Like last week's post on mobile revenue models, gaming isn't a revenue model itself, but it does offer a number of interesting revenue models and is worth discussing in a post in this series. This is the last post in the revenue model series, which is based on the peer produced revenue model hackpad we created at the start of the series.
Gaming is interesting because there are a number of revenue options that game developers can choose from when thinking about how to make money from their game. The hackpad lists the following:
There is still a sizeable business in selling a version of the game to the game player. That's how the console game (xbox, etc) market works. It is also how downloadable games market works. And there is a vibrant market in mobile games that you have to pay for to play.
But the games market has been moving to newer models in recent years. In app upgrades is certainly one of the more important revenue models. Many of the most popular mobile games are free to play but offer in app upgrades to get more game elements or simply to eliminate the ads. This is an example of the freemium business model in action.
Advertising is another important revenue model. For many web based games, advertising is the dominant form of revenue. On mobile, advertising supports the free offer and the elimination of advertising is often the value proposition for the in app upgrade.
The revenue model that is mostly (but not totally) unique to gaming is virtual goods. Virtual goods (like a tractor in Farmville) allow the player to have more capability in the game and they can be earned over time but are often purchased to enhance game play. This revenue model was inititally created in the asian gaming market but has been adopted by game developers all over the world.
I have been waiting for non gaming web and mobile services to adopt the virtual goods model but have yet to see anything that feels like it is working really well. Virtual goods is another excellent implementation of the freemium approach to business model.
There are game developers who use all of these models at the same time. They might sell their game on certain platforms, they might offer a free ad supported version on mobile with in app upgrades and virtual goods. In many ways, I think the gaming market is the most sophisticated about revenue models of all the sectors in web and mobile. That may stem from the fact that most games have a finite life and so the developer has to extract real revenue quickly to get a return on the investment they have made in developing the game. I think there is a lot that the rest of the web and mobile services world can learn from the gaming market.
The Internet is a data generating machine. According to Eric Schmidt, every two days now we create as much information as we did from the dawn of civilization up until 2003. It's also incredibly good at presenting that data, both to humans and machines.
So it makes sense that collecting and publishing data is one of the primary business models on the Internet. Here are some of the examples that you all created on the revenue model hackpad:
I like to think of data businesses in two categories; businesses that aggregate and then publish data and businesses that generate their own proprietary data by virtue of the service they provide on the internet.
Most of the companies listed in the data section of the revenue model hackpad are businesses that aggregate data from others and sell it. These can be good businesses but they are rarely great businesses.
Google is an example of a business that generates its own proprietary data by virtue of the service they provide. Google doesn't monetize with a data revenue model, they monetize with advertising that is targeted based on the data they generate. But in many ways, Google is a data business. Data is the secret sauce of their business and they have invested heavily in data science to maximize the value of their data.
Facebook and Twitter are rapidly becoming data businesses like Google. They collect a ton of data about users and what they think about and care about by virtue of providing a free and valuable service on the Internet. And that allows them to improve their services, make them smarter, and to target advertising to their users.
Going back to the aggregation model, if you are going to pursue this approach, try to figure out how to make your data as proprietary as possible. Anyone can aggregate so you run the risk of commodification in the aggregation game. If you can create some sort of proprietary advantage, either through exclusive access to the data or through some sort of refinement of the data using your own insights and analytics, that leads to a better aggregation type business.
Most data businesses are subscription based, but data can also be sold on a transactional basis. Transactional models are easy to sell when you are just getting going, but subscription models work better over the long run.
Many data businesses use APIs to make it easy for their customers to get data into their own systems. This is a good idea because it makes it harder for customers to leave if your data is part of their systems. If you can make your data part of a broad ecosystem, that is a good thing.
Selling data is a good way to build a business on the Internet but if you can figure out how to leverage proprietary data produced by your service to make your service even better, that often turns out to be an even better "data business".
Licensing, according to wikipedia, is an authorization (by the licensor) to use the licensed material (by the licensee). Of all the business models listed on the revenue model hackpad, licensing is the least net native business model. There is very little about the internet that makes licensing work better and there is a lot that makes it work worse.
