'Shark Tank' Entrepreneur: 20 Secrets To Surviving Vicious IT Waters1:00 PM EST Thu. Aug. 15, 2013
Kevin O'Leary, a successful software entrepreneur featured on the hit ABC television show "Shark Tank," recently spoke to 400 IT buyers at $1.5 billion solution provider PCM's Vision IT Conference & Expo. Following the conference, O'Leary spoke to CRN about the secrets to succeeding in the fast-paced IT services market. The new season of "Shark Tank" starts Sept. 20, with about one-third of the deals involving technology ventures, said O'Leary, the author of "Cold Hard Truth: On Business, Money & Life." Here are 20 secrets from O'Leary on how to survive IT's "Shark Tank."
For the first time with some of the companies I am investing in, we are talking about putting the chief technology officer on the board. Why? Because it is an area we can turn into a profit center. We can drive 20 percent savings if IT is implemented properly, but also we can make our people more competitive, particularly in sales and marketing. When you can provide IT solutions like tablet-based enterprise solutions and get people trained on it, it is a competitive advantage. I'll give you an example: In my mutual fund company, O'Leary Funds, we now use tablet solutions to show the performance of every one of our funds against the competitors in a way that has never been done before. Real-time closing prices by the minute.
(O'Leary pictured far left with Adam Shaffer, senior vice president of marketing for PCM)
I prefer to pay salespeople more than the CEO because they are more important. Without sales, you have nothing. Frankly, sales knows more about the business than anybody else. They see the problems first. I think sales is absolutely the front line of any technology company. My attitude is, when I go to invest I talk to the salespeople first. I want to hear from them first. I want to know what is working and what isn't. I also think they should be comped more. They are more valuable than the CEO or the CFO. And I think usually the CFO and CEO have more equity -- long-term stakes, but the comp, the acutual salary, the highest-paid people should be sales.
Many businesspeople are not able to articulate their advantage in 90 seconds or less. A good IT solution is easy to understand. They don't explain why they are the right team to execute the business plan. The one that comes up most of the time is they don't know the numbers. They don’t know the market size. They don't know what their costs are. They don't know anything about their numbers. I just take them behind the barn and shoot them.
IT has actually been one of the reasons that the S&P 500 has driven the highest cash flows in history. We had the biggest [S&P 500] earnings ever last year and at least 20 percent of that is due to IT. Numbers tell the story. For all of the pessimism around business, we have had the best earnings in history and 20 percent of that came from implementation of good IT with product associated with it. There is a huge upside [for IT service providers)]as we move to the cloud with implementation, training, merging IT with HR. These are all big deals. It is a whole new world that is coming. And customers are willing to pay more. I actually see margins going up in this [IT services] space -- not going down.
I am loving applications around sensors because that is where you get the most productivity, the best bang for your buck. Let's say you are building a $100 million building and you want to have very low-cost air conditioning by floor, by populated floor, by number of people per room. That is all sensor technology. All of that stuff is sensored. Enhancing automotive performance. That is all sensor technology. So for me that sector is the most interesting for the next five years.
IT providers no longer have the challenge of having to do all of the work to enable on-site [solutions]. There is no on-premise solution necessary. And profitability should go up as a result. That is my investment premise in IT providers. The good ones have figured out that they don't have to provide the services they had to in the past, which were so proprietary and had to be upgraded individually. They are just doing one massive cloud upgrade and every customer is comfortable. So their productivity, their profit margins and, more importantly, their capital expenditures are less.
Service trumps price. If you are trusted and you are providing a service that is flawless, the customer is willing to pay more. I have seen this dozens of times in my own investments that I have made across multiple different sectors in different companies. When we find an IT provider and it is working and our compliance is working, particularly in financial services and companies that do stuff like mutual funds and hedge funds, we don't change. We are willing to pay a premium because it is working.
I think the pendulum has swung in the wrong direction. I look at a state like the one I am standing in right now -- California -- this is a very hard place to start a new company. As we move into another political environment and go through the next election, I am agnostic to party. But what I am saying is the administration that we elect should be the one that is talking about a very strong priority in making business in America one of their top agenda items. What we all keep forgetting is that all of the things that we do here come from small companies becoming large ones, all the jobs come from small companies becoming large ones. All of the funding from government comes from the taxation of the private sector. We are not supporting it enough. The pendulum has swung to where we have vilified business.
I am very unhappy with the [new Massachusetts 6.25 percent tax on software and services] . Boston is one of the hotbeds of innovation. Hyperion, a mobile application company I am invested in, is in Boston. I would rather see the Massachusetts government cut spending than start taxing the innovation we have. Boston and technology have been hand in hand for decades. We have some of the hottest startups coming out of MIT and Harvard. Why are we putting a shackle on them? Why are we putting a ball and chain on them? Why are we making them less competitive than their West Coast counterparts? I am against it -- 100 percent against it. This [software and services] sector is one of the most important for the entire economy for Massachusetts and we are penalizing them this way. Of course it's a mistake.
