Startup Execution, Startup Talent

Motorcycles vs. Jumbo Jets

I’m a speed junkie. When I was young, I used to watch A. J. Foyt battle Richard Petty in NASCAR. Since I didn’t own a fast car, the best I could do was take my bicycle off road and imagine I was a motocross racer. As I’ve aged, I’ve migrated from NASCAR to Rally racing and from motocross to MotoGP.

MotoGP racers are crazy. They ride machines capable of heart-stopping acceleration and dare to brake at the last possible second before entering a turn. And in each turn, they lean the motorcycle to the extreme, threatening to either scrape their body on the inside of the turn or lose their grip and go sliding through the outside of the turn. All of this with what appears to be minimal protection.

 

Every seasoned entrepreneur lives a similar experience. Running a startup demands hyper-aggressive acceleration and iron nerves to push the limits in order to hold your line in a turn, and maximize your speed. Riders must make dozens of split second decisions to accelerate, downshift, brake, lean in, and position the engine in the power band (the range of RPM that produces peak power output) coming out of each turn. Founders must do the same, except instead of a motorcycle, they jockey a company.

If you aren’t lucky enough to race for an established team like Ducati or Red Bull with big funding and a large support staff, you have to wear multiple hats: from racer, to mechanic, to marketer and sponsorship fundraiser. Founders often have to be proficient in multiple business disciplines — particularly in the early stages of the startup. Founders have to be willing to pick up a wrench, pull apart an engine and get greasy. Then they might need to clean themselves up, change into business casual attire, and pitch to a potential investor. After that, they may have to play diplomat and negotiate with a new customer who complains that the solution doesn’t match the claims made during the sales pitch. And then at a lunch interview, they need to quickly determine if a job applicant with a promising resume will really be a good fit for one of the few engineering roles that the startup can afford.

It’s a difficult mix of demands that call for very broad, experienced, executive skills. Unfortunately, I often see recruiters, investors, or advisors glibly counsel the entrepreneur to pull out all the stops to hire a Senior VP from a large Fortune 500 company to run their sales, business development, marketing or engineering team. The Fortune 500 SVP clearly has a strong set of skills that enabled him/her to play their role in leading 1,000-person teams that drive $1B or more in annual revenue. However, many people fail to recognize that most Fortune 500 SVPs have skillsets unsuited for startup life. Yes, they carry huge responsibilities, but the machine they ride is not a motorcycle, but a jumbo jet. Yes, Boeing 777 and Airbus A340 pilots are responsible for the lives of hundreds of passengers, but their job requires them to focus more on following rigorous safety protocols, maintaining control, and making fewer, more deliberate decisions – usually with the assistance of advanced instrumentation.

Pilots of commercial jumbo jets aren’t asked to pick up a wrench and sling code, create the detailed requirements to earn a badge in your channel partner program, analyze a competitor’s features against your own, or write copy for product marketing assets. They typically surround themselves with large teams who do these tasks for them. They are usually best at developing policy, working the politics, or mining industry contacts. (I won’t even get into the topic of whether a small startup can afford the high-six-figure salary that a Fortune 500 SVP will command.) When joining a startup, many Fortune 500 executives either move too slowly or make the wrong decisions because they aren’t used to making dozens of judgment calls in just a few seconds. I’ve seen some very senior people who have enjoyed great success in a large company stumble when going to a small company because the job responsibilities – especially at startups with less than 100 employees – are completely different. I’ve also seen some founders and investors accept a jumbo jet pilot who averages 20 mph each lap around the track because they don’t know that the real racers will average well over 100 mph a lap. The founder often doesn’t realize they are only averaging 20 mph or don’t know that a 15-minute lap time is really, really slow. Inexperienced leaders don’t recognize the problem until they’ve been passed multiple times on race day. But by then you’re way behind the competition or you’ve lost your market lead.

