Do you understand your customers?

The purpose of this article

  • Help the board of directors and C-Suite establish a common understanding of their customers and users.
  • This article provides an overall framework.

You may download a PDF of this article from: Do you understand your customers

Why am I writing this article?

  • I have observed that the majority of companies, both startups and established companies, have limited understanding of their customers and users. There are often opinions and assumptions regarding the customers. Frequently these assumptions and opinions are undocumented and not commonly understood and agreed upon.
  • A McKinsey survey of board directors revealed that “Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies.”1
  • Your company will fail if you base your understanding of customers and users on hopes, dreams, and opinions.

What is the process to understand your customers and users?

  • The seven-phase process is set out below.
  • The most critical part of the process is listening to what the customers and users are saying and observing what they are doing.
  • You start out by listing your assumptions.
  • Then you validate these assumptions via customer and user input.

Phase 1 Analysis of market data

  • What have been the historical trends?
  • What is the existing aggregate analysis of target segments e.g. geographic, social characteristics, demographic?

Phase 2 document your assumptions, whether or not you have customers and users

Step 1: Define who your customers and users are

  • Identify the key members of the customers’ ecosystem? Users are most common.  There can also be influencers, recommenders, blockers, etc. e.g. Google’s cash paying customers are advertisers.  Google would not have customers if there weren’t a large number of free users doing searches.
  • Who are your target customers and customer segments e.g. geographic, social characteristics, demographic?

Step 2 What does a day-in-the life of the customers and users look like?

  • What are the points of the day when they have urgent problems, pains, needs which your solution may be able to help with. Rank these in terms of intensity and frequency of occurrence.
  • What are the points of the day when they could expect benefits from your solution? What will make them happy? Rank the relevance in term of relevance and frequency of occurrence.
  • What value would the customer achieve as a result of solving problems of gaining benefits? g. time saving, saving money, making more money, reducing frustration, increasing happiness, increasing social standing, etc.
  • At which points do they touch or become aware of your solution? These include: friends, colleagues, social media, conferences, publications, website, app, email, customer service, etc.
  • How do the customers and users perceive the value of your solution vs the current situation and competitors?

Step 3 What is the market size?

Market size requires customer who realize they have an urgent problem or need, are willing to spend money to solve it, and can afford the spend the money.

  • How many cash paying customers, and what would be the revenue, if you receive 100% of customer spending, regardless of distribution channels, and geographies?
  • How many cash paying customers, and what would be the revenue you receive 100% of customer spending, with your current distribution channels and partners?
  • What is your current market share? How many cash paying customers do you have, and what is the revenue? If you’re a startup, what are your assumptions for years 1,2,3?

Phase 3 Validate your assumptions

  • Interview and survey your customers and users, in a series of iterative and learning steps.
  • You’ll need to do thematic analysis of your interviews.

Phase 4 Additional input if you have customers and users

The single most important question is asking  “Would you recommend our solution to others?”  This metric is known as NPS (Net Promoter Score)2.  Follow on questions could be “If so, why?  If not, why not?”

A more detailed question would be: “How would you feel if you could no longer use our product or service?”3

  • Very disappointed?
  • Somewhat disappointed?
  • Not disappointed – it’s not really that useful?
  • I no longer use it.

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your solution.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The 5 questions to ask them are: 1) who are you (demographically) 2) why did they seek out your product/service?  3) how are they using it 4) what is the key benefit 5) why is that benefit important?

Additional sources of customer input include:

  • Follow up emails after customer and user interaction, customer purchase, or customer/user exit.
  • Analysis of live chat discussions.
  • Analysis of sales call logs.
  • Analysis of app or website interaction.
  • Analysis of customers and users postings in social media, including review sites.
  • Survey kiosks at physical events.

 

Much of the customer input require thematic analysis, because it will be qualitative and unstructured data.

Phase 5 Analysis of company data

  • What % of customers and users do you lose each month?
  • What is the lifetime profit of a customer?
  • What is the customer acquisition cost?

Phase 6 Combine all of the above data

  • All of the above data may be combined and analyzed.
  • Different customer and user views include: by cohort, customer/user segment, geography, channel, partner, etc.

 Phase 7 Continue the above 6 phases on an ongoing basis

  • Understanding customers and users is an ongoing process not a one-time event.
  • There are rapid and ongoing changes to: customer and user problems and needs, the competition, market sizes, regulation, the economy, new technology enable solutions, etc.

Your next steps

  • Document your current situation, based on what you’re currently doing or not doing in the above 6 phases.
  • Assess the gaps and the risks associated with those gaps.
  • Does the board of directors and CEO believe some or all of those gaps are urgent to correct? Most of the startups I’ve met and many of the established companies I’ve met do not believe it is urgent to have a fact-based understanding of customers and users.
  • If the decision is made that there are urgent gaps, then prepare a company specific plan to close those gaps and establish an ongoing process.

Footnotes:

1 Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

2The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 3 https://medium.com/swlh/in-search-of-a-better-way-to-measure-product-market-fit-584fa41d3840

 

What are the values, morals, and ethics of board directors and CEOs?

What are the values, morals, and ethics of board directors and CEOs?

You can download a PDF of this article from: What are the values, morals, and ethics of board directors and CEOs

 Air Canada’s CEO says travel restrictions should be loosened. British Airways is taking legal steps to reduce the British government’s travel restrictions.  Are these directors and CEOs taking these steps because of medical evidence they have which the government is lacking or are these people focused on sales and profits?

Major food chains (Sobeys, Loblaws, Metro, Walmart) are scrapping their pandemic pay boost for front line workers.  Loblaws in the past has had press reports regarding their refusal to pay living wages. What message are the directors and CEOs sending about the degree to which they value their front-line workers?

Bell Canada raised their rates during the pandemic.  Massive government bailouts occurring and incredible unemployment. I wonder why the directors and CEO felt this was an appropriate time to increase prices.

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”1

The 2020 Edelman Trust Barometer for Canada (completed before COVID-19)2 includes the following findings

  • 47% believe capitalism does more harm than good.
  • 53% believe the system in not working for them
  • 76% are worried about losing their job
  • 83% trust scientists, 42% trust CEOs,33% trust the very wealthy

In 1981 the US Business Roundtable published a corporate governance report with stated: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises”.

Neither Larry Fink, not the 1981 US Business Roundtable, believe that the board of directors and CEO’s overriding objective is to maximize profit and shareholder value.

What do you think are the values, morals, and ethics of board directors and CEOs?

 Footnote

1 https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

2 https://www.edelman.ca/sites/g/files/aatuss376/files/2020-03/2020%20Edelman%20Trust%20Barometer%20Canada%20-%20FINAL.pdf

Why do startup CEOs fail? V4

The three-fold purpose of this article:

  • Help startup CEOs and founders understand themselves and identify potential fatal flaws.
  • Help investors, and others, assess startup CEOs and founders.
  • Help assess the CEO’s of traditional established companies.

The following is focused on software and high-tech startups.  Many of the concepts apply to other situations.  CEO failure results from an inter-related set of experience, skills, character, personality, values, morals, ethics, and luck.

You may download a PDF of this article from: Why do startup CEOs fail V4

Research regarding the most critical traits of successful founders.1

Founders with complementary skills sets tend to be successful. “The best founders know their strengths and weaknesses and recruit a complementary team.” Founders of all ages can be successful.  Age is not a predictor of success.”

There are three archetypes of successful founders:

  • Humble Operator: Exceptional at execution, extremely humble while confident in themselves. They are resourceful and gritty. People who worked with them before tend to follow them.
  • Agile Visionary: Usually first-time founders, they are young, visionary, and driven by a desire for greatness. They have a unique perspective on the market they’re going after and an intuitive sense of what their customers want. They test and iterate quickly to incorporate market signals.
  • Seasoned Executive: Experienced older founders, they often have 5+ years of management experience and deep industry expertise. They are intrinsically motivated to build a company. They may have started a company before.

There are three archetypes of unsuccessful founders:

  • Passionate Outsider: Usually first-time founders, they are humble and hard-working. However, they don’t have good founder-market fit and don’t have a complementary cofounder to rectify this gap.
  • Overconfident Storyteller: Charismatic, compelling, and have high confidence. They are likely to be solo founders and they are often not humble.
  • Stubborn Individualist: Slow to adapt to learnings from the market and not empathetic to what the customers want. They are not good at articulating a convincing narrative.

