STEVE JACKOWSKI

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Always Hire 10s!

1/28/2014

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So you think you' re smart, right?  Usually the smartest person in the room?  If only everyone were as smart as you,  people would understand each other, see the big picture, and work together as a team to make the world a better place.  If you could hire these people, nothing could hold back the explosive success of your company.    

On the other hand, you must admit that you have a healthy ego.  What would happen if everyone you hired had an ego like yours?  Would anything get done?  Would there be non-stop debate with little real progress?  Would your employees be at each others' throats jockeying for control?  Would they question every decision you make?

What's the alternative? 

I guess you could hire people who aren't quite as smart as you and don't have as strong an ego as you do.  That way, they'll look up to you and you can do your job: Lead.  They will follow. 

Of course down the line a bit as your company grows, these people will need to hire.  If they have the same philosophy, the next set of hires will be less smart than the previous.  A few more iterations like that and you have a company filled with mediocre people.  This doesn't sound like the path to success.  It's certainly not the philosophy that was employed by companies like IBM, Microsoft, and Google.  

But if instead, you decide to hire people who are as smart as you are, or, if it were even possible, smarter than you are, what's going to happen with all of these egos?  Hmm.

What do you think of when someone says Jane has a very strong ego?  Is this someone who is overconfident and unwilling to take direction or ask questions?  

Not for me.  I find that people with truly strong egos are so comfortable with themselves that they can take criticism and apply it to make themselves better, have the confidence to know that they can learn whatever they don't know, and have the core ego that will allow them to ask questions when they don't understand something without fear of looking stupid.  

If you can find people like this, you're on your way to success, assuming you can manage them.  More on that later.

Let's take a quick look at the first part of that statement.  How do you find superior people with these types of strong egos?

As backwards as it may sound, as a first step, I like to contact references.  I can tell the references what I'm looking for and get their takes on how the candidate would fit.  I can actually ask the reference what questions I should ask the candidate to ferret out the qualifications I'm looking for and to best assess the candidates' strengths and weaknesses.  

Next, I like group interviews.  First, it shows respect for the candidate's time.  Rather than going from person to person where the preliminaries include asking the same up front questions, these get done one time with the entire interviewing team.  Instead of several individual interviews lasting 30 minutes to an hour each, you have one interview lasting one to two hours. 

Yes, it may be a bit intimidating.  But this is the real world and if the candidate is going to fit our strong-ego requirement, s/he will rise to the occasion.

In a group interview, the candidate gets to meet the team s/he will be working with, see the team's internal interactions, and determine if s/he will fit in to this group.  At the same time, the team can ask questions and one interviewer can build on another's questions.  This can be very productive and in some technical interviews, I've actually seen interviews turn into dynamic design sessions. The candidate left excited about the creative opportunity and the team couldn't wait to have their new team member on board, joining in the next design session.  

Before ending the group interview, once I'm convinced the person has the skills for the job, I talk directly about ego and self-confidence; about taking criticism and applying it to become more successful; about our philosophy that if your ego is strong enough, no one's feelings get hurt when ideas are criticized.  I often test their responses to criticism and try to assess to what degree they'll defend an idea.  My team members usually jump in both confronting and defending the candidate. 

Then I do a sneaky thing.  I lay out a challenging situation - maybe a technical design, maybe a marketing plan: a situation that would involve the candidate were s/he hired.  In the course of describing this challenge, I purposefully leave something major out and watch the candidate's response.  If the candidate confidently asks a question without fear of appearing stupid, we're on.  Otherwise, if s/he nods his or her head like they get it all, I point out the fact that they didn't ask critical questions and thank them for their time.

It may sound a bit brutal, but it works. 

Now, once you've found your '10s', you need to be able to manage them and earn their respect.  Managing people with the strong egos we've discussed requires a different approach.  We'll look at  that in my next post.
 

Building a Startup - Head in the Clouds, Feet on the Ground
Managing the Best of the Best
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Building a Startup - Head in the clouds, feet on the ground

1/21/2014

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In my novel, The Silicon Lathe, there's a section where after having been burned by an unethical CFO, the CEO tries to trap prospective replacement candidates by seeing if they'll stretch the rules of accounting to make books look good to investors and shareholders.  After one candidate storms out of the interview, outraged at the CEO's suggestions, they hire her on the spot.  This really did happen and it was the beginning of a longstanding business relationship that led to multiple successful startup companies. 

