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Is it time for you to hire a COO?

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One of my pet peeves as a mentor is seeing teams composed of a CEO, COO, and CTO – that’s the “company”! Where oh where is marketing and sales, I ask these founders? (They usually assume marketing and sales are like frosting, something you apply after you bake the cake to make it a bit more appetizing.)

But CEOs of high growth companies may actually need to hire themselves a COO. How do they know when? The article 5 Signs You’re Ready to Hire a COO by Todd Klein, sub-titled Bringing on a COO is a decision that can transform your business on Inc. is unfortunately not an article I can agree with.

Here are Todd Klein’s five signs, with my comments appended:

1. Instead of spending time growing revenues, transforming operations, or pushing product boundaries further, you’re resolving disputes among your functional direct reports.

In my experience it’s not that as CEO you are spending time resolving disputes among your functional direct reports that drives the decision to bring on a COO. In fact if you are spending time resolving disputes amongst your senior management team that is a sign of a dysfunctional senior management team and adding a COO will only exacerbate the problem. Rather, the time to bring on a COO is when the CEO is does not have the reach to play Mr./Ms. Outside AND Mr./Ms. Inside at the same time. This typically happens when the company is on a high growth path and the CEO has to spend the bulk of their time outside the company: talking to investors, analysts, key customers, and the media and thus doesn’t have enough time to manage internal functions like finance and administration, customer support, and manufacturing.

Your COO needs to put away their ego, as they will be Mr./Ms. Inside, focusing on the internal operations of the company – making the trains run on time, as the saying goes. If your COO is getting media attention then something is probably not right with the allocation of responsibilities between the COO and CEO.

2. You start noticing the flow of actionable, transformative ideas from your team is slowing down.

No doubt this is a problem. Is hiring a COO the answer? Again, I’d say no. A highly functional senior management team should be able to evaluate, compare, and prioritize initiatives and make sure there’s follow through on the right ones.    As I’ve written elsewhere, if this is a problem make sure each task has a DRI – Directly Responsible Individual, and enforce this principle throughout your organization, especially in the senior management team. Hiring a COO to be traffic manager is not the answer to this problem.

3. Your business is expanding faster than the forecasting discipline required to optimize it, preventing you from accessing a more demanding tear [sic] of financiers, suppliers, and customers.

What you need is not a COO but a stronger CFO/VP of Finance and Administration to handle forecasting and the interface with suppliers, and a strong customer support organization to handle the interface with customers. It’s the job of the CEO to handle financiers, be they bankers or venture capitalists, or large shareholders.

4. You continue to produce a multitude of great ideas, but neither you nor your team has the bandwidth to follow up on them.

This is a good problem to have! But again I’m going to refer to the management principle of Steve Jobs, who took inordinate pride in the number of ideas he said “no” to. Focus and execution is the name of the game. If you actually have a new idea that can get through the gauntlet of the senior management team then it should be allocated resources accordingly. The money you would be spending on a COO should go to the functional area that needs resources to incubate a great new idea.

5. Increased business complexity and a faster pace exacerbates communication asymmetries.

I believe that the majority of problems a company faces internally can get traced to communication problems. But adding a COO only increases the nodes in the communication network, increasing the odds of message distortion or failure to transmit.

If you do indeed need a COO because the company is outgrowing the CEO’s ability to handle both internal and external responsibilities make sure you have your communication channels and rules of the road firmly established. otherwise you may see more, not less “communication asymmetries.”

In summary, COO’s are expensive. They add management overhead to the organization and without very clear responsibilities they may step on the toes of both the CEO and their direct reports. COO’s are not the answer to problems in the senior management team. They are only needed when the company is growing quickly across multiple metrics: headcount, markets, products, sales, and revenues. CEOs should resist the idea of bringing on a CEO until and unless they have very clear duties and objectives for this person and have buy-in from both their Board and their senior management team that the time for hiring a COO is now.

