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Why Your Startup Doesn’t Need a COO

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Why Your Startup Doesn’t Need a COO

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It’s very common for startup companies to have COO’s. So I know I’m getting myself into a bit of trouble by writing this. But …

Startups don’t need – shouldn’t have – COOs. I have this conversation with every startup that comes to see me and has a CEO & a COO. I think usually a COO title at a startup is an ego thing. You have two founders and it was agreed that one would get the CEO role so the other needs to call themselves president or COO.

But ask yourself, what does a COO actually do? In a mature company it’s often like a presidential chief of staff. They will often run all of the daily reports into them covering off for finance, sales, marketing, biz dev & HR. Many times they also pick up product and tech, too.

In an early stage start I believe it’s the CEO’s job to manage these functions. It’s pretty tough to convince me in a company of less than 50 people that the CEO can’t handle 6-8 direct reports to manage the various areas of the business.

Often times you find the CEO who really just likes to do product or tech. You can always spot these types because they can’t tell you what their revenue number for last month was or what their sales target is for next month. It’s actually not that uncommon for me to encounter this with young CEOs. What it tells me is that they’re not properly managing their business. They’re not allocating their time properly across all of the business functions, they’re favoring those that they like best.

Similarly I talk to CEOs who can’t do a sales pipeline review with me. They don’t know the details of the deals. They can’t name the key decision makers at their prospect, they can’t tell me who they’re competing against, etc. I once did due diligence on a potential investment where the CEO was projecting $9 million in sales for his next 12 months. His largest account was Coca Cola for which he was projecting $3 million alone. I asked him for a deep dive on the Coca Cola sales campaign and he said, “that ones’ not my deal.”

Ha. And I decided that his startup company was not MY deal.

CEO’s run things. They run their business. If they’re not running their business then perhaps the wrong person was picked as CEO or perhaps they need more mentorship / coaching to better allocate their time.

So what does a COO at a startup do if the CEO should be managing things?

Usually it’s a line function but they’ve been given a lofty title. Of course they “need” the title to convince customers, biz dev partners and VCs that they’re to be taken seriously. Sure.

I think it’s better to take the title of the job for which you will fulfill.  If you’re running sales & marketing then why not VP, Sales & Marketing? If you run product then it’s easy – VP Product.

If the CEO is the “chief strategist” while the COO “runs the company” then I think it’s time for a coup d’état.

What harm having a COO or worse a president? Clarity for staff and decision making.

Like most everything in business I learned by making mistakes at my first company. I was the CEO of my startup and my co-founder was the president. None of our staff really knew what that meant but they knew that he was a co-founder and that he was, well, the president. So from time-to-time he would be talking with the product team about his vision and they would react unbeknownst to me. They were taking direction from the president. But I ran product management.

He liked to weigh in on biz dev deals. We had a VP of Biz Dev. We gave him conflicting view points. He wasn’t really supposed to meddle with these job functions, but as president and co-founder he kind of had the authority to do so. It took me a while to figure out this was going on and when I did I put an end to it.

Over the years I’ve talked to enough startup staff members at respective companies to know that this lack of clarity in decision making can be a real problem at many companies. It’s far more effective to check your ego at the door and align your job function(s) with your title.

When should a company get a COO then?

I’ve had this debate with some very successful VCs who are pro COO. They talk about freeing up the time of the CEO to think bigger picture and plan for the long haul. They talk about the need of the CEO to be chief evangelist, speak at conference, lead executive recruiting, etc. They say that having a COO allows the CEO to remover herself from the continual politics and personnel management that can be a drag on management time. I know this one as I’ve often said, the main job of a CEO is chief psychologist.

I can buy this argument as a company becomes bigger. I think when the company has the complexity of large customers, customer service & SLA management, well established sales processes, continual recruiting because you’re growing, constant press, etc. it may make sense to appoint a COO to handle more of the day-to-day management. I never chose to do that, but I could see how it would work for some.

We were never Google but we got as large as 120 staff and I never felt the need for a COO. I had an amazing CFO who helped me lead budgeting, planning, board reporting and legal matters. I had heads of sales, marketing, business development, product management, technology and customer service. We had team meetings where we discussed each other’s areas and I mostly stepped in when conflicts needed resolving. But at that stage of the company as we were approaching $20 million in sales I think, sure, a COO might have freed up my time a bit.

For now, if you’re early stage, I’m not convinced. It isn’t something that would dissuade me from investing in a company, but I’d want to be very clear with the team what their respective roles were and make sure they were also very clear with their employees.

I think the best way to protect the ego of the rightly deserving status of non-CEO co-founders is to preserve the co-founder name in their title as is, “VP Product & Co-Founder” or “VP Sales & Co-Founder.” Your right place as a member of the team that was there at inception is protected while your functional role is crystal clear.

What have your experiences been?

Image courtesy of Headspring Insights.

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SEOmoz Fundraising

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randfishSEOmoz Staff
January 6th, 2010 - Posted by to SEOmoz News
Prelude: I've long promised blog readers a detailed accounting of my experiences raising capital over the course of last summer and into the fall. My apologies for the long delay, and to those seeking more SEO-focused content. This entry is lengthy, detailed and designed to share as much as possible, so hopefully you've got a good 20 minutes to read it :-) We'll be back to SEO tips & tricks tomorrow.

Sections in this post:

In this post, my goal is to walk you through the process we used, the feedback we received and the final results and decisions. Fundraising is a demanding, lengthy, emotionally charged process and something that challenged me personally more so than any other single part of my life in the last 5 years. I hope that by sharing my experience I can help others who start down this road and give you an idea of what to expect. The more knowledge you have, the less fear can hold you up; that’s what this post is here to accomplish.

First, I’ll try to provide some context around why we went to raise money in the first place, how we constructed our "pitch deck," how we got introductions and meetings to a large number of VCs and the progress from initial meetings to partner meetings to final decisions.

SEOmoz started the VC process in June 2009, in possibly the worst climate for fundraising since 2001. You can see the stark contrast from our timing with the previous round in, arguably, the best environment since 2000.

VC Invested 2007-2009
Graph of Venture Capital Invested by Quarter (via NVCA)

Ventue capital is "expensive" money, not just in terms of the price paid in equity, but in the obligations and requirements that come with it. In our Series A, we took money more like a seed investment – Michelle & Kelly saw potential and wanted to see what could happen. Raising another round meant aiming to hit the "home run." For those who are unfamiliar, the startup world has built an entire lexicon around the "seriousness" and exit-size focus of a company that ranges from "lifestyle" businesses that don't try to achieve multi-million dollar scale to "home runs" that exit for $1billion+.

Note that there’s plenty of criticism of this model from both the venture side and from entrepreneurs and operators. Lots of other blogs have talked about the imbalance in interests between founders and investors and current market conditions vs. expected VC portfolio returns. I won’t re-hash these, but as a broad overview, most venture funds have 100s of millions of dollars from their LPs (Limited Partners – folks like large endowment funds, pensions, government entities, extremely wealthy individuals, etc). In order to provide significant returns, they follow a model of investing in a few dozen startups, most of which will go bankrupt and, hopefully, 1-3 of which will provide most of the profits in billion dollar+ "exits" (an acquisition or IPO).

This somewhat odd scenario means that VCs are often investing in "long shots" to be huge, rather than low-risk bets for more reasonable exits (for example, an 80% chance of exiting for $150 million is not nearly as interesting as a 10% chance of exiting for $1 billion). As an entrepreneur, particularly a first-time startup guy who has $3,000 in his checking account, an orange scooter and a small apartment, the incentive is completely the reverse. Fred Wilson wrote a bit about this disparity in his post on Swinging for the Fences.

In order to be appealing to a venture investor, especially those with larger fund sizes ($300 million+), a company must be able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more likely outcome is something far lower, but the "sell" has to include the envision-able path to hundreds of millions in annual revenue that can yield those tremendous exits. Again, I'll point to Fred, who wrote about the Venture Capital Math Problem (and a Part 2).

You can read a lot more about the catalysts for fundraising on my post – My Startup Experience: VC, Entrepreneurship, Self-Analysis & the Road Ahead – so I’m going to dive right into the process for creating a pitch deck.

We started with a lot of great advice and direction from entrepreneurs who’d been down this road before and also got terrific help from the partners at Ignition, for whom we delivered a "mock" pitch and collected feedback that helped push us in some smart directions. As a base, we used the model promoted by VentureHacks and sprinkled in bits liberally from Dave McClure's excellent How to Pitch a VC deck and Guy Kawasaki's - Perfecting Your Pitch (PDF).

The process itself involved sheets of paper affixed to a large wall, which we'd then swap around, tear up, mark up with pens and generally treat like a post-it-note fight. We started with blank paper that we'd draw on, then began creating real slides in Powerpoint. It was fun - exhilirating and stressful, yes, but also exciting. We were going to raise millions of dollars, put that money to work and build incredible product and an amazing revenue stream.

Before we did that, we had to get beaten up a bit first. I mentioned that we gave a test-run pitch of the deck to the board at Ignition Partners (our first-round investors). We also privately delivered the pitch to a handful of CEOs and angel investors, hoping to garner feedback and assistance (these weren't serious attempts to raise money, as we weren't seeking an angel-type deal). The great part is, we really did get beat up. I have pages and pages of notes from meetings where I showed the pitch to other entrepreneurs and got feedback ranging from "this is almost perfect, just tweak X" to "you need to start completely from scratch, and here's the deck I used to raise $XY millions in my last round."

