Monday, March 29, 2010

Partners & Co-Founders

On April 17th, I'll be speaking at a "how to start a business" seminar being hosted at Peninsula Bible Church in Palo Alto, CA.  One area I've been asked to discuss is partners and co-founders.  My current company, Infrastructure Group, was co-founded with a partner. And most of the technology startups I work with, especially those planning to seek institutional funding, involve at least two or more partners.

To Partner or Not to Partner
To use the oft repeated cliche, entering into a business partnership is like getting married, and it should be approached with the same degree of care.  There are pros and cons to taking on a co-founder or partner vs. hiring an employee or contractor.

The pros:
  • Partners can provide complementary, critical skills that you lack - This is the most common reason technology startups have co-founders.  The range and depth of skills required to build a scaleable technology enterprise are almost always more than any one person can provide.
  • Work load sharing and backup - A partner can help share the work load and act as a backup.
  • Bringing a different perspective to business decisions - A good partner can be a sounding board and bring a different perspective to problems, opportunities, and decisions facing the business.
The cons:
  • Profit sharing - You will be sharing the profits and gains with your partner.  This means that you will need to generate sufficient revenue to support not only yourself, but your partners as well.
  • Potential conflicts - Having partners means that they will have a say in business decisions and direction.  You won't be free to just do things the way you want.  And the process of compromise takes time, energy, and some degree of interpersonal skill.
In deciding whether to take on a partner, weigh the cons against the alternatives.  For example, you can acquire missing skill sets and share workload by hiring contractors or employees.  They earn a wage, but you get to call the shots and keep any profits for yourself.  Need a sounding board?  Seek out trusted advisors or meet regularly with people in your network whose judgment you trust.

One bad reason to take on a partner:  emotional support.  Starting and owning a business can be scary.  So many people take on a partner to give them emotional strength.  This leads people to take on friends as partners who might not otherwise be qualified which then leads to problems if that person isn't pulling their weight.  Rather than being a source of emotional comfort, the partner now becomes a source of stress.

What to Look for in a Partner
Assuming that you've decided that you want to take on a partner, other than skill set, what else should you look for?
  • Trustworthiness - Can you trust the person completely ethically and financially?  If you can't trust them with equal access to your business bank account, even if things were to turn bad, do not take them on as a partner.  This is non-negotiable.
  • Shared Values & Objectives - Do they share the same core values as you with respect to right and wrong, treatment of people, ethical behavior, fair play, and other values important to you?  Do they have the same objectives for the business?  Are they in the partnership for the same reasons you are?  Shared values are important in being able to resolve the decisions and disputes that will ultimately arise.
  • Can Place the Interests of the Business Ahead of Their Own - There comes a time in all businesses when the partners need to make short term sacrifices for collective long term gain.  If your partner can't or won't do that, it will make it difficult to build the business.
  • Compatible "Stress" Style - How will your partner react under stress?  How do you react under stress?  And when you're both under stress, will those two styles work together or explode?  How should your partner deliver bad news or confront you?  You want a partner with whom you can disagree without losing respect for each other.
  • Compatible Work Style - How does your partner like to work?  How do you like to work?  Do you share the same work ethic?  This is the area where little irritations can build up, so it's best to get them on the table now.
  • Complementary Personality - In addition to complementary skills, a partner with a complementary personality can strengthen your business.  Are you an introvert who hates to sell?  Maybe having an extrovert partner would add strength to your business.  Do you like to wing it?  Maybe partnering with someone with a more deliberate style would act as a nice safety net.  However, the same personality differences that can add strength can also be a source of friction.
As you might guess, being able to determine this means knowing your potential partner quite well.  And this means you have to spend time with that person beforehand.  Don't rush into a co-founder decision.  There is one thing worse than having no co-founder;  it's having the wrong one.

Entering Into a Partnership
If you decide to take on a co-founder or partner, what's the best way to proceed?

