Lesson #16: The Plusses & Minuses of Virtual Employees

The internet, web video and mobile technologies have clearly made working from outside of the office easier than ever.  And, now, we are seeing more and more "virtual companies" getting staffed with employees located in numerous cities around the country, or in some cases, around the world.  But, is building a a virtual company the best thing for your business?  I believe the "inside vs. virtual" hiring decision really comes down to three points: (1) how critical is it that position be located at the home office; (2) how hard is it to recruit for that position; and (3) are there business efficiencies created by a virtual workforce.

The first point is pretty obvious:  it would be pretty hard to hire a virtual call center manager if the call center employees are all centrally located in the home office.  You can never beat that face-to-face engagement with your staff, especially in a team building or sales-driving environment.  But, the flip side to that, it would be pretty easy to have your outside sales team remotely located in cities around the world.  Salespeople are largely independent and are constantly on the road meeting with clients.   So, no harm if your sales team is virtual, as they typically aren't in the office anyway.

As for ease of recruitment, let's face it, certain positions are easier to fill than others.  If you need a simple web designer, there is a large and fertile pool of prospective employees in any major city.  So, I would try to fill that position locally for any permanent staff positions, for better team building and communications with the rest of the tech staff.  But, if your office is located in Kalamazoo, Michigan and there are very few hard core tech developers with C++ or C# experience, you may have no choice by to hire a virtual tech developer in Chicago or elsewhere, including India where labor rates are a fraction of what they are in the U.S.

In terms of business efficiencies, virtual employees bring a ton of potential economic value.  You don't need to pay rent in the home office to house them, you don't have to pay relocation costs to move them, you have access to lower salaried employees in smaller markets, willing to do the same job for less, etc.  And, there are ways to take this model to far extremes with crowd-sourced solutions over the internet.  At MediaRecall, our secret sauce was a distributed work force of 2,000 digital media professionals that worked from their homes all over the country.  We were able to hire talent at $10 per hour (compared to our clients paying on-site engineers $40 per hour) and we were able to throw hundreds of bodies at a project (getting work done in months, not years with in-house solutions).  In this example, the virtual workforce became our entire value proprosition to clients and was the foundation of our entire business.

Overall, I think the core management team needs to be centrally located, in order to facilitate easier communications between the team.  But, for non-critical positions, that can easily be completed and managed remotely, virtual employees are a great way to go.

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Lesson #15: Hands-On vs. Hands-Off Management of Startups

Startups have so much work to do, that it is typically much better to hire a smart management team, and let them do their jobs in a hands-off kind of way.  That does not means letting them run entirely unmanaged, as you should at least have weekly update meetings with your team, both individually and as a group.  But, it does mean letting loose the reins, once you are sure you and your team are sailing in the same direction.  A hands-off style allows the business to be more nimble, making quicker decisions, and also instills confidence in your team, that you trust them to do their jobs, and they will certainly appreciate not being micro-managed.

This is particularly true when dealing with start-ups, where you are in a race to win market share and client adoptance as quickly as possible.  I always tell my team, I would rather you get it right 90% of the time, and move at light speed on your own, than to get it right 100% of the time, and rely on me for input, which slows down my own work efforts.  Or, said another way, if you can deliver an A- result in one week of effort, that is much better than an A+ result in two weeks of effort, given the diminishing margin of return on that extra 50% of work time.

That said, there are a few times when a hand-on style is required.  The first time while you are still learning the business.  It is critical you have a deep understanding of all aspects of your business, to ensure that all input you are getting from your team makes sense and is justified by your own experiences.  For example, when I was a first-time CEO, I had no experience in running different areas of a business, like marketing, technology and operations.  So, I hired team members with deep experience in these areas, and relied on them to make key business decisions in those areas.  The problem was, their experience only revolved around big companies, not startups which required different skills.  We made a lot of mistakes in those early months, and we could have saved lots of money, had I been more hands-on right from the start, until I had a firm grasp of the key drivers of the business.  You never want to be in a position where you are getting advice from your team, and don't know whether or not what they are saying is the right advice, or at least credible based on your own personal experiences with the business or otherwise.

