Posts from management

Using Debt Like Growth Equity

If you are in the venture or startup business and don’t read Dan Primack, consider changing that. He’s great.

From his newsletter this morning:

Indebted: Last week we noted that Wal-Mart subsidiary Jet.com had acquired ModCloth, an online retailer of vintage women’s apparel. No financial terms were disclosed, but this didn’t feel like a success for either ModCloth or the venture capitalists who had invested over $70 million into the business since its founding 15 years earlier. Here’s what happened, per sources familiar with the situation:

  • In 2013 ModCloth went out in search of Series C funding, but the process was felled by a back-to-back pair of lousy quarters. So instead it accepted $20 million in unsecured bank debt.
  • ModCloth effectively treated the debt like growth equity, rather than recognizing the time bomb it could become.
  • When the debt first came due in April 2015, existing ModCloth investors pumped in new equity to, in part, kick repayment down the road for two years. This came amid four to five straight quarters of profitability, and just after the company brought in a former Urban Outfitters executive as CEO.
  • Once the income statement returned to the red, ModCloth again tried raising equity ― but prospective investors cited the debt overhang as their reason for passing on a company whose unit economics were otherwise fundable. Insiders could have stepped up but didn’t.
  • Jet.com heard of ModCloth’s debt coming due debt month, and pounced. We’ve been unable to learn the exact amount it paid, except that the amount left over for VCs after repaying the debt (and accounting for receivables) won’t be nearly enough to make them whole.
  • 2 takeaways: (1) Debt is not inherently troublesome for startups, particularly if it’s supplementing equity as opposed to substituting for equity. But startups must recognize that not all cash is created equal. (2) ModCloth was founded in Pittsburgh, but later moved its HQ to San Francisco. It’s impossible to know if things would have worked out differently had the company remained in the Steel City, but some of its quirky retail culture did seem to get commingled with the “grow grow” tech etho

I have lived this story several times in my career and we are seeing this play out again in the market.

It is tempting to use debt instead of equity to finance a high growth company, particularly when you cannot get equity investors to value your company “fairly.” When a company has achieved “escape velocity” and is growing quickly, lenders look at it and say “there is enterprise/takeout value here and we are senior to the equity so the risk to us is pretty low.” And so they will underwrite a loan to the company even though the market hasn’t made up its mind on how to properly value the equity. So the temptation all around the table is to take the debt and kick the can down the road on the equity in the view that more time, more growth, more market validation will fix things.

This can work out well. Our portfolio company Foursquare is an example of where this did work out well. A debt deal in the middle of a business model pivot gave that company the time to re-engineer its business model and validate it. And time also allowed the company to come to terms with how the equity markets would value it and its new business model. Foursquare went on to raise another round of equity capital and refinance its debt and is in a great place now.

But, as the Modcloth story points out, debt can also work against you. If you can’t execute well post raising debt and get to another equity round or some other transaction (an attractive exit being the other obvious option), then you can have your debt called from under you and lose the control over the timing and terms of your exit. I lived through this story with a company I backed in 1999 and which was sold a few years ago in a transaction that was very good for the lenders and good for the management and very bad for the early equity investors.

Dan’s point that substituting debt for growth equity is a risky bet is spot on. That doesn’t mean it shouldn’t be done. But it should be done with care and with eyes wide open.

Gender Diversity

Today is International Women’s Day and I thought I would recognize it by writing about gender diversity, a challenging topic for many in the startup/tech sector.

I believe that diversity of all kinds results in better companies, better performance, better culture and better workplaces. It is challenging for many small tech companies to build diverse teams, particularly in the early stages of their development when they are hiring for very specific skills. But the longer you wait to build a diverse team, the harder it gets. Scott Heiferman, Founder and CEO of our portfolio company Meetup, which has women running both product and engineering, explained to our CEO Summit a couple years ago that once you have a male-heavy team, it becomes very difficult to recruit women to join it. His advice was to build diversity into your hiring from the very start.

In addition to Meetup, I work with a few companies that have done this incredibly well. Etsy reported in their diversity report last year that:

people who identify as women comprise roughly 54% of our staff (compared to 51% in 2014), which makes us an outlier among tech companies in the U.S. and NYC where we are headquartered. Women managers increased by 14%, (to roughly 50% from 44%) and women in leadership roles increased by 35% (to 50% from 37%), which means people who identify as women comprise half of the leadership and management positions at Etsy. As of today, a third of our board of directors are women, and if the directors nominated for election at our annual meeting of stockholders are elected, half of our board of directors will be women. Roughly one-third of our technical roles are held by women or people with gender identities other than male.

