Startup Execution

YADM – Yet Another Dilution Model
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Any programmer or Linux gear head should recognize the “Yet Another …” family of tools and frameworks. Stephen C. Johnson is credited with creating the first Yet Another tool when he created YACC – Yet Another Compiler-Compiler. Some currently popular Yet Another tools or frameworks include:

  • YAML: Yet Another Markup Language (later rebranded as YAML Ain’t Markup Language) – a data serialization language usually used to capture configuration parameters
  • YANG: Yet Another Next Generation – a data modeling language related to network configuration
  • YARN: Yet Another Resource Negotiator – a component of the Apache Hadoop framework

Not to be outdone, I decided to create another Yet Another tool: YADM (Yet Another Dilution Model) – an Excel spreadsheet to help founders model the expected equity dilution as a startup reaches typical funding events.

Dilution is near and dear to the hearts founders everywhere. Many VCs, accelerators and incubators publish guidance on the typical dilution events a startup will encounter in its life cycle. Several web sites also provide downloadable spreadsheets that founders can use to visualize their expected dilution. Given this, why do we need yet another dilution model?

Well, simply put, the spreadsheets I’ve seen hard-code the financial terms of each funding event. Because every startup negotiates slightly different terms with their funding events, I wanted a tool that had some simple “knobs” that the user could turn to model their dilution given the terms of their specific investments.

Many startups have slightly different variations down the path of equity investments. Creating a custom model for each specific pathway is beyond the scope of this effort. To keep things simple, I built the spreadsheet with the following assumptions common to most startups:

  1. The earliest non-founder employees paid primarily with equity
  2. One round of angel or seed investment
  3. Three rounds of traditional VC investment
  4. The equity pool for the employees gets replenished based on the pre-money valuation — this just means that the dilution from the option pool is taken before the investment from the VCs.

I’ve provided a sample funding scenario in the screenshot of the spreadsheet (download here) below.

Yet Another Dilution Model (YADM)

Let’s walk through how this spreadsheet captures various dilution events:

  1. Row 2: The user enters their specific data points of their dilution events in the orange cells in row 2. These orange cells are the “knobs” that the user should turn to model their own dilution scenario.
  2. Column B: When the startup is formed, the founders own 100% of the equity.
  3. Column C: The founders set aside 7.5% of the equity to distribute to the startup’s earliest employees.  The founders now own 92.5% of the company.
  4. Column D: 10% of the company is sold to angel investors.  The founders now own 83.3% of the company.
  5. Column E: The terms of the series A investment requires setting aside 10% of the equity for the employees that will be hired up to the next round of funding. Because most VCs negotiate this 10% to come from the pre-money valuation, the spreadsheet calculates the amount of equity required to reach the 10% pool post-money. The founders now own 72.8% of the company.
  6. Column F: The series A investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 58.3% of the company. Note: some might argue that column E is not needed since the series A investment is the primary outcome of the investment round. However, I break this out separately to help illustrate the multi-step dilution that happens as a result of the series A investment.
  7. Column G: As the series B investment comes together, the employee option pool needs to be replenished back to the 10% target. The same pre-money valuation terms apply. The founders now own 56.1% of the company.
  8. Column H: The series B investment closes, with the incoming VCs purchasing 25% of the company. The founders now own 42.1% of the company.
  9. Column I: As the series C investment draws near, the employee option pool again is replenished back to a target amount. This is essentially the same dilution math as columns E and G. The founders now own 40.9% of the company.
  10. Column J: The series C investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 32.7% of the company.

Hopefully, this spreadsheet helps you model your expected dilution scenario. Feel free to turn the “knobs” of the spreadsheet by changing some of the numbers in the orange cells of row 2.

My life is complete now that I too have published a “Yet Another” tool …


Startup Execution

Cheap Advice is Cheap
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Back in 2001 when I was a first-time CEO, I struggled to grow the company to beyond a certain point. We had a good product that filled a very important market need, so the company quickly grew to over a hundred customers. But as we grew, we struggled to consistently provide the quality that led the market and fueled our rapid growth. We often handed large responsibilities to our employees that stretched them beyond their experience. Sometimes they excelled, other times they crashed and burned.

As we struggled to get over the hump, I sought advice from multiple people. I found no shortage of advisors who were quick to push solutions that were sure to solve all my problems. The challenge was, very little of the input actually solved any of my challenges. As I look back, the common thread among all the flawed guidance was the lack of investment to truly understand the problem and custom-tailor a solution that worked in my situation. Most advisors spent maybe five to ten minutes asking a few questions about the nature of our company’s challenges, then proceeded to give 30 to 60 minutes worth of “off-the-shelf” recommendations from their limited understanding of the problem. To say I was frustrated was an understatement.

But things changed when I sat down with Jenkin, an inventor with both a strong technical background as well as great startup execution experience. Jenkin asked me dozens of questions over a two-hour period. He listened to my responses, which often led to three or four more questions down a specific path. Once he had a good grasp of the problem, we spent the next hour brainstorming possible solutions. We worked as a team to craft some specific process changes, role changes and expectation changes. Unlike the quick hit, “drive-by” advice I received from others, Jenkin was willing to dive deep to truly understand the essence of the problem. He invested significant time in me and my company’s problems, resulting in tangible changes that helped us clear several hurdles.

From this, I distilled the observations below.

Details Matter

In most cases, the devil is in the details. Hard problems are rarely solved from the 60th floor of an ivory tower. You have to be willing to get down to the ground floor and dive deep into the problem to understand specific strengths, weaknesses, opportunities and threats.

