Good lawyers get up close and personal with family businesses

David Simpson knows all too well the tough battles that need to be fought to successfully transition a family business. He has worked with many of Canada’s leading family businesses and he has worked in one himself, with his brother. He now teaches the next generation of entrepreneurs at the Richard Ivey School of Business MBA program in London, Ont.

He also knows the important role played by lawyers.

“When talking about transition success, your long-time lawyer may not let you in on a little secret,” says the founder of the Ivey Business Families Centre. “The lawyer may not ask if you realize that the legal documentation of your transition or success strategy is the easiest part of the succession process.”

Is Mr. Simpson implying that family business lawyers have it easy? Not at all.

A family firm lawyer will know the law, but a good lawyer will also get to know the family very intimately and how the members interact. This close and frequently personal relationship brings its own set of challenges, often requiring a lawyer to step outside of the legal box. The lawyer is like a ring master, advising the owner on when to call in experts to deal with various non-legal family issues encountered when running a business and balancing the long-term succession planning.

“The toughest part of transition is asking three key questions, which have nothing to do with the law or the business itself, but they will challenge every family business,” Mr. Simpson says.

His questions are as follows:

• Does your family speak the same language? A successful transition requires a common frame of reference, and even the simplest everyday terms such as “soon” – as in we’ll meet soon on that – or “long term” can mean different things to each family member. A daughter might ask to run a philanthropy event, but when the founder says ‘we can do it later,’ it means next year. Meanwhile, the daughter thinks her father means next month and conflict arises. It is critically important to meet together as a family to work out common frames of reference to avoid misinterpretations within the family, which can then spill over and confuse staff, customers and other stakeholders.  
• Are the children dependent on the business? While children are growing up, they are dependent on their parents. When the business relationship is added to the family dynamic, it can be emotionally difficult for adult children. They have to be at peace with working for a parent while competing with their parents’ legacy goals for the other “baby” in the family: the family business. Children need to realize that their livelihood may not come from the family business if their skills are not a good fit with the requirements of the industry. Author and family business adviser David Bork said it best: “The purpose of family is to raise responsible adults, who have high self-esteem and can function independently in the world – acceptance is unconditional.” Now compare that unconditional love with Mr. Bork’s description of the uncompromising world of business: “The purpose of business is to generate profits! Acceptance is based on skills, competence, the ability to produce and perform.”
• Have you discussed personal goals within the family? It is critical for the leader who is passing the torch to not snare the next generation in a trap. There can often be a conflict between the founder and his vision of how the legacy will continue and the next generation’s goals. For example, the younger generation might want to move marketing efforts online and use Google Adwords, Facebook and Twitter. The founder says, “What’s this Facebook – it’s for teenagers?” or “I don’t want to tweet,” and puts a kibosh on the plan. To pass the torch to a new generation, a founder needs to grant full freedom. Great families honour the founding entrepreneurs and understand stewardship of family assets, but they are also mindful that success lies in allowing the next generation to remain entrepreneurs. This means providing the new leadership with the fullest autonomy to take the business in new directions.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

Is It Ever OK for Founders to Sell Off Their Company Shares?

Image credit: Illustration © Jakob Hinrichs

One of the strangest things about being a startup founder is that I'm running a multimillion-dollar company but earning a salary far below my market value. My company may be worth a lot, but the vast majority of my personal net worth is tied up in an illiquid asset (company stock), which is no help to me as a mom with two small kids, a mortgage, medical bills and day-to-day expenses.

Five years in and easily $500,000 below what should have been my accumulated earnings since 2009, I'm left scratching my head. I hear murmurings that some founders sell personal shares long before an exit. Should I do the same? Should you if you're in this boat?

A quick survey of other startup founders revealed that they believe it's OK to sell a tiny percentage of stock (in the single digits) once a company's valuation reaches $10 million.

The Valuation Game

Figuring out how much your company is worth is an art and a science.

The art: The story you pitch to investors matters. Spend time researching and crafting a pitch that represents the company's long-term greatest revenue or exit potential, not its current situation.

The science: While not an exact calculation, look at the valuations of comparable companies based on income and market presence. If you're an early-stage startup with no profits, base your valuation on traction metrics such as how many new customers you have, how many come back and conversion ratios, then apply them to a total future market opportunity.

What you want to avoid is the obvious cash grab. People grimaced when Foursquare founders Dennis Crowley and Naveen Selvadurai took home $4.6 million--23 percent--of their $20 million Series B funding in 2010.

Most of the founders I spoke with agree that you should try to sell to inside investors first. "It gives you a cleaner cap table, and you can tell a better story around it; i.e., the insiders wanted to help you stay focused on the long term," says Jon Crawford of e-commerce platform Storenvy. He points out that if the people closest to you are pushing for a bigger slice of your stock holdings, it's a testament to just how valuable they think your company is.

Karl Jacob, startup founder and angel investor since the 1990s, has witnessed CEOs sleeping in their cars because they can't make their rent. "That's not good for anyone, including the investors, who need a CEO working long hours in top mental and physical form," he says. To ensure that you don't end up in this scenario, Jacob advises startup founders to pay close attention to their stockholder agreements upfront to make sure they can sell a small percentage without restriction.

I'm not sure if I'll take the plunge and sell some of my stock to ease my cash crunch, but it's nice to know that it's not necessarily viewed as a bad move.

Amanda Steinberg

Amanda Steinberg is CEO of DailyWorth, the professional woman's guide to business and money.

