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Anticipation and resiliency

February 3, 2009

Big and unexpected changes are frequently less “unexpected” than we would like to admit sometimes, whether they occur in our personal lives or in our professional lives.  Sure, there are true shocks whose probability of occurring are so slim that they’re hard to anticipate, but much more often, the times when you have to confront an unpleasant change is something you knew was coming.

Henry Blodgett wrote a sober and ego-free article about why market bubbles happen, and will continue to happen.  A key point he makes is that bubbles happen naturally, for factors that in the long run will never be fully predicted or avoided, even though they may be anticipated.   He quotes investor Jeremy Grantham who sums it up well.  “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term.”  The anticipation referred to here is anticipation of a bubble bursting, and the fear of the loss that will result. 

I love Henry Blodgett 2.0 (his role Merrill Lynch analyst was version 1.0).  He’s honest and humble, in a “serious scar tissue” kind of way.  I found his article refreshing because he was so direct about knowing the housing bubble was there, but that awareness provoked only a messy and clumsy understanding about what he should personally do about it that was best made sense of only with hindsight.  But by anticipating it he was able to see beyond the here and now, to the more pleasant and hopeful medium term, regardless of his near term decision making or consequences.

Early in 2008 we were advising our companies to expect a very hostile fundraising and operating environment in the second half of the year.  All we knew was something bad was coming, didn’t know the magnitude of the shock or the timing, just that it was coming.  What did we do differently?  Well, a lot, and nothing. 

Our companies applied a lot of scrutiny on expenses and revenue, for sure.  But they also continued to sell aggressively and keep product development schedules tight. 

So when October happened?  That was beyond bleak, but the companies in our portfolio methodically revised 2009 plans, optimized around a different set of variables (cash conservation, getting to profitability), and they addressed the very unpleasant tasks of expense and headcount reductions.  The entrepreneurs I was meeting with who were incubating new companies or raising money? They had a tough time of it, but by November, they were back, also with revised plans, showing how they could envision success even with so much less of everything to count on in their plans and assumptions.

Anticipation of an unpleasant outcome didn’t inhibit the responses of those of us in the startup community, anticipation enhanced the response.  It helped sharpen the focus more firmly on the fear of not succeeding, and fostered the resiliency we all need so very badly now, and enabled us to see beyond the near term. 

Over the holidays I confronted an earth-shattering shift in my personal life, and an unpleasant one I’d anticipated for many months.  What did I do?  Well, I focused myself on how to work through this, and to understand that the medium and long term are where to apply my focus.  Did the anticipation affect me or my response?  I think it did, I think it helped me move more quickly to focus on where success could be found beyond the near term. 

I find life in the world of startups fascinating and inspiring, where productively making use of anticipating an unpleasant outcome, having it serve as a means to provoke adaptability, provide a “stretchiness” to your thinking and ability to respond all comes so naturally.  We’re in a world where resiliency will matter a lot, and where for the foreseeable future there will be much to anticipate, a lot of it unpleasant.  But in the medium term there is much inspiration and excitement to be found, and resilience will help speed us from here to there.

[the holidays and ensuring rapid start to the year took me off line, blog-wise, so I am glad to get this first post off for the year, and look forward to resuming the active pace of November and December.  Thanks to all of you for your patience!].

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Posted in Business planning, Failure, fear of not succeeding, Intellectual curiosity, meaningful failure, Success | 1 Comment »

Why the numbers in your operating plan are wrong

December 9, 2008

Startup companies begin life with operating plans – the spreadsheets that outline how revenue will be generated and expenses will be allocated. But in the end it’s all a very well calculated guess. So much is unknown.

A phrase I use a lot when I meet with startup companies is “the only thing we know for certain about your plan is that the numbers in it are wrong”.   It’s a disarming statement, it generally sets everyone at ease.  How could you possibly know what your revenue will be in month 33, when you haven’t even shipped your first product?

And it’s true, in a good way. It’s not the values in the cells that are important, but the set of assumptions and principles that underpin the numbers in the cells that are. I mentioned this in my first post. It sounds and is obvious.

Why bother with the plan? Some CEOs I meet take this path, and use their operating plan as a “check off the box” deliverable on the way to getting funded. But if you go there I think you blow right by critical insight about your business. You need that plan, even when you are far off it, to help you understand which assumptions are still valid, and which may need to change.

