Build Your Companies…With Good Boards

Each board is different...choose carefully and use correctly

Each board is different…choose carefully and use correctly

Most of the new founders I’ve ever met roll their eyes when I suggest that they form an advisory board.  One of the main reasons people found their own companies is to have supreme magisterial control over their empire.  They certainly don’t want the obligation of reporting to and taking advice from some outsiders.  They certainly don’t want the extra work and commitment that would be required  for an effective use of a board.  However, this weekend I decided that from now on,  when a founder rolls their eyes at my suggestion, I’m pretty sure I’ll say “Bully for you!  Best of luck with your venture! I’m sorry I’m not interested in helping you and I’m certainly not going to consider funding you.” I mean it.  From now on, my clients are gonna form an advisory board of some type and we’re going to use them. I’m not suggesting that you let some other people run your company…I’m not talking about a Board of Directors with fiduciary responsibilities to the shareholders of your company.  Occasionally, those shareholder-responsibilities can run counter to founder-responsibilities.  I’m simply talking about a group of 3-5 people that are willing to spend 3 hours with you 4 times a year and provide feedback and advice and connections and an occasional smack with a 2×4 upside your head (of course, that is a different kind of board). Here are some quick thoughts about creating an effective and legit advisory board:

TechonomicMan Advisory Board Rule #1: Do NOT simply collect advisors. It’s not impressive that you list 17 names on a slide in a powerpoint titled “ADVISORS”.  Some faculty member that once told you ” you have a great idea, there” is not an advisor…it’s a person being polite.  An advisory board is also not a group of people scattered all over the world that never gets together in person or, at a poor 2nd best, via video call.  Making a phone call to an advisor who is expert in some area of your business 3 or 4 times a year on that subject is not an effective use of their time.  By keeping advisors in one-on-one conversations only, forces them to miss valuable context and prevents deeper discussion that would be gained from having that person in a room with several others.  And you may miss the very best of their experience by not allowing them to feed off the ideas of others. Bring the group together regularly for maximum effect.

TechonomicMan Advisory Board Rule #2: Do NOT call an advisory board meeting only when there is a crisis. If you are down to 2 weeks of cash for payroll and haven’t spoken to someone you’d consider an “advisor” for nine months…you are not only a bad entrepreneur, you are a jerk.  A smart entrepreneur doesn’t “use” an advisory board, she “engages” it.  Treat the people you consider to be professional advisors in a, you know, professional way.  It isn’t hard: A) Put meetings on a calendar 1-2 months in advance; B) Send update material to your advisors 1 week in advance; C) Have a high level agenda for the 3-hour meeting to touch on major aspects of your business (eg. sales/marketing and pipeline; product development; organization and staffing; financials and capital).  This professional approach not only makes you a better founder, but it is more likely to get the best out of your advisors.

TechonomicMan Advisory Board Rule #3: Speaking of getting the best out of your advisors, yes you should provide some form of remuneration to the advisors.  If they are not already shareholders, they should be provided with at least a token amount of equity.  Nothing dramatic, just a few hundred to a few thousand dollars worth is appropriate, depending on your situation. If you do bring them together in person once or twice a year (and meet online the other times), and there is travel or overnight stay involved to make the visit possible, offer a small amount of expense reimbursement.  This is probably $100 if you are bootstrapping and pre- or very early revenue.  It is probably closer to full expense reimbursement if you are up and running and more of a going concern.  Talk to your attorney or accountant for the best way to establish these policies.

You’re making dozens of tiny and several large decisions every week as the founder/CEO of your company.  And, I’m guessing that as a founder of tech company, you have a hard time staying focused on the mission at hand.  This combination of accumulated decision-making and a hyperactive and creative mind, make you a perfect candidate for an advisory board.  A well run, healthy advisory board not only provides a way to help you gut-check some of the more important specific decisions in your company, but it will also help you  recalibrate your company strategy and mission a few times during the year. “Measure twice, cut once” is the old woodworkers adage regarding boards. For the tech entrepreneur, I hereby declare the mantra to be “the cut of your company can be measured by the effectiveness of your advisory board”.  Or something like that.

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The Four Seasons of Your Start-Up Begin in the Spring

The inner dynamics of a start up…like sands through the hourglass.

In case you hadn’t noticed, it’s been about 9 months since I posted anything…time to get busy! While I’m working on some new stuff, I thought I’d re-post this since it’s, well…you know, Spring.

I spend a lot of time with start up companies.   To be specific, I spend more time with start up companies than I spend with my wife.  That is actually true and explains why despite 22+ years of marriage, I think I understand start up companies better than I understand women.  With that in mind, I’ve observed and want to share my thoughts about the evolutionary stages that start ups go through as a framework for understanding them better.  I think this matters for you as a start up company or, perhaps even more importantly, for you as an advisor to start up companies.

