Illinois ITA CEO Summit

I had the privilege of presenting last week to the Illinois Information Technology Association's CEO Summit. My presentation focused on Lessons Learned, especially when it comes to picking and focusing your business model. I've included my PowerPoint presentation here. I'd love to hear your comments.

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Why is it so hard to focus?

Early stage businesses are risky. Investors know that. Entrepreneurs are notorious risk takers. Statistically, most new businesses fail. But the ones that succeed often disrupt the status quo, challenging traditional industry leaders, and creating substantial value for their stakeholders. With the benefits of winning so high, American entrepreneurship is alive and well and fueling thousands of aspiring startups each year.

But all too often, we see startups adopting a hedging strategy. They pursue two, three, or more different products, markets, or opportunities at the outset, prior to establishing any beachhead position. When asked, usually the answer is: "its too early to tell which of these might succeed, so therefore we would be negligent to count any of these out."

This portfolio strategy for a newcomer attacking the market is doomed!

A reduced risk strategy for an not-yet-established company will seldom work. While it is possible to just get lucky and win the lottery (and some companies have) the chances of succeeding with a diffused set of investments, lacking a laser focus, has proven to be faulty. The competition is fierce. Well heeled competitors with established distribution, brand recognition, and operating momentum are tough enough to compete with head to head. But, trying to fight multiple battles concurrently is a prescription for disaster.

Startups succeed when their drive, willingness to take on risks, and gorilla strategies all point in the same direction. They win by attacking staid competitors who themselves see that new potentially winning strategy as risky, who lack the desire to do "whatever it takes" to be successful, and who are busy covering their bets so they do not risk the shareholder value they have already created.

This is probably why we often find that entrepreneurs are young and early in their careers. They either are naive to the risks of failure, or they have little to loose. But entrepreneurs who are willing to risk it all, are the ones that big established businesses should be afraid of.

There are many analogies that can help understand why this focus is necessary. Have you ever tried to drive a dull nail into a hard piece of wood? The resistance of the wood, coupled with the larger surface area of the dull-ended nail, makes this a difficult task. Better a very sharp nail with all the force directed on its head to succeed at this task.

War analogies also apply to this situation well. Small armies attacking larger established forces never attack in multiple locations. Instead they pick their targets, focused on the spot of most vulnerability, and use all of their forces in one location. No self respecting general would ever pursue a strategy of trying to go head to head with a much larger enemy in multiple locations at one time and expect to live to fight again. That is until they establish their beachhead and then branch out from there.

And of course there is the old Chinese proverb: "He who chases two rabbits catches neither." Ever tried to chase down even one rabbit at a time - that alone is tough. But with the added distraction of the second, the chances go down exponentially.

Business leaders who are unwilling to focus, to pick one target, and give it all they've got to try to win, are not entrepreneurs at all. They should go back to the comfort of their less risky established company jobs and run a division. As an investor, who better to take advice from than Warren Buffett? Mr. Buffett suggests that if you are looking for a portfolio of investments, then buy the stock of multiple companies, rather than investing in companies with a hedging strategy.

Geoff Moore, Author of the seminal marketing treatise: Crossing the Chasm, suggested that disruptive inventions solve one problem for one market substantially better than the existing solutions (if any exist at all) and focus on taking a single beach head on the other side of the chasm. Doing otherwise increase the risk of failure.

Rather than decrease risk, entrepreneurs that follow multiple simultaneous paths, actually increase their risk of failure.

Deals Take on a Life of Their Own

Just about every CEO denies it will happen to her. Clinically analytic CEOs and their teams, painstakingly analyze the acquisition (either their own company being acquired or a company they are intending to buy). Great process, due diligence, clear minded accountants, tax & legal counsel, all engaged and focused on the particulars. Investment bankers who sole incentive is the get the deal done. Mix all that together and what do you get? A great acquisition?

Sometimes! But quite often most deals, whether they are good or bad, end up completed. Once offers are made and dollars are discussed, deals take on a life of their own.

