One of the things I liked about Steve Jobs was his total disregard for Wall Street. He focused on pleasing his customers and proved that an insane focus on the consumer was all that really mattered. The pity is that so few have comprehended this fact even while they try to “replicate” Jobs’ success.

I’m hoping well abandon the “dumbest idea in the world”, as Welch puts it. It’s time. In fact, it’s past due for CEOs and others in senior management to focus on the needs of their customers. The hijacking of corporate America by Wall Street needs to end so that the very fabric of the West — the middle class — isn’t utterly destroyed.

Eisenhower’s Axiom: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

Powell’s Axiom: “No battle plan survives contact with the enemy.”

To this I’d like to add my own:

Eugen’s Axiom: “The foundation of a good plan is to rely on those you trust.”

It makes the planning quite useful if you know that when the plan becomes obsolete you can move forward with conviction.

Like most geeky types I’ve been watched the Star Wars series repeatedly. My kids watch the original three at least twice a year, with my son and I’ve come to notice something: Darth Vader is a venture capitalist.

Now, you may think me nuts — I’ve been called that before, usually before heading off on another start-up adventure — however, hear me out. When you listen to Darth Vader motivating the troops or attempting to get the upper hand on the competition (i.e., the Rebel Alliance), he speaks like a seasoned venture capitalist. I’ll provide some examples although this may mean you can never watch the Star Wars saga in the same way again.

On Deals

I am altering the deal, pray I do not alter it any further.

When you’re dealing with an investor and you need the funds to survive you are at that investor’s mercy. Regardless of how pleasant an individual that investor may be the fact remains that the structure of the deal and the clauses that affect you are dictated by the investor. The personality of the investor will adjust the deal slightly but it will still be in the investor’s best interest. Aggravating an investor will only make them alter the deal more in their favour. Complaining too loudly about a modification to the deal will result in something akin to Darth Vader’s quote, above.

The Two Strikes Rule

Don’t fail me again.

VCs don’t give you many chances. If you’re lucky, you’ll get more than two. Usually, though, you’ll get exactly two. And if they’re in a sour mood because of another investment or the general market you’ll get exactly one chance to be right. If not, they’ll be sure to let you know of how many chances you have remaining — if any.

Good Cop, Bad Cop

The Emperor is not as forgiving as I am.

Believe it or not, VCs come in various temperaments. And they’re smart enough to ensure the nicest ones typically deal with you directly. However, the threat of the big boss remains. And it’s not that the big boss is unusually difficult or mean-spirited, it’s just that he or she is just sufficiently senior as to not have to put up with crap. Plus, the downside of an investment is a downside to their personal fortune — something they don’t take kindly to. Poor performance or aggravating the junior VC only means that you’ll hear, sooner or later, from the senior VC. And that won’t be fun.

Drinking the Kool-Aid

I find your lack of faith disturbing.

Perhaps the most frightening aspect of running a start-up is the feeling that the investors have lost faith in you — or your technology. Well, there is one thing that is worse. That is if they believe you lack the focus or belief in where the company should go.

There are typically three outcomes to this lack of faith in your abilities. First is outright dismissal. Second is demotion. Third is remaining in charge, but having every decision double-checked. Which is worse? Who knows. They all suck to various degrees. But once you lose investor confidence it’s hard to get it back.

Uber-Geeks

Impressive. Most impressive.

Just as Darth Vader was impressed with Luke’s lightsaber, so, too, are VCs impressed with cool and interesting technology. Unfortunately, cool technology doesn’t imply success. In fact, the best technology rarely wins. So winning their approval with respect to your technology is one thing, but winning them over with a solid plan is something else entirely. Without a solid plan and the right people to execute against it, you’re lost.

The old adage of people, product, plan remains the truest form of a start-up. Good people executing a plan against a viable product. But the product need not be top-notch, it just needs to be good enough. However, VCs do appreciate elegance and cool technology, none-the-less.

Plans

I want to know what happened to the plans they sent you.

When you’re running the show you need to execute against plans. Various departments send you their plans and you need to ensure that everyone is marching in unison towards a common goal. The VCs will be very particular about this. Executing against a plan means you’re handling their money properly. If you’re not executing against a plan — or, God-forbid, don’t have one — then you’ll be in a sorry state. Now, you can change the plan but you need to understand that you need to keep the investors informed as to what the situation is with respect to the plans, where you are in terms of the plans, etc.

An inability to adequately define your progress with respect to the plans is just plain bad.

Merger and Acquisition

Join us or die.

When you have a lead product or are seriously threatening a competitor it isn’t that uncommon for their investors to come calling. The meetings are cordial but there is an underlying threat, especially if they’re bigger than you are or are better funded. In either case, Darth Vader’s warning is apropos. Regardless of what you think, the better part of valour is typically joining the enemy — especially if they’re poised to rip your head off.

Motivating the Troops

Perhaps I can find new ways to motivate them.

Ah, motivation. This is always a problem. There are classic beliefs like money is not a motivator, but is a great demotivator. However, the fact is that each individual needs some level of motivation. A lack of motivation within a start-up will bring down the ire of the investors. Much as Darth Vader was less than pleased with the progress on the Death Star so too an investor will be less than impressed with your motivational skills if your company falls behind schedule.
If the investors begin to threaten to take the reigns of the company it is already too late as they’ve already discussed the lack of progress and have formed an opinion that you can’t make it as a senior executive. You don’t have what it takes to motivate others to follow you.

By the way, the best way to motivate someone is for them to respect you. Being chummy with them isn’t going to get you anywhere. I always said that when I walked into the office I had neither friends nor relatives within the confines of the office. It wasn’t to be a smart ass or a hard ass, but instead to be fair. Everyone had to realize that I respected their capabilities and they had to respect my decisions. If I were to make a decision everyone knew it wasn’t tainted by past friendships or relationships. It allowed me to make a decision and see it to conclusion.

However, it doesn’t imply that you can’t make mistakes. Those are expected — and allowed. The way you handle mistakes is what makes a leader. Take blame when appropriate and lay blame when required. And when there is praise, heap it upon staff where it’s due. You helped herd them in the right direction, but it was the staff that got the work done. Without them you’d have gotten nothing done! Few senior managers remember this fact. Forgetting it will likely lead to a revolt and a subsequent visit from the VC to remotivate the employees!

It’s Over

You have failed me for the last time.

When Darth Vader uttered that threat you knew it wasn’t hollow. Similarly, when an investor has had it with you or some other member of the company their time is up. Investors aren’t in the business of being nice and offering an endless supply of chances. If you prove yourself inept you will be removed. The only reprise would be if the investor feels you can still offer the company something. But usually the motion is out the door. The interesting side effect of eliminating someone is that more than just the investors have noticed that the person hasn’t been performing and so the overall morale and motivation of staff goes up.

This increase in morale when someone is let go happens even when other employees are let go. People despise pulling their weight plus that of someone else. Letting someone who can’t meet their obligations go is good for the company and good for the psyche’s of the people within the company. It shows everyone that you value them and their efforts.

A company lives on cash. For VC funded companies the initial infusion of cash comes from VC Funds that invest a part of a given fund into a company. Obviously, if this is the only cash the company ever receives it won’t be long for this world. A revenue flow is required. To attain that flow sales must occur.

But how? That’s the trickiest question of all. How do we get sales? Fortunately it’s simple: provide customers with a product or service that scratches a particular itch and one that results in a demonstrable return on investment (ROI). Unfortunately, it isn’t that easy to quantify nor to find those first customers — those “early adopters” who effectively will wish to live their startup aspirations vicariously through your firm.

First, let’s discuss the most important aspect: ROI.

Some ROIs are easy to determine. A construction worker requires a heavy duty, reliable vehicle to get him to and from various construction sites. The construction worker will have tools and other things he will need to transport, and a truck or similar conveyance suffices to efficiently bring him to his various jobs. Similarly, when selling a software product or a service one must be able to convey to the customer the potential ROI. This is calculated as either a savings or additional revenue based on the use of the service or a savings in time or a new capability that opens new opportunities.

When a new product is being created it is vital that you get out there and talk to your potential customers to determine what their itches are and what your potential product might do to help scratch that itch. This information is typically called “marketing material” and will be utilized by the sales team, and must be easily digestible. The sales team will be talking to customers who are extremely busy. They won’t have time to listen to long, drawn out explanations of what the product does and how it will change the world. Instead the entire product must be reduced down to three packages: Elevator Pitch; Presentation; and Demo.

Elevator Pitch

This is the hardest one to do, but the most crucial. When approaching a potential customer often times the salesperson has a few minutes, perhaps less, to pique the customer’s curiosity. In that minute or two the salesperson must convey to the customer why she should be interested in the product or service. The customer is typically very busy, and is bombarded by sales pitches on a regular basis. She has probably become fairly numb to them by now, but the salesperson must still pitch if your company is going to go anywhere.

