When the Dream is Over

Every day is a rollercoaster for any entrepreneur, but for those who are in it for the big exit, except for the very lucky few, there comes a time when you realize that its just not going to happen. Predicting and planning for the death of the dream can be difficult, but here are a few things that entrepreneurs should consider:

• Reformulate, reformulate, reformulate – when Starbucks had more than five locations, they didn’t even sell hot coffee. It took them years to get it right, and when they did, they really got it right. Companies don’t really fail, strategies fail, so you’ve got to reformulate.
• Rewind your clock – it’s likely that the company you’re leading today looks nothing like what you thought it would. This is probably because you didn’t really have a clue when you got started, but it may also be because you had to compromise your dream at different time. If you made smart changes, fine, but if you compromised, go back to that original dream and see if its still worth pursuing.
• Plan your next move – When you’ve reached your psychological failure point, there’s no turning back. You’ve either got to shut it down or move on to something else. Even if your partners think there is something there, they’ll never be able to convince you otherwise, so there’s not reason to pursue something just can’t believe.
• Change your appetite for risk – If you’re failing, you might as well do something dramatic or crazy to see if it works. Many companies have little to lose, and this is a perfect time to try that crazy idea you dreamed up months ago but never thought anyone would go for it.
• Consider salvage value – if you’re company is going to sink, consider how you might salvage some of the value. Mega corporations pay big bucks to people who can minimize losses, and there’s no reason that you can’t do the same.

Entrepreneurs don’t give up easily, so I know that dying dreams are contradictory to a small subset of these people—which is a great thing. Yet still, most hit a point where they know that their business is going to be only average and that they aren’t going to get that bix exit they were shooting for. Tread carefully if and when you get there, because this is where an average leader gets their opportunity to obtain hero status by planning and executing an excellent backup plan.

Burn Rate

If there’s one thing that an entrepreneur needs to watch, it’s their burn rate. This is not only good for business, but its good for investors. There’s nothing that kills an investment like poor fiscal management.

If you don’t watch your cash, investors are going to think one of three things: you don’t care about their money, you think you’re going to get more money when you run out, or you don’t have a clue what’s going on with your money. Any or all of these scenarios will sour a leadership team and potentially tank a company.

Most entrepreneurs actually care about their cash burn but miscalculate an investor reaction to unexpected shortages. First off, everyone has shortages so you should feel at ease about this. Secondly, when there are shortages, one should recalibrate the financial models and make sure that your plan is up to snuff, because investors don’t like to invest twice in the same inaccurate game plan. Thirdly, most investors actually care about your business and want to help where they can, so a little openness in the finances can elicit valuable feedback.

All in all, you gotta watch the burn and you gotta make it clear that you care about your burn much more than your investors do. So before they ask the question, break the news and chase it with a refreshed plan.

Value-based Pricing

Value-based pricing sets selling prices on the perceived value to the customer, rather than on the actual cost of the product, the market price, competitor’s prices, or the historical price. It’s a great pricing strategy in an oligopoly or monopoly, but not in commoditized markets.

My MBA professor called this baguette pricing to cut the loaf at the production cost for a floor price and the perceived value as the ceiling price. So long as one doesn’t try and take more bread that is reasonable, a deal is likely to occur.

But what happens if you want to do a second deal? One could argue that value-based pricing is still the right way to go, and one could also argue that as long as you don’t surpass the perceived value to the customer, you’ll be okay. The problem with this thinking is that it assumes that the client in unaware of your costs—something that occurs only rarely—and that you can continue to take a bigger piece of the loaf. This approach breeds neither trust nor loyalty, which means that your customer is going to keep shopping around for a better deal.

An alternative approach is to push the selling price down the loaf a little so you’re splitting the difference a bit more. This way, the client knows that they’re getting a great deal, they quickly understand that you’re sacrificing margins, and they’ll trust you enough to do a second deal. In fact, they’ll become a loyal partner, because they know that you’re looking out for them.

Extracting the maximum margins is a great thought, but these decisions should always be considered in conjunction to the message that you send your client. Good values mean happy customers, and happy customers make good clients.

Digital You: The Last Frontier

Forget everything you know about you. The past is irrelevant, because you can now become digital. You started to notice things changing when you sent your first email. You logged your first thoughts with email, and now you’ve begun creating avatars, photos, videos, and blogs that begin to form a rudimentary digital you.

You’ve noticed a shift away from the physical you, because the digital you can do so many new and exciting things. For starters, you can meet just about anyone you want to. You can also learn about (or just link to) an unlimited amount of information. And you can create a slightly better you.

Trend the digital you out a few more years from today and you see someone who is playing by a new set of digital laws. You can be whomever you want—even partitioning your identity as you see fit—and hide behind a mask. In fact, anonymity and pseudonymity completely uncouple the digital you from the physical you that you know today.

