Nesheim Online

STARTUP STALLED BUT GETS $41 MILLION: Learn from Foursquare's situation

When a startup becomes the news of the day in the popular press, you know something that stands out is going on.

It it good news or bad news for the CEO?

SITUATION

"Can Foursquare Check-In to Adulthood?"

"Foursquare Gets $41 Million Investment, Time to Grow"

Those are headlines from Bloomberg Business Week.

"Foursquare Finding Its Way" from the Wall Street Journal.

"Foursquare's Newe $41M Round Helps It Delay Tricky Questions About Its Valuation" chimes in Techcrunch.

THE STARTUP

Here is a 120 person startup, launched in 2009, nearly four years old, with $71 million of capital (4 rounds, including the recent $41 million round), who is recording just $2 million of revenue from ads.

Launched with rave reviews for its location based "check-in" feature, the novelty has worn off.

Now the company is pivoting, morphing, changing, to move into a business model that pushes its search feature which had been minimized to date. With only 10 people selling ads, founder Dennis Crowley plans on hiring many more with the new funding (Groupon has thousands.).

LESSONS FOR STARTUP FOUNDER CEOS

1. Tell your own story. Or your competition will tell it for you. Foursquare was pro-active, did a lot to diminish the negative rumors flying about.
2. Spin your story to the positive. Why? "To buy time to settle the valuation." That sounds more glass half full than "Startup survives, barely." or some other awful blogger's spin.
3. Listen to wise advice. The $41 million round was a sophisticated package, engineered to give the startup time to prove it can significantly boost revenue. Founders are wise to listen and not object when experienced board members (typically VCs) make bold business and financing suggestions.
4. Plan the details of the change before announcing it. Reporters are skilled at digging and will find out if you are winging it. Much more credible to a doubting blogger is your response to sharply penetrating questions about how the new business model is going to operate.
5. Bold is best. Tweaks of business models do not get attention.
6. Free PR generates priceless Buzz. Dennis sat in the hot seat, responded to interviews and generated huge attention (free broadcasting) on Foursquare. That makes life a lot easier for the new Sales Department personnel to sell ads.
7. Act sooner. Hanging on, hoping things will get better is dangerous. In the case of Foursquare, the bloom is now off the rose, the glory is now gone. The quest has begun. It's a slog from here on. Street-smart serial entrepreneurs run scared and make bold changes quicker than first-timers.

I certainly wish Foursquare people my very best. It's a story that could become an amazing success. So far there is no Gorilla in the location based business. The opportunity to be "first-to-get-it-right" still exists. But there is a huge Gorilla in search -- Google. That adds new risk to the new business model (search via Foursquare). Time will tell how it all turns out for Foursquare. Might be a great acquisition. Or might get a formula right that kicks ads into high gear that powers the company to IPO.

All this is about "Execution", that prized skill in startup leaders so sought after by world-class venture capitalists. It is central to why VCs say yes or no to financing your next round.

BOTTOM LINE: When your startup stalls, its revenue is mediocre, time has come to change its business model. That calls for courage and wisdom. Founders that know how to get advice, be creative and act boldly will emulate the skills of serial entrepreneurs who know how to execute a plan for a startup. When you can do that, the money people and talented employees will be pounding on your door, surrounding your car before you leave the parking lot. It is a very powerful part of building an unfair advantage.

I wish you The Best on your Adventure!

STARTUP MARKETING: (14) Marketing research is subversive

Management follows research.

Marketing follows intuition.

Would you use a search site called Google, or would you prefer to use a search site with the Microsoft name?

Before the launch of Google, there would have been no question which site consumers would have preferred. 

Research will always favor the existing brand. But the companies that begin and become gorillas of new markets are not-yet-brands, they are unknown start-ups.

Try explaining that to a board member from a large corporation when you are about to make a bold marketing maneuver. And while trying it, sit close to the exit. That's where you'll likely be told to make a swift departure.

Serial entrepreneurs live by intuition, that instinct learned from real world experience. They can see through the fog. Yet they are risk-takers without being reckless. From their marketing minds emerge the great start-ups.