Strategy and Tactics Matter

Most advisors and consultants prefer to operate at the strategic level. This makes sense as war strategy guides the overall campaign. However, great strategies still fail without strong battlefield tactics. Don’t assume that smaller startups with younger founders know how to implement good battlefield tactics. Don’t be afraid to plan out the details of specific battles to ensure the success of the larger strategy. This takes more time, but improves your odds for victory.

Execution Matters

Look for advisors with strong operational experience. In football, it’s great to have a wizard of an offensive coordinator who can craft fantastic game plans against your opponent. But without the offensive line coach to teach blocking technique, the receivers coach to teach route running, and the quarterbacks coach to build the ability to identify and exploit defensive sets, the game plan falls apart. If your offensive coordinator can’t also coach the fundamental skills, you’ll have to either supplement with other coaches or find a different person to lead your offense.

Size Matters

Startup execution is a very different problem compared to large company execution. Look for advisors who have successfully executed in smaller startup environments. Flying a Boeing 787 Dreamliner complete with advanced auto pilot and computerized navigation is a much different skill than racing a motorcycle down the speedway.

Go Deep

The startup community is full of people who have tasted some success. Many position themselves as advisors based on their past victory or victories. But just because someone is a great athlete who has won a few trophies doesn’t mean they are a great coach or take the time to give you great advice. When you compete at the highest levels, you need coaches who go deep with their understanding of you, your company, and your challenges. Quick, casual advice is cheap. Look for coaches that roll up their sleeves instead of pontificate. Team up with advisors that take the time to build a broad and deep understanding of your market and your needs — invest in advisors who invest in you. Success is within reach if you build a team of coaches who don’t just point the way but help you build the road to get there.


Startup Execution

The Teachable Student
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A few years back, one of my friends in the venture community suggested that I connect with a young startup. He felt I would be a good candidate to advise the startup in their journey. I proceeded to meet with the founders and got an overview of their company and their plan. I asked several questions, probing for more insight where I saw potential areas of need. Every question I asked was met with a confident response. Never mind that the content in the response was lacking. I tried to graciously point out that I had some concerns about parts of their plan, but I received strong push-back, as they seemed offended by my suggestion that there was an opportunity to improve their approach. After several more rounds of back and forth, I ended the discussion and declined to advise their startup. I never heard from the founders again, nor can I find any trace of the company today.

Everyone needs help

In my 30+ years of work experience, one common trait of every founder, every startup, and every business plan was the opportunity to improve. No matter the depth of your education, the breadth of your work experience, or the strength of your pedigree, no one is perfect. No company has all the bases covered, no plan exists that couldn’t be improved. I chose not to advise the startup above because they worked so hard to appear to have no needs that it became clear they didn’t want help. Any effort to give them help would likely result in either subtle resistance or contentious debates.

Advisors by definition provide advice. But the advisee needs to at least be willing to accept the advice. In fact, a healthy relationship between an advisor and a founder is built not just on willingness to accept advice, but a strong desire to seek it out. Don’t make your advisor play detective to figure out how they can help. Don’t be afraid of looking weak if you have questions. A seasoned advisor and coach will not think any less of you if you admit you have needs. In fact, a really good advisor will love your transparency because it encourages teamwork and cultivates trust. When meeting with your advisor, don’t be afraid to come with a list of topics that you want help with.

Michael Jordan – GOAT

Many basketball fans consider Michael Jordan to be the Greatest of All Time. It should come as no surprise that Jordan said “My greatest skill was being teachable… I was like a sponge. Even if I thought my coaches were wrong, I tried to listen and learn something.” Watching Jordan play was a delight as he lit up the scoreboard on the offensive end while also winning Defensive Player of the Year honors. Many founders and executives would do well to imitate Jordan’s attitude and approach.

Humility to be Great

But to be clear, being teachable is not a technique. It is not something you just add to a meeting agenda in hopes of making a good impression. Being teachable is an issue of character. It is rooted in humility — which sadly is a word that is very rarely used among leaders today. The humble leader is secure enough in who they are that they don’t have to appear to know everything, aren’t enslaved to winning everyone’s approval, and aren’t afraid of looking bad.

Humility also goes both ways. Good advisors need to practice it as well. I’ve seen plenty of insecure advisors who are afraid to admit that they don’t have sufficient background in a certain area to provide worthwhile guidance. Be wary of advisors who cave in to the pressure to have an answer for every question. Such advisors are prone to give advice that may not be best for your situation. In the same way we’d question the qualifications of a single person who claimed to be a doctor, lawyer, engineer, scientist, astronaut, athlete and therapist, we should question any advisor who confidently pushes their opinions on every professional, technical and personal matter that arises in the life of your startup.

Greatness Through Coaching

Those who seek success are often encouraged to build a relationship with a mentor or a coach. Professional sports provide dozens of examples of great relationships between a coach and an athlete that clearly transcend a single game or team. Take a moment to read about John Wooden and Kareem Abdul-Jabbar, Gregg Popovich and Steve Kerr, Tom Izzo and Draymond Green, or Tara VanDerveer and Jennifer Azzi. Many athletes are obligated to work with a coach, but not all coach – athlete pairings result in sustained success and long-term relationships. In the same way, many startups are paired with advisors, but not all startup – advisor relationships produce great fruit.

Recognize that we all need help. Commit yourself being teachable. Seek out advisors that know how to advise. Install a culture of transparency rooted in humility. With this as a foundation, you’ll be well on your way to success in not just your startup, but in your personal life as well.


