THE SMARTER FINANCE BLOG

“There’s nothing to fear but fear itself.” – Franklin D. Roosevelt

Photo courtesy of Christopher Michel.

Recently, our team read a fantastic book – Getting Naked, by Patrick Lencioni – that explores the journey from superficiality to deep empathy that amazing human relationships usually take. Amazing consulting relationships, being just one kind of human relationships, also follow this journey, starting as professional engagements and becoming meaningful relationships of loyalty and trust. The book explores why.

It turns out that consulting relationships that stay superficial in the name of looking “professional,” never move a consultant from a vendor to a trusted partner. This is a book that goes deep into the simple but powerful insight that growing a relationship – any relationship – is about becoming vulnerable. For a consultant, this openness results in a better understanding of the “whole,” enabling us to understand their business better by understanding their motivations, their strengths, their weaknesses, in short, their true needs. It is about a humble approach to consulting where you open up completely and show your human side. It is in this zone of humility and openness that loyal and sticky relationships can develop. The book is a call to open up by facing three fears that prevent us from building deep relationships.

The concept is surprisingly unsurprising: professional relationships are human relationships. There is no way around it. Like all lasting human relationships, professional ones also move from the superficial to the deep, as those involved open up to fearlessly expose their humanity with all the good and the bad that comes with it. It is this fearlessness that is the basis for the insight of this great little book.

Lencioni brings home this need for fearlessness that turns into trust and loyalty on both sides by exploring the three specific fears that prevent consultants from becoming trusted partners of their clients.

  1. Fear of losing the business

Like in dating, if you’re afraid of losing your partner, you will behave in a way that actually gets you there. Your relationship will stay superficial because you will avoid the “difficult” conversations that make a relationship more intimate.  In regards to consulting relationships, Lencioni puts it brilliantly: “ironically, though, this fear of losing the business actually hurts our ability to keep and increase the business, because it causes us to avoid dealing with the difficult things that engender greater loyalty and trust with the people we’re trying to serve.” This happens, he explains, because clients can “smell” that fear of losing their business makes us put our interest in keeping it before their interest in being helped.

  1. Fear of being embarrassed

This year marks the 50th anniversary of one of the most acclaimed movies of all time: 2001: A Space Odyssey. In it, pride causes HAL, an AI-enabled computer, to assume it is infallible, pushing it to eliminate all but one of the crew members, derailing the mission it was trying to maintain intact. It is pride, Lencioni writes, that keeps consultants from asking questions that may make them look ignorant or stupid. This leads to the second fatal fear in his book: the fear of being embarrassed. Nobody can look smart 24/7 in a deep relationship, vulnerability, which builds empathy, needs to go through the trial and error of making mistakes, sharing stupid ideas, and facing errors. In my experience, it is how one reacts to errors that shows a client what one is made of. A client will fire a consultant who tries to save face before firing one who owns their mistakes and problem-solves to correct them. As in personal relationships, wanting to be seen as smart is a turnoff. Smart people don’t yearn to be seen as so.

  1. Fear of feeling inferior

This final fear that prevents consulting relationships from taking their journey to loyalty and trust is also based on pride, but on a different kind. Lencioni writes that the “fear of feeling inferior is not about our intellectual pride, but rather about preserving our sense of importance and social standing relative to a client.” Interestingly, he reminds us that the word “service” comes from the same root as “servant,” and outstanding consultants who build loyal relationships overcome their need to feel important by serving, or in the author’s words, doing “whatever a client needs them to do to help them improve, even if that calls for the service provider to be overlooked or temporary looked down on.”

