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Achievement requires process *and* people

I was planning to write this month about Power and how to use it. Then a news story made me realize you can’t build power without the basics. Like actually getting the job done. This month’s article discusses the two factors that account for all of your business success or failure.

This month:

  • Please send questions!
  • Upcoming public events
  • Article: You can only achieve through process *and* people
  • Recent press mentions

Please send questions!

I like to base newsletters on your questions. Send questions to:
inquire@steverrobbins.com.

I’ll answer the best in my newsletter and BLOG.

Stever’s Upcoming public events

For details, visit https://www.steverrobbins.com/register.

12 Sep 06, Teleseminar on ‘Developing the Executive Mindset’, noon Eastern Time. Hosted by Art Giser.
26 Sep 06, Teleseminar on ‘Overcoming email overload,’ noon Eastern Time. Hosted by Mary Cole.
30 Oct 06, Live workshop on ‘Manipulation 101: Advancing your agenda when logic fails.’ Harvard Business School Club of Boston.

Article: You can only achieve through process *and* people

[Send your questions to Stever at: inquire@SteverRobbins.com]

Competence. I read an article about a company hired by the US to build a number of roads, hospitals, and buildings. Nice, measurable goals. Years later, they had failed miserably on all counts. Complete incompetence, paid for with billions of taxpayer money. If you were CEO, would you consider that a job well done? (If so, either hire me to help you change or unsubscribe from this newsletter. I’d rather it not be found in your inbox when you’re arrested for racketeering and fraud.)

And that’s the whole trick in business, isn’t it? To get results people value. When good results are the exception rather than the rule, there are only two possible causes: check your people and check your systems. I’ve found most of us naturally care about one or the other, but not both. We love people, but never have time for the systems. Or we’re great with systems, but … people? Who cares about them?

You should care. They do all the work and set the quality standards. Do you know you’re hiring for competence? Most people hire for skill. They look for resumes with keywords or for experience doing exactly what the open job needs today. Earnest folk develop assessments, tests, and competency models, rating each candidate along a dozen painstaking scales.

Shallow, shallow, shallow. Those are skills, and you can train skills. But you can’t train people to care deeply about doing a good job. You want people who are proud of their work and devoted to getting better. Who cares if they’re good at a skill before you hire them? Trust me. In six months, you’ll care far, far more about whether they’ll move heaven and earth to master and grow in their job once they’re on board.

Look for the right attitude. Southwest Airlines is famous for group interviews, in which they actually watch each candidate in a group setting and notice who cares about pleasing others. That’s who they hire. Go talk to your candidates and employees. Listen carefully to find out who looks proud when talking about doing a good job. Dig. Ask questions like, ‘What was your favorite work experience and why?’ If there’s no evidence they care about the quality of the job, they’re likely not your dream employee. If people are just showing up for the paycheck, they won’t put in the effort it takes to produce results. And that includes you!

In fact, if they have no work ethic, they might deliberately sabotage you. The owner of my local Subway sandwich shop hires kids with a strong work ethic. He once heard a new hire tell the others they could get more hours by making sandwiches more slowly. He fired her on the spot. That kind of attitude doesn’t change, and will poison a business unless it’s nipped in the bud.

Hiring the right people is only half the battle. You have to back them with the systems to do good jobs. Yes, you need to give them computers, machinery, cash registers, and the other tools of the job. You also need to give them policies and procedures that let them do a good job. We’ve all called customer service people who are super friendly and helpful, and spend the entire call confiding that ‘management just won’t let me do that.’ How long do you think a quality-committed person will stay at a job that only allows mediocre results? Not long.

The system underlying everything is your system of Money. Moola. Cash. Scratch. Pay. People do what you pay them for. They take pay as a signal for how to behave. If you pay and promote mediocre-performers the same as high-performers (an astonishingly common practice), your high-performers are more likely to start imitating your mediocre-performers than vice-versa. And when you promote people just because they’re politically savvy, you get a political organization that only incidentally does any work. Think about it: politicians are hired solely for political reasons. Which member of Congress do you want running your business’s cash register?

