Saturday, June 21, 2014

Your Most Valuable Asset

The purest treasure mortal times can afford is a spotless reputation. -William Shakespeare

I firmly believe that your personal reputation, as well as your company’s reputation is your most valuable asset. It enables you to attract and retain the right customers, best people, and good investors. That’s why you should vigilantly protect it and continuously work on building it.

The way to a good reputation is to endeavor to be what you desire to appear. – Socrates

This is true for any company. In particular, startup companies face many critical dilemmas, especially in the early stages. One dilemma is which investment offers to accept?

This is a tough dilemma since early stage startups are in a constant survival mode. They find themselves continuously in a need to raise funding in order to survive and move forward to the next stage in their lifecycle.

Startup founders and CEOs spend a significant amount of their time searching for the right investors, building relationships, and pitching their ideas and plans. This is often an exhausting and frustrating effort.

That is why they find it hard to turn down an investment offer. They know they need the money. They know how hard they have worked to finally get an offer, and how long it might take, and challenging it might be to get another one.

And yet, sometimes “No, thank you” is the right answer. Sometimes it’s best to walk away from an investment offer in order to preserve your reputation. Some call it “bad money”. I also call it a “toxic investor”.

A “toxic investor” is one that brings with him a high risk of bad reputation. Such an investor may give you the money you are asking for, even at a good valuation. However, they are a long-term threat to your company and its future success. They drive away good and reputable investors, both in the current round, as well as in future rounds of funding. They tarnish the reputation of the company and its leadership team.

A “toxic investor” may be an investor that has gotten bad reputation because of the way they deal and cooperate with other investors. Another reason might be that they sabotage the company’s decision making process, or use other bad practices.

Worst yet, sometimes their bad reputation comes from actual illegal activities (money laundering, SEC violations), or a suspect source of money (illegal businesses).

Whatever the reason for their bad reputation, they should be avoided like the plague. I would like to offer the following tips for avoiding a “toxic investor”.

·       Due your own due diligence – This can be as simple as a search on Google for any information related to the investor. Also, talk to fellow entrepreneurs, or other investors to learn what is the perception and experience with this investor.
Try to learn about the sources of their funds, what is their typical investment amount and stage, do they have any other investment partners, what is their decision making process, and style.

·       Check references – In many cases credible investment firms or VCs will have a list of their portfolio companies on their website. Contact those you’re familiar with, or might be relevant to your situation, and ask about their experience and lessons from their engagement with the investor. Check for the things that matter most to you and your company.
If the investor has no list of companies he has invested in, politely ask for references. It’s a legitimate professional request, no different than when hiring a key employee to your company.

·       Listen to your instincts and gut feelings – They are usually right.

Whatever the reason, if there enough red flags the right decision is to simply walk away and look for another investor, no matter the cost (opportunity cost). Your reputation is more valuable than money.

Benjamin Franklin once said: “It takes many good deeds to build a good reputation, and only one bad one to lose it”.

Saturday, March 22, 2014

Beware of the Trojan Horse Investor

We are all familiar with the historic mythology of the Trojan Horse.

Sadly, in recent years we’ve also been introduced to its contemporary version in the form of Trojans, malware programs containing malicious code that, when executed, carries out actions determined by the nature of the Trojan, typically causing loss or theft of data, and possible system harm.

But there is another type of Trojan horse, less familiar though just as malicious and harmful. This is the Trojan horse investor.

The Trojan horse investor is someone who presents himself as a credible startup investor, however has a very different agenda. His purpose is to take over the company and lead it in a direction that suits his own interests, and not necessarily those of the founders or the other (minority share) investors.

Unlike a typical financial investor or a VC, who invests in the company because they believe in the founding team, their idea, and its business potential, a Trojan horse investor has a very different motivation. He seeks to take over the company and its IP and use it to achieve his own business objectives.

His Modus operandi is quite simple. For example, let’s take an early stage startup that’s trying to raise a round A investment of $2m in order to develop their product and take it to market.

The Trojan investor offers to make a considerable investment of say $1.5m. Such an investment is typically hard for an early stage startup to ignore. It’s not entirely what they need to develop their product and go to market; however it’s a good start and may last them for a year.

However, this “Trojan horse investment” comes with some very specific terms of conditions, including a relatively low valuation that guarantees the investor a large share of the company. It also includes some veto powers that essentially limit the company’s funding options in the next round, such that they are forced to take additional funding only from the “Trojan investor”.

Thus, a year after their round A of $1.5m the company runs out of money. They don’t have a product yet, nor any customer deployments, not to mention actual revenue. Their bargaining power is weak and valuation low.

