"Chance favors the prepared mind" — Louis Pasteur

My love/hate relationship with the Economist continues here on this post. I love to read the Economist as it is, in my opinion, one of the best written (if not the best written) magazine in circulation. Because of the breadth of international topics and the density of its articles, it take me quite a while to hammer through it. I hate how they stack up as I try to find time to get to them, but well worth the effort… So, here is a second post from the most recent issue.

In the Economist article "The Universal Diarist",  it talks about the formation of and on-going success of Six Apart. (Quiz: what is the origin of the name…and it is not Kevin Bacon). Since I blog on their platform and have looked at using most of their offerings, I am quite familiar with the firm. I am debating using their most recent offering, Vox, for more personal applications. Mena Trott uses Vox to chronicle her life with uploads of video and photos (including cell phone shots) from her day to day life for descendants. I digress here.

What I find most interesting in this article is how "accidentally" they came across their business. At 23, Mena started posting personal observation about childhood, pets and such on her site Dollarshort. In one post (about her husband), she surprisingly began to receive a variety of comments from a broad array of people, giving her advice or expressing emotion about her situation (buying a banjo of all things). She was surprised by the breadth of readers and about their willingness to dive into dialog with complete strangers. The light bulb went off in her head…the era of mass media was being replaced by "intimate media" in the web 2.0 world.

Like Alexander Fleming’s accidental discovery of Penicillin, Mena stumbled upon the core idea for Six Apart by chance. The same can be said of Pierre Omidyar in the founding of eBay (wanted to create a site for his girl friend to buy and sell her Pez collectibles). Chance plays a key role in the creation and success of businesses. However, being tuned into and on the lookout for opportunities in the noise is also a key ingredient. For every issue or problem or set-back, you also have a potential opportunity for a solution. However, our normal reaction is to bemoan our situation and struggle through it. It is rare that we tune into where there may be opportunity. This needs to be reprogrammed into our daily living in a very systematic manner whether it be personal encounters or business setbacks.

Bill Miller, one of the most talented investors of our era, recommends a book on chance called Fooled by Randomness: The Hidden Role of Chance in Life and Markets by Nassim Nicholas Taleb. Worth the read for those into this kind of work.

I have received a number of emails about my Paul Saffo post yesterday. Here is another link to his original Newsweek article on the Entrepreneurial "Cycle of Life" (analogy for you Disney fans).

The Silicon Valley of today is built less atop the spires of earlier triumphs than upon the rubble of earlier debacles

The dot-com collapse may have been a disaster for Wall Street, but here in Silicon Valley, it was a blessing. It was the welcome end to an abnormal condition that very nearly destroyed the area in an overabundance of success. You see, the secret to the valley’s astounding multiple-decade boom is failure. Failure is what fuels and renews this place. Failure is the foundation for innovation. (click here for the rest)

As I have often written in this blog, with failure comes lessons and opportunities (God closes one door, he opens another [or a window]). In fact, it is often necessary to experience the failure to be ready for the success. It changes your perspective, your knowledge, the industry structure, customer behavior, etc. Too often, entrepreneurs either a) are not able to hold on long enough to realize the eventual win or b) fail to see the lessons or new opportunities but rather see just failure.

 

I am always curious about the various strategies people have for time management. In particular, my nemisis is anything with a screen on it. My Blackberry and Mac top the list. Like an alcoholic, I am addicted to LCD’s and the connectivity they bring me.

Dr. Edward Hallowell has written a couple of books on the increasing craziness of our worlds these days. Interestingly enough, his core specialty is treating kids for ADD. In “Crazy Busy”, he lays out a broad array of time abusers and approaches to dealing with them. He doesn’t condemn this new world but rather describes it as one of the most engaging, exciting and interactive of times. It is because of this energy that we are drawn to the rush of always connected, all the time.

He refers to my illness as “Screen Sucking”. Unchecked, it will consume 24 hours a day. There is always someone to send an email to or receive one. It is our generation’s IM.

He recommends setting windows (every hour or two, for 10 or 20 minutes) to answer email. Use a timer so it doesn’t expand out. Others take a real-time approach and answer critical emails (preset key people to screen) as they come in. Remaining messages are batched for later or trashed. I’m always open for hearing different approaches. Until a 12 step program comes out, we are all left to figure this out together.

