I had dinner recently with a former colleague and good friend, let’s call him Al, who has recently transitioned from CTO to CEO of an early stage company he founded; he’s struggling with every aspect of his new job. Al was originally the de-facto leader through his first funding round, then at the urging of many around him recruited an experienced CEO to “take it to the next level”. Potential investors, former bosses, and current shareholders felt this was a critical step in for them to invest more time or money. The common line was “You’re not a CEO”. The new CEO was performing well, hitting milestones, preparing new funding and building the business, but he and Al couldn’t get along.
So now Al is now back in charge. This happens often in the early stages, sometimes because the new CEO is a bad match, but that’s usually just an excuse. Usually the CEO leaves for good or bad reasons, or the founder can’t let go of control of the company. In this case it was the latter. Als investors and employees are quite unhappy and he’s not sleeping much.
In hearing his frustrations I figured out his main problem – he’s having serious problems making decisions and sticking with them, which is why he brought in a professional CEO in the first place. He has no reference point for many key decisions so lacks the confidence to execute decisions. His frustration is that this doesn’t happen to him in technical matters – he’s brilliant at those decisions. Technical leaders frequently underestimate the job of the CEO or business leader in a fledgling startup. They use the logic – hey, I’m extremely smart, so marketing, sales, and business development can’t be as hard as developing an entire software platform. This is a big mistake, and a common reason why startups never get out of the gate.
I’ve been the incoming CEO several times in early stage startups, taking over for the founder. This transition is difficult to pull off, but necessary for many companies to scale. Emotionally it’s very hard for a founder to “let go” and trust an outsider to care as much as he/she does about their baby. There are also others around the founder that can feel ownership and impede the new CEO – a spouse, other early employees, a displaced senior manager who thought he/she had a shot at the job. I’ve experienced all of these situations, but I’ve also had many good experiences where I did have sponsorship and support, and succeeded.
In Al’s case, he never really committed himself to stepping aside, even though he said the words. He admits that now. In his actions he inadvertently sabotaged his new partner, changing the CEOs decisions without discussion, etc. He felt that the new CEO was making “too many” decisions. He obviously wasn’t ready. I realize that he still isn’t ready.
The reason for our meeting was to see if I was interested in the job – he feels that our long term relationship would provide the foundation for a successful transition, but I know it wouldn’t work. I explained to him what CEO means to me – the final decision maker in a company, answerable to a real Board of Directors, of which the founder is a member but not the only member. The E in CEO stands for execution, making things happen, responsible for the results. The CEO must communicate clearly to everyone involved what he/she is doing, especially if taking over the reins from a founder, but should be supported by all as the final major decision maker. If that process works, the company works. Without that authority they become ineffective quickly and are only doing portions of the job, and can’t take full responsibility; then they leave and you have to start all over.
I explained to Al two reasons why I wouldn’t join his company: 1) With all due respect, I don’t feel that he’s any more ready to let go than he was a year ago, even though he respects my abilities and has comfortably worked for me before, and 2) the company is distressed now, unhappy employees, unhappy investors, delays in both the business and technical initiatives, messy equity stakes and a decrease in trust all around. Like I said, a Big Mistake. I told him his best chance is to try to learn how to be a CEO or merge his company as fast as possible. But this one is most likely kaput.
:: An ominous title for a blog post, but “Grow or Die” has been one of the most basic rules in the high-growth startup world for decades. And by growth I mean revenue growth.
The first trick is to offer something that the world will need more and more over the next few years (growing market), without that it doesn’t matter much anyway; your product/service/thing must “catch on”. This can be somewhat manipulated by your successful marketing execution (i.e. why one iPhone app succeeds vs. another).
If you do have something compelling, you’re either running as fast as you can to catch up to something bigger or to stay ahead of those below you. Lack of growth will encourage others to come along and knock you off the track, attack you; they will smell blood. Inconsistency in growth can do the same thing. Millions are currently watching boastful high flyers like Zynga, Google, and Facebook to see if they stumble. If you’re not offering something in a growth market, it doesn’t matter so much; you become either a zombie/lifestyle company or shrink slowly then die.