Also pay attention to how flexible your policies let people be at their job. The Customer Service world is filled with stories of overnight packages being delivered by helicopter by daring deliverymen during a storm. Or department store clerks letting customers return merchandise they didn’t even buy there. By giving those front-line people flexibility, companies created a culture where the job got done and customers became evangelists for life.

We’ll never know what went wrong with the company that couldn’t build hospitals. Likely as not, they didn’t subscribe to this newsletter. You can avoid their mistake. Start by looking around to find out whether your people even want to do a good job. If not, start cleaning house. (Hold yourself to those same standards, by the way. You might be in the wrong job.) Then make sure your people have the systems and policies they need to deliver the results. Just ask, and they’ll tell you if it’s so. And pretty soon, you’ll be able to create an organization where you set out a goal and your company is able to Do Great Things.

[Send your questions to Stever at: inquire@SteverRobbins.com]

Stever sightings:

Canada.com
‘You’re back from vacation and face a mountain of emails: It’s time to tame the beast’
https://www.steverrobbins.com/r/e1nmx (will redirect to Canada.com)

Need breakthroughs in your business or career? Call 617-491-7638!

Are you reaching the breakthroughs you need around business, strategy, career, and people? I can help. Just call +1-617-491-7638. Whether it’s becoming the best executive you can be, heading off to climb Mt. Kilimanjaro, or just having a successful business and fulfilling home life, some dreams should come true. I coach high-performing leaders to help them further their skills, careers, and lives.

Become a better leader in a Fun, Provocative Read!

Looking for new ideas you can implement immediately to be a more effective leader? Pick up a ‘It Takes a Lot More than Attitude … to Lead a Stellar Organization.’ This collection of essays explores with what it takes to be a great leader, in an engaging, no-nonsense conversation that keeps you turning the pages. It also makes a perfect gift for the person with the leadership title who just doesn’t get it.

Buy it now at http://www.alotmorethanattitude.com.

(The only book on leadership that starts by discussing the responsibilities of leadership, and goes on to reveal all the secrets the great leadership pundits never discuss. Like when and why you can wear a feather boa to staff meetings…)


Do Great Things!

– Stever

Why we don't face facts … but should

Hello!

The NBC Nightly News segment was fun, though the 4-hour shoot became just 15 seconds of airtime. That’s showbiz. I’m trying for permission to post the segment on the web.

‘Face facts,’ my mom used to say. That’s the moral of business book Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management, which inspired this month’s article on the times we stop facing facts so we can (short-term) keep feeling comfy.

This month:

  • Article: Why we don’t face facts … but should
  • Overcoming Email Overload: It’s a strategic issue.
  • Upcoming challenge: can you solve a simple business problem?

========== Article: Why we don’t face facts … but should

I was reading Hard Facts,(1) a business book that presented a case for ‘evidence-based management.’ In evidence-based management, better business results come from using data and sound reasoning. Sounds pretty obvious to me, but the authors felt compelled to make a case for evidence-based management using facts. Of course, people who believe facts are for sissies won’t buy that argument. But I’ve found confronting hard facts is often way worth the payoff.

You see, facts matter. You believe you can fly? Great. Dive off a 10-story building with no safety net. Gravity will dispute you. Gravity will win. If you act from untrue beliefs and aren’t willing to look at the unfolding facts, your flying belief might lead to an abrupt, messy end.

We only want facts at our review if we’re doing a good job

We all believe we’re great at whatever we do. We resist evidence to the contrary. When I help an executive create a development plan using 360-degree feedback exercise, their self-perception (‘I am a communication skills God’) mismatches the feedback (‘Charlie has the worst communication skills I’ve seen in 35 years of work’). Charlie’s reaction? ‘Wow. That feedback hurts. But maybe people here just don’t know what good communication skills are like.’ As if!

When it comes to leadership, others’ perceptions matter because perception IS reality. If people don’t understand or respect Charlie, they won’t follow him, they won’t listen to him, and they won’t promote him. Even if they’re all wrong and he’s right, it won’t matter, because creating the right perception is a vital part of his job.

