Posts from management

A Return To Fundamentals

I wrote a fair bit last year about the disconnect between how companies were being valued and the fundamentals of those businesses. It seemed to me that many companies, from the founders, to the leadership teams, and the rank and file employees got more focused on raising capital and valuations than the basics of a business (people, product, customers, revenues, profits, etc).

That is starting to shift. I can feel it. With the public markets bringing high flyers back to reality, you can now buy the best companies out there at multiples of earnings and profits that make some sense in a historical context. And we are seeing reports that many mutual funds and hedge funds are leaving the private markets because the values in the public markets are so compelling. All of this is healthy.

Vitalik Buterin, the founder of the Ethereum project, said this at ETH Denver this past week.

The winters are the time when a lot of those applications fall away and you can see which projects are actually long-term sustainable, like both in their models and in their teams and their people

Vitalik was talking about a “crypto winter” but the basic point is more broadly applicable.

Business models need to be sustainable. Teams need to stick together and ship things. The fundamentals need to be in place for a business to succeed. All the money in the world at eye-popping valuations won’t do that for you.

I have no idea if we are in for another crypto winter. I have no idea if the stock market will continue to go down. I have no idea if the slump in the public markets will seep into the private markets. All of those questions are above my pay grade.

What I do know is that the businesses that focus on the fundamentals will succeed in any market, up or down. And I do feel that there is more of that going on in 2022 than we saw in 2020 and 2021 and that’s a very good thing.

#entrepreneurship#management#VC & Technology

NFPs

Early in my career, I was taught that any team member was replaceable and that as long as you had sufficient time to find a suitable replacement, you would be fine. I have operated on that basis since then, imparted that wisdom to the founders and teams that I work with, and have always advocated for that approach to management.

But I have learned that on any team there are always a few members who are extremely difficult to replace. While most team members are “fungible”, there are always a few “non-fungible people” and retaining these NFPs can be incredibly important to the long-term success of the business.

The first, and most important, NFP is the founder. The person who originally conceived of the opportunity, recruited the first few team members, scoped (and often built) the first product, brings immense value to the business, mostly around long-term vision, setting the culture and values, and knowing when something is “off.” Retaining the founder’s interest in and involvement with the business is critical. There are times when the founder is bringing more difficulty to the business than value and they should depart. But those situations are to be avoided if possible because of how important a founder is to the business.

NFPs are usually individual contributors, not managers. The management function is much easier to replace than a uniquely skilled individual. A common mistake that I and others have made is to promote an NFP into management when they are much happier not managing people. A classic role for an NFP is the CTO of the business. In this role, the person sets the overall technology direction of the business, makes the hardest technical decisions, builds technology themselves, but does not manage the engineering function. In many companies, the CTO has no direct reports.

You can find NFPs in any part of the company. They are not limited to technical functions. You can have an NFP in customer service, finance, legal, marketing, really anywhere. The key is to identify them and recognize them, reward them, compensate them, and retain them.

More and more companies are moving to compensation models where critical individual contributors can make as much, or more, than their manager or any manager. This has long been common in sales where commission models create such opportunities and where there are often NFPs, but I am seeing more and more companies recognize that simply compensating people on the basis of their management level is incorrect and leads to their best people moving into management, underperforming in that role, and departing.

NFPs are pretty rare. Most people are easily replaceable given sufficient time to do a proper search. But there are always a few people who are not replaceable. Identifying them and retaining them should be a key goal of the management of the business.

#management

The Pull Forward

I saw two charts last week that showed the same thing:

This chart was in the deck I shared here last week called Consumer Trends 2022. It shows that after a big lift in 2020 and a bit of a lull in 2021, the e-commerce trendline is back to its old baseline.

This is our portfolio company DuckDuckGo‘s search traffic curve, available here, on a ten-day moving average. You can see after a huge move up in late 2020, it had a pullback in early 2021 and has now gotten back on its normal growth curve.

