Author: Tom Koor

Tom Koor

What is the purpose of your company?

Purpose of this article

This article enables the board of directors and C-Suite to begin the discussion regarding company purpose.

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2021/03/what-is-the-purpose-of-your-company.pdf

What is purpose?

Purpose answers the question: Why does the company exist?

  • Without cash paying customers, the company does not exist. One aspect of purpose is to address the problems and needs of cash paying customers who are able to and choose to buy the company’s solution.
  • The company also impacts other stakeholders in its ecosystem which includes overall society. This may include providing value to them and extracting value from them. The stakeholders can also impact the value of the company. Some stakeholders may deny the company its social license to operate.
  • What society needs does the company meet?
  • Why should employees work for the company?

What are some perspectives regarding purpose?

  • Only 7% of Fortune 500 CEO’s believe their companies should mainly focus on making profits.1
  • The top two employee priorities in a McKinsey survey were: contributing to society and creating meaningful work. These priorities were the focus of only 21% and 11% of respective company purpose statements.1
  • 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
  • U.S. Business Roundtable in 1981 “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.”4

What is the value of purpose

Boston Consulting Group analysis revealed that the majority of companies with high purpose scores achieved above median long-term total shareholder returns.  The majority of companies with low purpose scores achieved below median long-term shareholder returns.3

What are the challenges of gaining value from purpose?

  • Company purposes may be “…little more than catchy slogans and posers….so generic they could apply to just about any company….”4
  • There are different legal and regulatory requirements around the world. e.g. The UK Corporate Governance Code states: “To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit.” “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.” “ The board should establish the company’s purpose, values and strategy……”
  • What to do the legal and regulatory requirements actually mean when it comes to decision making by the board of directors and officers? The Further Reading section below has the “duty of care of directors and officers” from the Canada Business Corporations Act.
  • There may be multiple purposes for a multi-national or multi-business unit companies.
  • In a private company, the shareholders agreement may restrict a number of key decisions to the shareholders rather than the board of directors or C-Suite.
  • Stakeholders may have different perceptions of what is value and how the company should allocate this value among stakeholders. It may not be possible to meet the expectations of all stakeholders.  There could be situations where a company decision or action does not satisfy any stakeholder.

How does a defined purpose enable a board of directors and C-Suite make difficult decisions?

The following are just a few examples of difficult decisions:

  • Should employees be paid a living wage e.g. live above the poverty line in their community?
  • What should the employer in a single company town do when the plant is not meeting profit objectives, and the middle aged work-force has no other options for employment?
  • How much employment should be shifted to lower paid off shore staff?
  • How much work should be done by lower cost contractors rather than employees?
  • How should the companies profit be allocated among: employees, C-Suite, and shareholders?
  • Should the company be lobbying the government to change laws to reduce the companies taxes or reduce environmental standards?
  • Should the company be structured to minimize or eliminate taxes?
  • etc.

Purpose is tied to values, morals, and ethics

The decision making and behaviour of the board of directors and C-Suite reflects both purpose and their values morals, and ethics.

 What are your next steps?

  • Identify the stakeholders. Interview and survey stakeholders to determine how they perceive the company’s purpose, values, morals, and ethics. How do stakeholders perceive the company relative to other companies?  How has this perception impacted stakeholder actions?
  • Collect the currently documented purpose, values, morals, and ethics. Where do the board of directors agree and disagree on these?
  • Analyze key historical decisions of the board and CEO to identify the degree to which they demonstrated purpose, values, morals, and ethics. How do the historical decisions and behaviours of the board support the purpose, values, and morals.
  • Create your own list of difficult decisions. Discuss how each board director and C-Suite member would make each decision.

Footnotes

1 Purpose: Shifting from why to how, McKinsey Quarterly, April 2020

https://www.mckinsey.com/business-functions/organization/our-insights/purpose-shifting-from-why-to-how

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

3 Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

4 Purpose with the power to transform your organization, Boston Consulting Group, May 2017

https://www.bcg.com/en-ca/publications/2017/transformation-behavior-culture-purpose-power-transform-organization

5 UK Governance Code 2018

https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

Further reading

 Canada Business Corporations Act – 2021 Jan 28 Duty of care of directors and officers

122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

 Best interests of the corporation

(1.1) When acting with a view to the best interests of the corporation under paragraph (1)(a), the directors and officers of the corporation may consider, but are not limited to, the following factors:

(a) the interests of

(i) shareholders,

(ii) employees,

(iii) retirees and pensioners,

(iv) creditors,

(v) consumers, and

(vi) governments;

(b) the environment; and

(c) the long-term interests of the corporation.

Tom Koor

Startup terminology and metrics. V3

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.

There is no single set of commonly agreed upon definitions.  Many startup participants use the same words and acronyms to mean different things.  E.g. many founders I’ve met say that they have an MVP (Minimum Viable Product), when what actually exists is some partially written code.

This article is not intended to be comprehensive in breadth or depth nor to explain how to create and use the terminology and metrics.

You may download a PDF of this article from:  https://koorandassociates.org/wp-content/uploads/2021/03/startup-terminology-and-metrics-v3.pdf

How to read this article

Section 1 General concepts

Section 2 Finding a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.

Section 3 Customer and market metrics

Section 4 Some startup financial metrics

Section 5 Financing rounds

Section 6 Type of financing

Section 7 Investment fund reporting metrics to their investors of limited partners

Section 1 General concepts

What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.

Startups are not building a solution.  They are building a tool to learn what solution to build.  (Lean Analytics – Use data to build a better startup faster (2013) by Alistair Croll, Benjamin Yoskovitz, O’Reilly Media, Sebastopol California Page 41)

What is a business model?

A business model describes how a company creates value for itself while delivering products or services to customers.  Who are your target C&U (Customers and Users)? What C&U  problems are your solving? What C&U needs are you addressing?  What benefits and value are you enabling customers to achieve? What are the human and technology resources needed?  What are the channels and partnerships?

Customers are those who give the company cash.  Users are those who use and interact with the solution.  Google is an example.  I use Google but don’t pay cash to use it. Advertisers pay cash to Google.