Startup Execution

The Seven Sacred Abilities
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Technology is complex. In the world of corporate Information Technology (IT), thousands of products compete for mindshare. Many startups with enterprise solutions struggle to position their value against larger, established IT vendors. In order to compete, startups should leverage a structured process for evaluating and selecting among multiple options the solution that best fits the needs of your prospective customers.

The Method to the Madness

In my experience, most companies take an unstructured approach to choosing an IT solution. At best, companies looking for an enterprise solution may conduct a brainstorming session to compile a long list of requirements that eventually feeds an RFP. Companies then evaluate vendor responses, apply some score to each line item requirement of the RFP, and then attempt to select a solution.

Though this process provides some structure, I feel it is still suboptimal. Buyers tend to struggle to digest vendor responses to fifty or more individual line item requirements. It becomes difficult to evaluate and compare solutions because customers struggle to see the forest through the trees. In addition, any attempts to apply different weights to individual line item requirements complicates an already complex problem.

Back when I worked as a management consultant, I developed a process that I whimsically called the Seven Sacred Abilities to provide a methodology and a framework to address some of these issues. The process involves grouping individual requirements into seven higher-level, prioritized categories as depicted below.

Each ability is further defined below:

  • Affordability: Affordability assesses the initial capital and on-going operational expenses to acquire and operate the solution. This data provides the cost component of a return on investment analysis.
  • Availability: Availability deals with system uptime and fault management requirements. Considerations such as management of scheduled and unscheduled downtime, mean time between failure, mean time to recovery, recovery time objective, recovery point objective, fault detection, fault monitoring, fault correlation, and fault handling all contribute to fault transparency and system resilience.
  • Capability: Capability considers the product architecture, features, benefits and compliance with industry standards or regulatory requirements. A large portion of the requirements usually focus on product capabilities.
  • Interoperability: Interoperability takes into account the solution’s ease of evolution, integration, extensibility and flexibility. With the current market trend towards cloud native architectures, microservices, API integration, and automation/orchestration, interoperability often becomes imperative to modern technical solutions.
  • Manageability: Manageability evaluates the solution’s overall  operational capabilities, including building blocks such as transaction-level metrics that feed system-level analytics, single console management, support for standard management protocols and the ability to integrate with distributed systems management frameworks.
  • Scalability: Scalability evaluates the product’s handling of high transaction volumes, concurrent users, overall throughput, speed, latency, data size, and the ability to grow via smaller stepwise upgrades versus large-scale investments.
  • Vulnerability: Vulnerability considers the overall security infrastructure, product hardening, industry certifications, and its fit within a multi-layer, integrated defense system.

I usually recommend customers prioritize these seven abilities using the following scale:

  • High: the most important abilities that will generally serve as the key selection criteria. Solutions that score well on these key abilities will usually rise to the top of the product selection process. In general, there should be two to four abilities classified “high” — any more than four usually suggests a buyer with unrealistic expectations and an inability to prioritize.
  • Medium: the abilities that every solution must satisfy, but generally won’t serve as key differentiators during the product selection process. Solutions with higher scores on these “table stakes” abilities rarely influence the product selection process. In general, there should be two to three abilities classified “medium”.
  • Low: the abilities that do not factor into the product selection process. The only exception would be any solution that fails to meet the criteria in some extraordinary way. Good, average, or below average scores don’t affect the product selection, but a terrible score may eliminate a product from consideration. In general, there should be one to three abilities classified “low”.

Once these seven abilities are prioritized, individual requirements are then compiled and categorized. Vendor responses to line item requirements can then be streamlined and more efficiently evaluated.

Quantitative or Qualitative?

Many buyers use a quantitative approach to weight and score individual requirements. The buyer creates a spreadsheet with formulas that calculate a final numeric score that supposedly results in a winning product selection. Sadly, problems plague this seemingly objective process, often resulting in a product scoring well due to mathematical coincidence rather than its actual fit to the requirements.

One major problem is the sensitivity of this mathematical model based on the underlying assumptions. A small change to the weight of a certain requirement can result in a completely different score for the short-listed products, as illustrated in the example below:

Example of Problems with Quantitative Scoring for Product Selection

Another problem is the weights chosen for each requirement and how they semantically compare to each other. In Scenario 1 from the example above, Requirement 1 is weighted 30%, while Requirement 5 is weighted 10%. But is Requirement 1 really exactly 300% more important than Requirement 5? In Scenario 2, Requirement 1 is 167% more important than Requirement 5 (25% vs. 15%). It’s difficult to say which scenario more accurately captures the true business importance of the individual requirements.

Because of the difficulty of building a quantitative scoring model that accurately reflects the business need, I recommend a qualitative scoring system. I typically use the following (somewhat subjective) grading scale:

  1. Excellent
  2. Very Good
  3. Good
  4. Fair
  5. Poor
  6. Unacceptable

I recommend building a table that summarizes your findings for an executive audience. Annotate the grades with several salient bullet points supporting your score. In the (slightly dated) example below of a bake-off of Cisco home office firewalls, the four high priority abilities are presented, along with grades and details supporting the grade.

Sample Executive Summary of Seven Sacred Abilities Product Selection Process

Building this one-page executive summary helps your customer present their findings and overall recommendation to their internal decision makers. Capturing several bullet points for each grade helps your customer respond to questions that arise during the discussion.

