How & What Growth-stage CEOs Are Ending 2011 & Planning for 2012

Below is the hyperlink to take the Q4 CEO peers speed-survey, exclusively for growth-stage CEOs. This survey focuses on “How & What Growth-stage CEOs are Ending 2011 & Planning for 2012″

This shouldn’t take more than 5 minutes of a busy CEO’s time–

We here at BSG Team Ventures periodically take the temperature of the markets we serve. The survey is no more than 15 questions, most simple multiple-choice.

These surveys are created and compiled by BSG Team Ventures as a courtesy to our executive ecosystem with the belief that knowledge is power. Aggregated peer-provided knowledge is “actionable power.”

To compare how you’re feeling a year later with the survey results from Q4 2010, titled “CEOs Plan for 2011”, go to http://www.bostonsearchgroup.com/blog/q4-2010-ceo-survey-of-growth-stage-companies/

We make an effort to survey only those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies). [Note, if you don't fit the aforementioned description, please refrain from responding.]

Feel free to forward to the qualified CEOs in your sphere of influence. The more data generated, the more accurate the trend lines.

All responses are anonymous due to the web-based survey technology employed.

We will forward the survey results within the next two weeks to the email address on file. Please let us know if there is another email address you wish us to send the results to as well.

“]

Rob Day, Black Coral Capital | Michael Balmuth, Edison Ventures | Alexis Borisy, Third Rock Ventures

Once or twice a year we as a firm gather CEOs from the Boston innovation ecosystem to share thoughts amongst themselves.  Often, the format is lubricated by a panel to kick things off.  Always, the format is lubricated by an open bar and dinner.

 This Fall’s CEO gathering in early November brought together 50 or so CEOs around the topic of planning for 2011, and what to expect as a CEO. 

Whether early-stage venture, or mid-stage growth, investors are adopting a different approach to what they are looking for, how much they are putting to work, and what they expect to see as an end result.  This is proving true not just in the tech sector, but cleantech, medical device, and biotech.

 If CEOs are looking for more investment, whether growth equity, seed capital, or something in between, what are the “new normals” to think about going into 2011.  And if CEOs aren’t looking for money, but looking for exits, what are the expectations of investors in 2011 and beyond? 

 We assembled a panel of venture capital investors who all had raised new funds in the last year or so.  These investors also represented a different flavor than traditional venture capital.

 On the panel? 

• Michael Balmuth, General Partner, Edison Venture Fund
• Alexis Borisy, Partner, Third Rock Ventures
• Rob Day, Partner, Black Coral Capital

 What were the “new normals” CEOs and VCs talked about?

 Here are a few that got some air time:

2011 is likely to be an economic “ground hog year.”  The current economic cycle of “flat is the new up” is here to stay for the medium term;  In taking a flash vote of the room, the overwhelming majority felt that the economic conditions in which companies are being created are not going to change for the better any time soon.  Simply turning the calendar over from 2010 to 2011 is not likely to yield a more fertile or forgiving economic climate in which to grow innovation-stage companies.  In our recent survey  of growth-stage CEOsfor Q4 2010, we noted in a prior blog post that the vast majority of CEOs had already shifted their strategies or were planning to in the near future as a direct result of an expectation that 2011 might look a lot more like the end of 2009 or 2010 than ‘07 [see CEO survey pie chart below]

Seed rounds are becoming pervasive compared to prior quarters.  And these aren’t for Web 2.0 companies only.  CB Insights in their Q3 2010 summary demonstrated that this is a trend that is occurring in cleantech / greentech as well as healthcare IT.  All 3 investors on the panel agreed that seed funding makes sense.  Alexis Borisy, Partner at Third Rock Ventures, talked about their approach to seeding, saying that they tend to help start the companies, not just fund them, often taking an interim role on the executive team to incubate to a point of value inflection.  Michael Balmuth mentioned that although Edison Ventures doesn’t do “seed stage investing” per se, he loves to see companies that get seed rounds, as it often is an effort to drive toward profitability faster.  At that point, Edison may be more interested in a seed-funded company that achieves an early positive cash flow position than a typical heavily syndicated, multi-series venture-backed portfolio company.  Black Coral’s Rob Day added that he felt that investing in capital-efficient companies, even in the cleantech sector, was something he has advocated for a long time.  [see CB Insights graph of growth in seed round funding over last 5 trailing quarters, 2009-2010]

• As an asset class, venture funds have lost money for a while now.  Limited partner investors in venture capital and even private equity believe that they still have to invest in this asset class because it does make money during economic or industry sector bubble periods, and to invest once a bubble has been established would mean missing the upside.  During other times, LPs try their best to pick the funds that outperform their peers.

