Nesheim Online

PERSISTENT STARTUP CEOS: Startup leaders need it to get to the finish line

CEO E. cheered from across the Pacific and CEO A. kept on driving forward his startup in Seoul. Both are startup CEOs leading their early stage ventures through the early launch stage of their new enterprises. Each has demonstrated that they have many of the skills of startup CEOs that I discussed in my blog of January 29, 2008.

One characteristic, resilience, has a cousin skill, persistence. E. and A. have shown that they have that skill.

In E.'s case, he has succeeded attaining a deal with a global strategic partner after months of heavy work by all the employees of his stealth startup. I cheered when I read his email last night. A few more of those and the "Wow" lights will start flashing around the world when the new enterprise becomes uncloaked. This company has what it takes to become the next Google of a new space. Stay tuned.

A. is in the middle of a large financing that will fuel the launch of a world-class product in Asia. He and his co-founder have been determined to succeed in a new entertainment space. The entire company has worked long hours very creatively and recently finished the first product. First-time viewers are amazed, breathless. The financial backers have wisely seen the persistence of A. as he and his co-founder have gotten so much done with so few resources.

Both of these CEOs know they have a long road to travel on their startup adventure. The goal is clear: go IPO in 3 to 4 years. Meanwhile, both will face setbacks as well as successes. That's where resiliency is needed in the CEO. Their lessons learned during their prior years of persistence will give them confidence they can get back on the horse and keep on riding, even after the inevitable-to-come bombshells land.

I admire startup CEOs. They do one of the most difficult jobs on the planet. They are hard to find. VCs know that best of all. And serial startup employees, those are very special talented humans who look for this kind of talent in CEOs.

BOTTOM LINE: Look for examples of persistence in the CEOs of startups you join or invest in. If you are presenting yourself as CEO, keep handy your personal stories of persistence. All the stakeholders want to hear about them. That will add a strong element to your unfair advantage.

STARTUP CEO SKILLS: Do you have what it takes?

"Do I have what it takes to be a startup CEO?"

People often ask me that question. I've written about it in several of my other blogs (see the Category for "Managing").

So today I decided to share with you a response to the CEO question that was presented to Jack Welch and his wife. Jack is not noted for startups, rather for managing successfully one of the most complex public corporations in the world, General Electric. Details of his answer to the question are in the February 4, 2008 issue of Business Week in the well written column Chief Executive Officer-in-Charge. I have used a lot of their words in my summary of the list of skills for CEOs [and I have made observations on how they do and do not apply to a startup CEO]:

• Trust: This is about authenticity, the foremost quality business leaders must possess. There can be no debate about the CEO's sincerity when he is promoting a major initiative or leading through a crisis. There can be no doubt in the minds of anyone.
  
  • [The same applies to startup CEOs and the key stakeholders in early stage new enterprises: Investors, employees, the media and later customers and strategic partners. All need to trust the CEO, without doubt.]
    
• Having the vision thing: This is second in the list of universal skills. A clearly conceived, inspirational mission is critical for real progress. Yes, more important than the important skill of improvising in fast-changing markets.
  • [The vision thing for startup CEOs is what gets the money, the outstanding employees, the headline public relations stories and blogs, and leads to the best customers and strategic partners. And yes, for a startup it is also ahead of importance compared with improvising in fast-changing markets.]
    
• An innate ability to hire great people: You can't live without this. And it is more than hiring, it is challenging great recruits for new ideas and deeper insights.
  • [My research shows the number one reason startups fail to meet their growth plans is because they cannot hire the outstanding people fast enough. It is what quickly separates the Ciscos and Googles from their rivals during the startup years.]
    
• Resilience: This is the capacity to bounce back after defeat without feeling defeated. Such CEOs learn from their mistakes and get back -- wiser -- on that horse.
  • [Startups are mostly like children that get into trouble. They need to learn the discipline to learn and hope that comes from the CEO who bounces back from the many setbacks the new enterprise encounters.]
    
• Uncanny ability to see around corners: They can feel market shifts in their fingertips. This lets them act quickly.
  • [Startup CEOs need this to cope with new markets that barely exist, have little direction, and change overnight as fresh competitors arrive weekly. The CEO's innate sense for what direction to take for a startup is never obvious, it is mostly like running in a thick fog. This skill leads the new enterprise to more and more capture of market share as the rising wave of the new market category begins to rise to the sky.]
    