Here are some of the ways licensing can be used to build a business:
The first five items in that list are related to the software business and reflect the dominant business model for software before the internet came along. Software used to be sold (licensed) with maintenance as the recurring revenue item. The internet has largely changed that with software moving to a subscription model (SAAS) as we discussed in the subscription post. Software is still sold with a license, in fact the SAAS model doesn't change the provision of a license, but the idea that you will pay up front for a license has largely gone away in favor of the subscription.
An important and growing form of license is the open source license. There are a number of variants on the open source license but the basic idea is the licensor makes a license of the software avaialable for free for anyone to use, modify, and share. The benefits of this model is that the software is maintained and improved by a group of developers working together with no economic model around their collaboration.
The last two items are forms of intellectual property licensing where an owner of a patent or a brand will license it to someone else to use in return for a monetary payment. These revenue models can work online but they don't take advantage of the scalability of the internet. In fact intellectual property and the internet are in many ways in tension with each other.
The only form of licensing that USV is actively investing around is the open source model. We think open source is an attractive form of licensing that creates network effects in the developer and user community and we have had success investing in the open source model.
That said, licensing is probably the least interesting business model to me of all the ones we are covering in this series. It is possible that entrepreneurs will invent new ways of licensing that take advantage of the scale and reach of the global internet, in the way that open source does, and that could produce some interesting opportunities.
Transaction Processing is not a "net native" business model. There have been businesses built up around processing transactions for a long time. But the Internet and Mobile present some challenges in processing transactions and therefore there are opportunities to build substantial businesses around helping companies process transactions.
If you look at the Revenue Model Hackpad, you will see that there are a number of different kinds of transaction processing businesses:
The first four examples in the hackpad are related to credit card processing, the next three are related to banking transactions, then there is fulfillment which is physical logistics, then the next three relate to the world of telephony, and the last one is related to internet and mobile platforms.
So you can see that transaction processing is a business model that can be applied to a number of different types of transactions. And certainly our revenue model hackpad is not comprehensive. So I am sure there are many other forms of transaction processing businesses in the online world.
The thing that all of these forms of transaction processing have in common is the processor handles a transaction that was generated by another product or service and provides some form of completion service and charges a fee for doing so. That could be processing a credit card transaction, handling a banking transaction, shipping something to someone, completing a call originated on another network, or distributing a third party app on an internet or mobile platform.
For financial transactions, the fees are generally small, typically in the 2-4% range. For banking transactions, the fees are often much smaller than that because the credit and fraud risks are lower. For logistics (shipping and handling), the fees vary but relate to the costs of providing the service. For telephony, the fees are generally expressed per minute or per message and are generally low but can be high in certain markets. Platform distribution fees are the outlier as they are often very significant, Apple charges a 30% cut in its app store.
For the most part, the transaction processing business model is all about scale. You process billions of transactions and take a few percent of the total transaction value. PayPal processed $145bn of transactions in 2012 and generated $5.6bn in revenue. Out of that $5.6bn, PayPal has to cover all its costs including processing fees to other transaction processors, customer service, fraud prevention, fraud losses, technology and development, and several others. I am certain that PayPal makes a very nice profit off of that $5.6bn of revenue but it is probably on the order of $1-2bn, which is in the range of 1% of the total transaction volume. This is a business model of pennies on the dollar, literally.
One of the challenges of this business model is that the fixed costs required to process transcations can be significant and you will operate a loss until you can get to scale. You can see that by looking at how much capital Square has raised to date. Crunchbase has it at $341mm. Now Square is one of the most exciting new companies created in the past five years and is executing incredibly well. But it has taken hundreds of millions of dollars to get where it is today. That's what I am talking about. You had better be prepared to fund the costs of ramping to scale if you want to be in this kind of business.
In general, I like these kinds of businesses a lot once they reach scale, but am cognizant of the costs of building them. They are not for the faint of heart.
We've covered advertising, commerce, and subscriptions so far in this series on business models. And while they are the big three of Internet business models, they all existed well before the Internet. They are not Internet native business models.