• Using investment banks to raise equity capital  should be done selectively.  If the industry is a small one, and the network is well established (like biotech investing Alexis pointed out), using an i-bank at an early stage is not the best idea.  However, in the cleantech sector where there are more total number of investors, they are internationally distributed, the industry is younger and less well-networked, and there is an imbalance in demand-supply (more money chasing fewer good deals), the investment banking solution may be just the right one.  One CEO, Larry Letteney of Second Wind in the cleantech sector, shared just such a recent positive experience in going out for their next round. 

• Seek out funds that have real capital to invest, preferably “fresh.”  Each of the three funds represented on the panel had all raised funds in the last twelve months or so.  But there are a lot of funds that are at the end of their last fund.  Many are unlikely to raise another fund.  Many investors are taking meetings, but setting the bar exceedingly high because they have only an investment or two left, and they don’t want to get caught making a bad one given the challenge in delivering returns to LPs in the most recent investing vintages.  There was also a “beware” comment about funds who are making seed round investments at the end of their funds.  They are more likely to do so, as it is an easier story to message an investment mulligan to LPs if you can just say, “It was just a small seed investment, so no biggie.”  Caution was also expressed that an investor at the end of a fund making a seed investment will be less likely to have additional capital to invest even if the company is doing well.

We hope to post a video snippet of the the VC-CEO dialogue for a flavor of the evening’s conversation in the near future.

Each quarter we survey growth stage CEOs who are running innovation driven companies.  This quarter,  we had more than 60 CEOs responding.  CEOs were running companies in broadly defined technology (software, hardware, semiconductor, telecom), Internet (e-commerce, media, social, entertainment), medical devices, biotech, and cleantech / renewable energy sectors.

A note on methodology.  We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies).    All responses were anonymous due to the web-based survey technology employed. The majority of respondents were in the United States, with the highest concentration on the East and West coasts (New York, Boston, and San Francisco/Silicon Valley areas).

For prior survey results from Q2 2010, titled “Impact of Economy and Renewed Growth”, go to http://www.bostonsearchgroup.com/blog/ceo-survey-results-q2-2010-%e2%80%93-impact-of-economy-renewed-growth/ .

ECONOMIC CLIMATE

The first set of questions was around the economic conditions in which each CEO felt s/he was operating.    One question we continue to ask and re-ask over the last six quarters or so targets the turbulence in the macro- economic climate.  It is interesting to compare CEO responses to the same question, “Do you anticipate a double dip in the near term future?”

* In Q3 2009, more than half  (54%) of CEOs polled were expecting a double dip, and planning accordingly

* In our Q2 2010 survey,  again 50% felt a second economic correction was likely, the biggest percentage of those CEOs believing it would be in either Q3 2010 or sometime in 2011.  The other half  of CEOs felt the specter of recession was behind them

* Currently in Q4 CEOs were consistent with prior quarters with a bit more than 50% indicating they didn’t feel a double dip was likely, and the other half of the CEOs saying either a 50/50 probability or greater (16% feeling more likely than not)

So less than 1 in 5 CEOs feel another economic dip is likely.  No CEOs selected the ” greater than 75%” probability.

It’s interesting to do a meta graph of the changing CEO sentiment on this question.  Surprisingly, the graph would be sloping downward, but not as much as many would hope.  The high point was certainly back in Q3 2009, but even throughout 2010, as many CEOs were fearful of a negative correction as those who felt it was behind us.  No doubt this “lack of confidence” index doesn’t inspire the CEO with a swashbuckling, damn-the-torpedoes-full-speed-ahead attitude toward growing their companies.  Rather, it makes CEOs think in short-term windows, perhaps 3 months at a time, with little appetite to make medium or long-term bets.

