Man’s Best Friend

The prevailing view in national politics is that if you want a friend in Washington, get a dog. This same axiom is true for the CEO of a venture-backed company.

Sure, while they were courting you, your venture capitalists said wonderful things about your company. They applauded your past successes. They told you of their hands-off style and how they were there to help you navigate (only) the strategic issues. They persuaded you that they brought more than money to the table. They brought their contacts, their experience, the synergy of their other portfolio companies, and of course their “brand.” But what they probably left out of the equation is that the sole reason they invested in your company is their expectation of a healthy return on their investment. In other words, they are in it for the money!

Venture capital is often a necessary evil to get you, your colleagues and your company to the next level. Often times you can’t get there without it. And in many cases it is a badge of success for an entrepreneur. Venture backed companies get more attention from the press, tend to grow faster, and, in fact it is much more likely that you will accomplish an IPO with venture backing than without.

Oh sure, you say, you always knew VC’s were in it for the money. And in fact, you’re probably in it for the money too! Otherwise, why would you be putting in those long hours, enduring the hardships of limited resources, competitive pressures and dealing with hard-to-please employees and investors. But while this may be a similarity between you and your VC, there is an important difference. While you both may be in it for the money…they are in it ONLY for the money.

You, on the other hand, may have to maintain friendships and relationships with your employees, you may have your name on the line with your angel investors, friends, or family. It is on you whom the vendors are taking their chances. And perhaps you have some desire to continue running your company. You need to make decisions that may have implications that go beyond just plain money. These “other” considerations all are part of what makes you a CEO. But your VC ultimately wants nothing to do with them.

VC’s really only care about the money. You and your company are just a vehicle to get them to their goal of a return on their investment. If something, anything extraneous, gets between them and their return, like you or your “other” considerations, you will likely find yourself alone.

If you haven’t experienced this yet, just wait until your try to raise the next round of capital. Or, you miss you numbers one time too often. Or, you are forced to sell your company at a price that is not quite what the venture guys were hoping. Or perhaps worse yet, you go through a liquidation. Then see who ends up with what’s left.

So next time you are sitting at a board meeting, and perhaps things are going well enough to let your guard down just a bit, don’t consider for an instant that they the guy next to you is your friend. Unless he’s got long furry ears and a tail, think again!

Time to Replace Yourself

Fortune Small Business recently posted an article with this title. While I believe the article is a pretty good rendition of what founders go through when they determine they need some help, the issues touched upon are just the tip of the iceberg and are probably only appropriate from a founder’s point of view. But having been the replacement CEO for four different founders, as a successor to a founder you are often fighting an uphill battle trying to do things differently than the founder - especially when the founder is still peering over your shoulder. Often the founder/CEO may decide they need help, but not know how to accept it. In one of these companies, I used to joke that the founder encouraged me to initiate any changes that I thought were necessary as long as he agreed. This was a difficult charge, since doing only those things that the founder agreed with potentially doomed us to relive the past and not improve the business.

It is a unique founder indeed who is willing to leave a successor alone and let them make what the founder may feel are mistakes in order to take the business to the next level. In my experience, the founders who figured out how to get out of the way and give the new CEO the same full reign they maintained when they were running the show, are the ones who ultimately were able to reap the rewards of a successful liquidity event. The others were drastically different outcomes.

Of course you’ve got to have the courage and the foresight to hire the right successor. I am an advocate of “try before you buy” - hiring a successor CEO as a consultant or in a less invasive role before making a final succession decision. But continuing to hold tight on the reins after making that decision can compound the issues rather than solve them.

I’ve often considered that the best prescription for a founder who has determined that they need to hire a new CEO, is to get completely out of the way - which may require leaving the company - in order to empower the new CEO to make the necessary changes.

Large companies tend to understand this when replacing a CEO. Take the example of GE. Welch engaged in an extensive process to identify the appropriate successor. But when Welch stepped down from the role, he quickly extricated himself from the business altogether to enable Immelt to lead the company in an entirely new direction.