The digital you will retain relevance only to the extent that you exert your physical identity in the social graph. A world where identity is not anchored in some portion of static identity can never achieve greatness because it can never trust itself.

Opposition

Anything worth doing at all is going to be tough. It’ll be tough not only because it isn’t proven, but because people will not believe you or believe in you.

Now there are two types of opposition: doubtful opposition and absolute opposition. The first is simply not believing that someone can actually do things differently. Doubtful opposers are people that entrepreneurs need to keep in their rolodex just because everyone needs a devils advocate once in a while…especially when you prove them wrong and make that delightful little call to suggest that you did it and it worked.

The second kind of opposition, absolute opposition, tends to be more of a structural opposition. Unfortunately you cannot call anyone up and tell them that they were wrong, but this kind of opposition will actually make you a hero if you can overcome it. Structural opposition is almost always more difficult, because it involves changing a system, not an opinion.

Someone once told me that entrepreneurship is absolute optimism in the face of total rejection. Don’t let this total rejection get you down. Embrace it, engage it, and eliminate it.

Passion

If you ever find a passion for anything in life, stick with it.

No amount of pay or perquisites can buy the results that passion produces. Sure, you can buy somebody’s time, energy, and even loyalty, but none of that translates into world-class work.

Most people simply end up doing what made sense at some point in their life either because an opportunity came up or because someone they knew convinced them that they should do something. This is an okay strategy only because it’s what most people do and it generates average outcomes, but it’ll never produce world-class outcomes.

If you don’t love your job, your hobby, or who you are, change it. Make it something that is exciting and challenging. I’m not talking about become a professional athlete or driving your motorcycle across the country, I’m talking about finding something or becoming something that is real, valuable, and meaningful. Passion for these things will bring real happiness and you will see that your work becomes world-class.

Who Needs Customer Service Anyway?

I don’t understand why companies provide customer service when they don’t equip those people with the tools and resources to fix problems. It’s especially unnerving when unfixed problems don’t go away.

Take the example of a certain Wendy’s restaurant in Grand Junction, CO. Almost all of their customers are just passing through town and will probably never eat there again. As you can guess, their drive through lane is always backed up, and their employees rank up there with the worst of the worst. The customer experience stinks, and nobody really expects much from them. I don’t go there anymore, and I’m okay with that.

Now let’s take a look at Nordstrom's. They will bend over backwards to ensure that you have a good customer experience. Yes, you’ve got to pay for it, but it sure beats dealing with the hassle when issues arise. One expects a lot from these people, and one will always get a lot. People will always shop there.

Now, for yet another contrast, let’s look at HP’s consumer printer customer service arm. I just purchased a beautiful 4-in-1 printer with built-in wi-fi, and the software stinks. In fact, since installing the software on my computer and my wife’s computer, both have slowed down to a snail’s pace and neither even detects the wireless printer. I’ve spent no less than 15 hours trying to work out the problems, four of them with customer service, and they finally admitted that there were some bugs in the software. They promised to have an expert call me back within two days to fix the problem, but they broke their promise and I’m still waiting for a call back. Now I’m stuck with a problem and am left at the mercy of HP’s technical support team. As I’ve looked in to this problem on various tech support forums, I have seen countless others who tell my exact same story.

I don’t much care if Wendy’s of Grand Junction stinks, and I’m willing to pay a little extra at Nordstrom’s, but I’m appalled that I forked over $350 to HP for something that doesn’t even work and that I’m stuck with tech support who doesn’t keep their promises.

If customer service cannot or will not fix problems, just get rid of them. If however, you want to build a brand, reputation, or culture, hire people who can fix problems, equip them properly, and encourage them to fix problems.

Can anyone recommend a good printer for me?

Real Entrepreneurs & Real Visions

It’s funny what can happen to an entrepreneur as time passes. My first encounter with most entrepreneurs is pretty exciting. They pitch their vision to me and tell me about how they’re going to change the world. Independent of what their vision is, I love this attitude, and I consider this mindset an absolute requirement for anyone who has a chance of succeeding.

Fast forward six months, a year, three years, and you’ll almost always see a major transformation. If successful, the entrepreneur usually emits a confidence in their abilities and optimism in their vision. If they’re not really that successful, which is the case for most entrepreneurs, they flip a mental switch and begin to reek of unmistakable complacency and mild optimism for a lukewarm vision. Gone is the vision, reality has set in.

One might think that this gradual fatalism is caused by the bitter realities of entrepreneurship and the infinite challenges of creating value, but I think it is just the opposite. I think that most downtrodden entrepreneurs get that way because they allow reality to tarnish their vision, or, better yet, they think that their original vision was gospel. They miss the most critical point about entrepreneurship in that real entrepreneurs never stop finding new ways to create value.

