5-4-3-2-1 Countdown for Entrepreneurs (12/15/22)
5
Ways to evaluate your startup’s “business reputation”
It’s tempting for leaders of an early-stage venture to think in terms of their “brand” because they feel that is something they can conceive and control through marketing. But “reputation” – earned, deserved, or damaged unfairly – is another test for success.
How is your startup perceived, judged, and talked about in the marketplace? Your reputation grows over time, whether by design or inaction. To understand, safeguard, and improve your startup’s rep, you should occasionally try to view your endeavor through the eyes of those who come to know you – customers, prospective customers, investors, prospective investors, employee contacts, job applicants, vendors, et al.
To get a better sense of your evolving reputation, a startup’s leaders might ponder questions like these from the different perspectives of various constituencies:
Customer-centric. Is your startup viewed as truly dedicated to serving and solving?
Creative. Is your startup appreciated as genuinely and impressively innovative?
Collaborative. Is your startup known as an efficient and enthusiastic team?
Conscience. Is your startup recognized for having high standards of integrity?
Capital. Is your startup perceived as fiscally sound and a smart investment?
4
Insights from Stoic Philosophy for Startup CEOs
“The impediment to action advances action. What stands in the way becomes the way.” – Marcus Aurelius
“Some periods of time are snatched from us, some are stolen, and some simply seep away. Yet the most shameful loss is the loss due to carelessness.” – Seneca
“If anyone can prove and show it to me that I think and act in error, I will gladly change it – for I seek the truth, by which no one has ever been harmed.” – Marcus Aurelius
“You have power over your mind – not outside events. Realize this, and you will find strength.” – Marcus Aurelius
3
Thoughts to Inspire New Year’s Resolutions
“You are never too old to set another goal or to dream a new dream.” — C.S. Lewis
“We must always change, renew, rejuvenate ourselves; otherwise, we harden.” — Johann Wolfgang von Goethe
“If you don't like something, change it. If you can't change it, change your attitude." —Maya Angelou
2
Qs for startups: What is your minimum outcome for “success” and the maximum risk that is acceptable?
Startups are inherently risky. And if that isn't challenging enough, founders and CEOs routinely take on more risk for their venture than is necessary.
But there's a path they can take to increase the likelihood of their venture’s success — without taking on additional risk.
The first step on that path is to answer two core questions about what I call a venture’s “min/max”: What is the minimum outcome your venture needs to achieve for you to deem it a success? And what is the maximum amount of risk or loss that you're willing to accept in pursuit of that outcome?
With many startups, I often see what I call “vision creep.” It goes something like this:
Imagine you've got a new concept and you shop it around a bit, with friends or potential investors, and the earliest conversations don’t seem to generate much interest. But some individuals suggest a few adjustments to your ideas; maybe ways to scale it up to possibly grow the top line revenue or track different markets. Soon, interest starts to pick up and the next conversation tends to go a little further. Before you know it, your modest ideas get bigger and bolder, and people are a lot more encouraging.
That's vision creep. Having a bigger vision and more ambition is great. Indeed, it’s critical in your quest to get a venture off the ground. I'm not trying to dampen that ambition. However, when a startup’s goals grow, the resources required to get them there will also grow. And these resources don't come for free. They require more money, more uncertainty, and more risk.
But when you keep a minimum outcome in mind, you don't take outsized risks. Because once you reach that minimum, you treat everything beyond it like a bonus — like icing on the cake. And you adjust your approach in a way that better protects what you've already achieved.
Now let’s look at the other side of this equation, the max. By having this maximum that you're willing to put at risk, you're introducing two ke y benefits: First, you better accept the risks you are willing to take. This means that when you're operating below this limit, you're not overly concerned about the risks you're taking or the costs you're incurring. Sure, you still need to be thoughtful and calculating, but your decision-making is unclouded and your reaction time is quick — both critical for a successful startup.