At the end of his insightful book about loyal relationships, Lencioni provides a practical list of actions that outstanding consultants can take to overcome the three fears and build a deeper relationship that grows roots. These practical actions are the following:

To fight your Fear of Losing the Business:

  • Always consult instead of sell
  • Give away the business
  • Tell the kind truth
  • Enter the danger

To fight your Fear of Being Embarrassed:

  • Ask dumb questions
  • Make dumb suggestions
  • Celebrate your mistakes

To fight your Fear of Feeling Inferior

  • Take a bullet for the client
  • Make everything about the client
  • Honor the client’s work
  • Do the dirty work

At the end of the day, Lencioni reminds us “we all have weaknesses, and if we try to cover them up, we’ll probably put ourselves in a situation of having to do more and more of what we aren’t good at.” Nurturing trust and loyalty in a consulting relationship requires us to put down our egos so that we become vulnerable by showing – not hiding – our weaknesses, by showing our humanity to ultimately generate the empathy we need for our relationship to go deep.

Become fearlessly human in your professional life! Realize that you can’t conveniently put your humanity in a drawer in the name of a “professional” relationship, because at the end of the day, all relationships are human.

Craft a sticky story of your company’s journey.

Photo courtesy of Christopher Michel.

Last week I had a Monday morning meeting with the founder of a pre-seed, self-funded company. We had been collaborating for almost a year and he told me that they had their first pitch competition in three days. He wanted to do a review of their pitch with me.

After a quick run through his pitch, I gave him my brutally honest take on it: “None of it was usable”

The deck would have been OK for an investor sit down, but it was not appropriate for a three minute pitch in front of an audience where the goal is not to attract investors but rather to win a competition – or at least to peak interest and to be memorable.  After all, win or not, you want them talking about you afterwards.  A totally different frame of mind is necessary in the prep and the delivery for an event like this.  You do not need to be a Ted Talk master, but you do need to tell an authentic story people will remember and connect with.

Unfortunately, they had already submitted the deck and could not make changes.  I pondered for a moment. The deck had one good slide so I advised them to just focus on that one slide and ignore the rest. As scary as it sounded, a good story focusing on one good visual was much better than a bad story focused on many bad visuals.

Here’s how we re-worked their pitch.

Make you and your story the focus of your pitch.  If your story is powerful when you sit down one-on-one, then it is simply a matter of figuring out how to translate it into one that captivates a large audience. So for my friend (founder), this meant it was time to break him down and build him back up.

We began by asking all sorts of questions….

  • Why did you start the company?
  • Are you really self-funded, what past success lets you do this?
  • Why should I invest in you.  What makes you special?
  • Who are you? What is your story?
  • What is your personal story that drove you to start the company?
  • What about your team, what makes them special?

Now, can you tell all this in no more than three powerful sentences?

Notice that not once did I ask about Sales Growth, Exit Strategy, MRR,  LTV or financial models, setting up the story is all about you and your story. If your story is compelling, the details can follow. It doesn’t work the other way around.

Here are my top 9 pitch tips that can help you weave a sticky story that is authentic.

  1. Watch Youtube videos of winning pitches:  Everything is online these days so watch past winners of this pitch competition and others of similar time criteria.  This was the aha moment with the company I was working with.  It is one thing for me to tell them what to do it is so much more powerful to see what successful peers have done.
  2. Be Memorable / Be Remembered: When 60 founders are pitching in one evening it is all about standing out from the crowd. Do something memorable, shocking but genuine.
  3. Tell your personal story:  Quickly let the audience know how you got here and why this is your passion and you are the one person in the universe that could come up with this product because of your unique background.  Let your personality come through.  Remember at this point they are investing in you as much as your product. Be Authentic, and true to self.
  4. Show, not tell: demonstrate your product:  Figure out a way to show what your product does even if it is software.  You need to have an aha moment with the crowd.  If they don’t get it nothing else matters.
  5. Tell them how big the opportunity is:  Revenue and traction is not necessary at this point.  That the market for your product is huge is mission critical at this point.  Get them excited.
  6. Practice the pitch so much that it seems like you are doing it off the cuff:  The 2 – 3 minute pitch needs to come off as if you are speaking to a friend telling then your companies life story for the first time.  Practice, practice, practice and edit, edit, edit always making the statements shorter, shorter and more concise.
  7. Have less content than time:  If it is a 3 minute pitch have no more than 2 minutes of material.  This way one is never nervous about running over and there is space to let your personality come through and add lib to the audience based on their response to you.
  8. Plan the transitions well: how smoothly one moves from one topic to the next is the mark of a good story teller.  If the transition is logical and seamless it feels more like a story to the audience and not a presentation / pitch.  The more story-like, the more entertaining, the more entertaining the more memorable.
  9. Prepare for Questions: founders often practice, practice, practice the pitch but forget to practice answers to questions.  Come up with a list of the most likely questions and a clear, concise and memorable response.

