Some love for middle managers

inspiration

Middle managers don’t get much respect. In fact many CEOs of late have tried to flatten out their management hierarchies to get rid of as many middle managers as possible.

Thus I was surprised to read The Wall Street Journal article The Economy’s Last Best Hope: Superstar Middle Managers sub-titled Anemic growth, millennial malaise, you name it—blame a lack of inspiring bosses. Superstar middle managers sounded like an oxymoron to me.

The problem posited by Sam Walker, the article’s author, is lack of growth in the economy. As he writes, “For the better part of three decades, economists have worn out their chalkboards trying to map a path back to the glory days of 7% growth. So far, the only point they agree on is that we must be doing something wrong.”

What triggered the article and the possible solution to lack of economic growth was a survey of the future of work.

Five years ago, the Gallup organization embarked on one of the most ambitious deep dives it has ever conducted; an analysis of the future of work based on a decade of input from nearly 2 million employees and more than 300,000 business units. The results confirmed something Gallup had seen before: a company’s productivity depends, to a high degree, on the quality of its managers.

What no one saw coming, however, was the sheer size of that correlation—something Gallup calls “the single most profound, distinct and clarifying finding” in its 80-year history. The study showed that managers didn’t just influence the results their teams achieved, they explained a full 70% of the variance. In other words, if it’s a superior team you’re after, hiring the right manager is nearly three-fourths of the battle.

You can read a lot more about this in Gallup’s forthcoming book, It’s the Manager.Gallup found that today that people they surveyed ranked having a rewarding job as their number one priority, unlike previous decades when they ranked family, having children, owning a home and living in peace above having a good job. Today’s workers are engaged with work when it generates feelings of purpose and personal growth.

What sort of return can businesses expect from doing this? According to Gallup, the top 10% of companies, ranked by engagement, posted profit gains of 26% through the last recession compared with a 14% skid at comparable employers.

Mr. Walker’s solution to flat-lined productivity growth is that companies need to hire better managers, going against the mistaken practice of promoting superstar individual contributors into management. As I’ve posted elsewhere, that often results in losing a superstar individual and gaining a lousy manager.

His formula is that better managers will generate higher levels of engagement in their teams, resulting in greater worker productivity.

So forget about the $1,000 expresso machines, the free back massages, the endless supplies of food, none of these attempts to galvanize workers can touch the power of providing them with a fulfilling, rewarding job. Save your money and put it into hiring effective middle managers, who will inspire your teams. And you might want to set aside a few dollars to buy a copy of Mr. Walker’s book, The Captain Class: The Hidden Force That Creates the World’s Greatest Teams, because the true organizational measure of any company is not the division or the department but the team, and every team needs a great captain in order to win.

 

 

 

How Barack Obama made tough decisions

obama

I’ve been interested in how people make decisions ever since I enter the decision-driven world of fast paced tech startups nearly 40 years ago. In fact I tell people interested in joining startups that they are really going to join decision machines – they will be making more decisions, and more consequential decisions, than every before in their lives. And perhaps more than ever again in their lives, unless, like Barack Obama, they become President of the United States. The article Barack Obama shares his approach to handling tough decisions by Lila MacLellan on Quartz at Work holds lessons for founders of new ventures as well as executives of well-established companies. She quotes extensively from an on-stage interview Obama gave Qualtrics CEO Ryan Smith.

By definition, if it was an easily solvable problem, or even a modestly difficult but solvable problem, it would not reach me, because, by definition, somebody else would have solved it,” he said. “So the only decisions that came were the ones that were horrible and that didn’t have a good solution. They said, ‘Let’s send this to Obama, I don’t know what to do.’” That way, he joked, “when things got all screwed up,” people could blame him.

Become comfortable with probabilities

First he needed, like founders in a startup, to become comfortable in dealing with probabilities, as there were no certainties. Not only must founders become comfortable with probabilities, but unlike decision makers in large, established companies, they must also become comfortable making decisions with far less information. As Obama puts it:

…being comfortable with the fact that you’re not going to get [a] 100% solution, and understanding that you’re dealing with probabilities, so that you don’t get paralyzed trying to think that you’re going to actually solve this perfectly.

In other words, avoid paralysis by analysis. As I’ve written elsewhere, most successful entrepreneurs will assert that any decision is better than no decision at all.

