Daydream or Nightmare

“A vision without a plan is a daydream. A plan without a vision is a nightmare.” I do not recall where I saw this quote, but it got me thinking about the challenge faced by entrepreneurs. I serve as a mentor for eForAll, a terrific national organization that helps under-represented individuals start and grow businesses. Often, when I read prospective candidate’s business pitches, they fall into one of these two categories. They have a vision or a passion, but no plan for how to get going, or they just feel like they want to start a business, but do not have a real vision or business strategy.

The same challenge exists for many later-stage businesses. Even though the company managed to get off the ground and has products or services and clients, there still may not be a plan to truly turn the vision into a sustainable business. This is similar to the challenge presented in Geoffrey Moore’s classic “Crossing The Chasm.”  Starting with a vision, it may be possible to find the early adopters who share a similar vision, but without a plan to scale and build on the vision, the business will find itself stuck in low gear, dreaming of greatness but unable to cross the chasm to a healthy business.

The alternative behavior of a plan without a vision is evident in business plans that are mostly spreadsheet exercises where the entrepreneur makes arithmetic assumptions about growth rates and revenues that show a terrific business, but they forget about the hard work of ensuring product / market fit.  In grad school, a professor called this the ‘Shoe Analogy.’ The entrepreneur’s plan goes something like: “Every year, there are 24 billion pairs of shoes sold. If we can just get 1% of the left feet, we will be a huge success.” The problem is that nobody buys just the left shoe, and the math exercise is not supported by an actual vision for a viable business.

Connecting the vision with a plan is the key to laying a foundation for a sustainable business. Rigorously testing the viability of the vision by formulating a plan and testing it is a critical process. Years ago, I learned a method from a fellow CEO that has served me well in my own companies, and as an advisor and board member for other companies. The method is called a Strategy Staircase, and I have written about it in the past. For purposes of testing a vision and plan, it can be applied as a thought exercise to see if the vision and plan hang together. The elements of the staircase are:

1. An honest, no fluff statement about the current business: revenue, growth, profitability, funding, customers, team, etc. Make sure this is a purely factual description of where you are, with no aspirational optimism. This is the ‘Today’ picture.

2. A timeframe for the analysis. If your runway is twelve months, then see if you can formulate a viable plan for 12 months. If you have more or less time to execute your plan, adjust your test accordingly. A two or three year plan is usually a good timeframe to work with.

3. Create a statement of what success will look like. Be specific about how you want to transform the elements of your current situation during the timeframe of the plan. For example, if today you have a slow growth business that is burning capital, perhaps your six month goal is to increase your growth rate to 15% and move to breakeven. This is the ‘Tomorrow’ vision.

4. Write a headline that defines the general nature of what you will need to be doing in order to move from Today to Tomorrow. Example: Grow our sales skills and improve prospect targeting, or replace our outdated product and launch a new updated version. This is the ‘Headline’

5. Clearly state the prioritized steps you will have to take to climb from where you are ‘Today’ at the bottom of the Staircase to where you want to be ‘Tomorrow’ at the top of the staircase. Each step should be a simple statement of one activity that will result in a measurable outcome that will lead to the next step. Most Staircases have about 10 steps. Force yourself to put the steps in priority order as if you can only do one thing at a time. This is the ‘Plan.’

6. Build a pro-forma business model that realistically follows your Staircase. If your steps include increased investment in sales or marketing or engineering, build that into your financial model. Be realistic (or pessimistic) about the pace of your revenue growth and ability to generate new business or retain existing business. The model should start with your Today situation and lead to your Tomorrow vision in the timeframe of your Staircase.

By iterating on the Staircase plan and testing it against your business model, you will build a picture of how your vision can become your dream instead of your nightmare. Share the result with your board or business advisor, and ask them to be critical and constructive. Debate the order of the steps and the practicality of achieving each step. The objective is to avoid the daydream and the nightmare by creating a viable plan that will result in achieving your vision. Once you think you have it worked out, the hard work begins. You have to turn your thought exercise into practice in the real world. Hold yourself to your timeline as you execute the steps. Adjust as needed, and re-plot your Staircase and plan if you find the business is not performing as you expected. The key is that you will have a plan and a goal that ultimately result in your vision, so you are on your way to turning your dream into reality and avoiding it becoming a nightmare.

The Board’s View Of The CEO

My last post explored the characteristics of what makes a great board of directors (BOD) and board member, from the CEO’s perspective. I also provided a game plan for how to fix a broken relationship with the BOD. However, there are two sides to every relationship, and as a board member, there are CEO attributes that can make all the difference in building a positive working relationship, so in this post I turn the table and take the board’s view of what makes a great relationship with a CEO.

Great execution and business results clearly go a long way to smoothing over any relationship issues between the BOD and the CEO. Every board member appreciates results without drama, but things do not always go as planned, and when the going gets tough is when the cracks in the relationship typically surface. From my own personal experience, and feedback from other board members, here are a few of the key attributes that shape a positive view of the CEO:

• Honesty tops everyone’s list. The board has to be confident that whatever the CEO reports is in fact true. There are no “small” lies.

• Openness and candor run close second. The board has to be confident that the CEO is providing a clear-eyed factual representation of the business. This is a little bit different from honesty. A CEO can be honest, but not completely open or share the full story. This is about omissions that shade the message. If the board is going to be helpful, they need to know all there is to know about a topic and not feel the CEO is holding back.

• Problem solving and decisiveness. The CEO is the person running the business, and they need to take charge. The board wants to be confident that the CEO has solid reasoning skills and will make tough decisions in a timely manner. When a crisis occurs, the CEO needs to be decisive and not frozen like a deer in the headlights.

• Leadership and gravitas. The BOD values a CEO that acts the part and has the support of their team. It is evident when an executive team is working well, or when it is dysfunctional. The BOD counts on the CEO to ensure the leadership team is aligned.

• Stable. The world and most markets can be chaotic at times. The BOD wants a CEO who is not creating more chaos. We want a steady hand guiding the business forward.

• Firm grasp of the business. The BOD will never be as close to the business as the CEO, and we rely upon the CEO to be on top of everything that is going on in the business. The CEO does not have to precisely know every number and metric and detail, but we at least expect them to have a complete understanding of the state of the business, and to surround themselves with a team of experts who will know every detail.

• Accessible and patient. Board members want to be able to reach the CEO easily, and feel as though the CEO places a high priority on being available to interact with board members. Forming a solid relationship takes more than just quarterly board meetings. Often the call is just to catch up and hear what is going on, but the patience part of this attribute is also important. Board members do not always know or understand the nuances underlying parts of the business. The CEO has to be patient and recognize that part of their job is to educate and explain things to board members and help them to understand the drivers behind various challenges and decisions.

The aggregate of these attributes is a reflection of character, but the bottom line from all of it is trust. Board members want a CEO they can trust to ‘do the the right things’ and ‘do things right.’ Trust is hard to earn and easy to lose. Because the board is not involved in the business every day, we need to trust that the CEO has it under control. We also need to trust that when they need help they are confident enough to ask for it, and that they understand the scope of their authority so that when they cross into a realm where the board needs to be involved, they do not hesitate to call for help.

How Great Is Your Board?

As a CEO and independent board member, I have had some great boards of directors, and I have had a couple terrible boards. Talking with other CEOs, I hear a similar mixed bag reaction. It made me think about the question of what shapes a CEOs opinion about whether their board of directors (BOD) is bad, neutral, good, or great? There is a similar perspective and question among board members about the CEOs they work with, but that is a topic for a future post.

In early-stage technology companies, corporate boards are typically dominated by investors and founders, with the occasional quasi-independent outsider mixed in. I say quasi because the independent is usually sponsored or strongly recommended by the CEO or a specific investor group. They may be independents who are experts in their field and a natural fit, but somebody on the board was probably their champion and holds a bit more sway with them. None of this is necessarily bad, but it is contextual for how the relationship with the CEO evolves.