Hiring is Hard

Most people do it poorly. But in early stage companies, the people you hire (and fire) to form your executive team are critical to the success and often the survival of your business. Any early stage CEO must read Marc Andreessen's post Hiring, managing, promoting, and firing executives on this topic.

Marc nails it as he discusses how and who to look to hire, how you know if they are right for the role, how you can tell if they are succeeding, and how you know when it's time to pull the plug.

As Marc suggests, getting it right 50% of the time ranks up there as a best practice result. So figuring out if you have done it right, earlier rather than later, is essential. His post offers a checklist of thoughts before you make (or keep) that big mistake.

Business Models Matter

Have you ever tried to swim against a strong current? Even if you are a good swimmer, almost no matter how hard you try, its very difficult to make any forward progress.

This is a similar situation for companies who have business models that work against them. [Business models are roughly defined as the value proposition that your company brings to the market.] No matter how hard you work, or how smart you are, or how great your solution, you don't seem to make any money.

Smart CEOs attack business models first when founding or taking over the leadership of a business. Once they have that down, everything else is much easier to handle. In fact history has shown us that even great CEOs will likely fail with a poor business model and in fact the converse, poor CEOs often are propped up and succeed with great business models. So rather than continuing to swim against the tide, consider altering your model.


So what's a good business model look like?

We have found that good business models have the three characteristics that match up with an immediate, a future and a long term time frame.

Great Profit Margins
Stickiness
Defensibility

Great profit margins - Business thrives on this. Seems simple. However, there are untold numbers of businesses that don't get this. The work hard, sell lots of whatever it is they are producing, and like the old proverb, "will make it up in volume." Actually that is what many of these businesses believe (hope?) - that once their volume is sufficient, they will become profitable.

Instead, smart founders and CEOs seek out ways to make their business profitable today. Clayton Christensen used the term "impatient for profits" in his book Seeing What's Next. It's important to ensure that your business today (or as soon as practical) earns profits and that those profits are not necessarily dependent upon reaching some volume threshold. It certainly makes it easier on your scarce capital to do it this way. Businesses that clearly differentiate themselves from the competition (have a unique offering) generally have an easier time making a profit. They tend to have selling prices that have no direct relationship to their cost - typically large spreads between the two. Instead their prices are based upon their value they deliver to the purchaser. Scarcity helps as well - if you are the only one delivering this solution to a target market - you can often name your price.

Severing the markup-over-cost relationship can accelerate any business model. There certainly are great examples of this in the market, often associated with luxury goods that create a perceived value in the mind of the buyer. But great margins are sometimes found in more innovative ways. I've experienced two technology companies that saw this light. Tangoe, an application software company based in Orange, CT found that their telecom expense management was so good it saved big companies millions of dollars. Rather than just charge some amount that amortized the steep development costs of their software, Tangoe has begun to charge based upon "sharing" that value with the customer. Another company based in Hickory, NC, Transportation Insights, had the insight (pun intended) to charge their customers based upon how much their freight logistics services save their customers, generating large percentage profits for this young company.

At one company that I lead, we found that offering our software as a service (back before Salesforce.com made this term vogue) was our key to juicing our margins. After listening hard to our customer base, we heard there was great value in not just handing them the CDs with the code, but in fact in running the application for them (in this case employee equity management) provided more value and hence higher profit margins. (This move also had an ancillary positive impact on the idea we'll discuss in the next post - stickiness.)

So just don't take the business model you've been handed for granted. Be sure it works for you! If not, no matter how good you are, its probably a critical enough factor to rethink whether this is really a business for you.


Good business model provide enticing profit margins - so enticing that your well-heeled competitors might view this territory as ripe for their expansion. While a good business model (and a great product) might generate some nice short term profits, how do you keep this good thing going?

We call this next stage Stickiness. Stickiness is that quality that keeps your customers loyal to your solution.