At that time, our Trojan investor comes to the rescue offering them additional funding at a low valuation, which they are forced to take in order to keep the company running. Now, his takeover is complete and he has obtained full control over the company, in terms of equity, and board representation.

Game over!

The startup founders, who worked hard and risked everything to start the company and create its IP, are now left with a very small share of the company, no control over its direction, and no influence in its operations.

For the Trojan investor this approach is more advantageous as compared to other alternatives, such as acquiring the company, or paying it NRE to develop his product. In the investment approach he ends paying much less than a straight up acquisition. On the other hand, unlike an NRE payment he gets his product, as well as the entire company with its IP.

So how can entrepreneurs avoid this Trojan investment? Unfortunately, there is no “investors’ antivirus” that you can install and run. And yet, I would like to offer a few suggestions:

1.   Review any offer or term sheet you receive with a trusted legal adviser to understand the potential risks, as well as the proposed terms and conditions. Also, review worst case scenarios of how your next funding round might look like, in terms of valuation, equity, and control, if you take this offer.

2.   Consult with your current investors. They are your allies and have a strong vested interest in the success of the company.

3.   Never give any single investor complete control of your company, in particular on critical issues such as funding, strategic directions, or key hires.

4.   Trust your guts. If it smells fishy, or feels wrong, it’s probably wise to politely say no and look for a better offer.

So beware of the Trojan horse investor. He can turn your dream into a nightmare.

Saturday, March 8, 2014

Customers, Investors, or Employees, Who Should Come First?

Much has been said and written about the dilemma of who should be your company’s first priority: customers, investors, or employees?

To be sure, this is a real dilemma for any company, including startups.

A company has three main constituents: customers, investors/shareholders, and its employees. Obviously it needs all three, and moreover, it needs all three to be happy and satisfied in order to succeed.

And yet, you can’t have three #1 priorities. So who should you rank as #1?

This is not just semantics or a mission statement exercise only. This ranking affects your long-term priorities, operational plans, trade-offs, and daily decisions.

In the 90’s the mission statement of “maximizing shareholders value” was very popular among US companies. This became the mantra of company leaders and executives. Needless to say, it didn’t inspire and motivate employees, nor did it delight customers. Eventually, it didn’t lead to higher value for investors either.

Later on, that mantra was replaces with “customer focused”. Everyone became, or wanted to be, customer-focused. Granted that makes a lot more sense than “shareholder focused”. However, treating customers like kings and employees like pawns is not a recipe for sustainable success.

For example, in the US retail sector, Sears is ranked amongst the worst in employee satisfaction rating and is losing money. On the other hand, Nordstrom is ranked high in employee satisfaction and is also highly profitable. This is just one example out of many.

I believe that employees should always come first. My rational is very simple. Happy and motivated employees perform better. They develop better products to meet customers’ needs, provide better service to customers, and find innovative ways in which to make the company perform better, and be successful.

This in turn makes customers happy since they get better products and service. Happy customers purchase more, remain loyal to the company, and recommend its products and services to their friends.

This makes the company successful and profitable, which of course, delights its investors and shareholders.

Thus, my ranking is:

1.   Employees

2.   Customers

3.   Investors

What’s yours?

Saturday, February 8, 2014

To Pivot or no to Pivot, That is the Question

Every startup has its own unique story, including different challenges, circumstance, people, and often results. And yet, there is one thing that’s common to the majority, if not all startups, and that’s the need to make some change and detour from their original idea and plan.

That change is also known as a pivot. Steve Blank defines a pivot as: a substantive change to one or more of the 9 business model canvas components.”

Having said that, in order to succeed, startups need to maintain focus and execute their plan to perfection. Otherwise, they risk getting late to market with their product, just to see another startup (or company) beat them to it.

Time to market is a critical element for any company, and even more so for startups that always have limited funding and resources. Being late to market could spell death to a startup company.

Also, zigzagging too often adversely affects execution, and results in longer time to revenue, higher burn-rate of cash, and frustrated development teams.

Moreover, to quote the late Steve Jobs: People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are.”

But that’s much easier said than done. How do you decide when it’s time to pivot and when to stay the course? How do you pick between several good alternatives?

In the Lean Startup approach, Steve Blank suggests that anytime you discover that any one of your initial hypotheses was wrong there is a need to make a pivot and change the hypotheses. That makes good sense.

However, what if it’s not clear that your hypothesis is wrong? What if you simply come across another good option, such as another good idea, a new potential market, etc.? How do you decide then whether to pivot or not?

