Making Decisions in Context
August 20, 2017: This is another in my series of posts all leading up to a book on Startup Decision Making.
One of the most common mistakes I see in startups is making decisions that lose sight of the context, including the past, present, and future. Early stage startups have to survive one day at a time and are often presented with limited choices of the moment that enable them to continue. But, later on they often wish they had the ability to erase many of them.
Let’s look at some specifics:
1. Hiring is a chapter unto itself, but it deserves to lead off any discussion of context. If you intend to accomplish anything of substance with your startup, you are no better than your ability to choose the right members of your team. There are many ways to measure technical skills and check work histories and achievements, but assessment of team chemistry is a high art form. You can conduct group interviews, get your candidate “liquored up” (not a recommendation), and even have a trial period on the job to see if there’s a good match. You also must give thought to the priorities of tasks at hand. At early stages you probably don’t have an assembly line and can’t clearly define any particular job. You should be particularly mindful of trying to attract people who fit into startup uncertainty and who can roll with limited direct supervision and often limited specifications for any given assignment. This is the context of your world, and it’s not for everybody. And, if there’s a spouse or significant other involved, you better make sure that person also can tolerate this ride.
2. Compensation decisions obviously affect hiring and retention. Sooner or later everybody in a startup knows what everyone else is getting paid. They also observe who is pulling his or her weight and who is not. What will most upset them is what they perceive as unfair treatment. They’re looking to be paid properly in the context of the overall salary structure, including cash, benefits, and equity, and to be paid commensurate with performance. It’s an ancient saying that money is a de-motivator more so than a motivator, and that holds true. You can’t be too careful in determining comp packages for your new hires. Are they consistent with your founding team, are they competitive in the market, and will they not create precedents that you’ll regret in the next round of hiring? If you shoot from the hip, you’ll be shooting your own foot most of the time. Of all your hires, if you have commissioned sales people, those will give you the most problems if they’re not all given an equal chance to make their quotas and achieve their personal earnings goals.
3. Your Cap Table is something that deserves constant care and attention. Startups often hand out shares, options, and warrants for employees and for contractors rendering needed services. You can print shares all day long even if you have no cash, so I get the need for that from time to time. You will do yourself a great favor if you can maintain some uniformity in that endeavor. Keep the valuations consistent with company progress. Set any vesting schedules and expiration dates on roughly similar terms, if for no other reason just so you can track all of them correctly. Messy cap tables can come back to haunt you when you do a financing or sell the company. Your investors or buyers may want everyone to sign off the deal to be sure there are no lingering complaints out there. If you’ve handed out equity in some form to 100 people and have done so under a wide range of “sporting propositions,” you may have a very difficult time finding all those folks when you need them, much less getting them to sign. You risk being held prisoner by some long-forgotten shareholder who painted your office when you first opened in exchange for a few shares. And, there are potential tax traps as well, especially when Non Qualified options are traded for services. Even for ISO’s, have you heard of form 83(b)?
4. How about your Investors? At this writing, the first salvos have been fired in Gurley v. Kalanick, former investor BFF turned highly disappointed by founder behavior. That will keep the Silicon Valley wags buzzing for some time to come. It’s high drama at the highest levels of the Unicorn economy. In your case, you should strive to engage investors who will support you through all phases, and you should never give them an excuse to take you to court. That goes without saying. It’s so hard to raise money that your predisposition is to take the first offer that comes along. But, if that investor has an “impedance mismatch” with you or your concept, you’ll wish you kept on looking. The ideal investor is someone who not only provides you money but whom you also put to work on your team by calling on that person for connections, introductions, and advice. You should choose smart money, i.e. startup investing experience and knowledge of your space, over dumb money, i.e. cash to blow with no particular methodology. And, you should choose ones that fit your context and get along well with each other. If you get enough smart money to create a solid foundation, letting some dumb money close out a deal can be fine, if that money comes from people you know and you can trust to tolerate your ups and downs. The bottom line is that the pedigree of your investors will have much to do with your ultimate valuation and with your enjoyment of the startup experience. Work hard to give yourself some decisions to make on who’s in and who’s out. Your investors, the smart ones at least, are certainly making decisions the other way among competing deals.