If you’ve got something hot, the idea is to spread your footprint quickly and prevent others from knocking you off (first mover). Growth means bigger and more complex barriers to entry – more advertising, products, support and security for your users/buyers, advanced services, etc. And protection form death. And gasoline to create more growth.
Flat to negative revenue growth is a real red flag, especially for early stage companies. Your stakeholders start to wonder what is going wrong? Did we build the wrong product? Are we becoming passé? Time for a new CEO? And all those other depressing clichés. If you’re venture funded, things get kind of ugly -unhappy board members, cut off from communications, down- rounds to keep you going, or no more funding.
Many early stage founders aren’t sure how to handle this requirement for success. What about users? Eyeballs? Hits? Press Mentions? Those are all nice and should be designed impact revenues, but usually aren’t a real measurement (unless you’re Twitter). Revenue growth must be the core strategy and drive all other strategies.
Continued growth becomes more and more difficult for larger companies, you must “feed the monster” as it grows. Many companies are currently hitting the wall after strong growth, like MySpace, Yahoo, Dell, Fedex. Even Google is starting to struggle due to a slowing growth rate, and attracting attention for this problem – losing employees to Facebook, trying across the board 10% raises, switching out their CEO of 10 years.
But the focus here is not big companies, it’s startups in their first years of revenue. Companies that hit their “first millions” then get stuck, and often panic. I was once VP of Sales for a startup that went from zero to >$10 million in one year, then back to zero the following year. Talk about panic! That’s an extremely contracted timeline for up then down the growth curve, but the general trend is not that unusual in startup land – up then down quickly. In our case we didn’t have our internal house in order, and didn’t know how to handle our sudden success – no strategic planning and thereby no adherence to such a plan.
The bottom line is that continuous growth, at a good rate, is imperative for long term scalability. If this is a hole in your business strategy, don’t ignore it. Put your heads together, hire expertise, call your advisors, revisit your business models, sacrifice sacred cows, and respect this key piece of your success.
There’s a recent phenomenon in the startup world, the quickly built startup, where as few as 1 or 2 engineers can hatch an idea in code and deploy a new web-based company within a few days or weeks. Also known as startup-lite, startup-in-a-box, the 90 day startup, hackathon, etc., the proliferation of these quick startups are the result of many converging milestones in high-techdom – advanced simplicity in web design, “little or no-programming” visual technologies, extremely low cost of entry, an explosion of micro-funding and some shining examples of dream-come-true companies/people like Facebook/Mark Zuckerberg.
Groups like Techstars, Y-Combinator and several others are fostering this trend with “summer camp” like gatherings to help young entrepreneurs get a new company up and running, with a team of world-class mentors, paid lodging and often funding, in less than 3 months. Techstars alone graduates 30-40 companies per year in 4 different cities. What a concept!
The advantages of this trend are obvious – democratization of the process (anybody can do it), low barriers to entry, minimal overhead (a laptop and free dev tools), almost instant revenues, easy leverage of the social graph for push-button marketing. This new bridge between the haves and have-nots, or techs and tech-nots is inspiring many to start their own web/app companies as never before. Any undergrad at Stanford or Harvard or any other college must be constantly thinking about this – “What company am I going to start?”. There are countless people in their early 20s these days that are on their 3rd or 4th startup already. Mark Zuckerberg was on hs 4th (Synapse, Wirehog, Facemash) at 19 when he started Facebook.
So it’s clearly easier to build and easier to discard one that doesn’t take off and move on to the next. And the next. Amid all this excitement, what is the long-term track record of these mini-companies? How many survive after 12 months? 24 months? How many never achieve revenue at all? There is a naturally high failure rate in startups that we know about, ~90%, so is this new generation more or less likely to make it long term? There are no proper records for the many unknown startups that never make out of the bedroom or off the living room couch, but the throw away rate is probably very high. Techstars actually keeps statistics of its graduates on its website – alive after 12 months, 24 months, funding, acquisitions <$2 million and >$2 miilion, etc. But remember, Techstars rejects over 500 companies every year. How are those accounted for?
