Friday, November 22, 2013

Bad Advice

Founders put a lot of effort into raising money from the perfect mix of angels or raising a top tier series A. Unfortunately, a number of brand name investors will give you bad advice.  Most of the time, this is out of a good natured attempt to help you.  Occasionally, it is due to an investor trying to take advantage of you[1].

Startups often have email lists for their investors and advisors.  I have now been on enough of these email threads to see brand name, top tier, investors inadvertently give terrible advice[2].

Examples may include:
1. Offers to make partnership introductions that are a waste of time.
As the entrepreneur it is up to you to screen and qualify what is a real opportunity and what to politely decline.  One of the values of an investor may have a broad network they constantly offer to introduce you to.  This can be quite helpful, but on your end you need to make sure to be judicious with your own time.  Remember, you know your business better then anyone else and know who you should be talking to (and more importantly, who *not* to talk to).

If someone repeatedly makes blind intros, tell them to stop.  These likely are wasting your time.

2. Product feedback.
If you are spending sufficient time with your customers, most investor product feedback will be high level and not super helpful.  There are some people with an eye for product, or who have relevant experience that you can benefit from (e.g. running a growth team for a company successfully).

Others will give you canned advice to pursue the latest meme ("Can you make the images on your site ephemeral - you know, more like SnapChat?") or make suggestions that just don't make sense ("But why doesn't your dating site accept BitCoin??  Getting ahead of the curve on this one is strategic!").

3. VC intro mis-fires.
It is important during a fundraise that you get introduced to the right partner at any given venture firm.

Often, the person you get intro'd to first at a partnership takes the lead on representing you to the full venture partnership as well as takes the board seat if the firm invests.  This means who you get intro'd to governs the fate of your company relative to the firm.

Many investors are not well networked to the full partnership at a VC, so will intro you to the wrong partner for your company.

4. Bad hiring suggestions.
One of my favorite all time investors tried to encourage my previous startup to hire someone they were friends with as our COO.  We were only 6 people at the time, and did not have product/market fit.  The COO candidate was a talented business person, but completely unnecessary for us at the time.  The investor had given us lots of great advice on other topics in the past.  He felt there was a "war for talent" and we should hire up while we could.  This was pretty awful advice and would have been quite expensive (financially and more generally) if we had hired someone with a big salary and little to add at that stage of the company.

How to avoid bad advice?
Ultimately you asked these people to invest because you thought they could help you.  As the founder, you need to take input from your investors but ultimately decide the right course or direction for your company.  Remember, just because someone has a brand name doesn't mean they know what they are talking about[3].

The best entrepreneurs I know listen closely, seek multiple opinions on the same thing, and then decide for themselves.  They question or point out underlying assumptions their advisors may have, and make sure the context of their own situation drives the solution.

There are also investors who are good at one thing but think they are great at another.  E.g. someone with a broad network (supervaluable!) who thinks they also have good product advice (when they don't).  Sometimes as a founder you need to just listen politely, nod your head, and then go get back to building an amazing product.  You can always call your investor later when you need that key intro.

[1] Another post coming on this shortly.
[2] I am sure I have done so myself.  If your advisors or investors are busy, they may pattern match rather then focus sufficiently on context.  Sometimes pattern matching is sufficient, but the specifics of the situation obviously make a huge difference.  The only good generic startup advice is that there is no good generic startup advice.
[3] With the exception, of course, of investor brand building :)

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Thursday, June 27, 2013

Social Products

The rise of Facebook and Twitter led many people in 2006-2008 to start or fund multiple social product companies. Many of the entrepreneurs and investors who went all in on social have since shied away from this market.

However, a survey of the big winners suggests the pace at which large social networks emerge has not slowed down.  Although it is hard to reproduce a success the size of Facebook, many billion dollar social companies have been started more recently.  Below is a chart of major products versus the year they launched [1,2].

Once you remove products that never reached traffic on the scale of the top ~50 or so sites based on Alexa[3] you end up with:

Just as the calls came that "social is dead", a wave of major services launched.  WhatsApp, Foursquare, Pinterest, Instagram, and Snapchat launched 2009 or later.  A number of vertical social networks also launched including NextDoor (2011), ClassDojo (2012), and EdModo (2008).

2009-2011 Mobile Social Emerged
While it is unclear if all the newer companies listed above will be successful, it is striking that so many new social networks have hit scale since 2009.  Obviously, the internet is a much bigger place than it was 10 years ago so scale can come faster.

The rise of mobile as a new platform has yielded a whole new set of social products (5 of the 6 companies listed since 2009 are mobile-first products).  The ubiquity of smart phones has also opened up more time of the day for people to spend time online in short bursts - the perfect behavior for a social product or game.  Finally, many young users don't want to use the same social networks their parents inevitably join once it gets large enough.

It is interesting to speculate if Google Glass or other new platforms will yield new social products tailored to new hardware experiences.

2008-2012 Specialized Social Experiences
Just as LinkedIn (launch 2002) pioneered business social products a new slew of vertical networks have emerged including NextDoor (launch 2011), ClassDojo (2012), and EdModo (launch 2008).  In general, the vertical networks take longer to grow, but in many cases monetize more directly for a subset of users then broad based consumer sites (see e.g. LinkedIn).