Both of these are examples of what is called “the pull forward”, an event or a series of events that draws a large and unsustainable boost of new users. It is often followed by a lull where growth is flat or even down for a while, but then the normal growth pattern resumes.

We have seen curves like this throughout our portfolio this year as the pandemic and other factors (in DuckDuckGo’s case the presidential election also played a big part) have whipsawed growth curves. It feels great when things are growing faster than ever. It feels bad when things are flat or down.

My suspicion is a lot of these odd-looking curves are going to resume their normal shapes in 2022 when things gradually start to normalize.

The last two years have been a challenge to manage through. There have been endless curveballs coming our way. Boom and bust. It is important to see things for what they are and not get too up or down in times like this.

#management

Founder Led Companies

I remember about fifteen years ago, a well-known VC said to me “you need to sell a company within a few years of the founder leaving. Companies can’t sustain their innovation after a founder leaves.” I told that VC that my experience has been different on that measure and that I did not agree.

I have seen leadership teams take over great businesses from founders and get them to the next level. Etsy, where I am Chair of the Board and a large shareholder, is a great example of that. There are many others in my career as well.

However, there is a special something that founders provide companies. I’ve heard it called “moral leadership.” I’ve heard it called “the soul of the business.” I’ve heard it called “long-term thinking.”

This podcast with Brian Armstrong, founder and CEO of Coinbase, another public company where I am on the Board and a large shareholder, is a good example of that.

If you are into crypto or a Coinbase shareholder, you might want to watch the entire one hour and forty minutes of this video.

But if you want to see what I am talking about with founder-led businesses, there are a few conversations in this podcast I would direct you to. They are:

  • 25:48 The Drive and Vision
  • 29:36 The Future of Coinbase
  • 47:30 Public Goods & Decentralization
  • 51:39 Eating All the Banks
  • 1:32:12 Maturing and Growing

#crypto#entrepreneurship#management

Office Utilization

I saw a statistic from one of our larger portfolio companies yesterday. They have had their offices around the world open for some time now with office usage optional. They are seeing office utilization rates of around “20-30%.” They are also seeing “flexibility” as the number one issue in recruiting new talent.

That was interesting to me because we are seeing a much higher office utilization at USV. We kept our offices open for much of the last 18 months and encouraged a return to the office once we were all vaccinated in early April. On most days, we see about half of our team coming into the office. I think that number was higher in the spring and will be higher in the fall. We also see friends in the VC business and startup world working at our office from time to time and that has been fantastic.

We have also seen that office utilization is much higher for our team members that live in NYC vs the suburbs, which is not surprising. This chart says it all:

We surveyed our portfolio companies last month on the topic of their work environment plans. We got 56 responses which is a tad under 50% of our active portfolio so this data could be off a bit. But it is interesting. Pre-pandemic, 75% of these respondents were fully “in office” with most of the rest using some sort of hybrid model. Very few were fully remote. Now the distribution looks like this:

That is a dramatic change from the pre-pandemic norm. I am sure that there will be some movement back to the office when we get to a new normal, whatever and whenever that is, but no matter what, tech companies have moved away from the “fully in-person” model and that will mean very different office utilization models.

We also asked our portfolio companies about “seat to employee” ratios and got these responses:

For those companies that will continue to have an office, it looks like the average seat to employee ratio nets out around 65%. And that is for the 75% of the respondents that plan to have some sort of office.

At USV, we are taking a contrarian approach to the office. We plan to build a new office that can seat 100% of our employees and we want to be able to host board meetings and other events frequently. We are also looking at other ways to invite the broader “community” to work and be at USV regularly.

But that does not mean we will expect our employees to be at the office every day. We understand that those with long commutes and children or parents at home need more flexibility and we have seen that providing that flexibility builds loyalty and commitment. So we will continue to support that way of working.

Startups and high-growth companies seem to have embraced fully or partially remote models for the most part in an attempt to attract and retain talent and leverage the increased productivity that comes from eliminating long and painful commute times.

