The difference between being right and getting the right answer

Entrepreneurs can be a hard headed lot. It takes courage, determination, a lot of luck, and sometimes just old fashioned, bull-headed persistence to create a company but as a result entrepreneurs don’t always listen well.But even if you know you resemble this description, ask yourself – is it more important for you to get to the right answer, or to be right?

You want to be right because your team wants to follow someone who knows what to do. You want to be right because it’s more efficient, and it increases your confidence, and if you’re right more often than you are wrong you have a good chance of winning. And if you believe you are right you are more likely to take risk.

But your potential investor wants you to be more interested in getting to the right answer than being right. When you are building your company you cannot predict what’s going to happen. You may switch markets, your customers may show you a different direction, the company may almost die more than once, you are certain to make some bad hires along the way. It is almost guaranteed that your journey will not be smooth.

As a result, it is much more impactful as an investor to work with entrepreneurs who are seeking truth, seeking to understand, seeking the right answer. These entrepreneurs ask questions, question themselves and try out ideas without fear of being wrong. As an investor you can dig in and problem solve with them. It’s more fun, it’s less frustrating, and you are more likely to get to a great end result together.

So when you are talking with potential investors, or even potential senior team members you want to hire, ask yourself how strong is your need to be right?

Career Advice

Three critical questions to ask a startup before you agree to work for it

So you want to work for a startup!

You’ve been talking to one that you think is going somewhere and will give you the experience you want, you like the people and the title, job and salary sounds right for you. They make you an offer. Great!

But now is the point where you need to ask three critical sets of questions to determine if this is actually a good company to work for or not. Remember each job you take influences your future career. What you learn, who you get to know, what opportunities you get as a result. Many people peak in their forties (career wise, and for a myriad of professional and personal reasons) and so the job choices you make in your twenties and thirties will affect how you peak.

After 30 years in Silicon Valley, 20 of them as a high tech CEO, and now talking almost every day to people who want company and career advice, I’ve seen too many bad company structures to take any offer at face value. I recommend you (respectfully) ask questions to explore these three areas – the health of the business, the capital structure and the organization – and if a company won’t answer then that in itself tells you this is a not a great situation for you.

1. Understand the health of the business

Health is all about rate of growth. What is the revenue, how is it growing and what other metrics are critical health indicators for the business? so ask:

– What was the revenue for the last 2 years, what is the forecast for this year and next year? You’re listening for consistent, sustainable growth and a management team that is making its plans. There is no right answer here because it depends on the stage of the company, but you’re listening for b.s. or inconsistency.

– What percentage of the revenue this year is recurring (ie. it renews every year)? Do you expect this percentage to improve? You’re listening for the quality of the revenue. Recurring is higher quality than one-time revenue and drives a higher valuation. If a high percentage is recurring then you want to understand how many of the customers renew – i.e. what is the customer retention rate? How much do they churn.

– Are you profitable? If so for how long? If not when do you plan to be profitable? If not, when do you need to raise your next round of investment? Note, if your hiring manager says “we’re not profitable and we don’t want to be” don’t buy the b.s. The ONLY time you don’t want to be profitable is when you have easy access to lots of cash and you’re truly investing for growth but most good companies would like to be profitable, while still growing, so they stop burning cash. They should be able to talk about how much time and cash it is going to take to get profitable if everything goes to plan.

– What are the other important metrics you track for your business? For example customer acquisition rate and costs, customer retention rates etc? Be sure to listen for real metrics that are about the true health and growth of the business, not just marketing metrics (clicks, downloads etc) but which are not metrics leading to revenue growth.

2. Understand the capital structure and cash

Startups run on cash from investors, not cash from operations and so it’s important you know what the terms are and how they might affect the future of the company, so ask:

– What is the capital structure? How many preferred shares are outstanding, how many common and what is the total number of shares including the unallocated options in the employee pool? You want to know the total number of shares so you know what your options may be worth in the future.

