Startups and angels: Along the way to success

There's Only a Test if you Sign Up for It

Every business needs cash from someplace.

At RTMS it was from customer revenue.  We had $500,000 in annual sales on the day we opened the door in 1989.  We built the business from there and never had professional investors until ten years later.

We never had to take the "Investor Test," jumping through the hoops of plans and projections, diligent market intelligence, close examinations of our team, and the like.  The closest we came was a personally guaranteed loan from a friendly banker for $75,000.  He asked to see "an outline of the business." 

I did that with six slides.  (Meaning little pieces of film mounted in a paper frame.) 

We grew tenfold in a couple of years and were one of the players in the early CRM business.

By the mid 1990s we were golden.

Great, huh?

I'm teaching undergraduates at Marquette University in a class called "Entrepreneurship for non-business majors" for the first time this year. And I love it.  They are bright, eager, engaged and interested.

But they do ask, constantly, "will this be on the test?"  Somehow they are trying to manage their time and try to remember only those "things" that they will be responsible for.

I think the Investor Test is the same thing.  I assumed in 1989 that since I didn't have to take "the test" since I didn't need any money from investors, I didn't need to study for it or know the answers - or even the questions. 

In the words of Beethoven, dumb de dumb dumb.

We were unprepared for the discipline of rapid growth.  For the complexities of managing a team for success.  The only thing we were really great at was hiring real stars and keeping the target squarely on making money for our customers. 

That was enough for a long time.  Eventually quasi-competition overtook us in the heyday of the late 90s.  We were competing with companies preaching change and talking a good game but delivering...nothing.  A couple went public, and crashed.  One CEO had to return his secondary offering cash - in its entirety - or face the SEC.

While we were smart enough to avoid such lunacy, and stay focused on our customer, I think that if we had taken the investor test in 1989 we would have been a different company - and a better one.

We would have failed, no doubt - and again, and again until we got it right (no failures in life just tests that get repeated until you pass).  But the learning would more than have made up for the work, a thousand times.

BTW the company today is doing great and the exit was fine.

But it could've been "start a foundation great" exit rather than just fine - if we had passed the test.

Not every tester knows what they're doing, of course.  Some ask dumb questions; others ask good questions but have the wrong answers.  But there are those who really do know what to ask, and what the right answers are.

A good deal of this process is well documented.  Bill Sahlman at HBS wrote a great article in HBR ten years ago, "How To Write a Great Business Plan," that is right on.  Critical thinking skills, working from hypotheses rather than assumptions, focusing on the workings of the business model rather than the projections, these are all components of "the test."

Even if you are without need for investment, take the test.  See what you learn. 

Ideas Are Easy

...but execution is hard.  It's axiomatic that a bunch of bright people can dream up any number of ideas for startups. 

In any venture, however, relentless attention to the details is what separates the real winners from the also-rans.

Remember Startup.com ? The circa 2001 movie about the meteoric crash of govworks.com?   At one level it's a dramatic look at an appalling lack of attention to detail when it would've mattered.   

How many software companies died on the way to an SaaS model because they did not have the ability to think through the large scale changes a business model shift would require?

I wonder if the commonly accepted overoptimistic forecasting that every business plan seems to incorporate is really rampant optimisim, untested against any kind of comparable or experience base, or if it is a lack of ability to execute - really execute - on the details that make plans work?

When Google Analytics was Urchin there's a great story about how they needed a "Windows" version within three (weekend) days that the engineers said was "impossible."  Those same engineers rolled up their sleeves (do t-shirts have sleeves to roll up, really?) and got it done by Monday.  It's a legendary story at the company that is now Google Analytics.  They won by relentless hard work and attention to detail. 

Sometimes that lack of execution is an weak analysis.  Everyone starts analyzing a problem by looking at weaknesses and differences.  (I'm not the only one, am I?)  However, if the next level of action is to jump from the hypotheses being considered to assumptions, a huge mistake gets made.  A hypothesis cries out to be tested.  Assumptions - no matter how well grounded in experience or "obviousness" are simply a black hole waiting for the entrepreneur to fall into.

Obviously (not an assumption but a fact) a venture succeeds by filling a need in a new and more value added way.  The drive to aim higher is basic.  It's the well informed use of experimentation - rapidly, learning every step of the way, that makes the difference.

Reducing Variability for First-time CEOs

I'd like to focus on one part of a post at Redeye VC , by Josh Kopelman.   He points out that there's " greater risk (and variability) in first-time CEOs than in serial entrepreneurs."  I would agree that in the portfolio companies we have, that seems to be true.

The follow on question, though, (aside from the interests of the investors,) is how does the first time entrepreneur get assistance to succeed?   Successful entrepreneurs seem to be able to hyper-focus, and, as Josh, points out, say NO effectively (Denial is not just a river in Egypt, after all).  In addition, living with both ambiguity and the demands of very high growth requires quite a bit of skill- and something akin to experience.

But how do they both learn from the experience of others and not allow themselves to be distracted by competing voices?

How do they choose mentors wisely?

Performance. 

Find mentors who have delivered on the goods.  This is a lot tougher to do than to say.  It's relatively easy to find people who would like to be mentors.  I suspect it's easy to find a lot of people who would like to coach an NFL team, too. 

