Founder Transitions

The Inside Trac

2010-12-31T17:18:00.000-05:00

I have moved my current postings to this new blog: The Inside Trac. There I talk a bit more specifically about the related experiences of my work at Force 3, Inc.

Do Venture Firms Transition CEOs too Early?

2010-01-09T07:13:00.003-05:00

Donald Katz talks about VC transitions of founders.

Don't Mistake Loyalty for Leadership

2009-08-25T08:52:00.008-04:00

A common trait of founders, CEOs and in fact most executives, is the loyalty they command among their troops. During times of crisis (including most of the early years of a developing company, integration of mergers, etc), loyalty is a critical characteristic of the leadership team. But in order for a company to scale, leadership is much more important than blind faith alone. It's apparently quite difficult to separate the two. And clearly, the bonds born of loyalty are hard to overcome.

As companies mature and it becomes necessary for management decisions to distribute beyond a strong single central decision maker, loyalty alone is not sufficient to generate good decisions. So CEOs need to steel themselves to objectively view their teams as either capable or not to operate on their own. Coloring (or perhaps blinding) the decision of who sits in these important leadership seats is a mistake too often made.

Now these were some real Founders!

2009-07-02T10:49:00.002-04:00

THE 4TH OF JULY Have you ever wondered what happened to the 56 men who signed the Declaration of Independence?

Five signers were captured by the British and executed as traitors. They were tortured before they died. Twelve had their homes ransacked and burned. Two lost their sons serving in the Revolutionary Army; another had two sons captured. Nine of the 56 fought and died from wounds or hardships of the Revolutionary War. They signed and they pledged their lives, their fortunes, and their sacred honor.

What kind of men were they? Twenty-four were lawyers and jurists. Eleven were merchants, nine were farmers and large plantation owners; men of means, well educated, but they signed the Declaration of Independence knowing full well that the penalty would be death if they were captured. Carter Braxton of Virginia, a wealthy planter and trader, saw his ships swept from the seas by the British Navy. He sold his home and properties to pay his debts, and died in rags. Thomas McKeam was so hounded by the British that he was forced to move his family almost constantly. He served in the Congress without pay, and his family was kept in hiding. His possessions were taken from him, and poverty was his reward.Vandals or soldiers looted the properties of Dillery, Hall, Clymer, Walton, Gwinnett, Heyward, Ruttledge, and Middleton. At the battle of Yorktown, Thomas Nelson, Jr., noted that the British General Cornwallis had taken over the Nelson home for his headquarters. He quietly urged General George Washington to open fire. The home was destroyed, and Nelson died bankrupt. Francis Lewis had his home and properties destroyed. The enemy jailed his wife, and she died within a few months.John Hart was driven from his wife's bedside as she was dying. Their 13 children fled for their lives. His fields and his gristmill were laid to waste. For more than a year he lived in forests and caves, returning home to find his wife dead and his children vanished forever. Some of us take these liberties so much for granted, but we shouldn't. So, take a few minutes while enjoying your 4th of July holiday and silently thank these patriots. It's not much to ask for the price they paid.

Remember: freedom is never free! - enjoy the fruits of their efforts this weekend and every day.

How did you get here? And where do you go from here?

2009-06-23T11:35:00.001-04:00

This morning, I presented this speech to our first Leadership Class at Force 3. The class is taking place at the Smith School of Business at the University of Maryland.

Eight years ago, I had the honor of addressing the first leadership class that my company at that time, Transcentive, ever held. I gave those remarks in June of 2001. And our leadership program became the launching pad for greatness for Transcentive’s professionals as we dealt with the tragedies of 9/11 during which we lost several of our customer and partner community, the dot.com meltdown which changed the complexion of the entire technology industry and specific to Transcentive’s business, changes in stock option regulations that almost swamped our industry.

In preparing for this program, I shared with Rocky and with Jim the remarks I had made at that time. When he read them, Rocky thought that they still resounded today and asked me to address you with similar thoughts. It was interesting that many of the same themes still apply today.

As many of you know, I like to read. I like to learn. Perhaps I get that honestly from my mother who was a teacher for some 35 years. Of all the books that I have read, one of my favorite books is The Last Word on Power, by Tracey Goss. What Tracey says is that everything that got you to where you are today will hold you back from succeeding in the future. At first glance this seems a bid absurd. But in reasoning through her words and arguments, it now appears perfectly clear to me. The stuff I did in the past to succeed, was intended to solve the issues, problems and situations that I encountered at that time. My new role at Force 3 has required drastically different thinking. Drastically different responsibilities in a drastically different market. When it comes down to it, if you think that life has changed, or that your role at work has changed, how could applying the same recipe to it really work?

Think about managers for a moment. We insert managers into most organizations to help direct workers and projects. Most managers got to that position by succeeding in what they had done in the past. Either you were an individual contributor and you got good at your contributions, or you were a manager of people or projects and you were able to drill your team and help cause some successes. Either way, you were promoted based upon what you had already done under very different circumstances. So how can we expect that same person to be prepared for this new role without providing them with new training or guidance? But in most cases we don’t! And it leads directly to something that has become known as the Peter principal. We promote people until they get to a point where they are no longer successful. Until their success formula breaks down.

These two concepts – Tracey Goss’s and Peter’s both actually converge. If you are not capable of giving up your past, or reinventing yourself, you have no chance succeeding going forward.

· What if we kept acting as if 9/11 never happened,
· or expect to keep acting the same despite the financial meltdown?
· What if we kept acting like we were still a 100 person company.
· What if we kept acting like Obama never got elected.

You get the picture. Our actions change because the world in which we live is different. Our situations are different. And in fact all of our jobs are different.

But many people end up as positional managers. Positional managers are managers who manage based upon what position they hold. Like, I am the Sales Director so the sales people will do what I say. In fact positional authority often does cause short term action.

But in the long run positional managers are ineffective. They are limited by what they know, how much domain they can control, and how demanding they are. Their people respond only to their demands. They do not trust their manager, nor care about the end results. Since often times it is the positional manager who then succeeds (if there is success) and the workers get only the blame. This is sort of like treating people like machine parts. Henry Ford era. Think about the professional basketball coach Phil Jackson trying to get 5 prima donnas to listen to what he tells them to do. That simply does not work in this day and age.

What’s required are Leaders! Leaders are managers who have figured out that their position (their title) is meaningless. I tend to call it the second step of becoming an effective manager.

Leaders attract talent they don’t herd them.
Leaders inspire workers, they don’t push them.
Leaders listen more often than speaking.
Leaders motivate they don’t just manage.
Leaders do the right things, they don’t just do things right.

So let’s talk a little more about leaders and how they differ from managers. First of all effective leaders are genuine. What does that mean? Well first of all, we know in today’s complex environment that it’s impossible to know everything about everything. Certainly life and industry used to be much simpler. But today, can you really tell me that you know everything they need to know to get the job done? Do you really know how to do even just your own job? Aren’t there things you wish you knew? Aren’t there books or seminars or people you could talk to or other companies who MIGHT do things better, more efficiently, more innovatively than what you today are doing in your own departments?

So the starting point is: check your ego at the door!

Second step, realize that there is no involuntary servitude in this country. Your department, your coworkers and everyone across the entire organization is there because they CHOOSE to be, not because they have to be. Many of you already know that. We’ve experienced extremely high turnover for a company our size and for our position and performance and potential. The reason for it is US! Don’t point to any other cause other than we are inept at leading (and perhaps in hiring). People leave because they are not being led, or they don’t chose to be lead by YOU! Once you realize that, you’ll find that in order for you to succeed, you need to connect with your people and ensure that they are ready and eager to be lead…by YOU! If you think about it it’s an awesome task.

The main reason that people want to be led by you is that you empower them. You offer them the opportunity to be great. And you make sure they know when they are and they aren’t. And then empower them to do it better than you ever could on your own. That doesn’t mean they run haywire throughout the organization. That doesn’t mean that you don’t mentor them, provide them with insights that perhaps you learned the hard way, that doesn’t mean that you don’t reward and punish their behavior. It does mean that you start out with great people (good hiring is very important) that are BETTER than you or can become BETTER than you in figuring out how to do the job. So that’s step 3, find better people than you to do the job. Remember Phil Jackson and our basketball analogy. No successful coach is nearly capable of going out and beating his players. So why wouldn’t you hire people who are better than you at that job?

Then fourth, you got to give them a good reason to excel! Why should they WANT to do a good job. To me again the answer is pretty clear. WIIFM. What’s in it for them? Figure it out, in advance and respond to it. Our millennials, generation X’s and Y’s are motivated by different things that perhaps our parents or even ourselves. They want freedom, they want recognition, certainly they want rewards, but most of all they don’t want a wet blanket manager who holds them down and suffocates their initiatives.

This is all driven by your workers knowing that you care.

People don’t care about how much you know unless and until they know how much you care.

That is until you convince your team that you care enough to make them great. And by the way, if its bullshit. If you just say you care and every action that you take is to try to make YOURSELF look better, it won’t work.

That you care enough to ensure that they get credit for what they do. That you care enough to discipline them when they stray.

Caring includes, setting the example yourself. When you become a leader, you’ve got to walk your own talk. That is, never ask someone to do something that you wouldn’t do yourself. That means that just because you’re the boss, doesn’t mean that you don’t have to get your hands dirty. That means that you participate, you put yourself in a position where you are just as vulnerable as they are. You become one of the team, not just the boss. That means putting yourself in a position where you can fail and look bad just like them? To do this you have to become a very sensitive listening device. Stop talking and start listening.

And most of all, seek out the people in your organization that themselves can become great leaders. Because the highest level and most important contribution to a business organization is not being a great contributor, although where would we be without them, its not being a manager of projects or people, although we need them as well, and its not even being a leader of people, although that would propel most any organization to greatness. The real challenge is to become a leader of leaders.

Since coming to Force 3, I’ve pushed our executives to each identify of their own successors. Now that may seem a little foolish. It also may sound like I was ready to replace these managers and just wanted their help in selecting the “who”. But in fact it was a test of leadership. Because you see that despite all you may have heard or what you may think, the way to make yourself indispensable in an organization is to make yourself dispensable. If you are not able to do this, then… your organization will always need you around to do the work. That means when you are not there, productivity lags. That means when you are called upon to reach the next level, you will be skipped over, because there is no one there to fill your void. Think about it. Sounds pretty logical. The best managers are the ones in which their departments manage themselves.

How do you find these future leaders?

· They are the ones with passion and motivation.
· They are the ones that ask to do more.
· They are the ones that are not just looking out for themselves.
· They are the ones who don’t take anything for granted.
· They are always wrestling with the status quo and looking for better ways to succeed.

You’ll know a leader as the one who heads the team into the forest. Climbs the highest tree herself. Surveys the territory and then declares: Wrong Forest! Not just seeing the forest from the trees; but being willing to acknowledge mistakes and make bold moves to correct past actions.

Leaders are forever raising the performance bar, and they like to keep score. They are the optimistic ones. The ones you feel good talking with. The ones that don’t suck the energy out of you and point out all the reasons something can’t get done, but rather ask why not? They may not be the smartest. They may not have the most experience in our particular business. But you know when you meet them that they can do whatever it is you need of them. They don’t have a big ego. They usually describe their past successes as having been either lucky or caused by the greatness of their team.

And so why this program? Leadership is not something you are necessarily born with. It can be learned but does require a commitment. A commitment like what we asked you to start here, by preparing for and attending this week.

And so how do we get there. First of all it takes commitment. Your senior management team’s commitment is required. Because if they don’t raise the bar, no one else can. So you have our commitment. First embodied by this program. And soon to become a part of everything we do at Force 3.

What’s in it for you? I think this is an opportunity unlike any I’ve ever been given. So take advantage of it. It’s your ticket to your next level of thinking and hopefully acting. It’s your next step along the way of your progress to give you an opportunity to become a better leader of whatever it is you are going to lead? Whether that be your children, your civic group, your tribe, your department, your country, or your company. I believe you will find it’s worth the effort. Work hard at it and together we’ll see real tangible results. By creating a culture of leadership we’ll together be able to take this company in new directions and to levels we’ve never dreamed were possible. Because institutionalizing leadership, as we are starting today, is the ultimate act of leadership.

Enjoy the next three days. Work hard and come away with new ideas and new motivation to make Force 3 and even greater part of our collective community than it is today.

Founder Non-Admissions

2009-06-15T06:53:00.001-04:00

A CEO friend of mine posted this slide show on her facebook account. Having read and sat through many a business plan presentation, I would have to say that most of this is true.

Founder Non-Admissions

View more OpenOffice presentations from Chris Yeh.

Our National(s') Pasttime (Sgt Delgado's Response)

2009-04-26T06:39:00.004-04:00

Sgt Delgado, the subject of my last blog entry, responded to the opportunity that he had to throw out the first pitch at the National's game in a letter to his CO. He included the quote below as the preface. Quite a touching impact.

A man who is good enough to shed his blood for his country is good enough to be given a square deal afterwards. More than that no man is entitled, and less than that no man shall have.

-Theodore Roosevelt, on Patriotism

Sean,

I'm writing you today to inform you of the outstanding day me and my son Giovanni had at the Military Appreciation Game Phillies Vs Nationals. To begin, Never in my life did I imagine myself throwing out the first pitch it was the most amazing experience that wouldn't have been possible without your support. Nadia of the Nation

als was also very instrumental in allowing SPC Wood to catch the 1st pitch, at the same time allowing my son to walk with me onto the field. When walking to home plate I was able to see Jesus Flores who then signed my Jersey, and gave my son a baseball. The walk to the mound was also an experience which I shall never forget, it's great to know that all present at the game support our Troops. After throwing the pitch, it's was great that SPC Wood dropped the ball and now my 1st Pitch Ball has official dirt from the Stadium. The excitement still didn't end after the pitch, the entire Nationals Dugout came to shake our hands. We had an amazing time during the game, and the NATS won the game for the Troops talk about an amazing game. (HOOOAH) Need less to say the excitment still didn't end, after Adam Dunn hit a homerun, the BIG 44 came over to me and son and gave him the bat. I would have to say that this was one of the few times Gio was speechless. As I saw Adam walk I called out his name and said Thank You Very Much, Adam kindly turned and said no problem. It was at that moment that my son turned to me with tears in his eyes " Daddy, yes Gio, this is a day I will never forget I Love You". Sean I want you to know that you will always be in our hearts even after I have finished my time at Walter Reed. I would also like to Thank the Nationals" Orginazation ( Especially Nadia,) and all the players for making this the most memorable day in my son's life as well as mine. May God Bless You Always.

Sincerely,

SSG Delgado Rafael - Able Company WTB

6900 Georgia Ave. N.W.

Building 14 Abrams Hall #2080

Washington DC 20307

Our National('s) Pastime

2009-04-17T10:51:00.008-04:00

On Thursday night, 17 April, I had the priviledge of attending The Washington National's Military Appreciation night down in DC. Our company, Force 3, sponsored the night, and as such we were able to go down on the field for batting practice and Rocky Cintron, our CEO was able to welcome the crowd as well as some guests of honor. I've reproduced Rocky's own Blog (it's published inside our fire wall at Force 3 so I was unable to link to it) together with some photos of the event. I think you will enjoy the read and perhaps remember that its not just on Veteran's day that we should remember our veterans.

These are Rocky's words....