While having a board of advisors makes intuitive sense, its usefulness is very hit or miss. To begin with, entrepreneurs often seek brand name individuals who, by definition, have very busy schedules. While having a deep pool of experience, often it is tied to larger corporate issues. These advisors also  don’t have much of a stake in the business and have trouble finding the time to participate or aid the company. This is not to say that this is always the case, but has been 90+% of our direct experience.

Successful advisory boards have members with deep domain expertise and networks. They participate and help because the CEO has built a personal relationship with them. They have been pre-screened based upon their ability to commit time and effort to the company.

I am a much bigger fan of customer advisory groups. These groups comprise of the company’s primary or potential customers. They are diverse and represent a cross section of customers (versus all of the large ones or all of the insurance industry members). They provide specific feedback around product features, ease of use, competitive advantages and disadvantages and overall satisfaction. These are useful for incremental product improvements, but are not necessarily great avenues for future product generations. Customers often think linearly while successful new products are often seminally different. That said, these groups can help take your straw out of the Coolaid cup and give you a realistic view of the world.

In both cases, the company can maximize value by setting up specific (quarterly often) periodic meetings. These meetings have clear agendas and are working sessions around specific issues or challenges. Avoid using these meeting to primarily update them and share the love. While it is important to establish context, these people are normally action oriented and will feel most engaged when targeted as specific problems.

One last and important item…you will get little credit in fundraising for a board of rock star advisors. Investors know how easy it is to get people to agree to join a board of advisors and we also know how unproductive they can be because of the demands on their time. Moreover, we are not backing advisors. We are backing management to run the business day to day and to make the hard decisions. If you have a weak management team, a list of brand name advisors will not help you. Get a rock star management team and your world will be significantly better…

Board Management:
The care and feeding of a board is as much art as science. I have seen functional boards and extremely dysfunctional boards. Here are my key takeaways:

1) Open Communications Is King
Too often, CEO’s try to manage their board by managing the flow of information going to the board.  He/she makes it clear to managers that only positive information is to be shared. When bad news occurs, he/she puts a positive spin on it or suppresses it. They comment that this setback is really a positive development since it allows the company to address or work on a known issue. Or, the new entry of a major competitor is not a big deal. Board members aren’t stupid. They know when the spin machine is going and they know when something bad has happened. They will only begin to doubt the entrepreneur’s judgment or trustworthiness. Will the entrepreneur identify potentially lethal developments and take appropriate action or will let the board know about it once it is too late.

2) Stay Ahead of the News
Boards much prefer to have a CEO that proactively identifies issues, lays out why it is critical and what needs to be done. This is especially important if it is bad news. Get the good and the bad news out early and often. Anticipate questions, criticisms or issues and acknowledge those that are appropriate. Show clear action steps and show that you have identified the issues early so that a) the company has time to respond and b) the board can give feedback or assist

3) Seek Input and Advice
CEO’s can either view the board as a value-added partner in building the company or as an entity to be managed and presented to. Communications is one way. Feedback is not sought nor incorporated into actions. Either the entrepreneur has picked the wrong board members or is failing to take full advantage of its resources. Too often, a CEO feels a need to show strength and self-sufficiency. Asking for help or advice shows weakness. This could not be further from the truth. It is hard to form a true relationship with your board if you only talk to them…kinda like a marriage. This advice is often most useful when it is counter to existing beliefs.

4) Maintain Cohesiveness
Some CEO’s use divisions on the board to advance their agendas.  They feel empowered by the fact that they can go to either the Hatfield’s or the McCoy’s depending on any given issue and determine whose opinion is closest to his/hers. I have seen several situations where it is clear the CEO is having side meetings and agendas with one faction of the board and then relies on that faction to push through the dirty work. He/she then has side meetings with the other faction on another item in order to have that issue championed. In the end, neither side trusts the CEO nor the other faction. They seek to find situations where they can get leverage over the others and you end up with a civil war. Some CEO’s can make this work, but most eventually piss off one of the factions and his/her tenure is cut short.

