Perspectives: A Conversation with Tim Berry (Part Two)

This is the second of our two-part conversation with president and founder of Palo Alto Software Tim Berry. In part one, Tim discussed business planning and the critical role it plays in the growth of young companies. In part two, he offers advice for entrepreneurs seeking investment funding and shares some secrets of his own company’s success.

You had great success growing Palo Alto Software from the ground up without taking venture capital. What two or three practices did you find most useful in growing your company?

We built a foundation on a set of values that mattered. It was always about how business planning is good for the person running a business. We never saw the business plan as a set of hurdles – it has value. As we started to grow, the early team shared those values of doing something good for our customers.

In 1995, we started bringing people in and got an office outside the home. We found people who could share our vision of good — the idea that it was worth it to spend $100 on Business Plan Pro versus a business dinner. Values kept us going early on and became part of the team structure. The employees could intellectually own what they did — be it customer support, book keeping, or finance. Each person identified their part in what the whole team was. So 1) we built around values people could believe in, and 2) people had ownership of their functions. We did a good job in the early years, and I think it was easier during the earlier years to let people own their functions. It created a concept of ownership – not something you could get from stock options, but something where you felt empowered and that the group trusted you.

Why was it easier to create that ownership in the beginning?

It has something to do with stages of growth. That team spirit is easier to develop and maintain in the beginning. We went through a period where we were growing 40 to 50% over three or four years, and in my honest opinion, there is a point of inflection. In an environment like that, people struggle to keep up during the growth. Then there’s a change in management … all of a sudden there are more goals, measurements. In the beginning, it’s like mice scurrying around a piece of cheese trying to figure out how to move it, but with growth you need more structure, especially in the late stages.

What is the ‘right time’ for an entrepreneur to seek outside investment?

My theory is that, based on a set of assumptions, there are a range of outcomes for every business. There’s a sweet spot if you’re looking at an opportunity — the right amount to spend to match the opportunity. And it’s hard to prove or argue. It’s more of an art form.

An entrepreneur can ask him or herself, “What can I do with this amount of money? If I had $300,000 I could get to here. With $100,000 I can’t really get to it. With $1 million I would definitely be okay, even luxurious.” So it’s based on the cost benefits of what you see in spending. In this example, maybe the entrepreneur decides that with $300,000 he or she might have to make some sacrifices, but they can make it work. And maybe no one would really give them $1 million anyway.

So there are knobs you have to turn. And yes, there is some guessing. You need to know what you can do with what amount of money, and, if investors are involved, where they will be getting the most benefit. Investors want to see growth for every dollar invested.

With the sweet spot, there are examples where bootstrapping is a better option. But there also are cases where you can stunt growth when you keep trying on your own. Personally, I’ve worn all the hats. It’s all about finding the right set of tradeoffs to match the opportunity. It’s in the nature of the opportunity. It is industry and idea specific. These variables have an impact.

What should he or she look for in an investor?

I heard David Chen give a speech to some MBA students four or five years ago, and he said to choose an investor like you would a spouse. An investor relationship that works benefits everyone, and the relationship is good for the entrepreneur too – and not just in regards to money. The investors can give you help, encouragement, make introductions, and serve as devil’s advocates – partners in life. I’ve been there with investors who were very helpful. I’ve also seen adversarial relationships where everyone is losing. It has to be win-win. It’s all sides win or all sides lose.

What are some of the most important things an entrepreneur must do to prepare before getting in front of an investor, especially in terms of the business plan?

First, understand that your plan is the key and don’t confuse it with outputs. The pitch isn’t separate, but an output of the plan. The investors may not have read the plan, but if you don’t have a plan, they’ll know it. The lack of a plan is a fatal flaw.

Second, during the early screenings investors will look at videos, memos – outputs of the plan. If they’re serious, they’ll want to see it. So don’t wait. Maybe wait to dress it up, but make sure you have one, even though it might change tomorrow.

I remember at a University of Texas business plan contest (the Super Bowl of Investment Competition) where an entrepreneur was in the middle of a pitch. She was in the finals and showing some projected numbers. One of the judges (an investor) said, “Wait a minute, those aren’t the same numbers in the plan you submitted.” She said, “Of course not, that plan was submitted three weeks ago – this is our plan now.” She won.

This drives home the point: plans are supposed to be kept alive and will change. Her plan was a snapshot as how things existed at a given point in time.

Third – the most common mistake I see by far is what I call ‘stupid profits.’ I use this phrase on purpose … people promising what I see as stupid. Numbers above 2X the industry average are stupid because they’re not credible. Get a clue. Forty to 50% of the plans I see have these incredible profitability rates. If your business is so good that you COULD generate 40%, then pour it back into growing faster! If you’re at 50%, pour 20% back in to marketing — use it to grow!

Another trend I see – and this is a mistake – is in an effort to keep the plan short, some people omit the essential projections. Keep it short, yes, but by cutting text, not numbers. Do not fail to show me cash flow. Do not fail to give me projections, costs, expenses. Do not fail to show me your exit strategy because that’s when I’m going to make my money. Don’t spend forever in a business plan reveling in your technology and your science. I’m not going to evaluate your science. I’ll learn about your patents and science during due diligence. Show me your sales projections, cost of sales, marketing, defensibility and growth – focus on those things.

Tim, you and your wife have been married for 41 years and you’ve raised five children. You stress the importance of family. What words of advice would you pass along to the leaders of young technology companies who may be struggling to find balance in their lives?

Well I sure hope they can find balance. I might have gotten lost in my business, but my wife saved me from that. I had young kids, and my wife would remind me, “They’re not going to be this young forever. We have to do THIS, now.”

Yes, I was home for dinner, but it was because my wife was bossy about it; if not, I would have stayed at the office late two, three nights a week. I thank God I had someone in my life who didn’t let me. She had great sense to do that. She put the money down on vacations well in advance to make sure we would actually go. She knew what she was doing. She encouraged me to coach soccer, knowing full well that once you’re committed to 15 sets of parents it’s easier to miss an investor meeting than a soccer game. Yes, the temptation to get lost in the business is there. You keep thinking you can postpone things … you think ‘I’ll do this, and then I can do that.’ But the core point I can share is that it goes away. You can’t postpone the other parts of your life.

Back to part one: A conversation with Tim Berry

For more from Tim, check out his blog, Planning Startups Stories, and follow him on Twitter @timberry.