That's hard for the big corporation trained manager to accept. Much too dangerous. And he is right, it is far too risky for him because he would be following intuition trained in established enterprises, educated with MBA lessons, and that is far too likely to lead him to make big errors in start-up marketing judgment decisions about new products, branding and strategy.

BOTTOM LINE: Your job is to have confidence following your intuition and learn how to sell your decisions to a reluctant board of directors of your start-up. It is easier with a board composed of start-up winning people. They know the power of intuition over research when making marketing decisions for new enterprises. They learned how, so can you. Make it part of your unfair advantage.

I wish you The Best on your Adventure!

STARTUP MARKETING: (8) "First-mover" dies - "First-minder" wins

Management strives to be the "first-mover."

Marketing strives to be the "first-minder."

"In marketing circles, the first brand that gets into the end users' minds is almost always the winner. Gatorade in sports drinks. Red Bull in energy-drinks. Activia in probiotic yogurt." Says Al Ries, about how  winning marketing works.

That's hard for first-time entrepreneurs to grasp. But it's no more difficult to comprehend than to realize the first runner off the line in a race rarely wins.

It is vital for all entrepreneurs to grasp because it is central to why too many otherwise winning startups fail. Too many startup board members think marketing is about first-mover wins all.

FIRST-MOVER EXAMPLE

What was the first successful MP3 player? Creative Technology's product, the Creative Nomad Jukebox.

What was the giant MP3 winner? Apple's iPod.

First-mover loses to first-minder. iPod was first to get into the consumers' minds. End of game. Over. The gorilla has arrived.

Now read what Ries sees as Creative's marketing mistakes (so you don't repeat them):

• Line extension. Creative had two other players in the market, the Creative Nomad II and the Creative Nomad II MG (magnesium case). They had small amounts of flash memory to store a few hundred songs. Creative Nomad Jukebox had a six gigabyte disk drive to store thousands of songs. It was in a new category.
  
  Using the Creative name in the new category caused confusion, which undermined the brand-building process.
• A generic name. "Creative is a description, generic name. You can't build a brand with a generic name. You need a brand name.
  
  What's a brand name? It's a manufactured name like iPod, or a generic name used out of context (Apple doesn't sell apples).
• A long complicated name. "Creative Nomad Jukebox" (seven syllables) versus "iPod" (two syllables). Short and simple become brand names.
  
  A first-mover should always ask itself, "Does my name have a chance to become the generic name for the new category?" No one calls the category "hard-disk-drive MP3 players." They call them "iPods".
• A lack of focus. Creative made a host of other products, digital cameras, graphic accelerator cards, modems, CD and DVD players, and more. They should have done what Nokia did. Drop everything in order to focus on a hot product, the hard-drive MP3 player. What did Creative do? They kept doing business as they were, lost the market and sued Apple (the consolation prize was the collection of a $100 million technology licensing fee from Apple).
  
  Such leaping, abandoment, switching is what winning entrepreneurs do. Call it morphing, looping, changing, leaning, whatever the tag, it takes guts and confidence to do. Great startup marketing minds thrive on doing it. And it makes startup board meetings get very heated.

This is a message management doesn't want to hear. They think it downgrades the importance of the rest of the startup. They think it implies that knowledge, skill, and effort don't matter. They think that's all you need to be successful.

Left brainers are verbally oriented. They think of marketing as communicating a laundry list of benefits and features. How do you verbalize the benefits of consuming a caffeinated drink containing herbs, B-complex vitamins, and amino acids? (You don't. You build a brand for a new category, energy-drink, with the name Red Bull).

Right brained marketers often have patience. It can take a long time to change minds. Some say marketing is "psychology in practice." It took Lexus 12 years to overcome Acura's lead as the leading Japanese luxury-car brand. That's another reason it's tough to go to board meetings of startups.

BOTTOM LINE: Aim to be first in the mind of your end user. Being first-mover will be near certain death. Being first-minder secures leadership in a new category, setting the foundation for building the unfair advantage that propels your startup to become the gorilla of the new market. Then your brand will stand for the category. Like Google for search, Facebook for social networking. They did it, so can you!

I wish you The Best on your Adventure!

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"Marketing is too complicated to be left to management people who have little experience in marketing and who don't understand its principles." wrote Al Ries.

