Closing the Loop

Today, I am currently an advisor/mentor/investor in 10 early stage start up companies, 3 accelerators and 1 venture fund. I pride myself on spending a lot of time with each company and getting as involved as possible, in many cases having projects assigned to me. Regardless, I am regularly shocked by a simple fact:

Only one of these companies sends me a regular update.

I know I shouldn’t be shocked, as the early days of building a company are hectic and busy so updating advisors and investors is never a high priority. There is also a natural fear of bad news, so if things are not going extremely well it is easier to say nothing than admit things are hard.

Unfortunately, the side effect of a lack of updates is that I’m not as engaged as I could be. As a founder you live through a hundred battles everyday, but if I never see them then I can’t understand. For all the time I spend with a company, not knowing about the struggles, the victories and the defeats means that when I do help it is with only a limited perspective. Even worse, I have no idea if the advice that I provided proved useful as I rarely get told the end results of any given decision.

But it’s not the fault of these companies. Almost all entrepreneurs are really bad at closing the loop.

Closing the Loop

One of the fundamental components of Corkscrew_(Cedar_Point)_01continuous improvement is feedback. If you don’t know how you are doing today, you can’t get better tomorrow. Modern engineering processes such as Scrum or Kanban encompass feedback as a core part of the process through the use of retrospectives. This is why the engineering teams at many startups are the best run teams, since they have a clear and well understood process to follow. So what of the rest of the company?

The best way to make sure your company is focused on continuous improvement is to make sure you always close the loop. For every decision that’s made, for every goal that is set you check back on it in the future to see whether it worked. Did that strategic partnership pay off? Did you meet your goal of 10% weekly growth? Make it part of your company culture to always review decisions and goals in the future, and learn from them.

All companies make decisions and set goals, but surprisingly few will review them on a regular basis. Many start up board meetings involve a review of key metrics, but not a review of key decisions and how they worked out. If you don’t review the decisions you made and the results of those decisions, what do the key metrics matter?

It can be scary to review past decisions since many of them will not work out well. However, fear of bad news will slowly paralyze your decision making because it will evolve into fear of failure. If you develop a habit of sharing news, both good and bad, you will feel a weight lifted from your shoulders – the weight of that fear.

Communication as a Core Competency

Making sure your team closes the loop is easy if you’ve set communication as a core competency of your team. If you have done that, then you already have plenty of tools and structures for communicating, you just have to make sure you communicate retrospectively.

Some examples of how you can close the loop:

  • Regular Updates. Send regular updates to your team, investors and advisors on your progress that review the results of key decisions (Leo has a great template for these kinds of updates that is short and easy). These serve not only to update the team around you but force you to put in writing what has worked and not worked on a regular basis.
  • OKR Reviews. Many companies use OKRs, but not many have regular public OKR reviews. Such a public review of individual OKRs should not serve as a punishment or a reward, but instead a chance for everyone to learn from what worked and what did not.
  • Waterfall Financials. When projecting your company’s financials, the only guarantee is that those projections will change (a lot). Keeping track of changes in your projections will help you understand the flaws in your forecasting models and waterfall financial reporting is a great way to do that.

The best way to make sure you are closing the loop is to make it part of your corporate culture. Any decision that gets made comes with a report on how it faired later. Remember, the goal of closing the loop is not to punish failure but to learn from your mistakes.

We all make plenty of mistakes, why not turn them into assets?

Image made available via Creative Commons by Coasterman1234.

The Snowball Effect

I spend a lot of my time advising 113026147_9ce84baa38_zand mentoring entrepreneurs, including coaching at three awesome accelerators. Since almost all the companies I work with are at the pre-Seed stage (translation: very very early), I end up hearing the same questions quite a lot. They are, in order of frequency:

  1. How do I convince my co-founder to quit their job and join full time?
  2. How do I close my first customer?
  3. How do I raise my first seed financing?

These are very fundamental questions for building your business, so it’s no surprise they come up so often. The good news is that the first step towards answering any of them is exactly the same: build up your snowball effect.

The Fear of Being First

If you turn around each of those questions, you realize that the person on the other end represents a first for your company. You are trying to convince the first employee, the first customer or the first investor to believe in you. Being first, while exciting, brings with it the most risk since you clearly have not proven your business if they are the first. Most people have a very justifiable fear of being first which makes it hard to convince them to take that first step.

However, you need to have a first because if you don’t then you will never have a second, a third and so on. So how do you overcome that fear?

