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#NotesOnStrategy: Tips For Early Stage Startup Founders on How To Build A Culture of Accountability

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Getting from Point A to Point Z: How?
Getting from Point A to Point Z: How?

CULTURE EATS STRATEGY FOR BREAKFAST, OPERATIONAL EXCELLENCE FOR LUNCH, AND EVERYTHING ELSE FOR DINNER.

– Bill Aulet

During one of our weekly Monday morning team meetings we were talking about one of the startups in our portfolio . . . Things are going well; the product is pretty good and improving, sales are increasing, revenue is growing etc. It’s preparing to raise a big round within a few months.

There’s one problem . . . Accountability. Things are not happening when they should, people are not doing what they are supposed to be doing. It’s not yet fatal, but . . . A culture of accountability does not exist.

What should they do? The founder/CEO is proposing an approach to solving that problem that I believe is indirect and ineffective. I do not think it will work, and worse I think it will confuse his team and cause resentment and stress the team unnecessarily.

After the meeting, I posted a status update on Facebook asking my friends who are early stage startup founders if they have any nagging questions they’d like me to research and tackle in a blog post . . . A couple brought up team-building, accountability, and culture. One said:

I think organizational building/management/structure, HR, and team building get very short shrift in the startup dialogue, which is a shame. I understand why in the short run, but in the long run I suspect the costs can be high.

– Tayo Akinyemi

I had inadvertently found the topic for my next blog post.

I have some experience with situations in which accountability is a problem . . . Dating back to my days as a student at Connecticut College when I ran two businesses on campus to earn pocket money – one was a newspaper delivery business, the other was a deejay business; I respectively had to hold my best friend and my partner accountable, leading to me firing them for failing to keep up their end of our bargain; and again between 2008 and 2012 when I devoted substantial portions of my time to turning around two companies – in that case I did not have the authority to fire anyone, but I had the authority to hold people accountable and I played an important role in setting and getting buy-in for expectations, and then determining who should be held accountable meeting those expectations we had agreed on. I also had to help the senior leadership of the two companies learn how to build a culture of accountability. In addition I helped my mom and my dad run a number of small business while I was growing up, and since 1986 have discussed management and leadership issues my mom is grappling with as she has grown Summit School from 3 kids in our garage to several hundred pupils in Kano, Nigeria. Holding people accountable is hard, but necessary for organizations that want to grow and accomplish important things.

In this post I will first delve into a general discussion about management and leadership, then I will end with tips on how startup founders might foster accountability.

The intended audience for this article is early stage technology startup founders who have no training or prior experience in management or leadership, but who nonetheless need to come to grips with the basics in order to run their startups effectively. Consider this a launchpad from which one might do further reading and independent study.

If you have not already read my posts on team building you can get caught up on high-performing teams first here and then here, what religion teaches us about culture, and how management skill can enable startups to build an impregnable economic moat.

Fundamental Ideas About Leading and Managing Teams of People

One way to distinguish between leadership and management is to remember that; in the grand scheme of things leadership affects issues that are of strategic, relatively long-term importance to a startup, while management by comparison focuses on issues of tactical, and relatively short-term importance.

Things get confusing in startups because founders, who are really defacto leaders also have to fulfill responsibilities as managers till such a point that the organizational structure has evolved and the distinction is clear.

But what does this mean? Concretely? It means that a manager typically will be responsible for implementing a strategy and vision developed by the leader. Leaders focus primarily on creating a vision, developing a strategy to actualize the vision, and nurturing culture. Managers draw up detailed plans, discuss the plans with the leaders to get buy-in and approval, then they execute and implement those plans with the help of people on the teams that they manage.

Every leader is also a manager, but not every manager is a leader.

What is leadership? The definition of leadership that I find most compelling and applicable to early stage technology startups is based on this quote from John Quincy Adams:

If your actions inspire others to dream more, learn more, do more and become more, you are a leader.

To be a little more specific Kevin Kruse and Dr. Travis Bradberry define leadership as ” . . .  a process of social influence which maximizes the efforts of others toward the achievement of a greater good.”[3. What Makes A Leader? by Dr. Travis Bradberry on LinkedIn. Accessed on Jul 2, 2016.]

In order to become an effective leader one must understand the difference between a leadership model, a leadership philosophy, and a leadership style.

A leadership model is a practical framework that helps a startup founder develop into a competent and effective leader. A leadership model answers the “What?” question.

A leadership philosophy is a values-centric framework about how a startup founder should behave, and the sources from which the founder can derive power as a leader. A leadership philosophy answers the “Why?” question.

Lastly, a leadership style focuses on the reality of how a startup founder fulfills the responsibilities of a leader. A leadership style answers the “How?” question. This is an important issue, because effective leadership rests on authenticity . . . Obvious incongruence between a budding leader’s personality and choice of leadership style is one of the quickest paths to catastrophe.

In the context of an early stage startup, the leader’s tactical goals center on leading the team from one milestone to another. The leaders strategic goals center on guiding the startup through discovery, and ultimately to helping the team navigate its way to becoming a company.[4. A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. A company is what a startup becomes after it completes discovery.]

What is management? According to Mary Parker Follet; “Management is the art of getting things done through people.” Similarly, Harold Koontz says “Management is the art of getting things done through and with people in formally organized groups.” Lastly, Henri Fayol says “To manage is to forecast and to plan, to organize, to command, to coordinate and to control.”

Management is an ongoing process of producing results against pre-existing budgets, forecasts, targets, tactical and strategic initiatives through teams of people, and measuring performance with an eye towards continuous improvement.

I think it is worth reiterating that the function of leadership and management do not always have to be embodied in the same individual, though in the context of an early stage startup it is almost inevitable the the founders function as both leaders and managers.

The Psychological Contract, Theory X, Theory Y and Theory Z – Cliff Notes Version

The psychological contract is a set of tangible and intangible expectations, beliefs, feelings, and emotions that govern the relationship between an individual and that individual’s employer, manager, and leader. The most important aspects of the psychological contract are based on mutual trust and respect.

I like the Iceberg Model approach to thinking about psychological contracts because it depicts quite clearly my belief that the most salient aspects of effective leadership and management are intangible and hidden from view.[5. A diagram of the Psychological Contracts Iceberg Model is available here: http://www.businessballs.com/freepdfmaterials/psychological-contracts-iceberg-diagram.pdf]

I believe that there’s no repairing the relationship between a team member and that individual’s manager or leader if one party believes that the psychological contract has been violated.

Theory X is a management worldview that can be described as militaristic, or command-control-and-punish. Theory X managers subscribe to the belief that people hate work and cannot be relied upon to work responsibly towards meeting tactical goals. As such they need to be motivated through the threat of imminent punishment.

Theory Y is a management worldview that is the opposite of Theory X. Employees can be relied upon to apply self-direction, creativity, and a take-the-initiative attitude to solving problems faced by organizations and teams. There is no need for threats of punishment.

Theory X and Theory Y arise from Douglas McGregor’s work, and were popularised in his book The Human Side of Enterprise.

Theory Z arises from the work of William Ouchi, and combines MacGregor’s Theory Y with Japanese management concepts. It places an enormous amount of trust in the individual. It assumes and expects that individuals will demonstrate  commitment and loyalty to the team and the organization. Ouchi explained Theory Z in the book Theory Z: How American Management Can Meet The Japanese Challenge.

Source Unknown
Source Unknown

On Accountability

In Four Tips for Building Accountability, Rosabeth Moss Kanter says;

The tools of accountability — data, details, metrics, measurement, analyses, charts, tests, assessments, performance evaluations — are neutral. What matters is their interpretation, the manner of their use, and the culture that surrounds them. In declining organizations, use of these tools signals that people are watched too closely, not trusted, about to be punished. In successful organizations, they are vital tools that high achievers use to understand and improve performance regularly and rapidly.

Based on my experience, and Prof. Kanter’s article, here are a few tips for startup founders who are grappling with this issue for the first time.

Ask questions, ask more questions, and then ask even more questions. What seems blindingly obvious to the manager or the leader may not be so obvious to the individual team member responsible for executing the assignment and delivering results. The key to asking questions is to ask lots of them both before work begins, as well as while the work is in process, and after the project has either failed or succeeded. Before work starts leaders and managers need to be certain that their audience has internalized the message that the leader or manager wanted to convey. This ensures that there’s complete alignment of the leaders understanding of the “Why, What, When, Who, and How” they have tried to communicate and that this is understood by the team, as well as by individuals within the team.

Praise publicly, chastise and reprimand in private. While it is important to get work done in the near term. It is also crucial to build individual team members’ self-sufficiency and effectiveness over the medium- and long-run. It is very hard to do this if people feel humiliated in the presence of their peers, especially since the person experiencing the humiliation will often have a strong belief that they are being treated unjustly and unfairly. Note that this belief often bears no relation to “the facts” as the manager or leader might interpret them. For accountability to work people have to feel safe discussing difficult issues, and collaborating with one another to tackle and resolve issues that may feel difficult to discuss. However, if the focus is on learning how to become more successful as a team and as individuals on the team respectively, things become a lot easier. As Prof. Kanter says “The goal is to solve problems, not to hurl accusations or tear people down.”

No pencil, no pad? Poor performance is guaranteed. Take copious notes. In my experience things on the accountability train start falling apart when there’s a high degree of ambiguity. There’s an inexplicable tendency to assume “everyone knows what I mean” or “they will understand what I expect” without clear, direct, and succinct communication from the leader/manager, or worse “they will see that those doing the right thing are progressing and so they too will start doing the right thing.”

Leaders and managers who adopt that approach are failing the most basic and fundamental test of their ability to lead or manage a team. In my opinion it is a sign that they do not want to feel the responsibility of setting clear expectations and dealing with what that process entails. Perhaps they think of themselves as “friends” with the members of the team.

Be that as it may, the founder/leader/manager must communicate expectations, break big goals down into more specific and unambiguous tasks, and provide guidance about expected deadlines and desired results. Shying away from doing this is a red-flag. Inevitably, there will be problems down the line.

Taking notes is one way to ensure that nothing is miscommunicated, or that something that was communicated is not overlooked or even forgotten. I believe leaders and managers should take and share notes about their thinking related to the team’s work. I believe team members should take notes too . . . As time progresses, comparing notes, filling in gaps and making corrections is one way to avoid miscommunication and misunderstandings . . . An important step in the journey towards a culture of accountability.[6. I will not judge you if you use a pen instead, but I prefer pencils, mechanical pencils.]

Landmarks in A Culture of Accountability: Excruciating Clarity[7. Based on The Right Way To Hold People Accountable, Peter Bregman, Jan 11 2016. Accessed at Harvard Business Review on Jul 2 2016.]

