What does transparency buy you?

I had an emotionally intense conversation with a startup CEO today about the benefits and costs of regular, transparent communication with company investors and close advisors.

My point of view -- which I articulated forcefully if not very effectively -- was that transparency within this limited set of insiders was incredibly valuable and created far more benefit than it cost in time + effort.

The CEO's view -- which he defended calmly and rationally -- was that his job was to maximize shareholder value, and that the communications effort was too costly -- not just in time away from hands-on product + coding, but even more in the randomization of effort and attention that those investor interactions often unleash.

Since I failed to express myself well in person, I figured I'd try to write it down instead...


First, what do I mean by "transparency"?

It may not be the most comprehensive sample, but among our 30+ Founders Co-op investments, the companies that have grown the fastest, and attracted the best follow-on investors, customers and team members, are all led by CEOs who practice some version of the following:

1. Frequent (weekly or monthly) written status reports to investors

Most Founders Co-op CEOs use Thinkfuse (a fellow FC portfolio company) to manage regular investor reporting. (A few have become such passionate evangelists for the product that they've virally seeded it into the portfolios of other venture funds). But the tool isn't as important as the content -- use email or carrier pigeon if you like.

Some of these weekly reports are very brief, some rival Moby Dick in length and completeness, but all of them include some version of the following:

• The Numbers -- where are we on our top one or two Key Performance Indicators (KPIs) and what's the period-over-period trend?
  
• Did -- what important things happened in the business -- good, bad or otherwise -- since the last report?
  
• Doing -- what big projects and issues is the team focused on in the current period?
  
• Help needed -- where could we use the kind of help investors and advisors are best-suited to offer: e.g., recruiting, fundraising, business / corporate development, strategic input?

By developing the discipline of regular, lightweight reporting, the CEO can keep her most important non-employee stakeholders current with needs and priorities of the business. Not only does this help her maintain ambient awareness among an important influencer group -- which often leads to serendipitous intros and connections for the business -- it also opens up a regular channel for specific asks that complement and leverage the internal team's efforts.


2. Automated, web-accessible performance dashboards

Since our portfolio founders are super-numerate hackers, they've all instrumented the hell out of their most important business processes. With a little extra effort, most have also built private but remotely accessible dashboards that give insiders an at-a-glance sense for how the company is performing on its KPIs. The over-achievers in the group have also spun up automated daily emails providing a 24-hour snapshot of key financial and customer metrics.

The more comfortable a CEO is with sharing these internal dashboards, the more informed their employees and stakeholders generally are about the company's vital signs and underlying trends. That can be uncomfortable when things aren't going so well, but it's hugely motivating when the business is making progress, and -- no matter how things are going -- it also serves as a daily reminder of the leadership's commitment to an organization-wide culture of trust and empowerment.


3. Regular (weekly to quarterly) phone or face-to-face meetings with key stakeholders

Emails and dashboards are great, but there's no substitute for regular, face-to-face interactions to stay on top of the complex emotional and interpersonal dynamics that exist among founding teams, employees, investors and advisors.

When you're running a growing business with limited resources, and your hair is on fire all day and deep into the night with stuff you need to deal with RIGHT NOW, it can be hard to make time for open-ended conversations with anyone who's not on that day's critical path.

But the founders who *do* make time to invest in those relationships -- who reach out proactively even when they don't need something, who show up at dinners and social events, and who get to know all the people who touch and influence their business as human beings -- those are the ones who tend to navigate the really challenging moments in their business (and personal) lives most successfully.


4. Active promotion of contributions made by other key team members

All of the traits and habits listed above are table stakes for competent startup CEOs -- if you aren't doing these things, my strong advice would be to start thinking about how, and to what degree, you want to begin adding these to your management routine.

But the biggest level-up for founder-CEOs -- especially those who haven't been in a leadership position before -- is the transition from doing to leading. An early indication of this ability is when founders begin to hire people who are clearly better than they are at something of critical importance to the business, and to trust these new hires with meaningful chunks of responsibility.

An even stronger signal is when the founder makes a point of calling attention to the performance or contributions of other team members in areas that they previously controlled. It's one thing to have the confidence to hire above yourself -- it's another to call your investors' attention to that outperformance, and know that they will value you all the more for having built a team that can carry the business to the next level.


What are the costs of transparency?

Startups are more acutely aware of opportunity cost than any other type of organization -- there is never enough time, money or manpower to do all the things that need doing, and every choice requires painful tradeoffs against the myriad other things that won't get done.

In this context of brutal, daily triage, the unstructured, open-ended activities -- which includes most of what I've described above -- are the first to go.

