Posts Tagged ‘Venture capital’

The Brand Value of “No”

March 5, 2012

One of the most valuable lessons I learned as a venture capitalist, and one that my partners and I took super seriously, was how our personal brands and firm’s brand would be built on how we said “no.”

Being in the VC business is being in the business of saying “no.”  We looked at 300-400 deals a year and funded two or three. Every week I had to say “no” to lots and lots of people. Heck, Marc Andreessen said “no” 1,500 times last year at his firm.

It’s hard to tell someone you’re not going to provide the funding to get their company started when the person you’re speaking with likely has put months or years of their lives into the business they’re pitching to you. The easy way out is to avoid it. And a lot of the time that’s what happens.

A surprising minority of VCs just won’t ever get back to the entrepreneur. Others will send a short, frequently cryptic “your business does not fit with our criteria” response. Neither of these is helpful or particularly honest because VCs pass on deals for very specific reasons that they discuss with their partners in Monday meetings.

So my partners and I decided when we said “no” we would do so in a way that passed along the reasons why – that way the entrepreneur would be able to make some use of our collective thinking. If I felt the business model was flawed, the team was weak, or product strategy too broad – then sharing that information might help the entrepreneur make adjustments. But at least I would be straight-up.

Many of these businesses were fundable – just not by us (that’s where the “did not fit our criteria” was true), so I strove to pass along information that might help the entrepreneur have a better shot at the next firm they pitched.

Not only is it hard to be this direct with someone, it also takes a lot more time than going silent or sending a curt generic note. The nature of leading a startup means being tenacious and persistent. So frequently I’d spend an hour or more while the CEO would try and talk me out of my decision, rebut my argument, and bring more data to the discussion.

This is super relevant regardless of what business you’re in. You will say “no” far more often than you will say “yes”, and becoming comfortable and constructively effective at saying “no” is a way for you to build value in your personal brand as well as your company’s. Whether it’s turning down a proposal from a contractor or letting the many people applying for an open position know they’re not going to make the cut, you can distinguish yourself mightily in how you convey your decision.

You have the opportunity to share your personal values – your brand – to the many people you say “no” to and who knows what opportunity that might create down the road. And in an age where personal brands are becoming increasingly essential to your company and your career, learning how to effectively and constructively say “no” is critical.

So, the next time you’ve got five or ten or fifteen candidates for an open position, invest in your personal brand by telling the folks that didn’t get the job why you chose someone else. You’ll be doing each of them a favor, and building a brand for yourself that you’ll be proud to associated with.

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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.

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.

Ego and why it’s over-rated

November 27, 2008

Becoming a VC has had the same effect for me as getting an MBA – it’s provided me with a label that has opened some doors.  But a label is different from substance, it’s thin, and sticks to the clothing you’re wearing. Under the clothing is you.

I’d never been a VC before and it felt very much like a very fast race, but where I was learning the event and the course as I went. So much to learn about the business of evaluating embryonic, wildly ambitious businesses as well as learning the mechanics of investing other people’s money.

Then again, this is a lot like every job I’ve ever had. In every startup I’ve been in, we were creating an entire new category in the market. No one had a playbook, no one had studied this before. Yet, we had a business to run, and customers to keep happy. We wrote the rules, we led our teams, in real time.

About 15 years ago, right after business school, I worked for a high powered management consulting firm in Boston. I managed a small group of undergrads, and we worked with large firms on tough strategy problems. It was intellectually rigorous and obsessively methodical. It was very much about the essence of management: establish a plan, direct a team, measure results. You operated with a playbook you carefully constructed as you went along.

My team? All recently minted undergrads, and so, so much smarter than I was. At various points I managed Steve Levitt (yes, Freakonomics), Glenn Berger, Russ Wilcox, and Greg Sands. But all I was focused on was how their smarts compared to mine, and as a result I quickly lost my ability to direct them.  I lost my ability to let my experience and perspective provide a framework and direction. My ego, fed with insecurity, became this huge obstacle to success.

In about 18 months, it was clear I was failing. I was repeatedly counseled “forget about how smart they are, they need the direction that your experience can provide them”. But I couldn’t. I’d like to say I failed “spectacularly”, but there’s never anything spectacular about consulting firms. I failed quietly, by being told I would have three months to find a new job.

With hindsight I realize I lacked the confidence to accept what I knew and didn’t know, I thought I had to know everything, and if I didn’t, I spent a lot of time and energy trying to create the illusion I did. All that energy got wasted and prevented me recognizing and embracing their talent, and I couldn’t focus on the pleasure of enabling and directing their effort and success.

So in the first few months in my role as a VC, I had almost an out-of-body experience. I could see where I could go back down that path of ego-as-obstacle – so much I didn’t know, so many people who knew so much more. But this time it was different. I had the accumulated scar tissue to “let go”, to seek and embrace that line where I knew what I knew and where I didn’t.

This time there was an added twist.  This is an industry where a very few people have made enormous amounts of money by helping to create groundbreaking new companies. But the other 98% of us? We haven’t. That “aura” is thrust upon you, projected on you by the people who seek your advice and your funding. It’s easy to let that define you, to let that inform the ego you present to the outside world.

So, I love knowing that if I’m lucky, I will meet and work with people smarter and more capable than I am.  I also love knowing that I haven’t yet made billions in this business.  I still believe I’m really good at it, and enjoy it.  But it’s a heck of a lot lighter meeting with entrepreneurs and co-investors, comfortable in the skin I am wearing.  We’re all a lot more effective, and at ease.

So, I love having no ego in this business. For me, ego is different from being smart, experienced, and helpful. You can be all those, but you can be those in a way that meets people in their comfort zone on their terms, not yours.

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.