Startup Lessons: Tough Decisions

This is the 6th installment in the Startup Lessons series I have been writing in the wake of my experience with Get Satisfaction. This one is a tough one to write and it is important to acknowledge that when it comes to strategy there is a lot of nuance and the fact remains that you are dealing with a complex multi-variant problem so there is no playbook you can pull off the shelf and just hit go. Having said that, a key failing of startup management teams is the inability to develop and adhere to a strategic planning process that lays out priorities and initiatives that have to be attacked in order to achieve the only metric that matters, growth.

To recap, here is the series thus far:

1) Hiring
2) Dynamic Org Structures
3) Product First
4) Marketing
5) Board Management

6) Tough decisions: Today I want to highlight is the challenge of making tough calls in a startup, decisions that may mean giving up one thing you already have in exchange for something you would like to have. You can’t have it all so you have to narrow down the range of strategies you are executing to those things that sustain the company over the short and medium term, grow shareholder value, and result in a culture of winning. The bottom line is that your resources will constantly be 120% consumed and the only metric that matters is growth, so bias every decision you make to delivering growth

Case in point during my tenure was the observation I made in late 2010 that a reliance on a feature driven packaging approach was hamstringing the company and creating a bias to the direct sales side of the business. Enterprise sales models deliver revenue and there is an extensive library of company case studies on building large businesses off enterprise license agreements but those models don’t deliver customer number growth and coverage across businesses of all sizes.

We kicked this can for a full year – we wasted a year – until we took one step in the right direction and replaced our antiquated billing system. The problem is that this is just one piece of the puzzle and it wasn’t until I took it on myself to start driving change on the pricing model itself that the product, packaging, and pricing aligned. The massively frustrating part of this work was getting people to look beyond the revenue impact in the current customer base. Once we moved beyond the protracted months long debate that centered on existing revenue streams, people got behind it and delivered a thoughtful and well presented agent-based pricing model. and then abandoned it.

This realization helped me understand the human psychology of decision dynamics more than anything else. People, rational and educated people no less, have a tendency to overvalue the thing they already have relative to the thing they are moving to. Looking at the revenue impact of customers moving from high price points to lower price points that are consumption metered misses the point that protecting the existing revenue is not the strategic priority. growing the business is. The risk in allowing the compromise to be driven by existing customer dynamics is that it is is encapsulated by the saying “a camel is a horse designed by committee”. so much gets compromised in order to protect something that you end up in a position that really isn’t much different than where you already are.

When you push out tough decisions that will ultimately never be made with perfect information you are wasting the one resource you will never get more of – time. Assumptions have to be made and decisions fully committed to, the consequences of failing are serious but equally serious consequences result from failing to act when action is precisely what is required. If the decisions and commitments were easy they would already have been made, the fact that teams struggle with tough decisions is not the exception but when you know with certainty that what you are doing today is not optimal and within your capacity to improve, there is no excuse for pushing it for the sole reason that doing nothing is easier until the point when you literally have no choice but to change.

Startup Lessons: Board Management

This is the 5th installment in the Startup Lessons series I have been writing in the wake of my experience with Get Satisfaction. This one will certainly inspire a lot of head shaking around the table as anyone who has been involved with a startup can relate to this.

To recap, here is the series thus far:

1) Hiring
2) Dynamic Org Structures
3) Product First
4) Marketing

5) Board management: My point here is not about criticism of investors because at the end of the day what investors provide above all else is access to capital, and point in fact their motivation is ultimately pure, which is they are in it to make money. Clarity of purpose is really a blessing but as anyone who has been involved with venture capitalists from the perspective of a startup can attest, there is a lot of complexity.

Investors do not do that much to help a company operationally, despite what they may want to believe about their contribution. They are a sounding board and provide critical objective voice on strategic subjects, but an investor is far too removed from the day-to-day decision making to be useful in an operational capacity, and if they are involved in the day-to-day then the are no longer simply investors.

Where this all comes to a head is when a company is facing headwinds. People in general tend to want to simplify things down to the just one thing moment and any problem set in the modern tech startup that can be distilled to just one thing at it’s root is an exception if there ever was one.