Those CEOs who felt another downturn was likey referenced several factors that might tip the scales negative–  gridlock in Congress due to midterm elections and likelihood that Democrats lose congressional majority, a belief that a bad Q4 holiday retail shopping was likely, and the persistent overhang of ongoing commercial and residential loan defaults.

As for when another economic dip might occur if it were to occur, the vast majority of CEOs pointed to Q1, 2011, with Q4 of this year and Q2 2011 tying for second at 18% each.

STRATEGY

Almost 50% of CEOs polled said that they had either made a shift in strategy in 2010, or were planning to in the near future.  Granted, growth-stage companies are prone to shifting strategy until they land upon the best formula for significant and sustainable growth.  However ~50% is a big number, and clearly a chunk of those companies have been driven to rethink their strategies because of the challenging economic climate, the concern over the future, and the possibility that 2010 might represent “the new normal” where with no economic “rising tide” no help generated to float all company boats as in periods of economic expansion in the past (1997-2000, 2005-2008, etc).

CASH FLOW

The majority of CEO survey respondents (49%) indicated that they were still planning on burning cash over the next 2 quarters.  24% indicated they would be profitable.  CEO comments regarding this question indicated an overwhelming drive toward cash flow break even.  That was the big push and focus for their companies in 2010, and if they hadn’t achieved it yet, they were gunning to by end of the first quarter of 2011.  CEOs also commented that they were trying to run their companies at break even, with any extra EBIT being reinvested back into the company for additional growth.

COST REDUCTION PLANS

When asked what were the top 3 areas CEOs were targeting for cost reduction, the following table summarizes their responses, representing a combination of spend reduction and staff reduction in non-core areas.  There was a preference by CEOs to favor non-staff cuts over cutting headcount if at all possible, but many acknowledged that in order to make meaningful cuts, staff had  to be considered in the equation.

CEO responses when asked about increasesin spend were logical.  The top three in order were sales, marketing, and R&D.  Many of the comments about this question noted the fact that outside of directly growing revenues, additional spend was hard to build in when many CEOs are driving toward a minimum cash-neutral mandate and economic uncertainties are driving CEOs to think conservatively rather than expansively.

[Click on "more" below for remaining 8 slides and narrative from Q4 2010 CEO survey]

RAISING CAPITAL

The largest segment of CEO survey respondents (40%) listed themselves as having raised capital in the last 12 months, and also planning on raising additional equity in the coming 12.  For those who indicated “other,” most of these CEOs had raised capital quite a while ago (2 or more years ago), were at cash flow positive, and some who were looking at liquidity event in the next few quarters, subject to market conditions.

OUTSOURCING & OFFSHORING

A quarter of CEOs surveyed responded that they were unlikely to ever use/need outsourcing or offshore resources to grow their businesses.

However, almost 70% of CEOs were using some combination of outsourced resources, whether domestic or offshore, full-time or project-based.  Those CEOs using domestic resources were the largest segment at 22%, while those with full-time offshore resources tallied at about 14%.  Nearly one in four CEOs had used contract (non-full-time) outsourced resources in the last 12 months.  A number of CEOs highlighted the fact that although they were users of offshore staff in some capacity, it was difficult to “get right,” and often the experience was less than positive early on in the relationship and took a great deal of work before CEOs could declare it truly accretive.

In answer to where global outsourced/offshore resources were being most utilized, manufacturing, product development, and customer service were the three biggest areas.  One in 5 CEOS (20%)  had already established an international sales presence located abroad.

GROWTH-COMPANY CLIMATE

Do CEOs feel it will be harder to grow companies in the future than in the recent past?  This is a question that many entrepreneurs who look to undertake a new venture (and venture capitalists looking to invest in them) are often quick to ask.

CEO responses were much more evenly distributed than one might think– slightly greater than a third of CEOs indicate “about the same” difficulty, a bit less than a third feel “somewhat more difficult,” and 27% indicating that they thought it would likely be “easier in the next 5 vs. the last 5 years.”  Many of the comments of CEOs responding “easier” pointed to the fact that advances in technology have allowed entrepreneurs to stand up companies for less cash and a lot faster than in years past.   Those CEOs who said it would be harder all pointed to the capital markets, and the medium-term challenges in both raising capital, and achieving liquidity.

