But The Greatest Of These Is Management

I’ve stated earlier that a successful venture begins with the right mix of market size, product or service, and management team. Many Investors argue that the most important of the three is management. The management team consists of all individuals having an impact on decisions which may include founders, past investors, the executive team, and board members. When investors consider a deal, they scrutinize the fit, depth and completeness of the management team with respect to the CEO, integrity, tenacity, leadership, domain expertise, and industry contacts. However, since the CEO is the central figure of the company, it is he or she that is the primary focus of such due diligence exercises. The greater part of the company’s success depends on the leadership, execution, and results capabilities of the CEO.

Conduct Your Own CEO and Management Team Assessment
It is clear that most management teams do not see the same management weaknesses as investors and other outsiders. In fact, I’m somewhat amazed at the number of teams I interview that are unaware of its weaknesses, do not acknowledge them, or do not have a plan to address them.

As the management team, it is important to consider conducting your own due diligence exercise on a regular basis. This is an exercise that should be done with honesty and integrity. You may want to consider involving board members, mentors and other colleagues who are willing to be up front and candid. One other thing to consider is the skills required for the development stage of your business. Clearly, different stages require a different skill set for success. Areas to consider are:

• Does the CEO have adequate CEO experience or did he (or she) assume the role because he saw a market need, identified a product, and launched the company (this is actually quite a common assumption)?


• Does the CEO have experience that matches the industry and development stage?
  Is the CEO the right communicator, representing the venture effectively?


• Does the CEO have the right commitment and execution strength?


• Does the management team have the required knowledge and domain expertise?


• Do the CEO and/or members of the management team have a strong industry network, strategic agreements, and relationships and contacts? Frequently, I talk with management teams that lack critical contacts necessary to jump start their product development or sales initiatives. Often times this is a sign of an inexperienced management team or a team that is new to the industry.


• Does the management team have the necessary financial and market experience or is there too much focus on the product? I recently interviewed a management team offering a service based on a licensed software application. The CTO was the founder of the company that developed and patented the application logic. During the discussion he took every opportunity to expound and promote the technology. Not only does this interrupt the flow of the discussion but such positions are generally viewed as disruptions to the overall management of the venture.

If there is no intention on pursing investors or if investors cannot be found, does the CEO have the skills, resources, and network to boot strap the company for as long as it takes? It is important to note that VCs considering investment in start-ups and early stage ventures expect to find gaps in the management teams and even missing CEOs. Therefore, they anticipate having to round out the team as part of the agreement going forward. The exercise described above allows you to understand what experiences and skills are required, which ones are missing, and what plan is necessary to fill the gaps.

Seize Opportunities to Build CEO Level Experiences
I recently interviewed a CEO who was in the process of finalizing full ownership of his company. The company had recently acquired seed capital. While he was busy executing, his partners were controlling company spending. In just a short period of time, the capital had disappeared. The interviewee expressed his amazement at how fast the company burned through the money as well as the unnecessary things it burned it on. Instead of sitting back and having discussions with the other team members on the importance of spending investor money wisely, he immediately began the process of buying out the existing partners and restructuring and refocusing the company. In so doing, he demonstrated tenacity and commitment as well as acquired critical experiences and skills.

Approaching Investors as an Inexperienced CEO
Your market size and product idea may get you an audience with investors; however, it is important to understand that investors will not invest in a deal with an inexperienced CEO at the helm. Generally investors want to see a series of CEO successes and even a failure or two. If you do have a strong enough market/product combination to open an investor’s door, you can expect that they will bring in their own CEO/management team to augment yours. Following are the primary routes to consider when approaching investors:

• Wait to develop CEO experience – If your goal is to develop your skills and establish yourself as a seaworthy CEO, then get a short list of ventures under your belt before approaching investors. An inexperienced manager by any other name is still and inexperienced manager.


• Bring on a CEO – If getting your product to market is your priority, then step aside and bring on a CEO. However, be sure to pick the right CEO for your venture. I’ve seen a number of situations where a founder brought a CEO that he or she was familiar with and had known for years. Although the candidate may be a good CEO, they may not be the right one for your particular venture. Go back to your management assessment and select a CEO that meets your management requirements (i.e., CEO experience, domain expertise, strategic industry contacts, etc.).


• Allow the investor to provide a CEO – As opportunities to talk to investors arise, let them know what you believe to be the gaps in the management team and that you would welcome their help in making recommendations and/or augmenting your management team as necessary. For most investors, filling the identified gaps in a management team is the only option. Such deals do not get funded when the management team is resistant to this.

Understanding your management team and taking the subsequent actions to address the gaps can be your most effective route to successfully navigating your venture’s key milestones.

Putting Cool Ideas Into Perspective

Much has been said on effectively pitching your idea to potential investors (or strategic partners). I have plowed through a number of business plans and talked with several business owners and it appears there is still need for more to be said, particularly when it comes to having a balanced perspective on where a product fits into the venture equation.

