Posts by: JFinkle

Conscious Capitalism

Gekko57

In June of 2010, something really extraordinary happened in the world of Philanthropy. Bill Gates and Warren Buffet began recruiting for what is known as “The Giving Pledge.”

As many of you know, the giving pledge is a promise made by the wealthiest individuals in the world, mostly billionaires, to give away the majority of their wealth to charity during their lifetime or after, in their will.

As of August of that year, the aggregate wealth of the first 40 pledgers was $125 billion.

And, according to their website, there are now 138 pledgers, the latest of which is Mark Zuckerberg, who has committed to give away an astounding 99% of his wealth. At the time of his pledge, this amounted to $45 billion and because of the recent increase in the price of Facebook stock, it’s an even greater amount today.

This is amazing, but perhaps not surprising. The technology industry is the largest donor industry to charity, contributing $9.8 billion or an astounding 47% of the total donated in 2014, far more than the financial services sector.

This movement highlights a change to the traditional philanthropy model.

First, people are thinking about their philanthropic legacy sooner and wanting make an impact during their lifetime as opposed to only after their death. Second, as evidenced by the giving pledge, capital is being aggregated in an effort to create critical mass and tackle medical, social and environmental problems previously though of as too big or too overwhelming.

Now sadly, few of us will make it on to Bill and Warren’s billionaire recruitment list. But that’s ok, because there are a number of other ways to contribute to the greater good.

Over the last few years we’ve seen “purpose driven” companies like Tom’s Shoes and Warby Parker establish giving as a key identity attribute of their brand.

In Tom’s case, giving a pair of shoes, and, in Warby’s case, a pair of eyeglasses, to someone in need in a developing country, for every pair sold.

In 2015, we saw the emergence of internal facing efforts like that of Gravity Payments who decided to mitigate salary disparities by raising the lowest salary in the company to $70k, and by the founder of Boxed, who donated a double-digit percentage of his founder’s equity to fund college tuition for the children of his employees.

The term that best describes this way of thinking or operating a business, coined by Whole Foods CEO John Mackey, is Conscious Capitalism.

This describes businesses that serve the interests of not just stockholders, but all major stakeholders: customers, employees, suppliers, communities, the environment, and even humankind.

He wrote a book about it called Conscious Capitalism. It’s inspiring. You should read it.

And rest assured that companies can do well by doing good.

According to Nielsen’s Global Survey on Corporate Social Responsibility, 43% of global consumers said they are willing to spend more for a product or service that supports a cause.

And it can serve them well in other areas. According to the Case Foundation, 86% of millennial workers choose employers with strong corporate social responsibility programs, and 88% would consider leaving if corporate values no longer met their expectations.

I was fortunate to lead a panel discussion on this topic this past weekend at the VCs on Skis event at the Killington Grand Lodge in Killington VT, hosted by Reitler Kailas & Rosenblatt. The panelists were: Jeffrey Cherry of Conscious Venture Labs, Dave Kirkpatrick of SJF Ventures, Miki Agrawal of Thinx, Matthew Colbert of Spend Consciously, and Karan Gandhi of Boxed.com.

We learned about each panelist’s practice of conscious capitalism, the motivating personal stories that served as inspiration, the effect on the constituents they serve, and the threats that this philosophy faces as their business scales. I learned from my panelists, that Conscious Capitalism is in fact a philosophy and not just a program.

Our panelists not only shared their experiences, but also have demonstrated through the continuing success of their businesses that you in fact can do well by doing good, Jeff Cherry believes that that’s even the wrong sentiment for where we are as a society. “The realization is”, he said, “if you’re not doing good, you’re going to be much less likely to do well”.

I thought back to that famous quote from actor Michael Douglas as Gordon Gekko from the 1988 movie Wall Street.

He said: “The point, ladies and gentlemen, is that greed, for lack of a better word, is good”.

Well, it was evident to me, at least in the technology sector that we’ve evolved from Gordon’s world of greed and recognize that sustainable success in businesses needs to be driven by a purpose higher than maximizing profit, a purpose that also ensures participation by all stakeholders as opposed to benefiting just a few and leaving others behind as nothing more than collateral damage.

Continual Partial Attention

 

Tan Lines of the Future

Tan Lines of the Future

We live in a connected world, and it is a wonderful world. Twenty years ago it would have been hard to fathom that every bit of information we need could be found by clicking an app on a mobile phone.

This access to information is, of course, unlimited: trivia, a definition, personal background information, and specific information such as how do you compute IRR?, and, available at any time: an address to a destination to which you’re already on your way, or the next song on the playlist of a concert you’re attending.

When you think of it, there is barely an occasion where you have to ask anyone a question anymore.

And opinions?… well covered by social media as we all know.

While real-time access to information is one of the greatest achievements of our generation, it has also created the condition of continual partial attention.

