Founder/CEO: Knowing what you don’t know

Recently I have seen several occasions when the Founder/CEO thought they knew more than they did and could not see the cliff that was quickly approaching them. The bigger challenge was that someone was trying to help them see what was coming, but the Founder/CEO wasn’t listening. As a result,  a small issue that could be addressed now becomes a much larger effort to correct.  Whether it is re-writing code, shifting resources from one product to another or re-organizing an entire functional group, the effort to fix it can easily be 10X what it would have been to get it right in the first place.

Company Fix trajectory lines

The reality is that most Founder/CEO’s haven’t done this before, and quite often neither has anyone else on the team. But there are people who have the relevant experience. Although it may not be exactly the same experience needed for this new opportunity, it certainly rhymes with the past.  The risk is that they have ‘big company’ experience and don’t know how to be scrappy and lean to selectively pick what is really needed for a fast growing startup. But these days there are many people who have big company pasts and enough startup experience to strike the right balance.

So, how can a Founder/CEO anticipate the challenges ahead and plan appropriately when talking to experienced talent?

  1. Be open minded – you’ll be surprise how much you don’t know

There is nothing wrong with a confident CEO, but that doesn’t mean you shouldn’t listen to folks with years of experience.  In almost every conversation you should be able to find at least one insightful nugget that will enhance the lens through which you view the world.

  1. Find a specific problem to solve

Being open minded might be a start, but really it all gets down to brass tacks.  Instead talking to experienced talent in the hypothetical try picking a real problem that you currently have (or anticipate) which is in the wheelhouse of your expert.  Working through a real-life issue can surface many benefits:  better understanding of the problem, possible solutions, and how the person would work in the organization.

  1. Don’t expect experts to be totally startup savvy

It takes about 6 months for someone who has been working at a large company to shake all the big company habits that are better left behind at a startup. This doesn’t mean that they won’t fit in or add tremendous value, it just means that they need to get used to their new environment and figure out how to find the best of both worlds.  Focus on the value they can provide to accelerate the company and ensure they don’t put their foot on the organizational brakes by accident.

There are many people out there with a tremendous amount of experience that can be purposefully leveraged at a startup, but knowing how to leverage that experience requires some thoughtful effort.  As a Founder/CEO your job is to find the best way to solve your problems in new ways leveraging the talent and organization you have AND want to build. Make sure you take the time to figure out how to assemble the right amount of talent and experience for the company you are building.

Startup challenges and how they can differ from large companies: Decision Making

Having a ‘Steve Jobs-like’ founder with more of an autocratic style of management can obviously have its pros and cons. But one of the real benefits of this personality–led organization is a simplified decision making process – since it is very clear who the decision maker is and what their decision is. This clarity makes it very easy to align the organization around a common goal and reduces the amount of thrashing that can go on debating what the decision should be. Not everyone will agree all the time with the decision and people might quietly continue questioning it, but the benefit of having a final decision made and moving forward is quite beneficial to an organization.

I’ve worked at or been involved with several startups in which the company did not have a single founder who controlled most of the major decision making. Instead there were leadership teams  with distributed power who worked together to make decisions.  The two main issues I have seen in startups of a reasonable size are either  1) dragged out decisions or worse, 2) decisions that were continually re-opened after they were made.

Over my career I have seen the ingredients that go into good decision making. They consist of three key elements:  a good process, data/information and teamwork.  Big companies use some form of RACI, which stands for Responsible, Approver, Consult, Inform and is used to clearly define team member roles.  By knowing which position to play and acting as a subject matter expert, the team can function more effectively; especially when the right data is presented to facilitate a decision.

 

Agreement & Commitment

Once a decision is made there are two components:  Agreement and Commitment.  Usually getting some form of agreement is possible for most well-organized teams. But the challenges I have seen is where there is passive-aggressive behavior by some team members. Someone who says they agree in a meeting, but then takes steps afterwards to either re-open or torpedo the decision because they didn’t really agree.  This situation is pretty common where there are strong personalities and divergent opinions about the direction of a company, business unit or product.  These types of behaviors are killer for a startup, they can handicap the entire organization when there isn’t true commitment to decisions that have been made. The amount of lost productivity and wasted energy used to further debate the decision has an incredibly negative primary and secondary effect on an organization. Everything from just lost time, to reducing engagement of quality employees who realize what is happening.

A specific example from a past company is when our product team had made a decision on how a specific feature was to be built. However, the engineer who ‘owned’ that module of the  product did not really agree with what should be built, so he just built it the way he wanted to without telling anyone until he was finished. Needless to say when he showed off his works the entire product team was surprised at what he done. Now, to give him credit, there were elements to what he built which had some merit and would have enhanced the original agreed-upon features. But instead we got a little bit of ‘right’ to go with a lot of ‘wrong’.  Somehow the product team needed to do a better job of both listening to the engineer to improve the final decision which incorporated his ideas. This engineer was top-notch.  However his team skills were not up to par. The engineer shared some responsibility in not committing to the decision and finding ways to share his ideas.