I would like to offer the following simple approach. When you reach an intersection in the road, and must decide whether to stay on the path you’re currently on, or take the other path, you need a simple and effective decision making process.

It starts with having a clear purpose for your startup. What are you about? What would be considered as success for you? Without that, it becomes very hard to make the right choice.

Assuming your purpose is clear, and still both alternatives seem to support it, you next should look at your immediate objectives and priorities. Those change as your startup progresses. An early stage startup that’s looking to raise seed funding needs to consider which path will enable faster and better investment options. Growth stage startups are looking for ways to accelerate revenue growth and increase profits.

Therefore, your decision making criteria will be dependent on your current priorities and objectives. I suggest making a short list of criteria in order to simplify and speed up your decision making process. The longer you take to make your decision the greater the chances that your team will become confused, and start to lose focus.

For example, let’s take a case of an early stage startup that set out with an idea to solve a very specific problem in market A. They develop an innovative technology that uniquely solves this problem, have developed an early prototype, based on this technology, and have successfully completed a proof of concept. This led to high interest and demand from their target customers.

In the meantime, they realized that this technology has other potential applications in very different markets. Moreover, some customers in market B have expressed great interest in their technology. They have a high-priority need that until now could not be addressed with existing products.

Our startup is now faced with a dilemma. Do they continue in their current plan and go after market A, or should they pivot and start with market B?

In this case, I would consider the following decision criteria:

1.   In which market would they get faster traction, and earlier revenue?

2.   In which market are they likely to raise money faster (and better)?

For an early stage startup market traction is huge when it comes to raising money, or better yet, creating bootstrapping opportunities.

One way to determine that is to check in which of the two markets is your idea/product a must have for your customers? Where is it higher priority that will cause them to want it ASAP, and be willing to pay for it? Where are there less (or seemingly no) viable alternatives to your product? That’s the market you want to start with.

To use the famous line from Hamlet, to pivot or not, is the startup version of “to be or not to be”. And if you want to “be” (a success story), you should make the right decision in a timely manner.

Good luck with your next pivot.

Saturday, December 7, 2013

C is for Culture


I recently read a great post by a founder and CEO of a startup that failed.
He candidly and skillfully shared his lessons learned from the failure of their venture.

One of his important lessons was the need for a clear and simple articulation of a company culture. He used the term: culture is your cofounder.

I think it’s more than that. You are your company’s culture and it is you.
Leaders define the culture of their organizations. Their choices, actions, priorities, and values set the tone and example for others to follow. That becomes the de facto culture of the company, no matter what is written in the “About us” tab on the corporate website.

Moreover, your company’s culture is defined from day 1. It’s not something to be developed by your HR department when the company has grown into a mid-size enterprise. It’s set formally or implicitly by the way you conduct yourself, treat your co-founders and people, engage with your customers and partners, and deal with your investors.

Make no mistake; your company culture is as important as your IP, and technology. It’s the personality of your company. And like any personality it can be attractive or repellent, and even downright offensive.

Your company culture should help you attract and retain great people, passionate customers, and valuable partners and investors. It needs to send the right positive messages about the company and the way it goes about its business.

Those companies who are known for a positive workplace culture tend to perform well, as evident in a new ranking recently released by Great Place to Work Institute. Among the top performers on the 2013 World’s Best Multinational Companies list are culturally-strong technology companies such as NetApp, SAS, and Google.

On the other hand, bad examples can be easily found everywhere, and most notably on Wall Street.

I personally think that when it comes to articulating and defining your company’s culture less is more. Big words and long lists of values often come across as fake and empty declarations. Rather, I prefer simple, authentic, and short sentences that can be understood and remembered by everyone.

For example: always do the right thing, and treat everyone in the same manner we want to be treated ourselves.

Regardless how you decide to phrase your culture creed, it needs to be consistent with your daily actions, priorities, values and choices. It should also be timeless.

If I can borrow from Mahatma Gandhi, be the culture that you wish to see in your company.

Saturday, October 5, 2013

What Makes a Successful Founding Team?

I’ve written before about the importance of picking the right co-founder/s for your venture. I cannot overemphasize the importance of this decision. And yet, even if you’ve chosen great co-founders you still need make sure that you and your co-founders are functioning as an effective team.

Based on my experience, and that of other entrepreneurs, I believe there are four critical elements to a high-performance founding team.


1.   Mutual trust. This is by far the most important element of any team. You and your partners need to have complete trust in each other. Otherwise, don’t even start your company.

2.   Full Confidence in each other. This means confidence in each other’s skills and abilities to perform their respective roles and responsibilities professionally, successfully, and with high quality results.

