Friday, April 29, 2016

6 Leadership Behaviors Drive Continuous Innovation

vijay-govindarajanEvery entrepreneur and business executive knows that continuous innovation is required to survive, but most struggle with this more than any other challenge they face. They know they need to act proactively, but still are often blindsided by a new competitor coming out of the blue with a future they never imagined. Innovation driven by the next crisis is not leadership.

I just finished a new book, “The Three-Box Solution: A Strategy for Leading Innovation,” by Vijay Govindarajan, one of the world’s leading experts on strategy and innovation. He succinctly outlines the key behaviors that I believe every business leader must focus on, to drive innovation without waiting for the next competitive crisis:

  1. Avoid the assumption that current gifts will keep on giving. This is a trap of the past to be avoided at all costs. The best leaders selectively forget the past, and are constantly on the lookout for the future’s raw material of new ideas. They overtly set out to create the future as a mission distinctly separate from their performance engine of today.

  2. Be alert to “weak signals” of non-linear shifts and trends. To do this, leaders must eliminate the noise of obsolete ideas and activities, by creating protective structures, including dedicated teams focused on innovation. They need to regularly listen to a few mavericks and outsiders who routinely generate nonlinear ideas and trends.

  3. Create the future as a day-to-day business process. The future needs to be treated as today by a team and a process that is insulated from interference, but empowered to draw on necessary performance engine resources. The trick is not to sweep everything aside, but to balance relevant aspects of now while making room for what is new.

  4. Sponsor experiments and measure like new investments. Experiments on today’s revenue engine necessarily focus on short-term financial goals. Experiments on future ideas should be measured like investments, and judged on longer-term potential, allowed to iterate, and focused on learning and adapting quickly. Both are always recommended.

  5. Constantly build new skills to be resilient in the face of change. Ensure your firm’s fitness to act on new opportunities, and develop an evolving sense of where the future lies. A business that relies on static skill replacement is falling behind, and ripe for the next competitive crisis. Build a process also for divesting those who have lost their value.

  6. Invest more energy in the “horse you can control.” Most executives admit to spending huge amounts of time and energy on issues they can’t control, including the economy, regulatory changes, and competitor moves. The best leaders spend more time on their own processes, skills, and hard decisions on what to keep and what to divest.

Govindarajan recommends a simple and practical “three box” framework for allocating time, energy, and behaviors in the proper balance to foster continuous innovation. These three boxes include managing the present, escaping the traps of the past, and generating breakthrough ideas. This is the only way to exploit change and let go of old ideas, while still profiting from the present.

He relates actual examples of how major companies, including GE, Hasbro, and IBM, have used this framework and strategy to selectively let go of the past and remake themselves on a regular basis to stay vital and competitive. On the other end of the spectrum, technology startups also really need this mentality, since the rate of change there is rapid, and competition is so intense.

Thus, I believe the approach actually works and applies to leaders at all levels – from a small team startup entrepreneur, to a business unit leader in a larger organization, to the chief executive of a multi-national conglomerate. It allows any leader to actively invent the future, rather than consistently be reacting to it. How much of your time is currently spent in crisis reaction mode?

Marty Zwilling

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Wednesday, April 27, 2016

For Equity Investors, A Startup Has To End To Win

startup-ipo-exitThe last thing a new entrepreneur wants to think about for a new startup is how it will end. Yet one of the first things a potential equity investor asks about is your exit strategy. The answer you give can make or break your ability to get an investment, so you need to have the right answer ready before anyone asks. Here are three important reasons for the question:

  1. Good investment paybacks normally require an exit event. Equity investments are not loans, so there is no loan payback period or interest payments. Equity is stock, but private company stock has no market value until the company goes public or is sold or merged with another company. These events may take three to five years at a minimum.

  2. Startups with no exit planned will minimize investor returns. If the entrepreneur plans to grow the company into a family business, or keep it private, they will either never be interested in buying out investors, or will certainly not be motivated to provide the 10x return that investors are looking for. Investors hesitate to invest under these conditions.