I'm going to come back to this again below, but the generosity of time, energy and prior work (even stuff that's usually very private) from other startup CEOs and entrepreneurs was absolutely remarkable. I found none of the closed-door mentality or brash indifference I expected, especially in Silicon Valley. Founders and CEOs, who had multi-million dollar businesses to run would take hours out of their days to have lunch, walk through the deck, and introduce us to VCs they knew. I've rarely known so much goodwill from people who have so many demands on their time.

Let's get to the meat and potatoes, as I'm sure by now you're hungry :-)

The "elevator pitch" sounded something like:

SEO is huge - every site on the web is doing it or wants to be. But the process is broken - it's hard to learn, hard to measure, hard to know what's working and far more art than science. We are going to build software that helps transform SEO into a mainstream marketing activity, the way analytics software (Urchin, Omniture, etc.) did for web visitor reporting or email software (iContact, ExactTarget) did for email marketing.

Unfortunately, I'm not going to share the exact deck we used, nor all the details from it. Transparent though I love to be, there's a lot of information and data points that aren't fit for public consumption. It's less that I believe any of this data could be used to materially harm us and more that we've made promises to our investors and board to keep this stuff internal for now. I will say this - while I believed strongly in the deck when we first created it, that confidence was somewhat eroded by the end of the process. In late September, for example, I think I could have done a far better job crafting and delivering the pitch than when I gave my first one in July (only 60 days before).

Below, you'll find a modified version of the original pitch deck (we later crafted many customized versions with slides particular VCs wanted to see). It doesn't include things like a P&L statement or specific customer retention/churn/lifetime value metrics, but hopefully it will still be valuable and interesting.

Since I didn't include revenue/profit numbers in this deck (and it's hard to get a sense for how a potential investor might perceive this without it), I've included some non-specific growth charts below, illlustrating the top-line numbers in a profit-and-loss statement:

SEOmoz's Revenue Breakdown 2007-2009

I've also left out some portions of our very large appendix. The appendix, in fact, was one of the most interesting parts of the deck. When we started the process, it was 5-6 slides with additional information about market size, importance, some detailed stats on membership, lifetime customer value calculations, etc. A month into the process, it was nearly 30 slides, attacking every question, problem or issue that had been raised in meetings where we didn't have an immediate solid answer or data point. I really believe that the VC process is all backwards in this fashion. The pitching company should:

  1. Have an introductory call to see if there's interest
  2. Attend a sit down meeting with a partner or two, some associates and a dilgent notetaker to get all the questions, concerns and issues on the table
  3. Go back home, make a great deck that addresses the things the VCs care about
  4. Come back and give the formal pitch

Instead, many pitch meetings at the beginning made us feel like amateurs and it was only at the end of the process that we felt more comfortable tackling any question thrown our way (mostly because we'd heard nearly all of them before). In my opinion, venture capital shouldn't be about who has the most experience pitching, or who can deliver the best pitch, but about who has the most exciting, interesting company. In the current model, it feels like 80% sizzle (pitch) and 20% steak (company).

Then again, what do I know about the VC process? I got lucky in my mid-twenties, landed a bit of capital, and have never invested or even studied the venture model the way the professionals have. Perhaps ability to pitch and success of company are well correlated metrics or at least, indicative of company performance. I'll leave that to those more knowledgable on the topic.

In any case, now that we had this story to tell (the pitch deck), we needed an audience.

I initially presumed that our investors (Kelly & Michelle) would drive this process of introductions and networking, but in reality, this is apparently a suboptimal methodology. Michelle explained (and many others concurred) that entrepreneurs themselves provide the best introductions. Thus, it was my task to find other founders & CEOs who would provide positive connections to the investor community. Outside of Ignition, I knew virtually no one in that sphere, so this would be my first formidable challenge.

Thankfully, the entrepreneur community was incredibly kind – generous to a fault, actually. Busy CEOs of important startups took time away from their jobs to sit down for coffee with me, buy me lunch, take me to dinner, review the pitch deck we’d built, give advice and make introductions to a very impressive set of folks in the VC world. In exchange, I did the best I could to help them with SEO, and we hosted a number of great companies at our offices in Seattle for hour-long SEO reviews. It will be hard to thank everyone here, but I’ll do my best:

I’m indebted to all of these great folks and I can only hope that the SEO help we provided to many of them has returned some of that.

However, this part of the process is also where we made our first big misstep. Explaining will take a bit of background.

SEOmoz’s business model is what’s generally called "self-service SaaS." Similar to most SaaS companies, we sell software in a subscription/licensing type of model and, as has become common in the last few years, do it "in the cloud" (meaning we don’t install software; everything’s run remotely over the web). However, we're very different from traditional "SaaS" in that we have no sales team. There isn't a single person at SEOmoz whose job title or description includes sales (though, technically, if Gillian and I had descriptions, "sales" might be part of that).

Our business model and margins might result in an acquisition price (sale of the company) of between 3-6X trailing revenue, depending on the market circumstances, growth rates, strategic importance, etc. This is massively favorable to consulting revenue, which typically garners 1-1.5X. Put another way:

  • An SEO consulting business sale price (assuming $5 million in trailing revenue) = $5-7.5 million
  • An SEO self-service SaaS business sale price (assuming $5 million in trailing revenue) = $15-30 million

It's no surprise that investors are far more interested in these "scalable" business models that have higher exit multipliers. This is a big reason why you rarely ever see venture or angel capital flowing into consulting firms. The margins on a consulting business hover between 40-55%. Margins in software get closer to 80%+ and scale isn't proportionally tied to cost (in most consulting businesses, the more you want to make, the more consultants you need to hire). 

In our situation, a VC in the B-round would be likely to get something between 15-20% ownership in the company (depending on valuation, amount in, etc). Let's look at a chart that helps explain why we messed up from a strategic standpoint in the introductions process:

VCs Level of Interest Based on Levels of Outcome

Doing the math, even at the high end of the revenue/exit numbers, the VC is making 15% x $450 million = $67.5 million. If you have a $300 million fund and invest in 20 companies, you need at least 6 and hopefully 7-8 of those to hit in that range. The odds say that 10 of those companies will go under, 8 will have much more modest outcomes and 1-2 will return the lion's share. Thus, big fund VCs are going to be seeking portfolio investments that address multi-billion dollar markets and have a shot at that massive IPO/acquisition.

A smart entrepreneur would look at this ahead of time and specifically chase venture capital firms with small-moderate fund sizes. Unfortunately, we didn't plan ahead intelligently on this, and thus talked to many folks with funds between $100-500million. At those levels, it's the 1/20 or 1/50 billion dollar+ exits that bring all the returns for the VC. They're not seeking a reasonable bet on a company that has an long-shot, outside chance at a $500 million exit. They want 20 or 30 companies with 1 in 20 or 1 in 30 chances to go all the way to that billion dollar acquisition or IPO.

Our introductions came streaming in very unstrategically. I met with lots of entreprenuers and people in the tech community, who put me in touch, usually via an email introduction, to a partner at a firm. We'd exchange a couple emails to set up a time to talk, chat for 15-45 minutes (sometimes longer) and then schedule an in-person meeting for the next time I was in their area. Those introductions didn't come all at once - in the first 30 days of actively pursuing introductions, I had ~10 calls. Then, over the next 40 days, more and more introductions would roll in from people I'd connected with in the past couple months, and those would turn into calls and meetings.

I talked to entrepreneurs who were much more strategic and exacting about their introductions process (and plenty who followed a similar pattern to what I did). In hindsight, it wasn't perfect, but I did get to meet a tremendous number of very impressive investors and get their feedback.

During our fundraising experience, we connected with a lot of VCs. I've taken a screenshot of the the firms we talked to below (from my Google spreadsheet file on the subject), though I won't go into more detail about who from each firm we talked to or how far along we progressed with each of them. I think there's an expectation of privacy most VCs have, and I want to respect that. BTW - I'm not listing every single firm we talked to, but this is a more-than-representative sample and hopefully fulfills our core value of transparency.

List of VCs

Initially, we were very excited and I'll try to explain why. When starting out, our expectations (thanks to both advice from other entrepreneurs and via blog posts/articles the web) were that 10-20% of phone calls would lead to first meetings , a few of these might turn into partner meetings and we'd hopefully get a term sheet or two at the end. Instead, the funnel looked like this:

VC Conversion Path

As you can see, we had phone calls with 40 firms, and had a surprisingly high conversion rate to first meetings, which had us initially enthusiastic. VCs are notoriously busy, and scheduling time with them is often a massive challenge. To have such a high percentage of firms interested in such a dour climate made us believe we could buck the trend. Unfortunately, it also meant lots of time we needed to invest in preparing for, and in most cases, flying out of Seattle for in-person meetings.

The entire process from the first call I had with a partner (on June 18th) to the time we stopped actively pursuing funding (September 30th) was 93 days. In that time I made 5 separate round trips to San Francisco, which adds up in hotel, airfare and car rentals. Raising money takes time, resources and a tremendous amount of energy, not just from the founder/CEO, but from the entire team. Adam & Matt were consistently pulled away from day-to-day and strategic work to create and refine the product demo. Sarah, Christine & our accountants labored to provide detailed financials. Jeff often had to postpone critical work items to make custom queries against our members database to pull an obscure metric about recitivism, churn or usage.