In order to foster accountability the leader/manager must be clear, and must obtain confirmation that the audience “gets it.” The five necessary ingredients for building a culture of accountability are;

  • Clarity of expectations – does the team understand what the desired outcome should be?
  • Clarity of capabilities – does the team have the resources to meet the expectations it has created for itself?
  • Clarity of measurement – does the team understand how its performance will be judged?
  • Clarity of feedback – does the team understand that lines of communication should remain open in both directions in order to avoid surprises at the eleventh hour? Does the leader/manager understand that it is necessary to check in periodically and often about progress towards the goal?
  • Clarity of consequences – does the leader/manager have clarity around what must happen if the preceding 4 conditions have been met and yet the outcomes fall short of the expectations that the team has set for itself? The crux here is that the leader/manager has to be honest and sufficiently self-critical in order to ensure accountability traps do not keep arising “out of nowhere” . . . Under the worst circumstances some individuals have to be let go, but that is life.

Conclusion

Navigating the treacherous waters between launching a startup and becoming a company is hard work. That work is made exponentially more challenging by failures in leadership and management. It does not have to be that way. To make it easier it helps to build a culture of accountability.

Further Reading

“Liking” Facebook’s Business Model – The #EconomicMoats Remix

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Facebook Employee Sign Hack: Pride 2015 (Image Credit: Facebook)
Facebook Employee Sign Hack: Pride 2015 (Image Credit: Facebook)

Note: I published “Liking” Facebook’s Business Model on December 26, 20011 at Tekedia. This article updates that discussion by incorporating developments since then. It also folds in discussion of the economic moats that Facebook has developed around its business. Large segments of this article are exactly identical to the post that was published by Tekedia in 2011.

Introduction

The primary purpose of this post was to demonstrate how one might apply the Business Model Canvas in trying to understand Facebook’s business model. Assuming we understand the business model, I then apply the Economic Moats framework to thinking about Facebook.

It is a fair critique to accuse me of playing “Monday-Morning Quarterback” since it is easy to pick on an extreme success like Facebook and use it as an example. However, from my perspective as an early stage venture capitalist who is basically teaching himself the trade that critique ignores at least one benefit of this kind of case study – mainly that it is useful for trying to recreate the path I might have followed in thinking about Facebook had I been introduced to Mark Zuckerberg in 2004 when he was raising his first outside capital from investors. Think of this as the self-taught early stage venture capitalists’ version of working in a science laboratory, trying to recreate the experiments and reproduce the results that have brought us the advances of the past. Such work is what lays the groundwork for original scientific discoveries in the future.

Also, I should point out that I do not have direct access to inside-information about Facebook’s early days. This case is constructed on the basis of information, reports, and data that are in the public domain.

Okay, with those disclaimers out of the way . . . On with our case study.

According to Michael Rappa; “In the most basic sense, a business model is the method of doing business by which a company can sustain itself – that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.” Alex Osterwalder and Yves Pigneur say that; “A business model describes the rationale of how an organization creates, delivers and captures value.”

What problem does Facebook solve?

My son’s paternal grandparents live in Nigeria, as does his uncle – my younger brother. His aunt – my younger sister lives in Ghana. His grandfather has never met him, nor have his uncle and aunt. His grandmother paid him a visit for three months soon after he was born. He was only two months old when she visited.

I had been asking myself the question; “How can I ensure that his grandparents, his uncle, his aunt and other members of his extended family do not miss out on his childhood entirely?” My desire to answer that question in a comprehensive way helped me to overcome my objections to Facebook. I joined Facebook in November 2009.

Facebook enables its users to connect with one another through the company’s social networking online portal. Users connect socially with their “friends” in a “social-network” to share status updates, articles, videos, music, photographs and other content through Facebook.

Facebook’s users can interact with one another in a number of different ways:

  • Users can connect directly as “friends” – this allows the highest degree and freedom of interaction subject to privacy controls that each user can put in place to govern their activity on Facebook.
  • Users can connect to one another as subscribers/followers – this is a one-way connection. Subscribers will see and can comment on the public posts by the person to whom they have subscribed. This feature was a recent addition when I wrote the original post in 2011.
  • Users can interact with one another through Facebook Messenger, an instant messaging app that has evolved since the function was first introduced to Facebook’s users in 2008. 
  • Facebook acquired Instagram in 2012 Instagram built a social network for sharing photos.
  • Facebook acquired WhatsApp in 2014. WhatsApp is a mobile instant messaging app that is popular in developing markets.
  • Facebook acquired Oculus VR in 2014. Oculus VR is  a virtual reality technology startup. 

Founded in 2004, Facebook’s mission is to give people the power to share and make the world more open and connected. People use Facebook to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them.

– Source: Facebook, as of March 2016

The following list highlights some of Facebook’s features:

  • User profiles and homepages – users post status updates on their homepage or wall.
  • Messages, Chat and Social Hangouts (video chat).
  • Photos + Videos – users can tag one another in photos and videos.
  • Games + Apps – people can play games with one another, or share other information through specialized apps.
  • Groups and Pages – people can form a group or create a page for sharing information around an issue of interest.
  • Events – people can use Facebook to plan events and invite others to participate.
  • Credits – this is the virtual currency for transactions on Facebook.

Reports in the press suggest that Facebook has about 800 million active users around the world. An active user is a user who has returned to Facebook’s website within 30 days.

ComScore reports that 82% of the world’s 1.2 billion online population participates in some form of social networking. Social networking eats up 20% of the time people spend online. Facebook’s users account for 75 percent of the time spent on social networking websites. Facebook’s users also account for more than 14 percent of the time people spend online around the world.

December 2015 Update: 

Monthly Active Users: 1.59 billion monthly active users as of December 31, 2015

Daily Active Users: 1.04 billion daily active users on average for December 2015

Mobile Monthly Active Users: 1.44 billion mobile monthly active users as of December 31, 2015

Mobile Daily Active Users: 934 million mobile daily active users on average for December 2015

How Does Facebook Make Money?

Facebook does not charge its users a sign-up or monthly fee. So, how does Facebook make money if users like me get to use it for free? There are three sources of revenue for Facebook;

  • Advertising – Facebook can deliver targeted ads to its users based on information that they provide during sign-up or as they interact with their friends.
  • Games + Apps – Facebook is paid a 30 percent fee by companies that develop games and applications for its user base. This fee is applied to in-game or in-app sales.
  • Virtual Goods – Facebook earns a slice of revenue from the sale of virtual goods to its users.

Reports in the press speculated that Facebook’s 2011 revenue would be in the neighborhood of $4.5 Billion. Advertising should account for the majority of that amount, followed by revenue from games and apps. Virtual goods account for only a small portion of Facebook’s revenues.

March 2016 Update: Revenue for the full year 2015 was $17.93 billion, representing an increase of 44% over revenue for the full year 2014.

The Business Model Canvas – The Building Blocks of Facebook’s Business Model

Note: Business Model Generation was not published till July 2010, nearly 6 years after thefacebook.com launched. Still, using the business model canvas to analyze Facebook’s business Model is instructive.

Customer Segments

  • Mass market – any one that uses the internet and wants to connect and socialize with family, friends and other people that are online.
  • Advertisers – big, medium and small companies that wish to advertise to the hundreds of millions of people that spend time on social network websites. Reports estimate that people spend about 3 to 4 times as much time on Facebook as they spend on Google.
  • Developers – apps, social games, and virtual goods.

Value Proposition(s)

  • Enable users to connect and share with family, friends and other people with whom they share a common interest.

Channels

  • Website
  • Mobile App

Customer Relationships

  • Network effects – users will gravitate to the social network where most of their friends are already users.
  • Relatively high switching costs – users are less likely switch to a competitor after sharing a lot of content on Facebook.

Revenue Streams

  • Advertising – fees generated from online display banner ads delivered to users through Facebook.com. There are probably two or three different categories of advertising.
    • Not entirely clear if this will work, but the team has been pitching this to advertisers since it was two months old. Might need to verify this assumption with someone in the advertising industry.
  • Facebook Credits – 30 percent share of in-app and in-game transactions.
  • Virtual goods – straight virtual goods sales not connected to use of an app or a game by the user.

Key Resources

  • People – employees, and Facebook’s more than 800 million active users.
  • Technology – software, servers and other cloud-based services that Facebook must purchase from other companies to support its operations.
  • Brand – people have to trust in what Facebook represents.

Key Activities

  • Developing and improving the Facebook platform – both the frontend user experience and backend data processing capacity. The company was reported to have started working on proprietary server designs to support its operations – reports suggested the company might be worried about the speed at which conventional server designs allow it to serve content to its millions of daily users.

Key Partners

  • Third party developers – apps, games and other features to enable people connect and share with one another using Facebook’s platform.

Cost Structure

  • Employees – Facebook reportedly has between two and three thousand employees spread across offices in 15 countries. The company seems to be preparing for a burst of growth in the size of its workforce.
  • Technology – server maintenance, software latency and optimization issues; this will continue to be a concern as people generate and share more and more content using smartphones.

The company says that more than 50% of its more than 800 million active users log onto Facebook on any given day. Nielsen estimated in a report on social media that American internet users collectively spent more than 53 billion minutes on Facebook in May 2011. The average user has 130 Facebook friends. The company also says people interact with more than 900 million objects on the website and that the average user is connected to 80 community pages, groups and events. On the average day Facebook’s users upload 250 million photos. Facebook is available in 70 languages, and 300,000 users helped to translate the site by using Facebook’s translations app. On the average day, Facebook’s users install apps 20 million times. During the average month, half a billion people use an app on Facebook or experience the Facebook platform on other websites (e.g. to share this story from Tekedia with your friends on Facebook). In all more than 7 million apps and websites are integrated with the Facebook platform. There are 475 mobile operators globally working to promote and deploy Facebook’s mobile products through their mobile networks and on their mobile devices (for example Facebook’s Android, iOS and Blackberry apps). More than 350 million active users currently access Facebook through a mobile device.

Facebook was launched in February 2004. As the preceding paragraph clearly demonstrates, the over-arching elements of Facebook’s business model that we have discussed have led it to unbelievable success. This success has occurred in spite of the fact that Facebook was not the very first social networking company. MySpace launched in August 2003, and before that Friendster was founded in 2002. Classmates.com, SixDegrees.com and Makeoutclub.com preceded Friendster. One may argue that Facebook benefited from technological advancements that its predecessors could not exploit. One may also argue that Facebook launched at a time when millions of people had become accustomed to the concept of social networking. I suspect there’s a lot of truth in both of those arguments. However, I would also argue that Facebook did a better job of understanding the intricacies of its business model better than its predecessors, and then executing that business model more effectively than any of its predecessors. Put those three arguments together and one can see that Facebook’s phenomenal growth is not completely outside the realm of possibility.

