size of the total software cake.

5) Mobile expands the market to non-desk workers
About ten years ago, the number of smartphone users was negligible. Today there are more than two billion smartphone users worldwide. This development, which I think is nothing short of amazing, has (almost) suddenly increased the number of target users for B2B software companies by tens of millions in the industrialized countries alone. People in industries like construction, landscaping, hospitality and many other areas of “non-desk work”, who previously weren’t using any software, are now getting mobile apps that help them become more efficient.

6) New technologies will catalyze adoption
SaaS has always been more than just a better deployment option. It has enabled the creation of new ecosystems (, new business models (Zenefits), new distribution strategies (Zendesk) and much more. The next wave of enterprise software will likely be powered by machine learning (check out this TechCrunch post for a good primer) and continued consumerization (and in some cases, new hardware). These and other innovations will allow SaaS applications to get even wider adoption and to provide even more value to its customers.

This is by no means meant to be an exhaustive list, and there are many more reasons to be bullish on SaaS. Want to let me know what you’re most bullish about? Tweet it to me!

Tuesday, August 25, 2015

Is SaaS doomed?

If one looks at the stock price development of public SaaS companies in the last few weeks, one could come to the conclusion that SaaS is over the hill. 17% down from its 52 week high. Veeva: 30% down from its 52 week high. Workday is 29% down, Box 47%, Hubspot 22%. Everyone got hit, as you can see in Tomasz Tunguz' post about the topic.

There are several reasons why this conclusion (that SaaS is past its prime) is wrong. Firstly, it's not just SaaS stocks which took a dive. The NASDAQ and the Dow Jones are both down more than 13% from their 52 week highs, too. Secondly, as this chart of the BVP Cloud Computing Index shows, SaaS stocks have outperformed the market significantly in the last couple of years, and it's not surprising that when the market corrects, stocks that went up more strongly than others are going down more strongly as well.

More importantly though, while public markets are good at valuing companies in the very long run, short term movements are – if not random – the result of all kinds of factors, most importantly supply and demand for stocks as an asset class, which itself depend on all kinds of factors that are not related to a specific company's ability to generate profits in the long run. That's why long-term public markets investors – let alone SaaS founders or VCs – shouldn't worry about the short-term movements of SaaS stocks. 

Fundamentally, there are lot of reasons to be bullish about the Cloud. I'll follow-up on that with another post soon.

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