Successful founders have four superpowers:

  • Running her company effectively day-to-day, learning and adapting quickly
  • Results driven i.e. exploring many solutions to quickly finding the best one.
  • Customer empathy, which enables finding product-market fit.
  • Agile thinking i.e. able to iterate quickly based on market feedback, but at the same time persistently focused on the vision.

Successful CEOs have founder-market fit.

Founders with a deep understanding of the market have founder-market fit.  There are 4 signs of founder-market fit:

  • The founders are obsessed with the market. They are obsessed with market knowledge.  This results in them knowing everything about the market, what a day-in-the life of a customer looks like, the customer’s urgent problems, the competitors, et.
  • The founders’ personal stories. Customers are excited by personal stories which explain why the founders are obsessed.
  • Personality is the ability to build a network in the market and the market’s ecosystem.
  • Experience but not so much experience that the founders are constrained in their ability to disrupt, and to be able to see new and innovative ways of doing things. The degree of appropriate historical market/industry experience varies by market. e.g. Developing a new drug requires a degree of past experience.

The first point-of-failure is when the CEO is thinking of founding a company and becoming CEO.  Examine yourself.  Do you already have the characteristics of someone who is likely to fail?

  • Not able to clearly communicate on why starting the company and what the idea is.
  • Not having a very broad set of knowledge or being able to quickly learn a broad set. A startup CEO does it all without the infrastructure of a large company to support her.
  • Not relentless and able to overcome all obstacles.
  • Not able to do things quickly.
  • Not able to quickly learn from mistakes.
  • Not able to work long hours for many years. The average time for a SaaS startup to exit or IPO is 9 years.  But the vast majority fail.
  • Not willing to take risks. The majority of startup CEOs are forced to leave the company at some stage of funding.
  • Not able to minimize cash spending.
  • Not having the funds (personal savings, family, and friends) to live for a significant period of time without income from your company.
  • Not able to ruthlessly prioritize time e.g. who to meet vs who not to meet; problems which must be solved vs can be ignored.
  • Not having the personality and skills to build a broad set of trusted relationships with potential customers, suppliers, employees, advisors, investors, etc.
  • Not able to attract appropriate coaches, mentors and advisors. There are major differences between star athletes and star coaches.  The same person is rarely a star in both fields.
  • Not able to listen, and clearly understand what the other person intends to communicate.
  • Not willing to go all-in
  • Not extremely intelligent.

The second-point-of failure is when the CEO makes a poor selection of co-founder(s) and is not able to manage co-founder(s).

  • Not able to select co-founders with the range of experience and skills necessary for short-term team success. Co-founders should bring diverse experience and skills, resulting in the pool of capabilities necessary to create and launch the company.
  • Not selecting co-founders with similar objectives, character, values, morals, ethics, and time lines.
  • Not picking founders who have the personal financial resources to live until the company can afford to pay them or third-party investors can provide financial support.
  • Not having a common understanding of what each co-founder will contribute e.g. # of hours, capital, finding capital, creating the product or service.
  • Doesn’t have the skills to make the founders work well together.
  • Not being clear on how decisions are made, and who makes them.
  • Doesn’t ensure that the founders are physically located together and working together.
  • Unable to articulate and help the all the co-founders understand and support the higher purpose of the company. If the only purpose is to make money, the chances of long-term success are low.
  • Not having a common understanding of how much of the company the founders are willing to give up in return for capital.
  • Not documenting expectations and assumptions. This leads to future confusion and disagreements. “People forget 40%-80% of what they hear immediately.   Half the information people do recall, is recalled incorrectly”2

 Your next steps

Regardless of the situation, the CEO or founders need the capabilities to be successful in the next 24 months and to be competitively differentiated from the CEOs/founders of competitors.

  • If you are a startup CEO or founder: Assess your self and compare that to how others view you.
  • If you are an investor, advisor, someone planning to join the startup CEO: Review the above criteria and prepare your own list of criteria. Identify the deal-killers or fatal flaws and the criteria that are important. Assess the CEO or founders. You don’t want to be associated with a CEO or founders who will likely fail.
  • If you are the board of directors or major investor in a traditional established company: Prepare you own list of criteria. Identity the deal-killer criteria i.e. whether to terminate existing CEO, not to appoint a candidate as CEO or not to invest in the company.  Identify the criteria that are important. Assess the CEO. Boards should not a have a CEO who is likely to fail.  Investors should not deploy capital to CEOs who are likely to fail.

 Footnote

1 Basis Set Ventures, a San Francisco early stage fund, surveyed other funds to understand their opinion of the traits of successful vs unsuccessful founders.  https://www.basisset.ventures/founder-superpowers

2 Lindsay Wizowski, Theresa Harper, and Tracy Hutchings, Writing Health Information for Patients and Families 4th Edition (Hamilton Health Sciences, 2014), Page 5

Further Reading

How do  venture capitalists assess teams https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-assess-teams/

 

Startup investment memo

The purpose of this article.

The two-fold purpose of this article is to:

  • Provide an investment memo template for a startup investor, investment fund, or angel group.
  • Enable early stage startups to understand how they will be assessed.

This article is linked to “Due diligence questions for an early stage startup”1

You may download a PDF of this article from: Startup investment memo

There are three phases to an early stage startup.

Startup

  • A startup is a temporary organization designed to search out a repeatable and scalable business model. Lots of learning experiments are carried out. The focus is on getting some delighted cash paying customers.
  • A business model describes how a company creates value for itself while delivering products or services to customers. What are you building and for whom? What urgent problems and needs are you solving?

 Preparing to scale

The startup believes it has a business model which can meet the needs of a large number of cash paying customers. The focus shifts to putting in place cost-efficient and easily scalable technology, processes, and talent.

Scaling

The focus shifts to growing the:

  • geographies
  • marketing, sales, delivery resources and activities.
  • channels and distribution partners.
  • Customer segments.

The purpose of the Investment Memo .

Recommend whether or not the investment is appropriate to proceed to the term sheet stage. The Investment Memo is based on:

  • The answers from the early stage company to the due diligence questions.
  • Additional facts gathered from third party questions.
  • Analysis of the collected facts.
  • Investor judgement, based on a variety of criteria.

In an early stage fund, the investment memo is presented to the partners to explain why the investment should be made, or not made.

The investor will have used simple criteria to quickly filter out early stage companies before devoting time in due diligence E.g.

  • After spending less than 5 minutes reading an emailed application.
  • After a 15-minute phone call or meeting.
  • After listening to a pitch at an event.

A deal-killer recommendation.

Each investment fund will have some deal-killer criteria. If the startup-meets any one of these criteria, there is no deal.  The deal-killer criteria vary by fund.  E.g. market size is too small, founders are not trust-worthy, no potential customer interviews or surveys, etc. Deal-killer criteria could include not answering, or unable to answer, critical due diligence questions.

In this situation, the investment memo only one-page long.

Investment Memo with no deal killers – the process.

 The detailed structure of the Investment Memo follows the structure of the due diligence questions for the startup.

For each question, indicate whether the questions were answered, whether or not there are any issues, and what validation was done.  Validation can include: talking with 3rd party experts, doing independent primary and secondary research, preparing analysis separate from that submited by the startup.  I’ll indicate below some possible approaches to validation in each section of the investment memo.

There is a one-summary, which includes the recommendation.  Each section in the summary has 1-2 lines.

Recommendation: either proceed to a term sheet OR recommend not to proceed with the reasons why.

Each of the six sections in the one-page summary also contains: recommendation: yes or no and why, plus any critical read flags

  • How does the company create value for customers and itself?
  • What are the plans?
  • Investor specific
  • What is being asked of the investor?
  • Legal documents
  • Historical results.

Detailed report

Each section of the detailed report starts with the summary information from the one-page summary.

Each section/subsection of the report contains:

  • Indication of whether or not the due diligence question was answered
  • Indication of whether the answer was a “pass” or “fail”.
  • Any red flags.
  • Any input from third party experts.
  • Any input from the investors primary and secondary research.
  • Any results from the actions noted below.

#1 How does the company create value for customers and itself

Target Customers

  • Interview potential and current customers.
  • Assess market size determination (TAM, SAM, and SOM) and review sources cited.

Value proposition

  • Review some or all interview notes from potential or current customers.
  • Review some or all survey responses from potential or current customers.
  • Review analysis of interview notes and survey responses.
  • Interview potential and current customers

Channels

  • Review some or all interview notes from potential or current customers.
  • Review some or all survey responses from potential or current customers.
  • Review analysis of interview notes and survey responses.
  • Interview potential and current customers regarding their expectations.
  • Review detailed financial information to validate appropriate allocation of costs & revenue to: CAC (Customer Acquisition Costs) and calculation of LTV (Life Time Value)
  • Review calculation of the churn rate.

