Public Service Announcement: Upcoming Entrepreneurship Seminar Series on April 1, 2011 in Room B8 Sage Hall, Cornell University. Topic is “Energy & Clean Technologies: Catalysts, Risks and Opportunities Driving the New Energy Economy”.
Go to following link for more information and registration (free): http://www.cctec.cornell.edu/events/ess/4-1ESS.pdf.
Webinar available too. Hope to see you there in person or webinar.
I recently got a slot car track for my kids. And me. I had one up until the middle of high school (my cars were actually stolen when I brought them to school for a speech and that kind of killed my track time). So, 28 years later, I got the urge for a track and knew my kids would love it. I found an incredibly good deal on Craigslist and picked up a nice one, and then invested in a bunch of cars and extra track and made a table. Here is the current configuration in my basement (not the greatest picture, but it will work for purposes of this post; it is roughly 8′ x 8′).
Slot Car Track in Basement
Ok, I am guessing some of you are thinking “cool” and some of you are thinking “huh??”. I can understand that. But, the other night I was doing some racing (a bit like meditation for me), and I started thinking how slot car racing is analogous to startups. Here are some of the ways (not exhaustive by any means):
First, the path to success is not straight. See curves in track. The favorite startup word lately seems to be “pivot”. Well, startups pivot and change direction all the time. The key is to be able to do so without coming off your track – just like slot car racing. Here are the S-curves in the current track. Accelerate into the corners.
S-Curves
Second, there is always competition nipping at your heals. In slot car racing, it is your bumper that is being chased. In slot car racing, the competition always passes you at some point and you typically always catch up and pass them. Same with startups. Here is a picture of one of the 4-lane spots on the track where lots of passing and catching up happens.
Competition Alley
Third, the cars do come completely off the track once in a while (or when my 9 year old races, all the time; my 5 year old is much better at keeping the cars on the track). At a startup this comes in a variety of forms: product restarts, management team shake ups, key employee defections, approaching your fume date, losing a key customer, etc. You have to pick up the car, put it back on the track, PULL the trigger to give it more gas and accelerate in the right direction.
Fourth, it is really fun to win. I think that winning at a startup (for example, acquiring customers or getting to an exit) is thrilling. Winning at slot car racing, particularly when my dominant competition is my 5 year old (yes, he beat me last night), is not quite as exhilarating, but still tons of fun. Actually, the whole racing experience is fun, and hopefully the startup experience will be often fun as well. Startups are not always fun (hence my use of the word “often”), but if the enlightened moments don’t occur, startup life is just a drag (and no, I am not referring to any race this time).
BTW, if you have any HO scale slot cars hanging out in your basement or closet, I want them!
I am frequently amazed by the quality of contacts that CEOs and Bus Dev executives can generate. Yes, it is part of the job, but sometimes the success of getting “in” with important people at key strategic companies/partners is awesome. I think of myself as an outgoing person, but am not sure I would have such success.
Then I start thinking about business basics. Connections are vital and a business basic, but they are barely meaningful without execution. Management success is not measured by connections, it is measured by execution of a plan. It is measured by the attainment of goals and business milestones. Moving a business incrementally closer to a goal (for example, acquiring Customer Z) is exciting. Attaining the goal and having Customer Z buy your product is thrilling. Connections don’t execute.
As a board member, it is execution that makes me smile most. I like to see the plan of attack and then measure success against the plan. I care deeply about connections too. But the connections do not get the company to revenue or the next financing. My next goal is to figure out how to better use my LinkedIn and other social media connections to advance an execution plan!
Hypo: you are CEO at a venture backed company and you receive a term sheet from a potential investor that has unacceptable terms. Do you share the term sheet with your board or do you try to negotiate it first and then disclose? Not always an easy decision.
This is just one hypo out of many that address the same question, namely, when, as CEO, should you share a given piece of information with your board of directors (and let’s assume your company is venture backed and you have VCs and independent directors on your board)?
Let’s set the basics on two issues. First, board members owe fiduciary duties to shareholders (and critically to common shareholders). In order to exercise those duties (in particular the duty of care and duty of loyalty), board members must be fully informed. For example, if the company is moving down a path with one party (for example, a strategic partnership) and then another alternative presents itself (a competing strategic option), the board will need to understand both alternatives in order to properly make decisions.