  3. Most entrepreneurs like the startup role, but not the big-company role. Investors know that the fun of a startup turns into managing production processes, sales processes, and personnel in a few years. You probably will do that job poorly, unless you plan your exit early, to move on to your next startup role, to do that better the next time.

Of course, if you are able to bootstrap your startup, and don’t anticipate the need for outside investors, you can technically ignore the first two points. Even still, in the context of all three points, I recommend that you evaluate the most common exit alternatives and considerations, and integrate the right one into your startup strategy and plan:

  • M&A - merger or acquisition by another company. This should be perceived as a win-win event, where your startup is bought or merged into a larger peer or competitor, allowing both you and investors to cash out. The resulting entity will gain complementary skills, economies of scale, new customer sets, and hopefully a larger growth opportunity.
  • IPO – public company initial public stock offering. According to recent National Venture Capital Association statistics, only 16% of venture-backed startups now use this alternative, due to high liability concerns, demanding shareholders, and high costs. Most experts don’t recommend this approach as your default strategy anymore.
  • Find a private equity firm or friendly individual. This alternative differs from an M&A, since the result is still your original single company. Yet it is an opportunity for you and your investors to cash out. The buyer has the challenge of scaling the business, and managing all the operational growth requirements. You can kick-off your next startup.
  • Position the company as a cash cow to fund spinoffs. If you can convince investors that your startup will generate a solid revenue stream, and the market won’t go away any time soon, they may see an opportunity for an ever larger return. You can maintain ownership, and even find someone you trust to run it for you, as you focus on spinoffs.
  • Liquidate the assets, cash out investors, and keep the rest. This is not a recommended strategy, since business shutdowns are usually seen as distressed situations, meaning the value of hard assets will be highly discounted. Less tangible assets like the brand name, business relationships, and even your reputation may be lost or damaged.
  • No exit. If your startup strategy is to be a lifestyle company, or a family business that will grow organically and never go public, then no-exit is a valid exit strategy. This alternative is often paired with a personal no-exit strategy. If you expect investors to help your startup scale, it probably won’t happen, as discussed in the first points of this article.

While exit discussions may somehow seem negative, an exit strategy should always be seen as positive. It’s a plan to develop the best opportunity for you, your startup, and your investors, and capitalize on it, rather than a plan to get out of a bad situation. Think of it as a succession plan, to keep you and what you have started growing. It may be the end of your startup phase, but it should be the beginning of a more mature and stable business.

Marty Zwilling

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Monday, April 25, 2016

7 Reality Checks On Your Funding Odds With Investors

The_Reality_CheckIf you expect an equity investment from reputable investors for your new startup, you need to know the boundaries that often limit their interest. In the jargon of investors, certain businesses may be viable but not fundable. For example, investors recognize that online gambling sites or a medical marijuana site may generate big returns but may tarnish their squeaky clean reputation.

There are many other more mundane reasons that your startup might be deemed non-fundable, depending on your own circumstances, where you live, or the case you have put together. As an active angel investor, here are some key ones I have seen, with some guidance on how to improve your odds.

  1. Poorly written or missing business plan. If you recently sold your last startup for $800 million, you probably don’t need a business plan at all to get money for your next startup. On the other hand, if you are a new entrepreneur, a well-written and complete business plan demonstrates that you understand the issues and have a real plan for execution.

  2. Team not a good match for the challenge. Outside investors bet more on the team than the solution. If you and your team have no experience in your chosen domain or no credentials starting a business, you will have trouble attracting investors. A solution would be to find a co-founder with the requisite background or investors who know you.

  3. Business is a good cause, but has limited returns. Your plan may eliminate world hunger -- but hungry people don’t have much money. If you have a great social cause, perhaps you should be looking for philanthropists instead of investors. Other social ventures may make good family businesses, but scaling and profitability are limited.

  4. 'Secret sauce' or competitive advantage is not clear. Investors are wary of startups with no intellectual property, even with a first-mover advantage. They know that showing market traction will attract big companies, like Apple or Google, who can easily overrun the best startup. It costs very little to file a provisional patent to begin your protection.