Key Partners

  • Interview current and potential partners.

Key resources

  • If patents, check with patent offices
  • If trademarks, run a trade mark check
  • If contracts, call third parties to validate
  • Have all required resources been identified?

Key Activities

  • Have all required activities been identified?

Cost structure

  • Assess whether the cost-drivers are in fact cost-drivers.

Charging customers

  • Review some or all interview notes from potential or current customers regarding value and pricing.
  • Review some or all survey responses from potential or current customers regarding value and pricing.
  • Review analysis of interview notes and survey responses regarding value and pricing.
  • Interview potential and current customers regarding their expectations regarding value and pricing.
  • What are competitors or similar companies charging?

Talent

  • Assess team bios for relevant skills and experience
  • Run a background check on the team.
  • Are the founders emotional or irrational under pressure?
  • Do the founders have empathy?
  • Are the founders unable to clearly and easily communicate their pitch.
  • Are the founders arrogant or overconfident?
  • Are the founders transparent and honest?
  • Are the founders fully committed or is this a part time effort?

#2 What are the plans?

  • Does the 24-month Gantt chart reflect the key milestones?
  • Is the 24-month Gantt chart plausible?
  • Review the detailed allocation of costs and revenues to validate the calculation of LTV and CAC.
  • How does the LTV to CAC ratio change in the cash flow forecast? How does it vary by customer segment, channel, and partner?

#3 Investor specific

  • Are the presentation decks (oral and standalone) consistent with the rest of the due diligence material.
  • What are the issues with the current and forecast cap table? Do the founders have enough equity.
  • What are the options for an investor exit?
  • How long has the fundraising round been open, what’s been committed, by whom?
  • Who is the lead investor and what is their reputation?
  • Are previous investors following on? If not, why not?

#4 What is being asked of the investor?

  • What are the issues regarding terms and valuation?

#5 Legal documents

  • Who has the legal right to make what kinds of decisions under what conditions? Review loan agreements, voting trust agreements, shareholder agreements, board of directors and committee mandate, delegation of authority to CEO, etc.

#6 Historical results

By target segment, by channel, by partner, by cohort.

  • Monthly growth rate in number of cash paying customers, and revenue.
  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • NPS (Net Promoter Score)
  • How many similar competitors have failed in the past? Why? How is this startup different?

Next steps

Regardless of what type of investor you are:

  • Prepare your list of deal-killer criteria and deal-killer unanswered questions.
  • Prepare a one-page investment memo.
  • Customize the due diligence questions and due diligence report to reflect the specific nature of investor and the nature of the investment. The due diligence questions, due diligence report, due diligence cost and time invested will be very different for an angle investor contemplating a $25,000 investment in a pre-revenue company vs an investment funding contemplating a $10 million investment in a company that is scaling.

Footnotes:

1 Due diligence questions for an early stage startup: https://koorandassociates.org/selling-a-company-or-raising-capital/due-diligence-questions-for-an-early-stage-startup/

Further Reading

Definition of startup terminology and metrics: https://koorandassociates.org/selling-a-company-or-raising-capital/startup-terminology-and-metrics/

Red flags for any investor to consider:  https://medium.com/swlh/red-flag-list-for-vc-deals-9beea446270d

Due diligence questions for an early stage startup.

The purpose of this article

The two-fold purpose of this article is to:

  • Enable early stage startups, prior to scaling, to understand the due diligence questions they may encounter from an investor.
  • Enable an investor to structure a set of due diligence questions.

You may download a PDF of this article from: Due diligence questions for an early stage startup

There are three phases to an early stage startup

Startup

  • A startup is a temporary organization designed to search out a repeatable and scalable business model. Lots of learning experiments are carried out. The focus is on getting some delighted cash paying customers.
  • A business model describes how a company creates value for itself while delivering products or services to customers. What are you building and for whom? What urgent problems and needs are you solving?

Preparing to scale

The startup believes it has a business model which can meet the needs of a large number of cash paying customers. The focus shifts to putting in place cost-efficient and easily scalable technology, processes, and talent.

Scaling

The focus shifts to growing the:

  • Marketing, sales, delivery resources and activities.
  • hannels and distribution partners.
  • Customer segments.

The early stage due diligence questions are one of the inputs to the Investment Memo

The purpose of the Investment Memo is to recommend whether or not the investment is appropriate to proceed to the term sheet stage. The Investment Memo is based on:

  • The answers from the early stage company to the due diligence questions.
  • Additional facts gathered from third party questions.
  • Analysis of the collected facts.
  • Investor judgement, based on a variety of criteria.

The investor will have used simple criteria to quickly filter out early stage companies before devoting time in due diligence E.g.

  • After spending less than 5 minutes reading an emailed application.
  • After a 15-minute phone call or meeting.
  • After listening to a pitch at an event.

The  investor asks the startup five sets of due diligence questions

#1 How does the company create value for its customers and itself?  What is the company building and for whom?  What urgent customer needs and problems are being solved?

        • Target customers:
    • Who exactly will you be creating value for?
    • Who will pay you? What are the differences between users and customers segments, if any (e.g. Google – user do searches for free.  Companies pay to advertise.
    • How will they recognize themselves?
    • Who will be your most important customers?
    • What is the market size? TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market)1
    • Who is your initial target segment?
  • Customer Value Proposition: A value proposition is the customers perception of value. This perception can be influenced by: facts, emotions, family & friends, social media, etc. The value proposition = (All the customer achieved benefits) / (All the customer incurred costs) All the customer achieved benefits can include problems solved, gains achieved, financial and non-financial (e.g. time savings, convenience, status, etc.) All the customer incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, etc.)
    1. What value will the customers perceive they will achieve? This is very different from your opinion as to what value you will deliver.
    2. What problems do your customers think you will solve?
    3. What customer needs will be fulfilled?
    4. Why does the customer believe the value of your solution is better than the status-quo or the competition?
    5. What does the customer believe will be the impact of your solution? E.g. 10 times improvement in something?
    6. What is your MVP (Minimum Viable Product)? What is the smallest set of urgent problems and needs you can solve for a target customer segment, while delighting the customers, and having them pay you?
    7. What is the path to enhance your MVP until you believe you have a solution that can be scaled to meet the needs of a large customer segment?
  • Customer Relationships: What type of customer relationship do your customers expect to have with you?
    1. How will customers be acquired, kept, and grown?
    2. Why type of relationship does each customer segment expect you to establish and maintain? ? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person?
    3. What types of relationships have you already established?
    4. What is the cost of each type of customer relationship?
    5. What is CAC – customer acquisition cost?
    6. How many customers are you losing – churn rate?
    7. What is LTV – lifetime customer value? In the initial startup stages, LTV will be less than CAC, because of the need to obtain an initial pool of customers by doing inefficient things that don’t scale.  As the startup is getting ready to scale, it will have figured out how to make LTV exceed CAC.
  • Channels: Channels are how to connect the value proposition to the target customer. There are three different types of channels. Communications – used to communicate with potential customers.  There may be many communications channels. Sales – where customers and sellers agree on the transaction. Usually there are fewer sales channels than communications channels. Logistics – how to deliver the solution to the customers.
    1. Through what types of channels do the customers want to be reached? In other words, what channels are most effective? E.g. website, app, social media, face-to-face, marketplaces, etc.
    2. What channels already exist?
    3. Which channels are most cost efficient?
    4. Which channels are integrated with customer processes?
  • Key Partner: A channel may also be a partner, if the answer is “yes” to one of the following questions: Is the partner a leading entity with a brand and market position that adds to your credibility? Does the partner add expertise and resources to your solution in a way that increases the value of the solution for the end customer? Is the partner (and their brand/expertise/resources) required to land a contract with the key target customers?
    1. Who are the key partners?
    2. Who are the key suppliers?
    3. What key activities, supporting your value propositions, to your partners perform?
    4. How effective are your current partners and suppliers?
    5. What types of partners and suppliers do you need?
  • Key Resources: Resources mean any relevant intellectual property (IP), technical expertise, human resources, financial and physical assets, key contracts and relationships. In other words, resources refer to anything within your control that can be leveraged to create and market your value proposition (e.g., a patent pertaining to your value proposition, key contacts within the industry).What resources are necessary to:
    • Enable the customer to achieve their value proposition?
    • Maintain channels and partnerships?
    • Build relationships with customers?
    • Build revenue?
  1. What resources exist today?
  2. How effective are they?
  3. What are the plans to close the gaps?
  • Key Activities: What are the key activities to enable customers to achieve their value proposition, and generate revenue for the startup. What key activities are necessary to:
    1. Enable the customer to achieve their value proposition?
    2. Maintain channels and partnerships?
    3. Build relationships with customers? Marketing? Sales, Customer service?
    4. Build revenue?
    5. R&D?
    6. Billing?
    7. What activities exist today?
    8. How effective are the current activities?
    9. What are the gaps and plans to close the gaps?
  • Cost structure: What is the cost of delivering the value proposition, including the resources needed and key activities involved.
    1. What are the largest costs?
    2. What are the fixed costs and variable costs?
    3. What activities are the costliest?
    4. What resources are the costliest?
    5. What is the burn rate? (i.e. excess of costs minus revenue)?
    6. What is the runway? (i.e. how many months before all the cash is gone)
  • What will you charge your customers and how will you charge your customers?
    1. What is the value the customers are willing to pay for?
    2. How much are they willing to pay?
    3. How much are they paying today?
    4. What is the pricing model? Subscription, one-time, freemium, advertising, etc.
    5. What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.
    6. How are they paying today? Cheque, credit card, etc.
  • Who is the talent and how are they relevant to the startup’s success?
    1. Appropriate biographies of the management and advisors.

