Posts Tagged ‘Business planning’

Peripateia and the value of getting it wrong

March 9, 2009

One of my kids favorite TV shows is “Dirty Jobs”, and I have to say that what I’ve seen of it, I have liked, because the host Mike Rowe comes across as genuine and inquisitive.  He’s there to understand, not to judge.  That alone is a wonderful set of values for children to see and explore, regardless of medium.

So, when a friend forwarded a link to Mike Rowe’s TED talk  (embedded below) on the merits of hard work, my intellectual curiosity was high.  His job is to question assumptions and to get all of us to understand the real, human aspects of jobs that other people are unaware of or assume just get done. 

He talks about how he’s “gotten it wrong” a lot, but that getting it wrong informs the essence of what he does and how he does it.  He shares the meaningful failure he encounters as an apprentice on a sheep ranch where it’s his job to castrate the lambs. 

He does his research ahead of time and determines the “humane” way to perform said castrations (with a rubber band).  Then he gets to the ranch, and finds the castration performed there is quite different (with a knife, and more); on the surface a more grisly method than he or we could have imagined.  Let’s just say that this would make killing an actual chicken seem simple and an easy choice.

But in the process of telling the story he introduces the concept of peripateia – the sudden or unexpected reversal of circumstances or situation (remembering it from his days studying Greek classics).  What a wonderful way of describing meaningful failure. 

Mike’s castration dilemma is so clearly framed, his assumptions apparent (“the ‘humane’ way is the right way”) and then, through first-hand experience, not only questions that assumption, he casts it aside when he realizes the definition of “humane” needs to be questioned. 

He describes in twenty minutes what some entrepreneurs I know have taken years to internalize, and he draws on some key themes I’ve explored:

  • Getting it wrong is something you need to embrace, it’s what enables you to both perform better and to comprehend your purpose and goals more insightfully.  It’s meaningful failure from another point of view.
  • You need to know when to stop what you’re doing, and question your core assumptions.  This is hard, as I’ve mentioned in previous posts.  When he stops what he’s doing, he demonstrates incredible integrity and purposefulness.
  • Facing up to the unfamiliar, the unpleasant, is precisely what presents you with the opportunity for discovery and learning, and improving the quality of your results.  This is a benefit of chicken-killing I hadn’t thought about.

But the impact of Mike Rowe’s honesty doesn’t stop there. 

He has a transparent methodology (no takes, no scripts, it’s all real) that underpins the credibility of his “product”.  What I loved about this anecdote is that he even had to question that foundational element of his show; he had to stop the filming because his core assumptions about the subject matter were so precarious.   That takes experience and a confidence in your process and values.  He didn’t rationalize, he didn’t talk about the cost of stopping production, he just did it because he knew he needed to.

Back to peripateia.  That doesn’t exactly roll off the tongue, but what an elegant term to describe how you bring meaning to failure, from getting it wrong. and finding meaning from the doing.  I want Mike Rowe on the board of the next company I fund too.

The nuance of Series B financings

March 5, 2009

Given the economic climate, and the implications for startups, Series B financings are going to be tough to get done;  here are some substantive and “beauty” reasons. 

Substantive reasons. 

Series B financings happen at a vulnerable stage of a startup.  The company has generally proven its core value proposition, has demonstrated it knows where to find customers, acquire them, and has begun to monetize them.  The operative term here is “begun” – they haven’t generated enough revenue to cover their burn, and likely will need another 12-24 months to do so.

What the company or the investors don’t know yet is how scalable and predictable the revenue is.  How broadly into the target market the problem really exists (and whether or not they just got lucky with those first customers in the A round), and if/where the source of explosive leverage in the business is.

But the confidence of that revenue forecast, that can matter a lot.  Startups can run out of cash more quickly than they expect because the revenue forecast shows net cash needs going down over time…which is true only if the revenue comes in as planned.  So it’s easy to get a nasty surprise here if you miss your revenue forecast; all of a sudden you’re not managing to a break-even date, but a cash-out date that’s coming at you like a locomotive.

Series B financings may have less engineering or product risk, but they can have loads of revenue and market execution risk that can be hard to get your arms around.

Beauty reasons

There are also some beauty reasons why Series B financings are nuanced.  It’s precisely because they’re not Series A financings and they’re not Series C financings.  Let me explain.

Series A financings are attractive for VCs because they’re a product of your relationships and your deal flow – a result of personal, proprietary value.  The best deals involve shiny and bold unblemished ideas, are looked at by a small number of firms, and can be highly competitive. 

Series C financings are attractive for VCs because a lot of times they involve companies who have figured out how to scale revenue and have some clarity on the leverage in their model.  The engineering/product risk is generally behind them as is the revenue unpredictability; they need capital to expand and get to break-even.  These deals can also be highly competitive, and are shiny and old, old in a good way – they’re much closer to being sold (exiting).

What about Series B?  Well, a lot of times they’re just not as pretty.  They’ve been out in the market enough to success and have some warts and have already been seen by a lot of VC firms.  There’s still all that revenue and sales/marketing execution risk.  Series B deals are tweeners – neither a shiny Series A deal with a promising unblemished future, nor a “we’re just a few years away from an exit” Series C deal.  Picking a good one is tough.

What if you’re raising a B round?

You’ve got to embrace the reality of where you’re at.  You should expect to have a fair amount of “longitudinal” metrics supporting your revenue forecast.  Metrics you’ve been tracking for quite some time that communicate fact-based clarity in generating reliable revenue.

A closely related area is to have data that examines where in your business model the leverage comes from, and how that affects the economics of your business.  This too is best done longitudinally with data collected over time (like showing a strong network effect).

Finally, you need an operating plan that spends behind revenue; increasing expenses only after revenue has increased, reliably.  This means having some clarity around the context of expense increases, tying them to product or customer initiatives; “tear-off” plans that overlay onto your base revenue/expense plan.

B rounds are nuanced, and thoughtful planning and analysis can help you navigate the nuance.

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.