Nesheim Online

TIP OF THE WEEK: It's a great time to get seed round money

Don't listen to the dooms day bloggers that cry there is not seed round money for startups. Ignore depressing stories by depressed reporters. This is a great time to get startup money, anywhere in the world.

The great venture capitalists and respected angels are all actively looking for the next great startups. They know the weak have given up. The strong are easier to find (like you). They are eager to locate leaders with clever bplans and unfair advantages. They want to find you before their competition does. That is how they got wealthy.

Depressed economic times are the times when the next wave begins to rise. You want to hop aboard and ride its energy to success. So do eager investors and those top quality employees. Both are looking for the next Google in a new space. You can attract them now, with a great bplan. It is what they are seeking.

Bloggers and reporters are depressed because everyone out there in startup land is depressed (except the winners-to-be of the new wave of startups). So stand up, stand out and you'll find eager investors welcoming you with open arms.

When you read of smaller and smaller rounds of financing taking place, you can be assurred the next round of startups has begun. Seed rounds are smaller than the D, E and F rounds of old, struggling startups. That is your clue to get into action, go find your money.

BOTTOM LINE: Get your money when others think there is none for startups. There has never been a shortage of capital for startups. What we are short of is startups worth financing. So make yours so outstanding that VCs line up with their check books. That will happen when you start with the right attitude and prepare a bplan based on an amazing unfair advantage. That's how you will get your money.

TIP OF THE WEEK: If a gorilla is sitting in your space, find a different place to start your startup

Are you thinking about doing a better social networking service, or improved search, or an e-book offering more for authors?

That is a common starting point for an entrepreneur: better, improved, more are the operative words.

But those ideas are aimed at a seat occupied by a very large gorilla: Facebook, Google and Amazon. If you try to join them in the space they dominate, they will merely move their hulk a millimeter and crush you. In fact, they don't have to move at all. They are more likely to ignore you and enjoy watching you starve to death.

When a gorilla has arrived, that means the battle is over. End of war. From here on, attackers don't stand a chance. Head-on attacks with faster-quicker-better-cheaper end in carnage, blood all over the street.

Serial entrepreneurs avoid attacking gorillas. Instead, they move around them, into an uncontested space. That is a flanking competitive maneuver. It wins them a chance to become the gorilla of a new space that does not yet have a gorilla seated in it. Wow! That is exciting!

BOTTOM LINE: Avoid gorillas. Do not provoke them. Find a new space not yet occupied by a gorilla. Plan to become the new gorilla in the new space. That opportunity will be very attractive to investors, employees and bloggers. Using the flanking strategy is what serial entrepreneurs do to win, again, big time. When you understand that, you'll be well on your way to creating a great unfair advantage.

TIP OF THE WEEK: Ask for more money, not less, for your seed round

How much money should you ask for in your seed round? Does it matter to venture capitalists, angels or other investors such as friends, family and fools?

The response from serial entrepreneurs may surprise you: "Take more money than you think you need."

Here is the reasoning for that provocative response:

• The percent ownership is the same for more or less money. Experienced entrepreneurs find $1 million costs as much as $300 thousand. I know it is weird, but that is how it works. If investors get too greedy (their cost of capital is extremely high), there will not be enough of the startup left to motivate employees and not enough to attract follow-on rounds of financing.
• Less money is less attractive to venture capitalists. Professional VCs generate wealth by putting as much cash as possible into winning startups (like yours). Ten times $1 million is better than ten times $300 thousand.
• Optimism calls for more money. Get enough money to fuel your company well past the first major milestone  (e.g. proof of concept, running prototype, etc.). Entrepreneurs are always overly optimistic. Investors know that. They want you to raise the next round after, not before, completing the major milestone. it is very painful to try to find the next round of investors when your company is half pregnant.
• Less seed round money does not increase your chances of getting funded. You get money because of a great bplan, with great people, that have a great unfair competitive advantage. Begging for crumbs while holding out a tin cup and a cardboard sign is not how to get your seed round financed. Go for the gold, with confidence and boldness.

BOTTOM LINE: Experience tells the first time entrepreneur to find more, not less money. That increases your chances of success. It is a powerful addtional element to add to your unfair advantage.  If you doubt it, ask a successful entrepreneur.

STARTUP LESSONS FROM FISHING: 4 in a series

I just returned from a week of fly fishing on one of California's prime trout rivers, the McCloud. Along side the blue green running water I camped with my best friend. During our long ride up and back in my Jeep we had time to catch up and share a lot of what was going on in our lives. After each day of great fishing, I cooked a delicious camp dinner and we talked further, until we were ready to climb into our sleeping bags and quickly sink into a deep, restful sleep.

Today I thought I'd share with you more of the lessons for startups that you'll find in fishing.