My view is that start up companies, to achieve success, will progress through 4 major stages before departing “early stage” or “start up” status.  As with any good rule, no individual company actually follows all these stages, and yet somehow, they all do.  I’m calling the four stages the “Four Seasons” because it obviously possesses more flair and lends itself more to a potential book deal.  I arrived at the framework for these seasons, as I listened to “The Boston Consulting Group on Strategy” audiobook in my car.  I’d actually recommend you get the print version and read it sitting still because concentrating on complex business strategy concepts while working through traffic at 80 mph does tend to challenge the senses…especially while also keeping one ear on your smartphone…DID THAT JUST BUZZ?!  Stay calm…here are the seasons your start up will flow through:

Spring     =     Experimentation

Summer =     Tactical Execution

Autumn =      Operational Organization

Winter   =     Strategic Maneuvering

We’ll probably take care of these in a couple of separate blog posts.  Let’s start with the spring when all is fresh and new, and pollen covered and allergic-reaction-inducing.  In terms of a start-up, the spring is the beginning and clearly an experimentation stage.

The Spring of Your Start-Up…Experimentation

When founders found a company, they usually do so, based on several critically flawed notions. The trouble is, you never know which of their assumptions are critically flawed. What we know is that the percentage of your glass that is filled with uncertainties is larger than the percentage filled with certainties.  In the spring of your start-up, founders are and should be, probing the boundaries of their assumptions.  They are probing their assumptions with regard to technology veracity, customer-base validity and management team, um, virility.  I don’t have a clue how long the spring will last for your business.  And while spring on planet earth signals warmer mornings and brilliant sunny days, spring in your start up can feel like the winter of your discontent.  Customers can inexplicably evaporate. Production costs are twice as high and take twice as long as you hoped. Your business partner decides that full-time wages beats full-time no-wages. You are probing…probing.  And you should be.  And you should plan for this potentially long season.  Spring in a start up can last for years and, like some species of life on earth, start ups can die in the flowering stage.

But the probing goes on for those that last.  Elation associated with spring often emerges with the signing of a customer.  And then, maybe, another customer.  Maybe a third who hires you more for consulting than your product…and in a different industry than the other two, but its a customer.  And, OK, so the purchase decision by one of the three was made by a former college roommate who happens to be the VP of something at a business in an industry not targeted by you. But it is real revenue!  The beautiful aroma of spring is in the air!  Your idea is validated!  Several other relationship-based sales prospects are favorably evolving.  This all proves your technology has some value.  It does NOT prove that you know how to build a business.  This is why so many “seed stage” investors really don’t invest in your business until you’ve started securing a series of non-relationship-based sales.  They want evidence that your SALES PROCESS works, not just your technology.

The good news is that buds are on the vine.  The family members who took a lot of convincing are starting to make eye contact with you again!  You’re no longer introducing yourself as a “consultant”, but as a “founder” at Thanksgiving gatherings.  Your start up finally got, say, $250,000 in total revenue after 18 hard months!  But alas, as with spring on earth, spring in start ups tends to bring with it…rain.  It is going to rain.  There are a lot of opportunities flowing in…some prospects are finding YOU!  Unfortunately, you don’t really know why.  What did they search on? What are they searching for? What are they expecting? So much probing and experimenting yet to do. Different messages, different contact approaches, different pricing packages…probe, probe, probe.  This is life during spring in  a high tech start up.

Put a system in place that allows you to evaluate the successes and failures of your customer probes.  I know, this might just be a weekly meeting with your sales person.  Not exactly some complex methodology, but build the discipline.  Look for trends.  Be objective.  Be critical.  Ask your sales guy to keep better notes and look for trends.  Ask your incubator manager what she thinks about the trends you think you see.  Probe, probe, probe.  Spring is when you begin converting your business concept into a business plan.  Summer is coming…in the next post.

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The Four Seasons of Your Start-Up…Autumn Begins! (reprise)

The inner dynamics of a start up…like time through the year.

(Originally posted in 2012…thought of it as I picked my last tomato of the season yesterday!)

The temperature outside my window last night dipped to 44, the crickets have stopped chirping and my wife told me that she “can’t manage all the tomatoes I’m bringing in from the garden.”  Hmmm…kinda like life inside a high tech start-up.

The spring and summer inside a technology start-up can be, hopefully, times of growth.  Sometimes the growth is frustratingly slow, as can be true in the earliest months and years…the spring.  Founders spend the spring probing their potential customer base for the right mix of product, pricing and proposition of value (see part 1 of this Four Seasons series).  A successful spring leads to a summertime filled with rapid growth in revenue.  Your company’s offering has struck a nerve with a customer base and rapid customer acquisition and revenue growth leaves your team elated, but that rapid growth and strain it can put on your growing staff and operating systems can stretch your cash to the breaking point with all its heat (see part 2 of this Four Seasons series).  It is critical that your start up gets some relief and the Autumn can bring it.  Autumn in your start-up is the time to operationalize your organization and to build your WHOLE business instead of just your customer base.

This is what your business can look like as Autumn in your start-up breaks…a lot of tomatoes, no organization, and a pulpy mess.

