Yearly Archives: 2006

Hiring the right people?

“It’s management, management, management.”

That’s the phrase that many investors will cite when asked what is the most important element that they evaluate when considering an investment in a company. Variations on that theme include,

  • “I bet on the jockey.”
  • “I’ll take an A management team with a B idea over a B team with an A idea every time.”

If it’s so darn important, how come we continue to make so many mistakes?

Nobody’s Perfect

You are going to make hiring mistakes. It comes with the territory. Yet, rarely does a first-time entrepreneur’s plan reflect that eventuality. Most plans imply that every hire fills the necessary slot forever.

Have you included personnel turnover in your plan? Have you incorporated:

  • People leaving your company?
  • Having to fire people?
  • The cost of severance?
  • The inefficiencies of having to replace someone with a new hire who needs to be trained?
  • Costs of recruiting (advertisements, headhunter fees), if any?
  • The financial impact of having multiple slots unfilled at any time?

This is the reality and it will have a significant impact on your company’s operations. First-time entrepreneurs should anticipate that at least one out of four hires will not work out and will need to be separated from the company. When one takes voluntary departures into consideration, it would not be unreasonable to assume 50% turnover in each of the first two years.

The “good” news from an investor’s perspective is that at least nine out of ten companies will be under their spending forecasts because their staffing will be behind plan.

Why I’m Wary of Milestone Investing

In the beginning of my career working with early stage businesses, I believed in milestones and tying investments to their achievement. Conventional wisdom was (is?) that milestones help to keep the management of early stage ventures focused.

That assumes that the milestones agreed to at the closing remain the company’s priorities.

In my experience, though, that’s rarely the case.

Things change. Priorities shift. In some cases, strict adherence to the milestones may hurt the company. The conflict between the specifics of the milestones and the company’s needs are often difficult to resolve.

If you’re a first-time entrepreneur, all you know is that getting the next round of funding depends on hitting the milestones. The fact that things have changed is troubling, but you can’t tell your investor that you were wrong (even if the changes had absolutely nothing to do with anything you said or did). You fear that if you try to change the milestones, it will be seen as a sign of weakness. Instead of admitting and addressing the important issues, you play ostrich and forge ahead with meeting the milestones.

How does this relate to hiring?

Well, if you’re like 99% of first-time entrepreneurs, you do not have a complete management team in place when you seek your initial funding. A potential investor will point that out, and after discussion with you, you’ll agree that recruiting a vice president of [fill in the blank] by a specific date is a perfectly reasonable milestone. The deal is set. You close on the first tranche (a fancy word for a closing). And away you go!

As your cash dwindles and the next closing approaches, you can often find your standards for filling the agreed-to position begin to erode. After all, getting cash into the company is critical, so that takes precedence. Bad move.

I was on the board of a company that had a milestone to hire a vice president of sales by a certain date. We even had a budget to engage a recruiter to help us find the right candidate. Long story, short, we narrowed the selection to two candidates. The selection committee from the board, including the investors who had set the milestone, met with the candidates individually, and we endorsed the CEO’s recommendation.

Milestone met. Next round of funding closed. All is good… NOT!

To this day, it is my opinion that this specific decision led to the company’s ultimate failure (and the loss of over $5 million of investor money).

Why?

Within 45 days, the CEO knew that the hire wasn’t going to work out, but he was reluctant to bring this to his board’s attention. He was afraid it would undermine his relationship with them.

I advised the CEO to work with the VP. Surely he couldn’t be so bad as to not be able to do an adequate job. After all, the recruiter found him and confirmed his past accomplishments. I had interviewed him, and while he had some experience gaps that I knew were potential liabilities, they didn’t appear to be insurmountable.

Remember my comment earlier about playing ostrich? Well, that’s what I was guilty of.

The VP’s inadequacies were not obvious to the board until about the fourth month. Finally, he was let go before the end of six months.

So what’s the big deal? Hiring and firing is an everyday occurrence. I’ve even said as much earlier in this article.

Well, the big deal is that we had to unwind the sales organization that the VP had put into place. That took about three months.

So it took us nine months to hire, fire, and return to the status quo of where we had been before we hired the wrong VP. That’s nine months of burning cash. That’s nine months of market evolution without us being a meaningful participant. That’s nine months of telling customers one thing and then having to retract those statements. We went from a leadership position, to one of a follower. We never caught up. The company failed.