  • Legally Incorporate - The exact form will depend on your business and tax situation.  Even though this adds expense, the reason I recommend this for partners is that first, this reinforces that this is a business partnership, not just an extension of friendship.  Second, you will be co-mingling assets and will need to define profit sharing splits.  As part of this process....
  • ...Work Through an Operating Agreement - If a business partnership is like a marriage, this is the pre-nuptial agreement.  In addition to working out profit and gain splits, defining mutual decision conditions, and spelling out rights and responsibilities, the most important benefit of an operating agreement is working through the "what if things go wrong" scenarios.  An operating agreement should spell out under what conditions a partner separates from the firm and what the associated mechanics are.  And if you find that you can't discuss this with a potential partner, then you aren't close enough to be in partnership.
  • Define Roles & Responsibilities - To minimize points of conflict, it helps to define the areas of responsibility for each partner and spell out under what conditions a business decision needs to be made by mutual assent vs. when it can be made autonomously.
While taking these steps is no guarantee of success, they should improve the odds that the partnership ends up being a source of strength, not strife, for the business.

Monday, March 22, 2010

Demystifying Strategic Planning

In addition to early stage startups, I also work with established technology companies.  Beyond size, one of the more striking differences I see between the two is their approach to planning.  In the case of the latter, most have some formal process for strategic planning.

But for some reason, in early stage companies, strategic planning is a dirty term.  "The market's moving too fast for us to worry about that!"  "By the time we'd get done with a plan, it would be obsolete."  Or the one I hear a variant of all the time: "When I was at Giganto Corp, we used to waste weeks putting together these huge binders and massive slide decks that were complete bull**** and ended up on the shelf.  No way am I going to...." followed by a tirade against big company bureaucracy.

Unfortunately, by rejecting any semblance of strategic planning, many startups are throwing out the baby with the bathwater.  As a result, many of them become completely reactive.  In their quest for traction, they knee jerk with every shift in the market and call it "pivoting."  They end up wasting time, money, and energy achieving nothing.  The last time I checked, "flailing" wasn't a synonym for "pivoting."

So how would having a strategic plan help?

Let's first define what is a strategic plan.  At its core, a strategic plan should answer two questions:
  • What do you want to do?
  • How will you do it?
That's it.  All the fancy frameworks - Five Forces, SWOT, Portfolio Matrix theory, etc. - are merely mental aids to help one think through and to pinpoint what data is needed the answers to those two questions.   Don't get me wrong; this doesn't mean it's not work.  But most of the work is collecting data and forging consensus, which always takes work.

And let me debunk two fallacies of strategic planning:
  • Strategic plans are long, elaborate documents crammed with data - Wrong.  In my experience, a good strategic plan should fit on a single 8-1/2 x 11 sheet of paper with at most 3-5 bullet point initiatives, their relevant metrics (can be qualitative as well as quantitative) for evaluating progress, and a list of key assumptions (also bullet points) underlying the plan.  The rest is an appendix.
  • Strategic plans once formed are static - Really wrong.  A strategic plan is a living document that should be reviewed at least quarterly.  The main things to be reviewed:  Have any of the key assumptions changed?  How's the progress?  (Which is why you need metrics.)
In my mind, the major benefit of a strategic plan for a startup lies in the assumptions.  If a key assumption has changed or cannot be validated, the startup needs to know why.  Only then can it decide if or how to react.  A change in key assumptions, either external or internal, should be the only reason a startup "pivots."  This is completely in accordance with the data driven learning philosophy championed by Steve Blank's customer development methodology and the lean startup movement.  Planning is not the enemy of learning.

Effective Strategic Planning

The diagram below shows how and where a strategic plan fits into overall business planning and management.  A strategic plan flows from two things:  mission (the vision for the company) and the external environment (i.e. market trends, competition, customers, etc.).  Most entrepreneurs have the former.  The latter is where most of the data collection work will be.

