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Start Ups

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On the desk of the best portfolio managers, in the most prestigious Institutional Investment houses, you will find a "must read" book appropriately titled "Portfolio Management." Similarly for all aspiring hi-tech start-up executives, there is a must read book titled "Hi-Tech Start-up" by J. Nesheim. Many of the concepts below are discussed in his book.

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 Stages of Development  

In this article we focus on the interpersonal dynamics that might occur as a start-up company matures.

 

Stage 1:  In the Eye of the Beholder

Every great business begins in the mind of one person who has the confidence to believe in his or her dream. History is full of inspiring stories about young entrepreneurs who asked many companies for support, only to have their beautiful ideas  turned away. Alexander Graham Bell, for example, was willing to sell his "start-up" telephone idea to the telegraph industry for very little money, but he was rejected. Too bad the owners of the Telegraph company lacked his vision.

After tinkering with an idea for a while, today's techno-geniuses focus on the task of creating exciting, new technology; but to succeed, they'll have to focus on their emerging management team.

As everyone knows, venture capitalists (VCs) are the life blood of a start-up company. Venture capitalists are interested in the technology of course, but they are equally focused on the management team. Nesheim notes that "Investors start reading a business plan by skimming the executive summary; then they jump to the section in the back, titled "management". Through all the following stages of development, incomplete or ineffective executive teams greatly hinder a start-up company's chances for funding and for success.

Stage 2: Planting the Seeds

In stage II, the entrepreneurs seek enough "seed money" to pay the team of people needed to develop the first prototype. 

 

In choosing your team, the most important people to have in place during this stage are: the CEO, the technological leaders and the Engineering VP who will be responsible for the delivery and quality of the product. Start-ups are by nature understaffed and underfunded, and of course, you'll be seeking the most outstanding and experienced talent that you can find. And in fact, to improve your chances of obtaining funding, it's best to have a CEO and a VP of engineering who have previous experience in bringing a company public.

 

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These first team members establish the beginning personality of your growing corporate culture. The interpersonal dynamics and social styles of these founders will set the foundation for the organization's culture and core value systems. The best people are those whose style encourages openness of ideas, positive reinforcement, high performance values - all of which create an exciting and motivating environment.

 

If there is evidence of in-fighting at this level, it will surely carry through to the growing corporation. Some of the incubator companies are now hiring HR people to teach these young companies such skills as conflict resolution and team building. If you are experiencing the politics of blame, shame or lack of openness at this stage, these tendencies will tend to expand and grow worse as the company grows. It is important, therefore that at this early stage,  that you hire someone to help you create a wonderful  corporate culture.

 

The CEO

Often the entrepreneurs who have created the technology realize that, even though they might want to be the CEO, they do not have the experience behind them to wear this title. 

 

Your Chief Executive Officer  is  one of the most important positions you'll fill. To impress the VCs, your CEO must have participated in bringing a company public in the past. Even at this early stage, be sure that the CEO understands both IPO politics and VC IPO pricing policies and financial proposals. Be sure that their personality is such that as you get further along in the process, politically, they will work with you and not compete against you.

 

The personality and social skills of your CEO will tremendously shape the organization's corporate culture. Try to deeply understand his or her leadership style-- how will  decisions be made, how do they envision a successful product launch?  Is the person a team player who encourages  personal growth for their employees? What personnel problems has he or she encountered and how did he or she deal with them? Will this CEO create a "sane" culture, or will they create a dysfunctional culture that will de-motivate you and destroy your product?

 

All of us want to belong to a winning group - it's very exciting and motivating. Ultimately, we want to believe in ourselves and in our leaders. Excellent CEOs are very well paid because in addition to their impressive business expertise, they also know the art of creating a winning team.

Stage 3:The First Round of Funding

This "first round" of money is often five to ten times the amount of the seed money. This is a very exciting moment in the development of a young start-up company because it means the company can now grow. 

VCs care a great deal about the integrity of the management team. Nesheim notes that "Incomplete management teams scare off a lot of investors at this stage of a start-up; a missing VP of Marketing will probably bring the show to a complete halt.road mjk

In order to attract this round of funding, the CEO will need to present a solid and strong core team. This core team should now expand to include a VP of Marketing, followed by a VP of Business Development, and a VP of Sales should be in place at least two months before the product is ready to launch. The role of the VP of Engineering comes into focus during this period as they must ensure that a quality product reaches the customer in a timely fashion. A chronic problem with start-ups is underestimating the time it takes for a product to be ready for delivery. Some VCs use the delay to their advantage by asking for a larger share of the company in return for continued funding. This has, of course, a negative effect on moral.

The VCs are looking for people who have already participated in the creation of a succesful start-up. 

If interpersonal problems developed in the earlier stages of your start-up, then their effects will be severely felt during this stage. Interpersonal conflicts blossom as people choose sides and attempt to grab as much power as they can within the expanding company. Only a talented CEO can prevent this type of destructive and self-defeating behavior. What do you do if you are in a company where you cannot trust the CEO? What are your options? If you are the CEO what tools do you use to foster a motivating work environment while giving your company a sustainable competitive edge?

Stage 4: Future Rounds of Funding

In the "second" (and all further) rounds of funding there is a lot of pressure on the management team. Behind closed doors, the VCs are constantly asking "Is this person worth the salary we are paying? Is he or she really pulling their weight?" 

 

In Stage IV, sales become extremely important and the pressure on all executives is enormous. Everyone has a stake. At this time, the consequences of choices made earlier in the start-up's development become crystal clear. If there is a good CEO in place, who in turn, has hired the right mix of people then your corporate culture welcomes the stress with a positive anticipatory attitude. The atmosphere is electric and motivating. The predicted business timeline is accurate enough to create clear and achievable goals. Otherwise, those on board can become discouraged, afraid and despondent.  steps


At this stage, the management team can feel distressed by how long it takes for a healthy corporate culture to coalesce. It takes time for strangers to learn to work together. Everyone knows that only about 1 in 10 start-ups successfully make it through to IPO status. The pressure to perform is so massive because failure is always a very realistic option. The VCs push hard on the CEO and, in turn, the CEO pushes hard on the entire team.

During these last rounds of funding, you often see the CEO  and others involved in the initial rounds of funding step aside or leave the company. Neshieim notes that "The statistics increasingly say that the CEO's time as a founder is drawing to a close...Our research shows that most founder CEOs have gone or stepped aside to be replaced...in the first 3 years." (111) 

At this point of the company's development, you too may choose to move on. If at the beginning you enjoyed the intoxicating free-wheeling "I can run everything" attitude, you may no longer fit in the now older more role-rigid company.  If you are a founder and you choose to stay, you will need to redefine your contribution to the company. As more people are hired and your role may be diminished, giving up the power and redefining your role can be difficult

Stage 5:  IPO and Beyond

Once you have reached this phase you have truly made it. But the problems are hardly over. In this volatile market environment, stock prices can fluctuate wildly and the stock options used to hire and keep employees happy, can vary tremendously in their value. Most of these initial IPOs will fail. Many will succeed and one will surely be the next Microsoft.

 

If you have created a culture that gives you a sustainable competitive advantage over your competition, you have succeeded in building a gem that may last for generations. 

 

What psychological characteristics differentiate a failed start up from a Starbucks?  Fears about loss of control or about failure often holds us back. Risk can be terrifying. To learn more and to conquer your blocks to success, please call 781 235-0009.

 

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