Plus, you can better spot and avoid the risks you are not willing to take. They won’t sneak up on you. This helps you avoid undue risk, excessive stress, and decision-making that is rushed and unwise.
This min/max thinking is what we do naturally in other areas. Consider, for example, saving for retirement. Imagine you've got a 25-year window between now and when you expect to retire. In trying to plan for that, you have a vision of what you want your quality and standard of life to be then, so you think about what you’ll need to make it happen. You reflect on what you earn today and how much money you can set aside. You go through that process and start to put money into the stock market. And because you have a long time horizon between now and retirement, you can do some fairly risky investing today. But, as you get closer to retirement, you're willing to take less risk because you’ve got to protect that lifestyle you're hoping to achieve.
So you don't see people with modest savings one year before retirement deciding to buy a chateau in the south of France, with an entire house staff, and live la bonne vie. Nobody has that kind of vision creep. When it comes to retirement, people don’t adjust their approach and decide that with 25-30 years of savings they’ll invest all of it in extremely risky financial instruments because otherwise they can’t afford two yachts. Nobody does that. But in startups, that thinking is not uncommon.
So, if the advantages of this min/max approach are so evident, why is it that more of us aren't doing it? Well, frankly, to define and maintain this min/max approach a CEO has got to be willing to go against the grain of typical startup culture.
Startups are all about constantly striving to be bigger and better. Except for a Minimum Viable Product, the idea of trying to minimize anything in a startup is practically heresy. Investors don't want to hear about your minimum ambitions. They want to know how you're going to change the world and always push for something more. It's going to be hard to impress your founder friends by talking about a success that’s merely “good enough.” So, generally, we don't say that. We say, “go big or go home.” And imagine if we wanted to put a cap on our own personal appetite for risk. We tend to keep that little nugget of information to ourselves. Imagine if word got out that you exhibited the slightest hint of risk aversion. You'd likely be kicked out of your coworking space!
When I work with CEOs to define their unique min/max, I make clear that just because you identify the minimum level of success you’d accept does not mean you are putting any limits on your potential. The sky can still be the limit for your venture. This simply means that you're not willing to sacrifice your baseline achievements to roll the dice for something more. It means you want to boost your odds of winning on your terms. And when those successes come, you want to lock them in. But once they're safe, you can go ahead and keep shooting for the moon.
1
Argument for why startups should focus on outcomes, not exits
Startups can seem obsessed with exits. And why wouldn't they be? After all, IPOs and huge acquisitions are the stuff of tech startup headlines that founders talk about with each other. And frankly, from the perspective of most investors, these types of exits are really the only ways for them to pull material cash out of the startups in which they've made an investment, so for them, it's kind of a prerequisite.
Yes, exits are a huge focus. They are drivers in the overarching success of the startup landscape, and we shouldn't diminish that one bit. However, when decision-making, and thinking around the finances of a venture, are exit first, that can result in founders and CEOs prematurely limiting the options of their ventures. They might put themselves in the precarious position of having to trade off a scenario that creates the greatest likelihood for a near term exit that's big, versus a path that might create the most sustainable, profitable, and viable venture over the longer term.
When it's framed that way, you might think there's not much of a choice -- the second option of being outcome-centric gives young ventures many more opportunities to achieve than the first option of being exit-centric. You're still in the game, you get more at bats -- come to the plate again and swing for the fence. But so often, the startup environment and exit culture drives you toward the first choice.