The Value of Goodwill

Besides the inherent value of using a framework for product selection, startups instill confidence when they follow structured processes — it says you are a veteran that has done this before. You also build goodwill when you provide your customers the process and tools to make the right decisions. In addition, your leadership during the sales cycle commands respect and elevates you to trusted advisor status. These intangibles solidify your relationship with the customer, which can tip the scales in your favor should your solution be considered roughly equal to that proposed by another vendor.

As any startup veteran will testify, winning customers is critical to your success. Maximize your sales effectiveness by leveraging the Seven Sacred Abilities to create a clear, logical, and effective process for competitive product sales.


Startup Execution

Nailing Your Fantasy Draft
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Fantasy sports leagues have flourished in the last 10 years. I love football, but since I lack the size and skill to play in the NFL, I have to settle for vicarious competition in a fantasy football league. Anyone who does well in their fantasy league knows that the key to success is having the right players on your team. Getting the right players is all about nailing your draft picks and paying attention when quality players are available.

Your startup is no different. In my experience, getting the right players is so important that I have devoted several other articles focused on this topic, from building the right interview processes and skills to the role of game changing team members. Here, I have a few recommendations that will help you identify quality team members.

Show, Don’t Tell

Most interviewers are satisfied if the candidate tells you about their past exploits. It’s certainly important to get an overview of the candidate’s past work, but it’s vital to have the candidate show you their skills. This “show me” philosophy is the foundation for the hackathon, a popular Silicon Valley recruiting tool (which was immortalized in an over-dramatized scene in The Social Network). Although not as glamorous as Hollywood would have us believe, this “show me” exercise is still a very important part of identifying true skill. If you are hiring a pro services consultant, have them write a SOW. If you are hiring a programmer, ask them to write some code as part of the interview. If you don’t have time to create a programming exercise relevant to your startup, at least use a generic problem from a site like CodingBat.com.

My fourth startup was heavily dependent on a team of very strong Cisco network engineers. Every engineer we brought in for an onsite interview had to demonstrate their hands-on knowledge with real Cisco gear. We set up lab with a laptop connected to a Cisco firewall, which was then connected to a server. We then asked the candidate to configure a pinhole and NAT for web traffic from the client to the server. This is a simple exercise that a seasoned Cisco command line engineer should be able to do in 10-15 minutes. The candidate was provided with access to Cisco manuals if needed. I was shocked how many Cisco Certified Network Professionals (CCNPs) — a mid-level certification that can be roughly described as a “Bachelor’s degree” in Cisco technology — were unable to complete this simple exercise, even after laboring for over an hour.

If they succeeded, we gave them a second, more difficult exercise. We asked them to configure two separate VLANs on a switch intended for a production network and demonstrate bi-directional traffic flow through a layer-3 router. We purposely emphasized that this was for a production network and asked them to harden the configuration, but did not provide specific requirements. A mid-level engineer typically configures the VLANs in 10-20 minutes and says they are finished. But a senior engineer would take another 15-20 minutes to disable and assign unused ports to an unused VLAN, avoid using VLAN 1, configure user-facing ports as non-trunking, optimize spanning tree, configure VTP, configure switch security (such as BPDU Guard, Root Guard, DHCP Snooping, port security, etc.), harden access to the device, and many other configuration best practices. We basically designed a test that gave us insight into the depth and breadth of the network engineer’s skill. The more the candidate paid attention to these details, the more eager we were to hire them.

Not Just for Propeller Heads

These “show me” exercises aren’t limited to technical job roles. If you are hiring a product marketing or product management person, ask them to build a part of a go-to-market plan for a product. You could ask the candidate to put together one of the following components of a product go-to-market plan:

  1. Build out a launch plan for a new product
    1. Distribution and channel
    2. Marketing and communications
    3. Competitive positioning
    4. Sales tools
    5. Training and mentoring
    6. Customer success plan
    7. Target customers / segmentation
    8. Geographic expansion
  2. Build a model that segments a market for some common product of your choice (e.g., bicycles, refrigerators, cars, grocery bags, etc.)
    1. Target customers
    2. Product categorization / sub-categorization
    3. Value proposition
    4. Use cases
    5. Competitors

If you are hiring an accountant or a bookkeeper, create a fictitious business in QuickBooks (or your preferred accounting system) with a few customers and some high-cost inventory items. Then ask the candidate to create a sales order with multiple inventory items, convert items that shipped to an invoice, create an AR aging report, and receive payment from the customer. Take note of how much audit data (like product serial numbers, shipment tracking numbers, payment reference numbers, etc.) they capture in the transactions they record. Did the candidate know to ask about class tracking (a somewhat more advanced feature)? There are plenty of scenarios you can create to determine a candidate’s depth and breadth of knowledge. If you don’t have a strong accounting or finance lead to help you design the test, then at least use an off-the-shelf test from a web site like Brainbench.com.

How, Not What

Many people have had opportunities to serve in certain roles. Whether they have experience serving in the role is just one criteria. A smooth talking candidate will paint a rosy picture of their past roles with little verifiable information. Don’t just ask what their responsibilities were, but dig into how they did it. What was their approach? What process did they use? How did they govern and control the process? Did they create the process or did they just follow a process someone else created? Did they profit off of someone else’s groundwork? In a startup environment, the groundwork is rarely laid so the candidate will have to lay it themselves. Were they successful in growing sales because the market was growing and they happened to catch a rising wave? Or were they successful in growing sales in a down market? Dig into details. Don’t be afraid to spend 20+ minutes getting into the weeds with the candidate on how they did their job. I’ve met many, many candidates with Superman resumes, but Clark Kent abilities. It takes time and determination to separate the chaff from the wheat.