Does it matter? Maybe not, this is almost more experimentation, practice than pass or fail – Zuckerberg still holds all night hacking sessions at Facebook to stay sharp and connected to the keyboard, to promote discovery. There are hackathons, hacker spaces and other informal Internet company formation vehicles everywhere you look. The world has clearly changed.
But back to Scalability… are these entities scalable over time? In most cases, probably not.
Let’s measure the Idea plus the Implementation:
The more amazing and unique the idea, the more likely it will grow into a sustainable company. Most quick-Internet company ideas don’t have much longevity.
The faster (i.e. very few engineering hours) something is put together, the lower its barriers to entry for others to knock it off.
The personal investment and passion are typically much less in a quickly built site.
There are exceptions to these rules of course (twitter), but generally it takes a lot of work to design, build, implement, adapt and polish something into a must-have application for the masses.
An Exception to these rules
A great example of an exception to this rule is Twitter. The first Twitter (Odeo) interface was by design extremely simple, and drawn on a piece of paper by Jack Dorsey:
And the rest is history. It turned out to be an extra-amazing idea that grew enough as a name brand before it could be knocked off. Although some people still aren’t sure what to do with it, Twitter is clearly now a must-have for 100s of millions, myself included. A fairly simple idea, quick to implement (it took 3 months). But an amazing addition to our world.
When tech entrepreneurs hear the term “scalability”, they get excited, and rightly so.
Scalability is a worthy subject, arguably the most important parameter in startup success, especially long term. Controlled growth is the primary ingredient for survival in the highly competitive startup world. But what exactly is “growth”?
Is it measured by quarterly revenue? Eyeballs/Users? Buzz? For early stage companies, it is mostly revenue, especially if the company is pre-revenue. Revenue is the fuel that propels the company, allows hiring of great people, decreases dependence on investors and thereby preserves equity for founders and employees.
For most startups, first revenues and continuing revenues seem like magical milestones; before they are reached there is no sure way to know if/when it will happen. I know, I’ve been a pre-revenue CEO many times.
But there is much more to scalability than revenue. Revenue injections are like oxygen, and strong measures and reassurances that your company is real, and that you have a chance to become a long term enterprise.
The resulting cash flow, cash on hand, and recurring revenues give a warm fuzzy feeling like no other. But revenue alone doesn’t ensure scalability. Many other factors are critical in building the right foundation to construct a strong, integrated enterprise down the road.
This blog will hopefully explore many of those other factors, and help early stage management teams to make the right decisions as they create or encounter and then manage growth.
march 16, 2010 –– This is my first post, still in alpha mode here. So many things to write about, but so many blogs are boring, verbose.
My focus here will be the art of CEOing (past and present), the world of tech/software/Internet/vc/funding/ etc.
And I’ll try to keep these posts brief. Hopefully they will connect as they unfold into a story, like a reality show for tech CEOs, with flashbacks thrown in.
Much of my motivation to do this came from Jeff Jarvis, his book more than his blog.
SXSW: For a first topic, the most pertinent thing that comes to mind is SXSW since it’s on right now. I’ve been in the past and contemplated going this year, but have an instinct that it’s become so “cool” that it’s no longer cool, a caricature of itself.
Too big, too much drift from its original focus – Music, Film, Creativity. It’s good that Interactive is so big now, should be good for me, that’s my industry, but it still doesn’t feel right somehow. Maybe I’m just jealous ‘cuz I’m not there. They should split into 2, 3 groups? like Hannover Fair did. That worked.
Either way, I’ll monitor feedback from afar and inevitably correct at least some of my guesses about it. Lot’s of parties – my plancast list of parties is unbelievable, maybe I avoided that, the alcohol fueled networking, my body’s not ready for that this week/month. Could have pitched Rarefied there, but that’s a bit in limbo anyway.
Well, let’s see what happens here with this alpha blog. In the meantime, here’s a picture of my dog Frida…