Rated by Advertising Age as one of the Top Ten living legends of marketing, Ries's findings and related implications in the book "War in the Boardroom" are spot on with the marketing challenges that confront first-time entrepreneurs.

This series on startup marketing follows the principles laid down in that book. I highly recommend the book to startup leaders.

STARTUP MARKETING: (2) Marketing has become separated from management

"Marketing is too complicated to be left to management people who have little experience in marketing and who don't understand its principles." wrote Al Ries.

Rated by Advertising Age as one of the Top Ten living legends of marketing, Ries's findings and related implications in the book "War in the Boardroom" are spot on with a Big Deal Problem that confronts first-time entrepreneurs.

In a nutshell, startups lead by marketing-thinking, marketing-driven founders too often become quickly ensued in a battle with investors on the board of directors. Why? Because the investors think more like management, not like marketing, but insist they understand marketing and insist their marketing is superior to that of the founders'.

Also, hiring "managers" into your startup can become a similar source of unnecessary conflict. Leaders reporting to the startup CEO mainly come from great public corporations driven by great managers. When they join a new enterprise they find themselves up their ears in marketing and its complexities. Everyone is surrounded by marketing decisions, tasks and events. Unfortunately few managers have learned much about what makes startup marketing succeed or fail.

"Management deals in reality."
"Marketing deals in perception."

Serial entrepreneurs agree with Ries and see the conflict all too often.

An example can make the point clearer: A startup's growth slows and people are gathered to decide what to do to boost revenue. Management's response is to grow more, get larger, spread out, expand the business. Marketing's response is to narrow the focus more. Why? So the brand can be built that stands for something. So the brand can isolate a single service the startup can dominate or an attribute it can own. Management leaps to cut costs. Marketing leaps to focus the customer's mind to perceive the startup's brand and identify it with a word or two.

BOTTOM LINE: Become ready to pick your people for their understanding of startup marketing rather than management. Sure, everyone needs people to manage people and execute a plan brilliantly. But the plan must be a marketing-driven plan, lead by people who understand marketing and its complexities. Great startups are lead by a company of leaders who understand that. It's your job to find those people, starting with your initial core team and extending it to investors and employees. They can have expertise in accounting, engineering, human relations, customer service and so on, you need such skills and experience, but you have to have a group of leaders near and at the top who respect marketing and let you lead as you perceive best. When you get that, you'll get a vital core concept that will keep you out of most of the wasted conflicts between marketing and management. Then you'll swiftly launch your new enterprise with the speed and efficiency needed to build an every more unfair advantage.

I wish you The Best on your Adventure!

STARTUP MARKETING: (1) Divided Brains = Why startup boards of directors are in conflict so often

I'm often asked why there is so much conflict in the meetings of boards of directors of startups.

Watching board meetings erupt over the past decades has led me to a primary cause for most of the troubles at the top.

The main reason is not among often cited "obvious" reasons for board conflict (e.g. investors have different objectives than entrepreneurs, founder CEO is in over her head, competition is winning, running out of cash, etc.).

Brain Conflict

I think the central reason is due to how the different brains on the board think: the founder CEO and core team are driven by right brain decision-making while the investors are intensely left brain driven. The result is too often less than the best startup, and can even lead to its failure.

Big Corporations Suffer Similarly

This mix and related conflict are not confined to startups. The guru of consumer marketing, Al Riese, has found the same in large public corporations. His findings and related implications are discussed in detail in the book "War in the Boardroom". It is a quick read, packed with powerful marketing tips for company leaders wanting to become world-class and win big.

The board of directors of the typical early stage, venture-backed startup is made up of five members: two from management (founder CEO and a Vice President), two from investors (venture capitalists) and one independent. Small and quick, this mix is combined with monthly meetings and works well for new enterprises who must be fleet-footed and fast to change. Conceptually it is effective and powerful.

Conflict: Intuition Collides with Numbers

Founder entrepreneurs use a lot of intuition to make their decisions. Starting with an original idea, they move as fast as possible to push it forward, shaping it daily even hourly into something that grows and attracts more and more business. This speed, combined with entering a market that does not exist, leads to decisions that are based not mainly on statistics, rather they are made primarily at the gut-feel level. Bold and gutsy, inspiring and terriflying, those decisions result in the success or failure of the new enterprise.