Facebook Menlo Park HQ (Image Credit: Facebook)
Facebook Menlo Park HQ (Image Credit: Facebook)

Economic Moats Analysis

I am now going to pretend that I have travelled back in time, to September 2004. As fortune would have it I am a reasonably well-liked early stage VC who invests in startups raising their very first round of capital from institutional investors. Someone I know has introduced me to the founder of The Facebook; and describes it as “a web directory that the college-kids are going crazy about.” I agree to meet in two weeks, when some time opens up on my schedule. In the meantime I start doing some cursory reading about this “thing.”

The issues I am most concerned about are, in order of priority;

First, how do I know that thefacebook.com has proven that its value proposition will hold? Around that time reports in the press highlighted how addictive thefacebook.com had become to its users. Here are some examples:

Even those who don’t know why they love Thefacebook can’t stay away.

“It’s a stupid, stupid website, but I am completely addicted,” freshman Emily Bruckner said. “I just go around and look at all of my friends and see who they’re friends with. It’s like a contest to see who has the most friends.”

Source: Thefacebook.com Opens to Duke Students, Duke Chronicle; April 14, 2004.

Value Proposition – The bottomline: Users love thefacebook.com, and there is plenty room for growth. The are millions of college students around the world that thefacebook could target as users.

Second, do I have a sense of how the team intends to grow the business? Will the team’s ideas about growth work? Based on reports in the press, it appears thefacebook is growing rapidly, and so I have to assume the team has figured what it will take to grow within the market on which it has chosen to focus initially. There may yet be some work to do here, but so far so good. Each user is encouraged to invite some friends upon first signing up for thefacebook, and the website also suggests people that new users might know who are already on the site. Friendster is doing well within the general population, so there’s one example of how thefaceboook too might grow beyond college-campuses . . . when that makes sense.

Growth – The bottomline: The team seems to have figured out a method to accelerate growth on college campuses. That’s a good sign. There may be a few outstanding questions, but this is probably a good point at which to consider making a investment if growth can continue to accelerate.

Third, and finally . . . How does the team believe thefacebook.com will make money? This is a critical question since it speaks to thefacebook.com’s future prospects for becoming a self-sustaining entity. The team has been pitching itself as an online marketing service to advertisers . . . It will be interesting to see how advertisers react to this.

Revenue – The bottomline: Murky. Not clear if this will work. But Google is having success selling ads online through its Content Targeting Advertising. So not out of the realm of possibility. But no definitive answers at hand.

Economic moats help early stage technology startups preserve and enhance the advantages they enjoy over their competitors as time goes on their business model matures. There are five ways in which a startup can build an economic moat; Network Effects, Switching Costs, Efficient Scale or Cost Advantages, Intangibles, and Brand. Note, that I discuss “brand” under the heading of “Intangibles” but it stands alone as one of the 5 sources of an economic moat.

  • Brand: High. Becoming known as the platform for college students for intra- and inter- college social networking. Highly sought after by students at colleges where it is yet to launch a community.
  • Network Effects: High. Platform gets more useful for users as more of their friends sign-on to become users.
  • Efficient Scale or Cost Advantages: High. Users invite friends. Word-of-mouth seems to be spreading and helping keep costs of acquiring new users relatively low.
  • Switching Costs or Buyer Lock-in: Undetermined. Need more data. But should increase as people interact more and more on thefacebook.com. Described as addictive. Wonder how long that addictive quality will last. Need to get better understanding of user-perception of value.
  • Intangibles:
    • Intellectual Property: None necessary right now, but might be needed in the future to solve technical problems caused by growth. TBD.
    • Research and Development: Need to figure out revenue model. Also, what problems has Friendster run into that might be relevant for thefacebook.com? How is the team thinking about this?
    • Culture and Management: TBD. Young team, college students. Mark has prior experience building social-networking applications.

Conclusion: So, would I have invested? I do not know. There is more that goes into a decision like that one than the preceding analysis. However, at first blush there are no “smoking-gun” reasons not to take a closer look. To avoid saying no at this stage it would help to keep the following lessons in mind – they are adapted from Andrew Chen’s discussion about his decision to pass on making an early stage investment in Facebook when he had the opportunity to do so after he convinced himself that “Facebook would never be a billion dollar company.” Note: I wrote about this in April 2012 in a post that was published at Tekedia. The following discussion is adapted from that post.

  • Lack of experience and lack of knowledge are two distinctly different things. Do not confuse them with one another. Pass on making an investment because of a lack of knowledge, do not pass only because of a lack of experience.
  • Do not take solace in data and statistics without first verifying that such analyses are relevant within the given context. Data and statistics often inspire unjustified confidence, but calculations are useless if what you are calculating is wrong, irrelevant or simply inapplicable to the startup’s situation and future markets.
  • Do your own homework. Treat data and statistics from others with extreme skepticism. At the very least, try to interpret third party data based on your own analyses.
  • By definition, your past experience might be useless in understanding the most promising startups that you will encounter. Start from first-principles. Understand the fundamentals of what the startup is trying to do before you leap to conclusions grounded in your past experience. Don’t let your professional history and learned logic become a hindrance.
  • Business models matter, but execution matters more than the relative attractiveness or unattractiveness of the business model that exists at the time you encounter and early stage startup.
  • Heuristics are useful, but only up to a point. See the point on “past experience” above.
  • Keep an open mind, peel away the layers . . . Lack of conformity with the stereotypes you have become familiar with is an insufficient reason for passing on a startup.
  • Lastly, set all the analyses aside and spend some time thinking about what would happen if the team succeeds in accomplishing what it is setting out to do. If that happened, is that a story you’d want to be part of?

 

 

Notes On Strategy; What Can We Learn From Religious Leaders About Building Early-Stage Startup Culture?

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Alternative Working Title: Notes On Strategy; Engineering Your Early Stage Startup’s Culture For Longevity

The topic of culture has been in the news quite a bit since the New York Times published an investigative piece describing what it is like to work for Amazon. While culture is something I think about all the time, that article got me thinking about religion and culture . . . and how that relates to the early stage startups in which we invest.

In this post I plan to:

  1. Examine what we mean when we say “culture” and tie that to the work that startup founding teams do during business model search and discovery.
  2. Examine the structural characteristics of religious communities; How do they maintain a sense of purpose, direction, and elicit devotion and commitment from members of the community?
  3. Provide some pointers about how first-time startup founders might get things off on the right footing as far as culture is concerned by making certain deliberate choices early in the lifecycle of their startup.

I am thinking specifically of startups raising their first institutional round from seed stage venture capitalists, or perhaps a Series A round of financing. These teams are usually small, often fewer than 10 people.

To get things started; What is Culture?

Culture is the learned and shared behavior of a community of people which distinguishes that community from other communities. 1J. Useem and R. Useem. (1963). Human Organizations, 22(3). Page 169. See: The Center for Advanced Research on Language Acquisition (CARLA) “What is Culture?” http://www.carla.umn.edu/culture/definitions.html. Accessed Aug 29, 2015.

Some of the things that distinguish a culture: 2Adapted from: Richard-Hooker.com; Clifford Geertz, Emphasizing Interpretation

  1. It embodies a way of life, an approach to thinking, feeling, and believing about the world.
  2. It endows the members of the cultural community with a social legacy from prior members of the same community.
  3. It provides a framework that enables members of the community to think abstractly about how they should behave;
    1. It provides lessons about how members of the community should react towards recurring problems by pooling the collective wisdom of past and present members of the community.
    2. It provides a guide for community members when they need to interact with the external environment.
  4. It is the process by which the history of the community is created and brought into permanent existence.

In this analysis I am most interested in religion as a cultural system.

According to Clifford Geertz religion is: 3Clifford Geertz, Religion As A Cultural System. In: The Interpretation of Cultures: Selected Essays. Pp. 87 – 125. Fontana Press, 1993.

  1. A system of symbols which acts to
  2. Establish powerful, pervasive, and long-lasting moods and motivations in people by
  3. Formulating conceptions of a general order of existence and
  4. Clothing these moods and motivations with such an aura of factuality that
  5. The moods and motivations seem uniquely realistic.

It is not difficult to see that a religion is in fact a specific type of culture and further, that every cultures is a kind of religion. In the rest of this post I will use the term “religion” and “culture” interchangeably. I also assume that a symbol may be tangible or intangible.

The structural characteristics of a religion are: 4William E. Paden, Religious Worlds: The Comparative Study of Religion. 2nd edition. Pp. 51 – 161. Beacon Press, 1994.

  1. A religion inhabits a unique world: Religions create, structure and propose a universe that is unique to adherents of that religion such that members of the community can explain, make sense of, and differentiate what is within their world from what is outside their world. This helps establish lines of commonality as well as lines of difference, and helps confront change and challenges.
  2. A religion is grounded on certain myths: Every religion possesses sacred myths that tell a story about something that happened during the genesis of the religion and that continues to have great influence on contemporary realities experienced by adherents of the religion. Myths:
    1. Help devotees of a religion make sense of the past, the present, and the future.
    2. Are a powerful means of engendering a certain mood and attitude within the devotees of a religion.
    3. Focus our attention on that which is sacred and important within a religion.
  3. A religion possesses rituals: Rituals help to focus the devotees of a religion on specific concepts or ideas at a specific point in time, also rituals enable the adherents of a religion to express their beliefs about the world in the form of a tangible display that appeals to the senses through action.
  4. A religion possesses gods: In the context of religious worlds, gods represent instances of language and behavior that is held up by the religious community as exemplary, worthy of emulation, and possessing interpretive power in terms of how that community understands the world.
  5. A religion possesses systems of purity: These systems of purity help to differentiate what is acceptable from what is unacceptable, right behavior from wrong behavior. This is a system that enables members of the community deal with negativity within the community.

What role do symbols play within a culture?

  1. Anat Rafaeli and Monica Worline: Symbols in Organizational Culture – A symbol is a visible and physical manifestation of an organization. It is an indication of organizational life that derives its meaning from the social and cultural conventions and interactions among the people who belong to the cultural organization. Symbols can be experienced through the senses. Symbols play the following functions:
    1. They reflect organizational culture: Symbols communicate information about what we think we know about an organization. They act as a bridge between our emotional and cognitive responses towards an organization.
    2. They trigger internalized values and norms: Symbols serve as a cue to trigger certain expected, desired, and acceptable behaviors once a person enters the physical environment of an organization or whenever the person is acting explicitly as a representative of the organization to the outside world.
    3. They frame conversations about experience: Symbols act as a frame of reference for guiding the communication that takes place between members of the same organization, or between members of a specific organization with people who do not belong to that organization.
    4. They integrate organizational systems of meaning: Symbols integrate the culture, norms and values, and shared experiences of members of an organization into a coherent whole within which members of the organization experience the world.
  2. Sherry Ortner: On Key Symbols – A key symbol is an element of a culture that is crucial and distinctly unique to the organization of that culture. They perform the function of carrying and conveying cultural meaning to people within the culture as well as to people outside the cultural community. Key symbols might be identified when:
    1. Members of the cultural group discuss the symbol’s cultural significance,
    2. Members of the cultural group are positively or negatively aroused by the symbol, and none are indifferent towards it,
    3. The symbol appears in many different settings and contexts,
    4. There is much elaboration around the symbol, and
    5. The group imposes numerous restrictions around the symbol. For example, misuse of the symbol can incur severe sanctions.

