Scott Adams has something to teach us about mentoring

dilbert

As usual with Scott Adams, there’s a kernel of real business savvy embedded in his humor. While the Mentorphile blog focuses on mentoring entrepreneurs, not on the far more common career mentoring lampooned on today’s Dilbert strip, the pointy-haired boss’s request that “Maybe you could give me a scenario and then I’ll tell you what to do.” after whining that “It’s hard to think of advice while you are pressuring me.” are far from unreasonable. Of course, no mentor should make statements like “I’m full of useful advice”! There are two lessons here are worth noting for mentors and those founders who are being mentored:

  1. Mentors can not be expected to be vending machines for advice. Advice can’t be given in a vacuum; it needs context. It is the responsibility of the mentee to provide that context. In other words, mentoring is largely reactive. Our role is to response with helpful advice, feedback, and guidance to the founder’s current problem or situation. The exception is when mentoring raw startups who haven’t even created a business entity, in that case there is plenty of standard advice we can give about creating the right legal foundation, but even that advice needs context: is the founder trying to create a lifestyle business, a slow-growing boutique business or a shoot for the moon hyper-growth company?
  2. Scenarios are one of the best ways to educate, as proven by the case method used at Harvard Business School and at other professional schools at Harvard. Having worked with HBS on one of the first interactive case studies Managing Across Borders by Professor Christopher Bartlett –  I learned a fair amount about the case method and have become an advocate for adopting a version of it for both recruiting (in my past) and mentoring (today). While there’s a lot of abstract concepts tossed around in the startup world – like “product/market fit” – founders operate in the real world of concrete actions and results. One definition of scenario is a a postulated sequence or development of events. In other words, a hypothesis about how things will play out in the future given a certain initial state. In oThe founder can posit an “if/then hypothesis” such as “if I provide stock options to my senior management team then should I also offer options to outstanding individual contributors or even to my entire staff?” The mentor can then rely on his own experience, his experience mentoring other founders, and his general knowledge about compensation issues to help the founder explore different answers to this question.

Perhaps eventually Scott Adams will lampoon us mentors to company founders, in the meantime we now have two career mentoring strips to enjoy and learn from!

 

Strategic blunders that can sink a startup

adoption curveTechnology Adoption Curve

Flipboard, which I use to keep up with business and tech news, is infested with listicles. Since their business model is advertising you can’t blame them; research proves people will click on listicles. I tend to ignore most of them, but I noticed this article was from Entrepreneur India ,which I find is a provides a different and valuable perspective on the startup world.

Five Blunders that Could Doom Your Start-up Even before it Takes off by Dr. Pavan Soni, Founder of Inflexion Point, is based on Dr. Soni’s experience as a strategy and innovation coach and I’m in general agreement with him.  Here are those blunders with my comments based on my own experience as an entrepreneur and mentor:

Not knowing or communicating the ‘purpose’ with clarity

This blunder is rightly listed as number one. Simon Sinek observes that customers buy your ‘why’ and not ‘what.” Unfortunately, product oriented founders like myself get too hung up on the “what” – the product we are so proud of and have worked so hard to build. But what gets lost in the fervor to build – and founders are builders, as our most MIT students and alumni, they are engineers after all – is why anyone would not only want to use your product, but why they would actually pay for it. And there are layers below that, including why would they stop using their current product to adopt yours? Why would they attempt to convince other members of their team or company to adopt the product? If you don’t know the “why” a customer would adopt your product it doesn’t matter how many features you add, you won’t be adding any customers. But founders aren’t just building products, they are building companies – at the same time. And the same warning applies: what is the purpose of your company? And no, it’s not just to make money! The original purpose of Google was to to organize the world’s information and make it universally accessible and useful.”  Note how the “why” is embodied in the last phrase: make it universally accessible and useful. Simply organizing the world’s information is necessary, but not sufficient, it’s part of the what not the why. I suggest you start with the purpose of your company and the purpose of your products and why customers will buy them should follow.

Trying to be everything for everybody

This is one of the most common mistakes I try – sometimes with little success – to help founders correct. Many founders fear that by giving up some function in the Swiss army knife they are creating they will cede market share to a competitor and leave money on the table as well. They prefer to be a mile wide and half an inch deep. Unfortunately this is the converse of the success formula for startups: to be ruthlessly focused on a target market and clearly differentiated from competitors. I often use Microsoft as a great example of a startup that began focused on tools for programmers, namely programming languages. They built upon that success to become the colossus they are today by carefully expanding into adjacent markets, working their way up the customer food chain to the CEO suite, where the biggest deals are approved. One way I attack this problem is to ask, “Ok if everyone is your customer, who are your early adopters?” This generally gets the founder to pause for a minute to stop and think – the goal of a mentor! Working with Geoff Moore’s adoption cycle is the best way I know to kill off founders trying to be everything for everybody. As I tell my mentees, if you try to be everything for everybody you will end up being nothing for anyone.

Chasing the investors, and not the customers 

If you follow this blog you know that this mistake is extremely common and very frustrating to me. So many founders outrun their headlights and start looking for investors before they have a significant number of customers. I try to teach them that customer acquisition is the path to acquiring investors. In fact many of the most successful startups end up with investors chasing them because their rate of customer acquisition is so astounding. As Jeff Bezos said: “We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.” As Dr. Soni writes:  “Often, identifying the right market segment remains a thorny issue, and no amount of money can help you discover one.” That is painfully true! And keep in mind that customer revenue is the best and non-dilutive way to finance a company! Investors invest in growth potential, until you can demonstrate that by customer acquisition traction it will be very hard to garner VC capital. (The biggest exception to this dictum are successful serial entrepreneurs with very big and unique ideas.)

Settling for B-talent, initially

The number one operational responsibility of the CEO  is to supply the needed resources to build, market, sell and support their product. The two main resources are capital and people. Unfortunately I often see founders being opportunistic rather than strategic; hiring B players because they know them rather than holding out for finding A players. Hiring the best talent takes a lot of time and effort.  But if you cut corners and hire B players they will hire C players, as they are fearful of anyone as talented or more talented than they are taking their job. Here’s a great Steve Jobs quote from the article: “It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do”.

Trying to do it all by yourself

Trying to find a co-founder if you don’t have one organically – a friend or colleague – is very, very hard. And founders tend to be fearful of “giving up equity to a co-founder.” But the reality is that unless you are an inventor who plans to license their invention you must build a company at the same time you are building your product. Therefore before you even start you should be thinking of who in your network has world class talent and would fit into your company. The other source of help I’m very familiar with from experience with is strategic partners. It is safe to say that Course Technology, Inc. would never have grown to become a $100 million/year company withou the help of Lotus Development Corporation. Just as you should always be keeping an eye out for talent keep an eye out for strategic partners. And consider what is in it for them to work with you – the why again! (We helped Lotus to dominate the higher education marketplace which created thousands of graduates who demanded 1-2-3 in their new jobs.)

There are many, many more ways to screw up a startup! But if you can clearly define your purpose and your target market; focus on customers, not investors; hold out for A level talent; and successfully build out your company and forge strategic partnerships you will be far ahead of most founders.

Is it time for you to hire a COO?

coo

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?

Screen Shot 2019-11-01 at 9.19.24 AM

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

cuban

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

Bitcoin Litecoin Ethereum mining

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

debt

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.