The current wave of consumer-centric new enterprises (from Facebook to Instagram and Tweeter to apps and games for pad and phones) is lead by individuals trained to operate with a ton of intuition. Yet I've also witnessed similar intense intuitive decision-making in semiconductor and IT startups. Gut feel wins, often. Doubt that? Try asking people who worked with Steve Jobs and the Google co-founders.

In contrast, startup investors are mainly thinking left brained. The venture capitalist is most likely to come from an established company, often a public one whose stock is traded on Wall Street. Stockholders hold such boards responsible for getting the CEO to set expectations and meet financial goals (lots of numbers), quarter after quarter after quarter. That numbers-centric business culture is where the VC became famous, a hero, and eventually lead to his leaving to become a Partner in a venture capital firm. There he invested in a half dozen startups and joined their boards of directors, bringing with him the numbers-centric thinking that he used to become successful and famous.

The inherent conflict is obvious: When the founder CEO declares her right brained intention to boldly go "where no man has gone before," the left-brain set of board members goes ballistic. The ensuing fight is about the lacking numbers to support the gutsy move.

Exceptions are Great

People who learn how to find "the golden middle" (old German saying) win big. It took a lot of pain for Steve Jobs to finally figure that out, but when he did, the company that emerged became "awesome." There are other examples out there, and they make fine independent board members.

Investors who can do think intuitively have become icons. Examples include Don Valentine, venture capital pioneer and founder of Sequoia Capital. He hand picked the second wave of Sequoia investors, each of which I've seen demonstrate deep understanding of right brain thinking: Michael Moritz and Doug Leone.

Similar intitive thinkers can be found among the early employee numbered people who have left large startups such as Facebook before they went public to become active angel investors. Intuitive thinking investors are well worth hunting for.

BOTTOM LINE

If you assemble your board of directors with special attention to how each person makes decisions, your chances of success will get a big boost (and your long board meetings will be more pleasant, less filled with wasteful conflict). Right brain thinkers are especially valuable to founder CEOs, but are not common. Do your homework on investors, they all have money, but not all have the appreciation and ability to operate with fast moving, intuitive decision makers like you. When you have such people working for you (on the board), you will have added one of the most powerful elements of what it takes to build an unfair competitive advantage for a startup.

I wish you The Best on your Adventure!

GREAT START-UPS FOCUS ON SOLVING A BIG PROBLEM: Example shows how fresh ideas sprout quickly

Great start-ups get huge when they focus on a huge problem. I've got an example for you to think about today as you look for ideas to form a great start-up.

At first tiny or even non-existent, the next great market grows quickly to imense size. Then it splits into segments which in turn start the same growth, becoming individual huge segments. That leaves the original competing start-ups plenty of room to thrive.

Founders who spot such opportunities have an opening that lasts for a short while but can be the door to launch a great start-up.

One example of such a huge problem is "What happens to your digital assets (e.g. Facebook page) after you die?" This marks the birth of the "digital legacy" business category.

The problem is getting a lot of press lately. A long New York Times article discusses the issues, exposing unknowns and a lot of opportunities for entrepreneurs. Other reporters and bloggers have published a lot about related problems: legal, ownership, access, rights to edit and alter or delete someone else's Facebook page and all the rest. Just think undertaker, lawyer, trust administrator, judge, plus all the rest of the on-line social network businesses. Yes, the problem has huge, global potential.

At first it sounded easy to me. Then I read what the lawyers and Facebook (and other sites) have in their terms of use (including what can and cannot be done after you die). I was amazed. It is very complex.

That amazement triggered several entrepreneurs to start new enterprises that focus on the huge problem: What happens to your Facebook and other digital assets after you die?

Take a glance at this quick story about Legacylocker.com and then examine the following  points to your thinking about your idea:

7 START-UP IDEA TIPS

1. Personal need triggered the idea.
2. Size of the idea is world-wide and growing quickly.
3. No competitor dominates this new category yet.
4. Value was quickly added to the original idea (to make it more attractive to end users and more difficult to copy by other entrepreneurs).
   
5. The business model could make money quickly.
6. Technology required was not complex.
7. The management was capable of launching the business.