Choosing The Right Strategy When Communicating With Investors

Earlier this year, I wrote a post about the advantages of entrepreneurs having a strong communications plan for investors. The more engaged investors are in a venture the stronger and more beneficial the relationship can become. Of course every business and each investor is different. I have found that customizing my communications strategies to the unique wants of my investors and the needs of the company has been very effective. Here are a few strategies that I have used in the past.

First, you can’t go wrong with formal communications devices like written monthly reports. Monthly reports containing P&L information are a great way to inform investors about the status of your company and where funds are being allocated. This is especially helpful in entrepreneurial endeavors because investors can recommend course corrections if they see any “red flags” in the P&L report. They also might be able to suggest connections that can help your venture. This type of insight and guidance is invaluable when starting a company. One last thing to note regarding monthly reports is that they don’t need to be but so comprehensive. As I will discuss later, monthly reports should give a detailed snapshot of your company at that time. There are more effective ways to provide a holistic view of the status of a company.

(Photo credit: Wikipedia)

A second strategy that I have used is monthly conference call updates with investors. Some of the investors that I have worked with in the past prefer having the ability to ask questions about the report. I still provide written documents containing financial information but instead of just sending documents to read at their leisure, I review the report on a conference call. This approach adds a personal touch to the process. It shows engagement and the willingness to answer any tough questions from investors.  I also have found that starting a conversation with investors can be great for brainstorming ideas. We can share ideas and advice more freely than on email. Although I have used conference call updates frequently, one tactic that helps make the calls worthwhile is to create a script before so that I hit every point that I want to touch on.

A third strategy is in-person quarterly or annual meetings. This is probably the most effective communication strategy. Investors often expect that companies provide time for them to share their knowledge and provide advice because that is one of their responsibilities as an investor. When they have the opportunity to meet with you face-to-face and to see the operational side of the company, they have a better understanding of where improvements can be made or where successes are being had. I can recall a number of great experiences during in-person, collaborative meetings with investors because we have been able to brainstorm ideas and identify growth opportunities.

These are just a few different strategies that have worked well for me. The key to any communications strategy in business is honesty. Investors are genuinely interested in the success of their ventures so being honest about the status of the company is crucial to its survival.

As I mentioned earlier, each company and each investor is different. What are some of the best communications strategies you have used?

 
 Patrick Hull 

Three ways to make your business more attractive to investors

 

Before Wehuns Tan caught the attention of a major venture capital firm, he and his team had big plans.

As CEO of Toronto-based Wishabi, Mr. Tan saw a pent-up demand for a digital flyer experience on mobile. He wanted to give consumers a new way to shop and save, and also give retailers a different way to connect with their customers every week.

In September, 2013, Mr. Tan secured $15-million in a Series B financing from Insight Ventures, a private equity and venture capital firm who has invested in similar technology companies like Tumblr and Flipboard. The funding gave the founding team of graduates from the University of Waterloo the capital for rapid growth.

In its early stages, digitizing flyers for mobile presented a challenge to Wishabi, but with the right investment, the company rolled out Flipp, an app that brought together the richness of a digital flyer but on a mobile device, such as the iPhone and iPad. Retailers could personalize flyers for their customers, and in turn, Wishabi sends retailers data on consumer engagement and interaction on each flyer specific data on their customers’ purchasing behaviour which makes it possible to boost client interest.

“Consumers are using digital at an accelerated rate and the potential in the flyer industry is immense. We are just getting started,” said Mr. Tan in an interview. He added that their next move is further expansion in the U.S.

Although not every tech startup will be as fortunate as Wishabi, there’s good news: if an equity investor believes the management team is capable of delivering the business potential they have outlined, they will invest in the business. In tech equity, when you win, you win big. You only need one of your investments to take off to cover the investment costs sunk into the other firms.

So, what are the key ingredients to attract and secure funding from a prestigious private equity firm? Here are three main pillars that worked for Wishabi:

1. Get comfortable with growth: For those who do not own a company, it can come as a surprise that many owners are not comfortable with growth and once they hit a certain plateau, they prefer stability. There are many reasons for owner’s aversion to growth but as a company scales up, it becomes unstable and uses up more cash than previously; this increased risk brings stress.

For tech companies, founders generally anticipate the need for expansion, and recognize they will need to move from small to larger equity investors within a short time frame. Founders may not like the risk and added pressure, but they plan rapid expansion, as equity investors recognize the early winners gain the biggest market share. Wishabi knew how they would use the funding: to accelerate growth with a focus on bringing new technology to market and expansion in the U.S. Most importantly, they were ready to execute.

2. Disrupt the industry: Spell out exactly how your company will transform your industry. Wishabi took the print flyer and brought it to life. Then they established a massive distribution network through their media partners so that their content now reaches over 200 million consumers across North America. With Flipp, the weekly shopping experience was recreated on mobile – a platform most consumers already are using. Knowledge is power, said Frances Bacon, and Wishabi knew to give the gift of information to retailers, helping them understand the impact of digital flyers on their business.

3. Build team into the DNA: Private equity investors seek a competent management team as they personally do not want to do the day-to-day operations. Silicon Valley is full of start-up wannabees and investors filter for the cohesive team who will stay in together to overcome problems.

Wishabi had the advantage of growing organically. Since the founding partners of Wishabi are all graduates from the University of Waterloo, they had time to cement their roles and work together. The team believes in long-term success over short term wins. This is not a group of individual sprinters; rather they’re a team roped together in a grueling climb to the top, spurring each other on to a common destination.