There are a few catch phrases I hear when CEOs are complaining about their board:

• They don’t understand the business

• They don’t know the market and cannot help with strategy

• All they focus on are metrics and numbers. They don’t understand running a business

• They are a waste of time and board meetings don’t add any value

• They are only worried about their investment, not building something great

On the flip side, when CEOs are praising their board, it is more than just the opposite of the negatives. Positive comments tend to focus on the relationship the CEO has with the individuals and the board as a whole. Board member availability, supportiveness, understanding, and advice (when requested) are all common descriptors. When the interpersonal relationship is positive, many of the negative attributes are overlooked. Even if a particular board member does not understand the market or the business well enough to provide guidance, if they are supportive and available and bring other knowledge to the table, the CEO may still form a positive opinion.

In earlier posts, I wrote about the unique position of the CEO as sandwiched between the executive team and the board. There are many topics that are difficult to discuss with the people that work for you, and similarly, there are topics that are challenging to bring to a board member. The board has the responsibility to hire and fire the CEO, and every CEO wants to project confidence and control when interacting with board members. A common phrase is “don’t bring problems, bring solutions.” However, sometimes the CEO just needs help to work through a puzzle where they do not have a confident answer or solution to present to the board. These are the times that truly define the nature of the CEO / board relationship.

Building rapport with each board member and the board as a whole is one of the most important jobs of the CEO. When the CEO adopts an adversarial role with a board member or the board in general, things never go well. You need to understand what makes them tick, what they can bring to the table, and how they operate. If the board is well curated (see my earlier posts), then you have a pretty good idea of which board members can be most helpful with each topic. Some may have operating experience and can help on policy, while others may have finance or M&A experience, or go-to-market skills. Leverage the board to make it an effective ‘weapon’ to help the CEO and the company succeed.

As a CEO, if you find you are already in a situation where you have a negative perspective toward your board, it is past time to do something about it. In negotiating, there is the concept of a BATNA - the best alternative to a negotiated agreement. It means that when you go into a negotiation, you need to know your ultimate fallback result. When attempting to fix a broken board relationship, the ultimate BATNA is the CEO leaves the business or the company is sold. Therefore the first step is to decide just how bad the situation is, and what is your BATNA to rectify it. You may be OK with the status quo, rather than risk your job, but recognize that a broken relationship with the board is never good for the company, and ultimately the board gets to decide if the CEO is more trouble than they are worth.

Here is my suggestion for how to fix the situation:

1. Step back from the day to day, take a breath, and write down a list of  positives and negatives effecting your opinion. Divide the list into things that occur during board meetings, and things that occur between formal meetings. Be specific about each board member and the board as a whole. Often 1:1 behavior out of the board room is quite different from behavior in the board meeting.

2. Consider your list, and identify what is triggering your opinion and your own behavior. Sometimes, we think we just know how a board member will react to a topic. That triggers us to present in a certain guarded or aggressive way, and we stop listening to how they actually react. This requires a bit of introspection to acknowledge how you may be contributing to the situation.

3. Next, go on a listening tour. Tell the board members that you want to make the board more effective, and ask for their time to help. Meet with each board member in person, preferably in a social setting like a meal. We all default to timed virtual meetings as the norm, but an in-person meeting conveys your seriousness and opens the door to a more comfortable and open-ended conversation where neither party is racing to get to their next meeting. It is a big commitment, but it is worth it.

4. Open each meeting by asking the board member what they think of the board and their interaction with you — listen before you speak. Be clear that you are not specifically asking for a performance review; you are asking about your relationship. Acknowledge that there are challenges with the interactions (if possible do not make it a personal attack on the member’s behavior), and ask the board member to share their thoughts and suggestions for what can be done about it. Ask them what they are getting from you that they do not need, and what they are not getting from you that they want. One of my companies was in the habit of producing massive detailed board books, and delivering them the day before the meeting. The meetings were being derailed by members finding minutia throughout the book and consuming valuable board time drilling into operational details that were not board-worthy. The message from the listening tour was to dramatically shrink the book to just what really mattered, and get the book out several days earlier. It changed the entire character of the board meetings by focusing attention on the important topics without distractions. Make sure this a listening tour, not a confrontation, and assume you both want a positive outcome.

5. Repeat step 3 with every board member. Gather their comments and look for patterns and themes. You may prompt a response by telling a member that in an earlier meeting someone else suggested X, what is their opinion? Compare the collective feedback to your original list to find points of agreement.

6. Construct a plan to address the issues. Be specific about what you want from each member and from the board as a whole. Also be specific about your contribution to the problems and define what you intend to do about it.

7. Your plan may need to include a request to reconstitute the board with new or added members, or you may need to tell a member to step up or step off because they are not adding enough value. When financial investors such as VCs and PE firms have contractual rights to hold seats, you may need a conversation with the managing partner if you are convinced that the partner on your board is the problem. I have seen this situation play out twice, and it went surprisingly well. Everybody wants the company to succeed. A warning, keep your BATNA in mind, The result may be that the board decides you are the problem, so be prepared.

Just as a team matures through stages of forming - storming - norming - performing, boards do the same. The company deserves a highly performing board, and it is the CEO’s responsibility to make it so. You cannot just throw up your hands and say ‘my board sucks,’ you owe it to the team and the company to fix it, no matter how hard that may seem.

Ideology Is The Enemy of Intelligence

I was listening to a podcast recently, and someone commented that “ideology is the enemy of intelligence.’ It was in reference to the CIA, but it struck me as an apt mantra for a growing business. Our mission, vision, and values, combined with our product and go to market approach is our way of describing our ideology. Particularly in an early stage business, the founder has a vision and constructs a company to build the product or service that will deliver that vision. The vision is  generally informed by experience, such as solving a problem the founder encountered in their past. Nonetheless, the leap of faith the entrepreneur takes is based on their belief that enough other people have encountered the same market void and are willing to spend money to address their need. The entrepreneur’s vision for solving the problem becomes their ideology. At their core, they believe they know the right path.

Intelligence is comprised of actual market data, customer and prospect feedback, competitive information and the like. The market is teaming with data, and every company needs to develop a framework to absorb it and then separate the signal from the noise. The problem arises when the ideology causes us to ignore or drown out the true signal from the market. Selective listening, or only measuring the data points that reinforce our ideology is a sure path to lead a business astray. Too often, we celebrate data that confirms our ideology, and make excuses for data points that contradict or undermine our ideology.

In sales we see ‘happy ears’ behavior when a sales person only hears buying signs and ignores cautionary signals. The result is that they are surprised when the buyer chooses a competitor’s solution. They were filtering out the intelligence that may have provided them a path to success. In customer management, we love the feel-good metrics of usage stats and engagement, but we miss the true warning signs of discontent. We have all been ‘surprised’ by the big account that ‘loves us,’ but suddenly churns. We missed the signals that the account was not perceiving enough value to continue the relationship. Lastly, perhaps the most difficult example is the product team that believes in their vision for how the product should work and how customers should use it, but ignores the customer and market intelligence that is signaling that the product does not have adequate market fit, or does not solve the problem the way customers want to work. In other words, ‘the dogs won’t eat the food.’

All of these are examples of confirmation bias. We believe in our business and our ideology, and we avoid conflicting data. We seek data that confirms our beliefs. When we see data points that do not fit our ideology, we start explaining them away, but instead we should heed the old sales saying ‘if you are explaining, you are losing.’ We need to recognize the facts for what they are. When our ideology is the enemy of intelligence, our business suffers. The mantra should be ‘measure what matters, and believe the results.’ Better to have the intelligence and be in a position to make informed decisions and adjustments than to be blindsided by ideology and have adjustments made for you.

