Palo Alto, CA - December 6, 2005 —

"How much will they pay?"

That simple question is behind the remarkable growth of Silicon Valley software firm Metreo. Its software helps firms like GE, HP, and Owens Corning find the answer, and then adjust their pricing to improve margins by as much as 18 percent.

In return, Metreo has been rewarded with impressive growth of 1,686 percent over three years. The Palo Alto-based company was this year's Rising Star #3 for Silicon Valley in the Deloitte Technology Fast 500, #15 in the whole country.

The company also gets oodles of industry acclaim. This summer, The Yankee Group dubbed Metreo "the leading pricing solutions vendor for industrial manufacturers." In October, the firm won this year's award for excellence in technology partnership from APICS, the Association for Operations Management.

All this didn't happen by accident.

Company founder and CEO Daphne Carmeli is a hard-driving executive who admits to being "on the positive side of relentless." For instance, she played piano at Carnegie Hall at age 16, then did laundry and typing for fellow students at college, enroute to graduating magna cum laude in mathematics.

Her last position before starting Metreo was VP of marketing at Netscape/America Online. Before that, she was director of marketing at Healtheon/WebMD; she also worked in marketing management at Silicon Graphics.

SoftwareCEO had a lively conversation with Carmeli, during which she sketched out the reasons for her company's outstanding growth, and her 16 tips for building a successful software firm today.

Software company building tip #1: Find some groundbreaking research and apply it to a real business problem.
This takes true out-of-the-box thinking. But it pays off.

When Carmeli was working at Silicon Graphics, she met a scientist from Stanford Research Institute who had created some innovative compression technology to help smooth out video conferences.

She asked if the same approach could apply to real-time financial data to solve business problems, say the problem of "maverick selling" by undisciplined sales people who make deals at any price, but ultimately cut into their company profits.

He said yes, and the seed was sown for the new business. That scientist became one of the founders and now CTO of Metreo, Nachum Shacham.

Today, Metreo's software is built around patented algorithms that optimize bandwidth to analyze financial data from customers selling many thousands of products at a high transaction volume. The company employs a dozen PhDs who continue to push the envelope on what their software can do.

But all that ivory tower smarts is directed to a pragmatic business issue: how to help customers improve pricing and boost margins.

Software company building tip #2: Sell a painkiller, not a vitamin.
Business people want results now, not later. That makes it easier to sell software that solves a present ache, instead of software that promises to make you feel better tomorrow.

"You need to make sure you're solving something that really needs to be solved," says Carmeli.

"What could you build? You could build anything. What would someone buy? You have to build something people want to use, and you have to sell it in the way they want to buy."

From day one, her company chose to focus on the painful issue of pricing. No doubt there are lots of business people out there who lie awake at night wondering, "How can we compete better, without leaving money on the table?"

Metreo's software helps them find the answer.

"We sell to Fortune 500 manufacturers and distributors, and help them with their pricing," says Carmeli. "Pricing is pretty much all-encompassing within an enterprise. Everyone touches it: finance, sales, marketing, manufacturing, everyone.

"Manufacturers and distributors process hundreds of deals every day, with the vast majority of prices determined by negotiation or contract, rather than a standard price list," she says.

"Metreo was the first to simplify this process, and allow companies to ensure that each deal is truly profitable."

Software company building tip #3: Face reality, even if it's not always popular.
It may be painful, but there's nothing like a reality check to keep a software firm on track in the early days.

"Markets change, customers react, things happen internally. You have to face reality and be decisive," says Carmeli. "Sometimes that means you need to say and do things that might not be popular at the time."

Is there an example from Metreo's history?

"When we started the company, we were targeting e-marketplaces," she says. The online marketplaces were trying to gather buyers and sellers together, put the transaction together, and make everyone rich. So they could have used our application.

"But the reality was, the marketplaces were having a lot of issues. Very quickly, we had to face the reality that the marketplaces were just one channel by which manufacturers were selling. There were a lot of other channels as well."

Metreo moved its focus to two more traditional outlets that could benefit from their software: big manufacturers and distributors. That course correction paid off; without it, the company would have kept on chasing a dream... maybe right into the ditch.

Software company building tip #4: Simplify, simplify, and then simplify some more.
This emerges as a frequent theme for Carmeli: Simplify your pitch, simplify your website, simplify your offering, simplify everything.

"Keeping things simple has been one of the keys to our success," she says. "A simple messages travel faster. Simple designs reach the market faster.

