Category: Management
One of my favorite Bezo-isms is “Disagree and Commit.” I’ve seen it in articles a handful of times recently as the adulation around Amazon and Bezos’ management reaches a fever pitch.
Notwithstanding the disappointing forecast for Q418, Amazon’s recent operating performance has been spectacular. But, more interesting is that it has been “spectacular at scale” and across a very large and complex business.
While Revenue Growth YOY has been strong,
the real story has been YOY growth in Operating Income.
Those are beautiful numbers. It’s clear that in the past few years the company has turned on the profit machine.
For many years, Amazon (and Bezos) trumpeted their focus on revenue growth. The mantra was “we are reinvesting all of our profits in growth.” This is the same thing most startups say (and most VCs push for) as growth compounds rapidly if you can keep the growth percentage (yup – it’s simple math.) This has been particularly true for B2B SaaS companies, not withstanding the notion of the Rule of 40 for a Healthy SaaS Company.
While growth in revenue is still important, Amazon’s ability to generate this kind of growth on its operating income is a reminder that turning on the profit switch at some point does matter, if only to show how much leverage your operating model has (me thinks Tesla did that in Q318 for the same reason). The AWS numbers are remarkable to me – their YOY growth is 46% and their operating income is about 30%. That’s well above the rule of 40.
I would have loved to be in the meetings during the shift from “grow at all costs” to “keep growing fast, but flip the operating income switch.” There were many moments in time over the past 15+ years where I’m sure this came up. But clearly the focus on this changed in the last few years, and the results are now front and center.
I don’t hold any Amazon stock directly, nor do I play the stock market, but the financials in public companies have a myriad of lessons buried in them for private companies that are scaling. That said, the management lessons buried underneath the numbers are even more important. “Disagree and commit” seems to be working well these days for Amazon.
Complexify is such a delicious, underused word. I’ve been using it a lot lately, hopefully with great effect on people who are on the receiving end.
CEOs and founders struggle with this all the time (as do I). They are executing on a strategy and a plan. A new idea or opportunity comes up. It’s interesting and/or exciting. Energy gets spent against it. Momentum appears. While some people on the team raise issues, suddenly the idea/opportunity starts taking on a life of its own. Things get more complex.
Eventually, there’s a reset. The core of what is going on is good – there’s just a bunch of complicated crap happening that is distracting everyone and undermining the goodness in the business. So, the CEO and the leadership team go on a mission to simplify things. This takes a while, usually involves killing some projects, and often results in some people leaving the company. These aren’t big restructuring exercises but rather focused simplification exercises. The end result is often a much stronger business, with more focus, faster growth, and better economics, especially EBITDA.
This happens regularly in the best companies that are scaling. In my view, it’s a key part of the job of a CEO who is working “on the company” a majority of her time, rather than simply working “in the company.” It’s particularly powerful when a company starts to see its growth rate decline (it’s still growing, but at a slower pace than before) or a company is spending too much money relative to its growth rate.
Six months (or twelve months) later the simplification effort is complete. The company is performing much better. EBITDA has dramatically improved (or the negative EBITDA has gotten a lot smaller.) Growth is happening in an economically justified way. The product is improving faster. Customers are happier. Everyone around the team is enthusiastic.
And then a new idea or opportunity appears. Energy starts being spent against it. Momentum appears. You get where this is going.
I call this complexifying, a word I rarely see in the entrepreneurship literature. Maybe it’ll start creeping in now. All I know is that I’m using it a lot these days.
What do these numbers mean to you?
At a recent offsite, during our conversation about evolving our communication patterns (which I refer to, in my head, as “the Matrix”), Ryan said “16-49-81.” Everyone stared at him and I responded “4-squared, 7-squared, 9-squared.” Then, everyone nodded their heads but were probably thinking “these guys are numerology goofballs.”
But then Ryan said, “Metcalfe’s Law” and everyone immediately understood.
When we were just four partners, our communication matrix was 16. We added three new partners and it became 49. We recently added a General Counsel to our team and consciously included our CFO in the communication matrix, so now it’s 81.
