Monday, January 30, 2012

Lesson #106: Succession Planning

Most startup executives just assume the founding management will be there forever, things will always go perfectly to plan and there really isn't a reason to think about succession planning, especially for a young business.  A faulty assumption, in my opinion.  At all times, regardless of the size of the business, you need to think about who will take the reins for each role within the company, in case any current manager disappears for whatever reason (e.g., fatal accident, quits, termination).  And, more importantly, making sure any transition will be as seamless as possible, both in good times (with departing manager cooperation and involvement) and in bad times (without such support).

To successfully think about your succession planning, I think it comes down to the following categories: (i) hire subordinates that can fill your own shoes some day; (ii) share key information and train your potential successors on things they will need to know to be successful in your job; (iii) make sure all key procedures in the business are well documented, for followers to use as a "blueprint", if needed; and (iv) foster this "succession planning" philosophy into all employees within the organization, from top to bottom.  I will talk about each of these topics below.

I always recommend hiring the best talent possible, regardless whether or not they are smarter than yourself (as some people are intimidated by the potential of looking stupid, and steer clear of such situations).   Not only will the business perform better with A+ talent while you are still involved with the business, but having A+ talent "in the wings" is exactly what you want to fill your shoes in your absence.  So, to me, succession planning definitely starts with hiring the right people, with a long term vision in mind.

Now that you have the best "successor potential" talent in your organization, you need to mentor them along and train them on key areas of the business.  Not only train them on the skillsets they will need for their own job, but you need to keep them well versed on your own role and key things they will need to know to potentially step into your own job someday.  The employee will be excited about learning new skills that improve their knowledge base, having your trust and the long term potential for promotion.  And, the company will be much better off having a "backup QB", ready to come in off the bench, if the "starting QB" goes down.

In addition to having great talent in the wings, you need to make sure key information and procedures are well documented.  There should never be a single point of failure in a business, where all relevant information is lost with the departure of any one person.  So, think about what information and process is most important to each role in your company, and have employees train their "backups" with such information (e.g., key passwords, key procedures, key relationships, key contacts, key reports, key systems).  And, keep a copy of all documented "backup" information and procedures with your head of HR in a centrally accessable place (as a double backup, if ever needed).

And, don't forget, we are not only talking about replacing a CEO or other C-Level manager here.  We are talking about fostering this philosophy all the way through the entire organization, for all jobs from top to bottom.  So, it is up to the senior execs to not only use these practices, but to communicate how important it is for their subordinates, to do the same.

My rule of thumb is:  what happens if that person gets hit by a bus and doesn't come back to work.  Make sure the company has the back up talent with "blueprint" in hand, to continue operating at full steam ahead.  And, it is much easy to gather and document this "blueprint" during the "good times", when you least need it.

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Monday, January 23, 2012

Lessons in Leadership: Joe Paterno

With the passing of Joe Paterno this weekend, after a tumultuous last two months since the breaking of the Jerry Sandusky child sex-abuse scandal at Penn State, I thought we could pull out a few interesting leadership lessons that we can apply to our businesses.

First of all, a little more about Joe Paterno, the iconic football coach at Penn State from 1966 through his firing in November 2011, after the scandal broke.  During this time, he became the winningest football coach in the history of college football, with an incredible 409-136-3 winning record.  He lead his teams to 37 bowl games and won 24 of them (or 65%).  He has been walking the football sidelines since before I was born in 1969, and is mentioned in the same breath as other all-time great coaches, like Knute Rockne, Bear Bryant, Woody Hayes and Bo Schembechler.  Joe Paterno was the face of Penn State and all of college football for generations, sitting atop the pedestal of his field as a Hall of Fame coach.  Joe took great pride in his reputation and his position as a father-figure to his players.

But, in one fell swoop in November 2011, that all changed.  Paterno's walls came tumbling down and his reputation became forever stained with the breaking of the Jerry Sandusky scandal.  Sandusky was his assistant coach at Penn State for 30 years (1969-1999), and the defensive coordinator of the program in 1999, the year he stepped down (supposedly for not being able to become the head coach, with no retirement in sight for Paterno).  We should have known something was wrong in 1999, when Sandusky simply evaporated from the world of college football, with no head coaching position elsewhere, for one of the best defensive coordinators in football, at the time.

According to investigations underway, Sandusky had been sexually abusing under-aged boys while at Penn State, right around the time of Sandusky ending his coaching career at Penn State in the late 1990's.  And to make matters worse, Sandusky's actions continued to happen well after that time, even within the walls of the Penn State football facilities.  As witnessed by assistant coach Mike McQueary walking in on Sandusky raping a 10 year old boy in the Penn State locker room showers in 2002.  This incident was reported to Paterno the next day, who supposedly took it to the senior athletic administrators to deal with.  Nothing ever happened to Sandusky, who continued to walk the streets of Penn State, right through the scandal breaking in November 2011.

