Three Ways To Become A Better Startup CEO4 December, 2017 / Articles
Running a startup is one of the most difficult challenges anyone can undertake professionally. The startup CEO has to come in with a high-risk tolerance, an incredible work ethic and a versatility of skills unlike any other job. The founder has to be willing to face down a 90 percent failure rate and still make the leap.
Over the past decade, I’ve started and started and sold a collection of startups worth over $50 million. A key part of that success is continuing to focus and re-focus on three primary responsibilities. They are as follows:
Setting A Strategy
According to the Startup Genome Report, “Startups that pivot once or twice raise 2.5X more money and have 3.6X better user growth than startups that don’t pivot or who pivot frequently.”
My first venture-backed startup was focused on providing couponing systems for retailers. The original idea was to help restaurants and small businesses liquidate unused food and inventory by pushing hyper-local discounts. After exploring the market, we realized that the model was hard to scale, small business owners are not tech savvy and that user adoption would be slow going.
Once we researched the broader market, we identified that billions of dollars of grocery coupons were issued every year without innovation. The consolidation of grocery chains meant a few critical partnerships for our fledgling business. We also found power grocery-coupon users who would carry our brand. We pivoted into a free grocery couponing app that ended in up in a successful exit and wide user adoption.
As a startup CEO, be ready to pivot quickly, but only after you’ve taken the time to research the right market characteristics during your first pass. Most startups don’t survive after a couple of pivots, so learn early which markets are real and large.
Hiring The Right People
The reality with startups is that hardly anyone makes it alone. A startup team must understand the market, how to build a product, sales, marketing, advertising, HR, accounting, finance, insurance and regulatory compliance all simultaneously. Nearly no one is an expert in all of those areas. So, building out a team with that kind of expertise is critical.
My best experience building a team was with Dr. Andrea Paul when we started a medical company focused on CME and board prep. We met as competitors. It became very clear that Paul had medical expertise far beyond my own, and I had many more years of experience making technology and business decisions. What is perhaps just as important as domain expertise is that we didn’t second-guess each other’s decisions. If I made a technical decision, we would discuss it but I would get the final say and vice versa.
Not every decision is going to be right. Neither of us are perfect in our respective fields. But we’re able to cede responsibility and mind-share to the right person. Focus on what you and only you can do best in a business. Let the other experts decide where they know best and then trust their decision.
The other lesson that I have learned over the years is that while it’s tempting to hire someone to fill a specific role (for example, email marketing), it’s far better to hire someone senior who can bring with them an existing and trusted network. The cost is higher in the short run, but as long as the startup can survive the cash burn, bring in the CMO or COO sooner rather than later. They will fill out the roles you didn’t even know that you needed.
Keeping Cash Close
Convincing someone to invest capital in your startup sends a very strong signal to the market.
Understanding the who, when and how to raise capital is extremely important. First off, if you plan on exiting a company for less than $15 million, don’t raise venture capital. It’s simply not the right funding vehicle for something that is going to be a low seven- or eight-figure exit. VC expectations are sky high and they may actively block a sale at a low multiple. Focus on angels and possibly even seed groups for early capital. If you’re not competing in a $1 billion-plus market and don’t need rocket fuel, look at growth equity or bank loans.
An often-overlooked source of capital is collateralizing what the startup has built to date. For example, collateralize accounts receivable to buy more runway or use loans on your equipment purchases to buy more runway to profitability. This week I invested in a physician recruiting business that used collateralized code base to raise capital on better terms. If the company fails, the investors receive the code, which is useful for other projects and lowers the cost of capital to the startup since there is some downside protection.
Running out of cash is likely the absolute most disruptive event in a startup. Markets can change, so focus on earnings before interest, tax, depreciation and amortization (EBITDA) when and where you can. There are exceptions to that rule, of course. But the sooner you can chase profitability, the sooner you’ll be on much better negotiating terms with any funding source.