Managing Growth

Today, I had the good fortune of sitting in on a lecture by Verne Harnish on how to increase the value of fast-growth companies. Verne is the author of Mastering the Rockefeller Habits and CEO of Gazelles Inc. My host, a major Internet company, brought Verne in to provide senior and mid-level management a framework and set of best practices for managing growth and creating value. The subject matter is dear to my heart and a critical area of study for any start-up manager.

Verne's book is based on the management style of John D Rockefeller. Rockefeller's management style centered on three key areas: priorities (define the 1-5 most important organizational objectives), data (identify and manage to the key metrics and leading indicators), and rhythm (run a well-organized set of daily, weekly, monthly, and quarterly meetings that keep everyone aligned and accountable). The core premise is that success is the sum total of all decisions being made in an organization. Leaders/managers influence decisions, and hence success, and need a framework regarding how best to do so.

Verne laid out his 4-3-2-1 framework for how great managers can optimize decisions.

Managers have four decision levers:

• people (happiness, turnover, applicants/job opening, quality applications/total applicants)
  
• strategy (revenue/growth)
• execution (profit/time)
• cash

The four key decision areas are complemented by three key disciplines:

• priorities
• metrics/data
• meeting rhythm

The three disciplines relate to two key drivers

• reputation
• productivity

Finally, each manager needs a life coach who will push, challenge, and hold them accountable as you grow as a leader. The key point is that if Tiger Woods, Roger Federer, and Michael Dell have life coaches, why do you think you don't need one? Good point.

Often start-ups feel that data-driven management is an oxymoron, that meetings are a waste of time, and that communication by email is the most effective way to get things done in a crazy, fast-paced world.

Verne's rebuttal to that world-view is that relentless repetition and routine frees the company to shine and grow confident that energy and effort are aligned with the end game. He advocates meeting and managing to a few key priorities, daily "talk time" where the team can spend 10-15 minutes reviewing pressing issues, daily data and indicators, and bottlenecks that require resolution creates incredible energy, collaboration, and productivity. He recounted multiple examples of companies that make a daily meeting an essential rhythm of corporate life and benefit in doing so.

As an investor and ex-CEO of a start-up, I relate very well to Verne's approach. Companies need to select a framework and language of dialogue that centers the team on common goals, common metrics, and creates a forum for cross-function collaboration, problem resolution, and productivity. While this is common sense, too often common sense is lost to inertia and productivity grinds to a halt as misalignment and misdirection sap energy, cash, and momentum. Whether Verne's framework or another, picking a methodology to detail priorities, metrics, and company alignment and communication can make implicitly intelligent ideas explicit mechanisms of management and key tenents of company culture.

With respect to growth, he argued that the faster the rhythm (group meetings and metric reviews), the faster you will grow. Seems counter-intuitive that meeting time accelerates productivity - but if a short, stand-up meeting eliminates bottlenecks, realigns priorities and strategy, and enhances cross-team synergy then it is somewhat obvious productivity will be enhanced. This is very similar to the role of the Scrum master in agile development.

His site provides templates for strategic plans, daily and weekly meetings, and other useful materail.

Finally, he left the group with two sets of looming questions.

The first set is what is the business question we need to answer? What is the key problem/question whose answer will free us to grow at 2x the competition, 2x the cashflow, 3-5x the profitability, and 10x the market cap? He also suggests picking a key personal question that will similarly accelerate personal growth and development.

The second question is to determine what to stop doing. What wastes time, is inefficient, gets in the way of true productivity - answer the question and get rid of it.

Thank you to my host and to Verne for a great day and lots of food for thought.

Applied Interviewing

Interviewing candidates is an art and a challenging one. Hiring the best and brightest, establishing competency, qualifying cultural fit, and making interviewing productive are critical to the success of early stage companies. In order to avoid superficial discourse and backing-in to a process that rewards conversational skills rather than material functional skills, it is helpful to train people in structured, applied interviewing.

Too often, people walk into interviews armed with little more than a resume and ask, “so tell me about yourself.” There is an awkward dynamic where the candidate is eager to convey their strengths and the interviewer wants to qualify the “fit” of the applicant. And yet, far too often, the output of the interview is , “I liked them,” or,
“I don’t think they are a fit.”