The best advice for an ideologue is to go looking for trouble. If we acknowledge our ideological bias, then we can challenge ourselves to find the outlying data points. Adopt a healthy dose of paranoia and do not let conflicting data go unexplored. I have written in the past about CEO optimism and the need to balance cheerleading with reality. As an overly optimistic CEO, I recognized that I needed to have trusted realists by my side, and I had to listen to them. We would debate the meaning and implications of the data, but the facts were the facts, and we had to be brutally honest about the information. Do not let ideology be the enemy of intelligence. Listen to the data.

Pick An Aisle And Shelf

I was recently coaching a CEO whose product has tons of innovative and unique features and capabilities to offer. Unfortunately, sales are stalled and the business is not moving forward. They are stuck in a doom loop of selecting an ideal customer profile (ICP) then realizing that the buyer is only interested in a subset of the company’s capabilities, so they pick a different ICP in hope of finding a home for their broader set of capabilities, only to find that they still have a mismatch. They have a clear vision of why and how all of their capabilities fit together to deliver a great solution, the problem is aligning it with a clear ICP so they can focus their go to market efforts. It feels like a chicken or egg dilemma - capabilities first or ICP first. You could describe it as a Product / Market fit problem, but it is more an issue of a unique solution trying to convince an existing market to try something new.

What they are really dealing with is the need to select a specific ICP and then package their offering in a manner that helps their ICP understand the value proposition that makes it a compelling purchase. The challenge is that they have defined a solution that is sufficiently different from the competition that buyers do not have a classification system to grasp the offering and define evaluation criteria. Buyers have pre-conceived concepts of the solutions they are looking to purchase. Often it is in the form of an RFP (request for proposal) that has a checklist of features and needs. It is as if they are entering the store and they know what aisle and shelf to find all of the products that can meet their needs. Making a choice is only a matter of comparing similar features and selecting the best fit. The problem is that this vendor’s solution does not neatly fit on an existing shelf in an existing aisle. It is solving the problem differently and in a manner that encompasses multiple related problems that are typically each solved by point solutions that are found on various aisles and shelves.

The original Apple iPhone faced a similar challenge. It was a mash up of a phone, a camera, a browser, a pager, an address book, a calendar, and several other applications. We knew where to buy each of these separate items, but the iPhone was a new class of device. The solution for Apple was in the name. They called it a phone, so it went in the phone aisle, but on a new shelf. They did not try to sell it as a camera or a pager or any of its other functions, but they incorporated all of the additional capabilities into their competitive pitch for why this was the ideal phone. The irony of the Apple example is that the phone features turned out to be table stakes. Making phone calls is a generic capability that is identical for all vendors, and nobody buys a device because it is better at making phone calls. The genius was that Apple redefined what a phone is, and helped us all realize our definition was too narrow. Traditional phone manufacturers could not compete with Apple’s broader definition.

For the CEO I have been helping, and for most mere mortals, we do not have the market power of Apple to redefine a category overnight. However there are lessons to be learned and applied:

• First, select an existing well understood and valuable aisle and shelf. By picking the aisle and shelf, you are also selecting an existing ICP who is already coming to the store to make a purchase. You want to be found when they start looking for a solution.

• Next, make sure that the new offering has standard competitive capabilities that meet the basic requirements of the selected aisle and shelf. You have to get past the initial screening, so it is important to do the basics. In the Apple example, buyers had to be able to make phone calls in order for the new device to be considered when a buyer wanted a new phone.

• Position the new capabilities to differentiate the offering, and focus on the benefits that are uniquely possible because of the broader solution. This is not a features conversation. The buyer has a list of required features based on how all of the other vendors approach the problem, but their checklist does not have line items to compare your new features to other products. However, the buyer will understand new use cases and the benefits of a better solution - benefits, not features. Apple showed us why having a phone with integrated camera, email, and text made the phone more valuable. They did not try to sell us on every feature of the camera or the email or text.

When you identify an existing aisle and shelf it enables you to know who is shopping and what they are looking for. Whether you surveyed your competitive field and decided to pick the aisle and shelf where known competitors are found, or whether you selected a target ICP and decided to be present where that ICP goes shopping, either answer leads to the same place. Stake out some turf on the aisle and shelf where your ICP expects to find solutions, and declare that you are a part of that competitive category. Then, differentiate your offering by demonstrating the unique benefits that can only be achieved with your unique combination of capabilities. The more you can differentiate your offering in a sea of similar products and services, the easier it is for a buyer to purchase from you. Over time, competitive products drift toward commodities. In the arms race to add features and cover deficiencies, products all start to look alike and act alike. The list of standard features grows, and the only differences are subtle or at the edges. When all of the products look alike, the buyer’s journey becomes protracted because they get lost trying to discover the rationale for selecting one vendor and product over another. When markets get to this point, the strongest competitors become ‘do nothing,’ or ‘whoever has the lowest price.’ That is what the phone market looked like before Apple launched the iPhone.

A vendor with a new and unique offering has to rise above the noise. The hard way is to attempt to define an entirely new category of solution and convince potential buyers to pay attention. I contend, the better path is to breakthrough in a familiar category with a revolutionary approach. Notice, I said revolutionary, not evolutionary. This is not 1+ marketing where you present one new feature or one new custom color. If your approach is truly a radical departure from the pack, then the goal is to stand on the shoulders of existing solutions and grab your shelf space in the most prominent position by clearly demonstrating the benefits of your new approach.

Hire Slowly - Fire Fast

When we decide to open a new position, we are eager to get it filled as quickly as possible. If the opening is the result of someone leaving the company, we are typically in an even greater hurry to fill the role.  Whether we are backfilling a position that was vacated when someone left, or we are expanding our team, we diligently post the position and dive into the hiring process.  In a recent post, I wrote about the need to take a breath from time to time. This is one of those moments.

Everyone has made ‘bad hires’ at some point in their career. The person seemed to match the requirements,  their temperament seemed to align with the company culture, and the references seemed enthusiastic, but something went wrong. In the aftermath, it is important to try to figure out exactly where the process failed. This is a moment to reflect on the “should have, could have, would have” questions to help improve the hiring process next time. Often, when we look back, there were holes in our job specification, or subtle warning signs about the candidate that we overlooked in our zeal to fill the role. We have to be able to recognize the signs and be willing to act on them. Even if it is in the final stages of the hiring process, do not be afraid to pull the plug on a candidate if something feels off.

One of my favorite books on managing employees is ‘Topgrading’ by Brad Smart. The premise is that we can divide employees into A, B, or C rankings. We would move heaven and earth to hire and/or retain an A. We want to retain B’s, but our goal is to move them to become A’s. Lastly, C’s need to move up or out. An A player is the best person you can hire in a specific job, for a specific company, for a specific salary, and working for a specific manager. All of those specifics make it clear that the best person in the world is not necessarily available as an A for every position in every company. For example, a high school basketball coach would love to have LeBron James on the team, but LeBron would not play for a high school, he will not play for free, and he will not play for a high school coach, so even though he is a great player, he would not be an A candidate for a high school team. When you define an A with all of the specifics, it narrows the field. Smart suggests that everyone can be an A player in some role, but it just might not be one they want. Someone may be better suited to a smaller job that has fewer responsibilities and pays less, but where they can in fact be an A. Their ego often tells them they would rather turn down the offer or leave the company than take the smaller role. The book is a challenging read, but full of great guidance.

The dilemma, however, is that as the team grows, it inevitably moves toward being average. When you only have a few employees, they can all be special and great. But, on average, larger teams are average. If we score employees on a 1 - 10 scale, where 10 is the best, as the team grows, we will likely end up with a team that averages 5. There will be some super stars and some duds, and a lot of people in the middle. The problem for a hiring manager is how to spot a candidate that will be above a 5, while the odds are you will find a lot of candidates that are 5 or lower. This is particularly challenging when we think about replacing an existing employee. If the current employee is a middle of the road 5, performing as a solid B with little chance that they will move up to be an A, then replacing them in search of an A is pretty scary. You could easily do worse. This is what leads managers to the “warm body syndrome.” They have a warm body in the role, doing some of the job well, so isn’t that better than having an empty seat and taking the risk that we hire a dud to fill it?