Accelerators, Incubators, and Venture Studios

Accelerator

  • An Accelerator is a company or organization that puts a start-up company (which already has a Minimum Viable Product) through a very structured 3–4 month process. This process has the goal of quickly growing the size and value of the start-up to enable future funding.
  • The Accelerator puts companies through a vetting process so that higher likelihood of success companies are made available to investors. This reduces investors’ due diligence time and costs.
  • The Accelerator may take a small financial interest in the company in return for its assistance.
  • Mentorship is provided by experienced start-up executives, investors, and others.

Incubator

An Incubator helps take a start-up to the point where there is an MVP (Minimum Viable Product).

The characteristics of an Incubator include:

  • Co-located office space with other start-ups;
  • Links to investors;
  • Access to lawyers;
  • Provides coaching and mentoring, via successful start-up executives and consultants.
  • Networking, based on all of the above

University affiliated Incubators usually do not take an equity interest.  Investors may do so.  The process takes 12 to 24 months, with the pace set by the founders. Once there is an MVP, then an Accelerator may work with the start-up.

Venture Studio

A Venture Studio is an organization that creates startups, typically by identifying a market need, assembling the initial team, and providing the capital to launch.  The team must still persuade the venture studio to provide capital.

Section 2 Finding a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.

Understand the potential customers and users before building a solution.

The business model canvas

A business model canvas is a one-page document which easily defines and communicates the business model.  There are 9 components to the business model canvas: customer segments, customer value proposition, customer relationships, channels, key partners, key resources, key activities, cost structure, revenue streams.

Value proposition

This is the customers and users perception of value.  What are all the financial and non-financial benefits achieved? e.g. time savings, convenience, status, reducing negative emotions or risks, benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?

Customer journey map

The customer journey map is a visual representation of the customers’ experiences with your company across all touchpoints. Customers interact with via social media, email, live chat or other channels, mapping the customer journey out visually helps ensure no customer slips through cracks. The journey also illustrates the customer interaction with influencers and other who impact the customer. The following are some examples of customer journey maps.

https://blog.uxeria.com/en/10-most-interesting-examples-of-customer-journey-maps/

Customer engagement

Customer engagement is the relationship and interactions  between customers (existing and potential) and the company.  Engagement may include: useful content on the website, newsletters, interviews, surveys, etc.  Engagement continues and improves throughout the life of the company.

Ethnographic research. 

Ethnography is the branch of anthropology that involves trying to understand how people live their lives. It outlines the context in which customers would use a new solution and the impact that solution might have on their lives.

Thematic Analysis

Thematic analysis is a method of analyzing qualitative data such as interview transcripts. The researcher closely examines the data to identify common themes – topics, ideas and patterns of meaning that come up repeatedly. There are two approaches:

  • Inductive – the data validates or invalidates assumptions
  • Deductive – the data identities the finding

Wireframe

Provide a visualization of the potential user/customer interface of what will the customers/users will perceive in the MVP (Minimum Viable Product).  Note that customer/user interfaces are evolving to include voice interaction, hand gestures, augmented reality, neural monitoring, etc.

The wire frame has no functionality.  It may even be a PowerPoint slide.

Proof of Concept

The purpose of the proof of concept is to gain customer/user and domain expert feedback to validate specific critical assumptions of the MVP.

The very limited functionality is intended to validate customer problems and needs.

 Functional Prototype

The hardware or software prototype is only the hardware or software components of the MVP. The prototype’s purpose is to enable learning from customers/users and support demonstrations to customers/users.

This functionality is intended to validate customer problems, needs and potential benefits.

 Pilot Solution

This is the MVP, including onboarding, customer support, and exiting.  The customer is not paying for the pilot.  The two-fold purpose of the pilot is to identify any issues which prevent customer/user problems and needs being solved and to identify any issues which prevent the customer/user from being delighted. The pilot is providing specific feedback on the value the customers/users are achieving. The pilot helps determine what price should be charged.

This begins the validation of the actual benefits a customer is achieving in addition to further validation of customer problems and needs.

 MVP

This should really be called Minimum Viable Solution. A product or service with just enough features to have delighted early cash paying customers by enabling them to solve some urgent problems or needs, and to provide customer/user feedback for future development.  The MVP includes the full solution, including onboarding, customer support, and exiting. What the customer does not see or interact with (i.e. all the behind the curtain resources and activities) will likely be inefficient, have manual components, technology that is temporary, etc.

Customers/users determine whether or not there is an MVP, NOT the startup team.  If the MVP does not solve some core customer/user problems, needs, and meet expectations, there isn’t an MVP.  The startup needs to learn from customers and users what needs to change to enable an MVP.  It may take several attempts before there is an MVP.

The MVP validates the overall customer journey with the solution, starting from onboard to exiting and including customer service.  What the customer perceives as fatal flaws at any point in the journey may result in the customer neither using nor recommending the solution.

Product market fit

You get to product/market fit by adding more features to the initial MVP until there are a large number of potential customers and users.

The facts and analysis show that:

  • There is a repeatable, scalable, and profitable business model.
  • There are a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.
  • The customers and users believe you have a better value proposition than the competitors.

You know you have product/market fit if:

  • Your customers are so delighted that they are recommending it to others.
  • Your customers would be extremely disappointed if your solution disappeared.
  • Your customers can describe the big problem they had and the big benefit they achieved from your solution.
  • There is clear demand in the market place for your solution.
  • You are clearly and obviously differentiated from competitors in terms of the value customers achieve.
  • There are a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

You do not have product/market fit if:

  • Your customers are not recommending you to others.
  • Your customers would not be extremely disappointed if your solution disappeared.
  • You customers cannot describe the big problem they had and the big benefit they achieved from your solution.
  • The marketplace is not demanding your solution. You have to persuade/educate your customers that they have a big problem with a big opportunity.
  • You are not clearly and obviously differentiated from competitors in terms of the value customers achieve. Your only differentiation is price.
  • There are a not large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

Your metrics, facts and analysis show that:

  • There are a large number of potential customers who believe their problems and needs are urgent enough to buy your solution, and they can also afford your solution.
  • The customers and users believe you have a better value proposition than the competitors.
  • The Net Promoter Score is excellent.
  • Churn is low and retention is high.
  • There is a metric for new customer value achievement  (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • Measuring and analyzing new customer value achievement metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).

Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” From:  On product/market fit for startups

Section 3 Customer and market metrics

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

Customer metrics

New customer value achievement leading indicator. This measures the customer actions which are assumed to indicate that the customer is achieving value.  (e.g. for Slack it was 2,000 team messages sent within 60 days).

New customer success metric . This is the % of new customers that are assumed to be achieving value, based on their actions. E.g. The metric could be:  % of new customers achieving new customer value achievement leading indicator within 60 days).

Market Size Metrics

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. The number of customers demanding a solution will be fewer than the number of customers that have a problem or need.
  • 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, their problems and needs. Then quantify the subset of customers believe they have an urgent problem for which they are demanding a solution. What will be 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 current geographies, distribution channels, and partners, and the startup’s ability to deliver and support their solution. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geographies, the number of distribution channels and partners, and the volumes from each distribution channel and partner.

What is SOM (Serviceable Obtainable 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.

Section 4 Some startup financial metrics

Free Cash Flow

Free cash flow = EBITDA, subtracting all cash commitment, subtracting non-cash items, subtracting increases in working capital

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

EBITDA = (Capital expenses + Net Interest Expenses + taxes + non-cash items + increase in working capital)

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 the amount of time before you run out of cash.  There are multiple runway scenarios e.g. revenue and expenses remain constant; forecast revenue vs forecast expenses, etc..  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 month 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 do parts of the salary belong?  (i.e. QuickBooks class)

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

Section 5 Financing Rounds

General concepts

  • The startup may bootstrap (i.e. no equity or debt financing other than friends and family) or go through one or more stages of raising external financing.
  • Cap table. The cap table tracks the equity ownership of all the company’s shareholders and security holders and the value assigned to this equity. Cap tables need to be comprehensive. They should include all elements of company ownership such as convertible debt, stock options and warrants in addition to common and preferred stock. The cap table also forecasts the future equity ownership, through various fundraising rounds leading up to exit. The cap table is more comprehensive than the balance sheet. Anything that may results in equity ownership is included e.g. SAFEs are a contract but may result in equity ownership.
  • Term sheet. The term sheet is a largely non-binding document. It enables the startup leadership and investors to focus on the important issues and helps to minimize misunderstanding or problems when the complex and legally binding closing documents are drafted. The term sheet may outline the due diligence process, the timetable for the transaction, the due diligence process, any conditions to be met before beginning to draft binding legal documents, key legal principles, and any binding terms e.g. confidentiality.  Elements of the term sheet may include: company details (including current shareholders and current directors), company valuation, how much money the company seeks to raise (number of shares and at what price), investor information rights, any rights for certain founders or investors to remain as directors or have certain decision rights, any rights investors will have regarding specific company decisions, what the funds will be used for, any restrictions on what the founders or company may do, what rights to sell or transfer shares, co-sale terms (e.g.  If one of the shareholders sold their shares, other investors could be included and dragged along able to sell their shares), what happens when the company is sold or wound up, what the pre-money valuation of the company is, size of the option pool, any anti-dilution privileges, board size and how directors are appointed or elected, founder vesting of shares, who pays for the legal expenses, any rights to future investment
  • Pooling Agreement (sometimes known as voting trust) The Canada Business Corporations Act defines pooling agreement as “written agreement between two or more shareholders may provide that in exercising voting rights the shares held by them shall be voted as provided in the agreement.”
  • Subscription Agreement. The subscription agreement is the agreement between the company and the investor in a private placement of debt or equity. The agreement sets out the terms and conditions of the investment, the purchase price, the representations and warranties of the parties and certain covenants. The company obtains relevant information from the investors to ensure they meet the criteria of the applicable exemptions from the prospectus requirements of Applicable Securities Laws.
  • USA (Unanimous Shareholders Agreement) The Canada Business Corporations Act defines a USA as “…written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation.” All shareholders must sign and be part of the USA. The areas covered by a USA include: what decisions are made by shareholders, how do the shareholders make decisions, how are disputes resolved, what is the process and constraints regarding share transfers, how the shareholders extract value from their investment.

Five potential financial rounds

#1 Friends and family

Most early startups depend upon founders, friends and family for funding.

#2 Angel investors, pre-seed investors.

These are the first investors outside of friends and family

#3 Seed investors

These are the second round of investors, after pre-seed investors

#4 Series A, B etc. investors

These investors are funding the rapid growth of the company

#5 Longer term

  • Company is bought and merged into an existing company;
  • Long-term private equity investors; or
  • Public markets

Section 6 Types of financing

There are many types of financing:

  • Equity e.g. common stock, preferred stock.
  • Debt.
  • Convertible debt.
  • SAFEs (Simple Agreement for Future Equity). The SAFE is a contract which gives the investor the right to purchase stock in a future equity round (should there be one) subject to the terms and conditions in the SAFE contract.
  • Government grants, loans, tax credits.
  • Funding for research.
  • Paid pilots.
  • Profits and revenue sharing.
  • etc.

Section 7 Investment fund reporting metrics to their investors or limited partners

Investors should understand the funds reporting and forecasts, especially whether or not unrealized gains are included.

DPI (Distribution to Paid in capital):  Cumulative distribution to investors  /capital contributed by investors. Including management fees and expenses.

MOIC (Multiple On Invested Capital) Cumulative realized and unrealized value (an estimate)  of the investment / capital invested by the fund.

TVPI (Total Value Paid In capital): Cumulative distribution to investors + unrealized value (an estimate) /  capital contributed by investors. Including management fees and expenses.

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.

Further Reading

What does the startup journey look like?

https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/

Tom Koor

Do you need a Strategic Advisor?

When do you need a Strategic Advisor?

  • When the industry and functional experts have not successfully addressed critical CEO or board chair issues which impact the entire company.