In one sentence the job of the COO is to free up time for the CEO, primarily by management of internal functions like finance and administration, manufacturing, and customer support and to add expertise and experience to strengthen the senior management team.

Don’t believe everything your read, even if it’s in Inc., or for that matter, in this blog!

Where do you go after the success of your MVP?

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Virtually all investors, mentors, and advisors counsel startups to launch an MVP – Minimal Viable Product. There are several good reasons for this advice: startups by definition lack resources, thus they need to put “all their wood behind one arrowhead;” getting a product out quickly enables the founders to learn, priority one for founders; and an MVP minimizes the cost of failure, enabling a startup to try again.

But where is the advice for companies that have successfully launched their product? They have customers, they have revenue – how do they deploy their product or service development resources now? There are a number of options: keep adding features to build out that “minimal” product; bring their product to a new, adjacent market; create another, related product to build a “product line.”

But it pays to go back to the customer – what are they now looking for?  The article Vacation rental platform Vacasa raises huge $319M round — here’s how it differs from Airbnb on Geekwire by   &   presents another option: the full stack solution. Vacasa is a great example of a bootstrapped company – it didn’t take any outside investment for six years, but has raised $500 million since 2016 and just closed a $319 million round of new funding. What are they doing with this new round? Two very different things: one, extending their reach in the vacation rental industry and fueling the growth of a new real estate offering.

Vacasa is one of many perhaps better known companies using technology to disrupt the hospitality industry like Airbnd, and HomeAway. But how is Vacasa different from these online marketplaces:

But it’s not just a marketplace — it is a “full-service property management company,” helping homeowners manage the entire booking process from start-to-finish. Vacasa employs thousands of people across its markets for on-the-ground “field-based roles” — housekeepers, reservations agents, local managers, etc.

“Unlike Vrbo, Airbnb, and others, our field staff fully manage every home on our site,” Breon said. “This is a massive difference for both owners and guests. Owners can rent their homes without worrying about the day-to-day complexity of short term rentals, and guests have the assurance that we’re there to help should the need arise.”

Vacasa started out as a point service: solving one problem in the entire booking process, making a reservation. But it realized that its customers wanted more, not necessarily more listings, but more related services: a full stack solution to all the problems both owners and guests have. This is a good example of one way to expand your company once your product or service becomes established in its market.

But in 2018 Vacasa expanded beyond its service of vacation rental management to offer a new network called Vacasa Real Estate to help people through the process of buying and selling second homes. Note that this new offering is not a point service but another full stack solution: helping people through the entire process of buying and selling homes, not just providing listings, as many of their competitors do.

“With our data and expertise, we can help people find the perfect home — be it a pure investment, or a blend of personal use and profit,” Vacasa CEO Eric Breon said. “And with our local teams, we can make the process of buying, furnishing, and renting a home incredibly simple.” said Vacasa CEO Eric Breon

There’s much more to the Vacassa story; I encourage you to read the entire article for more detail, including how they use their proprietary technology to serve property owners.

So, congratulations! You shipped your MVP, attained product/market fit and have serious customer traction. Now what? There are a lot of options, don’t just automatically assume you simply need to add more features. Look at the entire customer process flow to see where else in that process you can provide value. Let the customers’ needs, not a product roadmap you may have developed pre-FCS (First Customer Ship) determine the answer to the “where do we go from here” question. And one final comment: note that the way Vacassa expanded its business also strengthened its differentiation from its competitors – a very good thing!

Well-known investor advises against raising money

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Mark Cuban is one of the most well-known investors in the U.S., thanks to making investments in dozens of companies and his starring role on Shark Tank. Here’s a great quote from him: “Once you raise money, that’s not an accomplishment. That’s an obligation. Now you’re reporting to whomever you borrowed or raised money from.” Too many founders I mentor view raising money as a major milestone on the way to success; bootstrappers are the exception, not the rule.

The Inc. article Mark Cuban: 1 Costly Mistake That’ll Kill Any Brilliant Business Idea (He Sees Entrepreneurs Do It All the Time) makes this point in its sub-titleToo many entrepreneurs think this is a required step to make their business successful. It’s not.

