At Quicken, Culture is Everything

I had the opportunity last week to tour a dozen or so of the more than 40 buildings in downtown Detroit that Dan Gilbert and his various associates and companies have bought and refurbished. It was an amazing experience. Building after building, interconnected by walkways and underground passages, has been repurposed into really cool workspace for young tech workers (with a few of us seasoned types sprinkled in for good measure). Nobody in Silicon Valley has it better.

I was attending Detroit Venture Partners’ annual Demo Day with more than a hundred other people, including many out-of-town VCs, most of whom were originally from Michigan but had to leave after school to find suitable jobs. There is a subtle—perhaps not-so-subtle—attempt to recruit these talented people back to Michigan to help rebuild the economy.

Such a tour is one of the standard components of any visit to this special kingdom. It’s usually led by Bruce Schwartz, the fedora-wearing tour guide who describes himself as a devoted advocate of Detroit; a childhood friend of Dan Gilbert; and the former CEO of a company in the mortgage business. Recent visitors, he reports, have included Madonna; Michael Bolton, who is directing a documentary on Detroit’s rebirth; and Warren Buffett.

The tour has a few interesting touch points: on the eighth floor of the former headquarters of Chase Bank—their logo is still on the outside—is the main cafeteria for employees of Quicken Loans and the many associated Dan Gilbert companies. It is as good as any Silicon Valley food court, and I have toured those at Google, Apple, and Pixar. Chase still has some operations in the building; you can tell which floors they occupy by their corporate dullness and lack of entrepreneurial energy.

Similarly, the building in which Dan Gilbert keeps his office, and the model of downtown that shows all the buildings that are being repurposed, is the headquarters for the venerable last-generation software company Compuware. Riding up the open glass elevators you can see where Compuware ends and Quicken begins. Bruce points it out. One is dull, grey, colorless and lifeless; the other is vibrant, colorful, energetic, and buzzing with activity.

“Culture is everything,” Bruce says, quoting a few of his favorite corporate sayings. They call them “isms.” Various of these are painted on walls throughout the tour, and passing employees, when asked, can cite a favorite one. This is one way that people are selected in, and out, of the interrelated companies.
Three of the locations stand out most in my mind. One is the security center of the 20 or so square blocks of downtown Detroit. In it are dozens of monitors that link to cameras dotting downtown. “You can’t take pictures here,” Bruce warns.

In this basement command center, personnel can monitor pretty much anything that goes on in the area. For our benefit, security personnel bring up a picture of a hoodlum who grabbed an iPad out of a tech worker’s hands one day in Campus Martius, the center of the zone. A picture of him was taken off a camera and, when he returned the next day to the same park wearing the same shirt, he was arrested. (Whoever said criminals were smart?) The message spread to this dumb crook’s associates, says Bruce, is that this is not an area to do crime.

A second location is the basement of the old First National Bank building. Vaults no longer needed in the age of digital currency are left open and surrounded by tech worker space—couches, open cubicles, art work. When the building was bought, it didn’t come with keys to the many safe deposit boxes in the vault, most of which remain unopened. “We didn’t want to deface it by breaking them open,” Bruce says. Warren Buffett, fittingly, was the only person to ever open a safe deposit box on a tour and find something—a dollar. “It figures,” says one person on the tour. The vault is furnished with chandeliers and a long table, and can be rented for dinners.

The third location that stands out in memory is the fulfillment area for Quicken Loans. It’s in a basement somewhere—I got dizzyingly lost after a while, but it might have been beneath the old Federal Reserve Building on West Fort Street. Bruce showed us the loan documents that a Quicken customer gets: neat, tidy, clear instructions, all in a cardboard mailer the size and shape of a portfolio case; everything in its place.

“We reimagined the mortgage fulfillment process,” Bruce says. Who takes the time to reimagine the package of papers a homebuyer gets on closing a mortgage? Someone who believes in this: “Obsessed with finding a better way,” which is one of the aphorisms Bruce quotes to us.

I have bought a few houses in my life, and the process is horrible. The documents are mind-numbingly opaque; the person explaining them is motivated by a commission, not by serving me; the documents get filed away and never seen again. Lawyers wrote them and were, apparently, paid by the word. Not so here; the documents are clearly labeled, concise, and simple to understand.

It’s good business to do mortgages this way, too. In the wrap-up to the recent mortgage crisis, mortgage originators and banks paid billions of dollars in fines and were prevented by courts from foreclosing on houses due to poor documentation.

The fulfillment area is staffed by young workers, with a seasoned manager or two. They’re used to tours and they greet us warmly. They seem genuinely happy, too, which is hard to imagine for somebody who basically works in a mailroom in a basement. How could this be?

As Bruce says, “culture is everything.”

The Overuse of the “C” Title in Startups

I visited with an early stage company recently—or I should say they visited with me—and it had many of the features an early stage VC likes to see in an entrepreneurial team. Vision; energy; a variety of skills; belief; and passion. They had a completed first generation product and had engaged with customers early in the process to gain feedback to adjust the product and business model to solve real problems at a price that made sense. The accelerator that had helped them had served them well.

They were beginning to engage with VCs to explore next-round early stage venture capital financing. They had been coached to approach this correctly—they weren’t meeting with me to raise money, but to establish a relationship that could lead to a future funding decision. Since VCs fund only 1% of what they see, the odds are that a company which pushes a VC to make a funding decision too early will get a “No.” It’s hard to convert a “No” into a “Yes.”

The Company’s seed funding was also structured well. It was in the form of notes that would convert into the Series A venture round on the same terms as the VC investor in that round. I have written about this elsewhere, but seed notes that convert into a discount to the Series A price create undesirable misalignments of interest among investors. Anybody who wants a fuller explanation of this can follow this link:

It was a first meeting and it was a young team with holes in their experience. They had never raised VC before, but had a lot of ideas about what that entailed. They had never scaled a company; living through that process provides experience, at the visceral as well as intellectual level, that can’t be obtained in any other way.