DEBT LENDER APPETITE

CEOs were closely split on the question of whether debt has been harder, easier, or about the same to procure in the last few quarters.  37% indicated about the same,  33% responded that it feels worse, and 27% conceded that it appeared easier to get debt now than in the trailing 6 months or so.  However, CEOs commented that even if debt lending had stayed the same or improved slightly in the last six months, over the last year or two lenders have tightened up a great deal, and the lending climate today compared to 2008 is substantially worse.

FEDERAL POLICY IMPACTS

More than three-quarters of CEOs surveyed indicated that there was no impact on their companies due to  changes in federal policy, be it pending capital gains changes, mandatory healthcare, or potential tax increases.  Of those CEOs who did register an impact, the majority (10%) indicated that they would be offsetting any negative impact via headcount reduction.

CEO comments focused on the negative impact of rising healthcare costs as the biggest contributor to any decisions they were considering that were directly attributable to federal policy changes.

EQUITY INVESTOR APPETITE

CEO respondents reported that they saw equity investors as having become more bearish in their investing, with almost 37% holding that opinion.  In contrast, more than 25% of CEOs felt investors appear more willing to put money to work in the next two quarters than in recent past.  CEOs commented that investors don’t want to put money into B rounds, and the investing profile “is a barbell– 259,000 angels poured $17.6 billion into more than 57,000 startups last year, and there are a number of very well funded late-stage private equity firms looking to put $20-$40 million to work per opportunity. But almost nothing in between.”  Other comments indicated that even though investors may be more interested in putting their money to work, those same investors are squeezing valuations harder than ever and their expectations for return are increasingly difficult to meet as an operating CEO.

PRIMARY SURVEY INDUSTRY SECTORS

Of the 50+ CEOs who responded, 25% were running software companies, 16% cleantech, 15$ biotech, 10% interactive media/Internet, and 4% medical devices.  Much of the other 32% of CEO respondents were in the services sector across various industry sectors.

Location of the Companies Surveyed

The majority of responding CEOs were from the New England region (66%), 10% of CEOs’ companies were located in the Rocky Mountain region, with smaller numbers in Northern California (2%), Canada (4%) and the UK( 2%).

TOPIC: How & What Growth-stage CEOs Are Planning for 2011

Below is the hyperlink to take the Q4 CEO peers speed-survey, exclusively for growth-stage CEOs.  This survey focuses on “How & What Growth-stage CEOs are Planning for 2011″

This shouldn’t take more than 5 minutes of a busy CEO’s time–

We here at BSG Team Ventures periodically take the temperature of the markets we serve. The survey is no more than 15 questions, most simple multiple-choice.

These surveys are created and compiled by BSG Team Ventures as a courtesy to our executive ecosystem with the belief that knowledge is power.  Aggregated peer-provided knowledge is “actionable power.”

For the survey results from Q2 2010, titled “Impact of Economy & Renewed Growth Planning”, go to http://www.bostonsearchgroup.com/blog/ceo-survey-results-q2-2010-%E2%80%93-impact-of-economy-renewed-growth/

We make an effort to survey only those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies). [Note, if you don't fit the aforementioned description, please refrain from responding.]

Feel free to forward to the qualified CEOs in your sphere of influence. The more data generated, the more accurate the trend lines.

All responses are anonymous due to the web-based survey technology employed.

We will forward the survey results within the next two weeks to the email address on file. Please let us know if there is another email address you wish us to send the results to as well.

The Q2 2010 CEO survey has logged more than 50 respondents, so although additional responses may roll in, we’re posting the results in order to make the feedback to those who participated as timely as possible.   Additional responses are unlikely to skew the percentages significantly.

We at BSG Team Ventures periodically take the temperature of the markets we serve.  Below are the results.  This survey’s focus was on the economic recovery (is it indeed here, and if so, measured how?), and where CEOs are budgeting their spend in the 2010 recovery year.

A note on methodology.  We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies).    All responses were anonymous due to the web-based survey technology employed. The majority of respondents were in the United States, with the highest concentration on the East and West coasts (New York, Boston, and San Francisco/Silicon Valley areas).