The argument I tried to make in my conversation today -- and am now reprising in long-form tonight -- is that small but consistent investments in transparency, relationship development and team development are the foundational work of creating scale in your organization.

None of this seems obvious in the moment, but over time, the depth of knowledge, accuracy of understanding and intensity of relationships that this kind transparency can bring will far outweigh the tactical value of the checks your investors have written to fund your business.

That doesn't mean things won't go wrong -- I can practically guarantee they will -- but when they do, the founders who have made these investments will have an army at their back, not at their throat.

A short (but important) list of things a startup accelerator is NOT

I found myself ranting again in a meeting today, a sure sign that another blog post was brewing...

The topic of the conversation was startup accelerators and the do's and don'ts for starting one.

Setting aside for a minute the broader question of whether the world needs yet another accelerator, here is a short but important list of things a startup accelerator is NOT:

A startup accelerator is NOT a real estate business.

I keep meeting people who own (or at least control) big chunks of commercial real estate. Some of these folks think that a startup accelerator is just a clever form of real estate arbitrage, meaning they think they can extract a higher net yield per square foot by renting individual desks to startups than they could by striking a deal with a single tenant.

In my experience, real estate is a necessary evil in the startup business. We aim to run our Founders Co-op space at breakeven (and usually run a deficit), because we're optimizing for quality and values alignment, not economic yield. The funds and programs we work with in other cities tend to think about their space the same way.

A startup accelerator is NOT a sales channel.

I have also run into people who see accelerators as a clever way to aggregate a cluster of uncommitted prospects for sponsors to advertise to, or for vendors (consultants, accountants and laywers) to sell to more efficiently. This circle of hell also includes my least favorite people in the startup ecosystem -- the "angels with sticky fingers" who are always eager to "help" entrepreneurs as long as they can round-trip some of that "help" back into their own pockets.

I know lots of great service providers who love to work with startups and treat them with respect. They are an important part of any startup ecosystem. But they are not the customer.

A startup accelerator is NOT a fantasy sports league.

Many talented people at big companies think about quitting and starting (or joining) a startup. Very few actually do, but the number who consider it tends to increase during boom times and decrease when the shit hits the fan. Right now there are a *lot* of people peering over the edge of the precipice, so many that they actually represent an addressable market segment. I know people who believe that giving this group a safer sandbox to play in is what accelerators are all about.

Starting a business is incredibly hard and unglamorous work and *anyone* who thinks seriously about it deserves all the support they can get. But a high-quality accelerator program like TechStars or Y Combinator is actually optimized to serve the weirdos and misfits who can't imagine doing anything else -- who build companies even when everyone else is running for the exits because they just can't help themselves.

A startup accelerator is NOT a pimp for the capital markets.

Most accelerator programs end with a Demo Day -- a big show-and-tell party where graduating companies have a chance to pitch a roomful of accredited investors. And Demo Days are absolutely a good thing for both companies and investors. But -- strange as it may seem for an investor to say this -- accelerators don't exist to serve the needs of the investor community.

There was a time, not too long ago, when money mattered more than talent. Thanks to the magic of open source + cloud, those days are gone and they're not coming back. So if you're going to choose sides -- and remember, the only thing in the middle of the road is yellow stripes and dead armadillos -- it's clear what side an accelerator has to be on: your customer is the talent and no one but the talent.

OK, fine, so what IS a startup accelerator?

Like most things in life, the answer is surprisingly simple: A startup accelerator is a system for helping the most talented and ambitious entrepreneurs in the world increase their (already considerable) odds of success. 

That may not sound fair, but then life isn't fair.

Accelerators only work if they attract the best possible candidates and deliver the maximum acceleration to those teams, producing the biggest wins for them and their investors. Those wins, in turn, draw new talent and money into the system, feeding the next cycle.

Any activity in this system that competes with or compromises the interests of the talent is not only a distraction from the core mission, it actually undermines the long-term health of the program.

Whether the world needs any more accelerators is a topic for another day, but if you're determined to start one in your community, do yourself a favor and post a big sign on the wall like James Carville did during Clinton's 1992 reelection campaign:

"IT'S THE TALENT, STUPID"

Wm. Shakespeare, Behavioral Psychologist

There are so many examples to choose among in the collected works that I might have to turn this into a series, but the one that's been rattling around in my head this week is the following (from Hamlet, Act III, Scene II):

Hamlet.  Madam, how like you this play?
Queen.  The lady doth protest too much, methinks.

Every time someone answers a simple question with an overly long and self-justifying response, this exchange runs through my head.