I always enjoy an opportunity to talk to someone about their new, cool idea – particularly if it occurs over a couple of beers. An enthusiastic entrepreneur can talk at length about the details, the endless possibilities, and its global impact. Unfortunately, there are a number of entrepreneurs that have difficulty leaving their cool product discussion at the bar when they talk with investors.

Avoid the All Too Familiar Product-Focused Equation

Very often, first time entrepreneurs over emphasize their product or idea to the point where their venture and product appear to be one and the same. Their communication with investors follows what I consider the product-focused equation for attracting investors:
You can summarize these discussions as follows: “My cool thing is a game changer; it will revolutionize the industry; at a minimum it will reverse global warming. And it plays to a 20 billion dollar market. So by adding just a couple of your million to build my thing, everyone will make billions.”

The reality is that there are extremely few ideas that reach this level of “coolness”. In fact, of all the business plans I’ve reviewed in the past year, I would have to say that only two were memorable and of the two, only one would fall into the category of “game changer”. What’s more, ideas in general, are not as unique as entrepreneurs believe. Nearly every business idea I review already has one or two very similar or competing ventures one step ahead in the search for funding.

Focus On the Need, Solution, and the Management Team

A success venture requires a thorough understanding of the market and an enthusiastic, experienced team to plan and build a creative solution to address the need. “We typically make our investment decisions based on three key areas: the size of the market, the strength of the team, and the product vision.”, states Josh Kopelman in Founders and Heat Seeking Missiles. It is key that you communicate your understanding of this equation in your conversations and presentations with investors as well as all documents that you intend for them to review.

• It is important that your understanding of the market need, solution, and management team is communicated consistently across all forms of communication. On a few occasions, I’ve reviewed a reasonable business plan. However, when I schedule a follow up phone conversation, it’s almost as if the business plan was written by someone else or in some cases, written for some other venture.
• Lead into your message with a sentence or two on the purpose or nature of your company.
• Transition naturally into your market. How big is it? What is the need; what is the problem you are solving? Consider following the traditional situation, problem, and solution outline.
• At this point, it’s time to talk about your solution. Where appropriate, continue to reference the problem or need.
• Address the experience of the management team and their ability to understand the need, build the solution, and reach the market.
• Close with why you need capital.

Prepare two introductions of your venture: a 30 second version and a one minute version using the outline above. The 30 second version is your elevator pitch for informal business settings and networking events. The one minute version becomes your intro for investor conversations. Practice both versions until they are perfect, then practice them again until they don't sound canned. When you are ready, present your introductions to partners and business colleagues. Ask them to tear them apart and ask the difficult questions.

Techniques to Consider When Talking With Investors

Typically, your first conversation with an investor will be a phone conversation. The one thing to keep in mind is that if an investor has setup an interview call or due diligence call with you, the investor drives the call. Following are some points to consider as you work through that call.

• Usually, you will be given the opportunity to provide a brief overview of your venture. Use your one minute version of the above approach to kick off the discussion. Then turn the discussion back to the investor.
• As you address each question, do so in the context of the above approach and answer each question succinctly. At times, I find that entrepreneur will eloquently circle around and around before getting to the point, particularly if the answer is, “No”.
• Once you've satisfactorily answered the investor's question, there may be opportunity to add in additional details, facts and milestones that is pertinent to the questions. Once this is done, return the conversation to the investor. Many times, an entrepreneur’s response will go on and on in various directions requiring the investor to look for an opportunity to cut in to ask the next question.

To be sure, there is much more to consider with respect to content and technique when it comes to preparing for a presentation with investors. The important thing is that you demonstrate your understanding of a successful venture. Investors attribute an over emphasis on product and company as a sign of inexperience. For most investors, the primary ingredient is an experienced management team.

The Chord Of Success

A successful venture hangs by a chord tightly woven from three strands: The market, talent and experience, and enthusiasm. A weak or missing strand results in setback and failure.

Recently, I began an interview with the management team of a startup company by asking for a brief company overview and status. The spokes person for the team responded, "Ok, where do I begin?" He decided to begin by sharing with us that the concept behind the company was largely due to his contribution. Then, he began with the company's history, discussed concepts and definitions, and went on and on about the product and its many possibilities. When I attempted to ask a question, he talked over me. When I did manage to squeeze one in, he redirected the discussion back to his agenda. I closed the interview by asking him to talk about the milestones the team had accomplished recently. He responded, "Well, we've been spending most of our time trying to raise funds, and since we don't have the funds yet, we've accomplished very little."

Within the course of a 30 minute conversation, this team demonstrated failure on all three counts:

1. Focusing on product vs. market need,
2. Poorly reflecting the management teams' abilities, and
3. Maintaining an unrealistic optimism regarding the company in general.

It is critical that we as entrepreneurs continuously evaluate where we stand. Do we know our customers? Are we clear on what challenges and opportunities our products and services address? Is the right core team in place? Are they demonstrating the right behaviors? Is the passion and enthusiasm of the team appropriately redirected into the right plan and execution? As we develop our understanding in these areas, we must also ensure that we communicate briefly and succinctly to our potential customers, strategic partners, and investors that we have the right focus and that we are executing accordingly.