After considering these pitch tips, it was only a matter of weaving the the story in a sequence that made it progress. Here’s the outline we used:

Happy to report that being the amazing entrepreneur he is, he turned this advice into a pitch competition victory three days later.

We now serve over 100 clients! See who.

 

 

 

Proper financial modeling is critical, but not for the faint of heart.

Work with enough early stage companies, and you’ll inevitably hear reference to a financial model. Depending on the company in question, the model will be either a mysterious topic discussed only in hushed tones, or something casually mentioned on a Friday afternoon as a box to check in the start-up’s sure-to-be rapid ascent to riches. Neither is correct; in my experience, entrepreneurs at early-stage companies almost always approach financial modeling from the wrong angle (if at all), resulting in incorrect expectations and potentially costly decisions down the road.

Here’s a quick list of the five most common misconceptions and mistakes that early-stage management teams make when it comes to modeling.

  1. Yes, you need to do a model…and a good one. It is staggering how many young companies try to raise capital around a business plan containing only the most basic of financial projections. It is not enough to list revenues, expenses, and net profits – you have to build out a model that accurately shows the moving parts of the business you want to build. No matter how astute an entrepreneur may be in his or her field, superficial financial projections scream amateur, and won’t help the conversation.
  2. No, the model’s estimates are not cast in stone. It’s a model, after all, not a guarantee. Many entrepreneurs are justifiably wary about overpromising, but being too conservative isn’t great either – better to actually build out what you reasonably hope will happen, and back it up with logical assumptions and arguments. Institutional investors know that reality and projections will differ, and a good model can be adjusted to reflect what is actually going on as your company makes progress. That’s what models are for – they are living documents.
  3. It’s the Journey, not the Destination. Any idiot can type numbers into a spreadsheet, so don’t think fancy formulas and complicated pivot tables will impress anyone. What matters much more is the level of detailed thought you have put into how all the moving parts of the business fit together under different scenarios. Investors will generally discount your projections anyway; what they really care about is whether you have actually done the work to think through all the expected revenues and expenses in the business over the model’s time horizon, and what assumptions you’ve made to ramp them. Important: Everything is connected, so don’t model, say, 5x sales growth without thinking carefully about what it means for the rest of the business. What will it cost? At what point to do you need to add staff? And what happens when you do? Does rent go up? How about insurance? All elements of the business have to reflect what you are predicting, not just sales, clients, users, etc.
  4. Models Are Not Fire-and-Forget. A proper business model is built in a way that allows key elements of the company’s economics to be adjusted going forward. This provides a mechanism for management to not only adjust core metrics to reflect real-world experience, but also a sandbox in which different scenarios and combinations can be tested to measure what happens to your company. Many entrepreneurs make a model during a fundraising round and never look at it again; this is like installing a GPS app on your phone and never turning it on. Use the model as a tool to better inform how and when you will be impacted by various developments, and what you can do to react. Done properly, they’re particularly good at predicting when cash will run low (which helps manage fundraising activities well in advance of a pinch) and can be a tremendous resource for learning which inputs and assumptions ultimately drive the business. Operationally, this helps you focus your time and energy – and that of your senior personnel – on the areas that ultimately have the biggest impact on the business.
  5. One Size Fits All. Don’t fall into the trap of building different versions of the model to suit the different conversations you’re having, display a certain pre-conceived result, or garner a higher valuation. It’s just not a good idea. You’re crafting the question to suit the answer, which leads to merely plugging in numbers into excel (remember the idiot mentioned in #3?). Build a model that is a legit depiction of what you think might happen if all goes well – no more, no less.

