STEVE JACKOWSKI

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Why You Shouldn't Become a Doctor

1/22/2018

2 Comments

 
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I have quite a few friends who are doctors.  Most are around my age and they've done quite well for themselves financially.  They have the lifestyles they wanted, and if they work at all, they choose when.  Some have built small empires and have joined what most of us would think of as the truly wealthy.

When I was growing up, becoming a doctor was the ultimate path to success, if you were good enough.  Getting into medical school was challenging, surviving medical school was harder, and according to everyone I know, residency was true hell.  

But if you made it through the gauntlet, you were guaranteed success in every sense of the word: financially, socially, and making the world a better place.  And as I've described before, doctors constitute a significant percentage of angel investors in startups, so even after the contributions in their careers, many continue to pay back for their success.

If you ask doctors of my generation if you should go through medical school and become a physician, they'll give you a resounding yes.  They'll promise that all of the upfront challenges will be more than worth it.  And, they'll point to their own success.

Unfortunately, things have changed.

I've added this blog post to my  Startups category  because I wanted to look at the new challenges of becoming a 'successful' doctor from a business perspective.  Many people entering medicine do so not just as a way to achieve financial independence, but often also from an altruistic desire to help others.  In my mind, you really are a success if you can do both.  

So what's different now? 

Well, you still have to get into medical school - no small feat.  You still have to survive it - I don't think that's changed much either.  And, you still have to make it through residency, working ridiculous hours on very little sleep and endure what seems to be hazing by older residents and attending physicians who propagate the torture because if they suffered, you should too.

So, again, what's different?  

Let's look at how a new physician starts a career.  In general, there are two choices:  1) go to work for a medical group or hospital, or 2) open your own practice.

In the 'old' days, these were two viable choices.  But no more.  In my surveys, the average new physician starts her/his career with at least $250,000 in student loan debt and it can be much more than that if they go into a specialty that requires more education and longer residencies.  Several years ago, Ben Bernanke (former Fed chair) remarked in an interview about student loan debt that his son would exit medical school with over $400,000 in debt.  That was several years ago.  Medical school costs have skyrocketed since. 

Most of these new physicians are in their 30s, sometimes in their late 30s (again if they sought a specialty).  If they married before or during medical school and residency, there's a good chance they divorced.  Medical school and residency are hard on relationships.  Because of this, many physicians wait to marry and they often marry other physicians.  I know several couples who finished their residencies in their mid to late 30s and are now saddled with over $500,000 in combined debt.

But that's okay, right?  They're going to make a fortune.  Well, not so much.  

Starting a practice right out of residency while carrying and trying to service medical school debt has become much more difficult than it used to be.  Sources of financing for these startups are generally unavailable.  And with the debt load, it's virtually impossible for new physicians to come up with startup funds and then generate enough cash flow to live on while they try to bootstrap a practice.  So for the vast majority, this idea of starting your own practice fresh out of residency is no longer a viable choice.  That means you need to get started in with a medical group or hospital.  Not a bad choice, right?  You'll gain experience.  You'll make a good salary.  And many of these groups will help pay for your student loans.

Sounds like a great place for a career or perhaps it could be a jumping off point for starting your own practice.  

The reality is a bit different.  I'll just hit on a few points.  Larger medical organizations are businesses.  Years ago, most businesses provided a second home for their employees.  You could start a career and work towards retirement with health insurance, vacation, and other benefits guaranteed.  If you worked hard, you'd be promoted, you'd earn a good living, and your job would be secure.  That's changed in virtually all of our industries, and the medical industry is no different.  

In many ways, the medical industry is worse.  If you've followed the posts in my Startups category, you know that I have very strong feelings about business models that motivate and reward employees.  If you look around, you'll see that just as mergers and acquisitions have created huge corporations in most industries, there are now fewer and fewer medical/hospital groups as they too become giant enterprises.  In tech, some companies have worked to leverage their size to ensure the best environments for their expensive talent.  They provide flexibility to ensure creativity.  Not so with the medical industry.  Arguably, the talent there (physicians) is even more valuable and more expensive than what we see in tech.  So what does employment look like?

I was shocked to discover that in spite of what appear to be contractual promises to the contrary, most of these groups have moved to a model where a physician's pay is 100% incentive based.   It didn't start out that way.  Medical groups wanted to provide incentives for physicians to spend their time on procedures that produced the most revenue, so they took a portion of the physician's pay and designated it as incentive-based based on Relative Value Units (RVUs).  

RVUs were originally developed as a mechanism to determine the relative value of medical procedures against each other.  This enabled insurance companies, and in particular, Medicare to standardize the definitions of the procedures themselves.  It made sense.  It even made some sense to provide incentives to physicians.  But now, it's gone too far.

Physicians are often now paid based on the number of RVUs they log.  If they go beyond what is expected, they get a bonus.  If they fall below, their compensation is reduced. 

One problem with this approach is that the physician has very little control over which patients are seen or what procedures need to be performed.  Scheduling is out of their hands as is the amount of time they are permitted to spend with a patient.  Add in the disincentive to spend time with a patient that needs more help but whose visit will generate fewer RVUs, and you get a physician who becomes frustrated that s/he can't deliver the necessary care, and patients who don't get the best care possible.

Worse, the number of 'expected' RVUs changes every year.  If the group of physicians does well with their RVUs, the expectation is raised.  After a few years, as the required RVUs  climb, physicians are doomed to miss the targets.  This model guarantees failure.  And that's not just from a financial point of view, it's also a question of the quality of patient care, and of the physician's motivation.  

But it's even worse.  If a physician takes vacation, s/he is not accumulating RVUs and those 'lost' RVUs are impossible to make up.  So, physicians avoid vacations.

And what about the new reporting requirements - physicians are required to fill out Electronic Medical Records (EMRs) documenting each visit, procedure, etc.  Do you think they get paid for that?  Not a chance.  Since they're only paid for RVUs, that work is done on their own time.  

All of the young physicians I know who are working for medical groups are stressed to the extreme.  Those that are making their quotas in RVUs know that it's just a matter of time before they can't do it anymore.  But they're making the big bucks, right?  Well, in the words of an urgent care physician I interviewed, "With the student loans and the current compensation structure, doctors are now blue collar workers."

And you know, there's no way out.  They can't just quit.  The student loan debt hangs over their heads.   Loan forgiveness in bankruptcy isn't generally granted to someone who could earn six figures.  Unfortunately, the only way they can earn it is to work as a physician.  There's no way out.  

If you really don't think it's that bad, take a look at suicide statistics for physicians.  They're more than double those of the general population.  Between the stress caused by lack of control of their work, the stress of trying to repay medical school debts, and the stress of knowing they can't quit,  and the lack of vacation time, it's not like it was for the physicians that came before them. 

Sure.  Some make it.  Some do manage to get their own practices started.  But unfortunately, it's not as easy as it was years ago.  Physicians get no training in how to start a practice.  And with the new reporting requirements, complex coding for insurance, and dealing with insurance companies who deny first, starting a new practice is a herculean task, worse for a new physician.

If you're thinking of embarking on a career as a physician, think twice.  Don't just listen to the physicians of your parents' generation.  Make sure you talk to younger residents and attending physicians.  Then, at least your expectations will be properly set.  
 

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Disappointment after the sale of your #startup

4/15/2016

1 Comment

 
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Congratulations!  You've done it.  You built a successful startup and you've sold it.  Perhaps you have some ongoing obligations: transition, earn out, pay out over time, but you'll soon be financially comfortable or on your way to your next venture.  Now,  are you ready for the disappointment?

Virtually every entrepreneur I've known has ultimately been disappointed after selling their startups.  They go in to the sale optimistic for the future.  Their businesses or the associated technologies will live beyond them.  The demanding work that they and their teams have faced is coming to an end.   They'll have financial success.  They can finally get a life and spend time with their families. 

Sadly, the fact is that most entrepreneurs are disappointed in one way or another.  Here are some examples:

  • Entrepreneur #1 created a world-changing technology and sold his company to one of the fastest-growing software companies in the world.   They promised to  get the technology into the hands of millions of users.  A two-year earn out seemed like a great way to guide the technology into universal acceptance.  Unfortunately, a large industry player and competitor made a deal with the CEO to shelve the technology and Entrepreneur #1 watched helplessly for 2 years as the technology languished.
  • Entrepreneur #2 sold her company to a large international Telco in a stock-only deal with one third made available each year of her 3-year employment agreement.  It certainly looked as if she could retire once the stock was registered and available for sale.   After all, this was a multi-billion dollar telecommunications company.  But during the first year, the apparently stable company nearly failed,  their stock falling over 99% before she could trade the shares.   At the end of her contract, she had sold her multimillion dollar company for a few thousand dollars.
  • Entrepreneur #3, thinking about retirement,  sold his rapidly growing service business to a younger entrepreneur who came in with a 5-year plan to grow the company.  They agreed on a 5-year buyout.  Entrepreneur #3 would remain on the Board but would wouldn't have any operational responsibilities.  Nothing would change for the first year so that the employees and customers could become confident in the new management.  Sadly, within a month, the aggressive buyer was making changes that drove employees and clients away.  Six months later, Entrepreneur #3 got a much-diminished version of his business back and began the arduous process of rebuilding.
  • Entrepreneur #4 sold her high tech product business to a multi-billion dollar public company that planned to integrate her products into their own.  Her payout and that of her employees was contingent on integration milestones.  But the larger company's product had never worked well, and the most minor changes caused it to fail.  Entrepreneur #3 fought constantly with her new management to show that it wasn't her technology that had the problems.  But the milestones were set in the contract and she and her team only received partial payment after working ridiculous hours to try to fix a poorly architected product.  She left the industry for good once her employment contract was finally over.
Of course not all startup sales are disappointments.

One entrepreneur sold his struggling business in an all stock deal for $5 per share, worth nearly $5 million to him after a 3 year earn out.  His new job as CTO of the acquiring division gave him control and he became wealthy as the stock rose to $55 per share.  He, too, left the industry, happy with what he knew was a very lucky break.  Had the acquisition delayed even a month, he would have been out of business.

Another sold her very small technology startup to a large company in an all-cash deal, turning her product over to the acquirer.  She walked away and became an Angel Investor, helping several successful startups. 

The reality is, when you sell your startup, you don't really know what's going to happen next.  The economy could change, political winds or industry competition could obviate the need for your technology, the new owners could make big management mistakes, or their companies could fail.  You need to be careful:
  • Make sure the acquirer has a solid plan for taking your business forward.
  • Get as much cash in the deal as you can.
  • Do your due diligence - examine the acquiring company at least as well as they examine you.  Often we are blinded by big companies - it looks like they must know what they're doing to be so successful.  But too frequently parts of their businesses are unstable or poorly managed even if they look good as a whole.
And most important: Lower your expectations.  You're selling your business.  You have to be prepared to let it go.  Otherwise, I guarantee you will be disappointed.

First Building Your Startup Post
Previous Post: When Should you Throw in the Towel?
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#Startup - When Should You Throw in the Towel?

12/22/2015

1 Comment

 
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Most of my posts on #startups have focused on how to avoid making mistakes that may lead to failure.  My first post, How to Build a Startup Company - Part 1,  asked some fundamental questions about your motivations when looking at undertaking a startup.  Subsequent posts tried to get you thinking about viability of your product or service, business planning, hiring the right people, and management skills. 

But the reality is that even if you do everything right, there's a chance that you'll fail.  Sometimes markets change.  The economy can turn.  An unexpected competitor may arise.  You or a critical team member may become seriously ill or have an accident.  There are countless disasters awaiting a new startup.  And many very successful entrepreneurs admit to having failed multiple times before finally achieving their dreams. 

You need to be prepared for possible failure.  If not, you could lose more than your business.

As I described in earlier posts, building a startup is not only hard on you, it's hard on your family and those around you.   You'll spend too much time away from your spouse and children.  You'll be interrupted at the worst times and often need to be available 24x7.  Relationships suffer, divorces frequently follow. 

It gets worse if you fail.  Your confidence will be shaken.  You may get depressed.  You could be even less available to those who care about you.  

But absolute disaster strikes when you've led  yourself and your family into financial ruin.  No more savings, no more retirement monies, no more equity in your home, you've raided your kids' college funds, you've run up credit card debt, have no income, no prospects for a job, and no funds to do another startup.  As ridiculous as it may sound, you could end up on the street.  I've seen it happen.  You can't let it go that far.

To use an overused boxing analogy, you need to know when to throw in the towel. 

So, how do you know when to give it up?

In an ideal scenario, you would make this part of your business plan.  Just as you set milestones for success, you should set checkpoints to assess possible failure.  You need to draw lines you won't cross.  These will be different for everyone depending on their financial and family situations. 

  • If you're single with few responsibilities, and know you can always get a job, you can probably risk it all.
  • If your kids have left home and you have a nice nest egg for retirement, you can take some risk but need to know where to draw the line.  You don't want to burn through your retirement monies only to find you can't get another job.
  • If you have kids living with you, you need to be much more careful.  You should determine how much risk you and your spouse are willing to take, and with regular checkpoints, when you need to give up on your startup.  It might be a period of time, a certain amount of money spent, how much time the business takes from your personal life.  It could be many things.
This may seem obvious, but when you're in the heat of it all, when you're fighting to keep your company alive, when you're sure that if you borrow from your retirement monies or take out an equity loan on your house, you'll be able to save your business, you usually won't see that you're about to go too far.   It's hard to step back and take an objective look when you're under live fire.  But you MUST do it.