Death Of Social Products
Over time, a number of social products that have hit scale have died (e.g. Friendster, Digg, and Myspace).  Typically social products can only die due to self-inflicted wounds once they have traction.  I would not be surprised if 1-2 of the companies I listed since 2009 will also eventually be subsumed.

Why Have Early Stage Investors and Entrepreneurs Fled Social?
Scar Tissue.  Many investors wrote a large number of checks to early stage consumer products only to watch most or all of them fail.  It is hard to spot a good social product before it has traction, when it is still cheap to invest.  Withdrawing from the market is a rational response to not being able to call whether a product will work or not.

On the entrepreneurial side, most entrepreneurs who tried to build social products have largely failed as well.  It is hard to predict what service will resonate with consumer until you launch it.  Many of these entrepreneurs are now working in other markets.

Allure of the new.  The same investors who scorned hardware 18 months ago are now suddenly talking about how much they love drones.  Silicon Valley works in waves of trends, some of which are legitimate and some less so (e.g. the "nanotech" wave of the early-mid 2000s).  The big trends today include hardware, bitcoin, health, and education.  Some of these trends will prove out to be healthy places to spend time.  In other cases the new trends will be dead ends.

Thinking it is game over.  Many people believe Facebook and Twitter have won the social wars and no additional major companies will emerge.  A common refrain is there isn't any room for consumers to spend more time on social.  Given how rapidly behavior changes (especially among younger users), the growth of "mobile time", and the seemingly infinite capacity for people to poke each other online, I am skeptical of this argument.  Older users typically follow younger users onto social products, and younger users have a lot more room for experimentation.

I would not be surprised if this pace of innovation continues for the next few years, with a new major social property launching every year or so.

Thanks to David King for many of the conversations that sparked this post[4].

[1] I have purposefully avoided listing companies that have a "social" component (e.g. Yelp, Waze, etc.) but are not primarily some form of content posting or status message service.
[2] I did not list launch dates for e.g. Chinese (Sina Weibo, RenRen, Tencent Weibo and WeChat) and Korean (Line) social products as I am less familiar with them.
[3] I kept Snapchat and WhatsApp in the list as I believe they are converging on traffic on the scale of an Alexa50 site, but it is hard to measure mobile messaging traffic.
[4] AFAIK I am probably ripping off a number of his ideas.

Thursday, June 20, 2013

The Danger of Pitching VCs Too Early

VCs are short on time and attention span as they meet large numbers of companies every week.  Like raccoons, they often are distracted by the latest shiny object in the form of a new company or product.  If you pitch them for a Series A and they pass, it is very hard to go back to raise money from them a few months later (even if you have significantly more traction).  Every time you pitch a VC and they pass, the bar for them to invest in your company later goes up.

As an entrepreneur, this makes it really important for you not to "poison the well".  You need to choose the right timing to raise a Series A relative to your traction.  You also need to be thoughtful about if, and how, to meet with VCs in advance of a fundraise.  Meeting VCs a few weeks before an official fundraise to "stir up interest" may backfire without a pre-existing relationship (more below).  

Things To Do Before Trying To Raise Series A

Check your runway.
How much money are you burning?   How much time do you have left?  You typically want to raise money if you have 6 months or less of runway left.  If possible avoid raising money during the month of August or December as most VCs are away on vacation.  

If you have enough money to not die anytime soon, you can check your traction to see if you should raise money now or what for a key event to happen (see below).  

If you are running out of cash, and do not have the traction to raise a Series A, you will need to either (a) cut down expenses and potentially your team to extend runway (b) make more money or (c) raise a bridge or (d) sell while you still have time to exit.

A big decision point if you decide to fundraise without traction is whether to skip a Series A fundraise and go directly for a bridge round, or whether to try to raise a Series A first (or in parallel).

Check Your Traction
Do you realistically have enough traction to raise a Series A?  One way to assess this is to ask a few fellow entrepreneurs, angel investors, or advisors what they think.

Some questions to ask regarding your traction:
-Growth rate.  Are you growing at least 10%[1] or more a month consistently?  (optimally 20-30% or more).  Is this growth organic?
-Engagement.  How engaged are users?  How often do they use your product?
-Overall userbase.  How large is your userbase or customer base?
-Customers.  If you are a SaaS or enterprise company, what is your customer mix?  How valuable is each customer?  What channels are you using to reach customers and how scalable & profitable are these channels?
-Revenue.  Are you making money or not?  How valuable is each incremental user?  What is your business model and how much do you need to prove it out?  Does revenue growth rate track user/customer growth?

Assume that X traction is enough to raise a Series A.  If you pitch a VC with <X traction they will pass.  If you then come back 3 months later with X traction, they will pass again.  Unfortunately, every time you pitch the same VC the bar for them funding you goes up.

Plan Around Key Events
If you have runway to last another 9 months, but don't have the traction to raise a round, think through what near term milestones may enable you to raise money.  Do you have a new product release coming that will boost distribution?  A new revenue deal with a major partner?  An app store feature?  If nothing in the next few months will make any real difference to your momentum, are you really working on the right things?