What does that mean? It means that even intelligent, experienced, and dedicated professionals all get caught up in very human behavior. That behavior, psychologists tell us, relates to the "investment" of time, energy and resources that have gone into getting the deal to where it is. These costs, this effort, this intense focus, leads to momentum. Like physical inertia, all of this "weight" of pointed activity aimed at getting this deal to where it is may very likely cause the deal to occur, no matter what the outcome of the final details. That is deals may occur simply because they are heading down the tracks at such a great speed (and mass of effort) that even the best laid plans may go awry and make way for a not so optimal deal.

How do you counter this?

It's not easy. Those involved in the deal, and especially those whose compensation is based upon getting the transaction completed (like investment bankers for instance!) will exert great pressure to get the deal (virtually any deal) completed. Acknowledging what smart business people call "sunk costs" and ignoring these as the final deal comes into place, under circumstances like these, is extremely difficult.

The best way we have seen to avoid succumbing to these kinds of pressures is to engage a dispassionate third party - who has the ear of the CEO - to keep a sort of pressure gauge on the transaction. Ensuring that this objective third party stays objective is the first trick. Even outsiders start to get excited about potent deals. Keeping them compensated despite the eventuality (or not) of a transaction and doing whatever you can to encourage them to point out the blemishes is your best medicine.

When deals get done, kudos are passed around, deal plaques are created, bankers get huge fees, and the good feelings abound (at least until the first quarters' combined results are tabulated). Perhaps companies should get in the habit of securing plaques for deals that don't get done, because someone realized it might not be the optimal deal?

Founder Rebounds

It seems to happen often. Expensive, heavily recruited, extremely qualified (on paper), high profile "professional" CEO brought in to take a founder-led company to the next level. Usually these situations start off with great expectation. Sometimes even a quick jolt of good performance. And then .... much more quietly, the Board reinstalls the founder to take over for a now floundering organization.

What does this mean? A bad hire. An organization that can't exist without the founder's magic. Just another phase of a company's growth.

Many companies have experienced it recently - Nike, Dell, Yahoo, and hoards of others whose names do not register as quickly.

Here are my thoughts on what might actually be happening behind the scenes:

1) It is hard to replace an icon, no matter who you are. Being the second act behind a nationally recognized figure is an awesome task. The expectations may be more than most can live into.

2) It's hard to be your own person with an icon looking over your shoulder. With the specter of the person who performed the magic that got the company to where it is hanging out in the wings, its hard to enact change. No matter what words are used, or how much support the newly hired CEO gets from the founder or the board, its a false belief that real change can occur with your predecessor standing nearby.

3) Some hires are just the wrong choices. Hiring is an art, not a science. Sometimes well intentioned boards and founders hire a person who is not capable of doing what is necessary. If it looks like a duck, smells like a duck, walks like a duck and quacks like a duck, sometimes it really is a duck!

4) Circumstances change. Sometimes the replacement hire is the right person and can adequately handle the job at the time they are hired. But subsequently the company grows, changes and the new challenges require different leadership. Leaders don't always grow at the same pace as their organization.

No matter what the reasons for the ultimate mismatch, is bringing back the founder the right answer? It's a question that remains unanswered. But perhaps its the best answer the Board can come up with at the moment.

The Power of Focus

Most early stage company failures are not caused by starving from a lack of good ideas. More often than not, instead they are choked by trying to digest too many at the same time.

Competition is fierce. Even companies with unique offerings run up against companies with orders of magnitude more of resources, experience, existing customer relationships and brand awareness. They can often favorably compete with the new entrant, even with a not-as-good solution. As the business world continues to expand, this competition will accelerate and they will set even higher hurdles for these entrants.

There is but one proven way to compete against these business Goliaths. That is to focus intensely and put all of your resources and momentum into driving that single finely honed direction. The sharper your focus the less "force" needed (or the more powerful it will become). Anything short of complete focus diffuses your efforts. Incumbents find it much easier to defend their turf when a new entrant gets distracted by things that blur the new entrant's vision.

Then why do so many early stage companies chase multiple opportunities rather than just one winning strategy? Our research tells us its risk aversion. Despite their entrepreneurial risk- taking swagger, CEOs (and sometimes their investors) like to hedge their bets, invest in several potential projects, hoping one will bear fruit. (Maybe some of this is because CEOs have short attention spans.) But this lack of complete focus is actually riskier than pursuing the one effort that really might have a shot at winning.

