BERKONOMICS – Business insights from Dave Berkus

Depending upon others

Extending Your Runway

by on Oct.30, 2014, under Depending upon others, Growth!

One of my books, Extending the Runway, uses parallels to piloting a plane to equate to the process of creating and building a small company, making maximum use of resources to get to and beyond breakeven. It is worth revisiting the most important point of that book, which was written to prompt discussion between entrepreneurs, professional managers and their boards of directors about issues that could unite them or strain the relationships between them.

There are five types of resources a great board can add to a company.   These are: time, money, relationships, context and process.

Time: The longer it takes to produce and release a product, the more fixed overhead is consumed, and the runway of remaining cash diminishes. Expert help and good planning can reduce the time to market, saving cash in the process.

Extending the Runway book available at www.berkus.com

Extending the Runway book available at www.berkus.com

[ Email readers, continue here...]   Money: A board of directors is primarily responsible for oversight in the use of and the raising of money for the company. There is a fine line between

loading the company with too much debt, and diluting the shareholders too early with additional equity investments. But all agree that a good board will express its stewardship well by preventing the company from running out of money.

Relationships: One reason for having an effective board is to give the CEO a resource for tapping into great relationships that are owned by the various board members, so that the CEO can reach out and find help in areas most needed. If a board member has few appropriate relationships in his or her field of expertise or from past experience, then perhaps the board member is not appropriate for the company at this time. And if the board member refuses to volunteer or allow such relationships when needed by the CEO, that board member should be held to task by the other members of the board.

Context: Every good board has recruited at least one industry expert, often as the fifth or mutually-approved outside member. With expertise in the company’s industry, that person can and should provide expert advice about the timing of the company’s product entrance and applicability in the industry it addresses. A great product at the wrong time or a poor product unable to address the needs of the industry will fail in the marketplace. That board member should be actively involved in questioning the positioning, marketing and even the design of the product to avoid just such a disaster.

Process: Here, most experienced board members can help to streamline the process of product development, manufacture, channel management and marketing. Knowing how to scale from test to release or how to complete a process more quickly saves money and time, making this knowledge as valuable as raising more money for the company, but without the cost in dilution or debt.

Use your board to help you to navigate through control over these five resources. If you don’t have a viable, relevant board, build one no matter what your size and stage of development. One thing is usually sure: an entrepreneur cannot successfully do it all alone.

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Stealing time

by on Oct.23, 2014, under Depending upon others, Surrounding yourself with talent

It’s a big issue within any company.  With easy access to Internet shopping, games, social networks and more, employees are able to find many ways to focus on personal issues while at work, detracting from productivity and demonstrating a dis-respect for the time paid for by their employer.  In fact, if we were to be direct, we might label it “stealing time,” and consider it a crime of sorts.

Based upon the actual “loaded” cost of an employee per hour, that is certainly not an insignificant cost for the employer.  Certainly it amounts to many times the cost of stealing something tangible, such as a ream of paper from the supplies cabinet.  Yet, many of us treat the latter much more severely than the former.

Managing_force[Email readers, continue here...]  Let’s consider counter arguments.  Attracting great employees often requires us to offer special incentives, including flexible hours, unsupervised time off, and access to perks
such as free food and soft drinks.  Often, employees just expect some degree of freedom when they work, to be able to quickly shop or communicate with friends in the middle of their day.  In times past, older generations were perhaps more discrete when making personal phone calls (how ancient this sounds).  But they often did so anyway, and often spending more time and more company money in phone bills than today’s typical employee distraction.

How about the counter to the counter argument?  There is no way to sugar-coat the fact that paid time is for work, not for outside play.  The cost may seem small until someone calculates the combined cost over a year of time and screams “thief!”

As in all two-sided arguments, there usually is a middle ground. The boss who requires complete adherence to the work-every-minute ethic called for in the employee handbook generates ill will when enforcing the rule.  But the manager, who openly ignores the behavior, encourages more of it from employees who will fall in to follow the example they see openly acknowledged.

My solution is to acknowledge the fact of life, equate it to personal time once used for personal calls, and define a ‘limits of acceptability’ publicly.  “We recognize how difficult and intense your work is.   We think it prudent for you to take breaks as often as every hour if you need them.  We expect your breaks to be self-policed and no longer than ten minutes, to be used for all personal issues including personal use of your workstation.  Remember not to stray out of bounds of corporate decency and confidentiality, and be safe in protecting corporate security.”

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Some great coaches are younger than you are.

by on Oct.16, 2014, under Depending upon others, Surrounding yourself with talent

Especially for social media-based businesses, we all need to recalibrate our thinking about who is the teacher and who is the student.  There is nothing wrong with a manager slowing a conversation to ask for more background when speaking to an often-younger and more involved associate.  You know what I mean… The conversation goes something like this: “We found it on x site and using y app with z as our data object.”