Jacoline Loewen is a director at Crosbie & Company, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

8 Mistakes Entrepreneurs Make When Pitching To Investors

Rick Frasch,  

 

One of my grown children called me the other day to ask if I knew of anyone who could help review a business plan for a startup technology company. Rather than offer a referral to someone else, I thought it would be easier to provide some fatherly advice and craft the following list of 8 mistakes that entrepreneurs often make when pitching to investors. During the last 15 years living and working in Silicon Valley, I have been a partner in a technology venture capital fund and most recently an angel investor. Before that I was finance and M&A lawyer for 20 years. So I thought my “fatherly advice” would be well received. Imagine my surprise when I received this email the following day: “Dad, I asked you to introduce me to someone who knows something about startups, not give me advice!”

 

Rather than waste my carefully considered advice, I offer it instead to you:

1. The Elevator Pitch Is Longer Than One Minute 
 If your “elevator pitch” is longer than one minute, you will have a very difficult time raising money because you will not have enough time to make a compelling investment case. This opportunity will likely arise in an elevator, at a cocktail party, or ever so carefully wedged between small talk with friends and their acquaintances. So you must make the pitch short and to the point, and make sure it showcases your knowledge.

The only way to accomplish all of the above is to have a well-crafted pitch that takes no longer than a minute to deliver in an unhurried — but practiced — manner. Any longer and the potential investor will most likely have moved on either physically or mentally. Needless to say, this is not easy. You must be able to condense all of the information in your PowerPoint presentation (see 2 below) and business plan (see 3 below) into a brief summary.

2. The PowerPoint Presentation (aka “the Deck”) Is Too Long 
Professional investors, such as venture capitalists and serious angel investors, do not have long attention spans. The reason is not necessarily that they have attention deficit disorders but that they need to consider, evaluate, and choose among so many startup investment proposals that 30 minutes of uninterrupted time is all you can reasonably expect to have to present your proposal.

If you have been successful in the elevator pitch, you must be able to present a slide presentation in about 15 minutes, then leave time to answer questions within another 15 minutes (see 8 below). Although you may be granted more time, you must also prepare for the possibility of less time, so you need to ensure you get your main business points across before the investor conveniently excuses himself due to a “prior commitment.” Bottom line: 15 minutes of presentation means no more than 12 to 15 slides. 

3. Not Having a Factually Supported, Well-Written Executive Summary 
At the end of the day, the key to raising money is to have a carefully thought-out summary of the investment proposal (aka “the executive summary” or, the longer form, “business plan”).

When raising money, you need to interest VCs or angel investors with the elevator speech and PowerPoint presentation, but you only close on the money after the investor reviews, questions, and buys in to your entire business plan. So you must spend a significant amount of time drafting a coherent and persuasive executive summary or business plan that sets forth, among other things:

• the problem that the startup will be solving
• the size of the market the startup will be addressing
• a sustainable competitive advantage
• the expected revenues and costs of the startup that are supported by realistic and detailed assumptions and projections
• a description of the startup’s management team
• the exit for the investors (see 4 below)

The best elevator speech in the world will not result in any money unless you can deliver an analytical and believable business plan explaining how an investment in the startup will make its investors rich.

While there are a few experienced entrepreneurs out there who can do this in an evening, you should plan to spend weeks, if not months, perfecting a business plan — otherwise the time spent on the elevator speech and PowerPoint will have been wasted.

4. Overlooking a Realistic Exit Strategy for Investors 
An entrepreneur’s thinking process is often to make the world a better place, create a long-term business that will keep him or her engaged and richly employed, and bequeath a legacy that will take care of the entrepreneur’s children and their children. In contrast, the investor’s thinking process is usually “How do I make a lot of money in a short to moderate time frame (3 to 7 years)?” Guess whose thinking process controls whether the entrepreneur closes on an investment?

Therefore, you must ensure your PowerPoint presentation and business plan address how the investor will make money (aka “the exit”) from investing in your business proposal. Many entrepreneurs never address this basic need of investors. To avoid this oversight, you must be prepared to answer an investor’s questions about how the investment will be monetized through, among other things, licensing agreements with larger companies or a strategic sale of itself to a larger company, not just an IPO scenario in which you see yourself becoming CEO of a Fortune 500 company (something that almost never happens).

5. Asking for a Non-Disclosure Agreement 
Almost all entrepreneurs are convinced their business idea will result in enormous wealth and, therefore, is at risk of being stolen by an unscrupulous investor. So their first thought is to have the potential investor sign a “bulletproof” non-disclosure agreement (“NDA”). But for many professional investors, such a request is a non-starter, meaning there is no longer any reason to see the 12-slide PowerPoint or incredibly detailed business plan.

Unless the entrepreneur has a business idea on the order of “Son of Google,” most professional investors, including both VCs and serious angel investors, will not sign an NDA because they know that there is a strong likelihood that they will have seen the idea before and will likely see it many more times in the future. Consequently, they cannot sign a document that will surely lead them to a lawsuit in the future from either this particular entrepreneur or another one.

6. Submitting Investment Proposals “Over the Transom”
Raising money is all about building credibility with investors. No investor wants to invest in a deal that nobody else is interested in pursuing. Investors are very herd-like and often need the validation of others investing with them before they will “pull the trigger.”