• Promises get kept and plans get completed: This is what execution is all about. It is about results.
  • [Startups set and reset goals rapidly, especially during the early years as the infant market begins to take shape and direction. The large corporation does not do that. Thus planning and promises are very different in a startup than a large public corporation. It is very frustrating for the large corporation CEO to be seeing goals and plans change dramatically every two or three weeks in the first startup he is leading. That is why serial entrepreneurs are so valued by venture capitalists.]
    
• Leadership: This is the last on the list of universal characteristics for the CEO list.
  
  • [I think of a leader as a person who knows where he or she is going and can convince others to follow. That ability is what attracts the first three or four core team members to join the startup CEO to do a new enterprise. It is the foundation for the other startup CEO skills. It is what the investors and employees look keenly for in the CEO.]

BOTTOM LINE: I hope you used the list above to measure yourself as a candidate for startup CEO. If you are planning on your first new enterprise and lack a few of the skill set, consider assembling a core management team that does have all those qualities in at least one of its leaders. Perhaps that person should be CEO instead of you. Note also how the skill set can be applied also to the people who directly report to the CEO, the people in the core team. When you have measured up to this skill set with good marks (great references) then you are ready to add this to the unfair competitive advantage of your new enterprise. It will be the central jewel in the crown of your startup story, the jewel most sought after by investors, employees and the media.

Great Startup Messaging: Look at this rare example of positioning a startup's story "just right"

Today I was alerted to a $19M round of financing for a startup. When I got to the web site of the new enterprise, I was very impressed. So I decided to share with you today what I emailed about that startup to a world-class new enterprise that I am coaching as it prepares its story for its next round of financing.

"I wanted you to see a rare, outstanding, high quality example of a well positioned startup.

Reading their website reveals what it takes to stand out, with believable credibility.

Mayfield lead the recent $19M round.

 
http://adchemy.com/html/team.html

 
Some items to note:

= The whole web site is simple and clear, part of a well done story with lots of uniqueness and Wow! in it.

= Clever choice of company name (part of the opening positioning statement on the home page).

= See the banner at the top of the page and note the logo name is the logo, NOT a separate graphic + name).

= Note and read carefully how the people are positioned (read the paragraphs for each person).

= And see what they did to declare their investors credentials.

= Founder is a serial entrepreneur with successes in his past and it shows it on this web site.

= Looking at the Careers reveals how they are thinking about their business model and marketing.

= And on the Careers page you can read the pre-Mayfield positioning and how the company was presenting itself in its recruiting message.

= Read carefully the About Us page to see how intense the founder CEO is with his company culture and values statement (reminds me of Google’s early days). Here is a related blog the founder posted http://foundread.com/2007/12/18/values-proposition/

= I would say the serial entrepreneur founder understands how to build an unfair competitive advantage.

 
Hope I don’t sound too much like a professor. But this rare example of a startup well positioned got me excited and I hoped it might encourage you as you are crafting your story."

That is worth studying, at least twice.

BOTTOM LINE: It is a huge challenge to craft the story for your new enterprise. Examples help. This startup's story is one to consider as you craft your story. Try to copy it and alter it using your existing thoughts about your company. That will tell you where you have to go to work, editing what you were going to say. I argue this is the heart of the startup game: crafting a story that is compelling to the key stakeholders; investors, employees, media (especially those quick to respond bloggers) and strategic partners and (if you have any yet) customers. When you can do that with a simple story, one that is compelling, you will understand how to build an unfair competitive advantage. Well done, Murthy Nukala and team at Adchemy!

STOCK MARKET PANICS AND VENTURE CAPITAL: Respect their links and long term investing

Panic hit stock investors around the globe over the recent trading days (during Jan 18 - 22, 2008). Should a startup founder be worried?

In a nutshell, sort of, but not really.

Here is what I mean: Robust stock markets are places needed to do IPOs. Sick stock markets mean few IPOs as liquidity events. That is not good for startup founders or its investors.

If a VC firm is sitting on a startup board which is ready to IPO, and if the stock market gets sick for a few months, the VC firm may have to do a special round of financing to keep the growing startup cash flow positive. That can be expensive for everyone. It is good to try to avoid that. But sometimes the timing of the sick stock market cannot be anticipated and life must go on via (costly) bridge loans to IPO.

The VCs get their fresh cash from huge institutional investors (pension funds, university endowments, and lately sovereign nation funds). When those institutions get cautious during a sick stock market, it becomes difficult for VCs to get fresh money for a fresh fund. So VCs can suddenly become very cautious with the remaining cash in their by-now-diminished fund. You do not want to be needing desperately to get cash from such VCs, ever, and never when a sick stock market arrives.