If at all possible, have an uninvolved observer look at your situation regularly.  It could be your board of directors, a friend you trust.  It might be your spouse. 

In my lengthy career, I've seen many disastrous business failures that ruined peoples lives. But I decided to do this post now because of two recent startup failures.  The first involved a person with no family obligations.  Unfortunately, she didn't draw that line and ultimately burned through savings, retirement monies, and equity, losing her business and owing the government a lot of money.

The second involved someone with a family who originally promised to give his dream a year.  He had sufficient monies to keep it going that long and wanted to see if he could make a living out of what had always been a recreational passion. 

But at the end of a year, monies were not flowing in.  Many of his targeted milestones had not been achieved.  Could he really give up his fledgling startup after investing a year and getting others committed to his vision?   When he told me he was thinking of dipping into his retirement accounts, I sent him a list of questions about what he'd learned about himself and his business opportunity over the past year.  Fortunately, he did an honest assessment of his strengths and weaknesses and determined that at least for now, in the way he's approached it, he wasn't going to be able to support his family via his new venture anytime soon. 

He'll continue to try to build the business part-time, but he's not betting everything on something that's not ready to support his family.  He's now interviewing for positions that will enable him to make a good living.  This was a wise decision.

Don't get me wrong.  I'm not suggesting you plan for failure.  However, I think it's critical for you to establish limits on the risks you're going to take.  And somehow, you must find a way to objectively assess where you are and avoid a failure that could destroy not just your business, but your family and your life.  Don't let yourself believe that even though you've missed your goals, if you just put more money and time in, you can save your business. 

You're much smarter if you can walk away before disaster strikes and as the old saying goes, live to fight another day.
First Build your Startup Post
Build it or Buy it - Which should your #startup do?
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Build it or buy it?  Which should your #startup do?

7/16/2015

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Hoping to accelerate the time to get his service business going live,  one of the entrepreneurs I'm working with recently asked me whether he should have developers build software, find a third party who could deliver something sooner, or find open source software that the developers could customize. 

Of course, I said it depends. 

Obviously it depends on cost versus the benefit of time to market, but there are other considerations including impact on your staff, your support plans, and perhaps most important, your exit strategy. 

Although most entrepreneurs are faced with this decision at some point and most have no problem making a good decision, I thought I'd jot down a few considerations just in case there's something you might not have thought of. 

Build it yourself

I must admit that in all of my companies, we built our own products.  This was largely because our initial products were 'under the covers' - inside operating systems and invisible to users.  At the time, there really weren't any off-the-shelf solutions that we could use as the basis for what we were building.  In fact, most of our products were these tools that others could use to build their products. 

This approach worked well for us for the following reasons:

  • We had complete control over the features and implementation of the products.
  • We understood the products completely so our support efforts were reduced.
  • Because of our modular development, the products were easy to enhance.
  • At the time of our exits, there were no questions about the ownership or licensing of our products
Of course we had to pay for development and it took more time to get to market, but for us, this approach worked out well.

Using Open Source Software

In my last company, we moved from tools to end-user products and since we weren't the strongest in building beautiful user interfaces, we took advantage of publicly available open source software that was subject to the GNU public license (GPL).  This sped up our development substantially, and since we had a solid proprietary base, the addition of the open source code presented little risk to our products.  We kept the code modularly separate from our main code so we were able to avoid some of the more restrictive aspects of the GPL.  The main advantages to this approach were:

  • It saved us a lot of development time.
  • The code was open source so we could change and modify it at will - we had complete control over the code.
  • The user community helped us with support issues.
  • It was free.
The way we handled it presented minimal risks, but there were disadvantages:

  • The GPL required us to publish and make available all changes we made to the code.
  • There were some occasions where the user community couldn't help us with support issues.
  • Upon acquisition, the acquiring company had to do a careful examination of all GPL code we used, the changes, and the interfaces to our core software.  They needed to ensure that there was no exposure to their products which would incorporate ours.
Because we were careful and knowledgeable in how we used the open source code, it worked to our advantage, advancing our time to market while preserving our control of the code, and presented only minor issues during our exit (acquisition).

Buying/licensing from a third party

Although we never bought components from a 3rd party to incorporate into our products, we were one of the third parties that sold components and tools to others to help them get to market quicker.  Our products were closed to the buyers.  That is, they bought functionality and we provided external interfaces.  We never supplied source code and they never needed it. 

From our perspective (and theirs since they paid us), buying from us had the following advantages:
  • Very rapid time to market.
  • A professional organization who guaranteed responsive support.
  • No requirement to hire expertise they didn't have or want to have longer term.
As it turned out, well more than half of our customers were acquired by larger companies.  Because we had assignment clauses for our licenses with clear explanations of what that meant in terms of fees and rights, all of these deals went off without a hitch.  And of course, we were happy to welcome these much larger companies as our new customers. 

So, if you're faced with the choice of build it yourself, use open source, or buy from a third party, each can work:

Build it yourself if you have the expertise and can afford to take the time to debug before getting the product/service to market.

If you need quicker time to market and have some expertise in-house, try for open source.  Be sure to keep the open source separate from other components of your offering if at all possible and to follow the GPL rules about publishing.

If you need to get to market as soon as possible, and don't have a lot of expertise in development, consider licensing from a third party.  They can give you a leg up.  Ensure that you have solid enforceable agreements for customization and support, and that assignment clauses are clear and wouldn't scare off a potential acquirer.  Also, vigorously negotiate the license fees.  Most companies are more flexible than you might imagine and many are willing to 'invest' in new ventures for back-end payments upon success.  If possible, get source code/designs.  In the worst case, ask for an escrow in case the company should go out of business. 

But whether you make it yourself, get a leg up from open source, or license a product, ultimately the packaging and presentation is yours.  You're also the face on the support.  From the public's point of view, this is your product/service.  Own it!
First Startup Post
#Startup - When Should you Throw in the Towel?
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Should Your #Startup Try #Crowdfunding?

2/18/2015

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  • A few surfer friends came up with a great idea for a product and used Kickstarter to raise funds.  Their campaign was overfunded and they're now on their way to launching their product.
  • A doctor had a great idea for a research project.  He applied for grants but the process was long, so he used crowdfunding to bridge him to the grants.
  • A filmmaker used crowdfunding to pay for her short film.
  • An author friend actually raised substantial money for travel as part of the research for his next novel.
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About a year ago in one of my #startup posts, I briefly discussed crowdfunding.  For the most part, I was negative on the idea. 

Now, a year later, I've seen some Crowdfunding successes and I thought the subject might be worth revisiting:

And of course there are hundreds of anecdotes about successful crowdfunding projects - just search the web.  Or, better yet, take a look at How to Run a Kick-Butt Kickstarter Campaign.  While focused exclusively on Kickstarter, this presentation provides excellent information not only on how to run a crowdfunding campaign, but statistics on the numbers and types of projects that have succeeded and how much money they have raised.  If you decide to go the crowdfunding route, it's a great place to start.

But should you use crowdfunding for your startup? 

A year ago, I would probably have given a categorical NO.  Today, after seeing so many successes, I'd say it depends on your project.  With the exception of the surfers' project, those I mentioned above really didn't have anything to lose in seeking crowdfunding - they weren't really startups anyway.  I single out the surfer's project because they were building a unique product as the basis for an ongoing business. 

Unfortunately, crowdfunding shows your idea to the competition.  You clearly lose some competitive advantage and risk losing your entire market if a larger player decides to jump in ahead of them.  Thirty years ago, this wouldn't have been a problem in the surfing world, but today, there are some huge companies in the industry.

So that's probably one of my biggest concerns.  If your startup is building a product and you want to preserve some secrecy about it, don't do crowdfunding. 

Okay, so it turns out you don't need secrecy.  Can you use crowdfunding for seed money?  How about offering your investors equity - a piece of your company?  After all, family, friends, and some generous strangers believe in you and your plan.  They're putting down their hard-earned cash to let you chase your dream.  They should have a piece of the action, right?

Here comes that categorical NO. 

In my blog on Angel Funding, I suggested that you didn't want Uncle Jim, who made money selling used cars, telling you how to run your business.  You certainly don't want hundreds or possibly thousands of Uncle Jims not only telling you how to run your business, but having the right to look at everything you're doing. 

With equity funding, you have to disclose your business plan and financials.  These become public and in the world of crowdfunding via the Internet, everyone will be watching you and may want to 'help'.  From the direction the SEC is going, equity in crowdfunding is going to be very complicated and expensive.

Let's just say NO to giving equity to your investors.  

So what do you give investors who help you to raise some seed capital?  First, be sure to limit your crowdfunding to a specific project.  Make sure that your obligations to the investors are well-defined and short-lived.  Be clear that they're investing in a project, not in your business, and that what they receive for their investment is not ongoing.  Give them early samples of a new product, discounts on future products or services, or some kind of recognition award.  

Once your campaign is over, you can then grow your business with no additional baggage - baggage that might encumber your business plan, cause you to lose focus, or make it difficult to bring in qualified investors or partners. 

You can use the money to get your project off the ground and use the project to help bootstrap your company through sales of your new product or service.  You avoid obligations to family and friends or seed investors, and you have a base from which to launch.

So yes, I have revised my opinion on crowdfunding.  I still think bootstrapping and using Angels are the best ways to fund your startup.  But for certain businesses needing help on very specific projects, I think crowdfunding can work. 

#Startup - Can YOU Swing for the Fences?
First Building a Startup Post
Build it or Buy it - Which Should Your #startup do?
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#Startup - Can YOU Swing for the Fences?

2/6/2015

1 Comment

 
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Last night I had dinner with an entrepreneur who presented me with the five-year plan for his growing business.  It's a solid plan that builds on his current business, expanding slowly for two years, then growing more rapidly.  I thought it was brilliant because the entire growth path, which might even get him into the IPO league, is self-funded.  He has contingencies for potential future problems and possible missed goals, and from what I can see, it's unlikely that he won't see the success he has laid out so carefully. 

But then he told me about his special project. 

It's true, most of us have them.  After all, we're entrepreneurs.  We're idea people.  We can't help it.  

Unfortunately, we have learned the hard way that these special projects can kill us.  They distract us from the focus we need to be successful.  And as my friend went into more and more detail about the technology, the initial trials, and the size of the market for the product that so intrigued him, I couldn't help but fear for the future of his main business. 

At the same time, I must admit that I, too, was fascinated by the opportunities in his special project.   

He asked me if I thought he could raise venture capital for it.  And of course, I had to ask the question: "Are you prepared to give up your main business to pursue this opportunity?"

With his negative response, I told him that first, I thought this special project was a perfect bootstrap candidate, and second, that if he were to raise VC investment, in addition to giving up a substantial piece for seed/early stage funding, the VCs would demand that he focus on this single opportunity.  That he 'swing for the fences.'  That he drop his main business.

We then kicked around the idea of him hiring someone to take over his existing business while he goes for it with the new one.

In previous posts, I've suggested that 'swinging for the fences' is something you can choose to do at various times in your life/career.  If you're young with no mortgage payments, family, or major obligations, you don't have much to lose.  Or, if your kids have left home, you've got some money in the bank, and some years of experience, again, with little to lose, why not take the chance?

But in thinking about it further, I began to ask myself (and my colleague from last night) if it might be more a question of temperament.  Does he have what it takes to swing for the fences?  As I thought about it, I realized that personally, I really don't have it. 

Some part of me wants to build a sustainable business that guarantees a reliable income for me and my employees, and is pretty much assured of at least moderate success.  I don't want to put them, me, or my brilliant idea/business plan at that much risk. 

Okay.  Maybe I'll never make it really huge, but as I suggested in my post  #Startup - Go Big or Go Home? , it appears that people who build these sustainable, non-VC-backed companies usually do better financially than those who swing for the fences.  So maybe it's not really a character flaw to be a more conservative type of entrepreneur. 

Ultimately after much discussion last night, my entrepreneurial friend admitted that he was like me.  He came from a place where he didn't like a lot of risk.  Clearly, starting any business is a risk, but we want to take as little risk as possible.  We want to be assured of winning every time, even if we don't win as big. 

I concluded with my insurance at blackjack strategy.  I don't gamble much but when I do, I play blackjack.  I admit it, I count cards.  I do whatever I can to turn the odds in my favor.  If you know blackjack, you know that if the dealer has an ace up, s/he will offer you insurance.  You can 'insure' your bet by purchasing insurance which pays 2-1 if the dealer has blackjack.  Statistically, if you have blackjack, the odds of the dealer having blackjack are smaller.  So you shouldn't take insurance if you have blackjack. 

On the other hand, if the dealer actually does have blackjack, you push - a tie.  You don't lose your money, but you don't win either. 

