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.
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.
