Lessons from Failed First-Time Founders

In my conversations with founders who failed the first time around when CEO was their first “real job,” I often ask about the key insights they took away from their experience.  Many founders don’t talk publicly about this, as they don’t want to denigrate their prior company and its employees, customers, and/or investors. But their insights are quite valuable to future young first-time founders and are worth summarizing and sharing.  I will focus more on operational decisions and learnings, as these tend to be most transferable, but obviously market selection matters a lot, as being in a market that is growing rapidly covers up a lot of operational sins that any founder will make.  Below are 5 takeaways that come up again and again in these discussions:

  1. Team Matters

An obvious point, but maybe not in the way you think. Who you hire is critical, but this first principle of building a company is often interpreted by young first time founders to mean that they need to hire “adult supervision” and people with the right resume.  This sounds great in concept, but in practice most founders end up hiring these “seasoned” veterans either too early, or not carefully enough, and end up with executives on their team who may have sounded great in terms of skills and experience, but have no idea how to operate in an early stage, rapidly evolving company.  

Further, bringing in a senior team too early – especially in product and customer facing positions – works to remove the founder from the front lines and slows the learning cycle.  This does not mean you should hire all your friends, as while that makes for a fun environment, it often does not put the right people in the right jobs and it’s really hard to tell your college roommate they just aren’t cutting it any more.  Instead, look for up and coming talent with skills and experience that are relevant to a portion of their new job, a history with start-ups, and prioritize above all else the cultural fit and passion for your mission. (David Cancel wrote a great post on this topic here that covers all of these points with much more expertise than I have). Remember, when you find this talent it does not mean you can check the box and move on to the next critical open position.  How you onboard your talent to make sure they are aligned with the vision, trained on key aspects of the business and integrated into the rest of the team will be critical to their effectiveness.  Finally, if you make a mistake, fix it quickly. In a small team it only takes one or two misaligned, cynical, negative assholes to screw up your company.

  1. Find your balance

A hard part for first time founders who have never worked in a company of any size is finding the right balance between being nimble, informal and on top of every detail on one hand, and putting in place rigorous formal processes and discipline on the other.  Too much process and structure too early and you slow down and are too removed from the front lines–stay informal and involved in every detail too long and you become a bottleneck and a micro-manager with a team that is not empowered.  Far easier said than done, but a few suggestions to help you find your balance:

  • Always ask yourself if you are slowing down critical decisions.
  • Decide what areas are most important to you personally, where you want to be the slowest to cede control, and be explicit about this with your team so they know your hot buttons.
  • Start with lightweight team meetings every week and then every quarter asking yourself and your key lieutenants if the cadence and process is working, or if there are ways to improve.
  • Seek out either a coach or other founders who are one step ahead of your company in terms of maturity and get their advice on how they changed their style at important junctures in the company’s life (important breakpoints are around a dozen employees, around 30 or 40 employees, and around 80-100 employees).
  1. Be on top of the metrics

Regardless of finding your balance point, one thing you can’t delegate as a founder is knowing the key metrics of your business inside and out and how they interrelate with each other.  While these change from company to company, in early stage businesses they can all be boiled down to cash, adoption, and customer success/engagement.  Know when you are running out of money to the day, and know how this changes if you grow more quickly (which often brings in the date much to the surprise of many first time founders), or more slowly.  Know how many customers/users you are adding every day/week/month and how this compares to the growth you need to achieve lift off.  Know whether you are delivering on your value to these customers/users and where you are falling short.  In addition to understanding the key metrics, set goals for how they are going to change and grow over time.  On this front, a common mistake of first time founders is setting unrealistic goals under the assumption that if you ask people for the stars you at least get the moon, but the best CEOs I know set goals that are a stretch, but most likely achievable, as this allows them to develop a culture of winning and a sense that they are on top of their business.