To be sure, many Fortune 500 SVPs are very skilled and are great at their current job. But smaller startups have very different job responsibilities. There are some Fortune 500 SVPs who also are (or recently were) motorcycle or rally car racers, but they are very rare. When you’re fighting a global war against terrorism, you definitely want the three-star general in the driver’s seat. You need their inspirational leadership, political moxie, ability to shape public opinion, and experience running multi-year campaigns. However, most young startups don’t need someone who has experience reporting to the Secretary of Defense. Startups need the Navy Seals to execute a hostage rescue operation or a special forces sniper to neutralize an enemy combatant a quarter mile away. Make sure you understand the actual detailed requirements of the startup role so you can add candidates with the right skillset. For most startups, one or two jumbo jet pilots could possibly help in an advisory role (maybe sometime near the Series B financing) or serve as a full-time employee once the startup reaches some scale. But more often than not, you’ll want a lot of MotoGP racers and pit crew chiefs.

 


Startup Execution

The Art of War

Every startup targeting a large market opportunity will face competition. When competitors are present, every sales opportunity becomes a battle. Founders must prepare their war strategy in order to be well-positioned for victory when the time for hand-to-hand combat arrives. Sadly, I’ve seen countless companies fail to prepare their teams to compete, resulting in weak sales. Founders need to ensure they install a framework that allows them to compete strong.

Lessons from Sun Tzu

Every business would benefit from adopting the wisdom from a 2,500-year-old book: The Art of War, by Sun Tzu. One principle from this ancient tome is the importance of knowing both yourself and your enemy, as summarized below.

Effective competitive frameworks must include a thorough understanding of yourself and the competition. Some teams charge blindly into a competitive sale without any preparation. I’ve seen many teams begin preparations for a sales presentation while sitting in the lobby waiting for the customer to escort them to the meeting room. Needless to say, in competitive situations, these meetings rarely deliver the impact that they could or should. Opportunities progress slowly through the sales pipeline, if they move forward at all.

Other more seasoned sales teams learn that multiple vendors will compete for the opportunity and only prepare by highlighting their own product’s strengths. They know their product well, but fail to really understand the competition and how they will attack. This leaves sales teams scrambling when the competition effectively highlights their own strengths or points out your weaknesses — resulting in a loss of confidence, credibility, and sales momentum. This approach is similar to a sports team that competes by only emphasizing their offense and ignoring their defense. As a long-time San Diego Chargers fan (yes, I know the Chargers moved to Los Angeles), I celebrated the vaunted “Air Coryell” offense that led the league in passing yards an NFL record 6 consecutive years from 1978 to 1983. Sadly, the Chargers’ defense also surrendered the most passing yards in 1981 and 1982. The team could easily score 35-40 points in a game, but their opponent often did the same. In the documentary “America’s Game: The Missing Rings”, the 1981 Chargers received the dubious distinction of being one of the five greatest NFL teams to never win the Super Bowl.

Companies that build a competitive infrastructure that highlights their differentiators and provides prepared responses to their competitor’s lines of attack enjoy the best chances of success.

Build a Solid Competitive Framework

Just as it’s key to structure your product’s value into features, advantages, and benefits, it is important to structure your competitive content. I usually classify competitive content into three categories: objective, subjective, and speculative, as depicted below.

Objective content is customer viewable, which means it needs to be based on fact or broadly accepted opinions. It needs to be unbiased in order to pass the credibility test. Subjective content is targeted at your trusted partner network and may be shared with the end customer in select instances. Because the subjective content may be disputed by an extreme skeptic, it should be built on conservative, plausible assumptions in order to be defensible. Speculative content is based on experienced opinions and logical projections. However, because the core content is often anecdotal or non-public, it is subject to claims of bias. As such, it should be only be delivered in very carefully crafted messages. Subtle messages that shine a light on a certain topic or that encourage the customer to explore a subject more deeply may be appropriate to convey the point. Simple examples of objective, subjective, and speculative messages are captured below.