There are two distinct categories of key symbols. Summarizing symbols express meaning in an emotionally powerful way that is of uniform significance for all members of a given culture. They are generally accorded sacred status. Elaborating symbols make it possible for members of the religion or community to communicate ideas and feelings with one another, and to translate such feelings and ideas into tangible action. Elaborating symbols are generally analytic in nature and rarely attain sacred status.

What does this mean in the context of building an early-stage startup?

  1. Communicate a clear world view internally and externally. One question I ask myself when I meet with a founder is this; Why is this specific person uniquely suited to solve this problem in this market and why do I believe this team will succeed in its effort to accomplish this incredibly difficult task?
  2. Preserve and embellish important stories, particularly those that reflect qualities and themes that the founder wants to become aspects of the startup’s long-term culture and identity. I listen for founders who express enthusiasm for the work that the other people on the team are doing. Team cohesiveness matters.
  3. Create and maintain rituals:  For example, does every team member understand what would get existing customers/users to become more engaged with the product, and reduce churn? Does every team member know what needs to happen for the startup to increase its growth enough to get to the next funding milestone? Does the founder have a firm grasp on the startups key performance indicators? Has the team chosen the right indicators to focus on at this stage?
  4. Focus on finding product/market fit: A startup that fails to find product/market fit is doomed. Are the founders experimenting enough to find an ideal early market for the product, or are they stuck in a cycle of dogma regarding an initial point of market entry? What indications are there to help me ascertain the quality of their decision-making processes?
  5. Create systems of accountability: At the very early stage of a startup’s life the individuals on the team have an enormous impact on the organizational culture that eventually evolves. What steps are the founders taking to ensure that the early team has the right mix of people?
  6. Create a sales and marketing plan: What steps is the startup taking to create strong bonds with its earliest customers/users? Is anything being done to create a brand? Are the choices that have been made so far cost-effective and appropriate for the startup’s stage of maturity and its funding status?

Closing Thoughts The job of an early-stage technology startup founder is basically akin to that of a religious evangelist. The founder must recruit believers. Early team members join the cause because they believe in the founder and in the vision that the founder wishes to bring into reality. Early customers become believers because they have a problem they believe the startup’s envisioned product can solve. Early investors join the cause because they believe in the founder and believe that the startup can create the future reality that it describes during investment pitches. Basically, at the outset . . . Building a startup is exactly the same as creating a new religion.

 

References   [ + ]

1. ↩ J. Useem and R. Useem. (1963). Human Organizations, 22(3). Page 169. See: The Center for Advanced Research on Language Acquisition (CARLA) “What is Culture?” http://www.carla.umn.edu/culture/definitions.html. Accessed Aug 29, 2015.
2. ↩ Adapted from: Richard-Hooker.com; Clifford Geertz, Emphasizing Interpretation
3. ↩ Clifford Geertz, Religion As A Cultural System. In: The Interpretation of Cultures: Selected Essays. Pp. 87 – 125. Fontana Press, 1993.
4. ↩ William E. Paden, Religious Worlds: The Comparative Study of Religion. 2nd edition. Pp. 51 – 161. Beacon Press, 1994.

How Studying Bankruptcy And Working On Two Turnaround Assignments Prepared Me To Become An Early Stage Venture Capitalist

by

The Chinese Character for Crisis; Danger + Opportunity (From The Ten Strategies For Leading At The Edge)
The Chinese Character for Crisis; Danger + Opportunity (From The Ten Strategies For Leading At The Edge)

 

When I started business school at NYU Stern in the fall of 2005 my plan centered on taking every class in Bankruptcy & Reorganization, and Distressed Investing that I could. I took 3 elective classes in that area; Bankruptcy & Reorganization with Prof. Ed Altman, Case Studies in Bankruptcy & Reorganization with Prof. Max Holmes, and Investment Strategies: Distressed Investing with Prof. Allan Brown.

By my logic, if I learned how to assess and invest in dying companies, and then nurse them back to health, analysing, valuing and investing in healthy companies would seem easy by comparison. I was so sure of this that I also tried to turn my Equity Valuation elective into a pseudo Bankruptcy & Reorganization course too, by opting to value a bankrupt company for my final group-project. I do not recommend trying that.

I was still in business school when the economy began to falter. I moved from UBS to Lehman Brothers in late March 2007. A few days later New Century Financial Corp. filed for Bankruptcy. I was let go from Lehman Brothers a year later, on March 12, 2008. Bear Stearns collapsed and was acquired by JP Morgan Chase on March 16, 2008. I graduated from Stern in May, 2008. On September 7, 2008 Fannie Mae and Freddie Mac were taken over by the federal government. Lehman Brothers collapsed on September 15, 2008. On September 16, 2008 the Fed bailed out AIG.

The rest of 2008 was a bloodbath.

It was in that environment that I joined KEC Holdings, KEC Ventures parent company, in December 2008. I was employee #2. I had been hired into a new role that had not existed before at the company. My responsibilities encompassed any direct and indirect investments the company had made, or might make in the future.

Most notably, the company had already made 2 private equity investments; one in a private jet charter company and another in a fine-dining restaurant group – they were struggling to stay afloat given the economic environment. My first order of duty was to “make sure they don’t die” and “help them come out of this mess stronger than they were going into it.” There would be no financial engineering gimmickry. No tried and true business school textbook “indiscriminate” cost-cutting shortcuts. I had to roll up my sleeves and work with each company as intimately as necessary to achieve the objectives.

This post is about how we navigated that period. It is also about what that period between December 2008 and August 2013 has taught me about the challenges startups face, and my role as a venture capitalist.

Every day is a journey, and the journey itself is home. - Matsuo Basho
Every day is a journey, and the journey itself is home.
– Matsuo Basho

Further Background

Both companies were generating top-line revenues in the range of $20,000,000 – $30,000,000 per year. Both had fallen short of budgetary expectations in 2008, but the aviation company had a more prolonged string of losses than the fine-dining restaurant, partly because the restaurant was a more recent investment at that point. I functioned as an “external management consultant”; I was not a full-time employee of either company, but I worked with employees across the hierarchy of both companies. The restaurant company employed between 400 and 500 people while the aviation company had between 30 and 40 employees after several previous rounds of downsizing.

Both companies had watched as some of their competitors ran into strong headwinds, and subsequently shut down operations because the economic environment was so bleak.

Lesson #1: Understand The Business

Once a company is in financial distress investors have to decide if it is worth saving, and they also have to answer the accompanying question; can it be saved given current known constraints? The only way to do this is to develop a deep understanding of the business, and the context within which it is operating.

Between 2008 and 2012, confidence in the economy was very low. People simply were not splurging on expensive meals or luxury jets. An economist would say that private jet charter and fine-dining both have a high elasticity of demand.

I had no prior experience working at, let alone helping to run a restaurant or a private jet charter company. So I decided to spend the first six months in learning mode. I studied everything I could about both markets while I helped the executives and managers at both companies deal with day-to-day nuts-and-bolts issues.

This was important if I was going to build personal credibility, and if I wanted to win buy-in for my ideas from the executives and managers later on. I had to be able to influence them into doing things they probably did not believe in at the outset, and I had to do this with little real influence.

How this applies to early-stage startups: Today, I look for founders who embrace their expertise, and demonstrate a knowledge of their business that surpasses mine. However, the founder also has to demonstrate an ability to assist me learn enough about their industry to make a decision, and act as a useful sounding board for decisions that have to be made in the future.

Lesson #2: Understand The People

During those six months, I also tried to understand the protagonists in each situation. I relied on a technique I had learned in my Literature in English classes during secondary school in Ghana; character analyses.

A character analyses involves performing an in-depth study of the key characters in a drama, and trying to figure out each character’s story; What motivates that person? Why is that person who they are? What is the person afraid of? What drives that person? How does that person communicate? How does that person respond to pressure and stress. What does that person gain the most satisfaction from? What’s the state of that person’s family life? How does that person perceive me? How do I perceive that person? Does that person buy into the need for a turnaround? Is that person willing to commit to the turnaround? What biases does the person exhibit that I can identify? How does that affect things?

I had to be honest, and to contend with the pleasant and the unpleasant, especially around the perceptions other people had of me at the outset.

I took copious notes, and added to them until I felt I had a decent understanding of each of the people with decision-making authority that I would be dealing with most often; executives, managers, and front-line employees.

Perhaps an important, but often overlooked insight is that an investor should strive to understand the people within the context of the business. For example, is this person a leader or a manager? The distinction matters because it can spell the difference between beating about the bush with no results to show, or getting to the heart of the matter and fixing the problems that need to be solved at a tactical and granular level. Fred Wilson writes about this problem in: Leaders and Executives.

How this applies to early-stage startups: We make seed stage and series A investments. That early in a startup’s life, the people make all the difference. The market is important, so is the product. However, at this stage the future is still so nebulous and difficult to envision that the team that has decided to embark on that journey matters more than anything else. So, I have learned to focus on questions like; How did this team come together? Do the founders take responsibility for outcomes, or do they have a habit of passing blame? Do they have the intestinal fortitude to withstand the difficulties they are bound to face as individuals, and as a team on this difficult path they have chosen or will they wilt under pressure? What evidence do I have to support my answer to this question. What is their approach to learning, as individuals and as a team? Have they faced crises together? How did they fare when the going got tough? I will not ask most of these questions directly, but I will be processing every interaction, every bit of information I get, to determine answers to questions along this line of reasoning.

Lesson #3: Create A Sense of Urgency, But Provide Hope

Unlike a startup, a company in financial distress already has a product that it has sold successfully in the past, it also has a sense of who its customers are and where to find them. It is easy for the people within the company to succumb to status quo bias. This is identifiable by statements such as;

  1. “Everything will be fine, we just need to close this one sale.”
  2. “I feel confident it will happen, we have this sale in the bag.”
  3. “They are not our competitor, they do not do what we do!”

In the face of incontrovertible evidence that “they are up shit’s creek without a paddle” people will still choose to do what feels comfortable.

It was my responsibility to shake them out of that rut. As John P. Kotter says in Leading Change: Why Transformation Efforts Fail; 75% or more of a company’s management has to buy into the need for change, otherwise the chance that the change effort will fail is unacceptably high.