Given the herd mentality of investors, you should never attempt to raise money by purchasing or collating a mailing list of VC firms or angel investor groups and then just mailing a proposal in the hopes someone will contact you to set up a meeting.

This is not to say that there are not many entrepreneurs who, in fact, do mass mailings. My point is that such an approach is likely to be D.O.A. Venture capitalists and serious angel investors are often deluged with unsolicited proposals, which sit in slush piles waiting to be opened. The only real reason they might be opened is because a friend or professional acquaintance has alerted the investor that the proposal deserves a read. In other words, someone has acted as a reference or provided a recommendation, preferably before the proposal has been delivered. Only then do you have a serious chance at receiving that special phone call.

7. Discussing Valuation Too Early On in the Negotiations 
The courtship ritual of most couples does not start with a discussion of how much each person will be worth seven years from their first date, and how it will be divided between them if and when they part. And neither should an investment presentation begin with a similar discussion.

The reason an entrepreneur often seeks an investment from VCs and experienced angel investors is to get a reliable indication of the value of their startup, which is what experienced investors do for a living. So there is no real point in preempting the process by insulting the VC or angel investor with an unwarranted starting point for a valuation.

As some would say, you should just “let nature takes it course” and wait for the investor to begin the discussion of valuation and pricing with a term sheet. Any other approach risks an early termination of negotiations.

8. Failure to Listen 
You need to “leave your pride at the door” when making an investment presentation and be open to the investors’ suggestions. The fundraising process can be grueling because experienced investors tend to ask numerous questions that likely have been posed to you before, questions that test your business model and technology platform so all parties might realize the best way of structuring an investment.

Most of the time, the questions are offered in the spirit of openness to justify the investment of such a large sum of money. But rather than viewing the questioning process as an exploration of alternatives by an investor who is obviously interested in the startup (otherwise why else would the investor have met with the entrepreneur in the first place?), some people reactively resist suggestions to consider changes to their business model or technology platform. Such a reaction is likely to cause a thoughtful investor to move on. You should instead take the time to consider the investor’s questions and suggestions, and view the process as useful insight into his or her thinking.

I end with number 8 because such a “failure to listen” was the chief mistake made by my own child. But I guess my own mistake was forgetting that children never listen to their parents either.

A Great CEO Is The Chief Experience Officer

The title “Chief Executive Officer” doesn't really say very much about what the person is supposed to do. Yes, they're an officer. Got that. They're an “executive” — got that too, whatever that means. And of all the executive officers, they're the “chief”. Sure. But, I'd still argue that overall, the title doesn't really work anymore. It doesn't convey anything. CFOs are about finance. CMOs are about marketing. CIOs are about information. But, a CEO? They're about being an executive?

Instead, I propose that the CEO should be the Chief Experience Officer.
If the CEO can make the following set of experiences amazing, she will have created an amazing company — and done her job.

1. Product Experience: What is the experience like using the product and getting value from it? Does it solve the problem simply? Does it make users happy, productive and hopeful when they're using it, or does it make them frustrated, angry, agitated and depressed?

2. Purchasing Experience: What is it like to go through the sales process and buy the product? Was it easy to figure out whether the product was the right fit? Was the pricing straight-forward? Was the buying process smooth without unnecessary steps and complexity?

3. Brand Experience: What is it like to interact with the company's brand? Does talking about the company with others ignite passion? What kind of emotions does it evoke? When people see the logo online or offline, what's the visceral reaction?

4. Support Experience: What is it like to receive support from the company? Do people dread having to call in and get help? When they do make contact, do they feel like the company cares not just about appeasing and pleasing — but that the actual problem is addressed?

5. Exit Experience: What is it like to leave the company, return the product, or cancel the subscription and no longer be a customer?

Sometimes you can tell more about a company by how it treats customers on their way out, than on their way in.

6. Employee Experience: What's it like being recruited by the company? Working for the company? Being let go from the company? If you have a terrible employee experience, you will not attract the kinds of people that will make the customer experience amazing. It just doesn't work.

Notice that most of the above experiences are all about the customer. How does the customer experience the company? I think that's the primary set of experiences the CEO should worry about. The reason is simple, by improving the overall customer experience, everyone wins. Including the investors/shareholders (and yes, the CEO also needs to manage the shareholder experience too).

What do you think? Am I over-thinking the importance of the overall experience? Any lessons learned or tips on how to measure and improve the experience?

Posted by: 
Dharmesh Shah

Product > Strategy > Business Model

One of the mistakes I see entrepreneurs make is they move to business model before locking down strategy. The way I like to think about this is get the product right first, then lock down the strategy of the business, then figure out the business model.

Getting product right means finding product market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. That means different things in consumer, saas, infrastructure, hardware, etc, but in every case you must get to product market fit before thinking about anything else. And, I believe, moving to business model before finding product market fit can be the worst thing for your business.

Once you find product market fit and start thinking about business model, I suggest you take a step back and work with your team (and investors) to develop a crisp and well formed strategy for your business. Investors, at least good investors, are very helpful with this stage. If you watched the John Doerr interview I posted yesterday, you hear him talk about strategy a lot (Intel, Amazon, Google, etc). The best VCs are very strategic, have seen strategies that work and ones that don't, and can be a great partner to develop a straetgy with. This is one of my favorite things to do with entrepreneurs.