Stud or Dud?

Getting the right players on your fantasy football team requires knowledge and hard work. Every team needs a few star players that you pick in the first, second or third round of your draft. In fantasy sports, identifying the best players is somewhat easier because you have access to the player’s performance and stats from previous years. In addition, ESPN and other sports outlets provide a ton of advice on who to pick and when to pick them. However, in the world of startups, we don’t have access to stats or sports analysts who provide specific advice on individual players. Hopefully the suggestions above help you hire a few game-changing players for your team. In a future article, I’ll provide some suggestions for finding unproven talent to fill out the rest of your team.


Startup Execution

Game Changers vs. Players
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In The Imitation Game, Benedict Cumberbatch plays Alan Turing in his quest to break the Enigma encoding machine used by the Nazis in World War II. About seven minutes into the movie, Turing arrives for a job interview at Bletchley Park with Commander Denniston from the British Royal Navy. Because of his quirkiness, Turing fails to convince the Commander of his qualifications, his vision or his plan. About nine minutes into the movie, the Commander decides to end the job interview, concluding that Turing was not qualified, having “set the record for the shortest job interview in British military history.” Fortunately for the Allied forces, Turing got the job anyway and created a machine that cracked the code — a machine that most historians recognize as the first computer ever built.

Sadly, many high-level job interviews fail to identify true talent and potential. Some fail because they lack process and structure (refer to my article on Interviewing Skills). Others fail because the interviewer doesn’t know how to evaluate the core skills that make people successful in their role. Some fail because they rely solely on the candidate’s past roles to evaluate fit, as if holding a position alone is the definition of skill. Some interviews appear to succeed because they resulted in a hired candidate who presented him or herself excellently, only to realize several months after the candidate starts that they hired someone with great polish but little substance — a heavyweight boxer blessed with Muhammad Ali’s silver tongue, but cursed with slow hands, lead feet and a glass jaw.

Preparation, Not Opportunity

Bobby Unser rightly observed that success is where preparation and opportunity meet. I’ve witnessed many people who were hired primarily based on the past opportunities presented to them or roles they played. Though experience in a specific role is certainly one consideration, it shouldn’t be the primary factor. Preparation is primarily the responsibility of the individual, but opportunities are usually given to you.

A well-prepared employee may be mired in a lesser job because the opportunities to shine were few and far between. For example, Tom Brady was second on the New England Patriots’ depth chart behind starter Drew Bledsoe and probably would have sat on the bench for years, as long as Bledsoe remained healthy. In his second season, Brady only got his chance to play when Bledsoe was injured in a game against the Jets. Similarly, Kurt Warner entered the NFL in 1994 as an undrafted free agent, got cut from the Packers’ training camp, and found himself stocking shelves at a grocery store for $5.50 an hour. Even after successful stints in the Arena Football League and NFL Europe, Warner found himself as the third-string quarterback for the 1998 Los Angeles Rams, behind Tony Banks and Steve Bono. Warner was only named the starting quarterback for the 1999 season after Trent Green, the first string quarterback, tore his ACL in a preseason game. Warner was wildly successful, anchoring the Rams’ high-powered, “Greatest Show on Turf” offense that set an NFL record with three consecutive 500-point seasons.

I’ve also seen situations where a company offers a job to a product manager who claims he grew the product from $10M to $50M in revenue. While it may be factually true that the product grew substantially while the employee managed the product, little effort is usually made to determine the conditions surrounding that revenue growth. Did the product manager benefit from a market that was simply on fire, where every vendor’s revenue grew substantially during that time? In a bull market, every amateur investor realizes strong gains. As the old adage goes, “a rising tide floats all boats”. But can they do well in a bear market? Can they do it over a long period of time, or was it a single flash-in-the-pan? Many marginal employees appear successful because they were beneficiaries of great opportunities, not because of great preparation. Though past success is often the result of being in the right place at the right time, it is more important to hire candidates with great preparation and multi-dimensional skills.

In a past job, I was involved in the performance reviews of all the employees in the region. Steve and Jim (not their real names) were both project managers up for evaluation. The senior management initially concluded that Steve was the stronger project manager because his project had fewer customer complaints while Jim’s project needed constant management attention. I happened to be an architect for both projects so I saw first hand the quality of each person’s work. Steve lacked domain knowledge, was disorganized and failed to implement the recommended architecture. This resulted in a poorly performing application that completely embarrassed the customer in front of their users. The customer had every right to flame-broil the team, but that wasn’t their style — they were very mellow and didn’t skewer us. On the other hand, Jim was handed a project that was completely undersold. It was priced at $800K, but should have been priced at $2M. That combined with the fact that the customer was very unreasonable and combative made it look like Jim was a very poor project manager. The reality was that, if it wasn’t for Jim’s methodical, logical and measured approach, the project wouldn’t have finished at all and the customer probably would have sued us. It was work to help the senior management team understand that the simple appearances betrayed the actual skill of both Steve and Jim. Thankfully, this was made clear and Jim received the promotion that was about to be given to Steve.

Game Changers Wanted

If anything is to be learned from the rise and fall of great houses and kingdoms in HBO’s epic Game of Thrones, it’s that mad fighting skills can tilt the balance of power. The Hound, The Mountain, Tormund Giantsbane, Brienne of Tarth, Oberyn Martell, Jaqen H’gar, Syrio Forel and a dozen other “lesser” characters were all pivotal pieces on the chessboard. In your fast-paced startup, you need game changers and not just players.  Finding these game changers is not easy and often requires thinking outside the box.  Over the next several days, I’ll expand on this posting to address several things to focus on that fall outside the realm of a typical interview in order to find your set of game changing employees.