Proper financial modeling is not for the faint of heart, and it’s one of the areas in which Burkland’s on-demand CFOs excel. It requires an interesting mix of accounting knowledge and good, old-fashioned operating experience to do well, which means modeling is often the very last thing an entrepreneur wants to tackle. But it’s critical to not only understanding and managing the inner workings of your company at a granular level, but also to raising outside capital, and most importantly, to understand all the moving parts that affect your own business. Take the time to do the modeling right; your company, your investors and you will be thankful you did.

Photo courtesy of Christopher Michel.

We now serve over 100 clients! See who.

 

Don’t let bad practices turn into stormy nightmares.

Photo courtesy of Christopher Michel.

Running a successful startup is a feat of enduring determination. What begins as an awesome idea for a couple entrepreneurs, becomes a growing Company that demands more attention to how you administer the business than those things which captured your excitement to begin with (i.e., product design, marketing plan, technology roadmap). Careful early attention to Finance and Administration (i.e., process, procedure, and people stuff) can avoid trouble later in what I term “nightmare growth.” This is when you are growing but your time, attention, and pleasant dreams are sacrificed to frustrations even as you sleep!

Here are four examples how a lack of discipline and culture can turn the small cracks in a wall appearing with growth over time, into a watershed dam rupture that ultimately derails a business.  Avoid pending nightmares as you grow by paying attention early on to how you administer your Company.

  1. Management Discipline

Top management sets the tone. How they conduct business, treat people, deal with big and small Company issues, and portray the Company to the world establishes the values and social mores to be emulated internally.  I’ve seen leaders in good times become driven by ego and limelight and in bad times experience significant stress – but in both cases – I’ve witnessed leaders who stray and become unpredictable or undisciplined in their behavior, causing volatility in the foundation of their culture.  Guard yourself to maintain culture in good times and bad, or you’ll have employees adopt your poor behaviors or just leave.

A talented Strategic CFO can help you guard culture and even repair it in times of decay.  Leaders need to regularly engage in conversations about culture, defining the values intrinsic to culture, and take the pulse of the organization through surveys or other formats to make sure they stay on course.

  1. Hiring and Culture

We’ve all heard stories of crazy dynamics inside startups that often make venture investors impose “adult supervision,” many times in the form of a new CEO. I wonder if Facebook would be Facebook if a seasoned CEO had replaced Mark Zuckerberg early on. The truth is that many times the vision and drive that a founder has is key to driving the business forward. Often, the problems begin when startups ignore cultural fit as they hire people to fill key positions, focusing more on specific skills a potential candidate brings to the job.  This approach to hiring for growth can lead to “people problems” later.

I’ve found that hiring people who share the same passion that drives the founders and the CEO is more important than hiring people who seem to have the perfect skills.  Spending time understanding where a candidate comes from, what inspires them, and how the work habits they bring fits with your culture will pay off in good times and in bad!

  1. Compensation

Humans are wired for fairness, so when your team perceives things as unfair, you will lose their energy and passion as they emotionally check out. In my personal experience, I witnessed a young and thriving small Company with highly paid key executives and a weak Board (i.e., proxied votes) drift into a downward spiral as employee effort dwindled and ‘pseudo sabotage’ set in as employees demonstrated who is really key to success.  Compensation was not the Company’s only problem as culture was also weak, but it proved that comp structure is a cultural glue, for you nonbelievers try not paying people adequately and you’ll find out.

The Company would have been better off designing a formal comp plan that rewards a larger set of employees for rowing in the same boat in the early stages, striking a balance between base pay, incentives and upside in an exit.  Prioritize creating a compensation plan early, one which you can flex up with incentives to balance growth objectives across your most critical employee base.