My advice is always to strive to fill every seat with A players. Do not be afraid to seek the best and the brightest, and never fall victim to the warm body syndrome. Assume that every hire will improve your average and lead to further success. Easier said than done, but the key is to focus on becoming a great hiring machine. As a friend of mine used to say “you have to kiss a lot of frogs before one turns out to be a prince or princess.” The hiring process takes time. Hence, the need to take a breath before diving into the frenzy to fill a position. Consider all of the characteristics that will make a successful hire. Experience and track record are important, but so is cultural fit and enthusiasm for the job and the company. Look at each of the elements that define who can be an A player for your company, and use them as a candidate screen. It takes a village to make a great hire, so engage others in the selection process, but do so with purpose. There is little value in having the same interview conducted over and over by different participants in the process. Each participant should be tasked with specific criteria to evaluate the candidates. Curate your hiring team to have different points of view. I suggest crossing department lines and organizational levels. Give each participant a formal scorecard to rate the candidates on consistent and meaningful criteria. Pay attention to the soft measures. If a participant has a “feeling” about a candidate, take it seriously and create a path to explore it further. We often undervalue the cultural fit element of hiring, but that is typically where an otherwise qualified candidate will eventually fail. Above all else, do not be rushed. If the candidate wants the job, they will follow your process and appreciate your thoroughness. If they have other offers, so be it. Better to lose a candidate than be rushed to make a bad hire.

Lastly, pay attention to hiring managers’ track record of making good hires or duds. If a manager is consistently hiring and then firing, the problem may be with the manager. Something about their process, or their leadership is resulting in the repeating pattern. They probably need some help. A-quality managers tend to be very good at hiring A-level talent and nurturing them to become great contributors. Invest in your A players.

Look at Acquisitions From All Angles

I was recently coaching a CEO through a complicated analysis of a potential acquisition. An acquisition should make a company more valuable, but it introduces risk and a host of other variables. The calculus involves a broad range of constituents that need to be considered. In addition to all of the financial and legal diligence, it gave me the idea to construct a roadmap, or checklist of softer items to evaluate prior to pulling the trigger on an acquisition.

The first order problem is the decision to move forward or not. From a deal structure perspective, this is pretty well understood territory. There are many good references for diligence checklists, and models to understand the financial implications of an acquisition. However, it is nearly impossible to cover all of potential variables and gotchas in an acquisition. The buyer has to determine what they know with certainty vs what they have been told, what they suspect but need to confirm, and what the likely traps or points of failure are. The unknowns all contribute risk to the deal.

Historic financial performance of the target is fairly easy to interpret, but past performance is not always a great indicator of future performance under new ownership. The seller did not build their business to fit hand-in-glove with the buyer’s business, so there will be rough edges and overlaps that need to be be smoothed out or eliminated. Acquirers look for “synergies,” which is a euphemism for cost savings. The buyer needs to consider the soft side of removing these edges, and how it will impact future performance. Assuming some of the seller’s employees will be reassigned or eliminated as a result of the ‘smoothing,’ what will be the impact on the culture and retention of the remaining employees? Are the effected employees cultural leaders with influence beyond their functional roles, and is there a risk that their exit will destabilize the remaining employee base? It is important to consider the flight risks and the cultural impacts of the synergies.

There are always different ways to structure an acquisition, and each approach will impact various constituents differently. The mix of cash up front, earn out, equity, debt, and timing will lead to different sensitivities. Buyers want to put the risks on the seller, and the seller wants to put the risks on the buyer, so it is a balancing act. If the seller has institutional investors, the buyer ought to be aware of the investor’s fund dynamics. Are they at the end of their fund lifecycle and looking to get out, or is this an under performing asset? Are they open to rolling their investment into the acquirer’s equity stack, or do they want a clean break? I am not a fan of earn outs, particularly as a seller. I view earn outs as a recognition that the two sides do not really agree on price, so they are kicking the can down the road. My frequent quote has been “an earn out is setting up a later fight.” However, as a buyer I recognize that it is a powerful tool to de-risk a deal. It basically means the buyer is unconvinced of the value the seller is claiming, so the seller gets to prove it by performing. The problem is that the buyer will make changes once they own the company, so the business trajectory will not remain the same. Typically the argument will be “you screwed up my company, so we could not earn the earn out.” My advice is to be VERY clear about the buyer’s intentions, the terms of the earn out, and the measures of success, and keep the duration short.

Often, buyers consider the needs of the seller’s employees, but under value the implications for their own employees. Successful acquisitions will typically result in a blending of executives and employees from both companies. There will be overlaps, and there will be winners and losers on both teams. The process will be unsettling for the acquirer’s employees as well as the seller’s. I have a firm rule that the acquirer has to answer four key questions on day-one for every one of the seller’s employees, and any effected employees of the buyer:

1. What is my job in the new company? Job descriptions are ideal, but at a minimum a clear statement of duties going forward is required.

2. Who will I report to? There cannot be any ambiguity of reporting structure. The direct manager is the most important influence on employee retention, so it is vital to set this relationship on the right footing from the start.

3. What is my compensation package? This is a comprehensive topic that includes base pay, variable pay and bonus opportunities, as well as benefits, equity compensation, and vacation or PTO policies.

4. What do I need to do to succeed? Employees need to understand their performance metrics and measures, and they have to believe they are attainable.

One of the most important constituencies is the customer base. The seller’s customers are likely to be unsettled, and if any of them were shaky to begin with, churn can become a huge issue. The seller’s leaders need to be active participants to calm down the base, and the buyer has to allocate senior resources to meet the customers and welcome them. Welcoming means listening, not just talking. Customers want to have a voice and a home with the buyer. Listening will uncover underlying satisfaction issues, and should focus on understanding the value the customers perceive in staying with the new company. It will highlight areas the product team needs to preserve or enhance going forward. This is particularly important if the acquirer intends to retire and replace the seller’s existing product. It is easy to think your product is superior so customers will love it, when in fact there may be some key capability your team overlooked.

The same care needs to be applied to the buyer’s customer base. Often the intention of the acquisition is to broaden the buyer’s product line or capabilities. However, existing customers may see it as deemphasizing the current product and react negatively, or look for a replacement vendor that offers more of a pure-play, where their needs are the only focus for the vendor. Churn is the absolute enemy of acquisitions, so it is paramount to focus on the customers of both companies to ensure the revenue stream is uninterrupted.

There are many other considerations, but the last one I want to address is the need to look into the value of the buyer’s business in the future. Assuming the buyer will either go to market to be acquired, or to raise incremental capital in the future. How will this acquisition impact the timing and the potential universe of future investors? Will it make the company a more desirable target, or will it complicate the future investment landscape? How long will it take to prove value from the acquisition, and is that within the investment horizon of the current owners? Institutional fund dynamics play a role in this decision process. If current investors want to get out in the next couple of years, but the acquisition will result in a short-term downturn while the company builds for a future upturn, will it play out in the timeframe of the current investors? This is particularly true if the acquisition will adversely impact near-term profitability, growth, and churn. It may actually lower the value of the buyer before it raises the value. Current investors may prefer a steady growth path to realize their exit value sooner, and therefore will view the deal unfavorably, or impose performance metrics that change the operating equation post-acquisition. All of the existing investors may not be in it for the long haul.