Me, I take insurance if I have blackjack.  Why?  Well, if the dealer doesn't have blackjack, I've paid 50% of my bet for the insurance, but I win 150% for my blackjack, netting me a gain of 100% of my bet.  If the dealer does have blackjack, I push on my bet, but I win 2-1 on my insurance, netting me a gain of 100% on my bet.  In other words, I always win - always. 

In the long run, I may not win as much as I would have if more often than not I'd won 150% of my bet but tied some of the time.  I'm the kind of person that given the choice, would rather never lose and be guaranteed that I'll always win.  I'm just not a swing for the fences kind of guy.  I take insurance  when I have blackjack. 

As we wrapped up the evening, my friend admitted that he's the same.  He's now exploring hiring someone who doesn't take insurance when s/he has blackjack to head up his higher-risk venture.

Negotiating Agreement
Should Your #Startup Try #Crowdfunding?
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Negotiating Agreement

1/26/2015

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I recently worked with two companies to finalize the purchase of one by another.  Compared to most agreements I've helped develop, this one was probably one of the most painless.  I'll talk about that particular negotiation at the end of this blog. 

First, let me say that I've been a long time fan of Getting to Yes and Getting Past No, two books that came out of the Harvard Negotiation Project.  They espouse a philosophy called Principled Negotiation which attempts to get both sides to negotiate interests instead of positions.  If you haven't read them, I'd suggest picking them up.  They're short, quite approachable, and if you're not already using their techniques in your negotiations, you should be.

I started my career as a somewhat weak negotiator.  Like many, I was very idealistic and believed that ultimately everyone negotiated for a win-win.  I always wanted to be fair and to give the benefit of the doubt to the other side.  And too often, I gave away too much to get the deal done.  This created resentment on my part and I found myself finding ways to terminate these agreements by looking for better partners.  You see, not only had I made a mistake in my weak negotiations, the other side made mistakes by ultimately taking advantage of my weaknesses. 

How did they lose out?  In business, the vast majority of negotiations are intended to create lasting relationships.  If a negotiation concludes and one side is unhappy, there's a good chance problems will arise from the bitterness and resentment caused by the negotiations.

For me, I think I hit a wall when I began my first negotiations with Israelis.  I don't really mean to stereotype, but I think most people will agree that Israelis are tough negotiators.  My first deals were with startup companies who wanted to license our technologies.  Later, I negotiated with larger companies to represent our products.  One of my companies was acquired by an Israeli company and ultimately, I bought that company back.  I learned a lot negotiating with them. 

At first, it just seemed like they constantly pushed to get more.  If anyone was happy, negotiations had to continue.  I left meeting after meeting frustrated.  Every deal was a lose-lose.  If both parties weren't unhappy, clearly one had taken advantage, so both sides had to negotiate until they were equally unhappy.  Only then did you have a good deal.  Several times, I walked out of meetings convinced negotiations were over.  This seemed to make my adversaries happy, or appropriately unhappy, and usually we came to agreement shortly thereafter.  It seemed like a miserable way to start off a new business partnership.

Worse, they seemed to enjoy these negotiations while I just tried to survive them. 

Or maybe I just didn't understand what was going on.  I didn't know how to stand back from the negotiation and look at it objectively.  I didn't know how to separate negotiating positions from real interests.  I didn't know how to step into the other side's shoes and really look at the situation.  And I didn't know how to deal with people who used position, power, and advantage to beat down the other party. 

In reality, it wasn't the Israelis, it was me. 

Fortunately, after one particularly difficult negotiation, my adversary and new partner decided to counsel me.  Completely independently of Getting to Yes, he taught me the techniques and even role-played situations to help me develop my skills.  And I got much better.

Over the years, I also came to realize that most of us think that each deal is critically important.  Too often we'll do whatever it takes to make it happen.   At some point, we begin to focus too much on making the deal, not on why we're negotiating in the first place.   I learned that very few deals are critically important and that it's okay to walk away when you realize that either the other side isn't listening or isn't sensitive to your interests, or that you just don't have enough common interests to benefit both sides.   Having the ability to walk away is a very powerful weapon in your arsenal.  Ultimately, it makes you step back and look at the negotiation objectively, look at the interests of both sides, look at the people involved and what's important to them, and be a better negotiator.

So what about the recent acquisition?

We got lucky.  From the outset, both sides explained exactly what they wanted to get out of the deal.  With agreement on the highest level objectives, it came down to deal points which were all interest-based.  Personalities did not get in the way.  There were disagreements, but with each one, we looked at alternative solutions, the pros and cons of each, and how they affected the goals of each party.  Sometimes there was impasse.  We'd sleep on it and usually, if there was no reasonable compromise found, we'd agree to a tit-for-tat - an exchange to make up for what one party was sacrificing. 

I must admit though that towards the end, contract fatigue set in.   I've seen this happen a lot.  After weeks of negotiations, particularly if there are delays, frequently caused by the advising attorneys, people just want to get it over with.  This is a dangerous time as too often one side will just walk away exhausted. 

It's a time when both parties need to be conscious of the risks to the deal and may need to bring their attorneys into line by assessing real risks in the contract language.  Ultimately, a contract comes down to trust between the parties.  Remember, attorneys are your advisors.  They're not negotiating the deal for you.  You need to manage them and make them understand your needs in closing a deal.

In our case, both attorneys recognized the importance of the timing of the deal and they too focused on the parties' interests.   This time we survived contract fatigue.

All-in-all, it took about six weeks to finalize and sign the purchase agreement.  Both sides are excited about moving forward.  Both sides feel they got everything they needed out of the deal and both sides came away with a better understanding of the goals of the other. 

I see promising outcomes for both.

Selling/Purchasing a #startup - Assets or Shares?
#Startup - Can YOU Swing for the Fences
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Selling/Purchasing a #startup - Assets or Shares?

1/6/2015

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As a disclaimer, let me state up front that I'm not an attorney and I'm not an accountant.  If you find yourself in a similar situation to the one I'm about to describe, be sure to consult both.  But assuming you agree with me, don't be afraid to argue your points with both.  They may have standard ways of doing things and may just need a nudge to do something better.

Over the course of my career, I have been involved in quite a few acquisitions - three, of my own companies, and several more for friends, business partners, and entrepreneurs I've mentored. 

I'm currently helping the owner of a service business sell her company.  You may recall that in most situations, profitable service businesses sell for one-times sales.  We started with a number a slightly higher than that because the company is growing and next year's revenues look promising.  Ultimately, though, negotiations were  a bit different than other acquisitions I've been involved with.  The big question was how do you guarantee future revenue?  After all, this is a service business.  Perhaps the clients won't want to work with new owners.  Perhaps the employees will object to the sale and will leave, jeopardizing the client income.  Clearly, there is risk for the new owner.

Standard practice in this situation is to adjust the price  downward for the risk and possibly  add performance incentives/additional compensation if certain revenue goals are met.  We did something else.  We decided to set the price at one-times 2015 sales.  In the interim, we set an estimated price and reduced the payments on the note for the first year to ensure solid company cash flow.  At the end of 2015, we'll adjust the note and associated payments to reflect the final price.  The new owner has zero risk in case of lost revenue, and assuming the business continues as it has, the former owner is guaranteed a nice upside.  Sounds like a win-win.

Once the terms were agreed and we had a transition plan in place, the acquirer sent everything off to his attorney who has done quite a few deals in the Silicon Valley.  What came back was a bit of a surprise.  It was an Asset Purchase Agreement.

As an asset purchase, the new owner would be buying all of the seller's contracts, all licenses held by the seller, the company names (including domain names), URLs, trademarks, patents, intellectual property rights, etc., all processes, trade secrets, know-how, documents, advertising materials, insurance policies and interests in insurance claims, rights in all confidentiality agreements, rent, prepaid expenses, goodwill, all physical property including computer equipment, copiers, printers, keys, pencils, erasers, - you get the idea, we need to specify every asset owned by the company, both tangible and intangible. 

Interestingly, it excluded cash on hand and all accounts receivable. 

It also required termination of all employees (though not stated, theoretically, the new owner would rehire the employees). 

So, was this structure in going to further the aims of the new and former owners?  Both want to keep employees.  Both want to maximize revenues.  Both wanted to have the company continue to operate as it was to ensure a smooth transition.  Well, with an asset purchase structure:


  • The current company would cease to exist.  All clients would have to sign new contracts with the new company or explicitly assign their existing ones. There would be significant risk of losing clients who might not want to sign with an unknown company.  They trusted the one who serviced them for years.
  • The employees would have to be rehired and work for a new company they didn't know.
  • With all the cash and receivables going back to the original owner, the company would need an immediate infusion of cash to continue operating. 
I proposed a Share Purchase.  The new owner would simply purchase the shares of the original owner.  As sole shareholder, he would elect a new Board which would appoint him CEO of his now wholly-owned subsidiary.  The employees continue working for the same company, the clients continue to be serviced by the same company and team, the business continues to operate as usual during the transition, and ultimately, the company that employees and clients knew and loved, would have more resources than it did before.

The attorney balked.  The big issue was liability.  In an asset purchase, you don't take on the liabilities of the company, only its assets.  This reduces risk for the buyer.   With a share purchase, you buy the whole company including its liabilities.

We sat down with the acquirer and discussed the implications of the Asset Purchase and how it would adversely impact 2015 revenues and would require upfront cash to fund operations.  We also suggested that to protect him from 'unforeseen' liabilities, the original owner would indemnify him. 

Although his attorney pushed back, he argued that the risk to the success of the business with an Asset Purchase outweighed the potential liabilities of a Share Purchase, particularly with the protection provided by indemnification.  The attorney ultimately agreed and drafted a much simpler contract.

Don't get me wrong.  Asset Purchases can be useful and are often necessary.  If you have a company that is failing, it's best to protect yourself from liabilities with an Asset Purchase.  If you're cherry-picking technologies or products or people, an Asset Purchase may make sense.  If you don't want to transition clients, customers, and/or employees, an Asset Purchase works. 

But if you want a very smooth transition of clients, customers, products, etc., consider a Share Purchase.  Acquisitions are by their nature disruptive.  You should do anything you can to avoid making them more complicated than they need to be.   If it makes sense to operate the subsidiary you've just acquired in the long term, great.  Keep things as they are.  If not, fold it in slowly.  Transition.

In my experience, Transition is the key to success of any acquisition.  In many cases, Share Purchase makes this much easier.

Selling/Purchasing a #startup - Assets or Shares?
Negotiating Agreements
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Should You Join a #Startup Factory?

12/3/2014

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I've written posts on Venture Capitalists and Angel Investors, but what about Startup Factories?  

Although it's a bit simplistic, generally, Venture Capitalists are investing to make as much money as soon as possible by encouraging businesses to 'swing for the fences'.  They know that most will not succeed.  

Most Angels, on the other hand, are looking to help give a leg up to budding entrepreneurs, hoping to repay their good fortune from previous successes.  

A Startup Factory looks a lot like a mix of the two.  Unlike an Incubator which helps entrepreneurs get started by providing office space and some assistance, a Startup Factory usually owns a large percentage (often a majority, sometimes 100%) of the companies it's 'nurturing'.  Startup Factories are usually founded by successful entrepreneurs who hope to replicate their success by betting on multiple companies at the same time in a 'collaborative' environment.   

For those of you who aren't familiar with Startup Factories, I highly recommend The Next Big Thing You Missed: Startup Factories by Issie Lapowsky of Wired. 

Startup Factories have been around for a while.   They seem to come in two Types:

  1. Those where ideas come from the Factory itself and are then grown into companies within the Factory (which may spin out once they're self-sufficient) taking advantage of the shared infrastructure offered by the Factory .
  2. Those that are more like  incubators, bringing entrepreneurs under the umbrella of the factory to share resources (including design, engineering, marketing). 
One of the big advantages of both types is that they leverage facilities, design and engineering resources, management, marketing, etc.  These are usually provided to the fledgling companies by the Factory.  Often, the Factory will also provide seed funding and assist with raising later rounds. 

Startup Factories sound like they could be the perfect mix of Venture Capital, Angels, and Incubators. 

So, should you join a Startup Factory?  It certainly seems like you can reduce your risk of failure by getting help from those who've been there before.  With the Factory's resources, you can leverage your own to focus on bringing your idea to  fruition much sooner.  A  percentage of your company might be  a small price to pay.  And if you're someone who has an idea but is without a way to build it, or you're an engineer with the prototype but lacking the skills to put together a company and get your product to market, a Startup Factory is worth considering.  But even in those situations, you should be careful.

If you join a Type 1 Startup Factory, you'll become part of their team.  You may be an idea generator, a developer, a manager, a marketer, but the bottom line is that you'll be an employee.  You need to look at the Startup Factory as the 'startup' that it is.  You'll likely get a great salary and benefits and some stock options - maybe also some options in the companies within the factory.  But your return on those options will obviously depend on success of the companies and of the Factory as a whole. 

If you join a Type 2 startup, be prepared to give up 50% of your ownership in exchange for seed funding and the help that the Factory will provide.  If your idea and company takes off, you'll likely do quite well. 

Unfortunately, the fact is, that aside from a few exceptions, Startup Factories don't have a great track record.  In the Type 1 Factories, you often have a successful entrepreneur who is looking for the next great idea or trying out his own ideas in a venue that lets him hedge his bets.  That isn't necessarily a formula for success.  Experience shows that a startup requires 100% dedicated focus to have any chance of succeeding. 

