Category: Operations

Previously I’ve talked about how we do bottom-up daily check-ins. That means each morning we get together for a five minute meeting with everyone standing where each person answers the questions what did you do yesterday, what are you going to do today, and do you have any roadblocks. Well, at the Cameron Herold event earlier this week, he introduced a different format for seven minute daily check-ins:

1. Share good news
2. Cover numbers by department
3. What does it all mean to the company goals and revenue?
4. Missing systems or opportunities for improvement
5. Sports team cheer with all hands in

There are pros and cons to each type of daily check-in but the general benefits of daily, quick, in-person communication remain true.

What else? What do you think of this alternative daily check-in format for startups?

For a new capital-light web startup I’m a big fan of a two person team comprised of a product manager with domain expertise and a lead developer. This type of team can move quickly towards finding product/market fit. Now, as the team grows from there the third hire should often be another software engineer. Software engineers, especially in the early stages, provide great leverage and economies of scale with their time.

At some point the product rapidly approaches the needs of the market, which are being coordinated through customer driven development by the product manager, and it ‘s time for that fourth hire. That fourth hire should either be another software developer or a jack-of-all-trades with a marketing/sales/service focus to start building a sales and marketing machine.

Here’s the ideal four person startup:

• Product manager/domain expert
• Lead developer
• Software developer
• Software developer or jack-of-all-trades sales and marketing person

Building a successful startup takes timing, luck, and hard work. A team like this significantly improves the odds of success.

What else? What’s your ideal four person startup team?

As a startup grows into a small business it becomes necessary to add more process and operational aspects to the company. The need for this typically occurs when a startup reaches the 10 – 20 employee size, and thus has more going on than can be simply managed by the startup CEO and other co-founders.

Here are seven startup CEO tactics for operational excellence:

1. Company-wide daily check-in stand ups/scrums
2. Weekly KPIs available company-wide in a Google Spreadsheet
3. Weekly tactical meetings with the management team to discuss the week ahead
4. Quarterly check-ins that act like a lightweight performance review
5. Quarterly off-site meetings with the management team to plan the next 90 days
6. Quarterly celebrations with all team members to spend time outside the office and reflect on the last 90 days
7. LCD scoreboard in a very visible location with up-to-date goals and progress

These ideas come from a combination of Mastering the Rockefeller Habits and books from Patrick Lencioni. I’ve found this approach works well and I highly recommend it.

What else? What are some other CEO tactics for operational excellence?

Recently I was talking to an entrepreneur that had rolled out a new technology product to her team members. The challenge was that the adoption was weak and they weren’t seeing a return for the significant investment made in the custom technology.

Catalytic mechanisms are processes and procedures that drive change through the very way things operate. You can think of it as ways to explicitly align interests or make one thing more tightly dependent on another. Instead of asking for a behavior change one approach is to rearrange something else that forces the behavior change.

For the entrepreneur, I offered up a simple suggestion: pay the team members (independent contractors) based on data present in the new system. If they don’t put it in the software, they don’t get paid. It seems so simple but it can make a profound impact (I know of companies that don’t pay commissions to sales reps unless the deals are in the CRM).

What else? What are some other catalytic mechanisms that drive human behavior?

At today’s EO Accelerator accountability group, one of the discussion topics was centered around how to determine when a startup is financially ready for a new hire. Many entrepreneurs are concerned with increasing their cost structure and want to be prudent when adding new people, especially if they are bootstrapping the business. It isn’t always obvious when the financial wherewithal is in place for that next hire.

There are two simple ways to determine when a startup is financially ready for a new hire:

• Growth Plan Assets (GPA) – for companies that sell products or services with limited or no recurring revenue, growth plan assets is the ratio of current assets (e.g. money in the bank plus accounts receivable) divided by the average monthly operating costs over the past 90 days (e.g. all expenses in the past 90 days divided by three). The GPA should be in the three or four range (like a good GPA in college) to know that the business is ready to hire (the GPA can be lower as the percent of revenues that are recurring go up).
• Recurring Revenue Greater than Expenses – for companies with most or all revenue recurring things are much simpler: once the recurring revenues are greater than the current expenses plus the expenses of a new hire, then the startup is good to go. This equation changes slightly if the startup has a bank line of credit and is able to hire in advance of revenue knowing that it will quickly catch up and surpass expenses.