GameSpy LA Times colorFirst, managers could not be paid enough or have enough time to stay entirely current with all of the details each employee or associate deals with daily.  Yet, many times that other person tries to explain an important finding or breakthrough, or make a significant comparison, using names of destination sites or apps or tools we have never used or heard of.

Yes, age often has something to do with it.  And occasionally, a manager has to work to join the club by trying new things, learning new tasks and using new language to relate to those already in the know.

[Email readers, continue here...]  I recall vividly one such experience.  I helped to found an Internet game company, playing the role of founding investor, chairman and even temporary CFO.  The company was destined to grow into a large, very valuable enterprise that we sold for many, many times our investment.  But that first day with the new employees was a test for
me.  Many years older than any of them, their initiation was to insist that I spend no less than forty-five minutes playing for the first time first person shooter games against Internet-based foes.  I had to acknowledge the difficulty of achieving high degrees of skill, and the size and terminology of the extended gamer community.  But most of all, I had to gain acceptance as “one of us” in an environment where my CEO coaching and my money did not count.

That was a lesson for me.  Taking the time to be taught by those able to master a skill or have extra knowledge is an important step to show respect for everyone at all levels in an organization.  And that respect flows in both directions, worth so much more than the time it takes to learn a skill or terminology or meaning.

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Two very powerful words: Great job!

by on Oct.09, 2014, under Depending upon others, Surrounding yourself with talent

The best managers we all know are the ones who take the time to praise good work in public, before an employee’s peers.  Most of us have a monthly award for the top person in a group of employees. And if we are big enough to formalize the process in a regular meeting, we make it a regular part of that meeting.

If you haven’t already discovered this fact, such a process quickly becomes routine and predicable.  Small companies have trouble finding new people to honor after a while.  Some employees even disingenuously consider the process an exercise in pandering, discounting the effectiveness of the award, and disenchanting those very managers who thought they were reaching out to do a good thing.
2014-0329_OxyTEDx-0276For all of us, we should remember that the best possible way to honor great work is to do so immediately.  A “Great job!” coming at the right moment from the boss is valued as an honest recognition of good work, especially if done in front of an employee’s peers.

[Email readers, continue here...]  At times, it is an entire team that deserves the recognition, again immediately after doing a great job.  I found a formula that worked for me where most of the employees were in several buildings on the same campus.  First arranging for my assistant to obtain the appropriate amount of hundred dollar bills from the bank, and then to follow me around checking off names, I had my own personal holiday celebrating each individual in the team with a handshake, words of thanks, and a C-note.  With lots of laughter and thanks, the celebration and words “Great Job” made for a completely memorable event.  And those pop-up thank you visits from the boss certainly contributed to the culture of the company.  Word does travel.

Remember to reward those not present at the moment, and remember that the amount should be grossed up to take care of taxes and be entered onto the payrolls of the employees so rewarded.

I’m sure you have your own way to making “Good job!” work for you and your team.

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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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How to make a business partnership a success

by on Jan.16, 2014, under Depending upon others, Ignition! Starting up, Protecting the business

By JJ Richa

Dave’s note:  Our guest insight this week is from JJ Richa.  JJ is a successful entrepreneur and technologist giving back to the entrepreneurial
community in many ways, including his weekly Internet TV program on entrepreneurism, and participation in several mentoring programs.   

Business partnerships have their advantages and disadvantages.  Taking on a business partner is like a entering into a marriage.  In general, partnerships are easy to get into and difficult to get out of.  Certain guidelines should be taken into consideration along with a path to follow – from dating to pre­nup to marriage – all of which can be applied to a business partnership.

Taking on a business partner can be an excellent strategic decision in helping move the business forward.  It should be well thought out for all parties involved. The relationship needs to be synergistic financially, emotionally, and operationally.  All parties need to perform due diligence to ensure that the assumptions are correct, that neither partner has financial issues which could affect the partnership, and that the opposite partner has the skills to contribute to the partnership.

[Email readers, continue here...]  Most of the important benefits for partnering include:

  • Combining of complimentary skill sets
  • Access to new markets
  • Addition of new services or product lines
  • Addition of essential expertise and knowledge to propel the business forward
  • Open doors to new distribution channels
  • Access to new technologies
  • Access to capital unavailable to either partner singly
From Basic Berkonomics: Available Amazon, B&N,  berkus.com and booksellers everywhere.

From Basic Berkonomics: Available Amazon, B&N, berkus.com and booksellers everywhere.

Certain steps should be taken before entering into a partnership.