The second time a hands-on style is required is when things start going wrong, which will require you to come in like a "fireman" with water bucket in hand to put out the fire.  I typically use the three strike rule, before resorting to this hands-on involvement.  The first time the mistake is made, a simple communication and guidance should be sufficient to resolve the problem.  The second time the same mistake is made, a little firmer communication and a warning that the next time it happens, you will have no choice but to get more involved.  Then, after the third time the same mistake is made, you will need to jump in and try to resolve the problem directly.

But, overall, a hands-off management style typically rules the day, assuming you have hired the right team with the right skills to get the job done, and you are comfortable in your own core knowledge of the business requirements.

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Lesson #14: The Role of a Startup CEO

Chief Executive Officer?  Chief Visionary?  Chief Cheerleader?  Chief Salesman?  Chief Funding Officer?  Chief Communications Officer?  Chief Team Builder?  Chief Lightbulb Changer?  Chief Coffee Maker?  Yup, all of these titles apply to the role of a startup CEO.  It is perhaps one of the hardest job to do in the business world, given the wide range of skills required to excel.  This is one of the reasons only 5-10 startups in 100 actually succeed, as it takes a really special person that has the right combination of skills and startup DNA.  In many ways, a much harder job than a CEO of a Fortune 500 company, minus the big salary!!

When it comes down to the core skills required, a startup CEO needs: (i) a clear vision of where the ship is sailing; (ii) a finger on the pulse of the industry and competitive trends, to navigate the ship over time; (iii) solid team management skills to keep all employees sailing in the same direction; (iv) impeccable sales and motivational skills, while maintaining credibility with clients, investors and employees; and (v) to keep the business on plan, on budget and liquid.  I'll tackle each of these points below.

The first two points really go hand in hand.  In order to create the clear vision, you need to have a good sense to what is going on in the industry and with competition.  That is really the first step to building a winning business plan.  It is not enough to say, "we are building a great travel website", as there are tons of travel websites out there.  You must shape the vision in a way it is more unique and competitive than current solutions in the market.  My previous startup, iExplore, positioned itself as a niche killer for adventure travel (compared to the general online travel agencies like Expedia).  And, within the adventure travel sector, iExplore marketed "privately-guided, made to order" tours (compared to the traditional packaged group tours with set itineraries) at a price point 25% less than similar tours being offered (leveraging the cost efficiencies of the internet, compared to brick and mortar agents).  This vision for the business created a unique product in the market place, which consumers ultimately flocked to with over 1MM unique visitors per month coming to the website.

But, the CEO's job is not done setting the initial vision.  He or she must stay on top of those competitive trends to navigate the ship over time.  For example, after 9/11/01, iExplore needed to evolve from a travel agent of other tour operators' trips, into an iExplore branded tour operator of its own in an effort to get more margin to the bottom line during a difficult economic climate.  And, at the same time, iExplore opened up a whole new revenue stream from online advertising, to get the company to profitability.  It is the CEO's job to constantly watch these kinds of economic, industry or competitive movements over time, and to respond accordingly to keep the ship afloat.

Another job of the CEO is to make sure all employees are clear on the vision, and that all staff are sailing in the same direction.  In the iExplore example for adventure travel, you can't have your tech guy building a cruise seller, your operating guy building a hotel seller and your finance guy building an airfare seller.  Everyone is building an adventure travel seller, and the CEO's job is to make sure all staff have contributed in building that vision, so all players are on the same page as to what they are building.  Therefore, the CEO is not only the communicator of the vision, the CEO is the consensus builder for that vision.  You will never be successful if your team does not buy into the vision, or if they feel their good ideas for improving the vision are not being listened to.  Then once everyone is firmly on board, keep them clearly focused on the goal.

Once the vision is set and being maintained over time, now comes execution.  And, one of the key execution requirements for any startup CEO is to be its Chief Evangelist.  This includes cheerleading the staff, from top to bottom, and getting prospective business clients and investors excited about getting involved with the company.  Everyone has been around that infectious personality that lights up the room, and you can't help but be excited by that person.  That is who you need to be.  But, and this is a big but, everyone has also been around that person who you feel is trying to sell you the Brooklyn Bridge.  So, it is important that your sales and motivational skills, are tempered with equally important business judgment and intellect to come across as credible and backable to all parties involved.