What are the benefits of a Strategic Advisor?

  • There is a broad range of critical CEO and board chair issues which impact companies. There are major financial or non-financial opportunities or risks at stake.

How do you recognize that you can benefit from a Strategic Advisor?

  • You have a critical decision or problem that significantly impacts your company’s long-term value growth or value preservation. You may be unclear as to the core problem, which questions to ask, and what the solution could be.
  • You are accountable for the results and require deep understanding, because you are the one who must present and explain your proposed actions.
  • You will personally devote significant time to your issue.
  • The decisions or issues may be new to you and your company or you have unsuccessfully addressed these decisions or issues in the past.
  • You recognize that your past experience, skills, and ways of thinking and making decisions may be of less value in today’s turbulent and rapidly changing world. You are willing to learn and try new things.
  • You need someone to help you and your team think through what to do.
  • You have either hired or met with traditional experts, who have not been able to help you make your decision or solve your problem.
  • You may need help selecting traditional experts and in co-ordinating their actions. A strategic advisor is not a replacement for the skills and knowledge of traditional experts.

How do you work with your Strategic Advisor?

  • You may have an hourly meeting once a week. Sometimes meetings are every 2-4 weeks or for 2 hours.
  • The agenda is jointly set. Albert Einstein supposedly said ““If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and five minutes thinking about solutions.” Einstein believed it was it was key to focus on the right problem and understand the problem. The final agenda item is your action plan subsequent to the meeting.
  • On occasion your Strategic Advisor may review material you prepared, prior to a meeting.
  • You work with your Strategic Advisor on a retainer basis.

Tom is a Strategic Advisor.  Click here to contact Tom.

The following are links to sections of my website.  Each section contains my points of view.

Avoiding business failure

The startup journey

Understanding customers

Investor management

Corporate Governance

Creating business value

Strategy and strategic planning

Business transformation

Values, morals, and ethics

Charitable support – the charities I support.

Tom Koor

Leaders don’t understand the strategy for creating value.

Purpose of this article

The purpose of this article is to help board directors and the C-Suite determine if they understand: the strategy, how value is created, and industry dynamics.

You can download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2021/02/leaders-dont-understand-the-strategy-for-creating-value.pdf

Most company directors do not understand: the strategy, how value is created, and industry dynamics.

  • A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said they strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.1
  • I believe this lack of understanding reflects the lack of understanding of the CEO and C-Suite.
  • Directors are not stupid and lazy. The CEO and C-Suite are not hiding things from the board directors.  The leaders simply lack the company facts and knowledge to enable their understanding.

 Leaders’ lack of knowledge results in few major companies having sustained value creation.

  • 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.2
  • Less than 13% of global companies had sustained value creation in the 1990s.3
  • 12% of public companies had sustained value creation from 2002 to 2012.4
  • Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “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

Leaders’ lack of knowledge results in most companies not surviving.

Few major companies survive:

  • 16% of major companies in 1962 survived until 1998.6
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.6
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.7
  • 50% of the S&P 500 will not be on the list in 10 years’ time.8

 Most public companies will not survive.9

  • 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.

Companies do not recover from crisis.10

  • 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
  • At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.

What are the missing facts and knowledge?

The following outlines some critical facts and knowledge the leadership must have.  This is not intended to be a comprehensive list.

#1 What is value?

  • Define value and how it’s measured.
  • In today’s purpose driven work, there are multiple stakeholders with different types of value expectations.
  • What is value to the customers? What problems and needs are urgent enough that they are both willing and able to pay for a solution?
  • Another value measure is economic profit(total profit minus cost of investor and lender capital) as a percentage of invested capital.
  • A critical value driver is the number of customers who believe they have an urgent problem or need that they are willing and able to spend money to address. Do these customers perceive that your company’s solution provides more value than the competition?

#2 How does the company create and preserve value?

There are two major ways the company enables value creation and preservation.

  • The first way is growth in the number of customers, growth in the number of problems and needs being addressed, and growth in what the customers are both willing and able to pay. The customers must perceive your company has a better solution that both the competition and the status quo.
  • The second way is retaining customers by ensuring they don’t perceive they’d be better off with a competitors solution or no solution at all.

Financial and human capital is allocated towards value growth initiatives and value preservation activities.

#3 What is the strategy?

The strategy must describe what is, how value is being created and preserved.

  • The customers, and their perceived urgent problems and needs for which they are willing able to spend money to address. How many of these customers are there?
  • How do customers perceive the competition?
  • Where is the financial and human resource capital being deployed?
  • What are the specific growth initiatives? What is the expected impact on customers and their spending?  What is the economic profit expected from each initiative?  Who within the company is accountable for: the changes in customer behaviour and the economic profit?
  • What capital and human resources are devoted to customer retention? What customer perceived weaknesses would be addressed? How was it validated that these perceived weaknesses would change customer buying behaviour? E.g. My wife and I own Apple iPhones which are expensive.  But that is not a competitive weakness.  We’re not going to buy a $100 Android phone.
  • What are the future scenarios? It is impossible to predict the future, therefore what is the company’s approach for being successful in a variety of emerging future scenarios?

#4 What are the industry dynamics?

First look at the historical trends leading up to the current situation:

  • How have customer problems and needs changed?
  • How has customer perception of your company changed relative to the competition over the years? What have competitors done to change this perception?
  • How has the ways in which customers interact with your company changed?
  • What new entrants have come in? Startups? Major players from adjacent markets?
  • How have market sizes changed? i.e. the number of customers?
  • How has the competition changed in terms of Mergers & Acquisitions or exits?
  • Why have competitors failed?
  • How have your benchmarking comparisons changed?

Then look at the external trends

It is impossible to predict the future, therefore you must consider scenarios, not just a single forecast.

  • What are the trends? Technology, Demographics? Economic? Regulatory?  Public expectations of company behaviour?  Political? Talent availability?
  • What are the implications of these trends? What will be the future problems and needs customers will be willing and able to spend money to address? How will customers expect to interact with your company? (I.e. how will the customer experience change)? How big will the market be? (i.e. how many customers?). Who will be the new competitors (i.e. startups, new entrants)? How will existing competitors respond?  What will be the M&A activity? How should you perform in your future benchmarking?

