Premature scaling kills businesses.

Venture capitalists sometimes make an error in directing their portfolio company CEOs to push resources to the limit and scale the business to immense size quickly, all to seize market share.  The logic in this is simple: once a company has market share, other issues can be sorted out to monetize the market, make the company profitable, scoop up wavering competitors, or even sell the company to a larger firm looking for a large customer base.

This form of thinking has been unusually true during the rise of social media, where Up_rightmarket share became the primary goal of a company, with revenues and profitability to follow later.  It was true for Amazon and other visionary companies that grabbed market share during the early Internet era.  But beware. Many, many companies accepting venture capital lost it all following this instruction.  VCs have a goal of creating extraordinary value for their investors.  Incremental profits from companies that later sell for three to five times their original value at the time of their investment may be considered great successes for founders but relative failures for VCs, who must hit for the fences with every early stage investment.

[Email readers continue here.]   I’ve been involved as a board member of two such businesses, where venture investors came aboard and pushed management to immediately scale the business without regard for profitability, and without much regard for infrastructure.  Both businesses scaled beyond what their market could absorb, and revenues did not build at nearly the rate of audience increase.  The cost of each exercise was dramatic, far beyond what a founder-entrepreneur would order to be spent when using his or her capital or reinvesting cash flow from operations.  Venture investors need large scale to make large exit valuations, or in many cases are not interested in maintaining marginal companies.  To state it again, what might be a success to angel investors and to founders could be only of marginal interest to a typical VC.

Scaling a business is an art as well as a science.  By definition, scaling requires the addition of fixed overhead, sometimes the kind you cannot shed easily, including leases for expanded space.  Experienced CEOs often make it a habit to scale as a result of demand, reducing risk and mating cost to growth in revenues.  Angel investors are more tolerant of this than VCs.   Typically, when you bring a VC onboard, you increase the risk, the reward, and the definition of the size for a successful exit.  Adding to this is the extra risk undertaken by premature scaling.  It is important for you to realize that there is a fair tradeoff in valuation between a company with less outside investment and a lower endgame sales price, and one that shoots for a much higher valuation to justify a higher amount of outside investment.

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5 Simple Steps to Executing the Plan

It is all about execution.  Waiting over a year to see results is too long, since your chance of mid-course correction is greatly reduced.  To make the point, Harvard’s Robert Kaplan believes that less than 10% of corporate strategies are effectively executed.  Ouch!

If that is true, we are tolerant bunch.  We carefully plan in long, dedicated sessions each year or so, then draw up a series of goals, strategies, tactics, objectives, targets, or whatever we want to name them.  We hold all-company meetings where possible, and departmental meetings to roll out the new plan.

We set individual objectives and rewards to match these goals.  Then we manage day-to-day routine execution, and periodically measure the results.  Sound familiar?  This is the startegy+4_smbfdescription of a well-managed process within what should be a well-managed company.

And yet, Kaplan is close to right, whether it’s 10% or 30%, it is a minority of strategies that are effectively executed.  Why?   Here is a list to use as a guide to better execution.

[Email readers, continue here…]  Make the plan simple to understand.  Once deployed down one or more levels in the organization, like the old game of telephone, the corporate plan begins to look less like the original as each department attempts to adopt it and create departmental objectives to conform.  A complex plan stacks the deck against all but those who created it at the top.

Put someone in charge of executing the plan. That may be you, but in some companies, that requires a dedicated individual tasked with removing roadblocks, measuring success, and reporting progress.

Provide feedback loops at each critical stage of execution.  If the plan calls for increased revenues, measure output and efficiency as well as revenues.  Look for leading, not lagging indicators of change.

Make sure you provide the resources necessary to hit the plan, including money, new hire authorizations, and above all, clear instruction and delegation form the top.

Listen to complaints, suggestions and warning signs.  Respond, so that people know you are serious about execution of the plan.  Modify what is not working.  Then pivot, when necessary, to scrap part of the plan, and then rewrite it in order to meet its objectives.

If a plan has realistic goals and if you are reasonably able to provide the resources necessary to complete the plan successfully, you are way ahead of that other 90%.