Last night was a fitting reminder of why I'm still a baseball fan. The weather was glorious for mid-April, no rain, a slight breeze, temps in the high 60’s, the intoxicating smell of Hot Dogs as you enter the stadium and 20,000 hopeful fans (1/2 of them from Philly) believing anything is possible with 150 games left in the season. It didn’t matter that the Nats were 0-7. I still remember 1988 when the O’s began the season 0-21 having the good fortune of gracing the cover of Sports Illustrated (no O’s fan will ever forget the downtrodden look of Billy Ripken sitting in the dugout, head in hands) – eventually finishing the season at 54 – 107, 34 ½ games back in the standings. Gratefully, and solely because Force 3 sponsored Military Night, the Nats will not succumb to an 0-21 start, having successfully bashed the World Champion Phillies 8-2. There was joy in Mudville last night.

Beyond the drama of the game and before the players took the field I was witness to something much more heartfelt. I had the privilege of being able to go down on the field and watch batting practice with some other lucky fans some of which were in our armed forces. I walked over to one of the soldiers, Sgt. Delgado, and introduced myself. Sgt. Delgado had recently gotten out of Walter Reed after his tour in the mid-east. He had a cane with him and was leaning against the concrete wall behind home plate. I quickly found out that he was going to throw out the first pitch. By his side was his friend (I never got his name), not in uniform who was going to assist him out to the pitcher’s mound. Sgt. Delgado informed me that his buddy was a rabid O’s fan and was a walking encyclopedia of Camden Yards, and indeed he was. His friend told me that last week he had a dream come true and actually threw out the first pitch at Camden Yards. The two men were like 10 year old boys basking in the glory of America’s favorite pastime. Sgt. Delgado actually thanked me for sponsoring Military Night and said “you guys are heroes for doing this. I never thought I would get the chance to be on a Major League field watching batting practice, let alone throwing out the first pitch.” My response was simply “you are the hero”. I looked behind the Sergeant and saw a little boy with bright eyes, a wide grin and a baseball mitt. Sgt. Delgado turned and told me that the little guy was his son. A Nats representative then came up to Sgt. Delgado and handed him the baseball that would be used for the opening pitch. Delgado’s friend asked the representative if he thought it would be OK if he caught the first pitch. The rep had the right response, “I don’t see why not”. The two men were absolutely giddy, high fiving each other and talking “smack”. I wished them good luck and walked away smiling at how this game can turn any of us into little boy’s once again playing on the sandlot.

Minutes after this exchange it was time for the Star Spangled Banner and immediately after came the ceremonial first pitch. Sgt Delgado, began his walk out to the mound, aided by his cane, concentrating on his dual prosthetic legs to carry him forward, flanked by his buddy, who we soon found out also had a prosthetic leg. Sgt. Delgado positioned himself and waited as his friend walked back towards the plate. Delgado’s battery mate assumed a makeshift crouch, bending his right knee with his left leg straightened to the side as they prepared to once again team up and deliver. This time it was not for their country but solely for the joy of the moment, to feel what it is like to hear the cheers of thousands. Delgado delivered a strike to his buddy, and although he momentarily dropped it, he deftly scooped it up, and then quickly hobbled to the mound to embrace his friend. Sgt. Delgado’s son was jumping up and down cheering on his dad while many watched – tears leaking out of the corner of their eyes. These two men gave much more than their commitment to our country. They were thankful that they served and grateful that they and their colleagues were acknowledged for their service. This is why Force 3 sponsors Military Night at the Ballpark.

Rocky Cintron, CEO Force 3, Inc. Crofton, MD

Meetings -- the Silent Killers

2009-04-12T08:52:00.003-04:00

If you are like most people, much of your day is taken up by meetings. And, when you really dissect the amount of time you spend in meetings, can you determine how much of that time was well spent?

I've spent a good deal (of productive) time trying to deal with this issue in my own situation. I've shared this with my colleagues. Below are my thoughts.

Premises:

• People are very busy.
• Meetings represent a sizable percentage of our busy days.
• Meetings are often too large.
• Meetings are often unproductive.

Suggestions:

Meetings need to be tightly controlled – the agenda should be set in advance; not everything is fair game – if it wasn’t expected to be discussed, it shouldn’t. People need to arrive on time and meetings need to be completed on time. Cell phone calls should not be accepted. Any follow up items and decisions from the meeting need to be documented.

Preparation is key – all meetings should have a known purpose. EVERYONE who will participate in the meeting should come prepared. If there is information that will be discussed in the meeting it should be disseminated in advance. If people are not prepared, the meeting should be postponed.

Meetings are for decisions – Meetings should not be show and tell – That was for elementary school. Unless a meeting is to a large group and specifically designed for mass dissemination of information, necessary information should be disseminated in advance so that it can be read and digested prior to the meetings. Meetings should become less presentation and more decision making. This should speed along the process.

Reduce the number of participants – In my opinion, the most important meetings are one-on-ones. This is where you really connect, where you can direct feedback and where you can actually understand how the other party is feeling about the topic. When the number of people grow, the communication generally gets worse. It’s been said that your ability to get each person in a meeting to understand the information discussed goes down by the square of the number of participants. So if you have five people in a meeting it is 25 times more difficult. Think of a meeting with 10 people, where it is 100 times more difficult. Having people who are not critical to the meeting (not just who will be impacted by the meeting) participate usually explodes the scope and expands the agenda, waters down the communication, or just wastes time.

Everything should not be fair game in every meeting - Just because people are together in a room does not mean they should discuss whatever they needed to raise with that person. That happens better in one on ones. Group discussions need to be limited to the specific topic and only to things that critically matter to that topic.

It’s OK to hurt someone’s feelings by not including them in a meeting – When it comes to meetings, titles and positions should not matter. Meetings should be focused on accomplishing a goal. People who are needed to create that solution should attend. Everyone else should be happy not to be burdened.

Follow-up is critical – If the meeting was important enough to have, it was important enough to document. Certainly any critical decisions that were made in the meeting, and ideas that were uncovered, or any follow-up items and commitments made, should be documented. If this is a regularly scheduled meeting, then this summary should be discussed at the start of the subsequent meeting and people who committed to follow-ups should discuss the completion (or not) of their committed actions.

Executive Skills in the "New" Economy - newly minted MBAs (and others) take note!

2009-03-18T07:59:00.001-04:00

A colleague of mine provided this article that he found on the web. I thought it would be important reading for any executive who is struggling with managing people under the current economic reality.

The hard work of soft skills

15 March, 2009
By Dr. Carol Kinsey Goman, HR Columnist, Troy Media Corporation

At a claim office of about 125 employees, the head of Human Resources spent the day observing the local manager. Not only had the office ranked high on productivity, but this particular manager had received fantastic feedback on her company's Leadership Measurement survey. So the HR executive was curious to watch her interact with employees to figure out what generated this great response.

As they walked through the office, conversing about the normal work conditions, the manager would often stop and refer to specific individuals: "Steve over there has been in our area for 15 years. Steve also coaches Little League. They won their game last Thursday."

Then they'd move on to someone else, and as they left that person's area, quietly the manager would say, "Sally had some problems with her daughter this year. You know how difficult teenagers can be. We've had many sessions behind closed doors where Sally's trying to sort through these problems."

Months later, when I interviewed the HR executive, that day at the claim office was still etched in her mind. "It became apparent to me," she explained, "that this manager knew all of her people. And I don't mean just knew their jobs. She knew each individual - their backgrounds and hobbies, what their concerns were, what got them excited. She knew when they were upbeat because things were going well, and she knew when they were struggling and needed her time and attention. I asked her how on earth she could do this for 125 people. Her response: 'That's my job.'"

Great leaders understand that you can't pay people to excel. You can only pay them to show up. But once you've got them there, the leader's job is to encourage people to excel by creating an atmosphere of caring, trust and inclusion. Sun Tzu, author of the Chinese "The Art of War" put it this way: "Regard your soldiers as your own children, and they will follow you into the deepest valleys. Treat them as your own beloved sons, and they will be with you even unto death."

As an expert on the "human side" of organizational change, I have been a guest on hundreds of radio call-in programs over the past several years, but I especially remember one in the Northwest, when an unusual number of disgruntled employees were phoning in with corporate "horror stories."

People complained about being unappreciated and overlooked. They spoke of callous treatment from uncaring bosses, and reported that they worked for organizations "just interested in making a buck." For the entire hour, calls followed the same line. Finally, in genuine disgust, the interviewer said to me: "The principles you're giving us sound so simple, why aren't more managers following them?"

I didn't have to think twice about my reply: "With all the diet books on the market, why aren't we all thin and trim? What could be simpler than reducing calories and increasing exercise?"

The answer to my question and his is the same. Things that are simple are not necessarily easy.

My work has enabled me to deal with business leaders around the world, and not once have I encountered a boss who despised all his or her employees. On the contrary, the leaders I've met were genuinely concerned about the well-being of people who reported to them. (Even the occasional leader whose only focus was on the bottom line understood that the best way to increase profits was to build the commitment of talented employees.) When you think of the qualities that leaders need to encourage in their employees -- responsibility, creativity, caring, commitment -- you can see why coercion or manipulation just doesn't work. The leaders who influence us the most are those who understand that engagement and productivity are not about rules, regulations, and rewards -- or the struggle to keep people "in line."

In general, it's the soft skills of leadership that are paramount. Leaders (and their organizations) won't succeed without a genuine caring about people and the ability to develop and nurture interpersonal relationships.

This is something that the MBA industry is grappling with today. Many business schools are revisiting their offerings to see if they still have relevance in the 21st century. Consider Harvard Business School, the blue-chip brand of all MBA programs, which used 2008 (its centennial year) to convene worldwide experts on business education and plot its directions for the next 100 years.

The results: Deans and recruiters said that MBAs in general needed better communication skills, increased self-awareness and an enhanced capacity for introspection and empathy. HBS is now looking at several change proposals, among them a program to develop various soft skills in its students.
Isn't that simple?

Not easy, mind you, But simple.

Carol Kinsey Goman, Ph.D., is an author and keynote speaker who addresses association, government, and business audiences around the world. Carol is the author of 10 business books. Her latest is THE NONVERBAL ADVANTAGE - Secrets and Science of Body Language at Work.

Start Up the Risk Takers

2009-02-25T07:32:00.003-05:00

It seems that Thomas L. Friedman, the economist and author of The World is Flat, agrees with the premise in my 21 December blog post on bailing out the auto industry. In his op ed in the New York Times published on 21 Feb 2009, Mr. Friedman suggested that it would be better to invest this money in startups than with the zombie auto industry. Great minds think alike (or he read this blog first).

For his column please see: Start Up The Risk-Takers

Bring on The Entrepreneurs - It's Time!

2009-02-12T20:41:00.003-05:00

The difference between the great and good societies and the regressing, deteriorating societies is largely in terms of the entrepreneurial opportunity and the number of such people in the society. I think everyone would agree that the most valuable 100 people to bring into a deteriorating society would not be 100 chemists, or politicians, or professors, or engineers, but rather 100 entrepreneurs.

Abraham Maslow

Seems like its high time to bring in the entrepreneurs in America!

Business Debriefing

2009-01-22T11:30:00.006-05:00

Many years ago, I became acquainted with the CEO of a storied software publisher. Bill Goodhew had recently taken over as CEO of Peachtree Software in a management buy-out. While Peachtree had the pedigree of being one of (if not) the first personal computer based accounting software packages, it had never made a profit. Peachtree was sold to Management Science America (MSA), an early mainframe software company, and during their tenure as owners, the division still did not make any money. Bill and his management team took it over, drastically reduced the price of the software, and marketed it predominantly using direct response advertising.

While that seemed very extraordinary at the time, Bill filled me in on his seemingly simple strategy. He selected three different advertising placements, all with coded responses, so he always knew which was producing the results. He continued these for some set period of time and then would pick the one that worked the best and double its frequency. The one that was the worst, he discontinued. And the other, he continued as it was. He also added one more publication and tried that.
Interestingly enough, using this strategy and the much lower price, Peachtree’s owner-management team made money for the first time in the company’s history. Bill made it very clear that he was no marketing genius. In fact, Bill seldom guessed correctly in advance which advertising placement would work. However, after receiving the results, he was in a perfect position to learn and adjust.

The lesson I learned from Bill’s strategy expanded well beyond advertising and marketing. What this taught me was the value of feedback. Learn & Adjust - that idea has lived with me for the several decades since our encounter.

Every business process can benefit from this concept of learn & adjust. None of us is smart enough to predict the actual results of our actions. But assuming we have a clear and available way to listen to the results of our actions, treat them as objective data – free from our personal prejudices, and be willing to act and adjust our behavior based upon this data, we can create learning systems that create impeccable institutional knowledge that can be shared within our organizations.

The US Air Force uses Stealth Debriefing sessions after every sortie. Immediately after a flight, the pilots debrief in an objective and selfless manner. They learn and adjust from these sessions so that they can institutionalize better practices in their very next encounter. As the Air Force puts it, for them it’s a matter of pure survival.

In business we usually survive multiple mistakes. But the best organizations are compulsive about feedback and learning processes in everything they do. I have participated in great sales organizations that use debriefs as a critical part of their process. After each sales call, the sales person and her team, get together to discuss what went right and what went wrong. These sessions enable the team to determine what is working and what is not, enabling them to hone in on their sales pitches in their very next call.

Seems pretty simple? Yet there are all too few organizations that institutionalize this type of behavior. Meetings occur without any summary of the results. Business decisions get made without the benefit of any recorded feedback. Marketing dollars get spent, without any clue as to their effectiveness. In today’s economically stressful times, using this simple (and cheap) process to immediately improve what we do, every time we do it, is long overdue.

Bailing out the US Auto Industry

2008-12-21T11:51:00.005-05:00

Friday, President Bush agreed to "loan" the US Auto Industry $17+Billion to stave off sure bankruptcy. No matter whether you are in favor or not of this use of taxpayer money, I've taken several lessons from this debacle and have a suggestion on how better to spend our money.

Here are the four takeaways I learned from what has gone on between the odd bedfellows in Washington and Detrioit.

1. If your product stinks and no one wants to buy it, there is little recourse from the free market other than to fold one's tent. That is unless the government decides that you deserve a few billion of tax payers' money.

2. Just because you pioneered an industry and once were great, does not mean you still are, unless you happen to important enough to the well being of 1/10 of the whole country's population.

3. Politicians are short sighted. They only look to solve the problems they are currently confronted with and have no vision to what the long run holds. And they certainly can't stand short term suffering for the long term value it may create.

4. But, in the long run, we all are dead anyway. So does any of this matter? What's another $17 Billion anyway?

The government has less business being in the auto business than the incompetent fools who have run the big three into the ground. Ultimately, we are moving all too close to a socialist state, where failure is protected by increased taxes on the successful.

I have a new proposal Mr. Bush. How about we take the $17 billion and create a seed capital fund to breed the next generation of great companies. And the US can be a shareholder! So not only will we all as taxpayers benefit from the hundreds of thousands of new high-paying jobs that will result, but we put ourselves in line for VC like returns on our investment. Can you imagine what value might be bred by that influx of risk capital. This certainly is a less risky bet than investing in the three auto companies!

An Execution Model For The Ceo

2008-12-09T11:58:00.008-05:00

Bob Sywolski, a former operating executive, turned venture capitalist, gave this presentation at a recent (October 2008) JMI Equity Executive meeting in San Diego. I've posted this presentation (with Bob's permission) and think it's got critical lessons for any founder/CEO. You can send any questions or comments you have to me directly here on the blog or you can find Bob at the JMI Equity web site.

