Wartime Leadership: Survival Assumptions

How do we navigate through a period where we know our revenues are going down, but we don’t know yet by how much, or for how long? No one can predict when business will return to the pre-pandemic state. We know we have to cut expenses, but what’s the right reduction target to be aiming for?

As discussed in our Wartime Leadership series opener, we all lack clarity for answering these big questions. This uncertainty in turn drives hard decisions around how deep to take cost reductions – especially when it comes to laying off team members. 

By now, many companies have already taken their first round of cost cutting yet remain more than a little uncertain if they’ve gone deep enough.

This post offers a methodical approach to defining a basis for forecasting the 2 most critical items on a CEO’s list: revenue and cash. The basis behind what gives visibility to revenue and cash drives how deep our cost cutting measures have to be to stay alive – or put another way, our survival assumptions. 

We’ll start with the revenue forecast since that factors into cash flow planning and is also the harder to define through this fog of war. We’ll also presume you’re a B2B company not expecting a quick rebound once stay at home orders are lifted since the pace of restoring revenue depends on a combination of factors you have little control over. 

With so much diversity across industries, business models, company profile etc., it’s not feasible to suggest a universal model that works for everyone. I’ll instead highlight a few process steps that may help steer your forecast towards being realistic and sufficiently fluid so you can guide decisions as circumstances change.

Throw out the peacetime budgeting process 

If you’re running an established business with a history of operating and sales team metrics, you’ve already got a defined process to approach budgeting. In peacetime, this is typically a CFO led exercise beginning with past baseline and trends passed to each operating exec. Execs and their departments add updates without necessarily having company wide guidance on macro trends or big picture external forces to consider.

Since how and when businesses recover from the pandemic will be all over the map (including impact on your customers reeling from pandemic losses themselves), the wartime approach has to take in a lot of non traditional input, gathered in a consistent manner so the findings can be rolled up and examined holistically, as opposed to each department viewed within its own silo. 

Get outside the building to gather new data

Gauging the extent of unknown external forces is what makes for the wartime exercise here. Relying only on what you know from inside the company would be like guessing how many troops you’re dispatching to battle before assessing the size and positioning of your enemy. 

Wartime CEO and serial entrepreneur extraordinaire Steve Blank says “There are no facts inside the building so get the heck outside.” This means dividing the team up with specific missions to go out and grab external findings from customers and prospects. When synthesized, these findings paint a more complete picture of the forces shaping the uncertain world your company is interacting with. 

Sample discussion points might include: 

  • How are different customers and prospects affected by Covid-19? 
  • Which geographies and/or industry segments are they most worried about?  
  • Are they reducing staff? 
  • Do they need to modify their buying plans with you now? 
  • What changes can you make to help them? 
  • Which trigger points or trends is the customer watching as leading indicators for where their revenue is headed? 

With pandemic restrictions precluding in person visits, you won’t get a grasp of what’s happening with your customers by sending out email surveys or expecting them to give you online feedback. In wartime it’s the human contact that matters, now more than ever. Not only to get a response, but also to coax a bit more information out than they would not likely provide other than through one on one real time contact. If they don’t answer your calls and personal outreach, then that itself is a signal worth tracking. 

Orchestrating a tight script with relevant questions is a large, manual task involving a broader portion of your team. A good script that you can deliver increases the number of data points and gives you a better handle on trends and findings.

Making sure everyone gathers input off a similar script increases value. This includes front line account managers, sales team members, and other managers and executives working in a coordinated fashion. Consistency of information capture is also important. This could be a scoring system in which account revenue projections are qualified with relevant comments (+ and -) that are also shared in a group exec team discussion as part of the roll up process leading to a consolidated forecast decided by the CEO and CFO. 

Throughout the customer outreach at all levels, keep pressing for ideas that point to key leading indicators signaling strength of the account’s expected revenue. If you’re able to spot assumptions behind individual account forecasts, a pattern may emerge that can be distilled to a few core measurements for your revised overall company revenue forecast. These measurements will help in articulating the company plan to your board or possibly alternative financing sources. And they will now be supported with quantified assumptions which can be tracked over the coming months so you can update the forecast as the recovery unfolds.

Let the cash forecast drive cost reduction planning

At the same time you and outward facing team members are speaking with customers and prospects, the finance team can be pedaling hard on collecting payments already due, tightening up credit policies that might lead to reducing or eliminate credit, building cash reserves by drawing on available lines of credit and mapping out other debt options in addition to grinding through the process to file for the government sponsored Paycheck Protection Program and Disaster Recovery Loans you might qualify for.

Focused discussions should also be underway to identify an expanded range of cost cutting options. Following the kick off exec team session to generate an initial list of options, individual execs meet for a detailed drill down with the CEO and CFO. These interactions are less about making decisions on the spot as it is to spark and nurture ideas, and also note who is contributing in ways that look beyond protecting their own turf in suggesting creative options that make sense for the entire company. 

While some of the obvious cost cutting might be implemented immediately, finalizing layoffs are best deferred till after you’ve got all the information put together from the updated revenue and cash flow forecasts. It’s only then that you arrive at the stage of showing the projected cash burn compared to your previous budget so you can then hone in on the amount of cost reductions needed.

Layoffs are the most drastic measures and should be undertaken after a great deal of thought. That being said, once the decision is made, it is best to act quickly and do in one single shot rather than creating waves of layoffs. Dribbling out layoffs over time is a sure fire way to damage your leadership credibility, destroy morale/impede productivity and increase the outflow of the very people you want to retain. 

Active leadership matters

Wartime leaders are visible and hands on throughout all these steps.  Everyone in the company is looking upwards to see how involved the CEO is. This is not a time to isolate and speak only with investors and executives. Team members are already aware the virus has severely disrupted the business, so there is a heightened sensitivity about whether their own job is in jeopardy. This is the time to step up interactions at all levels by taking part in team meetings and selectively engaging in 1:1 follow up discussions after the group meetings. 

