BERKONOMICS – Business insights from Dave Berkus

Surrounding yourself with talent

Find your champion.

by on Jun.19, 2014, under Depending upon others, Raising money, Surrounding yourself with talent

If you seek funds from an organized investment group such as an angel fund, venture capital entity, or even an investment club, the first thing you want to do is to find one person to buy into your vision, become excited by your enthusiasm and be willing to become the internal champion for your fund-raising effort.

In some groups, if you cannot find such a person, you cannot even find the way to apply for funding, as some groups make it imperative that any introductions come from the inside, from a member or partner.   In others, if you cannot find such a champion after initial presentations to a subset of the entire group, you will not be permitted to move from initial application to the next stages of due diligence and final funding.

And in all cases, simply sending in an executive summary of the business plan via email or filling in an application for funding on a website lowers the chance of success to near nil. If you cannot find someone on the inside, network with accountants, attorneys and bankers to find a name of an influential member or partner.

2014-0329_OxyTEDx-0276  [Email readers, continue here...]  You may have the most impressive plan in the world, but these organizations see tens of these each week, and often cannot be expected to understand the vision and potential of any at first glance at a document.   I receive three hundred unsolicited executive summaries a year, and my investment group, Tech Coast Angeles, sees over one thousand. Together we fund, maybe, twenty-five of these. Although much more than half are disqualified because of geographical location, industry, or amount of money needed, that still is a small percentage of funding to applications.

Banks and lenders often are the same way. Although anyone can walk into a bank and apply for a loan, those who are recommended by a trusted source are treated much more personally and have a greater chance of success.

Spend time finding your champion. Create time to network with members of these groups at their public events. Seek out names from your trusted sources.

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The Rule of Thirds

by on Jun.12, 2014, under Ignition! Starting up, Raising money, Surrounding yourself with talent

It is rare when one person starts a company, supplies all the funding, and shares no management tasks or equity with others, and still grows the company to any significant size, worthy of a multi-million dollar opportunity to cash out at exit.

We should think of the creation and growth of a high valued company as the sum of three parts, with three distinct classes of participants helping to make real value out of a raw start-up.

First, there is the entrepreneur, the visionary, and force behind the venture from start to finish. The reward for the entrepreneur, after years of effort, time and sacrifice, is measured by EA-9817what portion of the total pie s/he retains at exit, how much the person continues to participate through that time, and how many other resources are brought in to get to that point. Most importantly, the reward is measured by how much added value the total process creates over time. It is the old story of “100% of nothing is worth far less than 10% of a large number.”

[Email readers, continue here...] Few entrepreneurs can do it alone, with subordinate hired help and no expert management to share the burdens, skill sets and efforts involved in growing the enterprise. So co-management is the second group to share in the bounty upon a liquidity event. Often, if not co-founders, this group is rewarded through issuance of stock options from a pool of available options that usually totals 15-20% of the total company’s equity divided among all employees. Those who receive options but leave the company before a liquidity event may either purchase those shares represented by the options upon exit from the company, or lose the right to those shares, often 60 days after their exit.

The third group is made of the total number and types of investors, other than the founder(s). From friends and family early on, to angels that are not related to the founder(s), to venture capitalists for larger opportunities, these investors have risked their money in the venture for only one reason – to eventually profit from a liquidity event.

It is normal for the first round of organized angels to expect to purchase between twenty and thirty-five percent of the company with their investment. Second rounds, if needed, often drive the founder(s) into a minority position, unless the company has grown significantly by that time and can command a higher pre-money valuation, giving less stock for the same amount of investment. Investments in small companies involve a much greater degree of risk than investment in public companies, which provide immediate liquidity if needed and a ready measure of value at any time. That risk deserves reward if there is a profitable sale or even an initial public offering, rare as that event is.

So remember that there are three slices to the pie to consider when creating your company and again when considering a sale or liquidity event. All three deserve recognition for the risk, time and effort in driving the company to its ultimate value.

Think of it as the rule of the thirds.

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Accelerators: a recent and positive trend

by on Apr.24, 2014, under Growth!, Raising money, Surrounding yourself with talent

Often I see executive summaries from entrepreneurs who have never managed any form of business, or even managed employees in their past life, and who don’t know the first thing about business formation and managing for growth.  I used to tell them to find a partner with knowledge in business creation and management.  Although that is still a good idea in many cases, there is a recent alternative available to some entrepreneurs on a competitive basis that seems most attractive and positive.

Accelerators are organizations that selectively accept entrepreneurs into a program of intense coaching in a physical environment sponsored by the accelerator that also provides seed funds for the startup to begin its business.

