Posts from Business

Last week, in the thread on Herky Jerky Investing, the AVC community forked into an incredible discussion about 3D printing and our portfolio company Shapeways. If you click on this link, you'll see that the conversation just goes on and on and on. Clearly 3D printing is something that has captured the imagination of many members of the AVC community.

We are huge believers in the power of technology to feed creativity and new kinds of businesses. 3D printing in general and Shapeways in particular is exactly that kind of transformative technology. It is still not on the radar of most people. But that is rapidly changing. To get a sense of how fast things are changing in the world of 3D printing, check out this prezi that Shapeways published on their blog yesterday (hint: go into fullscreen mode, it's way better).

So you've built and launched your product. It is well received. You've acheived "product market fit" and it is time to get more users or customers. You've graduated from the "building product" stage and have entered the "building usage" phase. What does this mean for your team?

Well first and foremost, it means you are going to have start building your team. You will need more engineers because you will have to scale the product/service and you will need to continue to build it out, make it available on more devices, and listen to and adapt to the needs of the market. You will need to make sure your product team grows in lockstep with your engineering team and the demands of your users. You will need more customer support/community team members because more users means more users you must engage with and support. You will need to think about a marketing person because acquiring more users is called marketing. You will need to think about business development because you will want to talk with other companies for distribution and for product/service integration. And you may need to hire a sales team if your product has an enterprise/SAAS focus. Finally, you might think about staffing business operations/HR/finance/legal which is probably consuming a fair bit of your time.

The one/two/three/four/or five person team that got your product to market and achieved product market fit is going to grow to at least double that and you may find yourself with upwards of twenty people by the time you are moving out of the "building usage" phase.

Your first management issue is likely to be in engineering because that is where most companies of this stage have the vast majority of their headcount. Your technical co-founder or lead engineer will find themselves managing more than coding. Managing engineering means quite a few things. It means recruiting more engineers. This is a huge time sink but it has to be done. It means retaining engineers. And it occasionally means terminating engineers. But more than building and managing headcount, managing engineers mean making sure the right people are working on the right things, it means making sure the teams are performing well, it means resolving roadblocks. It means creating the right environment for your engineers to be successful.

And many technical co-founders and lead engineers aren't the kind of people who enjoy managing. They would rather be building the product than building the team. You have a few options at this point. You can help your lead engineer become a good manager. I strongly suggest that because everyone can and should become better at managing people. Even if your lead engineer doesn't become your VP Engineering in the long run, this will have been a good investment. But you should also be actively discussing the long term management roadmap in engineering with your lead engineer and if it makes sense, you may have to bring in a VP Engineering who is a great manager and move your technical co-founder or lead engineer into a more technical role. That is often the CTO role.

The other management challenge at this stage is likely to be your own. If you go back to that second paragraph, you will see that many of the hires that are made in the "building usage" stage are going to report directly to the founder/CEO. The additional product hires may report to you because it is likely that you are running product as well. The community team may report to you. And who is leading that team? The business development person, the marketing person, the admin/finance/HR/legal person, and probably all the sales people are likely reporting to you. Have you ever had ten or twelve reports? It is not fun.

A founder/CEO in a management crisis at this stage of the company is a very common thing. In some ways it is unavoidable. None of the teams, other than possibly engineering, is large enough to have its own manager. And so the founder/CEO is mangaing the rest of the business. The best thing you can do in this situation is find other members of the team who have management talent or inclination and invest in their ability to help you manage the team. These is your bench so invest in it and let it help you. During this phase you will find your leaders for the next phase. Just because you have a flat structure and a lean organization doesn't mean you can't be investing in management.

Investing in management means building communication systems, business processes, feedback, and routines that let you scale the business and team as efficiently as possible. I strongly suggest that founder/CEOs at the "building usage" stage start working with coaches. CEO coaches can help you build your own management skills and can help you think about how to build management skills and processes on your team as well. If you have talented managers on your team that you want to invest in, offer them coaches as well.

The "building product" stage is all about individual contributors. And the "building usage" stage continues to be largely about individual contributors. But management starts to creep into the equation at this point. Strong individual contributors are often not natural managers. Some can make the transition. Some can't. And some may not even want to try. This is a very difficult and painful process and a huge management challenge for the founder/CEO.

Next week we will talk about the "building the company" phase when management starts taking a front seat to everything else.

Mark Suster has a great post on this topic. In typical Mark fashion, it is long, with a lot of detail and substance. I highly recommend all entrepreneurs take the time to read it end to end.

For those who won't take the time to read it end to end, I'll summarize it.

Many high growth companies can be profitable. They have enough revenue to cover their essential costs and could easily decide to show a profitable income statement. But they don't make that choice. Instead they invest heavily in the business with the expectations that those investments will produce more revenue (by hiring salespeople), or additional products (by hiring engineers and product managers), or additional geographies (by hiring an international team), or any number of other value enhancing aspects of the business. The result of that decision is that the business loses money or simply breaks even (I prefer the latter approach).

