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May 21, 2006

After the Honeymoon

Much of my blog, and other information for entrepreneurs, focuses on creating new products, raising money, and building a successful startup. The advice stops there, and everyone lives happily ever after. Guess again.

Here’s some information about what happens after the honeymoon is over when the shiitake hits the fan. There are three parts to each section: the problem, how you got to this point, and what to do now.

  1. Problem: A founder isn’t delivering.

    How you got here: In the early days of many organizations, the primary qualifications for key positions are being present and believing in the story. For example, your college roommate became “chief technical officer” because he was the only programmer that you knew. However, now that he has to build a scalable product and implement serious engineering discipline, he’s lost.

    What to do now: You could simply get rid of him. This isn’t very humanitarian, but neither is keeping him around until he tanks the company. Let’s keep termination as a last, desperate step because losing a founder is usually traumatic for everyone.

    Until then, let’s assume that he is good at some functions. The thing to do is to move him into a position where he can succeed. This usually involves a demotion, but that’s tough shiitake for him and a good precedent for everyone else to see. If he doesn’t want to make this transition, then it’s aloha oe. Remember: Founder status affords a person equity, not immunity.

    Here’s a news flash. The founder may be happy to change position with fewer management responsibilities. Perhaps all he wanted to do was code, and a “management” role was thrust upon him. Changing his role could be win-win for everyone.

  2. Problem: The product is late.

    How you got here: It could be because you hired your roommate :-) The other common reasons are inexperience; wishful thinking; and knuckling under to the real or imagined pressure of investors to ship by a certain date.

    (By the way, an experienced engineering manager (usually not the founder/visionary) would not have let you get into this situation. And an experienced investor would have added six months or doubled the time to completion—whichever is greater—to your initial prediction.)

    What to do now: Several things: (a) Gather the team and have a “come to Jesus” about the real status of the project. (b) Ruthlessly decide on any changes in roles of people. (c) Scale back the scope/complexity/coolness of the product. (d) Plead guilty to your investors—that is, admit that you screwed up. (e) Sandbag the investors—that is, tell them a shipping date that you know you can beat. And I do mean “know” because your neck is on the chopping block. (f) Shut up and get to work.

  3. Problem: Sales aren’t meeting projections.

    How you got here: Let’s assume that you can completely lay blame on the shipping schedule—that is, even if you were shipping, there aren’t orders to fill. Most likely you’re in this position because you’re too close to the product, so that you thought that customers would leap to adopt your curve-jumping, paradigm-shifting, patent-pending innovation.

    In fact, your greatest fear was the ability to ramp up and scale volume. :-) You never anticipated that customers wouldn’t demand an unproven product from a thinly capitalized startup in the middle of a buying cycle.

    (By the way, an experienced sales executive would not have let you get into this situation. And an experienced investor would have divided your initial projection by twenty five to be conservative and by one hundred to be truly safe.”

    What to do now: Sales needs to have its own “come to Jesus” meeting with the goal of determining what’s truly happening and what the correct roles are for everyone. Other gurus would recommend staying the course and pursuing the big, strategic reference accounts. This guru would tell you to get any kind of sale that you can. My reasoning is that (a) you never know who will turn into a big account; (b) closing smaller, easier accounts is good practice; (c) these little successes build confidence in the sales organization; and (d) beggars can’t be choosers.

    The clock is ticking. You need to prove that the dogs will eat the food. Sure, you can try for the AKC champion German Shepherd, but I would recommend finding a few hungry mutts.

  4. Problem: Our team is not getting along.

    How you got here: You’re in this position because this is how it always goes. Companies don’t ship on time, watch sales go the roof, go public, and kick back. Startups are messy. Things go wrong. People don’t get along. If it was easy, everyone would do a startup and be rich. Welcome to the real world.