Also, for both Types of Startup Factories, if one of the startup companies begins to succeed, often most of the Factory's resources will move in that direction.  In several Factories, the founders have actually left the Factory to focus on the one opportunity.  If it was your company, you might be in luck.  If not, you and your company may suddenly have the rug pulled out from under you.

And even if it is your startup that gets the attention,  you may find yourself displaced as the Factory's founder(s) steps in.  

I'm sure that many of the current Startup Factories will see more successes than they have so far.  It certainly seems like combining Venture Capital, Angel and Incubator approaches should work.  However, I'm afraid that with Startup Factories, many of the strengths of each may be lost.   Although I'm not a fan of early stage Venture Capital, that swing for the fences approach is a strong motivator and sometimes leads to success.  With Angels and Incubators, as an entrepreneur, you have the control you need to run your company.  With everything on the line, you will work hard to succeed.   

Maybe the Startup Factory provides too much of a safety net. 

If you have a good idea and are motivated to build a company around it, I  suspect there are better ways to get your startup off the ground.

#Startup - Go Big or Go Home?
Selling/Purchasing a #startup - Assets or Shares?
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#Startup - Go Big or Go Home?

11/3/2014

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Most of you who have read my previous posts on building startups know that I'm a big fan of avoiding outside funding, and especially venture capital funding for as long as possible.  In particular, I've said that if your goal is to build a sustainable business with measureable value, you should bootstrap your startup.  On the other hand, I've also said that if your goal is to get rich quick, you might consider building a prototype, getting funding, and swinging for the fences. 

I've suggested that with this latter strategy, you have a high chance of failure, but that if you win, you win big.  It appears I was wrong.  Worse, I suggested that you can pursue this strategy as long as you're prepared to dust yourself off and try again and again until you succeed.  I may have been wrong there too.

I recently ran across an article in Business Insider called Why it's Better to sell a Startup for $20 Million instead of $200 Million.  The article gives several excellent examples of multi-hundred million dollar company sales that netted their VC-backed founders less than sales of much smaller companies with non-VC-backed founders.  It also gives some examples of how VC liquidation preferences (what I have previously called 'the double dips'), have resulted in sales of businesses where the investors received good returns, but the  founders received little or nothing.  And, it made the claim that most entrepreneurs who fail, don't succeed in their next attempts. 

That last statement shocked me.  Like every other entrepreneur I know, we believe that we learn from our failures and do better the next time.  I decided to do some more research.  If what this article says is true, then the chances of finding success in going the VC route is even lower than I thought.

Not surprisingly, my research confirmed what most of us have heard: 50% of all businesses fail within the first year and 80+% fail within the first five years.  The scarier number is that whether from discouragement, loss of credibility, lack of financial wherewithal, or other reasons, a HUGE 71% of entrepreneurs who fail never try to start another business.  And worse, of those that do try again, the failure rates are identical.  That means that contrary to popular myth, failure does not lead to success for most of us.    Yes, a small percentage of us  (4-5%)  learn enough from a failure to do better the second time, but for most of us, we'd be better off seeking full time employment, not attempting to create another startup.

Given these discouraging numbers, I wondered if VC backed numbers were any better.  I found  Harvard and European Union studies of several thousand venture backed businesses and discovered that in both studies, the VC numbers for people who failed and tried again were identical to those above.  On the other hand, those who succeed in a VC-backed company had a 50% greater chance of succeeding again. 

Of course, according to the Small Business Administration, nearly 600,000  businesses are started annually and of these, only 300 or so are VC-backed at startup.  Even if you want to join the rarified group of VC-backed entrepreneurs that have a chance at repeat successes, you're going to need to bootstrap your first business and seek VC-monies at a later stage. 

Bottom line: if you have a 71% chance that this startup is going to be your one and only, and you're likely to make more money in less time if you bootstrap a sustainable business, why bother with VC money if you can avoid it?  You conceive your business, you take the risk, you work to create a success, so you and your team deserve the rewards, not the VCs.


Selling Your Startup - Mistakes I've Made
Should You Join a #Startup Factory?
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Selling Your #Startup - Mistakes I've Made

8/6/2014

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I've made a lot of mistakes in my life, some personal, some business.  In retrospect, it's hard to say which were the worst.  As the founder of multiple startups, in reality, the personal and the business mix.  Your startup will definitely impact your personal life, usually adversely.

But since this is part of a series of blogs about selling your #startup, I'll focus on specific issues I have faced in sales of my startups.  If you want the whole story (though fictionalized quite a bit), check out my first novel, The Silicon Lathe.  Everything in there is true and did happen but I've changed names, places, companies, and even some people. 

Startup #1 - I loved my first startup.  My team and I developed technology that was going to change the world.  DARPA had deployed it world-wide, NTT had licensed it from us and was rolling it out in their backbone networks, we were one of the hottest companies in the Valley.  We had religion.  We truly believed.  

 When the world's biggest network product company came after us competitively, undermining us in their customers, it became clear we'd have to sell to a larger player who could compete with them.  A bidding war resulted between two potential acquirers - the fastest growing software company in the world at the time, and a much bigger player.  The first offered us integration of our product into theirs which would immediately go out into millions of user's systems.  The second had a detailed 5-year business plan for our products and people.  They were focused on large enterprise deployments.  The first company offered an all-stock deal.  The second offered an all-cash deal.   Because of circumstances I won't go into here, our VCs made the decision and they went with the first company.  So what went wrong with this deal?

1) The VCs laid out the deal including the effect of the  liquidation preferences in our funding agreement.  I had failed to understand this 'double dip' where the VCs got their monies out, then shared in the split of the rest according to their ownership, applied to a sale of the company.  I thought it was just for closing up the company - not for a very profitable exit through acquistion.

2) It was an all-stock deal.  I would be restricted from trading for 6 months.  Some friends suggested I purchase 'protective PUTS' in case the stock went south, but I didn't do that.  Worse, I trusted a close friend stock broker/investment advisor who advised me not to sell the stock on the way down - this was a solid public company with a perfect track record.  Unfortunately, after almost tripling when the deal was announced, once the CEO decided to kill off our technology (after an interesting meeting with that threatening competitor), the stock plummeted to 1/200th of its value before I could trade.  I did make some money on the 'dead cat bounce' but it was a tiny fraction of what was expected.

3) Did I mention that they killed off our technology?  Even with multi-million dollar orders in hand, the CEO decided to kill it.  Not only did it cause their stock to fall, our technology was put on the shelf.  I offered to buy the company back, but no dice.  Our change-the-world technology would never again see the light of day. 

Startup #2 - Once our iron-clad employment agreements were up, we decided to do another startup.  We decided to be mercenary about it.  We were going to build a new company and sell it in three years.  It would be about positioning for exit, not about changing the world.  We build a core networking component that quickly became a critical part of VPNs, network optimization software, network inspection software, antivirus software and more.  One of our customers was a Telco.  When their largest competitor approached us, we leaked that and immediately got an offer.  Again, it was an all-stock deal, but this was a large Telco.  And, thinking we'd learned from past mistakes, the purchase agreement promised that we could sell 1/3 of the shares immediately - as soon as the company could register the shares.  Sounded perfect.  So what went wrong this time?

1) Shortly after the sale closed the SEC discovered irregularities in certain executive stock options.  They froze the issuance of new stock.  We were not allowed to trade because they couldn't register the shares.  The investigation was long.  During that period, the Telco industry crashed.  The stock plummeted from nearly $180/share to 20 cents a share.   I still hold the stock today as a reminder. 

2) With Startup #1, the VCs hired a well-known firm to negotiate the purchase agreement.  For Startup #2, we went cheap and hired a local attorney who had limited experience in acquisitions.  The possibility that the stock might not be registered was not covered in the contract.  Later, we ran into numerous other problems with employment agreements, escrow accounts, milestones,  compensation, bonuses - all things that a more experienced attorney would have handled properly. 

Startup #3 - The shareholders of the Telco filed suits which were eventually settled a few years later.  We took advantage of this by convincing the Telco to give us the company back along with technology ownership (they got licenses).  We weren't completely mercenary, but we did keep our eye on a future acquisition as we built some very cool products.  Distributors signed up and we started growing fast.  Several companies approached us but we were unable to negotiate the price we wanted.  It was 2008 and things were about to crash.  Fortunately, a relatively larger networking player decided that they wanted to integrate our technology into their products.  A price was agreed, the term sheet signed, they promised a close in 30 to 45 days and it all looked great.   But...

1) The company asked us not to take on major new customers or distributors as our products needed to be customized for each OEM sale.  They didn't want our engineers tied up once the deal closed.  Made sense, but then they had a reorg and our purchase was put on hold.  Back on track two months later, they had another reorg.  This time, they changed the people we were going to work for.  At the end of 6 months, the deal closed, but we almost died in the meantime.  We had suspended our new deals because of the pending sale.  If it had dragged out a month or two longer, they would have picked  us up out of bankruptcy for pennies. 

2) Once in the company, we had milestones to meet to get payments.  This turned into a battle as the milestones involved integrating our products into theirs.  This should have been straight forward, but we had failed to determine in advance that the target products were fragile.  This cost us time, money, and created tremendous pressure on the entire team to do the near-impossible in record time. 

3) This isn't a negative, but is worth mentioning.  We finally learned about all-stock deals so for this one, we did 80% cash.  Of course the stock price tripled.  Still, we can't complain with the financial side other than the issues in (2) with the milestones.

So bottom line, what have I learned?

Before the Deal:
0) Be careful negotiating  the terms with your investors.  Try to avoid a double dip in the case of a positive acquisition.

In negotiating the Deal:
1) No all-stock deals!
2) If you want your technology to survive, get it in writing.
3) Get the best lawyer possible.
4) Make sure you have a break up fee in the term sheet. 
5) Do your own due diligence diligently - don't assume everything is okay with the larger player.  Due diligence goes both ways!

Fortunately, I have used these lessons to help several friends sell their companies.  Almost all have worked out very well.  But be careful and don't assume that just because your acquirer is big and seems to know what they're doing, that you'll be taken care of.  You shepherded your company and your team to the point that someone wants to buy you.  Don't let up on watching out for possible trouble just because there's a lot of money on the table.

As we used to tell novice pilots in hang gliding, when you're landing, fly it all the way to the ground!


Selling Your Startup - Who, How, How Much?
#Startup - Go Big or Go Home?
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Selling Your #startup - Who, How, How much?

7/29/2014

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Okay, for one of the reasons in my last post Selling Your #startup, you want to move ahead with selling your company.  Be sure that you're clear on why you want to sell and what you want to get out of the sale.  Keep those reasons and goals in mind as the sale progresses and try not to lose sight of them. 

As a first step, you should have discussed this with your board and investors and they should be in agreement that a sale of the company is worth looking at and that your reasoning is sound.  Ideally, you should have a board resolution authorizing you to look for a buyer for a designated period of time.   

In my experience, finding a buyer and closing a deal can be as short as thirty days or take more than a year. On average, once you have an interested buyer, you're probably looking at three months to close.   

Before you look at finding a buyer, you need to ask yourself if you want your search for an acquirer to be public knowledge.  My advice is to keep it confidential at this early stage.  If your competitors get wind of the potential sale of your company, they'll use that against you in sales situations.  Employees may decide to jump ship.  And even in non-competitive situations, your customers and prospects will often take a second look at buying your products or services if a change is possible.   Plus, ultimately, after looking at the landscape, you may decide not to sell at this time, so why tell the world? 

On the other hand, if none of these are a concern, going public with your sale will get you the most exposure and may bring in potential buyers you've never even thought of.  I know of a few people who've even had success finding a buyer by offering their businesses on Craig's List. 

WHO?
So how do you find the perfect buyer? 

You have a Board of Directors, probably have some additional advisors, and may have Angel investors.  These people know you; they know your company; they know your industry; and most likely, they know someone who might be interested in acquiring your startup.  Use them.  Listen to their advice.  They may tell you that this is the wrong time.  They will likely give you suggestions on positioning.  They will make introductions.  These types of acquisitions, initiated by a 'third party' are usually the easiest and cleanest. 

At the same time, except for specific industry segments, I would avoid brokers.  The 'third party' approach works best if the third party is close to your business.   Neither I, nor any of the people I've known in the Valley who've sold their businesses benefited from a broker.  In general, brokers don't understand your business.  They're in it for the commission and rarely look beyond that bottom line.  If you expect to see your company's technologies or products thrive, to find a great landing place for your team, brokers are not going to help you. 

So, where else should you look?

Business Partners.  These are your best candidates.  Again, like your Board and advisors, they know you; they know your business; they know your products and technologies.  They have partnered with you for a reason: you fulfill a need they can't meet themselves.  Whether you've licensed technology to them or they distribute your products as part of a solution sell, they might well be interested in exclusive ownership of your offering.  You should also make a list of Potential Business Partners if you don't already have one.  Whoever handles your business development should be able to open doors to get you in. 

Two of my companies were sold to Business Partners - companies who either licensed our technologies or distributed our products. 

