Perspectives: A Conversation with Michael Schreck, CEO of Zmags

August 24, 2011

Some keys to a wildly successful company that attracts top investors? Focus on the right customers and talent from the start.

Michael Schreck is president and CEO of Zmags, a global leader in SaaS-based rich media merchandising and analytics. With over 3,000 of the world’s leading brands in the retail, fashion, e-commerce and consumer products industries, Zmags enables its customers to mobilize their merchandizing and capture the value of their brand experience across social, tablet and mobile commerce channels.

 

Michael has presided over three startups that recruited exceptional talent and top venture capital investors: m-Qube, which was acquired by VeriSign for $250M; Upromise, which was acquired by SLM Corp. for $300M; and SmartBargains/Rue La La, which was acquired by GSI Commerce for $350M. He most recently served as president and CEO of Corrective Solutions.

 

Michael earned an MBA from Harvard Business School and a bachelor’s degree from Brigham Young University, where he now serves on the Presidential Advisory Council.

 

We asked Michael what he thinks are the most important keys to success for navigating through the expansion stage.

 

Describe what happens to a company’s leaders when they reach the expansion stage.

If you get there quickly, a few things happen. There’s an initial euphoria – someone is paying you for something you hoped they would. You had a concept that is now on its way to becoming a bona fide business and you feel validated by the market. It’s an extraordinary moment.

But there are two consequences. On the positive side, you have a business model, something real to build from. On the negative side, it is easy to become so narrowly focused in that moment that you can become blinded to other opportunities (and a far better business model still available to you). Don’t let the euphoria of the moment or the maniacal focus lead you to the wrong places. Step back for a moment and remember two things: 1) you are never as clever as you think (stay humble) and, 2) allow that humility to enable you to search for an improved model (because once you lock it in, it is very hard for your customers to accept change)

What is the most important thing to keep in mind while recruiting?

Cultural fit is the single most undervalued attribute when making a senior hire. I really think this is the biggest thing at which expansion stage companies fail. You have to have an extraordinary fit with the founding (or desired) culture.

 

When you reach the expansion stage (and you believe in accelerating your growth around a business model), you begin to hire very quickly around very specific needs. You typically have some good “generalists” at the table already, or you wouldn’t have made it this far. But now you need more “specialists” than generalists. For example, you need a dedicated VP of Sales or VP of Product, etc.  So off you sprint to fill the need. These initial senior “specialist” hires can massively reinforce or potentially destroy your culture.

So guard your culture when you search for these people. A person may have brilliant skills but that doesn’t mean they’ll be the right fit.  Don’t become unduly enamored with a person’s talent so that you miss the red flags on fit. I like to focus on things like: Are they “problem solvers” or simply “problem identifiers?” Are they worried about the organization’s politics more than the vision for the customer? Etc. etc.  You certainly don’t want a cancerous hire on your hands. And compounding that problem is that rapid growth often hides cultural hiring mistakes for an extended period of time. In fact, rapid growth hides almost anything negative for a while.

 

What areas do you stay most focused on during periods of extreme growth?

It’s all about — and always about — the customer. It’s easy for any executive to become insular, myself included. To try to avoid that, we have developed a few initiatives to improve our contact with customers across the franchise.  For example, we have integrated a “delight the customer day” where we spend one day a month hosting a customer for lunch, listening in on sales and customer service calls, and reviewing our latest customer-centric KPIs. We also have weekly webinars on topics our customers (and prospective customers) have indicated they want to know more about.  And internally, we organize “webinar listening parties” (with snacks) in our offices to hear better what our customers think.  We also hold formal customer advisory councils every six months.

At the end of the day, operating metrics are important, but if you don’t know what’s going on with your customers, what’s the point?

In his book The Loyalty Effect, Fred Reichheld talks about NPS – Net Promoter Score. We have implemented this to have a hard metric for the global team for our customer satisfaction.  It works like this: Ask your customer this one question – ‘on a scale of 1 to 10, would you recommend our service to a colleague or close friend?’ It’s not so much about what your score is when you start, but rather knowing what direction you are moving. Now you have something you can track. NPS forces us to know who our customers are – especially if our job is focused on an internal customer (or an outside influencer, or an analyst). You can use NPS to constantly evaluate where you stand with any type of customer.

At the end of the day, operating metrics are important, but if you don’t know what’s going on with your customers, what’s the point? I’m a big fan of NPS – we use it to track every performance area of the company (e.g., how the video-conferencing experience is working, etc).

How would you describe your management style?

I’ve learned that the saying “wisdom comes from experience” is really true. There are great, good and ugly ways that people respond to you. When I was a younger leader, I was extraordinarily intense in literally everything I touched. I always believed sincerely that everything could be better (right now). While it may have been true sometimes, that approach certainly didn’t give my team the freedom to be creative, to take risks and to fail. What motivation did they have to do their best work if they thought “Michael’s just going to fix it anyway?”

Am I still intense? Yes, but it translates differently. My advice to younger CEOs would be to learn to differentiate the things that do and don’t really matter (and this is particularly hard to discern the difference) and apply the intensity where it does materially matter. If you do that, your team will surprise you. Many younger CEOs think they can do everything better than the people they hire. If you think someone isn’t doing a good job – but you believed you hired the right person – you’re probably not trusting him or her enough.  That’s what I call a “you” issue not a “them” issue.  The faster you get your arms around this issue, the more productive your team will be in the medium and longer-terms.

What are your thoughts on strategy?