Know if your beliefs work

Sometimes facts annoy us by contradicting our long-held beliefs. So we ignore them. We believe good leadership means using a dictatorial, micro-managing style. We demand 80-hour work-weeks, are stingy with vacation time … and wonder why a steady stream of ungrateful jerks work for us and leave right when we need them most. Facts say that giving people autonomy, engaging commitment, and allowing them a natural rhythm of work/recovery simply works better than being bossy. Besides, you hated it when you parents were bossy; do you really think your employees are any different? Your belief may make you feel powerful, but it isn’t an effective way to run the business. Don’t let the lust to be Alpha Dog blind you to being Effective Dog. (Fact: my metaphors are a bit strained today.)

Know your productivity facts

We love to ignore the facts when doing what makes us feel productive. Email addiction is one place this shows up. Many executives spend 25%+ of their time handling email that only accounts for 5% of their results, They confuse busy-ness with business. Just because we feel productive doesn’t make us productive unless the facts back it up.

Think about how you approach your job. Do you if your beliefs are supported by facts? Or if they’re contradicted? The more you can build the strength to use data and objectivity in your decision-making, the more you’ll find you can shape a path that leads you and your organization to your most closely-held goals.

(1) You can read my detailed review and buy the book at Amazon by going to: https://www.steverrobbins.com/r/book-hardfacts back

========== OVERLOADED BY EMAIL?

The webinar was a success, despite some … interesting … technical glitches. Coming later this year: a product on how to manage your email. The product will focus on the strategy of integrating email into your job, and will present tactics that support smart strategy.

(Also coming soon: a white paper on how email overload is a strategic issue for companies, despite often being viewed as an individual productivity problem.)

Meanwhile, find out exactly what email overload is costing you and your company. It’s free and it’s fun. Visit:

http://www.overloadassessment.com

========== UPCOMING CHALLENGE PODCAST & BLOG: http://blog.steverrobbins.com/bizblog/, https://www.steverrobbins.com/podcast

Stay tuned for my Podcast & BLOG the week of the 24th. In my Podcast, I’ll be presenting a deceptively simple question about business and issuing a challenge for the first person to think through the Facts and answer correctly.

========== Need breakthroughs in your business or career? Call 617-491-7638!

Are you reaching the breakthroughs you need around business, strategy, career, and people? I can help. Just call +1-617-491-7638. Whether it’s becoming the best executive you can be, heading off to climb Mt. Kilimanjaro, or just having a successful business and fulfilling home life, some dreams _should_ come true. I coach high-performing leaders to help them further their skills, careers, and lives.

========== Become a better leader in a Fun, Provocative Read!

Looking for new ideas you can implement immediately to be a more effective leader? Pick up a ‘It Takes a Lot More than Attitude … to Lead a Stellar Organization.’ This collection of essays explores with what it takes to be a great leader, in an engaging, no-nonsense conversation that keeps you turning the pages. It also makes a perfect gift for the person with the leadership title who just doesn’t get it.

Buy it now at http://www.alotmorethanattitude.com

(The only book on leadership that starts by discussing the responsibilities of leadership, and goes on to reveal all the secrets the great leadership pundits never discuss. Like when and why you can wear a feather boa to staff meetings…)

====

Do Great Things!

– Stever

The Executive Mindset

Executive jobs are the ultimate “buck stops here” jobs. The core of being an executive is decision making. Executives have the final say in their area of the organization. As I’ve written about before, the CEO is ultimately responsible for everything. But the CEO can’t do everything, so she hires executives to help. Let’s explore the essence of the executive mindset. What is so intrinsic to the executive that it can’t be delegated?

What’s an executive?

First, we need to find an executive. You can often spot an executive by her title. In industries like banking, title inflation has made everyone a vice president, but here I’m talking about real VPs, not the ones who took an impressive title when they could have asked for a raise instead.

“Chiefs” are special. Their titles imply specialty—CFO is finance, CMO is marketing, COO is operations—but that just describes their expertise, not their scope. Their job is making decisions from the perspective of the entire business. They think about making the entire business succeed, not just their own domain. You know that grand vision statement the company wrote last month? It’s the chiefs who link the leadership vision with the strategy and tactics that get carried out.