An example of this is having a board member say “well you should just charge more” without first considering the competitive dynamics of a market, or the product and customer perspective on value. If the challenge of running and growing a business like this is easy then anyone could do it, so for all the investors reading this right now, it would be helpful to acknowledge that people running these businesses have more knowledge than you do about the business itself. As much as you want to pattern match, that isn’t always helpful because no one person has experience with all the patterns that can be identified and patterns of the past are not indicators of future performance.

Companies and markets are highly volatile multi-variant problem sets that defy simple explanations and recommendations. What investors across the board should be doing in environments like this is helping clear the fog and applying intellectual horsepower where it is really needed, the planning side of the business. Building good forecasting models against the backdrop of fast changing performance factors is no small task, and planning is 1/2 of the planning/controlling responsibility a team is responsible for, but typical boards end up spending a lot of time on the controlling part of the equation.

Furthermore, when it comes to planning the typical startup has the additional dynamic of being not well equipped to push back against investors who have an expectation of growth rates in the early stages that well exceed 100%. This is where the multi-variant challenges rears it’s head, which is that no market is static so while you are building a product, growing a customer base, facing new competitive threats whether they be other startups or incumbents who have identified you as a threat, and then hiring people to support growth in the business. well a lot of things can derail the best laid plans.

Managing for growth vs. managing for margin enters the discussion because investors want to manage cash efficiently while also proving the growth capability of the company in order to get to the next stage of financing. There is little room for error here and the capital markets are far less forgiving of pivots than they were 2 or 3 years ago.

I also want to talk about shareholder interests and the Board members positions are, typically, preferred shareholders. What is really lacking in tech startups today is a strong voice for common shareholders, the employees, in private companies. The executive members of the board are supposed to fulfill this but all too often their voice is not equal to that of the other board members when it comes to shareholder classes. Preferred shareholders are inherently conflicted in this regard because they enjoy advantages such as liquidation preferences and anti-dilution protections that give them a built-in advantage over the common class of stock.

The modern board needs to cast off the standard operating procedures of the past, in the process becoming more inclusive of shareholder classes as opposed to representing the preferred shareholders first and everyone else second. Board meetings require great structure and strong leadership, and board members need to accept that there will be pushback and dissent based on facts and information that they may not see plainly relative to executives of the company.

As a startup you have a choice, you can be subservient to the board, bending to their pre-determined points of view, or you can be a strong force that counterbalances the parochial interests and instead favoring the greater good. Lastly, boards should be focused exclusively on the substance of the company and less about the personalities of the board members and the executive team.

Startup Lessons: Marketing

This is the 4th installment in the Startup Lessons series I have been writing in the wake of my experience with Get Satisfaction. We are getting into the topics that are much more specific to Get Satisfaction, therefore I have an obligation to redact certain details that are confidential however in the spirit of shared learnings I will cover as much as I feel is appropriate.

To recap, here is the series thus far:

1) Hiring
2) Dynamic Org Structures
3) Product First

4) Marketing. and all that implies: What can you say really, if there are 2 things that a startup in tech should be good at, it’s product and marketing, everything else succeeds or fails on the basis of being good at those core activities.

Get Satisfaction was blessed – and I mean truly blessed – with the kind of brand that most companies in the space would kill for. It is at it’s core an aspirational brand message about all of the promises that the social technology revolution has presented to companies as they remake how they interact with people. I really loved telling the story of GS for this reason alone, it is about what is possible by empowering people, customers and employees, rather than saving a few dollars here or picking up some extra revenue there.

The problem with aspirational brand messages is that if you don’t back it up with hard hitting marketing that converts goodwill into revenue, you are wasting it or worse, educating the market about how to evaluate competitive products.

We did very well in 2010 and 2011 with a highly differentiated creative marketing strategy but then we had our VP Marketing leave just after the B round closed (awkward.) and the role went unfilled for the better part of a year. Actually, it was worse than that, we had a consultant that one of our investors recommended and that was a disaster that resulted in a botched website project, what I thought was a stupid book project, and a lurching repositioning of the company to traditional enterprise software. Disaster.

The last issue is particularly sensitive for me because at the time I was responsible for the freemium business and nobody was trying to understand what this part of the business needed in a website. The result was, predictably, a website that catered to the old world traditional call-to-action of “call us and talk about enterprise”. Not surprisingly, the new customer acquisition ramp for the monthly subscription business flattened out dramatically almost immediately when this site launched.

