Faith-Based versus Fact-Based Decision Making

I’ve screwed up a lot of startups on faith.

One of the key tenets of entrepreneurship is that you start your company with insufficient resources and knowledge.

Faith-based Entrepreneurship
At first, entrepreneurship is a Faith-based initiative.  There is no certainty about a startup on day-one.  You make several first order approximations about your business model, distribution channels, demand creation, and customer acceptance. You leave the comfort of your existing job, convince a few partners to join you and you jump off the bridge together.

At each startup I couldn’t wait to do this.  No building, no money, no customers, no market?  Great, sign me up.  We’ll build something from scratch.

You start a company on a vision; on a series of Faith-based hypotheses.

Fact-based Execution
However, successfully executing a startup requires the company to become Fact-based as soon as it can.

Think about all the assumptions you’ve made to get your business off the ground.  Who are the customers?  What problems do they have?  What are their most important problems?  How much would they pay to solve them?  What’s the best way to tell them about our product?…

Ad infinitum. These customer and market risks need to be translated into facts as soon as possible.

You can blindly continue to execute on faith that your hypothesis are correct.  You’ll ship your product and you’ll find out if you were wrong when you run out of money

Or you can quickly get out of the building and test whether your hypothesis were correct and turn them into facts.

In hindsight, when I was young, this where I went wrong.  It’s a lot more comfortable to hang on to your own beliefs than to get (or face) the facts.  Because at times facts may create cognitive dissonance with the beliefs that got you started and funded.

Customer Development
This strategy of starting on faith, and quickly turning them into facts is the core of the Customer Development process.


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Vertical Markets 1: Bad Advice – All Startups are the Same

In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business plan and securing funding for a startup.  The best entrepreneurship textbooks and blogs assume that advice to startups is generalizable.  But as I learned from my students this “one-size-fits-all” approach does not work for all startups.  Different market opportunities present radically different startup risks and costs.

Capital Requirements
In my class students form teams and spend a semester building a detailed plan for a company. When I started teaching I launched project teams with this advice: All you need is a half a million dollars to start a company and at most a few million more to scale the company.” And the students nodded, OK, yes sir, and they wrote down, “a half a million bucks to start.”

The next week in class a project group raised their hands and said, “Hey, Professor Blank, we found out the common wisdom in the biotech business is that “we need $10-20 million just for the R&D phase and 100’s of million to get through clinical trials.”

“Of course,” I said, “Life science is completely different. The time to product and scale of investment is radically different than other startup markets.”

Intellectual Property
At the next class I said, “You all ought to get out and start talking to customers on day one, and get early feedback on your idea. You don’t need to worry about any Intellectual Property (IP) issues. Just get out of the building.”

The next week another team, working on a new type of solid oxide fuel cell, remarked, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our IP.”

“Oops,” I said, “you’re right.  In clean tech nanomaterials you guys need to be talking to patent attorneys.  Don’t share the details of your manufacturing process with customers until you’ve locked up your intellectual property.”

Government Regulations
I turned to the class and said, “The rest of you can keep building your company and shipping your product because you don’t need to worry about government regulations. You’re a startup, just get your product out the door.”

The next week another group raised their hands, “Professor Blank, we’re building a medical device and there’s something called the 510K that the FDA requires, and that’s a two-year process.”

Verticals Are Different
I began to realize that entrepreneurs (and their professors) act like every vertical market and industry has the same set of rules. The guidelines I had originally proposed to my students worked for enterprise software or Web 2.0 startups, but medical device, biotech and cleantech startups required radically different approaches.

So the first heuristic is: do not assume the startup rules are the same for all vertical markets.

Now when my students begin their team projects, I list 13 vertical markets on the whiteboard.  Just for discussion, the markets I chose were:

  • Web 2.0,
  • enterprise software
  • enterprise hardware
  • communications software
  • communications hardware
  • consumer electronics
  • games software
Vertical Markets

Vertical Markets - Click to Enlarge

  • semiconductors
  • Electronic Design Automation (EDA)
  • clean tech
  • medical devices
  • life sciences
  • personalized medicine

There’s nothing special about this list other than it represents a diverse set of markets.  If your market is missing, just add it as we go through this discussion.

Entrepreneurs who have experience in the vertical market they’re entering do this analysis automatically. If you don’t have deep knowledge of the domain you are about to start a business in, you need to begin by understanding the answers to questions like these:

  • What vertical market are you in?
  • Do you have domain expertise in your market?
  • Do you have advisors who are domain experts in your market?
  • Do your potential investors understand your market?
  • What is it that’s unique about the market I’m in?

We’ll talk about the implications of what vertical market you’re entering in the next few posts. 