The bottom line is that the CEO, executive team, and the board need to be aware of all of the implications of an acquisition, and avoid focusing solely on the financial and diligence elements of the transaction. To apply a military analogy, there is the action (doing the deal), the reaction (post-deal fallout), and counter action (what has to happen to make sure things go as planned). As Colin Powell said, “you break it, you own it.”

Take A Breath

I volunteer as a mentor with eForAll, a terrific organization that supports aspiring entrepreneurs to launch mainstream businesses. I was recently on a call to meet a potential mentee who is striving to start a landscape business. He told me that he currently is a one-man company, and he has so many customers for lawn mowing that he cannot devote any time to anything else. He also said that his lawn mower is too small, but he cannot afford a larger commercial mower, and he cannot afford to hire anyone because he does not have equipment for them to operate. He needs a loan to expand his business, but he does not have time to secure one. He is a perfect example of the tyranny of the urgent being the enemy of the important. We talked about his need to take a breath and plot a course forward that will work for him, rather than just staying on the treadmill he is on and remaining frustrated.

The concept of taking a breath is something I often speak with CEOs about. Particularly in early stage companies, the founder/CEO tends to do everything, and as the business gets going they are rapidly consumed with the treadmill of day to day demands, and fall victim to the tyranny of the urgent. Moving from the massively hard task of launching a business to the herculean task of building a sustainable business requires a major change in CEO behavior. The first step is to take a breath and recognize the situation. The CEO needs a moment to reset and plot a path forward. Unfortunately, many entrepreneurs are so caught up in the moment and the crushing workload that they fail to consciously take a breath.

The same scenario happens in more mature businesses with experienced executive teams. Each executive is consumed with their own daily tyranny of the urgent, but collectively, the CEO and the executive team need to periodically take a breath. My approach is to schedule routine quarterly executive offsite meetings. Typically spread over at least two days so that there is evening social time to unwind together. Meetings have formal agendas and meaningful strategic topics to discuss and debate, but the key is to look a little further into the future to see what is coming instead of constantly being buffeted by unseen forces. The ability to look further into the future, or deeper into what is going on, creates the space to anticipate and course correct without falling victim to the tyranny of the present daily activities. A side benefit is it forces the executive team to disconnect from immediate issues, and rely upon their teams to hold down the fort. That means they have to have a competent team behind them, and at times the retreat will serve to highlight weaknesses in the next level team.

A wise manager I once worked for had an interesting saying — ‘always be decisive and make timely decisions,  but never make a decision until you have to, because you may learn more. The key is to know when you have to decide.’ It was his way to say ‘don’t procrastinate, but also don’t shoot from the hip without thinking about all of the angles.’ It was also his way of creating a pause to take a breath and make a well conceived good decision, not just any decision. In a fast paced, growth environment, everyone feels urgency, and they put that urgency on the shoulders of the CEO and leaders to make rapid decisions. The mantra to ‘take a breath’ is a way to slow time and make sure the urgency does not lead to carelessness or a treadmill situation.

The Staff Is Smarter Than You Think

CEOs and executive teams handle a lot of information, and some of it is pretty confidential or proprietary. There is always a question of how open to be with the staff versus how much to compartmentalize and keep secret. The level of openness is a style issue that starts at the top, and becomes deeply rooted in the culture of the company.

Small businesses are often quite transparent. However, as organizations grow, information becomes more compartmentalized and sharing drifts toward a ‘need to know’ model. As we move from a few colleagues that we know well and trust implicitly, to a staff of individuals who are in it for a paycheck, we tend to pull back on transparency. After all, you really do not know who is going to do what with your sensitive information. The dilemma is that the more you keep secrets, the less your team is likely to become engaged. By putting up barriers, you are actually driving team members to be disconnected, and you are fostering that 9 to 5 mentality.

Corporate info falls into a number of broad categories, and it can be helpful to think about how you want to treat information about each category in advance. Here are a few topics to consider:

• Financial information. Specifically, ongoing financial performance, cash flow, capitalization and ownership. Many companies share basic P&L data with the team as a form of scorecard. Cash flow is a little more sensitive as it may lead people to focus on the runway instead of the lift off. Capitalization and investment are often the subject of public press announcements — ‘we just raised $X million from YYY Partners,’ but individual investors and option grants tend to be much more sensitive.

• Human Resource information. This is a sensitive area fraught with personal data. The subtopics to consider are hiring and firing decisions. When and how do you want to share information about personnel changes, especially when it involves reductions in force? Every employee worries about their job, and any disturbance in the (work)force creates anxiety. This is the area where the CEO and exec team need to be at the top of their game. Past honesty in communicating HR decisions will build credibility and trust for when things get bad.

• Product information. New products and features are exciting and people like to talk about them. However, in a fast-paced competitive market, leaking foreknowledge of your product plans can provide your competitor with the opportunity to counter your attack. You need a clear strategy for managing internal and external information flow about product breakthroughs. The team needs to internalize what is at stake, and you need a trust environment with clear communication of authority and consequences for violating the confidentiality rules.

• Go to market information. The biggest topic here is typically sales pipeline information. Who gets to know about pending opportunities, and who gets to know about the forecast for the future? On the marketing side, metrics and lead flow may be informative about future performance, and as such may be confidential. How widely do you want to share this data?

• Customer information. Often, what a customer is doing and how they are deploying your product is considered confidential by the customer. Certainly, their data is their data and it needs to be respected. Beyond the confines of a single customer, consider how broadly you want to share customer lists, and customer health data. Pending or anticipated churn is often a sensitive topic that the exec team needs to have a plan for managing.

These are all examples of categories of information the CEO needs to consider when deciding how open an organization will be. In my experience, the greater the degree of transparency, the more engaged the staff will become, and the more trust you will build. It takes a village to be successful, and creating a shared trust and understanding of the facts of the business will help to create that village. Moving the needle from employment being ‘just a job’ toward ‘we are all in this together’ will go a long way to creating a resilient organization that can withstand the stresses of a growing competitive business. The staff is probably more mature and smarter than you think, and if you engage them they may surprise you.

One last note. Never underestimate the power of the corporate grapevine and rumor mill. Employees watch their leaders like hawks, and they perceive every nuance of behavior: is the door closed more often, are there more meetings, do the execs looked stressed, are voices louder or harsher than usual? Every element of executive behavior is a tell. Employees gather and disseminate information at the speed of light. On numerous occasions in my past, the executive team agonized about keeping a secret or how to share bad news, only to discover that everyone already knew it. The problem is that nature abhors a vacuum, so in the absence of a clear message from management, the grapevine will fill the void with its own interpretation of reality, and that is rarely positive. Bad news can quickly spin out of control while management is discussing and debating how to share the facts with the team. See my earlier post about the Ladder of Inference. Crisis management is an important part of the CEO’s role, and clear communication is a critical element of getting it right.

Everyone Needs A Friend

Being a CEO can be a lonely position sandwiched between the board of directors and the employees. Even though you are at the top of the corporate hierarchy and surrounded by your executive team and staff, it is an isolated role. You can build lasting and meaningful friendships with your team, but there is always a power dynamic where you, as the CEO, are the ultimate decider-in-chief, and you hold their careers in your hands. Business will always trump friendship, and the CEO is the one that may have to make the hard decisions about corporate direction, or whether or not to remove a teammate/friend from their position. To quote the great Stan Lee, creator of Spider Man, “With great power comes great responsibility.” This power dynamic creates a natural constraint on the flow of information.

A similar power dynamic exists between the board of directors and the CEO. The CEO and board must form a positive working relationship, but a fundamental role of the board is to hire and fire the CEO. Similar to the dynamic between the CEO and employees, the relationship between board members and the CEO has an underlying constraint on information flow that causes the CEO to be guarded about sharing uncertainty or showing vulnerability with board members.