Asking questions and getting input from the front line team demonstrates through your actions that both assessment and decisions are being approached methodically. Your personal interactions will also prompt chatter through the ranks – which in turn spurs greater cooperation in driving the information flow upward so you can build the right set of survival assumptions that become your instruments for guiding key decisions through the uncertain times ahead. 

Next post in this series goes into the hard decisions around positions, people and process for affecting a layoff. 


Wartime Leadership

 This past week I reconnected with CEOs in our UpVentures portfolio and others running companies that I have close relationships with. Synthesizing those conversations with other signals I’m getting about the economic impact of an extended shutdown, this post will advocate throwing out elements from leadership approaches companies were following just a couple months ago and rapidly shift to a wartime footing.

 Let’s start with some necessary context before advancing to leadership approaches for these unprecedented times.

We lack clarity on timing of downturn and recovery

We know the scope of Covid-19 shutdown is like no other business challenge any of us have faced before. Post 9/11 had some parallels, particularly for companies in NY metro – but did not lock down entire industries and consumers for an extended period as is happening right now.

 My own context coming closest was managing through the 2000-2002 dot bomb era – best appreciated by those who were in leadership roles in Silicon Valley over 1997-2000.  Back then, we rode the dot com wave to frothy excess, only to see it all blow up in a nuclear winter that followed starting mid year 2000.

 About 98% of TriNet’s revenue was coming from dot com customers – a great story when we sought to go public with our first filing on March 2, 2000. As mentioned in my 2014 Pre-IPO Anxiety post, things didn’t work out then as planned and I had to dig into wartime leadership mode for the next two years.

 Like now, we started the dot bomb era thinking it was a temporary aberration. Up to that point, dot com fueled an unprecedented wave of success and it’s natural to have confidence the past will soon return so could get back on track. With TriNet’s revenue model based on the volume of employees we serviced at other companies, customers closing shop or laying off people due to losing their own funding were immediate hits to our revenue. In a wartime environment, no one wanted to talk to us about buying our services – who had the time? We knew it would turn around at some point, but when would customers stop laying off and when would others be ready to start buying again? No one was predicting it would take the better part of 2 years to recover from that nuclear blast.

 Like now, leaders were understandably concerned about trying to retain their talent and think that by showing optimism with the “we’ll get through this” outlook we can keep everyone working hard, and in sync, just like before.   Albeit now we have the additional complication of not being able to call people together to meet in person.

 Like now, since we weren’t clear on the duration of the downturn, we felt the urge to provide assurances to our team by making promises we weren’t sure we could deliver on.

And probably most importantly, like now, we as leaders were trying to avoid making the hardest decision of all – laying off team members to rightsize the business so that we could ride out what we knew would be harder times ahead than many of our team understood or were anticipating. Not just employees who were marginal performers, but cutting right to the bone by laying off talented people who had worked their butts off and done everything and more than we asked them to do.

 In short, whether your business is fortunate enough to be in the category of being fueled by the pandemic, or the more likely scenario of being savaged by it, our entire mentality of leadership has to change from peacetime to wartime.

Peacetime priorities no longer matter 

In peacetime we tend to put culture first, building the strongest consensus possible to get buy-in on decisions and are also deliberate in pointing resources and projects that support our medium to long range strategy. Most of that becomes irrelevant in wartime.

It’s no accident our military operates on a strict command and control model. Survival is the lens by which all decisions are examined through. Leaders micromanage the critical things that matter – for companies that begins with cash and collections since that’s the oxygen that keeps the company alive. 

Start the process now with heightened focus on cash management with ultra conservative assumptions for a longer period than just a few months. Getting in line for the government’s PPP and disaster recovery loans will be short term band-aids, but necessary steps to invest management time in today since we know there will be a lag time to get that relief. 

All bets are off if we thought another round of funding was on the horizon from equity investors. Living on our own cash with whatever debt sources we can raise is the new imperative.

We’ll also re-examine our assumptions about what we need on a wartime team. Not just our direct reports, but at all levels of the company. Can we combine some roles with one person now wearing 2 or 3 hats instead of the peacetime practice of separate departments? 

Since we have to move fast, we know we’re going to have to make some decisions with imperfect information that do have some risks in the outcome. Sometimes that means we’ll break glass and ask for forgiveness later.

There’s only one goal in wartime

I’ll close with a couple quotes from Brad Feld’s excellent post Wartime CEO:

Peacetime CEO sets big, hairy audacious goals. Wartime CEO is too busy fighting the enemy to read management books written by consultants who have never managed a fruit stand. – Ben Horowitz

Your big hairy audacious goal in wartime is not to die – Brad Feld

The next post in this series will touch on the hardest of hard things – approaches to laying off team members.


Can my business still operate during New York’s COVID-19 restrictions?

In speaking with company leaders, this is one of the first questions that come up.

What follows is how I’m responding when asked – but with the caveat that this is my personal interpretation of regulations in place as of March 23rd and isn’t official guidance from either Upstate Venture Connect or any governmental agency.

Follow links I’ve included in this post to see source documents yourself. And let’s keep dialogue flowing to share our collective insights to help each other mobilize and connect resources – including through UVC’s UNYCEOs email group referenced in our Upstate CEO COVID-19 Pledge.

 

Restrictions are intended to protect your workforce

Since restrictions are intended to protect your workers (including volunteers for non profits), any organization who can have their employees work from home should be allowed, and in fact encouraged, to do so.

The question becomes what happens if a portion of your workforce have roles that are performed either in a company facility or some other location.

