Situation: An early stage company is wrestling with team dynamics and coordinating the achievement of critical milestones. The strategic picture seems to change on almost a daily basis. New employees who have big company experience want to see formal job descriptions and role definition. Older employees are jealous of the attention that newer, more highly qualified employees are receiving. Where should the CEO be focusing. How should she be handling these challenges? Should a start-up focus on team dynamics?
Advice from the CEOs:
At this point, the company is in start-up stage. The most critical issue isn’t team dynamics, it’s getting a product to market and demonstrating that you can sell it. If you don’t have a product, you don’t have a company.
Your top 4 areas of focus for the next 3-6 months should be:
Get the product out.
Close 3-4 good customers – preferably customers that you can reference.
Securing the funding – partnership or investor – that will get you to your next key milestones or to positive cash flow.
Build your organization and keep planning.
As an early stage company, distinct roles and job definitions make no sense. Your strategic picture is currently very dynamic. You need good people who can flexibly wear several hats and fill diverse roles.
If employees with big company backgrounds press you on job descriptions and role definitions, tell them that as a small company you must be quick on your feet, and that you need them to fill flexible roles. As you grow beyond 35 employees then roles will start to become more clarified. Ask for their patience.
If they continue to struggle with loose role definitions, then they aren’t the right people for an early stage company.
Employees who started with you early were great for the beginning. However, they may not be the best for you long-term. They may feel hurt as newer employees with deeper expertise and resumes start to replace them. In the interests of the company, the game is not longevity with the company; it’s about quality and putting the most competent people in the most critical roles.
If you are playing pick-up basketball, you play with whoever comes along.
If you decide to form a team and to compete, you need quality players. Some of your pick-up players won’t make the cut and need to go find another pick-up game.
Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?
Advice from the CEOs:
The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
Are you concerned that your current supplier might cut you off?
The CEO is not sure, but has identified this as a risk.
If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.
Situation: The CEO of a company has a niece working in the company on a project basis. The niece is has helped to develop a strategic plan and has performed well. She now wants to move from part-time to full-time and to receive a raise. Does it make sense to promote a relative?
Advice from the CEOs:
If you are pleased with the individual’s work, don’t worry about the family relationship – go ahead and hire her. This is especially true if she can play a significant role developing the strategic plan and help you to improve your sales organization.
Give this individual a set of responsibilities, a budget, and a time line to do the jobs you want done.
Evaluate her performance just as you would any other employee. Don’t compromise your standards for a relative.
This may offer the opportunity to improve your sales. Have your niece work and travel with your sales people as a systems engineer. This will allow her the opportunity to learn your products, customers, and process – and will provide you with valuable input on how your sales team is performing.
You are really addressing two problems:
What is your niece’s passion? Don’t make work for her simply because she’s related and available. The work must serve your and the company’s needs.
Do you have holes in your business? Put your best people on these If your niece is one of these people, then give her a chance but don’t play favorites.
Situation: A company’s sales are bumpy. The CEO thinks that this may be due to a mismatch between products that they offer and their customers’ needs. They currently use online surveys to capture customer needs and input. How do you determine customer needs? How do you find your sweet spot?
Advice from the CEOs:
The most important first step for a smaller and growing company is to clearly identify the customer niche that they serve. This must be a niche where the company can out-serve their competition.
There are two types of niches to consider:
A product/service niche focused on a specific set of products and services – one where you can offer a differential advantage over your competition and become known for this, or
A customer niche – a specific set of customers that you dedicate yourself to serve in a way that provides a differential advantage.
An example of the product model is an individual who started an e-commerce site for lacrosse equipment – products not commonly stocked in sports stores. They offered a wide range of lacrosse products, built an online community, shared articles, etc. and became THE place for lacrosse players to get their equipment.
An example of the customer niche model is to focus on a population and build a concierge or member-only service. The niche here is the buying group. This can be employees of specific companies or government workers as examples. Costco grew using this model.