How did I do this? In both cases I did not shy away from asking questions that I expected to generate conflict. Indeed, on several occasions I had to have unpleasant and difficult conversations with the top managers and executives in both companies. I did this even if it appeared that I was “meddling” in areas where I had no business poking around. Of course, the idea that there was a part of either company’s operations that I “had no business” exploring was a fallacy only someone keen on maintaining the status quo would believe.

The message, delivered by the investors and the board, and reiterated by me during my frequent field trips, was simple; “The status quo is unacceptable, and failure for lack of effort is out of the question.” We had one chance to get it right, and we had to make the most of that chance even if it meant discomfort some of the time. We could get there with or without conflict. It was entirely up to us to make that choice.

How this applies to early-stage startups: The time for the whole team to start thinking about the Series A Round of Financing is the night before the Seed Round closes. Some one on the team should always be thinking about what it will take to raise the next round.

The time to start thinking about revenues is yesterday, even if you do not implement those plans immediately. Always have a plan. Always test your plan.

Lesson #4: Investors Have Ideas, But Management Runs The Business

Investors will always have ideas about how a business should be run. Sometimes investors know more about a certain topic than management. It is okay for investors to make suggestions, and to offer ideas to management. However, responsibility for choosing which ideas to accept and which to reject has to rest on the shoulders of management, and management has to accept accountability for the outcomes.

There are a number of ways this aspect of the relationship between investors and management might unfold;

  1. Investors can dictate to management what investors think management should do, or
  2. Investors can teach management how and why things should be done a certain way.

I chose the latter. That approach takes more time, but it is also more likely to lead to permanent change in behavior than the former. Also, once the lessons had taken root that approach allowed me to gradually pull back my involvement without jeopardizing the progress that management was making in improving results. It is an approach that builds self-sufficiency.

As part of the process, we cultivated the practice of communicating:

  1. Why a certain goal or strategic initiative was important for the company’s near term goals and long term vision.
  2. What had to get done in order for that goal or strategic initiative to be successfully executed.
  3. Who specifically was primarily responsible for seeing that it got done, and which executive they could go to as often as necessary in order to navigate what ever obstacles they might encounter.
  4. How it would get done, not in excruciating detail, but in broad terms. For example; Which teams needed to collaborate with one another in order to make it happen?
  5. When the team expected to be able to report back periodically on their progress, and importantly, when the project needed to be complete.

To do this successfully, I had to focus on asking questions and encouraging deeper levels of inquiry than was the custom beforehand. Asking probing questions helped us cut out the “bullshit” of conventional wisdom that is seductively easy to accept.

Each time I heard; “You do not understand, that is not how it is done in our industry.” I would ask; “Why?” That would lead to an examination of the assumptions behind the choices that had been made in the past. Often there was no good reason to refuse to try something different even if it seemed out of step with accepted industry convention.

How this applies to early-stage startups: I am looking for founders at the seed or series A stage whose judgement I can trust enough to feel they do not need me to opine on every decision they ever have to make. That does not mean I am passive. It means I need to trust their decision-making skill and maturity enough to feel confident they will consistently make the right choices for all the startup’s constituents without the need to run everything by investors.

From the investors’ perspective, a policy of “show, don’t tell” goes a long way. To paraphrase the oft quoted saying; “Give a founder a fish and . . . . ” If I feel there’s something a founder ought to learn, I’d rather provide a guide to enable that founder learn the applicable frameworks and how to apply them in day-to-day decision-making situations.

Lesson #5: Create Internal Value By Increasing Organizational Capacity

The way we defined it; Organizational capacity is the harnessing of a company’s human, physical and material, financial, informational, and intellectual property resources in order to enable the company to continually perform above expectations and strengthen its competitive position.

In difficult times especially, it is important that companies do not lose sight of the need to continue to find ways to increase organizational capacity.

One way we did this, in both cases, was to shift both companies off MS Exchange Server and onto Google Docs for Work. This was not easy because of cultural attachments to MS Exchange and fear of having to learn something new. Both companies made the shift, eventually. The immediate benefit they experienced was a dramatic reduction in the costs they incurred for IT assistance. A more important, though less tangible benefit was that both businesses could then afford to give every full-time employee a corporate email address and access to a corporate intranet portal. The benefits were enormous; easier collaboration, easier information transfer and sharing,  and increased security of corporate information and trade secrets. Quicker turnaround on tactical decisions because people could now communicate by chat.

Given the improvements in tools for collaboration, we encouraged the formation of cross-disciplinary teams to tackle some of the problems that each company was dealing with. This allowed people from one area of each business to interact more closely with their colleagues from another area of the business. They developed a better understanding of one another, and of the challenges and constraints that they each faced in trying to execute their day-to-day responsibilities. In turn this fostered a more collaborative relationship across the entire organization. It also enhanced the learning environment for all employees.

How this applies to early-stage startups: It does not take a lot by way of resources to create an environment that is rich in opportunities for cross-functional collaboration and learning. This comes in handy during due diligence because every member of the team will be able to speak knowledgeably about the startup’s immediate and long term plans.

Lesson #6: Direction Must Be Set From The Top, But Engagement Must Begin at The Bottom

We started working on trying to develop a strategic plan for both companies in summer 2009. Before this time, neither company had previously had a coherent strategy.

In consultation with the executives in each company, the board of directors set out the broad areas that the strategic plans ought to cover; Finance, Operations, People, Demand Creation, and Expansion.

Once those had been agreed on, it was my job to meet with front-line employees as well as managers in the field in order to obtain data and insight about how the strategic plan would have to be set up in order to function effectively for them given what each company was trying to accomplish.

That sounds easy. It is not. It took multiple meetings, of several hours each. The restaurant had multiple locations in NYC, one location in NJ and another in CT. I did not visit the location in Chicago, the CFO held discussions with them during his quarterly visits. I had to sift through everything I heard during those meetings, and I had to extract broad themes. Then I had to reconcile that with the strategic framework established by the board. Finally, I had to interpret that information from the perspective of the competitive landscape for each of the two companies. Finally, I had to synthesize it all into digestible chunks for the board, the executives, the managers and rank-and-file employees.

The goal of spending so much time on having these meetings with people across all ranks in each company was to ensure that once the strategy was developed and implemented, there would be complete alignment behind the vision embodied in the strategy, and just as important that every employee would be engaged in and committed to executing the tactical initiatives required to make the strategy succeed.

How this applies to early-stage startups: The founder creates the vision that investors and the startup’s team buys into. The team executes to turn that vision into a living, breathing, growing reality. Investors hopefully act as a positive catalyst to help the process unfold more quickly.

Lesson #7: Do Not Ignore The Soft Issues, Emphasize Both Hard and Soft Issues Simultaneously

My experience might as well be called The Tale of Two Turnarounds. In one company leadership admitted things were awful. They also admitted that they could use whatever help I could offer. They readily admitted their limitations as a team. We had many instances of conflict, but starting from a position of optimism and a willingness to try, the process moved along slowly, but steadily. We created a survey that we administered twice a year to get a sense of how employees were feeling, data that might not be captured in the key performance metrics we monitored weekly, monthly, quarterly, and annually.

We launched the strategic plan in January 2010 after 9 months of work specifically focused on that task. A year later the company made its first ever payments from a new profit-sharing plan that we had created as part of the new strategy. The payments were not huge, but they were evidence that the team’s hard work was paying off. It also created a feedback loop about how actions by employees affect the bottom-line performance of the company.

In the other company the founder, who was also the ceo, was grumpy and relatively uncooperative with investors. To cut a long story short, we launched the strategic plan in April 2010, after about 9 months of work specifically focused on that assignment. Within 6 months 75% of the managers with whom we had worked to develop and launch the strategic plan had left the company or had been fired. It was a classic case in which we would take two steps forward only to take four steps backward.

Morale dipped ever lower. The founders incessant talk about “a vision” and “a mission” became the butt of jokes among rank-and-file employees. It became clear that employees were becoming disillusioned with what the company stood for. While the company fared better than it would have if there had been no attempt at executing a turnaround and developing a strategy, it continued to perform well below its potential.

At a board meeting one day, the founder/ceo went into a vituperous rant about all the areas where the company was falling short. This was in early to mid 2012. I had to burst out in laughter. He might as well have been reciting problems whose solution formed the core of the strategic plan we created in 2010. Implementing that plan would have started the process of solving those problems he was so exercised about that day. We had lost two years for no good reason.

No amount of emphasis on key performance metrics made a difference. Without the founder’s full embrace of the strategic plan, nothing else mattered. I should point out that he had been intimately involved in crafting the strategic plan. This was not a plan that was forced down on him “from on high.” It became clear how badly things had deteriorated when a long time employee quit, this individual was the only employee at the company who had been there as long as the founder.

How this applies to early-stage startups: I am of a firm belief that the team is really important at the seed and series A stage, or at least until uncertainty around product market fit has been largely eliminated. So, I need to develop a sense that a founder is someone I can work with over the long haul . . . Actually, the kind of founder I am happy backing has to be someone I could envision myself working for if circumstances were different. Age, race, gender, religion . . . That is all irrelevant. Early in my process for assessing a startup I focus almost entirely on soft issues.

In one example, I sensed something amiss about the body language between 2 Spanish co-founders pitching a startup to my partner and I in 2013. I decided to tune out what they were saying in order to better observe their body language. There was something about their body language towards one another that did not align with what they wanted us to believe, in my opinion. We passed on their seed round, and decided to watch them till we could get more data about the relationship between the co-founders. That was nearly 3 years ago. I have heard no reports to suggest we made an error in that case.

Let chaos reign, then reign in chaos.

– Andy Grove, Only The Paranoid Survive

Lesson #8: Be Prepared For Chaos; Harness, Focus And Direct It, Empower People

Once employees understood the strategic plan as well as the tactical initiatives that accompanied it, they began developing ideas related to the various functional areas in each company and making suggestions to managers and excutives.

At first this was overwhelming . . . Managers had to do their own work, manage the work of the groups of people that they managed, and now . . . . They also had all these ideas being thrown at them from “left, right, and center.” The initial knee-jerk reaction was to try to “make it stop.”

That would have been a mistake. Among the deluge of ideas were some real gems.

For example, a maintenance department team member at the aviation company noticed that the company could cut down on its electricity usage by changing all the bulbs in its main hangar . . . No one had thought about that over the years, but our discussion about the strategic initiative around improving the product while reducing costs prompted him to take another look at the company’s hangars in search of opportunities to reduce operating costs. Thanks to improvements in technology over the years this was now a measure that could be implemented relatively easily.

In another instance, the team at our restaurant in CT had observed that on certain days of the week large groups of Chinese tourists visited the casino resort in which they are located. They had been thinking of a way to capture some of that business, but had assumed the corporate office would object to the menu changes they thought they had to make in order to execute that plan. As part of our implementation of the strategic initiative around increasing revenues, I suggested they conduct an experiment, analyze the outcome, and then seek assistance from the corporate office if the results looked promising. They did that, and saw a jump in revenues on two days of the week when business would otherwise have been slow. The corporate office gave its blessing, and assisted in making that practice more entrenched by using corporate resources to give it the polish required for company-supported initiatives.

