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2016 Will be the Year Successful Startups Get Real

Growing up in the ’80s and ’90s, I got a front row seat to the explosion of pop-culture as entertainment. Not the least of which was MTV’s first season of The Real World. That show can be blamed for the proliferation of reality TV with its promise of high viewership, low production cost and questionable entertainment. It also created a pop-culture meme of its time with the tagline, in part, being “What happens when people stop being polite and start getting real?”

For years, it seems, we have collectively gone out of our way to be polite when discussing startups that have spent millions and returned little profits. We have excused companies who have clearly focused more on their planned exits than building an actual enterprise. Company perks like free food, ping-pong tables and dedicated napping stations were celebrated as signals of an organization’s greatness.

For those who work within or closely follow the startup community, you can see increasing calls for companies to get real. While startup companies still hold a highly desirable reputation among the media, venture capitalists and the millennial workforce, there were some warning signs that all was not well. We started to see some high-profile examples of how the promise and excitement of some companies may be more sizzle than steak.

Theranos was very publically lanced (pun intended) by the Wall Street Journal when it cited some research showing questionable reliability in the screening tech it promotes. It also cited what could be called revisionist story telling on the part of their founder Elizabeth Holmes. Both the WSJ and Theranos have doubled-down on their versions of the story.

Because Theranos is trying to make health care screening and monitoring less costly and more widely available, they have been appropriately celebrated for years. Unfortunately, the actual application of their efforts is drawing worthwhile scrutiny and the intoxication with their story is starting to transition into a nasty hangover.

Twitter laid off 336 people this year; about 8% of its workforce at that time. This number is dwarfed by the thousands of people laid off in heavy industries like steel production and coal mining but it sent shivers through the tech world as people realized even a brand behemoth like Twitter had to accept a certain level of financial and market reality.

Layoffs, in general, are on the rise among tech companies of all sizes. The number of people hired and fired in the same fiscal year is growing and those recently short-termed employees are less likely to accept tales of explosive growth and dedicated investors at face value when considering employment at that “next” startup.

Square has demonstrated the ability to lose hundreds of millions of dollars in the last few years as burn rates in the tech sector continue to expand even as investor money starts to tighten. I’m not intentionally targeting Jack Dorsey by using two of his companies as example in this article but Jack is now trying to perform two turnarounds simultaneously at companies that are supposed to be in growth mode, not survival mode. By all accounts, Jack is just as capable of pulling this off as anyone and is certainly showing the dedication needed to get it done.

There are currently 140 companies with a valuation of $1 billion or more. The key word here is valuation. The simple way of illustrating how ridiculous valuations have become is to remind everyone there are only 51 US companies currently listed by Inc Magazine generating $1 billion in annual revenue. Before you send me a bunch of hate mail for comparing revenue and valuation without considering exit values, assets or goodwill payments, recognize that valuations are largely a conspiracy between start-ups looking for cash and VCs looking to attract more Limited Partners. VCs with a paltry 10% success rate routinely attract more private money every year. Valuations are works of fiction.

Whether its inflated valuations or global instability in public markets, private investment money is drying up at a statistically-material rate. VCs saw a decline in funds raised by 34% in Q3 when compared to Q2 this year. It also represented the slowest period for raising money since 2013. IPOs also under-delivered in 2015. As published by the International Business Times, “According to PitchBook, this money (IPOs) amounted to about $64 billion on 860 deals during the first 11 months of this year and about $94 billion on 994 deals over all of last year.”

As we close out 2015, it has become increasingly important for the tech and startup communities to become more self-aware, transparent and start getting real with everyone. Whether those communities are willing to pull back the proverbial kimono or not, there will be a reckoning with investors, employees and customers if they continue to paint their worth in endless streams of run-rates and growth trajectories.

Employees who were once more attracted to the name or promise of a startup are now more inclined to consider how stable a company is and whether they will be back on the job market within a few months chasing the next unicorn-in-valuation-only. Many of the Twitter employees laid off were rehired within literal minutes of becoming unemployed but that not likely to happen in perpetuity.