What we originally thought was multi-tasking, has become a pattern of interruption from our many data modalities: text messaging, to phone calls, to email, to twitter, to text messaging, to live conversation, back to twitter to Facebook and back to text messaging.

Or the endless loop of topic-hoping, a great example of which is provided by Jordan Finkle @finkaboutit84

My buddy presented an opinion as a fact about the recent Deflategate scandal, which, of course, wrongly accuses Tom Brady of being anything other than a God. I, knowing my buddy, call his bluff and take to Google to reconcile this mess. He heads to espn.com to find and perpetuate the same BS writers he knows will support his claim and I go to the source and start reading up on the The Wells Report, as well as the Patriots side of the story, ‘The Wells Report in Context.’ Before we settle the argument, my friend, on espn.com, reads an alert about the LA Laker’s chances of winning the NBA lottery, which turns into a conversation about why players like going to Los Angeles (the weather, the lifestyle), which turns into a discussion about the new Entourage movie, which sends you to YouTube to watch the trailer, which sends you to HBOgo to refresh on the last season before the movie actually comes out. Before I can even finish reading about the convenient use of facts and logic in the Wells report or the lack of a tangible competitive advantage resulting from a difference in PSI levels as well as the overall problems with the structure of Wells’ argument, my friends don’t care about the original argument (or Brady’s integrity god dammit!) and are laughing at Turtle as he strikes out trying to get a girl’s phone number.

Continual partial attention in its finest form.

The craving for a media pick me up, that quick fix of information, or inspiration, multiple times an hour, is now a well formed habit. And, as we know from reading Nir Eyal’s blog, Nir and Far, habits like these change brain chemistry, and become exceedingly difficult to reverse.

Nowadays, nobody focuses long enough to get anything of true value done; for many from my generation, this is not how we grew up – this is not comfortable. Parents wonder how their kids will function in the working world, that is, of course, if anyone is willing to hire them in the first place. How will they get a job? Hell, can they stay focused in an interview long enough to get an offer? Many parents even feel like they have to remind their kids to keep their phones in their pocket during an interview. 

This is continual partial attention, and it is the topic of several of my recent conversations. And, in every one of them, I am surprised at the deep concern many have about how this behavior will permanently and negatively affect the way our society functions.

The world is ending.

Is it? Or will this behavior just become the new norm?

The truth is, the same level of negative sentiment existed before and during other great technological revolutions involving the dissemination of information, many of which I would argue had greater societal impact than the connected world of today.

The Guttenberg Press

Rearrangeable sets of letters, made out of metal, combined with a press, allowed information to be disseminated quickly and accurately for the first time in history. But, what sort of information would be spread? While the world would now become literate, there was deep concern by the Church, about the lack of control over censorship. In the minds of the clergy, the notion of broad dissemination of a secular idea was surely the beginning of the end. This is largely what made Martin Luther’s Reformation successful; in terms of execution, what Luther did would have been impossible without the press.

The Telephone

Before the telephone, people wrote letters, banged out a message on a drum or sent smoke signals…and of course there were carrier pigeons. But, these either took too long, were imprecise, or subject to environmental restrictions – fog trumps smoke! Despite the benefits of instant and ubiquitous communication, in the late 1800’s, people feared that others would listen into their conversations and that the telephone would only promote the spread of gossip. A common worry was also the noise of the ring, which many believed would make you deaf. The greatest concern, however, was the belief that the telephone would just be a source of, you guessed it, constant interruption!

The Television

As the number of homes with televisions increased from 0.4% in 1948 to 83.2% ten years later, evenings that had once been spent reading, conversing, and evolving familial relationships, were now spent in silence enjoying passive, often solitary, entertainment. The television was viewed by some as the biggest classroom in the world, and by opponents as eventually leading to declining school performance, distorted values, violence, and withdrawn and addictive behavior.

The Digital Age

As the digital age progressed and computers and the internet penetrated our homes, similar concerns were widely reported in the press. Some examples:

CNN – “Email ‘hurts IQ, more than pot’”

The Telegraph – “Facebook and MySpace generation ‘can not form relationships’”

The Atlantic – “Is Google Making US Stupid?”

Times of London – “Warning: brain on overload”

New York Times – “The Lure of Data: Is it Addictive?”

I think this Armageddon view is shaped by the fact that we’re smack in the middle of the transition between two eras, the ‘un-connected’ and the ‘always-on.’

Consider this, while the consumer internet created partial attention, it was the smart phone that made it continual. In the US, smart phone penetration grew from 25% in 2010, to 72% in 2014. Today, over 173 million adults own smartphones. If you were born after 1992 you may have some memory of being un-connected, but you lived most of your childhood and teen years always-on. This year’s college graduates were mostly born around 1992. More than likely, they will be interviewing with hiring managers who are 10 to 20 years older, and have lived a greater percentage of their lives un-connected. Those managers’ managers (as well as these graduates’ parents) lived the overwhelming majority of their lives un-connected. This creates the incompatibility. Ten years from now, in 2025, a greater percentage of those born in 1992 will be hiring managers, and then by 2035, most hiring managers (and most of the adult population) will have lived the majority, if not all of their lives, always-on.