Kickstarter reported in their recent PBC report that:

As of December 31, 2016, our team was majority women (53%), as was 61% of our Senior Team and half of our Executive Team.

I am sure there are other USV portfolio companies with similar statistics, but these are ones with which I am intimately familiar.

This kind of gender diversity does not happen unless your company makes it a priority in hiring, retention, and culture. It takes a comprehensive approach and it is not easy, particularly if you have a highly technical team.

Little things matter a lot. Having a separate bathroom for people who identify as women is an example of something that many very small companies don’t do/can’t do. But it sends a pretty loud signal.

Then there are the big things. What is your parental leave policy? What is covered in your healthcare policy? Do you give time off for things that matter to women, like today’s A Day Without Women?

You can take that extra step, go that extra mile, to let the women in your company (and the women you want to join it) know that you support them and you are committed to the fight for gender equality.  There are many fights to fight, especially at this time, but women make up half of the global population, half of our workforce, and so women’s rights are an important cause that you can and should get behind.

This is a place where strong leadership in HR makes a difference. The commitment has to start at the top with the founder and CEO, but having a strong leader in HR who is in tune with gender (and all) diversity and can advise on and implement the right policies will make a huge difference.

Finally, I would be remiss if I didn’t mention the lack of gender (and all) diversity in the partner team at USV. We have gender diversity in our firm (we have four women on our investment team who shape our investment strategy), but the five partners at USV are all white middle aged men. As Andy and I mentioned on stage at the Upfront Summit this year, we are well aware of this issue and are actively working to address it.

So we can all use today’s International Women’s Day as an opportunity to commit/recommit ourselves to diversity in our companies and to take and sustain the actions that will lead to diversity. It’s important and, as some leading companies have shown, it is very much possible to do it.

Cultural Differences

A friend of mine likes to say that “culture is destiny.”  You can get everything else right but if you get your culture wrong, you are going to have problems.

As I look across our portfolio, I see many different cultures, some very strong and obvious even to outsiders. Some cultures are more nuanced and you have to work inside the company for a while to understand them.

Some cultures are extremely supportive and welcoming. Other cultures are more mercenary.

The truth is that these cultures are set very early on, largely by the founders and the early team they surround themselves with.

Once you create a culture it is incredibly hard to change it. 

I have seen leaders, often new leaders, evolve the culture but not completely change it. 

I have also seen cultures reject leaders who tired to change things too quickly.

All of this leads me to believe that the decisions a founder or founding team makes in the first few months of a company’s life are among the biggest decisions and that they are setting their destiny in place, often without even realizing it.

Getting Human Resources Right

The news out of Uber last weekend was horrifying. A woman engineer was unable to get human resources to deal quickly and appropriately with a sexual harassment claim. I don’t know anything more than what I learned in her blog post. Uber is investigating and the full story will likely emerge in due course. I am not interested in piling on Uber right now. Plenty of people doing that.

But it does raise a great question which is how to get human resources right in a fast growing tech company. Growing from 50 to 500 to 5,000 to tens of thousands of employees is hard. Operating systems and processes that work in a 500 person company don’t work in a 5,000 company. The same is true of every growth spurt. Systems break down and stuff gets messed up.

A well designed and implemented human resources organization can help. A messed up human resources organization will hurt. As Uber has found out.

So what have I seen work and what do I recommend?