How this applies to early-stage startups: A startup stops being a startup once its search for a repeatable, scalable, and profitable business model is complete. While that search is in process it is important that every member of the team feels empowered to contribute to the discovery of that business model. It can’t be the job of only some members of the team, it has to be part of everyone’s job. The faster a startup gets through the discovery process the better.

Lesson #9: The Turnaround Should Be Its Own Reward; Incentives Should Reinforce Change Not Drive It

It was nice to be able to make payments from the profit-sharing plan that we instituted. The payments were relatively small, yet they were tangible evidence to the employees, managers, and executives that they were collectively well equipped to make it through the ongoing turbulence and correct the mistakes of the past.

The sense of accomplishment employees felt translated into a number of things, among them;

  1. Newfound and increasing pride in being associated with a company that was succeeding where many of its rivals had failed.
  2. High levels of morale and optimism about the future of the company, and their place at the company. Less stress about employment security.
  3. A greater willingness to take the initiative in situations where the possibility of generating business for the company exists.

Basically, every employee was empowered to function as a salesperson on the company’s behalf. We arranged training sessions to equip every employee with the vocabulary they needed to understand in order to do that effectively. We also developed simple tools that they could use. They did not replace the company’s professional salespeople . . . They became an auxiliary sales force.

How this applies to early-stage startups: As startups grow, founders and early team members need to get better at the art and science of “managerial leverage” . . . What is managerial leverage? It is the process by which a manager creates output that far supersedes that manager’s input by using all the resources at the manager’s disposal to influence the work that is done by the group of people whose on-the-job effectiveness and work-output is affected by interactions with the manager.

What is a manager’s output? According to Andy Grove, co-founder and former CEO of Intel “The output of a manager is a result achieved by a group either under his supervision or under his influence.” Great managers create positive output that far exceeds expectations. Below average managers create output that fails to meet expectations given superior resources. Average managers? The team’s output would not be any different if the manager were absent.

The art of managerial leverage is in determining; how to apportion time, where to pay more attention, where to pay less attention, who to pay more attention to, who to pay less attention . . . . etc etc. The science of managerial leverage is in determining; what to measure, when to measure it, how often to monitor what is being measured, where bottlenecks are most likely to occur and why, and how to eliminate them . . . . etc etc.

Managerial leverage drives output. Output drives results. Results are measured and reflected in the KPI’s that founders and investors measure. Getting that order right is critical to a startup’s success.

Lesson #10: Learn To Listen, And Communicate Effectively

It is amazing how many problems can be solved relatively quickly if people would communicate more effectively internally and externally. Communication involves two actions; first listening actively in order to understand what is driving the actions of other people. Second, responding to what other people have said in a way that gets to the root cause of the problem being discussed.

During one of my field visits, I spent 8 hours on my first day listening to the executives talk about all the problems they each perceived, and how they felt the issues ought to be tackled. I spent that day with the CEO/President, the CFO, the Head of HR, and the Head of Sales. I encouraged open disagreement and debate.

On my second day I spent about the same amount of time speaking with the middle managers; again we discussed the problems they each perceived, and how they each felt the issues ought to be tackled.

On the third day I brought both groups together, and moderated an all day discussion about the problems the company was facing. Once again, I encouraged open disagreement and debate. Also, I put the inter-personal issues and conflicts that I had uncovered on the table. Things often got heated. It was my job to function as a pressure-release valve during those episodes. It was not pretty.

For example, I explained to the entire group how the CFO who was disliked by a large number of people within the company had made payroll on too many occasions by dipping into his personal 401(K) savings for example. The irony, the folks who disliked him routinely failed to provide the finance team with the data they needed in order to collect on accounts receivable from the company’s customers.

The outcome of this exercise was that;

  1. Everyone felt they had been given a chance to speak and be heard by the rest of the leadership team, and
  2. We discussed expectations in a fair amount of detail, enough so that more work could be done laying them out in adequate specificity rather than vaguely wondering what people could expect from one another, and finally
  3. Created an environment in which each member of the leadership team contributed in creating a communication framework against which they agreed to be held accountable

Our goals for the communication framework were that;

  1. Every employee should know what is expected of them, as individual team members,
  2. Every employee should know what to expect from every other member of the team,
  3. Employees should know what to expect from executives and managers, and lastly
  4. Accountability should be about improving team and company performance, not punishing individuals.

As Rosabeth Moss Kanter says in Four Tips for Building Accountability; “The tools of accountability — data, details, metrics, measurement, analyses, charts, tests, assessments, performance evaluations — are neutral. What matters is their interpretation, the manner of their use, and the culture that surrounds them. In declining organizations, use of these tools signals that people are watched too closely, not trusted, about to be punished. In successful organizations, they are vital tools that high achievers use to understand and improve performance regularly and rapidly.”

How this applies to early-stage startups: Startups typically have to move quickly, especially if they have taken in capital from institutional venture capitalists. A culture of blame, lack of cohesive teamwork, and a lack of organization-wide accountability is an insidious tumor that will eventually lead to failure. The founders who are most successful in the long run are those who do not shift responsibility when things are difficult, but instead serve as a model that other team members can emulate.

Closing Thoughts

Executing a turnaround and getting a startup through the phase of discovering a business model are really just two sides of the same coin. That experience has led me to the belief that it is when things seem bleak that great early stage investors prove their worth.

Further Reading

Blog Posts, Articles, & White Papers

  1. The Psychology of Change Management
  2. Motivating People: Getting Beyond Money
  3. The Irrational Side of Change Management
  4. The CEO’s Role in Leading Transformation
  5. The Role of Networks in Organizational Change
  6. All I Ever Needed To Know About Change Management I Learned at Engineering School
  7. Changing an Organization’s Culture, Without Resistance or Blame

Books

  1. High Output Management
  2. Only The Paranoid Survive
  3. How Did That Happen?
  4. HBR’s 10 Must Reads on Change Management
  5. HBR on Turnarounds

Industry Study: Nanotechnology

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SUNY College of Nanoscale Science and Engineering's Michael Liehr, left, and IBM's Bala Haranand look at wafer comprised of 7nm chips on Thursday, July 2, 2015, in a NFX clean room Albany. Several 7nm chips at SUNY Poly CNSE on Thursday in Albany. (Darryl Bautista/Feature Photo Service for IBM)
SUNY College of Nanoscale Science and Engineering’s Michael Liehr, left, and IBM’s Bala Haranand look at wafer comprised of 7nm chips on Thursday, July 2, 2015, in a NFX clean room Albany. Several 7nm chips at SUNY Poly CNSE on Thursday in Albany. (Darryl Bautista/Feature Photo Service for IBM)

Note 1: This is an update of an article that I wrote on a whim in December 2006, while I was on a break from business school at NYU Stern. It was published without update at Tekedia in July, 2011. The announcement by IBM about its new 7nm chip prompted me to dig it up from my archives and update it to reflect more recent developments.

Note 2: KEC Ventures does not specifically invest in nanotech startups, although in the past we have examined startups developing quantum crystals and other nanomaterials.

Introduction

I became exposed to nanotechnology during my days as an undergraduate student at Connecticut College, in New London, Connecticut. I pursued a double major in Physics and Mathematics, and had the good fortune of working as a research laboratory assistant in the Tunable Semiconductor Diode-Laser Spectroscopy lab, which was run by Professor Arlan W. Mantz, Oakes Ames Professor of Physics, and erstwhile chair of the Physics Department. My involvement with the lab spanned three years, and that experience played a critical role in my education. 1Let me know if you feel I have failed to attribute something appropriately. Tell me how to fix the error, and I will do so. I regret any mistakes in quoting from my sources.

What Is It?

The term nanotechnology refers to a group of scientific processes that enable products to be manufactured by the manipulation of matter at the molecular level – at the nanoscale. One nanometer represents a length of 10-9 meters – one billionth of a meter. 2For perspective, 100nm represents about 1000-1 of the width of a human hair. Nanotechnology enables the manipulation of matter at or below dimensions of 100 nanometers. Nanotechnology draws from a multitude of scientific disciplines – physics, chemistry, materials science, computer science, biology, electrical engineering, environmental science, radiology and other areas of applied science and technology.

There are two major approaches to manufacturing at the nanoscale;

  • In the “bottom-up” approach, nanoscale materials and devices assemble themselves from molecular components through molecular recognition – small devices are assembled from small components.
  • In the “top-down” approach materials and devices are developed without the manipulation of individual molecules – small devices are assembled from larger components.

Where is Activity Concentrated?

Research into nanotechnology and its applications is growing rapidly around the world, and many emerging market economies are sparing no effort in developing their own research capacity in nanotechnology.

  • Naturally, the U.S., Japan, Western Europe, Australia and Canada hold an advantage, in the short term.
  • China and India have made significant progress in establishing a foundation on which to build further capability in nanotechnology – A 2004 listing puts them among the top 10 nations worldwide for peer-reviewed articles in nanotechnology. 3Hassan, Mohamed H. A., Small Things and Big Changes in The Developing World. Science,Vol. 309 no. 5751, Jul 1 2005, accessed on Dec 19, 2006 at http://www.sciencemag.org/cgi/content/full/309/5731/65
  • South Africa, Chile, Mexico, Argentina, The Philippines, Thailand, Taiwan, The Czech Republic, Costa Rica, Romania, Russia and Saudi Arabia have each committed relatively significant resources to developing self-sufficient local nanotechnology industries.

Why Should Investors Care?

Fundamentally, investors should pay attention to nanotechnology because of its high potential to spawn numerous “disruptive technologies.” Nanoscale materials and devices promise to be;

  • Cheaper to produce,
  • Higher performing,
  • Longer lasting, and
  • More convenient to use in a broad array of applications.

This means that processes that fail to provide results comparable to those available through nanotechnology will become obsolete rather quickly, once an alternative nanoscale process has been perfected. In addition, companies that fail to embrace and apply nanotechnology could face rapid decline if their competitors adopt the technology successfully.

The United States Government has maintained its commitment to fostering U.S. leadership and dominance in the emerging fields of nanoscale science. In its 2006 budget, the National Nanotechnology Initiative, a multi-agency U.S. Government program, requested $1.05 Billion for nanotechnology R&D across the Federal Government. 4The National Nanotechnology Initiative, Research and Development Leading To A Revolution in Technology and Industry, Supplement to The Presidents FY 2006 Budget That amount reflects an increase from the $464 Million spent on nanotechnology by the Federal Government in 2001.

Applications of Nanotechnology

Nanotechnology’s promise to revolutionize the world we live in spans almost every aspect of human endeavor. Today, nanotechnology is applied in as many as 800 commercial products. 5National Nanotechnology Initiative, accessed online on Jul 12, 2015.