[Email readers, continue here...]  Accelerators are popping up in college towns, urban cities and near existing technology hubs.  Some have become well known in the entrepreneurial community as benchmark operations for others to emulate, including  TechStars and Y-Combinator. Others have a more local flavor, catering to single audiences, such as students or 2014-0329_OxyTEDx-0276graduates of a nearby university.

Another term, incubator, is increasingly being used to define real estate operations run by universities or private groups in which the principal added value is the reduced price or free rent and access to resources from the incubator’s sponsor.  Accelerators, on the other hand, put entrepreneurs through a three week to three month intensive program closely monitored by accelerator management and volunteers, teaching, coaching, aiding and building the fledgling business to make it ready for its next round of financing upon graduation.

And graduation is typically marked by an organized “demo day” in which prominent investors, VCs, angels and super angels are invited to attend and see demonstrations and hear presentations from graduating entrepreneurs.  There are many stories of funding deals made on demo day amid the excitement of seeing new, polished startups with great ideas and the beginnings of an infrastructure.

Are you a candidate for an accelerator?  You’ll give up some small amount of equity to the accelerator, receive some amount of cash in return during the program, and learn more in a short time than you’d expect from more formal education programs.

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Ready, aim, fire. Really?

by on Jan.30, 2014, under Ignition! Starting up, Positioning, Surrounding yourself with talent

You’ve surely heard the variations on this theme.  “Ready, fire aim” was popular in the 1990’s, accredited to any of several authors.  I used the term to describe my efforts in the artificial intelligence field, experimenting with new devices, the lisp programming language, and our first trial installations.  It seemed an ideal way to describe a scrappy, entrepreneurial activity.

So why do so many business-book authors stress the opposite behavior? Ready, FIRE, aim. What happens to careful planning, sure-fire metrics, quality test scenarios, market research, a good business plan – all in place before pulling the trigger of a new opportunity.

And who is right here?

[Email readers, continue here...]  If you’re seeking investment from anyone other than friends and family, you’re probably going to have to navigate through the exercise of careful planning, documentation and execution.  Investors are a fickle bunch in general.  They want to know that DB Concordia2their money is not just being thrown at an idea that will become a trial by fire – literally.

On the other side of the argument is the truth of the claim that numerous iterations in the form of rapid prototypes and execution of new ideas in the field quickly refine the product or service to meet the needs of the customer, and at a far faster and cheaper pace than with careful pre-planning.

In the software arena, there is a term for this: “cowboy coding.” Without the need to carefully document the architecture and elements of a proposed application, a single programmer can much more quickly just code, test, and create revised code.  Without even pausing to document the process internally, no-one can easily take over the job, if for any reason the cowboy coder is no longer in control.  And the result? Typically, we call that “spaghetti code” to signify code that is so often changed that it no longer looks clean and traceable.

The conclusion is that the best process depends upon the product, its critical core nature to the business using it, and the way in which the entrepreneur approaches the need for outside investors.

Critical components of any operation or business must be carefully constructed, tested and inserted into the operation of the business.   On the other hand, if a new free iPad app has bugs, they can be corrected in the next automatic update, and probably without much customer noise.

Which is better for you: rapid iteration or careful planning?  What is your case for defending your method of creating new products or services?

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Plans? Humbug! Show me what you’re made of.

by on Nov.14, 2013, under Finding your ideal niche, Surrounding yourself with talent

By David Steakley

Our guest insight this week comes from David Steakley, a past President of the Houston Angel Network,  and a reformed management consultant.  He is an active angel investor, and he manages several angel funds in Texas.   Hang on, David tells it like he sees it!  – DB

Business plans are interesting.  But, as a famous field marshal (1) said, no battle plan survives contact with the enemy.  I have found it more important to assess the capabilities of the founding team to react, revise and pivot (quickly change direction), than it is important to assess the business plan.  How do you know whether your founder team and your added executives have the right stuff to survive contact with the enemy?

In addition to the ability to pivot, character matters, too.  As my kids have commenced driving, I’ve harped incessantly, hopefully to the point of their nausea, on the notion that they should always have in mind that everyone driving on the road is in a massive conspiracy to collide with them, and make it appear that the collision was an accident.  “Just assume everyone is trying to kill you,” I say.