The job of a CEO is to lead the charge.  The CEO has the vision and an ability to communicate that vision to the team, to customers, and to investors.  By its nature, the job is one of communicating optimism.  Many of us are probably too optimistic, but without that optimism, it's difficult to spark the enthusiasm and energy that are critical to a company's success. 

At the same time, that optimism can lead to disaster.  Sometimes you'll underestimate risks of a new customer contract or costs of a new product development or marketing campaign.  You may see a huge opportunity that could lead to the overnight success of the company.  But, that temptation to swing for the fences on every pitch usually leads to a strikeout.  If you have your head in the clouds, it's hard to keep your feet on the ground.  So, how do you do both? 

Find someone who understands and respects the forward charging requirements of a CEO, but who can pull your feet to the ground from time to time.  Recognize the value of conservatism as a balancing factor in the success of the business.  Look for someone who can be your watchdog in terms of legal and ethical issues.

These people are rare, so if you find one,  keep her/him close and don't underestimate their value to the business.  This doesn't mean you won't take risks or that you'll always follow this person's advice.  Your role as CEO is to gather all the information, assess the risks realistically, and then make your decision.  With a bit of luck and common sense advice, there will be plenty of opportunities to take a big swing without risking it all.   

Angel Funding
Always Hire 10s
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Angel Funding

1/14/2014

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You've looked at bootstrapping and are unable to fund the business yourself, talk your employees into going without salaries, or find customers who will help fund the development of your product.  You're looking for outside investment and know that at this stage raising Venture Capital probably isn't possible.  So, where do you go?  Angels!

Angels are private individuals or groups who are interested in helping entrepreneurs get started.  They could be family and friends, former entrepreneurs who made good, or groups of private investors who can pool their monies.   Family and friends typically will offer small amounts of money.  Former entrepreneurs will often provide $25K-$50K to get you started.  More successful ones who believe in your company might go as high as $100K.  Angel Funds may go as high as $250K to $500K. 

Although it's tempting, I'd advise you to avoid family and friends if possible.  You don't need Uncle Jim, who made money selling used cars, telling you how to run your business.  And, you don't need the guilt you'll feel if you lose the money that Aunt Mary invested. 

So assuming you're going to take money from a 'Qualified Investor' (someone who is considered knowledgeable and able to afford the risk), in general, you should be prepared to give up about 25% of your company for your first angel/seed round of investment where you raise $250K-$500K total. 

Experienced Angels can be very helpful.  They've been where you are and most are looking to 'pay back' a bit of their good fortune.  They can provide business advice, introductions to customers and other investors, and they usually have a lot of credibility in the market and the investment community.

Your choices for structuring the deal generally fall into convertible debt where the investment is considered a loan, but a loan that can be converted to equity at a later date, and equity where the investors will own shares of your company, usually preferred shares. 

Convertible debt means that you take loans from the investors but that they will have the right to convert to equity at some time or event in the future (e.g. you decide to raise a Series A round from VCs).  Pricing that conversion can be tricky.  A bit more on that below.

Offering equity is a bit more complicated than taking a loan.  You need to create a preferred class of stock and structure the preferences, including voting rights, board seats, liquidation terms, terms for converting to common stock, and more. 

While I'm thinking about it, let me advise you to be careful with liquidation preferences.  In general, VCs and Angels will ask that their investment be repaid in the event the company is liquidated.  The problem lies in the definition of 'liquidation'.  As an entrepreneur, you're probably thinking that if the company goes under, it's only fair to let the investors get as much of their money out as they can.  However, in most cases, 'liquidation' also includes sale of the company.  In an upside sale (as opposed to closing down the company and selling off assets), this means that you pay back the investors, then they convert their preferred stock to common and share in the remaining proceeds of the sale.  I call this the 'double dip'.  Avoid it if at all possible.

Coming back to equity versus debt, in general taking a loan as convertible debt works better for you than giving up equity.  However, if your angels are helping your company in a big way, it seems only fair that they should share in the equity up front and not have their upside limited in the debt conversion. 