Being sandwiched between employees and the board while carrying responsibility for all aspects of the business is what results in the CEO position being a lonely role. Regardless of experience level or business acumen, every CEO can benefit from a true business ‘friend.’ There are several ways to fill the role, but the requirements are pretty basic:

• The ‘friend’ has to be solely devoted to the success of the CEO. No ulterior motives or conflicts of interest.

• The friend has to be intellectually engaged in the CEO’s business and able to grasp the challenges the CEO is facing.

• The friend has to be able to subordinate their own ego and exclusively focus on the CEO’s needs.

• The friend has to be honest and able to hold up a mirror to the CEO, even if it is to show a painful truth.

In my past CEO positions, I have solved this need in different ways. One of my favorite approaches is to join a small, devoted peer group of fellow CEOs. I tried different types of groups, and found that the most helpful for me had the following specific characteristics:

• There was a facilitator who ran the group and imposed a structure on the meetings.

• Participants were required to prepare in advance and commit to be present for all meetings.

• Participants were all in similar, but non-competitive businesses. In my case, they had to be technology CEOs.

• Participants all had similar funding models. Mixing public company CEOs with private company CEOs does not work well. Blending self-funded CEOs with venture or PE backed CEOs also does not work well.

• Participants needed to be from similar sized companies at similar stages of maturity with similar growth objectives and similar experience levels. We had to be able to help each other, and feel like we all had something to contribute.

• Participants needed to have similar governance structures with a board of directors populated by institutional investors

I have tried CEO groups that did not follow these requirements, and it never went well. My craziest example was a group comprised of a sole-proprietor sod farmer, a friend-funded gravel pit owner, a PE backed healthcare company, and me - CEO of a VC backed software startup. Despite our best efforts, none of us could be very helpful to each other, and it turned into a waste of time. However, when I found a group that aligned with the requirements, it was life-changing.

An alternative to joining a CEO group is to find a CEO coach or mentor. A lot of people who make it to the CEO role have pretty big egos, and the idea of needing a coach may seem like admitting a flaw or deficiency. Our ego gets in the way of accepting help. The truth is even great sports champions all have coaches, so why not CEOs? A coach does not have to be able to do your job better than you, they only have to see how you can do your job better, and guide you to evolve to a better version of yourself. The most important rule for engaging a coach is that the CEO has to be the one who wants it, and they have to be the one to pick the coach. The coach can only serve the CEO. Too often, when the board thinks the CEO needs some help, they push for a coach, but problems arise if the coach is unclear about whether they work for the board or the CEO. It only works if the coach/CEO relationship is totally confidential, as if it is an attorney/client privileged relationship. No reporting to the board. The CEO has to be comfortable being vulnerable with the coach to acknowledge challenges and shortcomings without fear that the coach will rat them out to the board. In my experiences being a coach, it is vital for the CEO to understand that my sole objective is to help them become more successful.

Whether the answer is a coach or a peer group, the CEO has to take it seriously and commit the time and effort to do the work. Time is precious, and getting together with your coach or peer group has to be productive. It is not just a friendly shoulder to lean upon, although sometimes just venting an issue can be helpful. I am an advocate of making the sessions with a coach or a peer group structured. The CEO should prepare a brief and each meeting should review progress on past issues and address current challenges. Accountability is important, and that is where the coach or the peer group facilitator comes in.

In the situation where the board is uncertain about the CEO, they have a fairly blunt instrument to address the issue. Either they invest in the CEO to help them improve, or they fire the CEO and hope to find a better one. If the choice is not obvious, then the first step should be to help the CEO improve because replacing the CEO is a risky and painful decision. Investing in the CEO will either make the choice more apparent, or it will result in a better CEO. Coaches and peer groups cost money, and it is easy to question the expense or postpone the investment ‘until things are more stable.’ A common half-measure is to ask a board member to step in and ‘help’ the CEO, but that power dynamic thing will always get in the way. If the CEO is worthy of saving, then choosing to avoid the cost of an external independent coach or peer group misses the point. Investing to grow a better CEO is basically a self-funding investment that will deliver a high rate of return on investment.

The bottom line is every CEO can benefit from a trusted advisor or peer group, and every board ought to encourage the CEO to make the investment.

Board Conflicts of Interest

Each board member has an obligation to represent all of the shareholders and do what is in their best interest. In a simple cap table, where common is the only class of stock, everybody is in it together. All parties have the same interest, and share in the same outcome. What benefits one investor equally benefits all investors.

Unfortunately, this utopia has been dramatically distorted in most venture and growth-equity backed companies. The typical investment vehicle for institutional investors is preferred stock, or a similar instrument that puts the institutional investor at the front of the line when there is a liquidity event. They put their money in and want to be assured that they will be repaid before any common shareholders see a penny. In most cases, the preferred shareholders have the right to convert their preferred shares to common if the outcome is large enough that the common shares are more valuable than the preferred, so they win no matter what.

Preferred investors have gone even further with a few more aggressive forms of investing. One form is to structure their investment so that rather than having to choose either the preferred return or convert to common, their preferred shares get repaid (usually with interest), and then they also get a second bite at the apple by converting their shares into common and participate in the common shareholder payout as well. A second aggressive form of preferred investing is a preference multiple. With a preference multiple, the initial investment must be repaid two or three times before any funds go to common shareholders. In particularly egregious situations, investors may demand a preference multiple and participation rights, taking a second and third and possibly fourth bite at the apple.

The whole thing gets even more messy when there have been multiple rounds of institutional investments with different investor groups. The Series A preferreds may have different rights or economics than the Series B or C or D, and the waterfall of who gets what in a liquidity event can become wildly complicated. If the outcome of the sale is big enough, everyone gets a payday, but if the sale does not clear the entire preference stack, somebody is going to be disappointed, and the common shareholders are at the front of that line.

So what does this all have to do with conflicts of interest? Creating a collection of stock classes , particularly where the investors in each class include different institutions, introduces a governance challenge for the board. As noted at the top, each board member has an obligation to act in the best interest of all of the shareholders. However, the typical practice for an institutional investor is to require a seat on the board for a member of their investment firm, and that member’s first obligation is to their own firm. An exit that is acceptable to one investor may disadvantage another investor, just as the economics of the preference stack as a whole may disadvantage the common holders. So, who are the board members really representing, and whose best interest are they pursuing?

Let’s look at some examples that complicate this picture within the preferrence stack. Each investment fund generally has a limited timeline for holding an investment. An investor in Series A may make their initial investment expecting to exit after 3 - 5 years. However, if a new investor leads the Series C round two years later with an investment horizon of an additional 5 - 7 years, then the board members for these two groups are not aligned on their exit horizon. It is not unusual for exits to be driven by fund timing, and not by what is best for the business - aka common shareholders.

The same type of situation can occur when different series are led by different styles of investor. An early stage venture investor may have led Series A, while a later stage private equity investor may have led Series C. The venture investor is looking for high growth and is tolerant of losses or low earnings, while the PE investor is satisfied with more modest growth, but intolerant of losses or low profitability. The board and the CEO have to navigate these conflicting objectives and maximize the outcome for all of the shareholders, but it is challenging for the investors to take off their firm’s hat and put on their board hat.

When a company is doing well and everyone can see a fantastic exit approaching, most of these representation and governance issues fade into the background. Problems arise when the business is on a less attractive trajectory. It is really a problem if the company needs to raise more capital and some investors are open to the idea while others are eager to head for the exits. This is exacerbated when one of the funds is nearing the end of its lifecycle, and there is no additional capital available for them to invest. An investor who cannot participate with their pro rata share of a new round is often punished by the economics of the preference stack. As a result, they may press to sell the company rather than open the door to new investment. That might be good for them, but not necessarily good for the rest of the shareholders. The board member from that investor will face the dilemma of supporting what is good for the business and the other shareholders, or what is good for their fund. A pretty clear conflict of interest.

