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Remember community in the rush to riches

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It’s the holiday season, and in theory, we’re all caring for our Fellow Person. Actually, most of us are frantically shopping, hoping that the Christmas season is profitable, dreading that visit to our parents, and generally letting the happiness of business crowd out the happiness of those of us who comprise the business.

To make matters worse, in the midst of my frenzy of buying, someone had the audacity to ask what were the best presents I’ve ever received in my life. I thought about it. All the best presents I’ve ever received were gifts you can’t buy. One of my favorites was a totally unexpected friendship card waiting for me by a crackling fireplace in the ranger’s station at the top of Mount Greylock (the highest mountain in Massachusetts). To this day, I have no idea how the card got there! And the best present I’ve ever given? A surprise party to my partner, who had never before had a happy birthday celebration. In both cases, the cost was nominal. The warmth, love, and companionship was off the charts.

Think about that. Community. People. Relationship. Those are the things we look back on that really give us joy. So how does economics and money fit into this? Surely, it must. Though according to Dr. Martin Seligman, former president of the American Psychological Association and happiness researcher, once you’re above the poverty level, there’s no correlation between money and happiness. But our business behavior can certainly affect community, people, and relationship.

Business and Social Responsibility—the ability to respond—are linked

I had to take the light rail last week from Newton Center back into Boston. Newton Center’s small subway depot has since become a chain coffee shop. Although this subway stop requires an unusually large amount of change for a single trip ($2.50), the cash register proudly proclaims, “No change for subway customers.”

I guess I just don’t understand the business rationale. Most retail businesses would kill for an entire community’s worth of foot traffic each day. You want change for the subway? Sure! Just wait by our warm, delicious impulse-buy products and we’ll make change once you’re at the register.

Maybe they’re afraid it will be hard to supply the change. How hard is it, really? They get change regularly from the bank for their register. Next time, just stock up on quarters. It really isn’t that much additional trouble. Two additional customers a day (at gourmet-coffee prices) would pay for a part-time employee whose sole job is to do the subway change run every morning.

But to me, there’s a deeper issue: it’s one of community and friendliness. When a store only gives change to purchasers, neighborhood residents and regular travelers won’t stop in. That means they won’t interact, and that much more community gets lost in the race to make Economic Decisions the Be-all and End-all of our existence.

Why not give change because it’s a nice thing to do? Or because it’s the only way for your clerks, who work 60 hours a week to pay their rent, to meet other people from the neighborhood face-to-face?

It’s the little courtesies, the little interactions, and the smiles as we join each other in our daily business that tie us together as a community. Between our walkmans, net connections, and other “time saving” devices, we’ve eliminated much of the casual communing people once enjoyed. Rather than hanging signs rejecting our community members if they won’t buy from us, why not seek to build a community where people like each other so much they want to do business?

Start now. And it’s a great time of year to try out the theory that community matters. You have a built-in excuse: if someone notices you putting people and relationships first, you can always blame it on the holidays.

Remember Community in the Rush to Riches

Warren Buffett on CEO Measurement

,

Reprinted from the 1988 Berkshire Hathaway Annual Report.

Their performance, which we have observed at close range, contrasts vividly with that of many CEOs, which we have fortunately observed from a safe distance. Sometimes these CEOs clearly do not belong in their jobs; their positions, nevertheless, are usually secure. The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate.

If a secretary, say, is hired for a job that requires typing ability of at least 80 words a minute and turns out to be capable of only 50 words a minute, she will lose her job in no time. There is a logical standard for this job; performance is easily measured; and if you can’t make the grade, you’re out. Similarly, if new sales people fail to generate sufficient business quickly enough, they will be let go. Excuses will not be accepted as a substitute for orders.

However, a CEO who doesn’t perform is frequently carried indefinitely. One reason is that performance standards for his job seldom exist. When they do, they are often fuzzy or they may be waived or explained away, even when the performance shortfalls are major and repeated. At too many companies, the boss shoots the arrow of managerial performance and then hastily paints the bull’s-eye around the spot where it lands.

Another important, but seldom recognized, distinction between the boss and the foot soldier is that the CEO has no immediate superior whose performance is itself getting measured. The sales manager who retains a bunch of lemons in his sales force will soon be in hot water himself. It is in his immediate self-interest to promptly weed out his hiring mistakes. Otherwise, he himself may be weeded out. An office manager who has hired inept secretaries faces the same imperative.

But the CEO’s boss is a Board of Directors that seldom measures itself and is infrequently held to account for substandard corporate performance. If the Board makes a mistake in hiring, and perpetuates that mistake, so what? Even if the company is taken over because of the mistake, the deal will probably bestow substantial benefits on the outgoing Board members. (The bigger they are, the softer they fall.)

Finally, relations between the Board and the CEO are expected to be congenial. At board meetings, criticism of the CEO’s performance is often viewed as the social equivalent of belching. No such inhibitions restrain the office manager from critically evaluating the substandard typist.

These points should not be interpreted as a blanket condemnation of CEOs or Boards of Directors: Most are able and hard-working, and a number are truly outstanding. But the management failings that Charlie and I have seen make us thankful that we are linked with the managers of our three permanent holdings. They love their businesses, they think like owners, and they exude integrity and ability.

Reprinted with permission from Warren Buffett from Berkshire Hathaway
annual report, 1988

Copyright © 1988 Berkshire Hathaway and Warren Buffett.

Warren Buffett on CEO Measurement.
Reprinted from the 1988 Berkshire Hathaway Annual Report.

The Joys of Power Yoga

I’m a big advocate of life balance. Yoga is often held as a good way to relax, become flexible, and build balance for overstressed professionals. Since I like to put my money where my mouth is, I decided to try it. Being generous, I thought I would share the experience. After all, misery loves company.