If there is one thing I have learned investing in Internet businesses over the years it is to pay attention to things you can't do without the Internet. And that describes peer to peer pretty well. Like the Internet, a peer network empowers the edges and devalues the middle. I like peer networks very much.
If you look at the revenue model hackpad, you will see a list of some interesting peer network businesses, including our portfolio companies Lending Club and Etsy. They all take a similar approach to revenue generation. They connect one or more people together to conduct a transaction and take a fee for doing so. In Etsy's case the transaction fee is 3.5%. In Lending Club's case, the fee is generally 4% to the borrower and 1% to the lender. In Kickstarter's case, the fee is 5% to the project creator if the project is successful.
But there are ways to generate revenue outside of the transaction fee in peer networks. Etsy is a great example. In addition to the 3.5% transaction fee, they charge a 20cent listing fee, a payment fee for payments processed on their direct checkout service, and they have an advertising marketplace so sellers can promote their items on Etsy. It is possible to sell on Etsy and share less than 5% of your revenue with Etsy. It is also possible to sell on Etsy and share more than 10% of your revenue with Etsy. It all depends on how many of their services you are using to run your business.
I like this approach very much. I think the basic fee for participating as a seller in a peer network should be as low as possible. This allows the marketplace to develop as much liquidity as possible. Increasing transaction fees will push sellers out of your market into other ones. The better approach to increasing revenues is value added services that sellers can avail themselves of but are not required to. If these services allow sellers to sell more or if they make selling easier, sellers will adopt them and your take rate can ultimately be much larger than your transaction fee.
The purpose of the revenue model in a peer network should be two fold. First it should incent as many participants in the peer network as possible (ie the lower fees the better). Second, it should produce enough revenue so that the business will produce significant profits at scale.
The thing about peer networks is most of the value is created by the participants in the network. The business doesn't do that much. It provides the basic infrastructure so that the market can work. It provides trust and safety and governance. And it provides customer service and support. The participants in the network do most everything else. That means these businesses can and should operate very efficiently at scale.
Craigslist is a good example of a peer network leveraging the power of the model. I have no idea how much revenue Craigslist makes and how many employees they have. But I would not be surprised if it were a $200mm annual revenue business with $150mm or more of annual profits. And yet it is capturing a tiny amount of the economics in its peer network. It should easily be the case that billions of dollars a year are transacted because of Craigslist. So what you see is a huge amount of transactional volume, a relatively small percentage of which is captured in terms of revenue, but a huge percentage of the revenue that is collected drops to the bottom line. That is what a peer network business model should look like.
And it scales really well. Because so much of what a traditional business would do is being done by the peers on the network instead of the company. Compare an online retailer with Etsy. An online retailer needs to have buyers and merchandisers. It needs to have inventory and warehouses. It needs to ship and track. It needs to spend a large percentage of revenues on marketing, customer acquisition and retention. Etsy doesn't spend much money on those things. Their sellers do. And as a result, their sellers keep more than 90% of the value of the transaction as opposed to giving up 50% as a wholesaler.
So peer networks are powerful businesses that when constructed well have great defensibility and staying power. The key is keeping the take rate as low as possible and incenting participants to transact with you instead of someone else. If you can do that, you can build a large and sustainable business with this model.
I wrote the Mobile First Web Second blog post a few years ago. In that post, I talked about apps that were designed to be used on mobile primarily with the web as a companion.
There have been a number of startups that have taken that approach and done well with it. Most notably Instagram, and also our portfolio company Foursquare. It has become a bit of a orthodoxy among the consumer social startup crowd to do mobile first and web second.
All in all, mobile service apps turn out to be a horrible place to close viral loops and win at the retention game. Only a handful of apps have succeeded mobile-first: Instagram, Tango, Shazam, maybe 2 or 3 others.