  1. Your Investor(s) & Board Matters

One of the issues I see over and over again with first time founders is that they got sideways with their board, and investors more generally.  This problem often starts when raising capital and the desire to take any money that’s on offer, rather than the right money.  It’s your company; so treat any investor you take on as you would any employee you take on, make sure there is alignment with your companys mission, thesis, and goals, and you should reference check them, again just as you would with a prospective employee.  Once they are involved you must maintain a healthy relationship, which starts with communicating regularly, having bad news travel as fast as good news, and not sweeping potential disagreements on direction or strategy under the rug, but rather addressing those issues head on.  A fear of many first time young founders is that the Board is looking to replace them as CEO as quickly as possible. With some investors this is indeed their pattern, so understand their biases (from talking with prior companies they have been involved with) and call out the issue explicitly as the lingering fear strains relationships and leads to less frequent communication, which only exacerbates the issue. It also helps in navigating your first set of board relationships to find a mentor or outside board member (that don’t have a significant stake in the company) to provide coaching and help resolve intercompany issues, and act as independent mediator if necessary.

  1. CUSTOMERS MATTER MORE THAN ANYTHING ELSE

And finally, another first principles comment, but remember to stay CUSTOMER FOCUSED above all else. It is way too easy to get distracted by hiring, leading, raising capital, and dealing with a Board, not to mention obsessing over competitors or what is going on in the broader market, and when you lose this focus on customer success, your company will lose its mission, and consequently, its chance to succeed.

Listen Up!

I spent a lot of time over the holidays catching up with my family and friends. It seems forever ago, but as I reflect on how enjoyable as it was, and it was enjoyable, I was struck by how few people in the world would be considered “good” listeners. This led me to reflect on how many of founders I meet who are so busy being in in “pitch mode” when speaking with investors, customers, or potential employees, that they forget to listen actively.

Before relating this back to the start-up world, what are the common habits of bad listeners?  

  • Talking about themselves… excessively. Most people are too busy talking about themselves that they are incapable of taking a genuine interest in someone else. This leads to elongated, agonizing monologues that removes the opportunity for any genuine exchange of ideas.
  • Relating what you say back to their life.  Also known as “one-uppers,” these people immediately interrupt what you’re saying to somehow relate it back to themselves, implying that they have a better or more interesting experience with the subject at hand. While their experiences may indeed be more interesting, as they do this they are constantly thinking ways they could chime in with a personal anecdote rather than actually processing what the other person is saying.
  • Changing the subject. If someone changes the subject while you’re talking, they either have no idea what you’re talking about, or simply have no interest in what you’re saying. In both case scenarios, the person is not listening actively. This also makes the person seem careless, and unable to connect emotionally or cognitively with another human being.
  • Saying “yeah” or “uh-huh” to hurry you along. A nod or yeah can be a helpful social cue to say you are listening, but when over used it is a clear sign that the person is not absorbing any of the information you’re sharing. Along with the other bad listening habits, rushing someone along when they’re speaking hinders their willingness to listen to you when you speak. Bad listeners wait impatiently for their turn to speak, and still expect undivided attention.

With that said, it isn’t easy to be a good listener. Research says we talk at 130 wpm, listen at 400 wpm, and think at 1000 wpm. So even if there is genuine interest in what one is saying, it’s extremely easy for the mind to wander.

Active listening takes effort, patience, and understanding. In this Wall Street Journal article, Graham D. Bodie, a communications professor at LSU, states that “active listening starts with the real desire to help another person think through their feelings. Don’t try to fix the problem right out of the gate, and don’t rush things.”  It all starts with being genuinely curious about what the other person has to say and asking open-ended questions, but having good body language, maintaining eye contact and giving well-timed verbal cues also helps signify that you are engaged in a conversation and gives the speaker encouragement to continue confidently.

So… why is this important in regards to founders?

In so many pitches I receive, the meeting starts with a conversation, but then out come the slides and the founder moves into “pitch mode” and the listening and exchange of ideas stops.  No matter how well honed a pitch it is, this represents a lost opportunity as I believe how founders listen and take in feedback is a meaningful indicator of whether or not their company will succeed. Point 5 in this article is right on.  People who are naturally curious see conversations as learning opportunities.  And founders who are naturally curious are going to be more successful.  Too many founders are not open to criticism and potential change, which could help them shape and sharpen their idea, and many resist open-ended questions and conversations as they feel they won’t like the answers or that they can’t control the conversation.  [As a side note, I also see the reverse where founders take everything a potential investor says as gospel and they agree with everything.  This is even worse.]