 #2 What are the plans?

  • Gantt chart on one page of the next 24 months.
  • Cash flow forecast. There may be multiple cash flow forecasts illustrating multiple scenarios.

#3 Investor specific

  • Oral presentation deck which supports the oral presenter and is not intended to be read on its own.
  • Standalone presentation deck is intended to be read on its own and therefore has much more information than the oral presentation deck.
  • Cap table lists out each type of equity ownership capital, the individual investors, and the share values. A more complex table may also include details on potential new funding sources, mergers and acquisitions, public offerings, or other hypothetical future transactions.

#4 What is being asked of the investor?

  • Type of capital and amount?
  • Being lead investor?
  • Serving on board or advisory board?
  • Access to investor’s network of other investors, customers, employees, etc.?

#5 Legal documents

e.g. Charter documents, corporate organization, etc.2

#5 Historical results

Company history, past milestones, historical growth, etc.

 Your Next steps

  • If you are a startup, immediately begin to organize your data room to be able to address potential investor due diligence. The bulk of the information in your data room will also help your startup succeed.
  • If you are an investor, create your list of documented due diligence questions.

Footnotes

1 This article contains definitions https://koorandassociates.org/selling-a-company-or-raising-capital/startup-terminology-and-metrics/

2 This is a sample legal due diligence checklist  http://www.1000ventures.com/venture_financing/due_diligence_checklist_byvpa.html

Startup terminology and metrics.

Startup terminology and metrics.

 The purpose of this article

This article has a two-fold purpose:

  • Provide definitions of startup terminology and metrics. My various articles will refer to this article, which means that I don’t have to include definitions and metrics in each article.
  • Enable a startup to quickly create its own set of terminology and metrics

You may download a PDF of this article from: Startup terminology and metrics

What is a startup?

A startup is a temporary organization designed to search out a repeatable and scalable business model.

A business model describes how a company creates value for itself while delivering products or services to customers.  What are you building and for whom.  What customer problems are your solving? What customer needs are you addressing?  What benefits and value are you enabling customers to achieve?

A startup evolves

  • The startup phase, which concludes with the determination that you have discovered a business model that can be scaled and that has a large number of potential paying customers. Many startups fail before this phase completes.
  • The getting ready to scale phase concludes with the having the talent, technology, and processes to enabling profitable scaling.
  • The scaling phase, focuses on increasing the number of geographies, distribution channels, partners, and customer segments combined with marketing and sales investments.

MVP (Minimum Viable Product)

A product or service with just enough features to have delighted early cash paying customers by enabling them to solve some urgent problems, and to have obtained customer feedback for future development

 Customer Metrics

New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).

New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).

 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

Market Size

Market size = (The number people (or organizations) with an urgent problem or need that they are willing to spend money) times (the amount they are both willing and able to spend).

What is TAM (Total Addressable Market)?

  • What would be the startup’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought startup’s solution. This assumes all potential geographies, distribution channels and partners.
  • Is the startup’s TAM large enough to launch and grow the startup? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segments, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the startup’s geographies, distribution channels, and partners, and your ability to deliver and support your solution. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.

What is SOM (Serviceable Attainable Market or Share of Market)?

  • SOM will be lower than SAM for three reasons: there will be competitors, customers who are demanding a solution may not actually buy a solution, and there will be an adoption rate ranging from early innovators to laggards.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the startup validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP, customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

 

NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

Financial Metrics

Burn Rate and Runway

The monthly burn rate is the amount of cash the startup is losing each month.  Burn rate = revenue – expenses.

Runway is when you run out of cash.  There are multiple runway scenarios e.g. revenue and expenses remain constant; forecast revenue vs forecast expenses.  There may be multiple forecasts.

 CAC (Customer Acquisition Cost) includes all the costs to acquire a new customer:

  • Sales.
  • Marketing.
  • Onboarding.
  • Related compensation of the people.
  • Overhead associated with the people.
  • Technology to support CAC.
  • Legal expenses associated with sales and marketing.

LTV (Life Time customer Value)

What is the lifetime customer profit, after customer acquisition?  This will take into account churn.

A scalable business model is one in which LTV exceeds CAC.

Churn is the % of paying customers who leave each month.  Your target should be at most 2% per month churn.  5% per months means you are in trouble.  You must figure out and fix the churn problem if you hope to grow your company.

COGS (Cost of Goods Sold) What comprises cost of COGS? Everything required to meet the direct needs of current customers.  E.g.

  • Customer support people, and software
  • Technology e.g. software, cloud services, communications costs.
  • Bug fix and minor enhancement to the software – after all you do need to retain current existing customers.

CAC is not part of COGS.

G&A (General and administration) What comprises G&A?

  • Payroll administration.
  • Recruiting administration.
  • Finance
  • IT security.
  • Corporate development e.g. M&A.
  • CEO salary/benefits.
  • Legal expenses (both in house and external), other than those associated with sales contracts.

R&D/Engineering/new Development?

All of the costs associated with discovering major changes to the business model and enhancing the solution.

Gross Profit Margin

(Revenue minus COGS) divided by revenue.

Let’s use QuickBooks to illustrate the concept of the financial metrics.

There is a GL line item for salaries.

Then then there is a class i.e. where does the salary belong?  (i.e. QuickBooks class)

  • CAC?
  • Cost of goods sold?
  • R&D/Engineering/new Development?
  • G&A?

Next steps

Create definitions and metrics for your startup.  This will help everyone (founders, employees, advisors, investors, etc.) have a common understanding about you actually mean when you use certain words.

Focus your project on user and customer value achievement

Focus your project on user and customer value achievement

The two-fold purpose of this article is to:

  • Enable boards of directors and CEOs to better assess projects and potential project success.
  • Enable those preparing project presentations and business cases to increase the success of project success.

Projects which succeed in enabling users/customers to achieve value have a greater potential of achieving revenue and profits.

Looking back over the past 40 years, many, perhaps most, of the project presentations and business cases that I have led or have seen contained major flaws, which led to reduced or no benefits. The following outlines my current thinking, based on observations of countless initiatives and research.

You may download a PDF of this article from: Focus your project on user and customer value achievement

What is a customer value achievement project?

  • Create a sustainable scaling product/service which profitably enables users/customers (e.g. users are people doing searches on Google, customers are people paying money to advertise on Google) to achieve value in a changing competitive environment.
  • Many projects will not succeed, especially those innovating with new target users/customers, new user/customer problems, new channels, new partners, etc.

How to read this article

This article outlines the different components of the project starting with the oral presentation.

 The project has three phases

  • The startup phase, which concludes with the determination that there are a sufficient number of potential cash paying customers to create a scalable solution. Many projects will be terminated before this phase completes. The initial capital approval will be at most to complete this phase. Additional capital may be required during this phase, depending upon what is learned.
  • The getting ready to scale phase concludes with the business having the talent and cost-efficient scalable resources and activities in place. Additional capital approval(s) will be required for this phase.
  • The scaling phase, focuses on increasing the number of distribution channel and partners, combined with marketing and sales investments. Additional capital and resources may be required.