Get the facts, recruit the best minds

One of the first things I learned at Software Arts, where I started my high tech career, was to hire people who were smarter than I was. This was easy, as the dozen or so people in the company when I arrived were all smarter than I was, with perhaps one or two exceptions. Given that I rarely knew what I was doing, not being either a software engineer nor experienced marketeer, I tried to hire people who did know what they were doing. Obama took a similar approach:

Probably the last piece of this that was most critical was having the confidence to have people around you who were smarter than you, or disagreed with you, or have perspectives that were different than yours.

And is the case in many situations, asking questions is the best modus operandi. I found that instead of trying to conceal my ignorance I used it to my benefit. It turned many times that the experts weren’t necessarily right.  As Obama said:

Also key  was feeling certain you would understand what those experts were saying.  To that end, he wouldn’t stop asking questions until the facts were clear to him. “I am pretty proud of this: I always would say to somebody, if they’re talking about a really complicated issue, ‘I don’t understand what you’re saying. Explain it to me in English.’”

Little hat, big decision

There’s a great story Obama shares about how the solution to the BP Deep Horizon oil-spill disaster of 2010 was solved. Long story short, Obama asked Steve Chu, his Nobel-winning physicists to work on the problem and in three weeks he had a solution.

While founders may imagine the White House as like the rest of the government – slow and stodgy – Obama points out that is far from the case, the pace is like a startup, but the decisions could literally affect life or death.

“People’s idea of government is like the DMV, or the post office, when you used to go to the post office,” the former US president said, “but that’s not how the West Wing operates.”

 

 

Elon Musk’s first principles thinking

emerson

I’ve been advising my mentees to minimize their assumptions about their businesses as much as possible.  In the case of their financial projections, their bedrock assumptions are more important than the actual numbers themselves. It turns out that I’ve just scratched the surface of First Principles Thinking.

One of the specific breakthroughs of many made by Elon Musk that I admired was his challenging of NASA’s practice of using one rocket per test – they assumed it was either too difficult or too expensive or both to do otherwise. But Musk challenged this assumption and developed a way to re-use his rockets from SpaceX, thus saving millions of dollars per launch and helping launch his firm SpaceX into commercial viability.

Now from reading Mayo Oshin‘s post on Medium, Elon Musks’ “3-Step” First Principles Thinking: How to Think and Solve Difficult Problems Like a Genius I have an understanding of how Musk arrived at this breakthrough and many others. Musk has built three breakthrough multi-billion dollar companies in completely different fields: first PayPal, in financial services; then Tesla, in electric powered vehicles; and Space X, in aerospace. This doesn’t even include Solar City, energy, which he helped build and acquired for $2.6 Billion recently.

Obviously Musk is brilliant and coupled with that he’s a workaholic, claiming to work 100 hours per week for the past 15 years! But during a one-on-one interview with TED Curator Chris Anderson Musk explained his “reasoning from first principles.”

Musk: Well, I do think there’s a good framework for thinking. It is physics. You know, the sort of first principles reasoning. Generally I think there are — what I mean by that is, boil things down to their fundamental truths and reason up from there, as opposed to reasoning by analogy.Through most of our life, we get through life by reasoning by analogy, which essentially means copying what other people do with slight variations.

First principles thinking is closely related to my dictum of minimizing assumptions, but it is more sophisticated, it means questioning every assumption about a given problem, challenging all your assumptions. Possessing Soshin, the Zen beginner’s mind, an attitude of openness, eagerness and lack of preconceptions even when studying at an advanced level – which is where Musk is 95% of the time.

The way I tend to explain concepts to my mentees is the flip side, reasoning by analogy. Mentoring founders based on my prior assumptions, beliefs, experiences and what I consider to be best practices of respected mentors, like Steve Blank.

Here are the three steps of first principles thinking from Elon Musk:

STEP 1: Identify and define your current assumptions

“If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
— Albert Einstein

It’s important you write down your current assumptions, as the act of documenting them may well surface other, related assumptions. It also enables others on your team to review your assumptions.

STEP 2: Breakdown the problem into its fundamental principles.

“It is important to view knowledge as sort of semantic tree. Make sure you understand the fundamental principles, ie the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang on to.” – Elon Musk

The best way to discover these basic elements is to ask questions. Mayo Oshin provides a good example of this in the way Musk challenged the received wisdom about the high cost of battery packs by breaking down the components of battery packs, pricing out each component, and recognizing that the BOM (Bill of Materials) for a battery pack only cost $80 per kilowatt hour vs. the cost of a battery pac at $600 per kilowatt hour. That left him with the design and engineering problem of finding a way to combine these materials into a battery pack, resulting in a much lower cost.