No matter where the location is beyond the home, New York Governor Andrew Cuomo’s Executive Order 202.6 requires that each for-profit, non-profit, or government employer shall reduce their in person workforce at company facilities and locations by 100% from pre-state of emergency declaration employment levels – effectively closing the doors to your work locations unless the employer falls into one of these two exception categories:

  1. Employers who are operating within one of NY State’s designated categories of “Essential Services”
  2. Employers who are not in a specifically enumerated category of Essential Services but apply for and are approved by Empire State Development (ESD) for designation as an Essential Business.

 

NY State Designated Categories of Essential Services

The Executive Order presently defines 12 different categories of Essential Services including health care operations, essential infrastructure and selected manufacturing, retail, financial services, transportation, logistics and other services needed to respond to the COVID-19 crisis or sustain basic life functions in a community..

Details on the specifics behind each of the 12 enumerated categories are listed here in ESD’s Guidance for Determining a Business Enterprise is Subject to Workforce Reduction Under Recent Executive Orders.

Keep in mind that the text of Executive Order 202.6 reflects what was approved on the issue date. Government response to COVID-19 seems to move almost hourly and new orders are being given to clarify missed gaps in the original guidance. So bookmark these links and check back as you’re firming up decisions to see the updated guidance.

This link to the Executive Order’s FAQ is also very useful in deciding if your business can fall into one of the enumerated categories – including what to do if one portion of your business provides essential service and another portion does not.

 

What if my business isn’t defined on the official NY State authorized list of Essential Services but I believe our company is providing an essential service that falls within the intent of the Executive Order?

If you’re not already on the enumerated list mentioned above, it’s necessary to fill out this online form to apply for your business to be approved by Empire State Development as an Essential Business. At present, I’m thinking ESD is being flooded with a lot more applications than they are equipped to handle with a fast decision.

Since government is most interested in fast tracking those businesses that have a compelling argument on how their company is providing a product or service fulfilling an emergency response need to fighting COVID-19 or sustain basic life functions, you might consider retaining a copy of your ESD application and asking your mayor, state assemblyman or senator, or regional ESD representative to assist in advocating your application for expedited review.

And if your argument is clear enough to fall within the existing exceptions outlined in the ESD guidance then there may be no need to apply. ESD guidance concludes with the following statement:

  “Requests by businesses to be designated an essential function as described above, should only be made if they are NOT covered by the guidance.”

 


Five Years As a Public Company

My successor CEO Burton Goldfield emailed our full board Wednesday morning marking March 27 as TriNet’s 5th anniversary as a public company.

This prompted me to relive some moments with Krista from that special day, along with reflecting on the business and personal sides of how the public company stage of TriNet’s journey continues to evolve my outlook today.

Business Perspective

There are only about 4000 public companies meeting the listing requirements to trade on NASDAQ and NYSE. Since that number has been roughly flat notwithstanding about 900 IPOs over the last five years, it speaks to the tremendous difficulty in remaining an independent public company even after clearing the high hurdle to just IPO.

Observations in my one year IPO anniversary post Embracing Public Company Readiness in Scaling a Private Company still ring true.

Being accountable to a budget, holding executives to the same accountability as the overall company and driving transparency throughout the organization are absolutely critical for public companies to survive intense scrutiny that comes with everyone viewing daily fluctuations in your share price. Missing targets investors are expecting you to achieve  comes with immediate and hard hitting consequences rolling right up to the CEO, management team and board.

But now with a five year look back, I would add a couple nuances that are more subtle:

1. Accountability/transparency + High Volume Growth = Operating Complexity. Today’s IPO and public company requirements already have a huge complexity price tag just with to comply with Sarbanes Oxley, auditable internal controls, mandatory quarterly filings and managing institutional shareholder relationships to name just a few.

But since public investors demand steady growth well beyond an already large scale just to IPO, it is execution of the growth agenda now coupled with consumptive public company requirements that dramatically increase complexity of operating the business in a way that as a private company we couldn’t fully appreciate.  

2. Ever growing operating complexity drives new leadership demands. Ten years ago I might have said that if we had several changes in key members of the executive team perhaps we weren’t making the right hire or promotion decisions.

Now my view has changed to say that with the operating complexity that comes from being a growing public company, dealing with inevitable disruption that comes with executive transition can be a necessary price for having the right people in the right seats who are in sync with the higher public company bar for a more advanced growth stage.

Personal Perspective

This five year look back also helps me grasp how difficult I would have struggled in navigating those same business challenges at this growth stage. It is with respect and admiration that I can look to Burton’s guiding TriNet’s success while staying true to the company’s mission and core values.

Continuing as a member of the Board helps me grow personally. Among other things, many of the public company lessons are an important part of the lens I use in interacting with earlier stage entrepreneurs that I might mentor or invest in.

The financial implications of TriNet’s continuing growth put my family’s independence on a trajectory I certainly never imagined when we started the company 30 years ago.

And after 20 years of explaining what TriNet does to almost every business person I met, it’s equally gratifying to see how strong our brand has become throughout the U.S. along with awareness that what we do affects quality of work life that has touched (my estimate) of a million or more people since we first began.

I am more than a little lucky to have had the help of so many terrific people who’ve contributed to TriNet’s success.  How others supported me has in turn been a motivator in making decisions now on how I allocate resources and time helping others achieve their potential, particularly entrepreneurs who create jobs that foster fulfilling lives in their own communities.

Building scalable and lasting impact through investing, philanthropy and non-profits I help launch are opportunities I aim to be pursuing for as long as I am able.

For now, I’m one of many that can bask in the glow of what these first five years as a public company has achieved. I’m optimistic about the unknown challenges and opportunities still around the corner as the reward continues to be in the journey itself.