There was a discussion of profits (or the lack of them) in the comments to the IPO Market blog post I wrote last week. A number of commenters pointed out that many web companies lack profits. I don't think that is actually true (certainly not for many that have gone public), but it is true that most, if not all, web companies are not optimizing for profits this year or next year. They are optimizing for the ultimate size of their businesss and the total amount of cash flow they can ultimately expect to generate when the business gets to maturity.

This is tricky stuff. If you are going to take all of your potential profits and reinvest them in the businesss in search of higher growth and greater profits in the future, you had better be right about those investments. And it is often hard for investors to see how those investments are going to pay off, so at times you can be penalized for making those choices. Right now the public markets seem to be paying companies more for long term growth than for near term profits, so it seems that public market investors (and VCs) are aligned in this respect. But that is not always the case. Markets are fickle. But the best entrepreneurs are focused on the long term vision and will invest in their businesses without paying too much mind to what investors want at any point in time.

In the comments to last week's Burn Rate post, I was asked to share some burn rates from our portfolio. I can't do that. But an alternative suggestion was to write a post suggesting some reasonable burn rates at different stages. I can do that and so that's the topic of today's post.

The following applies to software based businesses, and most particularly web and mobile software businesses. It does not apply to hardware, life sciences, and energy startups. It is also focused on startups in the US. It costs less to employ teams in many other parts of the world.

Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage. Most MVPs can be built by a team of three or four engineers, a product manager, and a designer. That's about $50k/month when you add in rent and other costs. I've seen teams take that number a bit higher, like to $75k/month. But once you get into that range, you are starting to burn cash faster than you should in this stage.

Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. This is the stage after release, when you are focused in iterating the product, scaling the system for more users, and marketing the product to new users. This can be done by the same team that built the product with a few more engineers, a community manager, and maybe a few more dollars for this and that.

Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. You start to hire a management team, a revenue focused team, and some finance people. This is the time when you are investing in the team that will help you bring in revenues and eventually profits. I would recommend keeping the burn below $250k per month at this stage.

A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. That is not the number you pay an employee. That is the "fully burdended" cost of a person including rent and other related costs. So if you use that mutiplier, my suggested team sizes are 5, 10, and 25 respectively for the three development stages listed above.

Once you get the business profitable, you can scale the team larger and larger to meet the needs of the business. I don't think of that kind of expense as "burn rate", I think of it as "scaling the team." I believe you want to use a bottoms up budgeting process to determine your headcount needs at this stage of the business.

One final caveat – there are outliers. Twitter had a higher burn rate than I am recommending during the second stage due to the massive scaling costs they encountered. And Facebook had a higher burn rate during the building the business stage due to the size of the revenue team that they assembled and other needs of the business. There are some business opportunities that are large enough that they can justify (and fund) larger burn rates. The mistake we all make is assuming that many of our companies are outliers. There are very few companies that can justify a million dollar/month burn rate or larger. There are many more that thought they could and are no longer around.

I came to writing relatively late in life. Of course I wrote for work and during school. But I always saw writing as a chore and did not feel that I was particularly good at it. I went to a mediocre high school and then to engineering school where writing was technical, not creative. We wrote in business school, but I don't recall a lot of effort being put into making us better writers. And for almost two decades in venture capital, writing meant memos and quarterly reports and not much more.

Then, at age 42, I started blogging. And I've been writing daily ever since. Something like 5,600 blog posts have been entered into my Typepad CMS. Almost all of them by me. I'm getting close to Malcolm Gladwell's 10,000 hours. My writing has improved immeasurably. But more importantly, I have learned to love writing. It's creative. It's a puzzle. How do I tell the story? How do I get my point across? How do I do it crisply and clearly? How do I end it on a strong note?

I've been thinking about this because my son, who is in high school, has been working hard on his writing skills. And my daughter, who is in college, has shared a few of her papers with me recently. My daughter's writing has improved so much in the past few years. She writes so beautifully now, with poise and confidence. And my oldest daughter writes in her journal every day, keeping a private record of her life. My son is still working to find his voice, his style, his flow. I've noticed that the high school my children go to/went to really emphasizes writing and communication skills. I think that's great. I wish I had that kind of high school education. Better late than never.

But I still struggle to help my children with their written work. I find it easy to help with Math and Science homework. I know how to ask them the questions that lead to the insights that help them answer the questions themselves. But when I read a draft paper that isn't the best they can do, I struggle to help them. I certainly don't want to edit the paper. I want them to edit it. But it's hard to find the words, the strategies, and the ways to inspire them to improve it. I've noticed that the best english and history teachers usually ask their students to hand in a draft, which they mark up, and then the students are asked to write a final version. I think that's a great way to go. I guess I suffer from never having had an editor or an editor's job. I'm just a self taught writer.