STEP 3: Create new solutions from scratch

Again, asking questions is the way to create new solutions. First define your goal, such as to raise enough capital to last you 18 months.  The first step is to question your goal. Why 18 months? If you only raise enough money for 6 months you won’t have to raise nearly as much money. By making the amount smaller you may open up other options, such as crowd-funding or revenue sharing or a convertible note (loan).

By using first principles thinking you keep asking questions and challenging assumptions by looking a various options and their trade-offs until you hit bedrock. When Musk challenged the assumptions that rockets were not “re-useable” that must have lead him to design a way to retrieve his rockets after they reentered earth’s atmosphere.

Everyone talks about “thinking outside the box” but what does that mean? First principles thinking comes from physics, where complex phenomena are studied by “reverting to first principles.”

In physics, a calculation is said to be from first principles, or ab initio, [from the beginning] if it starts directly at the level of established laws of physics and does not make assumptions such as [and] empirical model and fitting parameters.

For example, calculation of electronic structure using Schrödinger’s equation within a set of approximations that do not include fitting the model to experimental data is an ab initio approach.

First principles thinking provides founders with a three-step process to “think outside the box.” And that’s the place to do your thinking if you are going to succeed in finding novel solutions to problems like Elon Musk has.

The battle for Internet attention

attention

The one thing I always say to mentees who are targeting consumers on the Internet is that they are in a battle for attention. This amazing graphic put together by media consultants Lori Lewis and Chadd Callahan for All Access Music—really points out the sheer amount of activity vying for (or constantly stealing) our attention. The PC Mag article Every Minute Online Is a Battle for Consumer Attention sub-titled This not-to-scale visualization of what is happening on the internet every single minute of every single day this year should underscore why you have a hard time getting anything done, enables you to compare the 2018 internet minute with the 2019 internet minute. The comparison shows just about every type of activity increasing.

Note the activities are a mix of consumption (dollars spent online) and creation (2.1 million snaps created).

For founders these images are daunting pictures of all the competition for attention on the Internet. It may be enough for you to think about off-net activities. A colleague and I were interested in entering the “rating” business many years ago, so we watched carefully from the sidelines. Yelp, of course, won the battle for a standalone ratings service. We believe that one reason was that they literally had feet on the ground in areas where they planned to launch and put on events in each region for prospective users. Their competition never got out from behind their computers and probably thought that they could build the business simply by sitting at their desks.

If there is a lesson in these numbers it’s that founders may want to consider what types of off-net activities can help build their brand and generate revenue. While the events marketplace is also very crowded perhaps the right combination of online marketing, social media, and events can help a B2C company breakthrough.

I’d like to see what an off-net minute activities chart looks like for a typical consumer!

It’s pitch scrub season!

lyft

Every year MIT’s  Venture Mentoring Services selects a number of its ventures to present at Demo Day. A number of us mentors help the presenters by doing a two part pitch scrub for them in preparation for Demo Day. On day one of the pitch scrub they present their decks and we give them feedback, on every slide. They then take a day to revise their decks and present to the same group of mentors again. The changes are always amazing, as they far exceed our expectations. If you can say one thing about MIT affiliated entrepreneurs they learn and learn fast. And they can apply that learning superbly.

But it never hurts to get some tips, especially from Carmine Gallo, who is an expert on presentations and the author of several books on presentations that I highly recommend, including The Presentation Secrets of Steve Jobs.

Lyft’s anticipated IPO roadshow kicked off this week. Carmine extracts five communication strategies from Lyft’s 24 minute presentation.

1. Start with the inspiration behind the product.

Origin stories as they are known, are powerful  ways to open a presentation. They quickly answer the “Why should I be interested in this presentation” question. “Why does this product exist?” Co-founder John Zimmer studied hotel management where he learned about occupancy rates, a key metric in the hotel business.

“Cars are occupied only 5 percent of the time. The other 95 percent of the time they’re just sitting there. If you have a hotel with a 5 percent occupancy rate, you have a failing business.”

It you don’t have a good origin story that’s ok, but you will still need to quickly answer the “why” question. One good way to do this is to present a surprising statistic about your target market or customers. Such as, “Do you know that X% of bicyclists fall at least Y times in their first year of competitive cycling?” While personal stories forge the strongest connections with your audience, stories about your customers can also work well.