Vice presidents should also be striving for global thinking, but they’re more specialized. They often come in many flavors—VP of Northeast Sales, VP of Human Resources, VP of Quality, VP of Customer Service, etc. VPs are accountable first for their area, and then for the business as a whole. But they’re still executives, at least with respect to their area.

Executives must think vertically

People generally rise from the bottom to become executives. They have experience at every level of the business. They know the issues, goals, and concerns of front-line workers, managers, regional managers, and directors. If they paid attention along the way, this makes them uniquely qualified to think up and down with their decisions.

It’s Monday morning, and an eager young intern suggests, “Let’s take our squeegee brushes and bundle them with free eyeglasses. It’ll be the biggest promotion ever!” The VP can consider the suggestion at every level: Does this idea fit with the strategy? Does this idea make sense given the director-level org chart? Will it work in manufacturing?

The VP’s job isn’t to answer these questions, however, even if she knows the answer. The VP’s job is to raise the questions with the right people so everyone at the appropriate levels does the in-depth analysis required to know if the idea makes sense.

In this way, the VP is doing her real job: building the organization. At lower levels of a business, everyone’s delivering a product or service. It could be the new Mach 9 Razor (now with seven diamond-coated blades), or the Faster than Light Package Delivery Service (packages delivered the day before you mailed them). At the executive level, that changes. The deliverable is not a Mach 9 Razor; it’s a business that delivers a Mach 9 Razor. The distinction is subtle but crucial.

The executive’s job is hiring the right people, asking them the right questions, and engaging them the right way during decision making. That’s why the VPs who think at all levels are so effective; they can spot opportunities throughout the business, and help the right people at the right level pursue them. Those people learn, and can spot the next opportunity on their own. Developing people and systems, now that’s building a business, not just building a product.

Executives who rise too fast or didn’t learn along the way often get stuck at one level. Some VPs think only at 50,000 feet. Their big picture thinking is great, but their strategy doesn’t capitalize on the actual strengths of the organization. They don’t know how to connect strategy with operations. Their strategies can range from completely unrealistic to merely a bad fit. And beware the 50,000-foot thinker with Attention Deficit Disorder! Every day brings a new initiative, any one of which would occupy the entire division for a year. Life with them is exciting and fast-paced, but somehow, not much progress comes from all that sound and fury.

Other VPs are stuck at 5 feet. While I was helping a finance company’s senior team plan a strategy, one VP mentioned, “the customer service input screen needs a ‘back’ button.” That may be true, but it’s out of place when discussing fifteen-year industry trends. VPs mired in details micro-manage, and usually do it poorly. When they appear on the scene, everyone rolls their eyes, smiles fake smiles, and waits patiently to start cleaning up the mess when they leave. Their contribution to the business? Less than zero. They don’t help at the top and they muck things up at the bottom.

Executives must think horizontally

Executives have entire functions or business units reporting to them. It’s the executive’s job to recognize how everything interacts and make sure those handoffs happen as they should.

In a start-up, everyone sits in one room. The product designers are three feet away from the people doing the invoices, and all of them gather in the storeroom every afternoon to manufacture that day’s batch of product. Everyone hears customer complaints. Everyone hears internal issues. And everyone can work out who needs to hand off what to whom and when.

Good executives think long term, short term, and every term in between.
But as the business grows, the tasks get too big for one person to handle; now ten people take calls in a call center. They’ve never met the designers, and don’t know what happens with the complaints they so dutifully record. Each customer service rep now does a tiny slice of the original one-person job.

As businesses grow, tasks grow. As tasks grow, any given job is a much smaller slice of the task. As jobs shrink, we need systems to link people, paper, and process so that everything gets done. Executives are the only people in the right place in the organization to identify all the different pieces and make sure the links happen.

Executives must think through time

The most critical decisions in a business are where to spend the limited reserves of time, energy, and money. Since executives are the ultimate deciders about their area’s resources, how they direct people and dollars determines the fate of the company.

