Author: Tom Koor

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.
Tom Koor

What can you do to reduce COVID-19 deaths?

As a business leader, you can advise and encourage medical and political leaders to communicate in a way that will result in a massive change in human behavior i.e. the wearing of masks and social distancing.

You know that the way to change the behaviour of employees is to help them understand why each of them must personally change.  Merely telling them to change does not work if they must make a major change in behaviour if results in major personal costs to them

You can help political and medical leaders change their communications in three ways:

#1 Telling people the value to them of making a massive change. E.g. “not wearing a mask may result in your death or your going to hospital.  It may result in the deaths of your family members, friends, neighbours, and colleagues.”

Remember when the anti-smoking ads would show people dying of lung cancer in hospital.

#2 Demonstrate empathy and understanding the pain and cost the leaders are asking the public to undergo e.g. “I understand how difficult this may be for many of you.  You may lose your business or job.  You may have to go to a foodbank.  You may lose your home and have to move in with others”.  It would be very powerful to have someone who has undergone major pain to say a few words about why they thought it was worth it for them.

#3 Use simple words in presentations that everyone can understand.  Often the leaders use words that are hard to understand, especially for those with limited education or new to the country.

I can understand why many people are resisting massive personal change.  I often observe political and medical leaders on TV, all of whom make significant income, dictating to the public, using hard to understand words, while showing no empathy.

I hope that you can help the political and medical leaders change so that there are fewer deaths, hospitalization, and economic devastation.

Stay safe. Stay well.

Tom

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2020/11/what-can-you-do-to-reduce-covid-19-deaths.pdf

Tom Koor

How do you interview potential customers? V2

The purpose of this article

  • The goal is to help founders as they are launching their startup.
  • The article is structured to help with potential customers interviews starting in the first week of the startup.
  • The information in this article can be modified to help a later stage startup, a scaling company, or an established mature company.

This article is not intended to make you an expert in interviewing potential customers and analyzing interview notes.

You may download a PDF of this article from: How do you interview potential customers V2

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.
  • 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?

Why interview potential customers immediately?

You don’t want to spend time and money to build a solution for which there are no customers with a problem or needs for which they are willing and able to spend money.  You don’t want to build a cattle ranch for selling meat and then discover that your customers are vegetarians.

The following two articles illustrate the value of talking with customers before you launch a solution.

What must you learn about customers and users?

You need to interview both C&U (Customers and Users). Customers are those who give you money.  Users are those who use your solution but don’t give you money.  You must learn about both of those groups.  Google would not have advertisers if there wasn’t a large number of satisfied people doing searches.

What do you want to learn from your interviews?

There are 5 areas you want to learn about, in a variety of interviews.

  • What are the C&U urgent problems and needs?
  • What do the C&U believe is the value to them if their urgent problems and needs are addressed?  Value can be both financial and non-financial?
  • When during the course of the day do C&U experience urgent problems and needs? How do they feel?
  • How will the C&U daily experience change as a result of your solution?
  • What is the decision-making process? E.g. who are influencers? Who are recommenders and advisors?  Who makes the financial decision?

The analysis of interview may reveal different C&U segments.

How do you analyze interview notes?

 Validating and invalidating assumptions as well as identifying new facts required thematic analysis of the interview transcripts. Two analytical approaches are used:

  • Inductive – the data validates or invalidates assumptions
  • Deductive – the data identities new facts or findings, other than the initial assumptions.

The Further Reading section has links to articles on how to analyze user interviews and how-to use excel in this analysis. As the number of your interviews increases, you’ll be able to analyze them by customer segment, and other characteristics.

The customer journey description in the initial interview is documented in the customer journey map.  The Further reading section has a link to examples of customer journey maps

 The analysis of your interviews, combined with 3rd party market research, will help you determine the market size of each C&U segment.  E.g. Potential revenue = (number of customers with an urgent problem or need that they believe they must spend money on) X (what they are willing and able to spend).

 How do you document your interview learnings?

There are three sets of documents:

  • The business model canvas, updated based on thematic analysis and customer journey mapping.
  • The one-page summary thematic analysis of interview notes. This analysis validates or invalidates assumptions made in the business model canvas.
  • The one-page page summary customer journey mapping, based on what the C&U say during interviews.

When do you interview C&U?

  • You start interviewing as soon as you launch your startup, before you have spent any time or money to start build a solution.
  • You continue to interview throughput the startup journey, as you start to build and validate that your solution addresses C&U problems and needs: Wireframe, proof of concept, functional prototype, pilot solution, initial MVP, enhanced MVPs, and product market fit.
  • You continue to interview as your company grows.
  • You never stop interviewing.

 What is the overall process?