Keeping the business on plan, on budget and liquid is a no brainer requirement for any startup CEO.  The CEO needs to set acheivable proof of concept points, and put key managers in place for hitting those goals.  That means building a management dashboard of the key drivers for your business, that are going to dictate its success or failure.  For iExplore, it was all about: (i) driving traffic to the website; (ii) getting those visitors to contact us; and (iii) getting those contacts to convert into a sale.  So, all energy went into driving those three datapoints, with one key manager in charge of each datapoint (e.g., head of marketing drove traffic, head of web design drove contacts, head of call center closed transactions).  Figure out your key drivers, and get the right team members to manage them accordingly.  But, more importantly, you need to be able to quickly identify when things are not going to plan, so you can put new initiatives in place to make up for any shortfall.  The longer you let cash-using problems go unfixed, the shorter your liquidity runway, and the higher odds you will run out of money and potentially go out of business.  So, plan accordingly.

The worst thing that can happen to any startup is running out of capital mid-launch or prior to full proof of concept, that would attract additional capital.  So, it is the CEO's job to make sure those proof of concept points are clear to the entire staff, a reasonable timeline has been created to achieve those points and the company has enough cash (including a cushion) to get to those goals.  The best people to solicit proof of concept input are your prospective investors.  Ask them, "what are you looking for before you would be willing to fund our business?", and firmly focus on hitting those targets.  And, when raising money, always raise more than you think you will need, to leave a material cushion for when things go wrong, as they always do with startups.

There is no single right answer for "who makes for the best startup CEO?", as everyone is different in terms of skills, style and personality, and every business is different in terms of economic, industry and competitive dynamics.  But, the above is a good summary of the types of people that have the best odds for success in becoming a successful startup CEO.

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Lesson #13: Creating The Right Culture for Your Startup

A company's culture is usually determined from the initial brush strokes of its design.  And, when talking about culture, we are talking about the "softer" aspects of business.  This includes the types of people that are getting hired, management styles, communication styles, work-life balance, incentive structures, etc.  Although there is no one right answer here, I will do my best to summarize a few preferred methods, based on my past experiences.

You cannot have culture without people, and that is where it all starts, right from your initial hiring decisions.  To me, this comes down to an individual's smarts, internal startup DNA and personality fit.  It is critical you find the smartest people you can find, to help you build your business.  I would rather have a smart person that is a quick study and no industry experience, than a marginal industry veteran.  If you don't have the fire power in the brain to think creatively out of the box, which is always required with a startup, then your business will never succeed.  And, don't be afraid to hire people that are smarter than yourself.  Sometimes managers are worried about being made to look stupid by their subordinates.  But, I say the smarter the better, to help raise everyone's skills around the table.

But, it is more than just having smart people around you.  They must also have the right startup DNA.  Someone that is passionate about the product that is getting built and is excited to come into work each day, and put in the long hours required.  Someone that is going to motivate the rest of the team to do the same.  Someone that is an extrovert A-type personality that is going to cheerlead when necessary and lead by example.  Someone that has a great personality fit with their peers, managers and subordinates.  Someone that is not easily rejected, or bring a bad mood to the office.  I always say, "we are all paddling together in a whitewater raft navigating the rushing rapids, and need all paddlers rowing in unison and as fast as humanly possible to survive."

As for management styles, the less heirarchical the better.  Sure there needs to be a clear chain of command, but it is critical an employee's voice is always heard and that they feel their smart ideas are being listened to.  There is no faster way to lose an employee than to constantly shoot down their ideas, or by making them feel stupid.  And, when doing employee reviews, always do 360 degree reviews:  manager reviews employee, employee reviews manager, peers review eachother and employee reviews themself.  This way everybody participates in the process and both manager and staff problems can get addressed.

In terms of communication style, I always prefer open communications with the team.  That means make sure the entire staff, from top to bottom, is always clear on the company's goals, and has regular communications from management, on both the good news and the bad news.  We are all in this together, so don't try to hide anything.  Employees are smart enough to know when things are going wrong, and would rather hear what the problems are, so they can help try to fix them.  And, have the confidence in knowing management "has their back" and isn't trying to hide anything from them.

