If you are the CEO of a VC or angel backed company, will need to raise more money in the future, are doing more than $100,000 of revenue a month, and are growing more than 25% a year, then this post if for you.
In January, you finalized your budget. Unless something went horribly wrong, you made your plan in January, especially if the plan was finalized in February. Assuming things were on track, you made March and declared victory on Q1.
Q1 is the easiest quarter to make. If you miss your Q1, regardless of the type of revenue you have, you aren’t going to make your revenue plan for the year because your budget process isn’t accurate. If you are a SaaS or consulting business, you likely just can’t make up what you missed, especially if your growth rate is greater than 50% for the year. If you sell a physical product, you have a lot of Q4 upside and unpredictability, but now you have to manage your cash to get to Q4 so that you can invest in building inventory to over-perform. If you are a marketplace, you’ve likely got a supply/demand imbalance that you don’t completely understand. And, if you overperformed on sales but can’t implement things fast enough to recognize revenue, you’ve got an entirely different, and especially difficult problem to overcome.
If you aren’t going to make your revenue plan, it’s unlikely you’ll make your EBITDA or Net Income plan. You don’t even have to get complicated and look at Gross Margin or more derivative metrics – if you are off in Q1 and have any sort of growth expectations , you are going to miss for the year.
But, if you are like most CEOs, you think you’ll fix things in Q2 and be close enough to or at plan to keep going on your current budget. And, if you met or beat Q1, you’ll be somewhere between appropriately confident and overconfident about Q2.
It’s June 7th. You likely know how you are going to do in Q2 by now. Every now and then I run across a business that doesn’t have a handle on their first half of the year by the beginning of June, but if you are honest with yourself today, you know whether you will be ahead of, at, or behind plan at the end of Q2.
If you are going to be more than 2.5% behind plan on your revenue line for the first half of 2016, it’s time to rebudget for the second half of the year. If you missed your EBITDA by more than 5%, it’s time to rebudget for the second half of the year. If your GM% is off by more than 5% for the first half, it’s time to rebudget for the second half.
When I say rebudget, I don’t mean “reforecast.” I don’t mean have three numbers – original plan, new plan, actuals. I mean start now, before June is over, and create a 2H16 budget. Throw away your current budget for 2H16 – it’s wrong. Don’t wait until July to realize that it’s wrong. Own that it is wrong right now and come up with a new plan for the rest of the year.
Deal with reality. Your growth rate will be slower than you planned at the beginning of the year. No matter what you do at this point, your EBITDA loss and the amount of cash you will consume over the year will be greater than the original budget. You will have an uncomfortable board meeting in your future. But it won’t be nearly as uncomfortable if you keep waiting to deal with reality.
This is especially true if you have a growth rate of > 100% planned for the year. The smart CEO has already reduced her hiring plan but in an informal way. By creating an entirely new budget for 2H16, you make it official. You also make it clear to everyone, including your team, your board, and your investors where you really are at and where you are planning to go.
For your Sunday video watching, I encourage you to spend ten minutes of your life and watch Chris Moody‘s Commencement Address to the Auburn 2016 graduates.
His message is simple: Work Hard. Be Kind.
Having worked with Chris for many years, it’s a great summary of how he lives his life. And he ends with a magnificent Dalai Lama quote. “Be kind whenever possible. It is always possible.”
As I procrastinate from going for a run this morning, I started writing a post titled The Pro-Rata Gap Myth. After two paragraphs, I got tired of writing it and hit the “this is bullshit” wall – it’s too complicated to explain a myth that I’m not sure even matters.
So I deleted the post and decided to tell a story instead. This is a story I roll out occasionally with CEOs to help them explain how their words can easily be misinterpreted by their teams, especially as the teams get bigger. But it’s also a way that CEOs misinterpret what their investors or board members (or chairperson) is saying. And it creates endless organizational waste and misalignment when the CEO / investor / board member / leader isn’t clear about what she is saying and who her audience is.
Between 1996 and 2002 I was co-chairman of Interliant, a company I co-founded with three other people. Interliant bought about 25 companies during its relatively short life, helped create the ASP business (the pre-cursor to the SaaS world we know and love today), went public, and then blew up post-Internet bubble and ultimately went bankrupt before being acquired, partly because we created a capital structure (through raising a bunch of debt) that was fatally flawed, ultimately wiping out all the equity value.