Well I could say a lot of things, but basically strategy comes down to a few things. First, be very clear about what you don’t do. It’s natural for young companies to say, “Yes we can do that…sure, whatever you want Mr. Customer.” That’s just our nature. We listen to our customers and we give them what they want. However, to build a replicable, sustainable, and scalable business, you have to know what you can’t do – not at a service level, but at a strategic level. The reality is that you only have so much capital, and you only have so much time to execute, so you have to be really clear on this.

Second, don’t rely on customers for innovation. Listen to them and hear their pain points, but don’t build to what they’re saying literally – build what you imagine will be even better to cure their pain points. Look at Steve Jobs. The teams behind the netbook and the early tablets imagined something like an iPad over a decade ago, but Jobs has been the only guy who succeeded (so far).  He did not rely on a focus group of customers to design the intuitive and elegant UX, software and hardware. Focus groups often create literal translations of their pain—with the results being such product duds as the Pontiac Aztec or Microsoft BoB.  Innovation needs to be a result of listening to customers but not a literal translation (which is so frequently the case).

Any advice on go-to-market strategies?

The bottom line: be prepared to change course immediately and frequently. Whatever you imagine, the market will say you’re wrong. The market is going to tell you all kinds of things you didn’t know. A lot of companies just look at the numbers on a spreadsheet and ignore their listening posts. Make sure you have customer partners. Go to the customers who helped you build the product and ask them to be your partners in the launch as well. Get that feedback directly.  Keep the channels open at all levels in your organization.

What about outside advisors?

My best advice is to attract an industry luminary to serve as your non-executive chair – it just makes everything easier. If you can do this, you have something brilliant. This is an important milestone for a young company. It will give you credibility, impact how much capital you can raise, the level of talent you can recruit — everything.

If you can’t attract a luminary into a non-executive officer role, find a technology luminary for the CTO role. It will create a halo around you. If you can’t get either of these, then at least create an advisory board or panel.

How can a young founder attract a luminary?

Entrepreneurs and CEOs are pretty good at overvaluing our points of view. Put an entrepreneur in front of a luminary and he will have no fear! Maybe you do have the best idea, and maybe it will be interesting to them. But to close the deal, you really have to know this person in advance – or find someone who does know them. You have to be able to connect your vision to their personal passion. These people aren’t in it for the money. Typically, they’re concerned with legacy issues and/or they want to give back.

What is your social mission? You have one, but maybe you haven’t thought about it. You have to show the human element of your business.  How does it make the world a better place in a revolutionary way? If a luminary can see a piece of himself or herself in you or that, then it’s an opportunity for them to give back and they will consider it.

And to put your money where you mouth is, consider setting aside a material portion of your stock to support that mission. If you put your skin in the game and the luminary gets it, they’ll want to put their skin (their reputation) in the game too.

What guidance would you give on capital and acquisition?

First, choose a VC who will support you. You need capital to build your business and you need a partner – someone who is going to believe in you as much or sometimes more than you do in your own self. There might be someone willing to give you a higher valuation, but their fund may not be as liquid, or maybe they have a bad history supporting their companies. Be careful.

Second, don’t get intoxicated by valuation. Early in our careers we value valuation over liquidity and that’s a massive mistake. A valuation can make you prideful and boastful. You might think, “Wow, I’m worth a lot. I’m must be doing something right.” I’m not saying that a valuation is unimportant, but it is not nearly as important as your own company’s liquidity. You can’t make payroll with a valuation, but you can with cash.  Raise more than you need whenever you can, as it always takes longer and costs more than you imagined.

Third, if you have several buyers coming at you with acquisition bids, you really have to consider all the outcomes. The highest bid is not always the best choice. Is it a strategic buyer or a financial buyer? Depending on the bid you take, how is your life going to change? How are the lives of your employees going to change? When you’re looking at a 100-page term sheet, the price is only written on one page. So you better understand what the other 99 pages mean.

If necessary, go to a trusted advisor who is not part of your company and who has been through this war many times before. Your lawyers and investment bankers are great, but they are still transaction-driven advisors – they don’t have to live with the consequences. Yes, use his or her expertise, but always have someone outside of your business that you can turn to for a more objective point-of-view.

Any final words for leaders of young technology companies?

First, consider B2B as a more sophisticated approach to a given market. Consumer-centric solutions (B2C) are very sexy right now.  For example, there’s an incredible amount of energy and money going into B2C mobile applications, social networks, etc.  — but I don’t see a business model anywhere in sight. Look at Flipboard (which I love) – they were just valued at $200 million. And they acknowledge they do not have a business model. I suppose with $50 million in capital they just raised, they’ll figure it out!  But think about it, do you really want to compete head-to-head against highly funded, business model-agnostic competitors?

A few continue to defy gravity — Twitter, Facebook, Groupon — and we become tempted to build our solutions in a similar way. But hold on. Where is the longer-term value proposition for the merchants? And the scalable and sustainable unit economics?  The recent S-1 Groupon filed indicated there is trouble on the horizon on these issues.

Yes, B2B channels may be harder for a young entrepreneur to learn. They are typically more sophisticated buyers. But go ahead and take a look anyway – what are the pain points? With a B2B plan, you don’t have to spend nearly as much money on your brand and the distribution channels are typically already forged. True, it’s less intuitive and the sales process is more sophisticated, but you can grow so much faster once you get it right.

Second, and far more importantly, trust the power of one. One new person can change an entire company. When you are interviewing someone, ask yourself, “Can this person change my company for the better?” If you aren’t sure, back away. If so, hire them.

Research Director

<strong>Lisa Murton Beets</strong> is Research Director for the <a href="http://www.contentmarketinginstitute.com/">Content Marketing Institute</a>. Prior to joining CMI, she was the Principal of Murton Communications, a firm specializing in writing and editing content in business books, feature articles, profiles, and case studies.