 The 20-minute oral presentation of your project

The purpose of the oral presentation is to demonstrate the leader’s:

  • In depth understanding of the project.
  • Ability to communicate complex ideas and concepts in an easy to understand manner.

The leader’s oral presentation will have 10 sections.

  • What is the problem and who has it (target users/customers)?
  • How will the users/customers see and achieve the benefits of your solution?
  • Why is now the right time to do this project?
  • What is the size of the market i.e. how many users have an urgent need and how much customer would be willing to save money?1
  • What is the product and/or service you are going to create?
  • Who is the project team and what is their relevant experience? The team may include advisors, consultants and partners.
  • What is the business model? e. how you are going to get users/customers and how will you make money?
  • Who is the competition and how are you unique?
  • What are the financials i.e. 24-month cash flow forecast by month as well as years 3-5 by year.
  • What are you asking for to launch the first phase of the project?

The outcomes of the project leader’s oral presentation

The main outcomes of the project leader’s oral presentation are that the audience will:

  • Support sending the project onto due diligence.
  • Have trust and confidence in the leader.
  • Have a clear understanding of who the users and customers will be, their urgent problems and needs, and the potential revenue from cash paying customers.
  • Know how the solution will meet the customers needs and problems.
  • Understand why users and customers will prefer this solution to the competitions.
  • Have confidence that the leader and her team have the relevant skills, and plans to close any skill gaps.
  • Trust that the leader will carefully manage the capital and resources based upon seeing a 24-month cash flow forecast, by month.
  • Understand that the initial project stages will consist of a series of experiments, prototypes, pilots, and phased releases reflecting the requirement to constantly validate user/customer problems as well as what the customer is actually willing to pay for.

The due diligence done on the project

The due diligence will include: review of material, calls/meeting with customers, and potential customers, calls. meetings with team members, and in-depth Q&A sessions with the leader and team. The written material for due diligence is in an online data room.

The outcome of due diligence is an IM (Investment Memo) which is the  recommendation as to whether or not to proceed.  The IM is based on the information provided by the project, information collected by the due diligence team, and due diligence team analysis and judgement.

The written material in the data room will include:

  • Who are your target user/customer segments? What is the user/customer market size?1 How did you validate your assumptions?
  • What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
  • What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
  • What will be your channels to the customer?
    1. Communications channels with potential customers?
    2. Sales channels which result in a sales transaction?
    3. Logistics channels which deliver the product or service to the customer?
  • Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
  • What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
  • What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
  • What is the cost structure to create and deliver the value proposition?
  • What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.
  • What’s the talent required for the project? What are the gaps and your plans to address the gaps?  What are the project team member descriptions and how are their skills, experience, and network relevant to this project?
  • What is the 24-month cash forecast, by month, showing key milestones and accomplishments.
  • The oral presentation deck. Designed to support the oral presentation. Lots of visuals, with few words.
  • The written presentation deck

Ongoing project reporting

The following reporting is ongoing from startup through to the business scaling the solution

The written report will include:

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.2
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.
  • Issue and problems – there are always problems and issues
  • What help is needed – help is always needed
  • 24-month cash flow forecast – actuals vs plan

There is a monthly review meeting 100% focused on issues, problems, and the asks for help.  The written report is distributed and read prior to the meeting.

Any requests for additional capital will require an updated Investment Memo,

Startup Phase

The additional reporting in the startup phase reflects that there may be many experiments, pilots/prototypes, and a series of evolving revenue generating solution, until the project determine whether there is a solution which meets the cash spending demands of a large enough number of customers and the needs of enough users.  What’s being done is often inefficient and even manual.

Reporting reflects what is being learned, what assumptions are validated or invalidated and what new assumptions are being made.

Getting ready to scale phase

The additional reporting in this phase is now focused on the efficient gaining of users/customers and the profitable meeting of their needs.  (e.g. The onboarding process in the startup phase may have had the CEO call each person who signed up on the website within 30 seconds.  This will be impractical in the long term) The reporting will reflect the talent, process, and technology changes required.

Scaling phase

The additional reporting will reflect the learnings and associated metrics arising from: new geographies, new distribution channels, new partners, etc.

Your next steps

  • Document your current project approval and project management process.
  • Compare your current situation to what I’ve outlined above.
  • Identify the critical improvement requirements and related assumptions.
  • Begin piloting the revised project approval and project management process to validate your assumptions.

 Footnotes

1 Market size

What is TAM (Total Addressable Market)?

  • What would be the project’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought the project’s solution. This assumes all potential distribution channels and partners
  • There is a critical difference between customer needs and customer demands. Customers have a large number of needs.  Demand is customers deciding that they will spend time, effort, and money to get a solution for what they believe is an urgent need.  Often this means that customers will spend less money to meet other needs.
  • Is the project’s TAM large enough to launch and grow the company? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segment, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the project’s distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.
  • How will customers connect with the startup?  If they are seeking a solution, how will they find the project?  How will the project make customers aware of the solution?

What is SOM (Serviceable Attainable Market or Share of Market)?

  • SOM will be lower than SAM for two reasons: there will be competitors, and every customer who is demanding a solution may not actually buy a solution.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the project validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP (initial revenue producing customers who are delighted from the initial set of value they achieve from the solution), customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 

 

 

Can your CEO pass this simple startup investor test?

The two-fold purpose of this article is to:

  • Enable CEO’s of established revenue generating companies to identify some potential survival issues.
  • Enable startup founders to assess if they have some deal-killer issues from an investors point of view and from a survival perspective.

You may download a PDF of this article from:  Can your CEO pass this simple startup investor test

Investors, advisors, the board of directors, employees, and others may already be aware of the CEO/founders issues.  This process is intended to increase the CEO/founder self-awareness.

The following are some questions that you can ask the CEO in a 20-minute period.  The questions are those that some investors use to screen out in a quick phone call early stage companies seeking funding.  These questions are known as deal-killers. Individual investors will have various deal-killer issues.

If the existing company has more than one business unit, with different target users/customers (e.g. users are people using Google to do searches, customers are people paying Google to advertise), then the question should be asked of the business unit leader.  The questions can also be adapted for internal users/customers

Deal-Killer Questions

The following questions are those investor deal-killers for a pre-revenue company.  The questions are valid for any stage and size of company. When asking your CEO these questions, remember that much of the actual work and  analysis may have been done by others in the company.  These questions identify if that work has been done and the degree of the CEO’s understanding.

  • Who are the target users/customers and what are their urgent problems or needs?
  • How did you calculate the market size? Number of customers, users, and revenue if you had 100% market share with all possible distribution channels and partners?  Number of customers, users, and revenue if you had 100% market share using your initial or current distribution channels or partners?  What is your initial or current market share, recognizing that not everyone will actually buy, there will be adoption rates as well as competition.
  • How many potential customers did you interview to validate the assumptions above and what did your learn from your interviews? What did you do differently as a result of your learnings?
  • Can your solution easily be duplicated or copied by other companies? What is unique and hard for others to copy?
  • Would you be willing to step aside, if necessary, for another CEO? If so, why?  If not, why not?

How do the questions address deal-killer issues?

The deal-killer issues I use are:

There is not a large number of people with a problem or need they are willing to spend money on.

  • If the market size isn’t large, then investors are not interested.
  • Many startups merely copy a few numbers from consulting report and don’t do their own bottom up analysis supported by potential user/customer interviews.
  • Existing companies must do ongoing user/customer interviews, and surveys to understand the changing user/customer needs as well as user/customer perception of your company’s solution relative to competition.
  • This insight is provided by questions 1,2,3,4

The CEO/founder is not coachable.

  • Some signs that a CEO is not coachable include: They always think they’re right and don’t possess the ability to self-reflect; They are not willing to experiment, learn new things and are not open to change; They are arrogant about their intellectual prowess; They usually are rolling eyes during constructive criticism; They have answers to every question without even questioning the logic of their answers; They react negatively to any constructive criticism; and they are disrespectful of others and/or others’ opinions.
  • Being coachable means: being open to radical changes; when getting constructive criticism, they ask themselves “What can be the benefit of this feedback to me and what is there for me to learn from this feedback?”; They are comfortable acknowledging their ignorance and are willing to do the work in order to fill the gaps in their knowledge.
  • They need to be coachable because they need to learn from users/customers, advisors, investors, distribution channels, partners, and others in order to change their behaviors and actions in an environment where unexpected change is a constant.
  • This insight is provided by question 4.