But if you toss a plan out to others to execute, don’t follow through until the end, fail to measure, or to provide needed resources, then you will deserve your fate.  So take heed.  If you go to the effort to plan, go to the effort to succeed.

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Fish in the giant ocean – not in a shallow creek.

This is like a Hans Christian Anderson parable, but aimed at you and your business… There are big fish and small fish, potential customers, all swimming in the sea that is your potential marketplace.  You, the lonely fisherman, have to weave a net to catch your fish.  Should your net be large and bulky, requiring more effort and expense to weave?  Or should it be small and delicate, to catch those fish that would otherwise fall through the net?

The size of your market may well define the ultimate size of your dream.  You can be the fishbowl1most successful coffee house owner in a city of ten thousand, or the founding CEO of the largest chain of coffee shops on the continent.  Defining your market in a limiting way reduces the opportunity to exploit the larger potential that may be available to you.

If you attempt to create a manufacturing business where the total available market for your products is only $30 million, even success leading to a dominant share of the market would not allow your company to scale it to a size of great interest to investors.

[Email readers, continue here…]  This lesson is important.  Companies grow proportional to the size of the market, and success cannot turn a limited market opportunity into a grand enterprise.

When we investors look at a business plan, we look immediately to see if there is research to support the claim of a large enough market to expect the candidate company to grow into the size projected.  And we look to see if the size projected is large enough to interest us as investors, since that is directly proportional to the ultimate value of the company in a liquidity event.

To the point of the headline above, sometimes an entrepreneur claims that there is a large market, and attempts to make the case for growth into a grand scale company, sharing only a relatively small portion of that market.  If the market claimed to be of a large size has no current, fast growing competitors, we must guess at the accuracy of the claim – something very unscientific.  But if there are entrants already scaling, often we then can focus upon the differences and advantages our candidate entrepreneur brings to the market, a much more comfortable piece of work for the investors.

The size of your dream must be scaled to fit into the size of your marketplace.  Be sure you can back up your claim with some form of research, then work to perfect the differentiation you offer against the competition.

And if your market truly is large but of unknown size, and if there are no competitors growing in the market, you must work doubly hard to convince investors of your dream.  Yet, there are wonderful cases where entrepreneurs created and grew vast enterprises in new markets which could not be measured when their journey began.  Think of FedEx, AOL, Microsoft, Cisco Systems, Facebook, YouTube, and tens of other billion dollar or larger players in markets that did not exist or were in their infancy when those entrepreneurs cast their nets.

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Money motivates.

What a title.  Of course money motivates.  But there is more to it then this.

Salaries or hourly wages must be within reasonable limits set by the industry and matched by the competition, both regionally and for the same job classification.  But more difficult is the sticky issue of employee incentive compensation.  I find that this is an area much more often the subject of a CEO phone call, a roundtable discussion, or a board compensation committee meeting.

There are many studies that can tell us how various industries reward employees for achievement above a base pay, or beyond expectation. And there are some industries money1where tools such as stock options are considered mandatory for a company to be competitive.  But how about listing the basics for designing an excellent incentive compensation program?  Here are several, gleaned from numerous companies and systems of compensation.

[Email readers, continue here…] First, be rule specific.  A bonus or commission that is granted after the fact, without a target plan or without objectives to meet, is surely appreciated, but does not often create an incentive to exceed, only an expectation of receipt again in the next period.  When a leader and a subordinate agree upon a list of achievements in advance, then good performance can be rewarded based upon a fair assessment of accomplishments against those achievements.  And if those goals are aligned with those of the overall corporation, everyone wins and the process can be repeated in subsequent periods.

Second, there should be a substantial carrot, or upside bonus for outstanding achievement.  A sales commission plan should reward a salesperson with a combination of salary and commission up to the expected level of performance, often called a quota.  Perhaps a part of that compensation plan should include a bonus upon achievement of quota, as a form of recognition and celebration.  Then, contrary to popular thinking, there should be an increasing reward for achievement above the expected number, beyond the list of agreed-upon incentives for non-commissioned employees.  For a salesperson, the commission percentage should increase above quota, and a second level of bonus available at some higher point.  Sometimes, a combination of revenue, gross profit and even operating income form the basis for individual and team rewards.