I believe that the hiring milestone led to us hiring the wrong person. Since then, while I have reluctantly participated in some milestone-based deals, I have never allowed filling a particular position to be one of the milestones.

The Groucho Marx Syndrome

Groucho Marx is remembered for many witty sayings. [I’m probably dating myself with this reference, but I hope not. Groucho should not be forgotten.] With respect to the topic of this article, I’m referring to: “I’d never belong to a club that would have me as a member.”

The individuals that you want to join your company have no interest in joining your company. The first-class individuals that you should be seeking are already in good jobs. They are being recruited for senior positions with companies that are much more established (read, “less risky”) than yours. There’s no way that they’d ever consider your company, is there?

Yes there is. You are launching a “kick-ass” company, aren’t you? [If not, why are you reading this article?] You will embrace capable professionals who will join your team and help to shape the company’s future. Being part of your company will be exhilarating, challenging, and fun. Your recruit’s current position can’t come close to the kind of satisfaction that can be achieved in your company. That’s why the recruit will join your company. You just have to convince him that that’s the case!

By the way, the inverse of Groucho’s Syndrome, while not absolute, is worthy of consideration. “Anybody who wants to join your company may not be someone you want to join your company.” Think about it.

Advice to entrepreneurs

  • You are going to make hiring mistakes. Admit it when you do, correct the error, and get on with it.
  • Never set a deadline, or accept a milestone, for hiring someone.
  • Only hire the best.

Microformats? hResume?

Geek shirt.. :) Microformat shirt :) Thanks Tantek!I have been talking about Microformats for more than a year.  The movement is exciting and if our experience with hResume is any indication, their use and popularity is growing.  I suspect that Microsoft’s support will increase the rate of growth exponentially.

When we first launched the hResume plugin it was downloaded more than 10,000 times in the first week.  Less than 1,000 people actually installed it.  Since then we believe that around 38,000 have downloaded the plugin and around 2,900 send us pings each month.  Each day I am notified of between one and five WordPress blogs, such as Hunter Johnson’s, that have installed our hResume plugin for the first time. This is interesting because we have spent ZERO time working on it since launch (focused on paying clients).  Keep your eyes open for the next phase of the project…
Last week I met with the SimpleTicket team to talk about the roadmap for the remainder of the year and for the first quarter of 2007.  Microformats were clearly one of the most important subjects covered in our meeting.  If you are working on web applications I would highly recommend including Microformats where ever possible.

Maker’s Bill of Rights

Great thought from my favorite gadget blog: Make.

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If you can’t open it, you don’t own it: Here’s our Maker’s Bill of Rights to accessible, extensive, and repairable hardware… Something to carry around when you’re shopping this year and figuring out what to buy (we are included a little print out of this with our MAKE: warranty voider Leatherman tools) MAKE 04 – Page 156 Subscribers–read this article now in your digital edition! 

Who I read: Rob Hyndman

Periodically people ask me which blogs I read so I decided to start doing little profiles on the bloggers I respect and read (well I don’t respect all of the people I read, but don’t tell anyone).

Rob is a lawyer from Toronto.  Visit his blog here.  His bio from his site:

I’m a lawyer practising business law for technology companies and their customers, in Toronto, Ontario, Canada. I spent my first 10 years in practice in Toronto, New York and Budapest with two of the largest law firms in Canada, and as a VP and General Counsel of Hotline Communications, one of the original P2P networking software companies. More recently I’ve launched Hyndman | Law, a boutique business law practice serving technology companies and other knowledge-based businesses, and their customers. Formation to exit; start to finish; financing, operations and mergers and acquisitions – I help my clients with a wide variety of business law needs, including the creation, structuring, negotiation and implementation of technology transactions, and with general e-commerce, internet, technology and other business law matters. I help my clients grow. You can find my practice here, and more about the specific practice areas I serve here.

I serve this industry because I’m a lifelong student of technology, and a geek at heart. I admire the relentless inventiveness and optimism of people in IT, and my mission is to help my clients create change with the transformative power of technology, and to provide personalized services to my clients without the distance, formality, and administrative pressures common to large law firms.

More and more I hear that many people in business – and in IT in particular – find the behaviour of large law firms and other professional service providers to be alienating and unresponsive to their business problems. And they’re right – large firms are increasingly gearing themselves to focus only on high dollar value work and their culture and the billing philosophies do not lend themselves to a “roll up your sleeves and help me grow my business” attitude. It seems to be getting more and more difficult for businesses to find advisors who understand the client’s problems, and who genuinely want to help.