Author Betsy Mikel focuses on the issue of control: once you bring on investors you run the risk of them disagreeing with the vision and direction of your company.

Cuban expands on his advice on bootstrapping: “The secret ingredient to be successful though, Cuban says, is that you have to be really good at what you’re doing. Whether it’s hair products or tacos, being the best at what you do will make you stand apart. Those are the best business that grow the biggest. And anybody can start them.”

There’s another reason to bootstrap: you increase the value of your company by focusing on gaining customers and the revenue you need to support your venture.  That means that if and when you do decide to bring on investors your venture will have a higher valuation; you can sell fewer share to raise an equal amount of capital.

We just had an entrepreneur come in for mentoring who was trying to decide between focusing on a single market and pursuing what looked like hot opportunities in a wholly different market. One of the mentors made the point that if his strategy was to bootstrap then “cash is king” – meaning he probably should grab business and revenue wherever he can get it. But on the other hand, if he plans to bring in outside capital he needs to be more strategic and focus on growing his share of a single market. Chasing other markets can be a distraction for the founder.

At the end of the day the single overriding reason to bring in outside capital and give up some ownership and control is to accelerate the growth of the company. As another mentor commented, this may be necessary in a tech-driven market, where as soon as you have some success – and with it visibility – the competition will be after you. To stay ahead you must grow rapidly. However, this entrepreneur’s venture was more of a services business and the need to fund growth to outrun prospective competitors is far less pressing.

One last important point from the article: referrals provide more value than investors. I advise every founder I mentor that their last question for every customer or prospect should be “who else do you recommend I talk with?” But another mentor made a complementary point: ask your existing customers for referrals to their peers. And this shows off one advantage of focusing on a single market: your customers should know, or know of, many of their peers, and thus be in a good position to refer you to them. Assuming they are satisfied customers! So bring your prospect list to the next meeting with your customers and ask for referrals. The worst they can say is “no, I can’t help you.”

 

 

When the government creates a startup opportunity

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It is a truism amongst mentors that startups have to solve problems, and eventually do so profitably. What I like to see is what I call a forcing function, an exogenous force that creates a problem that a startup to solve.

A great example of this is in The Wall Street Journal article IRS Sending Warning Letters to More Than 10,000 Cryptocurrency Holders. “Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency,” IRS Commissioner Chuck Rettig said.

While the price of Bitcoin and other digital currencies bounces up and down like a drunken yo-you, you can rest assured that like death, IRS taxes are a sure thing. So now everyone investing in crypto currencies has more to worry about than the value of their portfolio: their income tax obligations. But who’s been tracking their crypto gains and losses?

Chandan Lodha and Jon Lerner, the founders behind CoinTracker, spotted this problem and built a company to solve it. Cointracker supports fee tracking, margin trading, and the most integrations, while handling traders with millions of transactions. They support over 300 exchanges and 2500 cryptocurrencies.

The two are former Googlers, and cofounded the company after going through the prestigious startup program Y Combinator. They secured a seed round of $1.5 million. As the saying goes, the way to make money on a gold rush is to sell the picks and shovels and that’s certainly the tack that Cointracker has taken, with the IRS forcing crypto traders to track their transactions and file returns covering their crypto investments.

The origin story of Cointracker is typical; the founders were trying to find something to track their own crypto investment hobby. When they couldn’t find anything suitable they built it themselves. As with many tools, ease of use is critical:

“The key reason we’ve had some success to date is due to focusing on the UX,” Lodha said. “There are tons of other tools but one thing that really resonates with our users is that we’ve made it easy to use for mainstream people, not just expert cryptography folks.

And like many services, the business model is freemium: the basic tracking service is free but users pay from$49 up to $999 per year for more advanced features centered around optimizing tax filings by computing capital gains reports using FIFO, LIFO or HIFO accounting.

So if you are looking to start a new venture, pay attention to new government laws and regulations, you may well find that they are creating a new problem for taxpayers – one that you can profitably solve.