For example
The company has raised $5M selling 5 million shares at $1 per share to preferred sharesholders
The founders have 5 million shares
The option pool has 1 million shares priced at 10 cents per share
=> there are 11 million shares and the post-money valuation is $11M

The company is sold for $49M. 

$5M is returned to the preferred shareholders so now there is $44M to share
This means $4 per share – you make a gain of $3.90 per option you have vested at that time

– What are the basic terms of the preferred shareholders? Are they participating? – this means they take their money back first as in the example above and then what’s left is divided across the total number of shares.

– Do the preferred shareholders have any control on the sale of the company? For example, can they veto a sale below a certain valuation, or veto a capital raise below a certain threshold valuation? You want to know this because if they can, and you think it’s unreasonable then you should discount the potential value of your shares. These kind of terms are not typical with high class VCs, but you do see them with PE firms and newer VCs who don’t have a lot of experience on the downside effects. And I know of too many founders who lost their companies because of these types of terms. If you are unsure, ask around or check out The Funded to get a measure of the quality of the investors.

– Do any of the executives have 100% vesting on change of control? Some VCs say no to this for everyone, some say only the CEO, some say only the CEO, CFO and VP Sales and so on but most executives want it. This tells you a lot about whether the executives are looking to ramp quickly and sell vs. build a long term company.

– And if they suggest you buy your common stock don’t. Look at what happened to the employees at Good Technology, and there are thousands of examples like this where the common holders lost their money because they were behind the VCs. Be patient and pay a little more tax when you make money.

3. Understand the org chart and politics

– Figure out where you fit in the organization. How many layers are between you and the CEO? What is the span of control of your VP? You’re looking for a relatively flat organization where you are in a strong part of the organization – i.e. your exec has power.

– Does the organization make sense to you? Do you see what looks like politics between founders (odd titles, responsibilities in places they should not be)? Do you see one CEO by name, but two CEOs by organization? Does the balance between R&D and sales make sense to you? Again, does it pass the sniff test for you?

Remember, you want to work for someone who is really good at their job, a great manager, and who will invest in you and your skills. And someone who you will work for for a decent period of time – like a year. You don’t want a weak manager, a revolving door of managers, or ill defined responsibilities between you and other people/teams. The chaos being reported at WrkRiot is certainly unusual, but there are many aspects of this story I have seen and heard when founders don’t know what they are doing and don’t have good advisors – so be selfish and do your homework.

Most good companies will help you understand these three areas because they will respect that you are making an important decision for your career. The most precious thing you have is your time and the best thing you can get is experience. Not money, or options, or a title but experience. Training, education and opportunity. So measure your startup against those metrics too before you fall in love.


Are your investors double dipping in your startup?

I’ve been working with a number of small companies this year. I’m on a mission to help CEOs, especially women, figure out how to grow their businesses, manage their investors and boards and to create a level playing field for themselves.

But as I have spoken to some of these CEOs I’ve seen several data points which are very worrying, and which I hope don’t make a line! These data points are investors putting money in to companies, and then taking the money back out for services – so effectively reducing the cost of their investment. Double dipping.

For example…. The professional service provider:

This is the case for a small software company, lets call them W. W has developed a software technology to improve building management, and so reduce insurance costs. It wasn’t an easy company to raise money for and in the end the CEO raised from angels, one of whom invested $480k. Nice.

But he then turned around and sold W the development service to create the product from the technology for $490k. He didn’t require it, but it was “expected”. Assume a typical margin of 50% then the service cost for the angel to deliver is $245k and he has a profit of $245k. So he got $480k worth of equity in W for $235k. And to make matters worse, when the product delivery was not to the satisfaction of the CEO she found it very difficult to push back on him in the way she would have been able to push back on an independent contractor. It’s awkward to say the least, but I think it’s what in a public company would be called a related transaction – it is simply not independent and so has the potential for conflict of interest.

The investors with a side business:

Another small app company, raised money from an angel group. The angel group has a strategy of creating an ecosystem from their companies, and providing services to them to drive the market adoption. But, unlike the old school VCs like Mayfield and KP, or even the new large scale guys like Andreessen Horowitz, this group turned around and charged the company (which had only raised $1.5M) $11k/month for marketing. That’s $132k per year – which could have been spent on another engineer or a lot more marketing consulting from an independent.