Imagine now the entrepreneur whose vision is still vibrant, despite numberless revisions, and is still pitching something that they believe in and that makes me believe in them. I don’t care if they’ve changed their mind a million times, failed miserably, or if their plan has huge holes in it—I want to invest in this person. I want to invest in someone with a half-decent plan and a true belief that they can do it. I want to invest in someone who never stops being an entrepreneur in the purest sense and keeps the vision alive.

Next time you want to test an entrepreneur, ask them what keeps them up at night. If they’re beaten up by the cruel world, they’ll answer by telling you that they worry about problems. If, on the other hand, they continue to reinvent themselves and their company, they’ll answer you by telling you that they stay up at night thinking about how they’re going to capture the next big opportunity.

Dealmakers

Doing deals can be one of the most energizing events in one’s professional career. From the initial indication of interest to the final document signing, you really get a full perspective of what drives each player and how the deal is going to make things even better.

The most frustrating thing, however, is trying to do a deal with the right company through the wrong people. Anyone who has ever done a deal has experienced this, because it happens nearly every time, and if you’ve ever completed a deal, you probably initiated several others that broke down along the way.

Finding the right people at the right level in the organization and with the right motivations is always tricky. You either go through the process several times until you’re talking to the right people, or you pretend to have no understanding of the decision-making process, suggest that the person you’re currently talking to is only part of the picture, and ask to involve the right people.

What would happen if an organization chose one or a few dealmakers who had a good sense of the entire organization and what would happen? They could pull retired company veterans who know the ecosystem and make them the designated dealmakers. Then, anyone who wanted to do a deal would immediately identify this person, meet with them first to quickly vet a deal, and then involve the analysts, etc. when the deal already made strategic sense. In a nutshell, you remove the gatekeepers completely and backfill the analysis after you knew the deal made sense.

Accurate Financials

Right now I’m slogging through some messy financial data, and I’m completely frustrated by the integrity of the data. With all the advancements in software and technology, one would expect companies to maintain accurate and consistent records and projections, but that rarely seems to be the case.

Every company, big, small, new, or old, must always maintain an updated, simplified, and sufficiently transparent set of financial statements. From an investor standpoint, anything less than complete clarity in financial records and projections cast a shadow of doubt on both the business and leadership that suggest that they are not good stewards of the investment dollars.

Larry the Liquidator vs. Gordon Gecko

I just finished watching Wall Street (1987) and I’ve gotta say that Gordon Gecko (Michael Douglas) doesn’t hold a candle to Larry the Liquidator’s (Danny DeVito) shareholder speech in Other People’s Money (1991). Gordon doesn’t really tell a story other than “greed is good,” but that’s weak at best. Larry, on the other hand, uses a similar “I’m making you money” theme, but then he starts talking about buggy whips and funerals. I suppose that Norman Jewison had the advantage of watching what Oliver Stone had done four years earlier.

I’ve never been to one of these meetings before, but I’m curious to know if anyone else has given such a speech or heard on themselves. Is there really that much drama?

Trusting Your Employees

Some companies follow an absurd pattern of ratcheting down on their employees to prevent them from browsing the web, checking personal email, and shopping. They seem to think that they own their employees and their minds when they are at work. Employees keep finding ways to work around these restrictions, and employers keep plugging holes in the dam.

And then there’s another approach. This approach focuses on keeping employees happy and realizing that if your asking for their full commitment to the cause, that you’ve got to make sure that they can do those things that will keep them happy while they’re plugging away. Employees learn to decide when to answer their phone or reply to an email, and they feel respected as real people who lead real lives outside of work. Let’s face it, the more people integrate work into their personal lives via email, phones, and old fashioned homework, the more employers are going to have to allow their staff to tend to personal issues at work.

Perhaps the biggest effect of respecting the personal lives of your employee while they’re at work is that it breeds trust. You send a strong signal to your staff that I trust you to manage your time and effort, but I expect you to deliver for me when I need it.

The Option Effect

It is amazing what can happen when you go from one option to two. With one option, you are psychologically bound by the probable realm of possibilities. While you may think that the option is good, you’re probably lacking in perspective. Two options, on the other hand, give you a reference point and almost always lead to a better outcome.

The “option effect” is the name of the game when it comes to everything from deals to relationships. Before I met my wife, I always had a top three list. If one relationship fizzled, I had two more that I was cautiously cultivating and could quickly escalate if I wanted.

When I used to be in the government RFQ business, organizations almost always required at least three bids to run a process, and it was for good reason. There was always at least one foul ball, one stretch, and at least one decent bid.

Every time you decide to do something, whether it a deal or a donut, force yourself to find more than one option and you’ll improve your outcomes dramatically.