Once a strategic plan is developed, it should be integrated into the company's financial budget process with strategic initiatives broken down into individual business unit operating plans.  These, in turn, should be turned into tactical performance objectives for each employee.  In my experience, the main reason strategic plans fail to get implemented is because they are never integrated with the company's performance review process and not driven into individual employee objectives. Managers should touch base with employees on progress to these objectives at least quarterly.

I learned this the hard way during my first turnaround at Luxtron.  To my surprise, it became apparent early on that there was  nothing wrong with the former management's strategic plans.  Even more mystifying, while there were operational problems here and there, overall the employees were doing a good job of task execution.  Where the company was failing was in implementing the strategy because strategic initiatives had never been linked to individual employee objectives.  In other words, while the strategy was fine and the employees were executing their tasks properly, the tasks weren't the ones needed to drive the strategy forward.

So why don't more early stage companies engage in strategic planning?  In my observations, three reasons:
  1. They think they don't know how or that the benefit isn't worth the effort - Hopefully, this post has dealt with this reason.  Just try to answer the two questions above and keep it to a page showing (a) 3-5 initiatives (b) associated metrics (c) key assumptions.
  2. Action is more compelling than thinking - At the risk of stereotyping, most entrepreneurs are heavily biased towards action (in some cases to the point of having ADHD). While there is something satisfying about having met six potential customers, finishing that block of code, completing the website copy, and interviewing two new engineers all before lunch, sitting at a desk jotting down a note or two while you think doesn't quite have the same adrenaline rush and, in fact, feels downright lazy!  But action is not equivalent to effectiveness.  This is only true if you're doing the right things, which is what strategy is all about.
  3. They overestimate how well the team is aligned - While it's true that goal alignment is tougher in a company of 500 than with a three person team, don't assume that because the three of you all work in the same 100 sq.ft. closet, you have goal alignment.
My challenge to startups without a strategic plan:  Schedule a one hour strategic planning meeting.  If you and your team really understand what needs to be done, then you'll have that 8-1/2 x 11 sheet finished inside the hour and can then get on with building your business.  Congratulations!  But if you're still there after 90 minutes, maybe that should tell you something.

Monday, March 15, 2010

What Every Entrepreneur Should Know About NDAs

Warning:  This post contains self-promotional material

When I'm not doing marketing consulting, I'm co-founder of a company that provides integrated general & administrative services for early stage startups and other small businesses.  Many of our clients are technology based and one area where we get a lot of questions centers around non-disclosure agreements ("NDAs").  How effective are they?  When should I use them?  What are the pitfalls?

Recently, my co-founder at Infrastructure Group, John Horn, who also has a law practice serving Infrastructure Group clients and other technology companies, started his own blog, Law for Entrepreneurs as a service to our clients and others who may be interested in the legal issues faced by startups.  His advice comes from years of practice as a corporate general counsel (i.e. an operating guy) vs. from years of practice at a big law firm (i.e. the billable hours folks...tick, tick, tick....)

John has just completed a three part "tutorial" on NDAs that I highly recommend:

What an NDA Is (and is Not) Good For

Consider the Context Before Asking for an NDA

When Someone Asks You to Sign Their NDA

(Incidentally, having dealt with many, many NDAs over the years, given the similarity in provisions, I'm convinced that they are all spawned from one template that's been circulating around Silicon Valley since the 1960s.  Something to think about the next time your attorney offers to review an NDA for you for $400!)

Happy reading and don't forget to subscribe!

Monday, March 8, 2010

A Field Guide to Marketing People

Periodically, a technically oriented entrepreneur will ask me if I can refer any good marketing people his way.  Quite often, when I ask about the skill set they are seeking, I'll get a blank look and a "What do you mean?  You know, a marketing person!"

But marketing, like most professions, consists of several different specialties, each skilled at addressing a different aspect of marketing.  At the risk of stereotyping and gross oversimplification, I present here a quick guide to marketeers.