Unlike angels who invest early, VCs are looking for clear signs of traction that will de-risk their investment and create a high return over time.  

Pitch Prepared
When you do meet with VCs to raise a Series A, have a clear and cohesive story.  Optimally, practice your pitch with existing investors or advisors.  Treat this as a sales call, not a casual conversation.  If you don't impress a VC in your first conversation, you are unlikely to have another anytime soon.

Remember, a Series A fundraise is radically different from an angel round.  While you can get away with some sloppiness with angels[2], you need to be well prepared with VCs.

Market Timing
Sometimes a market gets hot and VCs will act irrationally.  If you are in a market that every VC wants to invest in, you can sometimes raise a Series A earlier then merited based on little traction.  There is a bit of an art to exploiting this but usually if you are in a hot market you will start to get inbound pings or the VCs may literally show up at your office un-invited (really!).

Proactive Rounds
Similarly, in some rare cases a single VC you know well will get excited about you are doing and ask if you want to "come in and meet the partnership".  In some cases this will lead to proactive funding at a valuation much higher then you would normally deserve given your traction.  In other cases this will lead to the partnership passing on you.  After they pass, it will be hard to get them interested again.

Unless you have traction, be cautious about turning the conversation with one proactive VC into a fundraising conversation with multiple.  You may end up getting burned by all of them and not be able to go back a few months later when you are in better shape.  Conversely, if the proactive VC really wants to fund you, you will need to create competition in the round quickly by enlisting other VCs to bid on your company.  This is a delicate balance to pull off.

Things To *Not* Do
Don't pre-met a bunch of VCs for coffee 2 months before your official raise.  If the VCs think you are pitching them over coffee, or if they just met you recently, they may not want to connect again 2 months later when you are really raising.  Wait until you have a well baked, cohesive story before meeting anyone.  Then treat it as a real fundraise.  

Don't be fooled by VC "interest".
A VCs job is in part to network and meet new companies and entrepreneurs on an ongoing basis.  Multiple VCs may ask to meet for coffee after you are in a TechCrunch article.  This may be more a sign of them sniffing around to build a long term relationship then immediate interest.

Thanks to Prasanna Srikhanata for help with this post's title.

[1] 10% a month is kind of borderline depending on all the other factors mentioned (userbase size, revenue, etc.).
[2] "Angels" is a really broad term these days and can apply to anything from a random rich person who write a big check on the spot on through to a professional investor with a $100 million fund.  In many cases, early stage investors may assess an investment very differently from a top tier VC assessing a Series A.  This allows you to get away with more during a seed round fundraise.

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Thursday, May 30, 2013

Entrepreneurial Seductions and Distractions

Speaking at events, networking, press, and fundraising can all be important parts of building your business.  However some people get overly caught up in these activities at the expense of their company's progress.  The only true long term measures of value for your company is the number of happy users you have, and how much money you (eventually) make from their use of your product.

Speaker Circuit.
Being a speaker at an event can help with recruiting, partnerships, and customer acquisition.  However it is tempting for an entrepreneur to overdo it.  You see some entrepreneurs flying to countries where their product hasn't launched to give a talk to the 20 person entrepreneurship club of a small university.  None of this helps their engineering team ship product or their sales people in selling it.

Questions to ask yourself before agreeing to a speaking event:
-What are the most important speaking events for me to be part of this year and is this one of them?
-Is the panel audience relevant to my company and if so how?  What is the goal of my being part of this panel or keynote?
-Are the other speakers and panelists of the caliber I would want my company associated with?
-Have the speaking events I have been part of in the past yielded the results I was shooting for (new customers, employee referrals, or the like)?  If not, why not?
-Is this event worth the travel time?  Do I really need to speak to the Guatemalan Council On Innovation?

VC Boondoggles.
There are some conferences that are worth attending given unique access to the caliber of the network there.  The Allen & Co conferences and Davos seem like obvious ones.  However, many VC firms have multi-day or week long conferences you can attend that may be of lower value.  These are often in cool and exotic locations (Mexico, Hawaii, Ski Trips, etc.).  Some founders will spend up to 4 weeks a year at these events.  Some are good for networking and can help the company, but again you should prioritize.  Don't go to 4 of these a year.  Choose the 1 or 2 that make the most impact if you decide to go to any at all.  And again, ask yourself how the event will help your company.  Are there specific people or relationships you can build in a targeted way so that your time away from the office is worth it?

Remember, VCs are paid to network for most of their time.  You are not a VC.  In general, some people get caught up in excessive networking...

Excessive Networking.
Networking is a crucial part of being an entrepreneur.  It is how you can learn from other people, forge ties to potential partners and customer, find people to hire etc.  While networking can be extremely valuable, take a look at your calendar.  If large blocks of time every week are taken up with meeting other entrepreneurs or random investors you are probably not being focused with your time.  Try to put networking into consolidated blocks so the switching cost is low.  Also, try to focus your networking towards things that are actually meaningful to your company.