 

What to do?

So how do you handle repeated inefficient decision making in a startup? First, make sure the basics described above are in place. If the issues persist, ‘how decisions are made’ becomes a leadership and management issue.  Look at the people on the team and determine if there is a teamwork issue.  Are people playing their position?  In young companies, it is not unusual for leadership not to have a lot management experience and training. It is very possible that someone just doesn’t realize that they are overstepping their bounds in how they try to affect the direction of the company.

My experience has been that some people just fundamentally disagree with the direction that the team is taking and they use their power to subvert decisions and drive their own agenda. This is poison to a startup and people like this, no matter how talented, tenured or experienced they need to either be straightened out quickly or asked to leave. As my first manager at Procter & Gamble told me, it doesn’t matter how brilliant a musician someone is, if  the whole band is marching in one direction and they want to go in another, you gotta let them go.

Startup Challenges – Deep Experiential Training

It took me a while to write this post because I wanted to cram so many thoughts and ideas into it and could not find a good framework for it all to make sense. Finally I settled on two organizing thoughts:

  • What kinds of skills and experience should you want to get at a company?
  • How should you develop these skills?

These two questions are related to my recent posts about startup challenges.  At a large company these two questions are much easier to answer since they tend to have somewhat-defined career paths. But if you are just starting your career and joining a startup there is no handbook that you get when you start out with a track for you to follow. The following is intended for people who have a goal to reach a high-level role in their career, whether it is a VP or CXO role, or for someone who strives to achieve a high level of responsibility and manage large teams.

What kinds of skills and experience should you want to get at a company?

As I look back on my career, I think about the various sets of skills I developed and I have bundled them into three groups:

1. What’s Important Skills

This is basically a re-adaptation of the ‘What Counts Factors’ framework I learned at Procter & Gamble.  It was basically a set of 7 or 8 skills that all employees are looked upon to demonstrate and perform at a continually improving level throughout their career.  As you can see these are fundamental abilities that can be applied to just about any role and is not functional specific:

  • Leadership
  • Problem Solving
  • Creativity
  • Team Work
  • Communication
  • Priority Setting
  • Initiative
  • (Technical Skills)

Many large companies have centers of excellence with specific training courses and leaders to help you continually improve on each of these skills.

 

 2. Functional Skills

This refers to developing a deep, core set of technical skills required to be successful in a role. If you are a computer programmer or a marketer, there is a huge breadth and depth of knowledge and experience required to master a particular function.  When you meet someone who has mastered a function, you know it right away by their ability to go into depth about just about any topic related to that function.  Not only does becoming a functional expert include understanding the foundational and traditional attributes of a function, but it also includes being familiar with the latest methods and innovative tools that are currently being adopted and have become new standards.  Example in marketing would be social media and online marketing tools. In computer programming it would be open source toolkits and mobile app development. Becoming a functional expert is critical to achieving a high level with a large amount responsibility within an organization.

Similar to going to school, many large organizations have various training opportunities to develop a breadth of knowledge and experience in a function.

3.       Performance Management & Career Development

Having solid performance management experience means both receiving great feedback from your manager and includes having your work evaluated against a tangible process and framework.  On top of being on the receiving end of this process, you should also be given an opportunity to manage others and giving performance-related feedback relatively early in your career.  While having direct reports is more ideal sooner than later, managing the performance of others does not necessarily mean having people reporting up to you, it could also include cross-functional teammates with whom you are their ‘customer’.

Learning how to develop your own performance and skill and then developing a career plan help with self-awareness and career satisfaction.  Helping others improve their results and manager their career path are critical skills to have as both a leader and a manager. This also includes discussion about future roles and levels of responsibility employees are seeking and other developmental opportunities needed to achieve both company and individual success. It is amazing how few organizations have processes and training on such a foundational set of skills.

 

How should you develop these skills?

The challenge in going to work at a startup early in your career is that there is a very good probability that you will not get good exposure to the three groups of skills and experiences above.  The focus and first priority for a startup is not to develop great talent, it is to grow and scale the company.  Now this doesn’t mean employees aren’t important nor that you can’t grow and develop within a startup, I am just saying that creating these training and development programs is usually not a priority early on in a young company’s life. If you are a computer programmer and never learned some best practices in coding it is very likely you are creating engineering debt for your organization that will need to be addressed at a later date. Learning the proper way to be a functional expert early in your career will be catalyst to your success.

So here are some thoughts on how to acquire these critical skills and experiences early in your startup career.

1.       Find great managers and mentors to work with

It doesn’t matter what size organization you work for, if you have a great manager who has deep knowledge and expertise you will learn a lot and improve your own skills. The key is to find several such leaders within the same organization that you can learn from.  No single manager will have demonstrate all the attributes you will want to acquire, so you need to plan on finding other sources to help supplement both within your current role and as you plan your next career move.

 

2.       Read a lot… learn your discipline

Don’t just learn how to do your job. Depending on your educational background you may or may not have had formal, academic training in your area of work. If you haven’t it is becoming of you to find the top books, articles, online tools and thought leaders in your field to learn the breadth and depth of your function.