Next, some form of rewards should be designed to be immediate.  Rewarding a February achievement in December disconnects the reward from the event, reducing the effect of the reward itself.  If we believe that money does motivate, then we should reward positive behavior immediately to reinforce that behavior.

Finally, and perhaps most difficult to design, there must be protection against workarounds or from employees gaming the system.  Reward only gross revenues, and salespeople will push the limit of profitability, impacting the corporation but not their commissions.  Real estate agents are paid as a percentage of the sale, not upon its relationship to the asking price.  Sometimes, agents push their clients to accept low offers to assure a quick closing of a deal, since their participation percentage is only slightly affected by a price cut to close the deal quickly.

There are more insidious ways to game a compensation system.   Wall Street brokers helped to create the financial crisis by following a bonus system driven by quantity, not quality of trades.  Salespeople paid entirely upon closing a deal will care less about the subsequent completion of a complex, time-consuming transaction.  Support people paid based upon the number of tickets closed will rush to close tickets at the expense of quality service.   There must be thousands of such examples where poorly designed systems allow employees to achieve personal goals that are at odds with the best interest of the corporation or its customers.

So use these four items as a checklist as you create compensation plans for various levels and types of employees.  Rule specific; substantial upside bonus; immediate rewards; protection against working around the system.

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Protect your international traveling employees.

international_travelAs your company grows, you will probably have to make conclusions about traveling employees, and travel for yourself.  There are vast opportunities internationally that require careful planning to execute well.  One of the most critical decisions is how to enter a new country or region.  Most companies early in to the process do not have the resources to place people on the ground in foreign countries, so they make new relationships with distributors or dealers to represent them in the new areas.

As you begin your travels into new territories away from home, it is always wise to have a host to greet you from arrival through departure in each country that is new to you.  If you do not yet have any firm relationships in a country, develop some connection using your outreach channels before the first flight.  Even if you are going to start a series of interviews, you can have one candidate meet you at the airport and another later return you to the airport.  You should find this connection occurs automatically later as the relationships mature and you have either dealers or your own personnel within each territory.

[Email readers, continue here…]  The customs, laws and even the knowledge of safety dos and don’ts are critical elements in assuring your safety and that of your traveling employees.  It is also good business to learn local customs from locals.  Having a local contact to provide information to your home and your work is a relief to all, including yourself.

Then there is the question of creation of a regional office to cover multiple countries in a geographic area.  It is the next logical step toward creating corporate entities abroad.  And the regional manager hired to oversee multiple countries can act as country manager for his or her home country, often volunteering to travel with you to the various countries in the region.  That’s the best and safest choice for a next step toward becoming a true, international entity with offices in numerous countries as you grow.

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The coffee and wine school of innovation.

coffeewineHere’s one for debate around a cup of coffee or a glass of wine.  Most innovation occurs when creative people are relaxed and thinking about other things.

We all can picture the corporate R&D lab with tens of scientists working at white boards, or over computer models, or with prototypes.  And we picture programmers working at their workstations or on their portable notebooks creating great new code.

But all of those people are following the flash of inspiration that started their activity, and it is that flash we seek to reproduce again and again in a successful enterprise.

[Email readers, continue here…]  This leads us back to coffee and wine, and showers, and quiet time.  Given that we are looking for that flash of inspiration that starts us down the path of innovation through the hard work of R&D, maybe we should reengineer our thinking about allocation of time for our most creative resources, including ourselves.

There are times when creativity comes under pressure.  Necessity, after all, is the mother of invention.  But whole leaps into new groundbreaking areas of innovation most often come from times of reflection, when the mind is clear to dream ahead, to think without interruption.

So there are those who subscribe to the coffee and wine school, and encourage creative thinkers to find extra time in the early mornings or evenings to free the mind to innovate, to find the spark that could propel a company forward.

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Reward success and failure. Punish only inaction.

Reward failure?  That may be a difficult concept for an executive. And there are limits of course. We wouldn’t reward a failure to follow laws, or protect lives, or deliberate endangerment of the company or its people.

But should we reward a research team that fails for the fourth time to find the solution to a nagging problem – on the way to a new product?  What if those failures are success-failurecommonplace?   Where do we draw the line?  Edison tried a thousand types of material before finding tungsten for the core of the light bulb.  If he had been a research employee reporting to you, at what point would you have pulled the plug on the project, or become disillusioned with the person?