 

Related post:

Startup to IPO: An Entrepreneur’s Reflections

 


Scaling up requires working ON the business

When a startup arrives at a stage of product market fit to show steady increases in revenue, my evaluation as an investor expands to include looking for evidence that the leaders are actively engaged in working ON the business itself as the team builds towards scaling up.

Experience helps pick up pattern recognition across a variety of decisions like how to hire winners, manage cash and keep the team on a focused path by everyone working on the right stuff.

But what about first time entrepreneurs, particularly those without prior experience in managing teams?

Founder vision and passion may be there, as well as the persistence needed to stay the course through tough times, but if the business is to scale up – that also means the entrepreneur CEO has to quickly adapt to challenges that each new phase of company growth brings. For rookie CEOs that invariably means navigating through situations he or she has never seen before.

Work Myself Out of A Job

As an active startup investor, I didn’t think enough about this before now. In part due to not having put enough emphasis on how a decade of management experience before starting TriNet was a foundation for my own entrepreneurial journey.

At the outset, perspective about not being the bottleneck for decisions others on the team could make was already part of my mindset. I had seen what worked and didn’t in my prior efforts to empower others so I was tuned to the value of working myself out of a job.

Founders with the startup being their first managerial role are having to learn these basics on the fly, while also carrying the burden of startup pressures on their shoulders as they navigate through unchartered territory every day.

It’s easy to be totally consumed with top of mind priorities like finding new customers and serving existing ones, supporting team members to keep them productive and expanding the team to fill growing demand.

Those and other day to day activities involving immediate people and resource allocation decisions get in the way of putting time into things like refining strategic direction of the company, driving changes in the company’s internal business processes, culture and public identity, finding investment capital as well as developing their own leadership skills for the next stage of company growth.

Working ON the business

Micheal Gerber’s classic “The E-Myth” popularized the notion that if you looked at any truly successful entrepreneur with an enduring company you’ll find someone who committed significant energy to improving the business itself at the same time they were also navigating through significant revenue growth.

Anyone growing a company from scratch knows how consuming the revenue growth and service side can be – so how does one find the time needed to guide improving the business itself?

Scaling up Requires a Capable Management Team

Organizations are only as strong as their weakest links near the top. A high performing team is one that leads together with unifying purpose and consistency in living a company’s core values as everyone puts the overall company ahead of any single individual or department.

But if the early stage team is also new to managing others, as the volume of necessary decisions grow (resource allocation, who to hire, changes to internal processes etc.), decisions which might routinely be made by a manager in a slightly larger organization are instead discussed among the founders to build consensus.

This all happens without much recognition that the time involved to do so inevitably slows down the needed pace of change for the company to adjust to new scale and demands.

There are no rule books out there saying if you are at a certain size this is how decision making should work.

The Founder/CEO sets the tone of evolving who decides what, with the goal of pushing decisions down the hierarchy to the lowest level possible while still having the company be coordinated with the team in sync with each other.

As the business prospers, we’ll all be successful

As soon as we started scaling up at TriNet, our first managers came in at below market salaries but offset with equity upside. There was lots of risk as our industry was unknown and growth prospects uncertain.

It all worked out as that first group of managers came in with leadership experience that made it possible for us to scale up.

Some transitioned out after a few years, several others stayed on for 10 years or longer. And I’m not thinking there was much regret on the part of anyone who took part in the early leadership team as they were all successful in transitioning to other roles where their TriNet experience was valued. Those that exercised stock options and held their shares also reaped significant financial gains downstream.

CEO’s have the opportunity to articulate an inspiring vision for what individual and company success looks like, while at the same time being realistic with regards to expectations. Leaders who are credible in striking this balance attract high performers to the management team who in turn model that behavior as they become critical links for building the company to the next level.

Developing The Company Requires Commitment

Even if the Founder CEO is able to attract experienced managers to the team, the need for management development to work ON the business will be ongoing.

Throughout my TriNet CEO journey I sought out meaningful development opportunities, sometimes as part of industry or entrepreneur conferences but especially where there would be a gathering of peer CEOs who were seeking to learn more about the same issues I was struggling with.

Extra value came from opportunities where those peers then had contact outside the learning session. Building an expanding peer network requires a time investment that also carries the opportunity cost of stepping outside the business to participate.

I could get pretty charged up after hearing wisdom from a world class speaker on some aspect of company development, but then had to be thoughtful about how to bring that new knowledge back into the company.

Our approach included devoting at least one full day per quarter to strategic planning to focus working ON the business with prepared topics addressing known bottlenecks as we generated new approaches to meet higher production and sales growth we were building towards.

In some cases, we enhanced group learning with outside facilitators. We wouldn’t do it often, but as the team grew this proved to be an additional avenue to help get everyone on the same page for important themes we needed to be in sync.

Define and Work the Plan

With so many other things requiring attention in the business, the only way to mark steady progress is to incorporate company development into the operating plan and then track progress against measurable company goals.

We sought out and followed proven structures that helped us learn from what worked well for others. This helped not only on how to frame company development goals but the internal management reporting that cascade down from the overall corporate plan with operating metrics that were meaningful to the people doing the work inside each company department and work unit.

Supplementing written guidance and goals with an outside coach is another way to insure there are eyes on progress against defined management goals that go beyond financial measures and other targets the Board of Directors should be holding the CEO accountable for.

None of this is easy nor will come together with a process that stays rigid. Like most everything in growing a company, the journey begins with commitment to get it done followed by continuous iteration on the approaches used.

With an expanding team, everyone needs to be engaged in contributing to strategic development even while totally consumed with challenges of dealing with rapid growth.

But I’ll argue that unrelenting attention to working ON the business can be the key differentiator separating those who never make it past the startup stage from those who evolve to become true companies.


Build to last requires partnering with the right investor

Overcome Investor Bias | Learn from TriNet Founder Martin Babinec

Someone just forwarded me Fred Destin’s excellent post “What founders really want from VC’s.”