2. Frame the opportunity.

While  journalists call Lyft a “ride-hailing company,” the company does not position itself that way. I prefer the term “positioning” to “framing” as it tells the audience what you are and what you are not.  The two co-founders position Lyft as “On demand peer-to-peer ride sharing.”  Your positioning or framing basically answers the question, “What is it that your product does?”

This is also a good time to answer questions about your market opportunity: what’s its size? How fast is it growing? What are its dynamics?

Lyft does a great job of this:

“We have an opportunity ahead of us to deliver the largest shift to society since the invention of the car” and “Lyft addresses one of the largest market opportunities of our lifetime; a shift from car ownership to transportation as a service.”

3. Create simple lists.

People do love lists, as evidenced by the thousands of listicles begging us to click on them. Carmine Gallo notes how Lyft makes use of lists, by creating a list of why Lyft is a good investment. As I advise my mentors, Mr.Gallo advises you to keep your lists short, no longer than three to five points.

4. Focus on key metrics.

Investors need to see the numbers, and that’s never more true than at an IPO Roadshow. Lyft’s Chief Marketing Officer compares Lyft’s market, transportation to three other markets: healthcare, entertainment, and housing. Comparisons between the known and the unknown – your venture – are a powerful way to help the audience visualize the opportunity before them.

5. Make it simple.

This tip may be last but it is not least! At a pitch scrub yesterday with group of research scientists the words “you need to simplify your slides” were said to every presenter! I advise you to limit yourself to one point or message per slide. That can be conveyed in two parts, a text header and an illustrative graphic or even very short (15 – 30 second) video. Even more importantly, your product must be simple to use. If possible you should be able to demonstrate that ease of use and simplicity as part of your presentation.

It’s highly unlikely any readers of this blog will be presenting at an IPO road show any time soon. It usually takes years for a venture to go public. But these tips from Carmine Gallo will benefit any presenter. And do follow the links to watch the video of Lyft’s road show presentation. After all, if a picture is worth a thousand words, a video is worth a thousand pictures!

Sometimes advice columns don’t dish out the best advice!

 

businessMost of the ventures I mentor plan to raise capital at some point in their venture’s life, if they haven’t already. So being as I have been out of the capital raising game for the better part of a decade, I try to read as much as I can to keep up with current trends in startup investing. Thus I just had to read the article 4 Reasons Why Investors Won’t Invest In Your Business Model, sub-titled Approaching the private equity firms or investors and persuading them in [sic] the most daunting task for businessmen. A typo in the sub-title is not a good leading indicator, but I read on. And it’s repeated in the first paragraph! But this is from Entrepreneur.com, usually a reliable source … So let’s look at their “four reasons.” But first, always look at the author. In this case it’s not a person, it’s “BusinessEx Staff” not a named individual. So credibility goes down a few notches.

1.    Fail To Foresee The Future

I have the feeling this was written by a non-native English speaker, as the title would typically be “Failure to…” or “Failing to…”  First of all private equity firms rarely “scrutinize new entrepreneurs” because they rarely invest in new entrepreneurs. Private equity firms invest in on-going businesses or even buy them outright, with the goal of re-engineering the business and thus being able to sell it or even take it public at a significantly higher value than they paid for it.  Yes, “buy low, sell high.” Remember that! The only way one can know for sure if an entrepreneur can successfully foresee the future is to wait for the future to arrive … which can take years. But I do have to agree with the statement that “… it is vital as to how a business owner executes the plan and mould [sic] an emerging, nascent company out of it.” As Bill Gates has said, “Ideas are cheap, success is 99% execution.”

And I also agree with the statement: “The entrepreneurs, who lose this vision or get diverged by the money factor, fail to build concrete foundations of the business.” While again the English is tortured, the point is that entrepreneurs do need a lodestone to focus their attention. Having no vision or losing site of the vision results in companies thrashing – constantly pivoting. So no one can foresee the future, but you can execute your plan well, or not. And you need to build a plan to achieve your vision.

2.    Improper Cash Flows

Yes, the saying “cash is king in startups” is true. The worse thing an entrepreneur can do is to run out of cash. So being able to present a cash flow statement based on strong assumptions and early performance is indeed important.

3.    The Enormous Size Of C-Suite Executives

I’ve written before about the incredible growth in the size of the C-Suite. We now have Chief Design Officers, Chief Security Officers, Chief People Officers. You name it, there’s a Chief for it. Too many cooks do indeed spoil the dish. I am in violent agree with the message that startups should not have too many C-Suite executives. CEO and CTO should be enough for a raw startup. Having more CXXs is a red flag. Cliches prove true yet again: “Too many chiefs, not enough Indians.”