Bob Sywolski An Execution Model for the CEO

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It's the economy stupid!

2008-11-24T06:05:00.007-05:00

Many CEOs and founders have been focused on the current economic downturn. Some take knee-jerk actions to cut expenses (and layoff employees), some clamp down on all activities, and some ignore reality hoping it will change. Not being old enough to have lived through the Great Depression, except through tales that I've heard, the only analogy I have is the economic aftermath of 9/11. At that time, I was running Transcentive, a stock plan administration software company. And, as you might imagine, stock options and enterprise software were not the top priority on everyone's list as we all struggled to understand the new reality that an attack on our homeland and the ensuing stock market crash and economic turmoil caused.

I've searched for some guidance during this unique patch of our economic history. One of the best, is an article found on CNN Money's web site by Ram Charan, a writer and management guru entitled:

Managing your business in a downturn

As the optimistic entrepreneur that I am, I like to view turmoil as a friend. Turmoil and uncertainty typically are great times to topple the status quo, to empower new market leadership, and to cause customers to look for new solutions.

Ram's article was written with this particular downturn in mind, but I see it as a handy reminder to refer to any time the macro economic conditions turn abruptly south.

Say Hello to Uncle Fred

2008-10-10T17:43:00.004-04:00

Some people call it the Uncle Fred factor. A Transition CEO comes into a founder-based business only to find a close friend or member of the family - Uncle Fred. He may be a do-nothing freeloader or a know-it-all who stays on the payroll simply because no one can fire him. Usually his (or her) tenure is dependent entirely on the good will of the founder.

New CEOs who can't accept such a quirky practice will have a really difficult time operating in this kind of environment. Uncle Fred can't do much good, but he sure can do harm. The cycles the new CEO will spend trying to neutralize Uncle Fred or trying to rid the organization of their uncle, will be time that could have been spent more productively elsewhere.

I learned the hard way that Uncle Fred is often a cost of doing business. If you can just keep paying Fred and shuffle him out of the way, that may be fine. Otherwise, if he causes chaos, you may need to take more drastic action. Savvy board members, including venture capitalists (whom I would have thought would be too cheap for this practice), will often advise that Uncle Fred should be treated gently. His departure should be handled gracefully and sensitively, often paved with more than a few dollars and continuing benefits. This, I have found, is a very inexpensive way of dealing with a tricky issue.

Secret Sauce for CEOs

2008-09-18T09:13:00.002-04:00

I received the article I've posted below a couple of days ago. I think that many of these ideas are right on target. I'm interested to hear from CEOs/Founders on whether these ideas resound.

The "Secret Sauce" For CEOs

15 September, 2008
By David Wexler

Having worked with a number of highly talented and successful CEO's over the past 30 years, I can with comfort assert that there are many ways for CEOs to successfully lead a business.

That said, there is one thing that I've observed those CEOs who have been most successful over the long term do that I believe is the secret sauce for CEOs who are committed to longer term profitable growth and shareholder value creation, and that is to build a high degree of organizational trust.

I define organizational trust as that intangible aspect of a corporate culture that causes employees throughout the organization to cut the leadership team some slack when leaders err, and to stay the course and stay committed to the organization and its leaders.

How often have we observed situations where a CEO makes a mistake, or a member of the executive team, or leadership at whatever level of the organization, and the knives come out?

Members of the Board, the CEO, peers, and/or employees at all levels of the organization begin to complain. The leader's decisions are questioned. Work is asked to be re-done. Subtle and not so subtle signs of disrespect and borderline insubordination emerge. Relationships chill. Access to people, information, and team forums diminishes. Ultimately, one way or another, the leader or leaders end up having to exit the organization.

Contrast this with some highly publicized mis-steps in companies that may make the wrong call on the market's appetite for a change in product formulation; product features; and/or pricing. These companies are often times able to recover owing to brand image, loyalty, and strong cash flow.

I will argue though that where their leaders survive is due more often than not to the trust and goodwill that they have built with their stakeholders.

How then to build organizational trust? The CEOs whom I've observed be successful at this do the following:

1. Communicate a vision, mission, strategic goals, and most importantly, what your expectations are of employees in achieving success.

2. Meet with and update employees and other stakeholders as to progress, regularly, openly, and honestly. Speak to what is going right, as well as what is going wrong.

3. Maintain an open door providing access to employees; provide forums for obtaining feedback and listen attentively to what employees have to say.

4. Slay sacred cows. In every organization there are long-standing issues that aren't attended to. Most employees know what these are but often times leaders fail to demonstrate courage in dealing with these. It may be a rogue unit head or a poisonous key employee; it may be a skewed compensation program that favors some at the expense of others; it may be a product unit or office location that has long ago ceased to make economic sense. Whatever these are, by addressing them, you send a powerful message to employees and build tremendous organizational trust.

5. Celebrate successes. There will be many along the way, both big and small, and it is important to mark these milestones to achieving success.

6. Credentialize the leadership team by having trusted (by the employees) third parties come in to speak to how the company is helping them to be successful. These can be key customers; key partners; and/or owners.

7. Be considerate and worthy of your employees. All roads to success lead through employee engagement and contributions. Leaders should validate the leaders who report into them since employees most trust their first line supervisor and respect most, leaders who respect their leader.

8. Most importantly, deliver wins. You don't have to win every battle and in fact will miss targets in some quarters and on some strategies. But, you have to win in terms of the overall strategy and be able to show that you are progressing towards delivering on the mission and strategic plan.

Employee engagement surveys often times hide the true picture of the level of organizational trust in a company. I have seen survey scores that indicated all was well, when in fact employee turnover was on the verge of becoming catastrophic and morale was down all over. And, while it is also true that I have yet to find nirvana in any company, and we all as employees will always find something to complain about, we don't need perfection in a company to be successful.

Just a high degree of organizational trust, and that is not only readily attainable, but the secret sauce for successful CEOs.

The former global head of human resources for Alias Systems, David Wexler has had HR and operational leadership roles at companies such as CPP Investment Board, Midland Walwyn, Digital Equipment, and Procter & Gamble. His experience spans lifecycle HR; the people related aspects of mergers, acquisitions, and divestitures, and building winning organizations. You can reach him at david.wexler@hotmail.com.

Mentoring Mentors

2008-08-08T15:41:00.002-04:00

Anyone who has ever mentored or is thinking about mentoring a business associate or colleague, might want to follow this link to the CT Innovation Pipeline Accelerator Effective Mentoring Webinar, just posted to their site.

More on Focus - This stuff matters!

2008-07-11T09:56:00.003-04:00

In response to my prior post, a friend and business colleague of mine - David Gibson, CEO of XOS in New York, sent me the following quoted excerpts from John Boe's web page. All of which drive home the focus idea.

"The quality of a person's life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor." Vince Lombardi

Walt Disney was arguably one of the most creative dreamers and determined men of the twentieth century. Walt understood the power of commitment and would frequently tell those around him, "When you believe in a thing, believe in it all the way, implicitly and unquestionably."

The ancient Greek warriors were both feared and respected by their enemies. In battle, the Greeks established a well-deserved reputation for their unsurpassed bravery and unshakable commitment to victory. The key to their overwhelming success on the battlefield had far more to do with how the Greek commanders motivated the warriors than it did with issues of tactics or training. The Greeks were master motivators who understood how to use a 'dramatic demonstration' to infuse a spirit of commitment into the heart of every warrior. Once the warriors had been offloaded from their boats onto their enemy's shore, the Greek commanders would shout out their first order, "burn the boats!"

The sight of burning boats removed any notion of retreat from their hearts and any thoughts of surrender from their heads. Imagine the tremendous psychological impact on the soldiers as they watched their boats being set to the torch. As the boats turned to ash and slipped quietly out of sight into the water, each man understood there was no turning back and the only way home was through victory.

"Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favor all manner of unforeseen incidents, meetings and material assistance which no man could have dreamed would have come his way. Whatever you can do or dream you can, begin it. Boldness has genius, power and magic in it. Begin it now." - Johann Wolfgang von Goethe

Entrepreneurs and investors who perpetuate multiple strategies in order to hedge their risks... It's time to burn your boats!

Focus your attention

2008-07-05T06:40:00.007-04:00

I often come across early stage ventures that are pursuing three or four different alternative products or strategies. When I inquire how they plan to win at several of these simultaneously, I get the same answers. We are pursuing multiple paths because we are not sure which one will be the winner. Or, Our investors are happy to have a portfolio of opportunities to reduce their risk. This causes me pause. On one hand, certainly in this early stage they are right, its difficult to pick a winner before their products are complete or the market has had a chance to vote. But, can they really afford to be pursuing multiple strategies?

Making tough decisions is always a difficult proposition. But not making them sets you up for much more certain failure. The word decide is made up of the Latin roots de- "off" + cædere "to cut"as in cut off other alternatives.

What entrepreneurs and investors who allow the pursuit of multiple alternatives do not understand is that without cutting off several of their multiple alternatives they are giving management permission to fail. That's right permission to FAIL!

Human nature is such that if you have a "fall back" position, an alternative if your pursuit fails, then you tend not to take success to its limits. Somewhere in the back of the homo sapiens' mind, we keep the glimmer of a trap door alternative to failure. Contrast that with the very powerful survival instinct that each of us carries. In the face of utter failure, we are able to call upon super-human capabilities to make the impossible occur.

If you study enough start-up ventures that had everything to lose by failing, you find a long list of very successful entrepreneurs who accomplished the impossible. Again, contrast that with many corporate ventures where the person leading the charge had a cushy job to fall back upon if their intrapreneurial venture failed. Is it any surprise that entrepreneurs create many more important ventures than corporations who have many times their resources are able to create from within these large entities with gracious safety nets?

Entrepreneurs who are pursuing multiple paths take note. Cut off your alternatives and your chance of success will increase! And investors who advise their early stage management teams to retain a portfolio of opportunities should instead capture their portfolio safety from multiple investments rather than diluting the focus of any individual management team!

What's your GHIN?

2008-06-13T14:43:00.005-04:00

We've all heard of private or venture capital companies doing due diligence on the companies in which they are interested in investing. And we probably are convinced that these financial firms are careful enough to do due diligence on the principals of the company. But did you ever think they would check out your golf handicap? Guess what? They do!

I recently found a private equity company as part of their diligence looking up the handicap (and finding out how often they play) of the principals of the company. This could be both interesting and damaging. What if you posted scores for the past two weeks, playing 4 or 5 times a week. Are they going to think about your office attendance? And what if your handicap is a 4? Are they going to believe that you are just a casual golfer?

I doubt that anyone makes a make or break decision based upon how good a golfer one of the principals is. However, it is easy for them to look you up on GHIN.com. All they need to know is your name and your state. If you have a posted GHIN account anyone can see it.

Golfers beware! :)

Dividing the Founders' Pie

2008-06-07T07:03:00.005-04:00

It seems that this problem is quite pervasive. Smart, driven, innovative founders, invent something great. Several of them join together to form the entity necessary to bring it to commercial success. Then, thinking nothing stands between them and their fortunes, they ineptly stumble, fall and sometimes even disintegrate.

What occurred in this all too frequent scenario, is that the founders realizing that success and the rewards that come along with that, were unable to agree among themselves how they each had and would contribute to the success of the company - or how to divide up the founders' pie.

I've recently encountered two such situations, where founders asked me to be the "King Solomon" and divide up their "baby". In both situations I refused - no outsider is capable of accomplishing such a tricky maneuver. In my opinion, unless this is handled appropriately, the rest of the entrepreneurial journey is probably not going to be pretty, if it happens at all.

Divisions like this should be done early - before there is even a glimmer of hope of the success yet to follow. It has to be done when everyone is digging in, doing whatever it takes, and following that founder dream. It has to be organic. It has to be unanimous. It has to be final. And, it has to be over.

So when I was asked to participate in these two situations, I answered the only way I could. Divide it up evenly?

Does this make sense? Did everyone contribute at the same level? Wasn't it one person's idea and the others were brought along to "support" the idea. Isn't there one person who early on gave up everything else to pursue this invention? Is this fair?

My experience is that questions like this are only asked when there already are hard feelings among the founders. It means that they put off this important decision, for good (or bad) reasons and now with that glimmer of success peaking out, they decided this was an important concern.

Without reading minds of the founders, I bet they each feel that they contributed in some special way to getting the company where it is. I bet they each believe they had more impact than they had. I also bet they are not going to be happy with anything less than an equal share.

My "everyone is equal" suggestion may in fact not be entirely equitable. But it is aimed at a more important conclusion that I know is true... spending time dividing up the pie is precious time (and energy) wasted not pursuing the real goal - your own success. Getting this out of the way is critical to any future opportunities.

I've seen important promising opportunities fail by getting mired in this specific issue. They literally could not get past it and they failed. And, perhaps more importantly, I've seen first hand, companies divide the pie up evenly - with the founding partners clearly NOT contributing equally or being equally capable - in one case for 25 years - and develop extraordinary shareholder wealth. Is this a coincidence? I think not. Focusing intensely on the issues that matter - product success - is what startups are all about.

He who spends his time dividing up an all-too-small pie, will end up eating less than one who focuses only upon increasing the size of the pie.

Illinois ITA CEO Summit

2008-05-17T06:08:00.003-04:00

I had the privilege of presenting last week to the Illinois Information Technology Association's CEO Summit. My presentation focused on Lessons Learned, especially when it comes to picking and focusing your business model. I've included my PowerPoint presentation here. I'd love to hear your comments.

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Why is it so hard to focus?

2008-05-04T05:36:00.004-04:00

Early stage businesses are risky. Investors know that. Entrepreneurs are notorious risk takers. Statistically, most new businesses fail. But the ones that succeed often disrupt the status quo, challenging traditional industry leaders, and creating substantial value for their stakeholders. With the benefits of winning so high, American entrepreneurship is alive and well and fueling thousands of aspiring startups each year.

But all too often, we see startups adopting a hedging strategy. They pursue two, three, or more different products, markets, or opportunities at the outset, prior to establishing any beachhead position. When asked, usually the answer is: "its too early to tell which of these might succeed, so therefore we would be negligent to count any of these out."

This portfolio strategy for a newcomer attacking the market is doomed!

A reduced risk strategy for an not-yet-established company will seldom work. While it is possible to just get lucky and win the lottery (and some companies have) the chances of succeeding with a diffused set of investments, lacking a laser focus, has proven to be faulty. The competition is fierce. Well heeled competitors with established distribution, brand recognition, and operating momentum are tough enough to compete with head to head. But, trying to fight multiple battles concurrently is a prescription for disaster.

Startups succeed when their drive, willingness to take on risks, and gorilla strategies all point in the same direction. They win by attacking staid competitors who themselves see that new potentially winning strategy as risky, who lack the desire to do "whatever it takes" to be successful, and who are busy covering their bets so they do not risk the shareholder value they have already created.

This is probably why we often find that entrepreneurs are young and early in their careers. They either are naive to the risks of failure, or they have little to loose. But entrepreneurs who are willing to risk it all, are the ones that big established businesses should be afraid of.

There are many analogies that can help understand why this focus is necessary. Have you ever tried to drive a dull nail into a hard piece of wood? The resistance of the wood, coupled with the larger surface area of the dull-ended nail, makes this a difficult task. Better a very sharp nail with all the force directed on its head to succeed at this task.