In order to move fast and meet your goals you will each need to take on a significant role and responsibilities in your start-up; lead a certain discipline or task; make the appropriate decisions; work independently. This requires the other members of the founding team to have trust and confidence in each other. Otherwise, your team’s progress will be slow and you will miss your goals, which will lead to disappointment and frustration. Moreover, you will be perceived as a dysfunctional team by investors, partners, and your own people.

3.   Shared vision and success goals. If your vision is to build a great and lasting company, while your co-founder is seeking a quick exit, you are bound to have significant disagreements in almost all aspects of running your company, including what’s the right business model, who are the right investors for your start-up, how to build your organization, and more.

A common vision and definition of success for your company should be established early on in your work together. Don’t skip this important discussion, since it will come back to bite you.

4.   Symmetric level of commitment. This topic is rarely talked about, and yet I believe it’s very critical for a healthy and positive team dynamics. An asymmetric level of commitment is when one of you is fully committed to the start-up, working fulltime to move it forward, with no salary, while another partner is doing it part-time still holding on to his daytime job, including salary and benefits. This may seem harmless enough, or at worst a petty issue. Believe me it’s not.

When one of you is risking everything, sacrificing her (and her family’s) quality of life, while her partner is taking no risk and sacrificing nothing, it’s a very real and personal issue. It can lead to conflicts in key decisions regarding fund raising, company formation, and equity distribution. It can poison the team atmosphere and cause resentment among its members.

An asymmetric level of commitment can undermine all the other three critical elements above, starting with trust.

Therefore, ideally all co-founders should commit to leaving their jobs and dedicating themselves to the start-up at the same time. If there is a situation where one of the founders needs to stay in his current job a bit longer either due to contractual or personal obligations, make sure there is a clear deadline after which he either joins the founding team fulltime, or is taken off the founding team (will not be considered as a founder). Although this may cause some discomfort among the team, it’s better to deal with it early on then later, when it threatens to destroy your company.


A great founding team is by far the most important element to a successful start-up. More than a great idea or a brilliant business model. The best idea in the hands of a dysfunctional team will be wasted. On the other hand, a great team can start with a bad idea and eventually arrive to a good idea and the right business model.

There are many challenges and struggles to overcome when you’re building a new company. Be sure you’ve got the right team, based on the right foundations, in order to improve your chances to succeed.

Good luck!

Friday, September 6, 2013

My Top 10 Leadership Movies


I’m very passionate about leadership, and I’m also a huge movie buff.

So it seemed natural to me to combine these two passions in to one blog post. The result: my list of top ten movies that provide some inspiring leadership lessons.

So here goes (in no particular order):

1.   Saving Private Ryan
Main Leaders: Captain Miller (played by Tom Hanks)

Memorable quotes:
This Ryan better be worth it. He better go home and cure some disease, or invent a longer-lasting light bulb, or something. Because to tell you the truth, I wouldn't trade ten Ryans for one Vecchio or one Caparzo”. (Captain Miller)

“I don't know. Part of me thinks the kid's right. What's he done to deserve this? He wants to stay here, fine. Let's leave him and go home. But another part of me thinks, what if we stay, and by some miracle we actually make it out of here alive? Someday we might look back on this and decide that saving Private Ryan was the one decent thing we were able to pull out of this whole godawful, shitty mess.” (Sergeant Mike Horvath)

Key leadership lessons: leading by example, leading through adversity, conflict management, trust, courage, sacrifice, motivating through a sense of purpose

2.   Apollo 13
Main Leaders: Flight Director Gene Kranz (played by Ed Harris), Commander Jim Lovell (played by Tom Hanks)

Memorable quotes:
“We’ve never lost an American in space and we sure as hell ain’t gonna lose one on my watch.”; (Gene Kranz)

“Failure is not an option!”; (Gene Kranz)

“Let’s work the problem, people.”, “I don’t care about what anything was designed to do. I care about what it can do.”; (Gene Kranz)

“With all due respect, sir, I believe this is gonna be our finest hour”. (Gene Kranz)

Gentlemen... what are your intentions? I'd like to go home. We've got a burn coming up... Let's go home.” (Jim Lovell)

Key leadership lessons: crisis management, teamwork, creativity, enabling others to act, setting expectations, determination, confidence, motivating through a sense of purpose

3.   Gladiator
Main Leaders: Maximus Decimus Meridius, commander of the Roman Armies of the North (played by Russell Crowe)

Memorable quotes:
What we do in life echoes an eternity” (Maximus)

Key leadership lessons: leading by example, trust, courage, honor, vision

4.   A Few Good Men
Main Leaders:
Col. Nathan R. Jessup (played by Jack Nicholson), Lt. Daniel Kaffee (played by Tom Cruise)

Memorable quotes:
“You want the truth? You can’t handle the truth!”; (Col. Jessup)

“We use words like honor, code, loyalty. We use these words as the backbone of a life spent defending something.”; (Col. Jessup)

“Ever put your life in another man's hands, ask him to put his life in yours? We follow orders, son. We follow orders or people die. It's that simple.
(Col. Jessup)

Key leadership lessons: values, code of honor, courage, fighting for a just cause.
5. Braveheart
Main Leaders: William Wallace (played by Mel Gibson).