Customers.  It may sound strange, but just like Business Partners, your customers know you and have confidence in your products/technologies.  I sold one of my companies to a customer who found out that their largest competitor was about to sign a major deal with us (I've always wondered how they found out;-)). 

They wanted to preserve the uniqueness and competitive advantages of their offerings which used our products.

Competitors.  As mentioned above, this one can be a bit risky.  Just having your competitor know your business is for sale can hurt you.  However, you can often avoid that by involving a third party (advisor or Board member), or by being politic.  In one situation, a friend was looking to sell his company.  At an industry conference, I just 'happened' to make an observation to his largest competitor that it was too bad they didn't work together.  My friend's product was complementary and had features that theirs didn't.  They could certainly reach a larger market and compete with one of the Big Guys if they combined forces instead of battling each other.  This ended up being one of the quickest sales I've seen.  Another friend made a similar comment directly to his counterpart from a competitor's company.  Again, this resulted in another successful sale.  Note that in both cases, it was never stated that the company was 'For Sale'.

To pitch to your potential buyers, you'll need a basic company presentation that includes your financials and projections, but you need to tailor it for each prospective buyer.  Do your homework.  Know their business and be clear on how you will fit together and how you will contribute to their market, their customer base, and ultimately, their bottom line. 

How?
The logistics of the sale are not terribly complex and are usually similar across industries.  It does happen that a large company might just make a offer, but more often your potential buyer will ask you how much you want.  As in many negotiations, the first one to name a price usually loses.  I could probably do an entire blog on how the acquisition process works and on negotiations, but I'll just summarize here and try to give a few pointers on price in the next section. 

Once you've agreed on price and basic terms, your acquirer will prepare a term sheet.  These can be very complex, but usually are more of an outline of the core terms.  With luck, the term sheet will reflect the agreement from the negotiations with your counterpart. 

One thing I will warn you about in advance is that if you're being acquired by a much larger company, there's a good chance that they will restrict your business until the sale is closed.  In the best case, they will adversely impact your business inadvertently as you and your staff work through due diligence.  You need to plan and account for these impacts in the term  sheet and look at 'walk away' penalties that will make you whole.  Get advice on this!

Once you have a final term sheet, you'll need to present the offer to the Board and Shareholders. Assuming everyone is happy with the terms, you accept.  Then the fun begins. 

You will need a good lawyer.  I'll tell you some horror stories in my next post about mistakes I've made and some friends have made in the course of acquisitions.   Most of these could have been avoided with a GOOD, EXPERIENCED (and often expensive) lawyer.  This is not the time to pinch pennies on legal fees.

As the purchase agreement is drawn up and negotiated, due diligence will begin.  This is a period where the acquirer will go through your entire business - technologies, products, customers, finances, contracts, lawsuits - everything.  If you have skeletons in your closet, bring them out up front.   I've seen too many great deals fall through because of 'minor' problems that weren't acknowledged at the outset.  Most experienced acquirers expect problems, but they get very unhappy if they think you've tried to hide something from them.

If your acquirer is a publically-held corporation they may need to get SEC or other government approval for the acquisition.  This may take some time.  But in general, as I mentioned before, if things go smoothly, you can usually close in about 90 days.  Note that exposure of negotiations with a publically-held company will immediately terminate any deal.  All negotiations and terms have to be kept confidential.  This will mean that even among family and friends (and employees), you disclose only on a 'need to know' basis.

How Much?
Ah yes, price.  How much is your business worth? 

It's worth whatever you can get for it. 

While that may seem facetious, it's true.  If you have a one person company with zero sales, but incorporation of your technology will increase the bottom line of your acquirer by $100M and their price to earnings ration is 20 to 1, you can see that your value is as much as 2 BILLION dollars!  Of course you have to prove that you can add that much to their bottom line... 

But as a rule of thumb, if you have a product business, you will need to justify any price that's more than 3 times sales or 10 times earnings.  For a service business, you will have to justify any price that's more than 1 times sales or 3 times earnings.  And by 'justify' I mean demonstrating why your company is worth more than these numbers.  It could be what you add to the bottom line (as above), it could be offering a strategic advantage against a competitor, it could be that there's someone else out there willing to pay more -  If you can do it, finding multiple bidders puts you in a very strong negotiating position, so until you have a term sheet, get as many people interested in you as possible.  With luck there may be a bidding war.   

Of course, even then, mistakes can be made as you'll read in my next post.

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Selling Your #Startup

7/24/2014

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I thought it might be useful to discuss selling your #startup.  You can do this as an exit strategy, or to use a larger company to leverage and promote your technologies, services, and/or products. 

I'm planning to write this in three parts:
  1. Why you might want to sell your startup instead of doing an IPO.
  2. How to sell your startup - who to target, how to position yourself and how much your company might be worth.
  3. Mistakes I've made and lessons I've learned in selling 3 startups. 
While an IPO could make you rich beyond reason, the chances of achieving this level of success are small.  Of course, if that's what you want, swing for the fences and be prepared to start over if you fail.   As I've described in previous blog posts, cutthroat competition, bad marketing timing, lack of support from VCs/customers, public perception, and unethical people can turn what looks like a sure winner into a certain failure.  If getting a startup to an IPO were easy, there would be a lot more repeats by serial entrepreneurs.  Do the research and you'll find that a surprisingly small number of entrepreneurs who have done a successful IPO do it again. 

On the other hand, I know quite a few entrepreneurs (me included) who have built and sold multiple startups and achieved modest (but certainly not insignificant) success with each.  This kind of repeat success comes from entrepreneurs who build sustainable businesses: businesses that meet a need and generate consistent revenue; businesses where reasonable risks are taken but where you're not betting the company on the next big thing.  

So why sell your startup instead of going for an IPO?

You'll have more control over the process.  With an IPO, it will be the VCs and investment bankers who decide how, when, and how much you'll make in the IPO.  Even the process of getting to the point where your company can go public will be controlled by your investors.  They will make management and organizational decisions to present the best face to the public investment market.  Your company culture will likely suffer.

Selling is easier than an IPO.
 The IPO process is complex and takes a lot of time and planning.  In addition to all the SEC filings and regulations, you'll be dealing with investment bankers, road shows, and  pitches to potential initial purchasers. It's no wonder most companies need a mezzanine round of financing just to fund the IPO.

You will have money in your pocket much sooner.  With an IPO, the investors and investment bankers will have registered shares.  Founders usually don't.  So, you won't be able to touch the monies for a long time.  Beyond the initial section 144 holding period, if you own more than 1% of the company after the IPO, you'll be restricted in how much you can sell and when.   When you sell your startup to a larger company, it's unlikely that you'll own more than 1% of that larger entity so these restrictions don't apply.

Beyond the financial and logistic considerations, there a quite a few strategic advantages which might encourage you to sell your startup:

Leapfrog your competition.
  Got a nasty competitor who badmouths your products, invades your loyal customers, or quite frankly is just getting ahead of you?  Get acquired by a larger company who can run past your competition simply by including your offerings with theirs.

Enter markets that are out of reach.
  If your acquirer has a large marketing and sales force, they can get your products/services out there.  In addition, they may have entries into specific industry segments like government, healthcare, telecom - customers where the sales cycles are long and expensive and often difficult for a startup to penetrate.

Leverage your technologies.
  Have some core technologies with potentially many applications but haven't been able to build and sell all possible products?  A larger company can integrate your technologies into their products and get your innovations into more areas sooner than you could reasonably achieve.

Of course there are challenges with any acquisition.  Your cultures might not match. Your team may not be ready to work with the bureaucracy of a large company.  Processes for development and integration in the larger entity might move too slowly for you.  But then again, the advantages listed above might outweigh these issues. 

We'll discuss how to mitigate the downsides  in my next post: Selling Your #startup - Who, How, How Much?

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Mom and Pop?

7/8/2014

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You love your spouse.  Without a doubt, this is your life-partner.  You share so much.  You have so many common interests and likes that it's almost frightening.  No one understands you better than your spouse.  Your spouse sees your strengths and weaknesses.  Your spouse brings your feet to the ground when you're flying too high and helps pick you up when you fall on your face.  Yes.  Your spouse is the perfect partner.  But should you bring your spouse into your business?

Certainly there are family businesses out there that have been successful.  And for many of the things we buy, it's comforting to think that we're helping out a family, that we're supporting a family with our business. 

If you think you want to build a family business which will last decades or even generations, then by all means create one and bring your spouse and whichever family members want to work with you.  Know that it's a family business and accept the limitations that designation entails. 

But if you're looking at a startup that will at some point need outside funding, especially venture capital funding, or are thinking of going public or selling your business to a larger corporation, you may not want to bring your spouse in.

The first company I joined after leaving IBM was a Mom and Pop shop.  He was a well-respected professor from UC who had done a technology transfer of a system he and his grad-students had developed.  She knew business and finance.  It seemed to be a perfect match.

I joined as VP of Engineering and helped develop new technologies and business for the products.   Our revenues rose and VCs were flocking to us offering a mezzanine round.  Their one condition?  One of the spouses had to leave. 

I've talked about how hard startups are on relationships.  You might think you can mitigate that by having your spouse share your passion and your challenges.  And that might be true, especially in a family business.  But with most marriages ending in divorce, especially with the pressures added in a high-growth, high visibility environment, and with decisions coming from a larger Board of Directors - no longer just the spouses - all the VCs could see was the damage to the company which would result if the spouses had a falling out.  

In another situation, my boss met my then wife at a company function and hired her.  Some of this story is recounted in my new novel, The Shadow of God.   While we worked in different areas of the company, some of the employees felt she was getting special treatment.  Ultimately, when she had to leave the company, she made my life miserable until I left as well.  The company failed soon after as much of my team quit not long after I left. 

More recently, I have a friend who just hired on to a Mom and Pop business.  He was brought in to take over most of the CEO's job.  His thought was that the CEO would retire and he'd end up running the business.  Unfortunately, the CEO and his wife just can't let go.  They keep coming back in and interfering with his plans for expansion.  He doesn't get much support from the other employees because if he takes a hard line, they go back to Mom and Pop to complain.  I think this is probably a dead end for him and a waste of a lot of commitment and effort on his part.

In one last scenario, I have another friend who joined a Mom and Pop business.  She has been responsible for rapid growth in their revenues.  And as in the first startup I joined, the wife handles the business side.  Unfortunately, the wife is struggling  and isn't doing such a great job now that they're growing so fast.  She's making bad decisions which have caused several key people to quit.  And if anyone approaches the CEO, he sends them back to his wife who gets defensive.  While spousal loyalty is great for a relationship, it's not always the best thing for a business. 

I could come up with more examples that I've seen in my career.  I'm trying to think of any company where two spouse founders have seen great success.  I can't come up with any.

So, if you're thinking about bringing your spouse into your startup, do think twice. 

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Venture Capitalists Ruin Another Promising Startup

6/25/2014

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Even if you don't actually see headlines like this, we all know it happens.  Venture Capitalists do kill off promising startups.  If you read my blog Why You Should Avoid Venture Capital, you know that VCs want you to swing for the fences so that you and they might hit a home run.  You also know that at least 9 out of 10 VC-funded startups will not succeed.  3 or 4 will fail outright, and 5 or 6 will limp along (from the VCs perspective), to either be sold off for their technologies, or allowed to die a slow death.  Unfortunately, many promising companies with potentially disruptive technologies never succeed.   And while there are hundreds or even thousands of stories of these failed VC-backed companies, truth be told, it's not always the VCs' fault. 

A few years ago, two technologist friends of mine kicked off their latest startup.  They did everything right.  Since they had done reasonably well with the sale of their previous startup, they bootstrapped their new company until they had a working prototype.  Then, using their reputations as successful repeat-entrepreneurs, they raised their first round of venture funding and were successful in keeping the lion's share of their company.   One of them continued as CEO but they promised their investors that they would hire a new CEO to enable the interim CEO to return to the job he was best at - managing a talented engineering team and generating and challenging new technical ideas.

They hired the best-of-the-best, created an envied company culture, and developed their first product ahead of schedule.  Initial trials of the product showed both demand for the new technology and the fact that it really did work.  Everyone was happy.  The VCs were ecstatic, sure that this was going to be a home run.  The two founders were happy.  Everything was going better than they had hoped.  The employees were happy.  Not only had their insane hours produced a world-changing technology, it looked like this time, they had finally chosen the right startup.  They came out of stealth mode and the trade press went crazy over the promise of this new startup.  The company's name was all over the Valley.  The buzz had begun (see my post Stealth or Buzz - Beware of the Big Guy).  They had done everything right.

Their next step was to raise a BIG Round of venture capital.  They needed to ramp up marketing and sales, open support offices, prepare for large scale production - do everything necessary to prepare for their IPO.  With the buzz and the enthusiasm of the initial investors, they easily raised a huge second round.  It appeared their success was assured.  Of course, they needed to hire that CEO - someone who could help manage the anticipated explosive growth.  Both of my friends knew that they weren't cut out for that work.  They were technologists.  And so, the CEO search began.

The VCs offered several candidates and a few months later, my friends selected a superb candidate.  He was confident that he could lead them all to huge success. 

And then there was a hiccup. 