Here is your problem as autumn breaks inside your start-up: You don’t know what is happening. Revenue growth takes a breather…maybe you simply hit a seasonality lull…but maybe your organization has simply reached an initial capacity plateau.  Two years ago you may have generated $200,000 in revenue.  Last year was $1.2 million.  This year might be over $2.0 million.  So you’ve built revenue nicely (remember when you had no revenue and friends and family told you to give up?)  Well now you’ve got so much revenue it is really all you’ve been able to concentrate on for 18 months.  But you recently heard some expert refer to a concept you’ve never really heard of…”EBITDA”?  You know…the stuff that is left after you pay for stuff?  You look at your Income Statement and, sure enough, it is there and although probably “negative”, it has been there all along.  Then you went online and Googled it and while you were clicking around, another person mentioned something called a “Balance Sheet”.  Somehow this sheet is supposed to help you understand the financial health of your business.  “Gee,” you think, “I wonder if I should have one of these Balance Sheet-thingys.”

Ok, so you may not be that far out in left field, but you do begin to realize in this chillier air of Autumn, that you really have no clue what the health of your business is.  In the spring, you spent all your energy trying to get one single freaking customer.  Then, in the summer, you spent all your energy trying to keep your head from exploding while chasing all the new customers you had.  Well, it is Autumn now, and time for you to focus on the other part of your business…your ability to sustainably deliver goods/services to your current, and more importantly, your future customers.  And you can’t just stop the world while you do it.  If you’re fortunate, revenues will continue to grow, maybe on their way to $5 million.  But it will all collapse if you don’t start putting some ORGANIZATION in place.

For those of you who have read Geoffrey Moore’s timeless classic Crossing the Chasm, this is what that transition looks like.  You’ve secured the “innovators” in your target industry and the “early adopters” are coming aboard or are in your pipeline.  Your organization now needs to make two huge transitions.  One, as Moore points out, is that you need to “normalize” your product offering for the large group of customers who are looking for a different set of clues about the value of your product or service.  You probably need to adjust your sales techniques (those channel partners who weren’t interested a year ago, now might see the light since the hard, missionary selling has had effect).  You may need to add to or subtract from your product offering to reach a customer set just above or just below your current customer set.  Maybe, for your business, geography needs to be added.  More US territory?  Go international? Whatever is next, you need to be aware of the drivers that will move you from a couple of million in revenue to the $10 million mark.

I know they’re apples and not tomatoes, but this is still no way to manage your start-up’s Autumn harvest.

The second, and arguably the more important of the two on this early Autumn day, is you’ve got to get your act together internally.  An inability of the founders to go from “100% entrepreneurial skill” to “75% entrepreneurial skill/25% management skill” can kill your business like the first hard frost of Autumn kills those tomatoes.  Managing cash flow, automating your customer on-boarding process, instituting standardized customer service levels and staffing, maybe creating organization-wide dashboards for measuring the key “profitability” drivers, all need to be front and center now.  If you hope to later emerge from the Winter of your “Start-Up” to the Spring of your “Growth” company, you need to show stakeholders that you can MANAGE all those tomatoes.

If you don’t already have a board of directors, get and meet regularly with a Business Advisory Board.  Seek out a part-time CFO…an accountant alone probably isn’t sufficient.   Consider hiring a top-notch Chief Operating Officer.  Depending on your business type, select and relentlessly install and use an ERP software package and, perhaps, engage a consultant to help.  Think of your business as a machine.  In the Spring, you and your partner were like a little 6 horsepower business…overkill for a $0 revenue business, about right for a $1 million business, but incapable of running a business generating even $1.00 more than that.  Just can’t do it.  As police chief Brody said in Jaws, “You’re gonna need a bigger boat.”

If you haven’t been through this phase before, it can be startling to watch your own growth. Resist the temptation to stand there and watch it.  Groom someone else in your company to prepare all the quotes you need to write.  Your new responsibility is to add horsepower to your business machine.  Take actions to organizationally operationalize your business.  Otherwise, you may as well just toss all those young tomatoes in the garbage disposal.

See the other three seasons of your start-up:

Spring, Summer and Winter

Posted in Business Planning, Entrepreneurial Advice, Seed/Venture Capital, Tech Based Economic Development | Tagged , , , , , , , , , | 3 Comments

Assessing Your Competitive Landscape…It’s a Forest Out There

It's easier to find the path when you see the whole forest.

It’s easier to find the path when you see the whole forest.

I’m finally going to get a business plan pet peeve off my chest and onto your shoulders.  I’ve decided that I’ve read my last business plan with a “Competition” section that blithely lists a few direct competitors and a factoid or two about them.  Statements like “We compete with Blackboard, a large, global, $600 million educational software company.  We feel they are too large to focus on our niche.” will no longer be tolerated in my office.

When I want to know about your competition, I don’t really want to know about individual trees.  I want to know about the whole forest ecosystem in which you’ll be competing.