"We're not trying to boil the ocean here; we've got to simplify, simplify, simplify. We want to make it very clear what we do, how we do it, who we do it for, and why you should perhaps look into doing this as well."

For example, the Metreo website is a model of clarity, where Carmeli says her people work hard to eliminate clutter and keep things simple. In an industry given to bafflegab, here is one of the first sentences a visitor encounters on the company's website:

Hey, that sounds just like the elusive answer that's keeping their customers awake at night.

So why doesn't everyone's website read this crisply? Why doesn't everyone simplify their pitch this way?

"Everyone tries to," says Carmeli. "But it takes us a lot of hard work, getting feedback from people, continuing to stretch ourselves. The bar is very, very high."

Software company building tip #5: Monitor sales to see where your pitch isn't working. Then simplify it.
There's no magic involved, just a continuous process of improvement.

"You just keep whittling away at it," says Carmeli.

"It's an iterative process of coming up with ideas, and then talking directly to your existing customers, providing messaging and training to the sales people, and bringing feedback back to marketing, back into the product" she says.

A typical sales cycle for Metreo is five or six months, following a standard enterprise software sales process.

"Lead generation starts with an understanding of the problem that we're solving. Then we get a list of who appears to fit into that target," she says.

"That target profile might be a combination of what they do for a living, how big they are, the kind of revenue, kind of product, whom they sell to, and what's the margin or business pressure."

That brings them to an interesting type of prospect.

"Typically, it's the general manager, or CEO, the guy who owns the P&L: the guys who is either trying to prevent a problem, or fix a problem. This is a business sale, not a technical sale. There's technical diligence that happens, to ensure we can do what we say we can do, but it's not a technical sale per se."

That helps focus the sale on business results, not pie-in-the-sky systems talk.

"Then we have lead generation that starts with calling people, understanding their problems a little more, and that goes to the direct sales force, and it's a closed loop back," Carmeli says.

"If you track the process of a sales lead, and you can see people dropping off after an inside sales person hands it to an outside sales person, that can help you see where maybe the messages aren't clicking."

And then it's back to the drawing board to refine and simplify the message once again.

Software company building tip #6: Simplify your product offering.
Another area Metreo has simplified is their product offering itself.

Carmeli says they started with three modules:

Then they further simplified those into eight different business modules they call "solution tracks." Each solution track is a set of software capabilities, a pre-configured solution that solves one or more specific problems for a specific type of user.

Those problems could be anything from how the product marketing team sets prices to a specific problem with a particular deal.

Going from three modules to eight might sound like it's adding complexity. Yet this repackaging of Metreo's offerings simplified the sales process for everyone.

"The customer sees a set of modules, and they think of them as steps they would go through. So we start with an entry point, and then they know where to go, depending on what problem they're trying to solve." she says.

"So that helps you sell, and it simplifies how you get results. It's one step at a time. Each piece is something you can deploy, and get the benefits from in maybe two or three months. Then that will fund your next step."

In an era when buyers are skeptical about any offer, this scaled-down process of "buy-a-little-get-a-payback-then-buy-more" really reduces their perceived risk.

Software company building tip #7: Don't sell AGAINST the big guys, sell WITH them.
Sell something that helps customers get more value from the enterprise software they already own. Then partner with the big guys.

Metreo's software doesn't try to replace enterprise systems such as SAP and Oracle; instead, it interoperates with them, and provides pricing as a missing module.

"We work very closely with the large guys that have access to hundreds and thousands of customers," says Carmeli. That helps get Metreo get in the door, with a ready-made customer base to talk to.

Of course, that doesn't mean they have no competition.

"If we were all by ourselves, I'd be concerned that there's really no market. There's always the large players, the traditional enterprise players that you would imagine. But we do pretty well, particularly in the vertical markets that we've chosen."

Like many software entrepreneurs, she recognizes that a lot of enterprise software was oversold in the past.

"Enterprise software is plagued with a kind of hangover right now," she says.

"Companies bought such huge amounts of it that these big implementations will take years to deploy.

"In order to sell into customers that already have big enterprise software solutions, we have to differentiate ourselves. We help our customers leverage what they've got already versus starting from scratch."

The pitch goes something like this: "Let us show you how to get more value from that big system you bought that's never given you a proper ROI. And by the way, we're not like those other guys."

That's probably a pretty effective pitch these days.