So the salesperson is in front of a prospective customer and she decides, for whatever reason, to listen for a minute or so. Now comes the crucial part, the salesperson must be armed with sufficient information concerning the product to be able to answer questions while still interesting the customer in the product. But what is the pitch? Picture a twenty to thirty second blurb that describes the benefits of your product to the customer’s current needs or future direction. That implies knowing something about the customer, which is crucial. Wasting a customer’s time is one of the worst things that anyone can do. Never waste a potential customers time. And, if you find out during the course of a conversation that the product doesn’t fit the bill, quickly explain that it doesn’t and, if possible, point the customer in the right direction. That will hold you in good stead the next time you call. If you waste the customer’s time and she believes until the very end that you have something that can solve one of her problems, and don’t, you won’t be welcomed back by that customer nor perhaps by the entire organization. Time is a precious commodity, ensure that you don’t waste it.

Obviously, the other reason the elevator pitch is so short is that it can be quickly determined whether or not there is a potential sale or not. If not, the salesperson can move on. And sometimes the location for the pitch is right after an impromptu meeting where someone you know introduces you to someone who they feel has a need for your solution. Thus, the elevator pitch has to be something you can quickly rattle off. One can further picture the elevator pitch as the “hook” of a good story. It helps reel the listener in, makes them want to know more.

The Presentation

Now, if things go well you’ll be invited to see the customer, usually at their place of work. She’ll usually want a twenty-minute presentation on the product, what it does, and how it will solve at least one of her pressing problems. Furthermore, it will explicitly indicate what type of return she will realize from this technology.

Since you’ve been invited to present there’s also a high likelihood that the potential customer is actually an early adopter. Early adopters are the rarest of breeds, but one of the most desirable. They are individuals that work in large corporations that understand that advanced and emerging technologies can make huge differences in how an organization is run and present a huge potential return on investment. As I’ve mentioned, often times these early adopters seek to live the startup life vicariously. They thrive on helping a startup succeed, knowing that the success can be mutually beneficial. They are risk takers and when they are found they should be nurtured. A good salesperson will have dealt with a number of early adopters and know exactly what their current pain points are and whether or not your technology can address their concerns.

So a short presentation is created that highlights the main points:

• Who the company is.
• What the product does.
• How much the product costs.
• What type of return the product will deliver.

Hopefully the return on investment will be self-evident by the time the presentation reaches its final stages and the customer will want to know about next steps.

Next steps usually mean demonstrating the product, but sometimes that step is skipped in favour of a pilot deployment, especially if the product does not impact any mission critical systems within the organization.

Demonstrations

At a good presentation the customer may well ask for a demonstration of the product, if it’s available. Or, the customer may request that you return with a demo version of the product that can be demonstrated to strategic individuals within the organization.

Any presentation you choose to do should highlight the customer’s problem as best you can. Showing the customer something that aligns with their needs and issues means they’ll more quickly grasp the advantages your product offers. In other words, the demo should illustrate to the customer how her problem will be solved or how she will gain an advantage she currently does not have. She should not have to take try to figure out how your demonstration can be applied to her particular predicament. In fact, the best outcome would be if the customer not only sees the product’s applicability to a particular problem but also to others and then leads the discussions on how those additional problems can be addressed. Usually what happens then is the customer presents similar problems that the product may solve.

And what are the signs of a good demo? When the customer spends more time talking excitedly to one another than to you. Listen politely and take notes. What they’re saying is exactly what they need and you’re now in a perfect location to benefit from information you didn’t have 20 minutes prior. A good customer will want to work closely with you, so ensure that if anything isn’t quite clear you bring it up in a pleasant manner whereby you ask the customer for clarification, especially if you feel that the customer may have misunderstood what the product does. Furthermore, if the customer wishes to use the product for something entirely different than what you initially thought, go with the customer’s instinct (for now). They might have hit upon your niche better than you ever could have. I recall during meetings with large banks where the banks were more excited about the possibility of doing dynamic, real-time analytics of financial information than the security aspects of the software we were presenting. Ultimately, they became customers of an audit capacity to determine fraudulent use of bank cards. The more complex security stuff was immaterial. And, interestingly enough, they were willing to pay a premium for fraud detection as it was a much larger problem than the security issue. Something none of us were aware of figuring security subsumed fraud and audit and not that fraud and audit (effectively accountability) was what they really needed and wanted and could show immediate returns.

Who To Hire

If you’re VC funded you’re probably going to have to hire a salesperson, maybe even a VP of Sales and some staff. If you’re on your own you will have to be the salesperson. Personally, I think being the salesperson for your firm is the way to go. If you can’t sell the idea to someone else how will anyone else? If you’re truly not that good at selling, maybe the solution is to get a partner in early who is good at sales. Take a page from Microsoft or Apple: one nerdy guy and one guy who’s truly a businessman and salesman.

Ultimately, assuming your firm survives, you’ll need a salesperson. A good salesperson. One who has prior customers that have received a good ROI on prior products pitched and will be more willing to listen. Furthermore, a good salesperson will have worked in a similarly sized company and be familiar with the support — or more accurately, lack of support — he or she will get.

Hence, to staff the sales team you must examine where the various individuals worked, what type of company was it, their references, etc. If a potential salesperson worked for a large software company that sold most of its wares through retail outlets and you’re interested in direct sales, then there just isn’t a fit. Furthermore, often those salespersons from large organizations are accustomed to an infrastructure to back them up. In a startup no such infrastructure exists. In fact, in the beginning the entire sales process may be run by a single, driven individual.

That said, if the salesperson was there on the ground level and helped grow his or her previous employer then they might be a perfect candidate. They might be interested in reliving the startup experience. Find out. And if they truly just want to return to the “luxury” of a small firm, they might be perfect.

One of my VCs used to say that the best salespersons were those that would eat rocks if they were hungry. They were the ones that thrived on the chase, they hunted down orders and business and loved dealing with early adopters. In fact, many VCs group salespeople into two groups: hunters and gatherers. The former require little infrastructure, are always on the move, are well connected in a given industry sector, and thrive on the hunt for new business. The gatherers, on the other hand, are those that work best nurturing existing customers. The former are usually found in startups. The latter in large multi-nationals. Both have a place and a purpose, but it is the salespeople of the former variety that a startup needs.

A good salesperson will actually create their own material, and will constantly be discussing the product and feedback from customers and potential customers with both the product manager and the engineering team. Salespeople are also the ones that will take everything an engineer or product manager says as gospel, even promising release dates to a customer based on nothing more than the musings of an engineer over a cup of coffee. To that end the job of a CEO is to ensure the dates the customers are receiving, as well as the potential ROIs, are backed up by the rest of the company. A startup survives on its reputation. If that reputation gets sullied it is very difficult to repair the damage. It always seems that bad news travels at twice the speed of good news, for whatever reason.

A good salesperson is a crucial part of any organization. The sales team must be kept small and dynamic. They have to hunt for business and bring in revenue. They have to coddle customers and ensure that the service the customers receive is the best possible. They have to extract vital information from customers and feed that information back to the marketing team, engineers, and product manager. They must be constantly networking trying to determine where the product can fit and looking for opportunities. Word of mouth sales are more powerful than any other type of sale. A good salesperson will not only be able to locate early adopters, they will be able to recruit those same early adopters into salespeople for your company. Good salespeople will get the early adopters to discuss your product with their colleagues by ensuring that the early adopter is properly handled so that the realize that your success is their success. And if you’ve read this far you’ll realize that the best initial salesperson is the founder. Start there and grow.

Follow your gut, listen to your customers, and be willing to change directions to whatever is most lucrative that matches what your firm does. Thus if the most lucrative thing is only part of what you’re planning on delivering, bonus! You can build that smaller piece, charge plenty for it, and then add in what you realize the market will demand going forward. Remember, being too far ahead of the market is bad. But knowing where the market should be is good. Being able to deliver that piecemeal is what allows a firm to grow going forward, providing what the customer wants as they come to realize what they want. And with a good sales team you should have little difficulty achieving success.

CEO: Now or Never

Jim Collins’ new book Good to Great is a prequel to his eye-opening Built to Last that discusses what it takes to get a company from good to great. From a company no one knows about to one that is a household name. Collins explains that the companies that did well — exceedingly well — all had CEOs that either started the companies or came from the inside and those that did poorly — and I mean poorly — had CEOs brought in from the outside. This goes against everything you’d come to expect but, in fact, it makes perfect sense.

Being in IT means I use IT companies as a benchmark and the companies that have been founded and then led to greatness invariably were led by the techies that founded them. In this list I include Microsoft, Apple, RIM, and Newbridge among others. But you can also include Linux and other Open Source initiatives that require strong management and vision; a drive to take the organization forward to a desired destination. The effort is the same whether it’s for financial gain or personal glory. You have to lead a team of disparate individuals forward towards a common vision. That vision is defined by a particular individual (or individuals) and must be dragged, kicking and screaming at times, forward. It requires a huge amount of faith in the direction and the vision as well as the people hired to take the organization forward towards the dream.

If you look at the various individuals who lead or have lead successful IT companies you see a common thread: they all have successfully recruited talented individuals who believe in the vision and are willing to help bring it to fruition. And the passion the leaders instill in the vision spills over into the individuals who adopt it as their own, and become just as passionate. In fact, in a well-run organization it becomes difficult to separate out who joined when; everyone is equally passionate.