Stickiness has another dimension as well. The stickier your solution, the less effort you should have in deriving additional revenue from that same client. Sticky solutions are the "gift that keeps on giving." You've probably been told that is is much cheaper to continue to keep a customer than to try to find a new one. Stickiness trumpets this characteristic ... and more!

Often times smart companies can create solutions that are sold once but paid for on an on-going basis. Subscriptions, leases, maintenance, outsourcing, services, royalties and the like are all examples of long term payouts from a single sale. If you can morph your business model into one that has recurring revenue, rather than a one-time fee, do it! Salesforce.com, mentioned earlier, pioneered a concept called SaaS - Software as a Service. Rather than do what everyone else in the software business was doing - selling based upon a large up front perpetual license fee and relatively small annual maintenance fees (usually running 15-20% of the license fee), they decided for this and other good technological reasons to charge a use fee - based upon the number of users, charged annually. This model changed the dynamics of the software industry. Sell a customer today, collect 100% of this year's fees this year, and then be virtually guaranteed next year's fees next year too! Compare that to the typical company that received 100% of this year's fees today and only 20% of that fee next year. Salesforce.com's model almost guaranteed growth - just by selling one more incremental customer.

Other sticky models are created through a community model. By community, we mean that the company has done something more than just sell you today's solution. They have developed a brand that you become loyal to because they delivered what they promised and they provided the reinforcement for you to continue to identify with that solution. eBay created a great community model that actually became more attractive the more customers it captured - there were more reasons to attend an eBay auction each time a new customer joined.

Each of these characteristics provides an ongoing value proposition for each new customer - one that will continue to generate benefits for the company - and for the customer. Done right, these can be like the proverbial snowball - gaining (revenue) volume at an accelerating pace.

Sticky solutions enable CFOs to sleep at night. Sticky solutions generally have a more predictable and less lumpy revenue flow - characteristics that are valued on Wall Street.

So now you have a great profit margin and a reason for your customers to stick around; what else do you need?



With both profit margin and stickiness, you may be set for the short and middle term. But what about the long term, once competitors have enough time to regroup and mount an attack?

We used to call this a barrier to entry. Most Venture Capitalists used to quiz their founder CEOs on how they were going to maintain their position in the light of big competitors targeting them.

Like security, no protection is fool proof. What you need is to find as much protection as you can today and then run like hell to build yourself as sticky a solution as you can. The government gives you some protection if you have developed something novel by issuing patents and copyrights. Each gives you a bit of a legal monopoly (hence scarcity) on your particular invention. But intellectual property protection is usually not available for services or other non-proprietary businesses, and patents wear out and are costly to defend, copyrights are relatively weak protection, so you will need to take much of this matter into your own hands.

So ultimately your long term protection will be built on establishing yourself, through both bulk and brand. Bulk comes from just that - getting big quick. Companies like RIM who invented the Blackberry was a company just in this situation. They initially relied on patent protection which ultimately backfired (they had to pay almost $1 billion for allegedly violating someone else's patent). But even with that big settlement, they didn't have to fold their tent and go home once their IP barrier was breached. Instead they were large enough to withstand the financial impact, had created a very loyal user base, and continued to innovate off of their original design.

There are always obstacles to customers changing brands - sometimes they are simply psychic impediments such as "I don't know how that new product will work - but I do know that the one I use now works fine" - or sometimes there are real switching costs - like having to convert one's data to a new format. But smart companies rely much more on the positive side of attractiveness to retain their loyal customers. They provide a great continuing customer experience - one that keeps the customer from even thinking about changing in the first place.

Together, great profit margins, stickiness and a good defensive strategy can create long term value for the owners of a valuable solution.

Presentation to Long Island Software CEO Forum

Last week I presented "Lessons Learned" to a group of software company CEOs on Long Island. Below, using a new tool that I found called "SlideShare," I've embedded the presentation. Let me know any thoughts about it and/or slideshare by leaving a comment.

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Are you really qualified to be the CEO?