The culture of the company you grow is very much influenced by your actions in rewarding or punishing employees or whole departments. And the best companies seem to be those that are motivated from the top to push limits within reason in order to find better ways to do things, to create products, to expand the market.  The CEO must realize that most such efforts lead to a dead end or will fail outright.

[Email readers, continue here…] I was once in the record business.  Speak about insanity. Only two percent of all records released broke even.  Of course, the major hits paid for thousands of misses.  In venture capital, the conventional wisdom is that one in ten investments will more than pay for the complete loss of half of those ten investments.  Yet investors reward the VC’s with a track record of one in ten, and record companies still churn out a reduced number of recordings, knowing that a great majority will fail to break even.

So, where does the learned, best of breed CEO step in to administer punishment?  As the headline infers, a visionary, proactive leader should not be able to stand by and condone inaction.  That is not only a waste of corporate assets, but the fixed overhead eaten by the inactive period keeps draining the cash and time resources of the corporation with nothing to show for it.  Wouldn’t you rather dissect a failure and move forward, than have nothing to show for time and money spent in wasted fixed overhead?

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Power is sometimes assumed when not granted.

How many times have you heard someone say “Let’s do it now and ask permission later?”  It’s a common practice in companies where there is a barrier between levels in the chain of command, or lack of communication between contemporaries.  The statement represents a failing at some point in the delegation or communication chain by a higher level of angry_employeemanagement, and should be taken as a warning that there is a problem greater than the issue handled at the moment.

I’ve worked with organizations that are so large that extensive paperwork is required to obtain approvals to accept customer orders, make any purchases of any size, or any commitment of resources.  In every case, people try to stretch those restrictions in as many ways as possible to get around the time taken to complete forms and lost in waiting for approvals.  It’s the “order prevention department” syndrome.

Incomplete delegation of responsibilities, or controls that are too tight, both lead to a rationale for subordinates to circumvent the system.  The worst thing about this is that the people most likely to do this are those most entrepreneurial and creative in doing their jobs.  Conversely, those most likely to fall back and seek guidance, clarification and direction are those most subservient and least creative.

Middle managers sometimes identify those who assume power as non-conformists or even troublemakers. It is rare to ever see a dialog come out of such an event that leads to better defined delegation of responsibilities, removal of roadblocks, or relaxation of overly restrictive rules.  More often such actions lead to reprimands without analysis of the underlying general cause.  And occasionally, the very creative, driven individuals you would otherwise celebrate are made candidates for elimination instead of catalysts for change.

 

Posted in Depending upon others, Surrounding yourself with talent | 1 Comment

A tale of two CEOs and the management of pain

This is the tale of two CEOs, one of them unfortunately….me.  It’s a story of how people handle unusual situations when selling to the top – an executive of a prospective customer.  And the stories couldn’t be more different.

Recently a CEO friend told me her story of a dinner with her director of business development and an executive of a major company, a candidate for a large sale.  As the dinner progressed, he started, and then continued to excuse himself from the table,

looking paler each time.  After several of these, upon his return, she asked him if everything was OK.  He responded, like most of us would, that all was OK, and that he was
having a bit of trouble breathing, would probably have to leave the dinner early, and drive home.

She took one more look, and went into decision mode.  “No, you aren’t fine,” she stated. “Give me your car keys; we’re going to the hospital.”  He reluctantly acquiesced, and she tended to him as her director drove all three to the hospital.  She had him call his wife on managementofpainthe way to meet them at the hospital.  As they waited in the emergency room, after more episodes, his breathing finally became easier, and by the time the doctor saw them, he could find nothing of worry, ruling out stroke or heart attack.  Our CEO then returned to the restaurant and met with the chef to have him list all the ingredients from the meal the executive was eating.  The problem was, as you guessed, an undiscovered food allergy, with a possible ambulance ride averted and a happy ending.   The executive even tells the story now that the CEO may have saved his life, because he was unwilling to own up to the fact that his breathing was so very difficult.

Now, I would not have been so fast to take charge. Maybe it’s a guy thing.  I would have been thinking about the sales relationship and the sale, and would probably have let the guy drive home, acknowledging his discomfort, and ending the dinner early.