81 is a lot different than 16. Our communication matrix is highly optimized (and something we are extremely focused on as a key attribute of what we do), but Ryan was pointing out that we needed to make sure we were paying attention to make sure we kept it clearly optimized at nine people, rather than just four.
We describe our communication and decision-making process as continuous. It happens in real time, on multiple channels, between all of us. We have very specific ways of reacting to new data which can flip quickly to a yes or no decision, rather than storing things up and making a collective decision at the end with summarized information. We have no intermediaries in our process – the seven partners are the ones interacting, with our GC and CFO now in the information flow.
There are days where it feels extremely noisy and others that are strangely quiet. This is different than a decade ago when it felt noisy all the time. I find the difference fascinating as I get used to the new surface area around the matrix.
I spend a lot of time thinking about and working on team dynamics. For a sense of how we think about them at Foundry Group, read Lindel’s great recent post Working at Threshold.
During a recent board call, there was a particularly challenging segment of the discussion. Afterward, I was frustrated because I felt like I was having an argument with another board member about something, but operating with different data. When I reflected on it, I realized that it wasn’t the data, but our respective frames of reference.
I was coming at the issue with an optimistic posture. She was coming at the issue with a pessimistic posture. The other board members on the call just listened, so while the data was the same, went ended up discussing it from opposite perspectives.
In general, this is a good thing. When the biases are known in advance, or explicitly stated, different starting postures can generate better critical thinking. But you have to know your bias as well as the other biases in the room. And, it has to be ok to come at things from different perspectives.
In this case, we weren’t explicit about it. I expect the other person knew that I was coming at things from an optimistic perspective (including the notion of “ok – we have an issue, but I’m optimistic that we can solve it) since that’s my nature. However, it’s possible that her pessimism about the situation overwhelmed her view of my position, and my frustration with her pessimistic viewpoint caused me to forget that this is her nature. If either of us had paused during the conversation and acknowledged our bias, or if someone else on the call had made the observation that we were simply talking past each other, that might have resulted in a more productive and fruitful discussion.
We talk a lot about this inside Foundry Group. Each of the seven of us comes from a different frame of reference on many issues. We have different biases, some deep-seated. We react differently to stimuli and behavior of others. We carry our own stresses in different ways. But, we know each other extremely well. By knowing that, and embracing it, we have more robust and honest discussions that we think lead to better decisions.
Ultimately, it’s not important to feel like you have to win each point, but rather simply be heard. As part of this, you have to also listen. Through this process, especially if you do the work to understand the posture of the other person, you should be able to modify and evolve your position based on the data you are hearing.
I wish I had a do-over on the board call that started this post with this rant in my mind.
Over the past 25 years, I’ve invested in many startups that sell products to large enterprises. Many of these companies end up either creating or helping to create a new category. As the startups (or the category) become visible, they inevitably attract the attention of industry analysts, who write reports on the categories and the startups as part of the industry analysts’ business.
Engaging with analysts can result in significant investments of time, effort, and capital on the part of the startup. The choice is a complicated one since startups are often challenging the status quo and industry analysts, while well-intentioned, don’t necessarily have a full grasp of the underlying industry changes taking place until well past the point that changes – and resulting trends – become obvious.
One of our portfolio companies recently engaged with an industry analyst for the first time with a very disappointing outcome. In this case, the company has created and is leading a new category. As a result of growing their customer base quickly, they were invited to participate in an analyst evaluation. Having invested little in relationships with this specific industry analyst, the company was hesitant, but the study was directly relevant and the industry analyst conducting the evaluation was prestigious, so the company decided to participate.
Unfortunately, it quickly became clear that the analyst conducting the review simply didn’t understand the problem being solved or why this company’s solution was so disruptive to the other vendors. The outcome was a deeply flawed report. In retrospect, the company would have been better off if they had never gotten involved.
While it’s easy to say “oops” and move on, this company will now have to deal with this report for a while in competitive situations. Rather than be pissed off about it, our feedback was to use this as a learning moment in the development of the company, figure out why this happened, and determine what could be done differently in the future.