War analogies also apply to this situation well. Small armies attacking larger established forces never attack in multiple locations. Instead they pick their targets, focused on the spot of most vulnerability, and use all of their forces in one location. No self respecting general would ever pursue a strategy of trying to go head to head with a much larger enemy in multiple locations at one time and expect to live to fight again. That is until they establish their beachhead and then branch out from there.

And of course there is the old Chinese proverb: "He who chases two rabbits catches neither." Ever tried to chase down even one rabbit at a time - that alone is tough. But with the added distraction of the second, the chances go down exponentially.

Business leaders who are unwilling to focus, to pick one target, and give it all they've got to try to win, are not entrepreneurs at all. They should go back to the comfort of their less risky established company jobs and run a division. As an investor, who better to take advice from than Warren Buffett? Mr. Buffett suggests that if you are looking for a portfolio of investments, then buy the stock of multiple companies, rather than investing in companies with a hedging strategy.

Geoff Moore, Author of the seminal marketing treatise: Crossing the Chasm, suggested that disruptive inventions solve one problem for one market substantially better than the existing solutions (if any exist at all) and focus on taking a single beach head on the other side of the chasm. Doing otherwise increase the risk of failure.

Rather than decrease risk, entrepreneurs that follow multiple simultaneous paths, actually increase their risk of failure.

Deals Take on a Life of Their Own

2008-04-10T07:04:00.004-04:00

Just about every CEO denies it will happen to her. Clinically analytic CEOs and their teams, painstakingly analyze the acquisition (either their own company being acquired or a company they are intending to buy). Great process, due diligence, clear minded accountants, tax & legal counsel, all engaged and focused on the particulars. Investment bankers who sole incentive is the get the deal done. Mix all that together and what do you get? A great acquisition?

Sometimes! But quite often most deals, whether they are good or bad, end up completed. Once offers are made and dollars are discussed, deals take on a life of their own.

What does that mean? It means that even intelligent, experienced, and dedicated professionals all get caught up in very human behavior. That behavior, psychologists tell us, relates to the "investment" of time, energy and resources that have gone into getting the deal to where it is. These costs, this effort, this intense focus, leads to momentum. Like physical inertia, all of this "weight" of pointed activity aimed at getting this deal to where it is may very likely cause the deal to occur, no matter what the outcome of the final details. That is deals may occur simply because they are heading down the tracks at such a great speed (and mass of effort) that even the best laid plans may go awry and make way for a not so optimal deal.

How do you counter this?

It's not easy. Those involved in the deal, and especially those whose compensation is based upon getting the transaction completed (like investment bankers for instance!) will exert great pressure to get the deal (virtually any deal) completed. Acknowledging what smart business people call "sunk costs" and ignoring these as the final deal comes into place, under circumstances like these, is extremely difficult.

The best way we have seen to avoid succumbing to these kinds of pressures is to engage a dispassionate third party - who has the ear of the CEO - to keep a sort of pressure gauge on the transaction. Ensuring that this objective third party stays objective is the first trick. Even outsiders start to get excited about potent deals. Keeping them compensated despite the eventuality (or not) of a transaction and doing whatever you can to encourage them to point out the blemishes is your best medicine.

When deals get done, kudos are passed around, deal plaques are created, bankers get huge fees, and the good feelings abound (at least until the first quarters' combined results are tabulated). Perhaps companies should get in the habit of securing plaques for deals that don't get done, because someone realized it might not be the optimal deal?

Founder Rebounds

2008-03-13T06:56:00.003-04:00

It seems to happen often. Expensive, heavily recruited, extremely qualified (on paper), high profile "professional" CEO brought in to take a founder-led company to the next level. Usually these situations start off with great expectation. Sometimes even a quick jolt of good performance. And then .... much more quietly, the Board reinstalls the founder to take over for a now floundering organization.

What does this mean? A bad hire. An organization that can't exist without the founder's magic. Just another phase of a company's growth.

Many companies have experienced it recently - Nike, Dell, Yahoo, and hoards of others whose names do not register as quickly.

Here are my thoughts on what might actually be happening behind the scenes:

1) It is hard to replace an icon, no matter who you are. Being the second act behind a nationally recognized figure is an awesome task. The expectations may be more than most can live into.

2) It's hard to be your own person with an icon looking over your shoulder. With the specter of the person who performed the magic that got the company to where it is hanging out in the wings, its hard to enact change. No matter what words are used, or how much support the newly hired CEO gets from the founder or the board, its a false belief that real change can occur with your predecessor standing nearby.

3) Some hires are just the wrong choices. Hiring is an art, not a science. Sometimes well intentioned boards and founders hire a person who is not capable of doing what is necessary. If it looks like a duck, smells like a duck, walks like a duck and quacks like a duck, sometimes it really is a duck!

4) Circumstances change. Sometimes the replacement hire is the right person and can adequately handle the job at the time they are hired. But subsequently the company grows, changes and the new challenges require different leadership. Leaders don't always grow at the same pace as their organization.

No matter what the reasons for the ultimate mismatch, is bringing back the founder the right answer? It's a question that remains unanswered. But perhaps its the best answer the Board can come up with at the moment.

The Power of Focus

2008-02-10T20:33:00.001-05:00

Most early stage company failures are not caused by starving from a lack of good ideas. More often than not, instead they are choked by trying to digest too many at the same time.

Competition is fierce. Even companies with unique offerings run up against companies with orders of magnitude more of resources, experience, existing customer relationships and brand awareness. They can often favorably compete with the new entrant, even with a not-as-good solution. As the business world continues to expand, this competition will accelerate and they will set even higher hurdles for these entrants.

There is but one proven way to compete against these business Goliaths. That is to focus intensely and put all of your resources and momentum into driving that single finely honed direction. The sharper your focus the less "force" needed (or the more powerful it will become). Anything short of complete focus diffuses your efforts. Incumbents find it much easier to defend their turf when a new entrant gets distracted by things that blur the new entrant's vision.

Then why do so many early stage companies chase multiple opportunities rather than just one winning strategy? Our research tells us its risk aversion. Despite their entrepreneurial risk- taking swagger, CEOs (and sometimes their investors) like to hedge their bets, invest in several potential projects, hoping one will bear fruit. (Maybe some of this is because CEOs have short attention spans.) But this lack of complete focus is actually riskier than pursuing the one effort that really might have a shot at winning.

Confucius has been quoted as saying - he who chases two rabbits catches neither.

Barney Relationships

2008-01-16T06:28:00.000-05:00

How many times have you been told by a bubbling senior executive of a high potential company about a relationship they have just signed with Bigco. She tells you how that relationship itself validates the value proposition of her company. And you probably believe it. After all, Bigco is a household name with legions of very smart executives who have their pick of the litter of companies with whom they could affiliate. In fact it’s not just one relationship with one Bigco that the company has rung up. In fact they have four or five with several different Bigco-like companies. Sounds impressive.

A good friend of mine, Gordon Rapkin who is currently CEO of an really cool data security firm in Stamford, CT – Protegrity, puts these kind of relationships into perspective. He calls these Barney relationships.

Depending upon your age, you either grew up with kids who were familiar with Barney the purple dinosaur, or perhaps you were a Barney fan yourself. Barney is this loveable character who caters to youngsters. You may recall Barney’s theme song. It included the words that Gordon was referring to:

I love you, you love me ….

I’m sure you can probably hum the tune.

In any case while these relationships may in fact be interesting or may even be predecessors to a more serious relationship, they are not equivalent to real market traction, unless that love also amounts to money changing hands. So while we all can all celebrate these successes, we should be very careful to realize that Barney relationships are not a proxy for a real sales or for tangible market penetration.

Don't get Bored of your Board

2008-01-05T09:51:00.000-05:00

I had a Director who once told me his job was easy. "I just have to show up once a quarter and whine!" Thankfully, this particular director was kidding.

I have witnessed Boards who do little more. However, with the right people and some advance planning, your board can be an important corporate asset. But this requires you as the CEO to provide some leadership.

Here are a five helpful hints that will enable you to get more value from your board:

1) Prepare - If you want your board to provide you with valuable insight at your meetings, get information to them well in advance of your meeting. While you live with the information every day, the board's view of what is going on inside of your company is limited to what you provide. If they get their board books a couple of days before a meeting, they are liable to only glance at the materials in advance. If it arrives a week before, they will find the time to read it through. You may even want to circulate your agenda in advance of the meeting and ask the board's input on topics they wish to discuss.

2) Communicate - Board books are invaluable tools for your Board. However, limiting their information flow to a book once a quarter is a meager helping of corporate information. Get in the habit of communicating more often, sometimes informally. Regular calls between meetings, timely information that comes up that relates to topics you've discussed or plan to discuss, or even face to face meetings outside of regularly scheduled board meetings can help an interested board member stay abreast of what is going on and hence provide richer input. Some industrious CEOs that I have known have given their board members jobs. I don't mean they make them employees or even consultants. Rather they designate special concentrations related to issues the company is encountering and have the board member become the "lead" in this area - typically an area in which they may have some special expertise.

3) Time manage - If you allow it to happen, most of the time at your meeting will end up being a review of your last quarter's performance. These kinds of meetings tend to look a lot like a quarterly report card for the CEO. Anything you can do to avoid this should be done. The vast majority of your meeting should be spent looking forward. The board's biggest value should be as an advisor and sounding board. I usually allocate no more than 1/4 of a meeting to reviewing the past. Your agenda is the start of this trend and then effective time management during the meeting can ensure the rest.

4) Be proactive - Engage your board in the issues that matter. There is a fine line between asking for feedback and asking for direction. I would always prefer the former. In my role as a board member, I'd expect the CEO to come up with a plan and then expose the board to his plan, the underlying assumptions and rationale. But if you instead ask for direction, you may get just that. And it may be a direction that doesn't suit your desires. Don't let the board fall into the habit of making tactical decisions for you. Be proactive, do your homework, make your decisions, and then provide the transparency required to enable your board to understand why.

5) Avoid surprises - If you are going to take on just one of these five recommendations, make this the one! Boards hate surprises. The Board's role is to look out for the interests of the shareholders. Surprises make the board uncomfortable in that role. Surprises connote a betrayal of trust and result in a Board that questions everything and pulls tight on the slack they have given to the CEO. Delivering bad (or even good) news surprises in close to real time, is a much better prescription for the CEO who wants to continue to ensure a healthy board relationship.

Man’s Best Friend

2007-12-07T17:49:00.000-05:00

The prevailing view in national politics is that if you want a friend in Washington, get a dog. This same axiom is true for the CEO of a venture-backed company.

Sure, while they were courting you, your venture capitalists said wonderful things about your company. They applauded your past successes. They told you of their hands-off style and how they were there to help you navigate (only) the strategic issues. They persuaded you that they brought more than money to the table. They brought their contacts, their experience, the synergy of their other portfolio companies, and of course their “brand.” But what they probably left out of the equation is that the sole reason they invested in your company is their expectation of a healthy return on their investment. In other words, they are in it for the money!

Venture capital is often a necessary evil to get you, your colleagues and your company to the next level. Often times you can’t get there without it. And in many cases it is a badge of success for an entrepreneur. Venture backed companies get more attention from the press, tend to grow faster, and, in fact it is much more likely that you will accomplish an IPO with venture backing than without.

Oh sure, you say, you always knew VC’s were in it for the money. And in fact, you’re probably in it for the money too! Otherwise, why would you be putting in those long hours, enduring the hardships of limited resources, competitive pressures and dealing with hard-to-please employees and investors. But while this may be a similarity between you and your VC, there is an important difference. While you both may be in it for the money…they are in it ONLY for the money.

You, on the other hand, may have to maintain friendships and relationships with your employees, you may have your name on the line with your angel investors, friends, or family. It is on you whom the vendors are taking their chances. And perhaps you have some desire to continue running your company. You need to make decisions that may have implications that go beyond just plain money. These “other” considerations all are part of what makes you a CEO. But your VC ultimately wants nothing to do with them.

VC’s really only care about the money. You and your company are just a vehicle to get them to their goal of a return on their investment. If something, anything extraneous, gets between them and their return, like you or your “other” considerations, you will likely find yourself alone.

If you haven’t experienced this yet, just wait until your try to raise the next round of capital. Or, you miss you numbers one time too often. Or, you are forced to sell your company at a price that is not quite what the venture guys were hoping. Or perhaps worse yet, you go through a liquidation. Then see who ends up with what’s left.

So next time you are sitting at a board meeting, and perhaps things are going well enough to let your guard down just a bit, don’t consider for an instant that they the guy next to you is your friend. Unless he’s got long furry ears and a tail, think again!

Time to Replace Yourself

2007-11-30T09:45:00.000-05:00

Fortune Small Business recently posted an article with this title. While I believe the article is a pretty good rendition of what founders go through when they determine they need some help, the issues touched upon are just the tip of the iceberg and are probably only appropriate from a founder’s point of view. But having been the replacement CEO for four different founders, as a successor to a founder you are often fighting an uphill battle trying to do things differently than the founder - especially when the founder is still peering over your shoulder. Often the founder/CEO may decide they need help, but not know how to accept it. In one of these companies, I used to joke that the founder encouraged me to initiate any changes that I thought were necessary as long as he agreed. This was a difficult charge, since doing only those things that the founder agreed with potentially doomed us to relive the past and not improve the business.

It is a unique founder indeed who is willing to leave a successor alone and let them make what the founder may feel are mistakes in order to take the business to the next level. In my experience, the founders who figured out how to get out of the way and give the new CEO the same full reign they maintained when they were running the show, are the ones who ultimately were able to reap the rewards of a successful liquidity event. The others were drastically different outcomes.

Of course you’ve got to have the courage and the foresight to hire the right successor. I am an advocate of “try before you buy” - hiring a successor CEO as a consultant or in a less invasive role before making a final succession decision. But continuing to hold tight on the reins after making that decision can compound the issues rather than solve them.

I’ve often considered that the best prescription for a founder who has determined that they need to hire a new CEO, is to get completely out of the way - which may require leaving the company - in order to empower the new CEO to make the necessary changes.

Large companies tend to understand this when replacing a CEO. Take the example of GE. Welch engaged in an extensive process to identify the appropriate successor. But when Welch stepped down from the role, he quickly extricated himself from the business altogether to enable Immelt to lead the company in an entirely new direction.

Hiring is Hard

2007-11-29T16:48:00.001-05:00

Most people do it poorly. But in early stage companies, the people you hire (and fire) to form your executive team are critical to the success and often the survival of your business. Any early stage CEO must read Marc Andreessen's post Hiring, managing, promoting, and firing executives on this topic.

Marc nails it as he discusses how and who to look to hire, how you know if they are right for the role, how you can tell if they are succeeding, and how you know when it's time to pull the plug.

As Marc suggests, getting it right 50% of the time ranks up there as a best practice result. So figuring out if you have done it right, earlier rather than later, is essential. His post offers a checklist of thoughts before you make (or keep) that big mistake.

Business Models Matter

2007-10-30T05:50:00.000-04:00

Have you ever tried to swim against a strong current? Even if you are a good swimmer, almost no matter how hard you try, its very difficult to make any forward progress.

This is a similar situation for companies who have business models that work against them. [Business models are roughly defined as the value proposition that your company brings to the market.] No matter how hard you work, or how smart you are, or how great your solution, you don't seem to make any money.

Smart CEOs attack business models first when founding or taking over the leadership of a business. Once they have that down, everything else is much easier to handle. In fact history has shown us that even great CEOs will likely fail with a poor business model and in fact the converse, poor CEOs often are propped up and succeed with great business models. So rather than continuing to swim against the tide, consider altering your model.