But VCs are in the business of playing long term high risk investing. So a hiccup in the stock market (they seldom last more than a few months) should not impact your attracting VC money from one of the top VC firms.

But do expect a negative stock market to be an excuse for a lower valuation of your company than you would like. I suggest you simply ignore that excuse, remind the VC that you'll be going public many years from now (3 to 5) and there is lots of time before that happens. In other words, today is not relevant to setting an IPO price 3 to 5 years from now, so don't accept a reduction in your valuation for the passing panic of today.

BOTTOM LINE: Put sick stock markets into perspective. Look half a decade ahead. Negotiate accordingly. You are in business to be a hero in 3 to 5 years, not today. Focus on finding long term thinking investors. Skip the VCs who panic with stock markets. They'll be the ones who panic at your first customer order cancellation (there will be many). Life is too short to live five years with frightened people. Assemble a board of directors who are long term investors and behave that way. They will be part of your unfair advantage.

INVESTORS COME IN FLAVORS: Pick carefully

Last night I facilitated a Cornell University event from the entrepreneurial community of Silicon Valley. This morning I listened to a VC tell me about plans for a round of financing for a hot startup.

As I reflected on what I heard, I was reminded of how different each investor is and how important that is to the entrepreneur.

Some VCs are control experts (very left brained, mostly male, mostly ex geeks, who became successful as VPs of large public companies that are famous). Others are big picture thinkers (very right brained, include the rare female, from a variety of job functions - often marketing or selling, and often from prior startups that succeeded). And there is a mix of both extremes among the VC crowd. There are many to choose from.

Angels also consist of very different types of personality and control.

So what? Well I suggest that as you meet and get to know a prospective investor, you should focus much of your thinking on how the person is going to manage you. And they will manage you.

Remember that managers are people put in charge of other people to get them to do the difficult things  people do not want to do.

On a board of directors, the investors (who have the gold) try to set the rules. The CEO's job is to manage the board, including the directors who are investors. That is a tricky balancing act. Good investors on the board can bring abundant resources to a CEO (the proverbial network to customers, strategic partner introductions, and so on). They are the people you want to find.

But when the startup hits the wall, when it runs into trouble delivering technology, or is stalled and unable to sign up customers quickly, then the worst in people comes out, the true character of your investor. That is when many CEOs I've spoken to regret their decision to choose the investor that now is pushing the CEO in directions the CEO believes is not good for the startup.

Do not misunderstand me, I do think that all too often that investors are wiser than the startup CEO. Then the sparks fly. But that is also when the board of directors meets to iron out the mess and make the wise decisions. Investors are not categorically bad. Startups are always difficult to manage, for anyone, even serial entrepreneurs.

What I do mean is this: Your choice of person to bring the money you need comes with a personality and style of decision making that will impact you for the rest of half a decade of your life. So pick deliberately, not randomly. Be very wise.

Talk to other entrepreneurs. Attend meetings they attend. Find school alumni to speak to. Your old professors can help. Discuss investors with your lawyer. Talk to CPAs. Take a look at the provocative web site that lets disgruntled people complain about VCs at thefunded.com. Get to know the person (who may be your lead investor) before you decide on your choice of investor.

BOTTOM LINE: Startup investors come in flavors. They are people, each with different ways of managing, investing and behaving on a board of directors. Before you chose one, get to know that person. Picking wisely is one of the smartest decisions of your life. Great choices of great investors lead to building unfair competitive advantages. I wish you The Best!

WORD POWER: A real startup example shows the power of owning a word

Last night I did an event for Cornell University, a hotbed of entrepreneurial teaching and high tech engineering. I met the founders of TokBox , Ron and Serge, both Cornell graduates, excitedly talking to attendees about their great startup.

This morning I did some digging ("research") on the company to see what elements make up its competitive advantage.

I found the company now can claim it owns two words.

The blogging world (first to report financing of TokBox by Sequoia Capital) observed the TokBox service was "fast and simple" to set up and use.

Owning those words (in its industry category, video chat) is very powerful. It differentiates. It is attractive to end users (The CEO, Serge, said the users of the service "are in the six figures and growing fast."). That rapid growth impressed me.

PR work produced headlines in the New York Times: "Video Chat Service Aims to Follow Path of YouTube". VC cash to pay a good PR firm can get your business noticed and above the noise of the crowd. That is worth pure gold.

Toyota owns "reliable", Lexus owns "luxury", Scion owns "hip", Volvo owns "safety", and so on.

That is what positioning is all about: it is a place in the mind of the customer that your company occupies and no one  else. It is about psychology, not technology. It is not about a list of features.