Pandora’s box is open, we will never be less connected, and we will never be just as connected, but less often. And, no doubt there will be changes to the way our brains absorb information. But, there is no need to panic. As the always-on generation becomes the majority, continual partial attention will become the new norm and when it is, society will be simpatico, and the behavior we now observe as awkward and troubling will barely be noticed.

If you ask me, I say continual partial attention is already the new norm, and I for one accept it…and yes, in full disclosure, I am among the afflicted. How about you? Is continual partial attention driving societal decay, or are we looking at it only through the lens of this awkward transition?

Special thanks to Jordan Finkle @finkaboutit84, for assistance with this post

Set the Context For Your Investors

I recently recorded a Podcast for Gavin McCully’s The Pitch Deck – Episode #53. Gavin offers a number of other great episodes.  Enjoy

 

Ep #53: Jeffrey Finkle, Angel Investor/Coach, ARC Angel Fund – Set the Context For Your Investors

Jeffrey FinkleJoining me today on The Pitch Deckpodcast, our guest brings an amazing new perspective, which I don’t believe we have ever had on the show previously. Jeffrey Finkle is an ex-entrepreneur, ex-Exec. in software industry, ex-venture capitalist, and now a current startup coach and angel investor. He started out as an entrepreneur in the 80’s, starting a company called Enhance Systems, which he grew over the course of 7 years to a revenue of over $4 million. From there, he joined another software company, working his way up to the executive level, and used that experience to hone his business skills.

Jeffrey joins me to bring you a masters level course in the dos, and don’ts of raising capital. He explains why you need to learn to engage your investors, give them context and show them why your solution is the one they need to get behind. Listen in to learn how to avoid presentations mistakes that create doubt in potential investor’s minds. Check it out below…

Listen To The Full Interview:

 

Play

 

What You’ll Learn From This Episode:

  • How Jeffrey’s early entrepreneurial years have shaped his angel investing and coaching.
  • The life span of venture capital funds.
  • How the ARC Angel Fund operates.
  • Jeffrey’s favorite sectors for investing.
  • Jeffrey’s 3 types of founders.
  • What you need to do to avoid investor disconnect.
  • Jeffrey’s dos and don’ts of pitch presentations.

Featured On The Show:

If you have questions about investing, early-stage capital raising, investor relationship and due diligence, post your question on The Pitch Deck Facebook Page. In our future episodes, we will read your questions and get feedback from our featured guests.

5 THINGS YOU CAN DO TODAY TO SAVE MONEY ON DILIGENCE LATER

gada_1 A company whose board I serve recently decided to accept an offer to be acquired. About one third of the way through the due diligence period, I checked in with legal counsel to see where the legal bill stood and found out that we were already at $200k…..whaaaaat?

This was close to the overall budget we had set. I couldn’t fathom that. Good legal advice is worth what it costs, and this group does world-class work at reasonable rates. But I realized I needed to better understand how and why it got so expensive so fast. In talking with the partner in charge, in this case, approximately $80,000 or 40% of the cost was because an overwhelming percentage of the documents that had to be uploaded for review were either incomplete, missing, disorganized, unsigned or not countersigned – for whatever reason not fully executed, as required.

This got me thinking about ways a company can be more “acquisition-ready” with its creation and maintenance of diligence materials in a way that wouldn’t have been too burdensome for them along the way. Because, let’s face it, in early stages of a company’s life, product-market fit and not running out of cash are the most important tasks, and, during scale, creating a repeatable sales process, building a product management function and organizational development should occupy “poll-position” in CEO mindshare, not saving $80k to $100 five years into the future! So, these have to be easy things that can be done painlessly without much disruption.

I asked my friend Maggy Wilkinson of AGA Advisors to have coffee and talk about it. Maggy’s company provides due diligence services ranging from forensic accounting to post-acquisition integration, in industries ranging from defense to technology and just about everything in between. I also sat with Matt Kittay, an Associate at Reitler Kailas and Rosenblatt (RKR), the law firm I affiliate with to provide startup advisory services. RKR specializes in venture law and does a lot of deals that mirror the transaction I mentioned above. Both Maggy and Matt had excellent suggestions, some the same, and some different. To follow is the best of both contributions.

1) Avoid One-Offs – Create and Use Company Standard Forms and Contracts. Not building standard forms lacks foresight; building standard forms that you don’t use (i.e., that are modified everytime or just not executable) is waste of the money spent to develop them. This happens most often with sales contracts and employment or contractor and associated agreements. In sales agreements, when trying to accommodate a purchaser, companies may agree to a request to vary the choice of which state’s law will govern the agreement. In employment documents, different employees may end up with different vesting schedules (three years vs. four years vesting duration, monthly or quarterly increments, one year cliffs, etc.). Some may get cashless exercise or even unique, non-standard description of duties. When time comes to diligence these contracts, not having a standard form (or maybe two standard forms – a Key Employee Option Grant Form and a Rank-and-File Option Grant form) that the company stuck with means the legal team has read every line of every document instead of simply reviewing the form which everyone signed.  If you have sixty employees and they each signed Form A or Form B, it is quicker and cheaper than having attorneys read and analyze 60 distinct agreements to see if anyone had a severance arrangement or acceleration on a Change of Control event. Your lawyers will thank you.