The meetings themselves are fascinating. I'll be honest - the first few were completely intimidating and overwhelming. Like most times in life when you're nervous, it wasn't until I stopped worrying and (very nearly) stopped caring, that I got good at the process.

You arrive at a nondescript, but very well-adorned office building, almost all of them on Sand Hill Road in Menlo Park. An assistant, who is nearly always young, female, very attractive and somewhat cold (though there were a number of exceptions), greets you in the front room and will offer a beverage. I typically waited only 5-10 minutes, though a few times it was 20 minutes or more, after which I'd be escorted into a meeting room with a place to plug in my laptop to a projector or screen. VC offices provide free wifi (though I always brought my AT&T aircard just in case) and are designed to impress - expensive furnishings and artwork, placards showing the successful companies they've backed and the massive IPOs/exits those companies had.

The VCs themselves ran the gamut, from friendly, approachable and jovial to overly serious, harsh and distant. Intentionally or unintentionally, they all have some emotional walls up, which I believe are out of necessity and certainly don't begrudge. If you're meeting with dozens of entrepreneurs every week, you can't get personally attached or build close relationships with even a fraction of them, especially if you're not going to make an investment. It's a very different experience from the many hundreds of other meetings I've had in my professional career, where establishing rapport and working in a mutually positive fashion is the norm. VCs need to drill down on specifics, call out your flaws, explain what they don't like and gloss over a lot of positives in the process. A typical partner meeting lasts precisely one hour, and in my experience, that rarely deviated (a few times we ran over, and more than a few times things started late).

Second meetings are often pretty similar in format, though there's typically more than one partner from the VC firm in attendance, as well as an associate or two. I also found that it was extremely helpful to bring Sarah Bird (SEOmoz's COO and a guru when it comes to our financials) as well as Nick Gerner and/or Ben Hendrickson (who convincingly play the role of "way smarter about technology than anyone else in the room") to these meetings. They'd sometimes be a bit longer, and would almost always request a much greater degree of detail, as well as significant "objections" to the investment, which were frequently presented as challenges we were intended to conquer using slides, data and verbal acuity.

Following both first and second meetings would be the impossible-to-parse "thanks, we'll be in touch." We'd take guesses about which VCs were actually interested and would follow up vs. those who'd email to say "no thanks" or simply never communicate again (the latter bothered me at first, but once you realize it's just part of the accepted cultural practice, it's fine). Surprisingly, we were never good at this. We'd often mistakenly think one VC was interested when they weren't and vice versa. They're a notoriously hard-to-read bunch, perhaps intentionally.

I have a much tougher time presenting a representative partner meeting, as we only had two. They almost always take place on Monday, though, and you're often back-to-back scheduled with pitches from other entrepreneurs. A larger, board-style meeting room will be filled with all of the firm's partners and you'll present the same pitch you made to the first partner to this group. Questions can get a bit strange if my experience is any guide - tangents and off-topic discussions come into play and it seems to be up to the entrepreneurs to keep things on track. I think this happens because in any given partner meeting, a good number of the partners won't be familiar with your industry, company or technology, and may not even be interested. I imagine that if you specialize in clean-tech investments, listening to an SEOmoz pitch can get a bit boring, and you might, naturally, focus on the one or two areas you know something or have heard something about.

I will say that my experience with the vast majority of VCs we saw was not nearly as negative as what Fred Destin wrote about in his posts for VentureHacks - The Arrogant VC: Why VCs are Disliked by Entrepreneurs and Part 2. Certainly a few of these traits came out, but by and large, I felt these were responsible, talented, experienced individuals doing a hard job the best they could and putting forward both a serious effort and respect for me, my company and my time.

For a completely alternate perspective on what it was like for my wife, who accompanied me on 2 of my 5 fundraising trips, check out A little more than 24 Hours in Palo Alto and San Francisco. I do wholeheartedly recommend someone who loves you unconditionally and pretends to be unable to identify a single flaw in you, your company or your pitch, supporting you in the VC process. It can get very lonely and emotionally turbulent.

When it came time to analyze the results, we tried our best to aggregate feedback, both positive and negative, for our board meetings back in Seattle. Early on, we focused on refining the pitch, but we were (I think uncommonly) stubborn about changing our business plan or product roadmap significantly to suite investors' opinions. We felt (and feel) strongly about the direction we want to pursue, and that may have been perceived negatively by some (though I know it was a positive to at least one investor who talked to us afterwards).

Following any "no" response, including a "no answer" within a couple weeks following the meeting, I'd email and ask for a phone call to discuss. 60%+ of the VCs we had met in person took those calls and explained to us some of their reasons for rejecting the investment.  I'd specifically ask what they liked, what they didn't and what they recommended for us to improve. I was both impressed and grateful to receive a number of thoughtful, honest answers, and encountered only a couple of folks who clearly didn't remember our pitch or company well enough to provide a cogent response.

Some of the things the VCs generally liked:

  • The Self-Service SaaS Business Model - although there were a few dissenters who thought we should pursue a more classic SaaS business with tele-sales would be better, most were supportive of the self-service methodology.
  • The Community & Userbase - that's you! Great work, gang :-)
  • The Marketing/Sales Funnel - investors tended to like the freemium/content model that attracted potential customers at a low marketing cost
  • The Technology Achievements - nearly all of the VCs with technical backgrounds were impressed by what we'd achieved with the Linkscape web index and ranking models work, particularly on such a small amount of capital.

Unfortunately, there wasn't a clear winner in the reasons VCs didn't want to make an investment. I did, however, make a quick chart noting which reasons were most frequently given by the investors for why chose against us:

Reasons VCs Didn't Invest

It's important to note that many of the VCs who said no that we followed up with gave multiple reasons for the decision. Some of these we found very reasonable and agreed with, others we struggled with. The most perturbing by far were the few folks who came back and said they didn't like to back the consulting revenue model and would be more interested once we were more product-focused. When I'd explain that we had 80%+ of revenue for the past three years coming from the self-service SaaS product, awkward silences would follow. Still, these are investors who likely talk to hundreds of companies each year, so it must be incredibly challenging to keep things straight - and it speaks to our need to move away from consulting in our branding and perception.

It's likely very obvious at this point that we didn't receive term sheets or offers to fund. In actuality, that's not technically the case - we did have firms interested, just not a the relatively high pre-money valuation numbers we sought. As you can see in the graphic above, there were a number of VCs who may have offered us terms at a lower valuation, though it's hard to say for certain.

The reason we went in with a high valuation "ask" goes back to the very beginning of the post. From the founders' perspective (and those of employee shareholders), an exit has to be judged through the lens of ownership percentages. If I or Gillian or Sarah owned, for example 50% of SEOmoz's shares (none of us do - this is just an example), in a $20 million exit, we'd make $10 million. If venture capital comes in and dilutes that to 35% ownership, that number drops to $7 million in the same exit scenario. Hence, every owner of SEOmoz shares has a vested interest in seeing the final exit price reach the highest possible figure while maintaining the lowest possible level of dilution.

My understanding is that it's very unorthodox to present a minimum pre-money valuation to investors prior to a term sheet. I believe this is because you're potentially "laying too many cards on the table" and you may actually be hurting yourself if the VCs planned to offer a higher pre-money figure. We did it both because we like to be transparent and because we hoped to prevent ourselves from wasting time with investors who couldn't meet our minimums. Our hope was that by giving that number in the first conversation (over the phone) and in the initial pitch deck, we'd achieve similar results as those we had in the past by publishing our prices for consulting - reduce the target market size and improve the quality.

I tell this story about our VC experience to a lot of people - it seems to be a subject that attracts great curiousity and I, of course, love to share. Most of the time, folks follow up by asking "are you disappointed?" and my answer has been the same since October. I'm not disappointed we didn't get funded. In fact, the more time passes and the more I think about the pitfalls that could have come with another round of investment, additional board members and pressure to reach $75-$100 million in annual revenue, the more I'm glad we didn't. However, I do regret the decision to seek funding - it cost our team countless days and weeks of productivity, took our eyes off our primary goal of delighting our members and customers and, in the end, was a learning experience with a shockingly high cost.

That said, I do think we learned a tremendous amount and really helped clarify the vision internally and to our existing board members and investors about where this company is going and what our roadmap looks like. We had dozens of smart, analytical, experienced investors reviewing our plans and ideas, and we received a lot of very positive feedback. Nearly everyone we encountered had positive things to say about the business' future, regardless of investment, and I'm glad we were able to be in a situation where we could turn venture funding down. I have friends here in Seattle and in the Bay Area who didn't have that luxury - who HAD to get funded, no matter the cost, because their company's future and employees depended on it. That's a burden I don't wish on anyone, and I hope more and more startups are finding ways to live lean and do more with less.

So, it's 3:45am and I've been working on this post on and off since before the holidays. There's so much more I want to add, but I think I'll leave that up to you. If you have questions I can answer, PLEASE post them in the comments and I'll do my best to incorporate that material into the post as it makes sense. Thanks for all the support, kindness and patience - I hope this has been valuable.


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    davidmihm Premium Member
    davidmihm | January 6th, 2010

     

    Rand, what a fabulous post.  I think the community will find it well worth the time you spent writing it -- even if you felt like it took too long to write. It was certainly worth the time to read.

    Although I have never been involved with a company that sought VC funding, I found your slide deck incredibly interesting & now understand why analysts can charge so much to VC firms and statistical/demographic companies can charge so much for their data.  When there's millions and billions of dollars on the line, $10K or $20K seems like pennies.