Investors who became VC LPs because they were tired of the 7% – 8% annual return for their public stocks and equities are now reassessing their risk-tolerance as the public markets have fluctuated significantly in Q4. The play-money investors were spending on longshot startup seed investments just won’t be as plentiful in the next 18-24 months as most pundits believe we have passed the peak of private investing for the current cycle.

People have already started to stop being polite about the performance of startups and established tech companies. Questions about profitability and long term viability are being asked with less guarded phrasing and with expectations they can be credibly answered by founders who have taken millions in private funding.

The companies that get real and are willing to not only tell us about the warts in their startup business but actively work on solutions for those imperfections will stand out from the crowd and attract the best employees, most dedicated investors, highest-value board members and loyal customers. When they make a mistake, they will own it immediately and without equivocation. They will build a company more focused on growth and durability than maximizing its exit offers. In 2016, the companies that are willing to get real will win while their competitors hope everyone continues to be polite about their lack of success.

Get off the Innovation Hamster Wheel

Innovation, long ago, became a term as ubiquitous in entrepreneurial circles as “Co-Founder” or “Unicorn.” When companies like Snapchat create a brilliant but singular idea and ride that to billion dollar valuations in less than 18 months, innovation looks like a very attractive path to success.

We can run through a laundry list of companies whose very existence is based on an innovative concept, service or product. Uber, Fitbit, GoPro, Netflix—the list is long and distinguished.

What fascinates me is the perpetual motion required when a company’s core strategy and value proposition are based on innovation itself. To offer a definition here, a company’s value proposition is what it offers to consumers through its product or service; usually represented in a unique set of features that help it stand out from competing products.

If you attend any tech industry conferences, the speakers almost always focus on the new whiz-bang features they are working to create. With investors clamoring to fund the next big thing in tech, this makes perfect sense. Often, this isn’t just posturing for potential investors- this IS the actual strategy.

If innovation is the strategy to deliver value, a firm needs to be prepared to fully commit to the demands of that approach.

For illustrative purposes, let’s compare Amazon and MySpace. They both successfully launched due to an innovative service that allowed them to gain initial traction. Where Amazon pivoted several times from an online bookstore to product marketplace and then to content and cloud services, MySpace traded on its original concept until it was completely supplanted by Facebook.

Innovation, as a value proposition, is flawed because people assume that innovation is far more durable than it actually is. If you insist on creating value through innovation, accept the hamster wheel that creates and be prepared to dedicate your resources to that endeavor. If you are creating no other durable value for consumers, you cannot innovate some of the time.

Now Facebook is watching an exodus of its younger users to Instagram, Snapchat will soon be considered “old-school” because of Periscope and Twitter’s business model seems to be completely tethered to its original platform.

When the biggest new launch from Twitter is “Moments,” you may wonder how they plan to create new value for their customers.

All of these companies went through a period in their product/ platform cycles where they were no longer innovating. Some haven’t innovated much at all beyond their initial concept. In the case of Twitter, that period may have lasted too long to regain their growth trajectory.

How will Apple continue to create value where it has traded on innovation for the last 20 years? It recently launched the iPhone 6s which is just a repackaged iPhone 6 with a few new features. In that same launch, they has the audacity to showcase the Apple Pencil- something that addressed near-zero demand. With more than $200 billion in cash on hand, will Apple start to create new value or trade on its cult following until Samsung or LG finally produces an iPhone killer? I still haven’t seen that TV we were promised a handful of years ago so I’m not holding my breath for the Apple iCar.

My point is that value creation is what separates a meaningful company built to last from those who will serve as a brilliant flash of light before being quickly forgotten as the next supernova tech company takes its place. If a company’s value creation only happens through innovation, there is no opportunity to stop or slow down.

Ever Been Punched in the Face?

I have only been in one real fight in my life and if YouTube had been around, I’m sure my scuffle would have received a critique similar to the famous Star Wars Kid video. I don’t remember much about my fight because everything kind of went blurry in the moment. I can only imagine there were a lot of flailing arms in an unflattering display of failed pugilism.

One thing I will always remember is getting punched square in the face. There is something so incredibly jarring and absolute about getting hit in the head. It was something I decided, in that split second, wasn’t for me.

Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.” Recently, that quote started to seem increasingly relevant to Redhawk and the work we were doing with clients.