 

3.       Take on different roles  

If you work in online marketing don’t just do a role which is about data analytics, also take on roles related to uncovering customer insights by talking to customers, or working on new distribution channels.  These days I see many young people who have become experts in a single aspect of their function but have tremendous difficulty extending themselves to other areas within their function. This myopic skill set really limits their career potential and their role flexibility.

If you are in Brand Management at a large CPG companies, the experience is a bit of an apprenticeship. Over the course of 3-5 years an employee in brand management will typically work on several brands in different categories with different managers, functional experts and outside agencies.  For example some brands are more advertising focused versus trade/retailer focused vs. R&D focused. This upward spiral of roles exposes brand managers to a variety of experiences to round them out as they develop into a true brand manager.

Not all startups give you the opportunity to change roles after a period of one to two years based on organizational size and needs. You might be the only person who knows how to do your job and the company may not want to move you. These are important factors to consider when working at a startup and whether or not the company is a good fit for your career.

This posting was based on my experience working with many startup employees who have not demonstrated the same level of well-rounded skill sets as others who started their careers working for larger companies.  I am not saying that you cannot develop these skills working at a startup, however, the effort (and sometimes luck) required to gain those talents and be successful using them is non-trivial and requires a thoughtful career path strategy.

Startup challenges and how they can differ from large companies: Team Work

In a two-person startup, roles and responsibilities are pretty straightforward.  Figuring out ownership, decision-making and how to manage projects from start to finish is almost a no-brainer.  For five years it has been pretty clear between John and me what each of us is responsible for and how we make decisions.  What typically happens is we might not realizing we missed something until we are done and then go back and address it (wishing we had realized it sooner). Now once a startup has found product-market fit it is probably time to grow the team to cover all these bases, go faster and make sure nothing gets missed along the way.

Clearly as the company grows not everything can be done by just two people, so new resources are brought on board.  Most of the time these new people will be hired in some area of functional expertise whether it is engineering, product management, sales, operations etc.  These people will allow the team to divide and conquer the different operational elements that drive the company’s success as the company tries to scale.

The challenge is that as the organization and product team grows, the amount of information flow, decision-making and synchronization of work becomes much more complicated.  This becomes even more apparent as different layers of management start to get created thus creating updates and decision making conversations occur at multiple levels. For example a product team can develop their point-of-view about a new release amongst themselves, but then need to review it with the founder, CTO, VP of Product Management etc. for final approval.  This is the kind of multi-stage team work that doesn’t exist in a tiny startup.  If you were one of the first employees of a startup this new amount of complexity in getting a product to market could be frustrating.

In fact, in my career I have seen that most people aren’t used to thinking end-to-end when dealing with a large team trying to get a big initiative into market.

Now I am going to use the dreaded ‘Process’ word.

It really drives me crazy when someone talks about there being too much ‘process’ at a company.  Process is usually just a symptom or an outcome. And in fact most of the time having a defined process for your go-to-market initiatives is critical.

Now I will grant you that as a company grows they tend to become more risk averse which then requires Legal, Regulatory and HR folks to become involved (the lawyers will tell you it’s to protect the assets of the company).  I can’t really argue that these types of added steps in a process aren’t causes of frustration.  Each company is different in terms of how much overhead they require from these functional groups. But this post is really referring to the core functions in a Go-To-Market project, some type of inititative that affects the main business operations of a startup.

What I have seen quite a bit (and occasionally been guilty of myself) are team members who do not think ‘end-to-end’ when working on a highly cross-functional team project.  For a variety of reasons, they focus primarily on their area of responsibility and have blind spots to other areas of the functional aspects of project.  An example is when product management decides to build a feature in a certain way which reduces the ability for Marketing or Sales to drive more revenue.  Or vice-versa where marketing ‘needs’ a particular feature for a release but it will come at the expense of other important user features.

As a company and its teams grow, complexity naturally increases.  More meetings start to take place, more sub-teams go off and work on specific issues and ‘report back’ to the main team.  Clarity of decision making responsibility becomes fuzzy unless special effort is made to define everyone’s role.

Team work in a growing startup is hard. Without using too many sports analogies, not everyone knows how to play their position.  Some people care more about themselves than the team.  Some people aren’t good at compromising and negotiating to strike the proper balance for the better overall good of the team than just their area of responsibility.  Some folks just completely ignore certain stakeholders on the team. And at a very basic level, some people aren’t comfortable with the amount of communication and interpersonal relationships necessary within a team environment.

 

Now here’s the interesting thing.  All the elements I just described about team work manifest themselves in a process to enable the team to perform at a high level. That is the only way to coordinate an important intiative and get it to market on time. There are more meetings, presentations, multi-functional decisions and collaborative compromises that these new processes are used to address.

In a big company, this amount of team work is absolutely necessary. And in well-run organizations not only do folks learn how to effectively work in large teams, they can also understand why the different steps in the process are (occasionally frustrating, but) necessary.