The Audience Matters

Another key consideration is the target audience for your competitive claims. I encourage product managers to create bullet-point messages for executives, mid-level managers and architects, as well as staff engineers. Similar to the functionality available in Google Earth, the bullet points should differ only in the level of detail, providing zoomed-out perspectives for senior management and zoomed-in details for front-line staff. I’ve created a sample competitive 3×3 battle chart to illustrate how each category of competitive content intersects with the target audience to create a specific message.

Snacks, Entrees, and Banquets

Finally, competitive content should be packaged and delivered in three different formats:

  1. Short bullet-point summaries (such as the sample above) that can be quickly leveraged by a sales team in as little as 10 minutes.
  2. Overview presentations that provide reasonable detail behind the summary claims that a pre-sales engineer can review in 45-60 minutes. Without this level of detail, your sales teams will not have the confidence to be credible and will likely crumble when challenged with an opposing viewpoint.
  3. A library of detailed evidence supporting each individual claim. Each library item may take 10-15 minutes to digest. In some cases, the customer struggles with accepting the competitive messages you tell them. In such cases, you need to be able to show them the specific detail. In one instance, I claimed that our product could be installed in about two hours, while the main competitor’s product installation took about two weeks. To back up the point, I referenced the competitor’s installation guides. Their installation process had six major steps. Each step had a long checklist of individual tasks. I copied the tasks for each step directly into my internal competitive presentation, giving the sales team hard, actionable data. The first step alone consisted of 41 individual tasks! In another instance that proved quite effective, an engineer created a video of the actual troubleshooting process of a common problem (loss of a network connection). The recording of the terminal session captured all the command line steps required to gather individual pieces of data in order to determine the correct course of action. The video illustrated the difficulty of troubleshooting the multi-layered, distributed solution that was not apparent in the competitor’s high-level product pitch. Both of these examples required a significant investment in order to understand the enemy. But, as Sun Tzu correctly observed, the fact that we knew the enemy very well enabled us to approach every battle without danger.

The Path to Game Day Sunday

Every football fan understands that games are won by creating a strategic game plan and then executing to that plan. Professional football players and coaches prepare and practice for six days and play for just three hours, one day a week. As Sun Tzu asserted, “every battle is won before it is fought”. Set your company up for success by knowing both yourself and your competitors. Invest the time required to learn your most effective offensive plays as well as defensively counter the opponent’s likely lines of attack. Classify your competitive talking points into objective, subjective and speculative categories in order to help your sales team know how hard to push and how to position each message.  By adopting a structured framework for your competitive content, you can avoid reckless street fighting and build effective battle campaigns for your sales force, enabling you to compete strong.

 


Startup Execution, Startup Talent

What’s in a Name?

Shakespeare famously spoke through Juliet, asking “What’s in a name? … a rose by any other word would smell as sweet.” That’s true, as long as you know you are truly holding a blossoming rose (and not a seedling or a plant that has yet to flower).

Many startups bring on promising talent to run large portions of the business. Because cash is usually tight and equity pools are limited, founders scramble to offer compelling packages to attract top talent. One common “carrot” or concession offered during the interview cycle is a big fancy job title. The rationale is that, if you can’t increase the salary nor the stock options, then let the candidate take a VP or a Director title. It costs you nothing, so the prevailing logic goes.

Pay Me Later

But the reality is that job titles are not free — you eventually pay for it later. Founders should think carefully before doling out executive or senior job titles. Founders need to ensure that the candidate’s skills truly match the expectations of the senior job title. Multiple challenges can arise when an employee is over-titled, including:

  1. Insecurity that leads to defensiveness. Difficult personnel issues surface when it becomes apparent that the employee isn’t capable of playing the senior role. Employees who are overly hungry for a big job title usually have a hard time facing the facts if they aren’t meeting your expectations of the role. Their insecurity often takes over when you try to provide constructive feedback and they resist any notion that they aren’t truly VP or Director-level material.
  2. No room at the top. If the candidate is over-titled, eventually founders need to bring on a truly senior employee to take over. But if the current candidate already holds a VP title, then you are left with few options other than to bring in the new person as a Senior VP. Top-heavy small companies easily become unbalanced when they have too many generals and not enough infantry. You need a typical distribution of titles within a team to properly allocate work between leaders and staff. New investors will also question your management decision making when they see an unbalanced, top-heavy organization. In addition, if you bring in the next person at a higher title just because the current person is over-titled, you run into more problems with compensation. The new person will expect a salary and equity package that is commensurate with the higher title, further draining your limited resources.
  3. Low morale among the troops. The staff working for the over-titled executive will eventually recognize that the team leader isn’t meeting the expectations of the role. The front-line staff are often the first people in the company who recognize that the leader isn’t doing the job well. They won’t want to work for the person, which results in disunity and dysfunction. Their expectations put pressure on the founders to deal with the over-titled individual, creating a messy people issue to resolve.
  4. Can’t right-title. In many cases, the over-titled individual is a hard worker and a reasonable employee, just not at the title he/she currently holds. The right thing to do is to change the person’s title to one that more appropriately reflects their current capabilities and contributions. But just about everyone will see this as a demotion. Very few people are comfortable with being demoted, leading you right back to cleaning up a messy HR issue.

Because most people hate dealing with messy HR issues, I often see founders avoid the problem altogether. Avoiding the HR issue means your company will just limp along, under-performing along the way. Progress will slow, investors will sit on the fence or lose interest, and employees will get disillusioned.

Right Titles, Right Foundations

Occasionally, you’ll find a promising candidate with great potential. Chances are the candidate will have many options to choose from, forcing you to compete for their services. Don’t give in to the temptation to over-title the candidate in order to make your offer more attractive. Do talk about your solid HR practices and culture and how you want to provide many opportunities for employees leverage their preparation. Every team member wants to feel successful, so highlight the fact that success is likely when opportunities and preparation intersect. Bring the candidate in at a lower title — the right title — and offer regular feedback and coaching. If the candidate exceeds expectations of the lower title over a sustained period of time, promote them. This approach avoids the risk of over-titled employees. It also motivates the employee when they see their contributions being recognized and their career opportunities growing.

As I wrote in my posts on interviewing and finding the right candidates, hiring game changing employees has to become a strength of every startup. Employees are the foundation of your startup. It is important to align the job title with the candidate’s true capabilities and proven experience. Over-titling employees runs the risk of creating multiple layers of complex, messy problems. But rational, consistent and accurate mapping of roles and titles can form a solid foundation for you to grow your startup. Hire well and grow well!

 


Startup Execution

Hockey Stick Dreams

Founders dream big. Founders see a need, envision a solution, then work tirelessly to realize their dream. Founders should shoot for the stars, but need to remain rooted in the reality that they might have to settle for landing on the moon. When setting goals, it’s important to aim high, but it’s also key to keep the realities of business or technical constraints in mind.

Catastrophic Cracks

I witnessed this first hand in my first startup, an e-commerce retailer in the jewelry space. I joined after the company closed its Series A funding round and grew to about 20 employees. We embarked on a crazy schedule to build out an e-commerce web site in order to handle the upcoming Christmas shopping season and the expectation of hockey stick growth. We built out a beefy technical infrastructure, hired marketers and merchandisers, and installed an enterprise-grade inventory system with Amazon-like pick, pack and ship functionality. In the fall of 1999, we launched a beautiful luxury retail web site graced with glamorous super-models decorated in gold, diamonds, and pearls. Early sales were good, as we benefited from a strong Christmas shopping season, fueled by a big marketing and advertising budget.