2) Have a Process in Place for Employees.  Have an employee manual and make people sign and acknowledge it; then be sure to enforce if.  Like many things in life, the value of having A PLAN is more important than exactly what the plan says.  The Plan not only gives your employees a fair understanding of the rules on day one, but it creates institutional memory for your HR coordinator (which may change multiple times) for how people are on-boarded and managed and what happens when they leave the company.  Simple steps like signing an acknowledgment that the new hire read and received the Plan is the evidence you’ll need to enforce the Plan.  And a simple two line email on their exit, stating their final date of employment, whether they left “for cause” or not, how many options were vested as of the last day of employment, and when those options expire, saves a multitude of legal questions later, whether dealing with the former employee or in a round of transaction due diligence.

3) Track All Your Service Related HoursAre you a software company about to be acquired by a larger company? Is the solution you are selling inclusive of all service related hours (training, customer support, etc.) What if the company acquiring you wants to add that as revenue stream and charge by the hour? Having employees report all hours: software development time, training, business development, internal reporting, etc. allows the acquiring company to understand and value the incremental revenue streams that are possible post acquisition, and allows you to be in a better position when arriving at the strongest possible valuation.

4) Regular Operational Reports. In order to understand how your business is progressing over the course of several years, you need to develop and use a reporting tool or choose one of many off-the-shelf solutions to track the key operating metrics that tell the real story of your company. You can save yourself significant time, energy and cost during the due diligence phase of going public or putting yourself up for sale. Save the snapshots and back them up somewhere. You don’t need a fancy time keeping system to do this. Again, there are off-the-shelf solutions for this or you can do it in something as easy as a homegrown excel template.

Often in startup mode, the founders are narrowly focused on sales, controlling costs and growing revenue. Everyone knows the company is growing by looking around. You started with 3 people and you now have fifty. You had 1 client and now have 101. But did anyone create a timeline showing the growth trajectory and margins over time? This often gets overlooked, and most investors or acquirers want to see it before handing over money.   Can you easily demonstrate that in three years’ time revenue grew year over year by a certain percentage while operating margins stabilized at month 20, etc.? What about customer acquisition costs? What happened to it when the company reached scale? When did average employee utilization reach 75% and how long has it been there? Capturing this information real time saves a lot of money down the road because hiring someone to do it retrospectively is costly. Outside consultants will charge big bucks to come in and do this. Digging through data to recreate the timeline rather than audit the one you already have, could be 3-4 times as costly as it needed to be.

5) Asset Tracking. You will want to accurately know what assets you have at any given point. Ensuring there are proper tracking mechanisms and protocols to identify assets (IT equipment, vehicles or rental equipment, furniture, etc.) will be instrumental for knowing real time what assets you have, where they are located, and what they are worth. Asset tracking solutions available today are efficient and affordable.   It will take a lot of time to recreate this after the fact, and it’s an annoying cost that can easily be avoided if thought about at the outset.

Worse than the cost of needless document recreation during due diligence is the additional time it might take to close a deal when diligence drags on. You might bump up against the expiration of an exclusivity date or there might be an adverse event in the business that spooks the acquirer. When the deal is right, close quickly…

Pinpointing Problems Worth Solving (Part Three of Three)

sherlock3

In part two of this series I wrote about how I believe that founding CEOs who are deep domain experts are the best at getting to product-market fit in a capital efficient way. I profiled ServiceChannel’s CEO’s 30+ year history solving problems in the contractor and facility management space.

In this post I will profile a few additional company examples that emphasize the strengths of a domain expert founder.

Wayne Lam has been in the storage management software industry for 28 years. He graduated from Copper Union in 1987. While in college, he became the co-founder and director of engineering for Advanced Graphic Applications, a startup building document imaging applications. The biggest challenge in implementing any document imaging application is how to deal with the large amounts of storage required to handle the large image files these applications have to store.  So, out of necessity, Wayne used optical disk storage because it was a safer and less expensive way to store and archive these images.

Recognizing an opportunity, Wayne started Applied Programming Technologies (APT) in 1989 to build large storage systems utilizing optical disk storage. While efficient, these systems were very difficult to deploy. Wayne would often spend all night at customer sites making these systems work.

I met Wayne in 1992, when I joined APT as VP of Sales and Marketing and acting CFO. We sold APT to Cheyenne Software in 1993. Cheyenne developed software to backup networks and was great at selling complex technology through a reseller channel. Wayne and I held a variety of roles within the company – I was on the management side while Wayne focused on product development, deployment, and support, eventually we each became General Managers of different divisions of the company.