I take this approach to angel investing.  I begin by assuming that the founders of the company are incompetent, psychopathic, lying con-men and thieves; and I try to convict them of these charges.  I ask them innocuous questions, and try to check as many seemingly inconsequential details of their story Basic_Berkonomics_front_coveras I can.  Where did you go to school?  When did you graduate?  In what field was your degree?  What was your first job?  Why did you leave that job?  Where did you grow up?  Did you play sports in high school?  What are your hobbies?

[ Email readers, continue here...]  Faithful in little; faithful in much.  If someone will deceive about a small matter, he will deceive about anything and everything.  I don’t do business with liars.  If I am unsuccessful in proving these charges, then, perhaps the company is a candidate for investment.

I was a partner at a large global consulting firm.  We hired literally hundreds of thousands of graduates every year.  They had no meaningful experience.  The only way to evaluate them was to look for a kind of raw, athletic talent.  To help us in this, we adopted a technique which I believe is now universally used, but which was unusual at the time.  We called it behavioral interviewing.  This technique relies on identifying specific traits and characteristics which one wishes to find, either negatively or positively, and then asking the candidate to tell specific true stories about situations in which s/he would have had an opportunity to demonstrate the traits in question.  A lot of the value of this technique relies on the interviewer being extremely aggressive with the candidate about the minutest of details within the story offered.

For the founders of companies in which I am considering investing, I have concluded that flexibility, intellectual nimbleness, and a relentless focus on dispassionate examination of factual evidence of results, are some relatively rare traits with which I cannot ignore.  “Tell me about a time when you changed your mind about something important,” I will ask.  “Tell me about a time when what you were doing wasn’t working.  How did you know it wasn’t working?  What was the problem?  What did you do?” “Tell me about a time when you screwed up big time.  What happened?  What did you do?”  I will ask questions about the tiniest details of their stories.  What were you wearing?  What time of day was that?

I have actually had people respond along the lines of “I don’t recall a time when I screwed up.” Or “Sometimes I have been let down by my subordinates and my partners, though.”  Check, please!

But, a more common problem is that you find out by detailed questioning that the story presented is not really a true specific story, but a theoretical composite story, which reflects theoretical behavior the interviewee assumes you want to hear about.  I don’t want to work with these people.  They are trying to tell me what I want to hear, and they do not want to admit the possibility of fault.

I want to work with people who are pleased to discover mistakes, errors, and opportunities for improvement.  I will not work with people who hide mistakes, who ignore errors, and who pretend that everything is wonderful.  I want to work with people who face the truth.

One of my very
favorite entrepreneurs is the shining example of taking himself to task over errors and missteps, and of a constant vigilant search for how things are going wrong in his businesses.  Recently he launched a unit which developed a casual browser-based online game, monetized through micro-transactions for virtual in-game goods.  One of the beautiful things about this kind of business is the depth and immediacy of information available about performance and results. So, when something is changed, you find out immediately how the change affects results.  This company has been through so many iterations of its model that I have lost track.  I love the willingness to experiment, and the perpetual dissatisfaction with how things are going, and the relentless quest for improvement.  This guy is going to make me a lot of money, or die trying.

So, focus on the personal traits and characteristics of your team.  Things will definitely go wrong.  You want to have some idea of how your team will react when that inevitably happens.

(1)      Helmuth Von Moltke the Elder, 1871

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Play Nice!

by on May.30, 2013, under Depending upon others, Surrounding yourself with talent

When you were a kid, surely at one time or another, Mom or someone reminded you to “play nice” when you got a bit rambunctious with your friends.   I was reminded about this by Mark Wayman, a friend and reader, who applied this statement to his recruiting environment. He called out those people who focus upon executives who burned bridges with threats and lawsuits, instead of just picking up their toys and moving on after a bad business breakup.

Over the years, I have reminded departing employees in their exit interview that we should always, always both take the high ground and speak well of each other, since we never know when we will meet again under entirely different circumstances.  And indeed, former employees (not necessarily disaffected or threatening in their departure) have shown up regularly as suppliers and customers in various companies in subsequent months and years.

DB Concordia2There is no immediate gain in threats to an employee or by an employee.  But there certainly is an immediate loss of respect and the start of a series of events that sometimes cannot be stopped.  A threat of a lawsuit results in that person being immediately isolated and sometimes removed – if the employer believes there is enough evidence of misconduct or poor performance in the file to justify immediate termination.

[Email readers, continue here...]  Short of threats, bad-mouthing a former employer or employee is the worst possible behavior when considering the effect upon the corporate culture if the offender is the employer, and upon the person making the claim if by a former employee.  The point is that no one wins in this kind of word war.  And if it ever gets to a lawsuit, both parties lose a second time as the lawyers take control and costs escalate out of control.