It’s better than weights

Until three weeks ago, I went to the gym. The results were decent, but my muscles are tight enough to play violin with my thighs. My physical therapist decreed, “Build strength and flexibility! Try Yoga.” At first, my vanity refused. A brawny manly-man like me, doing a sissy-man workout like yoga? Not likely. But then I took a good look at two guys in yoga class. They look strong. They look flexible. And rather than the muscle-bound “hours at the gym” look, they actually look healthy. Most importantly, they looked like they stepped out of an Abercrombie & Fitch catalog. Suddenly giving yoga a chance seemed … necessary.

It’s great in the summer

At Baptiste Power Yoga, it’s summer year-round. Even in summer. They keep the room heated to 85 degrees. When I walked in, people were stretched out on their mats, already looking exhausted. Class hadn’t even begun. They claim that heat promotes flexibility; when your body collapses from heat exhaustion, formerly impossible poses become trivial.

It’s the heat and the humidity

Did I mention heat and forget to mention the humidity? They keep studio nicely humid. So humid, you sweat. A lot. Not sissy-boy sweat, like you might get running a marathon, or a 3-minute mile. No. This is real sweat, manly sweat. Enough to soak two beach towels through and through. Rivers of sweat which carve canyons in the wooden floor. Enough sweat to make your fingers into prunes. If I’d had any room left for conscious thought at the end of class, I would have been totally grossed out. As it was, the sweat gently cushioned my fall as I collapsed on my mat.

It’s all about posing

So what do you actually do in practice? Mostly you do what they euphemistically call “poses.” Most “poses” are based on medieval torture devices, minus the spikes. You gently flow into a pose and hold it. What could be simpler? Alas, the poses were invented by a placid 13th-century monk with a well-hidden sadistic streak. Assuming you can get into the position (I kid you not; he actually said, “Now gently allow your foot to drift up and across your back and touch the top of your head”), holding it is the fascinating part.

Try this: bend at the waist and put your hands flat on the floor, keeping your feet flat on the floor as well. Make sure your back, neck, and arms are in a line. You’re making a big triangle, with the floor as the base of the triangle and your hips at the point. Use a mirror to make sure your butt’s way up in the air and all the lines are straight. Simple, eh? Now hold that for five minutes. Keep those heels on the floor. Keep those hands on the floor. Press down through the heels and palms. Straighten your back. And breathe gently, enjoying life.

Congratulations. You’re in “downward dog.” What could be easier? After about a minute, you’ll start to pant, easily. Arf. Arf. After two minutes, you’ll be about to collapse. But you’ll be so placid, you won’t be able to tell which body part is weakening. Maybe they all are. At three minutes, you’ll start howling. Now, you’re fully in touch with your inner dog. When your muscles give out totally, collapse into my favorite: “child’s pose.” In a cruel twist of fate, the English word “child” is Sanskrit for “collapsed in a senseless, gasping heap of sweat.”

Yoga masters hold these poses for decades. It isn’t common knowledge, but the word YOGA itself stands for “Years of Gravitational Agony.” For obvious reasons, you won’t find this in the brochure.

It’s something everyone can do

They say Yoga is about process,not results. There is only body, awareness, and breath. We don’t compare ourselves to others. That could get discouraging. The young man behind me is doing a perfect “downward dog,” but has lifted one leg, bent it at the knee, and is managing to rotate his torso 270 degrees with flat palms and feet. And he’s smiling. shudder And pay no attention to the 90-pound woman to my right, who bounces onto one foot and bends so far backwards she can lick the middle of her upper back—as she massages her scalp with her other foot. While the rest of the class tosses their legs deftly behind their heads, I’m working to get my hands behind my head. But I’m OK with that. Really.

It’s good for you

That 90-pound woman is typical. It’s always 90-pound women who swear by Yoga. There’s a reason. They used to be 215 pound men. Yoga did that to them. It’s relentless, brutal, and takes no prisoners.

But you know what? In six weeks, that could be me, licking my upper back. It might take a special effects crew and dim lighting, but it could happen. After going four times a week for three weeks, I’ve realized that the human body, when subjected to absurd torture, can compensate. My energy level is up, my posture is better, and I’m walking better. I’ve lost about 1/2 inch of waistline, and my abs are becoming visible for the first time in my life. I’m noticeably more flexible, more relaxed, and am moving more fluidly. I have never done anything which has had such a profoundly positive effect in so short a time. And that keeps me going. And as they claimed, the more I go, the easier it gets. After three or four months, I expect to be able to make it through the entire class without taking a break.

The body is what I really want. A yoga body looks naturally trim and fit. Frankly, it looks healthy without being excessive. And a yoga master can lick the back of their kneecaps from a standing position. That has possibilities.

I’m convinced! Sign me up!

Give it a shot. It really is amazing. But if you’re going to try it, commit for a few weeks. Make sure you do enough to get to the point where you begin to experience moments of being able to relax and breathe. The first few weeks are tough, but there’s definitely light at the end of the tunnel. You won’t be able to see it—the backs of your knees will be blocking your view—but you’ll be able to feel it. And your life will never be the same.

You can find Baptiste Power Yoga at http://www.baronbaptiste.com.

Author’s note: The woman licking her back was an exaggeration, but not by much. The heat, sweat, and spending a third of the class time collapsed in a heap are all accurate. For now.

Building an Internet Business

Roles, processes, and concepts to know if you’re going to be starting your own Internet business.

Internet businesses are the hottest startups around in late 1999. What makes them unusual is that they’re technologically based business, yet the founders come from marketing, strategy, or other non-technical fields. The technology is simply an infrastructure issue, but it’s a big one.

This paper outlines some of the basic concepts for aspiring web entrepreneurs: How does the web site design process work? What are the design and technology roles that need to be filled in a company? And how does the type of your business affect your technology needs? There’s also a resource or two for web design.

How does the web site design process work?

Five skill sets are needed to construct a web site. Sometimes you will have different people for each skill. Less common is finding one person with multiple skills. It’s almost impossible to find a single person who can do all phases of development. (Which is why a site designed by a one-man shop usually looks as if it were designed by a one-man shop.)

Graphic design: the look and feel.