So what's a good business model look like?

We have found that good business models have the three characteristics that match up with an immediate, a future and a long term time frame.

Great Profit Margins
Stickiness
Defensibility

Great profit margins - Business thrives on this. Seems simple. However, there are untold numbers of businesses that don't get this. The work hard, sell lots of whatever it is they are producing, and like the old proverb, "will make it up in volume." Actually that is what many of these businesses believe (hope?) - that once their volume is sufficient, they will become profitable.

Instead, smart founders and CEOs seek out ways to make their business profitable today. Clayton Christensen used the term "impatient for profits" in his book Seeing What's Next. It's important to ensure that your business today (or as soon as practical) earns profits and that those profits are not necessarily dependent upon reaching some volume threshold. It certainly makes it easier on your scarce capital to do it this way. Businesses that clearly differentiate themselves from the competition (have a unique offering) generally have an easier time making a profit. They tend to have selling prices that have no direct relationship to their cost - typically large spreads between the two. Instead their prices are based upon their value they deliver to the purchaser. Scarcity helps as well - if you are the only one delivering this solution to a target market - you can often name your price.

Severing the markup-over-cost relationship can accelerate any business model. There certainly are great examples of this in the market, often associated with luxury goods that create a perceived value in the mind of the buyer. But great margins are sometimes found in more innovative ways. I've experienced two technology companies that saw this light. Tangoe, an application software company based in Orange, CT found that their telecom expense management was so good it saved big companies millions of dollars. Rather than just charge some amount that amortized the steep development costs of their software, Tangoe has begun to charge based upon "sharing" that value with the customer. Another company based in Hickory, NC, Transportation Insights, had the insight (pun intended) to charge their customers based upon how much their freight logistics services save their customers, generating large percentage profits for this young company.

At one company that I lead, we found that offering our software as a service (back before Salesforce.com made this term vogue) was our key to juicing our margins. After listening hard to our customer base, we heard there was great value in not just handing them the CDs with the code, but in fact in running the application for them (in this case employee equity management) provided more value and hence higher profit margins. (This move also had an ancillary positive impact on the idea we'll discuss in the next post - stickiness.)

So just don't take the business model you've been handed for granted. Be sure it works for you! If not, no matter how good you are, its probably a critical enough factor to rethink whether this is really a business for you.

Good business model provide enticing profit margins - so enticing that your well-heeled competitors might view this territory as ripe for their expansion. While a good business model (and a great product) might generate some nice short term profits, how do you keep this good thing going?

We call this next stage Stickiness. Stickiness is that quality that keeps your customers loyal to your solution.

Stickiness has another dimension as well. The stickier your solution, the less effort you should have in deriving additional revenue from that same client. Sticky solutions are the "gift that keeps on giving." You've probably been told that is is much cheaper to continue to keep a customer than to try to find a new one. Stickiness trumpets this characteristic ... and more!

Often times smart companies can create solutions that are sold once but paid for on an on-going basis. Subscriptions, leases, maintenance, outsourcing, services, royalties and the like are all examples of long term payouts from a single sale. If you can morph your business model into one that has recurring revenue, rather than a one-time fee, do it! Salesforce.com, mentioned earlier, pioneered a concept called SaaS - Software as a Service. Rather than do what everyone else in the software business was doing - selling based upon a large up front perpetual license fee and relatively small annual maintenance fees (usually running 15-20% of the license fee), they decided for this and other good technological reasons to charge a use fee - based upon the number of users, charged annually. This model changed the dynamics of the software industry. Sell a customer today, collect 100% of this year's fees this year, and then be virtually guaranteed next year's fees next year too! Compare that to the typical company that received 100% of this year's fees today and only 20% of that fee next year. Salesforce.com's model almost guaranteed growth - just by selling one more incremental customer.

Other sticky models are created through a community model. By community, we mean that the company has done something more than just sell you today's solution. They have developed a brand that you become loyal to because they delivered what they promised and they provided the reinforcement for you to continue to identify with that solution. eBay created a great community model that actually became more attractive the more customers it captured - there were more reasons to attend an eBay auction each time a new customer joined.

Each of these characteristics provides an ongoing value proposition for each new customer - one that will continue to generate benefits for the company - and for the customer. Done right, these can be like the proverbial snowball - gaining (revenue) volume at an accelerating pace.

Sticky solutions enable CFOs to sleep at night. Sticky solutions generally have a more predictable and less lumpy revenue flow - characteristics that are valued on Wall Street.

So now you have a great profit margin and a reason for your customers to stick around; what else do you need?

With both profit margin and stickiness, you may be set for the short and middle term. But what about the long term, once competitors have enough time to regroup and mount an attack?

We used to call this a barrier to entry. Most Venture Capitalists used to quiz their founder CEOs on how they were going to maintain their position in the light of big competitors targeting them.

Like security, no protection is fool proof. What you need is to find as much protection as you can today and then run like hell to build yourself as sticky a solution as you can. The government gives you some protection if you have developed something novel by issuing patents and copyrights. Each gives you a bit of a legal monopoly (hence scarcity) on your particular invention. But intellectual property protection is usually not available for services or other non-proprietary businesses, and patents wear out and are costly to defend, copyrights are relatively weak protection, so you will need to take much of this matter into your own hands.

So ultimately your long term protection will be built on establishing yourself, through both bulk and brand. Bulk comes from just that - getting big quick. Companies like RIM who invented the Blackberry was a company just in this situation. They initially relied on patent protection which ultimately backfired (they had to pay almost $1 billion for allegedly violating someone else's patent). But even with that big settlement, they didn't have to fold their tent and go home once their IP barrier was breached. Instead they were large enough to withstand the financial impact, had created a very loyal user base, and continued to innovate off of their original design.

There are always obstacles to customers changing brands - sometimes they are simply psychic impediments such as "I don't know how that new product will work - but I do know that the one I use now works fine" - or sometimes there are real switching costs - like having to convert one's data to a new format. But smart companies rely much more on the positive side of attractiveness to retain their loyal customers. They provide a great continuing customer experience - one that keeps the customer from even thinking about changing in the first place.

Together, great profit margins, stickiness and a good defensive strategy can create long term value for the owners of a valuable solution.

Presentation to Long Island Software CEO Forum

2007-10-16T05:23:00.000-04:00

Last week I presented "Lessons Learned" to a group of software company CEOs on Long Island. Below, using a new tool that I found called "SlideShare," I've embedded the presentation. Let me know any thoughts about it and/or slideshare by leaving a comment.

| View | Upload your own

Are you really qualified to be the CEO?

2007-09-18T06:48:00.000-04:00

There is no degree that you can get to become qualified to become a Chief Executive Officer. Brain surgeons go to medical school and then spend years as a resident, apprenticing for the job. And, after passing the appropriate exams to gain certification, they regularly attend informative and educational sessions to stay current with the latest developments in their fields. Securities lawyers attend law school and then take an intense exam proving their merit before being awarded with their certification. They too have annual continuing education courses to ensure they stay abreast of the latest developments in the law. CPAs undergo a similar rigorous indoctrination and also are required to stay current on changes in laws and regulations.

But what about CEOs? The top office, perhaps the most critical position within entities who themselves control more wealth than some nations, need pass through no such process. There is no continuing requirement for CEOs to stay current on what is going on in business, in their industries, or on how to become better CEOs. Sure, there is business school. But, to our knowledge, there is not even one course given at Harvard Business School that pertains to how to do the job of CEO.

So how do you qualify to become a CEO? Are you just anointed? Is it your family connections? Or did you do it yourself?

Certainly there are many CEOs who become just that by founding the companies that they run. Often, as these companies grow, the founders find that the job has outgrown them. Whether this occurs voluntarily or is forced upon them by their investors, it becomes clear to many of these founders that perhaps they are not the right people for the job.

There are more family run companies than public companies in the United States. So your chances of becoming CEO as a birth right are much higher than climbing the corporate ladder. But here too the CEO job can become a perilous perch.

Other CEOs come from climbing the corporate ladder. They are either good at their prior jobs, show promise in leadership and decision making, or perhaps are just good at the game of office politics. They get appointed by their boards into the job.

But are any of these CEOs really qualified for the job?

What we have found from the years that we have spent working with some of the best (and in some cases some of the not so good) CEOs, is that how they came about capturing the job had little to do with their capabilities. There are some good CEOs who were simply the next generation of their families. There are some that founded companies. And there are some that climbed the corporate ladder. The characteristics of the good ones all seemed to coalesce around a similar set of habits and characteristics.

Our hope is that if you aspire to the role of CEO or already are one today, you probably should consider how you can get good (or better) in that role. The difference between a mediocre CEO and a great one can be the difference between literally tens or hundreds of millions, or even billons of dollars of stakeholder wealth. While we don’t believe that CEOs alone are what causes companies to succeed or fail. It is clear that without a good CEO, a company is clearly hindered in its ability to succeed.

Straightening out Employee Reviews

2007-09-02T09:52:00.000-04:00

I've spent several hours complaining about Business Week's coverage of a number of issues. I thought it only fair to try to be balanced in my comments. This week's issue (September 10, 2007) includes an article in the UpFront section that talks about how to improve employee reviews. Courage it says is necessary to overcome reluctance to conduct such a fundamental business interaction. That kind of courage is obviously sorely lacking in our culture today. That's probably why 90% of managers thing they are among the top 10%. Kudos to Business Week this time and for their balanced inclusion of Dr. Kerry Sulkowicz's viewpoint. If our CEOs don't pay closer attention to this concept surely many of us will be leading what amounts to be a ticking time bomb of a company with a quite out of touch employee base.

The Five Most Important Founder Issues

2007-08-25T07:46:00.000-04:00

Just ran into this posting that hits several critical founder issues right on the head. Take a look at Roger Anderson's Modern Magellan post entitled: Founder Issues - New wine in an old bottle Part 4. Roger lists the 5 most important founder issues for a new company:

1. Control
2. Communication
3. Personal value
4. Short-sightedness
5. Salary

"It could be argued that they all exist in most founders, regardless of the level of experience. A founder with prior experience may feel that they know more about business than anyone around them. Such over confidence can lead to errors that amateurs do not make."

His posting is a good read.

90% of Managers think they are among the Top 10% of Performers

2007-08-13T12:28:00.000-04:00

Business Week, August 20 & 27 edition, reports on p. 43 that among other things associated with how people view their "work" environments, this startling statistic. The percentage gets even higher - 96% - when they segregate out only companies with 50 or fewer employees. Like Lake Wobegon, where all the students are above average, the idea that so many managers think they are doing so well is likely a surprise to their supervisors, or is it?

Certainly, it is a statement of the ineffectiveness of our employee review systems for this many employees to be this wrong. Companies must improve the process of evaluating employees and communicate this clearly to their people or risk a plethora of wrongful termination suits, seldom improving employees and mediocre company performance. Perhaps telling employees the "bad" news is a difficult task. However, the consequences of not doing so will likely be enormous.

Lessons learned

2007-07-11T07:23:00.000-04:00

During the past year I have reviewed several dozen business propositions, talked with founders, entrepreneurs, angel investors, venture capitalists, and plain old rank and file business people. I've been in search of the the holy grail of business opportunities - and have yet to find it (but that is the definition of the holy grail isn't it?)

Along the way, I learned and confirmed some business truths that I thought were worth sharing.

Money

There is lots of it available in the market. Even VCs have more capital than they can manage themselves.
Valuations are always astronomical for other companies (i.e., not yours).
Angel capital usually comes from people who have too much time on their hands and put their noses in places in which they have no expertise.
Just because you have money to invest does not make you smart – in fact there may be an inverse correlation. (Thanks to Harry Gruner at JMI for that truism).
Money alone can’t help a bad venture or a good venture with a bad management team.
You probably can’t succeed without it.
If you continually have too little of it, you either are spending too much time looking for it, your valuation is stupid, your management team is inept, your venture is not worthy, or more likely all of the above.

Management Talent

There is not enough to go around.
In the land of the blind the one eyed man is king.
A combination of business savvy and engineering talent is virtually non existent.
Most techies would disagree.
Just because you are a founder, does not mean you deserve to run an organization (unless you are the only employee).
Good management techniques transcend most industries.
If you think your industry (or business) is different, you are wrong.
Founders who hold the title of CEO only because they started the company are usually in the wrong job.
Founders who have this epiphany, can actually become good CEOs.
Friends and family teams are usually all that is necessary to burn down a very promising venture.
Most bad management teams don’t agree with any of this.

Technology

You can’t risk your success on the back of one or a small team of technical people who don’t believe in technology transfer as a priority.
As a CEO if you don’t understand it, over time you still won’t get it.
It is highly overrated.
Companies that start with great technology and succeed have figured that out.
In order to succeed, your technology actually has to solve some problem.
Creating the problem just so your technology has something useful to do just won't cut it.

Sales

Great sustainable sales only exist in an environment where there are processes and metrics.
If you claim to have metrics, but don’t track them or can’t recite them, you are fooling yourself.
If you think your business is different and you don't need metrics, you are wrong.
Great sales talent is not personality based – it is process based.
If you are not concentrating on how to create reproducible sales – you won’t have any.
You can always spot a sales driven organization - their employees wear company-logoed clothing.

Founders

Believe their ventures are worth at least an order of magnitude more than people with money do.
Think that the money guys don’t get it.
Expect that splitting the pie is equivalent to shaving ice.
Need adult supervision.
Every organization has at least one.
If you care about how people feel about you, it’s probably best not to be his/her immediate successor.
There is much too much more to include (see the rest of my blog postings for more).

Details

Some people thrive in the details.
This isn’t always bad.
There is a place for them in every organization.
I’m not one of these people.

Quality of Life

In today’s world this often takes center stage.
Working with great people, having a flexible work environment, and controlling your own destiny often count more than fewer hours in the office.
Working for a, with a, or just be- cause can shift this balance.

Risk

There is a significant variance about the propensity of individuals to accept risk, which varies over time, with the weight of their pocket books, and the size of their mortgage.
Potential participants in any venture have different short term vs long term needs which also varies over time.
Everyone says they are looking for long term wealth generation.
Most can’t afford to really do that.

People

No good person wants to work with assholes.
Most assholes would love to work with you!
You are only as good as the company you keep.
That includes clients and investors.
Even a bad technology can succeed with good people.
The converse is never true.

The Founders' Pie

2007-06-27T05:05:00.000-04:00

A reader of this blog referred me to this article about a Founders' Pie Calculator as a way to add some science to splitting up the founding pie. While this method is also still an estimate, it does require that the founders put some tangible thought behind relative values brought to the organization and it does bode well for future sound decision making.

Make Yourself Dispensible

2007-06-25T05:06:00.000-04:00

Where would your company be without you? Better off?

Most Founders don't even consider where their companies would be without them. In fact, founder organizations often require intimate and frequent communications with the founder. This is the natural result of a driven founder with intimate knowledge of the marketplace and the solution being produced . Founders tend to take few vacations that allow them to become untethered from the organizations they created. Founders make many (most) of the critical decisions for their companies. Founders hire people who execute on the founder's decisions - usually not decision makers themselves.

But have you ever thought about whether this is bad or good for your company? While it may feel good to the founder - no decision gets made by some bumble head who doesn't know as much as the founder - and it may make the early stages of a company function efficiently - no bureaucracy, in the long run this poses an undue constraint on the organization as it grows beyond double digits of employees.