1.   Personal assessment and getting to know one another:

  • Work together on 2-3 projects before an agreement is consummated
  • Determine the commitment of the potential partners. Is the potential partner in for the long haul?
  • Identify each of the partner’s unique contribution. Does the potential partner bring specialized knowledge, skills, leadership, or experience that compliments others?
  • Understand each person’s personal goals. Are each set of goals consistent with the other’s including for example personal wealth, business success, and autonomy?
  • Determine trust and Values. Is there trust between the parties? Do the proposed partners share a set of common values? Core values are none negotiable.  Be ready to walk away when others are willing to negotiate their own values or try to negotiate others.

2.  Determine personal and business goals:

  • Contribution:  What will the new partner contribute? Example: cash, assets, equipment, connections… Regardless of what it is, a partner’s contribution needs to increase the value of the business.
  • Compensation: What are compensation expectations? Example: salary, equity, joint venture, etc… Can the business afford it?
  • Control:  What type of control is the new partner looking for? Example: percent of ownership, officer/operational, director/board member… What are the parties willing to give up in return for the prospect of business success?
  • Brand and Success:  Is the new partner dedicated to ensuring brand continuity and contribute to the success, or just to ride on what has been established by the other?

3.  Create roles and guidelines in the potential partnership:

  • What role and responsibility will each of the partners have including operation, financial, sales, marketing, etc..?
  • How will decisions be made and by whom? Is it by committee?
  • Will each have certain level of decision making authority? Will the new process impair quick decision making?
  • Will authority limits be defined, and processes and procedures put in place?
  • What is the understanding if one of the partners wants out or wants more? What is the understanding if things go downhill/uphill?

4.  Perform preliminary due diligence:

  • Review the business plan including marketing, sales strategies and financial needs
  • Review long term company debt, goals, objectives and financial projections
  • Review financial statements – up to 3 years if available
  • Review tax returns – up to 3 years if available
  • Research and talk to existing and past customers

5. Create partnership agreement basic terms:

  • Define Key Performance Indicators (KPIs.) How will the success of the business be measured?
  • Clarify decision making and dispute resolution processes
  • Define each partner’s title and position
  • Define management responsibilities and job descriptions
  • Detail authority limits for each partner
  • Clarify operation responsibilities and metrics used to measure performance
  • Define vacations and time off policies such as with partners vacationing at the same time
  • Determine compensation for each partner
  • Exit strategy planning, including determining what happens when one partner leaves, if closing the business, if selling the business, creating a mutual buy/sell agreement, and more.

Depending on the legal structure of the business, different types of formal agreements may be required.

Partnership agreement should never be 50/50 regardless of the perception of compatibility at the time of execution.  There must be some method of resolving a tie that is predetermined in the agreement.

Potential partners should follow and apply these guidelines independently.  This should be followed by a joint meeting to determine commonalities, synergies, and conflicts.  If necessary, this is the time to bring in an impartial third party to facilitate any possible conflicts and resolutions.

It is highly recommended that legal document are created and/or reviewed by a business transaction attorney.  All agreements should be in writing and signed by all parties involved.  Regardless of what method is taken to reach an agreement among partners, avoid some of the common mistakes.  These include premature rejection of ideas by the other partner, prematurely judging others, one-sided financial consideration, and not sticking to core values.

 

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My dad said: “Never take on a business partner.”

by on Jan.02, 2014, under Depending upon others, Ignition! Starting up

My dad was a smart businessman, even if not formally trained. He occasionally gave me advice that turned out to be more than wise, looking back at subsequent experience and events.  His personal teaching event was a typical experience, as I reflect now upon the tens of partnerships I have counseled over the years.  Most often, one partner remained active as another partner drifted away from the business, no longer carrying the weight anticipated at start-up.

It’s just one – the most prevalent – of the many things that can happen to well-meaning partners after time changes plans, and after the business passes through phases of growth or contraction.

I recall one very personal situation when I was very young, that reinforces Dad’s advice. Through my college years, I managed a phonograph record production and manufacturing business that I created as a senior in high school, using independent contractors in local venues to record and edit ventureforwardweb-237the original tapes from recording musicals and performances from schools, colleges, churches and organizations throughout the USA and Canada – and then to sell the records to the appropriate audiences.

[Email readers, continue here...]  It grew to significant size during my college years, and I associated myself with a “strategic partner” throughout those years, ceding to him all recording and editing of work throughout the large home territory, and any national jobs we received. The agreement was that he would retain all of the revenues generated from those activities.  We called ourselves “partners” and received lots of press, even nationally, as we managed our teenage business.