Work-life balance can sometimes be hard to acheive in a startup environment, when everyone is putting in the required long hours.  But, it is critical you take time every now and then to recharge the batteries.  It is hard to do good work, when you can't even stay awake, or if you are always upset you are not spending more time with your family.  It is not all about working hard.  It is about working smart, prioritizing your efforts and making time for yourself to maintain the proper work-life balance.  This could also include things like flex time or working from home, letting staff members set their own schedules that work for them to meet their personal needs.

When Google was getting started, they even went as far as letting staff members take 20% of their time (one day a week) to work on any personal pet projects they wanted, many of which lead to amazing innovations and the next growth vehicles for the company.  And, don't get mad if staff wants to blow of steam with a mid day video game or trip to the gym.  As long as they are doing the work, hitting their goals and putting in the effort, there is no need to micro manage their hourly schedules.

As for incentives, every employee beats to the tempo of a different drum.  So, properly set incentives on a person by person basis, for what personally drives them.  Some people are motivated by cash, others by equity or others by perks.  Figure out what the magic incentive is for each, and put acheivable performance thresholds in place to acheive such.  It should not be a "one size fits all" discussion.  And, targets reasonable need to be acheiveable.  There is nothing more demotivating than working your ass off and not seeing any fruits from your labor.  So, there needs to be both "company targets" and "individual targets", so employees feel they have control over their own incentive destiny.

This is a high level snapshot of a complicated topic.  But, hopefully it gives you a better sense on how to best set up your business culture right from the start.  As, it is very difficult to change down the road.

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Lesson #12: How to Structure Your Board of Directors or Advisory Board

Properly structuring your board of directors and advisory board could be one of the most important pieces of determining the success for any venture.  These are the people you are going to be relying on for strategic direction, or voting on all key decisions.  So, it is important you get this right.

First of all, a quick definition for each.  A board of directors are the people that manage the CEO and formally approve all key decisions of the company.  An advisory board is a less formal group of mentors that have specific industry knowledge, that bring their consulting expertise to the CEO and increase your credibility with potential investors.

In structuring your board of directors, here are a few obvious recommendations: (i) it should be an odd number (so never a voting tie); (ii) it should largely be comprised of parties friendly to you and supportive of your vision (so no battles in the board room or being forced into a non-desired direction); (iii) it should be a manageable number, like 5 or 7 members (so easy to schedule meetings); and (iv) members should bring real value to the story (e.g., specific industry or startup expertise, to help you avoid known pitfalls).

For the not so obvious recommendations, firstly, you should structure your board relatively in line with the equity ownership of the company.  For example, if one investor owns 20% of the company's equity, it would be fair for that investor to have one of five board seats, or a 20% voice at the board table.  Or, vice versa, if you own 100% of your business, you may not want anybody on your decision making board, instead relying on your advisory board for advice and direction.  Secondly, when you have an outside investor involved, it is important there is a mutually acceptable third party board member that has a non-biased perspective on the business (e.g., not a manager and not an investor), who in essence tie-breaks all disputes between management and the investors.  I typically want to identify and nominate that outside candidate (so I know I can trust them), for approval by the investor.  Don't do the reverse, as most likely they will be loyal to the investor.  And, thirdly, you do not want a passive board member, simply showing up at scheduled meetings.  You want a passionate member that you can assign real work to, that is providing real effort and deliverables in between meetings.

As for structuring your advisory board, this is much more flexible and up to you.  You can have as many or as few advisers as you deem necessary to help you grow your business.  But, what is key is, these people need to bring specific skills to the table that you are missing which will be important to the company's success.  And, the bigger the adviser's "brand name" in your space, the better.  This is for two reasons: (i) they are a big "brand name" for a reason, so they have plenty of learnings to share; and (ii) those "brand names" will help get investors excited about investing in your story, as credible references and mentors for the business (e.g., if "brand name" likes it, so should I, as the investor).  That said, it is hard to get the attention of "brand name" advisers, who typically are busy people and may not want to get involved with an unknown CEO or business.  So, where you can, leverage mutual colleagues that can broker that introduction for you.  If there are no known mutual colleagues, approach the adviser directly with an equity incentive for their participation (see more details below).