There are several ways in which entrepreneurs fail to accurately describe and, therefore fail to understand, the nature of the market forest they’ll be facing at launch.  Most common among these is an inadequate understanding of their actual market segment.  You cannot understand your market segment by reading a market study.  My experience is that market studies prepared to cover large segments…data security, for example…are too oblique to have relevance for a teeny-tiny start-up.  The fact that a $6 billion market exists is good.  Knowing that it is generally growing at 11% per year is a little more meaningful.  But for the most part, I don’t care.  What I want to hear is the classic “bottom up” understanding of your target customer.  After all, data security is not a market, it’s a task that needs to be solved by a market. Markets consist of groups of customers that share certain characteristics; certain needs.  Banks have different data security problems than hospitals do.  Large hospital networks have different data security problems than small hospitals do. Small hospital finance departments have different data security problems than small hospital patient safety departments do.  And so on. The point is you can’t possibly know your competition until you have drawn a circle around the appropriate group of companies with similar needs and characteristics.

Telling me that Cisco is a competitor in the data security industry tells me nothing about how you should approach your target customer base.  It does not help YOU understand how to organize your sales process, operational structure, staff, product development roadmap, etc. to compete to win the first small hospital customer.  Or the tenth, or hundredth.

If you are going to tell me about individual company competitors in a market segment, be sure to tell me about the value propositions and benefits they offer to customers in your target segments.  Tell me about the customers with which you’ve already been in communication and what data security providers are doing for them now.  If you don’t already have first-hand knowledge of the your target customer segments…get some!  If you’re not already selling in a market, and even if you are, you had better have a serious depth of understanding how your target segment makes purchasing decisions and a compelling story of how you’ve built your product offering to address the specific priority needs they have.

The companies that you will have to compete with in your target market segment will only be understood if you are accurate in identifying and describing and quantifying your specific target market segment.  Existing competitors in that target market segment have had success there for a certain set of reasons.  Cisco isn’t successful in it’s markets simply because it is large…it is large because it is successful at competing for customers.

The final mistake that about 20% of new founders make when assessing their competition is the dreaded “we don’t have any competitors.”  You’ve lost my interest at that point.  When you tell me that, you’re saying “I don’t know what my customers are doing to solve data security now, and I probably don’t even understand who my customer is really, but no one else offers them my particular product configuration.”  From that point on, I’m probably spending most of my meeting with you challenging every one of your other assumptions about your business. Your product configuration is irrelevant unless it has been intentionally created to address a customer segment’s needs…and they are probably doing something to solve their problems now.  It may be suboptimal compared to your vision of the future, but some sort of competitor is currently doing enough to get their attention and money.

Be aware that your competition may not be a particular competitor at all, but rather a confluence of solutions that emerge from the competitive landscape.  Simply put, be sure to spend a lot of time focusing on current solutions being provided and less time telling me about how some giant competitor is to big to be agile.

Certain trees thrive in certain forests and not in others.  Most industries have market crevices where your new, little business tree has a chance to take hold, even next to the oldest old-growth tree there is.  To understand your competition is not to understand the competitors, but the ground on which they compete.

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Please Do Not Take This Advice

Advice is cheap...remember that the next time you're given some.

Advice is cheap…remember that the next time you’re given some.

As a start up founder, you have a responsibility to yourself, your co-founders and your fledgling company to seek out the best advice you can about how to grow and manage your venture.

I would advise you to not follow any of it.

Well, I would follow that particular piece of advice…I mean, if you don’t follow advice that says don’t follow advice…I guess you’d be following it. Right?  Let’s try this again.

If you’re a smart founder, you will seek out, and you will find, lots of good advice for how to grow and manage your venture.  Just be careful as to what advice you take.

You may have noticed that as you’ve started your tech company, you’re missing a few things. Capital? Probably don’t have enough of that, right? People? You’re certainly missing access to enough human capital.  Access to customers! Yeah, you’ll never get enough of that.  However, notwithstanding your lack of all these ingredients, the thing you’re going to need more of than anything else is entrepreneurial skill.  Entrepreneurial skill is that combination of brain smarts and gut smarts that allows you to assess the stuff you’ve got control over and the stuff you don’t.  Entrepreneurial skill is what you use to figure out the best ways to get what you don’t have, mix it with what you do have, and then arrange it all in ways that make your business grow.  Put that way, it sounds kind of complicated.  And it is.  It sounds like you’re gonna need some help.  The good news is that there are hundreds of books on founding companies.  Maybe you should read a few of those books, or apply to one of the dozens and dozens of fancy 12-week accelerators and get all the advice you need to sort this all out.

Sounds logical, but my experience tells me it is more complicated than that.  I’ve actually had clients come and tell me how excited they were after a meeting with a potential supplier or vendor who is well-known in their industry. The important thing to remember is that without the context of knowing some details about your business,  advice from these strangers might be interesting…but should not be taken seriously!  You should consider listening to advice from advisors if ALL of the the following elements are present:

1) The advisor has a track record of success.  The advisor does not need to have launched, grown and exited a business to be a good advisor, although that history certainly helps.  The advisor may only be a successful investor or successful corporate executive or attorney/accountant.  Or incubator manager!  What matters is a depth of experience and track record of helping companies launch.