Dispassion

And here’s the rub, if anyone isn’t passionate they end up infecting the entire organization with their doubt until it becomes a cancer that must either be excised or kills the host. Unfortunately, not everyone’s doubt has the same effect. Some are slow simmers of doubt that can quickly be quelled; others festering sores. The worst doubts are the ones that are associated with senior managers. If the senior managers don’t believe — or lose their faith — it’s over. If senior managers join without believing it’s immediately evident. The vibes flow through the company. It derails the entire organization’s direction.  It breeds distrust between divisions. It kills.

Disinterest

Equally evil and dangerous is a CEO’s disinterest in the company. Perhaps the fit wasn’t perfect, perhaps the company isn’t going in the direction the CEO thought it would, or perhaps the company isn’t what the CEO thought it was. Whatever the case may be, if the CEO becomes disinterested in the workings of the company, of selling the company daily, of being part of the company then it’s time for the company and CEO to part ways.

At times this is the most difficult thing to do, especially if the CEO is generally well liked. It may also be a financial burden due to contractual obligations. The best possible outcome would be for the CEO to leave on his own, thus ensuring the company doesn’t have to endure a financial hit. Usually, and unfortunately, the financial hit occurs regardless. The CEO hangs out in the company collecting a paycheque until he or she finds a new job elsewhere. If that takes weeks it’s not a big deal; if it takes months — well, you get my drift.

The disinterest is also picked up by staff. They see that the CEO is isn’t pushing and selling as hard as he or she can. The staff then wonder why they should be killing themselves getting the product out the door. And then, the vicious death spiral starts. And without an effective CEO it’s very hard to get out of it. Hence the need to ensure you hire the right CEO, or none at all.

Salesmanship

Every CEO is a salesman, even if he or she started as a techie! The daily ritual of a good CEO is to sell the vision to the employees, to potential customers, to the media, to whoever will listen. And it’s got to be a believable sales pitch. The listeners have to believe that the CEO has bought into the dream. VCs will often say that the CEO has to have drunk his own Kool-Aid. The CEO will be going into environments where FUD is prevalent and broadcast by larger organizations that are protecting potential revenue. The CEO has to be convincing and be able to get customers, especially customers, to the point where theyíre willing to bet money on the product the CEO is selling.

Furthermore, as the company grows and requires more senior staff it is the job of the CEO to sell the company and its vision to potential hires. They have to be convinced that this is an opportunity that can’t be passed up. During the dot com days there were lots of interesting opportunities and a large number of senior executives looking for work. Today there are still a lot of executives looking and not that many companies. It’s crucial to take your time, evaluate each and every candidate, and not hire someone unless they are perfect. If they can’t sell you on themselves, this would be a good indication they won’t be able to sell the company and its product to anyone, either.

Ego

In Good to Great one of the overarching theses of the book is that CEOs with improper egos are detrimental to the health of the company. He utilizes a simple image to gauge whether a CEOs ego is beneficial or detrimental to the well being of the company. What Collins uses is a mirror and a window, and the CEO’s reaction to good news or bad news. The good CEO looks through the window whenever something good has happened and heaps praise upon his or her workers. When something goes wrong, he or she looks into the mirror to allocate blame. The bad CEO does the opposite. Quite simply, the bad CEO is the one that takes credit for all that goes right and lays blame on those around him or her for everything that goes wrong.

The question is: What kind of CEO do you have? You need to ask prospective CEOs about what they perceive as their greatest achievement and how much a role they had to play in it. If they put themselves front and center, it’s highly likely that you’ve got a wrong CEO. Even if all the answers are right, ask employees that used to work for him what type of CEO he or she was. You need to be brutal in your assessment because the nature of CEO you hire will either make or break your company. And, if you’re a start-up, you may not have enough runway to correct the effects of hiring the wrong CEO.

Never

My take on CEOs is either bring him or her on early (very early) or not at all. Investors may insist that a founder run the company for a given period of time and then hand over the reins to someone else. This is easy to agree to initially, but very hard to follow through on. My personal experience indicates that if you allow logic to prevail — namely the logic that someone with business experience and connections will help grow the company — then the transition can be fairly smooth. Unfortunately, if the person who comes in doesn’t quickly assert a sales presence and brings in revenue then friction will occur between the original employees and the new CEO and anyone he or she may have brought in. Also, if the company is still in a highly technical state bringing in a non-technical CEO can cause some serious problems. A high tech company is its employees. Without them it’s nothing. That’s why great CEOs like Steve Jobs ensure he connects with the people in the company that make the company move forward, namely the techies. Without them Apple would be dead. Jobs gets this. And in return for this understanding — and his actions — he gets an insane amount of loyalty. And people who are that loyal will do amazing things.

Furthermore, if the sales and marketing staff are working hard bringing forward potential customers while the CEO and his “vast” connections bring no one, then friction will exist between sales and marketing and the CEO or between the original employees and the CEO wondering why the white knight hasn’t produced.

And there’s the general problem with bringing in a CEO well into a start-up’s life. Once the start-up is established, work expectations are set by the original team. If productivity is measured in one part of the company it will be measured throughout a company. If the engineering staff must produce a product by a fixed date the engineering staff, rightly, will expect sales to be delivered by a given date. Similar expectations will exist for Marketing, Professional Services, etc. If sales are hyped up and then nothing comes of it the disappointment will be disastrous. Employees will begin to question the company’s direction, perhaps even the company’s viability. If that begins to happen the whole enterprise may derail. In the end, promises broken — even ones that may not be realistic — will result in employees leaving. And if senior and well-respected employees begin to leave the company is in dire straits. God forbid if the main founder decides to leave at this time. His or her exit may result in a mad rush for the exits dooming the firm.

Abdicating the Throne

Now, investors are professionals. They have dealt with successes and failures time and time again. They know, instinctively, what it takes for someone to be a successful CEO. Unfortunately a lot of it is gut instinct. But if their gut tells them you can run the company initially you have to ask them why they feel you can’t learn to run it for an indefinite period.

In actuality you won’t run any company you’re involved in it indefinitely. Sooner or later you’ll want to either change your focus or leave. Perhaps enjoy the cash you’ve made if the company is a huge success. Whatever the reason, leaving requires you to have an exit strategy and that exit strategy requires that you know how to hire the right CEO.

To me there are only a few points at which someone should abdicate leadership of the company they’ve founded.

No Management Ability

Not everyone is cut out for managing a start-up, or any company for that matter. Hell, some people aren’t cut out to manage themselves and require constant attention from mentors, etc. If you’re one of these people that just have no management ability or no interest, then it’s best to start looking and bring in a CEO immediately. I would recommend that you don’t even run the company initially but have one of the investors run it, preferably the chairman. This way it is obvious from the get-go that you’re looking for a CEO. There’s no reason to “step aside” as you’ll already be in your appropriate position. For example, if you’re an amazing computer scientist but not the best at managing staff, perhaps Chief Scientist would be a good position. You’d be free to think and move the product forward, concentrate on what you enjoy to the benefit of the whole company and all those around you.

And, you won’t have the stigma of having run the company ahead of time. The loyalty of initial staff will be to the company and the founders, but the founder-CEO link won’t exist, allowing the new CEO to easily integrate with the rest of the company. And since everyone realizes that a CEO is on his or her way, then no one can be disappointed that there was a management change as there was none.

Also, don’t be surprised if investors demand that you find a CEO before you get any funding. Many times they really don’t want to fund a company that will appear rudderless. It’s why knowing people who’ve run other companies and nurturing those connections is an excellent way of finding a CEO if you’re not really up to the task or not interested. And any potential CEO at this stage will show interest in a variety of ways, including doing a lot of the necessary work for free. If they demand payment up front, run. A proper high tech CEO knows that “no risk no reward” and thus is willing to put sweat equity into the business. Someone without a stomach for risk is someone who is not suited to being in let alone running a high tech startup.

Disruptive Individual

Sometimes the existing CEO is simply too disruptive to run the company. Even though they may be the founder their mind wanders and they’re not solely interested in what the company is doing and the vision. They’ve come up with the cool idea and perhaps can get the thing kick-started, but long-term they’re not interested in seeing this to closure. The fact they got it funded and may even have closed a few sales, if they’re not closers in the long term it’s best if they’re removed from the company.

Ironically this is usually not noticed by investors since what they initially see is a very successful business person capable of formulating a corporation, a vision, enticing investment, and hiring qualified staff. However, as time progresses he or she may suddenly find what they’re doing is not that interesting anymore. It was a rush early on, but now is a chore.

Honesty would be the best policy, approaching the investors and saying that it’s time for a new CEO to come in. But usually what happens is the investors watch as the CEO slowly becomes more and more disinterested, focusing on side projects, allowing the main business of the company to either continue on by itself or under the management of someone else. Regardless, by this time investors become worried and physically remove the CEO. Usually this is announced as being a decision of mutual consent (i.e., “We think it’s time for you to go.” “I think you’re right.”). Unfortunately, by this time there may be other consequences of the CEO overstaying his welcome. Hopefully any damage is minor and can be quickly fixed. But, unfortunately again, the position of CEO isn’t something you fill in a week and the company may be run by the board for weeks or months before a viable CEO can be found. This may be disastrous for the company.

