Documenting a success: David Skok

Tuesday Dec 22nd 1998 by David Fisco
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Part two of a two-part interview

David Skok, chairman and founder of SilverStream, has a proven track record of turning small companies into $100-million-plus organizations -- such as FileNet and Xionics.

Skok has the uncanny ability to wear both the developer's and manager's hats and easily discuss the trends that affect both camps.

He recently spoke with EarthWeb contributing editor David Fisco in our offices in New York City. In part two of this interview, he offers advice to those of you who are thinking of taking the plunge into a start-up.

On the entrepreneur in the software industry

Fisco: You've taken several companies from zero to sixty. Is there a common thread -- a recipe?

Skok: Definitely. There's no question that once you've done one, you've learned a ton of incredibly valuable things that you can go straight in and apply to other companies. I've tried to, in the past, help other entrepreneurs by figuring out what I could tell them about what was in that recipe. There's a series of common threads.

One of the most important ones is telling people to think big. There's a strong tendency when you're forming your first company to be scared of what you can pull off and to therefore think small. But in truth what happens is if you do that, you'll find it's very hard to get people interested. It's going to be hard to raise money, because the venture capitalists are after big wins and big situations.

It'll be very hard to hire really great people because they're interested in doing big and meaningful and interesting things. And it will be very hard to gain the attention of the press when you come out with something because they're already swamped with hundreds and hundreds of things.

I think people generally have some [market] they understand. What I always try and encourage them to do is to think about what it would take to really wow the customer and solve all their problems. And expand your vision to figure out how to completely dominate your space and do the absolutely wonderful, best thing that's needed in that space. Apply the constraints afterwards. I think often one of the things people feel heavily constrained about is how much cash can they raise. But there is no constraint there. It's really amazing.

If you actually look at how much capital is available to be raised in the States, there are funds out there that really don't like to invest small amounts of money. People think in terms of, well, maybe I should get one or two million for my new company. But these days it's almost hard to get one or two million; most funds don't like to invest that little because they have to spend so much time nurturing a company, they're better off putting in three or four million. That at least gives them a sense that now it's worth their while to have a part in it. That would be one of my first things.

The second one is incredibly clear: you've got to hire great people. It goes without saying, but it's so amazing to me how, again, people's self-deception damages their ability to go out and do this well. There are two things that hurt people. One of them is they're actually scared that they can't hire people that are better than themselves. This is sort of a sense that because they aren't necessarily that great, they won't be able to attract somebody they know is great in a particular area. It turns out that's not true. If you have a great idea and you recognize that they are not capable of being strong in all areas, you should go out and hire the very best people you can in the areas of sales, marketing, R & D, and all of the other areas.

If your idea is interesting -- and you need to be a bit of a sales person to pitch this idea -- then you can definitely go and hire amazing people. It's quite of a shock to individuals to discover this. I think that most failed start-up companies fail because they're unable to attract good talent to them. Often it's not even so much unable as they're unwilling to even consider what is the right talent, and aim for it and go and get it and bring it into the organization.

Getting the right people

Fisco: And this is the philosophy that you've used to bring in the people you needed and fulfill your mission? You showed them your vision?

Skok: Yeah. And they get excited about it. More importantly is that as soon as you get the first one to join you, they not only take your vision, but they add something to it, in terms of some small tweak. The minute you've got one great person, all of a sudden, they have a contact with a great friend, so all of a sudden you get a second great person and then that person has a contact.

Then your team starts to look very much stronger, so then getting the fourth person becomes a lot easier. And bang, after you've got four or five of these, the whole thing just becomes self-fulfilling.

Fisco: What's your recommended compensation plan?

Skok: All equity. If you've got people trying to come into a start-up that want lots of cash [salary] then they're in the wrong place. You need investors, not employees. Even better still, I'd love it if the management would put cash into the venture, too. That gives them an even greater sense of when they spend a dollar on something, they're spending their own money and they think differently about it.

When you go out and raise venture capital money, there's a tremendous danger. People suddenly start seeing this large cash sitting in their bank, and they think about money the wrong way. They suddenly start spending it as though it wasn't their own money. And that's a very dangerous thing. So, having people put a little bit of their own money makes them think better.

Avoiding the pitfalls

Fisco: What typical mistakes do entrepreneurs make?