But that doesn’t mean an office isn’t a good thing from time to time. It may be that organizations that support startups and high-growth companies, like USV, can step into the mix and be part of that answer. That is an interesting idea to me and one that USV is looking at right now.

#Current Affairs#management#VC & Technology

Sticking With The Plan

Managing a business is about having a plan, sticking with it, and not panicking or looking for hail mary passes. There are no silver bullets or shortcuts to success in life. You need to have a five to ten-year plan and you need to stick with it and execute against it day after day, week after week, year after year.

I was reminded of this watching my NY Knicks navigate the off-season after making the playoffs for the first time in eight years. The Knicks front office stuck with the core of the team, kept all of their young talent, and upgraded significantly at point guard and small forward. They also do not have a guaranteed contract that extends beyond the 2022-2023 season.

I am sure it was tempting to think about accelerating the plan after a season that went better than anyone was expecting. I am sure that they thought about taking bigger risks and going for broke now. But I am glad they did not do that.

Instead, they rewarded players like Derrick Rose, Alec Burks, and Nerlens Noel who were a big part of getting them into the playoffs with multi-year contracts, they got Kemba Walker and Evan Fournier as upgrades at point guard and small forward, and kept all of their youngsters.

That’s a model for how to think about building a business and a leadership team. It is much more likely that you can get a win with a five-year plan than a one-year plan. And you need to build your team over time, developing promising talent, and making smart upgrades when they are required.

There are times when you need to throw in the towel on the plan, blow things up, and execute a turnaround. That usually comes with new leadership at the top and a new five-year plan. But that should be rare and done only when it is clear that the current plan is not working.

When the current plan is working, even better than expected, it is best to stick with it, make incremental improvements here and there, and keep at it.

#management#Sports

Leaving Well

I have watched countless companies and leadership teams manage transitions over the years and I have come to believe that companies and leaders should do everything they can to promote “leaving well.”

What I mean by “leaving well” is a smooth transition of a leader out of a role/company. This typically means that a departing leader gives a company a heads up that they are planning to transition out, that news is shared broadly internally, allowing for a transparent process to find a new leader. A similar process is used to transition a leader out when a new one is needed.

For this to work, companies need to do their part to facilitate this process. This means reacting well to the news that an executive would like to move on. It can also include a financial incentive to stick around during a transition. A culture that embraces leaving well puts everyone in a better place during transitions.

There are certainly times when leaving well is not possible. If an executive is terminated for reasons that require an immediate departure, there is no way to execute a smooth transition.

It is also the case that an executive could get an offer that requires an immediate start date that they feel that they have to accept. This is exactly the kind of thing a tradition and culture of leaving well is designed to prevent. Generally speaking, it is preferable to run a process to find your next role versus accepting an offer that comes in unsolicited. If a company has a culture of leaving well, executives will feel that they have the option of running a process versus accepting an offer that comes at them.

It is best to set this culture up at the very beginning. Precedent is powerful. If people see that others have been treated well on the way out, they will be more comfortable being open and honest. If people see the opposite, then they will be more mercenary in their actions.

Cultures that allow for open honest transitions are better places to work and easier companies to manage. Nobody likes a fire drill. Sometimes you have no choice, but if your company has them all of the time, it is a tough place to be.

#life lessons#management

Startup CXO

On Monday, a copy of Startup CXO, my friend Matt Blumberg’s new book, arrived at the USV office. I picked it up to take a quick look and thought “this a heavy book!”

So I texted Matt, congratulated him on getting the book out, and then asked why it was so heavy. He replied “because it is 640 pages, there is a section on every C-level function in that book.”

That’s when I realized that Startup CXO is not really a book. It’s a “field manual” to scaling a leadership team and company. It is the kind of book you will keep by your desk and pull out from time to time to figure out how to approach an issue or to help one of your senior leaders figure out how to do that.

And in that context, it’s a very valuable resource for CEOs and leadership teams as they scale a company and find new challenges around every corner.