Several of the issues were exogenous to the company, but one big one was under the startup’s control. And, in all cases, the startup should have been much more forceful about their perspective on each issue. The specific issues follow:
The terminology was loosely defined by the analyst. Big shifts in technology are often interpreted at first as evolutionary, not revolutionary. It was notable that several of the “leading” companies in the report introduced their products over a decade ago, well before the category being addressed in the report was even invented. As a result, the younger companies approaching the problem in a completely new way were ranked poorly because the analyst missed the real value to the customer.
The analyst didn’t behave like a customer. In this product category, most customers perform an in-depth analysis of vendor capabilities through a thorough review based on their customer’s buying criteria before deciding on the solution. This analyst didn’t feel like the study warranted a deep look and used vendor demos instead. This eliminated the opportunity for the analyst to understand the customer’s perspective and to compare and contrast the different solutions being evaluated. All decisions and scoring were left to vendor claims (also known as “marketing”) while operational aspects of the customer, and how the various products addressed them, were ignored.
The analyst went wide instead of deep. The magic of this company’s product and the new category they have helped pioneer is a result of focusing on a very specific, yet critically important aspect of a broader problem. The analyst either didn’t understand this or didn’t focus on it and included a wide range of product capabilities, many of them irrelevant to the problem being addressed, in the evaluation. As a result, the study favored broad tools that covered more surface area (mainly from very large, established technology vendors), but had less specific capabilities, especially in the new product category being addressed.
The company failed to fully engage the analyst. Since the company didn’t have a fee-based relationship with the industry analyst firm, there was no long-term relationship. To young companies, paying analyst fees can feel like extortion, but it’s an essential part of engaging with and helping the analysts to better understand your product and how it’s different, especially when you are leading the creation of a new category. In this case (as in many others), the established vendors of broad products had spent years shaping analyst opinions. Even though these broad products didn’t compete effectively in the new category, their relationship with the analyst, who in this case relied on marketing information rather than real product engagement, won the day.
If you sell a product to large enterprises, neglect analyst relations at your peril. I generally categorize this activity in the same bucket as PR, even though they are different functions and often driven by different leaders in the company. Don’t assume that the industry analysts are all-knowing. Instead, start early and feed them regularly or risk having large, established companies win at this game.
Recently, I was talking to a CEO of a company I’m on the board of. We were discussing a problem in the category of something new Is fucked up in my world every day
He gave me a great idea. He apparently plays a game with his young (I think around 10 years old) daughter. When they are sitting around in the evening, she occasionally says “Daddy, give me a CEO problem.” He does, she thinks about it a little, and then gives him a solution. He suggested to me that this often helps break him out of whatever thought rut he is in given how wacky and creative the answers typically are.
Unfortunately, I don’t have a daughter (or a son). While I have two golden retrievers and I’m a practitioner of rubber duck debugging, I don’t think this works as well as what my friend is doing. Oh – and I’m not a CEO, although the list of CEO problems that I’m exposed to is pretty long.
The next time you have a CEO problem (which will likely be in the next seven minutes if you are a CEO and awake), try to think about it through the lens of a 10-year-old and see if that gives you any new ideas.
I said some version of the following statement several times in the past few weeks.
Assume aliens came down and one of your senior leaders was taken away to their home planet. Do they have a person reporting to them who could step into their role, even if it’s only temporary?
If you are the CEO, this includes you.
It’s remarkable to me, even in companies that are over 100 people, how the answer to this question is no. I get that this can feel theoretically challenging in a very small (less than 20) person company, but it should still be an aspirational goal. Once you get to 100, it should be a requirement for every leader to be able to identify this person.
This should not be viewed as a threat. If you have this conversation with your leadership team (or are on a leadership team having this conversation) and are threatening (or feel threatened), you are missing the point. Realize that things happen and people leave organizations suddenly. They die. They have a dramatic personal change. They get bored. They scale out of their role. They get stopped at the Canadian/US border by CBP agents and can’t get back into the country. The aliens show up.