    I must say, I am a bit surprised that you are so hungry for funding.  Especially after hearing Dharmesh speak at the Mozinar -- man was he a great speaker! -- about the desirability of bootstrapping as long as possible. 

    You, and the team over the years, built a great brand, and while consulting revenues are obviously not as scalable or desirable from an exit perspective, I do believe that had you built up a consulting team of 5-6 people exclusively focused on SEO at $400 - $500/hr, and let it be known that you were actively seeking clients, many more large companies would not have batted an eye at hiring you.  You probably could have achieved a million dollars in revenue in a few months to fund additional devs for Jeff and Nick, though maybe that still wouldn't have been fast enough for you.

    Regardless, I am pleased to see that Pro has worked out so well for you & while I am probably in agreement with the VC's that SEO may not be a $billion+ dollar market, the potential for you and the team to build a consistent annual profit stream in the tens of millions is absolutely there.  Best of luck in achieving it!

     

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    shor
    shor | January 6th, 2010

     

    Interesting to read the reasons mentioned for not funding.

    Rand, Atlassian co-founder Mike Cannon-Brookes made some interesting comments that may be of interest to you, since the challenges their business model faced (self service bug tracking software) are very similar to the challenges SEOmoz face:"We saw that it [enterprise software] was very expensive – $100,000 plus – and had a high cost of sales because sales people earned large commissions. We wanted to redefine that so the average sale would cost US$3000 to $3500 and we’d have no outbound sales people.

    To do that, we came up with five principles:

    1. The price had to be low
    2. The software had to sell itself
    3. Low price meant we had to sell to thousands of companies
    4. We must sell globally
    5. Customers must buy because we couldn’t afford to sell."
    Source: March 08 Playford Capital Entrepreneur breakfast

    Sounds familiar, doesn't it? In that context, how does SEOmoz fare?

    1. The price had to be low: Kinda Tick. SEOmoz Pro product price is low compared to SEO consultation - but so are the prices of the main competition (SEO Book/Raven, so price is not a strong point of diffentiation...)
    2. The software had to sell itself: Kinda tick. While the value of SEOmoz Pro is evident to search marketers, SEO toolsets are not yet 'must haves' in a company's technological arsenal (more on this later)
    3. Low price meant we had to sell to thousands of companies: Tick. SEOmoz PRO sells to thousands of individual users, but is there an enterprise version in the wings (corps are willing to spend a lot more than an individual)
    4. We must sell globally: Tick. SEOmoz Pro is a global product, at least for Western based linkgraphs but does SEOmoz PRO intend to head into other regions (Yandex/Baidu etc.) or markets (social graphs?)
    5. Customers must buy because we couldn’t afford to sell: Tick. No salesforce, none required thus far.

    More random thoughts:

    Industry awareness

    There are three main competitors in your space yet overall, the search industry itself has a low brand awareness. Compare that to the awareness for bug tracking. Almost every enterprise I know that has developers uses bug tracking software to some extent. And there are a lot more developers than there are search marketers...

    Industry size and potential (VCs that feel SEO doesn't exist as a marketing practice in the long term)

    The issue of SEOmoz reaching $1B valuation is correlated to size of the search industry. Search marketing is a rather low quantity profession. However, as Atlassian's JIRA evolved from its bug tracking roots into an issue tracking and project management tool, I believe SEO toolsets can evolve beyondproviding SEO insight to offering more valuable and broader business insight. Perhaps Linkscape can be applied to other datasets (eg. graph relationships in social networks)?

    Thanks Rand and good luck to the Moz - I'm glad that the core tenet of transparency lives on at the Moz. This epic post could easily have been a SEOmoz Pro article and I'm sure people would willingly paid for its valuable breadth and scope.

     

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    gfiorelli1 Premium Member
    gfiorelli1 | January 7th, 2010

     

    Great post Rand. I found it interesting not only because it gives an insight about the process of finding VC to partner with, but also because it can be used as it was one of the Pro Guides. To learn from other experiences is always useful, even though here in Spain things are little bit different, as there's not such a culture of VC and Angels.

    For someone as me who is still in the beginning of his own SEO company (my scooter is a Vespa, blue one not yellow), in Spain to start a business is more a bank stuff, in the sense that here the real "VC" has to be considered them (Banco Santander, BBVA, La Caixa...). All of them have a Business & Investment Dpt. where young entrepreneurs can try to sell their great idea. Mostly the procedure is the same, but the "atmosphere" can even be colder than the one you described, as they are almost totally 'ignorant' about the SEO matter, even if - in my last informal talks - I see a general interest about all can be web marketing.

    The problem with the banks as VC is that their own 'liquidity' problem due to the global crisis...

    Then, here in Spain, a great role has the State with its Funds for entrepreneurs. Usually a startup is not going to obtain big money with this kind of funds, but enough to move its firm steps in the market.

    Finally.... I'm glad to be Pro and to have given my grain of contribution to the SEOmoz success, as I know that your success will return to me with better products and services... which means greater smiles from my clients.

     

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Meet the New Enterprise Customer, He’s a Lot Like the Old Enterprise Customer

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“Meet the new boss
same as the old boss”
-The Who

“’Cause hustlers hit the block when police change shifts
New York, California different toilet, same shit.”

-The Game

Every day I hear from entrepreneurs, angel investors and venture capitalists about an exciting new movement called “the consumerization of the enterprise.” They tell me how the old expensive Rolex wearing sales forces are a thing of the past and, in the future, companies will “consume” enterprise products proactively like consumers pick up Twitter.

But when I talk to the most successful new enterprise companies like WorkDay, Apptio, Jive, Zuora, and Cloudera, they all employ serious and large enterprise sales efforts that usually include expensive people some of who indeed wear Rolex watches. In fact, companies like Yammer who originally started with new age models have transitioned to more traditional enterprise sales approaches after experiencing the market without them.

So what gives? Are all these smart people out of their minds? Has nothing changed since the early days of IBM? Some things have changed, but others are exactly as they were.

The Order of Adoption Has Changed
20 years ago, the technology adoption curve generally conformed to the following order:

1. Government, specifically Defense and Intelligence organizations.
2. Businesses, with large businesses going first and smaller businesses adopting later.
3. Consumers

Today things have completely reversed. The latest technology goes to consumers first, followed by small enterprises that behave like consumers, then larger ones, then the military. The stunning reversal is one of many profound side effects of broad scale Internet adoption.

In the old days (before the Internet), no technology products were free, because distribution costs made it impossible to offer anything without some commitment from the end customer. As a result, new technology adoption generally started with the deepest pockets (the military) and worked its way down to the shallowest pockets (the consumer). Since the introduction of the Internet, many technology products can be distributed for free, and therefore have some free or free trial version. Interestingly, the order of adoption now follows decision-making speed rather than deep pockets. That is, consumers who can decide very quickly adopt first and the military — who has a notoriously complex decision making process — adopts last.

This reversal first initially stunned businesses. I remember dozens of CIOs at large companies being shocked that it was easier to find things on the Internet via Google than it was to find things in their own companies. We’ve seen the phenomenon repeat many times with the most recent being that it’s far easier to get background information on complete strangers via LinkedIn than it is to know the skill sets and backgrounds of your co-workers.

Encouraged by the new trend, innovative entrepreneurs imagine a world where consumers find great solutions to help their employers in the same way that they find great products to help themselves. In the imaginary enterprise, these individuals will then take the initiative to convince their collegues to buy the solution. Through this method, if the product is truly great, there will be little or no need to actually sell it.

The actual enterprise works a bit differently. Meet the new enterprise customer. He’s a lot like the old enterprise customer.

Meet The New Enterprise Customer
At the D8 technology conference, Steve Jobs made a statement about selling to enterprise customers that many missed but was extremely insightful and revealing: “We want to make better products than them. What I love about the marketplace is that we do our products, we tell people about them, and if they like them, we get to come to work tomorrow. It’s not like that in enterprise . . . the people who make those decisions are sometimes confused.”

Why are the enterprise people so confused? Why don’t they just quickly adopt the best products without requiring these complex sales processes?

Big Companies Don’t Have Credit Cards
Purchasing anything in a large organization requires a rigorous justification process that generally culminates in a purchase order (PO). They do not allow their employees to use their credit cards to buy technology off of the Internet. In fact, at many companies, doing so and attempting to expense it after the fact is a fire-able offense.

If you work in a startup, you might wonder why large organizations don’t just trust their people to make smart purchasing decisions. If an employee needs a new technology, why wouldn’t the company just let him do the right thing? There are many reasons:

1. The employee may not know what’s appropriate in the context of the larger organization. The more people in an organization, the more diverse the set of needs. If the organization purchases, for example, social networking software it must attempt to take these needs into account.

2. The company may already own the technology or a similar technology. If you work with 100,000 people, how do you know what the other 99,999 have already purchased? When EDS was a customer of ours, they had a $1B annual credit with Computer Associates. Computer Associates sells hundreds of products and is constantly developing new products (many of which can only be learned about via special meetings with the company). How would any employee at EDS possibly know about potential conflicts without a formal process?

3. The employee may be corrupted by side incentives – If an employee of a large organization can make significant purchases without review or proper process, it’s quite possible that he will be corrupted by an agent of a vendor. For example, an enterprise sales rep might buy a networking engineering a new Porsche in exchange for a $10 million order.

