The Games Startups Play

April 4, 2014

Every startup plays two complementary games–the air game and the ground game. The air game is always more romantic. It is the emotional narrative of how your startup revolutionizes a market. It’s the aspirational hope that the company could become one of the great ones. It’s the buzz in the market, the great PR machine, talented people fighting to get in, and investors who can’t get enough money into the company.

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The ground game is much uglier. It is the day-to-day operations in which all the blemishes are visible. It is nearly impossible to live up to the expectations set by the air game and execute to your startup’s lofty aspirations. The ground game has metrics that you are embarrassed to share with anyone. It has nasty elements, such as falling short of milestones, founder conflicts, people getting fired, and missing quarterly numbers. Even solid performance with the ground game feels under-appreciated. Achieve 70 percent of your insanely ambitious goals and everyone is disappointed. The grind of the daily operations can be so exhausting that sometimes you lose sight of why you started the company in the first place.

In the startup world, early-stage companies are largely valued–at least for a while–on the air game, which tends to be way out ahead of the ground game. However, if your ground game lags for too long, the air game can get ugly as well. Talent starts to leave, and it’s hard to attract more. Investors become disenchanted, and finding new ones is nearly impossible. At some point as your company is growing, the ground game will become the focus, for better or worse.

Ask most founders about their toughest moments and you’ll almost always hear about the horror stories from the ground and the overwhelming obstacles they had to overcome to make the air game look so good from afar.

Though most companies are better at one game than the other, both are necessary for success. The air game gives the ground game cover. It allows time to fix the ugly details, thanks to enthusiastic capital and access to great talent. With a great narrative for your company, you’ll have more room to make mistakes. However, if the gap between the grand vision of the air game and gritty details of the ground game grows too large, don’t be surprised when your company starts to face cynicism.  

Companies that thrive on the ground game, but struggle to build buzz, face an equally uphill battle. As someone who executes really well, you probably feel slighted by the lack of enthusiasm for your company. The numbers should speak for themselves. Why doesn’t anyone (investors, talent, press) appreciate the facts? You scoff at overhyped companies and have little respect for peers who don’t put their heads down and operate. You are great at blocking and tackling but never seem to get the valuations of less-impressive competitors, which means you can’t get the cheap capital you need to expand and you lose out on the best people. Playing great on the ground without air cover feels like a Sisyphean feat. These companies rarely win. 

The challenge is to be great at the air game–by building huge enthusiasm for the long-term potential–but never oversell the near-term ground game. Inspire people with your company’s lofty long-term vision, but set near-term goals that are ambitious but achievable. Use the air game to energize your team, attract the right leaders, and raise inexpensive capital, but never forget that your success as a company will ultimately come down to how well you execute. It’s a difficult balance–underestimate either game and you’re likely to lose both.

 

A version of this post was originally published on Inc.com http://www.inc.com/magazine/201404/eric-paley/how-to-stay-focused-on-why-you-started-your-company.html

From Visionary To Leader

January 17, 2014

You’ve identified a great opportunity. Crafted a plan. Inspired talented people to join you and persuaded investors to put money into your fantasy. You are officially a visionary. Well done.

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Now comes the hard part. Being a visionary is table stakes in building a great company. Vision is the license to play the startup game and the base ingredient for being a leader. The challenge that you face now isn’t easy–you have to lead. Leading is different. We’ve all met visionary thinkers who are terrible leaders. Just because you can paint an exciting picture of the future your company can create doesn’t mean that you’re able to lead the company to that vision.

So how does a founder make the transition from visionary to leader?

1. Build trust with talented people. Everyone says he or she wants to hire talented people, but founders are often intimidated by great talent. They want people who follow their vision, but true talent will challenge that vision. Perhaps you are concerned that people who have more experience and success may actually undermine your role as a leader.

The exact opposite is true. Fear of being undermined by talented people is the sure path to failure. It will either cause you to hire less-talented people or cause talented people to question your judgment. To transition from visionary to leader, you need to demonstrate your ability to attract experienced people who can bring key expertise to the company. If you can get them on board and excited by your leadership, you’re well on your way.