In a growing startup when I hear about people complaining that they long for the ‘old days’ when there wasn’t as much ‘process’ or ‘we don’t need no stinking process’,  I basically think to myself ‘here is someone who does not like to work in large teams’.

Startup challenges and how they can differ from large companies: Focus

As someone who has spent about half my career in startups and the other half in large organizations, I constantly compare one to the other as a way to figure out how to get the best of both worlds.  There are many examples (and sterotypes) about how big companies are notoriously slow and lack innovation.  Just about anyone who has worked in both types of businesses can put together a big list of pros and cons of big versus small.

The questions that I continually ask my network of former large organization leaders who now work at startups typically relate to the common challenges startups face and what could they learn from large organizations.

This post is the first in a series stemming from recurring observations and conversations I have had across many startups in which benchmarking successful large companies practices would benefit a growing startup.

To start we will discuss ‘Focus’.

There are many smart people who have already discussed the importance of focus to any organization.  Just about every organization says they are focused, and even believe it. However as you start to peel the onion and ask specific questions, you can see how startups try to be clever in investing in too many opportunities at the same time.  To me, in a startup there are two elements to being focused. The first is having the right amount of time, people and resources to successfully achieve a project’s goals. But the second is also not investing in additional projects that could draw on resources, cash or leadership attention that your main project could have/would have needed.

The first question I like to understand about a startup is where they are at as a company. Are they before or after product-market fit?  When I worked at Emmperative we had two big customers who wanted very different enterprise marketing solutions.  Coca-Cola wanted a Sales & Marketing digital asset management distribution solution while Procter & Gamble wanted a Brand Management workflow product. Let me tell you, these are very different types of products. But we wanted to keep both name-plate companies happy. So we split our engineering efforts to solve two separate jobs.  Without going into all the details, our products were still so young they didn’t solve either customers needs completely.

At Adify, we hadn’t yet gotten to product-market fit with our first Build-Your-Own-Network solution, yet we were going after four completely different markets trying to see where we could get traction. Of course each of the markets had their own unique requirements, so until they began to focus on just one market segment which showed promise a lot of cash and resources were spent inefficiently.

One way to think about focus is to divide a startup’s offerings into the three buckets.

#1      Growing & profitable

#2      Fast growing, but not yet profitable (after Product-Market fit)

#3      Before Product-Market fit

If your startup is far enough along to have a product line in bucket #1, it really makes sense to keep investing in your success and allocating resources to buckets #2 and #3 (we can discuss the proportion at another time).

However most early stage startup’s primary/flagship offering is in bucket #2 or #3.

Let’s tackle the easy case first, bucket #3. If your startup has not yet reach product-market fit with its primary offering, investing in multiple offerings or customer segements will be a challenge as you dilute your focus. Even if it the same platform but targeting different markets, this will be a distraction to your team and scarce resources. Now, this doesn’t imply doing market research to seeing how close an offering could meet a different market segment’s need. Or going on a sales call to a potential customer in a different category. I am referring more to building market-segment specific capabilities into your offering that would ‘enable’ you to sell to two different customer types at the same time.  This is where not being focused comes into play.

Now let’s discuss the more common situation. Where a company’s main offering(s) are in bucket #2 and yet they also are investing in new offerings in bucket #3. (And to be clear, in this case I am not talking about a bucket #3 product which is a next-generation version of a product in bucket #2. In fact I would consider that investment as part of bucket #2.)   I am talking about where a company has a fast growing product that still hasn’t reached scale or profitability (bucket #2), and yet the company is investing significantly in new markets, customer segments or products (with or without the same technology platform)  (bucket #3).

There is a company I know who has a phenomenal offering in market that is growing quickly, but has not yet reached scale or profitability.  Thanks to that main product line’s success (with product-market fit) the company has been able to raise lots of cash. With this new cash influx, the company has invested 20%- 50% of its monthly cash burn into new products/markets that leverage the existing technology platform (bucket #3).

Here are some of the issues facing the company:

–          The main product line is struggling to get to scale and profitability.  The company has been able to find a market for their product and sell it, however the commercialization and operational efficiency required to get to scale has yet to occur.  Management experience and organizational focus on these two areas are seen as the primary reasons.

–          As the company struggles to get to profitability with their main product line, the investments in the early stage product development (bucket #3) has siphoned talent, resources and cash from the company.  Their balance sheet looks weak and these new products will still require a huge investment to get to product-market fit.  This has put the company in a challenging position to consider raising more cash that they really shouldn’t need if they were more focused.

–          Given the lack of ability to commercialize and scale the primary offering, there is a lack of organizational confidence that even if the new offerings find product-market fit that the company will be able to scale them too.

The challenges this company faces are pretty big. There are many challenges the leadership needs to address and they need to do it quickly before their cash position creates problems. Their situation is a wonderful example how the leadership did not did not make thoughtful decisions on how to keep the organization focused in a manner which struck the right balance of short term delivery of results and long term growth.