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Founders and dysfunctional families

Startup CEO Traits
I was having lunch with a friend who is a retired venture capitalist and we drifted into a discussion of the startups she funded. We agreed that all her founding CEOs seemed to have the same set of personality traits – tenacious, passionate, relentless, resilient, agile, and comfortable operating in chaos. I said, “well for me you’d have to add coming from a dysfunctional family.”  Her response was surprising, “Steve, almost all my CEO’s came from very tough childhoods.  It was one of the characteristics I specifically looked for. It’s why all of you operated so well in the unpredictable environment that all startups face.” 74HGZA3MZ6SV

I couldn’t figure out if I was more perturbed about how casual the comment was or how insightful it was.  What makes an individual a great startup founder (versus an employee) has been something I had been thinking about since I retired. My comfort in operating in chaos was something I first recognized when I was working in the Midwest.

The Rust Belt – (Skip this Section if I’m Boring You)
Out of the Air Force, my first job out of school was in Ann Arbor, Michigan, in the mid-1970’s installing broadband process control systems in automotive and manufacturing plants throughout the Midwest. I got to travel and see almost every type of Rust Belt factory – at the time, the heart and muscle of American manufacturing – GM, American Motors, Ford, U.S. Steel, Whirlpool.  Our equipment was installed in the manufacturing lines of these companies, and if it went down sometimes it brought the entire manufacturing line down.

I always made a habit of getting a tour of whatever manufacturing plant I was visiting. Most plant foremen were more than accommodating and flattered that someone actually was interested.  I was fascinated to learn how everyday objects (cars, washing machines, structural steel, etc.) that ended up on our shelves or driveways were assembled.

My favorite factory was the massive U.S. Steel plant by Lake Erie. On my first visit the foreman walked through this enormous building, not much more than a giant steel shed, where they had an open hearth furnace. We came in time to see the furnace being tapped, pouring steel out into giant buckets. (Years later I realized I watched the end of an era. The last open hearth furnaces closed in the 1980’s.)

We stood on a platform several stories up and light streamed diagonally through windows set high on top of the building cutting through the black soot particles created when the incandescent steel hit the bucket. It was too loud to talk so I just watched the steel pour through the clouds of soot backlit by the blinding bright liquid metal. It looked like an update of the iconic image of Penn Station writ large.

And as I stared through the billowing clouds of soot flashing between black and white took on fantastical shapes as tiny figures on the factory floor scurried around the bucket. I could have stayed there all day.

Automobile plants were equally fascinating. They were like being inside a pinball machine. At the Ford plant in Milpitas the plant foreman proudly took me down the line. I remember stopping at one station a little confused about its purpose. All the other stations on the assembly line had groups workers with power tools adding something to the car.

This station just had one guy with a 2×4 piece of lumber, a large rubber mallet and a folded blanket.  His spot was right after the station where they had dropped the hoods down on the cars, and had bolted them in. As I was watched, the next car rolled down the line, the station before attached the hood, and as the car approached this station, the worker took the 2×4, shoved it under one corner of the hood and put the blanket over the top of the hood and started pounding it with the rubber mallet while prying with the lumber.  “It’s our hood alignment station,” the plant manager said proudly.  These damn models weren’t designed right so we’re fixing them on the line.”

I had a queasy feeling that perhaps this wasn’t the way to solve the car quality problem.  Little did I know that I was watching the demise of the auto industry in front of my eyes.

Operating in Chaos
Repairing our equipment could be time critical. One day, I was at the Ford Wixom auto assembly plant training my replacement and I was at met at the door by an irate plant manager.  He welcomed us by screaming, “Do you know how much it costs every minute this line is down.” As I’m troubleshooting our equipment scattered across the plant, (in the computer room, above the steel, in NEMA cabinets next to line, etc.,) the manager followed us still yelling.  My understudy looked at me and said, “how can you deal with this chaos and still focus?”  And until that moment I had never thought about it before.  I realized that what others heard as chaos, I just shut out.

A Day in the Life of A Founder
For those of you who’ve never started a company, let me assure you that it never happens like the pleasant articles you read in business magazines or in case studies.  Founding a company is a sheer act of will and tenacity in the face of immense skepticism from everyone – investors, customers, friends, etc.  You literally have to take your vision of the opportunity and against all rational odds assemble financing, and a team to help you execute.  And that’s just to get started.

Next, you have to deal with the daily crisis of product development and acquiring early customers.  And here’s where life gets really interesting, as the reality of product development and customer input collide, the facts change so rapidly that the original well-thought-out business plan becomes irrelevant.

If you can’t manage chaos and uncertainty, if you can’t bias yourself for action and if you wait around for someone else to tell you what to do, then your investors and competitors will make your decisions for you and you will run out of money and your company will die.

Great founders live for these moments.