While I learned a ton of finance lessons from the experience, I also learned a lot a leadership lessons. Your wall is dingy is one of them.
We had just acquired a company (I don’t remember which one or in which city) sometime in 2000. I was visiting the company post acquisition and wandering down the main hallway with the founder of the company we had just acquired. We were having a causal conversation and I offhandedly said “wow – your wall is dingy.” We kept walking, I did a Q&A thing with the founder and the company, and then went out to a mellow company lunch celebration type thing.
I had other stuff to do in the city so I stayed overnight and came back in early to have some meetings at the company the next day. As I was wandering down the same hall, I saw that there was a crew already in the office painting the wall with a fresh coat of paint. I got my coffee, wandered over to the founder’s office (he was also already in early), and asked why there was someone in the office painting the wall?
Founder: “You told me the wall needed to be painted.”
Brad: “I did?”
Founder: “It was while we were walking down the hall. We were talking about the new car I was thinking about buying and you said that the wall was dingy.”
Brad: “Oh yeah – that was said out of admiration for how frugal you are. You were telling me how this is the first new car you will have, since all of your other cars have been used cars. I admire how thrifty and scrappy you’ve been and thought I was paying you a compliment.”
Founder: “Shit, I thought you were unhappy with how low rent our offices are and were commenting that we needed to make things a lot nicer.”
Brad: “Double shit. I was saying the opposite. Part of the reason you’ve been so profitable is that you don’t waste money on your offices. This is part of what we love about your company. And it’s part of why we were willing to stretch in the deal – we knew you know how to make money and that you value every dollar.”
We eventually both started laughing. It was a good bonding moment. Fortunately, it was just paint and didn’t cost that much, although it was one of 27,393 incremental expenses that helped sink Interliant, especially in a time when rent was skyrocketing and everyone needed fancier and fancier offices because, well, because everyone else had fancier offices.
Ever since that moment I’ve been a lot more tuned into what I say. I still talk the way I did then – plainly and with whatever is on my mind – but I try to add the reason so that I’m not misinterpreted. If I could teleport myself back to that hallway in 2000, I’d say “Wow – your wall is dingy, and I love it, because it reminds me how frugal you are.”
As a leader your words matter. It’s not that you have to necessarily choose them carefully, but make sure you explain them and try to confirm that they are understood.
Jon Hallett, a prolific angel investor and successful entrepreneur who I’ve gotten to know over the past few years, dropped a major knowledge bomb on me yesterday afternoon when he sent me a post from David Politis titled This is How You Revolutionize the Way Your Team Works Together… And All It Takes is 15 Minutes.
I remember having a meal in December 2011 with David at the Plaza Food Hall in New York and talking about BetterCloud which we foolishly passed on investing in. So I wasn’t surprised to have the reaction I had after reading the post, which I said out loud to myself.
“Fucking brilliant!”
The simple idea is to write a user manual about how to work with you. My partner Seth has an email he sends out to companies he joins the board of titled Welcome to Foundry which is a roadmap for working with him, but also reflects how to work with all of us. It’s similar and touches on some of the questions that David addresses in his article, which he based on a presentation from Adam Bryant, a columnist for The New York Times, titled “The CEO’s User Manual.”
In this presentation Adam gave there were two sets of questions to answer to sketch out the User Manual. The first set, focused on the individual person, were:
The second set are focused on how the individual acts with others.
I’m going to do this exercise over the weekend and share with my partners and all of the CEOs I work with to get their feedback on whether (a) it’s helpful and (b) it’s truthful. I’m going to let them give me feedback (which will help me learn myself better). As I iterate through it, I’ll eventually publish it on this blog. And, if the exercise works, I’m going to encourage every leader I work with to consider doing it.
I had a great interaction with a friend several months ago. The question he asked was:
“How do you beat Michael Jordan at sports?”
I thought about it for a second. I knew Michael Jordan was a good golfer and I don’t play golf. I figured he was in better shape than me and could beat me on a track. There is no way I could ever beat him at basketball. And baseball – well this video kind of says it all.
So I eventually said “I don’t know.” My friend said:
“Take him surfing.”