Skok: They finish their first successful business, and they rush out there convinced that they have this natural ability to make things succeed.

Fisco: The Steve Jobs mistake?

Skok: Yeah. The next thing they do is they don't choose it as wisely as they should. And they frequently make the decision too fast.

So my mistake was going out and thinking that I could take a company that was really sick and bankrupt [Xionics at the time] and simply walk in and tell these people the right cultural way of doing things, and that they would like that and turn around. It happens that in every other company I've done, I've started up from scratch. I hired my own people. Naturally, I hired people that had the right cultural instincts in them. So when I went into this company, these people didn't want this culture at all. It was totally alien to them. The only way I got it right was that I fired 73 out of 75 people, which is a very hard thing to do, over a long period of time.

The other problem at this company that was very nasty for us was they were a million pounds [Sterling] more bankrupt than they had declared when we were buying them. So, about two months into running this business, I got a phone call from the financial guy to say we've run out of cash. ...

We had a balance sheet that we used when we were acquiring them that was audited by a small firm, and we discovered that this thing was seriously different to what we thought. It put me into a situation where I was having to pay in a load of personal cash to meet the salary every month. ... That lasted for about six to nine months.

Fisco: What type of structure did you walk into and what did you change it into?

Skok: The biggest [problem] that I walked into was a hardware business and that was the mistake for me. I don't like hardware. It's not my natural area of joy and expertise. I'm a software person. Within a short period of time, what I figured out I wanted to do was create a software business. I liked this imaging area that it was involved in. So I took a team of four guys and stuck them in a room in a different building and gave them a specification and they wrote what then became Watermark Software.

Fisco: You didn't fly a "jolly roger" over the building, did you?

SKOK: (Laughing.) Almost. It had "skunk works" written all over it. That was going to become the future of Xionics, but as the companies evolved, we realized that we had a great business in Xionics, so we should leave that separate. So, I took Watermark and separated it from Xionics. I moved to the U.S. at that time.

Fisco: Any other advice for those just getting up and running on their own?

Skok: I have one other piece of advice that I can give to people. I'll try to summarize this one for you in an interesting story. It goes back to my very first company. The piece of advice is that you need to integrate sales and marketing. The way you do that is you want to think about all the steps in the pipeline that take a customer from being a suspected person that might buy your [product or service] to various stages where you're selling to them.

A typical example is that the first thing a customer wants is more information. So where do they get that? The Web site is a great way to get it to them. After they've been to your Web site, what do they want to do? In our case, they need to see our products. So we obviously have to do something like a seminar series to get them to see that. After they've come out of the seminar series, what's the next step that they need to go through? Well, in our case, it generally tends to be an eval of the product. They still don't believe it after it's been demo'ed to them, but they need to try it out themselves, and maybe do a prototype or something like that. So what I'm trying to describe is that in every company there's a selling cycle and typically you get people who are sales-oriented who think about sales people doing all of that cycle.

You could have your most expensive direct sales person cold-calling on suspects, which is clearly the wrong thing to do. Or you have people who are maybe very marketing-oriented and they think in terms of "let's do everything with events." Very rarely do you get the two organizations really coming together and running as one.

I once had this nine-month sales cycle selling computer-aided design systems to architects, and I figured out how to cut the whole thing down to one day. Well, I didn't realize that was what I had done at the time. I knew that afterwards. ... So what we did is in the seminar, we put the educational piece in, we put other architects in to show them drawings and stuff that they'd done. We brought in tax advisors. We brought in banks, and we pre-qualified them before they got to the seminar. And the only thing that we got wrong was we didn't bring order sheets. It was the most extraordinary thing. We did 3.5 million dollars on the first day on this seminar, literally within 2 or 3 hours. Our entire revenues for the previous year had only been 4 million.

So the business just went through the roof, and we continued doing about 4 million a month after that. It was an extraordinary change in how the whole thing worked. That's a bit of a silver bullet story, and life is never quite as simple as that. But, the trick is understanding the whole sales cycle and figuring out where to apply marketing and where to apply sales, asking the question: Why is somebody going to want to move to the next step? What's the hook that will get them to come to my next event? Ask questions about how to double the quantity of people that go through each of the stages. Developers hate hype and hate being marketed to. They really get very angry when they have somebody unable to answer their questions.

