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management

Leadership

It takes guts to make imperfect decisions

Every day we make decisions that impact our future. Every day we decide on pricing, product, sales strategy, hiring and because it’s an imperfect world we never have enough information.

When you’re building a company you have to get very comfortable with making decisions on partial information. There is never enough time to assemble all the facts, and if you wait for them you’ll fail anyway because the opportunity will pass you by.

Think about product design. When you’re creating a new market and growing fast you can’t take the time to survey the market, ask users what they want and then carefully design your product in response! Quite the contrary – you need to have a vision, a theory of what users want, build it and watch how they react. Do A/B testing to see which approach is better. Make changes very quickly as you figure it out. Listen to customers problems but don’t let them prescribe the solution.

Consider choosing a job. You never know enough, or everything, about a job until you’re in it. You can try to find out, but if you are too pedantic and careful about collecting information chances are you’ll turn off the very manager and company you want to work for, or you’ll miss the window for the job. Your job will probably dominate the majority of your waking hours – you need to fall in love and that’s not an analytical process. It’s a gut process.

And how about sales strategy! Sales campaigns are always under time pressure. A sale delayed is a sale lost (as one of my sales mentors used to tell me). So you can take an afternoon with the team at the white board thrashing through all the intelligence you have from your coaches but in the end you have to decide on a strategy with partial information and then be ready to course correct if you have to. When millions of dollars are on the line that takes balls.

But being able to make good decisions, where the majority are right, from incomplete information will change your future. As Pythagoras said “Choices are the hinges of destiny”. When you are courageous and make the decision with imperfect information you mold your destiny. So take a deep breath, embrace your imperfect information, and decide!

Leadership

Scaling a startup can be like driving without brakes

I dream of driving with the brakes failing on my car all the time.

As CEO, sometimes you just have to put your foot on the gas and go, knowing you may have no brakes and if you take a wrong turn you may not have time to correct and recover. It’s part of growing fast. But how do you know when is the time to put your foot on the gas?

First, you have to have enough proof of the value of your product – proof that some people, and enough of them, will use it. In the enterprise world this means one of two cases:

1. You have lots of SMB (small and medium business) customers signing on fast and you can track the adoption rate. You want to be sure these are real companies with the ability to buy over time, and not just startups who want to use a trial or freemium product for free because, unless you’re lucky like Yammer and you get purchased early, your value will depend on your growth AND your renewal rate, so you need to be sure your SMB business is repeatable. Or

2. You have major household name companies buying in volume. When you can see companies with $10B+ in revenue (the usual suspects like HP, IBM, GE, J&J) buying your product, and then buying more, you can track their usage, how much they’ll pay you and whether they renew.

Both cases tell you that your product has value to end users. So it’s time to ramp your revenue.

Next, you need to be sure you have a business model where you can make money, sustainably. For every rocket ship ride like Facebook and Twitter (who still have not actually worked out their business model), the startup landscape is littered with failed companies who never worked out how to make money and, eventually, tapped out their investors and could not find more. Cool product but no ability to scale the business.

Your path to revenue obviously depends on the type of product. In the enterprise case you need to be clear, again, whether you are going after SMB or large enterprise. The sales channels are completely different and it’s very tough to do both (or very expensive as the Marketo P&L shows – so to do both you need very strong access to capital).

You need to track your cost per sale – can you sell your product for enough money, to enough people, that you can pay sales people and make enough margin? And then, can you support the customer and still make a profit on each sale eventually? This can be hard in the early days of a SaaS model where you are paid annually (and many business do not make a profit until year two) and can be easier in a licensed revenue model (where you charge about 5 year’s worth up front and then maintenance) so it’s important to model cash carefully, and know which model is right for your market.

Now you’ve convinced yourself that your product has real value to lots of users, and that you can make money selling it, now what?

Finally, you need to have the team to do the ramp. Scaling fast means knowing how to hire and train quickly. It means having a strong culture so you can keep shared goals in mind as you make rapid decisions. And that means leadership. So before you pull the trigger and say go, make sure you have enough of the right leaders in the room with you for critical mass. You can’t lead alone.