I remember back to the 2009 time period at Twitter. The service had most certainly found product market fit. And the team turned its attention to business model. There were all sorts of discussions of paid accounts, subscriptions, a data business, and many more ideas. At the same time, Ev Williams was articulating a strategy that had Twitter becoming the "an information network that people use to discover what they care about." And so the strategy required getting as many sources of information on to Twitter and as many users accessing it. It was all about network size. 

That strategy required a business model that kept the service free for everyone and open to all comers. That led to the promoted suite business model. Twitter executed product > strategy > business model very well.

We have also had many portfolio companies build revenue models that did not line up well with the strategic direction. And in some cases, the companies really did not have a well articulated strategic direction at all. That led to a lot of wasted energy building a team and a customer base that ultimately was not of value to the business. We have seen teams walk away from parts of their business because of such mistakes.

These kinds of mistakes are usually not fatal. Not finding product market fit is fatal. But going down the wrong path in terms of strategy and business model can be fixed. But it is painful, costly, dilutive, and sometimes can lead to a change in management.

So my advice is not to rush into business model without first finding product market fit and then taking the time to lock down on a crisp, clear, and smart strategy for your business. From there business model will flow quite naturally and you will be on your way to success

Fred Wilson is a VC and principal of Union Square Ventures.

16 Common Mistakes Young Startups Make

Are you working on a startup? If so, I hate to break it to you, but there's a good chance it will fail. In fact, recent research shows that 75% of startups fail (based on a study of 2,000 startups that received VC funding from 2004 to 2010). Odds are, you won't be a Brin, a Zuckerberg, a Systrom, a Karp or a Fake.

But hard as it may be, don't let that statistic discourage you. Some startups are destined for failure. Perhaps the team is working on a product that really isn't that great or useful. Maybe they're trying to tackle too many problems at once. Or maybe the co-founders have a poisonous relationship that will hinder the company's growth. Maybe they never thought about product-market fit. Whatever your company's "fatal flaw" may be, you can likely avoid it in your own venture if you take some advice from people who've gone through the early startup phase before. Lucky for you, time-strapped entrepreneur, we've gathered some tips from the pros to help you avoid some of the most common, game-ending mistakes committed by young startups. Check out the tips below from founders, CEOs and investors alike.

1. Forgoing Simplicity
"Building a product is like packing a suitcase: Plan out what you think you need. Then remove half." — Jonathan Wegener, Founder, Timehop and ExitStrategy

"Young founders tend to complicate things too much, from structuring partnership agreements, financing, leases, etc. This is not a place to be creative; keep it simple, follow the norms and be transparent so everyone is on the same page." — Jay Levy, Co-Founder, Zelkova Ventures and Uproot Wines 

2. Waiting Too Long to Launch

"The biggest mistake I see is companies waiting too long to release the product. It's easy to let the scope of what you're building get out of hand. But equally importantly most startups build much more than they truly need to, but this is often only realized in hindsight. Whether your product is working or not, looking back it's easy to see that you only really needed to build a small fraction of the stuff you built. Most features/options/buttons/settings/etc. simply aren't crucial to success or failure, and for an early stage startup that means they were wastes of time — you could have done 10x more with that same amount of time and resources." — Jonathan Wegener, Founder, Timehop and ExitStrategy

"Don't underestimate the importance of Minimum Viable Design. Your first product will likely be just a little bit ugly, and that's okay — it's part of getting to market quickly and testing your idea in front of live customers. But don't underestimate the importance of achieving a basic threshold of "this looks good (and reputable)." In my first company, people liked our product but were embarrassed to share it because the design and presentation was so poor. When we launched The Muse, the result was the opposite — nearly 25% of the people who visited our site shared it with someone else via social media!" — Kathryn Minshew, Founder/CEO, The Muse 

3. Hiring Poorly
"Make sure that new hires understand your rate of innovation. You are small and agile, which means you have a high rate of innovation and growth, and with that comes work! Often times, that work eventually goes beyond your job description. At a small company, employees need to wear many hats, and they need to be prepared to wear many hats. If you don't manage this expectation upon hiring, you will be managing employee issues six months down the line. Those issues will eat into your time, and time is money for a new CEO." — Kellee Khalil, Founder/CEO, Lover.ly

"Someone told me recently, 'Any time I'm talking to someone who doesn't work for me already, I'm evaluating if I should try and hire them.' Whether that's someone you want to hire tomorrow or someone you'd like to work with in five years depends on your company, but every entrepreneur should always be recruiting." — Ally Downey, Co-Founder, WeeSpring

"Some entrepreneurs think it’s a luxury to have accounting, finance, or other support functions, but it’s important not to be afraid of spending resources early on for administrative efficiency. If you don't have someone to do that for you, you'll end up spending all your time on things that aren't critical to growing your company." — Matt Salzberg, Founder and CEO, Blue Apron 

4. Not Embracing Agility
"If you sat down and wrote out a pros and cons list comparing your startup to your corporate competitors, you'd probably find the big gorilla's list of advantages more than daunting. But on your side of that chart should be words like 'nimble,' 'flexible,' 'speedy,' and 'free flowing.' Many entrepreneurs seem to approach their startup like they would a quest to win the Super Bowl, with very defined steps leading to a pre-conceived single, solitary end goal. This doesn't really work for a startup. While it's vital to have goals and a clear vision, to survive and thrive you'll have to keep an open mind and stay agile enough to follow the path where it leads." — Jeff Jackel, CEO, BuzzMob 

5. Guarding The "Big Idea"

 

 

"How many entrepreneurs' opening words are about how 'stealth' their project is, followed by a 10-page NDA to hear word one? I was totally guilty of this back in the day. For young entrepreneurs, especially non-technical founders like myself, it feels like our 'big idea' is all we have, and we want to guard it like a defenseless baby. We also want to believe that no one else out there in the world has thought of our little gem, and if they were to catch wind, everyone will pounce! Ha! First, whatever your idea is, rest assured it's been thought of before. Secondly, an idea is by no means a business ... it's everything that comes next that makes a business happen.

