Ask the Wizard

Let’s pull a question from the MBA bin. I’ve spoken a few times to MBA schools that have mistakenly invited me in to talk about starting and running companies, and the question I always get at these events is “what is your exit strategy?”

I don’t think you can be very successful, and you certainly won’t be happy, if you are running a business and thinking about your exit strategy. If there is one theme that I hope I am conveying here over the course of many posts, it’s that you can’t predict what is going to happen to your company.

My cofounders and I have never entered a business or market thinking “the goal is to take this company public” or “we need to get this in front of the M&A team over at Toys ‘R Us”, or “if we have 50% of the online humidifier market by june 09, we’ll be a great acquisition target”, nor do I think you can unilaterally pursue exit goals successfully. The old adage “great companies are bought, not sold” is sometimes taken to mean that if you’re out there hawking your wares to M&A teams, your product/service must be second rate, but I think the more salient takeaway from this adage is that great companies are pretty focused on what they need to do in order to grow the business, execute on the strategy, and hit the revenue/operations targets.

The bottom line is that you have to take something of a zen approach to what the “result” of your company will be. Your business will either be successful or it won’t. If it’s successful, then the outcome will take care of itself. How will it take care of itself? It’s impossible to predict.

The enlightened reader is now thinking, “wait a minute, if you don’t have an exit strategy or outcome in your head, then how do you know how to finance the company? How do you decide what you want to do next in terms of growth? How do you decide if an offer (financing or acquisition or otherwise) is worth it?" Around this same point in the conversation at the MBA events, I usually get a raised eyebrow that accompanies the comment “well, your VC’s are certainly thinking about exits even if you’re not, so how can you say you’re not thinking about an exit strategy if 60% of your company is owned by people who want a fast exit”.

I have generally the same answer to both questions/comments. First of all, contrary to what I seem to read almost weekly, technology VC’s (at least the early stage folks we’ve worked with) are more interested in growing successful businesses by financing them and less interested in figuring out how to get liquid within 18 months. Obviously, there comes a point or many points in the life of a successful company in which there are liquidity options, including acquisitions, mergers, and public offerings. I can tell you that if you are running a growing company with solid investors, those investors will generally be encouraging you to keep growing the business and financing it for further growth and ignore everything else. At some point, the preferred financing is a public offering through which the investors have some ability to approach liquidity. So, the notion that you are on the speed clock to exit when you raise venture money just isn’t generally true. No doubt there are exceptions – say a fund is underwater, and you’re the last company in the portfolio and you’re doing 8 figures a year top line in your third year and you want to stay private as long as possible – ok, you're definitely going to have a fidgety investor on your hands. From the entrepreneur’s standpoint, the answer to the question,“If you don’t have an exit strategy, how do you know how to finance the company? How do you know where you’re going?” is similar. You treat any acquisition/merger/etc. entreaties as financing offers, realizing that financings that result in 100% acquisition of the equity are going to look different than those involving the purchase of 10% of preferred Series D stock. Since you should always have a general sense of how your company would be valued on a financing, you can then more easily react to other offers pretty quickly, without having to run around like a chicken with its head cut off. They either make sense vis-à-vis how you would finance the continued growth of the company based on your current trajectory or they don’t.

Don’t interpret my comments here as "never talk to your executive team about how much you think the company is worth right now" or “you don’t even talk to people that want to talk to you about financings, m&a, mergers, etc. until you are ready to finance the company for further growth”. That’s not at all what I’m saying, and in fact, I’d say the exact opposite. I almost always met with people that wanted to talk to us about these topics (almost always financings), even if we weren’t a stage where we needed to raise money. I’ll go into this more in a future post, but again, this is all part of our philosophy that you can’t try to steer your company down a pre-ordained path: “we’re not going to talk to VC’s now because our business plan has the A round lasting 12 months”, or “we’re not going to start talking to investors now because we’d really like to sell the company in six months”. Potential investors, potential acquirers, potential partners – these are all opportunities that you should weigh in the context of what’s happening to your business in this market. How these opportunities will play out is impossible to predict. Make a map of how you want to grow the business, not a map of what you want to happen to the company.

Posted by Dick at 03:45 PM | Permalink | Comments (6)

Good question about organizational behavior in startups and office configuration, a topic about which the FeedBurner cofounders have very definite opinions.

“Oh great Wizard, what is the ideal office space configuration? Cubes with some private offices, combination of open workspace, cubes, and private offices, or some other crazy configuration?”

