Posts from management

Being Transparent About Your Long Term Strategy

Elon Musk famously posted Tesla’s long term strategy in 2006 and ended the post with “don’t tell anyone.” That has led may entrepreneurs around the world to follow suit and be transparent about what they are up to and why. I think its a great practice for companies to follow. It helps the outside world understand your company and it helps with recruiting as potential employees can better decide which companies they want to work for and why.

Our portfolio Coinbase has been doing that for a while now and Founder/CEO Brian Armstrong just posted the latest version of their “secret master plan” to use Elon’s words.

You should go read the post as I think it does a nice job of explaining where they have been and where they are going. But if you want the quick summary, here are the four steps:

  1. First, we will make it easy for consumers to invest in digital currency by building a retail exchange (Coinbase). The differentiators for this product are trust (security, compliance, etc) and ease of use (access to convenient payment methods, intuitive interface, etc). This will allow more people to own digital currency, especially non-technical people.
  2. Second, we will enable professional traders and institutions to trade digital currency (GDAX). This will support the investment use case in step one, but also scale it by driving larger trading volumes. More liquidity in the markets will reduce volatility of the underlying assets, which is important to enabling the payment network. The differentiator for this product will also be trust (security, compliance, etc) to encourage larger, traditional investors to enter the market.
  3. Third, we will create a mass market consumer interface for people to start getting value from the payment network (Token). Now that a critical mass of early users have been drawn in by the investment use case, the industry is ready for its “Netscape moment”. This product will make it dramatically easier for consumers to use digital currency as a payment network, and for developers to build applications that utilize the payment network.
  4. Fourth, by lowering the barrier to create new digital currency applications, we’ll see an explosion in the number of ideas tried. We’ll invest in, partner with, or build a number of new applications in this space, including replacements for many of the services people use in finance 1.0. Some examples include merchant processing, remittance, loans, fundraising, venture capital, escrow, credit scores, and more.

If you have a secret master plan for your company, think about posting it publicly. I think it will do a lot more good than bad for you and your company.

There Is No Free Lunch

I am reminded time and time again that things that sound too good to be true almost always are. There really is no free lunch, in business or in life.

Here are a few examples of things that seem so tantalizing to entrepreneurs and the companies they create but turn out to be just as costly (or more) than the alternative:

  1. Taking on debt instead of equity in the hope that it will be paid off in the future with equity sold at much higher prices. Or convertible debt that converts in the future at a much higher price, which is basically the same thing. I have seen this go badly so many times that I now almost throw tantrums when our portfolio companies choose to do this.
  2. Raising another round to buy more time to figure out the business model vs figuring out the business model now. “Buying time” is one of the greatest free lunch fallacies of all time. I strongly believe that now is almost always a better time than later to do something.
  3. Hiring a service provider (lawyer, accountant, PR firm, etc) who will do your work for free in return for your company’s business later. This sounds great but unfortunately locks you in to using this firm later on when others may be a better choice for your company.
  4. A big enterprise company will pay you to modify your software to work “better” for them. Sounds great now, when you need the revenues/cash so badly, but little did you realize that you just outsourced your roadmap to a big company.

I could go on and on, but hopefully I’ve made my point. I encourage everyone to make the hard and painful choices when they have to be made and avoid the free lunch fallacy. It mostly leads to indigestion.

Can Do Vs Must Do

Over the past few months, I’ve been reminded about the difference between “can do” and “must do” and how companies often confuse the two.

With the abundance of capital sloshing around the tech sector, our portfolio companies often have the resources to do more than they can and should do. They greenlight a bunch of projects that are “can do” projects but not “must do” projects. And a number of not so great things happen when they do this, including but not limited to:

  • Core resources (like infrastructure, security, payments, design, product management) get stretched supporting so many efforts.
  • The team loses sight of the mission and strategy as so many projects are being tackled at the same time
  • Senior leadership gets pulled in many directions and loses alignment as a result
  • Projects slip or don’t ship at all, leading to malaise and morale issues
  • Headcount grows quickly to support all of these efforts, creating more management issues

I saw a presentation recently with a “plan” that had ten “near term focus items” on it. I told the person presenting the plan to me that I don’t think a plan should have more than three things on it. I am a big fan of the rule of three. I am not sure where I heard it but it says that you should not tackle more than three big things at one time, no matter how large your organization is.

But regardless of whether you have two, three, or four big efforts this year, you should test all of your initiatives agains the “must do” vs “can do” test. Just because you can do something doesn’t mean you should.

I’ve written about the importance of strategy and saying no. Strategy isn’t saying no. It is figuring out what is the most important thing for your company and deciding to focus on it and say no to everything else.

In order to figure out what the most important thing is, you need to understand your products, your customers, your market position, where things are going, and where you want to be in three to five years. Once you have figured all of that out, you can figure out what are the most important things you need to do in order to get there.

It is also true that the “most important thing” changes. My partner Albert told me that he thinks doing a startup is like playing a video game. Each level requires you to master one thing and once you do that, you level up and then there is a new thing to master.

I like that metaphor a lot even though it trivializes the company building process a bit. It is a very clarifying view on how you must think about things and prioritize things.