Creating the Entrepreneurial Personality – A Thought Experiment
Fast forward three decades back to today.  The lunch conversation was an interesting data point to add to a hypothesis I’ve had.

I’ve wondered, just as a thought experiment, how would we go about creating individuals who operate serenely in chaos, and have the skills we associate with one type of entrepreneurial founder/leader?

One possible path might be to raise children in an environment where parents are struggling in their own lives and they create an environment where fighting, abusive or drug/alcohol related behavior is the norm.

In this household nothing would be the same from day to day, the parents would constantly bombard their kids with dogmatic parenting, (harsh and inflexible discipline,) and they would control them by withholding love, praise, and attention. Finally we could make sure no child is allowed to express the “wrong” emotion. Children in these families would grow up thinking that this behavior is normal.

(If this seems unimaginably cruel to you, congratulations, you had a great set of parents.  On the other hand, if the description is making you uncomfortable remembering some of how you were raised – welcome to a fairly wide club.)

Over the last 5 years I’ve asked over 500 of my students how many of them grew up in a dysfunctional family (participation was voluntary.) I’ve been surprised at the data. In this admittedly very unscientific survey I’ve found that between a quarter and half of the students I consider “hard-core” entrepreneurs/founders (working passionately to found a company,) self-identified as coming from a less than benign upbringing.

Founders as Survivors
My hypothesis is that most children are emotionally damaged by this upbringing.  But a small percentage, whose brain chemistry and wiring is set for resilience, come out of this with a compulsive, relentless and tenacious drive to succeed.  They have learned to function in a permanent state of chaos.  And they have channeled all this into whatever activity they could find outside of their home – sports, business, or …entrepreneurship.

Therefore, I’ll posit one possible path for a startup founder – the dysfunctional family theory.

Throwing hand grenades in Your Own Company
One last thought. The dysfunctional family theory may explain why founders who excel in the chaotic early phases of a company throw organizational hand grenades into their own companies after they find a repeatable and scaleable business model and need to switch gears into execution.

The problem, I believe, is that repeatability represents the extreme discomfort zone of this class of entrepreneur. And I have seen entrepreneurs emotionally or organizationally try to create chaos — it’s too calm around here — and actually self-destruct.

So What?
Lets be clear, in no way am I suggesting that growing up in a dysfunctional family is the only path to becoming a founder of a startup.  Nor am I suggesting that everyone who does so turns out well. And in particular I’m not suggesting that every employee who joins a startup fits this profile, it just seems more prevalent in the founder(s).

And this hypothesis might be a good example of confusing cause and effect. Yet I am surprised given how much is written about the attributes of a startup founder, how little has been written about what “makes” a founder.

Let me know what you think.   Does any of this match your experience or people you know?

Comments and brickbats welcomed.

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The Sharp End of the Stick

The Sharp End of the Stick
At some point in my career as I began to formulate thoughts about mission and intentI started to think about the broader role of marketing in a growing technology company. It became clear to me that the mission of marketing in most companies has to be to support sales.  While this may seem obvious to anyone not in sales and marketing, trust me, in a technology company this is a conceptual breakthrough. In my experience, every marketer with an MBA wants to “do strategy.” Every marketing communication hire couldn’t wait to produce the next great ad or PR program.  Every product marketer thought they should help define the product feature set, etc.  But without sales there is no revenue, and without revenue there is no company.  All the strategic thinking in the world won’t make up for a missed revenue plan.  74HGZA3MZ6SV

Sales was the Sharp End of the Stick, and Marketing was the Stick
The epiphany for me was that in any company where I was running the marketing department, marketing’s number one job (its mission) would be to support sales – and to make the (commission-driven) sales VP the highest-paid person in the company. We were going to do that by turning marketing into a machine to generate end user demand, drive the that demand into our sales channels, and educate our sales channels.  And the same time we were also going to do all the other strategic stuff about pricing, positioning, promotion and customer discovery and validation to help engineering understand customer needs.  But sales came first.

(By the way, companies that have a single individual as the VP of Sales and Marketing have decided that marketing doesn’t add any other value then tactical sales support, and the only way to get is to put it under the VP of Sales.  That’s why you almost never see a marketer as the VP of Sales and Marketing.)

My way of explaining our support and service role to the marketing department was that:

  1. Sales is the sharp end of the stick, and marketing at best, is the stick.
  2. But while the sales team works for commission, the rest of the employees have equity (stock) in the company.
  3. If sales revenue and profits are high enough, we could take the company public or sell it, and the stock would be worth more than the paper it was printed on.
  4. In exchange for being the “point” organization, performance of a salesperson is measured continuously and individuals who fail to deliver quota are removed.
  5. If sales as an organization failed to deliver revenue to plan then all we had were worthless shares.
  6. In reality the sales team was working for the rest of the company to make all of our stock valuable.