The solution is easy to copy and duplicate or is already a common commodity solution.

  • Investors seek what is both unique and hard for competitors to copy.
  • New technology and new intellectual property may be hard to copy.
  • There are markets where all solutions get copied, thus the key actions are: understand the user/customers better than the competition; enable users/customers to obtain value quicker than the competition.
  • This insight is provided by question 5.

 The CEO/founder is unwilling to step aside, if necessary, for another CEO.

  • The majority of startup CEOs/founders will end up stepping aside (either voluntarily or forcibly). Few CEOs are like Bill Gates, able to change and learn as they take a startup to a massive global company.
  • CEOs need to understand that they are in place to meet the needs for a point in time (and the next 24 months) and that in 24 months time, they may not be the right person.
  • A CEO who refuses to recognize this will impact the value of any investment, plus result in a painful and costly CEO exit. The CEO may not be enabling the development of a pool of qualified successors, both short-term and long-term.
  • This insight is provided by question 6.

Your next steps

If you are a startup CEO/founder:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested.

If you are the CEO of an established revenue generating company:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested. If you are a public company do not ask: investors, potential investors, or bord directors.

In either case:

  • The reason for a trusted person is the assumption that the CEO/founder will listen to and think about the feedback.
  • You should know the questions in advance.
  • You will be probed and asked for the logic and/or proof of your answers. Opinions, guesses, and hopes are of little value.
  • You will have a 20-minute discussion, in which you’ll be asked the questions. The discussion will be recorded.
  • The trusted person will review both their notes and the recording to set down their observations. The recording will then be destroyed.
  • The trusted person will then share their observations with you.

The implications of the constructive criticism observations:

If you are a startup CEO/founder:

  • The CEO/founder is not coachable. Investors will likely decide to not invest or continue investing.  Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the investors will decide if the market size still warrants an investment.  If the CEO/founder is bootstrapping, the CEO/founder needs to determine if the potential warrants continuing.  If there has not been sufficient logical fact-based analysis of the target market, the CEO/founder may be coached on how to address this.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO/founder will focus on how she will successfully compete against both current and future competitors. Investors will likely not invest.
  • The CEO/founder is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming the CEO/founder is willing. The willingness may also come about when the startup runs into difficulty or when investors require a new CEO in return for funding.

If you are the CEO of an established revenue generating company:

  • The CEO is not coachable. The external environment (customers, competitors, technology, regulation, etc.) is transforming at an ever-increasing pace.  An uncoachable CEO, who cannot learn from others and continually transform themselves is dooming the company to eventual failure. Investors and the board of directors will sooner or later (unfortunately often later) make the decision to exit the CEO. /Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the CEO needs to fundamentally rethink the target market and the solution.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO needs to understand the logic and facts as to why the company has been successful in this environment, what needs to continue, and what needs to be transformed for continued success.
  • The CEO is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming that they are willing. The willingness may also come about when the company runs into difficulty or when investors require a new CEO in return for funding. Investors and the board of directors will take actions to ensure that qualified successors are available.  The investors and board of directors will also prepare and maintain an exit plan for the CEO, which may be triggered at any point.

Traditional strategic planning dooms companies to failure.

The purpose of this article is two-fold:

  • Help traditional companies succeed when faced with successfully growing startups.
  • Help startups succeed when competing against traditional companies.

You may download a PDF of this article from: Traditional strategic planning dooms companies to failure

What is traditional strategic planning?

Wikipedia (April 20, 2020 definition)

Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.  Strategy has many definitions, but generally involves setting strategic goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources).

Advice from strategy advisors

The following are some example of the advice from advisors regarding strategic planning.  Remember, it is up to the boards of directors to approve the strategy and for the CEO and management team to execute.

McKinsey Article “How to Improve strategic planning”1

  • Start with the issues. g. ask CEOs what the issues are, ask CEOs what the 12-month priorities are, interview middle and lower management to identify the issues.
  • Bring together the right people.
  • Adapt planning cycles to the needs of each business.
  • Implement a strategic-performance-management system.
  • Integrate human-resources systems into the strategic plan.

BCG (Boston Consulting Group) article  “Your strategy process needs a strategy 2

There are five broad approaches to strategy:

  • Classical – analysis, planning, and execution
  • Adaptive – continual experimentation and scaling up of what works. General Electric was the example of a company adopting an adaptive strategy in 2011. I observed that GE’s adaptive strategy took 2011 revenues of  $146.5 billion and profits of $13.1 billion to 2018 revenues of $121.6 billion and a loss of $22.8 billion.
  • Visionary – use of imagination to create a game-changing product, service, or business model.
  • Shaping – collaboration in environments that are simultaneously unpredictable and malleable.
  • Renewal – execution of necessary radical changes when the environment is harsh or there has been a protracted mismatch between the firm’s strategy and its environment

My observations of traditional strategic plans

  • They are inwardly focused and driven by financial objectives set by the board.
  • Limited facts regarding how users/customers behave and perceive the company. However, there are lots of opinions and anecdotes.
  • Significant time is spent on vision and mission.
  • The bulk of the effort is on allocating financial resources.
  • The implicit assumption is that only need to improve what worked last year.

 What are the results of traditional strategic planning?

Few companies survive

Most public companies will not survive. 3

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.4
  • Mark Leonard, CEO of Constellation Software, said in his final annual CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.” 5

What is the approach used by successfully growing startups?

  • Focus on a target market with a large number of potential users and cash paying customers. e.g. people doing Google searches are users, people paying for ads are customers.
  • Making assumptions regarding users/customers, based on research. These assumptions include: the number potential customers with urgent needs they are willing to pay for, the benefit to the users/customers if their needs are addressed, the degree to which the benefit is greater than the current situation and the benefit achieved from competitors, and the price the customers might be willing to pay.  Document your assumptions regarding the users/customers value propositions.6
  • The most critical part of understanding is interviewing potential users/customers. This may range from 100 to 300 potential user/customer interviews.  This also provides validation that the potential users/customers believe the solution provides more value that the competition. Note that interviewing is very different from sales calls.
  • Quickly create a minimal solution and get it into users/customer hands. Keep experimenting and changing the initial solution until there are a group of delighted users/customers. Then start charging customers. At this point the solution delivery and sales process are not cost-efficient. At this point the startup doing things that do not scale.
  • Continue experimenting in stages, expanding the solution to meet a larger subset of the target users/customers, and growing the number of paying customers. The solution is still not cost efficient.
  • Implement user/customer focused metrics. There is a never-ending process understanding user/customer needs and measuring user/customer delight relative to the competition. Remember what happened to Blackberry – the number of people who needed keyboards on their phones disappeared.
  • Determine when the solution has reached the point of being able to delight the full scope of target users/customers.
  • At this point, make the solution delivery and sales processes cost efficient and rapidly grow the company.
  • Keep exploring and experimenting with new types of users/customers, new distribution channels, and new partners.
  • Resource allocation decisions driven by fact-based metrics on what large numbers of users/customers perceive as valuable. I recall reading a quote from Google’s CFO, when meeting with a product team. “Why aren’t a billion people using this? If there are a billion people using this, why aren’t we making money?”
  • The sales process is designed based on understanding users/customers and enabling them to achieve value. Most traditional sales processes are designed to sell a solution.
  • The investors, board of directors, advisory board, coaches, and mentors have skills, experience, and networks which the founders and management team lack. The founders and management team have a passion to learn and change.

Why do successful startups doom companies with traditional strategic planning?

Successful startup have a combination of factors driving long-term success while traditional companies with traditional strategic planning have a combination of factors driving long-term failure.

  • They constantly document their key assumptions and validate or invalidate those assumptions. Tradition companies don’t document their key assumptions and don’t constantly validate them, which inevitably leads to crises . “The assumptions on which the company has been built and is being run no longer fit reality.”7
  • Their investment decisions start with and are focused on enabling customers to meet urgent needs. Traditional strategic planning often starts what the company’s opinions and needs are e.g. financial objectives, vision, mission, etc.
  • They have ongoing measurement of how users/customers are achieving value. Traditional strategic planning lacks these facts.
  • They have ongoing measurement of how users/customers perceive the startup relative to competition. Traditional strategic planning lacks these facts.
  • They explicitly assume is that user/customer needs and the competition are constantly changing. Traditional companies assume that change is limited.
  • They are constantly conducting experiments with users/customers, channels, and partners to learn what is valuable to change and what isn’t. Traditional strategic planning is focused on a small number of large projects. Traditional companies don’t have a culture that enable and supports the fact that most experiments fail.
  • They have a passionate curiosity and desire to learn.
  • They minimize what they have to invent by drawing upon proven solutions which don’t impact the user/customer perception of competitive value.
  • They have investors, board directors, advisors, and coaches which provide skills, experience, knowledge, and networks the startup lacks. Traditional companies have board directors who lack skills, experience, knowledge and networks that company management lacks or is weak in.