4. Public companies must comply with Sarbanes-Oxley compliant expense controls. Generally, when a company designs its expense controls, it must have in place a method for approving significant expenses before they are made. If a company lets an employee make significant a purchase or even a small purchase that leads to a significant purchase on his credit card, that will violate the company’s financial controls, because the purchase was not pre-approved.

As a result of these and other factors, large companies employ complex processes to ensure that major purchases make sense. These processes generally span many different organizations and stakeholders. It is not unusual for a purchasing decision to include people from many different IT departments (e.g. development, security, operations) and business functions (e.g. Finance, IT, Legal). The decision often involves technical decision makers, economic decision makers, and risk management decision makers.

Often these processes are so complex that almost nobody inside the company knows how they work. Excellent enterprise sales reps will guide a company through their own purchasing processes. Without an enterprise sales rep, many companies literally do not know how to buy new technology products. A top notch enterprise sales person not only knows her customer’s process better than the customer, but will be skilled at characterizing the value of her product to each decision maker independently. This will involve product demonstrations, proof of concepts, complete return on investment analysis and even competitive positioning. The sales rep will work with the various constituents to help characterize the value proposition to their management teams.

Large Enterprises Like Their Old Products
One thing that all large businesses have in common is that they have purchased a huge amount of technology over time. In fact, many of these technologies enabled the companies to become big in the first place. Naturally, the technology deployed in an enterprise varies widely in age. Some of the systems are outdated, complex, and downright arcane. Nonetheless, once deployed, enterprises develop great affection for the technology that runs their companies. They may complain about it, but like an old woman speaking of her spouse, the underlying love is far stronger than the criticism. And big companies expect you to love their old products too – by integrating with them.

But how do you figure out which old systems you need to integrate with and which ones you can afford to ignore? Like most things in the enterprise, it’s complicated. Great enterprise sales forces sort through the myriad of existing systems and help guide their companies to find the essential few.

People in Big Companies Work to Live
If you work in the technology industry and particularly in Silicon Valley, you become used to employees who work tirelessly to improve their companies. It is not difficult to imagine one of these employees independently finding a new technology then championing it inside of her company simply because she wants her company to become great. Outside of technology and especially in very large companies, people generally don’t do things like that. Most large company employees like to stay within the scope of their defined job. If they must make a choice between potentially advancing the efficiency of their employer via new technology or getting home to see their 8 year old’s pee wee baseball game, it’s not a difficult decision. As a result, expecting them to adopt your product with no help is probably not a good idea.

Final Thoughts
If you are selling to consumers or companies that behave like consumers, then moving away from the old channel models may make perfect sense. However, if you plan to sell to a large enterprise, keep in mind that the new boss is the same as the old boss.

Ben Horowitz is a partner at Andreessen Horowitz and the former co-founder and CEO of Opsware.

Building An Enterprise Software Company That Doesn’t Suck

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Editor’s note: Guest author Aaron Levie is the founder and CEO of Box.net

Thomas Wailgum, an editor at CIO.com, summed up the enterprise software industry best when he wrote, “It might appear that even tobacco companies enjoy a better level of overall ‘likeability’ than do enterprise software vendors.”

The way successful enterprise software companies have historically operated has been more or less uncontested: licensing costs increase at regular intervals, technology is difficult to integrate, and the user experience is often atrocious. Unlike most other open markets, which force out negative behaviors over time, many of the practices in place today serve the vendor and customer asymmetrically. Amazingly, more than 40% of IT projects still fail to deliver the expected business ROI, yet enterprise vendors come out winning regardless.

But not for long. Now that enterprise software can be delivered over the web and iterated quickly, we’re seeing the barriers for development, distribution and adoption shrink to levels previously only witnessed by consumer internet companies, with millions of users on top of platforms like Yammer, Box, and Zendesk; these changes are creating a much more competitive landscape where the customer stands to gain tremendously. The values that now separate legacy vendors from a new breed of companies are not only technological, but also cultural and organizational. In short, building better enterprise technology requires that we build fundamentally different enterprise technology companies.

Creating amazing products, not amazing RFP responses

Enterprise software vendors have long enjoyed a counterintuitive, but highly lucrative, reward system. Its buyers are different from the ultimate users, and each group’s needs are radically different — traditionally, enterprise technology has been designed with the sale to the CIO in mind, and this produces solutions that are inevitably feature-bloated to “satisfy” the vast majority of a customer’s requirements.

This has created an oddly perverse dynamic where the vendors with the most feature-rich solutions win the contracts, but the users lose due to the complexity of the technology. And thanks to the incredibly long gaps between product releases, vendors are further motivated to cram as many features as possible into each version, hoping to check all the boxes on RFPs for the next few years.

So how do new entrants avoid this cycle all together? By focusing on building enterprise software that the users love, driving demand up to the CIO. Vendors like Workday, Jive, Yammer, or Rypple are responding by investing more in design, usability, openness, and the total user experience. They’re measuring success by user adoption, rather than feature checklists. And thankfully, buyers are catching on.

At Box, we now see RFPs where “user adoption” is a heavily weighted factor in the purchasing decision; this was virtually unheard of a few years ago. IT managers are realizing that there are better, more strategic uses of their time than training employees, fighting low adoption, and contending with angry users – they want technology that just works. And because of this, we’re seeing more alignment between users and the CIO than ever before.

Maintaining a hacker-centric engineering culture

Paul Graham wrote a great essay last year on the need for hacker-centric cultures, where he ostensibly attributed Yahoo’s decline to their failure to build an engineering-driven organization. Enterprise software companies are uniquely vulnerable to the tendency of losing their edge in this way. For many enterprise software startups, survival mode kicks in and the market forces them to trade their product vision for more immediate, realistic revenue opportunities. But roadmaps driven by the goal of winning bake-offs or a few exceptional clients are the quickest way to kill the engineering spirit in your organization and turn away strong talent.

Today, the size and scope of the markets that even the tiniest enterprise startup can go after, and the amount of data and tools at their fingertips, are unprecedented. And because new software entrants are moving at web-speed, the challenges and rewards of building for the enterprise are drawing a new crop of developers. We speak with prospective engineers that hold the latest group of enterprise software startups, like Asana or PBworks, in the same regard as Facebook or Zynga because the ethos are now remarkably similar (minus the farm animals).

When business applications are delivered over the web, releases often occur on a weekly (or daily) basis – far from the standard three year cycle experienced by those working for Microsoft and most incumbent enterprise software companies. Engineers get to see their projects come to life immediately, and the organization benefits from instant product feedback.

Try performing A/B tests on a Siebel system or Lotus 10 to 15 years ago, or pulling customer activity in real-time to drive product decisions. It simply wasn’t possible. Or, just imagine what enterprise software would look like if all enterprise vendors implemented Google’s 20% time, or quarterly hackathons?.

Building radically different enterprise sales

The new approach to building and delivering enterprise software also entails a very different sales process. With web-delivered, freemium or open source solutions, we’re seeing viral, bottom-up adoption of technology across organizations of all sizes. And while the ultimate buyer remains the same (as Ben Horowitz has pointed out), the chief adopters of technology are now the individuals within an organization looking for quick, easy ways to solve their most pressing business problems. With the freemium model in particular, software companies now have an incredibly scalable and qualified lead generation vehicle; your sales team doesn’t have to bang on the doors of unsuspecting and uninterested buyers, because your prospects are already familiar, and likely successful, with your product.

This is also changing enterprise software buying patterns. Enterprises are tired of six to twelve month sales cycles that leave them with a solution that ultimately fails to gain traction. They’re beginning to focus on working with technology that their employees are already using or familiar with. This model forces the sales organization to stay honest, as customers generally have to be “bought” into the product before they’ve technically paid anything.

Consequently, enterprise sales tactics and techniques reminiscent of Alec Baldwin in Glengarry Glen Ross are becoming as quaint as the mainframe. The sales organization isn’t going anywhere, it’s just focused on ensuring that customers are blown away by its products; and the focus is on building a department that is knowledgeable, consultative and friendly, focused on helping the customer navigate from being an early adopter to large scale

Taking responsibility for customer success and support

Finally, the enterprise software industry has become too wedded to a model where the success of the vendor is disconnected from customer success. Traditionally, as soon as an enterprise software sale is made, it becomes the buyer’s responsibility to support the purchase – often requiring the manpower of a 6 and 7-figure consulting engagement. For instance, Microsoft touts that nearly 80% of SharePoint deployments involve a partner in some capacity, and there’s a 6:1 ratio of dollars spent on services to the cost of the original licenses. While that’s great for the partner ecosystem, it means customers have no predictability in what they’ll ultimately be paying.

This too is changing. With the new wave of enterprise software companies, customers are no longer solely financially responsible for the victorious implementation of their purchased solutions. The unstoppable trend toward “renting” vs. “buying” software, means the vendor gets paid only as the software continues to solve problems for its customer. As forcing functions go, this is a pretty good one to ensure customers are happy — and it means implementation services, constant feedback loops, and deep customer engagement are all critical to successful retention.

And while we’re at it, customers should no longer have to pay dearly for vendor support. What if every enterprise technology company demonstrated a Zappos-like devotion to customer satisfaction? We’re already seeing this today with Rackspace eeking out extra margin with their fanatical support mantra. In the next generation enterprise software company, the customer support and services organizations are more important than ever before – committed to the success of customers throughout the entire life of product ownership.