No one was confused after that.

Who’s on the Sharp End
In an early stage startup, instead of sales being up front, the point departments are likely to be product development and customer development. Later on in this same company’s life, sales will become the pointy end and product development moves to a supporting role.  In other companies it may be that manufacturing or finance is the sharp end of the stick.  In an IP licensing business, legal and finance are the sharp end of the stick. It varies by company and changes over time.  There’s no magic formula but there are always “leading” departments.  And all “leading” departments have some type of “consequence-based” feedback loops that make success or failure obvious.

The clearest example is the U.S. military.  Combat troops are the “tip of the spear” while everyone else is the logistical tail.  No one in the support chain of the troops is confused or resentful as they all understand that the greatest risk is up at the front.

Killing The Company With Equality
I’ve been on boards where the CEOs took the egalitarian position that “all our departments are equal, no one is more important than any other.”  The unfortunate corollary is that in these companies no department believed it was in a supporting or service role.

In these companies, departments that should have been providing support and service instead behaved like they were the “sharp end” organizations. I’ve encountered finance organizations with budget processes designed to simplify their lives, but not the rest of the company’s. Or expense reporting requirements that took hours of a sales teams time to fill out every week.  Sometimes it was the legal department crafting contracts so onerous I wouldn’t even sign it, let alone expect a customer to do so. At times it was human resources with policies that made people leave rather than stay, or it was a CIO more interested in standards than deployment.

None of these departments operated with any particular sense of malice – just with the certainty that the company revolved around them. But they were misguided because they lacked a clear departmental mission statement that reminded them of the corporate goals. If each department had a mission statement, it would have been clear whether their role was in support or at the sharp end. Having each department develop a mission statement depends on leadership and direction from the CEO.

“Going Out of Business” Strategy
I’m now convinced “all our departments are equal” is a “going out of business” strategy. Not understanding who are the “lead departments” makes companies feel like ponderous, bureaucratic and frustrating places to work.  The best people in the “sharp end” organizations simply vote with their feet and leave.

I loved to compete against these companies.  Their own internal culture would tie them up in knots, and agile startups could run rings around them.

Don’t let this happen to your company.  Embrace and then communicate the idea of a lead department(s).  Build a company culture where everyone supports the “sharp end of the stick.”  

Stay agile, stay focused. 

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Customer Development Talk Startup2Startup

Eric Ries of Lean Startup fame and the author of the Lessons Learned blog joined me at Startup2Startup for a joint Customer Development talk. Thanks to Dave McClure and Leonard Speiser for the opportunity to speak.

The Customer Development talk can be seen here74HGZA3MZ6SV

Part 1

Part 2

Part 3

The slides are here.

If you’ve never seen Eric’s Lean Startup presentation, take a few minutes to at least watch his part. It starts at ~40:30 in the video.

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Killing Innovation with Corner Cases and Consensus

I was visiting a friend whose company teaches executives how to communicate effectively. He had just filmed the second of a series of videos called, Speaking to the Big Dogs: How mid-level managers can communicate effectively with C-level executives  (CEO, VP’s, General Managers, etc.)  As we were plotting marketing strategy, I mentioned that the phrase “Speaking to the Big Dogs” might end up as his corporate brand.  And that he might want to think about aligning all his video and Internet products under that name. 74HGZA3MZ6SV

We were happily brainstorming when one of his managers spoke up and said, “Well, the phrase ‘Big Dogs’ might not work because it might not translate well in our Mexican and Spanish markets.”  Hmm, that’s a fair comment, I thought, surprised they even had international locations. “How big are your Mexican and Spanish markets,” I asked? “Well, we’re not in those markets today… but we might be some day.”  I took a deep breath and asked, “Ok, if you were, what percentage of your sales do you think these markets would be in 5 years?”   “I guess less than 5%,” was the answer.

Now I mention this conversation not because the objection was dumb, but because objections like these happen all the time when you’re brainstorming.  And when you are brainstorming you really do want to hear all ideas and all possible pitfalls.  But entrepreneurial leaders sometimes forget that in startups, you can’t allow a “corner case” to derail fearless decision making.

Corner Cases
A corner case is an objection that may be:

  1. technically reasonable
  2. may have a probability of occurring
  3. its probability of occurring is lower than your probability of running out of money.

I’ve noticed that corner case comments are directly proportional to the intelligence of the people in the room.  The smarter the team the more objections you’ll have – and they’ll all be technically and theoretically possible.

Corner Cases and Consensus are For Large Companies
Carefully considering each and every possible outcome before you proceed with a decision is something large companies with large revenues, shareholders and employees need to do.  