Here are some things you can do to increase the chances that your human resources organization will be a force for good in your company:

  1. Hire a human resources (HR) leader EARLY in the development of your company and “level up” your HR leader as needed as your company grows. The right HR leader in a company of 50 is not likely the right HR in a company of 5,000. Of course there are exceptions to this rule, but in general you will need more experience in the HR leadership function as your company grows.
  2. Have your HR leader report directly to the CEO. Do not tuck the HR leader underneath your COO, VP Ops, CFO, GC, or VP Admin. The CEO has a hard enough time figuring out what is going on in her company as it is. Putting someone between them and their cultural leader/thermostat is a bad idea. Plus the optics are terrible. Your management hierarchy says a lot about what you value and what you do not. Actions speak louder than words, always.
  3. Do not make your HR function a recruiting function. Of course HR needs to help the company hire. And it certainly needs to help transition out people who have to leave the organization. But HR orgs that function mostly as an I/O pipe are bad HR orgs.
  4. Do make your HR organization about culture and leadership first and foremost. I have heard many HR leaders called “our culture carrier.” That’s good. And HR orgs should be making sure everyone is getting feedback on their performance and development goals, including the CEO. Organizations that share feedback top to bottom with dignity and professionalism are great places to work and perform better.
  5. Always have a company handbook that lays out the rules of behavior in the workforce. You can’t do this too early. You set the tone early and it propagates. It is great if you can start with your values, clearly laid out for everyone, and then lay out the rules and what happens if they are not followed.
  6. Build a great employee onboarding process. I believe that the companies that take the time to properly onboard new employees are better places to work and perform better. Onboarding should be more than “here’s your laptop, here’s your desk, here’s your boss.” It should be at least a few weeks of getting ingrained in the values, culture, systems, processes, and rules. It should be learning about every part of the organization, the current operating plan, strategic priorities, management team, and more. Doing it right is hard but it pays off bigtime.
  7. One CEO that I have worked with for more than fifteen years once told me his HR leader was his most important senior executive. He said she was his “business partner.” That’s a great place to get to if you can get there. What is more important than your team, after all?

I hope those suggestions are helpful. They are based on what I’ve seen work and not work over the years.

In the Uber situation we also saw a failure in the “whistleblower process.” This is a particularly hard process to get right. First of all most teams, whatever kind of team, don’t really want “snitches.” It is human nature to try to come together and support each other. And blowing the whistle is the exact opposite of that. So here are some things you can do to get this right:

  • Train your organization about the situations that are particularly tricky; sexual harassment, drug and alcohol issues, fraud, etc. Teach everyone how to recognize them and what to do about them. Make it clear that they are EXPECTED to report these issues to management and that failure to do so is complicit behavior.
  • Have some sort of whistleblower hotline. Often times the company General Counsel will manage this hotline. Make sure everyone knows about it.
  • Enable anonymous feedback throughout the organization and explain when it is appropriate and when it is not. Obviously anonymous feedback has great potential for abuse. But it is often the only way you are going to get the most important feedback that nobody will share otherwise.
  • Talk about this stuff in your all hands, regularly. I am sure this is a big topic this week but it should not get talked about only when something bad happens somewhere. This is something that should be discussed at least a couple times a year. Companies that scale rapidly can double in size in less than a year. So you have to talk about this stuff frequently to make sure everyone understands it. And make sure to clearly cover it in the onboarding process.

If you don’t have this stuff worked out in your company, now is a great time to do that. Your employees are watching you.

What We Don’t Do

Strategy is hard and becomes increasingly important as companies grow and scale.

One thing I advise teams to focus on when they go through a strategy exercise is to identify the things they won’t do.

One way to do this is to make a list of all the things people inside (and outside) the company are encouraging the company to work on.

Then break that list into two lists – the things you will do and the things you won’t do. This should be a group exercise, iterative, and ideally done on a whiteboard or some other similar tool.

The timeline for this list of projects doesn’t matter a lot. It could be for the next year or it could be for the next three to five years.

This exercise identifies the things that are most important versus the things you would like to do but can’t get to right now.

And this process helps solidify the strategy.

I think a company, at least a company that is smaller than 1000 people, should not try to do more than three big things a year. These big things can include a number of smaller things in them. So you might have a list of ten things you want to do this year. If you can organize those ten things into three big focus areas, then that works. If there are literally ten big things you want to do this year, I think that is way too many.

The most successful companies I work with have a clear sense of Mission/Vision>Strategy>Priorities that guides the company quarter to quarter, year to year, and aligns everyone on the team around where the focus is and why.

Saying no to things that are off mission, off strategy, or are not a priority right now is critical to getting this right.

I say this as an investor who has seen his ideas end up on the no list way more often than the yes list. I understand why that is and accept it. I would rather work with a company that knows where it is going and why than one that blindly listens to its investors.