The most visible part of the site design is the graphical look and feel. This includes the color choices, the graphics, logos, and shapes that appear on the screen, and the positioning of the design elements on the screen.

Graphic design is best done by someone trained in graphic design (or has a naturally good eye). Web sites designed by non-designers look that way. And they don’t look professional.

Graphic design is enough for producing great looking print media, but graphic design is not enough when you are building a web site.

User Interface design: the sequence of screens and controls.

Web sites, unlike print media, are interactive. A graphic designer can make the page look pretty, but they may be clueless when it comes to interface design. An interface is the set of controls, links, and buttons that a visitor to the site will use to navigate around the site.

Interface design is all about cuing the visitor how to use the site. Where on the screen will controls be? Where will menus go? How does your visitor know to click somewhere? For example, it would be an interface design question to decide that main menu choices are always visible along the left edge of the screen. And subchoices appear along the bottom. Interface design also includes deciding when to use buttons vs. checkboxes vs. type-in boxes, etc. to interact with the user.

Good UI design involves usability testing, as well. Usability testing tries to make sure that a site really is easy to use, often by having real customers experiment with the site while being watched by the team designing the site.

As a general rule, the only authority on a site’s usability is the your target population. The team that works on the site is far too close to it to know how intuitive it will be to a new visitor.

Information architecture: the path through the site.

While the interface design dictates navigation within a page, information architecture decides how a visitor will navigate around the site. Information architecture chooses the main menu choices—how many, and what they are. Information architecture design uses the business goals of the company along with usability considerations to decide how to divide content across the web site.

During an information architecture discussion, decisions would be made such as whether a site should be organized around constituents or functionality. For example, an information architect could propose the following different ways to organize a travel agency‘s web site. In each case, the site has the same functionality, but getting to the functionality would be a very different experience for the user:

  Organization 1 Organization 2
Business goals
  • Reduce staff phone time.
  • Encourage people to think about vacation packages.
  • Provide immediate, quick information.
  • Establish personal relationships with clients.
Main menu
  • Vacation packages
  • Business trips
  • Personal trips
  • Make reservations
  • Search for a flight
  • Contact an agent
How visitors contact agents

Three menu clicks:
1. vacation package
2. custom vacation
3. contact agent

One menu click:
1. contact an agent

HTML and programming: the clockworks inside

Once the site has been mapped out and the design finalized, the images and text that make up the design have to be created and put together into HTML (the computer markup language used to create web pages).

If the site is more than unchanging pages of text (“static pages”), then the programming and HTML writing is the site is made “active“ and able to do something more than be a color brochure.

System integration: connecting elsewhere

Often a web site may have to connect to other computers. System integration is the process of establishing the links between your web site and other systems, and making sure that the right data gets sent between the systems at the right time. For example, a web site that does catalog sales may take orders from the internet and enter those into the catalog‘s manual order entry and financial systems.

What are the roles that need to be filled?

The different web site design phases described above are typically done by different people. You can have one person perform more than one of the tasks, however. Or, you can skip tasks to bring your site to market more quickly.

Most one-person or very small web design houses provide mainly graphic design or programming expertise. If you use such a shop, make sure you think about the information architecture, usability, and interface design yourself. With very few exceptions, programmers make lousy interface designers—they aren’t very good at understanding how the rest of us think(1). And graphic designers, while they can create beautiful things, don’t always have a good sense for how a user will move through a site interactively.

You can hire a high-end web design shop such as Zefer, Viant, or Scient. These firms will do a business case analysis and create a site whole information architecture, user interface, and graphic design combine to support your business case. They will also charge as much for your twelve week web design project as it cost to launch the entire company. Of course, they‘ll have it done in twelve weeks, while bringing the expertise in-house will take much longer.

If you do choose in-house development, you will need the following roles filled. One person may fill multiple roles:

Artistic director
The artistic director controls the ultimate graphic design, “look and feel” of the site. An artistic director usually has a background in graphic design.
 
 
Graphic designer
The graphic designer actually creates the design for your pages. It‘s a good idea to make sure you use a graphic designer who is familiar with the constraints of the web. Online design has different requirements than paper design, thanks to considerations like download times and restricted color choice. (See the book The Non-Designer’s Web Book by Robin Williams for more details.)
 
User interface designer
A user interface designer may come from a training or design background. Make sure they understand what makes things easy to use, especially on the web. Ask them what they think of Jakob Nielsen and his AlertBox usability column. If they say “Jakob who?” be skeptical.
 
Information architect
User interface designers will often give a lot of thought to information architecture, as well. A background in writing or editing can be helpful for an information architect, since writing involves organizing information over several pages into a logical presentation sequence.
 
Programmer (Java, JavaScript, C++, etc.)
Whether you need a real “heavy-hitting” programming staff depends on the complexity of your project. If your site interfaces with many outside systems and requires a lot of customer programming, it will pay off to hire some really top notch programmers (and be prepared to pay top dollar for them; every web site builder in the world wants these people right now).
 
If your system has many links to outside databases and systems, look for someone with prior experience in systems integration. If the system will be largely self-contained, you probably want someone with database and programming expertise.
 
Database programmer
I’m not sure this is a separate position. But if you are doing heavy database work (millions of transactions a day), you will be using specialized, high-end databases. These databases often require specialized knowledge to set up and use. While most good programmers can eventually pick up the knowledge, having someone who has mastered them before can be helpful.
HTML coder
HTML coding is a junior job. The trick with HTML however is that it’s tough to get things to look right on all browsers. A layout that looks great on Netscape 4.6 might look horrible on Internet Explorer 5.0. Ask prospective HTML coders about what they do to make their layouts look good on all platforms. If you want to be really tricky, ask them why it’s a good idea to have no line breaks inside a <td> tag in Netscape. If they have an answer, it’s a good sign.
 
System administrator
A system administrator keeps your machines and internal network up and running. They do things like install software, help you when your machine mysteriously crashes, and set up your email system. By the time you have 15 people in your company, you will probably need a full-time system administrator.
 