Startup Execution

Enter the Matrix
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As a founder or a startup executive, you often address complex topics. Your ability to communicate them clearly and quickly creates fertile environments where output is high and breakthroughs are common. Colleagues, customers and investors are energized and motivated to move forward when they quickly understand your message and can embrace your vision.

Playing Four Square

One of the most effective communication tools is the 2×2 matrix.  Industry analysts often use a 2×2 matrix to communicate concepts, but I continue to be surprised at how rarely I see professionals leverage this very valuable and effective tool. Gartner Group has their Magic Quadrant. Forrester Research has their Wave. Back when I worked in management consulting, I quickly learned to frame up my analysis or my message using a 2×2 (or sometimes, a 3×3 or larger) matrix. As an example, consider the matrix below that captures the basic options for evaluating the evolution of existing IT applications.

Using simple matrices to communicate concepts usually produces the following outcomes:

  • Improves clarity
  • Catalyzes conversations
  • Shortens mean time to consensus (and often minimizes disputes on unclear or debatable matters)
  • Improves productivity
  • Sets the foundation for action

Gartner’s Magic Quadrant has become so pervasive that most business professionals immediately recognize it and strive to land their product or initiative in the upper right quadrant. In the strategy matrix presented above, applications can be graded and mapped to provide a clear, visual representation the plan for each application, as depicted below.

The most effective matrices are characterized by:

  1. Horizontal and vertical axes that capture simple concepts
  2. A simple measurement scale for each axis, where the scoring criteria is clearly documented, easily understood, or easily rationalized
  3. Visual insights that are illuminated when combining the horizontal and vertical axes in a matrix format
  4. Simple one to four word descriptions of each quadrant of the 2×2 matrix

It is also possible to add annotations or other constructs to communicate higher-level  concepts on top of the 2×2 matrix. Here are a few examples that I’ve used in the past:

 

You can also refer to my Uncommonly Good Product Management article for several other examples of effective use of 2×2 matrices.

Upgrading to Tic-Tac-Toe

In some cases, a 3×3 or larger matrix can be used to prioritize a complex list of options. For example, risk management can be a difficult problem. But if you score each threat in terms of its likelihood and impact, then a course of action becomes more clear, as illustrated below.

 

Rubik’s Revenge

Another common but challenging exercise is prioritizing features for your new product. Often times, I see teams going through a brainstorming exercise or a dump of their feature tracking database to produce a large master list of feature requests. Then the next step is to prioritize each feature using a one to five scale, with one being the highest priority. This usually results in a suboptimal distribution where 70% or more of the features scored a one or two, about 20% a three, and less than 10% a four or five — hardly the bell curve distribution that you typically want. The team may have used a structured process that resulted in a plan, but the output is one dimensional, subject to debate, and difficult to deliver. A better process exists. Product managers should grade each feature request in two dimensions: business benefit and technical complexity, as depicted in the 4×4 matrix below.

The above matrix uses a four-point grading system to evaluated each feature request. This results in a seven-point prioritization scale along the diagonals of the matrix. If desired, you can step up to a five-point grading system, which results in a nine-point prioritization scale. This system of prioritizing features is still simple, more thorough, and more defensible. This method also produces more granular priorities with less clustering at the top and a better bell curve distribution. With a better distribution, product teams have fewer priority one features, paving the path for more agile development and faster releases.

Red Pill or Blue?

Startup founders and executives often have revolutionary ideas and visions. I’ve seen companies with great potential fail because they couldn’t sell their vision clearly, quickly, or effectively to potential customers, investors, and employees. In your role as an evangelist, your ability to communicate your vision is critically important. Effective evangelists create a short mean time to clarity, consensus, and action. Hopefully, your ability to Enter The Matrix will help you defeat the agents that battle against your success.

 


Startup Lifestyle

Take Care of Yourself
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I’ve previously written about the importance of taking care of your team and taking care of others. It’s also important and acceptable to take care of yourself. I’ve already written about how startups tend to extract a pound of flesh and pint of blood. After running a marathon, you have to rest and recover. Take a nice vacation with your family. Treat yourself to something you enjoy.

After my last startup was acquired at the end of 2012, I finally allowed myself to buy a nice Nikon camera system. I gave myself permission to invest time to learn to be a good photographer. Four years later, I now shoot about 20,000 to 25,000 photos a year. Some photos are about creating fine art. Other photos are about capturing memories. Still other photos are about giving to others by making quality pictures of their special moments. Taking photos provides me with a way to wind down and step away from the frenetic pace I usually keep.

But in allowing yourself to explore your passions, it is important to do so within healthy boundaries. It’s fine to get a nice car, travel to see the world, or upgrade your house. But acquiring a fleet of super cars or buying a ten-bedroom mansion can lead to a life with unhealthy or non-existent boundaries. It can also provide fertile ground for your kids to grow spoiled, as effectively you are spoiling yourself. Instead, consider the examples of Mark Zuckerberg who generally drives a $30K Volkswagen GTI and Warren Buffett who lives in a nice, but still modest $650K house in Omaha, Nebraska. Both can clearly afford to indulge in multiple exotic cars and homes that induce envy even in the wealthiest celebrities, but they choose not to.