While I don’t know the right amount of resources to allocate to non-primary Bucket #3 opportunities for a early stage startup, I am sure the maximum number is less than 20% and probably more around 10%.

Larger companies with profitable product can (and should ) invest in high growth opportunities. Due to their size they can take a more portfolio management approach to their investments and balance short vs. long term growth in way that fits their ability to generate cash from their core businesses.

If you are in an early stage startup, you should ask yourself how much of the company time, people and resources are we dedicating to these Bucket # 3 (before product-market fit) opportunities? And how much is it ‘costing’ to pursue them in terms of cash, resources and management focus.

How to interpret VC feedback – standing out from the crowd

In my past I have been turned down by VCs many, many times.  And while some of the VCs may not be so great at being a VC and not ‘get it’, for what I was pitching, it kind of didn’t matter.  Overall if you speak to more than five investors and basically get the same result it ain’t them it’s you.  But how do you know what ‘it’ is and figure out what to do about it?  It is really hard for someone who is raising money to figure out how to interpret the feedback (explicit or implicit) received.

You can break down what it takes to get funding into three big buckets Team, Concept, Traction.  Just about every question or discussion you had with an investor is evaluating at least one of these areas.

To get funded, you mostly need high marks on two of the three and ideally all three.  And sometimes funding is a no-brainer. If you are already a successful entrepreneur you can probably get by with just having a team and are essentially ‘instantly fundable’.  But most folks raising money don’t have a previous success.

The other ‘instantly fundable’ attribute is having big and growing traction. Mark Zuckerberg was able to raise his Series A from Accel Partners not because of the team, but because he had a pretty good concept and most important traction. Having great traction solves almost everything (except for maybe a small market) in order to get funded. And not just good traction, accelerating traction.

So assuming you are not a previously successful, repeat entrepreneur and don’t have accelerating traction, then it is basically a mix of the team, concept and traction that the VC is looking at.

With your product still in development (and likely without deep proprietary technology behind it) and traction several months away, it is all about evaluating the concept and the team. Interpreting all the messages that were sent by an investor can tell you how close you are.  Do not be surprised if you are a lot further than you expect to be despite all the nice things the VC says to you (like ‘when you have a lead’ or ‘I’m very interested to track you guys as you see some results’).

So let’s start with the team starting with the founders.  Attributes to look at include the technical background of the team. How much engineering experience is there on the team that knows how to ship a scalable product. Also, how much business acumen on the team to address acquisition and monetization elements of the strategy.  Education and previous companies worked at play a role in experience, but at the end of the day an investor wants to know if they can trust the team to build something and get people using it.

One thing most first-time entrepreneurs don’t appreciate is that most other entrepreneurs are also really smart. Most have really top notch educations, strong technical backgrounds and some previous experience in a related field to what they are working on. The question that a VC is trying to answers is ‘Are you exceptional?’.  The best (clichéd) analogy is American Idol. However, not during open auditions, but when the number of contestants has been narrowed down to a much smaller number like 20 or 30.

At that point everyone is a great singer. But what makes you have star potential even though you have never recorded an album before and not a professional singer? What makes the VC believe you have star potential?What crazy thing(s) have you done that most people would never do that shows you got something special? Did you start a business when you were 12 years old?  Did you build a cool product on your own that solved a cool problem? The ‘exceptional’ usually involves some level of either incredible domain expertise that you were able to do something great with or demonstrating some form of salesmanship that accomplished something most people would never dream of even trying.

There are many things that could show that you are ‘exceptional’, but in reality most don’t.

Given the market the team is going after, how much domain expertise is there to understand the nuances associated with the target customer. Of course, more is better.  Most thoughtful VCs can quickly ask a few questions to the founding team to see if the understand the basics and some subtleties associated with the market they are pursuing.  In a consumer business, developing some consumer insights and understanding behaviors is critical.  I can’t tell you how many times I have spoken to a startup who is developing a new product and has yet to talk to anyone who would be a target user.

At the end of the day, a VC is trying to understand if you know your stuff and do you have the passion and dedication to figure it out quickly.

A related element to evaluating the team is their ability to eloquently address the second big attribute VCs care about…the concept.

By concept I mean everything from ‘What is the problem being solved’ to the product experience, to proprietary technology, distribution to market potential.  All that rolled into one. Like we used to say at Intuit…Is it a big unmet need, that you solve well and can you have a durable competitive advantage?

And then there are the other common questions:  How will you get users/customers? How will you get them to come back? How often will they use it? How will you make money? Basically Acquisition/Distribution, Retention, Engagement and Monetization. Related to this is the network effects and scalability of your offering or model.

Do not underestimate the need to have convincing arguments for each of these elements.  Without data around adoption of your product it is very possible that there are risks on several of these attributes. Each of these risks affects your fundability.   This is where an investor can easily drill down and see how well you understand your business by asking questions about your metrics. Even if you don’t have any tangible numbers, you should know the benchmarks you will be compared to. Whether it is eCPM, DAU/MAU, CPA etc. a good knowledge of the key target metrics will demonstrate that you know your stuff.  A red flag for an investor is if they know more about the metrics than you do.