But ultimately, we are here for one reason only – to help people solve problems – and often, the only way to do that effectively is to sweep away the formality and the overhead and just get involved. I believe that clients are ready for a change, and I think there is a remarkable opportunity now for sole practitioners and lawyers in small practices who know how to leverage technology, are hands-on people, and want to build enduring, close relationships with their clients.

In my spare time I’m an assiduous blogger, the Board Chair of a non-profit organization that provides supportive housing services to people in need, and have just convinced my father-in-law, a retired professor of Medieval Philosophy, to write the Wikipedia entry for “Synderesis”.

This is my personal blog, a journal of my observations about law, the practice of law and developments in technology, business, media and politics. I also often talk to journalists and other members of the media about current events in technology and what lies ahead – you can find references to some of these media appearances here.

You can e-mail me here.

Who I read: Mathew Ingram

Periodically people ask me which blogs I read so I decided to start doing little profiles on the bloggers I respect and read (well I don’t respect all of the people I read, but don’t tell anyone).

Mathew Ingram is a tech writer for the The Globe and Mail in Toronto.  Check out his blog here.  His bio from his blog:

My name is Mathew Ingram and I write about technology and business for The Globe and Mail, a newspaper in Toronto. I’m interested in the Internet and new media and Web 2.0 and lots of other topics that occur at the intersection of technology and business, and this blog is where I write about that and also link to interesting discussions that I come across on the Web. Just for the record, what I write here is my opinion only, and doesn’t represent — nor should it be associated with — my employer. I also write a blog at the Globe, which is here.

I was born in Zweibrucken, Germany in 1962, while my father — a pilot in the Royal Canadian Air Force — was stationed there. We came back to Canada when I was little and lived on Air Force bases in a number of different places, including Winnipeg, Manitoba; Cold Lake, Alberta; Downsview, Toronto and Chatham, New Brunswick. I went to the University of Waterloo and got a degree in English, then went to Ryerson University in Toronto and got my journalism degree.

I worked at the Globe and Mail and the London Free Press, then moved to Edmonton to work at a weekly magazine called Alberta Report (now defunct). I moved back to Toronto and worked at the Financial Times of Canada (also now defunct), then moved to the Globe to write about the stock market. After several years of doing that, I moved to Calgary and wrote a column about Western Canadian business, then in 2000 I moved back to Toronto to become the online business columnist for the Globe’s relaunched website.

I live in Toronto with my wife Rebecca and our three daughters Caitlin, Meaghan and Zoe, and two cats.

Who I read: Pete Cashmore’s Mashable!

mashablePeriodically people ask me which blogs I read so I decided to start doing little profiles on the bloggers I respect and read (well I don’t respect all of the people I read, but don’t tell anyone).

Pete’s site has more than 150,000 subscribers (can you imagine?) and focuses on social networking.  Pete is a “new media expert”

Who I read: George Nimeh

Periodically people ask me which blogs I read so I decided to start doing little profiles on the bloggers I respect and read (well I don’t respect all of the people I read, but don’t tell anyone).

George writes the i-boy.com blog.  He is a journalist formerly from Rutgers as well as a former fellow from the Anneberg School for Communication.  I recommend that you check it out!

Who I Read: Screenwerking with Greg Sterling

Periodically people ask me which blogs I read so I decided to start doing little profiles on the bloggers I respect and read (well I don’t respect all of the people I read, but don’t tell anyone).

Sterling headshot smaller.jpgGreg Sterling’s Screenwerk is one of these blogs.  Greg Sterling is the founding principal of Sterling Market Intelligence, a consulting and research firm focused on online consumer and advertiser behavior and the relationship between the Internet and traditional media, with an emphasis on the local search marketplace.

Before leaving The Kelsey Group, Sterling ran its Interactive Local Media program. Prior to The Kelsey Group Sterling was at TechTV where he helped produce the first national television show dedicated to e-business and the Internet: “Working the Web.” Prior to TechTV he was a founding editor and executive producer at AllBusiness.com, a leading small-business ASP and Web site. Before joining AllBusiness, Sterling was a practicing attorney in San Francisco.