For an early-stage company, survival is about single pointed focus on that niche where you can provide better products/services or better serve your customers than anyone else. As you grow you can diversify based on the reputation and loyalty that you gained early on.
Look at competitors – how are they gathering customer preference information?
Look at your passion – is it products or people? Choose a niche that fits your passion.
Situation: An early-stage software company is expanding internationally, both offering services to international companies from their Silicon Valley base, and building a presence overseas. What land mines should they avoid? How do you expand internationally?
Advice from the CEOs:
Be more strategic than opportunistic. Europe is very interested in start-ups. Investigate potential locations thoroughly. For example, Luxembourg and Spain are not the most reliable markets or locations for basing a business.
There are already good networks in Europe that you can plug into so that you don’t have to build everything yourself.
There is a European organization called Open Coffee Club that attracts high tech and social media start-ups. You might consider either partnering with them or buying into their network.
You can set up a corporation in Cyprus to leverage tax advantages and build a network covering Europe.
To have geographic reach across Europe, you probably want two locations in Europe and one in Russia. Look at Ireland and Romania.
Many Russian oligarchs have their investments in Cyprus and may provide a source of investment funds.
Investigate the European Investment Fund and their sub-funds like the JEREMIE Holding Fund. This is a large government-funded investment pool focused on technology, innovation and start-ups.
Foreign companies are attracted to the US because we have the right ecosystem for technology development. However, a bridge strategy for European companies who want access to US funding is tricky. The key issue is visas which have limited duration and may be difficult to renew. Also, immigration frowns on foreign business people who visit the US too frequently.
Have you considered helping start-ups build through their early stages – reducing risk of early failure – before helping them come to the US?
Situation: A CEO has hired a banker to advise on the potential sale of a privately-held company. What else should she be doing in advance of the sale? How do you prepare to sell a company?
Advice from the CEOs:
Prior to moving forward with a banker, it is necessary to prepare a privately-held company for sale. Get an advisor – not a banker – to assist you. Search online for a good mergers and acquisitions advisor. If you know CEOs from other local companies, network with them to discover high quality advisors.
In selling a company, the final deal must provide for the survival and continuing effective operation of the company. A buyer may want assurances from you, or assistance in the transition. This can have a significant impact on your final payout.
Be prepared for the reality that you or someone else within the company will have to remain with the company post-sale. If this is to be another person, this individual will be very important to you during the negotiation process with potential buyers. Keep this individual up-to-date with your intentions and plans.
A company is more than numbers – it is a story. The story must be very crisp and compelling.
The buyer will want to perform due diligence before offering you a price and setting conditions on a purchase. This may involve more than you and your top managers. Communications within the company will be critical to keeping managers and employees informed and on-board.
You will want to have two or three potential buyers, both in case a top prospect fails, and to assure competition and a higher sale price.
Think carefully about your next move from a personal standpoint. Being at leisure may not fulfill you. What do you really want to do for the next segment of your life? This is far more important for you, personally, than you may estimate.
Situation: A company is in the process of shifting their business model to better address customer needs. They have three different models under consideration. Management is split between these models, but must arrive at a consensus. How do you optimize your business model?
Advice from the CEOs:
Right now, you are considering three different potential models:
Tools – your old model
Data – produced by your old model
Service – your new model
These are different models with different prospects.
The money makers in marketing focus on data, not tools. Data is information, and this is what is valuable to clients. If you want to focus on the data component of your offering.
Currently, you are scraping data from social media and matching this to your client’s database on a real-time basis. There’s a model and value here because you are enhancing your client’s current database by making it more useful and actionable to them.
You have tools to enable and add value to existing client databases by allowing them to better segment their database. Again, there is value here.
Your core IP is the ability to correlate diverse data sources. Have you protected this IP? If not, this needs to be a top priority.
How much information that you scrape from social media sources can you share without violating privacy? This is something to think about because people are becoming increasingly sensitive about companies collecting their private information.
Situation: A company wants to add additional apps to its current service. One possible source is a website that aggregates and publicizes relevant information. The CEO is concerned about whether these data can be used by the company and whether using these data will expose the company to legal action. What are your obligations for use of data?