5) Share the Limelight
Make certain that you include your key managers in board presentations. Let the board get to know your key lieutinents. This will give them a better appreciation for the depth of the team and can also help you assess the strengths/weaknesses of different members. Board members have often seen a wide variety of management situations and can provide  great insight from past successes and failures.

In summary, managing the board is mostly about exercising common sense. Assume that everything is transparent and that hiding, manipulating or spinning it will, in the end, not work. Be straight forward, pro-active and honest in your dealings with the board. If you feel that you have things you have to hide from the board, you have failed to form an appropriate relationship with it. Lastly, don’t just dump news on them. Tell them why it is or is not important, the implications for the business and the options available to the firm. Bring them into the loop.

Next, board of advisors…

Board composition varies dramatically between companies.  Some entrepreneurs push to add brand name executives to their boards in order to give credibility to the firm. Others load it up with friends and close acquaintances. Others add industry players or fellow entrepreneurs. I am a firm proponent of the latter.

The most functional boards I have been involved with have a number of leading executives from the industry as well as leading entrepreneurs. Board discussions are productive since directors have specific domain expertise around either the general management of an early stage company or the nuances of the industry. They can help think through hiring/personnel issues, financing activities or sales strategies. Industry participants can keep the CEO informed of trends, developments or breaking news. They can also help make introductions to potential customers, potential strategic partners, potential acquirors or potential hires. In one situation, the company was selling into municipalities. Board members new the key players and decision makers at many of the cities. They helped guide the sales force to the right people (or made the initial introductions). They also provided feedback on scuttlebutt, new developments or issues.

Fellow entrepreneurs are also very helpful. They can provide a sounding board to the CEO as he/she deals with day to day issues. Many of the board items are judgment calls. Experienced entrepreneurs can help guide the company through decisions based upon their past successes and failures. The company will want entrepreneurs that have enjoyed success and who come from similar industries. A biotech entrepreneur is not going to be very helpful to an Internet firm. Likewise, an entrepreneur who is still trying to figure out how to be successful might not have the best experience base upon which to draw learnings from.  Board members can act as mentors. Pick accordingly.

Too often, entrepreneurs pick current or former Fortune 500 CEO’s for board members. While this is very useful if you are about to go public, they do not often work out well for early stage companies. The company does not get the “marketing” pop that the entrepreneur thinks. However, these CEO’s are used to large staffs, governance issues and strategic planning. They often don’t have relevant industry expertise or are too high up to be able to answer or relate to the CEO’s day to day challenges. They get frustrated and the entrepreneur dozen’t get much from them.

Another common mistake is when entrepreneurs load up the board with friends and acquaintances. They know and trust these members and expect them to help the CEO maintain control of the company. The issue, again, is that they provide little day-to-day value. Worse yet, they encourage the entrepreneur to focus on the wrong things or give poor advice. We often see this when a company is fund raising for the first time. The company asks for non-standard items, seeks suboptimal structures and often focuses the entrepreneur solely on price or dilution. They pick fights over the wrong things, believing they are the important items. Smart entrepreneurs make dumb decisions in these situations.

Advice:
So, how do you know if you have a good board? Look at the number of times that you have had an issue or need and see the percentage of time that the board has been able to help you, especially on major decisions. Also, examine how useful and relevant you find the board’s recommendations and advice.

How should an entrepreneur go about finding these board members? I recommend that the entrepreneur make a list of the most plugged-in and knowledgeable players in his/her space. The ideal candidate is a leading, non-competitor fellow entrepreneur. The company gets both domain and managerial expertise. Make a list of the key candidates and begin a systematic process to build relationships with them. If the fit works out, you can approach them about greater involvement with your firm.

Find people who are selling similar types of products to similar customers. If you have a Web 2.0 company selling a consumer service, find someone who has scaled a sizable consumer service Internet company. If you are in etailing, find a successful etailing CEO from a different vertical. If you sell software to insurance and health care companies, find someone whose firm has successfully navigated and grown in the insurance and health care industries. At FeedBurner, Dick Costolo recruited Matt Blumberg from Return Path.  Matt is focused on email related services for major corporations while Dick is focused on RSS delivery services for major corporations. Matt provides a wealth of insight regarding day to day issues while also sharing successes and failures around different strategies and tactics. Elon Musk, a co-founder of Paypal, was on the Everdream board and provided an enormous amount of advice on everything ranging from satisfying the customer to call center management.