    What to do now: You work things out. You keep talking. You try to get an experienced outsider to provide a fresh perspective. There’s no magic bullet to fix this—it simply takes time. The same time, by the way, to finish the product and achieve sales because not getting along is the flip side of poor sales. If sales were booming, believe me, you’d probably be getting along—if not euphoric.

    One thing you don’t do is lynch people because you want to (a) set a precedent; (b) show everyone you can make tough decisions; and (c) get it over with. You should give people a second chance. Maybe even a third chance. Focus on the positive: how people can help an organization, not how they are hurting it.

    You have a moral obligation to give everyone a chance to change their ways and to succeed. If you don’t fulfill this obligation, then the unintended message that you’ll send through the organization is: “Anybody could be gone, so don’t piss me off.”

  5. Problem: We are getting slammed by the press/analysts/blogosphere.

    How you got here: Arrogance is the most likely cause: believing that your product is so great that you’re going to make Google look like a lemonade stand. When you start believing this crap, you draw a nice target on your chest.

    What to do now: The first thing you need to do is improve your reality. Ship your product. Fix it so that it’s good. It makes no sense to seek press coverage if your product sucks.

    The second thing you need to do is focus on customers, not the press. If you make customers happy, the press will always come around. They have no choice. For example, Apple currently gets great press because its customers are so happy. When Apple’s customers are not happy, the press will turn on Apple like a pack of starving hyenas.

    The third thing to do is to suck up the press (unless you are Apple). I don’t want to get into a new debate about the art of sucking up, but the people who disagree with me on this seldom get good coverage. :-)

  6. Problem: VCs are micro-managing us.

    How you got here: First, let’s set the record straight: VCs don’t want to micro manage. We’d love to make an investment, show up for a brief monthly board meeting to hear how great things are going, help select an acquirer or investment bank for an IPO, and cash out. You’re in this position because you either did something wrong or something out of your control went wrong. But it’s not like a VC wants to be in your face.

    What to do now: Ship. Sell. Achieve success. The VC will be more than happy to declare victory and move on to the next squeaky wheel. Until then, there’s no simple, cosmetic fix for this. You dug yourself into a hole—now you have to dig yourself out.

  7. Problem: VCs aren’t helping very much.

    How you got here: There are two likely reasons. First, you’re gullible and believed the VC when she told you that she’s a real “roll up the sleeves” investor who will be by your side. Second, you’re not asking enough.

    What to do now: You can’t do much about the first reason. What you got is what you got. However, whether it’s the first reason or the second, you’ve got to ask. Maybe you don’t want to be a burden, but the only thing that’s worse than asking for too much help from a person who’s unwilling to give it is to ask for too little help from a person who is willing to give it. So ask. And keep asking.

  8. Problem: Our PR/ad agency/consultant is not delivering.

    How you got here: Let me guess: you were in a rush so you interviewed a grand total of one or two agencies. You “really liked” Trixie and Biff because they gushed about how great your product is. You didn’t check references because you’ve “always been good about judging the quality of people based on a gut reaction.” Plus, you’ve never worked with an agency before but you insisted on selecting and managing it.

    You’re acting like an idiot. What can I say?

    What to do now: I bet that whoever is working with the agency on a day-to-day basis (a) knows more about marketing than you do; (b) has a good understanding of the agency’s capabilities; and (c) knows how to get more out of the relationship.

    This is usually your vice president of marketing or director of marketing. I would make it clear to the agency that this person is now running the show—including the ability to change agencies.

    Let’s say that you don’t have this person. Then you have to come up to grips with the fact that generally speaking, there are more lousy clients than lousy agencies. It’s your job to understand how to be a good client. I will try to cover this in a future posting.

  9. Problem: We are going to run out of money before we can raise more.

    How you got here: This is the perfect storm of entrepreneurship: the product is late, sales are less than hallucinated, and money is running out. You got here because your product delivery schedule was totally out of whack—a quality that it shared with your sales projections. To add fuel to the fire, you scaled up your infrastructure because you were afraid of too much sales swamping your systems.