A common mistake Internet startups make is to have their programmers serve as system administrators. In fact, the two have overlapping but distinct skill sets. And system administration is rather generic, while the building of your web site is unique to you. Get a separate system administrator. You will be glad you did.
System architect
This is the person who has the overarching technical vision for how all the pieces go together, programming wise. It is typically a single person, and usually a senior software engineer. It is rare in a startup to have a system architect who is not also writing code (though it certainly happens).
 
Project manager
Probably the least appreciated technical position is project manager. Hire someone who has run technology projects before, and can also understand the business goals and objectives. Hire someone who has the strength of will to say “Not until our next release cycle” to you when you rush in with a “must-have” feature at the last minute.
 
High tech projects are utterly notorious for being over budget and very late. Several books have been written about the subject and still no one listens, because managers generally don‘t want to accept that something as ephemeral as programming can take that much time. A good project manager will help you balance your optimistic goals with the reality needed to make sure you have a product to ship.
 
A good project manager will be able to tell you about “QA” (quality assurance), release management, where common pitfalls are in technology projects, and how to schedule a tech project.
(You may wish to read the Inc. Technology article on hiring technical people for your business.)

How does the type of your web site affect your technology needs?

The more complicated your web site, the more you will need sophisticated technical people. In increasing order of complexity, here are the kinds of site you might create.

Brochures. An online brochure is the simplest site to create. You will need good design talent, but the only technical talent you will need is an HTML coder.

Off the shelf shopping carts. A simple ordering system created with off-the-shelf software will require a programmer, but probably a junior programmer will suffice.

Your own application. If you’re doing something that involves custom development, you will almost certainly need a project manager and at least one good programmer. Even if you are outsourcing your development, don’t underestimate the need for a full-time person whose job it is to manage the project.

An application that integrates with legacy systems, or systems owned by other companies (your clients’ or partners’ systems). Applications with a high system integration component often require a full complement of technical talent: project manager, system architect, senior programmer, junior programmer, and HTML coder.

What are resources for web projects?

For web site usability, the best site on the Internet may well be Jakob Nielsen’s AlertBox site. It has more research-supported information about how to make your site usable than any other site around. Nielsen also has an article describing how you can do usability testing quickly and cheaply.

For graphic design, check out A List Apart, a site devoted to understanding graphic design on the web.

For usability testing, check out the company User Interface Engineering at www.uie.com.

For HTML tricks and tips, Dave Siegel’s web design page is a good one (though somewhat dated).

Good Luck!




(1) If you’re a programmer, please don’t take offense. I was a programmer for 14 years, myself. I’ve met a couple good programmers / UI designers, but most of us are just too close to the programming to understand what truly is and isn’t easy for other people to use. return to text

A Venture Capital panel discussion Q&A, by Stever Robbins

Answers to some questions about venture capital

This page contains several different Question & Answer sessions with Venture Capitalists.

Panel discussion of women Venture Capitalists

Venture Capital is one of the sexiest forms of financing a business. It’s also one of the most expensive. I attended a wonderful presentation last night where a panel of VCs answered questions about their business. Many of the questions were things that people ask me when considering whether and how to pursue venture money. The answers to these questions come from Karin Kissane of TTC Ventures, Marcia Hooper of Advent International, and Vernon Lobo from Mosaic Venture Partners. I am extremely grateful to them for their excellent presentation.

What do VCs look for in a business plan?

VCs are searching for a business opportunity. Your plan has to convince
them that you have what it takes to turn an idea into a breathing,
viable enterprise:

  • Management Talent
  • A good market
  • A product
  • Support networks (e.g. other VCs, professional contacts, employees, etc.)

    • Deal Structure

The biggest convincers for a business plan reader are demonstrations of your competence. If you have a management team with real experience who have successfully launched a company in the same industry, you’ll be credible. If you have customers who have paid money for your product, you’ll be credible. If you have a clear presentation of your opportunity that shows you have a deep understanding of what it will take to make the business succeed (strategically and tactically), you’ll be credible.

If all you have is a good idea, no paying customers (or just letters of intent with no money behind them), no prior experience as an entrepreneur, and a shallow plan, you aren’t likely to make it past the first cut.

But I don’t know how to put together financials. Who knows how much I’ll sell?

Your business plan isn’t a crystal ball. You aren’t expected to predict the future. You’re expected to understand the size of the opportunity. If your product is useful at most to 1,000,000 people, they will pay 10 cents for it, and they only ever buy one, the total the company can ever make is $100,000 with 100% market penetration. Not a terribly attractive opportunity.

That said, decent financials show that you understand how the opportunity will unfold and what it takes to make it happen. By all means, bring in professionals to help you do the financials if you aren’t comfortable doing them yourself.

Should I have someone write my business plan for me?

VCs understand that not everyone is good at everything. When it comes to putting together detailed financials, or polishing the actual writing, bring in help. But when it comes to understanding your business-the market, the customers, and the product-you need to demonstrate that you understand the opportunity. Look for comparables.

I’m a visionary. I don’t have time for all that business plan and market research stuff. I just have a great idea. What should I do?

Team up with someone who has the skill to do all that thinking. VCs won’t invest in a team that doesn’t have time to scope out their opportunity. You don’t need to be the research arm of an investment bank, but you do need to show that you know who your market is, how it is segmented, the size of your opportunity, who your competitors are, and why you will succeed in that environment.

I don’t know who my competitors are.

Then find out. Buy competing products and investigate the manufacturers. Do web searches. Call reference librarians. And think broadly about who your competition is. Rolex doesn’t compete with Timex. Rolex competes with Mercedes Benz. Because Rolex isn’t in the watch business, they’re in the luxury status symbol business.

But we only need 10% of the market to be profitable…why won’t they fund me?

The other 50 funded companies who are developing competing ideas also need just 10% of the market apiece. Unfortunately, that adds up to 500% of the market. Is this a market you want to enter? If so, you need a persuasive case that you have a real advantage over those other companies. Otherwise, you’re just another generic gamble.