But then reality hit. With the Christmas season behind us, sales slowed and web traffic waned. Given ambitious projections of big revenue, we built a muscular V-12 engine that guzzled gas like there was no tomorrow. We raised a lot of money, but were quickly burning through it. The Internet frenzy in 1997-1999 led to the B2C e-commerce crash in 2000. Our startup was no exception, as the investors lost confidence and pulled their support. The company shut down in fall of 2000.

As my team packed up their personal effects, someone found the original pitch deck used to raise the early-stage funds. One thing stood out: a graph with a $200M revenue projection by the company’s third year: classic hockey stick growth. This projection drove many key decisions around the size of the marketing budget, the “weight” of the big iron running the web site, and the bells and whistles in the inventory and logistics engine. I immediately recognized this as what it was: a catastrophic crack in the foundation of the business.

Jewelry Math

After I joined, one of the veterans from the jewelry business informed me that 70% of jewelry sales are Christmas gifts. So in order to do $200M in sales, that meant that we would have to do $140M in Christmas revenue. The Christmas shopping season is effectively about four weeks long. If you oversimplify your facts and assume the revenue is evenly distributed across the four weeks, that works out to $35M per week. Assuming an average order size of $300, that works out to 116,667 jewelry orders per week. If we further assume 90% of e-commerce orders are placed Monday through Friday with 12-hour shopping days, that works out to 21,000 orders per work day, 1,750 orders per hour, or basically one order every two seconds. There weren’t any reliable statistics that gave us the number of individual jewelry purchases in the US each day. But to assume our little startup retailer could rocket up to booking one order every two seconds — for luxuries funded mostly by availability of disposable income — is at best hyper-aggressive and at worst, fantastical. 

Logistics Math

But the jewelry industry sanity check above could be criticized on one important assumption: the average order size. Because the business plan included both high-end, low-volume luxury products and low-end, high-volume consumer products, predicting the average order size was an imprecise exercise.

Given this, a second sanity check is justified. So let’s take a look at it from a logistics perspective. In 1999, FedEx shipped about 1.2M Express boxes in the US each day. Our target of 21,000 orders per work day would represent about 1.8% of the total daily FedEx Express package volume. For a single fledgling Internet jewelry startup to go from zero package volume to one of FedEx’s top 10 customers in just three years is completely unrealistic.

The MBA Sniff Test

When you combine the unrealistic projection of how much of the jewelry market share this startup could capture with the equally unlikely logistics operations growth, you get an unfeasible business plan that was destined for failure.

The lesson learned here is that a couple of hours from an MBA analyst would have caught the overly optimistic projections. The business was viable, but the projections drove the company’s burn rate and investor expectations to an unsustainable level. Realistic targets would have given the company a fighting chance for success instead of a premature shutdown.

Grand Slams vs. Base Hits

It’s fine for founders to step to the plate and swing for the fences, but expecting to win by hitting grand slams every inning is poor game planning. When every batter tries to knock the ball out of the park, you end up striking out way more than you hit home runs. A better game plan focuses on getting batters on base, then advancing them methodically.

Every founder dreams of hockey stick growth, but most startups grow steadily, not explosively. Because a core premise of the business plan was unrealistic, the company overbuilt and overspent trying to hit an unachievable goal. Build a game plan with reachable stretch goals, execute well, and you’ll have a strong chance of success.

 


Startup Execution, Startup Talent

Diamonds in the Rough

As I’ve written previously, every startup needs game changing players. You can hire them if you have a good interviewing process, know what to look for, and can offer a strong compensation package (cash + equity). Sadly, even if you have all of these, the ridiculously competitive job market (especially in areas such as the Bay Area, New York, and several other tech hot spots) may frustrate your ability to bring on ready-built veterans. In such cases, your only alternative is to hire candidates with raw talent and potential and then grow them in house.

Every owner of a fantasy football team would love to draft the top quarterback, top two running backs, and top three wide receivers in the league. But the realities of most leagues typically limit any one team to maybe two veterans with a proven history of production over several seasons of gameplay. The rest of the team must be built around role players and younger, unproven athletes.