1. Be quick and agile. I fish a stream by starting on one section of water, choosing a fly patter and casting to see what fish will respond. Often nothing happens after alteration of technique and fly patterns. So I then move on. I don't spend a lot of time pounding the fishing hole with a thousand casts. Instead, I spend ten to fifteen minutes there and if nothing exciting happens, I then move to the next section of water. Startups that are quick and agile behave the same way. They test the market with what they have to offer, target a demographic segment of customers and start selling. If the response is mild, then the startup alters the offering for a short time to see what else might work and what does not. If only a mild response continues, then the startup moves to another market segment. This continues until the sweet spot is found and sales start to jump.
   
   A good example of this agility was reported in The Risk Takers, a special segment in Business Week of June 22, 2008. Here is a real startup that is quick and agile:
   
   "JustAnswer is a San Franciso company that lets customers ask questions of experts in almost any field for a small fee. It had been chugging along for five years when the recession hit. As the housing market crashed and homeowners slowed their purchase of appliances, CEO Andy Kurtzig anticipated a demand for repair services. He devoted an increasing portion of his marketing budget to appliance repair advertising. Much went to buying key words on Google and other search engines. It worked: JustAnswer has seen a 57% increase in questions about repairs over the past year. Refrigerator and computer repair quieries have risen 409% and 780%, respectively."
   
   The reporter, Brian Burnsed, commented further that "The common thread among successful entrepreneurs is that they're daring to be aggressive rather than defensive amid the weak economy."

BOTTOM LINE: Startups that are quick and agile thrive in challenging times. But hello, when are times not challenging for startups? The lesson is simple: the CEOs who use startup agility are the ones who not only survive, they thrive in these times. It is part of their unfair advantage.

STARTUP LESSONS FROM FISHING: 3 in a series

I just returned from a week of fly fishing on one of California's prime trout rivers, the McCloud. Along side the blue green running water I camped with my best friend. During our long ride up and back in my Jeep we had time to catch up and share a lot of what was going on in our lives. After each day of great fishing, I cooked a delicious camp dinner and we talked further, until we were ready to climb into our sleeping bags and quickly sink into a deep, restful sleep.

Today I thought I'd share with you more of the lessons for startups that you'll find in fishing.

1. Be secretive. Fishers never reveal their secret fishing spot. They keep secret the fly or lure that is attracting the big fish. Startups also keep secrets. Serial entrepreneurs are clever at knowing what to reveal to attract people and what to keep silent about. Stealth startups are elusive until the last minute when the big news such as product launch is announced.
2. Be stealthy. Fishers sneak up on wary trout and hide behind bushes and tall grass. They carefully consider obstacles and distance before casting to a large fish. They move quietly. Startups benefit from stealthy moves. They consider consequences before acting, make their moves deliberate, keep hidden until the time comes to move out to grab the attention of ideal customers and bloggers.
3. Be clever. Fishers use cunning and tricks to outwit fish and wild critters (snakes, bears, spiders and intruding fishers). The fisher's strategy and tactics are carefully chosen to fit the conditions and time of day. Startup leaders are clever at inventing ways to out-maneuver competitors. They create tactical moves that keep the opposition off guard.
4. Be wary. Fishers are constantly on the alert, wary of what might happen to upset the next cast, the next approach to the fish. They know from experience that the unexpected will happen, without advance notice. Startups expect the unexpected. So they make each step with the cautionary attitude that keeps their sensors sharp, alert to sudden changes. That wary mindset is often what keeps the startup out of serious danger.

BOTTOM LINE: Secrecy and its cousins are what fishers and startup leaders use to gain the upper hand in their respective competitions. It is a trait of the serial entrepreneur. Add it to your collection of elements for building your unfair competitive advantage.

Tip of the WeeK: Follow your intuition

I'm enjoying watching a second-timer entrepreneur follow his intuition as he starts his new enterprise. His first business attempt is no more. It was finally put out of its misery. I find it fascinating to see how he is applying (and sometimes avoiding) the many lessons he learned in his first attempt. As I have been reflecting on what I see, it is now clear that he is leading with his intuition. He is much happier and more fun to be around. I thought you would enjoy reading about some of the good things to learn from such an enthusiastic application of intuition.

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Here is the Merriam-Webster definition of "intuition":

in·tu·i·tion 

Pronunciation:

\ˌin-tü-ˈi-shən, -tyü-\

Function:

noun

Etymology:

Middle English intuycyon, from Late Latin intuition-, intuitio act of contemplating, from Latin intuēri to look at, contemplate, from in- + tuēri to look at

Date:

15th century

1: quick and ready insight 2 a: immediate apprehension or cognition b: knowledge or conviction gained by intuition c: the power or faculty of attaining to direct knowledge or cognition without evident rational thought and inference.
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I find serial entrepreneurs are outstanding at and applying learning, very quickly. That adds up to a knowledge bank rich in experience. They are quick to apply what they learned, so quick in fact,  that they act without consciously thinking.