The role of the entrepreneur can be pretty networking intensive, but you still need to prioritize and figure out what is important, and what to cut.

Press and PR.
Press can be a potent force in raising awareness of your brand and, for some types of products, acquiring users or customers.  Some entrepreneurs confuse getting press with being successful and spend time courting press over building or selling product.  Being in TechCrunch or on CNN does not mean you or your product has been successful.

Pull together a press strategy. 
-What is your objective for press?  Is it to acquire users?  Build an engineering brand for hiring?  Something else?
-What press will allow you to reach these goals?   How can you build an overall story arc for your company?
-Who is your audience and how should you reach them?

Then, compare this strategy to the press you have been courting - do these things line up?

Corporate Development. [1]
Corporate development is the part of a large company that buys other companies.  When entrepreneurs start to have M&A conversations they can get distracted and work can cease at their companies for months at a time.  Only talk to corporate development if you truly intend to sell your company.  Otherwise it can turn into a huge time suck, and you may convince yourself to sell your company for a small amount when you had no intention of doing so before.

Things a corporate development conversation is unlikely to yield:
-A partnership with the company.
-A better valuation in your next funding round.
-Life changing money.

Things a corporate development company is likely to yield:
-Months of distraction and loss of focus.
-Team confusion on your goals as a company.
-An accidental acqui-hire in which you sell your company for less then expected, to a buyer you weren't really interested in.

Unnecessary Fundraising.
Fundraising is a necessary side effect of having a company that needs capital to run or scale.  Unfortunately it typically takes a few months of concentrated effort to pull off, so is hugely distracting.  Some people seem to fundraise for no reason other then they think they should raise money, even if there is no need for it.  Or "a VC approached us, so we figured we may as well talk".  Only fundraise when you are ready to do so and it supports a plan or set of objectives for your company.  Otherwise it is a huge time sink.  Getting to meet Mike Moritz, Marc Andreessen or Reid Hoffman is pretty cool, but it does not mean your startup is succeeding.

You can find me on Twitter here.

[1] I will post more on corporate development shortly.

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Monday, April 22, 2013

Who Cares If It's Been Tried Before?

When Dropbox launched, there were at least half a dozen other "online storage" businesses in existence.  The Apple iPod entered a market litered with crappy MP3 players.  Google was famously the Nth Internet search engine.  Stripe launched into a market crowded with Braintree and Paypal, and before that and others.  Uber was not the first way you could order a taxi, although their spin on black cars was unique.  Facebook was yet another social network in a market "saturated" by Myspace, Friendster, Orkut, Bebo, Hi5 and others.

Some good ideas have a lot of bad implementations before someone comes in and does it well enough to win big.

Every large market, and every good idea, will have half a dozen others who are digging around the edges of it.  Many of these companies will be doing something similar to your own idea, or will provide a service that at a high level sounds similar.  In some cases these companies will win if they have a superior product or an unfair advantage in distribution (think Microsoft bundling browsers with their OS).  In a lot of other cases, the market is still wide open even if at a high level it seems crowded or busy.

A market that is perceived as crowded can actually be quite empty.  No one is really providing a great product or service.  These crappy competitors are getting some customer traction because the market needs a product similar to what they have.  But they have not built anything good enough to defend against the next young Google or Facebook.

Remember, just because someone has tried it before doesn't mean you can't make it work.  Just because someone else is doing it, doesn't mean you won't win.  You need to ask yourself is the competitor led by great people who can fast follow?  Is their product and brand really strong?  Do they have unfair or proprietary distribution?  If the answer to these questions is no, then you may want to ignore the naysayers and go for it.

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How To Win As Second Mover

Friday, March 15, 2013

Reference Check Candidates

One of the most important aspects of hiring someone is to properly reference check them.  Although the interview gives you some solid information on the candidate, the people who worked with them directly know their strengths and weaknesses most.  This post covers how to efficiently and effectively reference check employees for a startup.

Talk to multiple people
You should talk to 3-5 references for most hires.  The references should be people who worked directly with the candidate, rather then people merely at the same company at the same time.  It is a plus if at least one of the references is a former manager.

Set context for the call
Explain to the reference what your company does and the role the candidate is being considered for.  This helps the reference answer your questions through the lens of the role to be filled. 

Ask the reference to set context on how they worked with the candidate, so you know if they worked together directly or not (in which case, their feedback may not be as useful).

If possible, backchannel a subset of the references
Since people often use their friendliest co-workers (or just plain friends) as references, you may not get a real view into the candidate.  Business people are the worst offenders on this - they will often talk about how amazing a person is even though they never worked directly with them.

If the option exists, find people (you already know and trust) who have worked directly with the candidate in the past.  They may have additional insights on how well they completed their past duties.  You need to do this discretely - e.g. don't call their current boss to ask how good they are thereby screwing over the candidate, or alternatively causing their existing employer to make a big counter offer.  If in doubt, err on the side of caution and doing what is right for the candidate (i.e. don't cold call random people to ask about the candidate).