Yes, we’re all getting cute with the ‘oh great wizard’ stuff….serves me right. My opinion for technology startups is totally open space with some large conference rooms, some very small conference rooms which double as phone rooms for personal/private phone calls, and no private offices, and if that’s not possible (no such rental space in a neighborhood, etc.) then make your existing space as open as possible and turn private offices into rooms with 2-3 desks. When FeedBurner was about 35 people, I was with a collection of CEO’s at one of our investors’ entrepreneur summits, and I stated that this was the winning formula in my book. I was widely disagreed with, mostly on the grounds that you can’t sustain open space with no private offices beyond 40-50 people. Since we were only at about 30 people at the time, I figured maybe that was true, and I certainly couldn’t prove that it wasn’t. My short time at another much larger company with generally open space makes me think my first instincts were correct. I’ve certainly seen that it’s not true that you can’t scale the open space approach beyond 30 people. Let’s talk about why I like this open configuration in startups, and why I hate dislike offices:

1. Speed of communication begets speed of execution. News travels a lot faster in a big open room with no walls than it does in an office with corridors and private offices. When everybody is up to speed on what’s happening in the company in real time, it’s easier for everybody to zig and zag at the same time. True/simple/stacked-deck example: We once were working on a partnership with another small company – fortunately, for the sake of this example, they were in a *very* private office culture, and FeedBurner was totally open floor plan - no offices, everybody has a desk and no walls. Our marketing director received a call from their marketing person about a change their engineering team requested. Our marketing person put down the phone and just said to me “hey dick, they want to do blah instead of bluh”, and I got up to walk across the room to the engineering person on our side and he just said “yeah, that’s fine, no problem” before I even got over there. We’re all up to speed in 10 seconds. Meanwhile, over at private offices company, the marketing director and their lead engineer know about this, but the founder, who is in the office that day, sends me an email three hours later, saying “hey, I just found out our guys wanted to do bluh instead of blah, but I wanted it to be blah because [insert rationale]. So let’s go back to blah.” Then, separately, two hours after that, I get an email from the CEO, who is also in the office that day, and who also has a private office, that says “hey dick, understand we’re now doing bluh, that’s probably even better.” Ok, at this point, their executives aren’t even on the same page on this simple integration. Granted, this is one silly example. Yes, I know that this could have just as easily happened to us if one of us was traveling that day. Yes, I know this could just as easily have happened to us if our marketing director wasn’t at her desk when the phone rang and this became an evening email thread. The point is that all things being equal, our office configuration was far more adept at dealing with instantaneous change (what Newton called “calculus”), and the private offices at the other company prevented what should have been rapid communication given that they were all in the office that day. Private offices create distance when what you require is proximity.

2. Friction begets friction, transparency begets transparency. Can you tell that the key word in this post is “begets”? One function of a very open space work environment is that you get transparency up and down the organization. When the engineering team can hear the support team constantly fighting the same battles on the phone, they have a better appreciation for the product issues. There were many times when just overhearing a phone call would help countless people in the company correct an issue before it occurred (“hey, I heard you tell that guy that XYZ will be ready in a couple weeks. It’s going to be ready but we’re starting to think we want to limit the release initially until we make sure ABC is working well”). You don’t get that serendipity in a private office environment, you get friction. Friction requires a lot more formal communications processes, and processes in small companies have the potential to create more, not less, friction. You obviously have to have a few small conference rooms or phone rooms where people can make private calls. People have personal calls to make and some people don’t particularly care to be negotiating with a major media company out in an open room when the CEO is swearing about something else in the background, you know, just to pick a hypothetical. When all the general business is conducted out in the open, there’s much less likelihood of office gossip because everybody generally knows what’s going on. I would talk to our finance team about quarterly numbers out in the open, right next to engineering. Some people will say that’s stupid, as a new/junior employee might run out to lunch and tell their friend “We only did four dollars in revenue this quarter”. My position was that everybody in the company is a grown up and we’re not going to hide and speak in hushed tones unless there are very specific non-disclosures involved, which of course come up from time to time.

3. Motivation. Look, there are days when everybody comes into work and just thinks “How many times do I have to remind myself that the words ‘more’ and ‘tequila’ do not go together?” The beauty of a big open space is that you’re not going to just sit there and dial it in, or at least if you do, everybody will take notice….when you see your sales director on the phone with a particularly tough customer and really grinding out a long negotiation, it makes you think that you can’t just sit there and suck your thumb. You feel like you have to do your part. You feel more part of a team.