Your next steps

  • Build a list of questions, relevant to your situation, using the above questions as a starter.
  • Review your strategic plan including the supporting appendices.
  • What are the facts? What are the unvalidated assumptions?
  • What are the long-term implications of your findings?
  • What changes are need to your planning, monitoring, and risk management processes?

Footnotes

1 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, 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

2 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

3 “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

4 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

5 https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

6 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

7 “Unstoppable” by Chris Zook, 2007, page 7

8 “2018 Longevity Report” by Innosight Consulting

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

10 “The founders mentality”, by Chris Zook and James Allen, 2016

Further reading:

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

Tom Koor

What are your company’s values?

What is the purpose of this article?

Outline a list of questions to help discuss what the purpose of company values are and what should be the values.

You can download a PDF of this article from:

Click to access what-are-your-companys-values.pdf

What are values?

Values are the rules by which people make decisions about what they should or should not do.

Further reading:

Values, morals, and ethics  https://koorandassociates.org/values-morals-and-ethics/

Questions to consider

  • How do the board of directors, C-Suite, and every employee use your company values to guide decision making and behaviour?
  • How do your company values compare to the U.S. army values? https://koorandassociates.org/further-reading/values-u-s-army/
  • How do your stakeholders (e.g. employees, customers, suppliers, partners, community and society) perceive your company values?
  • How do your company values impact employee hiring and retention?
  • How do your company values impact customer recommendations any buying actions?

Your next steps

  • Survey your stakeholders to see how they perceive your company values. Determine the actions and behaviours which result in those stakeholder perceptions.
  • Compare the stakeholder perceptions to the documented values.
  • What are the gaps?
  • What are the implications of the gaps?
  • What is the impact of addressing some or all of the gaps?

 Further Reading

Why are values, morals, and ethics important? https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

How to assess director and CEO candidates regarding values, morals, and ethics https://koorandassociates.org/values-morals-and-ethics/how-to-assess-director-and-ceo-candidates-regarding-values-morals-and-ethics/

Tom Koor

How do you succeed with transformation? V2

The purpose of this article

The purpose of this article is to outline an overall framework to consider in any type of transformation.  This article does not discuss the details of each specific type of transformation.

You may download a PDF of this article from:

Click to access how-do-you-succeed-with-transformation-v2.pdf

What is the structure of this article?

  • What is business transformation?
  • What are the symptoms of a need for transformation?
  • What is driving the need for transformation?
  • Transformation usually fails.
  • What needs to be considered when setting the targets and outcomes of transformation?
  • What are some general transformation principles?

 What is business transformation?

Transformation is described in terms of the changes to the company’s business model. The business model describes how a company creates value for itself while delivering products or services to C&U (Customers and Users).

 There are five types of transformation. Each type of transformation will have its own specific approach and objectives, reflecting the need to address both symptoms and the underlying driving factors.

#1 Restructuring

#2 Turnaround

#3 Operational Transformation

#4 Business Model Transformation

#5 Strategic Transformation

Your corporation may need components from different types of transformation.

Startups often pivot, which may be a business model transformation or a strategic transformation.

Further reading:

What is business transformation?

https://koorandassociates.org/business-transformation/what-is-business-transformation/

What is a business model canvas?

https://koorandassociates.org/the-startup-journey/what-is-a-business-model/

 What are the symptoms of a need for transformation?

The obvious facts demonstrate that the company is in crisis. E.g.

  • Losing customers or losing market share. Net Promotor Scores dropping.  Customer churn increasing and customer retention decreasing. The lifetime value of new customers is exceeding new customer acquisition costs.
  • Benchmarked performance is poor compared to competition.
  • Debt and interest payments are causing major losses and negative free cash flow. The company is profitable with positive free cash flow, if debt and interest payments are not considered.
  • The company is unprofitable with negative free cash flow, even if debt and interest payments are not considered.
  • Employee turnover is unacceptable.
  • Employee ratings of the company are unacceptable.
  • Not being able to meet payroll or meet covenant requirements in financing.
  • The overall market size is shrinking.

What is driving the need for transformation?

There are four core factors driving the need for transformation:

  • The customers and users don’t perceive that the company’s solution is better than the competition, resulting in the symptoms shown above.
  • The company’s internal operations are no longer profitable or effective.
  • The market size is shrinking.
  • The company’s leadership has decided on strategic transformation. g. Google started new businesses such as phones.

Leadership failings (at both the board of directors and C-Suite) often are the underlying foundation driving the need for transformation.

Further reading:

Do you need to transform your company?

https://koorandassociates.org/business-transformation/do-you-need-to-transform-you-company/

 Transformation usually fails.

  • Major changes almost always fail. 12% of change programs succeed; 38% produced less than half the expected results; 50% diluted the value of the company.1
  • Efforts to recover a poor business (i.e. transformation) typically fail. Fortune 500 (1998-2013). 33% of the companies grew; 35% went bankrupt or were acquired; 32% stalled.  Only 10% of the stalled companies recovered.  Of the recovered companies, 75% returned to the core business and 25% redefined their business model.2
  • More than half of M&A deals destroy value for investors.3

Further reading:

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

What needs to be considered when setting the targets and outcomes of transformation?

The targets and outcomes of transformation should position the company for successful long-term value creation in a changing and competitive environment. There may be conflicting problems, needs, and objectives which need to be reconciled. Decision making must consider the following 8 factors:

#1 What are you company values?

The values guide decision making and behaviour of the entire company including the board of directors.  The values may encompass morals and ethics.

Further reading:

Why are values, morals, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

#2 What is the purpose of your company?

Why does the company exist?  What needs of society (other than selling to customers and providing a return to shareholders) does the company meet?

Neither Larry Fink (CEO of Blackrock, which has close to $9 trillion of assets under management), nor the 1981 US Business Roundtable, believe that the board of directors and CEO’s overriding objective is to maximize profit and shareholder value.