Founder decision making is just like the days of time sharing computers. For those of you who are not old enough to remember, time sharing computers gave multiple people access to a single computing resource (usually connected via a slow dial up line and acoustic coupled modem) by slicing the time the processor was dedicated to each individual task. Usually this was done fast enough to make the user believe she had unfettered access to the computing resource. However, when enough people tried to access the computer all at the same time, the response times suffered. (We actually are spoiled now - we accepted these delays as normal - such lack of responsiveness even under the best of conditions would not be acceptable today.)

Similarly, as the load increases on the founder with more and more employees clamouring for access to the founder, decisions get slower and slower - sooner or later bringing the organization to its knees.

It is the unique founder who "gets this" (before her board steps in) and begins to decentralize decision making. Often founders feel uncomfortable taking this step - allowing the bumble heads to make the decisions. They are too used to being the "go to" person for all major issues that anything short of that leaves them numb. But as soon as a founder realizes that she can hire smart people and permit them to make some of their own decisions, the organization gains a whole other level of potential and cycle times can begin to reduce.

So next time you revel in the idea of your indispensability - think again! Maybe you need a vacation?

Vote with Your Feet

2007-06-08T15:51:00.000-04:00

Ever been in an organization where after a change event occurs there is a constant back channel discussion about how the sky is falling? Ever participated in one of those conversations? Come on now, be honest!

There really is only a binary decision that needs to be made when experiencing a change event: either embrace the change or vote with your feet - that is get out if you don't like it.

Change is often accompanied by the unknown. It's human nature to expect the worst under conditions of change. So in the organizations I've led, I always suggest the following approach.

1) Give change a chance. Often times people react immediately to change. For all they know the change might be good or might enhance their career opportunities. So unless change hits you directly between the eyes (like in the case of being laid off due to a change), wait with a positive (or at least neutral) attitude to determine whether or not the change that is occuring is something you can live with.

2) Once you determine that you don't like the change (and you've at least given it a chance) vote with your feet. Get out. Or at least start the process for finding a new opportunity.

All too often employees choose a third path which is to stay and complain. When you stay and complain, you've got no one to fault but yourself. Complaints feed upon themselves. They foster an environment of resentment. And they don't lead to any positive results - either for the individual or the organization.

So either embrace the change ..... or vote with your feet!

Earnouts are for Sissies

2007-05-25T05:51:00.000-04:00

The ultimate founder transition - when the time comes for a founder to sell his or her "baby" - the highest hurdle encountered is often the PRICE. Buyers and sellers may find that there is a large gulf between the realistic value for the company and the price the seller is willing to take. Whether this is due to asymmetric information, scarcity, or the psychology of a founder expecting their kid (like in Lake Wobegon) always being better than average, it does create an obstacle to completing the transaction.

All too often, this gulf is bridged with a mechanism commonly called an earnout. An earnout is simply a way to pay less money today and (perhaps) more money in the future, based upon "proving" the value is actually higher than it appears today. How do you prove it? Typically, by increasing revenue, earnings, or the accomplishment of prescribed milestones.

So the seller agrees to take less cash today with the promise of a future upside (sounds very entrepreneurial) and the buyer agrees to pay what she believes to be the value today and something in the future if certain conditions are met. In theory, this appears to be a sound compromise. In practice, it often becomes a contentious and inexact computation.

So, if they appear so promising, why don't earnouts work?

Less than obvious to the innocent bystander is the fact that an earnout is used to paper over a disagreement. Like any good, long term relationship, a firm foundation of understanding, trust, and agreement is required to perpetuate the relationship. One founded on a disagreement is an indication of the quality of its construction.

Extenuating circumstances become the rule, not the exception. Once merged together, decision making on issues that may impact the trigger criteria may fall under the control of the buyer. While reputable buyers may not purposefully "game" the system to ensure that triggers are not met, they may in fact find that it is in the interests of the now "greater good" for the business to be run in a way that no longer hits those triggers. And guess who is making those calls now? Usually, it is not the seller - who has the vested interested in hitting those targets.

Who determines the payout? Sellers should understand that once a transaction is completed, the "golden rule" controls. (The "golden rule" is usually understood to be - he who holds the gold, makes the rules!) Buyers will make the determination as to when and if additional payouts occur. While agreements may be carefully crafted by expensive and sometimes even competent counsel, in practice it just may not be clear whether or not the trigger criteria has been met, several years into the future - especially if in between, the game has changed.

History has shown that earnouts don't always get paid out at the times or at the values that the seller had expected.

So should a Seller just say no? The realistic answer is no (I think that is a double negative!). Earnouts are ok to use as a seller if the expectation is clearly set that this portion of the potential purchase price is just gravy (or icing on the cake if you like that analogy better). Negotiating a purchase price that is "acceptable" even if the earnout is not paid, and accepting the earnout as a potential extra to the deal, will lead to a much sounder future relationship.

Of course if you are buyer - Earnouts are great!

Cheating - or Postmodern Learning

2007-05-07T07:20:00.000-04:00

I was absolutely amazed to read the commentary in Business Week, May 14, 2007 p. 42 from Michelle Conlin on the Cheating scandal at Duke's Business School. Can there really be a question here of whether these graduate business students, who in complete disregard of all ethical and statutory standards of this prestigious business school, did something WRONG by collaborating (CHEATING) on a take home exam?

I too am a fan of open source, collaboration and the idea that capturing the participation of customers and employees is required in this new 21st century competitive environment. But to write off this cheating scandal based upon the "mixed signals" society is giving to these students, is tantamount to explaining away Enron's criminal activities as just doing what everyone else was doing. The idea that email, instant messaging, and the iPod has somehow created a society in which cheating is de rigueur is just plain misguided! Michelle, if you don't believe that these students thought they were doing something wrong, then I suggest you think again!

How can a publication like Business Week publish such garbage and even allow the thought that this behavior should be condoned as a plausible argument? Haven't we had enough of our fair share of misguided business, political and religious leaders provide a large enough pool of miscreants to make us all uncomfortable with the role models our society has created?

This argument that "one can understand the confusion" that somehow cheating on an exam should be written off as postmodern learning is not "food for thought" as Michelle portrays it, this is our corrupt view of the lowest level that our standards have ever achieved. Business Week should know better!

Running the Funding Marathon

2007-04-06T06:04:00.001-04:00

So what is the right value for raising institutional (venture) capital?

As with many things, beauty is in the eye of the beholder, or in our case, value is in the wallet of the investor. Whatever the market will bear is the real value of the company. This value may and will have nothing to do with the value your angel investors paid for their stock. It will have absolutely nothing to do with the amount of work you and your team put into making your product or putting together your offering. And it certainly bears no relationship to how much the company would have to be valued so that you retain control.

Rather than focusing on the paper value of their current ownership, founders should think ahead, through as many of the "gates" as they can forecast, that stand between them and commercial success (all the way to a liquidity event). It's like a marathon, as opposed to a sprint. The leader at the mid point is not necessarily indicative of the winner at the finish line. Not all money is created equal. It may be more important to get a good value, rather than the best value, from a partner who is in it for the long haul. This may mean taking a lower valuation today in return for accelerated market entry and mind share from a partner who brings much more than just capital to the equation.

Often we see founders falling prey to early angel investors "bidding up" the value of their companies during several cash calls in an effort to increase their short term valuations. While this may "feel good" at the moment, it could become a critical obstacle to their long term success. Founders should understand that it will be VERY DIFFICULT to later get an early investor to digest a crammed down valuation if these angel values were artificially inflated.

Here's an example: A plastics company in upstate NY purchases some very interesting patents from a large industrial conglomerate who doesn't view them as critical. They raise angel capital to begin to prototype this product. They run out of cash. Management either knew or should have known they would need more cash. They go back to their investors needing more capital. The investors agree, perhaps they bring in a few of their friends in this round, but only at a newly established higher value. This continues for several more years. By this time the company has yet to commercialize its product, yet the valuation is now in the double digit millions - based almost entirely upon the angel investors bidding against themselves to increase the value and to feel good that their investment is increasing in value. Has this higher valuation helped them?

Absolutely not!

They are now getting closer to being able to commercialize the product. They need sales and marketing funding, they need production facilities, they are ready for their launch. This requires capital in excess of anything they have raised in the past. So they seek out institutional investors. In fact as they become a bit more desperate, they also seek a strategic buyer. There are several interested acquirors - but they each in turn demur due to the demanded valuations. Ultimately there is interest from institutional investors (bigger fool theory in play here?), they can't justify the lofty valuations the angels' fictions have created! But the company needs the capital. And voila - cram down occurs. Founders get squeezed (out completely in this case). Early investors get burned. Later investors get fried! And company's prospects for success are still in doubt. But the founders felt great at these lofty values, that is at least until ... they got dumped!

What could have happened?

With some foresight, the founders might have begun to understand that the only real valuation that matters is the one just before they cash out. Restricting their fund raising rounds to smaller increases (or sideways) in value that were commensurate with their market progress, might have enabled them to keep the valuations in line and then be able to raise capital from institutions at an appropriate rate. Or, it might have enabled them to cash out in a sale to a competitor at a valuation they could stomach.

This vortex of capital raising can stymie the progress of even the most promising venture. So beware when you hear yourself remarking about how the world doesn't get your value proposition! The "best" valuation you can have for your company, may not be the one that momentarily makes you currently feel the richest.

Your Money or Your Life?

2007-04-03T16:41:00.000-04:00

When is the right time and at what is the right valuation to seek outside funding? Founders and entrepreneurs constantly quip that the world (that is everyone outside of their four walls) does not understand their true valuation. Obviously, they know something that everyone else doesn't. (But do they?) And as such, entrepreneurs often wait, sometimes too late, to raise funds.

Sometimes waiting is exactly the right thing to do. If the product is not yet complete, the value proposition for the outside world has not yet been proven, or if the claims the company is making are just not yet credible to the financial community, this can be the appropriate move - assuming the company has the wherewithall to survive. But founders and entrepreneurs should be wary of continuing to push that rock by themselves for a bit too long and the implications that their "slow" pace of progress will have on their competitive strength.

Sometimes getting to market first is just not enough! The market is strewn with dead companies who introduced the next great thing to the market, only to bowled over by a better heeled competitor who follows in their path. Getting there first is part of the battle, having the resources to execute, to capture market and mind share, is a critical hurdle that must be overcome to be a commercial success.

The savvy entrepreneur should understand that having the appropriate resources at just the right time (no earlier - but certainly no later) is critical for maximizing the value of their opportunity. If your product or service is ready to be launched, but you delay due to perceived poor valuations, you may in fact be giving up much more value to the market than the lower-than-expected valuation costs you. If you miss a market opportunity, or enable a competitor to impinge upon your market space, or create noise or confusion in the market, you may just find that you have diminished the value of your creation beyond repair.

Founder Forecasts

2007-03-03T09:37:00.000-05:00

Having recently spent a substantial amount of time reviewing new business opportunities, I'm beginning to realize just how hard it is to come to agreement on the value of an early stage company. I had thought that this would be challenging, and certainly it has been. However, I continue to be surprised by the metrics (or lack thereof) that are offered by founders and the shaky foundations for their logic. So below is my advice to founder-types on what they should avoid when trying to negotiate the worth of their progeny with any outside investor.

First Lesson - You can't use discounted cash flow analysis as a method to measure value when there are no cash flows. Almost every time a valuation discussion with a founder begins, someone whips out a discounted cash flow analysis. I guess business schools all teach some version of DCF. and perhaps business incubators perpetuate this teaching by suggesting it to budding companies. But the DCF method for valuing a business was based upon "predictable" cash flows. Without predictable cash flows, applying mathematics to speculation does not make the result any more real. And, increasing the discount rate to account for the "risk" that these cash flows may not occur, while better, still results in factoring a mathematical formula against a speculative occurrence - still not helping the result to become any more real.

Lesson Two - One or Two Customers does not a trend make. As Abraham Lincoln once said: "you can fool some of the people all of the time." And this is often just the case. Or at least you haven't yet proven that your idea has widespread appeal. Extrapolating value from the first few customers to anticipate broad market acceptance is at best optimistic or at least premature. In mathematical terms, you need a set of points, not just the first few, to spot a trend. Early adopters are just that. Market acceptance occurs as Geoff Moore would describe, when you cross the chasm, when real customers purchase products as a matter of course, not as a pioneer. Anything less may be an indication of future opportunity, but certainly not proof.

Lesson Three - You can't pay your bills by trying to cash in on someones interest in your solution. I can't tell you how many times a founder has told me that things are going great because several potential customers, partners, venture capitalists, angel investors, (you can fill in the noun here) has told them how "interested" they are in taking the next step. I can't speak for everyone here, but it seems like a very American personality trait to use the word "interest" to mean "please leave now since I have a lot of other things to do and I would rather not tell you how I really feel about what you are trying to convince me of." If you don't believe me, try being a bit cynical next time someone tells you how interested they are in what you are pitching. But even more important, interest (even if real) is a long way from cash in the bank. Founders by nature are optimistic. But they need to gain a healthy does of cynicism and perhaps an objective sales process, before they can begin to value the "interest" they are receiving.

Lesson Four - While selling the first few of anything may be difficult, it doesn't mean your organization will be capable of selling a sufficient quantity to become profitable. I recently became enamoured with an early stage company and its solution. I spent a good amount of time investigating how the company was selling its solution. What I found was that the direct cost of sales and implementation was something in the range of 10X or more the gross revenue the company would receive from this customer (who had shown interest - see lesson Three). But just like the businessman in the well told joke, I was told, don't worry about the cost, we will make it up in volume. Well, really what I was told was that these were just early sales and in the future this would be much easier and cheaper. While I agreed that there were some very clear ways to reduce the cost of sale, there was no real plan for doing so. No one had thought through how they were ultimately going to deliver this solution at a profit. And while early cash flows and even beginning profits are interesting and necessary, unless the company is capable of generating some kind of real gross margin on its solutions, this is no place for an outside investor.

Lesson Five - Sometimes you have to give up more than you would like to get your idea to market quickly enough. I've run into several situations with founders who need to raise capital, but they only want to raise a small amount because too much will be too dilutive to their early investors and themselves. I always approach these situations with admiration. I too would want to not give up any more equity than necessary if I had a early stage company that I believed was quite promising. However, don't let dilution blind you to market reality. If your idea is good, then get it to market. If your idea is completely protectable - i.e., you got an encompassing and defensible patent that will be difficult to work around - you might be able to ignore this lesson. For everyone else, if you slowly inch your way into the market, and it is in fact a good idea that you have, as soon as you have proven sufficient viability, you have opened the door for someone with more capitalization and more resources to steal this market from you. Taking market share early is often the best tactic. To borrow and idea from a seminal marketing book Positioning authored by Ries and Trout: getting to market first is important, but getting there firstest with the mostest (big presence and share) is critical. In today's global market, you can be sure there is someone somewhere who is waiting to pounce. If your slow path to market risks someone taking over leadership ahead of you, it would likely behoove you to take the larger-than-you-would-prefer dilution, and ramp up your plans early.

So how does this help you come up with a mutually acceptable valuation? My advice is be honest. Most investors (with some notable exceptions) do not want to steal your business from you. Usually, it is more important to have you completely engaged in the business, than it is for the investor to get your equity at a bargain price. Investors like to have rational conversations with factual underpinnings. They often are enthused when they hear some healthy skepticism in their conversations with founders. If you can run the business and grow it fast enough without asking for any outside funding then do it! But if your business model requires that you capture market share and ramp up sales more quickly than your personal capital requires, then understand that being realistic may be just the ticket you need to capturing a share of the investors wallet.

