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Leadership

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

July 2, 2016 by Brian Laung Aoaeh

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

  • High Output Management – By Andy Grove
  • Only The Paranoid Survive – By Andy Grove
  • The hard Thing About Hard Things – By Ben Horowitz
  • HBR’s 10 Must Reads on Managing Yourself
  • HBR’s 10 Must Reads on Leadership
  • HBR’s 10 Must Reads on Managing People

Filed Under: Entrepreneurship, Management, Organizational Behavior, Strategy, Team Building, Technology Tagged With: Behavioral Finance, Early Stage Startups, Leadership, Management, Strategy, Team building, Teamwork, Technology, Venture Capital

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

August 1, 2015 by Brian Laung Aoaeh

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

Filed Under: Behavioral Finance, Business Models, Entrepreneurship, Finance, Innovation, Investment Analysis, Key Performance Metrics, Operations, Organizational Behavior, Private Equity, Sales and Marketing, Startups, Strategy, Team Building, Uncategorized, Value Investing, Venture Capital Tagged With: Behavioral Finance, Business Models, Business Strategy, Competitive Strategy, Early Stage, Early Stage Startups, Leadership, Management, Persuasion, Strategy, Turnaround, Venture Capital

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