The book is now out in Kindle and Hardcover. I recommend the Hardcover so you can keep it handy and pull it out from time to time when you need a quick primer on something.

#Books#entrepreneurship#management

Golden Handcuffs

Stock-based compensation plans throughout the startup and tech sector are based on “golden handcuffs” – the idea that an employee can’t leave because they would be giving up too much money if they do.

I’ve never loved that concept. It feels like staying in a bad marriage for the kids.

So I have been involved in a number of efforts to rethink that practice and one of those efforts came to light earlier this week when Coinbase, where I am on the board and compensation committee, blogged about their new compensation strategy.

This line in particular stands out to me as a powerful way to think about retaining employees:

Some may say eliminating 4-year new hire grants could hurt retention; we disagree. We don’t want employees to feel locked in at Coinbase based on grants awarded 3 or 4 years prior. We want to earn our employees’ commitment every year and, likewise, expect them to earn their seat at Coinbase.

We operate in an open market for talent. We all know that. Letting that market operate efficiently and not trying to game it makes a lot of sense to me.

#management

In-Person vs On-Screen

Last week I spent three hours with my six partners in a conference room talking through what we are investing in and why. It was a terrific session and I had more “ahas” in those three hours than I have had in many many months. There really is no substitute for sitting together with your colleagues working things out face to face.

This week our team met with a founder in Singapore via Zoom. It was midnight in Singapore and noon in NYC. In one hour we learned enough from the founder to be able to make a decision on whether or not to invest in the founder’s company.

In the last year, events like the latter one have been commonplace. Events like the former have been non-existent. And there are many in the tech sector and broader business sector (and other sectors too) that have come to believe that on-screen interactions will be the primary way we engage going forward.

For certain things, like raising capital and investing capital, on-screen works pretty well. Founders have figured out that they can raise capital from their kitchens, bedrooms, and offices in weeks vs roadshows that lasted months. I don’t think we will see founders going back on the road in any material way ever again. And founders in Singapore can access capital markets in NYC with ease. And investors in NYC can access investments in Singapore with ease. These are all important and disruptive changes to the startup, tech, and business sectors.

But in the last month, as I have been going into the USV offices most days, I have come to realize what we have been missing with the on-screen work model vs the in-person work model. Many things are more efficient on-screen but some things are way better in-person.

Understanding which is which and then figuring out how to continue to do the in-person things will be critical to leaders and teams navigating the new normal.

I got an email from a founder/CEO about six months ago saying that his company was going back to the office completely when the pandemic was over. I had not heard many CEOs taking that strong of a stance at that time. Since then, I have heard the same from a number of our portfolio company leaders. They are in the minority but they are not non-existent. When we survey our portfolio we find that about 20-25% will go back to full-time in the office work, another 20-25% have gone entirely remote, and the balance will try to figure out a hybrid model that makes sense for their company.

At USV, where we have landed for now, and maybe forever, is a bias to be in the office, particularly on the days we meet in person, but we are also way more open to on-screen work and we have an expectation that some team members will choose to work on-screen for multiple days a week, possibly the majority of days a week. We see that working parents benefit from the flexibility that on-screen work allows and younger team members benefit from the socialization and camaraderie that an office provides. We also see that those who commute long distances benefit significantly from being able to reduce the commuting load by working on-screen multiple days a week.

Our business has a natural rhythm of two days a week when we meet as a team; Monday and Thursdays. So those tend to be the days that team members try to be in the office and those are the days we do things like cater in lunch and maybe go out after work together. That allows us to retain the team dynamic and culture while being more open to on-screen work going forward.

We definitely have not figured this all out, but we are starting to see some patterns and some benefits of both work modes, and we are trying to navigate to a good middle ground.

Each company needs to figure this out in a way that works for their team and culture and I believe that there is no “right way” for everyone. But I also believe that in-person interactions remain critical to making better decisions, better products, better cultures, and better companies and so I would encourage everyone, including the fully remote teams, to figure out how to make in-person interactions happen on some regular cadence.

#entrepreneurship#management