In this part of the interview, Skok discusses his views on using Java and other technologies -- including open source software -- to get ahead in the marketplace.

Two guys in a garage

Fisco: One of the things said about Java is that it levels the playing field for everyone. Do you believe there's hope for the proverbial two guys in a garage in Cupertino?

Skok: Yes. I've never seen a time where it was more possible to identify great new ideas to use technology for and to get funded for them and to get acceptance by the marketplace for small, young companies. So those are all the ingredients the two guys in the garage need to be successful. Some time back, you had a much harder environment for two guys in a garage to distribute their products worldwide. The Web solves that problem.

You need to have something hot, though, because now there's a lot of noise out there. You've got to be able to rise above that, but if people hear about you, they can find your Web site from anywhere in the world and if the Java community gets hot about something, then you frequently find everybody talks about it on newsgroups. And funding is another really important thing, and that's available.

The other part is all the seasoned execs you need to get into your company. They all want to join start-ups now, because they've all read about their friends making money out of stock options and everybody now knows that they're never going to get rich by living on even a decent salary; they're only going to do it by getting stock options in a hot start-up. It seems that this is the best time you've ever seen.

There are more places where new, exciting applications can be developed than ever before because of the fact of this ability to use the Web to get the application broadly used and not have somebody go to the trouble of installing it and putting a lot of emphasis on having to convince people they have to put it onto their machine to use it. That solves the problem of niche applications. To a desktop user, it's hard to sell them more than a spreadsheet, a word processor and a graphics package, because it's too much effort and energy. But via the Web, it's easy to convince somebody that once a month they should go to some human resources type of site and just do something they need to do.

I think we've got this huge range of new, possible business ideas, and we haven't even remotely started to see them narrowing down yet; we're in the phase where more is possible. So if you're in your garage, there's strong possibilities out there.

Open source

Fisco: What are your views on open source software?

Skok: I think it's a good idea. There's a variety of technologies where there's a broad interest in seeing that technology become completely standardized and used across the marketplace. So if that's the situation, then there's perhaps a rate of development that needs to take place that's quicker than any one small organization can pull off. Putting it out into an open source environment gives you that. Probably the best example that I can see right now of this working is the Linux operating system.

Apparently, though, the key to that working well is Linus himself. And one of my fears, if I was a corporation investing in Linux, is: What would happen if Linus stopped working, or decided Hawaii would be a better place for him? Is this feasible to continue? Is this totally dependent on this one guy? Maybe Linus is the illustration of the best way that open source can work because he's clearly shown that they're able to take that operating system and stably move from one release to the next. But I keep asking myself: If he's able to do this, why can't we [as a company] do software development that way? Break the rule which says that you can only do development in small teams, otherwise it gets out of control. So I think there's got to be a lesson there for us all to pick up and learn about development, which we haven't figured out yet.

Fisco: There's a lesson, but there's a contradiction, because that particular type of structure, based on the Roman Catholic Church, slaps in the face everything that we've learned about management in the last 15 or 20 years, with Total Quality Management and pyramid flattening. Taking the Linus type of a structure into a corporation, I think, would be a complete failure.

Skok: Disaster. Well, we certainly don't follow it with the way we do development. How is he able to pull it off? Deliver stable releases? Is there any other situation that you can think of where somebody has pulled off open source development with the same commercial-grade quality? We're talking about a server operating system. High up-time, more reliable than NT.

Fisco: Netscape is trying, obviously. I guess you could say some of this spirit is alive at Microsoft, or at least was. But Linus has celebrity status. There's a feeling in that community that this is a very special person. I think he commands by virtue of that reputation.

Skok: In other words, it's very non-replicable and it's very, very worrying that we've got this single source of failure, because when people buy an operating system, they want to feel that there's another 15 or 20 years of life in the product, not dependent on one, single person.

That's where the area of questioning for me comes in, around how you manage that. How do you take all these pieces of code coming in, stably test them, get out releases, and ship a product? Certainly, we haven't been able to figure out how to pull that off internally. We have to have very, very strict source code management and any kind of parallel branching that takes place, well, it can be a nightmare for us. It's not a linear system.

David Fisco is a Web software developer and consultant based in Budd Lake, N.J. He is the former editor of DOC/Java and editor-in-chief of The Java Report, as well as a special consultant on new media to several clients in the entertainment industry.

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