What he meant, of course, was play a totally different game. Now, I’m not a surfer, but let’s presume neither is Michael Jordan (although he’s so physically talented that a dangerous assumption.) But let’s assume it’s true. When we are both on a surfboard we are each beginners. Assuming he doesn’t already surf, he’s probably not inclined to get on a surfboard. So I can have a huge head start on him if I start surfing now and practicing every day. After a few years, if he eventually decides to try to surf, I’ll likely beat him at a sport.
I’ve been a long time believer in Jack Welch’s famous thesis that if you aren’t #1 or #2 in a market, you should get out of it. Interestingly, for those who don’t realize it, he challenged his own thinking about this in his final shareholder letter at CEO of GE.
When I reflect on our investing approach, we have a very strong focus on helping the companies we invest in become the #1 or #2 player in their market. When we find ourselves in an investment where we aren’t #1 or #2 in a market, we try to follow the meta-point of all of this, which is to change the game and have a different point of view.
When I go through our portfolio, there are a bunch of companies that are clearly #1 or #2 in their market. These are very satisfying to be an investor in and their paths are clear.
Then there are some that aren’t #1 or #2, or are in very crowded markets where it’s hard to figure out what #1 or #2 is. And there are some that are in unformed markets, or their ultimate product and strategy is not clearly defined, so it’s hard to put them clearly in a market segment. This is the blessing and curse of being an early stage investor.
Then there are some who should simply go surfing. We try to tell them that when we realize it and in some cases they’ve gotten very good at surfing. When this happens, it’s especially satisfying.
I was catching up on a bunch of reading on the web from last week and came across a post by Lars Dalgaard titled Thoughts on Building Weatherproof Companies. I don’t know Lars, but know of him as the founder/CEO of SuccessFactors and now a partner at A16Z, and was curious after recently reading a Forbes article about Zenefits a few weeks ago titled ‘A Lot Of Things Went Wrong’: Lars Dalgaard On Zenefits Scandal.
Any CEO I’ve ever worked with has heard me say “build the company and make decisions as though you’ll be running it forever” many times. While forever is a very long time and so far the idea of running a company forever hasn’t happened, it’s a great frame of reference for a CEO to operate from. So, I found myself nodding at a bunch of things Lars wrote in his post and I encourage you to read it.
Following are a few of the headlines of the points that resonated with me along with my quick thoughts.
Successful companies are bought, not sold: This cliche is said 100x per day by VCs. And it happens to be true. Build something great and important and opportunities to be bought, whether you want to pursue them or not, will come to you.
Develop a perpetual, aggressively help-seeking mindset: A simpler way to say this is “learn quickly, do it continuously, and surround yourself with people you can learn from.” There’s a subtext about sublimating your ego and fears, which appears in several other parts of the post and is a characteristic of everyone I know who is a learning machine.
Invest in a coach: Many of the CEOs (and founders, and execs) we work with have coaches. We strongly recommend them. My partners and I have used Nancy Raulston since we started Foundry Group and my extremely close friend Jerry Colonna is someone I describe as “the best startup CEO coach on the planet.” I have a running coach, even though all I do is run marathons, and not competitively. I’ve never understood why people who are trying to be excellent at something don’t recognize the value of a coach.
Build a real board of directors … and use it: I’ve long been an advocate of building a real board early in the life of your company. Lars talks about adding non-VC directors early and I strongly agree. I’ve seen too many boards that are just gradual expansions of the number of VCs around the board table with each successive round of financing. While the CEO works for the board, a great board effectively works for the CEO also, doing whatever it can (as individuals and collectively) to help the CEO be successful with one fundamental governance role – that of insuring that if the CEO is not being effective, the board can take action to change this, which often, but not always, means replacing the CEO. If you want to go deeper on this, I’ve written a book on it called Startup Boards: Getting the Most Out of Your Board of Directors.
Kill the monsters of the mind, while preserving your spirit: While a provocative title, I’m not sure your goal should be to kill the monsters of the mind. In my post titled Something New Is Fucked Up In My World Every Day, I tell a short version of the Buddhist saint Milarepa’s story Eat Me If You Wish. Coming to terms with the monsters (or demons) is much more powerful (and efficient) than killing them, since it often makes them simply disappear.