Come to the call prepared with specific questions
  • If you are worried about an area of weakness from the interviews (e.g."does this person work well with others?"), use the reference checks to get more data.
  • Have a list of questions written down that you want to ask and areas you want to probe in.  I have a generic Google Doc that I print out for each interview, to which I add a few candidate specific questions.  I like to include questions focused on (non-exhaustive):
    • Culture fit
    • Smarts / raw intellect
    • Ability to GSD
    • Ability to deal with uncertainty
    • Determination & drive
    • Willingness to do grind through crappy work for the good of the team (this is important in a startup as crappy work is inevitable)
    • Contributions in current role (what did they actually do themselves?)
    • What do they do well?
    • What can they improve on?
    • How do they resolve conflicts?
    • How pragmatic are they?
    • For managers, there is a whole set of questions on their management style.
Rephrase the same question multiple ways
Often the references the candidate provided are their friends.  Or, it is a long time co-worker who doesn't want to say anything bad about the candidate.  By asking the same question multiple ways, you sometimes get more information from the reference, or the real answer emerges.  As an illustrative example, for productivity you can ask:
  • How would you rank Sarah relative to other people you have worked with in terms of raw productivity?  What percentile would she fall under?
  • Is Sarah one of the 3 most productive people you have ever worked with?  If not, is she in the top 5?  Top 10?
  • What is an example of Sarah being very productive at work?  How does that map to her day to day behavior?
  • When has Sarah not come through on something at work?  What was the reason for it?
  • Has Sarah ever bottle necked the team?  If so, what were the circumstances?
The above is meant as an example only.  The key takeaway is by probing for the same thing multiple ways, you often get to a richer answer and perspective.  On some reference checks I have done the tone has changed from the first such question "Yeah, Bill is great" to dramatically different by the last one "It is really hard to depend on Bill sometimes".

Anatomy of a phone call
  • Set quick context.  What does your company do?  What role is the candidate being considered for?  What skills are needed for the role?
  • Ask how the reference knows the candidate.  How long did they work together?  How closely did they work together?
  • Run through your list of questions.
  • Give the reference a chance to summarize at a high level their view of the candidate at the end of the call, or ask you questions.  Alternatively, you can synthesize your takeaways from the call and see if the reference agrees to your summary.
The above should take 5-15 minutes total.  The best and worst candidates often have the shortest calls.

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Tuesday, February 5, 2013

Should You Hire A COO?

10 years ago, if you were the founder of a high-growth company it was reasonably likely that your investors would want to bring in "adult supervision" as CEO to run your company.  This has shifted more recently with a slate of COO hirings following the example set by Facebook with the successful run of Sheryl Sandberg.

Box, Facebook, Foursquare[1], Stripe, Square, Twitter[2] and Yelp are all companies that chose to hire a COO as a complement to the founders, rather than replace the CEO with a "grey haired professional operator"[3].

Why A COO?
A COO is not about the title, but rather the background and experience you are looking for.  Optimally, you want someone who will come in to complement, operationalize and execute your vision as a founder.  Many technical or product focused founders want to (and should) remain focused on the product and overall market strategy.  In parallel the COO would build out and manage areas that the founders lack bandwidth, interest or experience in.  E.g.:
  • Add executive bandwidth and a business partner for technical or product focused founders.  
  • Scaling the company.  High growth companies have special needs around scaling and implementing simple processes (e.g. recruiting infrastructure, corporate governance, etc).
  • Build out executive team and organizational scaffold.  Hire executives or teams for areas founders don't understand well e.g. finance, accounting, and sales.  Help in screening and hiring executives for product, engineering, marketing as well.
  • Take on the areas founders don't have time for, are poorly suited for, or don't want to focus on.  Ongoing management of the "business side" (corporate development/M&A, business development, sales, HR, recruiting, etc.) while the founders continue to focus on product, design, and engineering - e.g. Mark Zuckerberg's focus on product at Facebook.
  • Shape the culture for the next phase of the company's life.  Sheryl Sandberg has impacted how Facebook is run across the entire organization by, for example, bringing a culture of people development and managerial excellence. 
Why Not A COO?
All growing companies need to build out an executive team and the ability and expertise to scale.  This can be done via hiring or promoting a set of people who in their sum complement the founders and allow the company to scale rapidly and effectively.  It is not necessary that one of these team members have the "COO" title.  For example, at Polyvore the CFO owns multiple areas beyond traditional finance.

Additionally, the COO title sets a very high bar for the person.  You can't really hire above them later like you could with a VP, taking flexibility out of future organizational evolution and changes as the company goes from e.g. 100 to 5000 people.  If the COO is out of their depth they often won't accept demotion to VP and will leave instead.

Another option raised by Reid Hoffman is to replace yourself as CEO instead.

How Do You Choose A COO?
For COO you optimally want someone strong enough to be CEO of a company or with solid general management or key functional experience.  For example Sheryl Sandberg interviewed for other CEO roles before accepting COO of Facebook.  Similarly, Box's COO Dan Levin was a CEO or President of 2 companies and a GM at Intuit before joining Box. You want someone so excited by your company's vision and opportunity that they are willing to give up some of the perceived upside of being a general manager or CEO elsewhere to join your company.  