Sticking around too long?

2007-02-10T06:09:00.000-05:00

I recently was referred to a blog post on Fred Wilson's Musings of a VC in NYC. Fred suggests that keeping a founder around post his replacement - moving "up" as he calls it - is an important positive development. I think Fred may not realize that while it may have positive implications for the right personality founder, it may pose some significant issues for the hired gun CEO who steps into a position which perhaps may have been previously filled by a "legend." Forcing a newly hired gun CEO to operate in the shadow of a large personality who has accomplished the impossible of starting and building a substantial company from scratch, while someone remains to look over his shoulder, can be an undue burden that hinders rather than helps the company. The fact that many founders return to their old jobs years later may not be as good a prescription as Fred leaves us to believe.

Good CEO's are not puppets. Moving the founder "up" to become the puppeteer to manipulate his strings (unfortunately what it appears happens with some founders who stick around), is likely not what you hired his successor for. When change is required (which often is the reason for replacing the founder to begin with) keeping the old guard around and still "in charge" as Chairman, can be a sea anchor on the successor's ability to implement change. It is a unique founder for sure who does not try to perpetuate their own ideas even when moved out of the CEO role.

Witness what may go down in history as one of the best performed transitions (albeit not of a founder, but the analogy certainly still holds) with Jack Welch giving way to Jeff Immelt. Jack carefully picked his successor after years of scrutiny (may be a big lesson there too on the care taken to select the successor - See my posting on Try Before you Buy) and then left the company entirely, in order to enable Immelt to do the right thing and not be encumbered by Jack's legacy. Jack clearly was quite a successful CEO. By all rights he could have stuck around and "helped" Jeff transition the company into its next stage. Instead, Jack felt it necessary to get out of the way. In fact, Immelt undid many of the well worn strategies that made GE successful during the Jack Welch era. But Jack was smart enough to realize that change was necessary and chose a capable successor, gave him the keys and waved him goodbye.

Is Jack available if Jeff needs him? Sure! But he is careful not to have his shadow restrict the vision that Immelt requires to take the company to the next level.

Slicing up the Pie

2007-01-21T06:00:00.000-05:00

One of the toughest moments for a new founder/CEO is when she realizes that success requires she begin to slice up the pie. Sometimes this happens first when its time to attract or compensate early employees - not all of whom are willing to take severe pay cuts without something in return. Or sometimes her first encounter is when it's time to raise some outside capital. But how big should the slices be? And how many of them should be cut? And what does this term dilution that people keep throwing around really mean?

The "pie" analogy is often used to describe the cutting and serving of slices of the business often in return for something of value. Whether this is a pizza, lemon meringue, or other category is not necessarily the relevant question. Venture capitalists will talk about "increasing the size of the pie" - usually about the time they are angling to cut themselves an oversize slice. And founders are often times seen giving out big servings to their original founding team without thinking through how many her pie will feed.

So there are several important considerations for how, when, why and how much, and to whom to serve from this founder's pie. Below are three common mistakes that the unwary founder may be (mis)guided to endure.

Common Slicing Mistakes

Excessive Portion Sizes for Early Employees - Early stage companies are often run like families. Sometimes they in fact are families (see Why CEO's Fail). Close knit groups of employees come together to do the impossible. To create something extraordinary from nothing but a vision. They dream dreams of (market) power and riches beyond most of the founding team's conceptions. They work hard, often in close quarters, and form strong interpersonal bonds. Many times these bonds cause founders to mistake relationships for value. At what Venture Capitalists might consider a "weak moment" for the founder, large slices of the pie are doled out early to the founder's team.
Using equity instead of cash to pay operational costs - in the earliest stages of a new venture, it is common for cash to be dear. There is much to get accomplished and too little cash to "pay someone" to do it. So often founders are induced to use equity (another slice of the pie) to substitute for cash. Whether this be for a bargain property lease, purchasing of equipment, or hiring a consultant, equity may be all the founder has as a currency to purchase these resources. So necessity itself is the mother of this mistake. And, although there may be little alternative than to use equity, the cautious founder should realize that while these expenses may be real, the use of equity is akin to mortgaging the future of your venture "just" to get this resource today.
Unwilling to create slices that increase the size of the pie - the flip side of the prior error is the contrary position. There are times in the life of a new venture when resources present themselves, in the form of unique talent, critical opportunities, and cash funding. Founders sometimes find themselves unwilling to part with even a relatively small slice of the pie, even though these resources may only be fleetingly available and could materially grow the size of the pie.

So how does a founder avoid these mistakes? Some forethought about the end result and understanding a bit about dilution will certainly be helpful.

There only is One Pie to Slice

The first thing to understand when slicing up your pie is that there is only one pie to slice. Better put and despite some notable con-men to the contrary, you can only give or sell 100% of your company. That means there are a limited number of slices. Once you cut a slice out of the pie, that slice is gone. Even if the pie gets bigger (the venture gains value) that slice will grow proportionally as well.

Early stage employees may be very important to the early stages of a venture. It is common for these early stage employees to be just that: good early stage employees. They may not be capable to take the company to the next stage. They may have to be replaced by new talent at a later stage. Realizing that giving up an extraordinarily large slice of the pie early, may leave you "slice-less" later when your venture needs to attract talent that may not be willing to work for just a salary. Employees may come and go, but there only is one pie.

When you pay for current expenses using slices of equity, you also should be thoughtful about what that means at a later stage. Remembering you only have one pie, while realizing your expenses will continue forever (they are recurring), will help you to understand that you won't be able to use slices of your pie for ongoing expenses forever. Therefore if you have to use slices to pay for ongoing expenses, be sure you know when you can reverse this trend. And, while the size (value) of your pie (entity) may be small today, most people value equity based upon future value. [Our own public stock markets are really valued based upon the potential value the ownership right (shares) that you purchase. Financial types often speak about discounted cash flows - or the value of this share of the company based upon expected future results.] So if you use stock to pay for current expenses, be sensitive to this valuation process and don't sell yourself short.

Increasing the Size of the Pie

Being realistic when opportunities arise that will grow the size of your pie is equally as important as careful scrutiny of giving out early slices for employees or expenses. Your value (the size of your slice) is truly dependent upon BOTH the proportion of the piece you have for yourself AND the size of the pie. A 1/4 slice of an extra large pizza is bigger than a 1/4 slice of a personal-size pizza. Understanding what will grow your pie is critical. When angels or venture capitalists offer you cash in return for a slice of your pie, you must look at the impact that financing has on the size of your pie.

Here's a quick lesson in pre and post money valuation.

Venture capitalists speak to you about the value of your venture. They may offer you $1 million for a 33 1/3% share in your venture. To you that means your venture is worth $3 million. Once you get their money your whole pie will be $3 million sized - that's the size after they added their $1 million. By simple math - the "pre-money" size of your pie was $3 million less the $1 million they added - or $2 million.

So based upon this financing offer - you used to have a $2 million pie that you had unsliced - all was yours. The VC is offering to increase the size of the pie another million larger - now $3 million. In return, they are going to take a slice that is 1/3 of the pie (1/3 of $3 million). You get to keep 2/3 of the pie or $2 million of the size.

So in this case the pre-money valuation was $2 million. The post-money valuation was $3 million. Assuming you both agreed on the $2 million pre-money valuation of your entity, the new financing was not dilutive - did not reduce the actual size of your slice. While you now only have 2/3 of the pie left, that slice increased in size sufficiently to leave you with the same amount (to eat?). While the amount of (surface area) of the slice of the pie that you still hold has neither increased nor decreased, the financing has put you in a position to continue to grow the value (size, surface area, value) of your pie into the future. You now may be in a position to stop using pie slices to pay for current expenses. You now may be in a position to attract the kind of talent you require for this stage in your venture without giving up too many large slices of what you have remaining. Overall, taking on the cash should help you continue to grow your pie beyond where you could take it yourself.

Of course you always could be happy with the size of your current pie. You always could decide that there is no need to grow the pie. Those are your decisions. But understanding and accepting that outside resources may be required to ultimately grow your pie to the size you desire, and that to do so may require you reduce the percentage of the pie that you own, will be critical to how you deal with the distribution of slices and the raising of outside capital.

A very bad Transition

2006-12-27T06:37:00.000-05:00

A good friend of mine in Austin, TX, Hank Jones (Henry W. Jones, III Esq.) who is an industry pundit and expert on Open Source issues, sent me information on a founder transition that really went awry. According to allegations filed by the company in the Superior Court in Orange County, California, Medsphere apparently twice tried to find a CEO to take over from two founder brothers ( Why CEOs Fail?). The first ended abruptly less than a year into the new CEO's tenure when the brothers forced the Board's hand. A second CEO was recruited with even more egregious consequences. According to the company's amended complaint, the two founder brothers got so angry at the direction the new second CEO put in place (only three short months after he took over), they clandestinely published the source code for the company's proprietary software as open source. That certainly put a crimp in the new CEO's plans (see his letter regarding the company's open source stance). Wow! Talk about a bad transition! Boards everywhere should be paying close attention to how dire the consequences of a bad transition can be and what an awkward position they can be put in when founders join together to counter a new CEO.

2-Feb-07 --> The story continues to develop.

Try before you Buy?

2006-12-26T07:32:00.000-05:00

Most of us who have been through or witnessed a founder transition would agree that this is no doubt a tricky process fraught with potential disaster at nearly every turn. Yet the process most companies and boards engage in with the potential CEO replacement is one that is set up for failure. And failure is what too often results.

Several interviews with various members of the management team and board, some surface level background and reference checks, discussions with some "insiders" who know what this candidate has done in the past, can never be sufficient to really know whether the most important criterion for successful founder transition will be met. That criterion is the chemistry and relationship that is required between the founder and the newly hired CEO.

While most of the "hard" criteria for founder/CEO transition can be learned using a time tested recruiting and interview process, the "soft" skill compatibility can probably never be really understood without trying it out. In-the-trenches interaction between the potential candidate and the founder and team might actually be the only way to really know if this transition will work.

Any organization that can avail itself of the opportunity to try-before-they-buy should take full advantage of that by engaging the CEO candidate as a consultant in advance of a final hiring decision. While this can be awkward for the candidate (confident and experienced candidates will relish this opportunity) and potentially a delay in the final decision for the recruiter, board and the team, finding out early that this relationship is not going to work is a small price to pay to avoid making a bad decision.

Why CEOs Fail?

2006-12-10T09:45:00.000-05:00

One of the most compelling articles ever written about CEO failures has many lessons for Founder/CEO's as well. In June 1999 Fortune Magazine published the article: Why CEOs Fail? The lesson was that CEO failure was generally not caused by a disagreement between the CEO and his/her board, or even a failure of strategy. More often, failure was a product of relying too long on key employees who just weren't cutting it. The CEO's failure was the refusal or unwillingness to get the right people into (or probably more important - out of) the right positions due to personal relationships that had grown between the CEO and his/her team.

Attributing the same characteristics to the founder/CEO seems to be all too appropriate. Often the Founder brings family (husbands, wives, brothers, parents), close childhood or school friends, or others with whom the founder has had an other than pure business relationship, in as early trusted employees. No one would argue that it is hard to sever those relationships; doing so might have severe implications for their outside-of-the office life. However, the implications of maintaining these relationships beyond what is good for the company can be critical to an early stage venture's prospects.

We've seen dozens of ventures that have either failed or been critically wounded by the presence of fairly nice but incompetent friends and family holding positions of authority. Not only does the lack of competence in their particular field hinder the company's success, but it also has a detrimental impact on other employees who have only their objective performance on which to rely.

Certainly the writers of this article (now gone on to fame as pop business book writers) were not focusing on founders when they wrote this piece. However, founders should pay close attention to the issues identified and realize the implications of a more-than-business relationship in the workplace.

Founder adoption

2006-11-13T06:18:00.000-05:00

There is no closer analogy for the hired gun CEO taking over a founder run business than adoption. Founders "baby" their startups, spending inordinate time and attention nourishing them during their early years. Mistaking taking over for the founder (especially one that remains involved in the business) for anything less than this level of emotional attachment is a fatal mistake.

So when I made the decision that we needed to change the name of our company as we positioned ourselves for market expansion, I knew I was in for a difficult process. The founder of my company had been its leader for almost 18 years by the time I took over. He had painstakingly bootstrapped the company and had done so quite successfully. Deciding only after this time that he was finally ready to take on some institutional capital in return for a partial cash out, he agreed to replace himself as the CEO.

The transition from founder to hired gun CEO actually went pretty well. We worked closely together, he as a mentor and me as a change agent. I made no material changes without a detailed discussion and rationale with him and ultimately, if I was passionate about a change, my direction was adopted. If not, and we disagreed, he often was able to talk me out of it.

This arrangement worked quite well. The company grew quickly during the first few years of the transition, culminating during the heat of the market runup in 2000 with us taking on some strategic investors (two of our clients) and our founder being able to cash out even more of his holdings at a very nice multiple. It was at this time, that we decided to expand our business. As our team reviewed the alternatives, one of the ideas that became clear is that we needed a bit more expansive name than the TLA (three letter acronym) that we had adopted as our call letters. So after much painstaking process, and many rejected attempts at renaming the baby, we all agreed (founder included) that the change would go into effect.

We positioned the name change to be announced at a gala affair we had arranged in conjunction with the San Francisco Giants baseball team. We had rented out (then called) PacBell field to invite some of our largest customers, partners, and investors to play ball with Vida Blue and Mike McCormick - two former Cy Young award winners, in a charity event. The idea was to make a big splash with our marketing repositioning.

The founder and I dressed in our best baseball garb in the visitors' club house and began the long walk out from the clubhouse through the dugout onto one of the finest baseball stages in the world. As we were coming up the steps of the dugout onto the field, the founder turned to me and matter-of-factly told me that he had changed his mind and that he was withdrawing his support for the change of name.

Fortunate for me it was too late. I pointed to the scoreboard out in center field that glowed with a welcome message with our new name and logo. The deal was sealed. The baby was renamed, and we all lived happily ever after. (By the way, four years later we sold the company for a slightly lower multiple than the heady valuations of 2000.)

The moral of this story? Don't take lightly the responsibility and emotion that is involved with adopting a founder-based early stage company. There is much more involved than meets the eye.

Rich or King? A founder anomaly.

2006-11-02T04:50:00.000-05:00

A phrase often used by venture capital investors when investigating the motives of a founder entrepreneur is: "would you rather be rich or king?" This arguably gets at the crux of whether or not the founder would give way to the greater good and relinquish his CEO role in return for the riches of success without him leading the way. Savvy founders looking for capital from these deep pocketed venture investors have learned the right answer from the VC's perspective is Rich!

It's not clear whether the Venture Investors are really seeking the truth or just want to see if the founder is savvy enough to answer this inquiry "correctly." But virtually every founder that I've interviewed has a good deal of king (or queen) in his (her) plans. Sure, founders may be seeking riches and financial rewards for their sacrifices and hard work. But ultimately, most founders found companies in order to run their own show (translate into rule their own kingdom).

And doesn't that make sense? Many of these founders were very successful corporate executives, earning good salaries, receiving nice perks, and enjoying the supporting casts of their established employ. Founding a startup involves leaving most of that behind, starting over from little, doing it mostly on your own, and usually getting paid very little for the effort. While founders may dream of some day hitting it rich, that may be a long way off. But the very day they start - they start as duke, albeit over what may be a very small duchy.