Achieving consensus about every corner case from each stakeholder in the room  is something large companies with large revenues, shareholders and employees need to do.  

Unlike large corporations, startup meetings are not about achieving consensus for every objection raised.  They are about forward motion, momentum and feedback loops (i.e. Customer Development.)

Calculate the Odds
The heuristic I suggest is: hear the corner case objections, make the objector calculate the odds, if the potential damage estimate is low (probability of the event occurring multiplied by its ability to put you out of business) keep the meeting focussed and move on.  If you do this consistently your team will catch on.

You’ll be spending your time on what matters, rather what’s theoretically possible. For a startup “No Corner Cases” needs to be an integral part of your corporate DNA.

Any startup that’s striving for consensus on corner cases instead of speed and tempo will be out of business.

Focus on Speed and Tempo

“Speed and Tempo” – Fearless Decision Making for Startups

”If things seem under control, you are just not going fast enough.”

- Mario Andretti

I was catching up over breakfast with a friend who’s now CEO of his own startup. One of the things he mentioned was that when it came to decision-making he still tended to think and act like an engineer. Each and every decision he made was carefully thought through and weighed. And he recognized it was making his startup feel and act like a big ponderous company. 74HGZA3MZ6SV

Speed = Execution Now

General George Patton said, “A good plan violently executed now is better than a perfect plan next week.” The same is true in your company. Most decisions in a startup must be made in the face of uncertainty. Since every situation is unique, there is no perfect solution to any engineering, customer or competitor problem, and you shouldn’t agonize over trying to find one. This doesn’t mean gambling the company’s fortunes on a whim. It means adopting plans with an acceptable degree of risk, and doing it quickly. (Make sure these are fact-based, not faith-based decisions.) In general, the company that consistently makes and implements decisions rapidly gains a tremendous, often decisive, competitive advantage.

Decision Making Heuristics for the Startup CEO

The heuristic I gave my friend was to think of decisions of having two states: those that are reversible and those that are irreversible. An example of a reversible decision could be adding a product feature, a new algorithm in the code, targeting a specific set of customers, etc. If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.

My advice was to start a policy of making reversible decisions before anyone left his office or before a meeting ended. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.

Tempo = Speed Consistently Over Time

Once you learn how to make decisions quickly you’re not done.  Startups that are agile have mastered one other trick – and that’s Tempo – the ability to make quick decisions consistently over extended periods of time.  Not just for the CEO or the exec staff, but for the entire company.  For a startup Speed and Tempo need to be an integral part of your corporate DNA.

Great startups have a tempo of 10x a large company.

Try it.

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SuperMac War Story 6: Building The Killer Team – Mission, Intent and Values

If you don’t know where you’re going, how will you know when you get there?

At the same time we were educating the press, we began to educate our own marketing department about what exactly we were supposed to be doing inside the company. During the first few weeks I asked each of my department heads what they did for marketing and the company. When I asked our trade show manager she looked at me like I was the house idiot and said, “Steve, don’t you know that my job is to set up our trade show booth?” The other departments in marketing gave the same answers; the product-marketing department said their job was to write data sheets. But my favorite was when the public relations manager said, “we’re here to write press releases and answer the phone in case the press calls.” 74HGZA3MZ6SV

If these sound like reasonable answers to you, and you are in a startup/small company, update your resume.

Titles are not your job
When I pressed my staff to explain why marketing did trade shows, or wrote press releases or penned data sheets, the best I could get was “why that’s our job.” It dawned on me that we had a department full of people who were confusing their titles with what contribution they were supposed to be making to the company. While their titles might be what their business cards said, titles were not their job – at least in any marketing department I was running.

Titles are not the same as what your job is. This is a big idea.

Department Mission Statements – What am I Supposed to Do Today
It wasn’t that we somehow had inherited dumb employees. What I was actually hearing was a failure of management. No one had sat the marketing department down and defined what our department Mission (with a capital “M”) was.

Most startups put together a corporate mission statement because the CEO remembered seeing one at their last job, or the investors said they needed one. Most companies spend an inordinate amount of time crafting a finely honed corporate mission statement for external consumption and then do nothing internally to actually make it happen. (And to this day I can’t remember if we even had a corporate mission statement.) What I’m about to describe here is quite different.

What was missing in SuperMac marketing was anything in writing that gave the marketing staff daily guidance on what they should be doing. The first reaction from my CEO was, “that’s why you’re running the department.” And yes, we could have built a top-down, command-and-control hierarchy. But what I wanted was an agile marketing team capable of operating independently without day-to-day direction.

So what we needed to do was to craft a Departmental Mission statement that told everyone why they come to work, what they need to do, and how they will know they have succeeded. And it was going to mention the two words that SuperMac marketing needed to live and breathe: revenue and profit.