Most VCs will tell you to scale too early. They have a standard model and often don’t have the on-the-ground experience to advise you on when is the time to be cautious vs. when is the time to take risk. I’ve heard the same hackneyed phrases from so many different VC mouths based on what worked for the 1% of companies that have been wildly successful – and many VCs would rather you succeed or fail fast rather than be patient with you because that is a more efficient use of their time. As Fred Wilson describes on his blog – the failed companies take the majority of the VC’s time so IF you are going to fail they want you to fail fast and hit the wall, not turn into a zombie company.

Instead seek out other successful CEOs for advice – they have a much better nose for the timing. They’ll ask you questions, challenge your assumptions and help you figure out whether your business is ready for scale.

Once you think you’re ready your job is to lead. To bring your team with you, help your cynics get on board, encourage your more cautious employees and make sure every one is aiming for the same target. This means focus and repetition, but if you have the product, the business model and the team then you’re ready.

Some people dream of being naked in public. I’ve never had that dream. But in my dreams I’m driving round a corner and the brakes fail; I’m pulling up to a
traffic junction and the brakes fail as I careen through the oncoming
cars; I’m going down hill and the brakes fail. Each time I pound my foot
on the floorboard but the car doesn’t slow down. I wake up in a sweat,
my heart pounding, and smile. Yup, it’s that time again.

Career Advice

Why hiring smart is not enough

Warren Buffet once said “In looking for people to hire, look for three
qualities: integrity, intelligence, and energy. And if they don’t have
the first one, the other two will kill you.”Clearly integrity is the first requirement when hiring. But right behind it, and just as critical, is intelligence, but intelligence comes with it’s own baggage.

Obviously intelligence is essential when hiring into a fast growing company. Intelligence enables quick problem solving and brilliant, innovative ideas. Intelligence allows people to work autonomously when they need to cut through to the solution and many smart people can work faster and still get to a great result. Smarter employees take less time to train, less time to positively impact your business.

But smart people can also have a hard time learning. Chris Argyris‘ article in the HBR, written in 1991, “Teaching Smart People How to Learn” outlines the basic dilemma and ways to think about solving it. (It’s a must-read in my opinion) The dilemma is that the smartest people in the organization, who are assumed to be the best at learning, may actually not be very good at it.

“Put simply, because many professionals are almost always successful at
what they do, they rarely experience failure. And because they have
rarely failed, they have never learned how to learn from failure. So
whenever their single-loop learning strategies go wrong, they become
defensive, screen out criticism, and put the “blame” on anyone and
everyone but themselves. In short, their ability to learn shuts down
precisely at the moment they need it the most”

Brittle behavior, defensiveness and blaming kill a team’s ability to solve complex problems together. When you are changing quickly and learning a market (which is a continuous process when growing fast) it’s important that everyone on the team can learn from the facts that are emerging, and when things don’t turn out exactly as planned (which they never do) don’t blame, just get on with finding the next solution.

And the key to not blaming is to be able to be introspective and look inside first – What are my assumptions and beliefs that are holding me back from learning from this situation (and so contribute to learning as a team)? Very smart people who do this naturally learn fast in complex business situations. Very smart people who are arrogant about their intellect typically don’t. Struggling early (in school, in your first job); and/or experiencing failure is humbling. It makes you go inside, and with practice people develop the ability to check their internal assumptions first, before blaming someone else.

It’s tricky, but you can figure this out in a candidate interview. Chris Argyris’s article points out that: “One of the paradoxes of human behavior,
however, is that the master program people actually use is rarely the one they
think they use. Ask people in an interview or questionnaire to articulate the
rules they use to govern their actions, and they will give you what I call
their “espoused” theory of action. But observe these same people’s behavior,
and you will quickly see that this espoused theory has very little to do with
how they actually behave.”

The way you can determine a smart person’s real behavior, not their theory of who they are, and whether their default reaction is defensiveness or blame is to spend time with them on their failures. Can they describe to you a time they failed? What did it feel like, what lead up to it, what would they do differently, what areas of growth are they still working on improving that hurt them then as well as now? When I look back on the bad hires I’ve made (and I’ve made plenty), for many of them I can think back to the interview and I missed the introspection step.

I’m still always surprised when I ask the question “so tell me about a time you failed and what you did that contributed to the failure”, shortly followed by “and what is the area you still need to improve, where you keep screwing up and you’re working to fix it” that very smart people cannot, or will not, answer in a meaningful way. Or give all the reasons why it wasn’t their fault. Conversely, it’s powerful when a candidate can tell me what they are working on (in personal development) and how they are looking for a team of complementary skills, or an environment where they can grow and learn.