Criteria to look for are:
  • Seasoned executive willing to suppress their own ego to partner with, and execute, a founder's vision.
  • Chemistry with founders.
  • Past experience scaling a company or organization.
  • Entrepreneurial.  Optimally, you want someone who has both operated at scale, as well as has startup experience (or scaled something from scratch at a larger company).
  • Functional expertise.  They should have previously run (at another company) a reasonable subset of the functions you want them to own initially at your company.
  • Ability to hire.  They will be building out a chunk of your company's organizational skeleton.  You need someone who can hire well and manage executives themselves.
  • Someone you can learn from.  Optimally as a first time founder or manager the COO can teach you about management or other areas.
  • Process focus.  Bring lightweight processes or best practices from other companies, and be smart about how to tailor the necessary ones for use by your company.  Sheryl Sandberg did this in many ways at FB.
When hiring the COO, you should have a clear sense of what you want to keep as founder (e.g. design, product, marketing, engineering) and what you are willing to truly delegate (e.g. BD, sales, Corporate Development, finance, HR, operations, etc.).  Otherwise you may not set the situation up for success to being with.

I don't think every company needs a COO.  Rather, a well rounded executive or leadership team allows you to do without one.  However, if you do decide to hire a COO the criteria above may be of use.

Thanks to Aaron Levie[4], Jess Lee, and Keith Rabois for reviewing and providing feedback for this post.

[1] The original title for the Foursquare COOs was "general manager".
[2] Twitter has recently re-added the COO role after a period without one.  The original COO, Dick Costolo was promoted from COO to CEO.
[3] Other interesting early examples include Microsoft, where Bill Gates in the 1980s had seasoned "Presidents" working for him, and Oracle, where Larry Ellison has gone through various COOs over the years.  Gates, of course, only brought in venture money after Microsoft was profitable, so he had sufficient control of the company to not worry about being replaced.
[4] Extra thanks to Aaron for tons of helpful comments and ideas which I shamelessly ripped off for this post; e.g. the first part of note [3] above.

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Friday, February 1, 2013

How To Hire Great Business Development People

Great business development (BD) people are hard to find.  You may meet a smart, charismatic, articulate BD person who can't get anything done.  Or a highly networked deal person who leaks value when they miss all the details of a deal and structure terrible terms.   It can be hard to differentiate between what a deal person accomplished versus what they take credit for in terms of a product's success.

So what should you look for in a business person?

Great Business Development People
The best BD people have the following traits:
  • Smart / raw horse power.  Smart, creative, and think well on their feet.
  • Articulate / good communicator.  Needs to communicate well with both internal teams (engineers, PMs, lawyers, execs) as well as the customer or partner (which may include their legal, engineering, and deal people).
  • Creative / fearless in deal terms.  Push the envelope on what is possible and are willing to make a crazy ask from the partner or client.  You never know what someone will give away until you ask.
  • Get shit done.  Have a history of closing multiple complex deals with creative or aggressive terms.  One person who worked for me at Twitter closed 3-4 partnerships while a part time intern working remotely during their school year.
  • Structured / can run a deal process.  Structure is under rated in deal people.  You want someone great at shepherding all internal and external stakeholders through the various phases of a deal (ideation, pitching, negotiating, structuring, closing, implementing)[2].  You want people mining a list of prospects, aggressively framing a negotiation, and setting up internal prep meetings before calling external parties.  Unstructured deal people create churn internally due to a lack of consensus on external gives or lack of planning for a negotiation.  
  • Detail-oriented.  Reid Hoffman once told me he expected his deal people to read every word of every contract including all the legal language.  This allows you to catch all sorts of gotchas that are otherwise buried in unexpected ways and to think through the implications of what the contract says.
  • Part-lawyer.  Pick up and grok key legal nuances, even without a legal background.
  • Good culture fit / put the company first.  Like all employees, you want your business people to put the company first.  There are all sorts of ways business people may benefit themselves rather then the company (more below)
  • Work well with others across the organization.
  • Pragmatic & keep big picture in mind.  Figure out what is important, optimize for it (80:20 rule), and get the deal done.  Don't optimize for little things that don't matter, except as a negotiation tactic.  Similarly, some deals should not get done.  Great deal people will take a step back and decide whether to walk away, or not try to force a deal to happen if it shouldn't.  Some of the best "deals" are the ones that don't happen.
  • Understand partner and market needs.  Understand what the partner really wants (versus claims they want), as well as trends in the marketplace that may impact both their company's, as well as the partner's, leverage and needs.
  • Have stamina.  Deals can take a long time and a lot of back and forth.  Bad deal people give up towards the very end to "just close the deal" and may leak enormous amounts of value that they didn't need to give up.
  • Relentless.  Sometimes you need to keep knocking at a door over and over until someone finally answers.
  • Moral compass.  Like all employees, you want people who will do the right thing even if it is uncomfortable or against self interest to do so.