The Power of Momentum

One of the best ways to overcome the fear of being first is to use an even more powerful force: the fear of missing out. The more momentum you build up for your company and the more progress you make before asking someone to be the first, the more likely that they won’t want to miss the opportunity. You want to make your company move as far as you can as fast as you can to make it an attractive bandwagon for people to jump on.

Having a brilliant idea is not enough. If you have a brilliant idea and nothing else, nothing separates you from the hordes of other dreamers whose dreams will never see reality. An idea has little value itself, you need to turn it into reality or at least as real as you can make it.

So, how do you get that momentum going in the early days? You don’t need to build a finished product (although that works well), there are many ways to build momentum without a product:

  • Invest In Yourself. You should be investing in your own company, using your own money. The more you invest, the more you will show commitment to your vision and building your business. You cannot ask others to invest or believe in you if you cannot demonstrate that you believe in yourself. It only costs a few hundred dollars to form a legal corporation – how much more than that do you believe in yourself?
  • Prove Demand. One of the most important things you can do in the early days of your company is prove that your idea has customer demand. Building a product can come later, but you can start by talking to prospective customers, industry experts and investors about a product and how much demand exists. The more you can quantify and prove there is demand, the more likely you are to convince others that your idea has value. Along the way, you’ve also lined up a list of prospective customers that make your company seem a little less risky for employees and investors.
  • Sell Your Friends. There is no rule that says your first customer(s) need to be strangers that you cold call. In fact, almost all successful companies start out by selling to friendly customers whom they knew well before they got started. YCombinator, one of the best accelerators, goes to great lengths to get their companies to become customers of each other to overcome the first customer problem. This strategy won’t scale, but it will get you started.
  • Spread Your Message. While your idea might not have value, communicating about the problem you are solving and building a voice in the community does. Set up a blog, join Twitter and start a mailing list to talk about the industry, market or problem. The more you participate in the discussion the more you can start to build your company’s brand even before you get started.

Most of all, be creative. I know non-technical founders that hired people to stand in front of conferences wearing sandwich boards to raise awareness of their company which had no product. I’ve seen founders hire armies of people on oDesk to gather hard to find data on the web to create valuable industry blogs. Even Mattermark, a great market data start up, got started from a blog post.

Accelerators are in the business of helping you build this momentum, at the cost of a small amount of equity. Many accelerators require that you have a working prototype, but if you do have a prototype they can give you a big boost of momentum and help you get past a lot of these early hurdles.

The Snowball Effect

So, what is the snowball effect? The great thing about building up your momentum is that it becomes a virtuous cycle if you can maintain it. You are more likely to raise your first investment if you can close your first employee, which in turn makes it more likely to close that first customer. Then it becomes easier to hire that second employee, close the second customer and so on. Eventually, making progress on all fronts makes it easier to make more progress on all fronts.

That is the snowball effect. Just like a snowball rolling down a hill, the more momentum you have the larger you can get and the more momentum you will get.

All you need to do is start the ball rolling.

Image made available via Creative Commons by redjar.

Speaking, Fast and Slow

Avoid the trap of thinking everyone sees the world the same way you do.

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I belong to a great science fiction writer’s meetup here in the bay area and we have a problem. If you’ve never participated in such a group, the format is simple: each month a few members submit pieces they have written and everyone else in the group reads them. Then, the group meets to provide feedback and discussion for the author.

As with any group of people, there is a wide variety of personality types in this group. There are introverts, extraverts and everything in between. Finding a format that allows everyone to participate in the meetings each month is very hard. If you give every person a turn to talk by going around in a circle, everyone participates equally but there is no discussion and the meeting is very slow. If you have an open discussion, the extraverts dominate the discussion and the introverts are alienated, often choosing not to participate. How can you get everyone to participate effectively? That is the problem.

By the way, this is a problem you have at your company as well.

Personality and Productivity

One of the most popular personality type classification is called the Myers-Briggs Type Classification (also known as the Myers-Briggs Type Indicator or MBTI). While it is hard to quantify human personalities, the Myers-Briggs system uses four different characteristics, each of which have two values. This creates sixteen different possible personality types to which a given person could belong.

Of those sixteen types, none comprises more than 14% of the US population. That means that any group of people larger than one is likely to contain at least two different personality types. Your company of 100? You probably have most of the sixteen represented.