Note, this is not about EQ. Being charming in an interview and being the person I’d like to hang out with in a bar is not the same thing as being good at learning with a team.

So the first step is to test if the candidate is smart, and smart enough for the job you have. Technical tests, or emulations of real life situations (eg. for sales) are necessary to find the high IQ candidates. But it is also important to make sure you are hiring someone who can learn as your business changes and learn from circumstance without becoming defensive.

To quote my father (not always a good idea on a blog, but sometimes worth the risk) “If you’re so smart, why aren’t you rich?”

Career Advice

Employee Ranking is an Innovation Killer in Tech

You’ve been in that meeting. HR’s leading the annual performance review process and you’re being asked to rank your team members with their peers. In larger companies you’re probably being asked to force your team into a bell curve of the top 20%, middle 60% and bottom 20%, or your HR person is talking about “the lifeboat test” (what order would you throw your employees out of the boat), or if you work for Intel maybe you’re being asked to do a literal forced ranking.

It’s a tried and tested HR process. Rank your employees, make sure they fit a bell curve, assign bonuses and merit increases accordingly, fit the merit increase budget that’s been approved at the top. And you’ll be told you’re a bad manager if you think half your team is truly excellent.

Makes sense right? People fit on a bell curve of performance don’t they?

The answer is no, especially not in technology. And as the recent Vanity Fair article about Microsoft points out, this approach to employees is an innovation killer. Kurt Eichenwald’s excellent article about the Microsoft “lost decade” points the finger at many of the reasons Microsoft lost it’s innovation mojo, and one is the adherence to stack ranking. “Every current and former Microsoft employee I interviewed—every one—cited
stack ranking as the most destructive process inside of Microsoft,
something that drove out untold numbers of employees,” Eichenwald
writes. “If you were on a team of 10 people, you walked in the first day
knowing that, no matter how good everyone was, 2 people were going to
get a great review, 7 were going to get mediocre reviews, and 1 was
going to get a terrible review,” says a former software developer. “It
leads to employees focusing on competing with each other rather than
competing with other companies.”


So this case is extreme, clearly. But I’ve seen it. I’ve been in the room, cringing.

Ranking has a role to play and can be useful, but as a CEO, or team leader, you have to be thoughtful about why you are doing it.

Where the process can be very helpful is to make sure you identify your top performers. Who are the people that really make a difference again and again? If  you get your managers in a room and debate that question it’s great to see leaders advocating for their people: why they are great, why they are one of our best, what their impact is on the company and it’s growth. This discussion should lead to a list of people you, as the leader, want to pay close attention to. Are they well taken care of? do they have plenty of stock options? are they paid well relative to the market? do you spend enough time with them? is their manager working with them on their career path and training? would they benefit from a mentor? All good questions that you should know the answers to for your top performers. They are your innovation engine.

It’s also good to force the discussion of the bottom performers. Not to hold a witch hunt, but to make sure your managers are not being lazy and keeping someone in the organization who should not be there. If an employee is not performing everyone around them knows it, it’s probably because they are in the wrong job, and it’s weighing down everyone around them. Forcing the conversation of who the bottom 10% are can illuminate who should be moved on, or who maybe needs some extra help, or moved into a different job within your company.

Forcing a stack rank through the whole population leads to politics without having any business benefit. HR loves it because it’s a clean process that helps them manage the budget, but as deeply technical companies (like Rambus where I chair the compensation committee of the board) know: if you have a world class technical team a great deal more than 20% of them are excellent.

When your goal is to innovate you want to build a team where more than half of them are truly spectacular in their field, and where you demand excellence from everyone. In innovative R&D teams you need a zero tolerance policy for low quality work – and yet at the same time you need to tolerate some failure. Innovation takes risk, risk means some failure. When you are developing new products the concept of stack ranking your team into a mediocre group in the middle is the kiss of death! You simply cannot afford mediocre.