5. Board and Governance issues arise from day one in most startups. Usually the founders duke it out among themselves as to titles and responsibilities and relative shareholdings. If you’ve chosen to take the plunge with a group of people and can’t quickly get beyond these fundamentals, trouble lies ahead. If you are the lead founder, if behooves you to sort all this out and get started with a clean organization. One or more of your founders won’t work out as the company goes through successive stages of maturation. New skills are needed, personalities no longer mesh, outside issues like family problems start interfering, and hundreds of other things can go wrong. Between day one and your first confrontations with those issues, particularly if you’ve raised any outside capital, you will have formed a board and stocked it with people you can really get to work on your behalf. Investors, particularly if you have institutional money, are obvious choices and may be entitled to board seats as part of their investment terms. Ohers should be chosen based on what they bring to the context of your company, not based on your enjoyment of knowing them socially. They will become the referees when you have internal disputes; they’ll be mentors; they’ll be door openers; and they’ll steady the ship. Make your choices only after you’ve done some due diligence with other companies where they’ve served. Then, keep them aware and keep yourself and your startup relatively top of mind for them at all times.
6. Self-Awareness will conclude this list for today. This chapter will be expanded in a subsequent post, but I am deciding to end on an important consideration. You must choose what and how to measure yourself as a founder and your company. Your original business plan will probably go out the window when you land your first customer. You did your best in creating it, but it consists of assumptions piled on other assumptions, and there are too many equations with too many unknowns until you actually have something ready to deliver to the market and can witness the reaction. My recommendation is that early on you decide to measure your achievements from the outside in. Keep a close eye on your competitors but also on your peer entrepreneurs in your town; they provide the context relevant to you. Keep yourself visible and keep your ears open for honest feedback. Are you progressing at the same rate as the best of them? Is your personal valuation of your company in line with what you see in your “control group” — or are you letting your natural optimism push the bounds of reality? Does the rest of your team measure progress the way you are? Do your investors and board members? If you have become accustomed to making all your choices in context, you’ll ore likely have positive answers to these questions.
7. Customers are choices made by your startup. Yes, early on every one is precious, and you don’t believe you can afford to be choosey. Your investors are pressing you for traction. You want to see your product or service performing in the hands of real users. Customers pay you money so you can keep the lights on. They often get you out of a jam when they magically appear just in time. But, you do have the power to select some over others, and I’m not talking about whether you like them or not. Your business works as intended if you can attract customers that fit into the context of your operation. Can you acquire them at a sustainable cost? Do they perceive enough value to pay prices that create for you a profit margin that matches your business model? Are the logistics manageable? Can you deliver when needed and at what quantities required? Is there a development step that you must take to fulfill demand for a particular use case, and, if so, how does that cost get absorbed? I’ve been guilty of the SNIT method of selling — Sell Now Invent Tomorrow — as have most entrepreneurs in tech businesses. Just get me some orders and let me make something that works. If you treat your customers well and choose ones that have some flexibility, they will be surprisingly accommodating when your overreach. Not that you should make that a habit, but if you do get away with it, make sure you understand how it affects your cost model. Customers that will communicate openly with you provide you highly valuable context for your business decisions. You’ve just got to listen. If you’ve been in the sales game, you know that most customers will sell themselves if you just let them. Listen first, talk later, be happy.
8. Procedures are a hot topic, right? Not really. But, it’s darn nice to have some clarity in the mundane aspects of administering a business. Adhering to standard rules and processes, no matter how formally they are documented, can keep the machinery humming. Apart from this type of context, you quickly find that it takes 5 times longer to unwind a mess later than it would have taken to have shown a little patience and done it right in the beginning. Many founders assume any flat surface is a filing and storage area. They even create a tangled web of electronic files that are hard to unravel. Sure you can use spotlight on a Mac to find things pretty quickly on your own computer, but you have files you need to share and perhaps sync with others and which are much more usable if organized and labeled in a common sense way. I advised for a good while a founder who did not use electronic files of any kind. He retrieved all documents by searching his email to find the one to which they were last attached, or, more often, he called me to re-send something and therefore move it up in his email stack. That wasn’t exactly part of my job description, but it wasn’t worth complaining about. In the grander scheme of that business, we had much more important issues to handle. Many founders assume employees will just figure out how their jobs work and do what needs to be done next. But, not everyone is a self-starter or comfortable working in an unstructured setting. They can be your finest performers if you spell out some responsibilities and boundaries for them and measure results accordingly. If you don’t, and if you allow your company to be run from the randomness of bottom-up decision making, you’ll be at fault when the results aren’t there. Never underestimate the value of the little do’s and don’ts that keep all your team working in the context that achieves your vision.