We did eventually replace the marketing consultant with a VP Marketing but by then the damage was done. Brand voice was lost, our demand gen was wonky because of the confusion we were creating around our market focus, and “shit wasn’t getting done”. Remember what I wrote about in my first post in this series about hiring and how bad hires are a cancer?

Even after putting in place a full time marketing leader things didn’t really get that much better. I think this goes to the dynamic that executives in this industry, and others for that matter, exhibit which is in times of challenge they go back to what they know. I do not believe that Get Satisfaction should have been directed at large enterprise sales opportunities as a primary revenue source, but that’s what happened and our marketing reflected that in spades.

My stated preference was to point the marketing at the upper SMB and mid-market buyer, also called the departmental buyer, and qualify 100% of the business off what was coming in from the web funnel. The is what companies like Yammer, Hootsuite, and Zendesk have done, they drive the traffic to the site and skim the enterprise opportunity funnel off the top. The objective in this approach is getting people into a rich product experience and then converting them or upselling them into an enterprise buying lane, rather stating a preference or making them choose up front.

Succeeding at zero to low touch web direct sales models is not a challenge to take lightly, it requires an intense focus on web traffic generation and instrumentation of assets for funnel analytics. It also requires that people think outside of their comfort zone of campaigns, PPC, webinars, and landing pages. in fact I feel more strongly than ever that in order to be successful with this customer acquisition model that tech companies need to act more like media companies with a distinct editorial agenda and content strategy. For this kind of model to work you need a lot of traffic. paid, sponsored, and earned traffic, all of the above.

Even if we did all that I am not sure we would have been successful because at the core we were underinvesting in marketing, both people and spend. However, it is hard to fault us for not investing more in marketing because we clearly had not solidified the Magic Number math that is essential for justifying increases in marketing spend.

There was a bigger issue with the marketing performance that all companies need to be aware of. When you marketing team has as a primary objective enterprise demand generation, well what they measure is enterprise lead generation. Meanwhile, GetSat also had a line of business that was dependent on getting people into the website and into a product experience that converts into a monthly subscription relationship, therefore we had a real sync problem that would not have been resolved with more money thrown at it.

When you measure your marketing spend solely on the basis of lead generation, the slippery slope is changing the definition of lead to juke the stats and show improvement in the specific activity you are measuring. This is something I will forever be aware of, measure the result instead of the activity.

I will close by highlighting something really special I saw happen at Get Satisfaction. Based on the early product work and what we discovered as the first iterations of the business came together, it was clear that social technologies were driving a consolidation of the customer lifecycle that all companies are subject to, with customer support and marketing coming together for the purpose of serving the customers you already have while using that momentum to acquire new ones. Whether or not we did this well in the business is not the point, the fact remains that we identified an important shift in the market well ahead of competing companies. While we did not fully capitalize on this, in no way does that take away from the innovative work that was done to develop a differentiated marketing story to compliment the product.

Startups Lessons: Product First

I have covered a couple of topics in this series, the first being hiring the best people and the second organizing for success based on the attributes of the people you are hiring.

Today I want to go into territory less obvious because let’s face it, hiring the best people and creating conditions where they can succeed is the kind of startup advice that is squarely in the “stating the obvious” category. This next one is also obvious but has so much nuance that it deserves attention.

3) It all starts with the product: Companies can overcome a great many challenges with band-aids, duct tape, and bailing wire. but one aspect of a startup and/or growth stage company that cannot be glossed over is the product. It all starts with the product. Marketing and sales will be amplified with the right product or victimized by the product that falls short, and not investment outside of product will overcome that reality.

Putting forward the right product for the market is absolutely key, but don’t confuse that with putting forward the BEST product. Ultimately you need to achieve best in class but if you try to achieve that in the first iteration you will be hopelessly late. and more on point is that the best product is a result of what you learn from your customers, not what you think you should be doing.