Bad Business Development People
Bad business development people may exhibit the following:
  • Great at selling, bad on follow-through.  Some BD people are charming, fun to talk to, and really smart.  Unfortunately, they have terrible follow-through and can't seem to get anything closed.  They may be full of incorrect excuses on why they had to give on a major term that is important to your company.  The only way to screen these people out is reference checks as they are great at selling, poor on substance.  Raw charisma is drastically over rated by technical founders.  Dont be fooled just because someone is friendly and charming.
  • Disorganized / unstructured.  Flying by the seat of their pants, not sending follow ups, or poor internal communication leading to needless meetings or internal churn often results.
  • Leak value.  Often over-think what is "fair" for the other side.  Make too many assumptions about what is important to the other side and just give a lot of terms away.  Or, they just want to close the deal at all costs versus thinking through what is actually good for the company they work for.
  • Don't think like an owner.  Bad deal people don't think like a business owner.  They treat the company's money or resources as not a big deal to use and will give away extra value in a negotiation because it "doesn't matter, its within 20%" or the like.
  • Don't think the details matter.  See above.
  • Outsource too much.  Bad deal people become too dependent on other company function (e.g. not understanding a legal term that comes up over and over because "thats legal's problem").  Sometimes terms important to the business are buried or hidden as legalese or "technical specs".  A great deal person will ferret these out.
  • Optimize for themselves and their network versus the company.  As gate keepers to external parties, some business people may use this point of leverage to benefit themselves.  They may build relationships at the expense of the company by being too easy on a deal so that the partner likes them. Or they are constantly networking at external boondoggles and on panels to build their own reputation, rather then working [1]
  • Cowboy mentality.  Some deal people go off and strike a deal, or mention terms that you can't back away from to an external party, without any internal discussion or approval.  They may act defensive when questioned about this and feel they are "getting it done".
  • Emotional.  Deals have a lot of ups and downs - you need an even keel.
  • Spin things internally.  Deal people need to be able to "turn it off" when it comes to sales.  You need to hire people who won't BS or spin internally even if it is sometimes their job to do it externally.

How To Screen For a Great Business Development Person
  • History of deals.  What deals have they themselves negotiated?   How complex were the terms?  What is an ask they received that no one else at the company believed they would get?  What is a clever deal hack they pulled off?  What impact did the deal actually have on the company?
  • References. Deal people often have lots of friends as their job is outwardly focused and they can be very charismatic.  They may give you a long list of meaningless references (e.g. friends of theirs at their current company, who actually don't know much about their work but think they are a "great person").   Get references from people who worked with them directly on deals.  Back channel more information on them.  Ask about the specific deals they worked on, how relentless and creative they were, and the tangible impact the deal had on the company.  Did the terms end up working out or backfiring?  Were there edge cases they did not think about that came back to bite?  Did they champion a radical position that paid off big?
  • Follow-through.  How is their follow-through during the interview process?  How structured are they?  What approach do they take in negotiating comp?
  • Culture fit.  What are they optimizing for?  Title?  Equity?  Future growth?  Something else?  How do they fit in your culture?  Business people will be different from technical or product people in a number of ways, but they should still hold to your core cultural values.
A Great Deal Person Is Not Usually A Great Partner Manager
Don't expect the people who are great at thinking of and executing deals to be great partner managers (post deal management).  You will need to find both types of people eventually for your team.

Thanks to Marc Leibowitz Clara ShihKim Malone Scott for feedback, ideas, and commenting on versions of this post.

[1] Some external speaking or networking events may be useful to your company, but the business person should chose the small handful of events that really matter, and have specific goals as to why they are doing them.  Rather then just claiming "all exposure is good exposure".
[2] Thanks for Marc Leibowitz for spelling out the various stages as well as other ideas.

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Tuesday, January 8, 2013

How To Fire A Co-Founder

The two biggest reasons startups fail is running out of money and founding team implosions.  One Y Combinator founder I spoke with felt that about ~20% of startups in his batch blew up in the first 9-12 months after entering YC due to founder issues.

When you find yourself in a situation where the working situation with your co-founder has degraded you need to decide:
A. Is this something you can work out?  Every founder relationship has its problems.  Can this one be fixed?  Have you given feedback to your co-founder before?  How did they react?  Sometimes having a series of frank conversations is the best way to fix things.

Do not proceed to step (B) unless you have had a few frank, non-emotional conversations with your co-founder about the issues.

B. Who should leave?  If this situation can not be worked out, which co-founder should leave?  Should you resign?  Or should one or more other founders be asked to leave?

The likely outcome to (B)  depends on the relative leverage each person has.  Who is essential to the continued life of the startup?  How much equity does each person own?  Who has a board seat and who does the board support?

If you are "equal founders" in terms of equity and board seats, you will need to have a series of frank conversations about how to separate   If you have a strong lead investor, they may be invaluable in helping the you and your co-founder(s) work through this negotiation.