This is good news. Teams comprised of people with different personality types are more effective, assuming they complement each other. Homogenous teams tend towards group think and difficulty defining roles, while diverse teams can provide multiple points of view and more easily fill complementary roles. In short, you want to have a lot of different kinds of people on your team to succeed.

Even people with neurological disabilities, such as autism, which may prohibit normal social interactions can be critical members of successful teams. For example, many autistic people excel at detail oriented repetitive tasks that others might find boring, such as data entry or quality assurance testing, and there are consulting companies set up that allow you to hire autistic people for such tasks.

Designing Teams

Since having diverse personality types makes your teams more effective, you need to make sure that your company is set up to recruit and empower a diverse group of people. Some simple ways to get started:

  • Watch for Personality Bias in Recruiting. It is often much easier to get along with someone of the same personality type, which is why you are so similar to your friends. When recruiting, this can cause you to favor people who have a similar personality type even if someone else might be a better fit. Make sure your entire interview team keeps an open mind and considers all the factors, not just personal affinity for the candidate.
  • Mix Up Your Teams. Just as you will gravitate towards similar personalities when recruiting, social groups of similar personalities will form at your company. Be careful not to let these social groups become teams or else your company will divide itself into personality driven teams. On a regular basis, change the composition of your teams so everyone has a chance to work with a different group of people and watch for productivity gains. It should be clear when you have a good team that clicks together, even if they are very different.
  • Have Many Ways to Communicate. Not all people do well in group discussions and not everyone will speak up when they have a problem. Do not rely on town hall meetings and group message boards to be the voice of all your employees. Make sure your leads speak to their people one-on-one and ask how they are doing instead of waiting for them to complain to you. Make sure employees have ways to express their ideas that does not require them to overcome a fear of public speaking. Don’t just tell everyone that you have an open door policy and wait for them to come to you, you should go to them.
  • Recognize Great People, In Whatever Form They Take. It’s always easy to recognize the star salesperson that everyone loves, but what about the quiet engineer that works long hours and does amazing work while keeping to herself?  Make sure your company is set up to recognize contributions of all kinds so that everyone feels involved and appreciated. Remember that not everyone will be appreciated in the same way, either, so buying wine for someone who doesn’t drink alcohol might not go over well.

The most important thing you can do is to avoid the trap of thinking that the other people in your company see the world the same way you do. It is easy to use yourself as the prototype for your employees when you make decisions about the work environment, processes and communication but that will often lead you astray. Always ask instead of assuming.

I take all of this one step further and seek out people who have very different personality types to mine. I find that such people keep me out of my comfort zone and constantly challenge my assumptions, while often succeeding in changing my mind about important matters. I would rather work with someone where I need to put effort into our professional relationship but I feel that I am at my best, than someone where working together comes easily but I get lazy.

So, What About the Writing Group?

I honestly don’t know what the solution is for our writing group, and I fear that it will inevitably disband as most volunteer and unstructured groups do. However, as testament to the positive impact of diverse personality types, we are tackling the problem head on by trying different kinds of formats to see if we can find one that works. In the meantime, the extraverts try to be less extraverted and the introverts try to be less introverted and we all learn something along the way.

The title of this post is in honor of the great book Thinking, Fast and Slow by Daniel Kahneman, one of the founders of behavioral economics. The image was dedicated to the public domain by Mamoru Masumoto.

Going the Distance

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You have two hours of peak productivity every day. How do you spend them?

I just returned from 3 weeks without internet or mobile service, which you might have noticed by the lack of updates. I find it harder and harder to turn off the urgent cacophony of the internet so I sometimes take extreme measures to quiet my mind and recenter on what is important.

There was a time when I would never have considered doing that. In the early days of Flurry I worked 12 hours a day, 7 days a week (and a few all nighters). Even when family was visiting me from out of town, I worked while they toured the city. I worked as hard as I possibly could because I was gripped by the fear of failure, by the urgency of seeing our money dwindle and dealing with a myriad of problems I didn’t know how to solve.

In short, I was a typical first time entrepreneur.

Ironically, during this period of hyper-work I actually moved more slowly than I ever had before and the company almost failed because of it.

Peak Productivity

One of the things that drives us to want to work harder when under stress is the assumption that our productivity per hour is a constant. If you make that assumption, then you believe working more hours equals more productivity. Unfortunately, that assumption is false. Your productivity is a function of many things including your natural body rhythms, how often you are interrupted while workingwhat you are doing and how long you have been working (fatigue). Improving your productivity requires managing many of these factors before you even consider working more hours.