Don’t lie to yourself: I remind you of the great John Galt quote “Nobody stays here by faking reality in any manner whatever.” If you ever stay in my guest condo in Boulder, you’ll see a painting by my mother with this quote incorporated into it hanging on the wall.
It’s Sunday – if you are reading this, take some time to read Thoughts on Building Weatherproof Companies and ponder it in the background, instead of burning brain cells on whatever political crap is discussed on the internets today. Lars, thanks for taking the time to write it.
After skimming the New York Times this morning (while Amy reads it word by word), I felt like a philosophical dump. Maybe it was the article on why Trump is so popular. Or the completely banal business section where everyone knows what is going on.
Confidence is an attribute that humans value. We like and are attracted to confident people.
Competence is an attribute that we also value. But it’s often more subtle and harder to determine, especially on a first interaction.
Over a long period of time, I’ve come to realize that a balance between confidence and competence is very appealing to me. I’m attracted to people who know what they know and know what they don’t know. These people are constantly learning and their competence around a particular topic increases linearly with their confidence.
Recently, I realized that we refer to people as over-confident or under-confident, but rarely refer to people as over-competent or under-competent. We do refer to people as clueless, ignorant, stupid, and other things that imply under-competent, but often in the context of their level of confidence. I don’t really know of a phrase we use for over-competent.
In an era where everyone is an expert, the ratio between these two concepts strikes me as particularly compelling. Lets define cluefulness (CLUE) as:
CLUE = confidence / competence
CLUE = 1 is ideal. If CLUE > 1 then you’ve got an over-confident person. If CLUE < 1 then you’ve got an under-confident person. But interpreting this on the under-confident / over-confident spectrum doesn’t really tell you much. Is the person a blowhard, or are they shy? Are they bombastic, or just quiet power? Are they an extrovert or an introvert? Are they full of shit, or just unconcerned with whether you realize how competent they are.
I’m attracted to people with CLUE <= 1. And I find people with CLUE > 1, especially by a significant amount, insufferable.
Do I have a CLUE about this? Feel free to help me get my ratio in balance.
I love the phrase vanishing mediary. This is what I aspire to be. It’s the opposite of a visible intermediary.
In our ego-fueled world, many people want to be front and center. Leaders are told to lead from the front, even if all they do is get up on a white horse and exit stage left as soon as the battle starts. We all know the leaders who are more about themselves than about the organizations and the people they lead. Many of us interact with this type of leader on a daily basis and, while it can be invigorating for a while when things are going well and there are bright lights shining all around you and celebrations around every corner, it’s often complete and total misery when things get tough.
The media wants hero stories. It also wants goat stories. The most glorious media story arc is rags to riches to rags with redemption back to riches. None of this is new – it’s been going on since the beginning of time. Just look at the covers of magazines going back 100 years. And I find it completely boring and tedious.
I can’t remember who first shared the word vanishing mediary with me (if it was you, please tell me so I can update this post) but I instantly loved it. It’s the notion of a leader who helps get things started and gets out of the way. She’s available if needed, and continues to lead by example, but doesn’t need to be front and center on a daily basis. When needed, especially when things are difficult, complicated, or a mess, she shows up, does her thing, and then gets out of the way again.
When I reflect on how I like to lead, it’s very consistent with the notion of a vanishing mediary. As an investor, as long as I support the CEO, I work for her. If I’m not needed, I hang out in the background and offer thoughts and data without emotion when I encounter things. If suddenly I’m needed for something, or get an assignment from the CEO or anyone else on the leadership team, I get after it. If there’s a crisis, I’m there every day for the CEO for whatever she needs.
My role with Techstars is similar. While I have some visibility as a co-founder, I offer it up to David Cohen, David Brown, Mark Solon, and the rest of the Techstars leadership team to use however they want. If they need me, I’m there. If they don’t, that’s cool. I’m a resource that can appear on a moments notice and provide any kind of leadership they need but I don’t have to be front and center.