2) The advisor needs to know your business.  Getting a question answered on Quora by Steve Blank or David Rose does not necessarily make it good advice. It might be good advice, but it might also simply be 80% advice…that is advice that is probably good in 80% of the situations…and the chances of your business being in that 80% is only…what? Like 80%? Not 100%.  No matter how experienced the advisor, it is difficult to provide good specific advice if the advisor is not familiar with things like your balance sheet, your sales pipeline composition, the capabilities of your team (i.e., both your dedicated team and those team members you think are dedicated but may actually not be), etc., etc. etc.  I don’t believe any advice from a single one-hour meeting should be taken all that seriously…especially if the meeting came about from you asking something from the advisor…like advice from a VC with whom you’ve had your first meeting.  I can’t tell you how many clients have come back from that first meeting with a VC and tell me “They told me I’m not raising enough money”.  For the record, this is probably true…you probably aren’t raising enough money, but that has little to do with how much money you SHOULD raise!

3)  The advisor begins making his or her network open to you.  In my experience, when someone who fits #1 above, and begins establishing a relationship with you along the lines of #2 above, and THEN makes an earnest introduction to someone else in their network, that advisor is making a longer term commitment in you and your venture.  This is a sign that this advisor is not just thinking about the 80% advice, but is really thinking about your business and how this advice lays into it.

Good advice comes from good advisors who have at least an intellectual commitment to your business.  The smart entrepreneur knows how to sift through good advice, bad advice, well-intentioned advice and contextually relevant advice.  An entrepreneurial skill that can’t really be taught is how to mix all those together and pull out the threads of relevant actions for you to take.  After all the advice…actions are all up to you!

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Venture Tips Update….Make Your Business About Your Customers, Not Your Technology

It's your customers!

It’s your customers!

I originally published the majority of this post back in January, 2012, but I was reminded of the issue again today…twice.  So I updated the post on why you should think of your business in their terms.

A founder came to see me yesterday to give me an update on how 2011 went and to bounce some ideas off of me for where to take the company next.  The company is a small business that is approaching $1 million in revenue.  Their software serves a very narrow market niche currently and has generally been an installed piece of software until the last 12 months or so when they offered up a web-based version.  In looking at their market and segments within it, we figured they’d probably landed about 10% of the target customers.  And they’ve sold the boxed version of the software to about 3,000 customers and the online version has now been sold to about 200 more.

Their software application, with a bit of investment and a new hire or two, could be adapted to a couple of other niche industries.  And the founders love their little application.  Their potential new market niches seemed to get the founders pretty excited and they had basically defined their fundraising needs so that they could build the new product and start marketing it to the new customer base. A customer base they know nothing about.

I asked him why he would want to do that.  He said it was because “the application is just so darned flexible.”  I told him that I thought his 3,000+ customers deserve more from him than that, and so do the next 3,000 customers!

Now I’ll be honest.  Many of the clients I work with have, well, zero clients.  So my rather dull eyes immediately focused on all those shiny customers.  I felt it was obvious that he was in danger of ignoring the most important asset his business had accumulated over the years…his customers!  The first version of the software he built was built on an ancient platform and very difficult to use, as evidenced by the support document which was a 500 page, photocopied, ring-bound tome. And this unsophisticated mess was released not 20 years ago, but in 2003!  And guess what…?  People were buying it!  And now he has managed to begin converting his customer base to the online version of the site, which they’ll have to visit every single day their businesses are open.  He landed one of the largest companies in the industry as a client at the end of 2011.  And yet, somehow, he was fixated on the other potential markets for the software and not the customers.

There are certainly opportunities to pursue the development of other market applications with their platform.  However, these should be opportunistic at best and will not likely involve his company directly, but perhaps through some licensed version of the code.  Without a doubt, for some other companies, pursuing new niches is a good idea strategically…especially when your current niche ain’t buyin’.  So every company is different.  But when you’re having the kind of success mining a mountain that this company is having, and you’ve only mined 10% of the gems, why would you go looking for a new mountain?

Another client and I had a conversation today about a strategic decision he is facing. His business has entered a bit of growth phase and has been approached by a foreign company about a strategic relationship…possibly an investment to allow the foreign company to enter the US market with a line of products that are similar and complementary to my client’s products.  For a variety of reasons, it is a tempting option, but one with risk. We spent about an hour discussing the other company and its product line and finally we got around to discussing the target market of my client where he is beginning to gain increased traction. I said “have there been companies in your targeted industry and size range that you lost but might have won by including this foreign company’s products?” When he said “maybe, but probably not,” the decision regarding the foreign company got easy.  If you think in terms of your customers and not your technology, it becomes easier to make clear decisions with no regrets.  There is always the chance that the road not chosen could have led you to the promised land.  But you have to play the percentages…and I’d bet on my existing customers every time.