How To Fire Your Co-Founder
Here are potential steps to take if you need your co-founder step down:
  • Discuss the situation with your other co-founders, if any.  Come to a consensus on letting the other founder go.
  • Discuss the situation with a handful of key stakeholders (e.g. your lead investors or advisor).  You should be smart about what sort of conversation you have depending on your relationship with the person.  Some investors you can ask for advice on the whole situation.  Others you should only contact after you have taken action.  A strong lead investor can help you negotiate with the founder you are firing and provide a fair outcome for both sides.
  • Determine what is fair.
    • What does your co-founder care about?  Would they prefer to hold equity or cash? 
    • How early in vesting are they?  If the conversation is happening pre-cliff, one option is to let them keep the portion of equity they vested so far for time spent. [1]  
      • If they have been part of the company for an extremely short amount of time, and they would be valuable in this role, you can convert them from a founder to an advisor with a much smaller, vesting, equity stake.
      • Alternatively, you can buy out their equity to date for some cash.  If they are pre-cliff, then they have no shares for you to buy.  In this case, you can focus instead on paying out a cash severance to reward their help in getting the company up and running.  Consult with a lawyer on all your options and their implications [2].
      • The most extreme situation would be to wipe them from the cap table entirely with no compensation.  If they are post-cliff, there are often clauses in the original stock agreements that if someone committed fraud or otherwise put the company at risk that they lose their shares automatically.
    • Board seats.  If the founder is on the board, you usually want them to step down and make a clean break.  You should think this through relative to (a) their relationship to you, the other team members and investors and (b) relative to the board dynamics you already have.  Can you still fill the other common seat with someone else?  This may be the de-facto outcome already written into your original company legal documents.[3]
    • Cash compensation / severance.  You should decide how much salary to pay out as part of letting them go.  This may depend in part on how much they are making per month, as well as the cash position of the company.
  • Figure out the situation with your lawyers.  Have the paperwork for termination / non-solicitation / etc. ready before the conversation with your co-founder.
  • Prepare for key conversations.  Write out the logic of why the founder is getting let go, what will happen to them (board seats, compensation, etc.) and when you plan to do it.  You can use this as a guide for the conversations below.
  • Take swift action.
    • Meet with your co-founder and discuss that they are being let go.  If you have communicated issues effectively with them up until this point, they should be well aware there are problems.
  • Communicate to various stakeholders.
    • Determine what to communicate.  What is the agreed upon story you and your co-founder will share?  If it is a contentious break up, there may not be a common story to tell.
    • Determine how to communicate to each of the following parties.  
      • Your team (more below)
      • Investors or advisors.
        • You will want to call or tell some investors in person.  Others can be notified via email as part of your regular company updates.
      • Partners or customers (if e.g. the co-founder was their main point of contact).
      • Press (only if needed).  I know a large number of startups that are down a founder but the world at large has never noticed.  While losing a co-founder can be very intense for you, don't project your emotions more broadly.  Most people may never realize a change has happened.
  • Team communication.
    • Many employees may confuse losing a co-founder with a loss of belief in the startup itself.  The co-founder may have hired a part of the team and be friends with them.  Be proactive in addressing employee concerns in a straight forward manner.  Bring in investors or advisors to show their ongoing belief in the company.  If the co-founder is leaving on good terms (or had proactively resigned), you can potentially have them be part of the conversation or host a goodbye party for them that same week.
What To Do If You Are The Founder Asked To Leave
If you are the founder who has been asked to leave:
  • Try to remain rational.  This is really hard emotionally and you will be upset.  Stay calm and dig into the facts, the financial offer they are making you, and the true leverage they have over you.  Is your firing a done deal that has full board approval, or posturing by your co-founder who has no real leverage?  What is objectively best for the company?
  • Get a lawyer.
  • If it is a done deal, decide what you think is fair compensation-wise, and how to best communicate this back to the company.
    • Note: don't confuse the company's money with the founders' money.  E.g. if they company raised a few hundred thousand dollars, you don't deserve "my share of it".
  • Determine which company stakeholders (investors, advisors) you want to reach out to over time in order to keep the relationship(s) intact.  You don't need to do this immediately.
  • Don't worry about your reputation being hurt.  Savvy investors see founding team issues all the time and understand early teams don't always survive the stress of a raw startup.  You now have one startup beneath your belt and a lot of things you have learned for the next one.  
    • Act in a mature and thoughtful way on the way out.  Life is not a one act play.
    • Yes, you will be able to raise money again, hire people, etc. etc.
  • Don't dive back into things immediately.  Take some time to clear your mind and get your emotions and life back in order before deciding what to do next.
Unfortunately, founder relationships, like marriages, often don't work out.  The key to avoiding a break up is to make sure you and your co-founder are aligned up front.  Keep communicating openly throughout the relationship as issues arise.

Some great founders have gotten fired in the past.  Hopefully the above is helpful in navigating this painful and stressful change.

Thanks to Harj TaggarNaval RavikantSam Altman, and Gokul Rajaram for reading drafts of this post.

[1] If it is a contentious break up, you may not want them to own equity as they can cause trouble for you down the line.  This is the reason to make sure you have vesting in place for everyone associated with the company, whether you raise convertible debt or equity.  If co-founding a company is a marriage, the vesting is a pre-nup.
[2] I am very obviously not a lawyer, and can't give any legal advice.
[3] Another reason to read your legal docs and not just gloss over them!

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