The board member who wants a salary:

This time a technology company in the security space. Killer technology, but a turnaround from a prior (not-well-run) incarnation so raising money was hard. In the end money came in from a PE firm. But after the close the PE firm put in an executive chair to “help” and insisted he be paid $180k a year for a few days a week. Now I am supportive of a board deciding a CEO needs some help and adding in an exec chair if the CEO agrees (or even if she doesn’t if it’s really needed) but to pull a salary out of a company that is not profitable is very tough on the company. And in the end it’s not in the best interest of the investors; it doesn’t make sense.

I wonder if I have seen a few outliers and this is not the new normal, or if this is a new trend? Is it a result of the number of angel groups out there who are not professional investors (and so to give them the benefit of the doubt we could assume they don’t realize the impact of what they are doing), is it a result of the tightening of investment (and so they can get away with it) or it is a result of the simply huge number of startups and first time CEOs who can be taken advantage of? If you have an example in  your own company inmail me on LinkedIn.


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.


How to Unite your Team: Advice from Napoleon

Silicon Valley is littered with small (and large) companies that want to create a revolution. It might be a revolution in commerce – like Square trying to “Architect a revolution,
thoughtfully”, or being the enablers of a revolution like social media was for the Arab Spring, or creating a revolution in music delivery the way Apple did with the iPod.

But what is it that unites a team of people to try to create a revolution in the world of technology?

Napoleon believed that “There are only two forces that unite men — fear and interest” (from Napoleon: In His Own Words 1916) because “all great revolutions originate in fear, for the play of interests does not lead to accomplishment.”

I think he was right, but in reverse order.

In the world of the technology startups the dominant, unifying force is interest. Most people I have ever worked with were a part of the company because of shared interest. They have a common end in mind (to use one of Covey’s 7 habits).

At Simplex (bought by Cadence in 2002) our interest was in the electrical modeling that semiconductor companies needed to make faster, more reliable chip designs – and so sell more chips at lower cost. Everyone in the team was interested in how to get the technology to work (a non-trivial series of math and computer science challenges), and work in the hands of customers at ever decreasing, truly less-than-the-width-of-a-hair, geometry sizes. Chip modeling was a “big data” problem before we talked about big data. Geeky, but very interesting.

The best technology leaders – usually the CEO or founders – unite their employees with a vision for what’s possible. They have a uniting concept that everyone gets interested in – like salesforce.com with their “no software” platform to move CRM to the cloud, or Amazon with a vision that we’d all be buying books, and then everything else too, on line. Both visions were compelling, interesting to work on, and right.

So “the play of interest” does lead to accomplishment when you are building a technology company. I think it’s the only thing. You can’t unite people around money (well not for long anyway) and you can’t unite them with fear in a market when they can walk down the street and find another interesting job.  You have to do it with interest.

The great general was right that fear plays a role too but it’s only at the tactical level, in the moment, or in the sleepless times of the night. Fear of losing a deal, fear of failure, fear of missing a deadline you’ve committed to another team or a customer, fear of being wrong in the path you took to solve a problem. Everyone in a startup feels it. If they say they don’t they’re lying. Everyone experiences The Struggle. But you can’t unite people with fear because, in the end, this is a game. It’s not life and death, it’s not the control of empires or the defense of your homeland. It’s a business, with a dream, but a business.

Napoleon had to unite his men to fight through the mud and risk their
own lives to (almost) bring continental Europe under his command –  he used both fear and interest. You
need to unite them to work grueling hours and take huge personal risk to
try out new ideas – and in technology that means uniting your team with interesting work and a meaningful goal.

Career Advice

The Passion of the Entrepreneur

Collyer’s mother: Beware of passion Hester. It always leads to something ugly.

Hester Collyer: What would you replace it with?

Collyer’s mother: A guarded enthusiasm. It’s safer.”