How long a time horizon do VCs have for their investments?

It used to be 7-10 years. Then it shortened to 3-5. In recent years, it’s become 1-5. It varies dramatically. One thing is sure, though: as internet time has begun to pervade the economy, VCs are expecting a quicker and quicker harvest.

In part, it is a function of where in the fund cycle the investment is being made. If it is at the beginning, there is obviously a lot more time than if it is the last investment in the fund. Although investors are always impatient, my [Vernon Lobo’s] personal bias is not to have funds come back as quickly as you have described. If I believe additional shareholder value, (in excess of a hurdle rate) can be created by continuing operations, I’d rather wait

How big an investment do VCs make?

Bigger all the time. More people have been investing in VC funds, and they have made huge sums which they are reinvesting. With such large funds, they opportunities to invest $3-$5 million at a time, in order to keep all that money productive. If you need less money, Angel Investors may be the way to go.

In addition, it may be better if the $3-$5 million is is staged in. I find that some entrepreneurs decide to ask for $5 million because they think that is what they have to ask for to get the VC’s attention, when all they really need to get going is $1 million. In the end, it is probably better for the entrepreneur (from a dilution standpoint), to take less up front, and stage in the capital, (as long as they meet their plan).

How big an opportunity do they need?

Many VC’s now are looking for a company that can grow to become at least $100 million (if not several hundred million) in revenue, and hopefully many multiples of that in value! If it doesn’t have that kind of potential it is not that exciting.

What kind of return do VCs need?

VCs need a high rate of return. Remember their business-they have investors that they are responsible to. With NASDAQ producing 50% returns, to be competitive, VCs need to offer their investors 70-80% returns.

But the situation is even worse. VCs have their share of failed investments. Their successful investments have to pay for the failed investments too, driving the returns they need on any single venture even higher.

On the other hand, one VC takes issues with the whole ideas of “target return.“ He writes, “We don’t have a “target” return. We don’t target a return any more than the entreprenuer does. When she/he starts a business, they usually don’t lay out a target return. Our philosophy is to become partners with the entrepreneur, so our objectives are the same…. We hope to make a lot of money!”

What do VCs want in a CEO?

Sales skills, the ability to attract the right team, an understanding of customer and markets, and flexibility. The business plan will change as the business and markets develop, and a CEO needs to be able to spot opportunity and steer the business to a successful (though perhaps unexpected) conclusion.

What’s the competiton for VC funding?

Advent International receives 10,000 business plans each year. They fund 30. You do the math.

What’s the best way to submit a plan to a VC?

Personal connections. One panelist couldn’t think of any unsolicited plans that her firm had funded. Another said some unsolicited plans had been funded, but she couldn’t remember who.

In short, work your network. The impression they gave is that unsolicited plans are virtually a waste of paper. But VCs do talk to each other. If you get your plan in one door, even if it doesn’t fly there, it may get passed around to other firms who will want to invest.

Do I have to tell VCs which other funding sources I’m talking to?

Nope. Keep ’em guessing. Late in the process, they will have to know so they know who their co-investors are. But there’s no need to be too specific in the early discussions.

What if a VC is already funding a competing venture? Will they sign a nondisclosure before looking at my plan?

Nope. You have to trust them. They have incentive to Do The Right Thing; their reputation is all they have. But legally, you’re on your own. They may sign an NDA (non-disclosure agreement) if you have a compelling trade secret, or late in the due diligence process.

An executive summary is a good way to summarize your opportunity without giving away proprietary details. Since a VC isn’t likely to read a plan in great detail if the executive summary doesn’t grab them, spend enough time on the summary and if you can pique their interest without revealing trade secrets, the NDA may be possible later.

How many VCs should I bring into the deal?

More VCs mean more connections and more resources for you to draw on. Two or three is a good number to have on board.

What should I look for in a VC?

Look for personality and fit with the partners who will be on your board. Personality clashes have destroyed companies; it’s better to wait for a good fit than to accept quick money with someone you can’t work with.

It is also perfectly acceptable to ask your venture capitalists for references. Ask for:

  • a current portfolio entrepreneur
  • a past entrepreneur whose company failed
  • a past entrepreneur whose company succeeded
  • a past entrepreneur who got booted from their company by the VC

Good Luck!

*****

Red Herring Interviews

Red Herring has published some excellent interviews with Venture Capitalists about what VCs look for in a plan. In addition to VentureCoach VC Q&A, check out:

Benchmark Capital’s Andy Rachleff interview parts 1&2:
http://www.redherring.com/insider/1999/1124/vc-vcps.html
http://www.redherring.com/insider/1999/1201/vc-vcps.html

Divine Interventures’s Mike Santer interview 1 & 2:
http://www.redherring.com/insider/1999/1117/vc-vcps.html
http://www.redherring.com/insider/1999/1120/vc-vcps.html

Things to Know about Stock vs. Options

This page is based on personal experience, and is based on what I know of American tax law. I am not a lawyer, however, and can not claim that this information is currently accurate. Use it at your own risk.

See Also

See also a paper on stock I wrote for fellow employees of a company several years ago. It covers a bit more material, and goes into more depth on some topics.