What is venture debt and why you might want to employ it

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Venture debt is a way to raise non-dilutive capital, but it is most appropraite for capital intensive businesses. Those businesses may need to buy equipment to startup their firms, but prefer to invest their venture capital in hiring talent or expanding their marketing. We raised venture debt at Course Technology – the debt was secured by the value of our computing infrastructure. It didn’t hurt that the wife of one of our venture capital investors was a partner in the venture debt firm.

Frankly I haven’t heard anything or thought much about venture debt in years until coming across the article What Does This Venture Debt Firm Look For Before Investing in Start-Ups? on Entrepreneur India. Rahul Khanna, managing director of Trifecta Capital, which has made over 50 venture debt deals in the past five years provides their criteria for making an investment.

First, “We look to partner with business in the emerging economy who are creating new categories or are clear leaders in existing categories,” says Khanna. But before doing a deal they sit down with the equity investors to make sure their expectations for the business are in alignment.

Like most VCs, Trifecta Capital back the entrepreneur. While they recognize that the founder is the expert on their business, Trifecta does attempt to highlight areas that might be a blindspot for the founder, much like equity investors and mentors.

One mistake they see, which I also see quite often, is failure to build a strong team when scaling up. Investors invest in teams, not just founders. And while a founder or co-founder can develop a product, to bring it to market and scale the company a full team, including sales and marketing executives, is necessary.

So if you have capital intensive business, have raised money from a name brand VC, and want to avoid further dilution, I encourage you to look into venture capital if you are in need of additional funding. But make sure you have a full team in place first.

A game-changing piece of advice from a mentor named Steve Jobs

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Well, when your mentor is Steve Jobs, as it was with Marc Benioff, founder and CEO of Salesforce.com, you might hope for a game-changing piece of advice. But it took Marc quite some years to actually apply what seemed inscrutable to him at the time.

The story in The Wall Street Journal, The Lesson I Learned from Steve Jobs, sub-titled A challenge from technology’s greatest showman led Marc Benioff to a breakthrough insight about how to find true innovation at Salesforce.com written by Marc Benioff, holds several lessons for founders and is charmingly written by Marc – highly recommended reading.

The first lesson is how Marc got a summer internship at Apple working in the Mac group. He had programmed several games while in high school and managed to find a bug in the Mac’s software. Unlike most of us, he directly contacted the Mac group to tell them about the bug and managed to leverage that conversation into a summer internship. Lesson one, bring something of value when you trying to create a new relationship. Marc was a mere summer intern but he managed to steel himself to chat with Steve Jobs not once but many times that summer, managing to forge a relationship out of their shared love for technology and science, as well as a passion for meditation and Eastern philosophy. Lesson number two: find common ground with someone with whom you seek to build a relationship.

Marc kept in touch with Steve Jobs after his internship ended and as he says, “as my career progressed he became a mentor of sorts.” Lesson number three: work to maintain relationships, even if at a distance. I won’t spoil Marc’s story for you except to say that Jobs advised him that though he had a slick web site, he needed a lot more, including a Salesforce “application ecosystem.” (Keep in mind this was many years before the Apple App Store.) Here’s how Marc was finally able to apply his mentor’s advice:

One evening, over dinner in San Francisco, I was struck by an irresistibly simple idea. What if any developer from anywhere in the world could create their own application for the Salesforce platform? And what if we offered to store these apps in an online directory that allowed any Salesforce user to download them? I wouldn’t say this idea felt entirely comfortable. I’d grown up with the old view of innovation as something that should happen within the four walls of our offices. Opening our products to outside tinkering was akin to giving our intellectual property away. Yet, at that moment, I knew in my gut that if Salesforce was to become the new kind of company I wanted it to be, we would need to seek innovation everywhere.