For prior survey results from Q3 2009, titled “Strategy & Outpacing Your Competitors in the Recovery”, go to http://www.bostonsearchgroup.com/blog/3rd-quarter-innovation-ceo-survey-results-outpacing-competitors-recovery/.

The response to the first question clearly demonstrates that CEO sentiment versus our last survey has demonstrably shifted, with almost 75% of CEOs indicating that the economy has either bottomed out, or is recovering.

Similarly, for those growth-stage tech or sciences driven companies, when looking at revenues, more than 40% of CEOs reported that revenues were up from Q1 to Q2, with the largest percentage revenue increases in the 1-25% range.  Approximately 10% of CEOs reported revenue increases of 25% or more.

A few months back in the New Yorker Magazine (May, 2009, http://www.newyorker.com/reporting/2009/05/11/090511fa_fact_gladwell ), Malcolm Gladwell penned a really interesting article on the subject of how underdogs-when they change the rules of the game-can beat stronger, bigger rivals. This is a story told many times over, starting with the Biblical story of David beating Goliath, which Gladwell uses in his article as the first of two fulcrums to work the concept out. The other fulcrum he uses is a girls basketball team on the West Coast that had as its coach a successful entrepreneur, Vivek Ranadivé, accustomed to innovating the rulebook to a start-up’s advantage as founder, Chairman and CEO of TIBCO Software, $1+B enterprise value publicly traded start-up success.

In the case of Gladwell’s article, the girls basketball coach was not given any special “talent” as an asset to build around. In fact, kids’ teams at younger ages are most often randomly assembled, with no “draft picking” involved. So, Randivé had to play with the hand he was dealt. He ended up with no tall girls, nor good shooters, just moldable clay, where a winning strategy would have to prevail over a special selection of talent.

In professional sports as well as business, however, coaches/CEOs get to pick their teams. And for business, there is no more crucial time to think about executive team-building than now. According to most analyst reports, markets are preparing for growth. The strongest competitors in each industry were the first to streamline operations at the beginning of the downturn and make sure their financial houses were in order. Now these leaner and meaner companies are looking to leapfrog their competition as recovery sets in. If a rising tide floats all boats, the top companies in each industry sector are looking for a way to rise at a faster rate than their weaker rivals. A recent McKinsey report framed this competitive dynamic, saying:

Roughly one in three industry leaders was toppled during the previous recession as attackers used the downturn to their advantage. Recent big acquisitions in sectors such as pharmaceuticals and information technology suggest that the current slump will be no different.

Our research shows that while all companies in an industry typically suffer during a recession, the performance gap between strong and weak rivals tends to widen. This gives strong players more opportunities to reshape their competitive environment. [http://blogs.harvardbusiness.org/hbr/hbr-now/2009/07/trend-to-watch-industries-taki.html]

But, how should these companies go about accelerating around the executive curve into the straight-away of economic expansion?

Sticking with basketball as a parallel for what one business can do to accelerate their rise over their peers, is it possible to consider hiring a superstar in a key area of the business?  A Michael Jordan of the Bulls, or Kevin Garnett of the Boston Celtics, or L.A. Lakers’ Kobe Bryant?  However, what should the latest definition of “superstar” be in light of all the change the recession has wrought in the business landscape?  McKinsey’s article went on to chronicle 10 key changes in the global competitive topography that are “must-be- aware-of’s” when re-engaging in strategic planning for the recovery in 2009 and beyond.  In July’s issue of Harvard Business Review, one answer is to bring on an executive with what Ron Heifetz and Marty Linsky call “adaptive leadership” ability-

The current economic crisis is not just another rough spell. Today’s mix of urgency, high stakes, and uncertainty will continue even after the recession ends….

Instead of hunkering down and relying on their familiar expertise to deal with the sustained crisis, people in positions of authority-whether they are CEOs or managers heading up a company initiative-must practice what the authors call adaptive leadership. They must, of course, tackle the underlying causes of the crisis, but they must also simultaneously make the changes that will allow their organizations to thrive in turbulent environments.

Adaptive leadership is an improvisational and experimental art, requiring some new practices.