IPO

Running a public company versus a private company is very different. A private company is shielded from view. Documents pertaining to the business are private and don’t need to be provided to anyone. A public company is just what the name implies, public. Its internal functioning, books, etc. are all public. Anyone who is a shareholder can ask to see various aspects of the corporation. Accounting and accountability are much higher. Furthermore, shareholders have a much larger say in the way the company operates.

Usually the person who is perfectly able to deal with a private company is incapable of dealing with a public one. The quarterly chores  alone scare most off from wanting to be on the front lines.

As an IPO comes into view it may be necessary to start looking for a CEO that is capable of taking the company public. Although the CEO may be capable the CEO must honestly determine whether or not he or she is ready to take the company public. If the limelight, dog and pony shows, etc. aren’t something the present CEO wants to go through it is perfectly acceptable to have the current CEO step aside either just prior or just post IPO. In fact the current and next CEO could do the tour with the investment bankers together providing comfort to the public investors.

Midlife Crisis

This is something that affects everyone. Even Bill Gates has had his, leaving the running of Microsoft to Steve Ballmer as he focused on being Chief Software Architect and ultimately leaving to tend to his charities. It allows someone to begin doing the dreaming of “what’s next”, either from a technological point of view or a personal one.

Wanting to get back to your roots or back to something other than financials, HR issues, board meetings, etc. Wanting to get back to where you started is a normal thing. We all long for the simpler days when our worries were trivial and life uncomplicated. The running of a company is one of the most arduous things you can ever do. The livelihood of dozens, perhaps hundreds, of people depend on your decisions. A misstep and all those people can be without a job. Even if you do everything right you can still all end up jobless. The market is a very unforgiving thing. I’m just surprised more senior executives don’t just leave and go off and do something else, like Bob Metcalfe did.

If you feel that a midlife crisis might be in your future, planning for succession isn’t a bad idea. In fact, not doing so is inconsiderate considering the possible consequences. And although the midlife crisis may well sneak up on you, you can at least begin the succession process when it does strike — delaying your departure until the company is properly set up with a successor.

Conclusion

But that’s just one person’s opinion — backed by some interesting research by Collins and other scholars of business. Perhaps your company will be different. Perhaps. But the purpose of this blog entry is to determine whether a CEO should be brought in now or never? To me, if you must bring in a CEO bring him or her in now. Don’t wait; start looking now. Let the entire company know you’re looking and make sure that the persons you bring in are interviewed, interviewed again, and interviewed some more. Make them talk to others in the company, not just the founders and the investors. Test them by throwing problems that currently exist or recently existed within the company at them and see how they’d resolve the problems. Find out how passionate they truly are about the area of IT you’re in. Find out if they truly understand the technology. Find out if they’re passionate about technology. If they’re not technical, and you’re heavily IT oriented, you may not want them around. Do you really want to be constantly explaining everything twice: once to the IT portion of the house, the second time to the CEO? And what are they bringing to the table? What’s their track record? You will need to assess their track record with start-ups to judge whether or not they’re going to bring what you want to the company. If they’ve only been with large corporations they’ve become accustomed to infrastructure you simply can’t offer. They need to be, in the words of one of my investors, hungry enough to eat rocks.??They should be focused on the well being of the company and be its lead cheerleader. He or she has to believe, perhaps fanatically, on the vision and be willing to move it forward. The CEO should not allow anything to stand in the way of success all the while understanding who it is that will deliver that success — the employees that make up the company. If the CEO ever feels that he or she is the reason for the company’s success you should start worrying.

After my time at Texar I’ve come to a series of conclusions as to who should be brought on early, who should be brought on at various stages of corporate growth, and who should never be brought on. Although my take is my own it seems to jive with what most other entrepreneurs see as the correct sequence. In at least one case, though, my belief is at direct odds with what investors, especially, view as crucial to getting a start-up to success. My disagreement stems from the belief of how the senior management team should be arranged, especially with regards to how super successful high-tech companies look at the senior level. Here I’m talking about companies like Microsoft, Oracle, and Newbridge from their formative years until IPO. My beliefs in this matter I’ll leave for another discussion entirely.

In the meantime, let’s examine the timeline of a company from the perspective of hires.

Initially a company starts out as an idea that a single individual, or small group of individuals, has. A belief that they can change the way the world does something. That something can be just about anything, but let’s assume it some form of technical wizardry which will facilitate work in the office. It really doesn’t matter what the product is, as you’ll see.

With this initial idea and the small cadre of individuals who believe in it passionately we’re going to assume that enough money exists to at least get this past the “cool idea” stage and all the way to the “an idea invested in” stage. The amount invested is immaterial, although an idea invested in by Venture Capitalists will have their imprimatur as opposed to the founders’. Either way, it’s crucial that certain individuals be brought on early or be part of the initial group. Professional investors won’t disagree with this part of my discussion, although they may well disagree with what’s to come.

Every start-up, even pre-money, has a number of founders. These founders are the heart and soul of the company. They believe in the technology passionately and drive the product forward. However, if they’re typical techies they won’t drive it forward from a sales and marketing perspective. Nor will they necessarily drive it forward from a customer perspective. Techies, being amazingly arrogant, won’t focus on customer needs until later in the development cycle thinking they now exactly how to change the world and what their product needs in order to accomplish this feat. This is simply wrong — well, at least wrong-headed.

So who do you need? A number of people. Let’s enumerate them and then go into each of them in detail.

1. Chief Executive Officer and President
2. Financial Officer
3. Chief Technical Officer
4. Product Manager
5. Quality Assurance Manager
6. Project Manager
7. Technical Staff
8. Executive Assistant

Chief Executive Officer and President

Someone has to run the company, and this someone needs to have a certain amount of business acumen. They have to be able to understand balance sheets and the general books associated with the proper running of a company. They have to be able to explain to the Board of Directors what the company is doing, to the employees why certain things are being done, and to customers how this new technology will change their lives for the better — in effect, why the customer should part with their cash for this particular product.

The CEO is the visionary of the company, blazing the trail towards the customers who will buy the product. He or she must be able to understand the customers requirements while at the same time understanding what the company is building. And, if the two are incompatible they must either decide if the product is ill-suited for that particular customer, if the product is headed in the wrong direction, or both.

Regardless of direction, the CEO must retain a level of focus that remains unswerving. They must believe the direction chosen is correct and must ensure everyone in the company believes this as well. If anyone doesn’t, then that person becomes a disruptive individual who must be dealt with. The old adage that one bad apple spoils the lot is especially true in a small company. Furthermore, keeping such a person around hurts morale while eliminating the person improves morale. This may seem oxymoronic, but it isn’t.

In effect the CEO is the company’s ultimate salesperson. Driving the company’s product vision forward with customers. This person must be passionate about the technology and be technologically aware. To me, the people that best epitomize this type of person are Bill Gates, Larry Ellison, and Terry Mathews. They get technology. In fact, they love technology. This passion shows through in their discussions of their technology, their product lines, and their company. If a CEO is in it “to get rich” they will achieve the exact opposite. “Getting rich” is an after effect of the success of driven focus. Of believing. It isn’t the effect of pushing incorrect product down the throats of unwilling customers. It is the effort of matching customers with product in such a way as to ensure that the product enhances some aspect of the customer’s life. This is typically calculated as some form of return on investment (ROI). And ROIs are typically defined as cost savings, increased revenues, or improved productivity. If you can’t show this to a customer quickly and easily, then your product won’t have a chance. This is the true job of the CEO — to sell the vision as an ROI for a given customer. If an ROI doesn’t exist for a given customer then it is the CEO’s job to tell the customer that there isn’t a fit. This leaves you in good stead with the customer! They’ll remember this and when they finally do need the type of product you’re selling they’ll most probably buy from you first.

Financial Officer

Someone’s got to keep track of all that money you’re going to make. If you’ve been funded by investors someone is going to have to explain monthly to the investors where you’ve been spending the money they gave you before you start earning revenues. As it’s highly unlikely that you’ll have someone in the company that is capable of handling the books in a proper and professional way, the best thing is to bring a financial officer on board. At the very least you’ll have to bring a comptroller aboard. Whoever you choose should be someone you trust implicitly as they’ll have access to all of your books, your bank accounts, etc. Initially this person can be on contract. There are a lot of qualified financial people out there doing this type of work for startups. Look around, find said person and bring them onboard.

A good financial officer can do way more than just the books. They can handle human resources, benefits packages, leasing, office provisioning, legal requirements, and investor liaison; as well as all the financial issues including budgeting. When you move into real office space he or she’ll also be able to handle finding brokers, assisting in negotiating the lease, hiring contractors to set up the space correctly, etc.

In terms of human resources they become invaluable resources that can deal with the various issues that will come up. A good financial officer will understand the workings of the company and ensure that individuals work together correctly and head off potential conflicts. They also deal with remuneration issues, ensuring that everyone understands that they are getting paid fairly and that individual remunerations are kept private. A good financial officer will know the pulse of the company as well as its character. He or she will easily and quickly assist in determining whether or not a potential new hire is a fit or not.