Mom’s advice is almost always right – for business as well as for personal relationships.  Never strike out at anyone before first cooling off and thinking about the relative worth of the effort against the long term gain or loss.  The resulting effort will be surely muted and couched in a way that you’ll avoid retribution.

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Manage your bottlenecks!

by on May.02, 2013, under Protecting the business, Surrounding yourself with talent

As a manager, you have a number of critical tasks that are general to your position as opposed to specific to your industry.  These include ensuring the continued health of the organization, setting the moral compass for your stakeholders, providing for succession by training and documenting, leading the effort in compliance of regulations and safety needs, and … elimination of all possible bottlenecks that impede the efficiency of your organization.

The definition of a bottleneck in your business is one that constricts the flow of work from one area to another in the flow of product or service through your organization.

[Email readers, continue here...]  A bottleneck in your organization’s flow of product or service can happen, shift, or disappear quickly.  Common to all bottlenecks are three factors:

  1. All product, labor, and cost before the bottleneck are impeded from creating maximum efficiency by being forced to slow output or build inventories. This is a costly loss for any business and one that should be a focus for your management as soon as identified.
  2. The bottleneck itself strains to keep up with demand, often to the point of reducing its own efficiency in the process of attempting to keep up with demand.
  3. All processes after the bottleneck are slowed for lack of flow into their zone of control and waste time, money, space and output, always resulting in reduced revenues and profits.

You can be the bottleneck.  If people are waiting for you to respond to a question or make a decision about design, process, spending for a core need, or any of tens of critical decisions, you are creating a Protectingslowing or stoppage of work before you and idle resources behind you.  If this describes you at any moment in your day, you should consider removing yourself from the bottleneck list by delegation, reduction of your non-critical workflow, or (heaven forbid) increasing your hours of production.

If failing to hire a critical employee is the cause of reduced efficiency, you must act quickly to either make an effective hire or alter the environment that creates the urgent need, all to remove that bottleneck.

And if an inefficient or undersized machine or department or process is creating a backup of critical path work flow, you must address this as an urgent matter whose cost is much more than the cost of the machine or person needed, but the amplified cost of the lost output it affects.

You, as a successful manager, must be attuned to and responsible for elimination of all forms of bottlenecks within your span of control.  Watch for, and stamp out, all those you identify as soon as you find them.  The effect of your action is magnified several-fold at the output stage of your business, leading to increased customer satisfaction and increased profits.

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The FAIRNESS doctrine.

by on Apr.25, 2013, under Protecting the business, Surrounding yourself with talent

Reduce the emotion; reduce the threat of lawsuit.

You’ve certainly experienced the angry outburst from an associate or employee who has just learned of an event that the person took as “unfair,” no matter how rational the explanation by the decision maker.

Most emotional responses to decisions in business are generated not because the person making the response feels the decision was unwise, but rather unfair.

So I’ve created the “Fairness Doctrine,” as a stated element in the cultural fabric of businesses where I am involved.  Simply stated, a decision or action that affects an individual must be made with consideration of the affected individual’s view of the fairness of that decision.  This doctrine is a variant of “do unto others” but with a twist.  The recipient of the decision in this case usually has little opportunity to respond in kind (“as you would have them do unto you”).  It is this frustration coupled with the simple outcry of “That’s not fair!” – that can affect the culture of a company in ways never considered by the original decision-maker.

People sue others and their companies usually because they feel emotionally that they have been treated unfairly, not just because they were affected financially.

[Email readers, continue here...]  Firing a person considered a key associate without any advance warnings or public revelation for the reason, such as the need to consolidate or downsize, is a good example of setting up such a groundswell of accusations of unfair treatment.  Public dressing down of an employee in front of associates is inhumane and often generates a negative response from all who witness or Managing_forcehear of the action.  Closing a highly effective department, shutting down a marginal company, canceling a promising project all are good examples of management setting up a visceral response of “unfair” among those affected.

I have often addressed the issue of maintaining the dignity of the individual in a business environment.  The two are linked: the fairness doctrine and treatment of an individual with dignity, no matter how distasteful the decision implemented.

So my advice is to take the time to establish the reasons for pending actions – if not in an emergency environment.  Speak privately to employees who are in danger of being fired, documenting the discussion to the employee’s file.  Open up to the general group with facts that might later affect them, even at the risk of losing one or more to a hunt for a new job.  Most employees and associates, treated with respect and dignity, will respond with understanding and lose the emotion that might have accompanied receiving the later news of a negative event.