Finally, one last attribute to consider is sex appeal. How hot a space are you pursuing? If you are working on a standalone web property versus a social, mobile, local (insert hot space name here) then you probably won’t be doing so great on the sizzle scale.

It is hard to get a term sheet from a venture capital firm. All you need to do is to look at the numbers of how many Series A investments any firm makes compared to how many startups are created annually.  A longtime venture capitalist once told me that VCs are not risk takers. In fact they are exactly the opposite, they are risk eradicators. The more you have reduced each of the risk factors related to the team, concept and traction described above, the much higher the probability of closing a venture round. Do you have what it takes to be the next American Idol?

Increasing the Odds of Success: Don’t Expect Cascading Miracles

Recently one of our investors asked me to meet with a friend of his who had his own startup and was looking to raise money.  I often get asked to look at startup companiesor ideas by people in my network to let them know what I think. Typically it is because they are looking to make an investment, join the company or want me to give them advice on starting their own company.  I both love and hate doing this.  What I do like is learning about new companies and the problems they solve, the different spin each one of them has and most importantly seeing how other entrepreneurs work.  What I don’t like is when I have share with another entrepreneur what I really think about their idea.  You see, like any VC will tell you, most ideas that I see aren’t venture fundable. However, unlike most VCs, I feel I have an obligation as an entrepreneur who has been around the block a couple of times to be candid in my feedback about the prospects for their company based on what I learned (so far).  In my mind, since I personally don’t have an agenda, I feel  giving the entrepreneur feedback that other folks may not share with them can be pretty helpful. I know I want to hear that kind of stuff, even if it hurts.  Anyone who knows me well knows that if asked I am pretty candid about my assessments.  And while I am occasionally wrong, I have saved my network lots of money and time (last year I helped one of my investors save over $1M).

So when I was asked to meet a fellow entrepreneur I agreed to meet for breakfast with my investor’s friend who was working on a new kind of calendaring product.

Evaluating a Startup for Investment

Before our meeting, I checked out his website and saw that I needed to complete the site’s registration process in order to see the product.  Immediately a flag went up in my head when I couldn’t use my Facebook, Google or Twitter profile to authorize the app.   In 2011 there is basically no excuse not to offer at least one of these login options for a consumer application.  I also checked out the founder’s profile on LinkedIn and saw he had some phenomenal PD experience at one of the most successful consumer technology companies around so he knew how to build great products.  Heading to breakfast I didn’t know what to expect but I was hoping my initial login issue was just a beta release nit and that I would be blown away by when I learned more about what he was doing.

At breakfast I was pretty impressed with my fellow entrepreneur’s background. Great product and technology experience. Also lots of startup stints, so he knew what he what he was getting into.

We started by him explaining the problem he was trying to solve. And it is clearly a big problem that many people have.  And many people have tried unsuccessfully to solve. There are dozens of free competitive/substitute solutions in market. None have solved the problem completely, but most people use some solution that solves part of the problem. So, kudos to him for trying to solve a big unmet need.

He spent a few minutes giving me a demo of his product and it was clear he knew how to build software. The UI was very attractive, looked pretty easy to use and had lots of features that would be needed to complete the most common jobs to be solved. But as I started asking questions about what it would take to make the product work well for most users things started to unravel pretty quickly.  It turns out that a lot of the content required to populate the application would need to come in via a feed similar to an RSS feed. These feeds would be provided by both large and small publishers. It turns out that most sites do not offer this kind of feed.  It would also require users of the application to know how to import these feeds. I don’t know about you, but I never figured out how to use RSS feeds properly. If it weren’t for the Rockmelt browser that basically did it for me, I would never use  feeds.  I couldn’t imagine your average user to be able to know how to import feeds for this app. In fact the overall product seemed like it would be easy to use IF it was an enterprise application, but it was a consumer application. It was apparent that it was not drop dead simple to figure out how to make it work for most users given the nuance of how each event could be created and shared.

Risk factors:

I then started going down the typical list for evaluating companies…user acquisition, retention, monetization, network effects etc.  It turns out my sign on process wasn’t misguided. There was not social networking capabilities built into the product other than email notifications.  Non-event organizers would not need to use the software and probably wouldn’t want to given the limited benefit unless everyone they knew used it too.  Hmmmm.  Retention was dependant on power users but lots of light users – kind of like Evite but without the pageviews.

So there was nothing built into the product that was social or incentivized non-users to use the product themselves.  The target would then be power users with no easily identifiably attribute to be able to find them in a haystack.

Given the competitive landscape he couldn’t charge for the product and I have my doubts about the other monetization options given all the factors that need to work in order to make the big bucks. The current plan for monetization was contextual advertising and selling content (specialized feed and template) subscriptions. Advertising seemed to be too distant from the core problem being solved to be able to capture high conversion rate CPAs and the subscriptions could work, but for a small market.