Monthly reports to the investors and CEO as well as quarterly Board meetings will be coordinated by the financial officer. When done correctly the Board will be presented with the numbers and no questions will arise from their presentation. The Board may have questions concerning particular expenses, but nothing should be out of the ordinary. In fact, if spending is getting out of budget the financial officer should inform the Board and the CEO as soon as possible. Yearly shareholder meetings will also be coordinated by the financial officer and all issues pertaining to options and shares will be handled by the financial officer.

Chief Technical Officer

The technical officer is often one of the key founders, but one that is both managerially and technically adept. This person must be able to motivate the technical staff while explaining complex technical details to the Board and to potential customers. They will inevitably be on sales calls. With start-ups potential customers will want to talk to the founder and CTO. They will want to have the CTO “nerd” with their techies, ensuring that the technology is something that is realizable and will actually meet the requirements as outlined by the customer. The risk profile associated with a start-up is much higher than with an established company. Anything that can calm the nerves and lessen the perceived risk of the potential customer will be welcomed. This is especially true of any early adopters who want to live the life of a start-up vicariously but can’t afford to assume too much of the associated risk.

The other major job task for the CTO is to work on designs and development with the technical staff and instill in them the long term technical vision. This vision is what the product means technically. The CTO also has to take customer requirements and ensure they are being properly reflected in the product and design. In some firms the founder is both the CTO and CEO. Initially that’s fine. But long term it may end up being two jobs, with the founder opting for the position he or she feels is the best fit.

Finally, the CTO is not a paper pushing job. It’s a hands on job. The CTO is the first techie. The first developer. As the team grows they will become more abstract in terms of the work they do, but initially they need to be familiar with the technology, the process of developing software, and how software is marketed and sold to customers.

Product Manager

I’ve said numerous times that a good Product Manager is worth his or her weight in gold. The reason for this is simple: it’s just so hard to find a good Product Manager. Finding poor ones is easy, but finding one that stands out — that’s hard!

One of the strange things is that when you have a poor product manager you may not be able to tell for a while but when you find a good Product Manager you can tell immediately! And the difference is striking. The good one is always in contact with everyone. He or she will be buddies with sales staff, and marketing staff. They will become one with the technical staff, they’ll hang out all the time with the QA team and senior management. They’ll be there with the other managers worrying about process and ensuring the process that is there benefits the company and doesn’t just meet the letter of some favoured development process.

One thing you’ll rarely find in a good Product Manager is that he or she is in their office. You’ll walk past the office and you’ll see hat and coat, various personal paraphernalia, perhaps even their computer but rarely will you see the Product Manager. The only time you will see the Product Manager is when they are doing one of the following:

• arriving to work;
• on the phone with customers, sales staff, or marketing; or,
• leaving for the day.

Oh, you may well see them other times as well but usually it’s because of one of the above are occurring. And if you watch them closely you’ll realize that the phone calls are all done at the same time each day. That they operate on a schedule, dealing with QA issues at one time of the day, marketing at another, senior management at yet another, technical issues at still another, etc. It’s quite amazing to watch.

And there’ll be output. They’ll send you questions that will leave you scratching your head. Not because they’re stupid questions — although we all send our fair share of them around — but rather because their deep. They’ll question assumptions because they don’t have the baggage you have with respect to the product. They’ll ask why repeatedly until you start to question why things are done the way they are. They’ll try to find out why the product or technology was designed and built the way it was so that they can reflect that back to the marketing materials. They’ll want to ensure the customer’s needs are handled by constantly asking for the system to operate in ways that seem simple and yet belie the complexity of what’s being asked. For example, the simple interface is usually the hardest to code. A GUI, for example, appears simple to the end user; the command line appears difficult. The former is difficult to program correctly, the latter trivial. The developers will want to design and build to the latter, the Product Manager will rightly demand the former.

Thus the Product Manager will not be well loved at times, but a good one will always remain well respected. Even when delivering the worst possible news about how the product should behave according to the customers, the delivery will be such that no-one will take offense. The most amazing thing you’ll ever see a great Product Manager do is have the sales, marketing, QA, and engineering teams all agree with him or her while violently disagreeing with everyone else. As a good friend of mine would say: it’s a beautiful thing!

Sadly, at the early stages this very valuable individual is someone you probably won’t have the capital to hire — unless you’re well funded. Instead, the duties will fall upon the CTO or CEO or the senior developer. But the tasks need to be taken care of so that when you grow you’ll be able to bring in a Product Manager who will actually be able to get up to speed by reviewing the process as it currently exists. If the place is run by intuition and chaos any growth necessary will be seriously hampered.

The good thing, though, is that today there are a lot of great process-oriented tools that can help run a software project. Wikis and blogs, for example, allow for a simple, centralized area to keep track of ideas, bugs, information, design, etc. This allows new hires to easily integrate since little if any information is locked in someone’s desktop. In fact, a well run development team will do most of their communications via a wiki leaving the number of emails circulating down to a minimum. And that’s a very good thing.

Quality Assurance Manager

This isn’t the 1980s anymore. You can’t just have the source code compile, pass a couple of simple tests, and then ship it out the door. It has to work nearly flawlessly. Your initial customers won’t stay long if you deliver crap. You’re software is the corporations first impression. If you deliver shoddy work it will paint your company as a company that delivers shoddy workmanship. If the support you offer is similarly bad, then you’ll have major problems. And, since initial customer support should be handled by the original technical teams (quality assurance and development), any additional work downloaded due to poor quality delays future releases, which result in missed deadlines, which, in the end, create a poor reflection of the company’s ability to deliver.

Whoever is hired as QA Manager must be able to stop the product. In fact, each of the QA staff should be able to halt production of the product if they see fatal flaws. The QA system should be set up to quickly deliver errors and bug reports to the development team and the development team should be in constant and friendly contact with the QA team. Their efforts aren’t at cross-purposes, both teams are striving for the same thing — deliver a salable product to the customer that meets the customer’s needs.

A process, put together with the Product Manager and Project Manager, is crucial to ensure the smooth flow of information concerning the qualitative state of the product to the entire company. Part of that process should be the internal deployment of the product, if at all possible. “Eating your own dog food,” as it were, is one of the best ways to discover flaws in the design and implementation of any product. Having to deal with your product the way your customer must deal with it is vital so as to understand where your customer is coming from when he or she finally calls in that first complaint or feature request.

Don’t scrimp on a QA Manager. A good one will utilize his or her knowledge to leverage the QA staff via technology to make them even more effective than otherwise possible (think Wikis and version control and automated bug tracking and automated testing). In fact the QA Manager should play a crucial part in the hiring of technical staff and for that reason I place the QA and engineering staff under a single header, technical staff.

Project Manager

Initially you need someone who is process aware. Later you’ll want to move this person up in the organization, either as head of deployments (professional services) or, if sufficiently technical, as CTO if you have someone doing double duty. The goal is to get some semblance of process in early during the chaotic period of the company and then replace that person with someone who is process driven.

This may seem odd but is, in fact, totally logical. In a small team having a process will only slow things down. It’s best to have something that evolves, something that will be tuned to the company and how it works. The Project Manager in conjunction with the QA Manager and Product Manager will create a loose process that facilitates the development and testing of the first version of the product. This initial process won’t be onerous and will, in effect, insinuate itself as part of the technical culture. Once insinuated it can be formalized as “the way we do things”. At that point the process has a life of its own. New hires are indoctrinated by the technical staff.

Think this won’t happen? Take a look at any open source project. The initial team members set up the process and then it is mandated by these same members to future team members. If anyone doesn’t wish to abide by the process they are summarily ejected out of the group. Without this type of control most open source projects of any size would be totally unmanageable.

If the initial Project Manager is also a strong techie, then the goal is to move that person into a higher position. The best position is CTO or Chief Scientist. Here they can think about how to better the product without having to worry about the day-to-day issues concerning process, bug reports, etc. They can interact with senior management, customers, sales, etc. ensuring they understand what needs to be done. Then, in conjunction with the QA Manager and new Project Manager, he or she can ensure that the technical staff are made aware of new requirements or directions. Markets will always drag start-ups in a variety of directions, it is the job of the senior technical staff to ensure that the market currents take the company where it truly needs to be and not towards one fad or another.

What if you don’t have a position to move that initial Project Manager to? Make one! You hired the best, right, then that person is still massively useful! And since the company is just a start-up, you’ll easily be able to create a new technical position for the person to fill. You need the person to be in a position where you get to leverage their intellect! Focus on that.

Today it’s easy to set up the process aware system what with project-oriented wikis such as Jira. You can stand up a process-aware (or process-driven) enterprise easily and cheaply. To not do so will only result in unnecessary development pain and suffering.  Plus, the tools allow you to track time, bugs, etc. that will be used to get those useful research and development tax credits some countries like Canada have, for example!

Technical Staff

The technical staff are the ones that have to actually design, build, and test the product. This one should be pretty obvious but often isn’t: you do want to hire only the best. If the people you’re hiring aren’t the best, why are you hiring them? Have the entire team interview them, put the potential new hires through their paces. Make sure they’ll work well with the existing team. If there’s any doubt at all, do not hire the person.