  1. Financial Discipline

Cash flow always seems to be in short supply. It is a slippery slope where you lose footing fast if you start funding expenses through payables to buy time for cash to come in.  This works (but still with risk) for Companies that have reliable recurring revenues, stable liquidity sources, and market power with vendors.  They make tradeoffs with short term liquidity in mind as they take creative measures to pay bills.

The problem occurs with smaller and less stable Companies that begin financing growth initiatives through vendor payables. If you don’t have adequate capital to fund a growth initiative, the temptation to fund growth by slow paying vendors and growing payables is hard to avoid.  After all, you have employees inside who are critical to the initiative at hand, and vendors outside who are less so. Having adequate capital to support investment decisions is an issue management needs to solve at the time the decision is made, not doing so turns growth decisions into bad decisions that create bigger problems.  There is always embedded risk in any strategic decision you make (e.g., one that requires incremental short or long-term resource investment), understanding that risk and how/when it trades into cash is key to understanding how you should fund the initiative at conception.

We now serve over 100 clients! See who.

Increase your odds of winning by setting smart goals for the new year.

KPIs, MBOs, OKRs. You’ve probably heard of these and several more ways to set your company’s objectives. With so many options to get to the same goal, it is no wonder why by the middle of the year, objectives, as originally set, often go the same way as New Year’s resolutions. The problem often lies on the goal development: sometimes goals are crafted at the leadership level and not effectively shared and refined with the rest of the organization. Also, there’s a tendency to focus on numbers without regards to the operational goals that drive these numbers, for example, growing revenue by x% (a key business goal) may require sales restructuring (an operational goal).

OKR: a framework that may work for you

Although there is no magic formula for setting goals and sticking to them, I’ve found that the framework provided by OKRs (Objectives and Key Results) can set teams on the right track when it comes to goal setting. Before going into details, diving into the Wikipedia definition of OKR can be useful:

“[OKR’s] main goal is to define company and team “objectives” along with the measurable “key results” that define achievement of each objective. One OKR book defines OKR as “a critical thinking framework and ongoing discipline that seeks to ensure employees work together, focusing their efforts to make measurable contributions.”[1] 

The key term to focus on is “to ensure employees work together.” The OKR framework is good at steering top management to align their goals with those actually in charge of driving the business towards them throughout the year. This means that as you think of OKRs, you need to make sure you’re delivering on the key initiatives the company needs to get done to get to where it needs to be. I find it useful to think of a “value chain” that will support the OKRs with specific initiatives from your team.

Some guidelines about setting objectives and key results

Setting goals and key results together – which is basically what OKRs are all about – can help you create the discipline to have the right internal conversations initially and throughout the year to ensure the team stays focused.

Here are three easy ways to get you going:

  • Get buy-in on your objectives early on. This ensures key team members own the goals, starting with your top management and all the way through to the execution level. Buy-in happens when your team sees a clear connection between objectives and the actions necessary to get there. At the same time, be sure to make your objectives challenging – challenges motivate – along with defining the key results that clearly make the path to this challenge visible.

 

  • Create a culture around goal-setting and goal-measurement.  Start with top down company OKRs and expand from there. It works a bit like fractals, where goal-setting and key results filter down and climb up. This analogy works also for timing: set your OKRs annually and quarterly to make sure you have the flexibility to adjust and the visibility to correct when necessary.

 

  • Stay simple: Your goals need to be easy to understand in addition to being simple to measure. This way, people will know right away when they’re deviating from the company’s objectives and will be able to take corrective action sooner. Also, don’t have too many objectives at any level – a maximum of five, each with no more than three or four key results.

The benefits of using a framework like OKRs go beyond just ensuring you develop objectives and meet them. Crafting objectives and key results together disciplines thinking at all levels, communicates the company’s vision accurately, establishes a measurement culture, focuses the effort of your team and enables employee engagement.

Are you ready for OKRs?