Five Easy Pieces – The Marketing Mission
After a few months of talking to customers, talking to our channel and working with sales we defined the marketing Mission (our job) was to:
Help Sales deliver $25 million in sales with a 45% gross margin. To do that we will create end-user demand and drive it into the sales channel, educate the channel and customers about why our products are superior, and help Engineering understand customer needs and desires. We will accomplish this through demand-creation activities (advertising, PR, tradeshows, seminars, web sites, etc.), competitive analyses, channel and customer collateral (white papers, data sheets, product reviews), customer surveys, and market requirements documents.

This year, marketing need to provide sales with 40,000 active and accepted leads, company and product name recognition over 65% in our target market, and five positive product reviews per quarter. We will reach 35% market share in year one of sales with a headcount of twenty people, spending less than $4,000,000.

  • Generate end user demand (to match our revenue goals)
  • Drive that demand into our sales channels
  • Value price our products to achieve our revenue and margin goals (create high-value)
  • Educate our sales channel(s)
  • Help engineering understand customer needs

That was it. Two paragraphs, Five bullets. It didn’t take more.

Working to the Mission
Having the mission in place meant that our marketing team could see that what mattered was not what their business card said, but how much closer did their work move our department to completing the mission. Period.

It wasn’t an easy concept for everyone to understand.

Building the Team
My new Director of Marketing Communications turned the Marcom departments into a mission-focused organization. Her new tradeshow manager quickly came to understand that their job was not to set up booths. We hired union laborers to do that. A trade show was where our company went to create awareness and/or leads. And if you ran the tradeshow department you owned the responsibility of awareness and leads. The booth was incidental. I couldn’t care less if we had a booth or not if we could generate the same amount of leads and awareness by skydiving naked into a coffee cup.

The same was true for PR. My new head of Public Relations quickly learned that my admin could answer calls from the press. The job of Public Relations at SuperMac wasn’t a passive “write a press release and wait for something to happen activity.” It wasn’t measured by how busy you were, it was measured by results. And the results weren’t the traditional PR metrics of number of articles or inches of ink. I couldn’t care less about those. I wanted our PR department to get close and personal with the press and use it to generate end user demand and then drive that demand into our sales channel. (The Potrero benchmark strategy was one component of this creating end user demand through PR.) We were constantly creating metrics to see the effects of different PR messages, channels and audiences on end-user purchases.

The same was true for the Product Marketing group. I hired a Director of Product Marketing who in his last company had ran its marketing and then went out into the field and became its national sales director. He got the job when I asked him how much of his own marketing material his sales team actually used in the field. When he said, “about ten percent,” I knew by the embarrassed look on his face I had found the right guy. And our Director of Technical Marketing was superb at understanding customer needs and communicating them to engineering.

Teaching Mission Intent – What’s Really Important
With a great team in place, the next step was recognizing that our Mission statement might change on the fly. “Hey, we just all bought into this Mission idea and now you’re telling us it can change?!”

We introduced the notion of Mission intent. What is the company goal behind the mission. In our case it was to sell $25 million in graphics boards with 45% gross margin. The idea of intention is that if employees understand the thinking behind the mission, they can work collaboratively to achieve it.

But we recognized that there would be time marketing would screw up, making the mission obsolete (i.e. we might fail to deliver 40,000 leads.) Think of intention as the answer to the adage, “When you are up to your neck in alligators it’s hard to remember you were supposed to drain the swamp.” For example; our mission said that the reason why marketing needed to deliver 40,000 leads and 35% market share, etc, was so that the company could sell $25 million in graphics boards at 45% gross margin.

What we taught everyone is that the intention is more enduring then the mission. (“Let’s see, the company is trying to sell $25 million in graphics boards with 45% gross margin. If marketing can’t deliver the 40,000 leads what else can we do for sales to still achieve our revenue and profitability?”) The mission was our goal, but based on circumstances it may change, but the Intent was immovable.

When faced with the time pressures of a startup, too many demands and too few people, we began to teach our staff to refer back to the five Mission goals and the Intent of the department. When stuff started piling up on their desks, they learned to ask themselves, “Is what I’m working on furthering these goals? If so, which one? If not, why am I doing it?”

They understood the mission intent was our corporate revenue and profit goals.

Core Values
Even after we had Mission and Intent down pat, one of the things that still drove me crazy was when we failed to deliver a project for sales on time or we missed a media deadline, everyone in my department had an excuse. (Since a large part of marketing was as a service organization to sales, our inability to deliver on time meant we weren’t holding up our end of the mission.) I realized that this was a broken part of our culture, but couldn’t figure out why. And one day it hit me that when deadlines slipped there were no consequences.