To me this is an example of one of those "Why didn't I think about that?" ideas. And it's a lesson on how to quickly move from a simple start to a robust business model.

BOTTOM LINE: Good ideas for start-ups often come from a personal need. Great ideas focus on solving huge problems. Entrepreneurs grow their idea rapidly, increasing the value to the end user and appeal to customers. Digital legacy issues are one example. There are many others popping up daily. The more you think up a few, the more will come to you. Apply the 7 Start-up Idea Tips to each of your ideas to help you form an unfair competitive advantage.

I wish you The Best on your Adventure!

2011 - AIM TO BECOME NUMBER 1 WITH REALISM: Expect your startup to compete and be sold

Most startups get sold instead of going IPO.

That is not failure, it is just how the competitive startup market works. 2011 will be no different in that than any prior year.

A thousand athletes compete to be chosen for the Olympic team, only a few will be chosen. Of the many striving to become the starting soccer team goalie, only one gets chosen. Others end up as backup goalies or do not make the team. We don't look down on the athletes who tried but did not make the team. Startups work the same way. As soon as a new market is sensed to be forming, a rush of startups launches a race to the top. The first to get there becomes what the venture community calls "The Gorilla". 

The Prime Directive of every startup should be "Become The Gorilla" of the new market. The startup which achieves that is the startup which is Number 1 in market size and power. It finally emerges from the intense fray as THE famed company, the Yahoo, Google, Facebook of the new market. Your plan to do that is what venture capitalists want to hear from you.

So what happens to the other startups, those failing to become The Gorilla?

A couple of the competitors turn into numbers 2 and 3. They are dubbed "The Chimpanzees". All the rest fall into the category dubbed "The Starving Monkeys". The chimps compete in the same market as the gorilla yet are different in several important ways. They also have half the share of market of the gorilla but remain financially healthy and a thorn in the side of the gorilla. The monkeys are doomed to bleeding red ink month after month.

The result is the gorilla and the chimps go IPO. The monkeys are either sold to established public corporations or they are shut down when they finally run out of cash. In some cases, even the chimps get sold before they go IPO.

As a result of this startup process, mergers and acquisitions become familiar to venture investors and serial entrepreneurs. Small, boutique investment bankers specialize on valuing and fining finding buyers. Lawyers and accountants work insanely intense hours to deliver the related documents. It happens daily in every new startup market. 

Why do companies sell themselves to others?

• Some startups get purchased for their technology and people. Cisco was famous for purchasing small startups with a dozen or so employees, several before they had launched a product, others after the first product launch had started.
• Other startups sell to corporations when the CEO realizes he or she cannot become The Gorilla and are in danger of not becoming a chimpanzee. Or the new market is not going to become large enough to spawn a gorilla. Selling your company is a very tricky decision to make. It is filled with intense personal emotions. It involves a lot of stakeholders.  It is a very difficult decision to face, analyse and decide upon.

I found an excellent piece of advice concerning the decision to sell your company in today's blog by Ben Horowitz. In it he explains how he views the related issues, particularly how personal emotions get in the way of clear thinking. I second what he has written and so will serial entrepreneurs. To learn more, discuss this issue with some of the experienced lawyers and accountants, as well as seasoned entrepreneurs in your community.

Selling your company can be a very wise decision. It is not startup failure. It can produce value for all stakeholders. 

Most importantly, sale of your startup is about realism. I find realism too often lacking in the public talks by luminaries from the venture community and momentum bloggers. Their speeches about great startups with crisp vision, big markets, and huge IPOs that lead to becoming gorillas of the past lead to a distortion of startup reality. Most startups are going to either be sold or shut down. So I recommend you add that bit of realism to your emotional thinking as you go about planning your startup. I don't mean begin by planning to be sold (The Olympic coach does not want you to say you are planning on trying to get the silver or bronze medal). I do mean add the sale of your business to the spectrum of possible outcomes for your startup. And as it prospers during the intense competitive battle for the new market, continue to be realistic about its chances of becoming Number 1 in the new market (the gorilla). That will enable you to both strive for the top spot while remaining realistic about deciding when is best to sell your new enterprise. It makes you a very wise startup CEO.