CA Technologies (formerly Computer Associates) acquired Cheyenne in the late 90’s. Wayne went on to serve as VP of R&D. He was laser focused on leveraging the skills he learned at Cheyenne to make CA’s enterprise software deployable and was put in charge of productization, packaging, and licensing of CA’s network management products.  He knew first hand from his late nights in the data center the difficulty IT executives had deploying enterprise scale technology and made sure his design and documentation eliminated needless steps and confusion.

In 2000, Wayne co-founded Falconstor Software with ReiJane Huai. I was an angel investor in the seed round and an institutional investor through my fund at the time, Odeon Capital Partners. Wayne was responsible for product vision, deployment services, and customer support, training, and advocacy.  Wayne became “the fixer,” and over 11 years, he spent a significant amount of his time managing the largest and most difficult deployments. He was on the front line of customer complaints and frustrations.

Wayne reminded me that:

“The lesson learned, over and over again, is that when you cater to too many specific feature requirements to the point that the added complexity compromises quality of the product, trouble always follows.  It is simple math: more feature means less test for all features, given that QA resources are often a fixed constant.  And for an Enterprise customer, a low quality product is less deployable, and NOT one that he/she will recommend to other customers, and the product is forever stuck deep in the Chasm.”

After 25 years of dealing with difficult enterprise storage deployments, Wayne decided to solve the problem once and for all and founded Cirrus Data Solutions in 2012. Cirrus developed enabling technology called the Transparent Datapath Intercept (TDI) to make the deployment of enterprise storage and caching systems as simple as plugging in a few cables – a huge advancement to the way enterprise storage is currently deployed!

Wayne is an engineer and by every measure a technical founder, although his brother Wei is the CTO. However the problem space identification and the enabling TDI technology came not from programming brilliance or a deep technical feat, but from the nuances learned from doing difficult enterprise deployments over a 28 year period.

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Jeff Schuer was a high school English teacher for eight years. In his estimation, he graded over 15,000 English papers, painstakingly correcting grammar mistakes with red ink, only to watch students throw the paper out and make the same mistakes all over again. Realizing that by the time he handed the paper back, students had already shifted focus to the next assignment, Jeff started NoRedInk, a software service that teachers use to help students improve their grammar and become better writers.

I wasn’t in touch with Jeff when he was raising money, so I didn’t get the opportunity to invest, but I had the chance to advise him over a few meetings we had when he was just starting out. NoRedInk was built on Jeff’s experience as a teacher.  He knew that students needed immediate feedback and a fun, interactive way to practice and get better. NoRedInk uses each student’s favorite celebrities, personal interests, and Facebook friends to generate grammar questions. The system adapts to each learner’s strengths/weaknesses, and it displays color-coded heat maps to help students and teachers track progress.

Jeff attributed his early traction to the following:

“I think it helped that I was solving my own problem. I had seen the same issues on students’ papers so many times, and I knew that feedback would be a lot more useful to them if it were instant and if they had the opportunity to practice working on specific skills right away. Most teachers have a deep appreciation for how central motivation is to achievement, so building a learning engine that utilized fun and personalized material was always a given. It was essential, though, to not only address students’ misconceptions, but to do so in a way that allowed them to play with language in structured ways, rather than measuring their skills through the limited lens of multiple choice assessments. I think teachers have adopted NoRedInk both because it helps them differentiate instruction and because their students respond to it”.

Jeff’s solution was a function of his teaching experience. In addition to the core tenants of the solution, Jeff also knew how teachers buy, what school districts will and won’t do, and how to drive a teacher referral loop to increase the product’s virility.

In comparison, I advise another EdTech company that is solving a similar, but perhaps even bigger problem. That founder’s education and professional background is in an unrelated space. While I believe he will be equally successful in the long run, this founder has to research or rely on learning though a serendipitous conversation or trial and error, key points that Jeff knew intuitively. And that uses up a lot of cycles that can best used elsewhere.

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However, just because you are a deep domain expert or a technical founder, doesn’t mean you are, or can grow to be, an execution CEO. That takes different skills.

I just returned from VCs on Skis, a 300 person event produced by the law firm Reitler, Kailas and Rosenblatt and Reitler Advisory,(where I conduct my startup coaching). The keynote speaker was Chris Barrow, CEO of EagleView Technologies. EagleView takes the time, and cost (and danger) out of the process of giving roofing estimates via a Saas service that builds 3d models from aerial photography. Imagine, no more climbing up ladders and walking across steep, slippery roofs with measuring tools to provide a cost estimate. And that is exactly the problem, the founder, a roofer, pinpointed to solve, when he founded the company.  Chris was recruited to be CEO, shortly thereafter, when the founding team had problems executing. Under Chris’s leadership, the company grew organically, made a major acquisition and just agreed to be acquired by Verisk Technologies for $650 million. The company raised less than $7 million.