4.    Inability To Understand The Competitors

Back in the last century investors used to say in all my pitch meetings, “But what if Microsoft decides to copy what you are doing?” That got superseded by “What if Google decides to copy what you are doing?” I used to tell my mentees to ignore the “What if GiantCo enters your market?” question until I saw Instagram rip off the Stories feature from SnapChat, which fueled the growth of Instagram and hobbled SnapChat. So you better be sure that you aren’t hanging the entire fate of your company on one feature that isn’t difficult to clone – because success breeds many cloners, failures none.

Despite the inelegant English like “The business owners should further avoid these mistakes by planning strategized moves to entice funders and investors.” the advice is correct, but the idea the startups are going to be pitching private equity companies is just wrong. Where private equity does come in these days is in later rounds of companies growing rapidly that need a lot of capital, like Uber. The risk is much lower for these late round investors.  Let’s hope you are so successful that private equity comes knocking at your door! Until then execute, manage your cash tightly, keep the number of executives down to the bare minimum, and keep your eye out for competitors. Better yet build your company on a sound, sustainable competitive advantage.

How things look from the investor’s side of the table

power law

Eric Feng, now a VC at Kleiner Perkins, but previously a CTO of Flipboard, founder of Erley and founding CTO of Hulu knows what venture capital looks like from both the founder’s and investor’s sides of the table.

His article A stats-based look behind the venture capital curtain on Medium has an analysis of trends in VC funds in the US over the past 15 years that is highly recommended reading for any founder seeking capital.

From 2003 to 2011, an average of 157 new funds were raised each year. But from 2012 onward, that average rose to 223, or an impressive 42% increase. More funds equals more active investors working at those funds.’

Another insight from Mr. Feng is that all the recent growth in the number of funds raised has been from seed funds, not venture or growth funds.

There has been an even bigger increase in the number of seed investors active in this country because of the disproportionate growth in the number of seed funds raised each year. So if it feels like there are thousands of new investors in the industry, particularly seed investors, that’s because there are.

“A lot of capital does disrupt venture capital, which is the problem we’ve had as an industry.”

— Sarah Tavel, Benchmark

Founders heed well: So even with the sharp influx of seed funds, the vast majority of the dollars are still invested by traditional venture and growth funds. Since 2011 the average number of seed deals per years (4,300) is not about equal to then number of non seed deals *(4,500).

But as veteran VC Bill Gurley says: “Venture capital is not even a home-run business. It’s a grand-slam business.” Virtually every founder I have met with over the past couple of years just assumes they will raise venture capital. However,

As investor Marc Andreessen has said, “returns are a power-law distribution” with the majority of returns concentrated in a small percentage of companies. That’s true now more than ever, and one of the great promises of the venture capital industry that motivates and drives investors.

So while this article is written from the viewpoint of a venture capitalist, it is well worth studying for founders in search of capital. Basically if you can’t show a VC that you have the potential not to just hit a home run, which was good enough the previous decade, now you have to show that you have the potential to hit a grand slam. Otherwise you are unlikely to even get a meeting with a VC, let alone an investment. Yet at the same time there are significantly more investors today than 15 years ago. The size, growth rate, and dynamics of your target market are the gatekeeper metrics for a venture capitalist today. In other words, disrupting a very large market is table stakes. If you are going after anything smaller you need to either bootstrap (be self-funded) or find an angel that falls in love with your startup,

Getting a VC investment has now become much like getting an acceptance to an elite college or university. The strategy is the same, send out a lot of applications and pull every string you can find in your web of contacts to get warm introductions. The only exception to this rule is Demo Day, where you get to present to a mass of investors, alongside your fellow founders. Demo Days are highly efficient for both founders and investors as both sides can cut through the introductory dance to get directly to a presentation or demo of the venture’s product. In higher education the table is tilted in favorite of athletes and legacies – children of alumni. How does a founder tilt the table in the VC game? By being a serial founder! It’s a chicken and egg problem, if you can’t raise money because you never have raised money what can you do? For one thing, find a partner who is a serial entrepreneur. Beyond that close advisors, like your former professors, with deep startup experience can help you distinguish your startup from all the competition.  But keep in mind where you truly need to distinguish yourself is in the minds of customers. If you can do that the money may well beat a path to your door.