Some call this "gut feel" while others describe it as strong talent or gift. I find it in people everywhere, but most don't think about it.

"Quick and ready insight" calls for speedy thinking, calls  on a reserve of appliable knowledge and application that gives the entrepreneur visibility and clarity in the midst of the fog of startup war. That means you must take time to learn, deliberately (note the word "contemplating" in the definition) and with a meditative level of time to dwell on and work on what you have experienced.

I recommend to the first-timers I coach to start a daily journal. Write down one thing you learned each day. Go back and read some of them. Mediate on them. That builds your bank of know-how to call on when you need quick and ready insight.

BOTTOM LINE: Intuition comes from experiences that are learned and stored. They are called on in times of need, e.g. to make tough decisions on-the-fly. It is more than a gift. It comes from hard work and conscious acknowlegement of good and poor decisions made in the past. Serial entrepreneurs are great at that. It's part of what gives them an unfair competitive advantage.

STARTUP LESSONS FROM FISHING: 1 in a series

I just returned from a week of fly fishing on one of California's prime trout rivers, the McCloud. Along side the blue green running water I camped with my best friend. During our long ride up and back in my Jeep we had time to catch up and share a lot of what was going on in our lives. After each day of great fishing, I cooked a delicious camp dinner and we talked further, until we were ready to climb into our sleeping bags and quickly sink into a deep, restful sleep.

Today I thought I'd share with you some of the lessons for startups that you'll find in fishing.

1. Make it an adventure. You can plan it to the finest detail, you can prepare in the deepest depth, but as soon as you start up the Jeep, as soon as your lure hits the water, anything can happen.
2. Plan it. Yes, a plan is important. It helps you remember to bring your sleeping bag, bug spray and my special marinate for the evening scrumptious dinner. It helps startups remember to figure out how to make money, how much cash it will take, what the most likely strategy will be, and who you have to hire.
3. Adapt. I have had to change campsites, even change rivers, all without notice. Startups will have to shift strategies and alter tactics week after week, all without notice.
4. Change. If the fish will not bite on the flies I select, I change them, quickly, until I find what the are eager to eat. Startups have to find what lures the ideal customer to part with their money, as quickly as possible.
5. Move. If the fish are not biting in one section of the water, I move to another until I find the fish. Startups need to keep searching and trying and searching, until they find the customers eager to consume what is offered.
6. Be patient. I have to keep on trying, even of all of the above tactics and methods are not working. I have confidence the fish are there, I just have to find out what gets them excited. Founders need to be confident and patient as they search for eager customers. Great entrepreneurs have a lot of patience.

BOTTOM LINE: You can learn a lot from fishing and apply it to doing your startup. That is part of gaining perspective and is what serial entrepreneurs do well. It is part of their unfair advantage and how they became serial suceesses.

STARTUP LESSONS FROM FISHING: 2 in a series

I just returned from a week of fly fishing on one of California's prime trout rivers, the McCloud. Along side the blue green running water I camped with my best friend. During our long ride up and back in my Jeep we had time to catch up and share a lot of what was going on in our lives. After each day of great fishing, I cooked a delicious camp dinner and we talked further, until we were ready to climb into our sleeping bags and quickly sink into a deep, restful sleep.

Today I thought I'd share with you more of the lessons for startups that you'll find in fishing.

1. Use guides. Fishing guides are professionals who know the waters well. They keep you out of danger (you can drown, get bitten by a poisonous snake, attacked by a bear). They know where the fish hang out. They know what flies and lures attract the fish. They add fun to fishing. First time founders benefit similarly from experienced people. Mentors add wisdom and a personal insight. Advisors bring  domain expertise. Serial entrepreneurs offer tips from the school of hard knocks. Smart first time entrepreneurs use all of them.
2. Learn from experienced people. Fishing is learned on the water by fishing next to experienced fishers. Startup leaders do the same. They get to work and find others in startups nearby to talk to and learn from. That leads to friendships that are very valuable when the dark days arrive.
3. Make your own decisions. It is up to the fisher to make the cast, fish the fly and land the fish. You can't fish with someone fishing for you. You have to make the decisions by yourself. Fishing is not a committee sport. Neither is doing a startup. As CEO, you will have to make the final decisions by yourself. It is up to you to decide and execute.
4. Trust yourself. When I cast, I do it best when I trust my cast to be successful. When I have confidence in the fly I choose, it catches the most fish. Startup leaders need to trust their choices. The unknowns are large but the reward will come from acting with trust in your decisions.