Execution. And no one else will execute the way you do. Third, you're going to need help and guidance from people who know more and have been there before, so you better get comfortable sharing your 'big idea.'" — Jeff Jackel, CEO, BuzzMob 

6. Losing Focus
“I think many startups have difficulty finding a focus. As an entrepreneur, there's a lot going on. You have countless decisions to make, and you have to keep moving quickly. Settling on a clear focus — your product, your audience, your strategy — is critical from day one. Of course, as you move forward, you must be willing to adapt. But remember to hold tight to that big idea as you go.” — Alexa von Tobel, Founder & CEO, LearnVest

"One thing I have learned building Grand St. is the value of intense focus. Trying to complete only a few things each week means doing an excellent job on all of them, whereas trying to do the 27 things I want to do usually results in mediocre or incomplete work. The same goes for the product itself — there's a laundry list of features we want to add, but keeping the experience simple and uncluttered makes us really focus on what our users really want." — Amanda Peyton, Co-Founder, Grand St.

"Founders of a young company will come up with hundreds of new ideas every day (I know my co-founders and I do). While most of these ideas are sure to be good ones, we’ve learned that we need to be thoughtful and selective about which to move forward with in order not to overwhelm ourselves and our employees. We all have limited time and resources, which is why we need to focus and prioritize." — Matt Salzberg, Founder and CEO, Blue Apron

"At times we have sat on ideas for months, before testing them and finding out that they are runaway successes. At other times, we have exhausted ourselves trying out 100 different things, when none of them work. I watched a great video with Barbara Corcoran, called "How to get more customers, step 1." What she describes is that many businesses, when they are looking for more customers, will try 100 different things, when they already have one thing that is working. As she puts it, this strategy leads to very few new customers and lots of exhaustion. She recommends that instead, founders look at what has been working and double or triple their efforts there." — Adda Birnir, Co-Founder, Skillcrush 

7. Assuming Virality
"A lot of new founders think, 'If I build it, they will come.' I have news for you: They're not coming and you're not going to 'go viral.' Services don't spontaneously go viral. High virality is almost always the product of early and deliberate product design decisions. Spend some serious time thinking about how and why people are going to discover and share what you're building." — Jeremy Fisher, CEO, Days and Wander 

8. Obsessing Over Funding

 

 

"I think a lot of young startups assume that fundraising is not only a necessary component of running a business but an important marker of success. We spent six months fundraising only to walk away once we had a term sheet in hand because we realized we were making enough money to sustain and grow the business on our own terms. Ultimately that felt like a much bigger marker of success than closing a round. If your business makes money, you may well be better off not fundraising, and in doing so, retain control and ownership of your business. And if your business doesn't make money (or have a solid plan as to how it will), then perhaps there are some bigger issues to tackle before you start pitching investors." — Claire Mazur, Co-Founder, Of a Kind

"Many young entrepreneurs think that raising VC money is a measure of success. There is a lot of money chasing bad ideas. The only thing that matters is building a viable, growing and profitable business." — Brian Garrett, Co-Founder, StyleSaint and Venture Capitalist 

9. Chasing Investors Instead of Befriending Investees
"A common mistake startups make in trying to meet investors is, counterintuitively, focusing too much on networking with actual investors. The best way to get a meeting with a VC is not by incessantly pursuing him or her, but rather by getting an intro from a founder that the VC has already invested in. Befriend funded entrepreneurs. Every VC will tell you that they will take meetings with 100% of the companies that their existing portfolio founders recommend. Don't spend all your energy emailing and LinkedIn-ing VCs; instead, get to know founders who have been funded and win them over because their stamp of approval is one of the most valuable data points for an investor." — Sam Teller, Managing Director, Launchpad LA 

10. Dwelling on Things
"A lot of new founders tend to over-optimize every single decision, which makes it difficult to actually move forward with anything. One of the most important lessons my co-founders and I have learned is that sometimes the best course of action is to make a call and just move forward. As a young company, nothing is ever perfect, but if you believe in an idea or strategy, you just need to move forward and manage the logistics and risks as you go." — Matt Salzberg, Founder and CEO, Blue Apron 

11. Getting Distracted By Feedback
"A startup is not a newly democratic nation state: Not every decision needs to be made by the collective. While we love getting ideas from our team and have seen some stellar product development and user experience decisions generate from brainstorming and having an open office environment, we try not to let everything come to a vote. We hire smart and capable people to come up with an idea and execute it: Not to have to balance the opinions and feedback of everyone, all the time." — Elizabeth Scherle, President & Co-Founder, Influenster

 "You will have a ton of people constantly sharing their feedback and opinions of your business with you. It's easy to get wrapped up in it and want to tweak things immediately. Keep in mind that people will give you feedback based off of their market knowledge and domain experience — it is your job to apply that knowledge to your company without losing sight of your vision." — Allison Beal, Co-Founder & CEO, StyleSaint 