You have an entirely different onboarding story on the web. You can test easily, cheaply, and fast enough to make a difference on the web. You can fix a critical bug that crashes your app on load 15 minutes after discovery (See Circa). You can show 10 different landing pages and decide in real-time which one is working the best for a particular user. You can also close a viral loop: A user can click an email and immediately be using your app with you. You can’t put parameters on a download link and people don’t download apps from their computer to their phone. Without the barrier of a download + opening the app to try your product, you can prove value to the user immediately upon their first impression, as is with Google. In addition, the experience of signing up for a service is superior in every way. Typing is easier. Sign-up with OAuth is faster. Tab to the next field. Provide marketing alongside sign-up as encouragement. Auto-fill information is a feature in every browser. The open eco-system of the web and 20 years of innovation has solved many of the most difficult parts of onboarding. With mobile, that kind of innovation is lagging significantly behind because we create apps at the leisure of two companies, neither of which have a great incentive to help free app makers succeed.
I use my phone more than anything else. I just don’t think that an entrepreneur who wants a real shot at success should start their business there. The Android and iOS platform set us up to fail by attracting us with the veneer of users, but in reality you are going to fight harder for them than is worthwhile to your business. You certainly need a mobile app to serve your customers and compete, but it should only be part of your strategy and not the whole thing.
Vibhu also takes a stance against the ad-supported, privacy challenged, free consumer app world. I respect that stance and every time I upgrade from a free ad supported app to a premium version (advertising free) via the in app upgrade on mobile, I express my solidarity with him on that one. But as a business person, I have and will continue to advocate for a free tier with a premium upgrade (or just entirely free) because as I have written many times on this blog, I think that is the value maximizing approach and it also allows the greatest number of users to access your product or service.
But I don't want to focus on business model in this post. We are at the start of what will be a long MBA Mondays series on business models and will be talking a lot about that.
distribution is much harder on mobile than web and we see a lot of mobile first startups getting stuck in the transition from successful product to large user base. strong product market fit is no longer enough to get to a large user base. you need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master
But just because something is hard doesn't mean you shouldn't try to do it. I am convinced the next set of large and valuable consumer facing services will be built with mobile as the primary user interface. You can see it in the success of Uber and Etsy this holiday season. That's where you users are most of the time. And if you don't design your products and services for what is rapidly becoming the dominant UI, you will not maximize the success of your business in the long run.
So do I disagree with Vibhu? Not at all. I think he makes some great points on why you might not want to go mobile only unless you are in the games business. But I differ in two important areas. First, I think you can't abandon mobile. It is the future like it or not. And second, I think it is critical to design for mobile first and then build a web companion. If you design for the web and then port to mobile, you will find that it is really hard to fit your UI onto the small screen. Better to design for mobile first and then build a web companion. Mobile first, web second. But as Vibhu points out, the web can't and should not be ignored. It is valuable in many many ways.
So what edits did I make to the wide open hackpad? Well first, I tried to clean up the examples and make them as definitive as I could. The more well known a company/service is, the better example it is. I also took out many of the multiple examples. I think one is generally sufficient. I also took out the revenue models I thought were duplicative or slight variants of other revenue models. And there were a number of sections at the end that I would call "business models" as opposed to revenue models. So I took them out. Finally, there were a few entrepreneurs who were using this hackpad as a way to promote their companies. In effect, they were spamming the hackpad. I took out everything that felt like spam to me.
We are left with nine categories:
I think six of them are truly definitive revenue model categories (advertising, commerce, subscription, transactions, licensing, and data). The other three (peer to peer, mobile, and gaming) could be folded into the first six since they mostly map to existing models (mobile ads are ads). But these three categoris are unique in many ways and so I felt like leaving them in even though it's not as clean this way.
The "final" hackpad still needs work. There are some entries that are missing examples. I noted them with (??). There also may still be important or emerging business models we are missing. If you would like an invite to help fix the final version, please leave a comment to this post and I will invite you if I think your edit is useful.
My hope is by next week, we will have a truly definitive list of mobile and web revenue models and then I can use the list as a template for the MBA Mondays series on Revenue Models. Thanks for everyone's help on this.
I will not do office hours this evening but I will do one final office hours next Monday, Oct 29th, from 6pm to 6:30pm. The link to attend that office hours is here.
For this final post, I want to focus on the Business Model Canvas and how to think about sustainability in the context of creating your business model. In order to talk about that, I went ahead and created a Business Model Canvas of my own using bmfiddle.com.