A front-line salesperson in a retail store needs only to think as far ahead as helping the customer select an outfit. Total attention span? Five minutes for the customer interaction. A middle manager might be in charge of a project that takes several months to complete, or even a couple of years. Converting 500 outlet stores to a new automated point-of-sale system doesn’t happen overnight. The middle manager needs to make decisions balancing the emergencies of today with the need to move the multi-year project forward.

Good executives think long term, short term, and every term in between. As company stewards, they make decisions considering the effects on the short-term environment, all the way out to the long-term implications.

Many attractive short-term decisions become bad decisions years later. In many cases, this could be predicted in advance. Layoffs became a fad in the late 1980s’ LBO craze. They produced (and still produce) short-term gain. But long term, they destroy trust and create a workforce that rightly feels very little loyalty to employers.

Start thinking now!

Success as an executive requires the ability to move freely from strategy to tactics, the ability to understand linkages across organizational boundaries, and the ability to balance short- and long-term concerns. Whether or not you’ve made it to the top of your game, start cultivating this flexibility and you’ll be a prime candidate for the C-suite

Know what you're really selling; it may not be what you think.

You’ve worked your butt off opening an insurance brokerage. People walk in the door and you sell them insurance. Or do you? We often choose our job and career because we like the job or the product or the industry. “High tech is fast-paced and exciting,” my friends exclaim as they dive head first into the Next Insanely Great Thing. It becomes easy to fool ourselves into believing our customers think about our product the same way we do. Yet our long-term survival depends on knowing what we’re really selling.

Selling the product when customers buy the benefit

Since we don’t know what customers are buying–only what we’re selling–we think we’re selling our product. To find out what customers are really buying, look to the benefit they’re getting. Verizon needs this lesson. My next door neighbor has had an unlisted phone number for the last 40 years. She recently heard that Verizon is now reporting phone bill payments to credit card agencies. She called and complained. “My account number is my phone number. By sharing my record, you’re violating my privacy.” The customer service rep smartly informed her that she’s paying $5/month to keep her number from being listed in the directory. She’s not paying for “privacy.”

Guess what? He’s wrong. The only way Verizon used to share her number was through the directory. People who wanted privacy would pay for an unlisted number and they were covered. Now that Verizon gives out numbers in databases, etc., they seem to think that customers won’t mind unsolicited calls as long as the calls didn’t originate from the printed directory or 411. Poppycock! My neighbor is buying privacy, and Verizon is going to lose $5/month unless they start selling privacy, and not just an unlisted number.

Sometimes customers are buying the interactions

What if you’re selling a commodity? Customers get the same benefit from any other producer of your commodity. But the experience of buying from you might be different. Customers might be buying that experience.

My local bookstore (www.PorterSquareBooks.com) charges full retail prices in a community full of techie geeks who love Amazon.com. They’re not just doing well, they’re thriving. Why? Because they’re not selling books. The physical layout of the store is light, airy, and open. Books in the center of the store are on tables, while the bookshelves line the walls. Freestanding bookshelves are arranged so aisles open into the middle. No matter where you are in the store, you never feel hidden or isolated. Shortly after opening, they added a cafe where people can sit, read, and work. Next, they started having book readings by authors, book clubs, and the like. Despite the higher-than-online prices, the bookstore is almost always buzzing with people. Because even though they make money with a commodity, books, they’re selling something far rarer today: community.

Selling community is very different from selling books. It means expanding into areas that bring people together, that encourage interaction, and that create a sense of belonging. Amazon sells books, and they’ve expanded product-wise. Now you can buy lawn furniture, too. Yippee. Recently, Amazon has added Blogs and Wikis and other community elements, but I’m convinced. Amazon online will never be more than a pale imitation of Porter Square Books in-person.

Here are a few more examples:

  • Ad companies don’t sell advertising campaigns. They sell sales.
  • Consulting companies don’t sell hours, they sell advice and/or results.
  • Media placement companies don’t sell ad impressions, they sell prospect calls.
  • Clothing stores aren’t selling clothes, they’re selling identities.