I could go on about the other elements of the company's unfair competitive advantage (revered investors, innovative advisers, brain trust techie staff, personal drive, and so on) but for now I'll stop with my congratulations to the founders ("Go get'em, Ron and Serge!") and make my main point of the day: Find a word to own!

BOTTOM LINE: Owning a word is powerful. It gets bloggers excited. It reflects why end users and customers get excited. It is your positioning hub. When you own it, no one else will. You will have achieved differentiation. Then all you have to do is reinforce that position by using PR to spread the word. So be wise, figure out what word to own. Don't let your competition do it for you! When you have found your word, you'll have added a very powerful element to your unfair advantage.

TRY THIS GAME = MATCH NAMES WITH PRODUCTS FROM CES 2008: Can you match the name with what the product does?

And on come more announced products that caught the headlines at CES 2008.

Consider the merits of the following by trying to match the name with what the product does:

PRODUCT NAME

1. Vudu XL
2. Rolly Music Player
3. HDC-SD9 Camcorder
4. Cruzer Titanium Plus
5. XEL-1 OLED Television
6. Slingbox PRO-HD

WHAT THE PRODUCT DOES

• An 11-inch fully digital next-generation television
• World's smallest high-definition camcorder
• Small robotic music player that dances and flashes lights to music
• High-definition streaming set-top TV box
• Television set-top box for watching movies from the Internet
• Portable storage device with online backup

Give this matching game a try before you look at the answers at the bottom of this blog. After looking at the answers, then ask yourself what you would change to improve the given product name.

• What names suggest what the product does?
• Which imply a benefit to the end user?
• Which are easy to recall? Spell?
• Which are unclear, confusing, misleading, even a surprise when matched to what they do?

BOTTOM LINE: The name game is a big challenge. It is very important to do well for startups. New enterprises need as much going positive for them as they can get. Confusion and boredom are enemies. It is worth the time and effort to create great product names. Names can add or detract significantly from your unfair competitive advantage.

ANSWERS

1. is television set-top box for watching movies from the Internet from Vudu
2. is small robotic music player that dances and flashes lights to music from Sony
3. is world's smallest high-definition camcorder from Panasonic
4. is portable storage device with online backup from SanDisk
5. is an 11-inch fully digital next-generation television from Sony
6. is high-definition streaming set-top TV box from Slingbox

CATEGORY AND NAME CREATION AT CES 2008: Learn to name things and then you'll win!

Consumer Electronics Show 2008 just opened and already is generating a lot of excitement about new products and technologies. What are you looking for at CES this year?

It may sound strange, but I look for something different: I look for names.

Names are the bold neon signs that announce new waves have arrived, waves that startups will be (hopefully some already are) surfing to IPO successes.

Names also are powerful lessons in winners and losers in the marketing battles worth fighting. So let's look at a couple that the media has picked up on (note "that the media have picked up on" because if they don't, then your category is boring and you have lost).

• "What is a device that is between the size of a cellphone and a laptop?" That is the question central to a boiling debate, some say cat fight, between the marketing departments of Intel and Intel's rivals. Intel calls the new category "MIDs", for mobile Internet devices. Intel's rivals are teamed up trying to promote -- without much success yet -- a similar category they call "UMPCs", for ultra-mobile PCs.
  • Now take a pause, step back, and ask yourself "Which name do I prefer?" and why?
  • I bet MID catches on for one simple reason: It is easier to pronounce. Try it right now. The winner will roll of the tongue most easily. And it will be easier to spell without error.
  • And MID is most intuitively suggestive. For instance, "middle of the market between A and B" is easy to recall. But a thousand confusing pictures pop up in my mind when I think about something that is "ultra" and "mobile". UMPCs sounds more like a breakfast cereal than a cool technology device.
  • I recall when Regis McKenna, the icon pioneer of Silicon Valley marketing, positioned a new product for a startup. It was the size of a mini computer with the power of an entry level super computer. Regis named it a "mini-super" and the category was born. The media latched onto it in an instant. The inventing company went IPO.

• "What is the new technology that standardizes the digital cable industry?" That is now public, it is called "tru2way". I like the name, it works well for me for the following reasons:
  • It introduces a new category of product possibilities: Hardware companies can design innovative products for television viewers using a single standard. Bingo! A new industry is born.
  • "tru" sounds exclusive and demotes the old technology (stuff you bought last year is "not-true" suggesting you are getting less than the best when using the old stuff).
  • "2way" sounds interactive, like the Internet is. That is better than watching a one-way TV screen. It has promise, hope, even a bit of imaginary excitement.