So, the immediate questions, as it related to the key players in this series of events, are: (i) what really happened in 1999 that lead to Sandusky retiring (it is too coincidental that the first sex abuse claim was from that exact time frame), and what did Paterno and the university know about it; and (ii) what more could McQueary, Paterno and senior Penn State officials have done to deal with the 2002 incident and Sandusky, both at that time and thereafter. 

We'll never know the answer to the first question, until the investigation is completed (and now, key witness Paterno, is gone forever, making that a difficult task).  But, as for the second question, it is clear to me: (i) although McQueary witnessed the event in process and should have immediately taken the boy out of there, he did take the information to his boss Paterno and the university official who manages the campus police to deal with the next day (which I imagine was a very difficult thing to do, for a young graduate assistant trying to make a long term coaching career for himself in "Paterno Land"); (ii) Paterno put his 30 year personal relationship with Sandusky and the reputation of Penn State football, in front of the interests of the victims of Sandusky (without thinking about long term consequences to himself if this news ever came out down the road); and (iii) the Penn State police chief, athletic director and other university officials did everything they could to keep any negative light coming to the university (for an amazing 12 year period between 1999 through 2011, until the hachet finally fell).

So, the key business lessons here: (i) never try to hide bad news or criminal activity, regardless whether or not you are best friends with the offender, or are worried about losing your job or the negative impact on reputation (the truth will always come out, and you will be perceived as a stronger leader tackling difficult situations head on); (ii) once a bad employee is identified, they must be swiftly dealt with, not only by terminating employment and pressing charges, but in access to the company or its facilities (I am shocked Sandusky had keys to the Penn State locker room and was walking campus even after he stepped down); and (iii) if you do 100 great things as a leader, but mess-up on one big one (especially if you are perceived as covering something up), it can ultimately change your legacy from champion to chump in a nano-second.  Don't let yourself fall into that trap.

Unfortunately, I can see how this happened to Paterno and Penn State.  It is tough sending your best friend of 30 years to prison, and trying to deal with this in your own private way (e.g., firing from job, mandated sexual counseling), so the negative news doesn't impact college football recruiting or the millions of dollars flowing into the Penn State football program and university.  But, at what price?  The lost justice of Sandusky's victims, who were little boys that would forever be scarred for life? 

History will only tell if Paterno gets remembered as a champ or a chump.  But, it took 45 years of hard work to build up Paterno's stellar record at Penn State, and only 45 seconds to knock it down.  This story is very sad, at so many different levels (for Paterno's legacy, for Paterno's last thoughts before dying, for Paterno's family dragged into this, for the assistant coaches who got fired who may have known nothing, for the shocked PSU alumni, for the former Penn State players that looked up to Paterno as a father figure, for the current Penn State players and recruits forced into turmoil and potential NCAA charges for nothing they did, and most importantly, for the Sandusky victims involved). 

Nobody took his reputation more seriously than Joe Paterno.  That is why he coached for as long as he did, in becoming the #1 winningest coach of all time.  But, Todd Blackledge, a PSU alum and ESPN broadcaster, got it right this morning, when he said: "but despite the symptoms of lung cancer, Joe Paterno died most of all from a broken heart."

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Tuesday, January 17, 2012

Lesson #105: Run a Sensitivity Analysis on Your Projections


Back in Lesson #78, we learned How to Build a Budget.  But, one important point that we did not discuss was the necessity of running a sensitivity analysis on your projections.  A sensitivity analysis is changing some of the key inputs driving your model, for both upside and downside case scenarios, to learn the impact such changes have on revenues and your resulting cash flow needs.  These key inputs could include things like: (i) your average price point; (ii) your gross margin; (iii) your cost of acquisition for marketing (and the resulting number of leads); and (iv) your sales conversion rate, just to name a few.

As an example, if your base case suggests you can build a $1MM business with a $100 price point and 10% conversion rate, your revenues would drop to $800K with a $80 price point, and would drop even further to $600K with a 7.5% conversion rate from there.  What felt like relatively minor changes to your price point and conversion rate in isolation, combined for a 40% reduction in revenues.  And, more importantly, if that $1MM business was break even before, with $1MM of expenses, it has now become a cash user, with a loss of $400K.  Since you most likely will not have excess cash sitting around to fund any losses, you should have a plan to raise outside capital if it may be needed.  And, as we know, fund raising can take months, so you need to be constantly thinking far enough ahead to ask for capital before you need it, and not when you need it (which is too late).