  • Day one of your launch:
    1. Create the business model canvas. It will likely be 100% assumptions.
    2. Create the customer journey map. It will likely be 100% assumptions.
    3. List the assumptions from the business model canvas you want to validate or invalidate, with the open-ended questions you’ll ask.
  • Define the structure you’ll use for your customer journey map.
  • Define the format of the one-page report you’ll create from your thematic analysis of interview notes.
  • Schedule interviews with C&U, selecting C&U represented by your business model canvas. Before you start to build something, you will interview 100 people. Most people will likely decline to be interviewed which means you may be reaching out to 100s of C&U.
  • Develop an interview guide, customized for the initial C&U interviews focused on their problems and needs.
  • Two people must be on the interview, with one person taking detailed notes of what the interviewer said.
  • Document each interview.
  • After each day of interviews,
    1. Update your one-page summary thematic analysis.
    2. Update your one-page customer journey map.
    3. Update your business model canvas, based on your thematic analysis and customer journey map.
  • The interview guides will need to be revised as you learn from interviews and as your startup goes through different stages.

What’s an example interview guide for the first problem validation interview with potential C&U?

  • Start with 1-2 minutes of personal ice-breaking, based on your research of the interviewee.
  • Set the stage for the interview. What are the objectives and how will the interview work.
  • Collect some demographic information about the interviewee, focused on their business or lifestyle in the context of the problems you’re trying to solve.
  • Set the problem context by telling the story of how you identified the problem and why you think the problem is important.
  • Validate the problem by getting the interviewee to rank the urgency and frequency of their problems. Ask the interview if there were other problems which you did not identify.
  • Test the solution. Go through each problem in urgency sequence and ask how the interviewee solves it today, what the value of a solution would be to them, and what this value would be.  This is a very free from discussion with you listening to the interviewee.  The interviewee may be begging for a solution may not care if there is a solution.
  • Conclude by asking:
    1. if OK to come back to discuss your solution.
    2. if interviewee would refer other people for you to interview.

What are the dos and don’ts?

  • Do define your target C&U and select potential C&U who are representative. For example, if you are creating a venture capital fund which will focus on providing investor exits within 3 years, do not interview potential investors who seek a 20+ year exit in-order to facilitate inter-generational wealth transfer.
  • Do face-to-face interviews. Video calls are a distant second best.  Phone calls are a very distant third best.
  • Do document the criteria for assessing the answers. This will avoid confirmation bias, in which you’ll ignore information which invalidates your hypotheses.
  • Do not interview friends, family, or those you have a personal connection with. You need brutal honesty, rather than hearing from people who do not want to hurt your feelings.
  • Do focus on the people who actually have the problem or need for which you are creating the solution.
  • Do create questions which require quantitative answers or specific descriptions. Don’t ask for subjective or hypothetical feedback.
  • Do create questions that help you understand how customers think, and why they take the actions they do.
  • Do not talk about your solution in your initial meeting.
  • Do not ask about price or what customers are willing to pay in the initial meeting. Do ask about the customers costs, budgets, etc.
  • Do finish each interview asking “What should I have asked but did not ask?”
  • Do create a data collection form for each interview. This will contain things such as: the description of the customer profile, your open-ended questions, which hypotheses were confirmed and why, which hypotheses were invalidated and why, which hypotheses you gained no insight into and why, what changes you should make for the next interview (target customer profile, hypotheses, questions to ask).

Other C&U understanding techniques to consider:

  • Watch the C&U (or video record them) as they carry out their work.
  • Actually do the C&Us work yourself.
  • Focus on the C&U who is suffering the greatest pain and determine their work-around solution(s).
  • Understand what the customers’ required outcomes are, as well the problems in achieving that outcome.

What are the challenges in interviewing potential customers

  • The founders, or existing companies, passionately believe that they have created right solution. They believe there is no reason to interview potential customers. They are focused on building the solution and selling it. Their passion results in them being unable to listen to and understand what the customers are saying.
  • The founders, or existing companies, believe any sales and marketing problems can be fixed by changing the sales deck and changing the website.
  • The founders, or existing companies, are passionate that they have the right solution. Hearing brutal feedback from potential customers requires founders who are self-confident, self-aware that they don’t have all the answers, and have the ability to learn and adapt.  I’ve observed many people who are not able to learn and adapt.
  • The founders lack the personality and skills to contact a large number of strangers to setup and conduct interviews.
  • Doing interviews appears to be lack of progress. Building a solution is more fun and appears to be progress.

Your next steps

  • Ensure your team has the skills and experience to interview C&Us and to analyze the results. These may reside either in team members or advisors.
  • Build your interview plan in conjunction with your survey plan. You will be surveying far more people than you interview.