Ben Horowitz has written about this in many of his blog posts. But, in the beginning, the CEO’s chief role, in addition to making sure the company has enough cash, is to be the chief product guy, owning customer requirements. So for the race to product-market-fit, pre-scale, I think founders who are deep domain experts get there in the most financially efficient way.

So, what do you think? Do deep domain experts have an edge in getting to product-market-fit? In what sectors are deep domain experts less import as founders?

Pinpointing Problems Worth Solving (Part Two of Three)

yoda

In my last post, I wrote about how many startups fail because they try solving problems no one really has or cares enough about to spend money to solve. I mentioned that while poor execution is responsible for many startup failures, you can’t execute your way out of a bad idea.

In the venture capital community, technical founders are extremely desirable. From an execution standpoint, technical founders have a tremendous advantage in getting a prototype or an MVP out quickly and least expensively because of their ability to write code and iterate on their own.

But, there is an intuition inherent in founders who are solving problems in industries in which they have been involved in different capacities over very long periods of time. And even more so when they have been wrestling with related problems in that space.  I call these “deep domain experts.”

These founders have the best chance of nailing customer requirements and getting to product-market fit quickly. As product-market fit is a threshold event indicating an investment might pay off, this is critical for investors (and founders, of course.) Who wants to spend three to five years of their life building a company only to realize that the product doesn’t meet the needs of its intended buyer? (I did this once, as detailed in my first post, and I wouldn’t recommend it.)

I like these deep domain expert founders best. I am not alone. Pedro Torres Picon of Quotidian Ventures is raising a fund that will focus exclusively on deep domain experts.

I have had a personal experience with a few of these founders, the first of which I will detail in this post:

Steven Gottfried is the CEO of ServiceChannel. I was an early investor and serve as Chairman of his board. ServiceChannel offers a SaaS solution that automates the way companies with facilities in lots of locations manage third party service maintenance companies (HVAC, landscaping, fire safety, etc.) that come and fix things at those locations. Their customers are facility managers at large retail and restaurant chains. ServiceChannel manages the work flow, processes financial settlement, and provides big-data analytics on things such as pricing and performance, by region and by industry. The software is used by most major retail brands you can think of.

But back to Steven. The summer after his sophomore year of high school, Steven went to work for Gotham Air Conditioning, which was owned by his girlfriend’s father, Herb. That first summer, Steven drove a parts truck, delivering supplies to the mechanics at their job sites.  He would often linger and watch the precision with which these professionals did their job.  The next summer, he worked in the warehouse, where he would help load the trucks in the morning. He noticed how at the start of the day the mechanics would assist the warehouse staff in carrying heavy air conditioner compressors from where they were stored and hoist them up on the truck. He thought this made no sense. Why make these guys, who were experts at their trade, and had a long day ahead of them, do all this extra work?

So Steven designed a pulley system that enabled the compressor to be picked up from where it was stored and slid across an I-beam on a trolley to the truck where the mechanic would guide it into the bay. The simple act of solving an annoying problem significantly improved the mechanics’ attitude and productivity.

During the third summer, Steven worked in the office matching purchase orders to parts supplier invoices in order to make sure parts were ultimately billed. He would often ask the mechanics to indicate more clearly in their work orders which parts were used. The mechanics just wouldn’t change their habits, and even Herb, the owner, couldn’t mandate them to change their behavior.

Faced with this obstacle, Steven started to understand how the mechanics viewed themselves and how seriously they respected the hierarchy (helper, apprentice, journeyman, etc.).  A five-year journeyman would never change a filter, that was for an apprentice to do. He learned that skilled tradesmen viewed themselves as experienced professionals and often felt looked down upon because they were not traditionally educated. At the same time, their bosses and customers felt completely vulnerable to them because they had a skill set that their bosses and customers didn’t have, which was critical to the business – it was the business.

Steven told me:

“Respect, which tradesmen crave, is completely disproportionate to knowledge and power!”

Steven went on to study computer science at George Washington University. Don’t call him a technical founder though, as by his own admission, he was a terrible programmer. Over the next 15 years, Steven started businesses involved in developing predictive failure systems for air conditioning compressors and contractor maintenance management systems for contracting companies. Each of these products leveraged the nuances learned at Gotham working for Herb.

Steven always says:

“All my products are developed from the mechanic’s or the tradesman’s point of view. Even if the buyer of the product isn’t the tradesman, as long as he is the user, the product must mirror the way he works, and be easy for him to use. He is the lowest common denominator. The product must be tradesman-centric.”

After solving problems in various contracting subsectors for 22 years, ServiceChannel was born out of a request from a contracting company to send a report detailing their work history to a client. Steven understood what the motivation was – the best contracting companies want to show their stellar performance details to their clients. Steven put it on the web so contractors could make it available to all their customers.