Terms to know

stock Ownership of part of a firm.
options or ‘non-qualified’ options The right to buy or sell stock at a predetermined price. For example, you might have an option that gives you the right to buy IBM at $100/share, even if it’s selling for $150/share..
strike price The price at which an option lets you buy stock. In the above example, $100 is the strike price of the options.
market price The price at which stock is selling on the open market. In the above example, $150 is the market price of IBM stock.
vesting You rarely receive stock or options all at once. Rather, you receive shares/options as you meet certain milestones. Stock whose milestones you’ve met are considered “vested.”
vesting schedule The schedule over which shares or options vest. Often, a person receives a certain number of shares each quarter or each year. A typical vesting schedule might be, ËYou receive 10,000 shares over 4 years. 2,500 shares vest on your first anniversary, and the remaining 7,500 shares vest in equal monthly amounts for the following three years.Ó
dilution When new shares are issued in a company, it ËdilutesÓ the value of the existing shares. For example, if you own 100 shares of a company with 1,000 outstanding shares, you own 10% of the company. If the company issues an additional 1,000 shares to investors, there are now 2,000 outstanding shares. Your 100 shares are now only 5% of the company. This is called dilution.
registered shares When a company is public, its shares are registered with the SEC. Private companies issue non-registered shares, which often can’t be sold or turned into money.
incentive stock options (ISOs) Options which get special tax treatment: they create no tax event when exercised, but are taxed when the stock is sold. if the stock is held for more than a year, they are taxed at the long-term capital gains rate, rather than the normal income rate.

When exercised, ISOs can subject the owner to the “Alternative Minimum Tax,” which can be substantial.

You can get paid in stock or in options. If you get paid in stock, you actually receive shares of a company’s stock. If you get paid in options, you receive the right to buy the stock later, at a set price. If the stock is selling on the open market for more than the strike price, you can exercise the option, buy the stock for the strike price, and then sell it immediately for the market price, pocketing the difference as profit. The lower the strike price, the more profit you make.

Options are often issued with a strike price equal to or 10% lower than the market value of the stock at the time the options are issued. That means that the maximum profit the option holder can realize is movement in the stock price after the time options are issued.

Cash flow & liquidity

With stock, there are no cash flow concerns. Once you own the stock, you own it. With options, however, you need to come up with the money to exercise the options. This isn’t always easy. If you have 10,000 options with a strike price of $5, it will require $50,000 to exercise those options and buy the underlying stock.

“But why is that a problem?” I hear you ask. “After all, you’d only exercise options if the stock were selling for more than the option strike price. Can’t you then just sell enough of the stock to cover the $50,000?” Ah, if only it were that easy…

Liquidity

You can’t sell stock in a non-public company. So unless your company is publicly traded, the stock you get (either directly or by exercising options) is just pieces of paper, unless the shareholder’s agreement gives you permission to sell it to third parties. Rarely—and never in a venture backed by professional investors—will you be given that ability.

As I write this (8/99), there is also a holding period on shares of stock in non-public companies. The holding period can range from 6 months to 3 years. Even if the company goes public during that time, the holder of pre-public shares can’t sell until their holding period expires. The intent of this is to prevent monkey business in which insiders are allowed to purchase pre-public shares immediately before an IPO and then turn right around and sell them. In fact, there is currently a strong movement in congress to eliminate the holding period.

[Author’s editorial opinion: eliminating the holding period will probably encourage all kinds of game playing and profit-taking. Philosophically a believer in businesses being value-creators, rather than transient-paper-profit creators, I favor keeping the holding period. Yet as someone who may someday be in a position to benefit from its elimination, I find my principles put sorely to the test.]

Tax implications

To make matters worse, taxes can cause a cash flow issue in all of this. Here’s a summary of how the taxes work:

  early tax hit later tax hit
options

When you exercise the options, the difference between the option strike price and the market price of the stock is treated as normal income, taxable at your full tax rate.Your full tax rate can be quite high, once state and federal are both taken into account.

For example, if you exercise 10,000 options to buy XYZ at $5, when the stock is selling for $7, that counts as $20,000 of taxable income even if XYZ is a non-public company.

When you sell the shares you acquired by exercising your options, any up or down movement in the share price since the date of exercise counts as a capital gain or loss. Capital gains/losses are taxed at a much lower rate than ordinary income.

If you later sell your XYZ shares for $9, that counts as a $2 capital gain (the fair market value was $7 when you acquired the shares).
incentive stock options No tax hit when exercised.

Possibly subjects you to the alternative minimum tax (AMT).

 When you sell the shares, the difference between the strike price and the share price is taxed. If the shares have been held for less than a year, the normal income tax rate is used. If they have been held more than a year, the capital gains rate is used.
stock

If you are receiving actual stock shares that vest, the moment they vest, the amount vested becomes treated as normal income, taxable at your full tax rate.

 When you sell your shares, you realize a capital gain or loss on any movement in share price from the time that you acquired the shares.

The big "gotcha" type tradeoffs:

If you want compensation that vests over time in a private company, stock may be a poor choice. As each block of stock vests, it constitutes taxable income equal to the fair market value of the stock at the time of vesting (not at the time the contract is written). So if the company is doing really well, the 5,000 shares that vest this quarter could be worth $10/share, giving you $50,000 of taxable income. But since the company is private, you can’t sell the shares to pay the taxes. You have to come up with the cash to pay the taxes some other way.

Options are more palatable, but they introduce a quandry. In a private company, you would like to exercise your options as soon as possible. You will start the liquidity counter ticking early, so your holding period will be over by the time the stock is tradeable. And if your options are not incentive stock options, they will generate a normal income tax rate hit. You also want to take that hit (which happens at exercise time) on as low a stock value as possible, and have most of your gains happen as a capital gain or loss.

But on the other hand, you might not want to exercise your options until the company goes public. The shares you receive from the exercise will be fully liquid, and you can trade them immediately. But your entire gain (market price minus strike price) will be taxed as normal income. That can be a huge incremental tax burden.

Whether to exercise options while a company is still private is a complicated, individual question. The answer depends on your regular tax brackets, your capital gains brackets, how long you think it will be until the stock goes public, and how much money you have to pay taxes on the options exercise.

Other Questions

What if the company never goes public?

Well, then you have to find someone to buy your shares if you want to make any money off them. Sometimes the shareholder’s agreement will let you sell your shares to anyone, while other times it only lets you sell your shares back to the company or to other shareholders.

What happens if more stock is issued to give to new investors?

Your shares get diluted. If you are in a very powerful negotiating position, you may be able to get an anti-dilution provision, which lets you maintain your percentage ownership in the firm even when new shares are issued. If this is your first job out of college, don’t bother asking.

