A VC in Vacationland

I’m Having an Out-of-Money Experience.

I recently saw this slogan(check out Winston Smith’s poster above) on a t-shirt worn by a bored looking guy in Rome, accompanying his well dressed(read:expensively) girl friend/wife/mistress, who was headed into Prada.

It made me think of fund raising by start-ups and the pitfalls of waiting too long to secure money to carry out business plans. I must speak with one entrepreneur per week who is having some sort of out-of-money experience.  Oh, I know, you are saying, isn’t this what start ups are all about?  Not in my book.

Too many entrepreneurs are in denial about money issues, always having a good reason why they should not worry about where the next payroll will come from. This is a big red flag for investors.  I will not invest in a company in money trouble under an circumstances, even one run by a good friend.  To me, having an out of money experience is a sign of poor management at best and incompetence at worst. 

Let me offer a few suggestions as to why this is no way to run a startup:

1. Lean & Mean. A well thought out business plan and budget, with early customer acquisition and pilots, rapid release of software and tight controls over unnecessary spending (you honestly do not all need Aeron chairs) is the best way to manage any startup.  Only about 50% of the startups I see have this discipline.  The ones that do are the most successful.

2. Clear Financial Options. No one can predict all financing needs in a small company, but you better have options available before they are needed.  Like that line of credit you never seem to get around to. Having cash available in advance is a lot cheaper than pleading with your bank in a money crunch, or having to give your investors 100% warrant coverage to get a bridge loan.

3. Dialog with Investors.  This should be a constant process in all stages of growth.  You never know when you will need them.  Take all phone calls from VC’s , banks, PE firms and other potential investors. Initiate quarterly discussion with the ones you like the best, asking them about the state of the market and what financing options are available.

Every startup may have a short term money crunch now and then, especially when receivables are late.  That is a normal and expected part of business, one that a carefully drawn up budget should be able to manage. 

Just be sure that the crunch does not happen constantly and end up turning into an out-of-money experience.

One of the most consistent mistakes among startup CEO’s is not preparing or over preparing the board in advance of meetings.

I recognize that there are two very different schools of thought on this subject–one school, which I’ll call "full and equal disclosure" ,says everyone should hear the same messages at the same time and them discuss things in a collective environment.  The other, the "schmooze the key players in advance" school says that the CEO should alert key Board members about certain topics and have a preliminary discussion as to how best present any issues, etc.

I have been members of both kinds of boards.

My take?  Either approach, taken in it’s extreme, is bound to cause problems.  In the "full and equal disclosure" board meetings, I have sat through sessions that wasted huge amount of time because one or more Board members simply had no idea what was going on in the company.  They were not that involved in the company and the CEO had not taken the time to bring them up to date prior to the meeting.  In the "schmooze the key players in advance" boards, I have attended meetings where everything seemed to be decided in advance by a few Board members and the CEO. You have to ask yourself if the potential liabilities from "hidden decisions" is worth the benefits of participation.

The optimal board management process should include both one-to-one discussions as well as collective decision making.  As long as everyone is treated equally up front and made aware of issues that may be contentious, collective discussions can occur among better informed participants. The problems arise when smaller cliques form and board decision making happens at the micro level instead of at the full meetings.

CEO’s need to treat all Board members as equal decision makers. Anything else can cause conflict and problems for the Board. Not prepping the Board at all creates the wrong environment for decision making, with too much time being spent of bringing everyone up to speed and too little on honest debate and decision making.

Many start ups, concerned about their investors and product delivery dates to customers, often neglect the social aspects of business culture.  Socialization is an important part of any business, and those that do it well are often the most successful in the market. Socialization also has two different, but interrelated aspects: externally with vendors, investors and customers and inside the company with your team.

The old adage about deals being consummated on the golf course, or in the case of my son’s "new age" consulting company, the paintball battlefield, is still very true.  People want and expect the intermingling of social and business activities in order to better know their business partners.  I am not speaking about the glad-handing sales guy who constantly calls you to take you out to lunch, blathers incessantly about how great his products are, and puts the hard sell on you before the check arrives. Rather, I am referring to participation in carefully arranged events where you can spend time learning about the lives of others in social settings. These are valuable ways to form a stronger bond between you, your customers, your Board and your investors. 

Similarly, developing and then respecting the right social culture inside your own company is also a key factor behind successful growth.  Most of the CEO’s in my investment portfolio used to work for me at Accenture.  Accenture was on a very fast growth track in the 1990’s and we were often hiring one or two new employees into supply chain consulting per week.  Integrating these people into the team was a major task of my managers.  We all spent many lunches and dinners together discussing how to integrate new consultants, better serve our clients, run the practice or just talking about families, sports or the world in general.  We held team dinners, did team days off site to build skills and just get to know everyone better.  We met after work at local watering holes to recap the day’s events.  Socialization as a mentoring tool was a big deal at Accenture and helped account for much of our successful growth over time.