But coaches have to deliver the goods.  And one pretty good way to judge them is on past performance.

So if you are looking for a mentor, or an advisor, I suggest you start by defining what you want to achieve as objective performance objectives.

Now go ask yourself if the proposed mentor has successfully done this - or is just someone who talks a good game. 

Just like the NFL.

Then, just ask the best person you can find if they will accept the assignment.  You'll be surprised at how many high quality folks will say "yes."

Selling to Elephants (and bureaucratic ones at at that!)

Every one of us whose company has sold to large customers has faced this issue.  It's usually some form of waiting for an order.  The customer (usually - almost always - a middle manager) has told you that you are the selected "vendor."  It's just a matter of a "bureaucratic" step or two and things will be great.

In the meantime, of course, you wait. And since the order is large, quite a bit depends on it. 

The inequality often causes you to hesitate about doing the right thing.  Each time you talk to your "contact" you get reassurance - and after a couple of times, a little testiness.  So you wait.  After all, you do not want to "lose the order" because of a perceived pushy attitude on your part.  So you wait.

And, more often than never, you get a very rude surprise when it's very late.  "I'm REALLY sorry," says Marvin Middle Manager. "Our CEO/CFO/COO/CTO has decided to cut back on XYZ and, well, we're going to postpone this order until next Month, Quarter, Year." 

So now what?

1.  Realize that when Marvin Middle tells you "everything is great" that he believes it.  At least he believes it 90%.  Be positive and sympathetic when he explains it to you.

2.  He, however, has seen things like this canceled before by his superiors.  Ask him directly about the last time he's seen a cancellation and why.

3.  Listen for the sound of office politics.  If there are opposing camps surrounding this purchase don't assume your guy has won just because he tells you he has.  (For an example just listen to the season's political rhetoric.)

4.  Worry if the specs change.  I recently saw an "order" coming that Marvin had specified in writing.  "It just has to light up and blink," he said.  No problem.  A month later, there's a whole lot more than that going on.  New requirements. Competing camps.  Non-cash alternatives. 

5.  Be positive with the client of course.  But plan - hard and severely - for the awful "sorry" phone call.  Don't bet the business on getting the order and leave yourself no alternative but a very painful one. 

6.  Don't necessarily tell Marvin how badly you need the order.  He can't probably do anything about it and if for some reason things get shaky he can use this fact to politely change his mind with his boss and save face at the same time.  ("Yes, Mr. Big, I now agree with you.  I think they are not as sound as we had hoped - financially." )  It's not very nice, but it happens more frequently than you'd hope.

7.  If you have a client that gives you straight answers, doesn't hedge and always delivers, do everything you can for them -- beyond the call of duty.  They are a pearl of great price. 

Do You Ask This Question...

...when you're hiring for your startup? 

"Am I selecting the right candidate by using performance based criteria rather than judging the candidate by their interviewing skills?"

When I'm asked by someone interviewing for a job how to assess the (often entrepreneurial) company, this is what I usually say.

When you get to the part of the interview where the interviewer asks you if you have any questions, ask this one (if it hasn't come up in the interview):

"In six months, if I am in this job, what specific, measurable achievements  would make me a great hire for you and your company?"

Of course, the answer you should get is obvious.  If it's anything other than a hard-nosed description of the specific challenges the hiring person is facing in filling this position, you have to ask yourself why.   My advice to people interviewing is that if they get a mealy mouthed "doing based" answer, run for the exit.

What's a "doing-based" answer mean? 

Consider the need to hire an accountant for your company.  One description is some variation of "perform the duties of the accounting manager, including managing the payables and receivables clerk, the monthly statement function, and the timely generation of management reports."

That's doing-based.  It's almost impossible to achieve quantifiable success.  How do you successfully manage a receivables clerk? 

A performance based description might be something like "The accounting manager, within 4 weeks of hire, will reduce defects in the inventory management system to less than 1% of all skus being improperly quantified and/or priced.  The manager will produce the monthly package of financial statements by the 7th business day of the month following, using the standard accounting package and report samples presented (attached.)  The manager will reduce receivables collection days by 15% and maximize payables cash flow by z% "  And so forth.

That's performance based.

Strong hiring people screen for performance.  They don't make a snap judgment based on a first impression and then listen for reinforcing evidence, positive or negative.  Inexperienced folks commonly make that mistake.

In addition, leaders hiring for performance have a pretty strong opinion of what is to be achieved and by when.  This has a couple of beneficial effects.  It laser focuses the successful candidate on the goal and immensely strengthens their ability to achieve the goal. 

It provides a channel for positive reinforcement.  It avoids the woefully common pitfall of assigning a "doing" based task (The successful candidate will perform the function of office manager...) that leads to self-defining success, falling into the trap of wandering off the task, and, if not caught in time, results in a lot of mutual dissatisfaction.   

And, a performance based task makes it easy to align compensation with performance that everyone will like.

If you are hiring for your new company, remember that the right hire for the right task is the single most important thing you can do.  Don't hire on impressions, but on performance. 

Carry this through past the interview to the reference checks.  Ask for specific instances for each area.  Find evidence.  Don't be afraid to ask the candidate for more references. 

Take your time.  Increase your hit rate.  Or "sin in haste, repent at leisure."