Active listening, and the genuine conversation it begets, on the other hand is is not only a sign of respect, but a sign of intellect and it shows you are a learning machine with an ability to accept and consider input and be open-minded, all of which demonstrates strength, not weakness or vulnerability.  Further, particularly for early stage companies in a fund raising setting, a genuine conversation builds relationships and deepens a connection, which is ultimately the basis upon which many investment decisions are made.  The converse also applies.  A potential investor who is not a good listener will be a terrible board member and advisor as they will never have taken the time to truly understand the issues you are facing and even if they do, they will be too busy promoting their world view for their advice to be meaningful.

Outside of the investor setting, good listening skills are even more important when recruiting or speaking with potential customers.  If you take an active interest in a potential employee and listen carefully you will come away with a much better sense for how they think, what is important to them and whether they will culturally fit your company.  With customers, if you immediately go into pitch mode you lose a valuable opportunity to let the customer articulate their issues, priorities, and organizational processes (including how they buy) and miss, as a result, valuable opportunities to shape and modify your approach to best fit their needs.  

If founders took a step back and listened more often, it would benefit them greatly, not only as the founder of a company, but as a person as well.  Listening actively will help all of us build our relationships, our businesses, and our knowledge. It would also make for a more enjoyable holiday break.

A Founder’s Guide to M&A

As a Founder of a venture backed company, eventually the question of whether and how to seek liquidity for your shareholders will come into question.  This may come about because you are approached by a strategic acquirer or seek to go public.  As shown in the chart below, given more than 90% of tech exits in the last 5 years are via an acquisition, the odds are by far in favor of M&A as the means of driving liquidity, although of course what the chart does not show is the thousands of companies that decided to keep building instead of selling in this period.  

Graph

This data is consistent with our most recent experience at Flybridge: in 2014 we had six acquisitions and one IPO across our portfolio.  So, if M&A is the most likely exit path for a venture backed company, what should Founders think about as they approach this process?  Below I will explore questions such as 1) Should I sell my company?, 2) What is the best process to sell?, and 3) How do I achieve the best possible value for my business?  This is a long post, so if you prefer the bullet points / presentation version, it is available here.

 

The first step is to take a step back and assess where you stand in the company building process.  Is your company still relatively young and immature, but growing fast and strategically important to a number of acquirers (one of which may have approached you)?  Or is your company mature, with a well understand and profitable operating model, but perhaps growing slowly and not terribly strategically important?  Or, do you have the benefit of being strategically important, while growing fast, with a business model that is showing strong evidence of operating leverage and recurring revenue?  Making a determination as to where you are along the axes of growth rate, strategic importance and company maturity will help inform your approach to M&A.

The intersection of these characteristics can be visualized on a 2×2 matrix as shown below.  The Y-axis is a composite metric of both your company's growth rate and its strategic importance.  Growth rate is pretty straight-forward and ranges from slow, less than 20% year over year growth, to hyper growth where the business is growing at more than 100% year over year.  Strategic importance is harder to assess, but is a function of the market potential for your company, how the company fits with important high level industry trends, how threatening your success is to incumbent players in your industry, how easily your product or service can be sold through existing go-to-market channels for potential acquirers and whether your company will help drive revenues for an acquirer from other parts of their company, i.e. "drag-along" sales.  The X-axis attempts to characterize where your company is in its development.  These maturity characteristics include how well defined and understood the company's business model is, whether there is evidence of significant operating leverage where expenses are increasing at a far slower rate than revenues are growing, what characteristics the company has in terms of customer acquisition costs relative to the lifetime value of a customer, whether there are significant risks such as customer concentration or regulatory exposure, whether the business is profitable and cash flow positive and the strength and depth of the management team.

2by2

While the matrix simplifies a wide variety of different characteristics, it ends up creating four potential groups: companies that are still "Figuring it Out", companies that are showing "Hyper Potential", Companies that are "Steady as She Goes" and companies where "Options Abound".  From an M&A perspective, each of these groups will lead to very different questions to ask on whether to sell, for how much and approaches and strategies to the M&A process itself.

 

Figuring it Out:

For companies in the Figuring it Out phase that are still early, not yet growing super fast, and are not strategically important, the critical questions to ask relative to M&A relate to how much runway you have and can more capital be raised (for example, if you have 6 months of runway and no clear path to raising more money, joining forces with another company via M&A starts to look like an important strategy).  In addition, understanding why the company is not growing faster is an important question as it could be driven by a market that is slow to mature, which is harder to change, or internal execution issues, which are equally hard to change but at least within your control.  A related question is whether, if you are successful in driving growth and can figure out how to get the resources to do so, is the pot of gold at the end of the rainbow still attractive, or have you lost faith.  More broadly, this speaks to your team's motivations and desires.  Is everyone still in the boat, or are you at risk of losing critical team members?  Do you all want to stay together, but the collective risk tolerance is such that being part of a larger company would be better?  Or does the idea of being part of a bigger company give everyone the shudders?