BOTTOM LINE: Your startup could become a global giant, go IPO and become famous. Or it could be sold. Put both into your mental planning as you look into the future of your infant enterprise. Continue to work hard to become The Gorilla. When that becomes doubtful, it is time for you to begin considering sale of the business. Your board of directors will expect you to lead that decision making. Your employees will trust you to make it wisely. The result can be a great victory for all the stakeholders, including yourself. When you can be that realistic, you'll become part of the club we dub seasoned entrepreneurs. You will have added a strong asset to your bank of wisdom. You will understand a lot more about what it means to build and employ an unfair advantage.

I wish you The Best on your Adventure!

STARTUP BOARD OF DIRECTORS: How the power works

"What can I expect from my board of directors? That is a question I am often asked by first time entrepreneurs.

This week I'll comment on that topic and give you help anticipating and managing your board.

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When you understand how the power works on your board of directors, you can operate with more realism and effectiveness.

Here is how power works in real startup boards of directors:

• Investors expect to dominate. They have more startup and managerial success than the founder (usually). That is how they became successful venture investors. They are on your board for one purpose: to make the value of the new enterprise rise as fast as possible to as large a number as possible. They are very eager to do that with your company. If you hinder that, you will feel the heat of their wrath.
• Serial entrepreneurs overcome with results. Veterans of startup boards of directors know the CEO will thrive as long as results are delivered. That is the ace power card the CEO has to use with the board. Results bring power to the CEO. Explanations of why things did not come out well lead to the exit door for the CEO.
• Investors do not want to run your startup. Time is the enemy of VCs. They cannot buy it or make it. Managing a startup is a huge use of their time. They want the CEO to run the business. Yes, they may get critical and they may step over the line (start to micromanage), but they do not want to get sucked into the black hole and get the reins turned over to them to manage the startup.
• Your ability to think more creatively overcomes strong suggestions. Better ideas win in power struggles. VC icons like Don Valentine founder of Sequoia Capital, tell each CEO they fund to expect a lot of ideas from the Valentine -- and that he expects the CEO to produce better ones. This pressure is part of the creative process of managing a startup and is expected at every meeting.
• You win power struggles as long as the employees are supporting you. Great morale in your workers -- especially your core management team -- is a powerful asset to use in power struggles. As long as the employees believe you can lead them to success, you have a very strong card to play when needed. They do not want to watch the board get rid of you and hire a stranger. So it takes a lot of bad decisions and rotten behavior on your part to get them to start to wish you were not there. That's one reason serial entrepreneurs are alert to the morale of their employees.
• Work outside the board meetings is how big decisions are made. The old joke is that board meetings are supposed to be boring. Why? Because everyone expects to arrive knowing how the official decisions are going to be made at the meeting. During the weeks between monthly board meetings the CEO will be discussing one on one with board members the sensitive, the important decisions that came up in the last board meeting. The choices are reviewed and the CEO works to get unanimous agreement on each before the next board meeting.
• Independent board members are expected to keep the peace. These people are the go-between person chosen to handle sensitive issues between the CEO and the board of directors. In addition to their startup and domain expertise, the independent person is typically skilled at working out practical solutions to tough people problems. This may call for spending time with the CEO and the techie founder to iron out a working relationship. Or it may be necessary to talk to one of the board members who is out of line with his criticism of the CEO. Such independents are special to startups and important to how well the board operates.
• Boards do not vote on decisions. Everyone is unanimous on every decision. No investor insists on voting his number of shares. Such thoughts are in the heads of naive people. Instead, all key decisions are made during the weeks before each board meeting. Yes, the lead investor has a lot of influence on the decisions, but still he will not vote shares at any meeting.
• Always able to raise cash is key to balancing power. CEOs learn "the man with the gold sets the rules." Without cash the company dies. If you only have board investors, you lose your balancing power. So serial entrepreneurs are always looking for viable alternative investors to the current ones. That gives the CEO confidence he can choose to accept or not accept any strong advice or command given by an existing investor. It is one reason serial entrepreneurs say that "competition (to invest in my company) is the entrepreneur's best friend."

BOTTOM LINE: As you may have realized from the above, your job calls for managing the board of directors. It does not happen for you. It is not done by investors or the independent on your board. You are the one to do it. So study your sources of power and weakness. Think about how you can do well when managing your board members. It will be one of the key elements of building your unfair competitive advantage. It is what serial entrepreneurs have learned to do so well.