Take the time to understand what your customers are buying. Are they buying your product or service? Are they buying the benefit they get from your product? Are they buying the interaction around your offering? Understanding what you’re selling is the key to knowing how, why, and where to go next to grow your business.

How to Set Salaries for Entrepreneurs

“How to Set Salaries” is an article that first appeared on Entrepreneur.com in May, 2006.

Setting salaries for your staff is always a tricky thing to do. It’s especially hard if you’ve never done it before, because you probably don’t even know where to start. On the one hand, you want to pay enough to get the best possible talent. On the other hand, you don’t want to overpay. What’s an entrepreneur to do?

First of all, don’t panic. Remember that your goal is to attract good talent and pay them fairly… (continued at http://www.entrepreneur.com/humanresources/article159438.html)

Some Communication Problems are Just Who Talks First

Ever met someone who likes to keep decisions open? WAY open? My friend Jordan is like that. No decision can be complete unless we have a dozen options to choose from. He enjoys the options-generation process itself. Especially for small things, I’m one of those people who just likes to make a decision and move into action. Options are only necessary if the initial options don’t meet the needs, and the fun is in choosing an option and acting.

Stever: Let’s grab lunch. How about a sandwich at Dave’s Fresh Pasta?

Jordan (thinking): Oh, Stever’s thinking of having some lunch. What fun! Stever’s tossed out the first idea. Now I’ll toss out some more ideas, get Stever’s ideas, I’ll react to his ideas, we’ll have a bit of a back and forth, brainstorming possibilities which shall surely result in a delicious lunch.

Jordan: Ok. We could also go to Maria’s. Or maybe there’s a new Mexican place down the street. Or maybe Harvest…?

Stever (thinking): Why does he always do this? Every time I make a decision, he has to suggest something else. Why can’t we simply go where I suggest once in a while?

Stever: Look, why don’t we just go to Dave’s Fresh Pasta.

Jordan (thinking): No! There might be something else I want to enjoy. Stopping the options-generating process means we now stop enjoying different possibilities.

We both end up in a downward spiral. Besides lunch, there are two sets of needs on the table: I need to move into action. Jordan needs to spend time generating possibilities. When we do it in that we both end up frustrated, and we do it that way every time I start off the conversation. The solution is surprisingly simple:

Change the order of the interaction.

If I’m starting the conversation, I normally start with my favorite option. But Jordan’s response will always be to generate alternatives. So how about this as an opening gambit:

Stever: Let’s grab lunch. What are some of the possible places we could lunch?

Jordan: How about Carberry’s? The Mexican place? Harvest?

Stever: Or maybe Dave’s Fresh Pasta? It’s close, inexpensive, and super-yummy.

Jordan: Sounds great! Let’s do it!

By recognizing that Jordan’s natural strengths operate at the start of the decision, I can kick off with a question that engages him appropriately. Then when he’s had his fill of options, I can put mine out and we can make a decision and move forward. In practice, he’s usually quite amenable to whatever I want anyway… as long as he’s had a chance to generate options first. We’re both happy.

This also applies to Dreamers vs. Critics

Another common order-dependent interaction is dreamers vs. critics. Some people are great at finding the holes in a plan. Others are great at dreaming. You want both in a decision, only often they happen in reverse. The critics get involved at the brainstorming phase, and knock ideas out before they’ve even had a chance to be fully generated.

When you have a dreamer and a critic, put forth some ground rules. Decide in phases. Make sure both people understand the ground rules and the reason for them. Then brainstorm first, with the critic muzzled, secure (hah!) in the knowledge that they will have a turn. After brainstorming has generated lots of options, let the critic find the problems with the options. During this phase, the brainstormers get to sit quietly, nod, and smile (through gritted teeth). Lastly, the brainstormers take the critic’s list of concerns and brainstorm answers to those concerns. The critic can review the answers and the group decides whether the final solutions meet the needs.

Often, differences in personal styles are points of conflict. But all the different styles are strengths in the right time and place. One path to harmony (not to mention better results!) is to change the order you interact to insure everyone has a chance to use their style in a place that makes sense.