From The Archives: Retaining Your Team

I picked up a bad head cold in SF this week. It’s rainy and cold there and that got the best of me. So I’m running a post from the archives and medicating myself instead of writing today.

Retaining Your Employees

I hate to see employees leave our portfolio companies for many reasons, among them the loss of continuity and camaraderie and the knowledge of how hard everyone will have to work to replace them. Many people see churn of employees in and out of companies as a given and build a recruiting machine to deal with this reality. While building a recruiting machine is necessary in any case, I prefer to see our portfolio companies focus on building retention into their mission and culture and reducing churn as much as humanly possible.

There isn’t one secret method to retain employees but there are a few things that make a big difference.

1) Communication – the single greatest contributor to low morale is lack of communication. Employees need to know where the company is headed, what they can do to help get there, and why. You cannot overcommunicate with your team. Best practices include frequent one on ones between the managers and their team members, regular (weekly?) all hands meetings, quick standup meetings on a regular basis for the teams to communicate with each other, and a CEO who is out and about and available and not stuck in his/her office.

2) Getting the hiring process right – a lot of churn results from bad hiring. The employee is asked to leave because they are not up to the job. Or the employee leaves on their own because they don’t enjoy the job. Either way, this was a screwup on the company’s part. They got the hiring process wrong. The last MBA Mondays post(two weeks ago) was about best hiring practices. Focus on getting those right and you will make less hiring mistakes and experience less churn.

3) Culture and Fit – Employees leave because they don’t feel like they fit in. Maybe they don’t. Or maybe they just don’t know that they do fit in. Another post in this series on People was about Culture and Fit. You must spend time working on culture, hiring for it, and creating an environment that people are happy working in. This is important stuff.

4) Promote from within. Create a career path for your most talented people. The best people are driven. They want to do more, develop, and earn more. If you are always hiring management from outside of the company, people will get the message that they need to leave to move up. Don’t make that mistake. Hire from within whenever possible. Take that chance on the talented person who you think is great but maybe not yet ready. Work with them to get them ready and then give them the opportunity and then help them succeed in the position. Go outside only when you truly cannot fill the position from within.

5) Assess yourself, your team, and your company. We have discussed various feedback approaches here before. There is a lot of discomfort with annual 360 feedback processes out there. There is a growing movement toward continuous feedback systems. Whatever the process you use, you must give your team the ability to deliver feedback in a safe way and get feedback that they can internalize and act upon. You must tie feedback to development goals. Feedback alone will not be enough. Build a culture where people are allowed to make mistakes, get feedback, and grow from them. I have seen this approach work many times. It helps build companies where churn rates are extremely low.

6) Pay your team well. The startup world is full of companies where the cash compensation levels are lower than market. This results from the view that the big equity grants people get when they join more than makes up for it. There are a few problems with this point of view. First, the big option grants are usually limited to the first five or ten employees and the big management positions. And second, people can’t use options to pay their rent/mortgage, send their kids to school, and go on a summer vacation with the family. Figure out what “market salaries” are for all the positions in your company and always be sure you are paying “market” or ideally above market for your employees. And review your team’s compensation regularly and give out raises regularly. This stuff matters a lot. Most everyone is financially motivated at some level and if you don’t show an interest in your team’s compensation, they won’t share an interest in yours (which is tied to the success of your company).

I believe these six things (communicate, hire well, culture matters, career paths, assessment, and compensation) are the key to retention. You must focus on all of them. Just doing one of them well will not help. Measure your employee churn and see if you can improve it over time. A healthy company doesn’t churn more than five or ten percent of their employees every year. And you need to be healthy to succeed over the long run.

From The Archives: The Board Chair

One of the things I am spending a lot of time on these days is Board leadership. That usually means Board Chair, but can also mean “Lead Director.” If you have a Board of five or more and are struggling with managing your Board, get a Board Chair or a Lead Director asap. Here’s a post from the archives about this.


Continuing our series on The Board Of Directors, this week I’ll talk about the role of the Board Chair.

The Board Chair runs the Board Of Directors. He or she is a Board member with the same roles and responsibilities as the other Board members. But in addition, the Board Chair is responsible for making sure the Board is doing its job. The Board Chair should make sure the Board is meeting on a regular basis, the Board Chair should make sure the CEO is getting what he or she needs out of the Board, and the Board Chair should make sure that all Board members are contributing and participating. When there are debates and disagreements, the Board Chair should make sure all opposing points of view are heard and then the Board Chair should push for some resolution.