Trusting Leadership

Today I received a phone call from my friend Jay who is raising a second and final round of financing for his life science company. I met Jay about a year ago when he was competing in a business plan competition, and I was awestruck by his optimistic candor and clear vision. I invited Jay to come speak with Nittany Lion Venture Capital, for whom I was working at the time, and again, he impressed me by his honesty and forthrightness. We didn’t make the investment, but Jay maintained his professional composure throughout the process, and we parted as friends.

Today, Jay asked me if I could connect him with any other investors, and I was happy to share my rolodex with him, because he had built a relationship of trust with me.

Now I know that there are a million reasons not to invest in any given company, but the critical deal breaker in my experience is the character of management. Jay knows what he knows, and he tells you what he doesn’t. This is a dream for any investor who intends to actively engage with management.

I am emphatically optimistic about Jay and his company simply because Jay can be trusted. Among all the entrepreneurs whose character is bankrupt, Jay is a shining example of how to deal with investors.

Board Composition

Boards were created to oversee strategic business decisions as well as make those decisions of which management is incapable. They help guide the strategic vision and protect the interest of affiliated parties (e.g. investors). For some reason, companies still build boards based on some other set of expectations, and the critical insight and oversight needed so dearly is absent.

During my academic career, I saw boards that were created solely to pander to current and potential donors. The superficial justification was that people with money are people who can really ad some sort of strategic value. Now I know that anyone can argue with my position, but let’s be honest with ourselves, these boards a pretty useless when it comes to oversight. Sure they catch those stupid mistakes, but those things are usually obvious to anyone.

The point I want to make is that whomever you put on your board, make sure that you’ve got at least three intelligent and engaged board members who can make the tough decisions and give you the much needed insight and oversight. Any board that doesn’t at least cover their strategic interest on a few points is absolutely useless.

The Art of Financial Modeling

The problem with most financial models is that they either make just a few overly generalized assumptions or they try and break down everything to its most basic element. While neither is wrong, the level of assumptive detail is often decided based on faulty logic. Financial models should always be created with one major question in mind: can you manage the model so it is both flexible and meaningful?

The last major model that I reviewed was for a medium sized service company in a very basic industry, but the problem was that they had built a workbook with a whopping 77 worksheets! There will always be a place for companies with financial models well above 77, but not a medium sized company with only a handful of financial people to keep the wheels turning. With all the cross-calculations going on and no clear structure, the model is completely useless. Like all systems, the level of complexity rises exponentially with each additional element.

On the other end of the spectrum, I recall working on a complex supply-chain case competition in business school, and using simple graphical charts to forecast supply-chains. Sure we did all the complex calculations, but in the end we realized that managing the system was entirely too complex, rendering all our hard work useless. Essentially, we just started graphing the data and adjusting the model based on what we saw on the graphs. We shot from dead last in the competition to second place by simply modeling something that we could understand.

There will always be those people who want to break everything down to the financial periodic table, but when the rubber hits the road and the landscape starts to change, it will be those people who actually understand their model, as simple and modest as it may be, that will quickly adapt their models and make good decisions because they we working with good models.

Big Ideas

So what's in an idea?

Every day I talk to someone who tells me that they've got a great idea and that it's going to change the world. They always seem to drop the name of some major company and go on to explain why their idea is somehow related.

I hate these conversations, because this is where I begin to operationalize their idea. I take their overly sanguine brainchild, perform major surgery, amputate any unnecessary appendages, and put it in a package that we hope will sell. It's no surprise that this process often kills the idea as well as the entrepreneur.

If you're wondering what I do, I'm a corporate venture capitalist for a major U.S. health system. I pull ideas from people in the corporation and try to commercialize them. I also work with outside companies to find new ways to create and commercialize value for the health system.

Two weeks ago a man who I've been working with on an idea came into my office, slapped his hand on my desk, and declared to me that he “want[ed] in.” Not fully understanding what he meant, I asked him to explain, and he said that he wants a piece of the new company. This guy has been a wonderful resource to me and others as we work toward launching this company, but this was a bit too much for me to handle. First off, it wasn't really his idea. His original idea is turning out to be more of an appendage, albeit major, than the core business. Secondly, he seems to think that this company is going to be worth something because it was a great idea. Wrong...mostly.

Big ideas are required to create and commercialize value, but when you add up all the work that goes into building a successful company, the ideas are only the tip of the iceberg. After the tens or hundreds of people involved in executing on a good idea, in addition to the capital required to get things going, the idea is merely an afterthought. In fact, I bet that if you asked those people who were involved in building a company, those who executed on an idea would probably take offense to anyone claiming that their idea made all the difference. I have no problem with his involvement, but the reward should equal the risk, and right now, it’s not much

To be clear, I enjoy confabulating about the next big company more than most, but any great idea must be eventually tempered with reality, and it’s the reality that can be so harsh.