If you think about banks in the real world, they are high cost affairs, with huge fixed costs including large branch networks. I am always shocked by how many bank branches I pass in a five to six block walk in NYC. The way these banks sustain these high costs is with large fees for depositors and high spreads between their cost of funds and the interest rates they charge borrowers.
So in thinking about how to create a sustainable Bitcoin Bank, I focused on a few key things:
1) keep the operating costs super low except in areas where there is a unique and important consumer value proposition
2) make it easy to access the bank and your balances within the context of low operating costs
3) keep the fees charged to customers as low as possible
4) allow third parties to build busineses on top of our business
The result is a super simple business model. My Bitcoin Bank would charge a very low monthly fee per Bitcoin deposited and nothing else other than pass alongs for any costs incurred in moving bitcoins in and out of the bank on behalf of our customers. We would not have any branches. We would operate via simple, easy to use mobile and web interfaces. We would keep our operating costs super low with the exception of one area where we would make a large and ongoing investment – in hiring and retaining a top notch and super experienced security team. We would allow third parties to create related businesses on top of our API. Services like lending, investing, etc would not be provided by our bank but by third parties who access our customers via our API.
I believe this business would be highly sustainable because it would focus on one very simple value proposition – security. And in return it would charge the lowest fees possible in order to make and sustain a profit. It would make it very difficult for others to price lower fees for storage and security. And it would benefit from the ecosystem of third party value added service providers operating on top of its API.
Here are some decisions I made in order to increase the sustainability of the business:
1) A focus on very low fees to our customers so that it will be difficult for competitors to undercut our offering.
2) A decision to focus on only one thing, security, and allow others to build additional services for our customers. This allows us to be best in class at the one thing we choose to do and it means our customers can choose to pay for additional services or not, and always on their own terms.
3) A cost model that keeps operating costs as low as possible in all areas other than security, which is our key consumer value proposition.
So when you are finalizing your Business Model Canvas for your final project for this course, think about what your key value proposition is and who is your primary customer and focus on that. And think about what you can do in your revenue model to make it so that it will be hard for others to come in and undercut you. And think about your cost model and how to keep it as low as possible while allowing your company to be best in class at what it does.
Please submit your final Business Model Canvas project here by Thursday, Oct 25th, 11pm EDT. I will pick out a bunch that I like and review them next week on office hours.
That will be the final event in this course. I hope you have enjoyed this class/series. I think sustainability is an important and overlooked aspect of business and it needs to built more tightly into business thinking.
Its time to kick off my Skillshare class on Sustainability. I will do a post each week this month (on Mondays of course). I will do office hours on Google Hangouts on Mondays at 6pm eastern for 30 minutes all month. We will do a project together which is to create a sustainable business model canvas. And there are groups you can create or join to allow you to collaborate with each other to complete the project and the class.
To join today's Office Hours on Google Hangouts, please check out the Skillshare page. There will be instructions there later today. [update: you can access the office hours hangout when its live here or afterwards via an archive here]
I will start with a post on Short Term Profit Maximization vs Long Term Business Health and then will end with some comments on our Business Model Canvas project.
If you want to stay in business forever, you have to focus on the long term. You must construct a business model that builds confidence and trust with your customers and keeps them coming back day after day, year after year.
Many business schools teach executives and entrepreneurs that business is about profit maximization. I don't believe that. I believe business is about making a profit that sustains the business and enriches the owners but is not maximized in any period (month, quarter, year). I believe the goal of a business is sustainability so that all the stakeholders (customers, employees, owners, suppliers, etc) can rely on the business for the long term.
Let's use an example. You own a business that operates on the web. You are a leading supplier of ecommerce to a vertical market. You generate $50mm in annual revenues and make a profit of $5mm a year. You see the launch of the iPhone and Android and think that your customers are going to want to connect to your business via their mobile phones. You ask your VP Product to scope out what it would take to build a comprehensive set of mobile apps that will allow this. She tells you it will take an investment of $5mm over two years to complete this project. You gulp. That is going to reduce your profits by $2.5mm a year in each of the next two years. What do you do? You make the investment because you must invest in the long term success of the business even though that is not a profit maximizing event. It may simply get you back to the $5mm per year of profits you were making before. There may be no ROI on this investment in a positive sense. It may simply be a defensive investment. You still need to make it to ensure you will be around for the long run.
Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate an return on investment (ROI) on the investments they want to make. If the ROI isn't greater than some minimum hurdle, the company doesn't make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company's lunch.
ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business.
One of the most difficult decisions entrepreneurs and executives have to make is the decision to disrupt their own business. Let's say you are a cable operator. You are making billions of dollars of profits each year providing voice, video, and data services protected by a monopoly business model. Along comes the Internet and it allows voice and video to be delivered to your customers via any IP network (wireline, cable, wireless, etc). You know that over time, this is going to disrupt your business. What do you do? Do you invest in this new technology and drive it into the market, hastening the decline of your monopoly protected business model or do you do everything you can to slow down the advance of this technology?
Sadly most executives make the latter choice. Most entrepreneurs make the former choice. The latter choice is about short term profit maximation but can, and often does, lead to the demise of the business in the long term. The latter choice is about survivability even though it will almost surely lead to a less profitable business in the future. Tough choice. But to me its an easy choice if your goal is long term survival.
One of the reasons entrepreneurs make these hard choices when executives don't is entrepreneurs think like owners. They have that survival instinct in their gut. They don't want their baby to die. Executives are hired guns. They are focused on maximing the success of the business (and their compensation) over a short period that they will in the corner office. They have no incentive to think about what happens in 20 years or 50 years. They know they won't be around. And so the company isn't around either.
So when you construct your business model and create the culture of your business, emphasize sustainability over profit maximization in everything you create and do. This does not mean that you don't need to make a profit. Profits are the essence of survivability. You can't and won't survive without profits. They are everything when it comes to sustainability. But just because you need to make a profit doesn't mean you need to maximize it. Balancing the need for a profit with the need to sustain the business is the art of what you must do as the leader of a business. Do both and you win.
Our project in this course is to create a sustainable business model canvas. If you are not familiar with the Business Model Canvas watch this video:
You will either have a business or you will invent a business and then you will map out your Business Model Canvas with the goal of sustainability as you go. You can do this by yourself or in teams. It doesn't matter at all. The goal is to do this project and learn by doing.
The thing I want you to focus on the most is the decisions you make as you fill out the canvas and which ones you were forced to compromise on some goal in order to maximize the sustainability of the business. Those are the magic decisions and the ones we want to document and discuss as we go through this course.
Good luck. Hopefully I will see you at 6pm eastern today in Google Hangouts.
Next up on our guest posts on the subject of The Management Team is AVC community regular JLM. For those that don't know, JLM runs a public company and before that built and sold a large real estate operation. He's also written one of the best guest posts ever on AVC. With that intro, here's what JLM has to say on the topic. I love the way he ends the post.
Congratulations, you have built a prototype. Got it to work. Debugged it. Even sold a few copies. Have some real customers. Now you are ready to scale up and make some real money.
You have crossed that Rubicon from having an idea to having a product and customers. Now you have to build an organization, a real company, to manage the entire process. Or your fledging little company has to evolve from crawl to walk to run.
You may look yourself in the mirror and say — “Well, I know a lot about my product, even its market and competitors but what the heck do I really know about building a company?” Can I do this?
The simple and truthful answer is “Yes, you can!” If you don’t think so, here are some tips to take you from the garage to the executive suite.
Bad news — your generation did not invent sex. It does not have to invent the crafting of companies either. Someone else has also done this before.
Create a clever and insightful graphical representation of the business model which will become your company.
Identify who the customers are and why they will pay money for your product. This is the revenue side of the model.
Identify the elements which must be incorporated into your product to create it. This is the expense side of the model.
Identify all the management functions which are necessary to transform the ingredients into the product and to educate the customers and to make the sale and to manage the money.
Identify the competitive forces that are lurking in the darkness wanting to destroy you — the ones that are real and the imaginary ones.