What if the company gets bought out while I own options or stock?

This depends on your agreement and the terms of the sale. An IPO or acquisition can drastically change a company, effectively making it a different place than you signed up to work in originally. If you can swing it, the safest thing to do is to require that your options or shares vest immediately upon a public offering or acquisition.

How much should I ask for?

As much as you can get. A few very, very rough rules of thumb: by the time a company goes public, the VCs and investors will own around 70% and the original owners and employees will own around 30%. What matters is not how many shares you have, but what percentage of the company now and at IPO/acquisition time you own.

If you believe that the company will be worth $100,000,000 someday, and you will own .5% of the company at that point, your share will someday be worth $500,000. If you took a $20,000 pay cut for 5 years in exchange for that equity, you essentially exchanged a guaranteed $100,000 salary for a risky $500,000 in stock. It’s up to you to decide if that tradeoff is worth it.

Think this through! I have seen people take a $30,000/year pay cut in exchange for stock that was worth $60,000 after two years. They effectively traded salary for equity without getting enough stock to compensate them for the risk they took or for the fact that it took two years before they saw the money.

Keep in mind that subsequent funding rounds will dilute you. What matters is the percentage you own when the company goes public or is acquired. The percentage you own today may be less relevant.

They offered 3,000 options. Is that a good deal?

Maybe. It depends what percentage that is of the company. If there are 30,000,000 outstanding shares, you’ve been offered .01% of the equity. If the company is the next AMAZON.COM, you’re set for a lifetime if you’re a careful investor. If the company is Joe’s Garage and Fried Chicken Joint, you might want to reconsider. (See the essay on Equity Distribution to get an idea of what percentages are good percentages.)

Remember: it’s the percentage you own, not the number of shares that matters! If they say they can’t reveal how many shares are outstanding, or won’t tell you what percentage ownership your shares represent, run, don’t walk, in the opposite direction. You are investing your time and reputation with the company. Any aboveboard company would instantly reveal those numbers to a monetary investor. If they won’t reveal them to you, it’s probably because they are making a lousy offer.

Without knowing the percentages, you can not evaluate the value of your options. Period. Companies split their stock immediately before going public, or they reverse-split their stock, to adjust the share price. You may have 30,000 options today, but a pre-IPO reverse split of 1-for-2 will leave you with just 15,000 shares after the IPO. (This happens. It’s rare, but it happens. Two companies whose IPOs I’ve been privvy to had pre-IPO reverse splits. One was 2-for-3, the other was 1-for-2 reverse split.)

Once you know what percent you own, find the value by multiplying the expected company valuation by your percentage ownership at IPO. Remember that the IPO itself dilutes all shareholders. Then multiply the result by 2/3 to find out how much you’ll have once you’ve paid your taxes.

I’ve heard companies say, “The percentage doesn’t matter. After all, regardless of percentage, 3,000 shares when the stock hits $100/share, is $300,000.” True. But how do you know that 3,000 shares today will still be 3,000 shares at IPO? And what would the whole-company valuation have to be to justify a $100 per-share price? That’s why it makes more sense to talk company valuation and percentage ownership at IPO.

Does the company care if they give me stock or options?

They may, but if they do, it is only because of the accounting treatment or administrative overhead of giving out stock. Either way, they are giving you ownership or an option of ownership in the company.

Anecdote on Quality of Life

This was rumored to have been written by Mark Albion in his newsletter “Making a Life, Making a Living.” The “By Stever Robbins” above is being added by a theme somewhere and I can’t figure out how to change it.

The American businessman was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellowfin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “only a little while.”

The American then asked why didn’t he stay out longer and catch more fish?

The Mexican said he had enough to support his family’s immediate needs.

The American then asked, “but what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life, senor.”

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat with the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City where you will run your expanding enterprise.”

The Mexican fisherman asked, “But senor, how long will this all take?”

To which the American replied, “15-20 years.”

“But what then, senor?”

The American laughed and said “that’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”

“Millions, senor? Then what?”

The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

Mastering Overwhelm at Work!

My name is Stever Robbins, and I’m here to confess: I’m an overwhelm wimp.

Give me more than three things to handle at once and pop, my head explodes. It’s not just me?everyone seems to be suffering from daily overwhelm. At best, we flounder. At worst, we shut down entirely. You can’t be effective running ragged, living surgically connected to your cell phone, and cutting short every meeting because you’re way too on-the-run. If being the center of attention makes you feel important, go for it. Personally, I’d rather be sane.

I’ll warn you in advance: this article is about what’s good for you, not what’s good for business. How can you take care of yourself amidst the chaos?

Surviving in the moment

When overwhelm crashes down, your emergency rip cord is to physically take a break. Grab something to eat, walk around the block, and get away! Breathe deeply, with a long, slow exhale. And lean forward. I don’t know why, but leaning into overwhelm makes it less overwhelming.

Once you’ve calmed a bit, consider taking longer-term steps to recover your life. Overwhelm comes from too much, too fast. The solution is learning to say “no,” keeping firm boundaries, and going easy on yourself when you are not superman or woman.

If you choose sanity, step one is changing your thinking. Rather than worshipping productivity and efficiency, remember that there’s more to life than living it efficiently. There’s family, quality of life, joy, love, spirituality, and community, for starters.

Some of the following anti-overwhelm suggestions will be heretical. They’ll actually suggest that you reduce your productivity. After all, do you want to be highly productive, or do you want to have a life? You can’t do both.

The root problem is that our tools have become too good. We’ve made our lives so very efficient with our cell phones, PDAs, and e-mail. But does your Palm Pilot make you more efficient? If so, just wait. Expectations will expand to include your increased productivity. You’ll quietly lose your relaxation and recharge time, sacrificed to the Gods of efficiency.

Remind yourself on a regular basis that while a Blackberry tempts you with “efficient” e-mail handling, resist! It slowly infiltrates your life, demanding you to respond to e-mail at any time of day or night. Take it on faith that labor-savings devices demand that you labor more.