    What to do now: This is a tough question because each situation is different. However, here are actions to consider. (a) Freeze all hiring—no matter how strategic a position may be. At the very least, you make a one-for-one trade: if you hire one, you fire one. (b) Cut marketing expenditures. You’re probably wasting money on stupid things anyway. (c) Get interns from local schools. They have something you want: free labor. You have something they want: real-world experience. (d) Cut the pay of the management team. Merely symbolic? Too little too late? Cut early and cut hard, then. (e) Get the co-founders to put more money in the company as a bridge loan to the next round of financing. (f) Do some non-recurring consulting work to increase cash flow. (g) Try to get some beta sites to pay for a pilot implementation.

Do you see any magic bullets in this list? I don’t either. Here’s the lesson: Don’t get yourself into this position because there is no easy way out.

Take whatever capital you have and make it last as long as you painfully can. I have never seen a company fail because it couldn’t expand fast enough. I have seen many companies die because they “invested in the future” and “spent ahead” to avoid missing an opportunity.

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Comments

How can you be that good as listing ideas/suggestions/facts?
Your blog is amazing, i just keep reading the "entrepreneurship" category for 2 hours and i love it.
Thanks for this great sharing!!

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Regarding the failure of the PR/ad agency/consultant: each entrepreneur is *always* in at least 2 businesses: the business of lead generation/sales/marketing *and* their core business.

It's amazing how much impact a marketing-focused entrepreneur can have to the growth of their own business by not delegating responsiblity for the direction/strategy to a PR/ad agency/consultant for generating the sales and marketing life blood for the company.

There is no higher paid role for the CEO of an small or large enterprise than leading the charge on marketing, marketing, marketing.

Is there anyway I can just skip the wedding/honeymoon and just have someone deposit the money in our bank? :)

-Tom

Your article describes a very productive analytical approach. The executives who make knee-jerk decisions could definitely benefit from your advice.
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What a great and delightful article! You understood everything. Now that we know all the reasons which prevent us from succeeding, we can just apply the contrary (let's do some failure marketing). Thank you very much. Il will translate some pieces and point on your blog for my next post.

An overlooked problem is horrible perception of reality. Most organizations do or die on this very basic factor - reading and analyzing reality like it really is - without overpainting with grey, pink, paranoid and overconfident colors. The decision making from that point on is usually not as bad compared to initial hallucinations - ones that start with inexperience, overconfidence and overambition.

The main "criminals" are usually CEOs and it's usually not really their fault. The CEO is under everybody's microscope, is the easiest target and therefore with the most natural tendency to "rape" reality. CEOs are expected to be gods, so they many times act like ones and invent a totally fictitious reality. The problem is that the rest of the organization usually ducks and covers ("raise a flag but stay loyal") or kisses ass ("we share our leader's vision").

The key failure I see is with "managing the CEO" in a way that benefits everybody. How do you stop a CEO from pushing a plan everybody knows is a fantasy? how do you balance the urge to "blame the CEO for everything" with the fact he/she is usually he is just another human being (and a talented one)?

You may not have to ask VCs for help... even if VCs don't want to micromanage, you can bet that they will manage if things are going wrong.

The point of using VCs is get them 'happy and out the door' (with their high ROI) as quickly as possible (as Guy seems to imply). Otherwise, majority-stakeholder VCs may end up steering your company in directions that you may not like. That is the best reason to stay on top of your game... or to avoid VCs altogether if your purse allows it :-)

Lots of sage advice here. The biggest problem I see is perspective. When you're in the middle of the storm, it's hard to get people to look for the telltales to detect these problems early. Detect them late, and the only thing left to do is blog about them.

Add to that the automatic "all-in" pressure facing a lot of VC-backed management teams, and you create a dangerous cocktail. Who's objective enough to point out the emperor's wardrobe malfunctions when everybody on the management team and the Board stands to look bad if the deal fails?

It sure would be nice if someone could follow this advice when it might do them some good, but I'm afraid it's probably the stuff of post-mortems.