After the company was closed down, there were some in the press and around the Valley who blamed the hiccup - a flaw in the technology.  Most blamed the VCs - they had closed down this promising company at the first sign of trouble - trouble which in the eyes of the analysts was just a resolvable glitch.  But what really happened?

I'm not sure anyone really knows.  Yes, we can see the events, the rapid rise and the sudden closing of the doors, but even my friends aren't sure how everything fell apart so fast.  Since the company was dissolved, they've agonized over how it could have gone so wrong.   And after months of analysis, they have some ideas, but they're not absolutely sure they understand.  And they do need to understand it.

From what I can gather, it went something like this.  Of course, I wasn't there, so I'm relying on anecdotal evidence and a fair amount of inference.

The initial trials of the product were expanded to large scale deployment and the hiccup occurred.  The product didn't scale as well as expected.  Clearly, this is a major setback, but was it enough to kill the company?  The analysts said no.  There was still a market for the product on a smaller scale that could be lucrative and which would give the team time to resolve their scaling issues.  While this stage of the rocket ship had sputtered a bit, there were more stages ahead, and it wasn't as if the product had blown up. 

Of course, I'm sure the new investors were disappointed, but I'm not sure they were ready to pull out yet. 

On the other hand, I'm sure the technical team felt tremendous pressure to resolve the issue as soon as possible.  Maybe panic set in.  To my understanding, the team went to work on solutions.  Not surprisingly, two distinct proposals emerged and they were radically different.  The team split into two groups, each adamant that their approach was the only one that could save the company.  My friends were on one side, several key players were on the other.  Perhaps discussions got too heated.  Perhaps words were said that couldn't be taken back. 

At the end of the day, a decision was made by the two founders to choose their own approach.  This didn't go over well and ultimately, some of those dissenting key players left the company.  I get the impression that their departures weren't completely voluntary.  I also get the impression that those who remained felt that much of what made the team so great had been broken.  Some had lost trust that they could express their ideas without penalty.  The integrity of a tight team had been breached.

I don't think anyone knows if the chosen technical approach would have worked.  They never really got the chance to find out.  

From what I've been told, the new CEO looked at his now decimated technical team and realized that instead of guiding a successful, rapidly growing startup to an IPO, he would have to reset market expectations, reposition the product and the company for a longer-than-promised success story, and at the same time, figure out how to reclaim the company culture and rebuild a team that could once again be successful.  It wasn't what he'd signed up for.  

He met with the VCs, and again, to my understanding, they looked at the company and saw too many flaws and not enough promise.  The problems in the scaled deployments now had them questioning the viability of the market and this particular approach.  It just looked like too much.

It appears the VCs realized that they could walk away with minimal losses to their investment if they did it quickly and cleanly.  They took back their latest (BIG) round and closed the company.    There were discussions of selling off the technology, of others picking it up, but as is often the case in these situations, the VCs wanted to look for the next home run.

My friends are now each working for different large companies  in the same sector.  The post-mortems continue.  They do need to understand what went wrong.  But knowing them, they will dust themselves off and move on to create another startup, benefiting from the hard lessons they've learned. 

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Build or Buy?

4/23/2014

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Over the course of my career, I've been involved in both building companies from scratch and in purchasing companies.  While most entrepreneurs in high tech go the first route (building companies from scratch), in other industries, it is more common to purchase an existing business.  Each approach is fraught with its own perils.

One big advantage of starting from scratch is that you can bootstrap the company.  You and other founders can start up with very little overhead, growing incrementally as business develops. 

While purchasing a business costs money up front and comes with overhead, an existing business will already have customers and income.  If the business was well-run, it should have financial systems in place and a team that drives administration, sales, product/services and support.  The day you close the purchase, you can hit the ground running.  You can probably even take home a decent paycheck - enough to support your family without putting your whole life at risk. 

Much like purchasing a home, the business will have intrinsic value which will likely appreciate over time.  Thus, while you may need to come up with money to buy the business, if you've chosen well, you should be able to sell the business at a profit (should you ever need/desire to do so). 

On the other hand, there may be issues with the business itself, its products/services, and/or the team.  Sometimes these things are hard to see from the outside before a purchase.

Worse, unless the business is exactly what you want it to be, it may be too entrenched in its own product/service market to make the changes you want to make, be they growth or new products/services. 

But starting a business is hard.  Ask anyone who has done it. 

You will put in the hours.  You will see less of your family and friends.  You will have less time for non-work activities and interests.  You will put yourself and your family at financial risk.

Add to this the risks in getting started, the time to develop your product/service and get it to market, and the challenge of putting systems and team in place to make the business run smoothly, and you can understand why so many startups fail and why so many founders get divorced. 

If you purchase a successful business, you probably don't have to worry about a possible short-term failure and with less stress on the family, perhaps the divorce can be avoided too. 

You might argue that you'd miss the thrill of doing it all yourself.  Maybe it's true.  However, I'd counter that any business is a challenge and starting with a stable platform may allow you to more aggressively focus on what you want to do rather than having to deal with the necessary, time consuming tasks that are part of any business, but which will distract you from what you really want to accomplish in a startup. 

Okay.  Buying a business is not for everyone.  But for those who can find a well-run business in their area of interest which can provide a springboard for the next great idea, it's certainly worth considering.  And if you find the right seller, e.g. someone looking at retirement, you might be surprised by how easy it is to finance the purchase.

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Meetings: the best way to avoid work

4/15/2014

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Everyone knows that meetings are the best way to avoid work.  In a larger company, meetings can consume most of your day leaving very little time for 'productive' work.  For those who are retired on the job, there's no better way to spend your day.  For others who want to get some 'real' work done, meetings are now recognized as a complete waste of time and are to be avoided at all cost. 

One of my former team members, frustrated after spending an entire work day in time-wasting meetings, asked if my next startup blog could address the issue of meetings, so here goes.  

First, just to remind everyone, a good meeting, if such a thing exists, has the following characteristics:
  1. There is a clear agenda, stated in the invitation.
  2. There is a fixed end time.
  3. All who attend know why they are there and are prepared to do their parts.
  4. The organizer or his/her designee must manage the meeting.
I think (1) and (2) are pretty self-explanatory.   Assuming the purpose of the meeting and the agenda is clear, (3) should be obvious as well, though I believe it is the invitees' responsibility to ensure they know why they're going before they show up.   (4) is a bit harder and is the reason most meetings are a waste of time. 

In my experience, in the better meetings, the organizer:
  1. Makes sure a meeting is necessary before calling one (Most important!).
  2. Takes the time to envision how the meeting will be run, creating an associated agenda.
  3. Identifies the participants and EXACTLY what is expected of each.  This should be communicated to everyone attending.   
  4. Manages discussion and prevents people from getting into rat holes by limiting time and identifying topics which need follow up outside this particular meeting. 
  5. Assigns action items and follow ups with deadlines for each participant. 
Okay, so that will help a meeting if you have to have one.  The real question is whether the meeting needs to be held in the first place. 

Very often, rather than holding a formal meeting, a manager can identify the two or three people who need to resolve an issue and suggest that they get together to do so.  A surprising number of issues can be resolved between team members - one-on-one - if the manager follows up to ensure the issue is being worked on, setting a deadline for a solution or at least a proposal for a solution. 

Whenever possible,  team members should collaborate instead of attending formal meetings. 

When group or company issues need to be presented, managers need to decide the best way to communicate them.  Often an email or video will do the job if the issues aren't too sensitive. 

If a personal touch is required,  managers could meet one-on-one or discuss news with the team by walking around.  In other words, put more management time into dissemination of information and demand less consumption of valuable productive time scheduling formal meetings.

In today's 24x7 connected world with flexible schedules, we and our team members may believe that email communication is sufficient.  However, all too often people lose sight of what others are doing.  If they're working hard, they many not realize that others are as well.  If they have problems, they may not seek help from others who may be able to provide a different  perspective.  Often, just explaining the problem to someone else, will lead  you to the solution.  

People still  need to work with each other in person.  In other words, they need  face-to-face meetings.  I don't want to call them meetings because in reality the best ideas arise with informal  in-person discussions across cubicle walls or on whiteboards (whiteboards should be on every cubicle wall and if possible on every other wall) - not formal meetings.  Still, I believe that there should be some required in-office days and/or overlapped working schedules to facilitate this personal interaction. 

So when should meetings be held?  As rarely as possible. 

One theme I've tried to emphasize in these posts:  As managers, it's our job to find the best people, set and communicate the direction, and wherever possible, stay the hell out of the way so they can be productive.  Too often, meetings don't encourage productivity. 

Lastly, as much as I push back against most meetings, I do believe that each manager should hold a weekly team meeting, ideally with everyone present and food on the table (literally).  In the worst case team members can teleconference or videoconference in.  Again, the agenda is important.  In my weekly team meetings, we do a person-by-person status report - each person describes what they're working on and how it's going.   These meetings have demonstrated the following benefits:
  • Each person sees what the others are doing.
  • If someone has encountered a problem, often another team member can offer insight.
  • If someone is overloaded, others who aren't as buried can offer help. 
As described above, the meeting needs to be managed.  Time limits are enforced and action items noted - often requiring two or three people to collaborate on an issue.  Food makes a difference encouraging people to talk openly.  The meeting ends on time and everyone knows that the following week there will be one formal meeting.  They'll get a free meal,  and the meeting  won't be an interminable one.  
 

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How to Ruin a Bootstrapped Startup

4/9/2014

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One of the guys I surf with told me a harrowing story today.  He's suddenly facing major financial problems.  He's been working for a company that supplies high-end construction components.  He does sales, helps with design, and supervises installations.  His largest customer is a major contractor in the Silicon Valley. 

Over the past few years, this customer has given him more and more work and started generating a nice income for him.  He focused on this customer because they were the fastest way to success.  He and his wife are in escrow on a house and life looked good.  The customer even suggested he start his own company - they would go with him. 

Then disaster struck.  One of the components failed.  It was the manufacturer's fault, but the customer needed a scapegoat and terminated all contracts with him and his company.  He lost 80% of his income because of something that wasn't his fault.  Fortunately, he still has a job, his wife is employed, and he can hopefully start rebuilding a more balanced client base. 

Since he was looking at starting his own company, I told him my own horror story of relying too much on one customer, emphasizing that this is an important lesson to be learned by anyone forming a startup.  I call it the one-customer syndrome.  As tempting as it is to all of us, it must be avoided.

When I formed Syzygy Communications, my first startup, I decided to bootstrap it.  I began by doing strategic-level consulting for a number of large networking companies and performing technology evaluations for Venture Capital firms.  It was lucrative, fun, and offered me visibility into potential product/service opportunities. 

One of my customers was IBM.  I had completed an architecture project for them and the manager of the project asked me if I could build the product for them.  I put together a team of contractors and we went to work.  That project led to another, then another.   Within a year, I had 25 people working on IBM projects in different divisions across the country. 

With the rapid growth of Syzygy and reliable revenue pouring in, I converted most of the contractors into employees, promising stable income, great benefits, vacations, the rewards of working with a team, and all the things that independent contractors have a hard time getting on their own. 

I expanded our office space and staff, bought the best equipment, software, and tools for my team, and put forth the image of a successful company that we deserved.  We got a receivables line of credit from a local bank. 

The bank had a policy that if a single customer represented more than 50% of the total receivables, they would limit their line with respect to that customer.  I ultimately convinced them that each IBM division was a separate entity and each division should be treated as a separate customer, so we didn't have a single customer that represented 50% of our business. 

I honestly saw the divisions as separate customers.  I had separate contracts with completely different terms and was paid from different places. Knowing the size of IBM and the independence of the divisions, I felt safe.  If one division had problems, others would be fine.  But in a reality I refused to see,  IBM represented nearly 80% of our business. 

As you can probably guess, in the midst of a minor recession, IBM had a reorganization.  Corporate dictated that all outside contractors had to go.  Within a few months, we had zero business from IBM. 

We scrambled to replace the projects with work from new customers, but our dedication or perhaps addiction to IBM had enabled us to ignore other opportunities.  We had to start almost from scratch.  And closing new sales takes time. 

Of course at that point, we had the overhead associated with nice offices and thirty employees.  We drew on our line of credit, hoping to bridge to our new contracts.  It looked like we were almost there.  Unfortunately, because of this same minor recession, our bank was acquired by a foreign bank who decided to get out of what they considered the risky high tech industry.  They called our line - demanded immediate repayment.    Syzygy was in trouble.

For me personally, this was a complete disaster.  My integrity was on the line.  Most of my team had given up their own businesses because they had faith in me and in the future of Syzygy.  My team was my family.  And now, the situation dictated that I had to layoff the majority of them.  It was difficult for them and humiliating for me, but I learned a lesson. 

We reduced the size of the company to ten people and started rebuilding.  We never again allowed ourselves to become dependent on one customer for our survival. 

Ultimately, we rehired most of the people we'd laid off.  Syzygy became one of Red Herring's top ten companies to watch, as we developed a world-changing technology that should have made us rich.  But that's another story (which is chronicled in The Silicon Lathe). 

Bottom line?  Bootstrapping a company is hard.  It's easiest if you have customers who can pay your way.  But the one-customer syndrome can be fatal.  I gave an example of financial dependence.  But even if you can avoid financial dependence, that one customer can demand too many of your resources.  What seems to be focus on this customer's needs can prevent you from building the best product/service.  Tunnel vision may cause you to miss the market altogether because your view is so narrow. 