From Idea to Business: I have an idea … how do I turn it into a business?

I have an idea… how do I turn it into a business?

Many businesses start with a great idea. But a great idea isn’t enough; you have to make it a great business. If you know business, that might be easy. But if not, here’s an overview to find out what’s involved in going from idea to business.

Building a business takes four things: a product or service, a business model, a team, and money. There is no standard order to gathering these, though they all affect each other. For instance, raising money first makes it easier to attract a top-notch team, but you will have to give up more of your equity to raise the money. Having a prototype first makes raising money easier, but without money, prototyping must be done on a shoestring. The tradeoffs will reflect your judgment, willingness to take risks, and the circumstances that come your way.

One word of advice: beware “equity paralysis.” I’ve seen entrepreneurs stall their business to keep as much equity as possible. It is better to own 10% of a $10,000,000 company than 80% of a $1,000,000 company. And if your idea needs to come to market quickly, giving up equity may make sense if it will buy speed.

You need a product or service

Most entrepreneurs start with a product or service idea. Make sure that your idea fills a real market need. Better technology rarely wins in the marketplace. It must meet a real need, and must be marketed in a way that the customers are willing to buy it.

In fact, you don’t always need a new product category. Microsoft was a late entrant in window systems, spreadsheets, word processors, and presentation software. Yet they virtually own those product categories.

Without a product or service, it is harder to raise money or a team. But even so, some entrepreneurs raise money for a “search fund,” where they take a year to find a business to buy or a product idea to develop from scratch.

If you plan on raising venture capital funding, you will find that products/services that alleviate customers’ pain are easier to fund than products/services that simply make life nicer. In general, people buy immediately to eliminate pain, while they are less urgent and motivated to make things better. A leaky roof gets patched before a homeowner adds ornamental trim.

You need a business model…

This article is continued in the “Entrepreneur’s Companion” volume 1. Click here to purchase.

What are Venture Capitalists? (What are VCs, anyway? Are they right for me?)

What are VCs, anyway? Are they right for me?

Q: I have a business idea on running a cafe. I was thinking of going to a venture capitalist for funding. Problem is, I don`t know how they work. Can you shed some light on some of their practices?

A: VCs are money managers who make high-risk, high-return investments. They raise a fund, usually $10 million to hundreds of millions, from private and institutional investors. They then invest those funds in startup and pre-public companies (their “portfolio companies“), hoping for a substantial return. The VCs are paid a percentage of the fund’s value as a management fee. They also have a “carried interest”—they get a percentage of any profits above a certain point.

VCs get their money back (“harvest” their investment) when a portfolio company sells shares to the public in an initial public offering (IPO) or when it is acquired by another company. Despite all the late-90s publicity around IPOs, there really aren’t very many of them–maybe a couple hundred in a good year, in contrast to several thousand companies invested in by VCs.

VCs want opportunities that have a huge market, tremendous growth potential, a competitive advantage in the marketplace, and experienced management teams. Financially, they often evaluate investment opportunities expecting a minimum return of 40-60% per year on their investment. Since they are required to return money to their investors on a certain timetable, they also want the possibility of harvest in a certain number of years. And depending on the size of the fund, they may only invest in companies raising more than a minimum (e.g. $2-$5 million).

You raise money from VCs by putting together a business plan (see bizplanhints.htm) and arranging for that plan to be given to a VC with a referral from someone they know. Unsolicited plans almost never get funded. Your plan must lay out the market for the business, how the business will operate, who the management team is, etc. See my Entrepreneur.com column “Formatting Your Plan” for a typical plan outline. I also recommend Palo Alto Software’s “Business Plan Pro” (www.paloalto.com) as a good source for guidance in writing a plan.

To return to your situation…a cafe does not meet most venture capital requirements. Most cafes aren’t a new idea, don’t have the growth potential to return 40-60% to their investors, have no obvious harvest strategy [a chain of cafes can go public-a single cafe can’t], and don’t have clear competitive advantages strong enough to outweigh the risks. A cafe furthermore probably takes a few hundred thousand dollars to start, rather than the millions most VCs want to invest.

