Failed Exit. Death Watch Begins For DevOps VC Funded Testing Company

Death Watch Time

Just who would believe, in a million years, that the “software museum” Computer Associates would get bought by Broadcom — for almost $19 billion?

Well, for sure, a little California DevOps testing outfit who thought they were going to get out of their ugly cap chart by selling their company to CA sure has a nasty hangover right now.

It is rumored their CEO may be on suicide watch.

Can you imagine what it is like to have over $100 million in invested funds, never having made a profit, in a market where your competitors are in the ascendancy, and you are just at the cusp of a possible deal to sell (get liquid) to possibly the only company on the planet dumb enough to pay almost 4 – 6X invested capital, and they get bought by the most unlikely suitor?

If you take VC money, this is very often what happens to you.

Let’s do the analysis.

DevOps companies are not the only ones doing crazy things with VCs — like taking in well over a hundred million dollars in investment while they do not even do that much in revenue. But they are the poster children for really stupid investments because the DevOps space is so widely fragmented and broken into almost infinite disciplines — like testing, config management and a host of others.

VC money makes you do stupid things fast.

One of them is to almost instantly ramp up the cost of sales to 50% or more, sometimes even 100%. This madness is paid for from that A Round.

Because the market is still an innovator’s market, that spend does little to boost revenues. All the innovators know about you so those sales steroids are wasted.

They are paid for by equity dilution of 40% or more. Employees are now working for almost nothing, stock-option wise.

So, what does a CEO do?

Fire the VP of Sales, because it must be a sales issue, and hire a new one and do the B Round.

Guess what? When the new VP comes in, bringing their “killer sales team,” spending tons of money on travel, events, you know the drill — then they also fail to get the “exit trajectory,” what happens?

Well, the CEO gets fired and the process begins again. Round after round failing to get the trajectory. 4, 5, 6 sales VPs, all coming from equally lifeless DevOps companies. You know them — Chef, Puppet and scores of others.

Finally the board realizes there is no chance for an IPO.

So they pull every string to sell the company. But this strategy, as our pals at this little DevOps testing company just learned, is very risky.

You never sell a technology company. You make someone want to buy it.

That is always the strategy, the only one that works.

And you focus on the next more stupid investor other than yours. So think HP, IBM, and of course, always, CA.

To get them to want to buy, you need a story, no matter how preposterous. Actually the crazier it is the more likely they are to spend 4X or 6X of your invested capital (not your paltry revenues) to get your investors out of this dog.

To do that you need a story.

Years ago, we were brought into a virtually dead distributed order management company. They had their 5-6-7 past Sales VPs, several CEOs, the typical drill. The VCs put in a brain dead CEO who brought in Sales VP number 7 or 8.

The new Sales VP brought in his pals from the recently dead I2, the logistics software company who made litigation history booking air as revenue. After a year, they did almost zero in new revenue. 17 new reps, among them, did less than $100,000 in new revenue. This may be a record.

We engaged, and in the first year we brought in a deal for $20 million in product and services that changed the trajectory for this company.

But, it was clearly an outlier. We found a deal for someone who had a totally unrepeatable event for which they would gladly pay $7 million in yearly licensing fees and twice that in services to make the stuff work. We found the Black Swan. The unrepeatable event.

The CEO may have been clueless how to run a high tech company, but he knew a story when he saw one. So he and his VC board went to all the usual suspects and sold the company to IBM for $200 million. It was not much of a profit for the employees, but the VCs got out whole, which at that point is all they wanted.

Back to our DevOps testing company. They hired a VP of Sales, number 5 or 6 and he flogged the sales force into happy production. Worked, as it always does, for a few quarters, then his toxicity was so great he got fired (getting an new gig almost immediately).

The new guy came in and did the usual.

The reason we aren’t selling is “execution.” So we are going to hire people who can execute. And he did. Knowing that the strategy was to dump the place, he and the equally terrified CEO put every effort into building that “story.”

“We are the leader in DevOps testing. The world is coming our way. The big customers are all buying our stuff. Our competitors just suck.”

And it worked. The story, from accounts from a potential buyer, had impact.

Then it happened. Out of the blue, a little-heard-of company in the browser testing space named Browserstack got a $40 million + investment from Accel Partners — a world class VC.

At first the little DevOps testing company investors were ecstatic. Wow! This space is really hot, we made a great investment. Apparently the potential buyer did not quite see things that way. This was very accretive investment, from a Tier 1 VC; it punctured the story.

Maybe these Browserstack guys are going to take over the market! After all, they have been profitable while the guys we are planning to invest in haven’t made a profit, well, ever.

Wait a minute! The story is starting to show holes. So CA, we were told, backed off a bit. Or at least some senior people did.

Not to be outdone, the DevOps company then showed massive growth forecasts. They showed several quarters of great revenues. And they asked a purchase price valued in parallel to what the very profitable Browserstack likely received.

The deal was never quite done, but it was very close, we hear. It went up the chain and because of the noise, the story, the space, it was considered within 10% of the asking price.