Intuitively understanding the nuance of how tradesmen work, particularly what they will and won’t do, influenced other key product decisions, such as the initial decision to make it available to all the contracting companies he provided software for, the way credentialing is done in the company’s Fixxbook directory, and the decision to build a multi-tenant, shared database architecture (without knowing it was a SaaS best practice), so a contracting company could see all its activity, across all its accounts in one view, and to efficiently plan routes to many customers based on proximity. Things Steven knew intuitively, honed over many years, a technical founder or business school graduate would have had to learn through long, painful, and expensive trial and error.

Evidence of the impact of Steven’s understanding of the nuanced world of facility managers, contracting companies, and their technicians, is the fact that well over 50% of ServiceChannel’s clients came as referrals from existing users. ServiceChannel is now in use by hundreds of large companies, managing greater than 100,000 facility locations and is used by over 50,000 contracting companies. The company enjoys a historical 98% customer retention rate.

My experience as an investor in ServiceChannel is indicative of why, as an angel investor, I like founders who are deep domain experts. To validate my instinct, I gave my colleague Jennifer, David Kidder’s book, “The Startup Playbook”, and asked her to chart the backgrounds of the 40 CEOs profiled. She found that 18 of the entrepreneurs had deep domain experience (over 5 years in the space) and 7 had some domain experience. Of these 25, only 5 had some technical experience in addition – like Steven – but considered themselves industry experts more than technical founders.

How about you? Would you put your money on a technical founder or a deep domain expert? Have you identified something that could be a business? Is it a problem someone might pay to solve?

 

Pinpointing Problems Worth Solving (Part One of Three)

Haystacks

Finding a good problem to solve with a startup can be like finding a needle in a haystack.

“Haystack. End of Summer” Claude Monet

One of my favorite blog posts is Paul Graham’s How to get startup ideas. Paul is one of my top-five bloggers, along with Marc Suster, Ben Horowitz, Nir Eyal, and of course Fred Wilson, but I connect the most with Paul. He is an infrequent blogger, as I imagine I will be especially now that I have spent 7 days staring at a blank sheet of paper. I will consider my blog a success if I can be one third as meaningful as Paul.

Paul begins his post by saying:

“The way to get startup ideas is not to try to think of startup ideas. It’s to look for problems, preferably problems you have yourself.”

Sounds simple, right? He continues:

“Why is it so important to work on a problem you have? Among other things, it ensures the problem really exists. It sounds obvious to say you should only work on problems that exist. And yet by far the most common mistake startups make is to solve problems no one has.”

The truth is that most companies fail because they build a solution that doesn’t have a corresponding problem or that solves a problem that has no economic significance.  Paul gives a great example:

“The danger of an idea like this (ones that sound plausible, in this case, a social network for pets) is that when you run it by your friends with pets, they don’t say “I would never use this.” They say “Yeah, maybe I could see using something like that.” Even when the startup launches, it will sound plausible to a lot of people. They don’t want to use it themselves, at least not right now, but they could imagine other people wanting it. Sum that reaction across the entire population, and you have zero users.”

More startups fail because of this than because of poor execution. Execution is important, but you can’t execute your way out of a bad idea. And concept aside, selecting an adequate problem, one that people are painfully aware of, gives you some tailwind for early adoption. Paul says:

“When you have an idea for a startup, ask yourself: who wants this right now? Who wants this so much that they’ll use it even when it’s a crappy version one made by a two-person startup they’ve never heard of? If you can’t answer that, the idea is probably bad.”

If a product solves a clearly identified problem, it is more likely to gain enough traction early on and to generate usage patterns and metrics. With further iteration, it might eventually get to a product-market fit. Only then will entrepreneurs have the luxury of perfecting the execution.

Below, in the first of three posts, I will discuss some of the common themes that entrepreneurs face in finding good problems to solve and avoiding bad ones.

——

Creative Validation

Best practices for problem validation are available by simple web search (if you can’t find them, I will forward you some links), but there are some creative ways to validate problems before you even write your first line of code. You can buy Google or Facebook ads to advertise a product so you can gauge demand by measuring pageviews, clicks, and requests for more information. You can even do A/B testing to test creative and/or pricing options, although I would focus on validation first.

Another creative way to validate a problem is to offer the intended buyer a solution to the problem in a different form, one that doesn’t require any work up front.

Case-in-point: I know an entrepreneur who had an idea for a platform where workers could capture their accomplishments throughout their career by recording each significant event as a one page story, for example when they turned around a sales situation that was impactful to the company. Each story would have a name like, Victory from the Jaws of Defeat, Lessons Learned, or Tough Love, etc. and workers could pull tags from a tag cloud to indicate sentiment, such as Piece-of-Cake or Out-of-my-Comfort-Zone, or skills used,  for example Diplomacy or Persuasiveness. They would then tag people who played a role in the story as Participants or observed the event as Witnesses. Emails could go out to those participants, and upon their response, the stories would be validated, creating a live, authenticated CV, or CVLive, as he would call it. Think Linkedin, but with a richer view of a professional persona.