2. Determine what’s important. There are an infinite number of things to do at a startup. One of the hardest challenges is figuring out what’s most important and focusing your scarce resources on that topic. It can be a difficult struggle to transform your grand vision into steps that your team can act on. Nothing frustrates talented people more than working for a founder who fails to offer clear priorities and appears to shift the game plan haphazardly.

Becoming a leader means focusing your team on the key priorities. You need to build consensus on these priorities, set goals, evaluate performance against those goals, and change course when necessary. Great leaders build credibility with their team by making a plan, executing it effectively, and demonstrating that it was the right plan.

3. Be transparent (up to a point). Your team deserves the truth, and being transparent will build trust in you as a leader. Unfortunately, being a visionary means constantly being frustrated at the speed with which your vision becomes reality. This is part of the reason that being a founder is such an emotional roller coaster. Visionaries who show this frustration typically burn out their teams over time. While you are experiencing insane highs and lows, your team members cannot be whiplashed by that same level of volatility. They’re committed, but not nearly as committed as you, which is why they might run for the hills if you expose them to your every emotion.

Instead, dampen the volatility they are feeling while being honest and transparent. Not everyone needs to know every little detail of your recent rejection or of the company’s financial challenges. Don’t hide the truth, but don’t torture your team with details that are out of its control.

Vision is the reason your company was born, but leadership will be the reason it thrives. 

A version of this post was originally published on Inc.com http://preview.inc.com/magazine/201402/eric-paley/visionary-leader-rules.html

Vaporizing VC Interest

November 12, 2013

Nearly every week, I receive an email from one of our portfolio founders that reads something like: “Hey, Eric, great news! We just got out of a meeting with Dave from AwesomeVC and he loves what we’re doing. I have a good feeling he’s going to lead our Series A round.”

Not long after, a few more superenthusiastic emails follow about the high probability that other VCs are also very interested and how the founder expects to wrap up the round quickly and painlessly.

Then the balloon deflates. One by one, the VCs pass on the round, and the founder has to break the news to the co-founders, employees, and existing investors. He’s completely dejected, his team is now concerned about running out of money, and his initial investors fear they may have funded a dud. How could he have been so wrong about the interest level of the VCs? They seemed genuinely excited; what went wrong?

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The problem is that venture capitalists often give off signals that are inconsistent with the real probabilities of their actually making an investment. Venture capitalists are not just buyers of companies; they’re also sellers of capital–meaning that because the best deals are competitive, investors use enthusiasm to increase their chances of winning (should they ultimately decide to invest). That’s not to say their enthusiasm isn’t genuine; it just doesn’t necessarily reflect their likelihood of investing.

Every VC is different, but here’s a breakdown of a few steps in the investment process to illustrate how a founder’s expectation of closing a deal differs from that of a VC’s. This is far from a scientific analysis, just a general sense of the numbers from my experience.

The VC Invites You to Pitch
Likelihood You’ll Get Funded:
In your mind-10% In reality-<1%
Most VCs take a few hundred meetings a year and fund one to three investments a year. Founders typically get in the door with a strong personal introduction from a mutual contact, which can lead to the assumption of real interest from the VC. Don’t get excited about getting a meeting; VCs are paid to listen to you pitch.

The VC Invites You to a Second Meeting
Likelihood You’ll Get Funded:
In your mind-50% In reality-10%
Being invited back happens right away, and
it can make you feel that momentum is building. Unfortunately, I’d estimate that the
typical VC quickly invites back 20 to 40 companies a year after a great first meeting.

The VC Invites You to a Partner Meeting
Likelihood You’ll Get Funded:
In your mind-90% In reality-50%
After multiple meetings and due diligence, a VC will often invite you to pitch the partnership. Although some firms really do rubber stamp investments at partner meetings, I’d estimate that about half of these investment discussions vaporize at this point. Frequently, the partner leading the deal loses enthusiasm after facing the crucible of his colleagues.