And this is where we ran up against what I consider to be a real problem. There were five team members in the room, none over the age of 30. They had a variety of skills and experience—some more than others—but each had a title with a capital “C” in it. There was the CEO; the COO; the CMO; the CFO; and the CTO. They were the only five employees in the Company—I say employees, but they weren’t being paid much and were really in it for the equity and the experience.

I like to have a conversation early with a founding team, prior to investing, to gauge the self-awareness of each team member on this issue.

Companies go through distinct phases from formation to exit (or demise): start-up; early adoption; growth; maturity. Each phase requires different skills among the executives and managers, and many people in the founding team may not be able to (or want to) make the transition from one phase to another.

For instance, the person who is relentless at opening doors to gain early customers in the start-up phase may not be good at recruiting and managing a sales team in the growth phase. There is nothing wrong in this; it is normal across all functions of a company—sales, customer service, marketing, finance, development—for producers to either develop into managers or to remain producers.

An early executive who can’t make the transition to the next phase may be a valuable employee, but if he or she has a title with a “C” in it the only way the employee can be retained is with a demotion. Entrepreneurs often take their identity from their role in the company and it’s a real blow to their sense of self to take a demotion. It’s challenging to remain a happy, loyal and dedicated employee after a demotion and difficult for other people in the company to know how to maintain or alter relationships with the demoted person. Sometimes a demotion works, but more often it doesn’t.

My solution to this dilemma is easy: don’t hand out too many “C” titles early in a company’s development. This retains an upward pathway for people who perform. People whom the company outgrows but remain valuable individual contributors don’t have to be demoted to be retained. The founding team should be motivated by equity, anyway, not the pomp and perquisites of management.

This particular team hadn’t been well coached on this issue. They seemed offended when I brought it up. I was glad to know this early on, because if this is going to be an issue, it should be surfaced before an investment is made. I told them that getting a VC to invest in a company with five people, all with “C” in their titles, will be an obstacle. I’ll be interested to see if they come back again, and what they have to say about this subject when they do.

The Emergence of “Human Capital Management”

I had dinner a couple of nights ago with two of my favorite executives, the CEO and COO of an enterprise SaaS company in which I invested early stage venture capital. The CEO rose through the sales ranks, and the COO through what used to be called HR and is now being called HCM—human capital management.

I have always liked sales-oriented CEOs because they are focused on customers and measurable results. The good ones spread these orientations throughout the organization, creating a culture attuned to customer service and accountability. This is the first company I have worked with, though, where the number two executive has risen through the HR ranks—and I’m surprised at what a good decision this has turned out to be. We talked a great deal about the shift from HR to HCM and how this reflects on modern personnel practices, especially in technology companies.

When I went to business school, HR was not the choice calling of most of my classmates. It was a backwater focused on administering benefits and avoiding corporate liability—not central to the MBA educational process—or so I thought then.

That is no longer the case.  The functional area has clearly been elevated. Talent acquisition, training, assessment, and retention are no longer backwaters, but are strategic to forward-looking companies.

There are many reasons why HR has become HCM, including better data on what drives strong company performance. Culture is increasingly understood to be important, and this particular company places a big emphasis not just on hiring good people, but on hiring people who fit and quickly weeding out ones who don’t. Yes, top performers are significantly more productive than average ones, but cultural misfits can be disruptive and hinder team productivity, no matter their individual performance. Bad hires are expensive because they have to be replaced, any holes they leave need to be filled, and any damage they have done repaired.

Watching this company, and learning from this team, I have become a convert to modern talent management practices. Apparently, I’m not alone, and am probably behind the curve.

Anybody who has been following the emergence of enterprise SaaS has seen the speed with which the HCM sector has emerged. SuccessFactors pointed the way, growing from startup in 2001 to $330 million in sales before being acquired by SAP for $3.4 billion in December 2011—that’s right, the acquisition price was 10x revenues. Not to be outdone, Oracle followed in February 2012 with a $1.9 billion acquisition of Taleo for 7x revenues. Not content to sit on the sidelines as SAP and Oracle bought their way into the cloud, IBM bought HCM company Kenexa for $1.3 billion in August 2012; the company was on a run rate of about $250 million in revenues—a relatively inexpensive 6x multiple.

HCM SaaS companies also have been well represented in the IPO market. Workday, founded by former executives from PeopleSoft, went public in October of 2012, and is now valued at $12 billion dollars—more than 34 times trailing 12-month revenues of $350 million. CornerstoneOnDemand, another HCM company that went public in May 2011, sports a market cap of $2.6 billion, a multiple of 16 times trailing 12-month revenues of $150 million.

There are also dozens of smaller privately-held HCM companies, many of which are growing at annual rates of 50% or more.

How can there be so many successful companies in this emerging market? There is clearly enough demand to feed them all.

These are all companies that, in one way or another, help businesses to attract, train, motivate, and retain the best people. I haven’t done the math, but it feels to me that if you added up the revenues or market caps of all the HCM companies in the enterprise SaaS industry, it would be the largest sector.

All in all, it was a pleasurable dinner. These two executives have been very intentional about elevating culture in their organization, and that decision—supported by the board—has produced very good results. I’m reminded of this every year at their Christmas party, which feels like a family gathering. Each year they have an artistic contest of some type—most creative door covering, for instance—and it is amazing to see the energy that people in every functional area put into letting their creative sides run free. You can’t predict who will have the most artistic creations based on their job functions. I take this as a sign that people are comfortable being themselves in this environment.