Fred’s insights are absolutely on point, and reading them prompted me to dig up an unfinished post of my own on this topic – one that I began writing earlier this year following the exit of TriNet’s long time controlling shareholder, General Atlantic.

For context, consider that TriNet’s annual revenue was about $50 million at the time of GA’s 2005 initial investment and have now grown to more than $2 billion.

More important than the growth capital GA invested, was the expertise and support they provided through our doing 10 acquisitions and transactions, including complex ones like our pre-IPO purchase of a much larger public company which we then took private, large debt financings that benefitted all shareholders, our successful March 2014 IPO and the smooth transition of their shares to Atairos, another large institutional holder so there was no disruption of our share price in the public market.

GA support also was instrumental helping us recruit my successor CEO Burton Goldfield, top quality board members and key executives, all while helping us with a savvy investor’s outside in looking view on important board level strategic and governance issues as we navigated through challenges at each stage of the company’s growth in that 11 year span.

It is hard for me to imagine how TriNet would have evolved to both our current marketplace position and promising path to remain an enduring company of the future had we not had the richness of GA’s contribution led by Managing Director Dave Hodgson.

So it is with some reflection now that I share a few principles on investor attributes I bring up when mentoring entrepreneurs who are in earlier stages in the journey of finding and working with institutional investors.

Companies don’t invest, people do

Institutional investors are duty bound to stay within the expectations set for the limited partners who are the source the fund’s capital. While this baseline can never be overlooked, the partnership responsible for running the fund still has latitude within the fund charter to make the key decisions leading up to when and how the fund ultimately exits the investment.

How that latitude gets exercised has a lot to do with the quality of relationship and trust between the company CEO (and board), with the key sponsor inside the fund – typically the company board member who is at managing director/general partner level in the fund.

The person who is your financial sponsor will end up being the company’s advocate inside the venture fund’s partner meetings where tough decisions are hashed out on things like:

– how the fund’s holding in your company is valued
– whether to increase the fund stake with a new round
– should the sponsor orchestrate a change in company leadership
– how would the fund’s non capital resources be deployed in supporting a company transaction or initiative
– when and how the fund’s stake in the company will be sold

As the CEO, you won’t have insight to the dynamics of those internal fund discussions, but you’ll certainly be dealing with the aftermath once the decisions are made.

So WHO the person is that you are relying on to be your advocate has everything to do with the personal qualities of your sponsor and how well aligned he or she is with the company’s view of playing for long term success vs. building to flip for near term gain when the inevitable unanticipated speed bump occurs in stalled company revenue growth.

Relationships are tested when times are tough

It’s hard to gauge the quality and strength of any relationship when things are going well. But if you’re truly scaling up a company, the truism is that is that even with the boost that might come with a big slug of new equity capital, it is never a straight line to uninterrupted periods of steady growth.

Whether due to bad planning, execution failures or external factors outside the company’s control, the time will certainly arrive when the company misses hitting critical budget goals expected to show progress in the investment.

When things go awry, whoever your financial sponsor is now has the added burden of convincing his/her partners of the fund on whether the setback is navigable or requires an investor driven change (e.g. like firing the entrepreneur CEO).

This requires the partner to have a deep enough understanding of the business and capabilities of the CEO and team, as well as the credibility and persuasiveness to advocate a difficult position that might run counter to conventional wisdom or prior experiences inside the private equity firm.

Don’t shortcut the investor diligence

The best sources to diligence someone who is a candidate to be your financial sponsor inside a fund would be founder/CEOs that sponsor has worked with in prior investments.

Here are a few areas that could be worth exploring to diligence someone lining up to be your financial sponsor:

– How well did the sponsor set expectations and deliver on them? When did he or she have to walk back expectations they previously set?

– Describe examples of where the sponsor dug into the details of the company’s business and applied that knowledge in a way that surpassed contributions of other board members?

– How persuasive was the sponsor at influencing the view of other directors on the board to get to the right outcome?

– How did the sponsor help when company results fell below budget?

– How did the sponsor affect a company outcome that might have involved responding to a company crisis or pursuing a major opportunity in a compressed time frame?

Don’t stop at just one diligence call. Speaking with CEOs from at least 3 former portfolio investments will provide a richer picture than any single source.

Viewing company success as personal success

Like most entrepreneurs who’ve been on a company journey a decade or longer, my ambition has always been about building a company to last – knowing that if the company is able to grow profitably over a sustained period of time it would be achieving what I set out to do in filling a market need and growing a team responsive enough to adapt to ever changing conditions that challenge others in the same industry.

If I was able to lay the foundation for building a company to last, I wouldn’t have to fret about where I would end up financially since the pace of growing the company’s value would far exceed dilution of my percentage ownership stake.

While it’s a straightforward financial proposition to see it’s better to own a minority slice of a huge pie than be controlling shareholder in a small company, the bigger issue many founders wrestle with is whether they can separate themselves from company leadership if that is in the company’s best interest.

Whether the founder opts to exit the leadership team or is nudged by the controlling shareholder(s), either case involves a high stakes transition where the financial sponsor is in a position to influence the outcome in a manner that all involved emerge as winners.


The long game begins with shared vision and trust

Some entrepreneurs, and investors drive towards generating a decent return over the near term by building a company likely to be sold for a profit at the earliest possible time.

If you’re in the other camp of wanting to build a company to last, continuous company growth will still provide meaningful exit opportunities where you could be in the envious position of passing today’s sale to stick with the vision of building a larger and enduring company.

That can end up with a more financially rewarding and satisfying journey, but likely to be achieved only when there is alignment with that shared vision and trust between the financial sponsor and CEO. Figuring that out before the investment is made is the first step towards what can become a long and mutually beneficial relationship.