A year after graduation from college, I left for six months to serve my active duty obligation in the US Navy, while others took care of accounting and customer relations.  And my “partner” left the company without notice and set up a competing company in my absence, never saying a word to any of us.  I was bitter, but unable to do anything about it, since there was no partnership agreement.  Luckily, after my return from active duty, my company flourished and his remained a small, one person operation for the rest of its existence.  But, as they say, everything he learned, he learned from me.  Dad was right, even if I learned the lesson years later.

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The most important person on the startup team

by on Nov.07, 2013, under Depending upon others, Finding your ideal niche

By David S. Rose

 Described by BusinessWeek as a “world conquering
entrepreneur” and by Forbes as “New York’s Archangel”, David is a former Inc.
500 CEO, serial entrepreneur and the founder of New York Angels. He is the
founder and CEO of Gust, the angel financing platform used by over 50,000
accredited investors in 1,000 angel groups and venture capital funds to
collaborate with over 250,000 entrepreneurs in 95 countries.

Since Bill Hewlett joined with Dave Packard in 1939 to create what is today one of the world’s largest computer companies, there has been an evergreen debate as to who is more important in starting a tech company: the techie or the business guy? Steve Jobs or Steve Wozniak? Bill Gates or Steve Ballmer? Jim Clark or Marc Andreessen?

I propose that it is time to reject the notion of the business man or business woman entirely. The underlying problem is that there are really three different Basic_Berkonomics_front_covercomponents here, and like the classic three-legged school, they are all essential for success, albeit with differing relative economic values. What confuses us is that the components can all reside in one person, or multiple people. And what upsets people is that there are different quantities of those components available in the economic marketplace; and the law of supply and demand is pretty good about consequently assigning a value to them.

Perhaps surprisingly, the components are NOT the traditional coding/business pieces; nor are they even coding /user interface / business / sales, or whatever. Rather, here is the way I see it, from the perspective of a serial entrepreneur turned serial investor, listed in order of decreasing availability:

[Email readers, continue here...]  1) THE CONCEPT:  A business starts with an idea, and while the idea may (and likely will) change over time; it has to be good at some basic level for it to be able to succeed in the long run. How excited am I likely to be when I see a plan for a new generation of buggy whip, or another me-too social network?  The basic concept has to make some kind of sense given the technical, market and competitive environment, otherwise nothing else matters. BUT good ideas are NOT hard to find. There are millions of them out there. The key to making one of them into a home-run success brings us to:

2) EXECUTION SKILLS: It is into this one bucket that ALL of the ‘traditional’ pieces fall.  This is where you find the superb Rails coder, and the world-class information architect, and the consummate sales guy, and the persuasive business development person, and the brilliant CFO.  Each of the functions is crucial, and each is required to bring the good idea to fruition.  In our fluid, capitalistic, free-market society, the marketplace is generally very efficient about assigning relative economic value to each of these functional roles, based upon both the direct result of their contribution to the enterprise and their scarcity (or lack thereof) in the job market.

That is why it is not uncommon to see big enterprise sales people making high six figure – or even seven figure – salaries or commissions, while a neophyte coder might be in the low five figure range. Similarly, a crackerjack CTO might be in the mid six figures, but a kid performing inside sales may start at the opposite end of the spectrum. Coding, design, production, sales, finance, operations, marketing, and the like are all execution skills; and without great execution, success will be very hard to come by.

But, as noted, each of these skills is available at a price, and given enough money it is clearly possible to assemble an all-star team in each of the above areas to execute any good idea. That, however, will not be enough.  Why?  Because it is missing the last, vital leg of the stool, and the one that ultimately–when success does come–will reap the lion’s share of the benefits:

3) THE ENTREPRENEUR:  Entrepreneurship is at the core of starting a company, whether tech-based or otherwise. It is not any one of the functional skills above, but rather the combination of vision, passion, leadership, commitment, communication skills, hypomania, fundability, and, above all, willingness to take risks, that brings together all of the forgoing pieces – and creates from them an enterprise that fills a value-producing role in our economy. And because it is this function which is the scarcest of all, it is this function that (adjusting for the cost of capital) ends up with the lion’s share of the money from a successful venture.

It is crucial to note that the entrepreneurial function can be combined into the same package as a techie (Bill Gates), a sales guy (Mark Cuban), a user interface maven (Steve Jobs), or a financial guy (Michael Bloomberg). And that it is the critical piece which ultimately (if things work out) gets the big bucks.

The moral of the story is that, for a successful company, we need to bring together all of the above pieces, realize that whatever functional skill set the entrepreneur starts out with can be augmented with the others, and understand that the lion’s share of the rewards will (after adjusting for the cost of capital), go to the entrepreneurial role, as has happened for hundreds of years.

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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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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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