So if you are frustrated by the pace of development (and not just engineering development) at your company, I would suggest you think about how many things you are trying to do at the same time. If it is a lot, then run them by the “can do” vs “must do” test and kill all the things that are not “must dos”. That might even mean parting ways with people you don’t need, which is painful but often helpful.

Executing well on all of the “must do” things is the hallmark of a well run company. And that usually means that there aren’t many “can do” things on the roadmap at the same time.

Grit

Last week during our CEO Summit, we had the opportunity to hear my partner Albert interview Angela Duckworth, author of the book Grit.

Angela is a Professor of Psychology at University of Pennsylvania and founder and Scientific Director of The Character Lab.

Angela has the ability to make complex concepts simple and combines her expertise in human behavior with a wicked sense of humor.

She is a great public speaker and everyone enjoyed hearing her talk to our group.

Her book Grit is about the power of perseverance.

It explains why some people have grit and how you can recognize it in people.

She also explains why grit is more important than talent in many cases.

If you hire and manage people, if you run start and run companies, if you invest in people and their projects, then Grit is a book you should read.

Path Forward

Path Forward is an organization that helps employers (large and small) run “returnship” programs in which people who have left the work force to care for a family or a parent have a structured and supported way to return to work.

In this podcast, the Gotham Gal talks about Path Forward with Tami Forman who is the Executive Director of Path Forward.

Learning From Others Vs Figuring Things Out By Yourself

Today is the annual USV CEO Summit. Once a year we ask our portfolio CEOs to gather at our office in NYC and spend the day talking to each other about what they have learned and are learning about building and leading companies. This is not a novel idea. Many/most VC firms do this sort of thing. We have been doing it for something like ten years now. We will have about sixty CEOs in our offices today.

I often think about the founder/CEO who has five or six VC firms invested in their company. They get invited to attend five or six of these a year. And participate in five or six networks. That’s a lot of networking with other CEOs. I sometimes wonder if there is a point of marginal utility for them in all of this “learning from others.”

Don’t get me wrong. I think there is so much founders/CEOs can learn from their peers. I encourage the CEOs I work with to join CEO groups, talk frequently with their peers, get peer CEOs on their boards, and do whatever else they can to learn from the experiences of others. Our CEO Summit today will be yet another great opportunity to do this.

But at some point, you have to learn things yourself. You can talk to peers until you are blue in your face about how to hire a great VP Engineering or CFO. But making a bad hire or two in these roles will teach you a lot more about it than talking to others. At some point, you are going to have to figure things out by yourself. There is no substitute for direct personal and painful experience. That’s just how life works.

So I like to think of learning from others as a way to steepen the learning curve. You can get there faster if you talk to others and are open to lots of feedback and advice. But no amount of feedback and advice will make you an amazing leader on your first day as a newly minted CEO. That comes with time and the scars and pain that result from your bad decisions. I have many of them myself and wear them as a badge of honor.

Change Creates Information

My partner Albert likes to say that “change creates information.”

I have seen this a lot recently in our portfolio.

A change in leadership, a change in strategy, a change in cost structure.

Doesn’t really matter what it is, it can tell you a lot about what is going on in your company.

Making changes is painful and so it’s understandable that we all avoid change.

But if you can’t understand what is going on and you want some more visibility, make some changes.

You will learn a lot.

IBM and Microsoft

As I was watching all of those Watson ads on TV this weekend during the Masters golf tournament, I thought to myself “well look at that, IBM has built the first big AI brand.”

And that is coming from a true dinosaur of the tech business.

Even more impressive in many ways, is what Satya Nadella has done at Microsoft. He slayed the Windows Everywhere albatross that was holding Microsoft back for most of the post Gates era and has made Microsoft relevant again in the world of tech. Windows is enjoying a resurgence, the Office app suite is finally and successfully moving to the cloud, and Microsoft’s cloud offerings are strong and getting stronger. The stock price tells the Nadella story as well as anything else. Here is how the stock has performed since Nadella took the helm of Microsoft in early 2014:

So what’s the point of this post? Well I think it’s worth pointing out that older tech companies can be relevant and competitive in the age of Google, Amazon, and Facebook. It just takes good leadership and the right strategy. As is the case with all companies.

Board Feedback

One of the most frustrating things about Board meetings is that it is difficult for founders and CEOs to get feedback on them.

I’ve seen some interesting approaches to addressing this problem lately.

Some companies are sending around post meeting feedback forms and asking all attendees to fill them out.

Some CEOs have asked their Board members to send emails to them summarizing their thoughts and take aways after the meeting.

I am a fan of anything that produces meaningful feedback for management from Board meetings.

My preference is to build the feedback function right into the meeting with a post meeting executive session between the CEO and directors where the feedback is delivered face to face in real time.

The big challenge with the post meeting executive session is that all Board meetings seem to run over on time and the end of the meeting is a time crunch.

So making time for the executive session is often challenging. But it is worth it in my view.

Regardless of what technique you are using, if you are running Board meetings and not getting feedback on them, you are doing it wrong.

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.