Goal setting using OKRs is valuable regardless of your size. As stated before, creating a culture around setting measurable objectives is always a good thing. Think in terms of developing OKRs around functional or product teams in addition to the executive team.

No matter your size, aligning goals with the specific results needed to get there will only result in an organization where everyone – from the CEO to the most recent hire – point their efforts in the same direction.

A well-thought initiative for giving back will help you reach the top faster.

The first days of the year are an ideal time to think about empathy and all the good we can be doing before our To-dos take over all the available energy. This can be a perfect time to realize that building a culture of giving in your early stage company is more than just thinking about giving. The good news is that you don’t need to have a “do good” scheme built in your product strategy or in your business plan; it is much simpler than that, yet the effects in your organization, and with your key customers, can be transformational.

Focusing your team on a cause other than the quarterly goals can help you create strong bonds, build motivation and foster loyalty. Giving back through your company also gives your people meaning and a sense of connection. Finally, having a cause you officially support can boost goodwill and adoption with your customer base.

  1. Giving back is good for teams

The days when people were satisfied with donating a tiny portion of their monthly paychecks to causes are over. Millennials, who now dominate early startups want it all: they want you to give back and they want to be actively engaged in that process. Heeding to their demands is good for your organization. Enabling engaging opportunities for your team to give back builds bonds outside the office thru things such as volunteer days, pro-bono consulting and joint projects.

Better if you let your team choose the non-profit to volunteer to for or to work with, there are hundreds of non-profit organizations around you that need your help. You can choose to focus your giving back efforts at places around your location, to causes connected to the nature of your products or services, to charities who are close to your heart, or all of the above. There is no shortage of organizations that can use the expertise, energy and resources of your team to make the world better.

If you want to get creative, you can also think inside the box. For example, just a few blocks from our office here in San Francisco, AirBnB employs several people from The Arc – an organization that focuses on helping individuals with developmental and mental disabilities have normal lives. AirBnB employees love having them around to help with all kinds of office tasks.

  1. Giving back is good for employees

Research shows that a higher sense of purpose is a better motivator than money. Millennials come with a chip for this, and have forced tech giants like Google, Facebook and Salesforce to make giving-back a centerpiece of their mission.

The energy that your people spend helping others on your behalf is actually re-charging energy. It is very common in non-profit and community organizations around the Bay Area to see employees from the likes of Google and Deloitte work on specific project during the day – not after work. For example, the City of San Francisco has an initiative called Civic Bridge where pro-bono consulting volunteers work together for 3 months to use their expertise to help the municipality on very specific issues. These volunteers then bring back to the office new ideas, connections and a sense of purpose that spreads through their companies.

Engaging giving-back opportunities for your employees will ensure your company’s social DNA is built and nurtured, internally and externally, through individuals that become the ambassadors of what your organization is doing beyond profit.

  1. Giving back is good for business development

The third pillar of giving back concerns the effect it can have on your business development efforts. Having your people donate their talent, time and energy locally will connect you to the community in a way that no PR effort can, and will bring in more business and potential employees.

Additionally, combining business with giving builds empathy into your DNA. Actions that you can take early on involve things like creating a .org for your company, giving your product away for free or at a huge discount to non profits. Toms and Salesforce.org  are good examples on how giving can be weaved into your core business to generate additional sales; after all, we are more prone to buying products and services from companies we like and admire.

In order to activate this business development-focused giving, you need to make it easy for a nonprofit to take advantage of your product and for a paying customer to see where some of their dollars go when it comes to social responsibility. In the case of Salesforce for instance, many big non-profits become profitable paying customers when they grow and have the resources to pay full price for a product they’ve been using for years.

It’s never to early to give back.

The positive effects on your team, your employees as individuals and your business development – just to name three areas affected by it – indicate that it is never too early to give back, even for a seed round company. Think about it, and if you need help with the right set-up to make it sustainable, ask your CFO.

 

Photo courtesy of Christopher Michel.