The Board Chair should be on the nominating committee and should probably run that committee. I do not believe the Board Chair needs to be on the audit and compensation committees, but if they have specific experience that would add value to those committees, it is fine to have them on them. Either way, the Board Chair needs to be on top of the issues that are being dealt with in the committtees and making sure they are operating well.

Small boards (three or less) don’t really need Board Chairs. In many cases the founding CEO will also carry the Chairman title, but in a small Board, it is meaningless. Once the Board size reaches five, the Board Chair role starts to take on some value. At seven and beyond, I believe it is critical to have a Board Chair.

It is common for the founder/CEO to also be the Board Chair. I am not a fan of this. I think the Chair should be an independent director who takes on the role of helping the CEO manage the Board. The CEO runs the business, but it is not ideal for the CEO to also have to run the Board. A Chair who can work closely with the CEO and help them stay in sync with the Board and get value out of a Board is really valuable and CEOs should be eager to have a strong person in that role.

When a founder/CEO decides to transition out of the day to day management but wants to stay closely involved in the business, the Board Chair is an ideal role for them, assuming that they were responsible for recruiting or grooming the new CEO. If the founder is hostile to the new CEO, then this is a horrible idea.

When Boards get really large, like non-profit boards, the Board Chair is even more important. I’ve been on a few non-profit Boards over the years. I don’t really enjoy working in the non-profit world, but I do it from time to time. I have had the opportunity to watch a couple amazing Board Chairs at work and I’ve learned a ton from them. The partnership between Charles Best and Board Chair Peter Bloom at Donors Choose is a thing of beauty. Same with the partnership between John Sexton and Board Chair Marty Lipton at NYU. For profit CEOs and Board Chairs could learn a lot from watching these masters at work.

When it works, the Board Chair role is hugely impactful. It allows the CEO to spend their time and attention running the business and not worrying about the Board. The Chair will manage the Board and when the CEO has issues with the Board, the Chair will be clear, crisp, and quick with that feedback and will help the CEO address those issues.

Many CEOs find working with a large group of people who have oversight over their work and performance challenging. It makes sense. Who has ever worked for six or more people at the same time. How do you know where you stand with all of them? How do you know what they want you to do? How do you know what is on their minds? The Board Chair’s job is to give the CEO a single person to focus on in dealing with these issues.

The Board Chair job is hard, particularly when the company is in crisis, but it is also extremely gratifying. It is an ideal job for entrepreneurs and CEOs to take on when they are done starting and running companies and want to move into something a little less demanding. I’m always on the lookout for people who can take on this role in our portfolio companies. The good ones are few and far between and worth their weight in gold.

Urgency

One of the things I often press for in my role as a board member and investor is a greater “sense of urgency” in our portfolio companies. The founders and CEOs, it turns out, are hungry for that even more than I am. It is a collective frustration.

So when I hear a suggestion on driving urgency, I take notice. I got this one from a CEO who I’ve worked closely with for years.

I find many business books to be fairly useless or at best irrelevant to my situation but I read John Kotter’s book “A Sense of Urgency” over the weekend and it was excellent. I highly recommend it. 

The best thing about the book is that it creates a common definition of what “urgency” and “complacency” mean and even cautions against creating “false urgency,” which is a lot of anxious frenetic activity without no forward motion. False urgency is just as bad as complacency.
I plan to read this book and if you are hungry for more urgency in your organization, I suggest you do as well.

Keep It Simple

I like this advice from John Lilly, a serial CEO and now a partner at Greylock:

I didn’t understand the role of simplicity and messaging early on. One of the things that happened at one of my start-ups was that I would get bored saying the same thing every day. So I decided to change it up a little bit. But then everybody had a different idea of what I thought because I was mixing it up.

So my big lesson was the importance of a simple message, and saying it the same way over and over. If you’re going to change it, change it in a big way, and make sure everyone knows it’s a change. Otherwise keep it static.

The number one cause of employee unhappiness and unwanted departures is “I don’t understand where we are going.” That is a failure of leadership on the CEO’s part. I agree with John, keep it simple and repeat often and don’t mix up your messages. It is critical, particularly as the organization grows in size.