The new rules of enterprise software are about delivering substantially better products and services, and aligning customers with buyers in unprecedented ways. We’ve already seen how quickly new solutions that are customer-focused can emerge within big and small businesses alike: Salesforce.com built an $20B market-cap company in a little over a decade with incredible customer success and satisfaction. The emergence of new enterprise platforms, and the amount of investment in and demand for these new tools, are going to dramatically change the competitive landscape for software providers. Startups, and even larger companies, that play by the new rules and understand the change taking place, will succeed. Ultimately, though, it’s customers that are the biggest winners, and my god has it taken a while for customers to win when it comes to their IT purchases.

Startup Mantra: Hire Fast, Fire Fast

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Editors Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at his Startup BlogBothSidesoftheTable.

I have often said that what separates real entrepreneurs from pundits and bystanders is a bias towards getting things done versus over analyzing things. My credo has always been JFDI.

Its the hardest thing to teach people who come out of big companies, out of conservative jobs. At the big consulting firms, investment banks and established large technology companies were taught to produce long reports, make sure that every document is perfect quality and that every possible bit of diligence has been done. Good enough isnt.

And so things operate on a CYA basis.

That doesnt work in a startup.

Theres a certain cadence that you can feel when you spend time hanging any well-run startup company. The management team has to have a bias toward making decisions. They know that a 70% accurate decision made quickly and based on sound principles is better than a 90% decision made after careful consideration.

The startup entrepreneur knows that theyre going to be wrong often. Theyre flexible and willing to admit when theyre wrong. They dont create a culture of punishment for mistakes. They live be the credo that if youre never making mistakes youre not trying hard enough.

In my mind the sign of a great entrepreneur is the one that spots the 30% scenario quickly and adjusts but doesnt get gun shy about rapid decision-making in the future.

In fact, analysis paralysis drives me fucking bonkers. It is not uncommon in a meeting for me to say, There are three choices: A, B, C. My gut tells me that we ought to do B. But lets decide as a group. I dont care if my view isnt selected. Lets make a decision and move on.

Many people find this uncomfortable. The world is filled with people who dont like having to put their neck on the line and say what they think. I dont really care if Im wrong as long as Im not dogmatic if evidence later shows we need to change course.

So that was a long walk into the topic of recruiting. But given that I believe the success of startups is almost entirely correlated with having extra-ordinary talent, the ability to source, select and inspire new staff to join is one of the greatest early tests of entrepreneurs.

There is an old management adage that says, Hire slowly, fire fast. The idea has become conventional wisdom. It says that you need to take due care in selecting team members. It also says that you need to act quickly when your instinct says somebody isnt working out.

Only half of this adage is accurate for startups.

Hire Slowly?
This is the bit I have a problem with. I dont think that recruiting is any different than any other decision process in a company. Youre never really going to know how somebody is going to perform in the role, how good of a cultural fit he or she is going to be and how motivated theyre going to become until theyre on the inside.

Im not arguing that no screening is required. There are obvious questions you have give staff to get a gut feel on cultural fit, intelligence, aptitude and the like.

But heres the thing. I see many teams that feel the need to interview another 3 candidates just to be sure. They suffer the decision on the way in. They over think the decision framework.

I come from the Blink school of recruiting and decision-making. If you havent read it, you should. As humans most of us are inherently good at reading people and our innate instincts for fit are much better than our ability to analyze humans on a spreadsheet.

I also subscribe to the views that you should always be recruiting (ABR) and when great people pop up you hire them and then find a way to make the role fit. Id much rather have the super bright, super ambitious, great cultural fit in my business now than look for the perfect person whos done this job before and maybe find them in 3 months. 3 months is a lifetime in a startup.

If you havent read it Ive written before on these topics:
1. Attitude over Aptitude
2. Only Hire A+ People
3. Hiring at a Startup

And just as my gut feel about the likely success of startups is often determined by looking at their velocity of product development and market progress of their product, so too is recruiting a factor in my assessment.

Great leaders and great teams have the ability to find potential staff, evaluate their fit, inspire them to join and onboard them. They have good recruiting velocity.

Any team that I work with that struggles to hire people quickly knows that Im likely frustrated because I have many other companies that I work with that arent so slow.

And when we didnt ship product on time, didnt get the biz dev deals we wanted competed, didnt get our market messages out and the founder says, sorry, I had too many other priorities like fund raising they know it will fall on deaf ears with me. Time spent onboarding new talented team members always yields more productivity than doing everything yourself.

But we dont have budget!

Great entrepreneurs find a way. Recruiting cadence matters.

Fire Fast?
Ive written in the past about changing jobs too frequently and I received a lot of blow-back from technical people who said, I had asshole CEOs. When we hit a bump in the road he was very quick to slash-and-burn.

I was trying to argue that its OK to change jobs a few times when youre young and that things happen but that if things happened 5-6 times there is probably a pattern that isnt completely the fault of some asshole boss.

But people dont like to hear about firing or job cuts, so I was flamed.

So I have been reluctant to weigh in again on the topic publicly. Brad Feld and I were discussing the topic at lunch at the most excellent Glue Conference this week in Boulder.

He encouraged me to write this post and after smoking me out on Twitter I had no choice. ;-) Outed.

So here goes.

I have never regretted firing anybody. Not once.

I have on many occasions regretted not firing somebody quickly enough.

I dont take any pride in letting somebody go. I recognize that it affects somebody economically, can affect somebodys personal life and is one big blow to the ego. But if youre afraid of firing people you shouldnt be an entrepreneur. No startup company has any spare capacity for dead weight.

Ive made every excuse to myself in the past, I cant fire him now, he owns the customer relationships and its a crucial point in our sales process. Or, I havent given him a long-enough chance to prove himself let me see how he develops or even, it will have a big impact on morale because she is well liked. I cant afford that right now.

Ive heard VCs use similar rationale, We knew the CEO wasnt working out but we couldnt fire him because it would have made it too hard to get a fund raising round done only to later regret not moving more quickly and reacting to the obvious discontent of the rest of the startup team.

Ive lived through every excuse. And for every firing procrastination Ive made, one month afterwards Ive always felt the exact same way, Why didnt I do this three months early?

Trust me: if you know, you know. If you know, do it now. Things dont get better. Your Blink instincts are right. You wont patch things up. Delaying the inevitable is not going to make things smoother with your investors, biz dev partners, customers or employees.

There is only one answer: fire fast.

Firing somebody is no different than the other 10,000 decisions you need to make in your company to survive. You free up much needed budget. You free up the org chart to bring in new blood. Almost universally your staff will come out of the wood-works and say, thank you, he needed to go.

When people arent pulling their weight other members who are know it. And theyre grateful to work in an organization where theyre valued and slackers arent.

When you have to fire somebody, dont pussyfoot about. Dont make up fake excuses about why theyre going or try to pretend its a redundancy or something. Tell them specifically what isnt working. Dont be mean for the sake of it. Give them suggestions of how they might think about the situation differently at the next company. Give them honest and constructive feedback.

If the sacking is legitimate, chances are they knew in their gut it wasnt working and will appreciate the candor.

Obviously make sure that youre following a legal process. In the US and UK if the termination comes reasonably quickly youre almost always OK but please double-check with your legal advisors.

To be clear Im not advocating creating a slash-and-burn employee culture where there is a constant revolving door. I do believe that you set the tone in your company that you as a founder work your arse off and expect it of others. You make sure people know its a meritocracy and the best staff will rise to the top. Age and experience are irrelevant. Good people get ahead, bad people get asked to leave.

So there you have it. Most companies hire slowly and fire slowly the exact opposite of best practice for startups.

Pick up your recruiting cadence. Take a risk on people who you think will be a good fit. Dont look for perfect resumes. Take some chances. Trust your gut feel. And when you got it wrong you move on. Youll recover.

Move fast. Dont delay the inevitable. Check your legal framework. Get your papers in order. Treat people with respect and professionalism. Be open and productive. But honest with them about their shortcomings or why they arent working culturally. But fire them quickly.

Flame away.

Image courtesy of Joeff via Flickr.

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Keren Eldad

Keren Eldad May 27, 2011

Nice one!

In Norway, Start-ups Say Ja to Socialism

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In Norway, Start-ups Say Ja to Socialism

We venture to the very heart of the hell that is Scandinavian socialismand find out that its not so bad. Pricey, yes, but a good place to start and run a company. What exactly does that suggest about the link between taxes and entrepreneurship?

Andy Ryan

AN EXPANSIVE MOOD Jan Egil Flo (left), Simen Staalnacke (center), and Peder Børresen, the co-founders of Moods of Norway. In the early days of their $35 million company, they lived almost rent free, courtesy of the government.


Erika Larsen

"A SOCIALIST IN MY BONES" Wiggo Dalmo is all entrepreneur notwithstanding an ambivalence toward capitalism.


Erika Larsen

THE DONALD TRUMP OF NORWAY Inger Ellen Nicolaisen would love to pay less in taxesunless it meant leaving the country.

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Wiggo Dalmo is a classic entrepreneurial type: the Working-Class Kid Made Good.

Dalmo, who is 39, with sandy blond hair and an easy smile, grew up in modest circumstances in a blue-collar town dominated by the steel industry. After graduating from high school, he apprenticed as an industrial mechanic and got a job repairing mining equipment.

He liked the challenge of the work but not the drudgery of working for someone else. "I never felt like there was a place for me as an employee," Dalmo explains as we drive past spent chemical drums and enormous mounds of scrap metal on the road that leads to his office. When he needed an inexpensive part to complete a repair, company rules required Dalmo to fill out a purchase order and wait days for approval, when he knew he could simply walk into a hardware store and buy one. He resented this on a practical leveland as an insult to his intelligence. "I wanted more responsibility at my job, more control," he says. "I wanted freedom."

