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2 posts from November 2011

November 16, 2011

Europe’s Autumn (or, Why You Can’t Outrun Big Debt Forever)

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

--James Carville

The news out of Europe just goes from bad to worse.  With debt levels so high and confidence in government so low, the bond market has come a knocking and is intimidating the heck out of European governments.  Interest rates on sovereign debt soar (see chart below) when the trust in the sanctity of that debt, and the country’s ability to tighten their belt while growing out of it, plummet.  First, the bond market knocks on Iceland’s door (see Michael Lewis' Vanity Fair article and his book Boomerang), then Ireland's, then Greece's and now Italy's.  And when the bond market comes to collect on the debt, leaders are overthrown – Papandreou in Greece, Berlusconi in Italy.  Who’s next?  Spain?  France?  If the bipartisan “Super Committee” of 12 senators and congressman can’t get their act together and come to a compromise that raises taxes while cutting spending in time for next week's deadline, the US of A?

What does all of this mean for entrepreneurs, other than a queasy feeling in your stomach when you read glance at the Wall Street Journal?  I have three pieces of advice:

  1. Plan for Anything.  My father used to always tell me, “don't assume anything”.  The range of possible macroeconomic scenarios has exploded in the last few months.  We are entering a time of such uncertainty that one needs to be prepared for a far broader range of scenarios than ever before.  Will the economy muddle through?  Will we avoid a double dip?  Are we entering a massive, 5-year EndGame of de-leveraging and no growth?  Will high tech entrepreneurs be unaffected when they play in such massive secular growth areas, such as cloud, e-commerce, online advertising, mobile and others?  No one knows, so develop a range of plans for 2012 with objective external triggers that would steer you towards one plan or the other – see The Art of the Long View for a guide on how to do this – and have them on the shelf ready to execute when the time is right.
  2. You Can’t Fund a Big Debt Forever.  Startups don’t typically take on financial debt (and certainly not at the level of a sovereign government), but there are many other kinds of debt in a startup in particular and in life in general that one can find oneself in the midst of.  For example:
    • One of my portfolio companies often talks about their “Technical Debt” – the notion that they paying the price for historically putting off building a robust platform in order to meet short-term customer needs.
    • I love the movie, Pay it Forward.  It beautifully depicts  the benefit of being nice to someone for no personal gain and then encouraging them to “pay it forward” to another party.  If that kindness becomes too one-way between two parties, “Relationship Debt” can form.  I often find myself reflecting on how luck I have been in my life to have had such great mentors and hope that I provide enough reciprocal relationship value to them so as to not be too deeply in debt to them.
    • My wife and I talk to our kids a lot about “Behavior Debt” – the notion that you have to deposit some kindness and good behavior “in the bank” if you want to get something in return from someone down the road (you can imagine how annoying a parent I must be…).
    • If you miss a number over and over again or a deadline, you build up “Commitment Debt”.  One of my portfolio companies gives the same caveat when reporting on the status of a promising partnership developing with a Fortune 50 company:  “Remember, though, this is a company that has never hit a single deadline they’ve given us.”  At the start of the 2012 planning process, one of my fellow board members commented ruefully in the private session:  “The plan sounds good.  Remember, though, this is a company that has never hit a single plan number they’ve given us.“ (note to self:  when someone starts a sentence with “Remember, though...”, it’s not likely to be a positive comment).
  3. Paying Off Debts Is Painful and Demands Sacrifice.  It’s never easy to step back and pay off your debts, but it is often the right course.  Unfortunately, when you’re an entrepreneur, you don’t always find yourself in a position of strength when it comes to paying off debts.  Going into “technical debt” is often required to survive and drive cash flow.  Commitment debt can be out of your hands if you’re never able to secure the necessary resources required to deliver on your commitments.  You get the picture. 

I suggest you make these debt trade-off decisions consciously, not unconsciously, and keep an eye on those debts as they  accumulate.  The last thing you want is to find that debt roughly knocking on your door some night when you least expect it, or are in a position to handle it.  Isn’t that right, Washington DC?