And with no consequences we acted as if schedules and commitments really didn’t matter. I heard a constant refrain of, “The channel sales brochure was late because the vendor got busy and they couldn’t meet the original deadline.” Or, “the January ad had to be moved into February because my graphic artist was sick but I didn’t tell you assuming it was OK.” Or, “we’re going to slip our product launch because the team thought they couldn’t get ready in time.” We had  a culture that had no accountability, and no consequences -  instead there were simply shrugged shoulders and a litany of excuses.

This had to change. I wanted a department that could be counted on delivering. One day I simply put up a sign on my door that said, “No excuses accepted.” And I let the department know what I meant was we were all going to be “accountable.”

What I didn’t mean was “deliver or else.” By accountable I meant, “we agreed on a delivery date, and between now and the delivery date it’s OK if you ask for help because you’re stuck, or something happened outside of your control. But do not walk into my office the day something was due and give me an excuse. It will cost you your job.” That kind of accountable.

And, “since I won’t accept those kind of excuses, you are no longer authorized to accept them from your staff or vendors either.” The goal wasn’t inflexible dates and deadlines, it was no surprises and collective problem solving.  After that, we  spent a lot more time working together to solve problems and remove obstacles in getting things done on-time.

Over time, accountability, execution, honesty and integrity became the cornerstones of our communication with each other, other departments and vendors.

  • We wouldn’t give excuses for failures, just facts and requests for help
  • We wouldn’t accept excuses for failures, just facts, and offer help
  • Relentless execution
  • Individual honesty and integrity

That was it. Four bullets. It defined our culture.

Why Do It
By the end of the first year our team had jelled. It was a department willing to exercise initiative, had the judgment to act wisely, and an eagerness to accept responsibility.

I remember at the end of a hard week my direct reports came into my office just to talk about the weeks little victories. And there was a moment as they shared their stories, that they all began to realize that our company (one that had just come off of life support) was beginning to kick the rear of our better-funded and bigger competitors.

We all marveled in the moment.

What did I learn so far?

  • Push independent execution of tasks down to the lowest possible level
  • Give everyone a shared Mission Statement: why they come to work, what they need to do, and how they will know they have succeeded.
  • Share Mission Intent for the big picture for the Mission Statement
  • Build a team comfortable with independent Mission execution
  • Agree on Core Values to define your culture

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Startup Ethics: Albatross or Essential?

A comment left on the previous post made me realize that it was time to discuss a subject I was going to save for latter – ethics.

While the story about the Potereo benchmarks was about relentless execution, its glib description of designing the benchmarks could be read as we cheated.  Given we consciously worked hard not to, here’s what we were thinking.

We decided to work with our engineering department to create the Potreo benchmarks because we really wanted to see how our boards performed with the four applications customers told us that they used; Photoshop, Quark, Illustrator and PageMaker. These were applications we had never seen or ran before when the boards were designed. As we ran our tests, our engineering team found ways to improve our graphic boards performance for these applications and they made revisions to the boards firmware (its operating instructions.) The goal was to make our boards run really fast on customer applications – the benchmarks just reflected that.

It would have been easy for marketing to skip all of this and just write a set of benchmarks that made us look good. It would have been possible to have our graphics boards recognize a benchmark and just speed that test up, but not really be faster in the real world. All these shortcuts were available to us. And we decided not to. And here’s why.

Even in the smallest of companies ethics matter. Culture matters. As a private company you can decide that winning at all costs is your culture. You can decide that coming in first at all costs is your culture. Unless your board of directors is looking over shoulder they may never know that’s what you’re doing and no one will tell you to stop.

Don’t confuse or rationalize “relentless and focused” with cheating.

Shortcuts are easy. But besides being morally wrong, in the end they come back to bite you big time. (Think about the baseball Steroid scandal, Tour de France doping scandal, housing bubble, etc.) When your employees see that it’s “an anything goes” culture you’ll find unethical behavior occurring that you will regret. And in a big company most of it is illegal and can have enormous consequences.

If you are a founder of a startup ethics begin with you. Think through if you want to win at any cost.  (I avoid these entrepreneurs like the plague.)

A final note. I’m sure at Enron and Madoff there were plaques and posters about ethics. Just remember ethics and values are about what you practice when the going gets tough. It’s the decisions that you make that might cost you an order, a sale or a higher stock price. Do the right thing. It pays off in the end.

There’s a Pattern Here

After my eighth and likely final startup, E.piphany, sitting in a ski cabin, it became clear that there is a better a way to manage startups. Joseph Campbell’s insight of the repeatable patterns in mythology is equally applicable to building a successful startup. All startups (whether a new division inside a larger corporation or in the canonical garage) follow similar patterns—a series of steps which, when followed, can eliminate a lot of the early wandering in the dark. Looking back on startups that have thrived reflect this pattern again and again and again.