Determining when a startup is financially ready for a new hire is a combination of current financials, sales pipeline, and gut instinct.

What else? What other factors should be included when determining financial ability for a new hire?

A startup last week told me their goal was 100,000 active users in three years. Great, I told them, that sounds like a nice round number. Then, I asked where the number came from. Naturally, they pulled it out of the air with no basis. Wrong, I told them — a bottom-up forecast is the way to go.

Here’s how a bottom-up forecast might look:

• 1% conversion rate from unique visitors (so, 100 visitors to get one user)
• Publish three blog posts per week with 100 unique visitors per post (so, three users per week)
• Send two tweets per day with 50 unique visitors per tweet (so, one user per day)
• Earn one PR placement per month that drives 5,000 unique visitors (so, 50 users per month)
• Assume this is constant for one year and you have about 1,100 new users (~150 + 365 + 600)

With this brute force inbound marketing approach it’s going to take a significant amount of time to reach 50,000 users (note there’s no word of mouth, viral co-efficient, etc).

Startups needs to do bottom-up forecasts for sales, users sign-ups, etc to better understand what it takes to be successful.

What else? What do you think of bottom-up forecasts?

Casually, I’m helping out a local first-time entrepreneur that has been working full-time on his idea for the past two months and is now focusing on raising an angel round. Earlier today he sent over his investor slide deck that covers the executive summary information as well as product details and brief financials. There was only one glaring problem: he listed year three revenue at $50 million.

Now, this is a well educated guy with the best of intentions, but $50 million at year three based on organic growth in an unproven market is extremely suspect. Most companies don’t hit $1 million in year three let alone $50 million. Here are some thoughts on startup three year financial projections for investors:

• Keep the financial projections reasonable and err on the conservative side
• Investors want to see a path to an 8x – 10x return — they don’t need to see a 100x return
• A solid year three revenue range for a technology startup with recurring revenues and high gross margins would be $7 – $15 million (the number would be higher for lower margin businesses)
• Revenue growth from years one to three should be reasonable as well showing some acceleration (e.g. year 1 of $1M, year 2 of $4M, and year 3 of $10M)

Startup financial projections are simply educated guesses. They are meant to show investors that the entrepreneur has a decent understanding of the financial aspects of the business and that there will be a solid return on investment.

What else? What are your thoughts on startups and three year financial projections for investors?

One of the startup traits I value highly is being scrappy, especially is regards to making every dollar go far. Now, don’t be a penny wise and a pound foolish, and invest in what has the best return even if it isn’t the cheapest. It’s one thing to waste a few hundred dollars, or even a thousand, but it is really bad when $10,000 is wasted. In fact, we’ve had the unfortunate experience of wasting more than $10,000 on three different occasions.

Here are three of our startup examples of wasting $10,000+:

• We tried out a new advertising mechanism, raised the bid per click high to try and spend a few hundred dollars to determine the ROI, and got no clicks for a week so we moved on without turning it off on accident. Only the next month we got a bill for north of $10,000, and no good leads from it.
• We had scripts running to backup our 100+ servers daily, including several extremely large databases, on an Amazon S3 account. Well, that S3 account and corresponding bill wasn’t monitored, and backup purging wasn’t turned on (e.g. purge backups older than X weeks). Once the S3 charge was brought up for budgeting, we realized we’d wasted much more than $10,000 due to storing unnecessary files.
• We signed up for a conference/trade show looking to generate leads and build our brand in an adjacent market. Well, it proved to be a horrible investment and we didn’t generate any leads. That was a $10,000 lesson learned.

My recommendation is to pay attention to expenses, especially ones that hit a credit credit, and know that as you get bigger more items fall through the cracks.

What else? What are some ways you’ve wasted money in a startup?