Category Archives: Startup Life

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March 15, 2011

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Management, Startup Life

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Tech Founder Wins at Early Stage

At the early stages of a startup, the founding team is probably the most important variable of success.  As a company matures, the concept of “founding team” is replaced by “management team”, which may and hopefully includes the founders.  The management team continues as the critical success factor.

Focusing on the early stage, the founding team typically will have a tech oriented founder and a business oriented founder.  It may have multiple people in each category, but for purposes of this post, let’s assume one tech founder, one business founder and then some additional “first employees”.  It would be normal for these first employees to be involved in product development.

There are many blog posts (from others) written about founding team composition and the importance of picking your co-founders carefully.  I am not going to focus on those aspects.  Rather, I want to focus on one interesting aspect of the relationship between the tech founder and the business founder.

At Cornell, where I teach, it is not uncommon for a Johnson School student (business school) to meet up with a tech oriented graduate student from another Cornell department and actually start a company.  This combination can work very well, and I strongly encourage my Johnson School students to do just that.  But, with one big piece of advice:  once you raise money and before the company’s product takes off, the tech founder is in the driver’s seat. My point is not to cause anxiety.  Rather it is to make sure that both founders (yes, I want both to hear the advice) understand the reality with the hope that they will interact with each in a more informed manner.

Let’s play this out a bit.  Company XT has a tech founder and business founder.  It has a great idea and developed a great product concept (stress concept – product not yet launched).  Based on the work, Company XT has raised $250,000 in its first round of outside financing from an angel group or early stage VC.  Importantly, the “money” has a seat on the board and is actively engaged.  The other board members are the tech founder and business founder.  The company’s burn rate is only currently $15,000 a month (and expected to increase over time), so that $250,000 will last, say, 12 months.

At the end of month 4, the tech founder raises competency issues to the “money” board member about the business founder.  They discuss the issues, but after a few weeks of hashing them out, it becomes clear that the tech founder is unwilling to continue working with the business founder.  The tech founder’s reasoning may be justified or might be questionable.  What happens?

In the usual case, there is no way to complete the Company XT product without the tech founder and the only way for the investor to see a return is for the product to launch.  In essence, at this stage, product development defines the company.  Sure, the product may change prior to launch and end up directionally in a different spot, but the product “owns” the company.

There is only one choice – replace the business founder to make sure the tech founder stays engaged.  The first time this happens, the tech founder basically uses a hall pass and the business founder is shown the door.  If the issue comes up again, all bets are off, but it is not surprising to see a second hall pass used by the tech founder.  A third time, different story – you should just hope the product is launched by then.  So watch out – founder issues are the most likely cause of company death at the early stage.

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March 11, 2011

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Board of Directors, Management, Startup Life

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Outside Board Member(s)

At a startup, there are a few critical “must haves”.   Funding cushion.  A great management team. A product that customers care about and want to buy.  Those are obvious list makers.

Additionally, I would definitely include a high quality outside board member (OBM), or if you are lucky, two of them, on the must have list.  The value that an OBM can bring is huge.  And that value comes in a variety of forms.

For clarity, an OBM is a person who is not an employee, founder or representative of a significant investor in the company.  They might invest eventually to take advantage of an opportunity, but the investment amount would tend to be small (say $25,000 – $100,000).  The OBM at a VC backed startup is usually compensated with equity.  The OBM is someone from industry who has relevant operating experience, marketing knowhow, or other expertise that the company needs.

In a typical startup board configuration (post venture funding) you might have 5 board members, with 2 being founders, 2 being VC representatives and 1 being the OBM.  There is no magic to this, and you might also have 6 board members, with 2 OBMs, or 3 board members (founder, VC and OBM).  Note that an even number of board members bothers some people (as in “who will break a tie?”), but not me.  I have rarely seen a significant board decision not be unanimous and have never seen a tie.

Back to the value of the OBM:

First, the OBM brings balance to the board.  I strongly prefer that the founder/CEO source the OBM.  That sense of empowerment is good.  And, when it comes time for the OBM to make hard decisions later, the fact that the founder/CEO sourced him/her makes the overall decision making process feel more balanced all around.  This is a particularly true if the OBM agrees with the VC board members on a given issue.

Second, an engaged OBM can really get things done.   I have experience with an OMB who literally spends over 500 hours a year on company business.  He is only compensated with equity (though his package is enhanced), he seems to know everyone in the industry, and he absolutely loves what this company is doing.  We are lucky to have him involved.  And I am pretty sure he feels lucky to be involved with the company.

Third, new potential investors will look favorably on high quality OBMs.  They add legitimacy to the company by association.  They can bring valuable insights that new potential investors might want to hear.  Involve OBMs in your fund raising activities if they are willing.

Fourth, OBMs can be fabulous mentors to young CEOs and other management team members.  Sure, VC board members can be excellent mentors too, but there is always the element of enhanced control rights lurking.  OBM do not have that handicap.  With that said, I have witnessed an OBM telling the full board that the then current CEO (who picked the OBM) needed to be replaced.

There are additional benefits, but they fall into the same theme:  OBMs are incredible resources.  Find them with deliberation, engage them with fair equity packages and get them as deeply involved in your business as they are willing.

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March 8, 2011

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Startup Life

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Startups are like Slot Cars

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!

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March 4, 2011

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Management, Startup Life

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Connections, Connections, Connections……Execution

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!

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March 2, 2011

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Board of Directors, Dealing with VCs, Management, Startup Life

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When to Inform Your Board

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.