We can all think of a number of startups where you might need private offices, particularly outside the realm of technology startup. Companies where customer/partner confidence is imperative and employees would feel that every phone call had to be taken in a private room. I can imagine some financial services companies, some health care companies, and some consulting companies require that just about everybody have a private office. If every one of your customer calls has to take place in a private phone room, well then, you should probably just have an office, however, I believe this is not the case for 99% of technology startups. I just do not buy that the director of sales or the CEO have to be on private calls more than once or twice a day, at most.

Frankly, whether people will admit it or not, most of the time you end up in an environment with a private office for status reasons, not business reasons, and status is not a particularly compelling argument for a specific office configuration. In fact, status has the downside of causing people in the company to work toward status instead of working toward results.

There is one humorous side effect of this kind of environment, which is that people from traditionally status-oriented industries (say, banking, just to pick on a vertical) don’t take you as seriously when they visit your office. You can’t possibly be doing that well as a company if the CEO is just sitting out here in the middle of the room with the rest of the huddled masses!

Posted by Dick at 09:58 AM | Permalink | Comments (13)

A brieft post! The first and possibly the last. I and Chicago-based technology entrepreneur and investor Dan Malven got into an email discussion a few months ago after my financing term sheet post on liquidation preferences. Dan has created a very cool spreadsheet that first-time entrepreneurs can use to understand how participation, preference multiples, and even participation caps will affect distributions and ownership post-money and on exit. Dan's one of those excel masters who has awesome spreadsheet voodoo skills, and this is a very cool document. Be sure to read Dan's post that points to his worksheet.

Posted by Dick at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

To say that the Wizard has not been answering his mail would be a dramatic understatement. Woe betide the person that has mistakenly turned to me for guidance over the past couple months. What can I say, there are only so many hours in the day, and I only get about half way through my to do list by midnight.

One of the questions I received over the past few weeks was “What are the biggest lessons you’ve learned in the past five years?”…. when the question came in there was no question mark at the end, but through my amazing powers of grammatical intuition, I have perceived that it was meant as a question, so I’ve taken the wizardly liberty of adding a question mark to the end. Onward.

I have a bunch of different answers to this question, but I’ll start with one that came up in a conversation with Fred Wilson in regards to some random topic, and Fred noted that I should post it. I’ll try to keep adding to this as a series of posts over time.

Lesson #1: What is obvious to you is not necessarily obvious to others (and vice-versa).

….and this isn’t as obvious as it may seem. I remember the first time I saw Twitter and thought “I don’t get it”, and then somebody explained it to me and I thought “uh-huh. I don’t get it”, and then somebody explained it to me again, and I thought “Ah!... I don’t get it.” Only after I saw somebody using it in a way that I found valuable did I finally get it.

It isn't always the case that I'm on the slow boat; sometimes I'll hear an idea that seems so obvious to me that I can't understand why nobody'd come up with it sooner, while other people will hear the same idea and think "I don't get it".

When we built FeedBurner, I would tell people about it, and some people would say “hey, that sounds very cool” and others would reply “uh-huh”, which is web2.0-speak for “huh?”. It was obvious to us that FeedBurner was a very powerful concept around which an ecosystem could flourish. It wasn’t obvious to most other people until they actually saw several examples of people using FeedBurner in powerful ways.

What’s the point? The point is that “build it and they will come” isn’t true. You need to build it, and then show them exactly how it can be used, and then show them several explicit examples of why it’s powerful, and then they might come.

Why is this so? Here I stray *way* outside the bounds of my knowledge and pretend to be Malcolm Gladwell, but without the cool retro afro. We all have mental models that we’ve built up over the years and we use these models to judge new ideas and services that we see, and this is the reason people came up with terms like “horseless carriage” when cars were invented….we try to make things fit into our existing models, and we all have slightly to very different mental models. Make sure you provide explicit examples of the powerful use or implementation of your service and don’t just expect people to ‘find’ it on their own. Similarly, pay careful attention to the things that people do with your technology/service/product, because some of them may have discovered a powerful use for it that has completely evaded you. Note that this is another reason to strongly believe that services and products that are more open and adaptive will always prevail over solutions that are less open. Open solutions enable the ecosystem to discover the optimal value of the solution, whereas less open systems are at the mercy of their creator having guessed at the optimal solution in the first place.

Posted by Dick at 11:45 AM | Permalink | Comments (4)