  5. Revenue and profit projections are not credible. Attractive businesses to investors may show revenues that double every year but don’t exceed the gross national product of your country. Investors do expect gross margins that exceed 50 percent, and double-digit penetration rates by the fifth year. Find existing cases to validate your numbers.

  6. Market is new or unproven, or your solution is 'disruptive.' When Facebook first started looking for investors, there was so social-media market. In these cases, you need to show more traction, or find highly motivated investors with vision. Also, disrupting an existing market typically takes too much time and money to interest the average investor.

  7. Go-to-market strategy is missing or not clear. Entrepreneurs with exciting new technologies too often assume that the technology will sell itself. In fact, it is your job to show how the technology will be embodied in a solution that satisfies a painful customer need, what channels will be used for sales and what business model maximizes return.

My advice to non-fundable startup entrepreneurs is to look past individual investors for partnerships with potential acquirers, grants from related institutions and support from your rich uncle. If all else fails, I recommend bootstrapping your own efforts, at least until you get enough traction to relieve the qualms of accredited investors.

In any case, it pays to listen to investor feedback, update your plan and make the rounds of additional funding sources after each new milestone has been achieved. Real customer revenue and thousands of new users represent traction and are the best indication of fundability. The right business advisors can also build your investor credibility through market connections.

Even if you aren’t searching for outside investors, don’t forget that you are making a major investment of yourself into your startup. Thus, these reality checks should always be taken seriously. The odds of finding funding generally correlate highly to your odds of business success -- and your personal risk is even more critical than outside investor risk. Minimize both.

Marty Zwilling

*** First published on Entrepreneur.com on 04/15/2016 ***

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Sunday, April 24, 2016

9 Great Paths To Recurring Revenue For Your Startup

NetflixDVDEvery new business quickly realizes that revenue coming in every period on a committed basis is the Holy Grail to survival and growth. According to many experts, getting new customers is five to ten times harder than getting additional revenue from existing customers. Thus the subscription model (low fixed monthly payments), is rapidly becoming the norm for new products and services.

Subscription pricing has been around for a long time for magazines, cloud-based software, and gaming, but now I’m seeing it used for just about anything, including for more stylish clothes via Mr.Conection, gourmet foods via TryTheWorld, and toys for your kids via Pley. If you are an entrepreneur not using this model, it may be time to consider a pivot.

In fact, in a recent book “The Automatic Customer,” by John Warrillow, who runs the successful subscription based research business SellabililityScore, I saw the nine most common variations on the subscription model today. If you are looking to start a new business in any domain, it’s definitely worth your time to check your fit for one of these models:

  1. Membership website model. With this model, you provide website access to insider information for a regular subscription payment. It works best in a tightly defined niche market, like antique car owners, or rare-coin junkies, or woodworking enthusiasts, where experts hare hard to find, and members can gain from interacting with each other.

  2. All-you-can-eat content model. By providing access to a large variety of titles, like NetFlix with streaming movies, or Hulu for TV shows, with new content added regularly, there is always a reason to keep up your subscription. If you already have many followers for some limited free offerings, this also becomes a natural freemium upgrade.

  3. Private club model. On the other end of the spectrum, if your service or experience is in limited supply, make it a status offering for the strivers out there who want to act and feel like affluent consumers. Here the key is to convince customers that you have something really rare, and maybe even entice them into a long-term but affordable relationship.

  4. Front-of-the-line model. If you can help with a relatively complex product or service, this one is especially appealing to customers who are not overly price sensitive, or ones for whom waiting in line can have catastrophic consequences. It works for the need to resolve IT issues in a small business, to avoiding long lines at popular clubs and hotels.

  5. Consumables model. You should consider this subscription model if you sell things that naturally run out, like Diapers.com or Birchbox for cosmetics. People are willing to pay for convenience today, but don’t underestimate the logistical challenges involved in fulfilling orders and providing services to thousands of subscribers in out-of-the-way places.