Our firm works primarily with entrepreneurs and owner-operated companies. More specifically, we work with companies that are in some kind of transitional phase. This is represented both in periods of growth and recession. The realization of this transition happens when the current business structure or model can no longer operate as it has and continue to grow successfully.

Sometimes this happens slowly over time and creeps up on our clients. In some cases, this point of inflection is immediate, explosive and violent. A key supplier folds, an important employee quits or a major customer leaves and the business has been fundamentally changed overnight.

They got (figuratively) punched in the mouth.

This is where one of three things happen and is best captured in a quote my friend Ted Alling posted to LinkedIn recently:

“Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.” —Andy Grove, former CEO of Intel

Company leadership that is focused on surviving immediately concentrates their efforts on damage control and minimizing the impact as much as possible.

  • They offer significant discounts to win major customers back.
  • They publicly fire a key employee to signal the problem has been corrected.
  • They re-brand themselves in an attempt to create distance between their image and their failure.

In the aftermath of this business “assault,” we see if an organization will rise to the challenge and merely survive or come out of the crisis prepared to THRIVE. Great companies are not only ready for this kind of challenge but relish the opportunity it presents to push forward and get even better.

How well can you take a punch? Here is an abbreviated list of questions to consider:

  1. How many customers do you have?
  2. What is the average revenue per customer? Any customers who represent more than 20% of your annual revenue? What happens if they go away?
  3. What redundancy do you have in your supply chain? Are you tied to a single source for any major production requirements?
  4. Do you have a succession plan for key employees? What happens if they win the lottery and never come back to work? Are you prepared to deal with that?
  5. Do you have clear organizational goals? Does everyone know what they are? Is progress toward those goals regularly shared with everyone?
  6. Do have your business rules and operating procedures documented? Are they kept up to date and relevant?
  7. What is your Current Ratio? Can you survive a downturn in your revenue?

This is a very basic list but if you find you are missing any of these, take the steps now to correct them.

Good companies are prepared to take a punch. The best companies are ready to make the puncher miss.

If you don’t understand your success, you are going to fail

You just got the email—you lost that deal to a competitor… again. This was the big one. The contract that was going to set your future success and allow your firm to grow its revenue and reputation.

Meetings are called immediately to review why the deal was lost, where it potentially fell apart and how you will take steps to make sure it doesn’t happen again. The sales management team, senior leadership and even the salesperson trying to consummate the deal are all in the room to pour over each detail.

This, of course, is both a reasonable and effective strategy to push improvement in your business and work toward losing fewer deals in the future.

But let’s flip the scenario.

The call comes in letting you know you won that deal you have been working 6 months to close. This was a big one. The contract that is going to set your future success and allow your firm to grow its revenue and reputation.

Immediately after, congratulatory emails and calls are received and maybe your team goes to happy hour to celebrate.

There is something missing here.

Why was there no meeting called to review the win? Why did you win it, where did the deal all come together, who stepped up? Most importantly, how will you make sure it DOES happen again?

We are quick to find faults and critique failures in our business efforts—it’s what business schools, mentors and continuous improvement experts have taught us to do. We are really good at it. Why, then, do we not apply that same discipline to positive outcomes?

Having spent quite a few years in sales, this hypocritical scenario played itself out with the reliability of a Swiss watch. Losses are examined, dissected and even used as political fodder among conniving managers bucking for the next promotion. Wins are usually recognized, briefly celebrated and then fade quickly among the competing business priorities.

Not understanding your success is a direct route to failure. Assuming your business wants more successes, it only makes sense that you should understand what made you successful in tremendous detail. Simply looking at where you failed provides a “Don’t do” list. Wins provide part of the road map for your organization.

Start looking at your wins and go back, where possible, and look at previous successes. This is not just an exercise for sales. Organizational successes happen every day in your HR, finance, recruiting and IT departments. Understanding WHY and HOW you won are as important as why you may have failed so treat those wins with the same scrutiny. You should know how to replicate your success as much as avoiding failure.