• "How can I transmit television signals to cell phones?" is an unsolved, very difficult technology problem. Until LG Electronics announced "MPH"' at CES. It stands for "mobile-pedestrian-handheld." It delivers digital television signals to cell phones. I like the name.
  • It suggests very fast (in English), miles per hour.
  • It is easy to recall.
  • It is positive.
  • The words behind it are meaningful, need no explanation, point to both an end user and a device. That is hard to do, but this name pulled it off well.

• "What is a good company name if the business is curbing electronic waste?" Try this one: "Green Plug Inc. It is simple, has green implications, implies beneficial value (plug the hole up), is easy to spell, with instant recall. Not bad.
  
  
• "What do you call the technology that cuts energy use in electronic devices?" How about "power factor correction" for the category of technology? That's what Marvell Technology Group named it. Then Marvell announced their Digital PFC Controller: 88EM8011 at CES. Ugh! What a letdown! Semiconductor companies name products that way, losing marketing advantage: Who wants to buy a number (boring)? I'd rather have an Intel Core 2 Dual Processor. Much more exciting!

• "Which will win: Blu-ray or HD DVD?" The outcome came today with the announcement that Time Warner was backing Blu-ray at CES. Why was Blu-ray successful?
  • Would you the consumer like a thing that used Blu-ray or what-ever-those-initials are?
  • Blu-ray is pretty. HD DVD is dull, boring, industrial grey.
  • Blu-ray stirs emotions ("It has a ray inside! Cool!"). HD DVD is generic, an undistinguished commodity.
  • Guess who invented the name HD DVD? I don't know but am confident it was the techies. They love initials. They are introverts. They have conservative bosses who do not like to stand out. Bold is a swear word to them. Bold is pure gold to great marketers. Blu-ray is bold. Do you have bold?

BOTTOM LINE: CES 2008 has a lot to learn in it, especially names. Names for fresh categories, products and technologies, all of them are for you to look at and learn from.  Naming is hard. It is never easy. Notice each of the points above begins with a question. Do you know the question to ask so you can name the answer? It takes focus to get there. That means saying "No" to a lot of potential customers. And it requires taking a bold stand, away from the main stream (What everybody else is saying [naming].) But that is how the greats do it. It produces Intels and Googles. It is a sign of greatness. Learn that and you'll be well on your way to creating a powerful unfair competitive advantage.

VALUATION FOR YOUR STARTUP: Set the $ amount before opening negotiations

“What is the valuation of your company?” I asked the co-founder. “We think about $50 million today, before the next round of funding. That seemed fair to us” was his reply. “So how did you get to that number?” was my next response. “Well, we did an MBA type of discounting of net income and guessed at the discount rate.” That told me these founders were not prepared to enter the rooms of investors looking to put money into their excellent startup idea. They would get fleeced.

Liquidity event. That is what venture investing is all about. Convert paper into cash. Real money. If not, all that the investors will hold is wall paper. Worthless. The shares must turn magically into cash at a point in time known as the liquidity event. That is what an IPO is all about. Or an acquisition by a public company. Buy a word of caution: If your company is acquired by another startup, you are not yet public. That is not a liquidity event.

So start your valuation work at the most valuable liquidity event: the IPO. Pick your company’s IPO value. Base it on sales, not net income. That is what IPO investors do. Use a multiple of sales that is similar to companies like yours in your industry. I use handy industry tables from Schwab. It is a bit of extra work, but worth it. Worth millions.

With the IPO value pegged (the liquidity event), then start pricing your company for each of the years prior to the IPO. Set the company value so that the ROI for investors (percent per year ROI, and the multiple of $1 invested compared to the IPO value) is what they expect for each year prior to IPO. If you don’t know those ROI expectations, try using QuickUp (http://www.nesheimgroup.com/). It has the standard ROI expected by professional venture capitalists.

When you are done, you can tell a seed round investor, or any later investor, what to expect in ROI for that round of funding. Then you can return to discussing how to get to those wonderful sales in the year of your IPO. That is where you should be talking. Get the valuation stuff over with, and focus on the business. Your goal is to get to IPO within five years, build an outstanding company and become a gorilla of a new category. Then your valuation will be justified.

LESSON OF THE DAY: Do your valuation homework before you start to raise your next round of financing. You can read more about doing this in Chapter 9 of High Tech Start Up and Chapter 22 of The Power of Unfair Advantage . Do not let the investors set your valuation. Become a black belt at it!