"Over-explaining" is a common result when people are reluctant to admit they don't know something, or trying (too) hard not to accept responsibility for a mistake. I'm sure I've been guilty of this myself -- but the right answer is (almost) always to put down your shovel and stop digging.

P.S. -- I'm not much of a bible scholar, but the spirit of this is similar to Proverbs 28:

"The wicked flee when no man pursueth: but the righteous are bold as a lion."

Next time you're tempted to dig yourself out of a hole with words -- to flee when no man pursues -- remember the words of the bard and shut your mouth.

Sell your investors a ticket, but don't let them drive

I've had too many conversations recently like this one:

ENTREPRENEUR: "We're raising [insert amount of money here]. As soon as our raise is complete, we plan to [insert one or more of the following: quit our day jobs; stop outsourcing and hire a real dev team; start building our product; etc.]"

ME: "So, you're asking your investors for permission to get in business?"

ENTREPRENEUR: "Ummm..."

I appreciate that this is a gross oversimplification of a complex and emotionally sensitive issue, but I feel strongly enough about it to do a little shouting anyway:

NEVER, EVER GIVE INVESTORS THE POWER TO DECIDE IF YOU GET TO BE IN BUSINESS OR NOT

Before you tell me why this isn't as easy as I'm making it sound, let me be clear: I'm talking specifically about software businesses that leverage web and / or mobile platforms for customer acquisition and service delivery.

The reason why it's absolutely the best time ever in history to be a software entrepreneur is that it LITERALLY DOES NOT REQUIRE OUTSIDE CAPITAL to get in business. If the founding team has technical skills and a credit card to put down for their AWS expenses, they can do a ton of damage without ever asking anyone for permission.

If you believe -- or your team is configured in such a way -- that this is not true, I'd strongly suggest that you consider the possibility that YOU ARE DOING IT WRONG.

There are lots of reasons why teams that ARE able to get in business without money choose to raise it anyway (more on that later), but even if you DO want to raise money for your startup, there is a fundamental principle of behavioral psychology that should stop you from ever framing your fundraising effort as a requirement to your being in business at all:

Humans -- and investors, contrary to what you may have heard, actually ARE human -- tend to want things more if they think they might not be able to have them.

If you give an investor control over whether or not you get into business, she (a) is likely to doubt that you have the skills / confidence / chutzpah to actually build a business; and (b) will tend to undervalue the opportunity to invest, because she knows you need her more than she needs you.

If, however, you demonstrate to her that you are already in business, building product, engaging with customers and figuring out where to go next, she is likelier to view her investment as a chance to empower and accelerate your team on its forward journey.

Furthermore, she knows that, if you continue to make progress at the same (or an accelerating) rate, she might not get the opportunity to invest at a later date, either because other investors will have beaten her to it, or because you'll no longer need the money.

In other words, if you can convince an investor that your train is about to leave the station -- with or without them on it -- they are much more likely to buy a ticket.

None of this is to suggest that you shouldn't seek investors for your software business. Not only would that make my life a whole lot less interesting, there are also plenty of good reasons to raise money for a startup that have nothing to do with asking for permission.

These include:

• Doing more faster -- Yes, you can stay up all night coding by yourself, sleep under your desk and live on ramen. But you can probably do a hell of a lot more with a (slightly) bigger team, a stronger sales effort and a little shwag to sprinkle on your best customers. Money can't buy love, but it can buy speed.
  

• Commitment / active support -- When investors write you a check, they'll (usually) feel compelled to actually do work to help you succeed, not only because they like you and believe in the business, but also because not doing so will trigger uncomfortable feelings of cognitive dissonance and inconsistency with their original decision to invest. The bigger the check, the more actual work they're likely to do.

• External validation / social proof -- Getting complete strangers to back your business, especially if they do that sort of thing for a living, is a great way to demonstrate to customers, employees, and your parents that you're actually doing something worth paying attention to. Attention is valuable.

So by all means, raise money for your startup -- if all of the above hasn't convinced you I'm an irredeemable asshole, I hope you'll raise it from me -- but PLEASE don't hand over the keys to your business to anyone who's not a full-time, all-in, shoulder-to-shoulder co-founder. And especially not to your investors.

Flow

"Only through freely chosen discipline can life be enjoyed and still kept within the bounds of reason" - Mihaly Csikszentmihalyi

I am not religious, but I am guilty of evangelism.

I spent the first seven years of my professional life careening from one unsatisfying corporate job to another, working my way down the ladder from a company of hundreds of thousands (AT&T), to thousands (Claircom/McCaw), to hundreds (Patagonia), until I found myself in the weird and wonderful land of pirate ships (Adjacency, Judy's Book, Founders Co-op, TechStars, etc).