Also today, I met with a brand new start-up and we were going over their investor deck.  It was pretty good, but just didn’t sit well, overall, with me until we went back to slide 3 where the company had their one-sentence elevator pitch.  It said something like “Our company is a cloud-based, crowdsourced platform that generates new sources of funding by leveraging…something, something, something…for medium sized companies in the publishing industry”.  When we went back to that, I realized what was wrong…the first words they used to describe themselves were about their technology, NOT their customers! PEOPLE! If you want to develop cool technology, go to a hackathon.  If you want to build a business, solve a customer problem!

The outcome for all of these companies is still uncertain.   But my advice to you as you build your business is the following:

1) If you are a relatively small business (<$5 million in revenue) and can evaluate your customer base and see that a meaningful majority of it can be described in a certain way (eg., medium-sized US clinical laboratories) and you haven’t even landed half the businesses in that segment…go dominate that segment! Don’t start changing your product or service to chase an unknown segment yet. 2) If you’re starting to penetrate an easy to define market segment, evaluate every strategic decision about product development, partnerships, new hires, etc. with the eyes of that customer segment in mind. “How will this help me dominate this customer segment?”  3) If you’re just starting out and don’t have any customers yet, pick a target and define your business as one that serves that target, not as one with a particular type of technology.

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Why I Loathe Tumblr.

No caption necessary.

No caption necessary.

I loathe Tumblr.

But not for the 1.1 billion reasons that you think. Sure, I’m a little professionally jealous that I’ve never had a client sell themselves for $1.1 billion. But it’s not like I had a chance to invest in them and passed. Heck, I had hardly ever heard of Tumblr until about 18 months ago when they raised $85 million on an $800 million valuation and had no customers. I admit to scoffing then…probably even blogged about valuation bubbles. But I didn’t loathe them then…like I do now.

I loathe Tumblr because they made me feel stupid.

Granted, it isn’t the stupidest I’ve ever felt. I mean, there was that time when I volunteered to clean our oven…Step 1) spread newspaper over the oven burners; Step 2) thoroughly spray the inside of the oven with the spray-stuff; Step 3) turn oven to “high” to activate the spray-stuff; 4) See smoke coming from the oven and rush the forgotten (and now smoldering) newspapers across the kitchen to the sink and douse the flames. Tumblr doesn’t make me feel THAT stupid.

No, Tumblr makes me feel stupid because I now realize that all the business advice I’ve ever suggested… is wrong.  Not sure how my clients feel about this, but I’ll apologize now for the following stupid pieces of business advice I’ve probably given you over the years:

Bad Advice Step 1) “Start a company that delivers a product or service that solves some problem that a large set of customers has.” It’s good that Tumblr didn’t take that advice. If they had taken that advice, they never would have come up with such an incredibly useful social media platform that allows me to gaze at pictures that people share with each other, even the borderline pornographic ones. Of course, there were several dozen other platforms out there already allowing this to occur and I would have been wrong to keep blabbering on to them about “I think you need a better customer value proposition”. So identifying a customer problem and then building technology to solve it was bad advice. I should have suggested developing technology to solve no known problem.

Bad Advice Step 2) “Obtain customers.” Pretty naive. I definitely would have told founder David Karp that since he didn’t at first follow my Step 1 advice above–solve a customer problem first, build the technology second–that he should now find a customer base where his nifty, scrolly technology might be useful. Look for a revenue model that would allow you to build a business. Instead, he simply went out and let users, (by the way, users are the exact-opposite of customers), pile on the site and jack up hosting and serving and support costs. Business model, schmizness schmodel.

Bad Advice Step 3) “Don’t raise more money than you need.” Duh. Nearly as stupid as leaving the newspapers inside the oven when trying to clean it! Tumblr raised somewhere in the neighborhood of $125 million on ever-higher valuations. Increasing valuations, mind you, for a company that basically burned increasing amounts of cash for every new user at the site. Apparently the old joke about the CEO who lost a nickel on every dollar of sales but who would “make it up on volume”…wasn’t so funny after all.

Bad Advice Step 4) “Yahoo’s offer is just the tip of the iceberg…I’ll bet AOL will pay $1.3 billion” Ok, I probably wouldn’t have given that last piece of advice. Of course, I also wouldn’t have advised Yahoo to pay $1.1 billion. They basically paid $10 for each of the 108 million Tumblr tumblebloggers on the site. But that includes my Tumblr blog, even though I haven’t visited my Tumblr blog in many months. I think that clearly proves they overpaid by about $10 at least. The good news from the acquisition is that I hope, soon, my Yahoo! home page will have the ability to scroll a news feed for crying out loud.

So, I loathe Tumblr because they’ve proven I have little in the way of good advisory powers. How am I ever again going to be able cast a skeptical eye at a prospective client’s customer growth curve? How am I ever again going to dare suggest a “bottoms up” approach to revenue projections? And how can I ever again offer up my conservative capital-raising sensibilities in answer to the question “how much money should I raise?” (See related post “How Much Money Should I Raise…$29,542?)