Here are a few things to consider about being social in business settings:

1. Neglecting the socialization factor in developing your company’s culture can be a big mistake, leading to higher attrition, less dedicated employees and perhaps even fewer customers, if they think that you do not care about them as people. 
2. Having a unique culture people can relate to is also important.  My son’s company, Control Group, like many others I suspect, has a Blackberry culture.  A significant amount of business is conducted via the thumb club, but the Blackberry is also used to get staff to come down to whatever bar the partners may be hanging around in after work.
3. Customers and investors also want to be part of the company’s culture, albeit for different reasons.  Invite your Board and investors to company events, including annual customer meetings. Ask them to participate in client dinners so that potential customers can see the experts you have chosen to work with you.  Most importantly, go to lunch or dinner with members of your board or your investors often, so that you better know and trust each other.

I am a big fan of simple business strategies for CEO’s of start ups.

There is an apocryphal story about  Jim McNerney, now CEO of Boeing and formerly of 3M that he arrived three years ago at his new job with a single Post-It note (get it?). The note purportedly listed just three words:  Airbus, energy, and ethics. Not a bad strategy, considering Airbus was kicking Boeing’s butt, fuel prices were beginning their upward climb and Phil, the former CEO, was sleeping with his secretary and possibly defrauding the U.S. government.  It is now clear that, Post-It note or not, Jim assiduously implemented this strategy.  We can now give him an "A" in all subjects on his report card.  Boeing’s back on top and Airbus is looking like an also ran in the race for the next generation of airplanes.

Three words on a Post-It note, perhaps stuck to their laptop, can help keep a new CEO focused on the critical issues they face on a daily basis. This is not to say one should not work hard to fulfill all the promises in the business plan, which far exceed three simple strategies.  Rather, the smart CEO will condense all the thinking in the plan to the key elements that will drive the initial success of the business, just like Jim McNerney did at Boeing.

Cyrus Freidheim, CEO of Chiquita Brands International also had a simple, Post-it note strategy : "Commit & Deliver".  He took over a bankrupt disaster at Chiquita in the early 1990’s, facing huge losses, "banana wars" with the European Union, pressures from NGO’s about alleged employee abuse in developing nations, labor unrest, and to top it off, a shareholder revolt.  Using his simple, but very clear strategy, he turned Chiquita by 2004 into a successful and profitable company, one that has one the respect of many of the same constituents that wanted his head in the early years.

The most interesting Post-It Note strategy I have seen recently in the start up realm is: "sell the right investors, sell the right employees, sell the right customers".

This is not a bad Post-It Note strategy for a start up, one that keeps you focused on the critical elements of building a business that will make you, your team, and your investors proud.

One of my first summer jobs after I had a car and driver’s license was delivering pizza. I vividly remember my first day on the job.

I showed up at the door of my customers, often fellow high school students, with the pizzas and a big smile on my face.  They stuffed money in my hand, grabbed the pizza and shut the door in my face, rarely paying any attention to me or even thanking me for the delivery.  It took me a few deliveries to figure out that "it’s all about the pizza, not the delivery person", and to accept my fate as a mere conveyor of dinner.

Entrepreneurs often get carried away and begin to think that they are the raison d’etre for their company. Start ups can be the ultimate power trips for executives who have never before been entrusted with so much authority and money.  Well, hello, it’s the results (the pizza) that everyone is after, not you, genius.

Remember the business plan with all the projected revenues, profits, product development, and customer acquisition goals and promises?  That’s what your investors and team are waiting to see happen. They care little about you or your next career move.  They want the pizza, they want it hot and they want it when promised.

So how do you best avoid getting lost in a power trip?

Your best friends inside the company are your best allies. Make sure you tell them early and often to let you know when you are behaving like a jerk or worst yet, like a little demigod.

Second, don’t get carried away and try and manage every detail of your start up. Remember Jimmy Carter?  For those of you too young to remember, he was president of the US before Ronald Reagan.  He tried to micromanage the federal government.  Jimmy made a big mistake.  Most any organization or company has a tough time succeeding under micromanagement.  We ended up electing a president who didn’t try and manage the government much at all, just the big, global picture stuff (like economically defeating the Soviet Union).  He had much better results. Rather than micromanaging your start up, rely on your team to get it done, with your coaching.

Finally, keep asking yourself if you are doing a good job.  If you have any doubts, consult with your board and investors. Sometimes they are reluctant to say anything until it is too late to repair any damage.  Don’t wait until no options remain except to replace you.

Remember, it’s all about the pizza, not the delivery person.