The VC Offers You a Term Sheet
Likelihood You’ll Get Funded:
In your mind-100% In reality-90%
This is often the most painful disconnect between founders and investors. Most founders consider a term sheet to be a 100 percent guarantee of financing. Unfortunately, my experience is that 1 in 10 term sheets self-destructs. When the term sheet comes, you shouldn’t take closing for granted.

Why does any of this matter? Raising money is like any other sales process, only the
consequences of failure are usually much more significant. Qualify your prospects accurately, make contingency plans, and don’t appear naive by overestimating the odds of a close. Once the deal is done, then you can celebrate.

A version of this post was originally published on Inc.com http://www.inc.com/eric-paley/what-to-expect-when-expecting-funding.html

It’s All So Obvious

November 5, 2013

Most of the business advice you’ll receive as a start-up CEO seems obvious. In fact, it’s rare that an investor or adviser makes a suggestion that you have never considered. More often than not, the suggestion is, in fact, probably already being implemented at some level.

Your company isn’t scaling as quickly as planned, and a board member says you need to boost sales. “No kidding? Thanks for letting us know,” you sarcastically think to yourself. Even the more concrete suggestions from experienced advisers or team members often seem either painfully obvious or just a regurgitation of things the company is already doing or has tried before. From your viewpoint, it can feel demeaning, because it suggests that your job is so easy that people think they can do it by giving generic advice while sitting in the cheap seats.

At times, real life can resemble that TV commercial in which a bunch of businessmen in suits sit around a conference room making insanely obvious statements and the tag line is something like, “If business were this easy, you wouldn’t need us.”

Duh (1)

No matter how obvious these suggestions may seem, take a minute to really consider the magnitude of your efforts. When it comes to operational issues, your start-up often succeeds or fails in accordance with the degree to which your company embraces these seemingly obvious ideas or suggestions. The advice may not seem earth shattering, but very often it is the successful companies that embrace that advice and put forward a serious effort in following it.

Take, for example, an exchange between you, the founder, and an investor. The investor is concerned about the quality of your customer development and advises you to get your hands dirty spending time with customers. That’s completely obvious to you, and you respond that you’ve done so and will continue to do so.

Box checked and issue resolved, right? Not at all.

Yes, technically you are talking to customers, but are you doing enough of it? Because you are already talking to customers, it’s very easy to shrug off the advice and move on. However, that advice typically reflects the investor’s concern about the scale of your efforts. In this instance, the investor is trying to tell you that whatever amount of customer development you’re doing, you need to do much more.

When I read Delivering Happiness, by Zappos CEO Tony Hsieh, I found the book both incredibly insightful and incredibly obvious. The book explains Zappos’s formula for success–putting the customer first and offering delightful customer service. Most of what Hsieh writes about probably seems familiar to any founder. What business doesn’t want to put the customer first and offer delightful service? The difference between Zappos and most other companies is one of magnitude. Zappos manages to do so at a completely different level than almost everyone else.

As a CEO, you should never blindly follow the advice of anyone–be it a team member, a board member, or an adviser. After all, whatever the outcome, it ultimately belongs to you. But you do need to seek out the best advice to figure out the right answer. Sometimes, the right answer comes from someone in a way that initially seems painfully obvious.

A version of this blog was originally published in the November issue of Inc. Magazine http://www.inc.com/magazine/201311/eric-paley/why-you-should-listen-to-obvious-advice.html.

I read a good number of blogs. I still like magazines. I love books, and I wish I could find time every day to read the newspaper from front to back. I also have great respect for academic writing.

Formal prose, however, has no place in a start-up. While I was working on Brontes Technologies during my second year in business school, our team entered both the Harvard and MIT business-plan competitions. Both contests required the submission of a written business plan. Our plan was 42 pages. It was obsolete before it was even completed.