The “Best Practice” Bandwagon is Costing Your Business

In the mid-1800’s, P.T. Barnum and his Flying Circus used to parade through towns on something he coined the “bandwagon.” It was gaudy, hard to miss, and a great marketing tool to let people know the circus was in town. Later, politicians used the same method to gain attention for their message, and it worked. People are drawn to the latest and greatest spectacle, even if it’s not strategic for them.

People jump on these bandwagons because something bad or unwanted has not happened to those driving the bandwagon and as such, they are protected from harm. This creates a false sense of security when your business is doing well in well established markets and market conditions for your product is good. To state the obvious, many businesses get on the bandwagon after the parade has passed.

One bandwagon phrase that is particularly troubling is “best practices.” The term is generic, overused and does not consider your business’s specific circumstances. Many times, best practices do not fit a small company’s strategy because they require extensive resources to implement and maintain. Best practices are a by-product of a good strategic plan. If implemented correctly, your strategic plan will continually adapt to the best practice that meets your company’s goals for sales, operations, and customer service.

In the small business world, it is often rare to have a published strategic plan that actually drives what everyone in the company does. If the strategic plan in not well-defined, there will likely be counter acting forces within the company working against each other that will prevent your success. The key is to develop the following as part of your strategic plan:

  • A measurement system to monitor results toward the plan’s goal
  • A recruitment system that will not only hire but keep good employees to drive the plan
  • An incentive system to drive the plan
  • A cohesive team that works together to achieve the goals of the plan
  • A culture that continually adapts and adjusts to drive the plan
  • Continuous training to support your strategic goals

Last but not least, it is important to get someone from outside of your company to give input periodically. An objective third party who has experience creating and executing against complex strategic plans can help a company set the goals and strategy necessary to win. Outsiders also won’t be protecting turf or acting in their own department’s self-interest so they are much more likely to provide unbiased input.

With the right strategy and employing the right resources, I believe that small businesses can lead instead of getting on the latest bandwagon—and driving new and innovative ways of doing business that will help them reach their goals.

Start by Firing Everyone

Early on in my career, I was asked to take over a regional service company with over 280 technicians and operating in 4 states. Having worked for another company in the same ownership portfolio, I was very familiar with the business I was tasked to take over and even assisted them with some management development stuff along the way.

Standing in the owner’s kitchen, I was offered the position and before I could even censor myself, I blurted out,

“I don’t really have the resume for this but I will work my ass off to make it work. And… I’m probably going to fire all of your managers…”

Not unlike other small businesses that grew quickly, the company had taken its high performers from front line positions and promoted them into management. Truthfully, this can work but it takes a special kind of talent to make this transition. They didn’t have many special talents.

The company was facing their first possibility of losing money in the business despite being busier than they had ever been. Productivity, quality and employee retention were all down dramatically.

True to my word and over the next two years, I did work my ass off and I did fire almost all of the office managers. Some were incompetent, some were bullying their staff and some were even stealing. Firing people sucks- except the one that was bullying his staff. I still reflect on that being the only time I’ve fired someone and actually enjoyed doing it. He was a jerk and he was treating our people like garbage.

I didn’t issue pink slips from a corporate office on a Monday- administratively eliminating all the managers in one big sweep. We took some time to understand each circumstance which either confirmed or disputed our belief in each manager’s ability to drive the business forward. We talked to their techs, their warehouse managers, their office managers and even the people in central operations about how each of them was performing. Pretty soon, we didn’t need to ask the questions- people were coming to us with feedback and suggestions.

We also changed the pay from a seniority model to a performance tier system, retrained techs, replaced the fired managers with a mix of internal and external folks, bought new equipment and tools, developed professional operating practices and even added a middle tier of management to push the transition. There was much more but listing it all is tedious reading and tangential.

The company turned the corner over an 18 month period driving up productivity almost 50%, reducing turnover 60%, opening two new offices, growing to over 400 technicians and adding almost 30% more revenue. The best part was the profitability was higher than ever.

As a business grows in size, complexity or depth, you will have people who can make the transition and those who can’t. Can you development them? Are they worth developing? Do they embrace and promote your company’s culture?

I have seen where companies don’t ask these questions because they are afraid of the answer- they have folks that can’t or won’t take the next steps with them. You know the symptoms of those decisions; people are shuffled around into different positions without increasing responsibilities, new hires and installed around them to fill gaps in ability and even creating positions for people that are unnecessary or redundant.