  6. Surprise box model. This model involves shipping a curated package of goodies to your subscribers each period. It may have started with wine club memberships, but has now been extended to include BarkBox for family dog treats, Standard Cocoa for those who love chocolates, and SpicySubscriptions for lovemaking paraphernalia.

  7. Simplifier model. Everyone these days wants to simplify their life, so this subscription model works well for personal service businesses, like pet grooming, tutoring, window cleaning, and even bookkeeping. The key is making sure the customer doesn’t have to remember the scheduling, deal with immediate variable payments, or worry about quality.

  8. Network model. This model works best where your product or service utility improves as increasing numbers of people join in. It was popularized with dating sites and LinkedIn, but now is popping up with many services, like Zipcar for car-sharing, BeatsMusic for music sharing, and WhatsApp for international messaging for a low predictable fee.

  9. Peace-of-mind model. This one is an extension of the insurance model into new domains. For example, Amber Alert GPS will make sure your kids don’t wander outside of safe zones, Site24x7 will let you know if your web site is down, and Radian6 monitors social networks so you know what people are saying about your brand.

If your startup is in the Business-to-Business (B2B) world, you need to realize that the subscription model has evolved considerably since SalesForce.com introduced Software as a Service (SaaS) way back in 1999. Popular variations of cloud subscription services now include offerings billed as Platform as a Service (PaaS), and Infrastructure as a Service (IaaS).

So now may be the time to start or transform your business into a recurring revenue engine with subscriptions, or just add an option to get some extra sales growth. But be aware, these models bring with them a whole new psychology of selling, supporting, and measuring your success with customers. Do your homework before jumping in with both feet.

Marty Zwilling

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Saturday, April 23, 2016

10 Tips On Finding The Best Career Fit In A Startup

start-entrepreneurToday is the new age of the entrepreneur, and I see an increasing number of new startups as the economy stabilizes. For new aspiring entrepreneurs, that’s the good news and the bad news, as it increases opportunities, but also increases the startup risk. Thus I often recommend taking a job in a startup first, to build connections and learn what you can, before stepping into the lead role.

Yet finding the right startup for your job interests and skills, or having them find you, is no small challenge. Startups generally don’t have the money or time for executive searches or large job boards, and many don’t even know what to look for. Other entrepreneurs don’t even realize that they badly need a co-founder or team leader who can complement their own skills.

Thus the burden is heavily on the job seeker to sell their value, and proactively find the roles that will get their entrepreneurial career off on the right foot. Here are my top ten tips to get the best ones interested in you, as well as deciding if the entrepreneurial fit is right for you:

  1. Optimize visibility and image on the Internet. No online presence these days may brand you as irrelevant, or not able or interested in contributing. A non-professional or negative image will likely eliminate you from consideration. How you manage your “personal brand” on the Internet is indicative of an ability to manage a startup brand later.

  2. Extend network through startup organizations. The more people you know in existing startups, and the more entrepreneurs who know you, the more likely you will be found as a candidate for the right jobs, and will recognize potential bad fits or low potential opportunities. Despite the Internet, networking is still a person-to-person activity.

  3. Build a list of startups to begin marketing yourself. If you wait for startups to find you, or limit your attention to posted job opportunities, you won’t convince anyone that you can be an entrepreneur. Demonstrate your communication skills and your marketing skills in researching opportunities to add value, and practice relationship building and closing.

  4. Volunteer for temporary roles to get experience. Practical job experience is often more valuable than academic training in the startup world. In addition, working with people already in the business gives you connections to others and insight into areas where you may need to update your portfolio. It also prevents a gap in your resume.

  5. Be an expert on new markets and new startups. Do your research on the top ten startups in your area of interest and be ready to best and worst attributes of each. Update yourself on their history, founder backgrounds, and competitors. With startups, the big picture understanding and value are more important than technical skill depth.

  6. Adjust your lifestyle to work for equity value. Whether you are working for a startup, or running your own, get prepared for living on Raman noodles, or depending on the support system of a spouse. Entrepreneurs are in it for the long-term payback, and have to be comfortable with the lifestyle constraints. Expecting a large salary won’t work.