So, for multiple reasons, avoid the one-customer syndrome at all cost.

Money and Motivation
Next Startup Post
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Money and Motivation

4/8/2014

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Years ago, I was surprised when a group of sales people I was working with made a  bet on who would earn the most money for the year.  The losers had to chip  in to buy the winner a Porsche.  

Countless times since, I've  heard colleagues talk about leaving their jobs because they could make more money elsewhere.  And as I mentioned in Eliminating Performance Reviews, even some of the best companies tie money to performance and vice versa.   

Is money really the big motivator?  If we pay our team members more, will we see a corresponding increase in productivity and creativity?   

In my post Managing the Best of the Best, I discussed my philosophy in managing a startup team.  In that and subsequent posts, you can probably see that I'm really focused on motivating a team.  For me, the team is the company, and keeping that team motivated is the most important part of my job as a CEO and for all managers in the company. 

If money were the answer, I would have done my best to make sure my team members were paid more than they could receive anywhere else.  Of course at one point, I was competing for engineers and Cisco had over 5000 reqs out.  There's no way I could compete with the compensation packages that some of the industry giants offered.  I certainly hoped money wasn't the primary motivator for engineers.  If it was, my startup was doomed.

So how can a startup compete? 

To be successful, we need to know what it is that motivates our team members.  At first glance, it may appear that people are motivated primarily by money, or for those who join a startup, by the promise of future money.   To some degree this is true.   Everyone needs to make a fair wage to work productively.  I have argued that eliminating things that interfere with a person's ability to do their job, whether money issues, healthcare expenses, or inflexible schedules, will certainly improve productivity and build team members' loyalty to the company.  But if another company can offer similar things, how do we motivate our team members to stay with us and do their best work? 

Although the research has been around for years, most organizations and managers fail to realize that promising rewards or compensation for creative tasks actually decreases creativity.  It appears that having a dangling carrot causes people to focus on how to get to the carrot, not on doing the best job possible. 

So ultimately, once a team member's basic needs are met, compensation will not be the primary motivator.  What is?

It's tempting to say that motivation is different for different people.  But aside from the  salesperson who wants to make the most money possible, if we think about engineers, construction workers, healthcare professionals, CEOs, lawyers, pretty much any profession, it certainly seems like there are common threads that motivate these people to pursue their careers:

Making a difference -   whether it's the engineer creating the next great thing, the nurse helping the sick or injured, the construction worker building something to last, the CEO founding a company, or the lawyer pursing a case, all of us want to make a difference.

Be challenged in their daily work - mundane work is boring and can be the quickest way to lose a team member.  Of course there are always tasks that we don't want to do.  But as long as they're complemented by challenges that make us stretch, we remain interested in our work.

Opportunities for Growth - Most of us do lose interest if our job never changes, if we never learn anything new.  Hand-in-hand with being challenged is that we need to see that we can grow as professionals in whatever we do.  The French have a word that describes this best: épanouir.  There really isn't an English equivalent.  It's kind of a combination of enrich, grow, and blossom.  That's what we all want to do.

Recognition - While there are some of us who can work tirelessly with no one ever noticing, the vast majority of people work better if they know that their efforts are appreciated.  I have a former employee who received a small plaque nearly twenty years ago recognizing his achievements.  It still sits on his desk.  Cash bonuses he received were spent long ago and I doubt he can remember what the bonuses were for or where the money went.  Recognition doesn't have to come in the form of money.

As CEOs and Managers, we can motivate our employees.  If we take care to ensure that their basic needs are met and then focus on keeping them challenged, offering opportunities for professional growth, showing them that they are making a difference and recognizing their efforts, we will help them grow as we ensure the success of our company.  To me, this all comes down to that basic philosophy that IBM championed many years ago: Respect for the Individual.  Respect them and they will give you their best.

As for the salespeople who are only motivated by money?  Well, maybe there's actually more to it for them too.  I suspect that if we look closely, behind all the bling, we'll find that each and everyone of them is motivated by exactly the same things as everyone else.  For them, like the rest of us, money is just the frosting on the cake.


Preserving Startup Culture
How to Ruin a Bootstrapped Startup
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Am I DONE?

4/1/2014

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It's April Fools Day.  My wife might consider this a joke blog posting. 

A few weeks ago I bumped into a former associate on Facebook and LinkedIn.  He's a technologist and serial entrepreneur who has had some significant successes, but whose latest company, even after raising two solid rounds of venture funding, didn't make it.  I read the press when it happened and heard a lot of speculation about VC interference, competitors using unethical tactics, pushing a product to market too fast, quality issues, and improperly-set customer expectations.  Most of the industry analysts at the time thought the company could survive or even thrive, but that the VCs had pulled out too fast.  All or some may be true, but knowing my former associate and his technological prowess, I suspect management of VC expectations may have been at least a part of the problem.  I'll get the full story when we meet for lunch in a week or so. 

Once we'd reconnected on the social networks and set up our catch up meeting (he's out of the country on a well-deserved vacation), he asked me a very pointed question:  Am I DONE?

I suspect he's nearing the same place I was when I decided to pursue writing for a while.  While it may look glamorous from the outside, the Silicon Valley can be a cutthroat place.  The best technologies don't always win; the hardest working don't always get rewarded; and you can do everything right and still end up down and out - or at the very least, viscerally discouraged. 

When I stepped out, most of my former team as well as executive level friends and other entrepreneurs predicted I wouldn't last six months.  My dream of writing, staying in great shape, and pursuing the sports I love wouldn't stand up to the excitement of developing new technologies and getting them to market. 

To some degree, they were right.  I do miss the technology and my team.  I stay current on what's going on, but I rarely design a new system or see it solve a customer problem.  Managing my team, doing my best to encourage their professional growth, and seeing them accomplish things together that would have been impossible alone, inspired me.  And, writing is a solitary pursuit.  I spend a lot of time alone.  Still, I don't miss the stress, the long hours, being available 24x7,  or seeing world-changing technologies crushed by the big guys who feel threatened.  But am I really DONE?

Not long ago, I came up with an idea that would take advantage of new systems which collect medical records electronically to predict outcomes of treatments based on history, genetics, environment, etc.  It seemed particularly fortuitous because not long after formulating the idea, while waiting for an EV charging station,  I met the head of strategic partnerships for a major medical manufacturer.  They were interested in predictive outcomes based on analysis of application of their equipment in treating cancers - what an amazing coincidence - it must be fate!  He seemed to think he could raise sufficient funding to build a prototype.  Maybe I wasn't DONE after all. 

I discussed the idea with my wife as well as with a couple members of my former team.  My wife was shocked.  She'd been working hard to get her business to a place where she could exit to join me in retirement and now I was going back into startup mode with all the stress.  And I was going to abandon her? 

Of course my team members were enthusiastic.  I started laying out a business plan.  Then I had a second thought.  Did I really want to do this?  Maybe I could just get it started, build the prototype, line up at least the first major customer, raise some funding, and step out. 

I contacted a VC friend who convinced me that the medical industry was a mess I didn't want to step into.  He urged me to enjoy my 'retirement': pursue my sports write, relax.  Sadly, it didn't take much to talk me out of it.  So maybe I was DONE.  Of course I've since learned that he had just retired when he gave me the advice that he was following himself. 

So, am I DONE?

Well, I am meeting with this former associate.  He's a brilliant guy and a great technologist.  I'm pretty sure he's looking for ideas for his next startup.  On the other hand, maybe he just wants to know what it's like to be DONE.  But ultimately, who knows what will happen when  two technologists who are both former entrepreneurs decide to brainstorm over lunch?

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Preserving Startup Culture

3/27/2014

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A good friend of mine is an HR specialist and is considering going to work for a startup that just received a large round of funding.  The company plans huge growth in the coming months and they'd like to have an HR person help them preserve their startup culture as they grow.  Unfortunately, I don't think this is possible. 

As companies grow, they change.  Any culture that existed at the beginning must adapt to the changing environment.  It can't remain the same.  If it did, the company would stagnate.  So ultimately, the goal must be to help the culture evolve.

In looking at the problem, the first question is: what is this company's culture?  After all, you can't preserve or evolve something unless you know what it is. 

Most of the time, 'culture' is just a feeling.  With any luck, a startup feels exciting.  The team feels committed.  The management and the team feel connected - there is open communication among everyone.  Everyone feels they're pulling together for a common goal.  People feel they can work hard and still have fun.  They feel rewarded through recognition, and perhaps through compensation.   But is this the culture?  Or are these feelings the result of the culture? 

Related to the culture of a company are its customs.  Maybe it's a custom to celebrate a new contract, project completions, birthdays.  Perhaps it's a custom for the CEO to hold weekly all-hands meetings with open discussion allowing questions and suggestions from anyone.  Or maybe one of the company's customs is to share in the company's financial success through bonuses or a company-wide adventure.

The reality is that once a company grows, particularly if it grows quickly, and even more so if outside investors become involved, the customs will have to change and many of those good feelings may change as a result.  Celebrating every birthday with everyone in the company will likely become impractical.  So too with new contracts and project completions.  Even the all-hands meetings will have to change.  There's only a finite amount of time available and if there are lots of questions and suggestions, it's unlikely everyone will be heard.

And then there's the money aspect.  Outside investors are going to be looking closely at financial results.  They will likely argue for more reinvestment into the company, its marketing, product development, and expansion, and may want to reduce those bonuses or company-wide adventures.  They may even want to cut back on the toys, free drinks, and meals that made it easy to work ridiculous hours.

What's the result?  People are going to feel less connected.  Then they'll feel less committed.  They won't work as well together, and it won't be as much fun. 

So how do we preserve the culture?  We don't.  We protect the roots of the culture.  These are the company's values.  They need to be identified, codified, and regularly reiterated to the entire team.  Years ago at IBM, it started with 'Respect for the Individual'.  It was simple, but went much deeper into the company than might seem obvious.  This was followed by the reminder on most everyone's desk: THINK!  IBM grew consistently and maintained the culture of Big Blue. 
But let's come back to those feelings that constituted our startup culture:

  • Excitement
  • Team Commitment
  • Open communication 
  • Pulling together for a common goal
  • Work hard, and have fun
  • Individual and team recognition
It seems to me that these can become company goals and values.  Different companies will approach them in different ways based on the CEO's philosophy.  As a company grows, the customs that support them will have to change but the core values don't have to.  Birthdays, project completions or new contracts might be celebrated in the responsible groups.  The CEO might conduct smaller group/team meetings to get more personal feedback than can be realized in an all-hands meeting.   Working hard and having fun may mean offering more flexible time or telecommuting.  Continue to recognize accomplishments and you  will motivate  individuals and teams.   

Above all, the CEO must foresee impending changes to the culture and customs, discuss them with the team, solicit feedback, and explain the realities of the changing environment.  S/he  must continually reiterate the goals and direction of the company and show how current tactics are going to help achieve them. 

Company culture can evolve if core values are protected and if the team understands the reasons for change.  Knowledge leads to understanding.

Eliminating Performance Reviews
Money and Motivation
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Eliminating Performance Reviews

3/25/2014

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Aside from the HR types out there, everyone hates performance reviews.  And truth be told, I suspect even the HR folks hate giving and receiving reviews, though they push hard to make managers and their reports go through the reviews and formal review processes. 

I guess I understand why they are so insistent on performance reviews.  Without them, many managers wouldn't take the time to sit down one-on-one with their reports.  A 'review' might only take place when the manager is preparing to terminate the employee and needs to document his/her inadequate performance.  Without the structure of the formal review process, a performance review, even with the best employees, degenerates into a brief conversation where each party knows they'd rather be doing something else. 

But even with the process and the regularly scheduled reviews, the experience is at the very least, uncomfortable and all too often, unproductive.  What is it we really want the performance review to accomplish?  I suspect that most people would agree to the following goals:
  1. Give the manager a chance to provide feedback on the employee's work,
    recognizing accomplishments and identifying areas that need improvement.
  2. Give the employee the opportunity to provide feedback to management on the job, the company, the work environment, the manager, and their career/developmental goals.
  3. Agree on new goals and what is needed to achieve them.
  4. Provide motivation for the employee to perform at his/her highest level.
When I started work at IBM years ago, we had an onerous review process done annually.  The forms managers and employees had to fill out were long and difficult to customize to individual situations.  HR was often present in the reviews.  This created an intimidating atmosphere and I don't think the process worked well.

Thirty years later, a 'big company' which had acquired one of mine,  had another completely different review process.  Each quarter, the employee was expected to lay out goals for the coming quarter.  The manager then approved the goals or made modifications.  This was done via a browser-based tool, no actual face-to-face communication took place.  Theoretically, during the quarter, the goals could be updated by either party.  At the end of the quarter, the employee rated him/herself and submitted the ratings to the manager.  The manager could approve or change the ratings and the performance review process was done.  Well almost.  HR required a follow up conversation about the review.  Raises were determined based on the ratings that managers and employees agreed to. 

