The Next Step is a Doozy

  I’ve been discussing a lot of different opportunities with new VC-backed companies as of late – including discussions around CEO and CMO roles – and I couldn’t help but make a quick observation: some new companies really understand what’s required to get to the next level of success and what the overall ladder of funding really looks like – and most clearly don’t. What’s worse is that many of the current leaders in these companies really don’t have a good sense for how far along their company is in the greater scheme of successful expansion and they lack focus in terms of what’s required next.

It’s been said that our greatest strength is our greatest weakness. Let’s add ‘over enthusiasm’ to the strength list for most entrepreneurs. It drives them to go out and invent and ideate and eventually create new companies to begin with. It also works against the notion of being realistic in terms of what the company has really accomplished and where it’s at in the overall gestation model for a successful enterprise. The best metaphor I can think of when I envision a company going from the formation of a new product or service idea to becoming a great company with liquidity opportunities is the minor league system which feeds Major League Baseball (MLB).

Rife with promise, newcos get started in Rookie League or Class A – depending on how mature and historically successful the executives are inside of the company. You’ve got something going for you – product idea or solid batting average – and you look like a baseball team with some measurable degree of talent. You’re adding bodies to make your team look like it belongs, despite the fact that many of them are inexperienced and in some cases literally immature. As a player, moving up means you have to understand what you do best and that’s relatively easy given that you’re in the minors to begin with. Usually a good product idea and basic management team will get you some initial start up funding. Like the minor league system, there are plenty more positions than exist in the Majors, so being alive at this stage doesn’t mean you’re heading to the Majors, but it means you’ve met a prerequisite in order to hopefully do so.

There are over 8,000 players in the minor leagues – only 750 of whom will ever make it to the major leagues. Given that eventually veterans take down major league rosters to a large extent, the reality is that it takes over 30,000 minor league baseball players to fill those 750 major league roster spots. Herein lies part of the problem: each of those 30,000+ players think they’re headed toward MLB, but only around 2.5% will actually get to play even one game at the senior level. To quote Crash Davis (Kevin Costner) in the movie Bull Durham, “Yeah, I was in The Show. I was in The Show for twenty-one days once.” Not only is it incredibly hard to get there, but it’s even harder to stick around for many players.

Like the teams you see in Class AA, individuals who move up from Rookie League/Class A ball understand that the talent level overall is definitely more intense and more rigorous. Still, just making it from A ball to AA ball only moves you into the top 96% of all players in organized baseball. In other words, you still have a loooooong way to go to The Show. Herein lies my observation. Too many newcos are sitting in Class AA thinking they’re ready for MLB with (a) the team they have; (b) the talent they possess cumulatively; and (c) the financial backing they’ve been fortunate to accumulate. Newsflash: over 80% of all venture-backed companies will either be average or out of business in a few years – despite the venture capital backing. Not all that different than the player in Class AA trying to make it into the lineup with a MLB club. Like a drafted college player in Class AA, you have a lot to be proud of – but you’re not in the Majors. You’re still in Class AA and  you still haven’t learned to really hit a low-hanging curve. You have very basic and very intense work to do on (a) your product or service; and (b) additional talent needs. There’s a reason great CEO’s spend up to 40% of their time ‘hiring’ in a typical VC-backed entity.

Still, major league scouts understand that the best prospects to make it all the way to the top have the talent which is improving and the prospect understands what they need to do next in order to progress. The best prospects are humbled by the opportunity: they know they have a long way to go and they’re looking for the help they need to get there. They’re openly appreciative that they haven’t arrived (we’ve all heard it: “… I’m just coming out each day working as hard as I can to get better …”).

I’ve had the opportunity to discuss leadership roles with several of these companies as noted and in many ways I feel like the talent scout evaluating a player’s current status. And the differences in the companies I’ve met couldn’t be more … different.

I’ve met companies with weak leadership and passive-aggressive tendencies (kiss of death #1). One COO who had never built a complete company had the gall to tell me – all why his company is openly seeking a CMO – that “(they’re) already pretty f*cking good at what (they) do.” All it took was a quick cursory review of their marketing tactics to understand they weren’t as  good as they thought they were. I was amazed at the attitude in light of the basic facts within a smallish 30-person organization. Not surprisingly, the attitude already seemed to permeate what could have been an up-and-coming organization. Serious buzz kill.

Jim Collins suggests that true leaders have a certain humbleness, but also a tenacity for surrounding themselves with great people of character. In over half of my conversations, not only did the conversation not focus on character or talent upgrades, but veered ridiculously far into their versions of things like ‘company culture’ (kiss of death #2). We built Lycos from six people to 1,300 people by the time we successfully sold it and the culture was a byproduct of our success, not a byproduct of whether or not our personalities matched when we were a small firm. In other words, work on hitting the hanging curve – not on making sure you all have color-matching wrist bands to go with your minor league uniforms. The goal is not to stay in the minor leagues and be like every other minor leaguer. At Lycos, if we’d have sat around looking for a perfect personality match when we started out with six people instead of bringing in talented people with character who could hit the cover off the ball and close ballgames, we wouldn’t have sold the company for $7.5 billion. Bluntly, successful companies breed great company culture because they hire multidimensional people with good character who eventually focus on aligning the success metrics of the organization with the actual execution and business operations. This is what allows all types of people to bust out creatively and productively. It’s amazing how much fun it is to work for a successful, well-aligned company of character versus a company in trouble proclaiming they have perfect company culture.

So the winners in my search – and eventually one of the companies I’ll be spending my time with – are those who (a) want to talk about the business and the revenue streams; (b) understand what their board expects; and (c) are focused on bringing their talent level up via people of high character in order to become a great company. Yes, by definition culture matters. Nobody who is talented will spend very much time with a bunch of jerks when there’s a lot of great, fun companies out there. But this isn’t The Dating Game. This is still a hard-working, intense game of productivity and expansion and the culture will either get better because you succeed or degrade because you don’t. Just because you all like to knit doesn’t mean you’ll be successful. It only means you all like to knit. The factors in business are far more wide-ranging and get more complex as the company grows up. You need left brain and right brain thinking from different parties, lest the company simply stalls. Frankly, some of the best people I’ve worked with in my life weren’t exactly my best friends nor did they even began to care about the things I really enjoy in my life – but they were uber competent and they were positively and ethically focused on the mission at hand. That made them perfect teammates in my estimation. The occasional club house fight didn’t detract from the fact that eventually we had a winning team and we were all focused on the goal of winning the whole thing. That made for great culture.

Newcos need to appreciate that they have a long, long way to go to get to The Show. Either get better in each and every one of those key areas by bringing in long-ball hitters who can get it done, or relegate yourselves to enjoying fast food and the long bus ride to the next minor league stadium. Remember, very few make it to The Show. Appreciating that being venture backed is a great start, the companies which are going to going to be great understand they have two to four more capital events which they’ll have to get through en route to the Fall Classic. Just this basic appreciation is a great place to start when you’re upping your talent levels.

– Jan