In the Figuring it Out stage, the answers to these questions will lead the the conclusion to keep pushing ahead or to look to be acquired.  If the conclusion is to look to be acquired, the process in this stage is on one hand the easiest in that there is likely a broad universe of potential acquirers, but on the other hand the hardest as there may not be a compelling reason any one of them to need to own your company.  This suggests that the process will be very customized, company led and relationship driven as you seek to demonstrate core value that you and your nascent product or service can bring to the table.  As a result, there is not much of a role that an investment banker can play, although a third party consultant or adviser might be helpful with introductions or unique insights into companies you don't know well yourself.  Likely valuations at this stage can range from modest acqui-hires to reasonably attractive outcomes if you are able to articulate a combined growth story that gets several acquirers excited such that you can get a little competitive bidding going in the process.  Apart from a competitive process, other important valuation drivers will be the strength of your team, the willingness of critical members to stay with the acquirer and for how long, and whether you can identify ways your company will help create new revenue opportunities for the acquirer.

Hyper Potential:

Hyper Potential companies that are showing rapid growth in important market segments that are strategically important to potential acquirers are the companies that are most likely to see inbound acquisition interest, and whether to entertain these offers is often the hardest question for Founders and their Boards to consider.  At the extreme, make the right decision and you look like SnapChat turning down a billion dollar plus offer only to be valued a year later at more than ten billion or, on the other hand, Groupon turning down a $6 billion offer and struggling to ever come close to that value even after significant further dilution.  The critical question to ask at this stage is how realistic it is to move up the company maturity scale – in other words is there a case to be made for, or evidence of, a wildly attractive future business model.  Related questions include how much capital and associated dilution will be required to pursue the opportunity and how this relates to the potential value of selling now.  Further, some market segments that seem unlikely to support public companies go through a game of musical chairs whereby several companies could be competing for a limited number of acquisition chairs and thinking through do you want to be the first to sell or the last, can have huge bearing on valuation in both directions.  Hyper Potential companies, by definition, have multiple alternatives, so the most important question is ultimately what motivates the team.  My partner Jeff Bussgang previously wrote about this here, but the question comes down to the passion you have for the business, do you want to go out and change the world or is having a good win more important?  Will the acquirer help you achieve that dream or screw it up and, conversely, if you stay independent can you and your team take the company forward for many years, and if you can't and lose control down the road, do you care? 

If you are running a Hyper Potential company and you decide to sell, the process tends to be relatively fast and the buyer universe narrow.  There are very few companies that can pay the super high-valuations (by any traditional valuation metrics) required to make it worth selling at this stage, so the likely buyers are the mega-cap public and private companies and it is more likely than not that the process actually started with an inbound approach by one of these companies.  Moving forward with only one horse in the race generally does not make sense, so the jujitsu required is to quickly spin up some competing alternatives generally by leveraging the team's contacts and relationships.  Given a quick relationship driven process, our experience has been that investment bankers are more likely to interfere in the sale of a Hyper Potential company than they are to add value.  The key to driving a high valuation is, instead, making the case directly that you fill a CEO level priority for the acquirer, having multiple suitors where this is the case and being willing to walk away from the negotiating table, perhaps several times, if the offers are not at an acceptable level.

Steady as She Goes:

Mature companies that are growing steadily don't necessarily have to sell at any particular time as they are often profitable with solid business models.  As a result, thinking about market timing is the most important consideration for these companies.  If you are coming off a string of good quarters and the valuations for your comparable companies are increasing, it may suggest the time is right to look for an exit, while similar good performance in a tough market environment would suggest sitting tight.  In other words, 2009 was a lousy time to sell if you did not need to, but 2014 was a pretty good time to look for an exit.  Other considerations to think about in terms of when to sell a Steady as She Goes company are what risks there are to the downside – such as changing competitive environments, margin pressure, macro-economic risks specific to your business or regulatory changes that could be forthcoming – and what opportunities there may be to the upside that will bend the growth curve in a positive direction such as new product launches, new markets that are just being opened or potential opportunities to make acquisitions instead of being acquired.  Important questions for the team to ask themselves is how motivated they are by the day to day running of the business and can they see continuing to do so for the next few years to come.