The one team where a stack rank can be useful is sales. Sales is the ultimate measurable job – everyone sees the score card every month. I know a CEO who ran a large CAD company in the 90s and he would fire the bottom 10% of his sales team each quarter on principle. The company was wildly successful, but it had a brutal sales culture. But when you live by the numbers you die by the numbers and so firing the bottom 10% each quarter created the focus on results that CEO wanted.

So what do I do? I run a process, once a year, with my FirstRain leadership team to discuss who the top performers are. Which team members are doing really great work – innovating, delivering excellent technology, winning major accounts – who’s making the difference? It’s always a lively debate. Some of the same names are (of course) on the list every year. It’s exciting to see some  new employees join the list quickly, or existing employees move up because they’re growing and their excellence is emerging. It’s a fun discussion and we use it to make sure we are taking care of the people who are making all the difference building the company. And I challenge managers on the non-performers. Beyond that, I think stack ranking is a bureaucracy we don’t need.

Boards, Leadership

How to understand your board’s baffling behavior

Boards don’t behave like management teams and their sometimes seemingly baffling behavior can be an irritant to management. But if you can get inside the head and motivation of a board member you can, with a little distortion of the nth dimension, understand their behavior.

Whether it’s a public company board, a start up board or a non-profit board there are perspectives a board member has that give them a very different view than the senior management team:

1. They don’t live it every day. Some board members do a better job than others of learning and remembering the critical aspects of your business, but if they only attend meetings once a quarter (or even once a month in the start up case) your business will have moved by leaps and bounds between each meeting and you have to take the time to back up and fill in the gaps for them.

2. Reasonable people given the same information will often make the same decision. But given that your board does not have all the same information as you, they will not instantly come to the same conclusion as you. They are not being difficult, they just don’t have the same info. And, short of a Vulcan mind meld, you are always going to know more details than them, so be patient.

3. Good governance on a public board requires a board to have diverse opinions and deliberate – it’s all part of good process. That then means they are not going to agree with you, in fact at least one of them should be disagreeing with you and challenging you at times or they are not seriously deliberating. Some board members disagree “just because” as a way to shake up the conversation and see what falls out. It’s all part of the process, not about you.

4. Really good board members have a laser like ability to figure out what you are most defensive about and then pick at the wound. It’s a way of testing and needling the CEO to understand what the real dynamics of a difficult situation are. It’s meant to be helpful.

5. Being defensive is like a red rag to a bull. When a CEO has a defensive “don’t question me” reaction to a challenge it’s infuriating to the board member because a) it’s the board member’s job to question and b) it signals that the CEO is not on firm ground with his/her position, knows it and attacks back to try to stop the line of inquiry. As a CEO it’s bad, bad behavior. I cringe inside every time I do it!

6. The board’s most solemn duty is the selection of the CEO. Boards are always, always thinking “Is the person in the job the best person for the job right now?” Their duty is to the shareholders, even in a private company, and the selection of the leader is the greatest impact they have on the return to the shareholders. As CEO you just have to get comfortable with it, and help the board question you, and engage you in a continuous succession planning analysis. The day will come when you may not be the best person – for any one of a thousand reasons including your own – so get comfortable with the discussion.

7. Different board members have different roles to play. Some are financial – they may well ask remedial questions as they seek to understand your products, but if they are a former CFO and running your audit committee – God bless them! Some are technical and may question your go-to-market strategy but be a great resource for you when it comes to evaluating a technology. But just because they have a deeper set of skills in one area and less in others it does not mean they always remember that.

8. Your board are not your friends. Remember pt #6. They are your advisers, your ultimate employer and the representatives of your shareholders. While they may be fun to have dinner and play golf with outside the meeting they are not your friend inside the meeting and you can get smacked in the meeting if you forget that. Want to complain to someone safe? The only safe person in the room is your outside counsel (your lawyer) once you tell him the conversation is confidential.

9. Your board may have their own fears and issues about being on your board which can show up as baffling behaviors in your meeting. One board member (of a currently high profile and controversial public board) told me about the reputational risk of being on a board that should have been interesting and fun but has now turned into a public pillorying. The problem is by the time the going is rough it’s hard for the board member to resign if the company actually needs his/her help. You can’t know what challenges they are facing so don’t assume their behavior is always about you.

10. Your board’s job is not to motivate your team. In fact they can do quite the opposite when they get on a tear on an issue. Your job is to be the buffer between your board and your execs and if one of your execs can’t handle the challenging, difficult decisions, don’t have them in the room. Or tell them to grow up and grow a thick skin.

