30 West 3rd

Very Early Stage Technology Investing

Posts Tagged ‘Entrepreneurship

Keeping Score in a Start-up

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Every early-stage company I encounter is under-capitalized and under-talented.  That’s not to say they don’t have great talent.  There’s just never enough talent or money to do the things that feel important.  Sorting out the important from the unimportant is Task One for the early-stage CEO, with the help of investors and board members.

7 Habits guru Steven Covey introduced a powerful and simple matrix for task management back in the early ’90s.  In the context of a sound business plan, with key milestones identified, it is a good method for sorting the important from the unimportant, the urgent from the not-so-urgent.  In today’s world things will fall off the to-do list for even the most organized and capable executive. 

For the start-up CEO it is more a struggle to see through the clutter to clarity.  I’m not one to hype self-help gurus, but I think everyone needs a paradigm for managing themselves and their time.  Covey’s book was right for me when I was a start-up founder.  I won’t endorse everything else that sprouts from that seed, but his book is filled with simple but useful concepts.

Now back to the quadrants.  You can find hundreds of blog posts and references to Covey’s quadrants, but you really only need to understand the axes: importance and urgency.  By building a matrix around these you have a paradigm for dividing tasks and activities – assuming you have a good grasp on what is important, of course – into either important/urgent (crises, pressing items), important/not urgent (planning, strategy development), unimportant/urgent (feeling busy), and unimportant/not urgent (golf, Vegas, etc.).

For the start-up CEO, sorting through urgent items is the real challenge.  Why?  Because all start-up CEOs crave time to plan, develop strategy, reflect on the business and seek advice/mentorship.  We called this “Quadrant II time” in my company.  We found that not only did we crave Quadrant II time as a management team, but our customers craved it as well. 

I rarely encounter a start-up CEO who is focused on leisure activities, so we know the only way to make Quadrant II time is by prioritizing urgent tasks and ignoring those that aren’t important.  It is liberating when this habit first gains traction in a small organization of any kind.  But it requires intense commitment and agreement on mission, key milestones and culture.  Building this sense of alignment is what leadership in the early-stage company is all about.

To illustrate, in the early-stage company, it is comfortable and easy to talk about marketing, partnerships, and topics that are at least one or two degrees of separation from an actual transaction.  Most early-stage companies, as they enter the market, overemphasize their branding needs and marketing requirements.  Filling a funnel with unqualified leads only creates work for the sales team, or whomever is plugging that hole at the outset.  Almost without exception all that matters in the first 12 months of market entry is building transaction momentum.  In some cases that may mean generating only four-six deals in the first 12 months.  Any start-up should be able to source, qualify, and close that number of deals without any significant outbound marketing effort.  If you lack that amount of resourcefulness and talent, you might have a bigger problem.

Consequently, you need to build a scoreboard that is prominent and unavoidable for everyone to see.  The scoreboard should first display the date that you are projected to need another capital infusion, or by which you must break even.  Next you should have sales goals/actuals at the appropriate periodicity for your business.  Below that I would have major milestones with dates that are qualitatively critical to raising the next round.  You don’t need to post a name next to these goals/milestones because they should be owned by the entire company.  Everyone should be selling, everyone should be contributing to product development, everyone must be pulling the organization forward. 

I also think that anyone who takes on a leadership position in an early-stage company should have an individual sales goal, even if it’s only one deal.  Start-ups thrive when they engage the outside world with all tentacles.  Everyone should be sourcing opportunities, even the introverted VP of engineering.

The scoreboard is a scary concept, but it is a grown-up concept.  It shows you are serious, that you have no secrets, and that the company thrives on transparency, unity of purpose and leadership.  It also eliminates by default any need to focus on the unimportant.

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Written by Mike Venerable

September 29, 2009 at 1:27 pm

Shark Tank – How not to raise money…

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I had heard about the show “Shark Tank” from someone last week, and my kids were also badgering me to watch it.

The premise is would-be entrepreneurs pitching their ideas to a panel of five “Sharks”, successful entrepreneurs who will evaluate the idea and possibly offer to fund the company.  During the two segments I watched it has the usual “acting out” problems of most reality shows.  The Sharks try to act cool and heartless, the entrepreneurs act coy and play hard-to-get.