If at all possible hire a senior designer early on if one doesn’t exist amongst the founders. If this person can double as a Project Manager initially so much the better. Furthermore, if you can find someone who can morph into the CTO position so that a business-oriented founder can do double duty initially as CEO and CTO that would be perfect. As the business grows the task of CTO can be handed off to the senior designer as a proper promotion, bringing their deep understanding of techies politics, the product, and management into perspective.

Executive Assistant

Probably the most overlooked individual in a start-up is the executive assistant. Invariably, start-ups think that hiring an executive assistant is either below them or an unnecessary luxury. Both are wrong. A good executive assistant will facilitate the correct functioning and operation of an office. They will offload jobs that deflect staff from doing critical work early on. For example, something as simple as photocopying some documents should be left to the executive assistant. The reason? Simple. An engineer should be developing the product, a salesman should be out selling, the financial officer has to worry about the vagaries associated with the financials of the office, etc. The executive assistant will ensure that the photocopying will be done in the most effective manner. A techies will usually stand by the photocopier waiting until the copy ends. The executive assistant will load the copier and return later when he or she knows the job has terminated. Furthermore, if it is a complex job they understand that their time is worth more than simply standing around copying things and will send the job off to a copy centre to finish. Although this might cost a few dollars it saves a huge amount of a given individual’s time, and that individual’s time when calculated as standing around the photocopier is way more than the cost of having that copy outsourced.

Similar arguments can be had for booking business trips, arranging meetings, ordering in lunches, organizing the corporate documents, etc. An executive assistant understands the most efficient way of doing all of these things. Leveraging a good executive assistant actually saves time and money!

At the beginning it might be that an executive assistance is a luxury in that you can offload those tasks to the financial officer. However, as the company grows getting an executive assistant will only make the company run more smoothly.

In Summary

One of the things I used to look for in hires was someone who would present a different point of view, but present it to me intelligently. If it made me feel a bit dumb to realize what they were saying was true so much the better. I always felt it best to hire those smarter than myself. There’s an old adage that states that “Pygmies hire smaller pygmies”. If you see staff hiring those that make them feel superior, then ensure you step in quickly to quash such hires. They won’t do your organization any good. Even though employees that are disruptive have to be removed to ensure the smooth functioning of an organization, those that are no more than yes-men are no better and, in fact, are probably worse. The disruptive influence will do good on occasion, the yes-man never will.

Hire intellect and drive above all else and then strive to keep them happily employed. Give them enough freedom to create and they’ll do wonders. Ensure that you’re not bringing someone on board because it’s the fashionable thing to do. Bring them in when needed. The above list is what I consider the bare necessity for a start-up. More than what’s listed is unlikely to be required, unless you happen upon a star — then, by all means, hire him or her! And make sure each person proves their worth repeatedly. Resting on one’s laurels is the kiss of death for a start-up as that person’s productivity must be made up by the remaining staff — who will quickly begrudge the fact.

As mentioned in an earlier blog entry, I’m opting for entries regarding my forays into entrepreneurship by focusing on subject matter as opposed to chronological order. Perhaps at a later date and if it makes sense I’ll place these into a logical or chronological order, but for now I’m going to do them as I feel. Hope you like it!

Due Diligence is that aspect of starting a high-tech venture whereby a series of investors get to examine every aspect of your organization and, to a certain extent, you. The outcome of a due diligence review is usually a set of reps and warrants (representations and warranties) that you sign off on saying that what was discovered is the whole truth and nothing but the truth, as far as you know. And God help you if you lied during this phase as it will come back to haunt you ñ big time!

The due diligence is typically broken down into a series of requirements:

• Sales & Marketing
• Financial
• Engineering & Manufacturing
• Materials Management

I will endeavor to go into each in some level of detail. However, no matter how much detail I may go into your investor may want more, or less, than what I present here. But if you cover all of the requirements Iím about to lay out youíre pretty much guaranteed not to be caught with your pants down. Youíll have the necessary answers that the investors want, and youíll find out a lot about whatís going to go on in the future since this is pretty much a roadmap to where youíll be expected to take the company and a set of requirements to which youíll be held forever more.

Sales & Marketing

This is, of course, assuming you have sales and marketing divisions. If not, this won’t be applicable. However, you will be required to get sales and marketing departments before too long. How do you expect to sell anything without ones? My belief is that you can’t wait too long at all, and need to get into sales mode as quickly as possible. You need to find folks interested in what you’re doing, so much so they’ll either buy your idea as is — before you’ve started coding — or will tell you what they’re really looking for, which you should take as sound advice since the customers are what you’re attempting to attract, not nods of attestation to your intellect. Similarly, it’s crucial to find a good product manager. They’re worth their weight in gold — just don’t tell them that, or they’ll expect to be compensated accordingly. More on this in a later blog.

Also, you should be doing marketing. And by “marketing” I don’t mean brochures and the like. I mean finding out what the market wants and how close your vision of that market is in reality. The two should coincide to a certain extent so that what you want to build actually has people wanting it. You want a “pull” from the market. Pushing a product into the market is a very bad idea and probably a guarantee of failure.

Now, if you do happen to have sales and marketing people on staff — or you have an idea of where you want to take the product youíre developing (have developed) the following must be answered:

1. For each key sales and marketing person, describe their backgrounds. You must describe why they are key individuals and what they bring to the table. Who do they know that will advance your product? What is their past experience? How will that experience help you get name recognition and that all important first sale? And, how will that first sale be repeatable?!
2. What is the state of the industry you’re targeting? For example, you need to consider economic factors, technological advances, anticipated trends and events, customer involvement (i.e., early adopters — are there going to be any?), competitors (i.e., are there any?, is this a new area?, etc.), and especially what will the future hold for the company’s product? Ultimately, you must figure out  how you will translate what you’re building into a competitive advantage?
3. Is there any research currently done by an outside group on the company? Although this might sound strange, some companies get write-ups because of who is in the company. Think of companies like Groove. Because of the founder they had write-ups well before they got funding because of Ray Ozzie. However, most companies won’t have anything written about them. But, they will have stuff written about their target market! And that’s crucial. It shows the investors that the area is hot, or at least likely to become hot. Look at it another way, someone other than you thought it was a cool enough area to write about so it probably has some legs in terms of an area to invest capital in to build a product to address the perceived need of the market. It will also indicate who the key players currently are and whether or not it’s worth the investors while to place capital into that market. For example, if Microsoft or Google or Apple are already playing in your market you should probably just abandon it. If they’re in there, they’ll most likely win. They’re just too big to fight. And if you try, the investors will lose confidence in your equilibrium. There is an exception, and that’s if you intend to stay small and go after business not worth the while of the big boys. A lot of successful “lifestyle companies” exist that do this. Of course, you (probably) won’t get investment cash. These types of startups are getting a lot of interest from techies because they don’t require a lot of capital to start, resolve an immediate problem, and usually offer superior support. It’s one of those ironies that a small firm is better situated to offer focused support for a niche while large firms can’t. This leaves a lot of niches out there that need filling and often the big boys will help you get into customer shops because the product the big boy sold doesn’t solve some annoying little thing that you do, so it’s a win-win. And, really, how much cash do you need? Not much when you think about it. So, if you have a nice idea for a $5M business, go for it. You won’t be Bill Gates rich, but money isn’t everything.
4. Background literature. This is an interesting one. This is stuff you’ve accumulated on your market and product, especially stuff over the past three years or so. It usually consists of articles on the market, what analysts are saying, stuff from the Internet, news feeds, etc. Don’t ignore what slashdot or some other source might be saying as they usually predict cool areas to be involved in. Hence if slashdot’s been on about something for a while you know it’s getting close to hitting the radar of people with serious money. Here I’m obviously talking about stuff that’s new, not stuff that’s been in the market for a while.
5. Who are your major customers? This assumes you have customers. You only need to include those that provide appreciable revenue. And if you have a lot, the top five or ten should suffice. For each you should include units and revenue totals. And if you have more than a single product, then break it down by product as well.
6. Who are the competitors? This one techies always love, but the investors need to know who the competitors are. They want to know they’ll be getting in fairly early and that none of the big boys are around yet. The reason? Simple. They want the big boys to buy you out. That’s one of the liquidation scenarios that investors are always talking about.
7. Do you have a backlog? This one usually doesn’t apply, but if you’re a fairly well established company you may have more orders than you can fill at the present time. If so, how do you plan to fill those orders? Is this a regular occurrence? For example, are you always backlogged? If so, this is a good thing. If it’s seasonal, explain why. Etc.
8. What new businesses are you contemplating? This is actually only applicable to established firms that may be opting to go into a new market. If, however, you mention more than a single product you’ll have the investors turn tail and run like hell! They’re investing money and for that they want your undivided attention on a single product. I know this sounds boring but that’s what they want. And, guess what? They’re right. As a little guy you can’t possibly run multiple product lines and be successful. If you try, you’ll die. If you get asked this question either answer with a “not applicable” or with the fact you have but a single product line and that will be your focus for the foreseeable future.
9. Do you have third party agreements with anyone? This one just wants you to tell the investors if you have any outstanding agreements to service one thing or another, or if you have an agreement with a software vendor, for example, for their software and services. This usually isn’t complicated. They do want to know if you’re using open source, though. And if you are, what rights do you have with respect to that open source? If you have to publish your source then the likelihood of getting funded diminishes, as you won’t be able to show any intellectual property that won’t quickly become available to the general community. In this way it’s best to know what your rights are with respect to your code base, etc. if you’re utilizing tools. This holds for royalties against binaries as created by a given compiler.
10. Do you have any distribution channels for your product? Another great question that’s hard to answer. If you’re just starting out, the answer is no. But if you’re established you must have some form of distribution channel. The usual answer here is direct or channel. The former requires a lot of sales people. The latter requires really good product within a niche where the product sells itself — don’t expect the channel to sell for you. Either way, you better have a good grasp as to how you’re going to sell this thing you’ve built. It’s why it’s usually best to have some sales before talking to investors. Know who your customers are and what they want. The type of customer you’re currently appealing to will usually indicate what type of market you’re in, as well as the size. It will also provide you with insights into who you should go after next.