So if they are baffling you, or annoying you, or confusing your team take a deep breath and remember they are probably good people trying to help the company. And never forget the old proverb “With the rich and mighty, always a little patience”.

For help on your meeting – refer to my How to Run a Board Meeting post.

I sit on the boards of FirstRain, JDSU, Rambus, the Anita Borg Institute and Planned Parenthood Mar Monte. No one board is special – these behaviors show up across the spectrum.

My Personal Journey

Progressive states of long offsite meetings

Long meetings can progressively sap energy and create altered states of being. Yes they can.

We went offsite as a management team for 2 days this weekend to talk through our strategy and 2012 planning. 11 of us in 2 houses at Pajaro Dunes, lots of flip charts, heated discussions, cooking together, walking on the beach and generally spending time together thinking about our business. It was really fun but, even so, it was intense and, combined with long discussions late into the night about the state of the world accompanied by some excellent wines, pretty tiring for some.

Two of our jokesters memorialized their progressive states of mind as they helped clean up after the meeting. They sent me the photos – the editorial is all mine.

Yeah! This two day offsite thing is a great idea, they’re ready.

A few hours in and Ryan is already wondering, he’s seen enough of these type of meetings to be healthily cynical, but Nima’s still gung ho.

Second day and Ryan’s mind is wandering but Nima’s using caffeine to push through – “There’s the mountain guys let’s go for it!”

Ryan’s rolling his eyes at Nima’s enthusiasm, just as Nima starts to wind down .

But as Nima finally falls asleep in response to Penny’s energizer bunny, Ryan stoically keeps pushing forward.

Thanks Nima and Ryan – it was fun – and despite the warm sun and sand, amazingly productive!

Career Advice

How to write a performance review

We are in the final stages of our annual performance review process here at FirstRain and it’s a great time to visit what really matters when writing a performance review.

My first principle is that everyone deserves a performance review – it’s a benefit and a right. I believe we owe it to every employee to listen to how they see their own performance, listen to their ambitions and what they want to learn next, and share our observations, advice and encouragement at least once a year. In reality it is something I like to do on an ongoing basis but at least having a formal review process ensures the conversation happens at least once a year.

So to the content of the review. We use SuccessFactors which (while not perfect!) structures an easy to use process to move the performance review documentation through the process.

The structure of our reviews is
section 1: assessment of the employee against our 5 core values
section 2: assessment of the employee against specific job skills (only 1 or 2 per job)
section 3: summary and overview assessment

It is the managers responsibility to communicate to the employee that the review time is here and what the steps are going to be so the process is clear.

First the employee writes their self assessment. How do they rate themselves against the values and job skills (on a scale of 1 to 5 and a brief description for each category)? What’s going well and what isn’t. Where would they like to improve, what help do they want from their manager or the company.

Next the manager talks with the employees peers and senior management. What is their observation of what’s going well? What behaviors should be praised and reinforced? Where are there opportunities for improvement. This is a 360 process of getting input around the individual to be able to give them useful and grounded advice.

The manager then writes up their assessment. Rating each category and writing up what is great about the employees performance, what could be improved, and advice. I find myself writing the phrase “I encourage you to…” many times. I manage senior people – there is very little I would ever “tell” someone to do because how they perform is their choice. I try to encourage and advise but it’s up to them what they do with that advice.

The step of the conversation about the employees performance is the most important step. This is where absolute honesty and integrity makes all the difference to whether the review is a positive or negative – useful or destructive experience. I believe it is very important to be straightforward, kind, use humor and above all else be direct but non judgmental. If you are direct you have a much higher chance of being heard and understood, rather than the employee shutting you out. This is a process that really should be going on continuously. I feel I have failed if there is a major surprise in the conversation – although this does sometimes happen.

Finally the employee has a final step of being able to edit their review, or comment on your comments, so the complete conversation is documented. And then you both sign.

I had 10 reviews to write this year. In each one I was able to give positive feedback on the many things that are going well and the great progress and growth we have made this year. And in each case I thought carefully about the one or two areas of advice I would give to help each person grow in the coming year. It’s the least I can do for a team that is working as hard and being as creative as my team is being.