  • IBM’s new chip “could result in the ability to place more than 20 billion tiny switches – transistors – on the fingernail-sized chips that power everything from smartphones to spacecraft. To achieve the higher performance, lower power and scaling benefits promised by 7nm technology, researchers had to bypass conventional semiconductor manufacturing approaches. Among the novel processes and techniques pioneered by the IBM Research alliance were a number of industry-first innovations, most notably Silicon Germanium (SiGe) channel transistors and Extreme Ultraviolet (EUV) lithography integration at multiple levels.” 6See the announcement from IBM. Accessed online on Jul 12, 2015.
  • Carbon nanotubes and other nanomaterial additives can be used to fabricate stronger, lighter materials for use in automobile bodies, helmets, sports equipment and other products in which stiffness and durability are important features.
  • Researchers at Stanford University have killed cancer cells using heated nanotubes, while EndoBionics, a US firm, developed the MicroSyringe for injecting drugs into the heart. MagForce Technologies, a Berlin based company developed iron-oxide particles that it coats with a compound that is a nutrient for tumor cells. Once the tumor cells ingest these particles, an external magnetic field causes the iron-oxide particles to vibrate rapidly. The vibrations kill the tumor cells, which the body then eliminates naturally. Other applications in medicine and biotechnology exist.
  • Cosmetics companies are actively engaged in the exploration of nanotechnology as a source of enhanced products. For example, to produce cosmetics that can be absorbed more easily through human skin and that exhibit longer lasting properties.
  • Thebreakthrough by IBM will only acceleratethe development ofnanoscale technologies for computing platforms. According to the National Nanotechnology Initiative:”Nanotechnology is already in use in many computing, communications, and other electronics applications toprovide faster, smaller, and more portable systems that can manage and store larger and larger amounts of information. These continuously evolving applications include:
    • Nanoscale transistors that are faster, more powerful, and increasingly energy-efficient; soon your computer’s entire memory may be stored on a single tiny chip.
    • Magnetic random access memory (MRAM) enabled by nanometer‐scale magnetic tunnel junctions that can quickly and effectively save even encrypted data during a system shutdown or crash, enable resume‐play features, and gather vehicle accident data.
    • Displays for many new TVs, laptop computers, cell phones, digital cameras, and other devices incorporate nanostructured polymer films known as organic light-emitting diodes, or OLEDs. OLED screens offer brighter images in a flat format, as well as wider viewing angles, lighter weight, better picture density, lower power consumption, and longer lifetimes.
    • Other computing and electronic products include Flash memory chips for iPod nanos; ultraresponsive hearing aids; antimicrobial/antibacterial coatings on mouse/keyboard/cell phone casings; conductive inks for printed electronics for RFID/smart cards/smart packaging; more life-like video games; and flexible displays for e-book readers.”
  • Nanotechnology is applied in the garment industry to produce stain resistant fabrics, for example.
  • Nanotechnology companies in the developing world are pursuing solutions to problems peculiar to the developing world – for example, an Indian company is working on a prototype kit for diagnosing tuberculosis. There is great potential for the application of nanotechnology to agriculture.

A more complete listing of the benefits and applications of nanotechnology is available here: US National Nanotechnology Initiative

Threats

In spite of its promise, nanotechnology faces threats that could investors ought to be aware of. Among these;

  • It is not yet clear how nanotechnology will affect the health of workers in industries in which it is applied. For example, how should we assess exposure to nanomaterials? How should we measure the toxicity of nanomaterials?
  • Public agencies and private organizations do not have a clear sense of how further progress in nanotechnology will affect the environment, or of the public safety issues that will accompany an expanded use of nanotechnology in industrial, medical and consumer applications. For example, what factors should risk-focused research be based on, and how should we go about creating prediction models to gauge the potential impact of nanomaterials?
  • The complexity of the science that is integral to nanotechnology makes it a very difficult area to regulate. It is likely that firms involved in the pursuit of nanoscale applications in medicine and pharmaceutics will face long delays in obtaining regulatory approval for the wide scale use of their products.
  • The complexity of nanotech-related patents could lead to delays in obtaining intellectual property protection for nanotech-enabled products.
  • It is not yet clear how society can protect itself from the abuse of nanotechnology. The public sector needs to collaborate with the private sector in developing protective mechanisms to guard against “accidents and abuses” of the capabilities of nanoscale processes and materials.

A Note To Would-Be Investors

The average investor must remain keenly aware that firms involved in nanotechnology will have to assign significant resources to research and development. There is no reliable means of predicting the ultimate outcome of such activities, and the probability that any firm can maintain an enduring edge over its competitors is small. Investors should expect the mantle of leadership in innovation to change with a relatively high frequency. As such, pure-play nanotechnology firms will need to pay critical attention to means of sustaining market dominance that go beyond core competence in the science of nanotechnology.

Lux Research estimates that revenues from products using nanotechnology will increase from $13 Billion in 2004 to $2.6 Trillion in 2014. The 2014 estimate represents approximately 15% of global manufacturing output. 7Gosh, Palash R, How To Invest In Nanotech, www.businessweek.com, Apr 17, 2006. Accessed on Dec 22, 2006.

In 2005, Lux Research and PowerShares Capital Management launched a nanotech ETF – The PowerShares Lux Nanotech Portfolio (PXN). In addition, Lux Research measures the performance of publicly traded companies in the area of nanotechnology through the Lux Nanotech IndexTM, a modified equal dollar weighted index of 26 companies. The companies in this index earn profits by utilizing nanotechnology at various stages of a nanotechnology value chain; 8Adapted from www.luxresearchinc.com

  • Nanotools – Hardware and Software used to manipulate matter at the nanoscale.
  • Nanomaterials – Nanoscale structures in an unprocessed state.
  • Nanointermediates – Intermediate products that exhibit the features of matter at the nanoscale.
  • Nano-enabled Products – Finished goods that incorporate nanotechnology.

Companies in the index are further classified as

  • Nanotech Specialists, or
  • End-Use Incumbents.

Investors must note that the investment characteristics of Nanotech Specialists are likely to differ markedly from those of End-Use Incumbents. The end-use incumbents that are part of this index include 3M, GE, Toyota, IBM, Intel Hewlett-Packard, BASF, Du Pont, and Air Products & Chemicals. Because these companies have large, well-established and significant operations in arenas that do not rely heavily on nanotechnology, investors can expect them to achieve financial results that are only moderately volatile. In contrast the financial performance of nanotech specialists will exhibit highly volatile swings, because;

  • With the exception of companies in the “picks and shovels” segment of nanotechnology, much of the work that many nanotech specialists engage in is still in the “trial and error” phase, and
  • There is no reliable means of predicting the results that heavy investment in R&D will yield.

Finally, it is likely that financial valuations of nanotech firms will fail to capture the true value of the intangible assets that provide the bedrock of each company’s ability to sustain innovation, create economic value, and protect its competitive advantage. If nanotechnology is truly the way of the future, then investors must embrace that future with enthusiasm that is layered with caution by;

  • Performing an extra amount of due diligence before committing significant funds to investments in individual nanotechnology companies,
  • Limiting such investments to companies in the U.S., Japan, Canada, Western Europe, and Australia, in the near term, and
  • Following developments in the nanotechnology initiatives of the BRIC block of emerging market economies without committing any funds until a clear assessment of the future prospects of individual investment opportunities becomes possible.

Individual investors must exercise an extra amount of caution in pursuing nanotech investments, and should not commit more than they can afford to lose. Most individual investors with a desire to invest in nanotechnology should do so through PXN and similar instruments. Institutional investors must bring all their resources to bear in assessing the viability of a nanotech investment strategy prior to committing funds to this nascent area. For added security, individual investors that seek to invest in publicly traded nanotech companies should seek firms with the following characteristics;

  • No debt, and positive cash flows, and evidence of an ability to sustain profits.
  • Companies that supply corporate customers must not be too reliant on one customer.

Founders and insiders should have a significant and increasing portion of their net worth at stake in the company, and a track record in multi-disciplinary research.

In a Feb 2014 State of The Market Report update, Lux Research says “Our expanded forecast for nano-enabled products reveals the global value of nano-enabled products, nano-intermediates, and nanomaterials reaching $4.4 trillion by 2018.”

Closing Thoughts

Many risks accompany investments in nanotechnology. However, if nanotech is to be believed, it may yield significant long-term returns to those investors that learn to harness its power while keeping the following caveats in mind;

  • Many nanotech companies face an up-hill task in converting promising research into products that can sustain a steady revenue stream.
  • A considerable number of nanotech companies may be surrounded by “more hype than substance”.
  • There is no guarantee that the price investors pay for an investment in nanotech will be adequate, once all associated risks are taken into account.

 

References   [ + ]

1. ↩ Let me know if you feel I have failed to attribute something appropriately. Tell me how to fix the error, and I will do so. I regret any mistakes in quoting from my sources.
2. ↩ For perspective, 100nm represents about 1000-1 of the width of a human hair.
3. ↩ Hassan, Mohamed H. A., Small Things and Big Changes in The Developing World. Science,Vol. 309 no. 5751, Jul 1 2005, accessed on Dec 19, 2006 at http://www.sciencemag.org/cgi/content/full/309/5731/65
4. ↩ The National Nanotechnology Initiative, Research and Development Leading To A Revolution in Technology and Industry, Supplement to The Presidents FY 2006 Budget
5. ↩ National Nanotechnology Initiative, accessed online on Jul 12, 2015.
6. ↩ See the announcement from IBM. Accessed online on Jul 12, 2015.
7. ↩ Gosh, Palash R, How To Invest In Nanotech, www.businessweek.com, Apr 17, 2006. Accessed on Dec 22, 2006.
8. ↩ Adapted from www.luxresearchinc.com

A Story About Startup Cofounder Teamwork: Climbing To The Summit of Denali

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Denali Image Credit: NPS Photo/Tim Rains
Denali
Image Credit: NPS Photo/Tim Rains

On June 30th, 2015, Naira Musallam and her climbing partner, Tim Lawton successfully summited Denali (Mount McKinley). They made history as The First Arab-American Team to ever do so. Naira also became the first Arab woman to stand on the summit of Denali.

Standing at 20,320 feet, Denali is one of the “Seven Summits” because it is the highest point on the continent of North America. From that point Naira and Tim raised a flag with the message “Peace and Security for All” written in Arabic, Hebrew, and English.

I checked my email around 8:00 AM EST in NYC after arriving at work on Tuesday, July 7th 2015, and found a note from Naira telling me the good news. She had sent it at 6:51 AM. I wrote back to congratulate her, and asked if I could write about their story. She and Tim graciously said yes.

This is their story. It highlights everything I discussed in Innovation Footprints: 6 Things I Have Learned About Building High-Performing Teams.