[Related post: Embracing Public Company Readiness in Scaling a Private Company]


Perils of a Rich Valuation

The entrepreneur gushed “We just closed a $2.5 million Series A on an $8 million pre-money valuation.”

My response: “Great news – now that you’re a couple months past close, what’s the probability estimate of hitting the 1st year revenue target you set for the VC’s?”

The smile quickly vanished as the entrepreneur acknowledged it was far from being a lock to hit the target. Both the risks and attendant pressures were already starting to hit home.

Valuation optimism can be masked with insufficient data

Unfortunately, this is a much too common scenario as founder drive to minimize personal equity dilution by grabbing the fattest valuation possible seems to override their judgment on what happens post deal.

Typically the culprit is too little thought given to the underlying assumptions behind a detailed bottoms up financial model. Proper models take into account factors like average deal size, sales process steps and time to close, productive lead sources beyond executive team personal relationships and diminished close rates of non founder sales reps. [See my post: Leading Sales as a Startup CEO].

The worst offenders set their valuation target first and then back into a set of projections that align revenues with the valuation goal as they scurry about for data points supporting their wished for revenue trajectory.

While VC’s will certainly review assumptions behind revenue as part of their due diligence, entrepreneurs will get some leeway if the product offering is distinctly different with what’s already in the marketplace (thereby lacking trend comparison with similarly situated companies) and you’ve already racked up a few sales to your credit.

Overly optimistic projections come with consequences

The path to judgment day starts with board meetings in which the new institutional investor board members are now brought up to speed with the insider’s view of your progress against the expected revenue targets that were in the deal.

If you’re absolutely confident you’re right on path to meet or exceed the targets then you’re golden.

But if you’re starting to break out in a cold sweat soon after the deal closes, then you’ve got the hard choice of perpetuating expectations you may not have confidence in or going about the delicate process of resetting expectations.

Perpetuating the improbable is a gamble that ever optimistic entrepreneurs take, believing somehow, someway they will find a solution over time.

However, as projections don’t get fulfilled, that factor alone becomes the biggest reason entrepreneurs get pushed out of the CEO role in favor of someone who has a proven track record of “meeting the numbers.”

And that equity stake the founder was concerned about? When projections get missed and Series A funding dries up while there is still a substantial burn rate – you then have the classic down round scenario where in order to keep the company alive with a new financing, founder shares can get crammed down to a pitiful percentage of ownership compared to their post series A stake.

De-risk with detailed assumptions behind revenue components

You can mitigate risk by building a detailed model for how revenue projections are derived.

List assumptions behind each component of a revenue formula so there is complete transparency and no “black box” – even tilting assumptions towards most realistic, if not outright conservative achievement at critical components of the revenue formula.

The best entrepreneurs don’t settle on just a high level view of 2-3 revenue component steps to come up with a formula. Instead they tear apart every step in the customer acquisition process to find patterns which can be reasonably tracked (with a minimum of admin burden) that help point to predicting success at that particular step in the sales process, and in the aggregate – timing of future revenue flows.

Since early stage companies typically won’t have a large enough team for a professional CFO on staff to build such a model, they can fill the expertise gap with an “Interim CFO” who has the background and strategic perspective to dive in and gather input from multiple team members to guide a true bottoms up model with detailed, defined assumptions.

The best interim CFOs divide their time among a cadre of early stage companies and often have the pattern recognition of having been through this exercise across many similarly situated companies. This helps not just in developing the model but with an ongoing retainer relationship will help their client tweak the model as more data comes in and analytics for management and board are refined.

While it’s best to avoid optimistic projections pre-deal, the earlier that investor expectations get reset to the proper level the more likely you are to retain your credibility as a leader.

So don’t wait for your next round to beef up the visibility and accuracy of your forecast. When you’re depending on other people’s money – than your success, and that of your company, may end up riding on how well you can predict the future with a financial model that you actually deliver on.

[Related post: Embrace Public Company Readiness in Scaling a Private Company]


Tribute to Chris Spagnola

My wife’s Dad passed on May 26th, a few months shy of his 99th birthday.

A long life, well lived. In every respect, Chrisopher Spagnola was the epitome of our “Greatest Generation.”

Like others born into large immigrant families Upstate in the early 1900s, his growing up in the depression era faced hardship that shaped life perspective and was then reset by the enormity and calamity of World War II.

Volunteering to serve in the Army Air Corps, Chris quickly advanced to flight school where he was commissioned an officer and at 23 years old, commanded a nine man crew as he piloted a B-24 bomber in the European theater.

He flew combat missions until Germany’s surrender and his 36 combat missions exceeded the 32 mission requirement making him eligible to return to the U.S. for non combat duty. To put this in context consider that by his volunteering to fly more combat missions, he was aware that within the 8th Air Force Bomb Group he was part of there was about a 25% fatality rate on the bomber missions being flown in that time period.

Awarded the Distinguished Flying Cross and seven other medals recognizing his extraordinary valor and combat record, Chris continued his military service in the Air Force Reserves, retiring as Lt. Colonel in 1972.

At the close of WWII he returned to Auburn NY where he married his hometown sweetheart Clementine “Dutch” Boglione for a union lasting 62 years until her passing in 2010.
In 1946 he obtained his commercial pilot’s license but declined an offer to fly for American Airlines to instead begin building the Auburn Foundry company – which he ran as co-owner and President until his retirement in 2006. The business remains one of Upstate’s last independent foundries – a testament to the strong foundation and team he built.

Putting others ahead of self

Given his war record, extended military service and success as a local businessman, accolades from those exploits alone would be a full life for many. But for Chris, life wasn’t about achievement as much as it was making a difference for others in ways that might not garner recognition, but truly had an impact.
He volunteered across a whole range of organizations like Knights of Columbus, Kiwanis, his local golf club and others. Chris successfully led an effort to engage an entire neighborhood of lakeside residents to pool their resources for creating a paved county road and bring in sewer and water to the area – something that would not have happened without a collective citizen coalition such as he put together.