The transition to professional CEO usually occurs (is forced upon them) well before they begin to enjoy the promised riches. So the choice for the founder is more appropriately: "would you rather be king or would you rather bank on someone else to lead you to what might someday be the riches you originally envisioned." Not quite the same choice originally posed by the VC during the courting ritual.

So VC's will most often hear the answer that they desire. And founders who need the capital, will continue to answer expeditiously, no matter what their actual motivation.

Why are founders surprised?

2006-10-03T10:55:00.000-04:00

It happens all the time. Hard working capable and uniquely qualified founder of an outside funded company is abruptly told by his board that he is no longer needed as CEO. Founder is surprised!

Most entrepreneurs know that when they accept outside funding they are now subject to a whole new level of scrutiny. Certainly they know that after several rounds of fund raising, when their ownership gets diluted down below 50%, they likely don't have sufficient voting power to override their investors. They also are very much aware, and sometimes have been directly told, that as a founder/CEO they may sometime need to be replaced. And in fact, funding agreements for VC's often include the explicit right to replace the founder CEO.

So why in so many situations that we've seen, when a CEO is told she will be replaced, is this such a startling occurrence?

In my experiences and discussions with founder CEOs I've come across several understandable rationales for this type of behavior:

1) The immortality theory - I know this happens to most founders, but it won't happen to me.

Many founders have the view that they are different from the pack. While others may suffer as less capable, they are different. They will be able to grow, scale and lead the company forever. Didn't they already start a successful company? Weren't they divisional managers leading large teams in their prior lives? This confidence in themselves is what made them great founders to start with. Unfortunately, confidence can turn to hubris, leaving the founder less aware of the reality of the situation.

2) The I'm critical to the organization theory - they wouldn't know what to do if I wasn't running the company.

Certainly in the early stages of the venture the founder is most critical to the success of the organization. But in order to grow there needs to be a knowledge transfer to a increasing number of others within the organization. Technology changes occur; existing knowledge gets outdated; other smart people join the organization. The organization matures. Other functions like marketing and sales take over for technology as the critical constraint. Often times the singular focus of the founder can insulate him from the changes going on around him.

3) The timing is wrong theory - sure I know it will happen someday. But that someday isn't today.

According to research described by Noam Wasserman in his article "Founder-CEO Succession and the Paradox of Entrepreneurial Success," Organizational Science/Vol 14, No. 2, March-April 2003., the timing for replacing the founder can often coincide with the successful completion of a prototype or commercialization of their offering. The experience of successfully meeting a milestone stands in stark comparison to the idea that the founder would be replaced... at least NOW!

So surprise it does. And the consequence of surprise often is the awkward and uncomfortable process of transitioning to a new CEO at a time when the founder is just not prepared to have their heart in the process - all things that make a tricky transition all the more delicate.

Organizations and certainly boards of directors would be well served if they ensured that they maintain high bandwidth communication with the founder, beginning well in advance of a forced transition, in order to reduce or eradicate the surprise factor and its consequences.

An Ounce of Preventive Medicine

2006-09-13T07:07:00.000-04:00

Venture Capitalists are often the impetus for the charge of bringing on a new CEO. And almost as often, the founder/CEO is reluctant to accept the change. However, typically the founder is in no position to object. He really needs to close that round of capital! An expensive retained search ensues. The Founder studiously interviews multiple candidates. Board members, recruiter and Founder have regularly scheduled sessions to vet these candidates. Leading candidates attend second and third interviews with a selected few meeting the staff. The Founder is usually given the final veto which results in making an offer to the candidate that they feel will do the "least damage."

All too often, damage is what occurs. Several venture capitalists have somewhat jokingly stated that to save time and money they should do two searches at once - first for the transition CEO who will fail and then for his/her replacement. While I am not aware of any situation where two searches have taken place simultaneously, it is clear that making a bad hiring decision wastes not only tens of thousands of dollars of search fees and costs, the time and opportunity cost taken by the senior management team and the board to do the search, but also the months when the company founders (pun intended) while this transition CEO struggles with the duel charge of leading the company while establishing a comfort level with the Founder.

This disconnect can sew the seeds of months or years of below the surface conflict, lack of productivity, adding up to a very costly mistake. While a good process may have led to the decision to hire the "right" CEO, even the perfectly suited CEO may not succeed without sufficient advance spadework.

Experienced boards know that the process of hiring a successful transition CEO is based on much more than a good recruiting process alone. Many have found that a good fit depends even more on ensuring the Founder is clear on the roles and responsibilities of the CEO and the Founder - a task that is not as simple as it sounds.

So rather than making that expensive mistake, some preventive medicine may be in order. Here are some "commandments" that will ensure the success of your Founder Transition:

1) Before engaging in the search, get the Board, the Founder, and the senior management team together to talk about WHY a new CEO should be hired; what are the challenges that the company is or will be facing that the existing team is not alone capable of accomplishing? While board members are always busy, be sure there is at least one designated "friend" to the Founder that dedicates sufficient time and maintains a close connection to keep the Founder informed and interested in the process.

2) Discuss openly how the role of the Founder will change when the new CEO comes on board. How will other members of the management team be impacted? Be specific. Discuss roles and responsibilities that will shift from the Founder to the new CEO. Now is not the time to placate a Founder just to ensure they go along with the recruiting.

3) When engaging the recruiter, be sure he or she is aware of the special challenge that the new CEO will face in order to effectively replace the Founder. Recruiters can play an important role in ensuring a smooth process. Experienced recruiters are familiar with the potential problems in having the Founder either intentionally or not chase off potential candidates. If the recruiter is not sensitive to this issue - find another one.

4) Be sure the CEO and management team is using some type of structured interviewing process - Like Topgrading: How Leading Companies Win by Hiring, Coaching, and Keeping the Best People. (Often Founders and the management teams are not experienced in the appropriate techniques for identifying the right hire.)

5) Create a transition plan, ensuring that there is a specific plan for how the new CEO will be indoctrinated, what information needs to be transferred, who will be engaged in the process and a time line for reaching certain transition milestones. (I suggest you get the new CEO to read the book: You're in Charge--Now What? before he/she arrives for their first day at the new company.)

6) Founder and Board in advance of the selected CEO coming on board, work out the tactical details of titles (a new one for the founder), office location, support staff, etc. in order to avoid the first awkward moments of the new CEO's tenure.

7) When the new CEO comes aboard, be sure that Board members are personally present when the new CEO is introduced to show the support that the Board has for the new CEO. Hold an all employee meeting to introduce the new CEO. Be sure the CEO and Founder have coordinated their "statements" so that the company gets the message that these two are working together.

8) Reinforce this process several times with joint Founder/CEO/Board discussions, measuring progress against the transition plan.

Everyone involved in the success of the transition (recruiter, Board, CEO, management team) should know in advance that not all Founder/CEO transitions work. The founder will no doubt go through the standard "grief" cycles of shock, disbelief and anger prior to either accepting or at least convincing the board he or she has accepted the inevitable shift in his or her role.

Even with sufficient preparation, not every hire is a good one, and not every Founder is capable of sticking around while a new CEO reconfigures his/her baby. So be honest, be clear, be attentive, and be sure that the board and the Founder have a high bandwidth communication channel throughout the process.

A clear willingness to fail

2006-08-18T08:29:00.000-04:00

Founders are typically strong willed individuals who focus on a goal and don't let much get in their way. "Driven" is a word often used to describe them. Founders typically are true entrepreneurs in every sense of the word - undeterred by lack of resources, stubborn, won't take "no" for an answer, and unwilling to follow norms and traditions. However, along with that comes a lack of willingness to fail - actually to allow anyone within the organization to fail. Often that means attracting individuals who "listen" rather than take initiative on their own and reinforcing that behavior by maintain themselves as a central point for all decision making.

At an early stage organization, this type of management by autocracy sometimes works well. Even small mistakes in the very early stages of a venture can be catastrophic. But as the organization grows, this type of behavior stifles (or perhaps strangles as one transition CEO put it) the organization. Single point decision making can work with a small team. However, as the team grows past the point of the founder's direct sphere of control, this type of management breaks down and likely will retard the organization's growth.

Letting go, or perhaps handing someone else the reins, is contrary to this type of behavior. And of course, letting go is a prerequisite to allowing someone else to fail. But just as all of us parents have found in raising our kids (perhaps the most challenging management task any of us will ever encounter), unless we are willing to let go, to let our kids try their own limits, make their own decisions, and perhaps fail - sometimes incurring direct physical pain as a consequence - they will never grow, flourish or reach their own potential. So founders who are not willing to allow their prodigy to fail ARE NOT READY TO TRANSITION TO AN OUTSIDE CEO!

While founders are often the most capable among us, one great person will find it tough to compete with a team of empowered individuals who can think, make decisions, and learn from their mistakes. Edison was often quoted as saying the secret to his success was increasing the number of times he failed. A founder who just can't stand to let a new CEO come in and fail (or perhaps do things that the founder views as a prescription for failure) will constantly be taking the baton back from the new CEO's hands - neutering the benefits that might have accrued to the organization.

Not all transition CEO's get this concept either. So the idea of handing off the organization from one autocratic leader to another, provides no benefit to the organization. On the other hand, if the new leadership is based upon a decentralized and employee empowering strategy, the benefits to the organization can be immense.

A founder's willingness to fail may be a key indicator of the potential success of a transition CEO.

A Factor Impacting Successful transitions

2006-08-01T18:55:00.000-04:00

Some recent discussions have led me to to believe that a critcal factor that impacts the success of a CEO - founder transition may be the prior cashing out of at least some material portion of his or her ownership. Arguably, cashing out enables the founder to take some of her risk off the table. By doing so her replacement is more likely to be given the freedom necessary to make the decisions required to successfully lead the company.

Noam Wasserman writes on his blog Founder Frustrations, that "Bridge CEOs" are most times not successful and that VC board members have suggested that companies be prepared to hire two, since the first CEO who replaces a founder will not be successful. I've lived through both situations where founder successors have and have not been successful. A differentiating factor seems to be a pressure relief valve that is at least partially opened by cashing out.

It's all About Change

2006-07-05T09:54:00.000-04:00

In three of the four situations that I personally engaged in as a replacement for the founder, I ran into a similar theme. In each situation I was asked to help transition the company to the next level. In each case, I carefully studied what was working, what wasn't and what was missing before acting. And then ....

I found what many new CEO's find. Change is painful for a founder. Several of the founders I succeeded even went so far as to translate change into a personal indictment. Almost any change I wanted to make was thwarted - "that's not the way we do things here," You don't know as much as we do about this market niche, so it's premature for you to make that decision," and "let's talk about that first". Each leaving me with the question of why they hired me in the first place?

What I found was that unless the founder had a good reason to agree with change, they are predisposed to oppose it. A good reason to change often takes the form of a close encounter with failure pointed out by a well meaning VC who just saw her million dollar investment turing to saw dust. Oddly enough, "successful" ventures, that need to hire a new CEO with experience and knowledge to get the venture to the next level, are often missing that "good reason." So companies that are doing ok, have a harder time integrating a new CEO than ones that are failing.

A good board and smart investors can make all the difference. Setting expectations early with the founder, the board can begin to process of transition way before a new CEO is ushered in the door. In fact, many VC's who I've talked with make it very clear to the founder that they will likely be replaced when the appropriate time arises and a new skill set is required. As the time nears, they reinforce that message - being sure the founder "gets it!" And during the transition process they back up their message by directly eliciting the "change" agenda from the new CEO.

Contrast that with the less experienced investors who convince and cajole the founder into believing that the new CEO will be their "partner" rather than their boss, just to get past this tough transition issue. Once introduced on the scene they expect the CEO and founder to work out the change relationship themselves. There are very few situations where this type of approach works.

As Tracey Goss pointed out in her book entitled: The Last Word on Power, everything that got you to the success you enjoy today will hold you back from success in the future. Founders can take a lesson from Tracey. It isn't about them and the change required is not about their inability or incompetence. Success at the next level is about using a new set of tools to tackle and new and different job. Installing a new CEO when then game has changed from start-up to later stages of commercialization requires the company (and founder) embrace these kinds of change.

2006-06-09T16:32:00.000-04:00

The challenge facing any new CEO is to get the existing team, which may have a long history of working together and who were no doubt more comfortable before the CEO got there, to engage in a team building process to embrace change, accept diversity onto the team, and leverage the team’s existing talents. This always proves to be much harder that it appears.

If you ever joined an organization where the founders give up the CEO role but stay on with the company in functioning roles, you already know this is a difficult challenge. If you haven’t experienced it first hand, or perhaps read about some notable failures, if should suffice to say that it is very hard for a founder to give up control of his or her “baby.” This is a company that they have birthed, named, nurtured and financed. Giving up “control,” just because some investors say it will be for the greater good, may be acceptable in theory, but it is not easy to do. Even those founders who actually believe it may be good for the organization, historically have had a very a hard time actually giving up this control.

Many new CEOs make a precondition for their joining an organization the removal of the founders. While you lose the talents and the institutional knowledge by doing so, it often is the only way to get a clear change in direction, loyalty and leadership accomplished. Keeping founders around almost always leads to fragmented loyalty, back channel conversations, distrust of the CEO, and second guessing of the new CEO’s decisions. In fact there probably has never been a founder-CEO succession in which the founder has not believed that many of the new CEO’s decisions were flawed, misinformed or misdirected.

2006-06-06T14:55:00.000-04:00

Since this is graduation time, I thought it might be appropriate to highlight one of the highest profile founders, Steve Jobs. He gave what may have been one of the the most meaningful and relevant commencement addresses at Stanford University several years ago. If you haven't heard or read it or had your soon to be high school or college graduates read it, I recommend it. Steve is one founder that gets it (albeit he may not have earlier in his career and certainly hit some bumps along the transition he did at Apple). His address is also available from iTunes in both audio and video free of charge here.

2006-05-28T10:08:00.000-04:00

Organizations (both for profit and not-for-profit) are started by a unique breed of individuals who often are driven by passion to solve a need or promote a cause. The characteristics of successful entrepreneurs are often antagonistic to the needs of a scalable organization.

Founders are passionate, driven, smart, opinionated, and capable. They often hold unique knowledge of the particular solution they are developing. Often founders find it more expeditious to “do” rather than “teach.” As such this centralized knowledge source can become a strangle-hold on a growing organization. Founders often seek out people to join the organization who believe in them or their cause and often maintain “blind faith” in the decisions of the founder. Early hires are usually people who can execute on the direction of the founder rather than managers who are empowered to make their own decisions.

The growth of a founder-based organization may plateau when the centralized control structure expands beyond its founder-capable sphere of control. While some founders are able to grow a company with several hundred staff without relinquishing control, more often the organization begins to suffer from his or her micromanagement.

There are several documented high-profile success stories of founder entrepreneurs who have shot past this phase of business expansion, typically by understanding their own limitations and taking action to expand the central authority through good hiring or through a personal metamorphosis. However these are the unique cases. More often it is an outside influence (from investors or stake holders) that forces this confrontation.

Bridging this phase of the business is not easy. If not handled correctly it can be the downfall of a potentially great organization. The effective process of changing leadership – what I call founder transition – is not well documented. While it is critical for an organization, most transitions are handled with gut reactions by financial people who are not necessarily skilled or experienced with this process and often do not set appropriate expectations or develop an effective structure. This blog is intended to create a conversation that will enable organizations to gain from the experiences of founders, investors, and hired-in CEOs who have succeeded and failed in this critical transition.