There is evidence that no matter what you do, you only have two hours of peak performance every day. Two hours. It proves your productivity is a scarce resource and you have even less time than you thought to get things done.

Designing For Productivity

While all of this might seem intimidating, it provides a clarity of focus that you need while building your business. Your productivity suffers from limitations, and just like every other problem you face you need to manage around it. Some common techniques for designing your day for maximum productivity:

  • Avoid interruptions through scheduling. Schedule time for email, social media and messaging instead of constantly suffering interruptions during the day. Instead of keeping a todo list, schedule time for your tasks the same way you schedule time for meetings.
  • Utilize your peak performance. Schedule complex or high priority projects for a few hours in the morning, or whenever you are at your peak. Schedule easier or routine work for times when you are tired such as after lunch or the end of the day.
  • Take breaks. Taking breaks, even if only 10 minutes, can greatly increase your productivity and problem solving skills. If possible, change your environment by getting out of the office. If possible, have meetings while walking around the neighborhood.
  • Balance your life. The more balanced your life, the more effectively you can deal with stress at work. Exercise, friends and family are well proven at helping you decompress and avoid burnout.  

There are tools to help make managing your productivity easier based on recent scientific research, such as Timeful, but none of them will be useful unless you make managing your own productivity a priority. Experiment with your time and see what works the best for you.

The Long Run

In those early days of Flurry, I was working so hard that I lost perspective on what we were doing. Working all of those hours greatly impaired my judgement and I lost the ability to think strategically about where the business was headed. Luckily, fate intervened and saved us from ourselves but it could easily have been the end of the company. I was given a chance to learn from the experience and better manage my productivity for many years to come.

Speaking of many years… It can take, on average, 7-10 years for your company to go public (although it varies wildly). That means that if you are very successful, and everything goes according to plan, you will be working on your business for a very very long time. In that long term, it is much more important not to burn out than to work a few extra hours to try and push something out. Focusing on maintaining your productivity is a great way to keep running for the entire race.

Now, stop reading this blog and get back to work.

Image made available via Creative Commons by Jon Rawlinson.

It’s All Been Done Before

Whenever I start a new project, it always starts with excitement. New ideas are always exciting because, as ideas, they seem perfect and carry with them the promise of learning new things. That excitement lasts right up until I finish the first working prototype and have enjoyed the glow of having built something new. Then, reality sets in and I do a Google search for similar projects only to find…

It’s already been done before.

Or, at least something very similar. Seeing that my idea was not, in fact, novel is always disappointing. Worse, to see that others have not only had the same idea but spent much more time working on it is even more disheartening. This cycle repeats for literally every project I’ve ever done, yet I keep working on these projects and also having new ideas and starting new projects. Why?

Everything has been done before.

It’s true that there are some areas of physics where new things are being done. There are biologists who discover new species and new archaeological sites unearthed. But these are at the cutting edge of science today and happen very rarely. In the world of product development, there are few unique ideas. Even if your idea is novel, it is likely that someone, somewhere else has the same idea. That should not stop you, however.

What matters is not the idea but the execution.

Anything can be improved upon, and that’s your opening. Google did not invent the search engine, they made it better. Facebook did not invent the social network, they made it better. Uber did not invent the car service, they made it better. For each of those companies, not only did they not invent a new kind of product, they were not the only ones trying to improve on existing products at the time they got started. What they did was act on the idea better than anyone else.

While others may have the same idea, can they match your focus? Can they match your passion? Can they match your work ethic? Having an idea is cheap, what you do with your idea is what gives it value. If you believe in your idea, make it impossible for others with the same idea to compete with you by being the best at turning that idea into reality.

So, who cares if everything has been done before? Anything can be improved. That’s where you come in.

 

 

The Profitability Challenge

Here’s a fun weekend experiment for you, something I call the $20 Weekend Challenge: Take a $20 bill out of your wallet on Friday. You task for the weekend is to turn that $20 into $40 by Monday, doubling your money. You are welcome to use any legal means at your disposal, but heading into a casino or buying lottery tickets doesn’t count. You have to turn that $20 into $40 without gambling. It sounds hard, but it is worth it, I promise.

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So, what does this have to do with building a business?

Cash and Business

A common refrain in business is that “cash is king”. Most people say that to mean your company does not exist if you don’t have enough cash to pay your bills, but it is also true that your business is designed to take in some cash and output more cash. You are trying to build something impossible in the world of physics: something that produces more than it consumes.