Less dramatically, leaders go through stretches where they are in a doer mode. The company has a crisis in an area and a leader has to spent 100% of her time working on this area, rather than covering her entire span on control. Or, focus shifts around a product launch and a leader who covers several aspects of the company focuses all of her energy on one of the three areas she has responsibility for. Or, someone really needs a vacation and goes off the grid for two weeks.
As a CEO, a big part of your job is to work “on” the company, rather than “in” the company. At the top of this list is making sure you have the right leadership team and they are functioning in a highly effective way. Part of that is making sure everyone on the team has a backup person identified and is not afraid to have them engage at any moment.
I recently heard the line “sandpaper only works if it is rubbing against something” and loved it.
From Wikipedia: “The first recorded instance of sandpaper was in 1st-century China when crushed shells, seeds, and sand were bonded to parchment using natural gum. Shark skin (placoid scales) has also been used as an abrasive and the rough scales of the living fossil, Coelacanth are used for the same purpose by the natives of Comoros. Boiled and dried, the rough horsetail plant is used in Japan as a traditional polishing material, finer than sandpaper. Glass paper was manufactured in London in 1833 by John Oakey, whose company had developed new adhesive techniques and processes, enabling mass production. Glass frit has sharp-edged particles and cuts well whereas sand grains are smoothed down and do not work well as an abrasive. Cheap sandpaper was often passed off as glass paper; Stalker and Parker cautioned against it in A Treatise of Japaning and Varnishing published in 1688. In 1921, 3M invented a sandpaper with silicon carbide grit and a waterproof adhesive and backing, known as Wet and dry. This allowed use with water, which would serve as a lubricant to carry away particles that would otherwise clog the grit. Its first application was in automotive paint refinishing.”
Every company I’m involved in has issues. Some are minor. Some are major. Some are easy to fix. Some sneak up on you when everything feels like it’s going great. Some are existential crises. Some just feel like existential crises.
Simply put, Something new is fucked up in my world every day.
That’s just the way companies work. And, as long as the company is still around, no matter what size, or level of success, the dynamic is endless. When you think things are going great, it’s just a signal to pay attention to what is going wrong. While there are lots of issues that are exogenous to you, that you can’t control, or impact, many others are issues on the surface of your company.
Use sandpaper on your company daily. Be gentle with it, but precise.
There’s a magnificent exercise that I like to do for myself on a periodic basis. I’m sure it has a more formal name but I call it “Good Bad Like Dislike.”
I create a two by two matrix that looks like this:
I then go through my calendar for the next few months as a starting point to stimulate things to put in each box. I’m careful not to put specific items in the box, but concepts. For example, “Managing Other People” often ends up in “Bad – Dislike” box when I realize, through my forward calendar review, that I have a set of activities where I’m managing others. Or, instead of Good-Dislike: Company X Board Dinner, I end up writing “Board Dinners” in the Good-Dislike Category.
To be more specific, I deeply dislike managing others. While I might have been good at it a long time ago, and I could also likely be good at it if I worked at it, since it’s in the Dislike category, I don’t want to work on it. In contrast, I like “Leading Other People” and am good at it.
Part two is a personal reflection. Instead of being prompted by my calendar, I sit quietly and think about the things I’m doing that I dislike. I’ll often talk to Amy about this as she knows my Good Bad Like Dislike better than anyone on the planet. This is a particularly hard exercise for me because I often rationalize that I should be doing things in the Dislike category. I often overrate my ability on certain things that I feel that I should be good at, so they land in the Good category instead of the Bad category. Having a Fair Witness in one’s life helps with this.
Part three of the exercise is to take specific action around the high-level categorizations. Since I used my calendar to stimulate the review, I have my next three months in the front of my mind. I can then take specific actions. For example, I systematically decide not to do any board dinners in the future. Or, I change the management structure around the project that I’ve ended up managing so that I’m a participant in the project instead of the manager.
I just did this over the weekend as I was considering what 2018 was going to look like for me. I’m also sneaking up on v52 of myself, so it’s a good time for me to think about these kinds of things.