No, Tumblr has ruined not only my outward reputation but also my inward self-confidence. Tumblr (and Instagram while we’re at it) have shown the entrepreneurial community the way the new economy works and clearly showed that this old-school incubator manager only ever really got one thing right…that Color Labs never should have taken that $41 million in 2011! Wait a minute…it can’t be…that car that just pulled up in front of Color’s office…isn’t that a Google car full of Google-Glass-wearing Google guys??

Oh, the loathing!

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The Search for Serendipity…And Why It Matters To Your Venture

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Kirk, Scotty and Sulu…the pre-Google Star Trek crew searches inefficiently, but serendipitously.

I turn 48 this week and like most people passing from one year to the next, I find myself a bit nostalgic for the way things used to be.  One of the things I miss…a little at least…has gotten extremely difficult to find.  Ironically, the thing I can’t find is a good search.

Like many people over the age of 40, my parents spent a boat-load of money when I was a lad to buy me a set of encyclopedias.   I had the Encyclopedia Brittanica and the sales guy convinced my parents to buy another set of books called the Annals of America, an outstanding set of 20+ books, chronologically bound, with writings from authors of the day, on the issues of the decades of America’s existence.  Unfortunately, like many things in American life, the series ended with the Nixon Presidency. I distinctly remember casually flipping through the encyclopedias when searching for information about some piece of homework or term sheet I was completing.  I can’t tell you anything specifically that I learned, but I credit these wasted hours browsing  and searching for my success at answering questions from Trivial Pursuit and Jeopardy.

The same was, and occasionally still is for me, with the dictionary.  Geekily, I was in the habit of highlighting good words I found while I was looking for some other word.  My vocabulary is definitely better than that of my dog, Jethro, because of this “wasted” time looking for a particular word but perusing the plethora of others in the lexicon (see what I mean?)

Phone books, those marvels of small font sizes and garish ads on extremely thin paper,  provided an opportunity to make chance findings of new repairmen and home improvement specialists. I’m not sure that any modern digital attempts have been as successful at helping businesses “get local” as the yellow pages were.  There was tremendous knowledge to be gleaned about your neighborhood and community from flipping through the pages on the way to the little business you were seeking.

Without question, the internet gets us where we’re going faster than paper ever did.  It’s like the express train to your destination.  The internet allows us to search and find the precise thingy we’re looking for.  Click-Click-Pow—Knowledge.  All of the companies formed in the Google generation are fortunate to skip the time wasted while tracking down precisely what they’re looking for.  Today’s web based companies can certainly get up and running quicker than companies from the 20th Century, mostly because the software is easier to build and deploy and distribute than in the era before Google.  But there are also fewer dark alleys of knowledge and connections…LinkedIn alone must save dozens of sometimes fruitless hours searching for the right contact to make.

Google-era tools are obviously also making communication more constant allowing more entrepreneurs to believe they can build a company virtually. When I challenge the strategy of some recent college grad insisting that he can build a company with buddies in various locations…I see that look.  That little sideways glance at the gray in my goatee.  That subtle raise in the eyebrows that says “Oh…you’re older than I thought you were, because you probably don’t spend 7 hours a day on Google Hangout.”  It’s ok.  Not your fault kiddo…you just didn’t understand the serendipitous power of Encyclopedia Brittanica.  In a virtual team you miss too many opportunities to accidentally discover your next opportunity.  There is solidifying value to spending 40+ hours per week together with your new venture ship-mates.  Humans are wired with sensory perceptions beyond what can be accepted over the internet miles. No latency issues.  No crappy pixelated choppy images and “hold on, let me text John and see if he can help us get Sam access to the powerpoint”.  Just a couple of founders in a room, with a whiteboard and chemical-odor-emitting markers…hashing their way to a solution and discovering serendipitous knowledge while doing so. Like the bridge of the Starship Enterprise…we’re all in this search for intelligence together.

Soon, very soon I think, kids and an entire generation of entrepreneurs under 25, will not know the pleasure of accidentally learning “stuff” while roaming their way to their destination.  If apocalypse comes, will they know how to forage for food?  Or will they be lost without the ability to wikigooglezon.com for it?  Will they ever try some restaurant they’re walking by in New York, without checking it out first on some website?  Will their life be pointed and direct with all their routes carefully mapped and presented by pleasant digital female voices telling them where to go?  Or will they allow themselves to be exposed?  Will one thing just…lead to another?  Will they be vulnerable to things that aren’t quite what they were looking for but… just adjacent to them?   We’ve tried to teach our kids, and now I teach young entrepreneurs, that the adventure is partly in the journey…but I don’t know if we’ve been strong enough to overcome the inexorable power of a precisely delivered digital vastness.