There is no degree that you can get to become qualified to become a Chief Executive Officer. Brain surgeons go to medical school and then spend years as a resident, apprenticing for the job. And, after passing the appropriate exams to gain certification, they regularly attend informative and educational sessions to stay current with the latest developments in their fields. Securities lawyers attend law school and then take an intense exam proving their merit before being awarded with their certification. They too have annual continuing education courses to ensure they stay abreast of the latest developments in the law. CPAs undergo a similar rigorous indoctrination and also are required to stay current on changes in laws and regulations.

But what about CEOs? The top office, perhaps the most critical position within entities who themselves control more wealth than some nations, need pass through no such process. There is no continuing requirement for CEOs to stay current on what is going on in business, in their industries, or on how to become better CEOs. Sure, there is business school. But, to our knowledge, there is not even one course given at Harvard Business School that pertains to how to do the job of CEO.

So how do you qualify to become a CEO? Are you just anointed? Is it your family connections? Or did you do it yourself?

Certainly there are many CEOs who become just that by founding the companies that they run. Often, as these companies grow, the founders find that the job has outgrown them. Whether this occurs voluntarily or is forced upon them by their investors, it becomes clear to many of these founders that perhaps they are not the right people for the job.

There are more family run companies than public companies in the United States. So your chances of becoming CEO as a birth right are much higher than climbing the corporate ladder. But here too the CEO job can become a perilous perch.

Other CEOs come from climbing the corporate ladder. They are either good at their prior jobs, show promise in leadership and decision making, or perhaps are just good at the game of office politics. They get appointed by their boards into the job.

But are any of these CEOs really qualified for the job?

What we have found from the years that we have spent working with some of the best (and in some cases some of the not so good) CEOs, is that how they came about capturing the job had little to do with their capabilities. There are some good CEOs who were simply the next generation of their families. There are some that founded companies. And there are some that climbed the corporate ladder. The characteristics of the good ones all seemed to coalesce around a similar set of habits and characteristics.

Our hope is that if you aspire to the role of CEO or already are one today, you probably should consider how you can get good (or better) in that role. The difference between a mediocre CEO and a great one can be the difference between literally tens or hundreds of millions, or even billons of dollars of stakeholder wealth. While we don’t believe that CEOs alone are what causes companies to succeed or fail. It is clear that without a good CEO, a company is clearly hindered in its ability to succeed.

Straightening out Employee Reviews

I've spent several hours complaining about Business Week's coverage of a number of issues. I thought it only fair to try to be balanced in my comments. This week's issue (September 10, 2007) includes an article in the UpFront section that talks about how to improve employee reviews. Courage it says is necessary to overcome reluctance to conduct such a fundamental business interaction. That kind of courage is obviously sorely lacking in our culture today. That's probably why 90% of managers thing they are among the top 10%. Kudos to Business Week this time and for their balanced inclusion of Dr. Kerry Sulkowicz's viewpoint. If our CEOs don't pay closer attention to this concept surely many of us will be leading what amounts to be a ticking time bomb of a company with a quite out of touch employee base.

The Five Most Important Founder Issues

Just ran into this posting that hits several critical founder issues right on the head. Take a look at Roger Anderson's Modern Magellan post entitled: Founder Issues - New wine in an old bottle Part 4. Roger lists the 5 most important founder issues for a new company:

1. Control
2. Communication
3. Personal value
4. Short-sightedness
5. Salary

"It could be argued that they all exist in most founders, regardless of the level of experience. A founder with prior experience may feel that they know more about business than anyone around them. Such over confidence can lead to errors that amateurs do not make."

His posting is a good read.

90% of Managers think they are among the Top 10% of Performers

Business Week, August 20 & 27 edition, reports on p. 43 that among other things associated with how people view their "work" environments, this startling statistic. The percentage gets even higher - 96% - when they segregate out only companies with 50 or fewer employees. Like Lake Wobegon, where all the students are above average, the idea that so many managers think they are doing so well is likely a surprise to their supervisors, or is it?