Communication skills are so important in life. The investment I've made in my communication skills over the past eight years is paying huge dividends for me now. I want to help my kids make the same investment, just much earlier in life. I know it will come in handy and I know it will be a great source of pleasure for them thoughout their life.

When I was in business school 25 years ago, I don't recall the term sustainability used. Maybe it was, but it certainly didn't register in my brain. The mantras that I recall were return on investment, shareholder value, revenue growth, and driving efficiencies in the business.

But as I look at many of the challenges facing businesses today, it seems to me that the focus on performance and efficiency often comes at the cost of sustainability. This talk by Clay Christensen really drives that point home. The recent history of the steel industry in the US is a case study in managers doing everything they were taught in business school and in the end they bankrupt the business.

Going back to business school, they teach you the value of a business is equal to the present value of future cash flows. If the company is likely to stay in business forever, then the value is most likely way higher than a business that is going to be out of business in a decade. The present value of a hundred years of cash flow is likely to be larger than the present value of  ten years of cash flow.

And sustainability is all about figuring out how to be in business forever. It is about business models that are win/win and lead to happy long term customer and supplier relationships. It is about avoiding the temptation to overeach. It is about avoiding the temptation to mazimize near term profits at the expense of long term health. It is about adapting the business to changing market dynamics. It is about building a team and a culture that can survive the loss of the leader and keep going. And it is about many more things like this.

I am tempted to develop a course on this topic. I think we need a lot more of this type of thinking in business. It seems in such short supply these days.

We have a portfolio company that will remain nameless that does something I want to call out as super awesome. Every board meeting, as homework after the meeting, they ask each board member to fill out a simple Google Form with two questions; three things we are doing well and three things we need to do better. They've been doing that every board meeting that I've been to.

They use this information as part of their continuous feedback loop to improve their management of the business and in turn improve the business. Based on their progress since our investment, I'd say it works pretty well.

This is one example of a larger theme I am noticing in our portfolio and the startup world at large. Companies are using simple web tools to get continuous feedback on their performance. They are using this kind of approach to do performance reviews of everyone in the organization, they are using this kind of approach to get feedback from their customers, and they are using this kind of approach to get feedback from their Board, investors, and advisors.

This makes a ton of sense. Startups are rapidly changing systems. If you use an annual review cycle, you aren't getting feedback at the same pace that you need to adapt and change the business. Doing this kind of thing continuously matches the frequency of the feedback loop with the frequency of the business.

I've written in the past about continuous deployment and how I have seen that work really well at some of our portfolio companies. Continuous feedback leverages many of the same principals and has many of the same advantages. If you haven't tried this approach, you might want to. From what I've seen, it works.

We got so many ideas for this Business Arcanery series on MBA Mondays that I'm not going to do it as a series. I am going to do one of these every month. There is enough business arcanery out there that I could do a years worth of weekly posts without running out of material.

We'll start with the term "going concern." What the hell is a going concern?

From InvestorWords.com, "going concern" is:

The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets. For this to happen, the company must be able to generate and/or raise enough resources to stay operational.

Going Concern is an accounting term that makes its way into business jargon because it captures an important concept – "will the business be around for the long term?" A going concern is a business that has the cash and other resources to sustain itself. It can also be a business that has very little cash and assets but has strong and repeatable cash flow.

Accountants are required to assess whether a business is a going concern as part of issuing an opinion in an audit of a company's financial statements. I believe (but may be mistaken about this) that the business must have enough cash on hand to sustain lossses for at least the next twelve months to be considered a "going concern."

Many of our portfolio companies are not going concerns. Most startups are not going concerns. That explains the bags under most entrepreneurs' eyes. Startups are often operating at the edge, with the hope that customers or investors  (or both) will come through and keep them operating.

There is no shame in failing to obtain a going concern opinion, at least in my eyes. We work with such companies all the time. I suspect every great company wasn't one before they became one.

But it is important to understand this concept. And when you are doing business with a company, it is helpful to understand whether they are a going concern or not. If they are not, make sure to get paid quickly because they might not be around much longer. And if your company is not a going concern, you should expect vendors to be more antsy about getting paid because they are doing the same calculus that you are.

The purpose of this series on Business Arcanery is to decode business code words. Going Concern decodes into "are you going to be in business long enough to pay me?"

I'm going to do a series on Business Arcanery. I don't even know if arcanery is a word, but I like it so we are going to use it as a name for this series. It is about arcane words that are used in business but regular people have no idea what they mean. We are going to decode the code words business people use.

I have a few words/phrases lined up like:

warrant coverage

restructuring

a collar trade

cultural fit

Please add others that you would classify as business arcanery in the comments. This should be a fun series and I am going to need your help with ideas.