“But,” you cry, “I can multitask, getting more done quickly!” Multitasking is a myth. At least, quality multitasking is a myth. If you have several simple, brainless tasks, maybe you can do a couple at once. But if you need reflection or depth, forget it. Attention Deficit Disorder is a problem for people precisely because much of modern life really does demand more than ten seconds of sustained attention. Multitasking is a chance to accomplish many things poorly, all at once. It takes nine months to make a baby, and it takes focused concentration to make great breakthroughs.

You’ll probably notice that many of my suggestions can result in slower career growth, less productivity, decreased efficiency.

In the people realm, multitasking can be deadly. Consider this: Effective leaders connect with their followers. When someone comes to you for direction and motivation, talking while checking your e-mail won’t inspire loyalty and commitment. If you’re not committed enough to give someone your full attention, why should they be committed to you?

The emergency solution

Our whole economy seems “just-in-time,” with lag times and delays removed. Here is one illustration. Recent banking deregulation allows checks to clear instantly, eliminating the “float” that provided many businesses with a few additional days of wiggle room to finance cash flow. Now, everyone must be that much more vigilant about their cash.

Just-in-time brings its own problems, too. Problems can happen, just-in-time. When one piece of our tightly coupled, precision system falters, the entire thing can come tumbling down. We risk utter collapse if we stop if even for a minute. Not exactly a recipe for sanity.

So make use of it: Become emergency driven. If the overwhelm is too great, rather than trying to avoid emergencies, orient your life around them. Ignore your inbox. Choose what you’ll let go, and then let go of it utterly and completely. What’s important will resurface as emergencies. Trust me, there will be some Type-A person in the next cubicle who will raise the alarm when a discarded initiative becomes critical. Then you can step in, do the work, and be a hero for saving the day. Sure, you can get promoted by doing it right the first time (assuming you work where such things are noticed), but you just may save your personal life by not doing it until it’s important.

It’s always possible that you have enough time to do everything, but just aren’t organized. I’ve spent four decades searching for the perfect organization system. The closest I’ve found is David Allen’s Getting Things Done: The Art of Stress-Free Productivity. He lays out a system that empties your inbox daily, turning items into “To-Do’s” and ensuring things get done. Of course, he doesn’t have much to say about what you do when you commit to too much that it takes a full workday just to process your inbox.

That’s because, as with technology, better organization will often result in temporary savings followed by increased expectations. This, you can control. Get yourself organized?but don’t tell anyone. Scatter books around your office and season the scene with old folders with papers spilling out of them. Then empty your real inbox (hidden in the corner behind the potted palm) daily, and enjoy an organized life.

Just enough

You’ll probably notice that many of my suggestions can result in slower career growth, less productivity, decreased efficiency. That’s right. In fact, here is the most powerful strategy of all: Settle for just enough. Unless you’re living in a really different world from me, you can’t have it all. You have limited time and attention. You can’t spend it all trying for “the most” in every category. Figure out what “enough” is and make that your target.

Just enough applies to money, too. If you’re driven by money, decide in advance when you can ease up. A real estate investor I know never set an “enough” goal for herself. The last time I saw her, she had been a millionaire for twenty years, and worth over $50 million. Was she enjoying life? Hardly. By not deciding what was enough, she was pushing herself as hard as if she were still working on her first million.

Just enough applies to title and status, as well. An executive vice president of a several-hundred-person company decided that she hated her job. So she decided to downshift to a director-level position that gave her just enough status. It worked like a charm. She later downshifted again, spending a year climbing Mount Kilimanjaro and leading safaris in Africa. “Just enough” gave her the freedom to create a much richer life.

Just enough information

This is big. In our Brave New Economy, information is plentiful, cheap, and usually irrelevant. Lots of information is useless; the right information is invaluable. In preparation for a client meeting, someone will often circulate a dozen pages of client “data dump” the night before. Overwhelming, certainly. But is it worth reading? Who knows?

Don’t just accept information. Start by choosing some good questions, ask them, and collect just enough information to get a good enough answer. You’re not shooting for a perfect decision every time; you want just enough good decisions so you still reach your goal.

Your intuition may be helpful in defining this elusive “enough.” The COO of a company may find she can begin to make the right decision most of the time with just 30 percent of the information she normally would collect.

Scheduled maintenance

One thing you should have “just enough” of is work itself! In the book The Power of Full Engagement, author Tony Schwartz points out that regulating your energy is key to being productive. That means taking frequent work breaks to rest, relax, and recover. The same holds true writ large; schedule vacations throughout the year, and make sure you take them. When on vacation, leave your Internet connection and cell phone at home. Never, ever call into the office.

The last way to reduce overwhelm is to make frequent use of “no.” Say it when someone tries to obligate you for something you don’t have time for. Say “no” when your boss sets targets that can’t be reached without burnout. Say “no” when someone wants your feedback for the tenth time on the same memo?tell them, “it’s GOOD ENOUGH.”

“No” is hard for most of us to say. We like to feel appreciated and useful to others. But far better to say “no” many times and concentrate on a few great wins than to say “yes” after “yes” after “yes” and deliver poor results.

If saying “no” doesn’t work, take a drastic course: Let go. Stop caring. If your environment is demanding too much of you, let go of it. (And if you’re a leader, don’t put your people in the position of having to make this choice!) In a choice between sanity and emotional buy-in, choose sanity.

Detaching doesn’t have to mean that you do less work. In fact, if you detach in just the right way, you can start delegating out work you previously guarded with your life. Find someone who can do the work better, then let them go at it. The key to delegation, however, is striking the balance between sharing the burden and caring enough to make sure things get done.

At the end of the day, it’s not like there’s much choice. You will reduce your overwhelm. Either you’ll do it voluntarily and deliberately, or you’ll do it when you collapse with a nervous breakdown. You owe it to yourself to take control of your own life and make the hard choices now, when they’re uncomfortable, but doable. Something’s got to give. Don’t let it be you.