Certainly, it is a statement of the ineffectiveness of our employee review systems for this many employees to be this wrong. Companies must improve the process of evaluating employees and communicate this clearly to their people or risk a plethora of wrongful termination suits, seldom improving employees and mediocre company performance. Perhaps telling employees the "bad" news is a difficult task. However, the consequences of not doing so will likely be enormous.

Lessons learned

During the past year I have reviewed several dozen business propositions, talked with founders, entrepreneurs, angel investors, venture capitalists, and plain old rank and file business people. I've been in search of the the holy grail of business opportunities - and have yet to find it (but that is the definition of the holy grail isn't it?)

Along the way, I learned and confirmed some business truths that I thought were worth sharing.

Money

• There is lots of it available in the market. Even VCs have more capital than they can manage themselves.
• Valuations are always astronomical for other companies (i.e., not yours).
  
• Angel capital usually comes from people who have too much time on their hands and put their noses in places in which they have no expertise.
  
• Just because you have money to invest does not make you smart – in fact there may be an inverse correlation. (Thanks to Harry Gruner at JMI for that truism).
• Money alone can’t help a bad venture or a good venture with a bad management team.
  
• You probably can’t succeed without it.
  
• If you continually have too little of it, you either are spending too much time looking for it, your valuation is stupid, your management team is inept, your venture is not worthy, or more likely all of the above.

Management Talent

• There is not enough to go around.
• In the land of the blind the one eyed man is king.
  
• A combination of business savvy and engineering talent is virtually non existent.
  
• Most techies would disagree.
• Just because you are a founder, does not mean you deserve to run an organization (unless you are the only employee).
  
• Good management techniques transcend most industries.
  
• If you think your industry (or business) is different, you are wrong.
• Founders who hold the title of CEO only because they started the company are usually in the wrong job.
  
• Founders who have this epiphany, can actually become good CEOs.
  
• Friends and family teams are usually all that is necessary to burn down a very promising venture.
  
• Most bad management teams don’t agree with any of this.

Technology

• You can’t risk your success on the back of one or a small team of technical people who don’t believe in technology transfer as a priority.
  
• As a CEO if you don’t understand it, over time you still won’t get it.
  
• It is highly overrated.
  
• Companies that start with great technology and succeed have figured that out.
  
• In order to succeed, your technology actually has to solve some problem.
  
• Creating the problem just so your technology has something useful to do just won't cut it.
  

Sales

• Great sustainable sales only exist in an environment where there are processes and metrics.
• If you claim to have metrics, but don’t track them or can’t recite them, you are fooling yourself.
  
• If you think your business is different and you don't need metrics, you are wrong.
  
• Great sales talent is not personality based – it is process based.
  
• If you are not concentrating on how to create reproducible sales – you won’t have any.
• You can always spot a sales driven organization - their employees wear company-logoed clothing.

Founders

• Believe their ventures are worth at least an order of magnitude more than people with money do.
  
• Think that the money guys don’t get it.
  
• Expect that splitting the pie is equivalent to shaving ice.
  
• Need adult supervision.
  
• Every organization has at least one.
  
• If you care about how people feel about you, it’s probably best not to be his/her immediate successor.
• There is much too much more to include (see the rest of my blog postings for more).

Details

• Some people thrive in the details.
  
• This isn’t always bad.
  
• There is a place for them in every organization.
  
• I’m not one of these people.

Quality of Life

• In today’s world this often takes center stage.
  
• Working with great people, having a flexible work environment, and controlling your own destiny often count more than fewer hours in the office.
  
• Working for a, with a, or just be- cause can shift this balance.

Risk

• There is a significant variance about the propensity of individuals to accept risk, which varies over time, with the weight of their pocket books, and the size of their mortgage.
• Potential participants in any venture have different short term vs long term needs which also varies over time.
• Everyone says they are looking for long term wealth generation.
• Most can’t afford to really do that.

People

• No good person wants to work with assholes.
  
• Most assholes would love to work with you!
• You are only as good as the company you keep.
  
• That includes clients and investors.
  
• Even a bad technology can succeed with good people.
  
• The converse is never true.