Advice from the CEOs:
Under fair use you can use data processed from other sources and resell this. The key term is “processed.” This means that you must add some of your own value to the data. You cannot just republish data through your site as though you had collected and analyzed it yourself.
You cannot copy and repost a copyrighted article. Text is copyrighted, but extracted facts are not. If you want to use text from a copyrighted source, you must get permission from the author or publisher. You can quote a source by providing appropriate references.
You can include a link to a relevant site without taking copyrighted information.
If the data that you wish to use from another site contains information that includes personally identifiable data – data that would allow a third party to identify personal information about an individual and misuse that personal data to the detriment of the individual – then a distinct set of regulations apply. If you even suspect that this could be the case, seek legal counsel on your obligations.
When you are using the Internet, your audience is international. The rules for use of data derived from other sources differ by country or region. Consult your lawyer for general guidelines that will allow you to use data from other sources.
Situation: A founding CEO is evaluating a purchase offer for his company. The buyer wants the CEO to retain some ownership interest to assure a smooth transition post sale, and ongoing assistance from the CEO so that the company continues to succeed post-sale. Should the CEO retain a minority share of the company? How do you structure an earn-out?
Advice from the CEOs:
The ideal option is full payment up-front. However, if the CEO is perceived by the buyer as critical to the company the buyer will want to have some assurance of continued services for some period.
An earn-out of fixed payments over time is acceptable provided that the language of the agreement is acceptable. However, performance-based earn-outs make no sense if the CEO no longer has control over the decisions that will impact performance. Don’t structure the payment as an earn-out, but as a retention bonus and assure that the terms are favorable.
Post-sale a minority share of your old company holds no value if you can’t monetize it. Holding a small share of a non-traded company has the same challenges.
It is all about liquidity.
If the other party offers this, ask what is the value is to you of the retained share.
Minimize the earn-out if one is demanded, but don’t count on it.
If there isn’t a strategic fit between the buyer and the company, the value of the company in a sale will be lower.
Situation: Edgar Allen Poe’s “Surviving the Maelström,” is a tale is of three brothers whose fishing boat is caught in a monstrous whirlpool, and how the reaction of each brother determines his fate. Similarly, in times of uncertainty, our ability to react with either panic or a rational, reasoned response determines our fate. How do you survive a maelström?
Advice of the CEOs:
Based on Poe’s story, you need to replace fear with assurance, uncertainty with boldness, and doubt with conviction.
There are several potential financial bubbles forming including student loans and negative interest rate loans to sovereign governments. Both, in their own way, pose a threat to the international and domestic financial systems and could rapidly impact borrowing costs for companies. The solutions are to stay in ongoing contact with customers, and to stay light and flexible as companies so that you can adapt to market changes.
For Internet companies, the shift to Freemium offerings (a base product for free with pay as you go functional add-ons) makes it more difficult to design viable business models, and means new competition for established companies in low capital cost businesses. Again, a solution is to stay in ongoing contact with customers, constantly reinforcing your value proposition and the reality of switching costs.
Creative Destruction – particularly the emergence of new companies that threaten large customers and can change the value perception of suppliers’ core competencies. Solutions include ongoing communication with customers seeing what they see as “the next big thing,” focusing on continually improving our own core competencies, and possibly teaming with the more promising emerging companies.
The illusion that advertising will pay for everything – in reality, advertising dollars are a scarce resource like all other resources. Solutions include testing our own value-adds as an ongoing process, and creating fast-fail models to cost-effectively test our own promotions.
Definitions of value and productivity are no longer stable; all depends on the method of measurement. A solution is to remain aware of the innovator’s dilemma and to continually renew our value propositions.
A workforce in flux where young people don’t want to work for what they perceive as “old line” companies, as well as early-retiring baby boomers who may learn in 3-5 years that they can’t afford retirement. Solutions include focusing on employee engagement, building more flexible and “liberating” business models, and teaming younger with more experienced workers to cross-train each other.