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.”4

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”.5

Further reading:

https://www.bcg.com/en-ca/publications/2017/transformation-behavior-culture-purpose-power-transform-organization

#3 What are the current problems and needs of the stakeholders you’re considering?

Stakeholders may include:

  • Customers
  • Employees
  • Suppliers, partners
  • The community

#4 What are the current and future needs of customers who are both willing and able to pay?

  • Understand the current and future market size.
  • Understand how the current customers perceive the value they achieve from your solutions relative to the competition.
  • Consider the example of Blackberry. The number of customers who had problems and needs that could be addressed by a keyboard-based phone shrank dramatically.  Any transformation that ignores shrinking demand may lead the company to extinction

Further reading:

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

#5 What are the current and future actions and capabilities of your competitors?

  • Competitors will continue to change and improve.
  • New competitors will arise.
  • Competitors will respond to your actions.

#6 What are the external trends?

Trends may include:

  • Technology
  • Demographics
  • Competitor actions
  • Changing expectations, of stakeholders

#7 What are the future scenarios?

External trends, the competition, and the changing problems, needs, and expectations of stakeholders all results in a variety of future scenarios.

#8 Will the transformation targets and outcomes result in long-term value creation in all future scenarios?

What are some general transformation principles?

#1 Assess how the board of directors provided value during the journey leading up to the need for transformation.

  • Does the company have a competitively differentiated board of directors, in terms of their ability to enable long-term value creation?
  • How has each individual board director provided value in the years leading up to the need for transformation?
  • Does each board director have the relevant current experience and capabilities to provide value?
  • How did the board regularly assess whether or not the appropriate CEO was in place?
  • How did the directors ensure that there was a relevant pool of internal and external CEO successors, as well as a successor development process?
  • How did the directors ensure that there was a relevant pool of internal and external director successors, as well as a successor development process?
  • Is each director able to transform themselves with new and relevant experience or are replacements required.?

Further reading:

How can the board of directors provide value?

https://koorandassociates.org/corporate-governance/how-can-the-board-of-directors-create-value/

“Does your board really add value to strategy?”, Professor Didier Cossin and Estelle Metayer, IMD Global Board Center

https://www.imd.org/research-knowledge/articles/board-strategy/

“Corporate Boards need a facelift”, Eric Kutcher, McKinsey, May 04, 2018

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

#2 Transparent Communications and Trust:

  • People need to understand why they must personally change and why the status quo is not an option. The urgency is based upon the facts of the current situation and a rationale regarding the scope and type of transformation.
  • Two-way communications are critical. People must see that management is listening to them.  If management doesn’t’ listen, it’s quite likely that people won’t listen to what they’ve been told.
  • The communications are focused on, and relevant to, the target audiences. For example, telling the call centre staff that the only reason the call centre is moving offshore is to improve profits will likely increase change resistance and decrease trust with the leadership.
  • Explain the need for transformation, and its related changes, in terms of the company values and purpose.

Further reading:

Why is trust critical for transformation success?

https://koorandassociates.org/business-transformation/why-is-trust-critical-for-transformation/

#3 Accountability

Be clear on who is accountable for achieving outcomes and benefits.

#4 Integrate transformation into the business

  • Existing planning and management processes and policies may need to be revised to reflect the transformation.
  • A transformation office may necessary in the short-term to make these changes.
  • A transformation office that works outside of existing planning and management processes for the long-term will create resistance to change and will not produce sustainable change.

Your next steps

  • Define the transformation plan, including scope, objectives, and outcomes.
  • In a parallel activity, define the overall framework as described above Collect the current facts and assumptions. Facts are often out of date.  Often there is confusion between facts and assumptions. Information may need to be collected directly from stakeholders.  g. how do employees and customers perceive values and company purpose?  To what extent do board decisions and actions reflect values and purpose?  These may be quite different from formal values and purpose documentation.
  • Analyze the transformation in the context of the overall framework. This analysis could take place as the transformation is being implemented.
  • Don’t wait until you are forced into transformation. It may be too late by then.  Conduct your framework analysis before there is a need for transformation.

Footnotes:

1 “It’s 8-1 against your change program”, Bain website, Managing Change Blog, 2017 June 23

https://www.bain.com/insights/its-8-to-1-against-your-change-program-how-to-beat-the-odds/

2 “The Founder’s Mentality”, by Chris Zook and James Allen, 2016, page 105

3 “The real deal on M&A, synergies, and value”, Boston Consulting Group, BCG perspectives, 2016

https://www.bcg.com/en-ca/publications/2016/merger-acquisitions-corporate-finance-real-deal-m-a-synergies-value

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

5 Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

 

Tom Koor

Should leadership compensation be sustained by bailouts?

Should leadership compensation be sustained by bailouts?

 Should board director and C-Suite compensation and shareholder dividends be sustained by government COVID-19 bailouts?

 This is a question regarding values, morals, and ethics not a question of whether or not laws are being broken.

I’ve been reading about many companies receiving large government COVID-19 bailouts while leadership bonuses are paid and even increasing; shareholder dividends are continuing or in some cases increasing. I have read some startup CEOs posting that they have eliminated their personal compensation in order to support the team.

In this time of massive government financial support, should board directors reduce their compensation?  Should C-Suite compensation be reduced?  Should dividends be reduced? Should these savings be redirected to support junior employees or other stakeholders?

Should the leadership and shareholders be suffering a small amount of discomfort while many are unemployed and many small businesses are collapsing?  Should the leadership and shareholders help society and the rest of the team at their companies?

In 1981, the U.S. Business Roundtable published the following:

“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.”1

 Larry Fink (CEO of Blackrock – with close to $8 trillion of assets under management), 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.”

What do you think is the moral and ethical thing to do?

Footnotes:

1 Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

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

Tom Koor

Political and medical leaders are not following the science of behavioural change.

Political and medical leaders are enabling large numbers of deaths, hospitalizations, and massive economic damage by not following the science of behavioural change.