In fact, many times over the years, I have seen whole companies rise to new levels of efficiency, creativity, and sense of urgency when informed of the alternatives being considered by a board or management.

At the risk of losing talent not targeted, it is only fair to treat people as intelligent beings capable of understanding the dilemmas faced by management, and sometimes able to find solutions to problems not seen by those in control.

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Hone your sense of urgency!

by on Apr.11, 2013, under Growth!, Surrounding yourself with talent

It is an unfortunate truism that most of us become a bit stale in our jobs after some time, even if we are most successful at it and appreciated by all who work for or with us.  It is human nature to start in a new position with enthusiasm, lofty goals, new ideas, and a heightened awareness of those around us and their ideas for the business.

And it is equally human for anyone to become complacent to some degree after an initial flurry of effort, ideas, reorganizations, brilliant decisions, and early successes.  Complacency is relative.  There is no direct measure to determine when a manager, even the CEO, has run out of new ideas and that sense of heightened awareness.  Usually this is masked by our having a better grip on the real drivers of the business, able to quickly see when things are not going right or people not performing to their peak.

But think back to those first days on the job.  You were ready and willing to effect change, to listen to anyone, to take in ideas, and share yours with your peers.  You spent extra hours more often in creative efforts, encouraged discourse, and delved into new ideas and projects with enthusiasm.

You exhibited a sense of urgency that charged your direct reports, made you want to come to work every day refreshed, and demonstrated to all that something special was happening in their world.

[Email readers, continue here...] Can you honestly state that your sense of urgency remains today at the same level as when you first started at this position?  Few of us could, and that is the reason why investors often feel that turnover in executive ranks is not so bad after all.  The average life of a CEO in the position is shorter today than ever before, partly because investors expect continual acceleration, Advanced Berkonomics soft front cover-smalland partly because a person seems to have only so much new material to offer.  If each of us could maintain that same sense of urgency that drove us to succeed early on, our peers, direct reports, investors, and stakeholders would all notice and respond accordingly.

Challenging your peers and reports to come up with new ideas, solutions, projects, and improvement in processes – all are signs of a good manager still in control of his or her sense of urgency.  It is hard for those around you to slack off with such a whirlwind adjacent.

I have previously told the story of the successful CEO who drove to work each Monday morning asking himself, “What if this were my first day on the job as CEO?  What would I do?”  He kept his company and his peers always thinking ahead, if nothing else to prevent his surprising them with ideas and solutions to problems that should have been uncovered and acted upon earlier.

It is not an easy task – reinventing yourself to be that person you were on the first day, but with the knowledge and experience since gained.  But it is an important part of being a great manager and retaining the focus upon excellence that certainly drove you to succeed back then.

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Avoid the office politics trap.

by on Apr.04, 2013, under Depending upon others, Surrounding yourself with talent

It is hard to separate this kind of advice from economic lessons in running a business, when office politics can threaten a business in ways that are subtle, but sometimes just as devastating as economic shocks or continuing poor management.

Most any office with more than one level of management (more than ten employees) can become a Petri dish for office politics.  It may be human nature to attempt to gain the good graces of one’s superior in the work place.  But it is a perverse form of human nature to do so at the expense of others.  Some employees disrupt a business intentionally in order to gain attention and an advantage over fellow employees.

Advanced Berkonomics soft front cover-smallOther times, people with personal agendas or personal dislikes of other individuals will disrupt the harmony of an office environment with negative statements, rumors, and damning comments.  We’ve all seen this unhealthy form of human activity in an office environment at one time or another.

So here’s the advice:  Never repeat, encourage, or even listen to the personal attacks by one individual against another within the organization.  The first time you join in the conversation instead of stopping it, the first time you nod in agreement, the first time you take a side as a manager –is the last time you rule over an office-politics-free organization.

[Email readers, continue here...]  A boss has power that person doesn’t often realize s/he has, when viewed from the lens of a subordinate.  That power becomes perverse when a boss takes a side in any disagreement that is personal as opposed to business-problem oriented.  The result is almost always hurt, frustration and anger from the party on the wrong end of such manager reinforcement, and a loss of work time and certainly good will toward the organization and toward management itself.

To set the example by stopping the personal attack, refocusing the parties on productive work and moving on is to state by your words and actions that you will not tolerate such behavior in the work place.  To ignore such action when observed is to allow one person or a small group to undermine the organization in subtle steps that can only increase in size and effect.

Worse yet, to take a side in a personal dispute is to reduce your authority and alienate one person or group and reinforce bad behavior.

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