I think the key driver entrepreneurs mis-forecast the most is cost of acquisition for marketing.  Most entrepreneurs don't have a solid grasp on how expensive marketing activities are, especially for consumer facing businesses.  Building an internet business today is materially more expensive than building an internet business a decade ago.  As an example, iExplore could drive a profitable pay-per-click campaign with Google at $0.20 per click and acheive a first page ranking at that level back in 2001.  But, today, travel is one of the most competitive categories in Google, with many more competitors and big-budgeted brands like Expedia, Travelocity, Priceline, Orbitz, Trip Advisor, American, United, Hyatt and Marriott all fighting for the top positions for key travel words.  That has driven first page search result prices through the roof, to over $1.00 per click on most words, making it near impossible to drive an immediate profit.  Hence, allowing only well-funded startups or big brand marketers the luxury of getting easily found. 

So, pay extra close attention to your marketing forecasts and benchmark your business off of the cost of acquisition datapoints being realized by other companies in your space today, using the same marketing tactics that you plan to use.  That said, don't forget about the marketing benefits big companies get from trusted brand names built over time and years of optimizing their marketing tactics.  If Amazon.com's conversion rate is 10%, do not forecast your business at 10%, even if you are directly competitive with them and using the same tactics.  Amazon has been in business for 15 years and has a very well-known customer experience and respected brand name.  It would be much better to forecast your business at the average e-commerce conversion rate of 3%, or better yet, at a material discount therefrom given the inefficiencies you will experience in the early testing days of your marketing initiatives.

Sensitivity analyses can also be run for upside scenarios, if things go better than plan.  But, honestly, for 99% of startups, most things go worse than plan, not better.  So, don't waste time on upside cases.  If an upside case happens, congratulations, you'll figure out what to do with the excess cash at that time.

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Monday, January 9, 2012

Lessons in Leadership: Tim Tebow


There have been many great football players over the years.  But, very few have had that additional "X Factor" which propel them and their teams to even greater heights, as demonstrated by Tim Tebow, the quarterback of the Florida Gators from 2006-2009 and the current starting quarterback of the Denver Broncos.  I think that "X Factor" in leadership is worth talking about, as it applies to people in business, as well as sports.

First, a few stats on Tebow.  While a player at Florida, the Gators acheived an impressive 48-7 record between 2006 to 2009 (a meteoric 87% win rate), led by the play of Tebow.  The Gators won two national championships during this time (2006 and 2008) and Tebow won the Heisman Trophy for the best player in college football in 2007, the first time a sophomore ever won the award.  When you watched Tebow play, especially with the game on the line, he just oozed confidence and leadership.

And, as for his young pro career, Tebow took over as the starting quarterback for the Denver Broncos mid-season in 2011.  He helped to turn a struggling 1-4 team, into an 8-8 divisional champion (7-3 Tebow record), that believed in itself and unexpectedly made the playoffs and knocked off the perennially great 12-4 Pittsburgh Steelers last night in a thrilling OT win (capped off by a walk-off touchdown pass by Tebow to end the game).  Tebow has not always played great during the entirety of these games (often ugly for three quarters and amazing in the final quarter that matters).  But, he does enough to lead his team to a win, often in thrilling fashion, which is what matters most.

Although the stats speak for themselves, they are not what is most impressive about Tebow.  It is his leadership abilities and deep religious convictions that overcome his unorthodox playing style, often criticized for not being good enough to succeed in the NFL (e.g., relies too much on running, weak throwing arm, awkward throwing motion).  But, Tebow doesn't listen to his critics, which amazingly includes some of his bosses, like John Elway, the former great Bronco QB and current EVP of Football Operations for the Broncos.  He just plays with a sense of confidence and conviction, regardless of what people say, or whether his in-game statistics fall short.  He simply wills his team to victory, either with skill or divine intervention.  His now famous praying position on one knee has become a word of its own ("Tebowing"), and is now being copied by people across the country.

But, what is most impressive, is the effect Tebow has on his teammates.  They are often quoted as saying there is no one they would rather follow into battle than Tebow.  Tebow's energy is infectious.  Tebow's hard work ethic and playing style, earn the respect of his peers.  And, even Tebow's religious conviction is rubbing off on his teammates, which is amazing in a 21st century sports world which is more typically driven by players with big egos commanding big paychecks.

I don't know if Tebow will be able to maintain his NFL success, or even his starting QB position, in the coming years, or not.  Especially, when rocket arm and accurate passers like Tom Brady, Peyton Manning, Drew Brees and Aaron Rodgers have proven to be the protypical model for success in the NFL.  But, what I do know is, Tebow is a proven leader, that will succeed at whatever he does, commanding the respect of his peers.  And, Tebow is driven by a calling that is greater than his own, making him a great person and proven philanthropist for those in need.  What a great role model for aspiring athletes and young entrepreneurs, alike.