 Footnotes:

1 “What is a business model canvas?”  The following is a link to my article https://koorandassociates.org/tools/what-is-a-business-model/

Further reading:

Creating an interview guide and interview process

The book “Lean Analytics – use data to build a better startup faster” by Alistair Croll & Benjamin Yoskovitz

Chapter 15 “Stage One: Empathy”

How to transcribe an interview

https://www.scribbr.com/methodology/transcribe-interview/

How to analyze user interviews

https://uxplanet.org/how-to-analyze-user-interviews-250fddb1e8d7

An example of using Excel and pivot tables for thematic analysis of user interviews

https://www.youtube.com/watch?v=P0gzlWNodKw

Some example of customer journey maps

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

Tom Koor

Venture Capital Investment Decision Making Process

Purpose of this article

Provide startup founders and early stage companies with a broad understanding of the investment decision making process used by VC (Venture Capital) firms.

This article provides a broad generic framework.  The actual process will depend upon the specific VC firm e.g. investing in pre-revenue startups or a $50 million revenue company.  The company  seeking capital needs to learn the decision-making process used by the VC firms they approach. Many VC firms publish on their website information regarding their process.

This article does not address the VC process regarding their existing portfolio companies. i.e. what happens after the deal is closed and the cash is in the startups bank account.

You may download a PDF of this article from: Venture capital decision making process

There 8 steps in a generic VC process

  • VCs are looking to say No as quickly as possible. They may be getting thousand of applications a year, thus the need for careful time management.
  • The VC may say No at any point and may not give the rationale. Recognize that decisions are often a gut-feeling.
  • After saying No, the VC may ask the startup to stay in touch via monthly updates. This often happens. The VC can observe through a number of monthly updates the achievements of the startup, what the startup has learned, and how the startup has dealt with problems and issues.

#1 Sourcing Deals

  • Most of the deals VCs end up investing in come from referrals by people they know and trust.
  • Many VCs also actively look for deals.
  • Some VCs use software to mine the web looking for startups. InReach Ventures in Europe has used custom software to create a database of 95,000 startups.
  • Startups directly apply to VC firms.

 #2 Initial Screening

  • Most VC firms have a set of a few deal-killer criteria to immediately say no to most applications.
  • A VC will spend 3 minutes and 44 seconds reading a pitch deck, on average.1

 #3 Initial partner call or meeting

  • Most VC firms will have a set of criteria to enable a fast No.
  • The key decision at this point is whether or not a VC is interested in learning more.

 #4 Quick Analysis by an associate

  • Follow up with the startup regarding questions from the partner.
  • Assess the pitch deck and answers provided by the startup.
  • Assess the competition.
  • Recommendation on whether or not to proceed.

 #5 Due diligence decision made by a partner

The partner makes the decision to devote a significant amount of associate time to due diligence, which includes:

  • Customer reference calls.
  • Founder reference checking.
  • Deep competitive analysis.
  • Drawing upon technical experts to assess the solution.
  • Drawing upon industry experts to validate analysis of customer problems and needs.
  • Compare the startups to others at a similar stage.
  • Legal due diligence to validate the startups current legal documents.
  • Financial due diligence to validate revenues and costs.
  • An investment memo is prepared with recommendation whether or not to proceed

#6 Partner meeting

  • The partner sponsoring the startup, presents the investment memo to the other partners.
  • The partners make a decision as to whether or not to proceed. The decision-making process is specific to a VC firm.  g. sometimes a unanimous agreement is required.

 #7 Term Sheet

  • How much financing?
  • What type of financing?
  • Terms and conditions regarding the financing?
  • Clarity on how key decision are made and who has what veto powers. g. what decisions require shareholder approval? What decisions require board approval? This is often in a shareholders agreement.

 #8 Closing.

  • A number of documents need to be signed.
  • Cash needs to be transferred into the startups bank account.

One startup told me that the deal fell apart at this point – the cash was not transferred.

 Your next steps

  • Define what value you require from a VC. Is it only money? Their network of potential experts and customers? Etc.
  • Reach out to VCs well before you need the money. The best way is via referral.
  • Research each VC to understand them. When and how do they expect to exit?
  • While the VC is doing their due diligence, you need to do your due diligence regarding the VC. g talk with other portfolio companies, both current and past, to understand what it was like to have the VC as an investor.
  • Start sharing your monthly update with the people who’ve agreed to receive it: your potential investors, your advisors.
  • The potential investor update is different from the update sent to existing investors and the update sent to customers (potential and existing).
  • Remember that potential investors may well read your monthly update on their phone, and only devote a few seconds to it.

Footnotes

1“What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

https://www.slideshare.net/DocSend/docsend-fundraising-research-49480890

Further reading

How does a startup communicate with potential investors?

https://koorandassociates.org/selling-a-company-or-raising-capital/how-does-a-startup-communicate-with-potential-investors/