In the most interesting segment two women with a patented slip-cover for porta-cribs agreed verbally to give up 40% of their company to a real estate entrepreneur in exchange for $350,000.  That puts the pre-money at $525,000 without considering any options.  Forgetting the absurdity of focusing entirely on the valuation (we don’t know whether they are selling preferred, etc.), I thought they got a raw deal.  They had 200k in revenue, plus distribution through Target and a handful of hotel chains.  And, as an analyst in my office pointed out today, they have now had free exposure to boatloads of prospective buyers and investors.  They’ll get a much better offer now that everyone knows how little it would take to get them to play ball.  And they might get it from someone with more experience in pushing out such a product than the real estate Shark.

Which made me wonder if these poor souls had signed any restrictive contracts in exchange for appearing on the show.  The reality TV world is famous for driving hard term on contestants at the beginning, before they make them famous.  Would they really be able to just walk away, or would the panelists have the right to match any offer they received based on the exposure they received on the show.  Let’s hope not, because the co-founders of the porta-crib slip cover company deserve a better term sheet and board members.

I have to give the show credit for at least having a credible panel.  They were also willing to discuss the issue of patent assignment in this instance, which made me wonder what other rather technical issues they would delve into on other episodes.  Could next week bring a dispute over liquidation preferences?  Ratchets?  Redemption rights?

What’s bad about the show?  That they imply that investment decisions among people like the Sharks – professional investors – can be boiled down into a few minutes of product presentation and chit chat.  TV oversimplified the process.  Imagine that.

Written by Mike Venerable

September 1, 2009 at 9:00 am

What makes a great sales culture…

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Continuing on the topic of great sales leadership from my last post, I reflected on some of the best sales leaders I’ve been around and what set them apart.

First, they were confident, organized, professional and direct.  They were not screamers, did not motivate or try to motivate through intimidation.  I’ve seen that style of leader as well and the result is not good.  You can be sure that great sales leaders are not fire-breathers.  Sales cultures built on raw revenue wins and show-boating – the Ochocinco Sales Culture, let’s call it – rarely create sustainable growth. Rather, they reward short-term, bloated deals that are rarely in the customer’s economic interest.  In the end, the scheme will unravel, often destroying enterprise value for all stakeholders.

In the software industry, the best sales leaders I’ve known were first accomplished closers in their own right.  They rose from the ranks by setting and hitting realistic targets on a consistent basis.  They understood the mechanics of the sales process, knew their materials, asked for and utilized technical resources appropriately, and knew how to work a prospect list and turn it into a consistently achievable forecast.  They were not desperate or manic but methodical and persistent.  These traits led to consistent performance, which led to increasing responsibility.

Another trait of great sales leadership is comfort with numbers, the tedious economic details of deals, compensation structures, and channel costs.  This is, I think, an underrated talent in sales management.  Understanding the customer’s economic context is imperative to shaping a consistent winning value proposition.  It is also required to design a balanced compensation model to attract, motivate, and retain a great team.  And understanding how to optimize spending across the sales process builds enterprise value and attracts investment.  Most important of all, financial numeracy makes the sales leader a full financial partner, along with the CEO and CFO, in the design of the business.  This is especially true in the early-stage venture, when predictability and rapid learning are required to build a viable enterprise.

A good friend and great sales leader I know had all the requisite qualities when I first met him back in the mid-’90s.  At the time he was the Federal Sales Manager at a venture-backed start-up.  He was very different than many of the sales reps and regional managers I’d met before, more polished, open about his belief in building an excellent team, and committed to building long-term customer relationships.  It seemed corny at the time, because I was naive about what was important in building a great sales organization.  By the late ’90s, with the dot.com Kool-Aid flowing freely, it seemed even more out of synch with the world.  But as much of the world soared and then sank, he and his parent company thrived.

Over the years he progressed to run both commercial and public sector sales in the region, then the Eastern U.S., then the entire U.S., then all of North America.  He did this while many other sales reps and sales managers I knew in the industry job-hopped, back-tracked, or flamed out entirely.  Eventually he was given responsibility for all North American operations, not just sales, in what had become a multibillion-dollar company.  He did it by building a culture that matched his principles, the same principles that made him a solid individual sales rep.  This culture delivered consistent results for shareholders as the company continued to grow.  He attracted like-minded people with similar professional habits.  It wasn’t for everyone, and some very successful, flashy sales people bristled, but many stayed and learned to appreciate the style and consistency he brought to the task.