BOTTOM LINE: Startups are a people business. Helpers are valuable, so find and use them. Then make up your mind, decide, and act with trust in your decisions. When you do that, you'll add a powerful element to building your unfair advantage.

Tip of the WeeK: Avoid Twitters Trip-up

Here is the headline in the Wall Street Journal, May 26, 2009: "Twitter Trips on Its Rapid Growth".

The story is about a common problem that hits startups run by first-time entrepreneurs: The startup suddenly takes off but the needed management (vice presidents and directors and managers) are missing.

Success arrives without warning. Boom! Customers rush to use or buy. Up shoots demand for services or products. Shock hits the startup staff. Everyone rushes to keep the web site from crashing, to avoid customers turning angry, to keep the media amazed, anything to keep the roaring rocket continuing to accellerate.

The organization becomes a wild collection of people rushing about with little time to think. They just do what needs to be done to survive each day. There is little time to do anything else.

So what are the CEO and core management team doing? The same thing: anything to keep the roaring rocket continuing to accellerate. They barely have time for five hours of sleep a night.

So  what is wrong with this situation? After all, success has arrived!

Here is what is wrong: There is noone with the time to work out the strategy for the company's next years of growth, to work out the branding messaging, to find and negotiate with strategic customers, to plan and build the architecture for the next level of telecommunications needed to support doubling the number of customers each year, to plan raising the next round of venture capital, and so on.

In other words, the core team has run out of skills and time to do what is necessary to build a company that can sustain a huge rate of growth, can scale ten times its present size and attain profitability and positive cash flow. The vice presidents with business experience are missing. The special skills needed to build a great company are absent. And everyone on the board of directors knows it.

The trouble is, the management running the company has neither the time nor the experience needed to find and recruit the missing management.

This can kill a startup. Either the wheels come off and it crashes. Or the tiny, inexperienced management team burns out and gets replaced (probably kicked out).

How do you avoid this portend of disaster? That's easy: plan on day one who is missing, when you will hire them, how you will recruit them, and when you will replace yourself.

I find that takes more wisdom and courage than most people have. But serial entrepreneurs do. That's how they have become successful. I recommend you do the same.

BOTTOM LINE: Plan your hiring of your middle management on day one. Name the jobs, give dates for their hire and the recruiting cash expenses into your budget. Then you will be ready to act when success jumps up to surprise you. That will keep your rocket accellerating. When you can do that, you'll have added a powerful element to your unfair advantage.

Tip of the WeeK: Spot the New Wave and Plan to Ride it

In this kind of economic situation, you need all the resources you can get to get all the capital you need.

One resource is spotting a new wave so you can ride its economic energy instead of paddling hard using more of your startup's scarce energy.

For instance, a new wave is forming that is all about organizing a web user's social information into a portable collection that can be easily moved between social networking sites and between proprietary clouds.

And example of paddling on your own is building an improved search engine.

The portable social information wave is just starting, is potentially huge and has room for lots of innovation and competitors. So start here.

The search engine improvement is competitively like shooting a bullet against a tank. Google has won. The battle is over. So move on.

Asian startups in the latest wave have shown solid signs of innovation that is creating new waves. Learn more by studying Netease and Shanda, and their competitors.

Here is another tip: Is your idea about doing something not done before? If so, you'll be able to ride a new wave.

BOTTOM LINE: Think about your idea. Is it going to benefit from the rising energy of the new wave? Or is it an improvement of a wave that has already arrived at the beach? When you know which to pursue, you'll have a powerful element to use to build your unfair competitive advantage.

SOCIAL ENTREPRENEURSHIP: Some comments and links

I am getting an increasing number of inquiries about "social entrepreneurship" so here are some good links and a few comments:

Start with a look at Ashoka and you'll learn a lot. They have been around since 1981 and have the experience to back up their programs.

Then read in The Economist May 23rd 2009 issue a story about a more recent, innovative social venture organization. It is Acumen Fund and is run by Jacqueline Novogratz, a market-minded development expert.

I've seen a growing  number of these groups forming during the last fifteen years. I think they are on the right track. We are in for a sea change of development funding from governments as part of the recent crash in global financial markets.

You may find more personal fulfillment working for a non-government agency such as the ones above. Give them a look before you sell your soul as a wage slave.

Or if you are an unemployed college or MBA graduate, how about doing something for a while with as a social entrepreneur?

 BOTTOM LINE: Social entrepreneurs have a lot of fun doing something different that blends development with entrepreneurship. Some experience there may change your life for the better. The experience will boost your unfair advantage.

Tip of the Week: Recruiting Method Excellence Makes Winners

Are you looking for a CEO? Or a VP of Business Development? Do you need to recruit key people missing from your startup?