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The judges seemed to have skimmed it, as did our academic adviser, but I don’t think they really read it. Even if they didn’t read it closely, they read more of it than anyone else ever did. We shared it with some investors, but it was clear they never read it. We never referenced it again ourselves. We never gave it to new staff members to help them understand our business. We never edited it as our business changed. We never really used it in any way. It was little more than academic.

No matter how gifted a writer you are, slide presentations, or decks, are a better way to get your message across. Quick to read and easy to edit collaboratively, slide decks are a much more concise way to express an idea for discussion and decision making. Prose is great for one-way conversations, but it
falls short for any type of engagement in a group. Ultimately, prose is not agile enough for start-ups.

Start-ups need to move fast, organize their goals succinctly, and edit on the fly. I’ve never seen a start-up go back to rewrite the marketing section of its business plan after rethinking its marketing strategy. I have, however, seen many start-ups in the same situation rip up the marketing slides in their slide deck and insert the updated ones.

This concern doesn’t apply just to business plans, either. Prose should be used sparingly in all types of business communications–annual plans, formal specifications, etc. As an investor, I’ve noticed that I have a very strong bias against teams that send me executive summaries. I rarely read them when they are one page long, and, unfortunately, most are four pages. This is your opportunity to make your company’s narrative inspiring and compelling–don’t waste it by submitting the equivalent of War and Peace. When I get an executive summary, I immediately ask for a deck, which I find much more energizing (when well executed) and digestible.

I think the formal business plan is a relic of the start-up business-plan competitions that originated at academic institutions. If you apply the academic mindset to a start-up, then it probably does make sense to start with a written thesis on the opportunity. Unfortunately, it took me a full year to write my undergraduate thesis, and I don’t remember anyone ever reading it outside of the professors responsible for grading it. I would encourage academic institutions to replace the traditional business-plan competitions in favor of pitch-deck competitions.

As for entrepreneurs, my advice is to discourage your team from writing prose whenever possible. If you want to tell a story, tell it in a compelling and concise narrative slide deck. If you have an argument to make, do it live in a team meeting. If you want to codify what has been agreed to on any aspect of the business, build concise slides that are easily digested, shared, debated, and edited as a group. If you want to slow your business down, stifle real-time discussion, and prioritize the argument over the outcome, write prose.

A version of this blog was originally published in Inc. Magazine http://www.inc.com/magazine/201310/eric-paley/writing-advice-for-start-ups-and-entrepreneurs.html-

I’m a big believer in the key tenets of Steve Blank’s The Four Steps to the Epiphany and Eric Ries’s The Lean Startup. Particularly, I like to see start-ups follow the authors’ approach to finding what both call product/market fit.

One of the key concepts of product/market fit is that you should not start to invest in building your company until there is evidence that the product fits a need in the market. Blank and Ries encourage start-ups to get their first product in front of customers quickly, get feedback, then tweak their product accordingly. That’s great advice–scaling a sales force and infrastructure to sell a product that the market does not want can be catastrophic to a start-up.

Unfortunately, the pendulum rarely swings halfway, and I’ve recently noticed a worrisome trend among many start-ups. Entrepreneurs are building good products, putting them in front of customers, getting solid feedback, and then iterating into infinity in search of something they will probably never find. In most cases, the product is viable, but it isn’t magically obvious that it is extraordinary.mirage

Many entrepreneurs seem to be waiting for their product to go viral before they actually build out their businesses. Although it’s fantastic to see companies grow without paid marketing, many outstanding companies have been built on products that have never gone viral. Some products just require a more meaningful marketing investment to educate and acquire customers before they achieve success.

Look to other metrics besides how fast your company is acquiring users to determine whether you are ready to scale up. User engagement metrics like net promoter score are very powerful in determining whether your product has satisfied users and you are ready to invest in growth. Even those numbers will never be perfect, but they should give you confidence to take a leap and believe your product will work for a large enough group of users.

Scale tends to breed scale. Start-ups often need to get some type of critical mass of users before their products start to be fully appreciated and begin to spread more organically. Malcolm Gladwell explores this phenomenon in The Tipping Point. Without making some efforts toward scale, you typically won’t have the possibility of the market tipping in your direction.

