Monday, November 30, 2015

1871 Hosts Fireside Chat with Dennis Chookaszian and 1871 CEO Howard Tullman



       In a recent fireside chat, Dennis Chookaszian, the long-time CEO of CNA Insurance and more recently a substantial angel and early-stage investor and advisor to numerous public and private companies, departed from the usual plethora of pompous pieties and platitudes that seem of late to comprise the primary content of far too many typical technology panel discussions and got down to sharing some concrete and very specific advice for startups, some concise rules of thumb and formulae which he uses to evaluate the likelihood of a startup’s success, some thoughts about the criticality of scaling swiftly, and a few closing comments about the importance – early on – of paying attention to matters of ethics and the core values of the business you’re trying to create. As I like to say, you can’t build value if you have no values. See http://www.inc.com/howard-tullman/how-far-will-you-go-to-be-loved.html   In terms of sheer content, straight talk, and take-away value, this was one of the best talks and Q&A sessions we’ve ever had at 1871.

Dennis is a guy who – as much as it’s ever possible to do so – has really refined his investment strategy and approach and made a science of how he looks at prospective investments. In addition, it was clear that he’s thought long and hard about exactly how he advises young entrepreneurs on what they can realistically expect on their journeys and the best ways to prepare themselves and their companies for the very bump roads and precarious paths ahead. He noted that he’s often approached by folks for help in raising early stage capital or providing senior level introductions for them to large firms and – as often as not – he says that while he could help, he won’t - because he doesn’t think that it’s the right time for them to raise capital or that taking in investment capital (even if it’s abundant and readily available) is the right approach for the development stage of their businesses. In the startup business, you eventually learn that a quick and honest rejection is a lot more helpful in the long run than a grudging or half-hearted favor that ultimately does neither party any good.

As you might expect, the discussion started with what he called the “rule of three” which is a simple way to think about the need to focus the scarce resources and bandwidth of the entrepreneur on the most critical and pressing issues for the business. He said that – as a general proposition – it’s almost impossible to pay attention and devote your energies to more than 3 or maybe 4 critical concerns at a time. As Confucius probably should have said: “Man who chase too many rabbits end up with none.”

The three most important areas that Dennis felt every startup needed to concentrate on were: 

(1)  Substantial and Sustainable Revenue Grow

If you can’t determine early on who is going to pay you for your new product or service and you haven’t demonstrated that the dogs are gonna eat the dogfood, then it’s highly likely that you don’t have a viable business. In addition, your business model and your actual results need to realistically demonstrate an achievable market size and a path to securing market share sufficient to show early exponential revenue growth. Dennis’s shorthand for this criteria was T2D3 which meant that your year-over-year revenues were expected to triple in each of the first two years and then to double in each of the next 3 succeeding years of the business.

Dennis shared some very specific and detailed criteria with the group about how each business should look at the nature and quality of its revenues in order to determine whether they were on the right path. The four critical factors were: (a) businesses building recurring revenue bases are far better than ones dependent on constantly securing new business especially because renewals are much easier and less expensive to secure than new sales; (b) the customer retention rate of the business was absolutely critical – all customers are very costly to acquire and very easy to lose today in a world of almost infinite choices and alternatives; (c) businesses based on products or services having a steady stream of new customers or ones that required constant replacement or renewal (the “razor blade” model) were much more attractive than durable goods businesses (like selling refrigerators) where the products had very long repurchase or replacement life cycles and could even fairly quickly reach points of substantial saturation; and (d) businesses offering products or services which had a predictably high rate of obsolescence were much more attractive than those where the products had long useful lives.

Finally, Dennis was also brutally frank with the audience about how frequently startups fail. While he believes (as noted above) that the most recurring cause of early business failures is a lack of sufficient and rapidly-expanding revenues, he also noted the problem with pointless perseverance. He said that very often the biggest mistake an entrepreneur can make is trying to stay the course and waiting too long to bite the bullet and either pivot quickly or decide to shut the business down if it’s not making the necessary progress. I like to say that there’s nothing worse than profitless prosperity where your top line keeps growing, but there’s no bottom line in sight. He pointed out that establishing some milestones or benchmarks for measuring your business’s success over a fixed period of time and then sticking to those metrics either way – in good times or in bad times – in deciding your next steps is a form of management discipline that is essential. See http://www.inc.com/howard-tullman/the-future-of-tech-metrics-not-moonshots.html  .