Yes is always the answer for startups. They are always recruiting.

Next question: "What did you do with your recruiting process to increase its success?"
Most common answer: "I do it like I always do it." (Or) "We do very thorough team interviews."

Such feeble responses expose a weak recruiting process. It takes forever to find,interview and recruit. That leads to frustration and failure. People hired with enthusiasm disappoint and have to be dismissed. That costs a lot of time and intense emotional stress. Such poor hires can damage, irreparably, a new enterprise.

So here are some tips from serial entrepreneurs on how to convert an ordinary recruiting process into one that hires the winners:

• Put it in writing. Document your words. That forces you to think. It will stimulate your brain. You will see holes and opportunities to improve the process.
• Stage it. Set up serial steps on a time line. The graphic will demand realism as you run into company events (launch of a product), travel (to strategic partner negotiations) and so on. It will give you respect for how long it takes to hire great people. It give you goals to hold the company responsible for.
• Declare it. Announce the documented process to the company. Get everyone involved. Show them how serious you are committed to hiring only great people. This builds pride in existing employees. It triggers enthusiasm and motivates everyone.
• Experts do reference checks. Headhunters start digging into the lives of candidates after the first interview. So should you. Do not treat reference checks as a mere formality, as something done the day before the job offer. You need to dig. Deeply. Find the real person. Spend the time it takes to find and talk privately to people in the company, the division, in the business the candidate is or was from. Do not rely on the references supplied by the candidate. World-class headhunters are brilliant at that. Homemade is often much lower quality.
• Rely on you, not venture capitalists. You have to lead the recruiting. VCs mean well but are not full-time recruiters. They are too busy looking for the next Google and trying to keep their struggling startups alive. So they grab what walks into their offices during startup pitches. Unemployed managers knock on their doors. One of them might fit your needs, but don't count on your investors to do your job. You are looked to by investors to be Recruiter Number One for your startup, whether you engage a headhunter or not.
• Prepare and ask the tough questions. Document your list of questions that penetrate the candidate's abilities, character, skills, the whole person. It is very important. If you are an introvert, you still have to ask the questions that may trigger anger in the candidate. That will tell you a lot about the candidate. The tougher the question, the more you will learn.
• Beware of the blind leading the blind. If the investors want a new CEO, that person is not likely to be the best recruiter, especially if he is a first-time CEO. Then you need a committe of the board of directors to lead the recruiting process.

BOTTOM LINE: The startup CEO needs to become a skilled recruiter. He may need to outsource much of the work to headhunters and contingent recruiters. But he still will be held responsible for creating and managing a recruiting process that delivers outstanding people for the new enterprise. When you can do that, you'll have added an emensely powerful element to your unfair advantage.

How to Manage a Real Startup: Nr 55 in a series

Chapter 10: Agility (continued)

(Draft of John's new book: Your comments are welcome)

Agility keeps the rider on the startup bicycle out of critical danger and ahead of the competing pack.

Agile Strategy

Elisha Otis invented the safe elevator. It made skyscrapers a success. He did not plan to do that. But he did it, through entrepreneurial agility.

During the industrial boom of the 1800s, industrial buildings rose to multiple stories. Lifts were invented to move heavy goods quicker up and down. But they were dangerous. Too often the cable broke and people were maimed.

Otis saw an opportunity. He found the existing safety devices had to be operated by hand by a lift operator. After such a safety brake failed and nearly killed people in the lift, Otis designed and perfected an automatic safety brake. A wagon leaf spring attached to the cable would flatten if the cable severed and the brake would drive stops into the vertical guide rails after a drop of mere inches. He immediately began sales to factory owners.

When the first skyscrapers arrived in New York City, Otis saw the larger market. He took a demonstration to the 1854 World’s Fair. Promoter P. T. Barnum paid Otis $100 ($3,000 today) to cut the cable on the hour each day and show the gasping crowd how his safety elevator worked. After the Fair his sales soared. His business became a success. Today the name Otis is the respected name in elevators.

More details about the man and his motivation are in Jason Goodwin’s book, “Otis: Giving Rise to the Modern City.” Reading it shows how a self-taught entrepreneur used agility to dominate a new market segment.

Sometimes your first target market leads you to a better one. Agile entrepreneurs move quickly to capture the leader’s position. That is how agility works to build unfair competitive advantage.

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More tomorrow.

How to Manage a Real Startup: Nr 54 in a series

Chapter 3: People  (continued)

(Draft of John's new book: Your comments are welcome)

People are everything to a startup. They are the ones peddling for dear life.

People Action

When it comes to people, startup leaders act, they don’t linger in debate nor wallow in analysis paralysis. They get results or get new people. They set goals for people with dates and hold people accountable.