Lastly, how should you compensate board members? For early stage companies, cash is king. You see board members getting up to 0.25% equity that vests over a period of time. For hands on board members (like executive chairmen), this can go as high as 2%. The company also picks up transportation costs to and from the board meeting.

Next, I’ll discuss how best to manage your board…

A number of readers have sent me emails regarding board of directors and advisors. I would put discussions around boards into three buckets: board structure, board composition and board management.

Board Structure:
I highly recommend two things around structure. First, that a company go with an odd number of board members and second, that it not go above 7 directors. Entrepreneurs often ask about 4 or 6 person boards. The primary issue with an even number is that it can result in split board votes (e.g. 2 for, 2 against). Stay with an odd number if you can.

For early stage companies, you often see small boards of two or three directors. When the first round of venture money comes in, the board will normally jump to 5 directors. This will include two investor board seats, the CEO, a representative for common (usually selected by the founders) and a fifth board member acceptable to both the founders and the investors. The fifth board member is usually an industry executive or fellow entrepreneur who can provide helpful advice to management. It should resist the temptation to jump to 7 board members at this juncture since it is harder to manage and sets the company up for a bloated future board.

The board will usually jump to 7 members at a second financing that is led by a new investor. These two extra directors will include a representative from the new investor and a mutually agreeable third party. We rarely see the board jump beyond 7. Should the company raise additional capital, the number of investor board members may jump to 4 and after this, these seats get shuffled around to represent the largest investor shareholders.

Often, there are either other value added players or more investors than there are available board seats. The company can give them board observer rights. This enables them to participate in all board meetings and receive all board materials, but without the formal governance responsibilities and rights. They do not vote on board matters nor have the formal fiduciary liabilities of a board member. Again, a company does not want to load up with observers since it leaves too many people in the room. You will see up to 2-3 observers.

Why don’t you want to have as many value-added board members as possible? It requires enormous work and time to manage. The CEO needs to establish and maintain strong relationships with each board member. This includes on-going communications, responding to opinions and requests and dealing with intra-board issues/conflicts/etc. Each new board member is someone who will be voicing opinion at the board meetings and requiring follow-up actions. It is a lot of work. It also increases the likelihood that you may get intra-board conflict as you add a wider array of personalities. Lastly, and more importantly, with that many players around the table, board discussions and decision making slow down dramatically. Forming concensus is much more difficult.

Tomorrow, I’ll discuss board composition…

A number of readers have sent me emails regarding board of directors and advisors. I would put discussions around boards into three buckets: board structure, board composition and board management.

Board Structure:
I highly recommend two things around structure. First, that a company go with an odd number of board members and second, that it not go above 7 directors. Entrepreneurs often ask about 4 or 6 person boards. The primary issue with an even number is that it can result in split board votes (e.g. 2 for, 2 against). Stay with an odd number if you can.

For early stage companies, you often see small boards of two or three directors. When the first round of venture money comes in, the board will normally jump to 5 directors. This will include two investor board seats, the CEO, a representative for common (usually selected by the founders) and a fifth board member acceptable to both the founders and the investors. The fifth board member is usually an industry executive or fellow entrepreneur who can provide helpful advice to management. It should resist the temptation to jump to 7 board members at this juncture since it is harder to manage and sets the company up for a bloated future board.

The board will usually jump to 7 members at a second financing that is led by a new investor. These two extra directors will include a representative from the new investor and a mutually agreeable third party. We rarely see the board jump beyond 7. Should the company raise additional capital, the number of investor board members may jump to 4 and after this, these seats get shuffled around to represent the largest investor shareholders.

Often, there are either other value added players or more investors than there are available board seats. The company can give them board observer rights. This enables them to participate in all board meetings and receive all board materials, but without the formal governance responsibilities and rights. They do not vote on board matters nor have the formal fiduciary liabilities of a board member. Again, a company does not want to load up with observers since it leaves too many people in the room. You will see up to 2-3 observers.