Financial

The company must have financials, even if those are no more than the incorporation papers. What the investors are looking for is a clean set of books. They don’t want to get into the company only to find out there’s all kinds of outstanding debt or preferential shares that will have to be immediately paid off against the incoming capital. The money the investors are putting into your company should stay in there. If it’ll be flowing out somehow, the investors will be very, very unhappy. Not a good thing.

Again, there’s a series of requirements. Ironically, these are some of the easiest to satisfy if you’re just starting out. If you’re established its a bit more of a problem but nothing onerous. The investors may ask to have your books reviewed or even audited prior to investing. But usually this isn’t necessary. If you do have revenue then a review by one of the big accounting firms will be in order.

1. Corporate legal structure. Just what it sounds like: what is the legal structure of the corporation? Is it a corporation or a limited partnership? Microsoft, when it was founded, was a limited partnership. You want a proper corporation. Federal, state, provincial? Up to you. You will have to provide the articles of incorporation and the minute book from the annual shareholders meetings, etc.
2. Employee information. Investors actually invest in people. The mantra of a good many investors is People, Product, Plan. In other words, they invest in people first, they assume the product will be reasonable and will determine that after due diligence. The plan, well, it can be written up later and usually is as the plan you currently have — unless youíve done this time and again ñ is wrong and needs to be corrected to reflect reality. What needs to be provided here is a set of organization charts, including who reports to whom, titles, etc. Don’t be surprised if the investors decide some people wont be vice presidents or chief gurus.
3. Go-forward employee information. This is quite simple, really: how many employees will you need to get this product to market and get the company to profitability? This is usually assumed to be for the next three years. Include budgets figuring out salaries for the various employees as well as assumptions as to their qualifications, etc.
4. Historical financial information. These are the details from your financial records. They need to be in good order and clean. If you’ve been around for a while, they’ll need five years worth. If you’ve not been around that long, then whatever you have. They want to ensure nothing is hiding in those documents.
5. Projected financials. Here you’re writing a bit of hopeful fiction as to what you hope your company will do in the future. Investors will usually want to have this broken down by month for the next year and then quarterly for the next two years and finally yearly estimates for the final two years (for a total of five). Although this is silly, in my opinion, it gives the investors an idea of what you’re thinking about and how grounded in reality you are. For example, if you state you’ll be doing $100M in revenue in five years they surely will want to have you examined. Furthermore, assuming you’ll capture a substantial part of the market you’ll be in is also a sure sign you’re not sitting in the investors’ reality. That’s one of the reasons investors shoot for companies that may own a substantial part of a market — but here were talking 10 ñ 20%. And then, if that market isn’t going to be huge they wont be playing with you anyway. 10% of a $100M market just isn’t exciting. 10% of a billion, now you’re talking. Yeah, I know, 10% of a billion is $100M and they wont believe those revenue numbers. Don’t argue logic here. Just make sure that market is sufficiently large enough to let you survive in it. Whether or not it gets to a billion in the five years the investors are looking at is another matter entirely. As one investor told me, spreadsheets produce the world’s best fiction.
6. General ledger and balances. This is just a copy of your books. You do have properly maintained books, right?
7. Auditor’s reviews and/or letters for the past 3 years. This is another check to ensure you a) have auditors and b) have kept your books up-to-date.
8. Accounting policies and bases for expense allocations. They’re looking to see how expenses are paid out, etc. Are the founders getting paid dividends? Are they’re expenses extravagant? Do they get a corporate car? Etc. Whatever’s there right now will either have to be changed or accepted by the investors. Similarly, what are the accounting practices in terms of:
   1. Product development costs.
   2. Other capitalized costs.
   3. Depreciation.
   4. Revenue recognition.
   5. Reserves and provisions.
   6. Deferred charges.
9. Assets and liabilities. What are the corporations assets and liabilities?
10. Capitalization tables. Which shareholders hold more than 5% of the company. How much did they put into the company to get that percentage? The table must include a history of past offering prices, share options outstanding, etc.
11. Previous stock issuances. Here you’ll need to provide the documents on how you valued the company. When you issued shares to the various individuals you must have valued the company at some preset value. What was that value and how did you come to it? If you’ve revalued the company a number of times, show the reasons behind the valuations and what those valuations were.
12. Unrecorded or contingent liabilities and outstanding litigation. Is there anything that the investors should know about possible liabilities or litigation that may cause them to lose their money? You have to be perfectly honest here. Better to mention the trivial than have the investor pull out of the deal at the last minute because of the liability associated with the corporate car, for example. Or an outstanding lease on equipment that requires specific payments.
13. Soft assets and liabilities. You may have R&D commitments or capital expenditures that are liabilities. For example, you’ve promised specific aspects of your research to another firm as they’ve paid you in kind with equipment or with services contracts. The investors want to ensure the IP is free and clear.
14. Material agreements. If there are any material agreements not mentioned elsewhere in the financials they should be mentioned here. This includes customer contracts, management contracts, supply arrangements, strategic alliances, software subscriptions, etc.
15. Computers and computer systems. What computers and computer systems do you currently have? These include ones for accounting, R&D, sales, the Web, etc. What is the current status for these systems? You should point out what the budget is for these systems, what you determine to be the ongoing liability for these systems, the annual budget, maintenance, etc.

Engineering & Manufacturing

This set of requirements is broken down into a series of targeted requirements. This is the messiest of all the requirements of a due diligence and is brutal as the investors will come back time and again to ensure that you know what’s required to get your vision to market. Screw up here and you can kiss any chances of running the company, or of even being a senior player, good-bye. They may still invest but you won’t be running any part of the organization; and rightly so.

Project Management & Manufacturing Processes

If you’re going to be manufacturing something, as you inevitably are if investors are interested in you — it’s rare the investor that invests in a services company. Hence, you need to provide the following information:

1. Equipment details. You need to provide the net book value for your major pieces of equipment. Don’t worry about your cell phones, but do worry about your servers, etc. If you’re into chip manufacturing you need to include all that expensive hardware. If into fibre, all the associated hardware that you require in order to get your product development must be listed. You should also include the age of the equipment, repair and maintenance history, etc. If you’re dealing with PCs, don’t worry about it as they’re pretty much a commodity so just list what you have. At well below $1000 a pop nowadays no one cares about its maintenance history. They know you’ll just get another one. Hell, you can buy used PCs for $200 and they’ll work wonders for your labs.
2. Capital spending. If you’ve had capital expenditures over the past five years, what were they. Is that equipment capable of delivering expected sales volume over the next couple of years? If not, how do you plan to address that issue?
3. Manufacturing process. This is a description of your manufacturing process. For software houses this is pretty straightforward. However, you should include details on who will assist you in getting the product out, how you plan to distribute it, other engineering/support requirements, etc.
4. Standards. If there are standards you must adhere to — or simply choose to adhere to — what are they?
5. Production technology. Here you’ll need to describe what technology you’ll be using to create that final, salable product.

Product Design + Project Management & Quality Assurance

If you don’t have a design process, you’ll be getting one. So you should start thinking of both product and project managers now.  You’ll need to explain to the investors what methodologies you utilize, how you develop the product, how you manage internal versus release versions, etc. You’ll also need to define the process associated with designing the product in terms of product verification, functional specification, detailed design, life-cycle management, etc. Any third party relationships that will impact the development process must be described.

If you’re utilizing tools to develop the product what are they? These tools may automatically maintain and track bugs and documentation. But if not, how are you going to handle the documents and the document stream for the product.

How well versed are you and your staff in the tools you need to utilize to get the product to market? Furthermore, are you truly familiar with the development process? Don’t be surprised if the investors bring in techies to probe your knowledge to see if you know your stuff or not. God help you if you don’t.

Finally, the investors will want to know what was the biggest design issue surrounding your product. What was it that kept you up nights during its design and development? If it hasn’t been developed yet, what do you think will keep you up nights? Is the product portable across a variety of platforms? If so, which ones. If not, which platform are you initially targeting and why.

There may well be more questions to answer, but this is a good sampling.

Quality Control, Versioning, Release Management

What are the quality control programs you have in place? For this market is there a requirement for an ISO certification or some other certification? What testing, process, or metrics requirements are there?