  7. Make a list of questions to validate viability. You won’t help your image or your experience by joining a startup that quickly fails. Be prepared to ask some hard questions, including current traction, burn rate, and runway before the next cash infusion. These are questions you need to understand well for you own business.

  8. Ask questions and do more listening than talking. Practice active listening with advisors and startup founders. This is important for finding a startup job, and later when you have your own startup, it’s important for finding investors, business partners, and even customers. Practice exuding humility and confidence at the same time.

  9. Be sensitive to culture and operating mode. Look for a fit in long-term values and mode of operation, as well as what you wear to work or to an interview. It’s smart to visit the office before an interview, or talk informally to other employees to make sure you understand what is expected. T-shirts and beer are not the norm at every startup.

  10. Sign up for some career coaching and auditing. Not everyone is cut out to be an entrepreneur, or even to work in the unstructured environment of a startup. There is no time like the present to take a hard look at your strengths, weaknesses, motivations, and aspirations. This life is too short to go to work every day stressed out and unfulfilled.

As an entrepreneur, or while working in a startup, only you are responsible for your career. You won’t find a fine-tuned human resources organization to pave the way for you, or protect you. If that frightens you, then I recommend the more traditional corporate career path.

Just remember that according to most surveys, entrepreneurs have more fun, and a higher probability of really changing the world. Use these tips to join the revolution.

Marty Zwilling

*** First published on Entrepreneur.com on 04/13/2016 ***

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Friday, April 22, 2016

7 Leadership Tips When The Business Is Struggling

Richard-LindenmuthIt’s easy for an entrepreneur or a CEO to feel like a leader when things are going well, but the challenge is to keep that confidence and drive in the face of economic downturns, business turnarounds, and stressful personnel situations. Working twenty hours a day, losing your cool, and falling back to a no-risk strategy are not conducive to long-term success.

I saw some practical tips for business leaders under pressure a while back in the book “The Outside the Box Executive,” by Richard Lindenmuth, a seasoned interim CEO, who has stepped in and revitalized more than his share of struggling companies. I’m convinced that his advice is equally relevant to early startups, where the challenges are legion and the path is far from clear.

I agree with Lindenmuth that emotional intelligence and stability is a must in these environments. He calls it strategic empathy, which is sincerely focusing on the individual, but always with the big picture of the business as top of mind:

  1. Expect anxiety on the team and deal with it directly. When things are not going well, or when the future is clouded with unknowns, expect to find people on the team who are scared and angry. You have to act quickly to communicate strategy, be the role model for calm, and stand up to outliers before the whole team becomes dysfunctional.

  2. Let them say no, and actively listen to team input. Of course, no leader wants to hear negative views, but it’s important to show empathy and reach everyone on an emotional level, while containing your own emotions. People need to know that it’s safe to express their opinions. Once you get beyond the negatives, most people have real contributions.

  3. Focus on team members who will tell it like it is. In any organization you will find people who will tell you what you want to hear, or who are fighting for their own survival. Although you must listen at every level, the best leaders look carefully for that middle ground or middle manager that can see the big picture and effectively implement change.

  4. Don’t send a representative in lieu of direct contact. Lack of your physical presence is read as detachment, or lack of leadership. Direct contact, to people at every level, is the best way to generate trust, respect, support, and action. A recipe for failure is assuming that you can deliver a message once, and get it passed down by subordinates.

  5. If you see something broken, fix it now. Decisive action inspires confidence. People’s perception of your leadership and trustworthiness is directly related to your word-action alignment and behavioral integrity. Show them what you expect, and people will follow your example. If everyone is fixing problems with confidence, the business will prosper.

  6. Everyone has to pull their weight in the same boat. Create an environment that encourages and rewards participation and progress, with no penalties for missteps. Define a common goal, such as improving the customer experience, and eliminate any contention between the internal towers of development, marketing, and sales.

  7. Practice the eight out of ten rule. Generally, out of ten ideas, eight are not usable, but that’s the only way to get to those two good ones. So welcome all suggestions and praise every attempt, which will encourage more ideas. This may also be stated as the Pareto principle, where 80 percent of the results come from 20 percent of the efforts.