Naira Musallam and Tim Lawton at the summit of Denali on June 30th, 2015. (Image Credit: Naira and Tim)
Naira Musallam and Tim Lawton at the summit of Denali on June 30th, 2015. (Image Credit: Naira and Tim)

I met Naira on Thursday, October 9th 2014 when I was at NYU’s Leslie eLab to lead a lunch and learn. I had arrived early, to give myself some time to work through my nerves – I get super nervous about speaking in front of groups of people.

Naira was the first person to arrive. She came, said hello, and introduced herself. I introduced myself, and asked if she was an undergraduate student, what year she was in, what major she was studying . . . She smiled at me and explained she’s a professor at NYU, and she teaches statistics. Oh, lest I forget. She also mentioned that she “climbs mountains as a hobby” and “runs long distance, as a hobby.”

I thought to myself; “Great! It really would have been helpful if someone had warned me that I’d have professors in the audience! Never mind mathematicians who climb mountains and run long distance races . . . as a hobby.”

So much for calming my nerves. It seemed to me that her arrival was timed to optimize the intimidation factor. Any way, the talk went well – or, so she says. To my great “horror” there are excerpts on video which you can check out here, here, here and here. After the event, I chatted briefly with Naira again and we agreed to meet for coffee. She wanted to pick my brains about something she was working on. Since I have never met a mathematician or physicist I do not like, I said yes. What could be better than chatting with a mathematician?

We met again on November 26th, 2014 at Cafe Reggio near NYU. After spending some time getting to know one another from a biographical standpoint, we spent most of the time discussing many of the types of questions I have come to expect from the first-time founders I meet; What does a VC want to see in order to decide to make an investment? How does the decision-making process typically work? How about fund-raising, how does that work, in general? How does one get a meeting with a VC to whom one does not have a direct or indirect connection? Does sending a cold-email work? And many more.

During subsequent meetings over coffee, and sometimes lunch . . . I learned about a startup she and Tim have been building, Frontier7 is an online data analytics platform. I also learned a lot about Tim, whom I had not yet met.

Eventually, I met Tim . . . I pointed out to Tim that Naira intimidated me when I first met her, and now she’d brought him along to escalate that intimidation factor even more. I remember we were all laughing so hard, the other folks in the bar must have thought we’d been drinking too much.

Naira Musallam and Tim Lawton: Starting The Climb on Denali (Image Credit: Naira and Tim)
Naira Musallam and Tim Lawton: Starting The Climb on Denali (Image Credit: Naira and Tim)

About Naira Musallam

Naira is currently a full-time professor at New York University, where she teaches Applied Statistics, Analytical Skills, and National Security and Middle East Affairs at the Center for Global Affairs. She also serves as an Adjunct Professor at Columbia University and in its collaborative program at the United States Military Academy at West Point where she teaches graduate level research courses. Naira received her doctorate from Columbia University.

She has over thirteen years of applied research experience consulting with multiple industries in the private sector, ranging from financial services, to pharmaceuticals, retail, oil and gas, and the fashion industry, helping them solve business problems through data driven processes. She used applied statistics to develop insights on business issues such as M&A deals, C-Suite executive assessments, employee retention, and sales strategies. She also consulted to governmental agencies and non-profit organizations on projects related to project assessment, and monitoring and evaluation. Naira is the recipient of multiple research awards from the Earth Institute, Columbia University, and the U.S. Department of State.

Naira grew up in a small Palestinian town in Galilee, and has been climbing for the last seven years. When not working in New York City on statistical issues, she enjoys high altitude mountain climbing, scuba diving, and cultural exploration and adventures around the world.

About Tim Lawton

Tim is a graduate of the United States Military Academy at West Point and served 5 1/2 years as an officer in various infantry and special operations units. During his time in the Army he was deployed to both Iraq and Afghanistan for a total of four combat tours. After leaving the military he attended MIT Sloan School of Management where he received an MBA with a concentration in corporate finance. He spent the next 5 years in investment banking with experience in debt restructuring, equity financing, and mergers & acquisitions in one role and helped to lead a sales effort in another.

As an active member of the veteran community in NYC, Tim is involved with various veteran non-profit organizations and is working to further veteran’s business initiatives in the city. He is originally from the Boston area. His hobbies include mountain climbing, travel, sky diving, scuba diving, and working out.

How They Met

“We first met at a 5k road race that was to support a veteran’s organization that we were both connected to. We had struck up a conversation because we were both wearing the same brand of sunglasses, which are unique mainly to mountain climbers. From then on we continued our friendship and over time began to discuss not only future mountain climbing endeavors, but also a potential business idea that leveraged both of our experiences from the corporate world.”

Naira Musallam and Tim Lawton: Camp on Denali (Image Credit: Naira and Tim)
Naira Musallam and Tim Lawton: Camp on Denali (Image Credit: Naira and Tim)

Why They Thought They’d Make A Good Team

We both suck at different things.

“In all seriousness, since we initially began our friendship due to mountain climbing and had subsequently climbed together in Ecuador before starting in business together we both had to learn how to trust each other on a different level than is typically required in business and cursory friendships. On that trip we realized that we could trust and rely on each other when things don’t go smoothly.

In one particular recent event while we were climbing together in Alaska, Tim was leading up a steep slope when the ice gave out and he began to tumble down the mountain. As they were connected via a climbing rope, Naira quickly reacted and began to self-arrest. By the time Tim had also recovered enough to self-arrest and stop his fall they had both fallen about 100 feet and 80 feet respectively.  It is this type of event that engrains a level of trust in another’s competence that can be carried over to any other type of situation.

On the actual business front, we both realized that we possessed very different, yet complementary skill sets. Once we began to develop the business plan and put together a strategy, coupled with the trust we had gained with each other from the mountains, we knew we could both move ahead with different responsibilities, yet towards achieving the very same goal.”

Three Things That Have Been Important To Their Success as a Team

  1. Trust,
  2. Complementary skill sets, and
  3. Sharing and believing in the same vision

What successfully Summiting Denali Means for Each One of Them

Tim: “For me it was the culmination of an idea and vision that began years before. In the mountains, it should be about the journey, but getting to the summit is always a sweet addition. This particular mountain and successful summit was by far the most complex and difficult in all aspects as it required more planning and preparation than other mountains I had climbed. Plus, we had spent so long this year attempting to get there. It took two trips, two cross-continental round trip flights, sleeping in airports, hotels, and tents, but we did it. We spent 35 days on the mountain during those two trips. So to have been denied the summit once before, but continuing to try and having the mindset of not quitting until we succeed, and then to succeed, is a great feeling. To have achieved that with Naira, with a mindset that we also share in business makes it satisfying as we look to apply the same tenacity to our new business venture.”

Naira: “While being able to say that I became the First Arab woman to climb Denali has its significance in the mountaineering world, the climbing of Denali with Tim took much deeper meaning for several reasons: Tim and I were the first American- Arab team to step on the highest point in North America. The ability to share a message of hope from there together, especially in today’s turbulent world was extremely unique. In addition, it was elating to reach the top with Tim because we have failed in the past to reach the top. Success becomes way more enjoyable when you achieve it with the same person you failed with before. Finally, reaching the top and being able to make history would absolutely not have been possible without Tim’s partnership and competence on the mountain. In that regards, I feel truly blessed to have Tim as partner.”

Naira Musallam and Tim Lawton: View From The Top of Denali (Image Credit: Naira and Tim)
Naira Musallam and Tim Lawton: View From The Top of Denali (Image Credit: Naira and Tim)

Their Shared-Vision for Frontier7, The Significance of The Name

“The name Frontier7, which certainly didn’t come to us quickly, has a number of meanings for us. First of all, we are both in love with the outdoors and adventure, so ‘frontier’ in the sense of the furthest known boundary, the last frontier, the beginning of the unexplored, etc. appealed to us. In business we wanted to create an analytics platform that helped push our clients to the frontier of their industries. The “7” has many meanings that we both value: in most cultures 7 is a lucky number, 7 wonders of the world, 7 summits, 7 colors in the rainbow, in Eastern thought the 7th Chakra is the center for trust, devotion, inspiration, happiness, and positivity. (There are also 7 dwarfs in Snow White and who doesn’t love Snow White?)”

Our vision for Frontier7 is to be the go-to online platform for seamless analytics. We want to enable companies to be able to unlock all of the value of the data they gather in order to maximize their own business performance.

The Announcement They Sent To Their Friends, and Other Associates

On June 30th, 2015, Naira Musallam and Tim Lawton made history together on the highest point of North America, Denali (also known as Mount McKinley) by summiting as the First Arab-American Team to ever do so, and with Naira becoming the first Arab woman to ever stand on the summit. Denali is one of the “Seven Summits” or highest point on the continent of North America, standing at 20,320 feet. From the highest point in North America they raised a flag with the message “Peace and Security for All” written in Arabic, Hebrew, and English.

Their goal to summit Denali began on May 4th, 2015 when they attempted to climb the mountain with a guided group but were unable to due to severe weather conditions, spending a total of 18 days on the mountain. While it would be normal for them to come back another season to attempt the mountain again, they decided to return only a few weeks later in June. The second and successful attempt was a self-guided climb with just the team of the two of them. They raised their flag on the summit after 13 days and took a full 17 days on the mountain. The two months, two cross-continental round trips, red eye flights, sleeping in airports, tents, and hotels, and 35 total days on the mountain was well worth the effort on the evening of June 30th, 2015.

What makes their story even more unique is that they come from significantly different backgrounds. Naira grew up as a Palestinian in Israel where she spent a significant amount of time working in the conflict field, while Tim grew up in Massachusetts, served in the United States Army and served numerous combat tours overseas. They connected because of their love for mountaineering, and drive to send a message about hope, interdependence, and common human values.

Furthermore, today they are also co-founders of a data analytics company, Frontier7 (www.frontier7.com), and are also in the process of starting a non-profit in the form of a social platform that engineers chance for people by connecting those from varied backgrounds and shared passions (like themselves) and aligning people, ideas, and resources for them to address social issues that they care about. They believe that in today’s reality, this message becomes more important than ever.

My Closing  Thoughts

We’ve had numerous discussions about Frontier7, but I have not yet seen a demo. They assure me that day is coming soon. Either way, I am eager to watch their journey, as co-founders and as people who have a vision that they wish to turn into a reality. They each embody the intangible characteristics I look for in founders; courage, grit, vision, determination, resilience, creativity, resourcefulness, conflict management and resolution, discipline, a willingness to assume responsibility, and the ability to learn from others. I could not feel more proud of their accomplishment.

Naira Musallam and Tim Lawton: At The Top of Denali (Image Credit: Naira and Tim)
Naira Musallam and Tim Lawton: At The Top of Denali (Image Credit: Naira and Tim)