On the board of a hot startup, I watched as the first-time CEO quickly (one year) ran out of ability to manage the accelerating complexity of the organization. Chaos began, morale dropped, deals did not get done and cash burned fast.

The board waited until the pain of incompetence was clear even to the determined but overwhelmed CEO. Everyone finally agreed that the company’s ambitious first product launch had to be delayed. A layoff was going to be necessary.

One of the investors was selected to be the temporary CEO. The first-timer and co-founder stepped aside reluctantly. A month later the former CEO (still an employee and still on the board) was in full agreement that such a drastic change was necessary. He and the temporary CEO did the painful layoff and altered the company strategy.

To find the replacement CEO, the board decided to avoid using a professional recruiter, in part to save the related fee. After three months of slow recruiting, no qualified candidate could be found. After a lot of anger and shouting, the decision was made to engage the services of a world-class executive search firm. Qualified candidates began arriving within weeks. A hiring decision was made and the new CEO was on the job two months later.

The above example of a CEO replacement decision process is typical of venture backed startups. Here are tips to avoid the related traps of hanging too long onto people who just cannot deliver what the startup desperately needs:

·         Plan to replace the startup CEO in the original business plan. Pick the date on the milestone timeline. Give the qualifications for the replacement candidate, including examples of real people in real companies. Repeat for all vice presidents.

·         Replace people, do not compromise. You have too much to do without the added burden of carrying the load for a failed employee. When in doubt, follow your intuition. Let the underperformer go – or give them a push.

·         Be bold while being wise about when you dismiss people. Anticipate sales trips to customers, deal negotiations with strategic partners and industry speaking events. Avoid dismissing high profile personnel during such important tasks and key projects. Act before the work begins.

·         Never pay blackmail. When it is time to say goodbye, say goodbye. Do not think any person is vital to the company. They are not and never will be. Remember that includes you. Either you deliver or you go. If you doubt this, ask the serial entrepreneurs, they have been there.

·         Hire the Dream Team. Work to hire only the best. Find the A class people. Get them to find their friends. Birds of a feather flock together and so on. Don’t give up. It is the most important thing you can do to ensure your success and the company’s.

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More tomorrow.

How to Manage a Real Startup: Nr 53 in a series

Chapter 3: People  (continued)

(Draft of John's new book: Your comments are welcome)

People are everything to a startup. They are the ones peddling for dear life.

Tolerating A Poor Performer

Turnaround expert Bob Seelert reported in his book “Start with the Answer” how he learned painfully that it is not wise to continue managing people who don’t fit in. Like a lot of startup CEOs, Seelert needed team players who would go the extra mile to help the money-losing company, Cordiant, regain its footing. The following is an excerpt from the story as reported by Investor’s Business Daily, May 26, 2009.

“Hiring the wrong person or tolerating for too long has been my biggest mistake. If people aren’t working out, sometimes you have to let them go rather than hang onto them. I inherited someone in a staff position who wasn’t fitting in. He kept getting in the way. I should’ve terminated him right away, but I didn’t.” So he kept the person for a year, largely because the staffer’s employment contract had a two-year termination agreement with a severance allowance. To avoid paying the severance, Seelert decided to put up with the employee’s poor performance.

Looking back, Seelert laments “wasting a year” managing someone who hindered his efforts to rescue the company. He wishes he had fired the individual sooner, paid the severance and moved on.

Making the Wrong Call

Seelert soon made another misjudgment in filling a key leadership position. An executive recruiter found a candidate with what Seelert calls “an outstanding track record.” Seelert hired him promptly.

“Everyone had the perception we had just found our Babe Ruth,” Seelert said. “Soon it became apparent he was grounding out to second, then popping up, then striking out on three pitches.”

Fresh from his experience holding onto a poor performer for too long, Seelert dumped the executive without dallying. But the distractions caused by the two abortive hires led to lost opportunities and slowed Seelert’s progress in turning around the company.

Seelert replaced the fired executive with someone who understood and appreciated the firm’s culture. More than a decade later, that person serves as the company’s CEO.

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More tomorrow.

Tip of the Week: Recession Startups are Leaders

Startups that lead are the winners.

In recessions, leadership stands out. While your competition is sitting on the sidelines, being conservative, yours is boldly marching ahead. That sets your new enterprise up for emerging from the recession at the head of the pack.

Your goal is to become the gorilla of a new market category within five years. That will make you the Google of a new category. The game is then over. You will own around thirty percent share of the new market. The second competitor will own half that. The rest will be single digit shares of market. One gorilla, a chimpanzee or two, and a dozen starving monkeys.

To become a gorilla you have to become the leader within three years, better yet within two.

You become the leader when the bloggers, Twitterers and PR media acknowledge you are the leader.

