Month: November 2005

As an early stage VC, I spend a fair amount of time helping entrepreneurs build their management teams.  I have written about what we look for (read the A-Player Domino Effect), the hiring process, and other facets of recruiting talent in previous posts.  One area which I cannot overemphasize is the need for companies to do back channel references on candidates.  We were recently doing a VP of Sales search for a portfolio company and in the intial call with the CEO and myself, we found the VP of Sales to be talented and engaging.  A subsequent face-to-face meeting with the CEO and myself separately over the next week further bolstered our interest in the executive.  After a few more meetings with various members of the mangement team, we decided to begin the standard referencing process where we collected the candidate’ s list of published references and called to get a better understanding of the individual’s strengths and weaknesses.  Of course, the references all came back glowing.  If they did not, I would be a little concerned.  This is where most companies end the due diligence process and begin negotiating a contract. 

However, I cannot overemphasize the importance of getting back channel references (references that were not given by the individual on the official list) to get a real view of the candidate.  You need to look deep into your network and your VC’s network to reach out to investors, executives, peers, and direct reports who worked with the candidate in prior companies to get a complete picture and balanced profile of the recruit.  A wrong hiring decision for an early stage company can be a killer!  All too often startup companies want to run fast and furious and hire that killer executive candidate ASAP without doing the extra work required to determine the right fit. In this particular case, through the back channel references we were able to find a number of inconsistencies about a candidate’s effectiveness at a prior startup, his reasons for leaving, and his overall management skills.  While the references were balanced and fair, they were far from glowing.  In fact, most of the back channel references were consistently mediocre which for me was a vote of no confidence.  Sure, you should always expect to get a couple bad references if you do enough of them on someone, but if you see a consistent pattern of concerns or "areas that need to be managed" emerge from those references, it is time to move to the next candidate.  In fact, let me extend this message and state that doing back channel references should be standard business practice.  Why learn in 3 months that a particular executive, VC firm, or business partner was not a right fit, if you can piece together that information beforehand?  Just a little more work in the diligence process can save you lots of frustration in the long run.

I was in a board meeting yesterday reviewing the sales pipeline for a portfolio company walking through the wins and losses.  As I wrote in an earlier post, it is extremely important (to the extent you can), to get good data on your losses. Many times you learn more from your losses than from your wins.  We like to know who we lost to and why.  We keep a running tab of these losses so we can figure out some key trends, how our competitors are selling against us, and determine what sales tactics we need to employ to reverse the losses.  Interestingly enough, over the last year a trend I have been seeing is the "do nothing" trend from enterprise customers.  We find out that the potential customer has budget, we are selected as the winner, and then they do nothing.  Obviously, the earlier you can identify a potential for spinning your wheels the better off you will be.  Mike Nevens has a great post on SandHill.com outlining this new reality and ways to determine if you are spinning your wheels early in the sales process or methods to make your project one of the 5 out of 30 projects that actually get implemented rather than just approved.

The CIO of one of the largest retail banks in the US recently told me that he has about 60 new projects under evaluation. About half of them will pass technical, functional and investment hurdles. He will then fund 4 to 6 over the next two years.

That means that 25 or so projects that meet all objective criteria will not go forward.

Software vendors and investors need to understand and deal with this reality. 

This is the new reality in selling to enterprises – doing nothing may be a bigger inhibitor to sales growth than your competition!

I admire entrepreneurs for the risk they take and the unerring confidence they have in their product and market opportunity.  However, what separates some of the great entrepreneurs from the average ones is an ability to acknowledge your weaknesses.  As we all know, being an entrepreneur is a difficult job that is 24/7.  Creating a new product or service can be draining but also quite rewarding emotionally and financially.  Obviously, the last thing you want to hear when you get your initial first customers is to hear that your product has faults.  For some entrepreneurs, it is akin to saying "your baby is ugly."  Well, I have to tell you, I have seen a number of times where companies and entrepreneurs can drink too much of their own Kool-Aid and go quickly from product innovator and market leader to second place.  In a recent example, I heard a couple customers tell a company that our field guys were a little too defensive about the product and somewhat condescending with respect to a customer’s technical knowledge.  In fact, the problem was not the customer, but our product.  We made the requisite changes at the personnel level but it is obviously a more important issue reflected in the core DNA of the company.  So as an entrepreneur, I urge you to create a culture of questioning the status quo, of constantly reviewing your weaknesses and figuring out ways to improve yourself, your product, and company.  It can be very hard to do for an entrepreneur when your blood, sweat, and tears are in the product or service but it is always better for you to figure out how to make your company obsolete and thus improve it against competition rather than your competitors.  I mean, even a big company like Microsoft is making an about face acknowledging the missed opportunity on the web for the second time.  As a result, we spend alot of time pre-investment trying to understand the entrepreneur’s motivation and goals as well as getting a feel for the culture in the company.  Sure, we can always bring in a new CEO to fix the execution problems, but I am a strong believer that culture starts with the initial founding team and once it is embedded and institutionalized early on, it is very hard to change.  As an entrepreneur, think hard about the core values you want the company to abide by as these will be the principles that take your company years into the future.