Software company building tip #8: Keep your friends close, and your enemies closer.
Carmeli isn't concerned that one of her enterprise software partners might think to reverse-engineer her software.

Well, not too concerned.

For one thing, it's based on some quite high-powered mathematical research applied to the issue of pricing that would be tough to recreate.

For another, they need her too much to fool around with the relationship.

"We are, quite frankly, the profit lever to the investment customers have made in their solutions," she says. "The SAPs and the Oracles of the world recognize it, the customers recognize it, we recognize it; so, we really co-exist quite nicely."

Why wouldn't an enterprise software firm try to clone her software, and sell it as their own?

"Traditionally speaking, that's not what they do," she says. "The major companies are not the innovators. They need companies like ours to innovate and grow the market."

Software company building tip #9: Don't over-manage your people; energize them.
Carmeli says she likes to leave people lots of room, and not over-manage them.

"I personally think that people do a lot more when they're not told what to do. Especially with the kind of DNA you get here in Silicon Valley. That's the beauty of a startup, right? Close supervision can kill the spirit of a company."

So how do you keep the excitement alive after nearly six years?

"I think it's the DNA of the people. We're in a high-growth market. We have a leading position. I think leadership comes from the quality of our vision, the ability to spark others to extraordinary performance, to keep employees excited about their work. I try to embody that, and so do all the rest of our managers."

Does that include handing out stock options?

"There's certainly the traditional sort of monetary rewards, the normal stock options and salary increases," she says.

"I don't think that's the be-all and end-all, though.

"The reward is building something from scratch, seeing it make its way on to the market, having an impact with customers, and being part of a market that's growing. At the end of the day, that's what energizes your people."

Software company building tip #10: Outsource sustaining engineering, but keep your core IP at home.
Three years ago, Metreo tried sending some QA work to a small team of three in India.

It worked so well, that team has now grown to about 25 people.

"This is a new paradigm, and I think it's proving to be very effective," says Carmeli.

"You have to work at it, though; it's not magic. There's a lot of extra communication that needs to happen, a lot of extra discipline that needs to be put in place. But if it's managed well, it's a very productive situation."

What type of discipline does she mean?

"People are working there when you are sleeping, and vice versa," she says. "So things that you would otherwise take for granted because you can walk down the hall and ask someone a question, that needs to be documented."

What about motivating people on the other side of the world? Are there any special tactics for that?

"I think people are people, and their motivations are the same," she says. "If they're engineers, they want to work on technologies that are new and challenging. They want to work on products that are exciting. They want to work with companies that are successful. They want to work with people who are genuine and have high integrity."

What about a software firm that's never done any outsourcing: Where should they start?

"I think you start with what we call 'sustaining engineering.' We started with some QA work and bug fixes, and that led to configuration and integration work.

"But the core innovation and intellectual property is still resident at corporate. I think we'll always keep that close to home. I could see situations in other companies where that doesn't matter. But one of our core competitive advantages is our intellectual property in the area of pricing. We want to keep that closer to home."

Software company building tip #11: Once you have VC, you'll likely need to outsource to stay competitive.
The real argument for outsourcing, of course, is economic. For the same budget, you can hire more programmers in India than you can in the USA.

"From a business point of view, you're at a competitive disadvantage if you're not doing that, particularly when you're starting a company," says Carmeli.

"The VCs really look at the operating line of the company, and there are certainly financial benefits of outsourcing pieces of development. Without doing so, you're at a competitive disadvantage; your operating costs go up, and the VCs don't like that."

Today Metreo has 50 people in Silicon Valley doing R&D, sales, and management, and 25 in India doing integration and configuration. That ratio works well for them, and keeps their VCs happy.

Software company building tip #12: Your passion and mix of people are key when pitching to investors.
Speaking of VCs, Metreo has done five rounds of financing so far. They won't reveal the total amount they've raised, but the first three rounds totaled close to $30 million.

Has each round gotten easier?

"It never gets easier," smiles Carmeli. "It probably gets harder, but at the same time, you become better at it. I don't think VCs by nature are patient, nor do I think entrepreneurs are patient. I think it's that impatience that drives us all."

Metreo's VCs include Mentor Capital Group, Prospect Venture Partners, Redpoint Ventures, Sequoia Capital, and U.S. Venture Partners.

Since Carmeli is a pro with five rounds of financing to her credit, what tips does she have for software entrepreneurs seeking VC for the first time?