Making these decisions comes with sleepless nights and repeated moral compass calibrations but not making these hard choices can cost you your profit margin or worse.

Now We’re Hacking Customers?

“Disruption”

“Game-changer”

“Hack”

“Bleeding edge”

“Thought leaders”

These are some of the currently ubiquitous terms revolving through business intelligentsia. Much like “synergy” in the 1990’s, it amuses me when words are invented or adapted to define something that was well-defined long ago. For the sake of brevity, I’m only going to pick on one of these terms.

“Hack.”

More specifically, I loath the addition of this word in front of actual business processes or endeavors to suggest a work-around or short-cut. Google any of the terms “Marketing Hacks” or “Sales Hacks,” or even “Life Hacks” and you will see pages of competing theories on the best way to get customers or people to behave in a certain way. Admittedly, those few theories rooted in actual science contain some pearls on how to engage audiences with ever-decreasing attention spans and who consume a wider variety of information sources than ever before.

The evolution of the “hacking” movement is devolving into something more unseemly. Take this quote from a website you can easily find through any search engine. This company, who uses the term “hack” in their business name, sells a service to find email addresses of people that are otherwise hidden in their social web profiles:

Save time and sell more! Uncover your sales prospect’s previously hidden email addresses while searching Social Profiles.”

So you should invade a potential customer’s perceived privacy so you can make your quota? Genius. I’m sure your prospective customer wants to get unsolicited sales email on their “wholelottafun123” Facebook email address.

If you have to trick someone into interacting with you, how long is it going to be before that reputation is synonymous with your brand? Are you able to build a long term and meaningful relationship with your customers or are you are hoping to fool them into doing business with you?

I know this makes me seem like a dinosaur in today’s digital marketing universe and there are plenty of folks using the term “hack” that have noble intentions. I do celebrate the push to innovate how businesses prospect and find connections but I caution this slippery slope where the term “hack” is being co-opted.

What’s worse is this really often hides a more serious problem- your product or salespeople (or both) are terrible. Just pumping more and more unwitting prospects into a bad sales process or to incompetent salespeople is a quick route to failure.

It is interesting, at least to me, there aren’t any relevant search results for “Value Hacking.” After all, its value we should be creating for and promoting to our customers- not deceptive ways of getting them to engage with us. Maybe there aren’t any relevant posts because value is something that can’t be hacked. Your customers determine what value you are bringing through their experience with you and your product. Those customer who get real value from you and your product will come back for more and they will help bring you more customers.

Who owns your strategy?

It is that time of the year when organizations all over the world start holding retreats and offsite meetings to discuss their strategy for the upcoming year. This exercise has become part of the corporate calendar for almost everyone in some form or another and it is an extremely valuable activity if it includes mechanisms to create ownership of the strategy.

In this case, ownership means the comprehension and adoption of these strategies, key performance indicators and business goals by the decision-making members of your organization. You need ownership of the strategy to thrive in the middle management and front lines of your company because that is where all the incremental activities shape your overall performance.

It isn’t enough for them to know the strategy. They need to understand and appreciate not only its significance to the organization as a whole but its practical application to their own goals and responsibilities. More on that in a few paragraphs.

This adoption will be demonstrated in the performance of individuals and the larger team as you see increased autonomy in tactical decision-making. Judgments will start to be made based on the foundation of the strategy and will start passing a litmus test of sorts as people weigh individual decisions against attainment of those strategic goals and measures. In simplest terms, your team starts rowing the boat in the same direction.

The challenge, of course, lies in creating this adoption throughout your organization. At Redhawk Consulting, we suggest starting with the “What’s In It For Me” or WIIFM- for short. If an individual can see the benefit to them personally, they are far more likely to buy into the strategy.

People almost always make good decisions when an owner or senior leader is involved but are they making those same good decisions when no one is around? If they understand the role they play in your strategy and how that strategy benefits them personally, you have a self-perpetuating strategy which your team will own.

Do have something to add to this article? If so, email me at matt.hottle@redhawkresults.com or leave a comment.

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