Let’s consider a real-world example. There's a startup in the health tech space with software as a service or SaaS product. They began with impressive success. Delivering software into healthcare facilities and hospital systems, they were able to get a strong proof of concept and MVP into the market and started to generate early sales from ideal customers -- small and medium ventures. They used that success to raise an early round of capital, and luckily had to raise less than they’d projected because they had enough revenue to offset the cash needs of the business. From there, things got even better because not only were they continuing to attract small to medium business customers who paid; one of their newest paying customers wasn't an SMB but a Fortune 500 healthcare conglomerate, the ideal candidate to be a future acquirer. The CEO of the startup had to admit that the new Fortune 500 customer really started to glow brightly for them, an intriguing and hopeful prospect for growth. That little bit of business didn't necessarily grow their revenue, but the startup caught the attention of more and more folks at the Fortune 500 company -- to the point where they asked the startup if they’d be willing to do a pilot program together so they could roll out some new features to the entire healthcare system. Now, the startup knew that to be able to service that kind of a deal, they would have to take resources from all over the company. They didn't have enough cash to hire more people, not with the revenue they were getting at that point, so they had to put all hands on deck to make this thing happen.
In doing so, some things would have to suffer, like their ability to sell to more of their small business customers and service them well to maintain the products. Well, they made the choice to focus on the Fortune 500 company. And it seemed like a reasonable trade-off even as some of the small to medium businesses had problematic experiences -- they got frustrated, didn't renew contracts, and moved to competitors. But it didn't matter because the startup had this incredible opportunity. None of their competitors had this kind of special pilot program. They were a half step away from creating the kind of partnership that had “huge exit” written all over it. Unfortunately, that all changed when the Fortune 500 skidded into challenging times, had pressure on their stock price, and had to put a pause on all engagements and programs like the pilot program. So, with a snap of their fingers, the program wound down, the startup was left with almost no revenue, few customers left on the roster, and no real chance that a partnership with the Fortune 500 company would ever materialize. They still had a sizable staff, a lot of bills to pay, and in the end, ran out of cash.
Now, an outcome-driven approach may not have saved this company. However, at every point along their journey when they had a critical decision, they could have asked themselves a couple of questions. The first should have been: Am I making this decision based on the outcome or the exit? They could have readily answered that. In every case I described, it was exit. The second question should have been: Do we have a choice? In all those cases, that CEO and the team might have assumed they didn't have a choice. But they did because the ability for that company to continue to service its small to medium business customers and generate that revenue would have given them a chance to fight another day; it would have given them flexibility to be able to negotiate different terms, potentially, with the Fortune 500 company or merely survive when that Fortune 500 company wasn't able to continue the program, or maybe use it as a case study to find another huge venture to continue to pursue their exit ambitions.
Those are the kind of advantages an outcome-driven approach can give a company, yet rarely do founders ask themselves the key questions: Is this outcome or exit driven? Do we have a choice? What alternatives could give us a chance to fight another day?
An early-stage venture should be clear about its desired outcomes, and clear about the outcomes of all the other stakeholders that matter. I'm talking about stakeholders who have real influence in day-to-day operations of the business, which usually comes from founders and/or major investors who have meaningful ownership of the business. They, too, will have a say in how the venture will scale.
Another place where there's a huge advantage and benefit to outcome-centric thinking is when it comes to making decisions about whether to take money, how much to take, or who to take it from when you're out fundraising. When you think about those environments where you're trying to raise money, imagine a scenario like the one I described for the healthcare SaaS company. It’s reasonable to imagine yourself raising money from particular investors or companies. You should be able to understand what they want, how they operate, how they generate returns, and what outcomes look like for them. And if a successful outcome for them doesn't align with what's a successful outcome for you, it doesn't necessarily mean you shouldn't take the money; it just means you should do it with your eyes wide open. It also means you won't be shocked when circumstances arise where you might not see eye to eye with those people or companies when their desired outcomes conflict with yours.
In contrast, if everyone is simply focused on the exit, then when you meet a prospective investor who pump all these ideas of how big you're going to be and how much an exit you can generate, both of you think those outcomes are phenomenal. And both of you are aligned with what you believe you want to do. So the exit-first approach makes the two of you believe that every part of what you want to do together is in lockstep, whereas an outcome-driven approach would show you all the places where you differ -- in a healthy and productive way that gives you every opportunity to decide what is best for the venture, which is your ultimate goal and responsibility.
Stay safe, stay happy, stay in touch!
Adam
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