There are all sorts of justifications for creating multiple classes of stock. Institutional investors point to their capital as a high-risk investment that provides the lifeblood cash to fuel the business, so surely they deserve an outsized return. The problem is that this stuff gets out of control and the common shareholders, which includes the founders and the employees and the early seed investors, are the ones that suffer the most. We have all seen preference stacks with multiples and accumulated interest that far exceed the current enterprise value of a business. However, when the investors want out, the business will be sold. The preferreds may get two or three times their money, but the commons will get zero. This is the bargain that was struck when the money was invested, but it does not lessen the sting.

The economic model of the venture and PE industry is complex. These investors provide a vital engine to realize the creativity, innovation, and growth of breakthrough products and services, and they deserve returns commensurate with the risks they take. I do not have a perfect solution, but my observation is that the concept of multiple classes of preferred shares and the complex structures that have evolved to ensure outsized returns has created a monster. If we look at enterprise value more simply, then the price paid for shares should be able to reflect the risk and reward to support institutional investors needs. Rather than frame the investment as ‘I should get twice as much for my share as you get for yours,’ why not price it so that ‘I will pay half of what you paid, but we end up with the same class of shares?’ Alternatively, if the structure has to be ‘I get mine before you get any,’ then maybe the answer is a single preferred class and a single common class where preferred holders get paid before common holders. Within the preferred investor pool, we should be able to deal with varying returns through pricing, rather than the creation of new classes. There is probably no simple answer that will mimic the complex waterfalls we see today, but eliminating the conflicting agendas will enable board members to truly represent all of the shareholders without all of the inherent conflicts of interest the current system creates.

The Board And Operating Divide

The CEO and the board have a unique relationship. The CEO is typically a member of the board, but they also serve at the pleasure of the board. As a CEO, I was always conscious of the line between operations, which is the domain of the CEO, and strategy which is broadly speaking in the realm of the board. It is a unique relationship, almost like co-equal branches of government, but not exactly equal. Even though the CEO is typically on the board, they also work for the board, and the board has the power to hire and fire the CEO. My defenses used to go up when board members crossed the line into operations uninvited. My feeling was if they are unhappy with operations, their remedy is to replace the CEO, not do the CEO’s job for them.

An important step to create a great board is to recognize the different roles and establish a positive working relationship between the CEO, the board, and the executive team. I have observed board members who understand the co-equal nature of the CEO and board relationship, and form a collaborative working environment. There is mutual respect and an understanding that both parties are experienced professionals and have the same goals in mind. Unfortunately, I have also observed board members who project a superior, all-knowing attitude, and treat the CEO as an employee rather than a peer.

Sometimes, the nature of the relationship is determined by the investor’s model. In the venture and private equity world, some firms are control investors and require their portfolio companies to follow defined methodologies or playbooks. They set the operating procedures and are deeply involved in corporate operations. When a control investor acquires a business, it is important for the CEO to have their eyes open and understand that their degrees of freedom will be constrained. As long as the roles are clear, a healthy and productive relationship can be formed.

In contrast, when bad behavior sets in more organically, it can create a toxic environment, and the CEO will start to dread board meetings. This is usually the result of one or more board members adopting that superior attitude and creating antagonistic meetings.

Antagonistic board meetings lead to all sorts of bad behaviors. The meetings evolve into performative recitations of metrics (aka Dog and Pony shows). The CEO starts to focus on feel-good metrics that paint rosy pictures in order to curry board approval. They also tend to avoid bringing controversial topics to the board until they can no longer avoid them, which is usually too late to address them. There is typically a reluctance to bring members of the executive team to board meetings in an effort to shield them from bad board behavior. Worst of all, CEOs leave the meetings feeling beat up and demoralized, rather than encouraged and energized.

When a positive board and CEO relationship develops, there are many more opportunities for board members to become engaged and helpful. With a well curated board composition, each member is expected to contribute their skills to the mix. This is when the divide between the board role and the CEO’s operating role can blur in a positive manner. At the request of the CEO, I have often been asked to engage with members of executive teams to help them evolve into the leaders the CEO needs. When I was an operating CEO with a strong board, I did the same. The important point is to recognize that this type of involvement has to be at the request of the CEO, and the help offered must be consistent with the CEO’s operational direction.

One last ‘friendly’ reminder about the CEO / Board divide. The working relationship between board members and the CEO can be a beautiful thing. I often talk about a great board as a competitive weapon, and a strong bond between CEO and board is necessary in order for this to evolve.  However, as the CEO, remember that you are sitting in the middle between the people who work for you and the board of directors you serve and essentially work for. A CEO can be friendly with both, but a wise advisor once reminded me not to confuse friendship with business. Friendship only goes so far in a business relationship. In particular, the board’s duty is to the shareholders and not to their CEO friend. If operations are going poorly, the CEO owns the problems, and the board’s job is ultimately to hold the CEO accountable.

Great Boards Are Curated

I am a huge advocate of having an active and effective board of directors. For nearly any size company, and any form of capital structure, outside advisors can add value. In its simplest form, an entrepreneur may just need an independent mentor, or an advisory board that does not have corporate governance responsibilities. However, as a business starts to scale and become real, a true corporate board can be incredibly valuable. The CEO role can be pretty lonely at times, and a board can bring a unique perspective, and hold an honest mirror up to help you see the business with greater clarity.

You may have noticed that I keep caveating the message by saying a board ‘can’ be helpful. That is because not all boards are created equal, and not all boards are functional and helpful. I recently wrote about boards that are dominated by representatives of institutional investors. This is often the case in companies that have taken rounds of venture or growth capital from multiple institutions. Each investor group wants a seat or two on the board, and soon the board is comprised of a bunch of suits who are mostly focused on monitoring their investment, and only narrowly involved in real strategy, direction, and business challenges. Like the old TV show catch line ‘just the facts, ma’am,’ these board meetings turn into ‘just the metrics, ma’am’ exercises, and become a report card instead of a real business discussion.

A great board has to be curated. Each seat needs to be occupied by an individual who can add unique value and who also has the bandwidth to contribute. Investors who represent a firm with a diverse portfolio can bring a wealth of benefit to a CEO. They have perspective across multiple companies and industries, and see best practices throughout their portfolio. The key is they have to be present and own the responsibility that comes with holding a seat. One of the questions I often ask is ‘how many boards are you on?’ There is no magic right answer, but too many is bad, and unfortunately investors often take on too much. It becomes hard to keep track and stay engaged with each company when trying to serve too many businesses. The distractions lead to what I call ‘board amnesia.’ From one meeting to the next, over-committed board members forget the nuances of decisions they helped make, and it often feels like they are starting over at each board meeting. As a CEO, this is incredibly frustrating because you have to constantly re-litigate topics over and over.

As companies move toward a liquidity event or sale, the die is basically cast, and the focus turns almost exclusively to short term execution, and away from making long term strategic plans. At this point on the journey, a well curated board should have one or more members who are experts at exits, and can help the CEO navigate the sale process to maximize the value of the company. For some board members, I have seen this become their queue to step back and put their attention elsewhere. The implicit message is “this one is done, and my time is better spent on the next one.” While there is some validity to this thinking for an investor with a portfolio to service, it can be very disheartening for the CEO and team. They are still charging hard and fully accountable, and they want their board members to stick with them to the end. Not all exit processes run smoothly, and some fail to result in a transaction at all, so the CEO and the board need to continue to collaborate for the present, and remain engaged as if there is a future, right up until a deal is done.

The CEO needs to be able to have a frank conversation with individual board members to hold them accountable if/when their contribution is fagging. Board members should recognize their obligation to be engaged and present, and if a board member cannot devote the time, then they should be willing to give up the seat to someone who can.