The most challenging part of either convertible debt or equity is valuation.  While most of us would like to value our companies high, thus giving up less equity now (with equity funding) or later (with convertible debt), valuing too high can be a dangerous trap.  It may cause you to give up much more of your company with future investments if you haven't proven and increased your valuation, and for the convertible debt, the conversion may cost you hugely. 

If you gave your Angels equity, they share in your downside by being diluted.  If you gave them convertible debt, their conversion would be at the new rate and they would have more of the company. 

So, be careful with valuation.  For a great article on Angel Funding, which is still relevant, if a bit old, see Mark Suster's Angel Funding Advice.

Why You Should Avoid Venture Capital
Building a Startup - Head in the Clouds, Feet on the Ground
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Why you should avoid Venture Capital

1/7/2014

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Okay.  You know I'm biased.  I'm a big proponent of bootstrapping a startup  and don't have significant problems with going for Angel Funding if you really need it.  We'll talk about that in my next post.  But what about Venture Capital?  Why am I so against it?

Well, philosophically, I like the idea of building a sustainable business.  I think you win the game more often by going for base-hits or short yardage most of the time and only taking that big swing or long bomb when you can afford to do so - not at every at-bat or down.  Sorry for the sports analogies, but if you're looking at Venture Capital, you have to be ready to 'swing for the fences' or to 'throw the long bomb'.  A Venture Capitalist (VC) is not looking at a sustained effort to win the game. They're looking for you to take big chances so that if you do win, you (and they) win big.  

I know this sounds cynical, and I do see need for Venture Funding at some stages of a company; e.g. funding a major expansion or preparing to go public. But I'm skeptical of early stage investments unless you are willing to risk it all. 

I have some experience with VCs.  For several years, I consulted to multiple VC firms doing technology evaluations.  I also took one Series A round of investment in one of my first companies.  There are some excellent VCs out there. 

I don't think they're shy about their objectives or methods.  As one VC told me early in my career, if he invests in ten companies, he expects one to hit that home run.  Three to four will fail outright, and the others will amble along, potentially growing,  but not fast enough to be of continued interest to the VC.   Most of these good companies will be sold off with no significant upside to the founders, or closed down by being denied additional funding after over-extending themselves with VC money. 

We all like to think we're going to be the one in ten.  Realistically, if we're good business people, we'll likely end up in the five or six who are reasonably successful, but not setting the world on fire in the VC's three to five year timeframe.  If we swing for the fences, there's a very good chance we'll be among the three or four companies that fail outright. 

Even if you're confident you have the next great idea and can beat others to the market to succeed and hit that home run, I encourage you to hold off on VC investment until at least a Series A round.  Get your business started, prove the model, show the customers and then take your big swing.  

Since this series of posts is about starting up a company, except in unusual circumstances, I would discourage you from taking seed money from a VC.  

While I'm sure there are some well-intentioned VCs offering seed money and actually helping entrepreneurs get started, I can't help but think that a VC who sets aside a small part of his fund for seed funding is taking unfair advantage.

Rather than actually committing to fund a company via a Series A round, seed funding allows a VC to gain control of a number of ideas and people with very little commitment.  There's no commitment to additional monies, no commitment not to take the ideas generated and fund another company with them, no commitment not to hire people away from you. 

Worse, if you develop a dependency on the VC's money, when it comes time to raise more, you're at a disadvantage.  If your VC decides to pass, your chances of raising money elsewhere diminish dramatically.  After all, if the VC who provided the seed funding isn't investing again, what does that say?  Why would anyone else invest? 

Even if they do decide to participate in a Series A round, you're going to be battling valuation.  If your seed money was convertible debt, you could be in a very difficult place when negotiating. 

I could tell you horror stories and I invite those who've gone the VC route to share theirs.  I also invite VCs to tell us their feelings about seed funding.   Perhaps they can change my mind. 

In the meantime, consider bootstrapping or Angel Funding.  We'll discuss that in my next post before moving on to more operational issues in startups.


How to Build a Startup - Funding/Fundraising
Angel Funding
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    Steve Jackowski

    Writer, extreme sports enthusiast, serial entrepreneur, technologist.

     
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