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My Podcast with SSTI – Ben Franklin wins National Entrepreneurial Capacity Builder of the Year 2012

 

ssti award with Dan Berglund

We were delighted to win this award last year and had a chance to talk about it with Phillip Battle of SSTI.  SSTI is a national nonprofit organization dedicated to improving government-industry programs that encourage economic growth through the application of science and technology.

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Scalawags, Scoundrels, and Other Corporate Partners

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Steve Martin and Michael Caine…charming scoundrels or true partners?

If you only quickly scan this post, you may get the impression I’m suggesting that relationships with companies larger than your start-up are not a good idea.  If you are getting that impression, please keep reading.  For almost all B-to-B types of start-ups, corporate partnerships can help in a variety of ways.  They can provide investment, credibility, a path to customers and important supplier relationships and you SHOULD seek to formalize them.  My clients have had many successful corporate partnerships in all these areas…and many unsuccessful ones as well!  The impression you should get from this post is that, although probably unintentionally (but not always), some partners can turn out to be dirty rotten scoundrels.

The prospective partners take you to the brink of forging a formal and enthusiastic business relationship, or sometimes even do formalize the relationship and then – poof – all those promises turn out to be false. Were they really scalawags…or were they just victims themselves of complex competitive businesses?  Ultimately, to your start-up, the reasons are irrelevant when the realities are so important.  Here is some advice for finding and managing your corporate partner relationships.

TechonomicMan Guideline #1: Don’t get fixated on one potential partner.  I’ve seen numerous clients land the attention of one big potential partner, work that relationship for 9 months under the impression that the partner and “start-up” were in love, only to have the partner evaporate.  Big partners have internal complexities that your start-up cannot imagine.  If they’re publicly traded, the complexities are compounded.  Big corporate strategies and fortunes and personnel can change overnight inside a large partner and your little start-up is certainly in no position to handle the strength of a stormy wind of change from a single corporate partner by which you’ve set your sails. Never stop prospecting for new corporate partners.

TeconomicMan Guideline #2: Let your love blossom inside your corporate partner.  If your relationship with a corporate partner begins advancing, develop multiple other relationships with individuals inside that corporation. Some of the best potential relationships can run aground when your start-ups sole champion inside the corporate partner disappears.  Your champion can get promoted, demoted, relocated, or in the occasional headline-making change, arrested! If that person was the only one inside the partner who really knew what your company does, you’re doomed.  Your champion, in truth, becomes your weakest link to that corporate partner.  You must work with that person to begin deepening your relationship network inside the partner and this usually means that you need to be able to explain your value proposition in ways that appeal to an ever-wider array of people and roles inside the partner.  In other words, the Head of Engineering who is so stoked about what your technology can do probably isn’t the one who can turn that excitement into money for you.  You’re going to need help from product managers, business development people and, probably, higher echelons of executive management.  Ask your champion for help in making these connections happen and for help keeping them moving.

TechonomicMan Guideline #3: Guard against trophy hunters!  Large companies sometime get the strategic urge to pursue new technologies.  Competitive forces inside industries change and occasionally, being able to make headlines for acquiring and generating new technologies can help one large company compete more successfully for customers, and so they are drawn to your start-up.  Sometimes this strategic direction is not fully or deeply backed inside the partner.  Your relationship may allow them to say to their customer base, through public relations and marketing, “Look at our new wild and crazy technology.  We’re actually old and shriveled, but man don’t we look good standing next to our new tech?!”  In these cases, your partner’s love for you is not likely to last…it is only skin deep.  Their sales force might never be fully empowered or engaged to sell your stuff.  The biz dev team may quickly move onto other sexy technologies and have decided to impress the market with quantity rather than quality of new tech rollout.  In your agreements, do all that you can to create “take back” clauses so that only a limited amount of time can pass between your marriage and a chance for annulment.

TechonomicMan Guideline #4: Develop a set of targeted partner characteristics that would be desirable.  The best bet is to determine what a perfect partner would look like.  They have to be the right size, so that your opportunity provides them with enough incentive to sell it. If the partner is too big, they won’t be motivated.  If the partner is too small, they won’t be effective.  If they don’t have a history of successfully rolling out partner capabilities…they probably won’t get better with your stuff.  Target partners who are experienced in your target industries.  Target potential partners in the same way you would target potential customers.  Just because they found your website and called you does NOT mean they are the perfect partner.  Evaluate each new opportunity critically.

Like the Steve Martin and Michael Caine characters in Dirty Rotten Scoundrels, appearances are not always accurate representations of reality.  Most professionals working for large potential partners do not intend to cause you strife.  But they can tie up your technology, keep you out of markets and burn your limited resources even if they mean well!  Partnerships with larger entities are probably critical to the success of your business.  Do not trust such a critical factor to chance…take a proactive approach to targeting and securing these relationships.

Here are a couple of other related posts/thoughts on building your start-up:

Don’t Overlook your Customers as your Most Valuable Asset

How NOT to Negotiate…lessons from former Washington Nationals manager Jim Riggelman

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