Beyond being active as a leader who got things done, it was Chris’s persona of easy going, rock solid integrity and always sensitive to the feelings and situation of others that endeared him to all he met.

He lived a Christian life doing things that made a difference in the lives of others, including for disadvantaged people on the margins of society. Appreciated by his community, he more than deserved the reputation of being a soft spoken, low-key hero.

Role model for the next generations

Chris was a hero to me and someone I appreciated from the first day we met 40 years ago.

As I matured, I also grew in my understanding of how the role model he was influenced his daughter Krista in ways that both attracted me to her and set the foundation for own marriage.
So as our children were in elementary school in California, and we thought hard about our priorities in their upbringing, uprooting from Silicon Valley in 1999 to come home was very much based in having our kids take advantage of the special grandparents they had.

These last 17 years with him have been more than special. As saddened as we are to no longer have him with us, we’ll forever cherish both the memories of our time together and how lucky we were to have him be such an influence in shaping our lives.

The example he set in living a truly full and impactful life inspires me, our family and the lives of others he touched. His legacy lives on and will never be forgotten.

“Those we love can never be more than a thought apart, for as long as there is memory, they’ll live on in the heart.”


Discovering Self Inside a Super Maximum Security Prison

Pelican Bay Supermax Prison. I’m locking eyes with Gary, separated by a perforated metal screen as zero physical contact is permitted with residents of the Secure Housing Unit (SHU), the prison’s solitary confinement facility.

While I’m aware Gary has been “inside” for more than 15 years, I’ve no inclination to ask about his reasons for being here.

Instead, we’re focused on an exchange guided by Defy Ventures CEO Catherine Hoke as I’m part of a team of 20 volunteers who are all facing individual SHU residents and now engaged in a series of interactions advancing each resident’s ambition to change their life by taking advantage of Defy’s highly refined program featuring guided personal development with many check points for accountability along the way.

The warden tells us it is the first time a group exercise has ever been done at Pelican Bay SHU, as no organization has ever ventured in with a track record to suggest having an impact on this segment of residents who are as isolated from society as you could possibly find.

Defy Ventures is a seven year old non-profit committed to reducing America’s recidivism rate. More than two-thirds of those released from prison, returned to incarceration within 5 years.

This mind blowing rate of returning people to prison is just one of the forces propelling the U.S. to hold 25% of the total prison population of the planet, even though we have less than 5% of the global population.

While other forces like lack of opportunity in disadvantaged areas, broken families, substance abuse, underperforming public education, electoral politics and inherent bias in the criminal justice system all have layers of contributing factors that go beyond the scope of this post, no one would disagree that a primary goal of our prison system should be to rehabilitate the incarcerated so those released can be productive in society and break the cycle of criminal behavior that too often continues into succeeding generations.

Not surprisingly, as employers are reticent to hire released felons, a parolees’ lack of opportunity to progress in society erodes hope and triggers gravitational pull back to the relationships and environment, which too often leads to a subsequent criminal act.

Defy’s approach to addressing this seemingly unsolvable problem is to help both prison inmates and recently paroled join on a committed path as Entrepreneurs-In-Training (EITs) – enabled by a combination of tightly structured self development and hands on help from a cast of highly accomplished volunteers.

The results of this program are nothing short of astounding. Of the 2,000 Defy graduates, 166 businesses have been created, spawning 350 new jobs for people with criminal histories.

Defy has had only 3.2% of their graduates return to prison. When you consider the cost of incarceration in California is $70,202 per year per inmate and an investment in an in-prison Defy EIT is $500, that results in a 294x SROI for California’s taxpayers.

But the win is far more than dollars saved as the real victory is putting individual lives on a productive path, breaking a cycle of returning to criminal behavior and bringing positive effect on lives surrounding the EIT like their family, friends and others seeking to break away from criminal behavior.

Everyone Invited, Only the Committed Advance

Being an entrepreneur is an alluring path for many, especially people with a limited range of options available to them. But only the committed will thrive as the failure rate for small business is often cited at 80% within the first five years.

Defy has evolved their entrepreneur development program so that it combines online and in-person exercises requiring an EIT’s sustained commitment to advance towards graduation.

Parolees access Defy’s online learning modules over the web and because, inside prison this is typically not an option, Defy’s video based learning can be accessed on the prison’s TV network.

At each phase of development, EITs are given assessment exercises that are tracked for completion through Defy’s Learning Management System.

In both “inside” programs and those on parole, EITs form support groups where they are helping each other stay on track, forming relationships with those who share a common ambition of finding success through entrepreneurship and strengthening commitment to avoid returning to a criminal life.

Mutual Respect Begins With Shared Understanding

As EITs progress in their development, they are offered opportunities to participate in high impact personal interactions with a very impressive group of experienced entrepreneurs, executives and investor volunteers.

Through a series of interactive exercises, volunteers and EITs come to know each other and learn about each other’s lives in ways that highlight their differences and similarities. In one exercise, separate lines of volunteers and EITs face each other, then step to a center line acknowledging how environment, family and impact of selected circumstances played out with either fortuitous or unfortunate outcomes now determining their status as an EIT or professional volunteer.

It is the similarities more so than the differences that are striking for me.

Like most volunteers, it is a huge “aha” moment to wrap my head around the realization that, with just a minor twist in my own life circumstances, it could easily have been me standing in the EIT line or see EITs with the clear potential to have ended up on the volunteer line as successful professionals.

That shared understanding of each other’s position begins the process of building mutual respect that in turn powers advancement of both EITs and volunteers in our respective journeys.