The external environment has also changed dramatically, enabling startups to take customers from traditional companies.

  • There is unlimited capital (e.g. at least $1.5 trillion of uninvested private equity capital) available to fund startups and rapidly growing early stage companies.
  • The investors passionately support the concept of experimentation and realize that most experiments will fail and most startups will fail – a very different mindset from traditional companies
  • The investors are focused on picking talented founders and putting in additional value-added talent to support the founders.
  • It fast, easy, and low cost to get the infrastructure needed to launch a company e.g. financial systems, CRM, billing, etc.
  • It’s become easier to connect with potential customers via social media.
  • Customer needs and expectations are rapidly changing.

Your next steps.

If you are a traditional company with a traditional strategic planning process.

Assess your strategic planning outcomes:

  • The trend for your economic profit generation.
  • Revenue and free cash flow growth.
  • Market share growth.
  • New channels, new partners, new types of users and customers.

How does your planning process compare to the above approach used by successfully scaling startups?

What are your customer metrics?

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.

What changes to your planning process do you need to start experimenting with and learning from?

If you are a startup

  • Follow the approach used by successfully growing startups.
  • Ensure that your investors, board of directors, advisory board, coaches, and mentors have skills, knowledge, and networks that you lack or are weak in.
  • Start your metrics with assumptions regarding your user/customer value achievement leading indicator and your user/customer success metrics.
  • Once you have revenue paying customers, start with customer churn and customer retention metrics.
  • Understand your customer acquisition costs and lifetime customer value. You’ll need this understanding to make your startup efficient and scalable later on.

Read the research supporting the value of experimentation in the Further Reading section below

  Footnotes

1 Renée Dye and Oliver Sibony, “How to improve strategic planning”, McKinsey Quarterly, August 2007, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-improve-strategic-planning

2 Martin Reeves, Julien Legrand, and Jack Fuller November 14, 2018 BCG website, https://www.bcg.com/en-ca/publications/2018/your-strategy-process-needs-a-strategy.aspx

3 “Corporate Longevity”, Credit Suisse, February 7, 2017

4 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

5 https://battleinvestmentgroup.com/effective-directors/

6 https://koorandassociates.org/understanding-customers/what-is-a-value-proposition/

7 Peter Drucker, Harvard Business Review, November 2009, Page 90

Further reading – Research supporting the value of rapid learning and experimentation

The Marshmallow Challenge is to build the largest freestanding structure with a marshmallow on top and using 20 spaghetti sticks, one yard of tape, and one yard of string.  This is done in small teams.

  • MBA students build structures with an average height of 10 inches.
  • Lawyers average 15-inch structures.
  • CEOs average 22-inch structures.
  • Kindergarten students average 26-inch structures.

What’s the difference in behaviour between MBA students and kindergarten students?

MBA students

  • First sort through who is the leader.
  • Then identify and debate options.
  • Then agree upon a single plan.
  • Then build the structure.
  • The final step is putting the marshmallow on top.
  • Very often the structure collapses at this point.

Kindergarten students

  • No time spent determining who is the leader, identifying or debating options, or creating a plan.
  • Immediately start to build something, with the marshmallow on top.
  • Keep experimenting and learning, building multiple structures until the time is up.

Major incentives result in MBA students teams almost always building structures which collapse.

  • Incentives, without the right mindset, produce worse results.

Teams made up of CEOs and executive assistants did better than kindergarten students.

  • Achieved about 30 inches.
  • The researchers have the hypothesis that the addition of a very different skill set: facilitation and process, enabled the CEOs to perform better than they could with only fellow CEOs.

My observations

  • The passion to begin learning and experimenting as quickly as possible is critical when the team is doing something that has not be done before.
  • Understand the range of skills needed. That’s why teams of CEOs and admin assistants performed much better than CEOs alone.
  • Understand when your startup is doing something new and unknown vs something that has been done before with a base of proven knowledge. In the Marshmallow Challenge teams of architects and structural engineers did the best of all because they knew how to design weight bearing structures. Your startup must know what skills, experience, knowledge and networks are needed in management, investors, board of directors, advisors and coaches.  Your startup needs to know where the gaps are, which are critical gaps, and how to close those gaps.  Your startup will also draw upon a broad range of existing proven solutions – not everything needs to ab an innovation.

https://www.forbes.com/sites/nathanfurr/2011/04/27/why-kindergartners-make-better-entrepreneurs-than-mbas-and-how-to-fix-it/#5047f0871394

https://hbr.org/2014/12/innovation-leadership-lessons-from-the-marshmallow-challenge

Tom Wujec’s TED Talk regarding findings from the Marshmallow Challenge

https://www.youtube.com/watch?v=H0_yKBitO8M

What is corporate governance?

The purpose of this document is to enable founders, CEOs, management investors, shareholders, board of directors, and advisory boards to create a shared understand of their company’s corporate governance.

You may download a PDF of this article from:  What is corporate governance

The challenges of understanding corporate governance.

Discussion around governance is often very silo based and depends upon the specific background of the governance advisor e.g.

  • Lawyers often start with the Business Corporations Act.
  • Regulators often start with financial risk management guidelines.
  • Accountants often start with quality of financial statements.
  • Consultants have a variety of different points of view.
  • IT (Information Technology) governance advisors have an IT-centric perspective.

Etc.

What then results is a deep, detailed, siloed discussion without a broader context or showing the relationship with related points of view. After the stakeholders have heard from several different advisors, there is a confusing and disjoint picture of governance with limited shared understanding.
What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. “1

Corporate governance is built on a foundation of relationships.  This requires knowing who the relationships are with and managing those relationships.

This definition has 4 other components:

  • Decision making i.e. setting objectives and approving action plans.
  • Action plans i.e. means of attainting those objectives.
  • Performance monitoring of the objectives, action plans, and communications.
  • Two-way communications and understanding among stakeholders, regarding objectives, action plans, and other information.

What is the purpose of the corporation?

Is the purpose of the corporation to maximize money for shareholders? Is the purpose to make as much profit as possible?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”2

 The purpose remains fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. 3

 What is the purpose of corporate governance?

The purpose of corporate governance is to enable the achievement of the purpose of the corporation.

Corporate governance manages the broad set of conflicts of interests which arise. The OECD governance definition starts with relationships: within corporate leadership, as well as stakeholders and third parties.  Any relationship has the potential for conflict of interest, because parties may have different or conflicting interests.  For example, how should both profits and costs be allocated among: CEO, C-Suite, shareholders, employees, other stakeholders, and third parties including society, especially in cases of poor profits or losses.

Perhaps the greatest conflict of interest is deciding the degree to which the corporation extracts value from society versus creating value for society. An example is the decision on whether to whether to replace employees with lower-cost offshore staff which may benefit the off-shore communities or retain the employees in order to sustain local communities.

A common understanding of values, morals, and ethics is needed, to enable decision making.

The Corporate Governance Journey

I outline some of the corporate governance concepts and challenges by an illustrative journey, starting with three founders and ending with a large publicly listed company. Every company will have a different journey, and none will be the same as this illustration.

The initial objectives include;

  • Targeting a large marketplace with customers that are willing to pay for a solution.
  • Delighting revenue generating customers and users by enabling them to achieve significantly more value than the current situation or competitors.
  • Having the right roles and right talent at each point in time to successfully carry the business forward for the next 24 months.
  • Honesty, integrity, and transparency of the founders.

The action plans are focused on achieving the above objectives.

Performance monitoring includes:

  • Constantly validating the number of customers who have a need they are willing to pay for. Needs may be changing. E.g. at one point in time, most people needed cell phones with keyboards.
  • The revenue generating customers and users delight in the solution and value they are achieving. The degree to which customers obtain more value from the company’s solution than from the competition.
  • The value that roles provide and the value that people in those roles provide. This includes: investors, advisors, coaches, mentors, board directors, management, staff, partners, and suppliers.
  • Morals, values, and ethics – including honesty, integrity, and transparency.