As for frequency of your board meetings, you should meet with your business based on the frequency of requiring strategic input.  For startups still tinkering with their models, that should be once a month (so monies not wasted for too long).  For more established businesses, meetings should be once a quarter.  Frequency for advisory boards is not really relevant, as they typically do not formally meet.  Instead, you call on your advisers as you need them, with one off questions over time.

The last key consideration for your board members and advisers is to make sure they are appropriately compensated for their time commitment, and incentivized to help you grow your business.  For you and your cash investors, you are appropriately motivated as is, with your material equity stakes.  But, for outside board members or advisers, I would suggest setting aside a small piece of the company's equity to distribute between these key people based on their level of involvement.  Let's say you set aside 5% of the company for these purposes, and your outside board member may get a 1% stake, and your 8 outside advisers may each get a 0.5% stake (in the form of options or warrants).  And, make sure all equity grants have vesting periods, so earned over time invested, and can easily be repurchased or recaptured if things go wrong down the road, in case you need to make a change.

This is a lot to cover in one post, but hopefully you have a better sense to the big picture items here.  Let me know if you have any questions.

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Lesson #11: Considering Incubators or Accelerators For Your Startup

One way to help get your business off the ground, is to leverage the mentorship benefits of an incubator or an accelerator.  First of all, a quick definition of each.

An incubator is physically locating your business in one central work space with 10-20 other startup companies, typically all venture funded by the same investor group.  You can stay in the space as long as you need to, or until your business has grown to the scale it needs to relocate to its own space.  The mentorship is typically provided by proven entrepreneurial investors, and by shared learnings of your startup CEO peers.  Examples include Tech Nexus and Sandbox Industries here in Chicago.

An accelerator is very similar, but has some distinct differences.  Your time in the space is limited to a 3-4 month period, basically intended to jump start your business and then kick you out of the nest.  The cash investment into your business from the accelerator itself is very minimal (e.g., $20,000), but your time in the accelerator should largely improve your chances of raising venture capital from a third party entity on the back end of the program.  And, mentorship could be coming from 40-50 entrepreneurs that are affiliated with the accelerator (many of which are proven CEOs and investors looking for their next opportunity or simply helping the local startup community).  Examples include Excelerate Labs in Chicago, and the wildly successful Tech Stars, Y Combinator and 500 Startups in other cities.  Here is a great list of accelerators by city curated by Robert Shedd.

Deciding on whether or not you should pursue starting up your business via an incubator or accelerator largely comes down to your personal confidence in the defensibility of your business model, your execution skills and your fund raising skills.  If you have a credible story and your business is nicely progressing on your own, you probably don't need to be part of one of these programs.  But, if you need help fine tuning your business model or revenue model, or may be a first time CEO wanting to hone your skills from proven peers and entrepreneurs, then this type of mentorship could be perfect for you.

Here are the high level advantages and disadvantages of programs like this.  The plusses are: (i) shared learnings and mentorship (helping avoid typical startup pitfalls and speeding up your efforts); (ii) access to capital, either within an incubator or post an accelerator; and (iii) the PR value and exposure you get from these programs (not to be underestimated).  The minuses are:  (i) they can be distracting at times, with lots of related meetings and events with mentors and investors (getting in the way of focusing on your own project); (ii) they can be confusing at times (getting 10 different opinions from 10 different mentors), so you need a good "filter" on any advice; and (iii) sometimes, sharing space with other companies is not always a plus, especially in long term incubators that may be carrying dead weight of underperforming companies.

Overall, I think these programs are terrific for first time CEOs, that can quickly get up the learning curve with the help of mentors and investors that have "been there, and done that".  Plus, your odds of raising capital are vastly improved given the tight screening processes of these groups, that naturally raise the creme de la creme to the top, from the 1000's of applicants they receive each year.  Competition is naturally fierce to get one of these coveted spots, so make sure you have a fine tuned pitch and leverage your network to help pull some strings for you.

Good luck!

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