In order to keep me somewhat rooted, my wife encouraged me to blend my passion for photography with a way to give back. I decided to volunteer to teach photography to underprivileged kids and to raise money for our kid’s school. I also volunteer as an event photographer for several non-profits and schools.

So feel free to decompress. Enjoy life. Travel. Pursue a hobby. But as you do so, think about ways to build community or invest in quality time with your family as you pursue your interests. One particularly good way to stay connected and grounded is to volunteer in your kids’ schools. It’ll help you get a feel for a big part of your kids’ daily lives while also deepening your connection with them. In doing so, you will probably find that the relationships you foster and the community you build will provide more satisfaction than any prized possession or individual (isolated?) pursuit.


Startup Lifestyle

Take Care of Others
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Startups provide great opportunities to grow. Startups are hard work, but they are fun, challenging and rewarding. And should your startup result in an exit, you can live comfortably, enjoying many of life’s good things. In the midst of your success, my encouragement to you is to share in some way with others. Besides just being the right thing to do, it keeps you connected with people and can ward off some unexpected maladies (like affluenza).

Financial security is a blessing, but it can also bring some hidden curses. We can easily fall into living an insulated life, leading to a privileged attitude. This becomes most apparent in your children. As parents, we want our children to have the best life has to offer. But as life enables you to have many things, children can develop an expectation of always getting their way. Kids can whine and insist on having the latest iPhone even though they just received a new phone last year. This happens when they haven’t learned the hard work needed in order to enjoy good things. You worked hard for your wealth, but your kids didn’t.

Warren Buffett’s Wisdom

While it’s not realistic to expect your younger children to earn a salary to pay for life’s expenses, it is reasonable to help them learn the value of hard work and stay connected with others who are less fortunate. One of my favorite stories is one where Warren Buffett was approached by one of his adult children for a $41,000 loan to remodel her kitchen. His response was epic: “You can go to the bank [to get a loan] like everyone else.” If you know anything of his life, you know that this response was not rooted in a selfish hoarding of his wealth, but in a desire to teach his family a set of values.

It Starts With You

Staying well-rooted starts with you. A parent who doesn’t set an example for their kids will wonder in frustration why their kids haven’t adopted their words of wisdom. Giving back to others is an important way to stay grounded. You don’t have to have the wealth of Bill Gates or Mark Zuckerberg to be able to share. If you’ve enjoyed an exit, you probably have more than enough to live comfortably.

Kishore is a friend of mine that sold his startup and subsequently started a charitable foundation to give back. His foundation drove an innovative, self-funding clean water project in India. In addition, Kishore heard of a young child that needed a costly surgical procedure that her parents could not afford, so he paid for it. Similarly, my own family is the beneficiary of someone else’s generosity. My youngest daughter is adopted from China. As an infant, she was left in the cardiac ward of a hospital because she needed open heart surgery to correct her VSD and ASD (two holes in her heart). She almost died several times, but a local businessman heard of her plight and donated the equivalent of seven years’ of a factory worker’s wages to pay for the surgical procedure. I do not know the man who paid for the surgery — I don’t even know his name — but my daughter is alive and thriving today because of his kind and generous gift.

Practical Paths

If you’ve decided to share, it’s important to plan. If you’ve received a windfall, make sure you consult a financial planner with many startup founders among their clientele. One benefit of being charitable is the opportunity to soften the tax burden in your years where your income will be abnormally high. Set up a charitable fund. Both Schwab and Fidelity have simple, low-maintenance charitable funds that you can participate in without being a billionaire. If you are fortunate to be in the multi-, mutli-million dollar territory, consult your financial planner about the benefits of setting up a charitable foundation.  (If you need a referral to a financial planner, I’ve had good relationship with Larry Steckler at Capital Financial.)

In addition to being generous with your money, remember to be generous with your time. Sometimes, it’s too easy to write a check and stay disconnected from true human need. Volunteer your time. When you volunteer, look for opportunities to talk to people you are helping. Listen to their stories. Connect with their difficulties. Involve your family — your kids might not be able to make substantive financial contributions to pay bills or fund a charitable cause, but they can still make a difference in someone else’s life by giving of their time and heart.

One of the things I’m most proud of is how my children give to support kids with special needs. My son just graduated from high school and has volunteered almost every week for over six years as a coach for e-soccer — a full-inclusion program for both typical kids and kids with special needs. He currently works a summer job helping children from low income families. He has developed an empathy and compassion for others far beyond the typical high schooler.

Startup life is amazing. There are great rewards professionally and personally. Should you be fortunate enough to enjoy an exit, remember to give back. When you give back, do so in a personal way that involves your family. You may just find that the rewards from doing so far exceed the benefits from your startup’s exit.


Startup Execution

Fixed Price vs. Time & Materials
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The Challenge

Every business has problems that must be solved. Vendors recognize this and build solutions to help Customers address their needs. In most situations, solving the Customer’s problems requires a professional services project to implement the solution that addresses the Customer’s needs. This gives rise to the classic relationship between Customer and Consultant. In every project between Customer and Consultant, both parties have to decide whether a fixed price or time and materials (“T&M”) fee arrangement works best.

In many cases, the Consultant allows the Customer to choose between a fixed price and a T&M fee arrangement. In other cases, one method is chosen without a full understanding of the tradeoffs, which increases the probability that a suboptimal fee arrangement will be selected. In order to choose the best project pricing structure, it’s important to break down the individual considerations that apply. This is especially important if the Consultant and the Customer prefer different fee arrangements. In this article, I’ll present the decision factors between fixed price and T&M in the context of the overall project discovery, proposal and delivery process.