When the business is struggling, it also makes sense to bring in outside help for a fresh perspective. This could be a peer, or independent business advisor, ideally one who has been through a similar kind of struggle in their business. The best leaders put aside their pride and emotion, and listen carefully to guidance from outside the organization.

When real change is required in business, a unilateral top-down business leadership strategy is rarely effective. Successful CEOs and entrepreneurs instead listen, learn, empathize and include everyone in the challenge. With their leadership, and everyone invested in the company’s survival, the odds of success go up dramatically. Are you ready for that really tough challenge?

Marty Zwilling

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Wednesday, April 20, 2016

8 Qualities That Put You In The Virtuoso CEO Category

Yo-Yo MaAs an angel investor in early-stage startups, I’ve long noticed my peers apparent bias toward the strength and character of the founding entrepreneurs, often overriding a strong solution to a painful problem with a big opportunity. In other words, the entrepreneur quality is more important than the idea -- in investor jargon, people invest in the jockey, and not the horse.

I’ve often wondered if anyone has quantified the implied assumption that leadership character is indeed a critical element of the success equation for startups, so I was pleased to see a recent book “Return On Character,” by Fred Kiel, a renowned leadership consultant. He has completed a study of more than 100 CEOs, with feedback from over 8,000 of their employees on this topic.

His research concluded that CEOs who received high scores for character also achieved much higher business results – nearly five times the average return on assets (ROA) during the two-year period covered. On the other hand, those CEOs with the lowest character scores (self-focused) were distrusted and suspected of telling the truth only slightly more than half the time.

Through interviews, Kiel identified eight common traits and habits exhibited by all the CEOs with a top character ranking (deemed virtuoso CEOs – masters of the skills and art of leadership):

  1. Displayed and demanded high moral principles. These are summarized as the four keystone character habits of integrity, responsibility, forgiveness and compassion. The authors found these to be achievable through self-training and practice, rather than requiring a genetic endowment. That means all of us have a chance.

  2. Embraced a worldview of positive beliefs. The scope of the positive leadership views included human nature, organization life, and personal purpose. The lower character leaders were consistently more negative and pessimistic in their worldview. In both cases, the beliefs tended to become realities.

  3. Developed a higher level of mental complexity. A leader judged high on cognitive complexity tends to perceive nuances and subtle differences that a person with a lower measure does not. High leaders continually challenged their own ideas and were quicker to adapt them to encompass new information, experiences, and meaning.

  4. Sought out and listened to critical feedback from others. High scoring leaders seek and positively respond to feedback from three critical groups: peers, customers, and direct reporting team members. Self-focused leaders, on the other hand, are more likely to resort to denial when faced with unpleasant feedback.

  5. Find and enjoy the company of one or more mentors. The leadership benefits of mentoring start in childhood, but are just as important at the mature CEO level. Virtuoso leaders recognize and seek three types of mentoring – career mentoring for the longer term, peer mentoring for tactical guidance, and life mentoring for quality of life balancing.

  6. Demonstrate the ideas and behaviors of self-determination. Leaders with a high level of self-determination continually seek more competence in their chosen domain, relatedness and connectivity to other stakeholders, and the autonomy to act in harmony with an integrated view of themselves.

  7. Virtuoso leaders know their life story. By crafting a coherent narrative of their life, they are better able to understand the major events and influences that have shaped their personal development and use that understanding to assess and improve their response to new situations as they arise.

  8. Sought and accepted help from many supportive people since childhood. Leaders who have sought help from natural helpers since childhood, including parents, teachers, and business influencers, usually feel more accepted, respected, and affirmed, and pass that feeling on to followers.

While Kiel’s focus was not specifically on startups, I believe the insights and conclusions apply equally well, if not more so, to startup environments. Every entrepreneur needs to understand the importance of character and leadership is to their growth and success, as well as their ability to attract investors. The return on character in business is well worth the investment.

Marty Zwilling

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