Great startup communities work the same way. Whenever someone introduces me as the leader of …, the king of …, or the creator of the Boulder Startup Community, I cringe and go into a rant about how I’m not that. I’m just one of the many leaders in the Boulder Startup Community. I’ve helped create a number of things that contribute to it and I play an active role in it. But, like many others, including serial creators like Andrew Hyde (Startup Weekend, Ignite, TEDx Boulder, Startup Week, now at Techstars) I am most happy when I can hand something off that I created to someone else to take it to the next level (Entrepreneurs Foundation of Colorado is a great example of this – thanks to my co-founder Ryan Martens and my partner Seth Levine for providing leadership that has made it what it is today.)
In the 1990s, I ended up being a chairman or co-chairman of a bunch of companies, including two that went public. Today, even though I’m asked, I don’t want to hold the title of chairman for anything (there are a few exceptions – all non-profits). I don’t want to be at the top of the organizational hierarchy. I can play a strong leadership role through my actions, rather than by a title that anoints me.
Most of all, I want to provide leadership through doing. And I think I can best do that by being a vanishing mediary. And, I recognize that mediary isn’t a well defined word, or may not even be an official word, so hopefully we’ll get an urban dictionary definition of vanishing mediary soon.
Matt Blumberg, the CEO of Return Path, has an outstanding post up this morning titled The Difference Between Culture and Values. Go read it, I’ll be here when you get back.
If you liked that, go get a copy of Matt’s book Startup CEO: A Field Guide to Scaling Up Your Business. It’s one of the books on my list of books all CEOs should read.
Matt distinguishes between culture and values. His punch line, which he reveals early, is:
Values guide decision-making and a sense of what’s important and what’s right. Culture is the collection of business practices, processes, and interactions that make up the work environment.
At Foundry Group, we have a slight modification to how we think of values. Supporting our values are a set of “deeply held beliefs.” These deeply held beliefs tangibly define our values and give us a frame of reference to operate.
For example, one of our deeply held beliefs is that “we will never grow.” Each of our funds is $225 million, we have four partners and no other investment staff, and we work out of the same office we’ve worked out of since we started in 2007. We’ve had opportunities to raise much larger funds and have considered it in the past given a variety of factors. But, we kept coming back to this deeply held belief and realized that raising a larger fund would violate our brand promise of only raising $225 million funds.
Our deeply held beliefs are fundamental to our values, although we are comfortable challenging them regularly to make sure they are deeply held, and make modifications on occasion when we learn new things but only after a lot of thought and discussion, among ourselves and with several of our very close limited partners.
For example, when we started we said “we’ll make around 10 new investments a year.” This came from a belief around the importance of time diversity of investing – we have a three year time horizon for making the 30 or so initial investments in the companies we want in each fund.
Until 2013, we made between 8 and 14 a year, which is close enough to 10 (although the year we did 14 was a year where we all said “too much – slow down.”) But at the end of 2013, when the JOBS Act became official and AngelList created Syndicates, we decided to understand the phenomenon better by participating in it. So, rather than sit on the sidelines, observe, and prognosticate about angel / seed investing, we created the FG Angels Syndicate on AngelList and have done around 60 seed investments in the last 18 months.
Another example of a re-evaluation of a deeply held belief was our decision to create our Foundry Group Select Fund. Until we created this fund, we limited the amount that we could invest in a company to $15 million. We would occasionally go a little higher (the most we have invested in a company from one of our funds, other than Select, is $17 million) but, especially with successful companies, we were limited to what we could do in the later rounds. During a particularly challenging financing for Fitbit, which we believed deeply in at the time as an unambiguously successful company, we were frustrated that we couldn’t write a big check in the financing. We talked to our LPs about what we were thinking, quickly raised a late stage fund to invest on in our later rounds for our portfolio companies, and made our first investment from that fund in the last round Fitbit did in 2013. With Select, we are no longer limited to investing $15 million per company.
Matt states in his post:
“A company’s values should never really change. They are the bedrock underneath the surface that will be there 10 or 100 years from now. They are the uncompromising core principles that the company is willing to live and die by, the rules of the game.”
I strongly agree with this, although I have one nuance. It’s hard to be absolutely correct at the beginning of the journey. So, instead of being dogmatic about values you created when you were three founders in a cafe somewhere, make sure you have one layer of abstraction about how you implement them, that can be tuned over time. For us, these are our deeply held beliefs, which support our values, but can be tuned as we learn new things. But, because they are deeply held, they can only be slightly modified, rather than torn up and replaced.