[http://hbr.harvardbusiness.org/2009/07/leadership-in-a-permanent-crisis/ar/1 ]

The adaptive leader has a greater agility than other leadership types. The adaptive-leader type also allows for optimal breakthrough performance coming out of a down cycle.  Generic adaptive leadership is not enough, however.  You still need to figure out where you topgrade your executive team to best capitalize on the upside afforded in an executive change.  Do you seek this new “adaptive leader” for marketing, strategy, operations, sales? General management of one business unit that’s high growth versus another that’s slower growth but lower risk? Or is it in new product development, R&D, or international/global specialization?  At the risk of overplaying a metaphor, coming back to basketball for a moment, it’s interesting to note that each successful professional team has often been built around one “superstar” player, but not always playing the same position.   There are 3 traditional positions in basketball-guard (2), forwards (2), and a center.  Magic Johnson was a guard (point guard to be specific) and he took the Lakers to several championships.  A current L.A. Lakers superstar, Koby Bryant, as well as the Boston Celtics Paul Pierce are also guards.  However, Larry Bird and Julius “Dr. J” Irving were forwards.  And not to leave out the third successful superstar permutation, Shaquille O’Neal, Wilt Chamberlain, Kareem Abdul-Jabbar, and Patrick Ewing were all “superstar” centers who repeatedly drove their teams to pennant victories.

Once you identify where the biggest impact can be made via topgrading your current executive team, and you pre-select for a leader with proven adaptive leadership skills and experience, the final question presents itself-where are adaptive leaders most frequently bred?  Where should you look for them, what ecosystem have they been building there leadership toolbox within?

Our experience indicates that a disproportionate  number of adaptive leaders come from professional backgrounds they’ve honed in two specific stages of the company lifecycle-

At our firm, where we specialize in recruiting adaptive leaders, we’ve broadly referred to the executives who are best equipped at leading the green-highlighted columns above of emerging and growth-stage as “Builder-Leaders.” However, whether we refer to them as “builder-leaders” or “adaptive leaders,” their experiences creating and growing companies in these stages are the foundational criteria for success for those companies looking to outpace their competitors as we come out of a down cycle and head into the next growth phase.

The winning formula for extra-ordinary company performance in this next economic expansion is a combination of good internal executive assessment as to which role(s) will give you the biggest step-function impact if you topgrade them, and a key attribute of “adaptive leadership” in the new executive you bring. This is the very same leadership characteristic Malcolm Gladwell’s Vivek Ranadivé demonstrated when he was coaching his daughter’s basketball team to compete and win against the rest of their basketball league.

If one of the goals is to create jobs, and another to foster competition, and a third to retain the U.S.’s status as leader in knowledge capital and innovation, this venture capital co-investment would go a long way to helping all three.  The government would be just another limited partner.  All those cynics who worry that venture capital might not invest it wisely need only look as far as the S&L bailout 15 years ago, or this past (and present) year’s Wall Street bailout, or the insurance bailout (AIG) for examples of venerable industries who screwed up.  Perhaps venture capital would be a better steward of our rebuilding efforts in this fashion than creating a “bad bank,” or nationalizing financial institutions.  And perhaps we could at the same time find new breakthroughs to ease our dependence on fossil fuels and reduce the potential for global warming.  Imagine that, it’s a two-for-one deal.  Now we’re talking.  I haven’t heard anything that sounded this good since the IPO window closed a year ago or more.  Oh, and about that IPO window.  Perhaps this could ease that problem too….

We wouldn’t be the first country to try this.  For years, England has had regional investment pools totaling more than £500M that get co-invested by venture capitalists to stimulate innovation in their  various regions  (British Midlands for example).  Singapore has done this as well through their sovereign wealth fund and related entities.

There’s a management adage that has become popular in the last several years.  It’s a twist on the old 80/20 rule.  In the past, managers ended up spending the vast majority of their time with those underperformers in their team.  The latest research and urgings by top management and leadership gurus like Marcus Buckingham (www.marcusbuckingham.com ) goades us managers to “cultivate employees’ strengths rather than simply improving their weaknesses” and in so doing, we  stand to dramatically increase efficiency while allowing for maximum personal growth and success.  In other words, invest 80% of your management efforts in your top 20% of high performers.

If this is true, why can’t government also adopt this principal?