Wicked Cupcakes, which I am an investor in through "Shark Tank," decided to outsource everything. And so they were able to immediately expand their capacity by 10,000 percent in 60 days. Their sales went from $16,000 a month to $380,000 a month in 60 days, all because of tech. They could have never have done that 10 years ago. They would have had to have bought servers. They would have had to figure out all the technology. They would have blown up [with IT overhead]. That didn't happen.
I think we are going into a decade of change in terms of how these [IT] services are provided. [IT services giants] will either modify to the new model, which is going to be cloud-based, or they will just disappear. Thirty-six months ago, it was either private cloud or open cloud and then it was what percentage should stay on premise ? How sensitive is the data? It has completely changed. Every IT guy now knows the best efficiency is going to come from being cloud-driven. There is no concern about staying on-premise anymore. Everybody assumes the security aspects of this will advance as quickly as the desire to move to the cloud is going to be. So all of these companies are going to figure that out, provide the services, keep their platforms or they are going to go away.
Look at the sales of the S&P 500 right now. The reason they were able to drive record earnings in the last three years is because they have gone global. They have turned their enterprises into those that provide services and goods all around the world because they know domestically our GDP growth is only 2 percent. They can find GDP growth three times that amount in the Asia, Brazil and India. So they have used technology to build global platforms to provide services.
Technology is a weapon. There are two driving forces: the marketing of a product and a brand-new service and the technology that supports exactly what you are selling. If you make a promise to a customer that you are going to give them a service or a product it has to arrive there, it has to be delivered and it has to be done in a way that is exactly what you sold them. And that involves technology and it is going to be cloud-based.
There is always the synergy of scale and there continues to be in every single sector and everything that happens. You are starting to see it in cloud now because of the scale of marketing and scale of all the back-office support services gives you an advantage. There is aways a roll-up going on in technology, and there is always innovation. I think sensor technology is the next big thing over the next five years and there is going to be a roll-up there too.
HR and IT are now merging. That is what is happening. When you can now implement a platform that is cloud-based, it is about deploying it and training people how to use it -- which is quasi-HR. So those two roles are merging together. You are covering a space that is going through massive innovation now that is actually driving profit in a way that it never has before. It has never been bigger. Empowering the employee with technology either in marketing or sales is the most interesting attribute of what this new phase is: It is giving tools to people that they understand how to use. It is a wicked competitive weapon in the enterprise.
The one that I think really changed the model for everybody is what Salesforce.com did. It showed the future to everybody. The new guys that I see coming up -- some of the investments that I have got -- I look at that and say, 'Look at what happened there; they proved everybody wrong.' Everybody said you could never do it. And what is so amazing about Salesforce is they service all 10 sectors of the S&P 500. Every sector of the economy and no one thought that was possible. That is the power of the cloud.
(Salesforce.com CEO Marc Benioff pictured)
It is a huge mistake. It is the biggest mistake the [IT services] sector does to itself. It is not a price-driven business. When an enterprise takes on a provider they are doing due diligence across all the other installations. That is what matters. And so in the score card of service, if you have a great customer base that is happy with what you are doing, it is a big part of the decision-making. I would never enter on price. Price is not why they are taking you on. It is: Is it complaint? Does it work? And are you providing them the service that you RFP'd in the beginning? Nobody is trying to save 10 percent.
The great thing about technology is it creates its own opportunity every cycle. I believe in what I call the seven-year cycle. Every seven years, there is a massive innovation. You don't know what it is going to be, but it comes. I have lived through three of them now. I am just watching the next one. This move to cloud and sensors is going to be huge. It is going to change the game in a big, big way.
When I see a lot of turnover in a company on the sales staff, I know they are underpaying because great salespeople are always found by a competitor. Always. So there is no cheating a salesperson. If you don't pay them what they are worth, they are gone. So the first thing I look at is the turnover of sales in a company. If I see a lot of turnover there, I know they are underpaying sales and the business model isn't correct. That is key. Every time you lose a good salesperson and you lose a territory and have to train a new salesperson, that is a hit to profitability. Frankly, I think it is easier to change a CEO than a great salesperson.
["Shark Tank"] is a hobby that has gone berserk for me. I have never had more fun in my life. "Shark Tank" celebrates everything I like about business. It supports entrepreneurialism. It supports capitalism. And it is absolute fun to make. I am all about entrepreneurs. I want them to be successful, and I want to make money with them. I put 5 percent of my net worth every year into venture deals. I used to have to go find them. Now they come to me. I sit in that chair and they all come to me. It is a dream come true.