The Process

Many resources document the project lifecycle as some variation of a “plan, design, implement” or an “analyze, prototype, refine” methodology. While these methodologies provide a strong framework to deliver a project, they don’t capture the nuances of the Consultant/Customer relationship from pre-sales discovery through post-sales delivery. In focusing on the choice on choosing between fixed price and T&M fee arrangements, I’ll ignore the many variations of waterfall or agile development processes and focus simply on the project engagement process presented below.

Every engagement between a Consultant and a Customer goes through some form of the discovery, proposal, and delivery process described above. The Discover phase focuses on obtaining a high-level understanding of the situation and the possible solution. The Propose phase focuses on analyzing the situation and building a preliminary design, which is key to determining a fee structure for the project. The Deliver phase focuses on implementing the proposed project, executing on the project management and change order approach determined by the agreed upon fee structure. Each of the seven sub-bullets that span the three engagement phases present specific tradeoffs driven by the choice of fixed price or T&M fees.

The Tradeoffs

Collect Requirements

Every discovery effort requires the Consultant to obtain at least a high-level understanding of the Customer’s requirements. Fixed price engagements require the project requirements to be well defined during the Discover phase. Customers must be able to commit to key design decisions and assumptions before the project proposal gets built. If additional investment is required to determine key design decisions and assumptions, then a T&M engagement fits best. Obviously, poorly defined requirements put the Consultant at significant risk on any fixed price engagements.

Assess Complexity

Once the initial requirements are set, the team needs to assess the overall complexity of the project. Complexity threatens the profitability of fixed price projects. Many factors increase project complexity, including: dependence on emerging technology, requirements to interface with many systems, significant reliance on third-parties, lack of staff experience with the technology or industry, geographically dispersed teams, use of non-dedicated resources, solution risk to high-value assets (such as human life or large monetary systems), and unreasonable expectations. Fixed price projects are best if no more than one of these complicating factors exists in a significant way.

Complexity leads to unpredictability. Unpredictability requires flexibility in order to adapt to unforeseen changes. Given the high degree of flexibility required, time and materials engagements are best when significant complexity exists in a project.

Size Project

Even the most knowledgeable and experienced consultants have difficulty providing accurate cost estimates on larger projects. If fixed prices are required, then the Consultant should segment any large projects into smaller, fixed price sub-projects. Otherwise, the Consultant must add huge contingencies that drive up the overall project price. In contrast, T&M projects are suitable for both large and small projects.

Refine Project Parameters

As the discovery effort winds down, the Consultant begins working on the proposal. An important part of the proposal effort is the iterative refinement of the key project parameters: scope, time and cost. Fixed price projects require a higher level of certainty on these parameters than T&M projects. Incomplete requirements, project complexity, or customer indecisiveness usually results in multiple iterations to increase the certainty of these project parameters. If both the Consultant and the Customer are willing and able to invest the time, energy and effort to cycle through multiple iterations, then a fixed priced engagement is possible. However, if either the Consultant or Customer are unwilling or unable to cycle through many iterations, then T&M would be preferable.

Determine Primary Risk Owner

From a cost perspective, Consultants want profitable engagements while Customers want projects to finish on budget. Fixed price projects require the Consultant to assume the profitability risk. Cost overruns eat into the Consultant’s profit, or in the worst case, result in the Consultant losing money to deliver the project. Consultants generally avoid this challenge with T&M projects because the Customer bears the budgetary risk of any cost overruns. Ultimately, a decision has to be made regarding which party assumes the profitability or budgetary risk.

Manage Project

With fixed priced projects, the project manager focuses on protecting the originally agreed upon project scope. As a result, the Customer must accept “No, not without a change order” as a response to scope creep. In situations where the Consultant’s documented assumptions become invalid or the Customer is unable to satisfy their responsibilities, the Customer may be forced to accept a change order. This focus requires a strong project manager and may strain the relationship between the Consultant and the Customer.

However, with T&M projects, the project manager focuses on diligent progress tracking and regular status reports to ensure project is delivered within the estimated cost and timeframe. The Customer is constantly kept abreast of how well project is tracking to progress and the likelihood of hitting the estimated cost and schedule. A less seasoned project manager can typically deliver T&M projects, as the primary responsibilities are easier to execute.

Adapt to Changes

With fixed price projects, the need to protect the scope, time and cost means adapting to unplanned, unforeseen situations becomes more difficult. In contrast, because the Customer bears budgetary risks on T&M projects, the Customer enjoys broader latitude to change the project’s scope, schedule, or costs while project is mid-flight.

The Bottom Line

Given the challenges of the tradeoffs above, fixed price projects generally result in higher priced projects. Fixed price projects require more effort and expertise during both the pre-sales cycle as well as the post-sales project delivery phase. This effort and expertise comes at a cost. In addition, to minimize the chance of losing money on the project, the Consultant naturally adds extra padding to fixed price quote. T&M projects are almost always cheaper since the Customer accepts responsibility for any cost overruns.

The table below summarizes the tradeoffs of the seven project engagement tasks above and their impact to the bottom line.

Ultimately, the decision of fixed price or T&M fee arrangements revolves around finding the right fit for the Consultant and the Customer. When both the Consultant and the Customer have a clear understanding of the tradeoffs involved, navigating the project engagement process and choosing the optimal fee arrangement becomes a smooth process for all parties.