In 1998, Dalmo quit his job, bought a used pickup truck, and started calling on clients as an independent contractor. By year's end, he had six employees, all mechanics, and he was making more money than he ever had. Within three years, his new company, Momek, was booking more than $1 million a year in revenue and quickly expanding into new lines of business. He built a machine shop and began manufacturing parts for oil rigs, and he started bidding on and winning contracts to staff oil drilling sites and mines throughout the country. He kept hiring, kept bidding, and when he looked around a decade later, he had a $44 million company with 150 employees.

As his company grew, Dalmo adopted the familiar habits of successful entrepreneurs. He bought a Porsche, a motorcycle, and a wardrobe of polo shirts with his corporate logo on the chest. As rock music blasts from the speakers in his office, Dalmo tells me that he is proud of the company he has created. "We tried to build a family, and we have succeeded," he says. "I have no friends outside this company."

This is exactly the kind of pride I often hear from the CEOs I have met while working at Inc., but for one important difference: Whereas most entrepreneurs in Dalmo's position develop a retching distaste for paying taxes, Dalmo doesn't mind them much. "The tax system is goodit's fair," he tells me. "What we're doing when we are paying taxes is buying a product. So the question isn't how you pay for the product; it's the quality of the product." Dalmo likes the government's services, and he believes that he is paying a fair price.

This is particularly surprising, because the prices Dalmo pays for government services are among the highest in the world. He lives and works in the small city of Mo i Rana, which is about 17 miles south of the Arctic Circle in Norway. As a Norwegian, he pays nearly 50 percent of his income to the federal government, along with a substantial additional tax that works out to roughly 1 percent of his total net worth. And that's just what he pays directly. Payroll taxes in Norway are double those in the U.S. Sales taxes, at 25 percent, are roughly triple.

Last year, Dalmo paid $102,970 in personal taxes on his income and wealth. I know this because tax returns, like most everything else in Norway, are a matter of public record. Anyone anywhere can log on to a website maintained by the government and find out what kind of scratch a fellow Norwegian taxpayer makesbe he Ole Einar Bjørndalen, the famous Norwegian biathlete, or Ole the next-door neighbor. This, Dalmo explains, has a chilling effect on any desire he might have to live even larger. "When you start buying expensive stuff, people start to talk," says Dalmo. "I have to be careful, because some of the people who are judging are my potential customers."

Welcome to Norway, where business is radically transparent, militantly egalitarian, and, of course, heavily taxed. This is socialism, the sort of thing your average American CEO has nightmares about. But not Dalmoand not most Norwegians. "The capitalist system functions well," Dalmo says. "But I'm a socialist in my bones."

Norway, population five million, is a very small, very rich country. It is a cold country and, for half the year, a dark country. (The sun sets in late November in Mo i Rana. It doesn't rise again until the end of January.) This is a place where entire cities smell of drying fishan odor not unlike the smell of rotting fishand where, in the most remote parts, one must be careful to avoid polar bears. The food isn't great.

Bear strikes, darkness, and whale meat notwithstanding, Norway is also an exceedingly pleasant place to make a home. It ranked third in Gallup's latest global happiness survey. The unemployment rate, just 3.5 percent, is the lowest in Europe and one of the lowest in the world. Thanks to a generous social welfare system, poverty is almost nonexistent.

Norway is also full of entrepreneurs like Wiggo Dalmo. Rates of start-up creation here are among the highest in the developed world, and Norway has more entrepreneurs per capita than the United States, according to the latest report by the Global Entrepreneurship Monitor, a Boston-based research consortium. A 2010 study released by the U.S. Small Business Administration reported a similar result: Although America remains near the top of the world in terms of entrepreneurial aspirations -- that is, the percentage of people who want to start new thingsin terms of actual start-up activity, our country has fallen behind not just Norway but also Canada, Denmark, and Switzerland.


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How Big Is Your Wasta? The Currency Of Entrepreneurship : The Next Women

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How Big Is Your Wasta? The Currency Of Entrepreneurship : The Next Women

This is a guest post by writer and entrepreneur Robyn Scott, born in England and raised in New Zealand and Botswana, founder of OneLeap and Mothers for All, with an MPhil in Bioscience Enterprise at the University of Cambridge.

“To quote George W Bush, “The French don’t even have a word for ‘entrepreneur.’”

robynscottSo tweeted an American friend, replying to my 4 am Twitter grumble about the exodus of taxis from Paris, which had stranded hundreds of revelers at Le Web, Europe’s largest internet conference. She wasn’t the first that evening to reprise this delightful remark. But a few days later – this time inadvertently – the same friend offered an illuminating perspective on a problem, not of the French, but of the 2,500 strong conference and the tech world more broadly.

An Arab American, she was describing a business deal in the Middle East and mentioned the need to find someone with enough “wasta” to pull it off. “Wasta is hard to translate” she explained. “Kind of a mixture of influence, clout, social status and networks. But it’s different. You accumulate and spend it. Like a currency. It’s also inherently a bit corrupt and nepotistic. Who-you-know rather than merit. You generally use wasta at someone else’s expense.”

The tech world doesn’t even have a word for wasta.

It should: the Arabic word pithily describes the lubricant of the cool web milieu – that night for a few hours rendered valueless by the confluence of ice and French taxi drivers’ absolute resistance to market forces. In the two hours it took me and a friend to trudge back home through the snow, we saw not a single free taxi. All had their lights off, heading home to avoid the (not very) slippery roads. The drivers were as unpersuaded to stop by two damsels in distress as they were by venture capitalists waving fistfuls of cash: willing to blow their annual seed fund (or to introduce you to any of my contacts) just to get back to the Huitième and avoid ruining their calf skin shoes. (This is not just a stereotype: I have it on good authority from a respected technology correspondent that you can always distinguish entrepreneurs from VCs by the latter’s expensive shoes.) That night, had one been able to hire a car, forget pitching for investment, it could have been raised in ransom style fares.

The next morning there was much grumbling about market failures – no doubt loudest amongst the cliques that, thanks to wasta, manifest the more interesting, and arguably innate, market failure at conferences like Le Web.

This is the failure of connections. At the utopian version of Le Web and its ilk once you’ve paid your thousands of euros – or begged, borrowed or bribed your way in – you can get access to fantastic people.

The reality is more complicated. Certainly almost all the valuable meetings I had were prearranged – many at dinners or gatherings that spring up around the conference, whose main utility becomes a loose geographic convener. A straw poll suggested this experience is the norm. If you’re really persistent and patient you can, of course, collar speakers. But the tactics involved are not conducive to a nice chat. Getting a word with Shai Agassi was like diving into a rugby scrum – of other fans, minders and press people, wielding large dangerous camera lenses.

To the credit of Le Web’s organisers, a tool called Presdo Match was introduced to help solve the problem. You could “like” participants and send them a message to pre-arrange a meeting. But it was opt-in. And many of the most interesting people did not – correctly guessing that there’d be lots of entrepreneurs indiscriminately firing off generic messages (it cost nothing but time, so why not?) inviting you to “meet up for 15 minutes so I can tell you more about my startup”.

The problem was neatly summarised by one of the speakers. “The only place anything of interest happens at Le Web,” he told me, “is in the speakers’ room. That’s why I come.” Ergo, for the conference to be of value you have to be one of the speakers. Or know one or more of the speakers. And preferably you need them to owe you a favour or two.

You need to have wasta. Or – one and the same – know someone with wasta.

Which pretty much sums the ostensibly meritocratic tech world. Wasta is ubiquitous: helping to get advice, investment, partnership deals, speaking gigs, even media coverage. Conferences merely bring the dynamic into stark relief. To an extent, it is necessary, unavoidable and nothing new. You refer people you trust and like. And often these are the right people. It stands to reason, however, that its importance should not exceed a threshold. And perhaps precisely because the technology world’s creed is one of merit, few have thought to look out for wasta’s insidious rise.

The dynamism and sheer scale of Le Web saved it. But the consequences of wasta were more apparent the following week in London at the high end technology conference, Noah, whose homogeneity would have made Noah himself blush.

There were – notwithstanding the dark-suited conformity and the abundance of old boys’ backslapping and its Twitter equivalent – many fabulous speakers and participants. But this alone wasn’t enough. Not simply thanks to the humdrum programme, the day and conversations felt dull, often echoing one another.

One got the feeling that they had surrounded themselves with themselves a bit too much. And that they might, consequently, be missing out on the real action, happening somewhere they’d forgotten to look, at the hands of people who weren’t like them. The other sex, for a start. (A woman did not make a single appearance on stage and women were so few and far between you generally encountered one only in the ladies loos. Enough to make one long for a bit of old-fashioned tokenism.)

For all the diversity Noah, the conference, exhibited, Noah, the man, might have loaded on board the ark a couple of hundred pairs of male peacocks – without the redeeming colour. Which, segueing irresistibly into an evolutionary metaphor, doesn’t bode well for the priceless vigour and innovation brought by outsiders – and talked about endlessly and excitedly by the kings of wasta – to each other.

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When They Are Throwing Money At You

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Jan 12 2011

When They Are Throwing Money At You

Companies get hot. And investors start throwing money at them. Entrepreneurs get calls and emails all day long from investors wanting to invest. After a while, the entrepreneurs start to think that they should take the money. Not because they need it, but because they figure if people are throwing money at them, it's probably a good idea to take some.