Then, out of nowhere, in came the Black Swan again. CA gets bought out in one of the craziest, nonsensical buyouts in tech history.

One analyst called the combination of CA products and Broadcom “like a geranium and a bicycle.” That is probably not a great, synergistic match.

Insert yourself here, dear reader.

You are a middle aged CEO and you are the captain of a ship that can no longer see the shore, with an exhausted crew, few prospects of ever finding land.

You are the VP of Sales for a company where you just flogged all the meat out of every forecast for the next two years, moving everything up to this quarter to make that “story.”

You are the Marketing VP who does SPAM marketing, giving the sales force leads from people who do not even want to identify with anything more than their Gmail or Hotmail address.

You put all this energy into selling your company to the next stupid investor.

You thought you could pull off the Mercury HP deal — sell the dumb big company your testing stuff, then get out before the numbers collapse a short time later.

Where do you go now? What to you tell your board? What is the next act?

Your company is 10 years old, has never made a profit, and has third rate VCs who just got really, REALLY edgy.

You have hired the B, C, D management team happy to have a gig, any gig, just to be employed knowing the stock sucks and they will have to find something else soon. They almost got the place sold. So close.

And your only buyer on the planet gets bought out in one of the craziest deals in history. Clearly, you are not out buying lottery tickets because you must realize you have zero luck.

What do you do now?

This is what the technology Death Watch looks like.

Your better employees are looking for jobs in a very hot economy. (I know as I am interviewing several of them).

The CEO is holding a wolf by the ears. He or she cannot let go or they are seen as a serial failure. And they do not have the juice, the energy, like investment money, to hit exit trajectory.

You cannot have a team meeting and BS everyone that you have “a very credible buyer in the due diligence process” because all of you at the table know there are not that many really stupid companies who will pay what you need to get whole. CA is gone and there is probably not another in sight.

You are almost out of cash or will be within a year so now you have to consider that “down round” math. Your pipelines are pretty much exhausted and almost a third of your sales force is looking for a new gig, quietly, but persistently.

If you are the CEO, you know your executive team must be looking for new gigs as well. That means those ugly board meetings where you have to say the VP of this or that just left. They sucked anyway but still, now you have to hire a head hunter. While that may have worked with the board before, now they are not having those cozy dinners with you the night before the board meeting.

You know the board is probably doing a quiet search for a new CEO.

Every exec knows the end game. Kind of like the Germans or Japanese in late 1944, the question is not when we lose, but how.

But you have to BS the employees. Now time to get those hapless HR types to do more games, better lunches, T shirts, post the kids singing in the halls, whatever it takes to get 20-somethings to think there is life in this dead body.

They love to do silly stuff to prop up the energy, never knowing there is no bottom beneath them. Kind of the fate of HR types. Imagine a career doing this!

You, as an exec, know it is over. You may sell for scrap.

You know the bottom feeders are smelling your blood in the water and considering how to buy your company from desperate VCs for almost scrap.

You know there are meetings, and that you are not at them. Your investors are. And they are talking a new CEO, new management team, dump this thing–how to get out close to whole.

You may find another gig. But it is another failure in a career of not-quite-so-good-endings. And you are a bit older, with not much to show, with no FU money, so, well, you are kind of screwed.

This is the life of a VC company who chased growth over profit.

This happens to 75% of all VC investments. This could be or will be their story—–75%

That means you have a 75% chance that this is YOUR story if you are working for a VC funded enterprise software company. Are you?

The boys and girls at Browserstack are having a ball. Their options are through the roof. They are taking customers with short sales cycles since their competitors spent time doing all the selling. Their investors are planning an IPO.

Browserstack, Atlasssian, Survey Monkey focused on profit over growth. They let others lead the market until they lost it—not with bad product, but with stupid leadership.

Some of them took in VC money, but they did so AFTER they were profitable. Thus, it was accretive. So this is NOT their story; it is, however yours if you took in early VC money that forced you to do stupid stuff — like that 60% cost of sales and marketing.

And, do not for a moment delude yourselves, companies lose their markets when their investors want out. Management teams are replaced with even more incompetent management teams–always focusing on “execution.” Then comes Quarterly Revenue Madness — that is all a VC has to render judgement.

Employees, even the chirpy team “pallies” in HR and recruitment start to lose some of their pep. Death is not far away and for many 20 somethings, it is their first experience at what they will see for an entire career — a company that has enough revenue to not die but not enough capital to ever succeed. The Death Watch begins.

And why did this have to happen?

Because you took early VC money and sold your profitable future for a quick IPO or sale. And when the only company dumb enough to almost get your investors out whole, although not that profitably, left the table, you lost the most likely prospect for that exit trajectory event.

You also lost the confidence, what little might be left, of your existing investors and certainly any future ones.

Sit back and watch Browserstack, Atlasssian, Survey Monkey and others who made a different choice, and thus, will have quite a different outcome.