12. Not Having the Right Co-Founder
"Starting a business is a lot like falling in love. At first, we tend to see the business and our partners at their best, full of promise, and can't conceive that they will ever be anything but their best. But as in any relationship, eventually their flaws and their failings are clearly exposed. What I have learned is that we need to do a thorough SWOT analysis not only on the market opportunity, but also on our partners. Some faults we can accommodate, but sometimes our partners' weaknesses in combination with our own constitute a deadly cocktail. A key aspect of our personal due diligence is then is assessing our partners, particularly learning how they react under stress." — Whitney Johnson, Co-Founder, Rose Park Advisors

"Your early partners, co-founders, investors and hires are crucial to get right. While the ideal partner balances you or brings skills to the table you don't have, the most important thing to look for is alignment of values. Do you fundamentally want similar things out of this endeavor? Are you willing to take more or less the same amount of risk? Are you comfortable with your prospective partner's ethics and moral decision-making? I've seen the last one in particular cause a lot of heartbreak in early-stage companies." — Kathryn Minshew, Founder/CEO, The Muse 

13. Trying to Win Over Everyone
"Among the biggest mistakes I made when fundraising early on was trying to turn every nonbeliever into a diehard fan, working to convince everyone who pushed back that they were wrong about Greatist and about the space. What I quickly learned was that it was more productive to find the investors who already believed, who were already my fans, and capitalize on the potential for them to become my biggest champions. I think a lot of new entrepreneurs face situations like this, and the quicker that realization comes, the easier the fundraising process can be." — Derek Flanzraich, Founder & CEO, Greatist 

14. Not Listening to Current (or Future) Customers

 

 

"Every time I sit down with a customer, I learn something. And usually, it's something that has a serious revenue-generating impact on my company. In Running Lean, Ash Maurya says that you know when you have spoken to enough customers when you can start to predict what they will say. I have done dozens of interviews with customers, and it's incredible. There are certain phrases that everyone uses. That stuff is business gold (or platinum). Every time we have been unsure about a product or direction and we have taken the time to talk to users, we have always walked away with the insight we needed to move forward. But keeping up that practice up is hard! Sometimes it feels so much easier just to sit at your desk, banging your head against a wall, trying to figure things out on your own." — Adda Birnir, Co-Founder, Skillcrush

"One of the common mistakes young startups make is developing a product without enough input. As much as you're executing on your vision and keeping things under wraps until launch, engaging potential customers early — even when it's just a twinkle in the eye—- can help put you on the right path. It also helps validate the demand for your product. Others can help provide feedback on your differentiation or competition. The fact of the matter is, as a startup, you're extremely strapped for time and resources. So, it's that much more important to try to get close to the target around product-market fit and iterate from there. At Kiwi Crate, we spent quite a bit of time working with parents and kids to develop our product. Even today, we have kids come into our offices at least once a week to help test what we're doing. It's been invaluable for us." — Sandra Oh Lin, Founder/CEO, Kiwi Crate

"Young startups can fall so deeply in love with their idea, they aren't open to tweeks in the business. If you never get product-market fit, you'll never really have a company (or you'll struggle the whole time)." — Nicole Glaros, Managing Director, Techstars 

15. Jumping to Decisions
"Don't hire someone till you have interviewed at least ten people for that position. Don't fall in love with anything, and stay objective. Get to know potential co-founders quite well before bringing them on to the team. In all the times I've seen companies fall apart due to co-founder issues, it was in young founders who didn't clearly specify roles and expectations and really didn't get to know each other." — Jay Levy, Co-Founder, Zelkova Ventures and Uproot Wines 

16. Not Maintaining Relationships
"Be consistent in your outreach with mentors and other key connectors in your network. Set a schedule for yourself and stick with it, whether it's weekly for your inner circle, quarterly for acquaintances, or somewhere in between. Every time you consider putting off one of those updates, think about the headache of starting off an email with, 'It's been too long since we've caught up!' and the effort it takes to re-build that relationship." — Ally Downey, Co-Founder, WeeSpring

By Lauren Drell

What Is the Theory of Your Firm?

by Todd Zenger

Photography: Courtesy of Pace Gallery

Artwork:Tara Donovan,Untitled, 2008, polyester film

If asked to define strategy, most executives would probably come up with something like this: Strategy involves discovering and targeting attractive markets and then crafting positions that deliver sustained competitive advantage in them. Companies achieve these positions by configuring and arranging resources and activities to provide either unique value to customers or common value at a uniquely low cost. This view of strategy as position remains central in business school curricula around the globe: Valuable positions, protected from imitation and appropriation, provide sustained profit streams.

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices. The retail giant Walmart is a case in point. Few people would dispute that it remains a remarkable firm. Its early focus on building a regionally dense network of stores in small towns delivered a strong positional advantage. Complementary choices regarding advertising, pricing, and information technology all continue to support its low-cost and flexibly merchandised stores.
 
Despite this strong position and a successful strategic rollout, Walmart’s equity price has seen little growth for most of the past 12 or 13 years. That’s because the ongoing rollout was anticipated long ago, and investors seek evidence of newly discovered value—value of compounding magnitude. Merely sustaining prior financial returns, even if they are outstanding, does not significantly increase share price; tomorrow’s positive surprises must be worth more than yesterday’s.