Make a drawing of all of this on a single very large piece of paper and then marvel at what you have done. Do it about ten times until you have perfected it. It keeps getting better each time.
This is the company you will have to create. The one that can operate this business model. The one which can deliver your product to the marketplace and make a buck in the process.
Make an organization chart which shows each of the functions that are necessary to operate the business model.
Make it a functional chart and don’t worry that it turns out very close to what every company ever created looks like. That is good. Remember, you did not invent sex.
Identify the functions which are “essential” and those which are “nice to have”.
Now identify what you can afford and what you can stretch to afford and those which are simply out of reach for the time being.
You have now identified your immediate, short term and long term organizational imperatives.
Take the business model and the organization chart and color code it to identify your own personal strengths and weaknesses. If you have a co-founder, put his up there also. Now you have identified those elements of leadership and management that you can provide and those you will have to hire from the outside. Be tough on yourselves; don’t undertake a task you hate just for the ego enrichment of it all.
Be prepared to hire people who are fabulous in their fields. Hire a Chief Financial Officer you cannot possibly afford and tell him he is the “financial conscience of the company”. Meet with him weekly and never miss a meeting.
Now take the business model and the color coded organization chart and create a schedule of how you will build the organization. Which functions will be added first and why? The business model will tell you what and the color coded organization chart will tell you who and the schedule will tell you when.
That is really all there is to it but you will want to consider the following considerations:
It will not be perfect out of the chute. You will do some stuff that does not work. Just re-engage and do it over. It’s going to be OK. Really punish yourself — just kidding. Learn to laugh at yourself.
Understand that everything in life is iterative. You do something. Get better at it. Get better at it some more and one day you laugh to remember how naïve you were when you started. Ever learn to ski or snowboard?
Do the formulaic and fundamental stuff and get it done but only do what you really believe.
Vision, Mission & Values
Vision — big dreams and little dreams all cost the same, so go with the big ones so that if you only accomplish fifty percent, it will still make your Momma proud.
Mission — simple, direct and jettison every extra word. The mission of the Infantry — “Find ‘em. Fix ‘em. Kill ‘em.”
Values — sweat this one because you will have to live this one. If you are going to take risks and run with the bulls, this is where you let everyone know. Don’t be afraid to say that “frugal” is a value. I like frugal.
Every new employee hears the values part of the company from you and only you. Wear a suit and a crisp white shirt and a tie and tie shoes. Do it in the first five minutes of their employment. They will never forget that. Don’t discuss them, tell them. Difference between a tattoo and magic marker.
Job descriptions — don’t hold out for a Pulitzer but put some thought into it.
Copy the absolute best exemplars you can find out there. They are out there. Be a copy cat. Read Drucker.
Make all your decisions about equity upfront and don’t be afraid to say that you have to “earn” it. Understand that equity is an element of compensation and sometimes it is not even in the top three.
A good comp plan includes:
Short term incentives (measurable performance based bonus);
Long term incentives (equity); and,
Something special (work from Colorado two weeks per year).
Develop a philosophy of management. Write it down. Try it out on some folks whose wisdom you admire. Put it to work. Live it.
Get a mentor, a rabbi, a gray haired eminence who is willing to work with you. Golfers get swing coaches but great swing coaches work on the golfer’s head as much as his back swing. Get a professional coach.
Do not be surprised that everyone in the company does not share your passion. That is the curse of being an entrepreneur — you see and care about things other people don’t even know exist. I would rather be a Captain of a rowboat than the second in command on the QE II.
Do not make changes, conduct experiments. Nobody can resist an experiment. Experiments that work well have a thousand fathers and mothers. It becomes their idea.
Brainstorm at least once a month. Honest to God, uninterrupted brainstorming. There are no bad ideas.
Learn to critique yourself. Learn to talk yourself down off the ledge. Be thoughtful. Take the lowest echelon of the company to lunch once a month. And then talk to them. Listen to them. Make one change they came up with and you will become a legend.
In any organization, you rarely receive power. You take power. You wield power. The most powerful people will things to be done they don’t order them to be done. That is real power.
Ooops, I see the hook. So I must go. Good luck. Remember — you can do it.