(2)  Resisting Raising Too Much Capital Too Soon

           Dennis is a bootstrapping hardliner. He doesn’t agree with the “appetizer rule” to wit: that the time to eat the appetizers (or raise new money) is when they’re being served or available. He believes that you should raise as little as you can for as long as you can regardless of how easy it might be at a given point in time to secure new funding. For a contrary view, see: http://www.inc.com/howard-tullman/tech-startups-take-the-money-and-build.html .  He also said that you should only seek outside investment (and only as much of an investment as you realistically will need) once it’s clear that you have an actual business with provable revenues that is going to grow and prosper. Otherwise the outside money will cost you too much and – probably worse for you and the business – conceal the fact (or defer the unhappy realization) that you haven’t really figured how to operate and scale the business in a profitable manner. He noted that mega-incubators like 1871 are great places to get started because they enable entrepreneurs to avoid all kinds of costs and commitments that are bad uses of their scarce capital and – at the same time – to secure access to enormous amounts of “free” resources, education, networking and mentoring that will all be crucial to their long-term success.

          (3) Leadership and Ethical Values

The smartest investors bet on the jockey and not the horse and nothing is more important for the success of the business than the strong leadership skills of the senior management team. And, because the required skills sets will change dramatically over time as the business grows, it is also critical that the management be sufficiently flexible that they can grow and adapt to the new requirements of the business. Dennis noted that this is a very rare outcome and that it is unusual for the CEO of a startup to survive in that role beyond a certain point in terms of the company’s revenue growth, market(s) size and share, etc.  It’s very clear that entrepreneurial and managerial skills are quite different and specifically the CEO’s role and involvement in various functions and parts of the company will need to change materially as the years go by or the CEO will need to be changed.

What cannot change and what is critical from the outset are the values that the company develops and builds upon as it creates its own internal and external culture and, here again, it is the CEO whose behaviors and attitudes are the most critical in providing the essential role model for the rest of the company. Mission statements are a dime-a-dozen these days and all the talk doesn’t mean a thing if your actions and behaviors aren’t aligned with your professed beliefs and values. Over time, the values of each business will develop and the priority of certain concerns and considerations may change somewhat, but it’s a very slippery slope that needs to be jealously guarded because it is very hard to ever recover from the damage that results from broken promises and commitments. By and large, values don’t abruptly break; instead they crumble a bit at a time. I like to say that it’s much, much harder to live up to 99% of your values than to honor them 100% of the time.

Dennis said that each of us needs to determine which values are most important and that we all need to establish an ethical framework. Once you have established those ground rules, it’s crucial that you also make it clear that there are boundaries and bright, red lines which simply cannot be crossed. While people are people and we are all fallible, there are just some behaviors which no business can abide or afford. In other situations, some understanding and forgiveness and a second chance might be the most appropriate response. 

In his view, everyone has a three tier ethical framework and the critical issues in each case are what behaviors are in each tier and then which tier a particular case of questionable behavior falls into. The three tiers are (1) Zero Tolerance; (2) Possible Rehabilitation; and (3) Everything Else. Behaviors which fall into the first tier are (1) honesty/integrity breaches and (2) any kind of abusive behavior. There is simply no way back from these kinds of problems and any proven violations must result in immediate termination. Violations that impair the core values of the business cannot ever be tolerated.

Other issues which fall into the second tier – personal problems, substance abuses or performance problems – can potentially be remedied by giving the offender a chance to correct the problem.  But these cases must strictly a one-shot opportunity to get things straight and any repeated behavior needs to be swiftly dealt with and the person must then be terminated.  

Everything else can and should be dealt with through the normal management and HR processes. By and large, these cases should not involve the senior management team. Only those instances which impact the business’s basic culture and mission are serious enough, central enough, and important enough to be reinforced and reiterated through the involvement and behaviors of the business’s leaders. People, since time began, have paid attention not to what we say, but to what we do. Some things never change.