Marketing Specialties
In my post Myths About Marketing, I defined marketing as the business function whose job it is to ensure that products that a company delivers to its target customers are those that a customer needs when they need them.  Furthermore, I stated that marketing effectiveness is determined by competition in the market as measured by market share and profitability over time.

In order to achieve this, the marketing function can be divided into six roles, five of which are traditionally considered marketing:
  • Direction Setting - The role of this specialty is to establish a competitive strategy that most effectively deploys a company's capabilities to win customers and fend of the competition.  This is the role of marketing strategists.  These people often hold M.B.A.s, are synthetic thinkers akin to industrial designers, software architects, and writers, who cross-connect their knowledge of strategic concepts with their observations about customers, competitors, and market trends to formulate strategy.  They tend to be generalists with a broad range of interests.  In hiring, you ideally want someone that has worked in many different industries, not just yours.
  • Intelligence Gathering & Analysis - The role of this specialty is to collect the quantitative and qualitative information needed to assess what is happening in the market.  This is the role of market researchers.  These people are analytical thinkers, the exact opposite of market strategists.  The quantitative ones are often trained statisticians.  The qualitative ones, such as those involved in human interface studies, are more like anthropologists.  Their tools are surveys, polls, statistical design-of-experiment, A/B split tests, conjoint analysis, blind controls, etc.
  • Product Management- The role of this specialty is to match the company's products and pricing to customer needs and manage the product portfolio to maximize profits.  This is the job of product managers or product marketing.  This is the most cross-functional of the specialties because the role requires regularly integrating the efforts of sales, engineering, operations, and the various field support groups mentioned below.  In high technology firms, product managers are almost always ex-engineers.  Product managers tend to come in two flavors, the product oriented ones who are more attuned to the possibilities of what the technology can do to fulfill customer needs and the customer oriented ones who have a high degree of empathy for understanding customer requirements.  Contrary to what you may hear, both approaches are valid.  The best product managers have an instinctive ability to "be the customer."
  • Marketing Communications - The role of this specialty is promotion and lead generation.  This is what most people think when they think of marketing.  Marcomm specialists use techniques in advertising, PR, brand building, graphic design, SEO, media deployment, and viral marketing to promote the firm's offerings and generate leads for sales to follow up.  Marketing communications is the trendiest, fastest changing, and most specialized of the marketing functions.  It tends to be populated with creative types with artistic or literary backgrounds.  If you're hiring a specialist in this area, make sure they "eat their own dogfood."  In other words, if you can't find that SEO specialist's website on page one of a Google search, the brand consultant's logo is ho-hum, and you can't find that viral marketing expert on Twitter, you might need to question what they can do for you.
  • Business Development - The role of this specialty is to establish key customer, channel, and co-marketing partnerships.  Busdev people use their extensive contacts and industry know-how to open doors and penetrate new markets.  These people tend to be human whirlwinds, are good at stirring up activity, and are highly attuned to opportunity.  Unfortunately, this often means they may not always be good closers, the most significant way in which they differ from salespeople.  (In this case, pairing them with a good sales closer can be effective.)  It is particularly important when hiring a busdev person that they have relevant industry expertise.
  • Field Support - This is providing the day-to-day support to sales and customers.  While people in all five specialties above, especially the last three, provide this support, this also encompasses technical services, customer service, and application engineering which are generally not considered part of marketing.
As you can see, given the differences in skill sets required, finding a single person who can cover all bases is unlikely, although some combine well (e.g. product manager/strategist). So who do you need?
  • Trying to figure out your business model?  Find a market strategist.
  • Trying to get to product/customer fit?  You need a product manager.
  • Trying to improve lead generation? Hire a marcomm specialist.
  • Need market data for you business plan?  Hire a market researcher.
  • How do you attack that new market?  You need busdev.
  • What market position should you take?  Ask a market strategist.
  • Trying to project communicate that position? You need a marcomm specialist.
  • What channels should you use to go to market?  You need busdev.
Happy hiring!