For smaller businesses, private investors or bank loans are your best bet. Many banks offer small business loans to people starting businesses that aren’t appropriate for high-growth investors. If you’re in the US, check out the Small Business Administration at http://www.sba.gov. They can help you find funding opportunities more appropriate to a cafe.

Best of luck!

Romancing the Dragon: Know What Accepting Investor Money Means

Right around the turn of the millennium, a startup named ArsDigita was born, flourished, and died a horrible death. The entrepreneurs blamed the venture capitalists and circulated their Tale of Woe far and wide.(1) I’m less than sympathetic. If the entrepreneurs had done their homework before eagerly accepting gobs of money, they might have understood the risks of accepting that money.

Having heard a bit from both sides of the ArsDigita story, there seem to be several lessons lurking here for entrepreneurs:

Understand what you’re getting into when you bring in outside money. Read the documents. Choose VCs who know how to run a business. Know how VCs are motivated, and understand that the very nature of VC deals gives the VCs a far better deal than you’re getting.

Read everything you sign. Twice. With lawyers. One ArsDigita founder mentions that the VCs invoked a clause out of the "phonebook" of financing documents. His naivety is touching…Didn’t he notice the quiet guy sitting by VCs? That was their lawyer. It should have tipped him off. They had a lawyer review the thousand-page document. He should have had his own lawyer go over it with a fine-tooth comb.

When you accept money from investors, you’re making a commitment. But you’re not committing to a vision. You’re not committing to a technology. You’re not committing to a dream. You’re committing to providing a certain return on that money to your investors in a certain timeframe. It’s an economic arrangement, and if they disagree with how you’re going about that, they almost certainly structured the deal so they can pull rank.

There’s no reason to believe that any given VC knows anything about running a business, or even choosing managers to run businesses. Some do, but a lot don’t. Many have never held an operational job, and even those who have didn’t necessarily learn from it. And even those who learned didn’t necessarily learn lessons that apply to your business in the current business environment. (Keep in mind that their rule of thumb is 2 home-runs, 2 failures, and a bunch of in-betweens out of a portfolio of 12. That’s called a "normal distribution," ladies and gentlemen, and may mean that most VCs aren’t doing much better than random.)

Furthermore, no matter what a VC thinks about their own motivation, as long as they are investing other people’s money, legally, their first priority must be making money. Their funds have a time horizon, and they own a portfolio of companies. That means when push comes to shove, harvesting your company is more important than your company’s mission or sustainability(2). And if another of their portfolio companies looks more promising than yours (say a 10x return in 2 year versus your 5x return in 7 years), that company will get more time, attention, and subsequent reinvestment. It would be bad business from the perspective of the VCs to spend their resources any other way.

And remember: you have to hit certain targets over several years in order to “earn” your equity in your company. They get all their equity simply by engaging in a one-time financial transaction. Unlike you, they are under no onus to do anything once they’ve put that money in. And if another portfolio company suddenly gives them the needed return on their fund, unlike you, there’s no vesting schedule or performance-based incentives to keep them interested or motivated. I’ve coached a CEO dealing with an outside VC that wanted out of the deal simply to simplify their own portfolio management. The VC was pressing to liquidate the company so they could get cash back out of the investment.

Remember: about 85% of a V’s investments aren’t home runs, and it may be their own fault. We rarely hear much about any except the home runs (“I started and grew a mediocre company” doesn’t make the cover of Fast Company).

That said, the right VC can bring a lot to the table when paired with the right management team. A VC can bring legitimacy, the ability to attract top management, and the connections to bring a company to the next stage of growth. But be very careful about what you’re getting into before you sign on the dotted line.

(1) I will not reprint the stories here. There has been a lot of litigation around the case, and I want to keep my distance. It’s juicy, though. Search for “ArsDigita lawsuit” on the web and you may find something on your own. back

(2) I made the mistake once of thinking that the finance community cared about sustainability. Maybe Warren Buffett and a handful of value investors do. But my experience is that this attitude is the exception rather than the rule. Learning that lesson cost me the chance to make $6.5 million … please learn from my experience! back