At all stages, a great board is a competitive weapon. Each participant has a purpose and is engaged to contribute time, energy, and expertise to build and nurture a successful company. I am biased, but I believe one of the most important board roles is that of the independent(s). Independents may be industry experts, or experienced operators. Their purpose is to add perspective and to be a solid bridge between the CEO and other board members. As a contributor to building the board as a competitive weapon, a former operator can bring unique insights and best practices with hands-on experience. If functional areas of the business, or members of the executive team need a little help and mentoring to grow, the CEO should curate the board to include an expert who can bolster those functional areas. It could mean adding a CFO to the board to help the operating CFO advance, or a CMO or CRO to help with go-to-market strategies, or a technologist to help guide the CTO. In my biased opinion, a former CEO is an ideal addition to a board. For less experienced CEOs, adding someone who has been there and done that can help them grow in their job, but regardless of the experience level of the operating CEO, a former CEO has walked in their shoes, understands the challenges and can relate to the issues. They can be a coach and a sounding board for the CEO, and they can add perspective and help other board members see the business through the lens of a CEO.

Whatever the unique needs and challenges are for the growth and success of the business, the CEO should insist on constructing a board that can help. Astute investors acknowledge that it is important to have the right people on the board, and the best person may not be a member of their investment team. If everybody focuses on the concept of building the board to be a competitive weapon, then making the right choices to fill the seats will become obvious.

Align With Your Buyer’s Journey

I had several interesting discussions recently about vendor sales and marketing roles throughout the buyer’s journey from interest (top of funnel) to purchase (bottom of funnel), and how a SaaS marketing and sales team aligns with the buyer’s needs. It made me think more about full-funnel management and the need to reflect the buyer’s journey in the way a sales team supports the process. Buyers used to follow a path from discovering marketing materials and doing casual shopping, to raising their hand, to asking for more information, which led to a sales development rep (SDR) or a sales person getting involved. This was a key handoff point between marketing and sales. Marketing content remained relatively high-level, and the handoff to sales took place in the upper part of the sales funnel.

What changed in the last several years is that enterprise shoppers do much more research on their own before they are willing to engage a vendor’s sales team. Outbound marketing techniques no longer entice shoppers to raise their hand before they are really educated and ready to make a purchase decision. The result is that the handoff from marketing to sales has moved further down the funnel, and marketing has had to adapt by expanding its role beyond surface creation of awareness to serious nurturing and education. It has also shifted the initial sales role further down the funnel, and changed, or eliminated, the SDR function. This all means a change in the staffing criteria for sales and marketing, and in some markets, it has expanded the role of channel partners. 

Let’s look at these changes one at a time. As you move down the funnel and the buyer is seeking more and more education and doing extensive research, the content put forth has to become more and more specific and deliver much greater depth. In many cases, a marketer who was comfortable at the top of the funnel with value messages and positioning statements is not sufficiently technical and comfortable creating the materials that will carry the buyer down through the funnel to the point where they are ready to speak with sales. Marketing leaders need to adapt their hiring practices. Their team needs more domain expertise in content creation, and more target market awareness in demand generation. Marketing’s role has to shift from generating basic brand awareness to building market credibility. Marcus Sheridan wrote a terrific book titled “They Ask You Answer” about becoming the shopper’s ultimate source of market information as the key to building credibility.

As the contribution from marketing becomes deeper and moves further down the funnel, the leads handed to sales are more knowledgeable, and further along in their journey. The result is that the SDR role has to adapt or disappear. Too often, the SDR function is an entry-level gate keeper with a primary purpose of screening out unqualified leads to avoid passing along shoppers who will waste a salesperson’s time. From the perspective of the vendor and the sales person, this may be efficient, but from the perspective of a knowledgeable buyer this can be very inefficient and annoying. At a minimum, as buyers become more sophisticated, and the first contact with sales moves further down the funnel, the SDR role requires much more product and market awareness.

Alternatively, we just need to eliminate the SDR role and focus on the seller filling the need. The change in buyer behavior means that by the time a seller gets involved, the nature of the questions and the specificity of the buyer’s needs are well formed. Buyers expect the seller to be an expert and provide specific demos and information about exactly how the solution will meet their unique needs. For some vendors, this means sellers have to also take on more of the traditional sales engineer responsibilities, or perhaps staffing ratios of sellers to sales engineers will need to change. The overriding message is that as buyers become more sophisticated, vendors need to adjust their selling methods to meet the buyers where they are today, not where they used to be. Many of the CEOs and sales leaders I have spoken with argue for expanding the role of a seller to be a full-stack player. More qualified sellers with fewer supporting contributors such as SDRs and SEs.

This change in buyer sophistication also opens the door for a different voice to participate in the process. In many markets, a channel partner or MSP may be the perfect match. Channel partners are force multipliers, but they also may have much deeper market awareness and a better understanding of the specific needs of the shopper. The partner can become the trusted expert advisor, and they can be the sherpa that carries the shopper to become a buyer. This is not a new or radical idea, but putting the shift in buyer behavior in the context of full-funnel management and factoring in the delineation of duties between the vendor’s personnel and channel partners can lead to a redesign of the marketing process and the sales cycle that will benefit both the vendor and the buyer. Vendors need to consciously strive to meet the buyer with the smartest person in the room who will be able to guide the shopper through the funnel.

Mommy Daddy Syndrome

Anyone with children has had the experience of saying ‘no’ when asked for something only to later discover that your child went to their other parent and managed to coerce a ‘yes.’ Kids learn which parent is most likely to say yes or no to each type of request, and they shop for their desired result. A similar thing happens in corporate interactions. Team members are really adept at learning who to ask for what, or who will be more open minded about a topic, versus who will shut down discussion.

Similarly, A CEO needs to build sufficient rapport with each board member to understand how they think and who to ‘shop’ for what opinion. When seeking advice and a ‘yes,’ the CEO will want to start with the board member most likely to be supportive and helpful. They can help the CEO explore all of the angles and test the idea before presenting it to the entire board. Once the idea is well formed, and you basically have your ‘yes’, the CEO should engage that member to help lead the board discussion. Its like getting Dad to explain to Mom why he said ‘yes’ when she said ‘no.’ In essence, you want to bring the key board member to the CEO’s side of the table, and engage them to assist with guiding the full board to ‘yes.’ Involving a key board member will also help the meeting to be more collaborative and less performative for the CEO.

A well formed board will not be homogeneous, and each board member will have unique experiences and strengths that add to the effectiveness of the board and the value to the CEO and executive team. The goal is to make the board a competitive weapon that assists the CEO to build a successful company. As such, each board seat should be filled with an individual who adds to the competitiveness of the weapon. Too often, particularly for businesses that have been through several rounds of funding, the board is comprised almost entirely of institutional investors. Institutions often demand a board seat as a condition of their investment, so after a couple of rounds there are a lot of suits on the board. The key is for these experienced investors to ensure that their participation adds to the competitive weapon — they have to do more than monitor their investment, and they have to work hard to contribute to the business. Sometimes, instead of adding another financial person to the board, the smart choice is to insist that the board seat is filled by an industry person or an operator who can help the executive team mature.

When the entire board thinks of itself as a competitive weapon, you open the door to jointly develop battle plans, and assign roles and missions to leverage each board member’s domain expertise. As the CEO discovers the unique strength of each member, they can hold them accountable to contribute their strength, and engage them as needed when shopping for that ‘yes.’ One member may be an M&A deal-finder or deal-maker, while another may be able to add technical expertise, or marketing skills. A member who comes from the company’s industry may have connections with potential customers or possible business partners. If a board member only sees their role as protecting their fund’s money, they are probably not adding enough value. Board members should constantly if they are doing enough, and what else they can do to be helpful. They should also be holding each other accountable to actively participate.

A great board is a thing of beauty, and as a CEO, it is a gift. However, that gift requires hard work, and bringing it to fruition largely sits with the CEO to make the effort to leverage each board member’s unique strength.