An example of an assumptions is “we’ll have larger companies distribute our product for us, and each company will deliver 50,000 end users to us”. That’s important to remember, especially if after six months, they’re only delivering 5,000 users.  It’s even more important to understand if this is just a factor of how long it takes to ramp demand (in which case that assumption needs scrutiny) or of it’s because that’s all the demand these companies can produce for you (ditto).

Your plan is a tool that has a limited useful life, at some point your business (and assumptions) change so much you need to pull out (or rather create) a new one. The right tool, for the right circumstances matters, a lot.

If the right tool is critical, the right mindset produces it. Successfully running a startup requires a resilient open mind and cultivating a sense of intellectually curiosity. You need to want to understand the “why” and “how” the numbers in the cells fail to match reality.

So, examining the failure of your plan, and finding the meaning in the failure, enables you to construct new, more valid assumptions, so you can discard the old plan and create a new one. This can be harder than you think, the plan you have now is was slaved over, polished, and is so “done”. But this new plan has a clearly defined lineage connecting it to the old one, and is the new “right tool” for your business.

Missing your plan is different. Plan “failure” is fundamentally different from missing your plan. Missing your plan comes from poor execution, poor discipline and poor vigilance about understanding why you’re not performing to your plan.  It’s still failure, but failure where no meaning has been examined or made use of.  It’s where you end up using the wrong tool, and not understanding, or even knowing, why you need a new one.

Missing your plan is like trying real hard to use that shovel that worked so well to dig the foundation of a house you’re building to hammer the nails into the framing. Sure it might work, for a while, but over time it’s just not going to do the job you need done. Missing your plan is insisting that you just hit the nails harder and faster with the shovel, and not realizing you hold the wrong tool to begin with.

This is why one of my partners coined the phrase “teams that miss plans generally continue to miss plans”. It’s because they don’t realize its their tool that’s wrong, not their intentions or efforts.

The best CEOs I work with are wonderfully disciplined about creating and appropriately discarding their plans. They measure their performance relative to their plan, and they’re vigilant about clearly delineating the key assumptions supporting the plan. When they’ve measured enough to know the assumptions are no longer valid, they revise their plan, and gladly leave that old plan behind. It becomes all about their new plan, and new tool.

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Posted in Business planning, Failure, Intellectual curiosity, meaningful failure, Success | 7 Comments »

How to make headcount reductions without killing your company

December 1, 2008

A friend of mine forwarded me an interesting article from Wharton about how companies are thinking through headcount reductions, pointing out how CEOs and boards in smaller companies frequently have more flexibility in how they reduce headcount.

Headcount reductions in startups are tricky; it’s an exercise in figuring out “what level of success can I still create with fewer of us” – you’re lowering the growth rate from some high double digit number to a lower double digit number – by other measures, this is still great growth.

Yet, in a small company, the people create the whole alchemy of the culture that is such a big factor in success, you don’t want to fatally harm that. At the same time, running out of cash will be fatal too. So, to conserve cash you’ve got to reduce heads. Here are five ways to do this without killing the company and its culture.

· Establish a planning horizon. If you know you can’t get to cash flow positive soon, then the planning timeframe is “when you do you think you can and should raise money” which is a guess about when the vc industry will get back to normal and a guess about what the operating milestones you’ll need to hit to get someone to invest. You want to end up with end up with as much cash as possible (in case you’re wrong about the planning horizon), or enough to fund the company to a sale (if the business isn’t on a path to recover the original growth projections/potential).

· Assess the horizon’s environment. This is both the environment you think you’ll be operating within, and your ability to operate reliably within the environment. Be sober about what expectations you have around revenue, customer acquisition, and product development. But make sure you keep the right core set of people who can sell to and support customers, and keep product development moving forward. You can’t afford to be very wrong here. If you miss your revenue targets, all of a sudden your cash-out date can come rushing at you like a locomotive.

· View this as an opportunity, sort-of. Headcount reductions are an opportunity to apply a scalpel to underperforming businesses/functions/people, and can be a productive means for clearing out roles or functions that were already identified as being questionable. So while these cuts are hard to make, they end up not being surprising. A lot of times companies convert full time employees to contractors, which is easier for a startup to do than for a big public company.