Salesforce’s App Exchange has become a huge driver of the company’s success, attracting thousands of developers and adding tremendous value to the core application. I’ll let Marc give you lesson four in his own words:

Steve helped me understand that no great innovation in business ever happens in a vacuum. They’re all built on the backs of hundreds of smaller breakthroughs and insights—which can come from literally anywhere. AppExchange now has more than 5,000 apps, ranging from sales engagement and project management tools to collaboration aids.

Building an ecosystem is about acknowledging that the next game-changing innovation may come from a brilliant technologist and mentor based in Silicon Valley, or it may come from a novice programmer based halfway around the world. A company seeking to achieve true scale needs to seek innovation beyond its own four walls and tap into the entire universe of knowledge and creativity out there.

What’s the number one issue for early stage founders?

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The founders I mentor are, with few exceptions, engineers and scientists, and as such they have a deep knowledge of their product’s subject domain and usually have made excellent progress on developing their product. But as angel Jeffery Potvin says in the Inc. article Need Funding? Ask This Angel for Advice, sub-titled Founders need resources to learn best practices around obtaining investments in their businesses: Most entrepreneurs are “builders, not sellers.”  I’m in violent agreement both with this quote and with the article’s sub-title. The number one issue, measured by the amount of time I spend mentoring founders about it, is how, when, why, and where to raise capital. I resonate with Mr. Potvin’s experience as a founder:

When entrepreneur turned angel investor Jeffery Potvin decided to turn some of his success into investments, he met a lot of interesting people with “great ideas and terrible pitches.” He says, “I kept seeing the same problem over and over: They couldn’t get attention and their value proposition didn’t make sense.

Early on in my career I was very fortunate to be mentored by an executive in Apple’s Higher Education group. She taught me about how to create visual and engaging pitches, pitches that were simple, clear, and compelling in conveying our value proposition. In other words, she was teaching me Apple’s best practices in creating pitches, as defined by its co-founder, Steve Jobs. (Perhaps proof of her success was in not only in our garnering an investment from Apple’s venture group, but for several other startups over the years.) I’ve created dozens and reviewed hundreds of pitches since that time. I find that pitch review is one of the key ways I can mentor founders. Mr. Potvin also has words worth reading about mentorship

“But throughout the years, and though through ups and downs, I always had mentors,” he says. “And there was a value in those mentorships.” However, they weren’t from the startup world. So, in retrospect, he realized that they didn’t always know how to guide him as he worked to build his first company Hardboot, which provides outsourced technical resources for enterprise companies. “But all the things I didn’t do right, I learned from. And with OPN, I want to help others learn how to do them so that they can drive their business forward.” In fact, he says he’s learned one simple lesson about whether a burgeoning business should seek investment: “If you want to grow a stable business, you don’t need money. If you want to grow fast, you need money.”

Im in total agreement with his last sentence, though I phrase it somewhat differently. I advise founders that investors invest in one thing: growth. If founders aren’t committed to building a high-growth company they should not pursue outside investment; rely on friends and family and customer revenue to support building a stable business.

Here’s some additional advice from Mr. Potvin that is worth taking into account by founders thinking about raising capital:

There are a few other tips he’d offer to any founder, particularly those who are perfecting their pitch. “First, before you build anything, define your problem. Then verify it with a company or two. Second, being marketable is everything. Reduce risk. Work with an early customer to ensure that you are solving a problem and to show that there’s a market. And third, get in front of people–at pitch events, speaking at and attending conferences… work on that elevator pitch.”

Too often I find founders fixated on their product and raising capital. This is backwards: you need to focus on the problem you are solving and your customers. Just as form follows function, product follows problem. Too many founders have a solution in search of a problem. And I have to plead guilty to multiple violations of this dictum; I have learned this the hard way.

But nothing says engineers and scientists can’t be great sales people, a very few I have known have been. But if you are like most, you are a builder, not a seller and so my last bit of advice is to consider partnering with a business person with solid sales experience, who also loves your product and buys into your vision. And whether you bring on a sales savvy co-founder or not, take advantage of the multiple mentoring opportunities out there to get good advice on the best practices in raising capital.