Given that we are in the "throwing money at entrepreneurs" period in web investing, I thought I'd say a few things about this.

1) Don't take money you will never ever need. No matter what price and terms the money is offered, it has a cost. Money is never free. If you have absolutely no need for the money then don't take it.

2) Money lying around tends to get spent. It is a very hard mental exercise to sock away a bunch of money and forget about it. If you think you'll just raise the money and put it away for a rainy day, just know that will be hard to do. And if you have team members who have ideas about how to spend/invest it, it will be even harder.

3) If you need the money, then raise it now. I have not seen a better time to raise money for web startups since the late 90s.

4) If you don't need the money, but have some ideas about how you could put it to good use, then do some hard work on those use cases. Flesh them out. Size them up. Build a plan. Then raise the money and execute the plan.

5) If your company doesn't need the money, but you sure could use some, then think about selling some secondary shares. But don't sell a lot. Maybe 10-20% of your position. I've come to believe that entrepreneurs putting away some money to protect the downside is largely a good thing. It allows them to take bigger risks and play for more upside.

6) Do not let the fact that your competitors are raising money impact your decisions around fundraising. I have not seen one company beat another because they raised more money. Most of the time it is the other way around. The overfunded company loses most of the time.

7) Don't let this environment make you crazy. I understand the problem. We get calls and emails too. It is tempting to get caught up in the nutty market we are in. Focus on your business, your product, your team. Put all this stuff in perspective and don't let it take you mind off what matters. You need money to build a business but the money is a tool, the business is the mission. Focus on the mission.

The financial markets will come and go. Sometimes investors are focused on the downside. Other times they are focused on the upside. Right now it is the latter. But someday it will move to the former. That's how financial markets behave. End markets, the place all businesses get paid day in and out, don't whipsaw you like financial markets. Build a product and sell it to the end market and get profitable and create lasting sustainable value and you'll get to the pay window on your terms and your time frame.

Be A Keeper Of The Company Vision

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14 Ways To Be A Great Startup CEO

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great startup ceo mark zuckerberg resized 600Everyone thinks that being a startup CEO is a glamorous job or one that has to be a ton of fun. That's what I now refer to as the "glamour brain" speaking aka the startup life you hear about from the press. You know the press articles I'm talking about... the ones that talk about how easy it is to raise money, how many users the company is getting, and how great it is to be CEO. Very rarely do you hear about what a bitch it is to be CEO and how it's not for every founder that wants to be an entrepreneur. I've spent a lot of time recently thinking about what it takes to be a great Startup CEO that is also a founder. Here are some of the traits I've found.

Be A Keeper Of The Company Vision

The CEO is the keeper of the company's overall vision. I'm not talking about the vision for the next few months, but the larger road ahead. The CEO needs to be able to keep things on course for the current quarter to make sure that the large overarching vision of the company can be achieved. The takeover the world vision of a startup usually can't be achieved in one year or even in some cases, like Google, in a decade. It takes a great startup CEO to keep the company on track to achieve that vision. A great startup CEO will often judge upcoming initiatives to see if they fit in as a piece of the large puzzle for the bigger vision.

Absorb The Pain For The Team

A startup CEO needs to be the personal voodoo doll for a startup. They need to be able to take on a strong burden of stress, pain, and torture all while making level headed decisions. You can't have the troops stressing and worrying about the difficult challenges at hand. A good startup CEO will absorb the stress, so the rest of the team can carry on. He also needs to be able to mask this pain and stress. Not that he should hide or lie to the team- I'm not encouraging that. Most of the day to day nuances+stresses of a startup aren't worth having the entire team worry about and the CEO needs to bear that pain.

Find The Smartest People And Defer On Domain Expertise

A startup CEO has a great knack for finding talent. The key is finding people that are smarter than you on specific topics. It might be technical team members/leaders or it might be a new VP of Biz Dev. A startup CEO has to have the ability to find these people and make relatively fast decisions to hire them. They also have to be able to show the fire and passion to convince them to leave what is most likely a better paying and more secure job to join the company. The real key to hiring as a startup CEO comes after the hire. A great startup CEO will be able to trust the hires that they make and defer to them on areas of domain expertise. It's hard to let go, but you have to learn to, especially when the company grows.

Be A Good Link Between The Company + Investors

Whether you want to believe it or not, you are not an investor's only portfolio company. Even if you are a superstar, they have a handful of other companies to help and a ton of incoming potential portfolio companies. A good investor will pick 2-3 new companies per year to work with. A good startup CEO will be a good link between progress, issues, and areas where they need help with investors. A good portion of early stage startups that raise money will have a board comprised of 3 people: the CEO founder, the investor, and an independent board member. You are the lone representative for your cofounder and other employees.

Be A Good Link Between The Company + Product

I have this unwavering belief that the best companies are those that keep a founder as CEO for the long haul. Not because the founders have the right to be CEO, but because the CEO needs to be close to the product vision of the company. Founding CEOs understand this the best and can carry out that same unified vision over time. To fill in the management gaps a great COO, other board members, and heads of divisions will come along. It's a strategy that Facebook has employed and why Apple has had a great resurgence with Steve Jobs at the helm. It's all about keeping the CEO as close as possibly linked to the product.

Be Able To Learn On The Job

Most startup CEOs didn't start out with an MBA or some background in growing a company from nothing to something. The best have an ability to learn along the way and embrace their failures to become a better leader. Zuck started when he was 19 and now 7 years later, runs the most powerful internet company. Don't worry about whether "you're qualified" as it's hard to put typical qualifications on the job. You'll learn the really core stuff along the way. The best startup CEOs will surround themselves with smart mentors to be a sounding board along the way.

No Experience Almost Preferred

It's almost better to have a blank slate of zero experience as a startup CEO. If you come in with preconceived notions and block out the scrappy methods of a startup founder, it actually hurts you. Traditional education often trains you to be CEO or manager for a much larger company, not for a startup of under 50 people. It's a different kind of leadership and company.

Have An Uncanny Ability To Say No

You will be inundated with a list of requests from potential partners, investors, employees, and more. They will all sound absolutely wonderful. As you grow, you will also have the resources to execute more of them. Don't. It's easy to say yes, but so very hard to say no. By having an uncanny ability to say no, you can keep your company on track with the large vision you maintain. It will also keep your team members (notice I don't like to use the word "employees") laser focused and feel more rewarded as they are able to focus on one thing for a good chunk of time. I've seen too many startups sink because the CEO keeps changing what the head of product and engineering should be doing.

Have Some Technical Knowledge And Skillset

A good startup CEO shouldn't be afraid of a little bit of code and a text editor. They don't need to be diving into the source code on a daily basis, but they need to understand the technical requirements. It's easy to say "go build this", but it's a whole other ball game to understand how to build it. What seems simple may be a huge mountain of a technical feat that just isn't feasible with the given resources and deadlines. It can also help lend some street cred with hiring early technical team members too.

Be Able To Break Things Down Into Sizable Chunks + Milestones

Remember that huge unwavering vision that you are the keeper of? Odds are it only makes sense to you and your cofounder. You will need to break it up into sizable chunks and milestones for the rest of the team to understand it. You also need to be able to pick when and where to conquer things strategically. What is the past of least resistance so you can gain traction? What can you do first with your given resources?

Have The Ability To Call An Audible

Nothing goes according to plan. Things fall through, people quit, shit happens, servers crash, and other random things go bump in the night. You're going to have to deal with it and fast. This is a football term:

"Seen when the quarterback goes up to the line of scrimmage, sees a defensive alignment he wasn't expecting, and adjusts by yelling out a new play."

You're going to come up against things that you didn't expect and just be able to call an audible. Launch faster, spend more money here, or even abandon a project.

Can Motivate The Team Through Despair

People love to talk in this business. People love to talk even more when you're company isn't fairing well. A great CEO will be able to take those moments of public despair and keep the company focused. They will be able to debunk the rumors or even approach them head on by keeping the members of the company focused on the bigger mission at hand. It can come in simple 5 minute talks or motivational emails. The worst thing you can do is avoid the situation and be passive aggressive. I repeat: DO NOT WUSS OUT.

Be A Great Communicator

You need to be able to portray the energy and passion that you feel into others...over and over and over and over and over and over again on a daily basis. As a startup founder you need to communicate the vision and hope for the future of your startup to the rest of the world. You need to be able to break down the overall vision of the company into something that mere mortals can understand. You can't speak in crazy technical jargon or industry terms. It needs to be simple, clear, and compelling. You also need to be able to argue your point. Many will pick "fights" with you just to see how strong willed you are. Be respectful, but be very confident in your answer. Often wrong, but never in doubt my friend.

Don't Be A "Fake CEO"

Mark Pincus, CEO of Zynga, makes a strong case for not being a fake ceo. In short, worry about things that produce results, not fame. If it's between going to a conference/doing an interview or completing a deal, get the deal done. Don't "leave it to someone else". You need to get your hands dirty every single day.

By no means is this an exhaustive or definitive list. In some cases, the traits listed above might be counter-intuitive. What are some traits you've seen in great founding startup CEOs? Not the glamorous job you thought it was, eh?

You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: jbaptiste@onstartups.com, or even call: 201.305.0552


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Posted by Jason Baptiste on Tue, Dec 28, 2010

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