Not surprisingly, I consistently advise MBA students that if they’re confronted with a choice between leading a poorly run company and leading a well-run one, they should choose the former. Imagine assuming the reins of GE from Jack Welch in September 2001 with shareholders’ having enjoyed a 40-fold increase in value over the prior two decades. The expectations baked into the share price of a company like that are daunting, to say the least.
 
To make matters worse, attempts to grow often undermine a company’s current market position. As Michael Porter, the leading proponent of strategy as positioning, has argued, “Efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy.” Quite simply, the logic of this perspective not only provides little guidance about how to sustain value creation but also discourages growth that might in any way move a company away from its current strategic position. Though it recognizes the dilemma, it offers no real advice beyond “Dig in.”

Essentially, a leader’s most vexing strategic challenge is not how to obtain or sustain competitive advantage—which has been the field of strategy’s primary focus—but, rather, how to keep finding new, unexpected ways to create value. In the following pages I offer what I call the corporate theory, which reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position—it is a guide to the selection of strategies. The better its theory, the more successful an organization will be at recognizing and composing strategic choices that fuel sustained growth in value.

The Greatest Theory Ever Told 
Value creation in all realms, from product development to strategy, involves recombining a large number of existing elements. But picking the right combinations out of a vast array is like being a blind explorer on a rugged mountain range. The strategist cannot see the topography of the surrounding landscape—the true value of various combinations. All he or she can do is try to imagine what it is like. 

Todd Zenger is the Robert and Barbara Frick Professor of Business Strategy at Washington University in St. Louis’s Olin Business School.

Private companies may be better investment than public trading ones

by Rita McGrath
One of the dilemmas of firms in rapidly transforming environments is that their ownership structure may get in the way of making tough decisions. Investors in publicly traded companies are understood to desire stable, predictable earnings and growth. But such expectations are unrealistic in many industries. As noted management expert Geoffrey Moore told me with respect to high-velocity competition, "I'm not sure you ever want to be in the public markets." The problems with public markets and quarter-by-quarter thinking are many, but for companies in fast-changing environments the biggest issue is that public markets are not patient — miss a quarter and the punishment can be severe. 

Take Motorola, for instance. Its RAZR thin phone was a huge success in the mid-2000's, and the market raved. The next few product launches were not nearly as successful and Ed Zander, a CEO who came in during the successful period, was unable to come up with any more hits. The pressure on the company by the investing community (among others) was so severe that it eventually split into two, Motorola Mobility and Motorola Solutions in January of 2011.

One interesting consequence of the indigestion experienced by the public markets over the volatility of strategy in rapidly changing businesses is that we are beginning to see evidence of a sort of division of labor, as it were, between different kinds of investors at different stages of a firm's lifecycle. 

In the early stages, incubation and launch, historically venture capitalists and angels (in addition to the "friends, families and fools" beloved of the entrepreneurship literature) have provided seed funds for organizations to develop an idea. The venture capital industry has now become fairly large and robust. Moreover, firms are often investing in venture capital-type organizations with the hope of striking it lucky with a new technology or offer. We are also increasingly seeing large firms partnering with small ones to provide the resources essential to launch and ramp up. Such a pattern is well established in the pharmaceutical industry as large established firms partner with smaller biotech firms. Such investors are not too concerned with stable earnings. Rather, they invest with an options-oriented motivation, looking for a large payout at some uncertain point in the future.

As a company matures and enters a period of exploiting a competitive advantage, it makes sense for the firm to be publicly traded if it requires the capital. The danger, of course, is that the pressure placed upon management by the drumbeat of investors looking for steady gains can lead to an unwillingness to make the tough calls required to disengage from businesses with declining value. Remember the pillorying Ivan Seidenberg got from the public markets when he moved Verizon out of cash-generating but slow-growing businesses like phone books? 

It is far more likely that the hard work of restructuring will be the task of private equity firms, leveraged buyout firms or hedge funds, all of whom have a financial motivation to make whatever disengagement decisions are necessary to profit from the eventual re-sale of a healthier company. Of course, all is not joy and sunshine in this world as sometimes over-leveraged companies fail to create or sustain the capabilities they need to be successful, but in theory it makes sense for a single investor with a reasonably long-term perspective to take on the difficult work of restructuring. Even better would be for management to have done that work without needing a savior to come and do it, but, as we have seen over and over again, being a publicly listed company can make a firm prone to short-termism, which can put off the tough decisions — until it's too late.

Take the case of Dell, whose attempts to go private have been hotly contested by its investors. As some observers have noted, Michael Dell believes that the massive changes required in the company to bring it back to health and growth would be poorly received by investors. He plans to make significant R&D investments, hire lots of sales people to approach enterprise customers, expand in emerging markets and develop entirely new product categories. As Dell's public statements have pronounced, these changes will reduce near-term profitability, raise operating and capital expenditures and involve a lot of risk.

So we are left with a quandary. As the pace of competition intensifies, it is going to be harder and harder for companies like Dell to keep a leadership position. And yet, the hunger of public markets for stability and steady profits can prevent leaders from making the very changes that would ensure a firm's long-term viability. So, how does this get resolved? Do we depend on private equity to help companies clean up obsolete activities? Do we hope that analysts will learn to use different metrics to judge management teams — metrics that realize that with fast-moving markets and short-lived competitive advantages a different set of criteria should be used to gauge performance?

Rita McGrath

Rita Gunther McGrath, a Professor at Columbia Business School, is a globally recognized expert on strategy in uncertain and volatile environments. She is the author of the upcoming book The End of Competitive Advantage (Harvard Business Review Press).