This is much harder than it sounds, as you likely know if you tried the $20 Weekend Challenge. If you are accustomed to working for a salary, you are used to exchanging your time for money which is very different from building a business. Having a job requires little thought on your part since your salary is (usually) guaranteed and your time has flexible value. Building a business, however, requires a lot of thought.

Let’s do a simple thought experiment to prove that point. Your typical employee at a high tech start up company costs between $100,000 and $150,000 depending on your location so let us assume $125,000. No, that’s not all salary, it includes benefits, payroll taxes, accounting costs, etc. (as a business, the salary can be only half the cost of an employee).

Depending on your business model, let’s see how many customers you would need to pay for that employee.

Business Model: Advertising

In advertising you are paid per every 1,000 ad impressions you show (CPM). CPMs vary wildly so let’s assume you make a $2 CPM (which is not bad). Assuming that 20% of your users are active on any given day and those active users generate 2 ad impressions, you would need 286,200 active users every day to support the cost of one employee.

Business Model: Subscription

In a subscription model, you make money through the monthly fee you can charge active customers. Let’s assume, your product costs $50/month to maintain a subscription. That means you need 210 paying customers every month to support the cost of one employee.

Business Model: Selling Products

When you are selling products, you get a one-time fee for the cost of the product. Let’s assume you sell your product for $100 and it costs you $90 to make it, leaving $10 in net profit per sale. You would need to sell 240 units every week to support the cost of one employee.

And remember, all of that only covers one employee.

The $20 Weekend Challenge

When thinking in these terms, I hope the value of the $20 Weekend Challenge becomes clear. In order to pay for a single employee, you have to have a lot of customers. To pay for your entire team, you need a large number of customers. To pay for your team, your offices, your lawyers and eventually make a profit? You need to have all the customers.

You need to take your money and almost double it to simply pay your bills.

Building a profitable business is hard because the cost structure that goes along with companies is high. Some companies claim they are profitable when they achieve Ramen Profitability, but that is really a false milestone. If you can’t afford to pay yourself a living wage, you are not really profitable.

If this makes starting a business intimidating, good. It should be intimidating. It should seem almost impossible. However, I bet when you first started thinking about the $20 Weekend Challenge it seemed pretty hard too. The only way to see if you can do it is to give it a try.

The Run Rate Trap

One of the best ways to think you are the only company not doing well is to go to a networking event and ask other founders about their “run rate”. You’ll hear that 6 month old companies are on a $50M run rate or that a three person startup is on a $100M run rate. Clearly there is a magic bean stalk that everyone else knows about except for you.

In finance, a run rate is an estimate for the full year value of a financial metric (e.g revenues) which is made by extrapolating from a shorter period of time (e.g. a few months). For example, you can use a run rate to estimate the annual revenues for a store by taking the first three months of the year and multiplying it by four to get the revenues for all twelve months. However, that assumes the rate of growth of store sales stays flat and if the business is growing, it’s better to assume the rate of growth, say 10% month to month, stays the same and estimating annual sales from that. It’s a quick way to understand the annual size of a business based on a snapshot of data.

Unfortunately, run rates are as error prone as they are simple. The faster your growth rate and the more volatile your finances, the less accurate a run rate estimate will be. When we extrapolated the annual revenues for a store from the first three months of the year we did not take into account the Christmas rush in December which can generate 50% of a store’s revenue.  If that was the case with this store we would have underestimated the annual revenue of the store by 50%.

If you take too small of a snapshot of data, or worse you cherry pick the data, your run rate estimate can be wildly inaccurate. Estimating the annual revenue for a store from only one day is impossible, and if that one day is Black Friday then your run rate estimate will be orders of magnitude higher than reality.

Which is exactly what your friends at the networking event were doing. The pressure to succeed is strong and it is tempting to bend the truth to make things sound good. Cherry picking a few good weeks or months of revenue and calculating your run rate from that is one way to bend the rules. Yes, it is technically possible that you will make $50M this year but that is hard to tell from the $3.5M you made in the first quarter even if you are growing 25% month over month. More than likely you will hit some bumps in the road and not quite get to $50M this year.

Not everyone uses their run rate to mislead you purposely, but in the world of fast growing companies the run rate is very often misleading anyway. Use it with care or at least with a dose of skepticism. So, the next time you hear someone’s run rate is an order of magnitude higher than yours don’t worry. They might just been telling you what they want you to hear.