I wish you The Best on your Adventure!

STARTUP BOARD OF DIRECTORS: What you can expect

"What can I expect from my board of directors? That is a question I am often asked by first time entrepreneurs.

This week I'll comment on that topic and give you help anticipating and managing your board.

• The board is your new boss. Even if you own over half the shares, you will still have to debate with the board of director members what you are going to do, how well you have been doing and your compensation and all the troubles the startup is running into. That's legal. It is in your incorporation bylaws. You cannot get around it. As soon as you have formed a board of directors for your corporation, you get a new boss.
• The board represents the investors, not you. This may sound difficult, but that is the way corporations work. The board is responsible for making decisions in the best interests of the shareholders. You are considered one of the shareholders, so that is in your best interests. But if you start messing up managing the company, then you are exposed and can be terminated. The investors expect good, positive results. Either you deliver or they will find someone else to do so.
• The board votes using special privileges. Preferred shares are what investors get when they invest cash in your startup. That gives them control of the voting of the important decisions of the startup. Voting on your job is one decision, your compensation is another and the big decisions about what the startup is to do next is another. All the rest of the people in the company get common shares, the less expensive shares used for stock options and founders' shares.
• There are no surprises. All the powers of the investors are spelled out in the terms of the deal with them that you signed. The details are in the "term sheet" you got when they offered to invest in your startup. Hopefully you read the documents, discussed the consequences with your lawyer and are now living with the results. There is no excuse for you to be surprised if you did your homework.
• You are not CEO forever. As soon as you have one investor, you are exposed to termination for lack of results (or other sins). No longer is it "your company". No one on the board expects you to be fired, nor do they plan on it. But you should start planning on your successor the day you have your first board meeting. That is most likely to happen.

If you do not like what you have just read, if you insist on being CEO indefinitely, then do not seek outside investors. It is that simple. The startup will be yours as long as you wish.

But if you accept cash from an investor, the game changes. Now you have to execute and deliver. You are in the spotlight, on the hot seat, expected to do amazing things with this startup. If you doubt that, ask the investor.

BOTTOM LINE: Knowing what you get with a board of directors can help you decide on when and who you choose to form a board. That will give you realism and wisdom. Boards are not all bad (I'll discuss their good side tomorrow). A great board can help you convert your idea into a great, enduring startup. In fact, it can help you build an unfair competitive advantage.

I wish you The Best on your Adventure!

How to Manage a Real Startup: Nr 6 in a series

This is a draft of a chapter of my new book. Your comments are welcome.

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

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(Chapter 1 continued)

As you may have surmised by now, the psychology of startup execution is special. Startup CEOs never feel safe. The bicycle is forever tottering. It’s parts work but awkwardly and do not always do what they were designed to do. The business will not run smoothly. It is never “a well oiled machine.” The ground being traveled on is always very rough. There is no easy way path. That impacts the guts of people. Their safety zones. The things they rely on to feel good about themselves. Startups make people irritable and short tempered. They can be downright ornery. The rollercoaster up and down is terrifying every time. Like real war, fear is a close companion to startup warriors. And yet they still love doing the startup.

Startups are also fun. They are a great relief from giant company politics. Startup people are optimists, positive on what can happen. They see the glass half full. They come to work daily with eager anticipation for what exciting things will happen. They expect surprises and thrive on them. Negative events are just another challenge. Together they form a special cadre. Their startup becomes a special mark to them, a brand they created, a place great to work at, where people do amazing things because they liked doing them and think they are exciting. Together they will execute, aiming at creating a great company that does great things together. That merges into a culture and begins to define and differentiate your startup. Some serial entrepreneurs think building company culture is central to their success.

The one thing that does not change is that startup execution is special. Very different. It is not taught in MBA school. MBAs can make great entrepreneurs, so don’t mistake what I mean. I earned mine at a great school, Cornell University and some of my best friends are MBAs. And there are a lot of MBAs leading new enterprises. But startup execution is unlike any other execution. It’s like building a bicycle while you are riding it. If you want to do a startup, you’ll just have to try it to learn it. And then get used to it. I hope you like the ride.

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More tomorrow.