If the decision is made that the time is right to seek an exit for a Steady as She Goes company, the universe of potential acquirers tends to be the broadest of all the categories as the company could be a fit for small to large-cap public companies, larger private companies and private equity acquirers.  As a result, the process tends to be more formal and involve broad outreach, an approach in which an investment banker can add significant value.  Valuations for this type of company tend to follow more traditional metrics and models where the acquirers will be thinking about comparable companies and their own revenue or profitability multiples.  The key to driving valuations higher will be a well orchestrated process, with multiple bidders, well articulated models of how the combined companies can generate significant synergies and a willingness to walk away and keep running the business if the options are not attractive.

Options Abound:

As the category name indicates, mature companies that are strategically important and growing fast, have numerous options.  They can keep pushing forward as a private company, they can seek to go public or they can sell.  This decision is ultimately a gut check on the business on all dimensions: does the market opportunity still appear to be unbounded, is there strong revenue visibility, does the business seem to be getting easier or harder as we scale, and do we have or can we readily build the right team?  Further, it is gut check on whether the team is up for being a public company, and all that entails, and what risks could derail the business if it stays independent versus what opportunities are created by being public such as an easier ability to make acquisitions or the publicity and credibility that comes from being public.  Having a clear point of view on the capital markers environment for your market segment and the relative values across the public markets, private markets and M&A markets as this will help you understand the financing tradeoffs.  For example, in today's market you could argue that in certain segments the private markets are paying the highest values, followed by the public markets and then the M&A market, so this would argue that for a company with numerous alternatives, financing privately and building for an exit may be a better strategy than selling now, whereas a few years ago the M&A markets were paying the highest values.  

If a company with multiple options does decide to put a toe into the waters of the M&A market, there is generally a mid-sized pool of potential acquirers from medium to large cap public companies to large PE firms.  Given the considerations around the market environment and wanting to have an IPO as a credible option, having a strong investment banker to advise the company and potentially explore a dual-track IPO/M&A process is important.   The key to driving a premium valuation will be all the process and synergy comments noted above for the the Steady as she Goes companies, but more important will be the credible threat of going public or raising a large private financing and being willing to drive the company forward independently for a number of years to come.  

 

Across all the stages, the last and most important piece of advice is to keep building your business.  An acquisition process can be wildly distracting, but even until the last minute there is a good chance everything can fall through, so figure out how to compartmentalize the efforts to make sure you don't sacrifice your company's potential along the way.  

Hopefully this provides a useful framework for thinking through the issue of whether and when to sell your company and how to best approach the process and drive value once you do decide to sell.  Once in the process, there are dozens of other considerations in terms of negotiations, structure and terms, but those can wait for another post!

20 years on

This December marks 20 years since I made my first venture investment.  I wrote about the specifics of that company here, but instead of reliving that one company, here in another bout of nostalgia I am going to reflect on what remains the same and what has changed in my 20 years as a venture capitalist.

In 2014 the US VC industry is on a pace to invest over $40B in some 4,000 companies and venture firms across the industry will likely raise over $25B.  This compares to 1994 when the industry invested $4.1B in just over 1,200 companies and raised $7.6B.  Further, the innovation is far far more global with markets such as China and India raising and investing significant amounts of capital, up from virtually nothing 20 years ago, while markets where there was some level of VC in 1994, such as Europe and Israel, have also seen tremendous growth and expansion.  The largest financings of 1994 were companies that raised $20M, while today financings of north of $100M are not uncommon and the average VC backed IPO in 1994 was for a company raising $25M at just under a $100M value after being in business for 5 years as compared to 2013 when the average VC backed IPO company raised $137M at just under a $800M value after 8 years.  So on the surface, the industry has changed significantly in the past 20 years.