For in-prison events, volunteers provide coaching to EITs on topics that include articulating their personal elevator pitch, resume feedback, mentoring on the business idea the EIT is developing and participating in pitch competitions.

Volunteer support for those who are released include those activities as well as supporting and tracking an EIT’s progress and linking EITs to resources that can help their business succeed.

In all situations, EIT contact with volunteers follows a strict protocol managed by Defy in a way that preserves privacy and security considerations.

A Different Kind of Volunteer Impact

Since I was already deeply engaged in helping lots of first time entrepreneurs, the fit for me to check out Defy was pretty easy. While the audience was different than the startup world I am typically engaged in, the activities seemed right within my wheelhouse.

My expectation before volunteering was that my ability to have impact would be based on my knowledge, entrepreneurial experience and relationships I could bring to the program.

But beginning with my first event, the nature of my interactions with EITs were in such sharp contrast with the traditional world of helping startups I began to understand this was less about my professional qualifications than it was an opportunity to grow by being vulnerable and giving without expectation of return.

You see in the traditional startup-coaching scenario we don’t spend much time showing personal vulnerability. We go right to diving in with the help and expertise we think we’re there to give.

And even if we tell ourselves we have a “pay it forward” mindset, we know the startup world has so many interconnected relationships there are paths where our volunteer contributions may come back in some form of unexpected reciprocity – be it new deal flow, a helpful entrepreneur or investor contact, or referral to a highly valued source that can help us.

Defy Interactions Can Be Transformational

The Defy personal interactions are humbling in their effect of acknowledging vulnerability and rethinking about forces that led to how I arrived at the stage of my life where I can qualify as a Defy volunteer.

And when there is zero expectation of reciprocity, it forces the commitment choice on what my real reason for volunteering is – am I sincere enough in my values to walk the talk of pay it forward, or not?

Locking eyes with Gary and continuing our discussion through the perforated metal screen brought home that realization on how any impact I was having wasn’t about my professional experience, but instead my ability to show understanding, compassion and commitment to someone otherwise cut off from society.

I’m thinking that after our exercise concluded, Gary replayed the interaction in his mind as many times as I have. For different reasons, perhaps we both came away feeling we grew as a result.

So my own success measure for Defy volunteer participation is now flipped from where I was at the outset.

These powerful in-person interactions have done much to alter my personal outlook in a transformational way – something that I simply don’t get in the traditional role of mentoring startups headed by people that have already been dealt a pretty good hand.

But that benefit of a transformational outlook comes only as a result of participating with Defy in person.

It’s alluring enough to keep me coming back for more, and is probably the underlying force behind Defy’s high rate of returning volunteers – which is the only kind recidivism you really want to see!


Crossing Boundaries to Build Startup Community

A delegation of a dozen business and professional community leaders from Binghamton took a day out of their already busy schedules to travel to Syracuse. They toured assets in the Syracuse startup community, and interacted with local leaders to learn from their experiences in building startup community.

The delegation included people from Binghamton Chamber of Commerce, City government, Binghamton University and local business leaders. These people are committed leaders with a stake in growing Binghamton’s startup community. They understood the value of getting an inside look at steps a neighboring city went through to build momentum around creating companies and jobs in newer industries. These efforts are now attracting top talent to a revitalized downtown area, and certainly worth paying attention to.

Journeys begin with vision

CenterState CEO’s Rob Simpson welcomed the delegation and provided an overview of some initiatives that started a decade ago. This ingenuity included critical public private partnerships, which set the stage for today’s job creating thrust.

A tour of the Syracuse Technology Garden, undisputed hub of Syracuse’s tech community, featured a recap of programs and entrepreneur supporting activities. Rick Clonan presented, and had John Liddy, Founder and Director of the Syracuse Student Sandbox sharing insights on how the college student accelerator engaged local mentors that were critical to graduating students deciding to put their roots down in Syracuse instead of going elsewhere to start their first company.

The delegation toured the new Syracuse Marriott Downtown (a project CenterState CEO helped lead), and enjoyed a luncheon discussion with Marc Viggiano, a retired business executive who shared his personal experience on how becoming involved with the Seed Capital Fund of CNY, StartFast Venture Accelerator, Genius NY program and Upstate Venture Connect all lead to helping entrepreneurs start companies and create jobs.

Entrepreneurs revitalizing downtown

A tour of Syracuse CoWorks, a nationally prominent co-working/living space, provided an inspiring look at how downtown space can be configured to foster relationships that attracts both millennial entrepreneurs and residents. The “community” also serves as a base for StartFast Code – a coding academy that puts individuals on a career path as professional web developers or helping advance their existing businesses.

Final stop was SpinCar, graduate of StartFast 2013 cohort and now a blossoming company with 40+ employees headquartered in Syracuse. Co-founder Mike Quigley shared the SpinCar story, including how the community helped his team on the path to success. This included connections to key people and resources of which Mike says made all the difference in SpinCar getting to the right customer market, finding investors and talent.

We closed the day with an engaging discussion around elements of a strong startup community. This long-term outlook and willingness to cross geographic and institutional boundaries relies on people working in concert. The result is connecting entrepreneurs to the resources needed to grow companies and create high-paying jobs.

True leaders break new ground

Five or more years ago, we could not have seen a delegation from one of our Upstate cities traveling to another community to learn about building a startup ecosystem like this. Not only would best practices have been harder to identify, but the interest to travel and learn from others just wasn’t getting any traction.

Over the last year, I’ve spent a lot of time in Binghamton and I’m impressed with the seeds of change that have clearly been planted. There is no doubt that this group of leaders, who are crossing boundaries are leading the way in accelerating change. Working together, we’ll have a meaningful impact in growing companies and creating jobs in Binghamton’s future economy.