So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups are not small versions of large companies.  Yet the processes that early-stage companies were using were identical to that of large corporations. In hindsight it appeared clear that startups that survive the first few tough years do not follow the traditional product-centric launch model espoused by product managers or the venture capital community. Through trial and error, hiring and firing, successful startups all invented a parallel process to product development. In particular, the winners invent and live by a process of customer learning and discovery. It’s a process that doesn’t exist in large companies with existing customers and markets.  But it is life and death for a new venture.

I call this process “Customer Development,” a sibling to “Product Development,” and each and every startup that succeeds recapitulates it, knowingly or not.

The “Customer Development” model is a paradox because it is followed by successful startups, yet articulated by no one.  Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed.

It is the path that is hidden in plain sight.

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Out of the Ashes – Something Isn’t Quite Right

“Customer Development” was born four years earlier and 200 miles away on Sandhill Road.  I was between my 7th and 8th and final startup; licking my wounds from Rocket Science, the company I had cratered as my first and last attempt as a startup CEO. I was consulting for the two venture capital firms who between them put $12 million into my last failed startup. (My mother kept asking if they were going to make me pay the money back. When I told her they not only didn’t want it back, but were trying to see if they could give me more for my next company, she paused for a long while and then said in a very Russian accent, “Only in America are the streets paved with gold.”  It was a long way from Ellis Island.) Both venture firms sought my advice for their portfolio companies. Surprisingly, I enjoyed seeing other startups from an outsider’s perspective. To everyone’s delight (and my surprise,) I usually could quickly see what needed to be fixed. At about the same time, two newer companies asked me to join their boards.  Between the board work and the consulting, I enjoyed my first-ever corporate “out-of-body experience.”

No longer personally involved, I became a dispassionate observer. From this new vantage point I began to detect something deeper than I had ever seen before: there seemed to be a pattern in the midst of the chaos. Arguments that I had heard at my own startups seem to be repeated at others. The same issues arose time and again: big company management styles versus entrepreneurs wanting to shoot from the hip, founders versus professional managers, engineering versus marketing, marketing versus sales, missed schedule issues, sales missing the plan, running out of money, raising new money. I began to gain an appreciation of how world-class venture capitalists develop pattern recognition for these common types of problems. “Oh yes, company X, they’re having problem 343. Here are the six likely ways that it will resolve, with these probabilities.” No one was actually quite that good, but some VCs had “golden guts” for these kinds of operating issues.

Yet something in the back of my mind bothered me. If great venture capitalists could recognize and sometimes predict the types of problems that were occurring, didn’t that mean that the problems were structural rather than endemic? Wasn’t something fundamentally wrong with the way everyone organizes and manages startups? Wasn’t it possible that the problems in every startup were somehow self-inflicted and could be ameliorated with a different structure? Yet when I talked to my venture capital friends, they said, “Well, that’s just how startups work. We’ve managed startups like this forever; there is no other way to manage them.”

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The Product Development Model

I realized that traditional ways to think about startups – have an idea, raise some money, do product development, go through an alpha test, beta test and first customer ship was the canonical model of how entrepreneurs thought about early stage ventures.

product-dev-diagram-b751

This product development diagram had become part of the DNA of Silicon Valley.  So much so that after I started teaching I’d ask, “Can anybody recognize this model of startups?”  And when everyone raised their hands I used to joke, “Even the waiters in San Francisco could draw this model.”  But in 2002 a student with a pained look on his face raised his hand and said, “Well, we’re now waiters in San Francisco because we used to be CEO’s of dot-com companies.”  So I no longer make that joke.

When I looked at the diagram in that ski cabin I realized there was a fundamental question I couldn’t answer: if all startups follow that model, why is it that some companies are opening bottles of champagne at their IPO and others who almost followed the same rules are selling off their furniture?  What was the difference here?  Were all startups the same? Were startups failing because of product failures or was there some other failure mode?  Is there any way to predict success or failure?  And even more importantly, was there any way to reduce risk in early stage ventures?

That day, alone in the cabin I knew I had to find the answer.

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Retirement and Redemption

In 1999 I retired and began to reflect about my career and what had happened in the previous 21 years and eight startups in Silicon Valley.  Alone in a ski cabin with the snow coming down outside, and my wife and daughters out on the slopes all day, I started collecting my thoughts by writing a series of “lessons learned” stories that I had hoped would become my memoirs.

Eighty some pages later I realized that a) I had some great war stories as a good marketeer and failed CEO, b) I’d have to pay my wife and kids to read them, c) the three of them were probably the entire total available market, and d) when I looked at what I had done and what other entrepreneurs had done at their startups, that there was a pattern.

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