Confucius has been quoted as saying - he who chases two rabbits catches neither.

Barney Relationships

How many times have you been told by a bubbling senior executive of a high potential company about a relationship they have just signed with Bigco. She tells you how that relationship itself validates the value proposition of her company. And you probably believe it. After all, Bigco is a household name with legions of very smart executives who have their pick of the litter of companies with whom they could affiliate. In fact it’s not just one relationship with one Bigco that the company has rung up. In fact they have four or five with several different Bigco-like companies. Sounds impressive.

A good friend of mine, Gordon Rapkin who is currently CEO of an really cool data security firm in Stamford, CT – Protegrity, puts these kind of relationships into perspective. He calls these Barney relationships.

Depending upon your age, you either grew up with kids who were familiar with Barney the purple dinosaur, or perhaps you were a Barney fan yourself. Barney is this loveable character who caters to youngsters. You may recall Barney’s theme song. It included the words that Gordon was referring to:

I love you, you love me ….

I’m sure you can probably hum the tune.

In any case while these relationships may in fact be interesting or may even be predecessors to a more serious relationship, they are not equivalent to real market traction, unless that love also amounts to money changing hands. So while we all can all celebrate these successes, we should be very careful to realize that Barney relationships are not a proxy for a real sales or for tangible market penetration.

Don't get Bored of your Board

I had a Director who once told me his job was easy. "I just have to show up once a quarter and whine!" Thankfully, this particular director was kidding.

I have witnessed Boards who do little more. However, with the right people and some advance planning, your board can be an important corporate asset. But this requires you as the CEO to provide some leadership.

Here are a five helpful hints that will enable you to get more value from your board:

1) Prepare - If you want your board to provide you with valuable insight at your meetings, get information to them well in advance of your meeting. While you live with the information every day, the board's view of what is going on inside of your company is limited to what you provide. If they get their board books a couple of days before a meeting, they are liable to only glance at the materials in advance. If it arrives a week before, they will find the time to read it through. You may even want to circulate your agenda in advance of the meeting and ask the board's input on topics they wish to discuss.

2) Communicate - Board books are invaluable tools for your Board. However, limiting their information flow to a book once a quarter is a meager helping of corporate information. Get in the habit of communicating more often, sometimes informally. Regular calls between meetings, timely information that comes up that relates to topics you've discussed or plan to discuss, or even face to face meetings outside of regularly scheduled board meetings can help an interested board member stay abreast of what is going on and hence provide richer input. Some industrious CEOs that I have known have given their board members jobs. I don't mean they make them employees or even consultants. Rather they designate special concentrations related to issues the company is encountering and have the board member become the "lead" in this area - typically an area in which they may have some special expertise.

3) Time manage - If you allow it to happen, most of the time at your meeting will end up being a review of your last quarter's performance. These kinds of meetings tend to look a lot like a quarterly report card for the CEO. Anything you can do to avoid this should be done. The vast majority of your meeting should be spent looking forward. The board's biggest value should be as an advisor and sounding board. I usually allocate no more than 1/4 of a meeting to reviewing the past. Your agenda is the start of this trend and then effective time management during the meeting can ensure the rest.

4) Be proactive - Engage your board in the issues that matter. There is a fine line between asking for feedback and asking for direction. I would always prefer the former. In my role as a board member, I'd expect the CEO to come up with a plan and then expose the board to his plan, the underlying assumptions and rationale. But if you instead ask for direction, you may get just that. And it may be a direction that doesn't suit your desires. Don't let the board fall into the habit of making tactical decisions for you. Be proactive, do your homework, make your decisions, and then provide the transparency required to enable your board to understand why.

5) Avoid surprises - If you are going to take on just one of these five recommendations, make this the one! Boards hate surprises. The Board's role is to look out for the interests of the shareholders. Surprises make the board uncomfortable in that role. Surprises connote a betrayal of trust and result in a Board that questions everything and pulls tight on the slack they have given to the CEO. Delivering bad (or even good) news surprises in close to real time, is a much better prescription for the CEO who wants to continue to ensure a healthy board relationship.

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.