While the idea of setting goals quarterly, reviewing them regularly, and doing quarterly employee reviews seemed like a good one, in practice, overburdened managers took cursory looks at goals and signed off.  Busy employees often just copied goals from one quarter to the next and submitted them.  Self-evaluations were haphazard and any changes by the managers were usually driven by budget - you needed to adjust ratings so that raises would fit within your budget.  Of course, then HR would step in.  If you had too many highly rated employees, they made you adjust some of them downward or sometimes they or your own manager would make rating adjustments without consulting you.  HR had standards that dictated how many Outstanding, Excellent, Average, and Below Average employees existed in any group.    It didn't matter if your group had the best performers in the company. 

Clearly the process was flawed.   And as I reflect on all the Performance Review processes I've seen in my long career, I think it's the nature of the beast.  Classic Performance Reviews need to go (away).

So what do we do instead? 

If we review the four key objectives for performance reviews above, doesn't it seem like they should just result from good management? 

As a manager, your job is to help your reports do their jobs better.  You're a facilitator.  This means agreeing on goals, checking in on progress, bringing resources to help if there are problems, adapting goals as necessary, and doing post-mortems to identify the good and the bad aspects of any project/task. 

Setting the initial goals should be done in person, or, for a telecommuter, via a video call.  Make the time.  Depending on the tasks and goals, checking in on progress should be done at least weekly.  Ideally this is done one-on-one, but depending on the project/size of the team, a group meeting isn't necessarily a bad way to check on progress.  Often another team member has time or experience that can help out when problems arise.  Employees should be encouraged to ask about changes to goals and their priorities (which may change frequently during the course of a project, particularly if the employee has multiple responsibilities, like doing both development and customer support). 

Again, depending on the nature of the tasks/goals and the team, post mortems can be done individually or as a group. 

There is one aspect of those formal reviews that rarely went well but which you need to incorporate into your non-review paradigm:  You need to regularly talk to your employees about their career and development goals and how their job, the company's direction, and your efforts are helping (or hindering) them to achieve them. 

Have a one-on-one meeting over lunch, coffee, or, if you're so inclined, join them in a recreational activity.  Make it clear you're listening, even if you can't give them everything they want.  Acknowledging their needs and desires, and  showing a path to realizing them is critical to keeping your team members motivated.   

Okay, the truth is, this approach hasn't really eliminated reviews.  Instead, we've just made them continuous by incorporating them into our daily management.

But good management is what it's all about and all too often, the formal review process just impedes our ability to connect with our employees and to be the facilitators they need.

Startups - The CEO Must Understand Operations
Preserving Startup Culture
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Startups - The CEO Must Understand Operations

3/7/2014

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As entrepreneurs, it's easy to focus on our new technologies, the market, management of our talented team, and communicating the vision we have to make our company a success.  These are the things that most entrepreneurs love to do.  Give us a challenge in any of these areas and we'll charge ahead, resolving problems, creating new opportunities and inspiring others. 

But the truth is, in running a successful business, operations is just as important.  A business makes and spends money.  In a software company and many other high-tech companies, salaries and benefits will be our biggest expenses.  We'll have vendors, whether for office supplies, software development tools, rent, utilities, computers, phones, the list is long.  We'll have other expenses too: travel, subscriptions, legal fees, and more.

If we have employees, we'll need to do payroll, will have to pay payroll taxes and manage benefit programs. 

With luck, we'll also have revenues from our products and services.  These too may fall into a variety of categories. 

By law, we need to track all of these sources of income and expense. 

While it may be tempting to leave this to a contract or in-house bookkeeper or to your head of finance/administration, as CEO, you need to understand where your money is coming from and where it's going.  I didn't do this in my first company, trusting my CFO completely.  I had no visibility into the books.  I relied on his conclusions.  I later regretted that I hadn't taken the time to understand details of the financial side of the business.  Results of that particular mistake are chronicled in one part of my first novel, The Silicon Lathe.

You should hire a professional bookkeeper/accountant to set up your books.  Most small businesses use QuickBooks which I've found to be an excellent tool.  It's available as software you can run on a local computer or you can subscribe to an online version. 

The bookkeeper/accountant can help you set up your Chart of Accounts. This is a list of income and expense accounts that your books will track.  As CEO, you should have some input on what you think you need to see in terms of financial information about your business.  You can rely on the bookkeeper/accountant to guide you through the basics, make suggestions, and work with you on things that are unique to your business or way of doing business.  Getting the Chart of Accounts right will facilitate tracking and retrieval of critical information. 

While I'm not suggesting that you become an accountant, there are things you need to understand and track on a regular basis.  QuickBooks and other similar tools generate standard and custom reports that allow you to drill down from a summary level to details of individual transactions (e.g. checks written, invoices sent).  Of particular interest are:
  • Profit and Loss Statement - a report of your income and expenses for a given period with the results (profit and loss). 
  • Balance sheet - a statement of assets, liabilities and equity of in the company. 
  • Statement of Cash Flows

With these reports, you and your investors can get a good snapshot of the state of the company.  Note that as good programmers know, garbage in yields garbage out, so for the information to be useful, your books need to be kept accurately and up to date.  Again, I strongly suggest having an in-house or external bookkeeper do this. 

Note also that these standard reports may not be enough. They may be all your banks or investors ask for, but you may need more reports to manage your business.  My favorite was a cash flow projection.  I had my head of finance keep a daily log of monies in and out along with a projection for the next 90 to 180 days.  If I saw negative numbers in the future, I knew we needed to step up receivables collection, generate new business quickly, or delay expenses to ensure we had adequate cash. 

Good books are not enough.  As CEO, you need to be able to interpret them.  You need to understand what others will see when looking at these reports.  This is critical as you negotiate customer deals, banking relationships, loans, and outside investment.  Anyone entering a significant relationship with your company will want to see your books to be assured that your business is viable.  So, at the very least, you need to understand:

  • Accounts Receivable, especially aging
  • Accounts Payable (and aging)
  • Quick Ratios
  • Debt to Equity Ratios
  • Payroll tax obligations
  • Basic tax law as it applies to your business

I'm not going to do an accounting tutorial in this post; there are countless websites available that teach the basics and classes in most adult education programs.  

Taking the time to learn basic accounting may seem like a step down for the CEO of the next greatest startup, but understanding operations is critical to the success of your business. 


Stealth or Buzz - Beware of the BIG Guy
Eliminating Performance Reviews
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Stealth or Buzz? Beware of the BIG Guy!

2/25/2014

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I apologize for the delay in posting.  I just got back from my step-son's destination wedding in Costa Rica at a remote waterfall resort that had no internet access.  I'll try to catch up on posts this week. 

First, I wanted to talk about whether a company should go into 'stealth mode' or go for the buzz.  There are clearly times when each is required in the life of a company.  If you're trying to raise money or generate sales quickly, you need as much buzz as possible.  On the other hand, premature buzz can bring you too much attention.  That attention could prove distracting to you and your staff, but worse, it could alert your competitors to the fact that you've become a threat.  Worse still, if your product isn't quite ready or isn't truly perfect, you can bring in unnecessary scrutiny and your competitors may pounce on your products' inadequacies. 

So, though there are certainly exceptions, my recommendation would be that unless you need outside investment immediately, remain stealthy until your product is solid, you have a proven marketing plan, and you're ready for the big launch.  Even then, make sure you know what you're up against with the buzz.  It can kill you faster than a bullet to the heart.

I suggest this after having made a few huge mistakes in my career.  One of the biggest was heartbreaking for me.  My team and I had developed a truly disruptive networking technology.  We were true believers in a technolgy that had potential to change the world.  We had signed contracts with one of the largest telcos in the world as well as with DARPA.  Both had deployed and proven its value. 

We partnered with some of the biggest players in the industry and thinking these partnerships now made us invulnerable, went to the press.  Within weeks, we were listed in Inc's top 50 companies and in Red Herring's top 10 companies to watch.  All of the major industry press were singing our praises. 

And then the BIG Guy came after us. 

Soon, the BIG Guy was showing up at our customers telling them that they refused to support our technology and that they would withdraw support of their products if the customer continued to deploy ours.  Our partners were dumbfounded and we really didn't know what to do.  We had hoped that our partners would back us up, but they wanted to leave it to us rather than cross the BIG Guy.  We talked to our VCs who suggested that we sell the company to a player who could give us wide enough distribution to force the BIG Guy to follow suit.   We did that, thinking once again that nothing could stop us.

Two months after the deal closed, the CTO from the BIG Guy invited me and the CEO of our new parent company in for a chat.  I gave a presentation of the technology and showed how easy it would be to propagate in their products.  The CTO congratulated me for the world-changing technology, slapped me on the back and said we'd be doing business.  I was on top of the world.  Our technology was going to bring incredible advancement to the entire networking world and Internet.  

As you might guess, it didn't happen.  No one will ever know exactly why our technology was killed off.  I offered to buy the company back from our new parent company but they refused.   

Several years later, after stalling the market with a red herring to ensure that no one else picked up where we left off, the BIG Guy created an initiative for a similar technology based on their own products.  Today, almost 20 years later,  it is widely deployed as a core underlying technology in most major networks. 

The moral of the is story is to be stealthy as long as you can.  And when you emerge from stealth mode, make sure you know who you're up against.  Have a solid plan to address hostile competition.  Sometimes big friends are not enough.

Managing the Best of the Best
The CEO Must Understand Operations
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Managing the Best of the Best

2/4/2014

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You've hired the best of the best.  Per our previous post, these folks are as smart and confident as you are.  Their egos are strong enough that they can take criticism without flinching.  They're so good, you may be wondering if they even need you.

Now, how do you motivate them, get them to work as a team, and manage them? 

If these are the people you think they are,  if they're as good as you believe them to be, then your job is to set the direction and get the hell out of their way so they can do their jobs.  Your own job is as facilitator, not boss.  You want to make their lives as easy as possible so that they can be productive as possible. 

When I left my engineering group at IBM and moved to the field (regional sales office), I thought my job was to evangelize the technologies that I'd developed, to help the sales force and customers understand it.  I believed that would be the entirety of my job.  I was the guru and they would come to me.

My boss was a rising star in IBM.  On my first day, she sat me down and explained what was expected of me.  I quickly discovered that there was more to the job than I thought and that I had a lot to learn.  I also found that while others on the team respected my technical expertise, they understood that I was a complete beginner when it came to dealing with customers in sales and support environments.  My 'boss' had explained to them what my weaknesses were so that they could back fill for me and guide me until I learned the ropes. 

The other important thing my 'boss' said to me was that she wasn't my 'boss'.  She had a different job than I did, but that we were all part of a team.  Her job was not more important than mine and mine wasn't more important than anyone else's.  From a work point of view, we were all equals.  We had to work together to truly succeed. 

While I was a bit skeptical of this 'no-boss' idea, it turned out to be true.  She was a facilitator.  There were times where someone screwed up (often me), and in a post-mortem, we would figure out what went wrong and how to be better in the future.  Often we did team analyses of any failure.  And perhaps most fun was when we had a huge success, and we analyzed that too, learning from successes as well as failures. 

I used this approach in my subsequent companies and was able to keep a talented team together for many years (in some cases, decades).  Most moved with me from startup to startup.  In one iteration, I did what my CFO called my grand social experiment.  Based on the concept that no job was more important than another and that we were all taking equal risk,  I gave everyone, including myself, equal ownership in the company.  They gave me proxies for their shares so I could run the company, but when we succeeded, they shared equally. 

I don't necessarily recommend this approach unless you've determined that indeed, all of you are taking equal risk.  If you like the basic concept, I suggest weighting the ownership based not just on contribution, but on the amount of risk taken as well. 

So let's see if we can summarize the lessons I learned, put to practice, then refined in my companies:
  1. Lay out the mission.  As CEO, you are the visionary.
  2. Make sure that each member of the team understands her/his role and what's expected.
  3. Make sure that everyone understands your job and what you're going to be doing both on a macro scale and on a day-to-day basis.  Micromanagement should not be part of your job description.
  4. TRUST that your people are there to do the best jobs that they can do.  Make their lives easier.  If they need to work an unusual schedule, trust them to get their jobs done during the hours they do work.  Understand that if they have the flexibility to take care of the demands of their non-work lives when they need to, they'll be much more productive when they do work (which will likely be more often).  

    Keep in mind your team does need to see each other from time to time, so some common hours are necessary. 
  5. Verify that (4) is working.  Help your team make adjustments and course corrections if necessary.
  6. Repeat 1-5 regularly. 
One thing to watch out for:  I had several employees who would work themselves to death if I let them.  Yes, they had flexible schedules, but with our ability to always be connected, we can overdo it.  I found that some of them would work themselves into a state of exhaustion and their productivity would then fall.  In these cases, discovered in step (5) above, I would FORCE (encourage strongly) them to take time off to clear their heads.  Then I'd work with them to help them create a more balanced work schedule and I'd verify. 

Much of this is TRUST.  But assuming you've done your job in selecting the best people, with your guidance and regular verification, you should be able to trust your team members to help you build the best company possible.

For an interesting and amusing video on trust (I must admit that this is cats versus dogs), see Dogs and Cats teaching Trust.


Always Hire 10s
Stealth or Buzz - Beware of the BIG Guy
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    Steve Jackowski

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