Political and medical leaders are expecting the public to make major behavioural changes E.g. wearing masks, reduced social gatherings, and social distancing. Most leaders are taking the approach of telling or dictating to people what they must do.  This is not science based.  The result is that many people are not doing as they as told, which is the natural result.

A science based approach requires communicating to people why they, as individuals, have an urgent need to change. E.g. avoid them or their friends and family dying.  There are more components to a science based approach, noted in the further reading section below.

I don’t know why political and medical leaders are taking a non-science based approach and enabling massive harm.  Perhaps they have not asked the experts for advice.  Perhaps they have rejected the advice.  Perhaps they’ve decided to take the easy approach and just dictate to people.

COVID-19 may be the greatest failing of our political and medical leaders in the past 100 years.

What can you do?

Reach out to the political and medical leaders you know to help them understand the science of behavioural changes.  It’s not too late to save lives and reduce economic destruction.

Further reading

The following three articles focus on major behavioural change within business organization.  The same principles apply to the major COVID-19 behavioural changes: wearing masks, reduced social gatherings, and social distancing.

The science of change management

https://www.forbes.com/sites/carolkinseygoman/2016/08/12/10-change-management-strategies-that-are-backed-by-science/?sh=8a845b42bd63

The four building blocks of change – McKinsey

https://www.mckinsey.com/business-functions/organization/our-insights/the-four-building-blocks–of-change

Managing the people aspects of change

Click to access Managing%20the%20People%20Aspects%20of%20Supervisory%20Change%20FINAL.pdf

Tom Koor

Why won’t angel investors provide funding?

Purpose of this article

This article has a two-fold purpose:

  • Help angel investors identify risks and issues to consider before making an investment.
  • Help founders understand how successful angel investors think.

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2020/12/why-wont-angel-investors-provide-funding.pdf

What is a startup?

  • A startup is a temporary organization designed to search out a repeatable, scalable and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.1
  • 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?
  • “Startups are not building a solution. They are building a tool to learn what solution to build. “2

 What is the context for this article?

  • Your startup is pre-revenue or has some revenue. You have already obtained funding from friends and family. You have made the decision not to bootstrap your business.  This is the first time you’re asking for funds from outside investors.
  • You are either an individual angel investor or an angel fund. You are focused on making money from your angel investments.  The risks and issue may be addressed during the pitch process, due diligence, term sheet negotiation, as well as preparation of the closing documents.  You may decide at any point to not invest.

The major reasons an angel investor will not provide funding.

  • This article outlines 11 major reasons an angel investor will not provide funding. These may occur at any point in the investment process, from someone recommending a founder through to the point of transferring money to the founders bank account.
  • There can be countless other reasons an angel may decide not to invest.

#1 The founders are not coachable

  • By coachable, I mean the founders are not able to learn and understand their customers, partners, employees, investors etc. Learning requires unlearning what is obsolete and being able to adopt new mental frameworks, new types of skills and new knowledge.
  • Founders who cannot learn and unlearn will likely fail.  Success usually requires focusing on different target customers and multiple changes to the business model.  The founders also need to learn many new skills, acquire new knowledge, and unlearn what is no longer appropriate.

Three ways to identify an uncoachable founder include:

  • When an investor, coach, or mentor provides advice, the founder immediately rejects the advice and tries to convince the other person they are wrong. There is no attempt and learning or understanding.
  • The founder is unable to explain what new things they’ve learned about their target customers and how the business models have changed.
  • The founder is unable to explain what new skills and knowledge they’ve acquired in order to search out a business model.

#2 The founders do not understand the customers and customer segments.

Customer understanding includes:

  • What are their problems?
  • What are their urgent problems?
  • What are the benefits the customer can achieve if their urgent problem(s) are solved?
  • Are the customers willing to pay for a solution?
  • Are the customers able to pay for a solution?
  • What does the customer journey or day-in-the-life of the customer look like?
  • How do the customers emotionally feel?

The most common reason startups fail is lack of a market.  The founders build a solution before they understand whether or not there are potential customers. The analogy is that many startups first build a cattle ranch to sell meat, and then discover their customers are vegetarians.

#3 Founders do not have a fact-based understanding of customers.

  • There are little or no facts regarding who is going to buy the solution and why.
  • There is a limited, or non-existent, ongoing process for understanding customers and validating assumptions.
  • Before building a solution, there have been a limited number of potential customer interviews and surveys. If the customers are consumers, then there should be at least 100 potential customer interviews combined with several hundred surveys.

Other fact-based approaches to understand potential customers include:

  • Asking customers to buy.
  • What is the trend for potential customers signing up on a waitlist to be informed when your solution is available.
  • What is the trend for potential customers signing up for your newsletter
  • What is the trend for potential customers engaging with the thought capital on your website.
  • Using Google Keyword Planner to: See the historical volumes for keyword searches, the competition for those keywords, and estimate the cost per click.
  • Using Facebook Ads to estimate the number of people interested in key words in a geographic area.
  • Using Google trends to see how popular the key words for your problem and solution are
  • Looking for consumer reviews in places such as Amazon.
  • Creating a website that will allow buying, but when the actual purchase is done, there is a message such as “solution not available”.

#4 Lack of trust and transparency

  • The angel does not feel that they can trust the founder or that the founders are transparent, especially regarding problems and issues.
  • All startups at the angel investment stage have major problems and issues. If the founder does not share these with the angels, then many angels will wonder: are the founders hiding their problems and issues OR are they unaware of them. Coachable founders can change their behaviour to be more transparent.
  • Founders should not make false statements to angels. Once trust is broken, many angels will immediately stop dealing with the founders.

#5 The founders’ startup does not fit the angel’s investment thesis

Founders should research the angels’ investment thesis. Angel funds often publish this on their website.  More effort will be required to understand individual angel thesis.

#6 There is no exit strategy for the angel investors.

The angel investors want to get a financial return at some point. Most successful startups are acquired.  Few startups result in an IPO.  The angel needs to understand:

  • Who are the likely buyers?
  • Why would they buy the startup?
  • At which milestones would they buy?
  • When will the milestones be achieved?