Despite this outward appearance, as I thought through the day in and day out of what we do as VCs, much remains the same.  Our goal is to identify and align closely with talented founding teams, target investments into companies that can participate in or create massive markets, can scale rapidly, have deep sources of competitive advantage relative to incumbents or other emerging players, and have potential business models, often leveraging technology platforms, that show high degrees of operating leverage and recurring benefits of scale.  While the specific trends change, the industry and the companies we support continue to perform best when there are massive platform shifts under way as this creates the environment where smaller, nimbler companies can identify and take advantage of trends far more quickly than larger companies.  The industry is also still comprised, with a few notable exceptions, largely of small partnerships raising capital from limited partners with a long term outlook and an ability to manage the illiquidity inherent in financing small companies in nascent markets.  Further, we as venture capitalists now and then sell a commodity (money) that needs to be wrapped in a customer service layer that provides value to our entrepreneurs such that we can be the preferred partners for the most talented executives and have a positive impact on the companies we support.  The best VCs from 20 years ago were preternaturally curious, knew how to jump on trends early and how to work effectively to support the best founding teams, and this remains the case today.

While the day to day activities remain the same, there are clearly changes in what I see on a daily basis.  First and foremost, the average founder today is far more educated on entrepreneurship and on strategies that are most likely to lead to success.  This is in part due to entrepreneurial studies becoming a core part of college and business school curriculum, but more so due to the amazing breadth of information and case studies available at the fingertips of every aspiring founder.  Second, the venture industry is far more transparent today with the most effective VCs regularly communicating with founders via a variety of channels on trends, best practices, important issues and the specifics of their own investment strategies.  It is amusing to look back on when I wrote my prior firm's first website that this was a controversial decision given that in the prior 20+ years of their history they never even had a brochure.  Given founders with a deeper background and understanding of entrepreneurship, the third change is that VC industry as a whole has become far more specialized.  It is no longer sufficient, to deliver on our promises to founders, to be a sound source of general start-up business advice (although this still has value), but rather we also need to be deep in the markets we participate in with a clear point of view on specific strategies, tactics and resources that will be helpful to founding teams.  I looked back at the investments my prior firm made around the year I joined and they included software,  communications, biotech, healthcare services, retail, media and financial services companies.  There are very few, if any, individual venture firms anymore, that cover this breadth of activities and if they do they are either investing at a very late stage and/or with multiple teams of specialists.  Interestingly, this move towards specialization comes as the breadth of industries and market segments impacted by innovation has increased significantly which is in part how the industry is able to successfully absorb a five to six times more capital each year than it did 20 years ago.  Finally, the company building tactics employed by the companies we back have changed (product development practices, sales and marketing strategies, and approach to global markets are three areas that immediately come to mind, but this is a whole separate topic), including specifically on the investment side where there has clearly been a major shift in how companies are financed, whether it be at the startup phase and prevalence of small seed rounds, or at the later stage where the small IPOs of 20 years ago noted above have been replaced by the $50+M late stage private financing at significantly higher valuations.  

My conclusion: venture capital has indeed changed in fundamental ways in the 20 years I have been fortunate enough to be in the industry, but what makes for a good venture capitalist and what makes for a good investment opportunity has not.  I feel fortunate to have worked with as many creative and talented founders over the years and look forward to doing so for the next 20!

Full-Stack Analytics: The Next Wave of Opportunity in Big Data

This post orginally appeared on KDnuggets in May of 2014 and came out of a panel discussion at Analytics Week in Boston that was moderated by Gregory Piatetsky of KDnuggets.  On the panel, I was asked to discuss where we see investment opportunities in the Big Data landscape and this post will expand on my comments.  The lens through which I make these observations is from our role as a seed and early stage venture capital investor, which means we are looking at where market opportunities will develop over the next 3-5 years, not necessarily where the market is today.

Over the past few years, billions of dollars of venture capital funding has flowed into Big Data infrastructure companies that help organizations store, manage and analyze unprecedented levels of data.  The recipients of this capital include Hadoop vendors such as Cloudera, HortonWorks and MapR; NoSQL database providers such as MongoDB (a Flybridge portfolio company where I sit on the board), DataStax and Couchbase; BI Tools, SQL on Hadoop and Analytical framework vendors such as Pentaho, Japsersoft Datameer and Hadapt.  Further, the large incumbent vendors such as Oracle, IBM, SAP, HP, EMC, Tibco and Informatica are plowing significant R&D and M&A resources into Big Data infrastructure.  The private companies are attracting capital and the larger companies are dedicating resources to this market given an overall market that is both large, ($18B in spending in 2013 by one estimate) and growing quickly (to $45B by 2016, or a CAGR of 35% by the same estimate) as shown in the chart below: 