Why don’t you want to have as many value-added board members as possible? It requires enormous work and time to manage. The CEO needs to establish and maintain strong relationships with each board member. This includes on-going communications, responding to opinions and requests and dealing with intra-board issues/conflicts/etc. Each new board member is someone who will be voicing opinion at the board meetings and requiring follow-up actions. It is a lot of work. It also increases the likelihood that you may get intra-board conflict as you add a wider array of personalities. Lastly, and more importantly, with that many players around the table, board discussions and decision making slow down dramatically. Forming concensus is much more difficult.

Tomorrow, I’ll discuss board composition…

A stitch in time saves nine
  — old proverb

Success and failure in entrepreneurial ventures ebb and flow frequently. It is not easy to differentiate between an on coming trend versus ordinary noise and fluctuation. Entrepreneurs often struggle to determine when to change course and when to let things play out. Having seen this dance play out across many companies at many different cross-roads, I have developed a bias towards listening to one’s gut and taking action sooner rather than later. There are three types of situations that come up most often:

— questions around burn and liquidity
— questions around management
— questions around product strategy

Burn & Liquidity: At times, companies find that revenue has not ramped according to plan and that the monthly burn threatens to take down the company. The runway shortens to a number of months. However, the company does not want to make the hard cuts and reorganizations for fear of spooking customers, signaling to competitors or disrupting fundraising. So, they hope that the situation will turn itself around and that the capital will flow into the business. Unfortunately, the calvary rarely comes in to save the day and, unless the company has extended its runway pro-actively, it finds itself in a tough liquidity squeeze. As a rule of thumb, always make the hard cuts when you have the runway for those changes to have impact and to benefit the business. Too often, the evasive actions are taken with only one or two months to go and the runway extension is modest at best. If taken 6 or 8 months out, you can often stretch the runway to a year. I have seen too many companies start too late and end up driving the plane into the tip of the mountaintop.

Product Strategy: Ever been in a meeting where everyone on the team is complaining about how the customer doesn’t get it? You push and you push with your product/service and customer after customer fail to buy. They comment how it is "better than anything they have seen" and compliment you on the "value of the product" and yet fail to buy. You will often begin to hear common themes/concerns about the product. It is time to start experimenting with different product strategies. The unfortunate thing is that the customer is never wrong. They have the money so they determine the rules. You have to dance accordingly. There is an adage in the venture business…fail your ideas quickly. You want to burn as little capital as possible on failed approaches. Throw the spaghetti against the wall and iterate quickly around ideas that seem to stick. I have seen companies pushing hard on one attribute of their product (say cost), only to eventually gain success with another (flexibility or sensitivity or ….). Listen hard to your customer and eliminate any sense of entitlement or superior insight that you might have. It is your job to hear their issues/complaints and to response creatively and quickly. Too many a proud company went down with the ship simply because the "customer didn’t get it".

Management: Listen to your gut regarding your management. Set clear, realistic objectives, give them the resources you can and let them execute. If you find yourself losing confidence in any one manager and you find yourself dragged in repeatedly to their domain, you may likely have an issue. Unfortunately, this happens most often in the sales role. Underperforming managers hurt you in three ways: 1) they take up inordinant amounts of your valuable time, 2) they drag down the moral of the team and 3) they tend to hire really weak team members beneath them. One indicator of issue is "recurring non-recurring" problems. Things seem to always be off, but the reason is always different and the blame rests elsewhere. Once you have concerns, set clear objectives with distinct deadlines and act accordingly.

It is obviously important to not make rash decisions. However, I can’t remember a time when my gut told me there was an issue, I failed to act and didn’t end up regretting things later. I have also rarely taken action early and later regretted having taken the action. More often, you hear the comment "we should have done this months ago".

Early stage companies walk on a tight rope. It does not take much to throw them off balance. Once headed in the wrong direction, they gain momentum and are difficult to turn around once down a road a ways. A stitch in time saves nine…

"TIme to Get the Gmail Account" — this one comes from an entrepreneur I know well. He uses this when one of his fellow CEO’s is about to get the axe. Since this often leads to previous employers shutting off their email under their domain (and the ex-employee wants to send correspondences through other email servers), you soon end up seeing them sending emails out of an alternative provider (usually free like Hotmail, Gmail or Yahoo). So, when you hear this phrase said to you, things might not be going well at the firm…