If the founders lack this knowledge, they need to have an advisor who can answer these questions.

#7 The startup will be difficult to scale if product market fit is achieved.

Example of these scaling difficulties include:

  • Needing significant amounts of expert talent for each unit of future revenue. Expert talent is often a scarce or expensive resource.
  • Needing significant amounts of capital for each unit of future revenue.
  • Future low gross margins

#8 The founders, management team, and advisors lack relevant talent

  • Thinking back to what a startup is, the talent pool is an organization designed to search out a repeatable, scalable and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.
  • The skills, experience, knowledge of the startup team is much different from a team that is successfully scaling a profitable business model.
  • Founders with deep experience in running a long-established and proven business may have to learn many new things in order to search out a new business model.
  • The skills to understand customers on an ongoing basis are very different from the skills to build a solution.
  • In addition to coachability, the founders need to be able to unlearn invalid assumptions and business models and create new business models. This is known as pivoting. I’ve seen too many founders try to sell a solution with little demand rather than create solution with massive demand.

#9 There is not a large potential market

  • TAM refers to total potential revenue assuming: 100% market share, all potential geographies, distribution channels and partners.
  • This revenue comes from customers who believe they have a problem or need urgent enough to pay for and are also willing to pay for it.
  • The customers must also believe the founders have a solution which better than the competition at enabling customers to achieve benefits. g. the TAM for smart phone is massive.  The TAM for smart phone with a keyboard is tiny.
  • The common mistake I see is that the dollars numbers in their market size slide are unrelated to the market for their solution. The following is a made-up example:  The startup wants to create a new type of brake light for cars.  The market size slide has the total dollar volume for car sales, not for dollar volume for purchases of brake lights.

#10 Lack of an achievable go-to-market strategy

  • Unclear how the customers will find the startup and purchase from the startup?
  • Unclear what distribution channels and partners are required.

#11 The angel doesn’t perceive a working-relationship fit.

  • The angel, for a variety of reasons, believes the working relationship with the founders would be too difficult or unenjoyable.

Your next steps

  • As a founder, have someone assess your startup using the above set of 11 items. You need the truth, so the assessment should not be from family, friends, or close colleagues.
  • As an angel investor, determine how the 11 items above fit into your investment decision making process. Which ones are deal-killers?  Which ones fit your risk profile?  Which one will you be able to mitigate over time, and how?

Footnotes:

1 adapted from: Steve Blank, “What’s a startup – first principles”. https://steveblank.com/2010/01/25/whats-a-startup-first-principles/

2 Alistair Croll, Benjamin Yoskovitz , Lean Analytics – Use data to build a better startup faster, Sebastopol, California, O’Reilly Media, 2013, Page 41

Why won’t angel investors provide fundingDownload
Why won’t angel investors provide fundingDownload
Tom Koor

Successful angel investors are focused on the exit.

Purpose of this article

This article has a two-fold purpose:

  • Help angel investors identify the exit questions and issues they need to consider when assessing potential angel investments and managing their exit.
  • Help founders understand what successful angel investors may be thinking regarding exits.

This article considers success to be the cash return the angels receives upon exit.  One of the key measures is IRR (Internal rate of return).

You may download a PDF of this article from:  https://koorandassociates.org/wp-content/uploads/2020/11/successful-angel-investors-are-focused-on-the-exit-1.pdf

How to read the article

This article identifies four sets of issues, questions, and analysis angels should consider. This article is not intended to educate angels regarding the techniques and tools to address the issues, questions and analysis,

#1 Alignment of goals.

Do the founders and angels have the same goals?  The angels want to get cash out, which almost always occurs via a sale of the startup.  Do the founders expect to sell the startup? Are the founders focused on the startup being their lifetime calling or reaching the stage where the startup provides a comfortable income for the founders?

Do the founders and angels have the same commitment regarding when to sell the company?  Perhaps on day 1 the founders and investors agree.  Then a buyer comes along which meets the original expectations. What happens if a VC then comes along with a term sheet with a high valuation that the founders want to accept?  Great news with the founders but the investors may end up being stuck in the company for a much longer period time as well as taking the risk that growth never happens or the VC terms preclude a sale.

The founders and angels are aligned on day one for a longer-term sale.  Then VC provide funding with liquidation preferences and accruing dividends.  The eventual sale does occur but the bulk of the cash goes to the VCs with little return for the angels.

What is the financial plan and cap-table leading to exit?  What will the rounds, types of investors, valuation, and key business milestone?

What criteria have the founders and angels agreed upon regarding when to sell. What happens if follow on investors want to change the criteria? What legal protections and agreements are possible to bind the founders and angels?

#2 Will an appropriate exit be possible?

Before an angel writes a cheque, she needs to determine:

  • Who might buy the startup?
  • Why? E.g. a PE firm looking for a 15-year investment or a high-tech company needing specific IP and talent?
  • What would they value it at and why?
  • What must the startup have accomplished?

It is risky to make a cheque and not know if an exit is possible.

The angel’s due diligence process will require validating exit assumptions, through research and even contacting potential future buyers.

The startup financial forecast will include a line for exit planning expenses e.g. going to attending conference and events which attract buyers; building relationships with potential buyers.

#3 What is the potential impact of dilution on founders and angels?

The financial plan and cap table will include all items which may impact capital inflow or capital outflow upon exit including SAFE, convertible debt, preferred shares, debt, government grants, anti-dilution provisions, option pool, etc.

#4 What is the value of pro-rata rights for angels?

  • Pro-rata rights can enable an angel to maintain her percentage equity ownership in follow-on rounds of a successful startup. The angel must determine if they have the financial resources to be able to take advantage of pro-rata rights.
  • The financial plan and cap table can show the financial implications of pro-rata rights.

Your next steps

  • As an angel investor, you require a financial plan and cap-table which leads to an exit. You’ll need the skills and knowledge to create this if the founders lack the skills and knowledge.
  • As a founder, you require a financial plan and cap-table which leads to an exit. You may need an advisor with these skills and knowledge to help you create these.
  • The founders and angels need to discuss the above four sets of issues.