BigDataMarketForecast2013

While significant investment and revenue dollars are flowing into the Big Data infrastructure market today, on a forward looking basis, we believe the winners in these markets have largely been identified and well-capitalized and that opportunities for new companies looking to take advantage of these Big Data trends lie elsewhere, specifically in what we at Flybridge call Full-Stack Analytics companies.   A Full-Stack analytics company can be defined as follows:

  1. They marry all the advances and innovation developing in the infrastructure layer from the vendors noted above to
  2. A proprietary analytics, algorithmic and machine learning layer to
  3. Derive unique, and actionable insights from the data to solve real business problems in a way that
  4. Benefits from significant data "network effects" such that the quality of their insights and solutions improve in a non-linear fashion over time as they amass more data and insights. 

A Full-Stack Analytics platform is depicted graphically below:

Full Stack Analytics Graph

Two points from the above criteria that are especially worth calling out are the concepts of actionable insights and data network effects.  On the former, one of the recurring themes we hear from CIOs and LIne of Business Heads at large companies is that they are drowning is data, but suffering from a paucity of insights that change decisions they make.  As a result, it is critical to boil the data down into something that can be acted upon in a reasonable time frame to either help companies generate more revenue, serve their customers better or operate more efficiently.  On the latter, one of the most important opportunities for Full-Stack analytics companies is to use machine learning techniques (an area my partner, Jeff Bussgang, has written about) to develop a set of insights that improve over time as more data is analyzed across more customers – in effect, learning the business context with greater data exposure to drive better insights and, therefore, better decisions.  This provides not only an increasingly more compelling solution but also allows the company to develop competitive barriers that get harder to surmount over time.  In other words, this approach creates a network effect where the more data you ingest, the more learning ensues which leads to better decisions and opportunities to ingest yet even more data.

In the Flybridge Capital portfolio, we have supported, among others, Full-Stack Analytics companies such as DataXu, whose Full-Stack Analytics programmatic advertising platform makes billions of decisions a day to enable large online advertisers to manage their marketing resources more effectively; ZestFinance, whose Full-Stack Analytics underwriting platform parses through 1000s of data points to identify the most attractive consumers on a risk-adjusted basis for its consumer lending platform; and Predilytics, whose Full-Stack Analytics platform learns from millions of data points to help healthcare organizations attract, retain and provide higher quality care to their existing and prospective members. 

Each company demonstrates important criteria for success as a Full-Stack Analytics company:

  1. identify a large market opportunity with an abundance of data;
  2. assemble a team with unique domain insights into this market and how data can drive differentiated decisions and have the requisite combination of technical skills to develop and;
  3. manage a massively scalable learning platform that is self-reinforcing.

If your company can follow this recipe for success, you will find your future as a Full-Stack Analytics provider to be very bright!

Leading high performers

In my #ifiwereafounder tweets, I had a few comments related to hiring high performers and team building, not only for finding a co-founder, but also more generally.  What I did not cover, as the CEO of one of my portfolio companies recently so correctly pointed out, is what it takes to manage and lead a team of high performers.  This post will attempt to shed some light on this topic.

Developing, managing, retaining and leading high performing team members, whether they are right out of school or seasoned executives, is obviously critical to the success of any start-up venture.  But these folks, by the nature of their intelligence, curiosity and drive, can also at times be a handful to manage.  They also know they are great and have plenty of other opportunities, so keeping them engaged, focused and happy is important.

In my experience, and from observing many successful CEOs over the years, the following are critical points to focus on in leading a team of high performers:

  1. Create a sense of ownership and identity by connecting what they are working on with with the broader goals of the organization.  This is critical across the board, but with A players there is a constant need to feel like their ample skills are being applied to issues that move the needle for the company.  Sometime this is obvious (i.e. closing a key account from a sales perspective), but when it is not, make sure you have clearly articulated short and long terms goals and connect the dots for people.
  2. Ensure the goals are expressed in terms of ambition, not just dollars.  As you connect the specific activities and tasks to broader goals, ensure these goals have meaning beyond just numbers.  Yes, growing revenues, hitting budget and creating shareholder value are important, but high performers are motivated by feeling like they are part of something truly important that will create an impact on the world.
  3. Delegate and provide autonomy, but take an active interest in what they are doing.  With a clear linkage between their team's focus and broader goals, strong leaders know that the best approach is to step out of the way and let their high performers execute fairly autonomously. That said, this should not be translated into a perception that you don't care about how they are doing what they are doing as high performers will be proud of the approach they have taken. If you take the time to understand this, they will reward you with further creativity.  
  4. Find the right scope for their activities with a balance between stretching them, but not stretching them so much they feel like they are set up to fail.  In a resource constrained early-stage company this is hard, as there is a tendency to keep putting more and more onto the plate of your high performers.  This is great, but know their limitations, listen carefully to when they feel like they are getting stuck and intervene before this becomes demoralizing.  
  5. Look for opportunities to let them stretch their wings outside of their core domain.  If you have a high performer in a specific domain, seek out opportunities to get them exposure to other parts of the organization.  This helps align their interests with that of the company more broadly, allows them to keep learning and facilitates cross functional cooperation across your team.  Special projects, critical sales situations or thorny customer service issues can often be good situations to involve others in developing creative solutions.
  6. Recognize success and achievement.  This is perhaps obvious, but as one of my CEOs observed, high performers all have a little diva in them.  Acknowledge this diva publicly and privately, but also in a demandingly honestly way as false praise for easy accomplishments is seen through pretty quickly.  
  7. Take pride in their development.  Our best CEOs view their job as grooming the next generation of leaders, and they revel in the success when people step up.  If seeing these unexpected accomplishments and this growth and development does not get you jazzed, it maybe you are not in the right role.
  8. Take an active interest in their life outside of work. Early stage companies can be all consuming and it is easy to lose sight of the fact that your high performers will have a life outside of the office.  Recognize this, know what is important to them and understand if there are extenuating circumstances outside of work that may impact their abilities inside work. 

I am sure I have missed some points, so let me know what works well for you!  I would also like to give a special thanks to several CEOs of Flybridge portfolio companies who provided invaluable advice on this post.  They are the real rock stars, and I would like to publicly acknowledge their inner divas.

On Being Scared Shitless

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Of all my #ifiwereafounder tweets, this comment resonated with the most people.  Profanity aside, as that always sells, this is because I acknowledged what every founder feels and almost never publicly admits: the day to day building of a company from scratch is scary.  These fears range from those that are inwardly focused (I am doing things every day I have no experience doing), team focused (how on earth did I become responsible for the livelihood and development of all these people), customer focused (we are at risk of screwing up our largest account), market based (will enough people buy what we are selling or if there are, will our large competitor react quickly enough to crush us ) to financial concerns (we run out of money in 8 weeks and I have no idea where the next slug of cash is coming from).  

The path through these fears is the second part of the tweet: be action-oriented around things you can control.  Don't fret about things outside of your control.  For example from the list above, what you do today has very little to do with whether your large competitor decides to try to crush you.  Every cycle you spend on things you can not impact distracts and bogs you down.  Instead, focus relentlessly on what you can do to keep pushing forward every day.  Break down big scary tasks down into manageable and achievable chunks.  Celebrate small successes and develop a culture of getting shit done.  Figure out quick data driven approaches to research your concerns and react accordingly.  Recognize you don't and can't know everything and reach out for input on your path forward from your team or advisors when you are outside of your comfort zone.  If you are confronted with a WFIO moment, read Scott Weiss's excellent post on leading from the front, getting the best brains around the table and realizing it is never as bad as it seems.  Speed, desire and unique insights are why start-ups win.

In a subsequent tweet I said "I would have one person to share my deepest fears and worries with" and this too is critical.  Generally I am a fan of leaders that are more open with their team than not, but I also recognize you can not share everything broadly.  But internalizing all these fears is also counter-productive and will lead to even more sleepless nights, and there are enough as it is.  So have someone you can be completely honest with as talking through your concerns, issues and worries makes them easier to address and overcome.  Ideally this person is your co-founder, but could also be a key mentor, other CEOs in a group you regularly meet with, your significant other or, heaven forbid, an investor you trust.  If you can find that unique combination of 100% supportive married with honest objectivity you will have found the right mix.

Finally, if the reactions I had to the tweet are any indication, recognize you are not alone.  This in and of itself is helpful.