Two-way communications of objectives, action plans, and performance monitoring occurs among all the stakeholders, thus enabling a shared set of facts, knowledge and beliefs.  Every stakeholder knows how they are contributing to the value achieved by customers.

The way to read the following journey is that any governance behaviours at a stage, continue in following stages unless other stated.

Three founders have an idea.

  • They decide to work together. The purpose of the company is to solve an urgent need of hundreds of millions of people, especially in the third world.
  • The founders agree that all decisions will be unanimous. This is documented in the decision-making document. This decision-making document may be included as part of a founders agreement.
  • The initial objectives reflect the purpose. The assumptions are that meeting the objectives and moving towards the purpose will enable revenue growth and financial success.
  • Plans are largely oral.
  • Each founder knows what the others are doing, because they are communicating throughout every day.

The founders incorporate under the Canada Business Corporations Act.

  • Some or all of the founders become board directors. Directors need to be elected by shareholders. The founders decide to split equity equally 1/3 each.  There is a unanimous shareholder agreement which clearly defines which decisions are made by shareholders. The decision-making document is revised to reflect which decisions are made by shareholders and which by board directors.  All other decisions continue to be made by the founders.
  • The founders decide whether the social purpose of the corporation requires them to become a B corp.

The founders create a website

  • The website describes the team. One of the founders is described as the CEO. Other founders are also described.  The decision-making document is revised to reflect which decisions continue to require unanimous approval.
  • Plans are written down, using project management software and other tools.

The founders get money from their friends and family

  • Some money is provided as covenant free loans. Some money is provided as equity, but voting rights are constrained.  There may be a voting trust. The unanimous shareholders agreement is revised. The founders begin to focus in different areas and make decisions on their own. The decision-making document is revised.
  • The founders send a monthly communications update to all investors, who are family and friends at this point.

The founders get money from AIs (angel investors)

  • The founders are still focused on the purpose. AIs agree with and support the purpose. The founders communicate documented action plans and objectives to AIs. AIs have made information reporting requirements (including tacking of actual results to plan) as part of their investment.
  • Objectives are set for customer satisfaction. The main objective is to have a small group of revenue generating customers who are delighted with their initial version of the solution. There may be an AI on the Board of Directors.  Decision making at the board becomes more complex.  The personality of directors has major impact on decision making – a strong personality with limited equity may be able to drive the board.  AI investors may have certain decisions under certain conditions. The decision-making document is revised to reflect the current situation.
  • Angel investors only invest if they believe in the founders honesty, trust, and integrity.
  • The unanimous shareholder agreement may be updated or replaced.
  • The founders send an enhanced monthly communications update to all investors.
  • The founders decide whether or not to bootstrap growth or obtain funding from VCs (venture capitalists). This decision is reflected in the 24-month cash flow forecast, by month with monthly milestone assumptions.  There is a supporting forecast for years 3-5, by year.

 The founders get money from VCs (venture capitalists)

  • The VCs are focused on making money by enabling the company to grow its revenue substantially. Understanding the long-term market potential is key. The purpose of the company is unchanged.  Many people in the world who need the solution but who would not make material profit for the company are excluded in the short-term objectives.
  • The VCs objectives focus on ensuring the company leadership has the right skills and experience. Coaches and mentors are put in place as well as an advisory board to assist the CEO.  New talent is brought into leadership.  Some of the founders may exit or assume supporting roles.
  • VCs will also provide advisors and board directors who have skills, experience, networks the founders lack.
  • The VCs have certain decision-making rights and veto powers. There will be a VC on the board of directors. VCs are deeply involved with management. 63% of VC funds will interact with the company at least once a week.4 Decision making often occurs outside of board meetings. Significant, ongoing reporting requirements to VCs.
  • The decisions which require shareholder approval or board approval are clearly documented. All other decision may be made by the CEO, who may in turn delegate decision-making authority.  The leadership team members will be making decisions, as will managers and staff.
  • There may be debt financing. Covenants may provide lenders with information rights as well as decision-making rights, in certain circumstances.
  • The CEO begins to send a monthly communications update to all potential investors.
  • The CEO puts in place two-way communications plans with a broad set of stakeholders, including all employees and contractors.

The founders get money from PE (private equity)

  • PE is focused on maximizing exit value in 5-7 years time. Every major decision is focused on maximizing this value.  PE still has a very long-term focus on total market size. The company will only be attractive to future buyers if there is still major growth potential at the exit time.
  • PE must approve the major decisions.
  • Every three months PE assesses whether there is the right CEO in place. The exit in 5-7 years allows little time for a poor performing CEO.
  • PE provides advisors and board directors with skills, experience, and networks the CEO and management team lack.

The company does an IPO and is listed on a major stock exchange

There is a 50% chance that this new S&P 500 company will disappear within 10 years.5  What governance changes have occurred which have put the company on a path to failure?

  • The founders have exited. Professional management and professional directors have joined. The original purpose of the company is forgotten. The purpose of governance has been forgotten.
  • The objectives are now focused solely on financial returns and shareholder value. There is no longer a focus on enabling customer perceived value.  There are no objectives regarding the value that roles and people provides.  Morals, values, and ethics objectives are secondary. E.g. the code of conduct, and all other company policies are written to minimize legal liability of management and the board directors.
  • Two-way communications with many stakeholders are very limited.

The following are some of the specific governance changes.

  • The planning process driven by meeting customer needs of a large number of customers is dropped and replaced by a traditional strategic planning process. (e.g. Vision, mission, objectives, strategies).
  • Performance reporting has dropped all customer satisfaction metrics and all metrics regarding the value customers are achieving from the company. There is little knowledge or understanding of the customers.
  • The two-way communications with shareholders and other stakeholders have collapsed. 95% of employees are not aware of or do not understand the strategy.6 An even greater percentage of employees have little understanding of how they help meet customer needs and provide value to customers.
  • The director selection process is flawed. The majority of directors do not understand the company’s strategy, marketplace, or how it creates value.7 The directors no longer have skills, experience, and networks which the company leadership lacks. “Directors are not liable if they exercise the same degree of care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances.”8 The director decision with the greatest impact on company value is the succession planning, appointment, and termination of the CEO.  No director has this experience.  The directors rely on recommendations from outside consultants and the HR leader to make CEO decisions.
  • Board of directors mandate specifically excludes customer focus, value creation, and any board accountability for the board’s performance or the company’s performance. The directors as advised to carry out their fiduciary duty, which is interpreted to mean maximize profits and share prices.
  • The initial focus on honesty, integrity, and transparency has changed. The culture of the board of directors, especially values, morals, and ethics permeates down through the company.
  • Shareholders no longer make material decisions, have little two-way communications with the company. Majority of the shares are held by ETFs, pension funds, sovereign wealth funds, and family offices. Shareholders have a wide variety of expectations and are no longer aligned.
  • Governance was previously driven by experienced leaders and advisors who were focused on growth and talent. Governance is now driven by a variety of advisors, each with their own point of view, with few advisors focused on solving urgent needs of a large number of revenue generating customers.

Your next steps

Your next steps depend upon the stage of your company.

Step #1 Document the current understanding of governance.  This requires asking a number of stakeholders, which may include: founders, CEO, leadership team, employees, the board of directors, the advisory board, investors, and shareholders. Do not just refer to existing documentation.  Asking people reveals what people actually understand.

  • What is the purpose of the company?
  • What is corporate governance?
  • What is the purpose of corporate governance?
  • What are the key objectives and plans to achieve the purpose of the corporation? Do these objectives include the skills, experience, and networks required for board directors, advisory board members, and investors?
  • Who makes the decisions as to what the key objectives and plans should be?
  • What is the two-way communications process with which stakeholders regarding the above 5 points?
  • What is the performance monitoring process regarding the achievement of objectives, plans, decision making effectiveness, and effectiveness of the two-way communications?

What are the results of the current performance monitoring process?

Step #2 What are the implications of your findings from Step #1

Step #3 What needs to change and what is the value of making those changes?

 Footnotes:

1 Based on “G20/OECD Principles of Corporate Governance”, 2015  I added the concept of third parties, https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf

2 https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

 3Page 17 The five most important questions you will ever ask about your organization (20008)   Book Summary   by Peter F. Drucker,  Jim Collins et al, I adapted

4 How do venture capitalists create value? https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-create-value/

5 https://www.innosight.com/insight/creative-destruction/

 6 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

 7 Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

8 Government of Canada, Corporations Canada website https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06643.html