Keep up the great work Greg!  Thanks for the posts…

Get Small Fast

As a first-time entrepreneur, you must be able to look at yourself and your business from the perspective of those from whom you want assistance, particularly investors. You’ve read the business planning books, and you know that you need to develop a plan that shows that you can become a big business. In your mind,

big business = big market

which in turn leads you to build your plan around penetrating a market potential of hundreds of millions, or even billions, of dollars. Sound familiar?

With that premise, your business plan may contain a declaration that looks something like this:

“By capturing 0.5% of the market, we will achieve our conservative sales forecasts. At the same time, we won’t be on the radar screens of the major players and won’t be subject to any competitive pressures.”

Red flags are raised! Alarm bells go off! Risk meter pegs out! Ding! Ding! Ding! Plan goes into the wastebasket! That was quick (perhaps less than 20 seconds). What happened?

Investor Requirement #1: You’ve got to know your market

An investor will want to be comfortable that you understand the dynamics of your chosen market and that you can successfully build a business. How do you capture 0.5% of a market? If the investor were to provide you with the requested capital, what are the first three things you would do? Advertise? Hire a field sales force? How do you measure your progress?

The point I’m trying to make (and probably doing it poorly) is that a target of 0.5% market share tells an investor that you don’t really understand your market. In addition, it doesn’t give you the kind of focus that he knows you’ll need to be successful.

All of this adds up to risk that in the opinion of the potential investor may be enough to reject the investment opportunity without going any further.

Investor Requirement #2: You’ve got to have a practical business development strategy

You do need to build a case that your overall market is of a significant size so that you have an opportunity to build that big business that investors seek. You need “sex and sizzle” to attract the attention of the sophisticated investor. But once you’ve done that, you have to think small to get big. Let me explain.

Your challenge at this point is to determine meaningful market segmentation parameters so that the overall market can be divided into market segments. Next you have to define the niche within that segment that you will successfully penetrate because the members of that niche have specific needs that you can uniquely satisfy.

Bear with me. I’ll walk through an example that I think will help you “get” this.

Investor Requirement #3: You need a plan that you can execute

As noted above, a target of a market share of 0.5% doesn’t give you much help in conceiving of and developing a plan that you can execute. But, if you do a good job of identifying your niche, you can develop such a plan.

An investor will want you to be able to answer the following questions:

  • Who are your immediate prospects, by name?
  • Why is each likely to buy from you?
  • What individuals in the prospect company will be involved in the purchase decision and what role will each play?
  • How long will it take to receive a firm order?
  • How many prospects will become customers in the first three, six, nine and twelve months?

You can answer these questions if you are focused on a niche. You can’t if you’re trying to get 0.5% of a market.

An Example: Automated Healthcare, Inc.

Sean McDonald, founder and former CEO of Automated Healthcare and current CEO of Precision Therapeutics, taught me these lessons. When I think back on those early days of the company, I marvel at his audacity and wonder how the heck he ever convinced me to lead the investment in his company. In essence, Sean said, “I’m going to sell robots to hospitals for $1 million,” and I believed him!

In 1990 there were close to 8,000 hospitals in the United States (or so I recall, perhaps in error). That’s a pretty well defined market, but not very useful. Of those, less than 1,000 had more than 400 beds, which meant that they were big enough to justify and use a robot. And so it went, until he had defined a universe of perhaps 25 hospitals that met the company’s requirements. Among those requirements were:

  • Hospitals in which the director of pharmacy was a significant player.
  • Hospitals in which pharmacy directors would “get it” (the inherent benefits of automation and barcodes).
  • Hospitals whose purchase of the AHI product would give the company credibility and would serve as references to other hospitals.

Of the company’s first ten customers were four of the past five presidents of the American Hospital Pharmacy Association. Now, that’s a niche! The company’s success with this initial batch of customers provided the foundation from which a broader market segment could be accessed.

The company was sold to McKesson in 1996 for $65 million, and I believe that McKesson Automation has over 800 hospital customers today.

To get big, you have to think small.

Summary

  • The identification of a large market is necessary to attract institutional investors.
  • Identifying a niche is necessary to formulate an effective commercialization plan.
  • You build your business one customer at a time.
  • Initial customers need to enhance your ability to attract future customers.

First Use of Big in Japan

I ran across the first known use of the Big in Japan tools released as open source projects earlier this month.  Called Weloo, it is a private label version of FeedVault.  The original tool, FeedVault was built to provide an easy way to backup and/or share your OPML file (the file that is inside of your newsreader).  The Weloo version now offers Google Adwords ~ well, it is a start anyway.