If we did anything egregiously wrong at Get Satisfaction in the 2010-1012 time period it was to under-invest in the product with the assumption that the existing product was good enough. The early architecture conditions created what engineers called “technical debt” and that effectively became weaponized to stall significant investment in fixing the old in order to build the future. Compounding the problem is that we became victim of agile engineering in a poorly structured development organization where there were no clear teams focused on building to the user archetypes and investing in the platform.. engineers paired would jump from frontend to backend erratically at each sprint iteration.

We failed to accommodate the changing demands that are a result of market, competitive and customer dynamics, all of which conspire to put you at a competitive disadvantage when you don’t have a market footprint that legitimately reclassifies you as a platform instead of just a product. Feature development is a result of the demands of the biggest customers with the loudest voices, the platform evolves at the rate which new customer features are required, not anticipated mind you, and lastly the API development is focused on what internal developers require rather than what the partner ecosystem is asking for.

In the absence of an org structure that creates a constructive tension between the product management and product engineering sides of the house engineers will work on things that are interesting to engineers but fail to advance the business. This is where we really erred in our approach, engineering and product management all report up to the CTO, and the company fundamentally underinvested in product management as a functional area.

In all fairness, the fact that the underlying product architecture was constraining product development had to be dealt with because in order to build better product their needed to be a foundational renovation of the substructure, and after years of kicking that can it was finally addressed in 2012. With that in mind I can’t help but remain conflicted by my view on this, either we replaced the architecture and built little in the way of new product or we focused on cobbling together new functional features that satisfied immediate demands while potentially sacrificing long term gains. and by framing it as a binary choice I am perpetuating the problem in many ways. We should have been able to do both.

My experience at Get Satisfaction has left me with a strong appreciation for the role of product manager, which as many in Silicon Valley will point out is the most powerful role in any company. While true, this oversimplifies the challenge of the role, which is not to wield an autocratic sense of control over product direction but rather be an effective consolidator of many sources of information, from all corners of the company. Good product managers hold dear a narrative about the market that is rationalized with the realities of running the business and they are always a half step ahead of the rest of the company in bringing product capability to bear that is great than the sum of a bunch of features. Lastly, a foundational skill of great product managers is GSD.

Startup Lessons Learned: Hiring

I spent 3 years at Get Satisfaction, going from around 10 employees to 70’ish at the peak. Leaving was not an easy choice but after 3 years I needed to do something different, not better just different; I detailed my reasons and next move here. After much contemplation I decided to write a blog post in an effort to document my lessons learned about what worked and did not, in an effort to hold myself accountable for personal and professional development. I wrote it and posted it, then immediately took it down because I realized this was far too long for a single post. so instead I rewrote it as a series of posts, the first of which goes up today.

As you might imagine, I learned about more than just a business in my time at Get Satisfaction, and with the benefit of hindsight I was able to reflect on the subtle but critical lessons learned through mistakes and successes over my time there. This is not an easy series for me to write because while the thoughts are crystal clear I don’t wish to reflect poorly on my former colleagues, therefore take what I write with the intention it is written, that of self-reflection for the purpose of learning and self-improvement.

1) Hiring decisions will make or break you, sometimes all at once: The axiom that great companies are built with A team players could not be more true. There are 2 dimensions to this that are worth highlighting, hiring the best people and then structuring them to succeed, which will be addressed in a later post.

It’s not my intention to backstab people after the fact but the fact remains that we hired some people who were simply not up to the task that was in front of us. A worse failing than hiring the wrong people up front was keeping them in place after it became evident that they were not succeeding and taking the rest of the company down with them.

This dynamic is interesting to explore and reflects the challenges of hiring good people in Silicon Valley but more critically reflects the sense of ownership that the executive management team has over top level hires, and the subsequent desire to not have bad hires exposed for what they are, a failing of process and judgment. It happens, everyone is human and in the final equation it is better to just acknowledge a bad hire and move on rather than stick with someone who will impair the business the longer they stay in place.

A bad executive hire is like a cancer and the treatment for a cancer is to get rid of it, not get rid of it and replace it with something else, just get rid of it. I wrote a post about fear shapes personal behavior that was directly in response to my frustrations in dealing with a colleague who was failing in his role.