Memorable quotes:
I have nothing. Men fight for me because if they do not, I throw them off my land and I starve their wives and their children. Those men who bled the ground red at Falkirk, they fought for William Wallace, and he fights for something that I never had.” (Robert de Bruce).

“Aye, fight and you may die. Run, and you'll live... at least a while. And dying in your beds, many years from now, would you be willin' to trade ALL the days, from this day to that, for one chance, just one chance, to come back here and tell our enemies that they may take our lives, but they'll never take... OUR FREEDOM!” (William Wallace).

Key leadership lessons: leading by example, trust, courage, honor, vision, fighting for a just cause

6.   Gandhi
Main Leaders: Mohandas Gandhi

Memorable quotes:
“When I despair, I remember that the way of truth and love has always won. There may be tyrants and murderers, and for a time, they can seem invincible, but in the end, they always fall. Think of it: always.”; (Gandhi)

“An eye for an eye only ends up making the whole world blind.” (Gandhi)

Key leadership lessons: leading by example, vulnerability, vision, courage, sacrifice, unselfishness, determination, diversity

7.   Thirteen Days
Main Leaders: President John F. Kennedy, Robert Kennedy

Memorable quotes:
“I have the authority! I am the commander in chief of the United States, and I say when we go to war!” (President Kennedy);

“No, no, no! Now, there is more than one option here - and if one isn't occurring to us, it's because we haven't thought hard enough!” (Robert Kennedy)

Key leadership lessons: crisis management, teamwork, challenging assumptions, remaining calm under pressure

8.   Invictus
Main Leaders: Francois Pienaar (played by Matt Damon), Nelson Mandela (played by Morgan Freeman).

Memorable quotes: “I thank whatever gods may be / For my unconquerable soul. / I am the master of my fate / I am the captain of my soul.”; (Nelson Mandela)

“The day I am afraid to do that [risk my political career] is the day I am no longer fit to lead.”; (Nelson Mandela)

“Forgiveness liberates the soul. It removes fear. That is why it is such a powerful weapon.” (Nelson Mandela)

Key leadership lessons: creating a shared vision, leading by example, inspiration, trust, diversity, influencing

9.   Schindler's List
Main Leaders:
Oskar Schindler (played by Liam Neeson), Itzhak Stern (played by Ben Kingsley)

Memorable quotes:
“This list... is an absolute good. The list is life. All around its margins lies the gulf.” (Itzhak Stern);

“Oskar, there are eleven hundred people who are alive because of you. Look at them.” (Itzhak Stern);

"Whoever saves one life, saves the world entire." (Itzhak Stern);

“My father was fond of saying you need three things in life - a good doctor, a forgiving priest, and a clever accountant. The first two, I've never had much use for.” (Oskar Schindler);

“I could have got more out. I could have got more. I don't know. If I'd just... I could have got more.” (Oskar Schindler)

Key leadership lessons: crisis management,
influencing, courage, fighting for a just cause, sacrifice, creativity

10. The Last Samurai
 Main Leaders: Katsumoto (played by Ken Watanabe), Captain Nathan Algren (played by Tom Cruise)

 Memorable quotes:
“You believe a man can change his destiny? (Katsumoto) I think a man does what he can, until his destiny is revealed.” (Algren).

“I say, Japan was made by a handful of brave men. Warriors, willing to give their lives for what seems to have become a forgotten word: honor.”; (Simon Graham)

“And so the days of the Samurai had ended. Nations, like men, it is sometimes said, have their own destiny. As for the American Captain, no one knows what became of him. Some say that he died of his wounds. Others, that he returned to his own country. But I like to think he may have at last found some small measure of peace, that we all seek, and few of us ever find.” (Simon Graham);

“What does it mean to be Samurai? To devote yourself utterly to a set of moral principles. To seek a stillness of your mind. And to master the way of the sword.” (Captain Algren)

 Key leadership lessons: leading by example, honor, duty, courage, sacrifice, unselfishness, fighting for a just cause
That’s my list. What’s yours?
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