An advisor counseled: “What problem are you solving, and for whom?”

The entrepreneur originally thought job seekers would want a really rich profile of themselves so they will be ready when they want to change jobs or when a recruiter calls. However, that’s a lot of work if a professional changes jobs once every three to five years – there is no immediate value or gratification to the action of publishing the story.

Next the entrepreneur considered recruiters. Wouldn’t these rich profiles with validated work events help them differentiate candidates and better select ones that are the best fit? Won’t these stories aid in determining cultural fit by exposing the way a job seeker feels about his accomplishments?

Recruiters make a fee of about 30% of a candidate’s first year compensation for a placement. That’s about $18k to $30k for a mid-level search. The entrepreneur hypothesized that a recruiter would surely pay $250 to $500 for these stories if the additional information yielded a better placement – the cost was 1% to 2% of the fee that would be earned.

Before creating the program infrastructure, the entrepreneur tested the concept by offering the off-line equivalent to three executive recruiting firms. The deal was that he would call the top five candidates for their next search and write their workstories as they would have done themselves on the platform. Same questions, same tags.

The response from recruiters was consistent across the board:

“As a recruiter, my problem is that when vetting a candidate, I spend almost all of my time sifting through bull-shit to find truth. Your stories just give me more content and potentially more bull-shit to sift through. The data in those stories are generated by the candidate and validated only by people the candidate chose to tag. So I still have to vet it and find truth. These workstories not only don’t solve my problem, they actually give me more work to do, so no thanks!”

The entrepreneur hadn’t looked for a job in 15 years. He had never worked as a recruiter. He was looking for an idea in a space that he had no connection to or history with (more on this in the next post). He thought it was a good time to be an entrepreneur, and the idea sounded, well, plausible enough. However, it just didn’t solve a problem for its intended user.

Mission aborted… time and money saved!

So what do you think? Would you have invested in CVLive? How could CVLive have become more useful? Any ideas on additional methods to creatively validate ideas?

The Undervalued Witness to History

PerryMason_witnessDuring my 20 years as an operating executive, when I would interview a job candidate I would often think:

“Is he/she a ‘maker of history’ or a ‘witness to history?’”

Candidates would tell great stories where they play the hero:

“I created a cross-function marketing allocation process around quarterly initiatives, which included members of each marketing sub function, channel, direct, OEM, international, etc..we met quarterly to vet initiatives and allocate capital to initiatives.”

“We were short on tech support personnel, and the hardware failed in the field, so I coordinated a multi-location hardware replacement program, where I bought tools for, trained, and then dispatched administrative and sales personnel to do the replacement.  We centralized support by phone, and walked them through any difficulties in the field – completed it in 24 hrs., customer happy!”

Wow…but really? Was it your idea? Did you single-handedly spearhead the execution? Or were you in a supporting role? Was it a team initiative? Did you observe from close by?

Either way, the story was told as though the candidate was the maker. How the hell could I know if that was really the case!

***

As an investor, I find myself asking the same question. What is the entrepreneur’s role in his stories?

Maker or Witness?

Makers make, witnesses observe. I love hiring and investing in makers – we all do. They add observable, measurable value. But I know from experience that witnesses are additive to a business too, even if it is harder to quantify.

I started my first technology business out of college. It had a seven-year run. The business ultimately didn’t succeed. My regret was not so much that it failed, but that it took seven years to fail. I wish it had taken three years instead.

During those seven years, I had no exposure to the higher level of complexity, decision making, leadership, or challenges that make a successful business. I didn’t have the benefit of being…..well, even a witness to successful decision-making, execution, and leadership!

A number of years later, my partners and I sold a software business to what was at the time a rocket-ship growth company called Cheyenne Software. Over three years the company went from $40M in revenue with 130 people to an annualized $300M in revenue and over 1300 people. We grew product lines, sales channels, and selling regions. We had a winning culture. Many of us, myself included, were put in positions we had no prior experience in. In my areas of responsibility, I was probably 1/3rd maker, 2/3rds witness – best case half and half.

It was the 2/3rds of my role as a witness at Cheyenne which provided exposure to an environment I could not have created and ultimately shaped me as an executive. I grew up there. I learned from the culture, from watching my peers, and from seeing what didn’t work and what did.

What would have happened if my first business did succeed, I had an “ok” exit, and I was a 100% “maker”? Would I have been better off?

As an Angel Investor (and a startup coach), I’ve come to realize that while it rocks to invest in a maker, witnesses are also valuable – and more often than not undervalued. When I evaluate an entrepreneur, I think about where they were a witness and what they witnessed. I can worry a little bit less about whether they were makers.

***

When you think about your own career defining moments, were you a maker or a witness? In the cases where you were both, what was the percentage breakdown?

What advice would you give your younger self on the significance of being a witness?

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