Classic lines from The Deep Blue Sea, and the sentiment of the England I grew up in. Passion, while interesting in poets, was a sign of weak character. One should always maintain an even keel, and in times of trial, a stiff upper lip.

But when you’re building a company, or developing a new product, or growing a team, passion is essential. It’s at the essence of what you’re doing.

Bringing a new idea or product to market takes a level of conviction that, until you’ve done it, you cannot imagine. Everything sensible tells you you’re going to fail. Good friends question your judgement, your parents question the risk, your bank account gets annoyed with you, your children complain when you’re not around, even your spouse may have days when they wonder if you’re Don Quixote.

But passion carries you through. The desire to see your vision come to life, the thrill of winning a market and customers, the intensity of seeing your product finally perform magic, the agony of losing a deal, the excitement of getting profitable, the frenzy of a liquidity event (selling your company or doing an IPO). The synonyms for passion are the every day experiences of entrepreneurs.

If you don’t enjoy the heights of heaven and the depths of hell don’t become an entrepreneur. Or a CEO. Or a fast climbing, ambitious executive. Because the intensity it takes to create something from nothing, or break the glass ceiling, or change the trajectory of a company takes passion, and with it the boil of your blood, or the chill of your bones that comes with the roller coaster ride.

For the true entrepreneur there is no choice. It’s a drive they cannot resist. A vision they have no choice but to pursue. And if you feel that drive you are one of the lucky ones. There is nothing like it. Except maybe passion.

The Deep Blue Sea stars Rachel Weisz and Tom Hiddleston and is a gorgeous, sensuous and heartbreaking film about self destructive passion. Pour yourself a great glass of wine, settle into your favorite chair, hold your breath and immerse yourself.


Will must be stronger than Skill

With all the coverage of the get-rich-quick startups of Silicon Valley at the moment it’s important to remember that most of the time building a company is a marathon, not a sprint.

Yes you need a good idea. Yes you need a strong, growing market. Yes you need smart people. But even with all of that, s**t happens, you get surprised, some things take longer than you expect, markets change and it can be a long, hard slog up the hill to build long term value. Especially in a time of global recession.

Eric Jackson wrote a terrific article in Forbes last week — titled The Most Under-rated Key to Long-Term Career Success: Staying Power — in which he admires people who just keep churning out great work. They have the will power to just keep going, keep reinventing themselves and live his first key “Never Give Up”. U2, Henry Blodget,  Magic Johnson. Vastly different but similarly committed – they determinedly persist.

When you are building a company you want to find a team of people who, like you, have willpower and simply won’t give up. You know you are going to ask a lot of them. You know you are sometimes going to push them past their limits, and then ask for more, and forget to ask for forgiveness later. At times you are going to appear insane, a bitch and heartless. But you won’t give up. Winning may be quick, it may be lucky, but most of the time it comes with determination, persistence and hard work. When Yahoo recovers under Marissa Mayer (as I certainly hope it does) it will be because a team of people in Yahoo decide not to give up, they decide to fight to climb back out with great products.

When I was running Simplex we discovered that our product wasn’t a must-have until the customers were designing for 0.18u semiconductor technology – which came 18 months later than we had planned. We had to cut back, hold expenses down, keep developing leading edge customers and persist until 0.18u ramped up for the big customers. Then a couple of years later as we grew and needed cash we filed our S-1 to go public in Sept 2000 but it took another 7 months of a rotten, volatile equity market to finally get public in May 2001. It would have been easier to bail out and sell instead at either of these points, and I’d have been a nicer person, but we were stubborn and determined, and tough.

It’s not easy to never give up, especially in the face of The Struggle (as eloquently described by Ben Horowitz), which most leaders experience at some time or another. In the end it just takes sheer willpower. I love Muhammad Ali’s quote, which is as much about building companies as it is about boxing: “Champions aren’t made in gyms. Champions are made from something they have deep inside them. A desire, a dream, a vision. They have to have stamina, they have to be a little faster, they have to have the skill and the will. But the will must be stronger than the skill.” Something we don’t talk about enough in the flashy, celebrity-CEO style of today’s tech industry.