The farther down the ladder I climbed, the harder I worked, and the more alive I felt.

I didn't discover Mihaly Csikszentmihalyi and his concept of flow until my kids were in Montessori school, but I experienced an immediate flash of recognition when I read his words.

Flow is...

"...being completely involved in an activity for its own sake. The ego falls away. Time flies. Every action, movement, and thought follows inevitably from the previous one, like playing jazz. Your whole being is involved, and you're using your skills to the utmost."

Entrepreneurship is grueling work. For every Mark Zuckerberg there are literally thousands of brilliant and anonymous founders toiling away on their dreams. For years. Most of these companies will fail. Most of these founders will never make vast fortunes or find their faces on the cover of a magazine.

But for all that, the fellowship of entrepreneurs is full of joy.

For those who haven't (yet) chosen an entrepreneurial path, it's easy to assume that startup founders are just bad at math, or greedy, or egotistical. Why else would they choose a life with such uncertain prospects and so little chance of success?

The answer is simple. So simple that it's impossible to explain to people who have chosen a different path.

Entrepreneurs have given themselves the gift of flow. Not all the time -- no one is that lucky -- but more often than they can find on any other professional path. And the older I get, the more I understand how precious and important this gift is.

Freely chosen discipline. Creativity. Autonomy. Exposure. 

My business partner has cancer. I spent the weekend with two old friends; one recently had a pacemaker implanted in his chest; the other had a brain tumor the size of a golf ball removed last year. As the Buddhists, say, "death is certain -- only the time of death is uncertain."

It's none of my business, but I just can't help myself. It took me too long to realize it for myself, and now I preach the gospel with the zeal of the converted.

Choose flow. Choose joy. Choose life.

Who Loves You? | Who Fears You?

Entrepreneurship and schizophrenia have a lot in common.

Every entrepreneur lives the Stockdale Paradox -- constantly toggling between the urgent daily realities of survival and their lofty dreams of massive success and cultural impact.

But entrepreneurs who take outside funding -- and especially those who raise "institutional" money -- have another dual life to live: one centered around customers and revenue, and another around competitors and incumbents in the industry they seek to disrupt.

If you raise venture capital you are signing up to a war on two fronts -- one based on love, one based on fear.

Let me explain.

Like other very high risk investment strategies, venture capital is an asset class that puts a huge premium on deals with "asymmetric" return profiles -- with limited potential losses but explosively large potential gains (i.e., where winners commonly return 1-2 orders of magnitude on invested capital).

In an exit environment dominated by M&A outcomes, the preferred liquidity path for venture capital investors is "strategic" M&A -- which is code for overpayment relative to traditional financial benchmarks. Strategic acquirers overpay for deals for one of two reasons:

• Fear -- The target company threatens to disrupt the competitive landscape or destroy margins in a business segment core to the acquirer's business and strategy.

• Greed -- The target company represents a new strategic opportunity for the acquirer to grow revenue / margin and improve competitiveness, thereby accelerating growth in enterprise value faster than normal / organic growth.

In this context, returns-maximizing investors who deploy capital with asymmetric returns expectations will tend to seek investments that meet (at least) two criteria:

1. Business Viability -- Can this combination of team and opportunity produce a business that generates positive cash flows with accelerating margins at scale?
   
   
2. Disruptive Potential -- If successful, can this team's approach to the opportunity represent a sufficiently dangerous threat (or sufficiently attractive growth accelerant) to two or more large and acquisitive incumbent players to generate a significant exit price multiple as compared to an exit based on purely financial benchmarks?

In other words...

If your startup idea -- implemented with quality + urgency -- doesn't scare the pants off one or more big and dangerous incumbents, most venture investors won't give a shit about it.

So, not only do you have to build an amazing product, get customers to love you and pay you money for it, find a way to acquire customers for less than they're worth to you, recruit great people, build a culture that keeps them happy, raise money, get press, pay taxes, etc. etc. (This is the "Love" part of the journey).

If you want to get professional investors involved, you also have to strike fear into the hearts of big, established companies that have (effectively) unlimited resources to throw at the same problem you care about. (This is the "Fear" part).

If you don't like the idea of fighting on two fronts and think that building a solid, cash-generating business is all that should be asked of you, don't be surprised when institutional investors don't get out their checkbooks to support you.

But if you think this kind of two-front battle sounds like a hoot -- and your team has the engineering, product and sales chops to back it up, please give me a call ;)