So, the key business lessons here, are that great leaders know how to: (i) find ways to overcome their own shortfallings, especially when it matters most; (ii) tune out their critics and believe in their own abilities; (iii) communicate with, and drive the best performance out of, their team; and, most importantly; (iv) they know how to win, regardless the odds or the headwind in their face.

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Tuesday, January 3, 2012

Lessons in Leadership: The Race for the South Pole


I have always been fascinated by the polar explorers, boldly going where no one had gone before (much like startups).  After the North Pole was conquered by American Admiral Robert Peary in 1909, that left only one pole yet to conquer: the South Pole.  After a bold attempt, but failed effort, by Britain's Ernest Shackleton in 1909, the conquering of the South Pole ended up a thrilling footrace between Britain's Robert Falcon Scott and Norway's Roald Amundsen in 1910 and 1911.  But, the two explorers couldn't have been more different in their styles, approach and outcome.

Let's start with Scott, the British Navy Admiral, leading a British sponsored expedition under the primary mandate of scientific research and exploration (the only way the expedition could get government funding).  Although attainment of the South Pole was a goal, it was not the only priority of the expedition.  Scott was a military man with sailing experience in the polar region, but wasn't natively a polar land explorer.  So, using the best judgment of the British Navy, they decided to use mechanical sledges and horses, to carry the expedition to the pole.  Especially, since they would be needed to carry the heavy scientific equipment needed for the research portion of the expedition.  This expedition was highly publicized and the world was watching.

On the other hand was Amundsen, a proven polar explorer in Greenland, the Northwest Passage, Antarctica and elsewhere, who had fine tuned his polar survival and travel skills.  He knew the importance of sled dogs for speed and the native clothing and equipment best suited for hostile weather and environmental conditions.  And, more importantly, he was a man born to explore from his early years.  He wanted his legacy to be known as one of the world's greatest explorers.  If he couldn't have the North Pole, he'd better get the South Pole, and fast, to forever cement his legacy.  And, he certainly knew the element of surprise, basically hijacking a ship and crew heading for the North Pole on a scientific expedition, and redirecting it to the South Pole with the sole objective of getting to the pole before Scott and the British Expedition.  You can imagine Scott's surprise when he got a telegram from Amundson announcing that they were both wintering on Antarctica at the same time, and in essence, the race for the South Pole was on!!

Long story short, Amundsen won the race to the South Pole, beating Scott by four weeks, despite starting the expedition many weeks after Scott (so he made up 7-8 weeks in total).  You can imagine Scott's disappointment seeing the Norwegian flag planted at the pole upon his arrival.  And, to make matters worse, Scott and his crew, who had suffered so much in getting to the pole due to poor planning and equipment (forcing them to man-haul their way to the pole when the horses and sledges gave out), died a few weeks later on their return trip, largely due to starvation and not being able to find their food supply depot in storm conditions (a short 11 miles away).  Amundsen returned to Norway as a national hero (but was largely forgotten over the years), and Scott ended up frozen in the Antarctica ice (but, is forever remembered as one of Britain's beloved failures).

For a good read on this race for the South Pole and the different styles and personalities of Amundsen and Scott, check out Roland Huntford's, The Last Place on Earth, which does a great job of documenting the story.

There are plenty of key lessons here which may apply for your startup businesses: (i) you can't build more than one business at a time, you need a clear focus on one goal (Amundsen was solely focused on the South Pole, was wasn't bogged down with scientific research); (ii) you need to have the right assets and experienced team to get the job done (Amundsen won because he knew what to expect, and brought the right team, dogs and equipment for the conditions); (iii) the element of surprise is a huge advantage in acheiving your goals (keep your cards close to your chest until you have no choice but letting your competitors learn of your plans); (iv) know your own limitations of what is really possible or not (Scott man-hauling heavy gear over hundreds of miles in hostile conditions contributed to his demise); (v) it's not whether you win or lose, it's how you play the game (Scott is equally memorialized in lessons from failure, as Amundsen was in lessons from success); (vi) make sure you take cash from investors that share your vision (as Scott taking government funding slowed down his expedition with scientific research, and contributed to his failure); and (vii) the devil is in the details, with planning of utmost importance (if Scott had better marked his trails to the supply depot and increased his food supplies on hand in case of unexpected weather, he could have survived).  This last point sure sounds like a startup not having enough cash reserves on hand for a rainy day.

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