Second, the board is the ultimate decision maker at company on strategic issues and non “day to day” issues. The board hires and fires the CEO. The board hires and fires other officers (think VPs) after recommendations from the CEO. The board approves financing and sale terms. The board approves approves “important” agreements with third parties. The board approves overall strategy and spending to execute. The board approves “significant” deviations from budget. These are just some examples.
But, what is “important” and what is “significant”? In other words, what should the CEO necessarily present to the board members? Unfortunately there is no bright line test, and answer falls into the same category as the infamous US Supreme Court text about pornography – “you know it when you see it”. That is not always helpful to a CEO because different directors have different senses of sight. And different CEOs will have different views of appropriate level of board member engagement. Some will engage often on most issues and some will inform later on most issues. And some will be in between.
If I were a CEO of a venture backed company, here is a disclosure test that I would try: if i were a board member (and not CEO) would I like to know the given information from the CEO? Just put yourself in the non-CEO board members’ shoes. Keep in mind that disclosure can be painful for the CEO because disclosure will lead to questions and answering questions can be a time sink. Yet this can be curtailed by qualifying the disclosure. For example “here is a competing term sheet with some unacceptable terms as follows [X, Y and Z]. I am going to try to negotiate and see where it gets us. It would be more productive to discuss after that happens, but if you have any input in the meantime, feel free to give it”. Here the CEO has basically told the directors to stand down, but has also fully informed them. To me that is a win-win. This is important as I have seen situations where directors have wet noodled a CEO for not disclosing early enough. The disclosure essentially protects the CEO from criticism and allows the directors to do their job.
So, not surprisingly as I am a board member for many companies, I think that disclosing early and often is safer and the more prudent course. People will differ for sure on this point, but over communication to your board is rarely a bad idea.
This topic is complex, and I bet there will be more disclosure on it.
I have something to admit – yes, we do ask the CEOs with whom we have the pleasure of working to do a weekly written board update (email typical) after we invest. I just got one on email to review this evening. In fact, I often am happy to forgo a monthly board meeting (and instead do every other month) if the weekly update shows up regularly. Some CEOs completely embrace this task and say something like “I do this anyway” (which is music to a VC’s ears). Others do not at first and this can be difficult. I should add that before we invest, we bring up the “update”. There is nothing surprising about the ask post investment.
So, why do we like the updates (with “we” being me and my partners and other board members in particular):
1. Shows discipline. The update does show that the CEO has his/her act together and can concisely communicate to the board. I have never come across a board member that does not appreciate receiving regular updates. Conciseness if the key. The update should be a fast process, perhaps 30-45 minutes.
2. Shows execution ability and areas of concern. When asked what should be in the update, I often suggest just give your “top 3” and “bottom 3” of the week. Top 3 high points of the week and top 3 concerns. The updates are typically 1 page or 1-2 pages. Short and crisp, and it keeps the board fully engaged. It allows the CEO to fully utilize the board better as well.
3. Amazing communication tool. The update can be used to communicate with the board obviously, but is also a great piece to circulate among the top management team. It keeps focus. It keeps accountability. It keeps all eyes on the collective ball. Keeps a healthy dialog among key constituents. I suggest erring on the side of over communication.
4. Amazing fund raising tool. Most of the CEOs I work with have used their updates as fund raising tools (sometimes with appropriate redactions). It is simply a fantastic way to show a potential new investor the level of communication and hopefully progress. It is an amazing way of dialogging with existing investors as well and helping assure that they will be there in the future for additional support. Communication = comfort in investors’ minds and comfort = support.
5. Minimizes surprises. The update can be used as a great board management tool. I love it when a CEO or founder says to me “Zach, that was addressed in the update from 2 weeks ago – read it again.” Sure, I might have additional questions, but that is one of the very purposes of the update. The update should surface key issues and keep surprises to a minimum. If routinely done, it provides the CEO with an amazing board management tool.
6. Enhances the quality of board meetings. With routine updates, the actual board meeting can almost always focus on strategy (which is what a board meeting should focus on anyway). The updates will keep the board in the loop on the tactical ups and downs – often no need to cover again at the board meeting.
I am fast approaching my self imposed 500 word limit (just tripped it actually). There are others benefits as well and I honestly cannot think of any downside to the weekly update. Should take 30 minutes and ultimately save hours of communication time.
ithaca VC 