9. Your Product Plan must fit into context of your overall business mission. I’m never surprised when I see product development driven by engineers proceeding at top speed developing the next cool thing. I am very surprised when that cool thing actually meets a customer need or drives revenue. As a founder, you need to install a feedback mechanism that keeps development inside the fences. You value creativity in your engineering staff, but it translates into profits only when pointed in the right direction. From time immemorial, or at least since programming became a profession, the creation of software has been a magical journey. The old aphorism that the first 90% of the project takes 90% of the time, and the last 10% takes the other 90% is still true. It is very difficult for an outside observer to assess progress in the coding kitchen until the completed work is ready for its unveiling on the banquet table. Your best defense against slippage is making the right hires in the first place. Choose the engineers who understand the meaning of staying on task and fulfilling a business requirement. Expose them to live customers whenever practical so they have some grasp of human use cases for what they are building. Don’t distract them with meaningless diversions, like automating your Little League schedule, and don’t let yourself wander in your specifications as you are buffeted from one customer to the next. One of my engineers once told me my favorite color was plaid. Don’t be the plaid guy. (Paisley is OK.) You get the drift. You have a responsibility to be the ultimate keeper of the context for your company.
10. How about your Marketing Plan? I have spent a lot of time wrangling the topic of messaging in several recent projects. Some products are very simple to message. How about a grenade: grip the lever, pull the ring, throw a long way, duck, listen for Boom! Many tech products are hard to condense into a line or two, or even into a manageable deck. More complicated enterprise software applications are a good example of that. They may even be very difficult to demonstrate. There’s no Boom — just reams of data and a long list of features and use cases. Some take a day to explain. If that’s your case, you had better have a fat startup with lots of funding and lots of staying power. And, you had better hope your messaging is no more complicated than your nearest known competitor’s. If you have something intended for SMB or consumer usage, you must have an accompanying message that is easily communicated in the elevator. This is a recursive process. There’s no point in building something that is too complex for your target market to comprehend quickly. You’ll just never create the sales momentum you need. The marketing plan requires many decisions at the inception of the business, and it sets the context for other choices. If you watch any broadcast television, you’ve surely seen the “Hotel? Trivago” commercials with the appealing male or female spokespersons. That’s about the best messaging I’ve seen; it makes me want to find the lowest cost room even if I don’t need to stay anywhere. They air lots of different commercials, but they all use one of those two people to hammer home a very simplistic and unforgettable message. It behooves you to strive for similar succinctness and to carry that across all your communications, from web to social media to presentations to just casual conversations at your country club. You never want to hear the dreaded request: “Explain to me again what your company does.”
11. Service Providers, more particularly attorneys and accountants, can be a high value added component of your venture if you are careful to use them in proper contexts. If you have a straightforward organizational and seed funding project, you have plenty of options in smaller law firms that specialize in such areas and who are cognizant of cost pressures. There’s no need to go to a Wall Street legal team unless you are rolling the dice for a Unicorn with a truly fat startup. Those firms will welcome you when you get to their scale and will be happier for others to handle your needs on the way up. If your startup is in a highly specialized area, say wet-lab life sciences, then you will want to look for lawyers who know the regulatory ins and outs and can keep you out of trouble. Both your lawyers and accountants can provide warm, qualified, and recommended leads to investors from seed through multiple lettered series thereafter, and that’s an area where you should ask some questions in advance. If your own network isn’t adequate to generate the funding in a highly specialized sector, make your service providers part of your strategy to offset that shortfall. If you’ve got patent or other IP needs, you may want to engage specialists in those areas. Many founders I know are happy to use legalzoom, and, according to its website it has helped start over 2M businesses. It’s a good product, but I personally will always choose a trusted expert to make sure everything is in order when I’m trying to create a business of any consequence. Early mistakes, especially on securities matters, can complicate or even thwart exits some years down the road. My decision is always to spend a little money on protection at this stage and keep my focus on running the business.
12. The World will conclude this list for today. You see the same news I do, so there’s no point elaborating on the many threats to our society and to our economy. Many of us suffered in the 2000–2002 dotcom crash and/or the 2007–2009 Great Recession; others hardly noticed a blip. If you’re in the oil business today, you’re down; if you’re in the transport business you’re quite happy with lower fuel prices. You may be starting something that will ride a new technology wave and be impervious to general economic cycles, or the opposite may be true. The owner of Waffle House told me he has a very counter-cyclical business; when times are bad, he gets a better class of customers and can hire better help. It’s still an extraordinary business at all times, however. The point is that you should making decisions from the onset in the context that, over your first five years, world events may radically alter your possibilities. A Korean war could bring about a technology industry winter on top of the enormous suffering to those directly in its path. There are many externalities that will make choices for you. Just don’t make a really dumb decision like building your business model around Sears as your primary customer. Keep your antenna up and be aware of all that is happening around you. Those could be good events as well as bad, so we’re not ending this essay on a sense of doom. The prevailing wisdom now is to approach every day with a sense of gratitude and make the best decisions you can. The rest will take care of itself.