He’s not looking for a job right now but taking a well-earned sabbatical, unfortunately.  And he learned his basic selling skills at Unisys, of all places.  Not flashy, not load, just perfect for the job, it turns out.

Why the first 3 customers don’t matter…

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Most of the software companies we encounter are able to produce a first product and close one or two customers on little or no paid-in capital.  This is a positive trend.  With venture investors looking for lower net burn rates and a clear path to sustainability, seed-stage investors are typically paying for the first 12-24 months of customer acquisition.

Unfortunately, the first one or two customers prove little about how the product is perceived and sold to the next 10.  First customers typically have some connection with the founders that will not exist as the company scales.  Early customers are buying into a vision or a relationship or even a curiosity.  They will have great influence on the first product, often driving features that will be irrelevant to the broader market.

Early customers also have little interest in competitors, bake-offs, RFI’s and RFP’s, much less internal purchasing controls.  First customers will cheat to get a product in and not expose it to normal scrutiny.  If they did, it likely wouldn’t make the cut.  First customers rarely agree to standard pricing and terms.  That’s not to say that you don’t get value from these first customers.  But they do little to prove how the business can scale at a pace venture investors desire.

Consequently seed investors must attract sales leadership to pre-venture companies, which is no easy task.  Proven sales leaders are in great demand, and those suited to an early-stage company role are rare.  They must have solid market knowledge, be willing to spend signficant time in the field, and be able to readily attract a team of similarly minded subordinates.

Attracting such a leader is a test for the early-stage CEO.  The right sales executive is probably more experienced than the CEO and will consume more total cash compensation than anyone else.  The sales leader should be ready to set targets and become increasingly accurate in hitting those numbers as the company matures.  Predictibility and consistent quarterly growth are required to attract venture investment.  The early-stage CEO must relinquish the leadership of the sales function to someone who can focus on it and be held accountable.

None of this is easy.  In all the companies with which I work, there are challenges in transitioning from pioneer customers to sustained and consistent top-line growth.  Flame-outs of sales VPs in early-stage companies are more common than successes.

Of course, flame-outs of early stage companies are also more common than successes.  Choose carefully.

Real Entrepreneurs Wanted

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There is a great post on Growthology that raises more questions than I can answer in one post (thanks to David Willbrand at Thompson Hine for pointing it out), but let’s start with this provocative quote:

Admittedly if you are so nervous about becoming an entrepreneur that you want to take a few years out of your life to learn in a business school about being an entrepreneur then maybe you’re more interested in the idea of being an entrepreneur than in actually being an entrepreneur.”

I have had that thought a number of times in the last decade, and especially since working on early stage investments.  There are a fair number of people in any large metro area who are mostly infatuated with being an entrepreneur, but who seem to make little real progress towards building a new business.  Mixed in among them – fewer in number, less visible, less vocal – are the real entrepreneurs.

Entrepreneurial events/programs/investors attract both types, but a pattern forms quickly.  The pretenders attend and attend, but never seem to get beyond the plan stage.  They expect the idea to be so compelling that others will jump on board and drive capital and energy into the business.  They propose to do little of the heavy lifting on their own.  They frequently lack the domain expertise required to properly self-vet their idea.  They may stumble into family/friends money, grants, win a business plan competition, but their trajectory flattens quickly when execution of the plan is required.  There they languish, consuming time and resources in the community that could be applied to the real article.

Real entrepreneurs seek outside capital and assistance grudgingly.  Some of the best are combative, informed negotiators over terms.  They know their market, buyer, and competitors better than their prospective investors.  They knock down doors on their own.  Sure, they need help and guidance, but they have a commitment to get to product, revenue, and an exit that makes attending entrepreneurial events and entering business plan competitions a luxury.

Most successful entrepreneurs I know are introverted and actually don’t like to sell.  They force themselves against instinct to do these tasks to calm the compulsion.  It’s admirable, is often done without venture capital, and is the principal job engine of the economy since WWII.  Finding them in the crowd, or away from the crowd, is the real challenge.

Written by Mike Venerable

August 13, 2009 at 3:53 am