This leads me to my story.  Years ago, I was in the process of selling a $125,000 system to a well-known baseball hero who owned his namesake hotel in St. Louis.  Flying on the red eye to make a morning appointment, his hotel bus driver dropped me off in the dark a few feet beyond the lighted portico. I stepped off the van into… a recently dug pit about two feet deep, and broke my foot in the fall.  What pain!  I tried to sleep in the room they gave me, and managed to make it to the 10:00 AM meeting with the very well-known sports figure and sales candidate.  He saw me drag my leg into the conference room, made no comment, but asked if I would like a tour of the hotel.  “Of course,” I said, ignoring the pain and dragging my foot the entire way through the tour.

Well, I didn’t make the sale.  And I didn’t sue the hotel.  I was in selling mode and nothing was going to detract from my focus or reputation.  I sure was not admitting to the problem or seeking recourse for the obvious flagrant error by the hotel in not marking the excavation.

Who was right?  Well, I should have led the meeting with my story of woe in order to protect others.  The other CEO took charge, and made a friend of both the potential customer and his spouse, who she called as they drove to the hospital.

Is it a guy thing?  Is it conditioning us to put things in perspective regardless of the personal outcome, including a lost sale?  I think about these two examples now, and have concluded that there are some traits of a great CEO that cannot be learned easily.  Putting others above self, and sacrificing a short term goal is not easy for a type ‘A’ driven entrepreneur when the stakes are high. But it is the right thing to do.

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Protect your outlier innovators.

Here’s one for executives of technology companies, or any company with next generation products in mind.  As your business grows more complex and there are more employees to manage and more customers to care for, slowly you will notice that more and more time of your chief innovation officer or system architect or R&D department is spent focused upon enhancements in response to needs of the user base.

The company’s most valuable technical visionary, the person tasked with staying out in outlierinnovatorsfront of new technologies, developing the next generation of new products, and thinking “a mile above the box” is drawn into working on projects that are incremental to the product and to the existing business.  Often he or she will approach you and state that the work has become more boring, and that there is no time left for creative thinking or next generation experimentation and development.

[Email readers, continue here…]  That’s one scenario. In many companies, there are people who are quiet geniuses, wanting to work on projects outside of the daily focus of the department or company.  Managers sometimes view this behavior as non-strategic or wasteful, and even sometimes will isolate or reject these outside thinkers outright.

Or finally, you may want to start a project using the next generation of tools to produce an entirely new product – but your development resources are all tied up with projects to enhance existing products.  Whichever of the three scenarios may apply to you, it is a red flag for your future if you condone the status quo, and allow the company to devote all of its resources to existing products and simple enhancements.  Your best creative thinkers will leave you, looking for more challenges than you can offer.  Your competitors may already be working on the next generation of product, as you remain stuck in the mud, even if focused upon serving the customer base with outstanding service and rapid feature rollout.

It is up to you to decide if research and development for advanced or next generation products is a strategic priority for you and your company.  If so, you have a duty to protect these future-focused developers or architects, removing or reducing the pressure of reactionary development work, and isolating them in a space that prevents constant interruption by others focused upon day-to-day work.

Technology companies are prime targets for this problem.  Every six to ten years, there is an entirely new platform to focus upon for the next generation of products.  Just think of the computer and software fields.  First there were mainframes, followed by minicomputers, then client-server systems, then peer-to-peer networks, then the Internet, mobile devices, cloud computing, and now mesh networks.  Each generation required new tools, rewrites of software, creation of new user interfaces.

And in each generation, there are dominant players from the past generation that fade as new companies not inhibited by the demands of their user base leap beyond the last generation’s leaders with new systems for the new age.  Leaders of significant size are sometimes made irrelevant over time, or pivot into service organizations, or absorbed into growing next generation companies.

What happened to Wang, Sperry-Univac, Burroughs-Unisys, DEC, RCA, and hundreds of early generation leaders?  Their CEOs did not provide enough of a safe environment and enough resources to their creative geniuses to make the leap into that next generation.

It is a cost of doing business that you cannot ignore.  Not only providing resources for next generation development, but protecting the people performing those development tasks should be one of your strategic priorities.

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