Given the massive importance of hiring the right people, screening for the right skills, and making the best use of the time consuming interview process it really pays think about how best to evaluate talent. Structured, applied interviewing moves the interview away from conversational skills and the serial recounting of someone’s background to a focus on the specific skills that are relevant to the hire in question.

For each department, I encourage start-up teams to jointly develop a set of questions, case studies, and applied examples of the skills in question. Then train each interviewer in how to best ask the questions and use the structured material. Group evaluations can then center on a common framework and a targeted output. For example, for engineers the interview could center of logic and coding tests, for VP sales on forecasting methodologies, CRM systems of choice, pipeline and sales force management…In my case here at Hummer Winblad, the team asked me to present my thoughts on the future of the software industry, in a one hour presentation, to the full partnership. My ability to present, articulate a thesis, and provide a framework for analysis were made transparent and the final evaluation allowed for skills and cultural fit to be taken into account.

After interview-day dinners can help with the cultural fit questions, however, for the scheduled interviews I suggest avoiding the conversational approach for a vetted, structured approach that helps make the interviewing process more productive in terms of both time and results.

People, after all, are the most input into any growing business.

SVASE - VC Breakfast

Next Thursday, I will be involved in a SVASE VC breakfast event. The event is Thursday, May 25th at 8am at 50 Fremont St in San Francisco.

Per the SVASE site:

"The VC Breakfast club provides an intimate setting and meeting place for one VC and up to ten entrepreneurs who meet for breakfast every week. The participating VC listens to each entrepreneur's extended elevator pitch and provides immediate feedback - enabling fast, effective, accessible mentoring and relationship development."

I look forward to meeting some great entrepreneurs.

Cash Breakeven Analysis

In the spirit of sharing best practices in start-up management, I write to share some interesting analysis on cash breakeven forecasting that I saw at a recent BOD meeting. The BOD deck included a simple yet powerful slide that helps understand the size of the "cash gap" derived from analyzing the make-up of monthly cash expenses, current monthly recurring cash revenue base, and average monthly sales price. Simply graph total montly cash expenses by category vs existing recurring monthly revenue - illustrate the size of the gap and note how many incremental sales * contribution margin it will take to close the gap.

An example is below:

Follow the User

In 2006, American industry will spend $290 bn on advertising. How much will be spent on-line as a percentage of the total? 4.6%, or $13.4bn.

It is quite remarkable that despite the pay-for-performance advantages and closed-loop nature of on-line spend versus off-line spend that the number is so low. Newspaper spend is 6.6x that of on-line spend - why? How long can this last?

In many ways, on-line ad spending is changing our relationship to our service providers - more and more content and application functionality is ad-supported - email, storage, video, news, calendaring, IM, 411 calls, etc - and the companies that recognize the move to providing users high-quality product while providing advertisers high-quality demographics and targeting mechanisms are clearly winning.

Google's model: revenue = users x queries/user x ads/query x clicks/ads x revenue/click is powerful. Queries provide targeting information (what is someone looking for, watching, blogging about), clicks provide insight and accountability (how many consumers find this campaign relevant and useful), and revenue/click helps advertisers understand cost of customer acquisition and helps site that provide meaningful user populations, user segmentation and targeting monetize their users.

Questions to Ask

Quick post sharing some of my favorite questions to ask entrepreneurs thinking through enterprise business plans and strategies....the questions help me think through the merits of enterprise software start-up strategies given today's IT environment.

What is the time to value quotient? How long does it take for the customer to realize value from your product? Compare and contrast clicking on a URL to self-provision versus a two-month on-premise proof of concept.

What is the customization to value quotient? How much customization is required before the customer sees relevance and value?

How much manual labor is required to realize value? How many sales engineering and professional services hours are required to both explain the merits of the solution and have it running successfully in the customer's environment? The common element of MySQL or Salesforce.com appears to be that customers self-validate through low-risk experimentation without the need for vendor sales engineers.

What is the risk of experimentation? Does the customer need to pay for a proof of concept? Does the customer need to requisition IT resource (new servers, open up a firewall port, etc) to enable your product to showcase its benefit? As with the MySQL comment above, can the customer experiment and test the value proposition without material risk or expense?

What is the time to integration? Can the product provide standalone value that obviates the need for day one systems integration, a la SFA? To the extent integration is required, how standardized are the interfaces to relevant up and downstream systems that add value to the solution?

The consumer internet offers useful lessons and direction for the enterprise space. Customers self-provision, self-validate, self-integrate, and self-configure.