Archive for the ‘meaningful failure’ Category

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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 »

Five ways you can tell if the VC you’re talking to is being straight with you

November 28, 2008

One dose of humility I try and keep at the front of my mind is that before I went into venture capital, I was in startup companies, and I had to raise money myself. This means I also had to develop and hone the pitch deck, and meet with venture capitalists.

It’s a good place to put your mind when you’re hearing a pitch from someone. To remember what it felt like to try so hard, and be so eager to hear the good or the bad, to get some feedback, some guidance, some hope.

But something I think we’ve all learned as VCs is how hard it can be to say “no” to someone, and to do it in a way that respects the entrepreneur’s role in the transaction. We look at 400+ deals a year, and fund fewer than four. Saying “no” happens a lot, and happen for a range of reasons, generally not because the company is bad or the idea is bad, but because to fit through our filter, a whole lot needs to line up really well.

So, if you walk into your meeting with a VC cognizant of the fact it’s 100 times more likely you will be turned down than not, well, you better get something back for your time, don’t you think?

So here are the five ways you can tell of the VC you’re dealing with is NOT being as fair with you as you’re being with them:

  1. They took more than they gave in the first meeting. VCs see tons of deals and have relevant experience. Meeting with you should be an opportunity for them to help you. If they view the meeting as a way to feed them, time to move on.
  2. They’ve met with you more than two times without setting expectations. Remember, your time is valuable, and you can’t waste it with folks who can’t articulate a process and put you on a timeline. The process can be “Let me track you for the next year”, which tells you no funding in the meantime. But if you’re trying to raise money now, then you need to know within two meetings if you’re on a path to that, and where that path leads.
  3. They want you to extract all the risk. It’s totally chicken for a Series A VC to tell you they’ll be ready to invest once you’ve proven the business works at scale. Go to a bank instead (assuming you can find one that is lending).  It’s fair of them to ask you to show you’ve validated the value proposition and core assumptions, but that’s different.
  4. They want someone else to lead. What does this mean? “I will give you money if someone else says they will invest first?” This is kind of helpful, but in the end moves you not a whole lot further down the road.  You need someone to lead the round, and firms that wait for another to lead are making essentially a non-commitment, and are leaving a great deal of work for someone else to do.
  5. They didn’t tell you why they said no. This is really important. VCs pass for specific reasons that they discuss in their Monday meetings. Reasons might be “the team has never done this before” or “I think this is a feature of someone else’s platform”. Don’t you think this is important information to know if you’re the CEO? Yeppers, it sure is. You’ll know when you’re dealing with a quality VC when they tell you why they passed, because they know this is information that will help you.

So, a quality VC understands your time is valuable, that they’re in the business of making risky investments, and most importantly, that “no” is an opportunity to impart advice/feedback to help the entrepreneur raise money from someone else where the fit is better.  Whether you raise money from a particular VC or not, it’s the process of the interaction that’s valuable and important.  Success or failure has meaning here, and the high quality VC firms not only acknowledge this, they focus on it.

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Posted in fundraising, meaningful failure, Venture capital | Leave a Comment »

Meaningful Failure

November 27, 2008

In my world as a venture capitalist and a veteran of four fairly successful startup companies, I see and have experienced failure, a lot. My colleagues and I talk about it a great deal, in familiar ways and in ways that assign value to failure that occurred in a meaningful way. With the big ideas and within the teams that build companies around these ideas, modest success is simply not valued as highly as failure that occurs while attempting something bold, new, and ambitious.

Outside of my world, failure is spoken of in ways that make me think the people doing the talking view failure more superficially than we do. It’s a pause on the way to success, something you move on from. It’s as if failure is treated as a currency that gets spent on the way, but it’s a currency that’s been in circulation too long; it’s grimy, and you don’t really want to touch it if you can help it.

In the ”sky’s the limit” world of startup companies it’s all about being in a place where you’re brave enough to go do something new and bold and the only thing you are scared of is not succeeding. My colleagues and I frankly spent less time worrying about the failure side of our businesses than we do understanding what the obstacles to success are. We know failure is going to happen. In those early days of our companies, in fact, one of the few things we know is that the plan will end up being wrong, or at least that the numbers in all those cells will be. But understanding why they are wrong – examining, seeking the knowledge of where we failed – is how we find the path to success.

It’s not that we’re in love with our failures, but we do have meaningful relationships with them.

Meaningful failure. It’s not just where things didn’t work out. It’s failure that happened even when you were really, really motivated for and focused on success. It’s that confluence of ambition and reach, hard work and commitment, preparation and talent; where all of that comes together, and it’s still not enough.

It’s why most of us have an iPod while we also still use Windows computers; Apple sure failed to get the Mac mainstream, but learned from that when they entered the music and phone businesses.

But this is a really big failure. What about the failures we all experience in our jobs and personal lives that happen on a very human scale. You can have ambitions, you can place yourself in uncomfortable and vulnerable positions in order to achieve something of importance to you, and still you can fail. In fact, if you accept, even embrace failure, then about all you can control is how you respond to it when it happens, and what you take with you to as a result of it.

I like the analogy of failure being the lubricant in the engine. Without it, the engine stops. Without the meaning from the failures we create and encounter, the engine of success will stop. Or rather, when success happens it will be a lot smaller. Failure can tell you why what you hoped would happen didn’t but also why something like it, or better, can and will. If you’re not experiencing failure, then, perhaps you’re not hoping with enough ambition. Embracing it, anticipating it, being resiliently open minded, well, that’s just being a good steward of a high performing engine.

That’s why when I describe what it’s like to be in a high octane startup I refer to it being in a place where you remain calmly focused on the very few reasons why you will succeed and not on the seemingly thousands of reasons why you might fail. You’re striving for performance towards the big goal, not results of any specific setback along the way. It places you on the balls of your feet, not your heals. You know failure’s bound to happen, so lean into it.

It’s as simple as shifting your perspective to a “fear of not succeeding,” which is fundamentally, and in a very nuanced way so much different from a “fear of failing.” By focusing on what it takes to succeed, you can embrace the fact that there will and should be many junctures involving failure along the way. It’s the focus on success that enables you to get the big things done in life.

But embracing failure and extracting the data isn’t enough. You need a resilient, open mind to care for and make use of what you learn from your failures. Resiliency is important; it provokes a stretchiness and adaptability of your frame of reference and enables you to let go of that firmly held set of assumptions developed yesterday in order to embrace a better, more informed set today.

I like to think of my life as living in a continuous startup. At some point along the way, I realized that it’s at the moment of failure where the real meaning is, where you can figure out both what you are deep down inside and then how to be a different, more capable you the next time. That in order to be living a life of meaning and value, failure has to be not just acknowledged but embraced as the missing ingredient to success.

When you’re busy being focused on how you’ll succeed and failure occurs, it seems so much simpler to look at what just happened as fodder and information to take another run at finding out how to succeed the next time. It may be that the “next time” is the next iteration of the business you run at your company today or a totally different business at a totally different company. The constant, however, is standing at a juncture of success, open-minded learning, and meaningful failure and being ready to take the next step.

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Posted in Failure, fear of not succeeding, meaningful failure, Self-knowledge, Success, Venture capital | 3 Comments »

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