The best definition I have heard for marketing is “Identify a consumer need, meet a consumer need”.  But for an entrepreneur I have added a word… “Identify a consumer need, meet a consumer need, profitably”.   While it takes skill to build a great product, there are lots companies that can create products that solve a big unmet need, but never make any money.

Cascading Miracles

You see the challenge I found with this company and many other companies I have looked at is that they needed cascading miracles in order to be successful.  A hard product problem in general just to make the product easy, heavy users needed to know how to use feeds, publishers needed to provide them, users somehow needed to find the product, somehow making money would have to come together. This is way too many risk factors for a startup.  The probability of success just seemed too low.

I shared with my fellow entrepreneur my appreciation for him tackling a real, hard problem. But I also questioned the number of challenges he was going to face in order for his company to succeed.  We both understood the incredible effort required to scale a startup even in the best of conditions, why would you make your life so stressful by tackling something that would be hard almost every step of the way?   It takes just as much energy to build a company that only requires one miracle to succeed as one that requires three or four.  So why would you choose an idea/ product/ comapny  that needs more than one (or maybe two if you feel really confident or have lots of cash)? Life is too short to depend on cascading miracles for your company’s success especially if it isn’t riding any waves that give you huge momentum these days like social, mobile or local.

Facing Reality

At the end of our conversation I shared with him that I thought his startup fell in the bottom half of all startups that I see.  It was probably the bottom of the third quartile. No one likes to hear their baby is ugly.  I know I never liked hearing the truth about what was wrong with my startups.  In reality he could pivot and make something of his technology. This introduces a topic for another blog entry about how entrepreneurs can often get too attached to their ideas and develops blind spots to the realities of their company.  I wished him luck and advised my investor to pass on the opportunity.

Building a great product in a weekend – is it possible?

So I’ve been thinking a lot about advice I have seen on Twitter about getting your product out there super-fast. In particular, I have pondered about the statements that encourage entrepreneurs to build a product in a weekend, launch it, get feedback, iterate and, if you can, charge money for it; all within a few days.

What I’ve been struggling with is:

Is that reasonable? Could we have done that?

Even more so, what kind of traction is reasonable to expect?

How long would it take to demonstrate enough traction to raise an institutional (VC) round from such a fast time to market?

As an early stage entrepreneur we hear a lot about finding the Product/Market fit. Which basically means figuring out if you have solved a problem with your offering that a significant number of people have.  The way I describe it is ‘do we have a winner?’ i.e. is this a winning, big idea concept if we keep going with it?

However, finding Product/Market fit and have a mass-market appeal product are different. You can probably figure out if you have Product/Market fit with Innovators as well-described in the Diffusion of Innovation Graphic:

Diffusion of Innovation

And this is a tremendous milestone in itself, because it is very hard to get product/market fit with any sized market. But then there is the next major milestone which I call 80% product/market fit.

To me, 80% Product/Market fit means that the significant majority of users in your target market can use your offering successfully. In other words it solve the jobs they do in order to want to continue using your product again (and again). This does not mean having certain advanced features that leading edge / pro users want, but solving the problems the vast majority will need in order to adopt your product on a regular basis.

80% Product/market fit from a time perspective can occur somewhere between the latter portion of ‘Early adopters’ and the early ‘Early Marjority’. Why isn’t it a specific milestone on the graphic? Well because I am separating the product development cycle from the customer acquisition and distribution aspects of technology adoption. The graphic shows when users actually adopt the product. The product may be ready for the vast majority at times different from when users actually start using them due to the  acquisition capability of the organization (sales force, channel management, social media etc.).

There is a wide spectrum of what it takes to get to Product/Market fit at the 80% level. While by no means simple, it is pretty fair to say that the timeline varies by the types of offering you are developing. Some very successful products like Instagram, Twitter, eBay, Turntable.fm surely had a much shorter time-to-market compared to complex applications like most EA titles, enterprise software, ad serving technology and popular analytical tools like Google Analytics.  An interesting observation is that many of the companies that have had shorter development timelines seemed to have large amounts of user generated content and participate in markets with network effects.

There are some companies like SAP which started in 1972 and took years to build to solve enough problems (aka ‘jobs’) to become an option for large corporations in the early 90’s with R/3. Most of Microsoft’s products took several iterations to find 80%Product/Market fit.  The period between MVP launch and 80% Product/Market fit could easily be measured in years (decades?).

Why I am writing this post? Well, we certainly could have been in market several months sooner if we just built what we released as our MVP.  As you might recall, after building several workflows, we removed a large amount of functionality for our public release with the expectation that most will be added back in at a later time.  However if we just built the MVP to start I don’t think we would have gotten our Product/Market fit to the 80% level much faster. In fact, we may have slowed it down.