The Veterans

In order to develop unproven players, founders must build an atmosphere and system that cultivates growth. Veterans who are chartered and able to develop the younger staff serve as the anchor of high-growth teams. These veteran leaders need to buy into the fact that a key part of their success depends on their ability to raise up their teammates. Team leads need to balance the efficiency of doing tasks on their own versus delegating, coaching, training and empowering others to take ownership for key parts of the project or team.

The Rookies

Once you have the veterans in place, you need to find the right rookies to add to the team. Take a moment to review my previous post on building a strong interviewing process. As I’ve previously written, success is usually the combination of preparation and opportunity. Younger-in-career candidates haven’t have many opportunities, so your goal in the interview process is to identify candidates that have great potential because they’ve done the necessary preparation. You should focus on:

  1. Strong technical ability. Front-line staff typically need to demonstrate very strong technical capability in the role they are hired to play. Make sure your interview process goes the extra mile to identify raw technical talent with real-world “show me” demonstrations and tests rather than “tell me” stories.
  2. Executive abilities. Don’t ignore analytical abilities, methodical / structured problem solving, organization skills, communication skills, and attention to detail. These are common requirements on a resume, but rarely assessed in an interview.
  3. Emotional intelligence. Daniel Goleman published a landmark work where he asserted that a person’s Emotional Intelligence can matter more their Intelligence Quotient. Because of the demands of a high-growth team environment, candidates need to have some basic emotional intelligence in order to thrive. Goleman identifies five key components of emotional intelligence: self-awareness, self-regulation, internal motivation, empathy, and social skills. Make sure your interview team evaluates these aspects of every candidate.
  4. Humility. Finally, each member of a fast-paced, growing team needs to be willing to learn from others and not be afraid of owning up to any mistakes. Humility is essential, as individuals with a modest view of their own importance tend to be better learners and less defensive when mistakes are made.

The Farm System

Once you have the veterans and the rookies lined up, you need to create a system that provides a safe environment to grow. Give people challenges that stretch their abilities. Capable, well-prepared team members really need just one successful project to go from a novice to a strong apprentice. Two successful projects will often be enough to forge a journeyman from a strong apprentice.

When you task a team with multiple stretch goals, regular check-ins become very important. Create daily and weekly processes that have your veterans providing regular inspection, direction and coaching of younger team members. Agile development processes are very well-suited to rapidly develop younger team members.

Keep in mind that, as you challenge teams with stretch goals, failure is not just possible, but likely. Mistakes will be made. Bugs will always plague software development. But failure shouldn’t be fatal. When honest mistakes happen, make sure the team knows where they went wrong and are diligent about recovering from the error. Hopefully, your regular check-ins will uncover the mistake before the freight train flies off the rails or the project goes completely sideways. Plan for problems because, with fast moving young teams, mistakes will happen.

On the flip side, when a young team or team member executes the stretch assignment well, be quick to recognize and reward the achievement. Correct mistakes privately, but praise successes publicly. If the young team member strings together a couple of wins in a row over two to three months, find a way to recognize that with a small bonus. If the team member continues the winning streak over two to three quarters, step up the recognition with either a larger bonus or a small bump in compensation (cash or equity). If the team member demonstrates consistent growth for about a year, recognize it with either a job title progression (e.g., Associate 3 to Associate 4), or a promotion (e.g., Associate 4 to Senior Associate 1).

Creating Brilliance

Building a strong team from a pool of raw talent is very difficult. Few people do it well — even fewer can do it at startup speed. But most startups need to learn how to do this as it’s not likely they will be able to always fill their roles with seasoned veterans. You basically need to find diamonds in the rough, then cut and polish the raw stones to brilliance. With a few strong veterans, a pool of promising rookies, and the right farm system, success with younger teams becomes not just possible, but likely.


Startup Execution

YADM – Yet Another Dilution Model

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

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

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

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, Startup Talent

Nailing Your Fantasy Draft

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.