Your company achieves that buzz with social networking marketing communications. This is what Web2.0 era marcom has become all about. It is new space for fresh innovation in marketing.

What is said about your company becomes what brands your company. The company name will become associated with the word or few words that people mention most when buzzing about your company. Then you are branded. It will never change. That's one reason to carefully think about what you want to be branded with before you do your first company blog.

BOTTOM LINE: Leadership is everything to the startup. In a recession it will give you a strong competitive advantage. When you achieve that, your competition will compalin that you have an unfair competitive advantage.Congratulations!

How to Manage a Real Startup: Nr 52 in a series

Chapter 14: Organizational Structure (continued)

(Draft of John's new book: Your comments are welcome)

The shape of the startup bicycle is both strange and constantly changing.

Multiple Hats

Job position security is non-existent in a startup, but work security is. There is always more to do than the company can do.

You may have the title of Product Manager, but if you are the only Marketing department person available when the unexpected customer arrives, you will be standing up giving the company introduction along with the Sales Rep and whatever Engineer you can pull off his computer. The VP of Operations will present the latest marketing positioning to the industry conference because the CEO and VP Marketing are on a plane to China to negotiate an order with a large customer. Summer interns are rounded up to write the next business plan as required by the venture capital firm interested in leading the next round of financing for the startup. All of that has happened to startups that I have been close to.

What needs to get done gets done, regardless of title. This is threatening to insecure personalities. It is expected by serial entrepreneurs. There is no place in startups for turf wars. Instead new enterprises are places where mine is yours and yours is mine. They behave more like cooperatives than hierarchical organizations. They are both eager and bold with humility and quiet confidence.

Title Pride

That sense of teamwork and rapid job shuffling requires a culture of trust. Each person must be open to others doing their work for them when that is best for the company. People jump from title to title and give little regard for what is on their business cards. Titles are for helping customers and strategic partners quickly understand what a person represents in the startup.

If you find prospective employees demanding job titles above their demonstrated abilities, it is wise to avoid hiring them. Such pride comes before their fall. If they insist on perks (cars, expense allowances, travel first class) send them on their way. Those are signs of people focused on themselves instead of on the startup.

Promotions

People will surprise you. Some will be set free at last to finally do what they have dreamed of. The results can be stunningly beautiful. They produce amazing products, negotiate significant deals, clean up impossible accounting messes and recruit world-class talent. I’ve seen these results from people freed from big company politics and family dominated multi-nationals.

Then it is your turn to promote them. The announcement may include a fresh job title, more cash and increase in stock option. That encourages others in the new enterprise to aim high, to over achieve, to go for the big win. It excites the culture. It sets a path for others to follow. It is how your organization learns, grows and matures.

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More tomorrow.

How to Manage a Real Startup: Nr 51 in a series

Chapter 14: Organizational Structure

(Draft of John's new book: Your comments are welcome)

The shape of the startup bicycle is both strange and constantly changing.

Startup organizations change as fast as they are agreed to by the core management team. That is very frustrating for leaders who take pride in their being in control at all times. It is also frightening to managers doing their first startup. But serial entrepreneurs expect such chaotic organizations, in fact, they endorse their strange forms because that facilitates success.

New Corporation

Today’s modern corporation is rapidly morphing beyond the virtual organization of the 1990s which introduced global enterprises to aggressive outsourcing to gain strategic competitive advantage. Experts today see fresh forms that include metaphors related to proteins (see for example “the protean corporation” in “The Future Arrived Yesterday” by Michael S. Malone) and rings and balls and orderly chaos.

Startup organizations begin with a core team consisting of a founder and three others. Typical this consists of a person who has run a business before, a marketing business development veteran and a technical or idea leader. Together they form the vision for the new enterprise and raise its seed financing.

The work done in the early Chaos Stage is performed by a mix of full time employees, part timers, contractors, and outsourced service providers. Examples include project engineers who are expert at setting up testing facilities, finance people who set up the early accounting system, legal services, marketing research, and public relations buzz. It is not uncommon to find more people working for the startup than it has full time employees in the early days of the new enterprise.

I like to keep startup organization charts simple and think mostly in the form of a circle surrounded by concentric rings. Or it could be in the form of a three dimensional ball with layers like a baseball. Or even an orange with sections. Whatever you use to describe it, be sure to leave room for a lot of change.

The next ring around the organization arrives with strategic partners. These can be key suppliers (servers or telecommunications services), middlemen in the chain from you to end user (independent Internet service provider, game publisher, module manufacturer), or strategic investor (Intel, Cisco, Netease, Shanda). These increase and decrease in their importance as the company moves on to successive stages of growth during which more strategic partners are added to this organizational ring.