What makes a good executive hire? If I had to pick one thing in particular I would say good judgment is what is missing in every executive hire gone bad. People skills, execution capability, cross team collaboration, and many more skills essential for the modern executive can all be learned and adapted to different teams, but good judgment is as much a function of DNA as it is education and discipline. Good judgment trumps all because it brings with it focus, confidence, and optimal outcomes relative to execution effort.

Staff hires are no less critical and again the tendency to stick with people who are not A or even B team quality just to have a body in place reflects the challenge of hiring people in the Valley. However the fact remains that if you have a D team member and your aspiration is to bring them up to a C level, what exactly is your strategy? A and B quality people don’t just contribute disproportionately to the success of the company, they inspire other people of similar quality to join as a result of them being there while D quality people drive away the highest quality people you will attract.

In the spirit of full transparency and disclosure, hiring is something I do not consider a particularly strong point in my favor. My personality tends to attract to people who have similar “strange attractors” in their own character and for better or worse I tend to evaluate people on my gut level reaction to them. This has made me more attuned to my own judgment and forced me to be very strategic and deliberate about hires, at any level. Time will tell if I am getting better at it but without a doubt I am more conscious of the consequences of bad hires and looking beyond resume and personality when considering prospective hires.

I have 7 additional posts to publish over the coming weeks, detailing everything from fundraising to product/competitive strategy to managing your board of directors. Stay tuned.

Building Feedly, An Altnerative Approach

There is something really important in this post on the Feedly blog about how they launched their company and approach to building out the product. Along with the succinct description of what it means to develop and launch a product using an agile process is the indictment of the stealth-and-hype approach startups have embraced in years past as a calling card for venture capital.

The benefit of this approach is that you put the customer and your metrics at the center of your development process: as a result you get constant feedback and can use that feedback to both improve the idea/positioning and the product. It will also help you iterate and add a lot more polish to the product. Finally, it will help you have a core user community and measurable understanding of their behavior – something which is really important if you are interested in raising VC money.

[From An Alternative to the TechCrunch 50 Model « Building Feedly]

In a nutshell the VC industry is in a bind of epic proportions right now as institutional money, the bulk of money invested in VC funds, is deciding to sit this one out and M&A and IPO activity is trending to zero for the foreseeable future which has the effect of dramatically reducing any opportunity to generate returns for active funds.

Perhaps more significantly, venture capital is on average a 9-10% return as an asset class which means that putting your money in venture funds is no better or worse than what you would have earned on real estate, equities, or any other of a number of different investment options. Venture capital is a cottage industry built on the perception of outsized returns that very few funds actually deliver. I have spoken with a frightening number of individuals, who are LPs in name brand funds, who are questioning the point of funding their capital call commitments, which in effect is capitulating on venture capital in general because defaulting have consequences beyond future investments.

The holy grail of venture capital is the “10 bagger”, also known as the “home run”, and for good reason because venture funds simply can’t survive on a steady diet of singles and doubles because the losses accumulate over time to wipe out anything other than monster gains. Entrepreneurs essentially understand this and have crafted, although not always with deliberate care but rather intuition, a startup process that swings for the fences. This momentum based approach, as in “getting the flywheel spinning” and all other manner of creative metaphors, is designed to catapult a promising startup into the consciousness of potential investors and acquirers, which has the effect of depriving potential competitors, large and small, of the oxygen their require to establish a base in the marketplace.

Furthermore, by being in the rarified air that white hot startups reside in, investors tend to overlook shortcomings and deficiencies by overweighting marketplace momentum and using this as evidence that “it’s the team that matters” in their investment review process. The competitive dimension among investors comes into play here as hot startups benefit from the fear that a competing investor will be first with a term sheet, offer a better deal, or promise a more prestigious syndicate.

Interestingly what has happened in recent years is that by tailoring the startup launch process to investors and the Valley echo chamber what startups, and their advisors, have done is raise the bar to levels that are almost impossible to achieve. Saddled with institutional attention deficit disorder (IADD) the typical Valley pundit and investor is on to the next shiny new thing before any real and meaningful growth is achieved.

It’s a cliche to suggest we need to get back to basics but essentially that is what Feedly is documenting, an approach that values focus on customer experience first and uses that to lever up interest among the various constituencies that startups often court first. Yes it is stating the obvious but sometimes we all need to be reminded of the obvious.

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