Let me explain…

Because we were designing and building a product that was striving for the 80%, we made several architecture and infrastructure choices and investments that we would not have anticipated upfront had we just been building our MVP.  So while we may have gotten some early traction with Innovators and very early adopters, it may have taken us longer to get to the 80% level by having to re-architect various aspects of our product at a later date (see my post The Biggest Decision). John’s perpective on this is almost always ‘better to do it now while the patient is open’, and after four plus years of working together he is usually right.  Of course, it was very possible we made some investments in areas that turned out to not being needed or important so that may have worked against us. We also missed some feedback that we should have gotten sooner (Launch & Learn – quickly adapting to insights from our users), luckily that wasn’t too costly. However, on balance we feel confident we will move faster once in market to quickly get to 80%.

Since traction is so important, our speed to 80% product/market fit is what we are solving for; so that we get hundreds of thousands of users not dozens or hundreds of Innovators or Early Adopters. If we got the right initial product/market fit then our speed will be the key to our success.

If someone else has a new product that can be built in a weekend and get 80% product/market fit right away (and ideally benefit from network effects) that is awesome, and I commend them with coming up with such a great idea and opportunity. However, those opportunities are rare. I think the significant majority of meaningful companies require several months to get to 80% product/market fit and in many cases even longer.

Getting the right people in the right seats on the bus

One of the biggest challenges in an early stage startup is to have enough talent on the team to do all the tasks required to get stuff done right.  If you only have a handful of people in your company (i.e. four or less) it is almost impossible to have all the skills needed to deliver a new offering, especially if it is some type of consumer application like ours.  So how do you find all the people to do all the work that is needed?

For many years now I have talked to people I work with about people I would label ‘Swiss Army Knives’ and others who I would call functional experts.  Swiss Army Knives are basically like the metaphor suggests, they are talented individuals who can perform multiple types of tasks well enough to accomplish the required objectives. This does not mean that they are experts in any specific functional area, but in a startup environment they are able to figure out what is needed and to make it happen. Almost always Swiss Army Knives are choosing this breadth vs. depth capabilities. My experience is that they are very smart and flexible individuals and if they chose to go deep in any specific functional area (and usually they have at least one or two in which they have gone deep) they would be world class in that area.  I started my career at Procter & Gamble and they really encourage attracting and developing Swiss Army Knives, and a lot has to do with their philosophy of promotion from within, general management skills and an upward spiral career path.  Which basically means that at P&G high performing employees are encouraged to take multiple cross-functional roles during their career as they move up the ladder. Being able to perform well in multiple functions and appreciate different functional roles is a critical leadership and career skill.

A few additional thoughts on Swiss Army Knives, while I don’t have statistical data on this I have found that only a small percentage of people fit this categorization, even in great organizations. What’s even more interesting is that I have found that SAKs tend to find each other and hang out together. I really don’t know why, but it just seems that they tend to have similar values, experiences and outlooks. Also, not being a SAK is not a bad thing either, having deep functional expertise is necessary in almost every company especially when combined with the depth of experience that the SAK will almost never have.

So how does this relate back to driving a successful startup?  Well, if you are small and can only have a few folks working full time in your company I would suggest having as many of your early employees being Swiss Army Knives as possible. By having as many people on your team who are able to get things done (in a ‘good enough fashion) within your team means that you do not have to tap outsiders (contractors, consultants, agencies etc.) to help you get them done.  Kind of obvious, but it all start with who do you have riding on your startup bus.

My partner John is a Swiss Army Knife. Not only can he tackle just about every technical aspect of our product (such as architecture, web service integration, functional coding, presentation layer functionality, HTML/CSS, dB management, operations etc.) he also has a unique appreciation of consumers and marketing from his past experiences. Thus when we discuss new features or user feedback we can immediately have a great, productive discussion about what to build and translate the conversation into new requirements.

However as you grow your startup you can’t do everything yourself and you can’t hire full-time people for every role that need to be done. There are lots of ways to address this issue via contractors, interns, consultants etc.  What we have found to work pretty well for us is using oDesk (www.odesk.com).  We use oDesk for both product development and marketing-related experts. oDesk is a great resource if you use it properly but it is certainly not a silver bullet. In fact, our experience is that unless you put a very big effort upfront into hiring and managing the functional experts you find you will be very disappointed in the results. Leading a team on oDesk takes as much effort if not more effort to coordinate (to account for time zone, language and not being in the same room).  In fact until we developed the right process and tools for the team, it was hard for some oDesk people to succeed was a challenge for them. But as we have found if you get your ducks in a row and find the one or two key people that ‘get it’ and can ‘do it’ the bang that you get for your buck compared to hiring locally really pays off.

To-date, getting the right people in the right seats on the bus has been a long, iterative challenge with our efforts finally paying off. We are happy where we are today, but of course it is a never-ending battle as we try to grow and keep up with all the new changes to our product and small company.

Good luck to you on getting the right people on the right seats on the bus – and may as many of them be Swiss Army Knives as possible.

Hello world! I’m finally joining the blogosphere

Welcome to my blog! I decided to start one to keep a record of some of the major events associated with launching a new startup offering and also to share some of my learnings along the way. I will also use this space to put down in writing some musings about my other passions. Stay tuned my first real posting will be about the biggest decision we made so far as related to our upcoming launch of Jernel – The easiest way to share and remember your life.