The board of directors is added when investors sign big checks. That will add a governing group formed with an independent director, the representatives for the investors, and a couple from management, typically the CEO and founder.

All of the startup organization is constantly shifting and changing as the startup grows, runs into surprises and adds to its increasing complexity. That behavior makes it very challenging to manage the startup organization for the first time startup CEO.

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More tomorrow.

How to Manage a Real Startup: Nr 50 in a series

Chapter 14: Organizational Health

(Draft of John's new book: Your comments are welcome)

All components of the bicycle must work well individually and together with unity.

The health of the startup organization is as important as your good health, mental and physical. Serial entrepreneurs build their companies by continually promoting efforts to keep the health of the organization in great shape.

Doctors use simple check lists when doing an annual physical examination of you. Here is a check list to use for checking on how healthy your organization is:

·         Resilience. Startups run into surprises every week, some good, some bad. All require a swift response. Markets are fickle, customers do not arrive as hoped for, buzz is dull instead of exciting and the next financing round can be a dud. Or a sudden arrival of excited customers from an unexpected sector challenges your carefully laid plans. Healthy startups are good at spotting and managing such risks before they happen. They anticipate catastrophes and avoid them. They keep cash reserves ready. They build mechanisms that prepare the company for responding quickly. This is a key aspect of being an agile startup.

·         Execution. Startups must do the basics right, make good decisions, and perform essential tasks. Brilliant products, hot buzz, or surging markets can cover up sloppy performance for a while, but eventually poor execution catches up and can kill a startup. Every department must execute well. It is dangerous to focus management on high performance marketing communications if it cannot build great products. When execution breaks down, it is time to get a new CEO, quickly.

·         Cohesiveness of Purpose. This is part of the vision thing, yet it is more than that. Startups need everyone to believe in and be dedicated to the purpose of the company. That is one reason why it is so hard to manage startups with people separated by thousands of miles, in several countries. Even worse, is mental disaggregation because it divides the company emotionally and dissipates energy. People need to work in a common cause. So your vision must be shared with the organization. You achieve that by crafting a compelling articulation of your story. This generates a shared identity. It reflects corporate values, reinforces the common purpose and produces enthusiasm.

·         Momentum. The startup must have a sense of growth that is accelerating. That comes from lining up your bowling pins as successive market segments. Then you start by knocking down the first so it leads to beginning the market penetration of the next two, simultaneously.  The limited resources of the company become focused and produce expanding sales that grow the value of the company. It demoralizes less organized competitors. Keeping momentum alive calls for creative minds to find the next market segments while the early ones are being entered. It calls for quick moves to respond to surprises during marketing campaigns. Speed is very important for startups building momentum.

·         Complementary. All your departments must act in concert. They are not silos. They must communicate effectively and collaborate like twins. The startup’s informal social structure comes into play here. The culture of the organization with its shared values is a powerful asset in keeping everyone reinforcing the drive for successful growth.

All of those check points will tell you how healthy your organization is. It should assist you in finding where your company needs attention.

Execution of creation and management of a healthy startup organization is one of the prime tasks for the CEO. It includes performance reviews of individuals, a task that is typically done poorly by startup CEOs. When every employee has written goals, you have one of the most important processes in place that contributes to a healthy organization.

If you are from a public corporation and are looking at a startup, try comparing the above list and comments to the one for giants that was published in the McKinsey Quarterly of 2007 Number 3. That should encourage you that with some modifications, the checkup on organizational health for a giant can be used for a startup.

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More tomorrow.

Tip of the Week: Recession Startups Invent the Future

You must continue to work on the future even if you are fighting to stay alive.

This is an essential skill of serial entrepreneurs. They can both do and dream at the same time.

Employees need hope: both for today and for tomorrow. Today's hope gets them to work. Tomorrow's hope gets them energized. As CEO you have to deliver both.

You may be up to your neck in alligators, struggling to cut costs, keeping cash flow positive or finding enough sales collections to meet payroll. But you still have to spend time thinking about shaping your company's future. It may be done in the shower, during commute time or over short sandwiches, but it must be done.

You invent the future with your core team and employees. Many are the times when I've watched an introvert engineer or young marketing person pop up with a very cool idea that is a company maker. You need everyone thinking about what the company can do to fulfill its best in the future.

Overcoming organizational fear and cynicism is a skill you have to have or learn. It is central to your role as CEO and company leader. That is one of your prime human resource skills. It will become vital as you work on inventing the startup's future.

BOTTOM LINE: Startups are about the future. They are about the promise of tomorrow. Like children with eager parents, they are excited about what they can become. Meanwhile the struggle of daily life goes on. As you execute your company plan, it will include inventing the future. When you can both do and dream in your startup, you will have made a great contribution to your unfair competitive advantage.