November 01, 2011

Top 5 Scaling Lessons From Superhero CEOs

Scott Kirsner of The Boston Globe called them the startup equivalent of the Justice League of America. Seven superhero CEOs gathered on Friday afternoon at the Mass TLC Unconference to discuss the challenges of scaling their young companies. The CEOs on the panel were (from left to right):

  • Michael Simon, CEO/founder of LogMeIn (2009 IPO) 
  • Scott Griffith, CEO ZipCar (2010 IPO)
  • Gail Goodman, CEO Constant Contact (2007 IPO)
  • Niraj Shah, CEO/cofounder of Wayfair ($500m revenue)
  • Colin Angle, CEO/cofounder of iRobot (2005 IPO)
  • Paul English, CTO/cofounder of Kayak ($200m revenue, S-1 filed)
  • Matt Lauzon, CEO/cofounder of Gemvara (reportedly $10m revenue) 

The panel was particularly fun because the environment was very relaxed - the Unconference uniquely creates a dynamic free-for-all where different topics are created spontaneously and teams are formed throughout the day to address big issues.  This panel on scaling was touted by Scott over the course of the week via numererous tweets and so attracted a large audience.

Here were some of the key takeaway lessons from this august group:

1) What Got You Here Won't Get You There. Each of the executives talked about tough decisions that they had to make with early team members that helped build the company to the point of scaling, yet held them back because they didn't have the right skills to lead the organization to the next level.  An "A" executive during the scrappy start-up days has a very different profile than an "A" executive at scale.  To drive this point home, I often use a metaphor called The Jungle - there are three stages to the life of a company: The Jungle (where you are hacking away to find a path), The Dirt Road (where the path is established but still bumpy) and The Highway (where the path is smooth and it's all about achieving maximum speed in a well-defined direction).  It is a rare executive that is skilled at two of these stages and nearly unheard of to be great at all three stages.

2) Outside Catalysts Force (Healthy) Change.  Sometimes you need an outside force to act as a catalyst to change the way you do things from scrappy start-up to more process-oriented, scalable business.  The CEOs pointed to this frequently, whether it was an acquisition (cited by Paul English when they acquired SideStep), global expansion (cited by Scott Griffith when they entered the UK) or filing for an IPO - these event jolted the organization into changing the way things were done in a very positive fashion, forcing discipline and processes that didn't exist previously.

3) Create a Culture Based on Integrity.  Paul English pointed out that the word integrity has an important definition beyond truth, and that is consistency.  His point being the consistency of the culture that emanates from the leadership is critical to help companies as they scale.  The implication, which resonated with the others on the panel, was to avoid creating a culture that is inconsistent with your identity and your authentic core as a founder.  Pursue the priorities that get you personally fired up.  Niraj Shah cited the fact that he avoided taking outside money for over 10 years and ignored much of the outside advice that urged Wayfair (fka CSN Stores) to over-expand as an example of staying true to your authentic self  and what strategy feels the best reflection of your mission.

4) Nothing Comes Easy.  When young entrepreneurs read about the success stories of founders like the ones on this panel, they sometimes forget that there were many ups and downs along the way - and there still are!  Many of these companies were "10 year old, overnight success stories" and each of them had their struggles.  Michael Simon talked about taking years to discover the business model that led LogMeIn to be so successful.  Niraj Shah joked wryly that the Wayfair rebranding resulted in his company going from low brand awareness to no brand awareness and each of the public company CEOs clearly struggle quarter by quarter to drive results and demonstrate success.  Michael Simon told me before the panel, with a smile, that when his stock goes up, it's because of LogMeIn's strong business momentum and when it goes down, it's because the market is having a bad day.  None of these CEOs are resting on their laurels.  Gail Goodman once told me she felt Constant Contact was in the second or third inning of a nine inning game.  And she's been CEO for 12 years!

5) Alignment, Alignment, Alignment.  Gail Goodman hammered the importance of alignment.  Some of her investors were ready to sell the company when it hit $30 million of revenue and over $100 million of market value.  She wanted to build a billion dollar company, and had to find investors that were aligned with this bigger vision.  

I could have listened to this panel of CEOs all day.  The hour went by way to fast and I hope there is a sequel coming soon - we need the Justice League to point the way to acehiving entrepreneurial success and scaling!

Ironically, the panel was conducted a day before an interview with Mark Zuckerberg, where he indicated that if he were starting Facebook now, he would have stayed in Boston.  I guess others are noticing that you can scale great companies in Boston nowadays!