Furthermore, when you begin to intelligently scale up, you can then start to focus on the challenges of marketing and selling the product. Those areas are also critical to long-term success and will require just as much hypothesis testing and iteration. As the company gets good at overcoming these challenges, you then have the opportunity to show some pretty impressive evidence of product success that might not have been possible with a smaller user base.

When scaling up, do it rationally and sustainably. When a seed-funded company goes to investors for the next round of funding, the first question typically is, how much traction with users does the company have? Some churn is to be expected, as are some product problems.

Investors don’t expect a perfect product, but we do relish analyzing a business’s customer growth and engagement. If your company has a product that looks solid but hasn’t demonstrated the ability to scale up, you are going to find yourself meeting with lots of VCs and falling victim to the Series A crunch.

Of course, you should continue to improve your product, but don’t wait for some magical moment to start building the rest of the business. Sometimes product is the reason a company isn’t ready to scale, but often the culprit is the insecurity of the entrepreneur.

Originally published in Inc. Magazine http://www.inc.com/magazine/201309/eric-paley/no-product-can-be-perfect.html

How Not to Get Fired

July 2, 2013

Getting fired from the company you created is probably the last thing you can imagine. Unfortunately, it’s a fairly regular occurrence that can have devastating effects on both you and the company.

Dismissing a founder is never an easy decision for a board to make. In general, investors have good reasons to want to see you lead the business to long-term success. You are the person who got the investors excited about the company and sold them the vision, and you are the person they bet on to lead the company. Start-ups have lots of luck hiring managers but generally little luck hiring visionaries. Not to mention the fact that hired CEOs are quite expensive.

But boards have an obligation to investors to do what is in the best interests of the company, and if you give them no better option, they will get rid of you.

donald-trump-youre-fired

I have found that there are a few failure modes–fireable offenses, so to speak–that ultimately persuade a board to replace a founder. Here are the three most common.

Fireable Offense no. 1: Failing to Address Real Problems

In my experience, the most frequent failure occurs when founder CEOs don’t confront the hard facts. You get so invested in selling the grand vision of the company that you fail to deal with the challenges that the company is facing every day.

Moreover, fear of appearing incompetent can cause you to downplay any problems in the business. By failing to address those challenges, however, you start to lose all credibility with the board of directors. I’ve seen CEOs who insist that things are going well, even though the company is demonstrably far behind plan. It is nearly impossible to take meaningful corrective action as a company when a CEO is insisting that everything is rosy.

Fireable Offense no. 2: Neglecting Functions Outside Your Comfort Zone

Most founders have expertise in a single area–be it engineering, product, or marketing. Staying within your core experience and neglecting other areas is a common problem. For example, I see lots of founders who come from product backgrounds (my bias as the best background for a start-up CEO) and fail to recruit and manage a great sales and marketing organization.

Too often, they undervalue the importance of less-familiar functions to the company’s success. When a product-experienced CEO is struggling in all areas but product, that person should probably consider stepping down as CEO and simply running product.

Fireable Offense no. 3: Not Recruiting an Awesome Senior Team

Founders are frequently threatened by leaders with more experience. Perhaps you worry that the board regards senior managers as your potential replacements. In my view, however, the best evidence that you should stay in the CEO seat is if you demonstrate the ability to recruit and lead a team of experienced functional leaders. If outstanding talent is willing to work for a less-experienced but inspiring CEO, that’s evidence enough that you are doing a terrific job as a leader.

To be sure, I have seen numerous underperforming start-ups whose board members are so impressed with the founder that they find it simply unthinkable that anyone else would lead the company. If you can manage to avoid the mistakes above, you’ll earn the support of your board, and you’ll stay in the CEO seat long enough to get the business back on track.

Originally published in Inc. Magazine http://www.inc.com/magazine/201307/eric-paley/how-not-to-get-fired.html

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