· Size the magnitude of the expense reduction. In a startup, this number is arrived at through equal parts art and science. You need to be thinking about your math around preserving the essence of your culture, keeping enough forward momentum for key initiatives (sales, products), and retaining who holds the most DNA relative to those initiatives. Iterate (a lot) with your CFO or Controller and you’ll get a feel for whether the number is 15%, 20%, 25% or more.

· Don’t do this in a bubble, think empathetically. To me, the most thought provoking sentence in the article was this one: “(Headcount reductions are) driven by the executives’ view of the way things work, and the executives, frankly, think that everyone thinks like them.” The discussion and thinking done by the board and the CEO needs to be done cognizant of the tradeoffs and values of the employees. What will work for them, and for the company.

This is as much about embracing the fact that much is unknown, and there is tremendous value in iterating, combining thoughtful intuition with data-driven analysis, and giving yourself the freedom to think outside your personal point of view.  Headcount reductions are in a sense, meaningful failures, perhaps of the macroeconomic conditions, perhaps of your own making, but from these unpleasant circumstances, value can be created, and opportunities siezed.

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Posted in Business planning, Failure, meaningful failure, Success, Venture capital | Leave a Comment »

Why “I don’t know” is a great answer

November 27, 2008

Here’s a news flash: You can learn a lot about someone by asking a question and seeing how they answer it.

 

That’s so obvious, and we’ve all heard it a million times. I spend a lot of time listening to pitches from startup company CEOs, as well as spend a lot of time with the CEOs of my companies, and in both cases, end up asking a lot of questions.

 

The questions, that’s where the really hard part of making productive use of time is. Anyone who has the ambition and the drive to start a company is generally smart, and has spent so much time on their business that they’re awash in information about it. Anyone who is CEO of a startup is the same way, except they’re not pitching a vision to you, they’re living and managing it. In either case, it’s their job/role to have anticipated the key questions, and have the answers to them.

 

So, it’s hard to ask questions that dig below the surface, that reveal something that hasn’t already been thought of. If you’re lucky enough to have thought of one, it can accelerate everyone’s understanding of the business and the people running it. Conversely if you’re the CEO, when those questions are asked, it will put you in a potentially awkward position. Do you have an answer, and should you have had an answer.

 

This is true about life in general, so while what follows is specific to my job, I find it’s the same calculus with friends, spouses, children, parents….

 

I love it when we get to that juncture and the CEO says “I don’t know the answer”. It’s even better if they then say “there are a number of ways to try and answer it, let’s start….”. Now you’re about to take a trip to a very rich landscape indeed. A landscape where you’ll find out something potentially valuable about the company, about the CEO, and about your ability to work together to solve problems.

 

But there’s another direction that frequently gets taken. When the CEO produces an answer. I choose that verb deliberately. The answer is produced right there, like a big patch applied over a void. The void is hidden, not explored. This is where ego and insecurity hijack intellectual curiosity and drive it right past a tremendous source of opportunity.

It’s where the person being questioned feels the need to have an answer for every question, that somehow exposing that they don’t know is bad or weak.

 

Once you become familiar with the “answer for every question” mentality, it becomes a warning sign of significance. I hate it. It spoils all the fun. Worse, it destroys credibility at an alarming pace, but in a very quiet and nuanced way – because you can’t possibly have all the answers in a company that’s still more vision than substance.

 

And it turns out, the people who most often fall into this trap are the folks who have left the large technology companies to start up a company. It reveals the culture they had to navigate through to succeed in the “big company” world. The problems generally were so well understood you could have and were expected to have all the answers. And if you didn’t, you could “patch and pivot”, loop back, and get the answer – accountability was so diffuse, and decision cycles so long.

 

But what gets missed here is that the answer isn’t important, at all. It’s seeing that juncture where you don’t know the answer – that’s the super valuable piece of information. That may tell you about a core set of assumptions that are off, or an area of opportunity that’s been missed or overstated.

 

I love the landscape that is revealed in not knowing the answer. I love working with people comfortable with traversing it. I love it when a CEO sits me down to talk through a tough problem, and will state the truth: “I know I’m missing something here, help me figure it out”. When I hear that, I know the fun is about to begin.

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Posted in Business planning, Intellectual curiosity, Self-knowledge, Values, Venture capital | 3 Comments »

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