Great article! I believe the main emphasis should be placed on item #1 but on a greater scale.
Different people are good at different things. The best placement of resources should focus on who does what and how well they do it. Divine Inventory for example can be used to find out where people excel.
As most of you should know, a startup CEO is not usually a good long term CEO. If the CEO does a great startup then he should do another one after he meets his capacity. The right CFO should be brought in for going public and so forth. Too often, successful companies die because the upper management does not change as the company changes from one life cycle to the next. Find out what you are best at doing and stick with it for lifetime success and successful employee placement.

It's like deja vu all over again...

Having just made a change from away from a venture-funded company, the tiny hairs on the back of my neck stood up as I read this post.

I faced each one of these items (in the context of my position in the company). No rock-throwing here, they simply appear to be the facts of life for many startups.

In my case, I would re-name this post "Nine reasons why a change was a good thing for me."

Regards,
Kip Meacham

Keep up the good work and fight on we are with u!!

Great post Guy. Very good points. David Heinemeier Hansson and I are discussing a related topic to this article and so i referred him to here.

Check it out if you get some time.

Regarding point #1 - many times the personalities needed to start a company are not the kind of personalities needed past the initial startup stage. The personality based gung-ho, take no prisoners approach only gets a company so far. At some point the company has to stop being the founders and be its own entity or the founders need to change.

One of the best posts I've read this year. One issue - you assume that experienced engineering managers, sales managers and marketers "would not have let you get into this situation." I've seen many a "pro" miss their targets in an early stage company. The fact is that brand new products, new sales teams, new engagements with the press are inherently very difficult to forecast.

The trick is to not be fooled by what the team believes. Your "haircuts" are deeper than mine, but the rule of twos is a good place to start: engineering schedule times two, sales forecast divided by two = 1/4 as good as your team thinks it is.

Yeah, it does get boring meeting newbies who perceive themselves to be on third base and beleive they had hit a triple. What's that line about common sense not being so common?

I do also believe that sales fixes most everything. Customers are the ones who can help...therein lies the sense in common things.

Hi Guy

You just wrote my story, and man, have you got me scared! Fabulous insight. You rock, as always.

The honeymoon is always fun. The marriage can certainly be rocky. I think I may blog today about the divorce. That one is interesting as well.

This is good stuff Guy, but the real issue is that entrepreneurs fall in love with our own ideas. If we had any idea of how hard it was going to be, we wouldn't do it. Therefore we have to try to find that balance in the planning stage that allows us to bring some reality into our business plan.

In my case, I went out with my team and sold for a couple of days. No resistance at all, and some people even thanked us for doing this. Now sales cannot deliver what we expected.

Point 9 should also have the possibility of finding a strategic partner (who will undoubtably take more equity than you want him to) to help with whatever areas one is having a problem with, including obviously more money.

We all want to go it alone, but sometimes you run out energy (capital) before it flies.

I have one small addition to make.

When you as a CEO, director or whatever you choose to call yourself :-) have to manage time between different activities, Spend more time making sure that you're bringing in sales - monitoring the sales team, meeting prospective customers, following up with existing beta customers etc.

The rest can be properly delegated, but not the sales bit. Remember that you're the ultimate uebersales guy for your company. Don't let anyone tell you otherwise.

Great stuff, reality-based entrepreneurship. 'Art of the Start' has been like gospel for our startup and Guy's blog definitely keeps it coming.

Reading these comments reminds me of the secret thoughts that many of us at early-stage companies hold... "Someday I'll write a book about all this and everybody will want to buy it!"

Then we realize that the only person who wants to read it is the author, because your story is repeated in board rooms and conference rooms across the country.

Good work, Guy.

As usual, great stuff, Guy. I keep going back and forth between laughing my ass off and thinking I must know half of the people that you based some of these questions on. :)

Keep on fighting the good fight, mate.

Cheers.
Scott

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