How are versions handled? What are you going to do when you have one version in the field and another in development? How are you going to handle patches and updates to those versions in the field and how are you going to ensure those fixes appear properly in the next version? What approval process is in place from quality assurance to ensure that bugs that have been fixed are noted as such.

The version and release management systems that you’ve opted to utilize — and these can be paper-based initially but must be able to handle multiple product versions. Do note that today with so many free version control systems just opt for one and get on with it, preferably with an embedded Wiki. It’ll save days of trouble later and provide a history now.

And who’s going to run quality assurance? What is that person’s qualifications? Why do you feel that that person will be able to stay independent and ensure delivery of quality product to the customer? Remember, you have but a single chance to impress the customer. A bad first impression will probably be your last impression.

The quality assurance manager will have to interact with the Program/Project Manager and the Product Manager. Who fills these positions at the moment? Whats their history and what do they bring to the company? Are they process driven or process aware?

Materials Management

This is closely tied into the accounting aspect of the due diligence. For a new company it’ll be fairly straightforward, for those that have existed for a while it will depend on how the manufacturing process is done and what the various depreciations, etc. will be on equipment and assets. Furthermore, you’ll need to examine the costs associated with inventory and the maintenance of older equipment and products. For example, if you change the manufacturing of a particular product are you going to have to maintain the old equipment that manufactured the older equipment as well as the newer equipment?

The following describe the typical questions that must be answered during this aspect of the due diligence.

1. Costing process. What is the company’s costing process (i.e., standard or actual)? Does this include the full cost, including overhead for all goods sold including inventory?
2. Inventory. If you’re an established company, whats your inventory been like the past quarter? Here you’ll need to include every product you sell, how much resided in inventory during that past period, the financial burden of keeping said inventory, etc. You will also have to include how you track inventory, deal with quality issues (i.e., returns), shortages of inventory, and seasonal supply and demand.
3. Demand profile. If you’re an existing company, what is the demand profile for the product(s)? What is the profile one month out? Two months? Three months? Six months? A year? And why do you believe these profiles are accurate? Is there history to back up these numbers?
4. Backlog. List all the products that have a backlog. How big is the backlog? Are there any products that you sell that have no backlog — i.e., you’re sitting on a huge inventory of product? For each you should include the cost of the product, the cost to inventory the product, etc.
5. Assembly. If there’s a requirement to assemble the product, what is the actual cost behind this? Sometimes this is trivial, for example the simple manufacture of a CD or the use of the Internet and a Web site for sale of a product. The more complex situation is large computer or network systems.
6. Purchase orders. Provide a list of outstanding purchase orders, potential revenue, and the time it will take to fill the purchase orders.
7. Warranty returns. What ratio of sales to returns exists? Is there a particular component that fails more often than others, and if so what is it? Are warranty concerns being addressed to limit the amount of cost these returns are taking on the company?
8. Inventory obsolescence. New versions come out all the time, what type of inventory obsolescence has the company experienced over the past number of years — typically five? The reason for this is to see if you’ve been building way more than you can sell. If you historically build more than you can sell and then have to have fire sales, the investors will determine that you cant manage your supply side and that this mismanagement will lower your revenue potential as you’ll always end up with customers willing to wait until the next model of the product so they can get a good deal on last year’s mode. Obviously this is more of a hardware problem than software. CDs are cheap, you can always just toss them and today you can manufacture them on demand or utilize the Web to permit download to customers thereby eliminating the need for inventory.

As you can see, the number of questions the investors ask is enormous. And this is just a base list of questions, they can ask a lot more if they don’t get a warm fuzzy for a particular question or requirement. If they figure you’re pulling the wool over their eyes, they’ll delve deeper or ask for more onerous reps and warrants. Honesty is your best policy here as it’ll make your life easier as time goes by.

And as you’re going through the due diligence process you’ll also be dealing with lawyers and accountants ensuring the company is ready to accept external investments. That alone is a series of blogs I will get to sometime soon.

Until then.

I would definitely agree. But, to be successful, being angry about something that’s stupid is only half the battle. The other half is finding those people who similarly believe a given system is stupid and are capable of assisting in change. Otherwise, you can be angry all you want, create a great product, but if the folks with the bucks don’t agree with you you’ll get nowhere.

Thus, to affect change you need to ensure others who want to live vicariously through you are also those who can affect change. It’s this very reason why I believe innovation takes so long to take off. Much of it is a fight against those who refuse change. They dislike it because change is different and different is uncomfortable.

But I do agree with Tom Peters: stay angry if you want to make change. Just make friends who can help you affect that change once you’ve converted your anger into a solution.

Tony and I had repeatedly discussed the possibility of his joining Texar should Texar ever get funded. In early 1999 the possibility moved towards a high probability. Tony and I sat down and discussed the possibilities at my favourite restaurant, Mini-Italia in Centrepointe. Enjoying another fantastic meal prepared by Kenny, Tony and I discussed what was transpiring. He was interested but wanted to mull it over. I told him I’d keep him informed. When the deal finalized I told him the money was “imminent”. He contacted me a short while later and we discussed positions, salary, and other issues. When it was all over I had hired myself a Chief Scientist.

It was now April 1999, we had more than $2M in the bank, and were still operating out of our basement. The VCs wanted to get together for a kick-off meeting. They flew in and we sat down to discuss what had to be done next.

First thing on the agenda was a director of finance. They felt that we needed a qualified individual who could work the corporate books, handle various administrative minutiae, and handle various HR issues until we had the need to hire an HR person. I immediately remembered Drew. I had met Drew while attending a Coopers & Lybrand Christmas Party at the Chateau Laurier with my wife. Drew wore traditional Scottish attire, including kilt, to the formal event and his sense of humour and dynamism, plus his quirkiness, was enough to etch in my memory the impression of someone I’d love to work with should the opportunity ever arrive. To me, the time had arrived. But the question was how to track down Drew?

Second on the agenda was the need for office space. Working out of the basement was unacceptable and impractical for any start-up thinking of going to grow and that wanted to house sufficient computers, desks, etc. Plus, we needed a bit more formal space — and we wanted to get our house back! I was tasked with finding reasonably priced but good office space that met our needs. I hooked up with a broker and started touring office space while at the same time trying to organize the company into a logical layout and determine exactly who we needed to hire.

And once we had that settled we began to discuss what I had to do as Chief Executive and President in order to get the team in place, the product developed, and finally get the product out to market. We had a corporate name but no product name, no marketing, no sales, and only a few people in R&D. Our lack of Quality Assurance quickly became evident and the VCs offered their QA expert as an advisor so we could find the appropriate candidate. I began on the road of interviewing potential staff, eagerly awaiting Tonyís arrival to at least assist in the selection process for R&D. And to that end, we were to delay coding until we had a team in place and had placed some development processes into place. I found it odd, but the VCs wanted the design, etc. documented “just in case”. When I realized I needed things like keyman insurance, etc. I realized it was just another of the insurance policies the VCs intelligently required. So the priority was to get everything out of my head and onto paper.

To add to the insanity of those first few funded weeks I, the person who’s been process averse his entire life, had to ensure a viable process was in place at Texar. To do that required doing the logical thing, ensuring that whoever I hired to manage R&D and QA were process driven, or at least process aware. Tony was definitely process aware. The guy I landed for the head of QA, Alberto, was process driven. A friend by way of our baby-sitter — our kids shared the same lovely woman who took care of our kids — we easily connected with respect to what was required to get a QA and R&D process up and operational. He was interviewed by our VCs and of all the candidates was easily the best. Not according to me, but according to the VCs. They felt we had a killer team in place on the R&D side. I felt that nothing could stop us. And we were well connected to the industry so filling vacancies in R&D and QA should not be too much trouble even if the Dot Com explosion was happening and startups were everywhere.

With R&D and QA on solid footing that left the question of Drew unresolved. How to find him? Fate would provide. My wife went shopping and noticed someone at the shopping centre who bore an uncanny resemblance to Drew. She approached him to double check and sure enough, it was Drew. His start-up had just run out of cash. Their misfortune would become our fortune. Drew remembered me as well and we hit it off immediately. Another set of interviews was arranged with the VCs and again they applauded the choice. In their view my wife and I were golden. We’d snagged three first rate managers, ones that awed even them. We were to discover we had a knack for attracting excellent talent and would soon find the process-driven manager for R&D we desperately required. Further evidence of the quality of our team would be exhibited years on when the Dot Com Implosion finally caught up with us wherein we’d be caught up as collateral damage to the excessive ways of firms attempting to make it in what is now termed the Internet Gold Rush.

But at that time, we knew that the real work could begin. All that was required was to get ourselves set up at the new offices — which would require a few more hires, software, and a lot more stuff than I could have imagined even a few months before. And the setting up of an IT group (a one man dynamo, in fact) so that everyone could focus on getting things done. In fact, one of the most pleasant aspects of dealing with our VCs was that they were techies who had been very successful and knew that removing obstacles ensured the best performance from technical staff. As we set up the firm the investors applauded our desire to hire staff whose purpose it was to remove obstacles.

Setting up the office to our liking was the next big step, but that went off without a hitch courtesy of my connections into the Croatian community.