"The most important thing when you start a company is to have passion for what you do — you have to believe in it, believe in the team you've brought together," she says.

"That shows when you're talking to a group of investors. You could have some great ideas, but if the passion is not there, the company will go nowhere."

She says a mix of complementary skills is also critical.

"I think everybody knows that market conditions change, competitive pressures change, business models change. A good team can adapt to changes," she says — as long as you have a balanced mix of talents.

"You can't have all pitchers; you really need to have the pitchers, the hitters, the full team."

After passion and people comes, of course, your brilliant idea, and a huge potential market for it.

"When you're in front of a VC, you obviously need to have a business model that holds up. And you absolutely have to have an idea that could become a very large, billion-dollar company. They don't look at companies that have a little upside. They are looking to build."

Software company building tip #13: Tap the best people you encounter on the job for your startup.
Carmeli says that she worked with every one of her management team in previous companies.

"As I went through my career, I worked with people, and I always said, 'If I ever were to do anything, we'd work together.' So that's how our team came together."

Six years later, all the founders of Metreo are still working with the company, a rather uncommon achievement.

"I think typically you see a splintering of the founders, a splintering of the executive team, " she says. "We haven't had any of that."

Why not?

"Partly I'd say 'luck' — and I'll take luck any day of the week!" she chuckles.

"I think we communicate. We each have our own unique set of skills that are complementary. No one is trying to do the other one's job. We just do our work."

Software company building tip #14: Generate a quick payback for your clients, and build that into your pitch.
That's the sure way to get a prospect's attention.

Metreo's deals range from an entry point in the low six figures to a complete bundle of modules in the high seven figures. License and maintenance fees amount to two-thirds of the price, and the rest is services.

And here's the real kicker: the software is designed to generate a payback within three months.

Who wouldn't want that — but how is that possible?

"Consulting firms like McKinsey and others have done studies, and seen that, on average, a one percent improvement in price will drive a 10 percent improvement in margin," says Carmeli. "They've done several studies where they've seen anywhere from eight to 12 percent improvement, based on that one percent.

"The point is, there's a huge order of magnitude change. This also gives you an indication of how much money is being left on the table if you're not pricing well. That's partly why this segment is growing so rapidly."

Metreo doesn't keep those figures to itself: it trumpets them on its website, in its press releases, and in its pitches to prospects.

"People get very excited when they can point to tangible results that another customer got. 'I increased my margin from 40 percent to 47 percent' — or from six percent to eight percent — whatever the number is, it's a huge order of magnitude."

Software company building tip #15: Find sales people who really appreciate delivering your pitch.
OK, Metreo has a compelling pitch. But where do they find the salespeople to deliver it?

"Our sales people come from ERP companies, CRM companies, analytics companies," says Carmeli. "And the typical profile of the most successful are those who are creative, entrepreneurial, and competitive by nature."

But that's not all.

"They are probably the most motivated, given that there's never been an enterprise software category that's generated the results that pricing has.

"There have been a lot of questions — 'How does CRM pay off?' — and it's very hard to quantify the value. In the case of pricing, it's by definition very quantitative, and the results are very quantitative," she says.

"It's a total 'show me the money.' And we can."

Carmeli's sales people are having the time of their lives, selling something that delivers quick, tangible results.

For example, the company's website cites hundreds of millions of dollars in lost profits that have been uncovered by its software. More than anything else, that's what keep up the momentum for everyone: developers, sales people, and customers alike.

"It's an ongoing relationship with our customers. They keep buying more, so we are always working with them, deploying solutions, sharing in their successes, continuing to broaden the footprint of the solutions in their organization," says Carmeli.

Software company building tip #16: Don't discourage talk of value pricing; it can help seal the deal.
With a payback this fast, isn't Metreo tempted to entertain some kind of value-based pricing or ROI sharing with customers?

"That's a great question which gets asked often," says Carmeli. "But when our customers start to see the benefits they're going to get, they don't want to give us that much money! Our customers don't want our hands to stay in their pockets!"

How does the company handle that discussion?

"We go down the path with them, and then they start to realize the money they're going to make. And they start realizing they don't want to pay us that much, and we end up working a more traditional enterprise software sale.

"They feel like they've got huge value, and it helps to close the sales cycle."

With a focus on simplicity, and providing step-by-step value for customers, Carmeli has built a software firm on a solid foundation. Metreo should stand for a long time to come.