Author: Tom Koor

Tom Koor

Is your company actually a startup?

What is the purpose of this article?

Help shareholders, the board of directors, and C-Suite have a fact-based discussion regarding the status of your company.

You can download a PDF of this article from: Is your company actually a startup

 What are the critical learnings in this article?

  • The leaders of many long-established companies are unaware that their company has become a startup.
  • As a result, the wrong type of talent is in place, taking the wrong actions.

Where is your company it its life cycle?

#1 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.

#2 most startups fail or end up as small companies.

#3 A scaling, growing profitable business enabling customers to achieve a competitively differentiated value proposition. Market share is growing, the overall market may be growing, customers are strongly recommending the company, employees want to join and stay, etc,

#4 Failure may occur at any time.  The company may end up being a startup again and not realize it.

#5 A large, slow growing or static company. Market size isn’t growing, market share isn’t growing, etc.

#6 Most large companies fail or disappear. Market size shrinks, market share shrinks customers no longer perceive that they achieve a competitively differentiated value proposition, hard to hire and keep the best employees.  The company has become a startup again.

#7 The company is constantly improving and changing to avoid becoming a start.  Transformation is continuous rather than a one-time event. Ongoing talent management transformation, starting with the board of directors, is the foundation for long -erm success.

The company can become a startup again at any time, but the leaders don’t realize that.

  • A company, at any stage, is competing in a hyper-competitive world, with constant massive changes in the ecosystem. A company can suddenly become a startup.
  • Companies must be constantly improving, changing, and transforming to avoid becoming a startup. There are trillions of dollars of capital available to fund the right talent.
  • Exceptional talent is much rarer than capital. The ability to determine future talent requirements, assess the future potential of talent, and successfully develop that talent is the core foundation of long-term growth.

 What are your next steps?

  • Do a fact-based analysis of where your company is in its lifecycle.
  • Identify the changes you need to your ongoing talent management processes.
  • Identify the changes you need to your talent, using your new talent management processes.
  • Your new talent will create and execute the appropriate plans.

 What further reading should you do?

Is your company planning to fail? Koor and Associates

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

Tom Koor

What is a value proposition? V3

What is the purpose of this article?

  • Enable founders, investors, C-Suite, boards of directors, shareholders, etc. to understand what a value proposition is and to discuss their company’s value proposition.
  • This article encompasses all members of your company’s ecosystem, but focuses on customers and users.

You can download a PDF of this article from: What is a value proposition V3

What are the critical learnings in this article?

  • A value proposition is someone else’s perception of the value you provide, not your opinion.
  • All members of your company’s ecosystem have a perception of your company’s value proposition.
  • Your company’s growth and survival depend upon your understanding of the key members of your ecosystem and their perception of your competitively differentiated value proposition.
  • Some members of your company’s ecosystem may perceive a negative value proposition e.g. employees who are terminated as part of moving their jobs to lower cost employees elsewhere in the world.

 A value proposition is some else’s perception of the value you provide, not your opinion

  • This perception can be influenced by: facts, emotions, family & friends, social media, etc.
  • Perceptions are both based on fact and emotions. g. many people in the US believe that Donald Trump won the 2020 presidential election, although there are no facts supporting this.

How does someone perceive their value proposition?

Value proposition = (All their perceived achieved benefits) / (All their perceived incurred costs)

  • Perceived achieved benefits can include both financial and non-financial (e.g. time savings, convenience, status, alignment with personal purpose, values, morals, and ethics, etc.)
  • Perceived incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, mis-alignment with personal purpose, values, morals, and ethics etc.)

People may include in the value proposition impacts on other members of your company’s ecosystem as well as their personal impact.  E.g. cash paying customers considering buying from companies that pay employees a living wage or from companies that raise animals in a humane manner.

All members of your company’s ecosystem have a perception of your company’s value proposition. E.g.

  • Employees may consider: compensation, working hours, working location, alignment of your company’s purpose with their personal purpose, development programs which increase the value of the employee, etc.
  • Shareholders may consider: long-term shareholder price, company purpose aligned with shareholder purpose (reducing the company’s impact on climate change, increasing diversity (gender, race, sexual identity, sexual orientation, etc.) at all levels of the company.
  • Society may consider: your company’s impact on the environment, the % income tax your company pay’s vs the average taxpayer, whether you pay your employees a living wage, etc.

You need to understand both the customer and the competition.

  • What is the reason the customer wants or needs something?
  • How can you help the customer with what they need or want?
  • Do your customers believe your value proposition is more attractive than the customers’ current situation?
  • How do your customers perceive your value propositions’ competitive differentiators? And weaknesses?
  • How do your customers perceive your competitors’ value propositions differentiators and advantages? And weaknesses?

How is your company going to grow and survive in the marketplace?

Your company will fail if you are not competitively differentiated.

  • Your company’s growth and survival depend upon your understanding of the key members of your ecosystem and their perception of your competitively differentiated value proposition.
  • How other members of your ecosystem perceive your value proposition for them may enable or destroy your company’s success.
  • You may need to provide other members of your company’s ecosystem with a competitively differentiated value proposition. E.g. your current and future employees.

You need to provide your cash paying customers with a competitively differentiated value proposition.

  • You must take market share and business away from competitors.
  • Your customers need to decide to stop dealing with current suppliers and start dealing with you.
  • Your customers need to stay with you.
  • Your customers need to recommend your company
  • You may be creating a new market (e.g. Apple with the iPad)

What are your next steps?

Understand how the critical members of your company’s ecosystem think and feel about your company.

  • Survey the individual members of your board of directors, C-Suite, and key shareholder to identify who they believe are the critical members of your company’s ecosystem.
  • Also ask them what they believe those members view as your company’s competitively differentiated value proposition.
  • Then individually survey those critical ecosystem members to determine how they perceive your company’s competitively differentiated value proposition.
  • Collect the facts regarding those critical ecosystem members e.g. customer/market share growth, customer churn, employee retention, etc.
  • Identify the implications of the above information.
  • Determine what needs to change, in your ecosystem’s members of your company’s value proposition, to enable your company’s future growth and survival

 What further reading should you do?

Do you understand your customers?

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

An example of a business ecosystem: What does the Toronto Startup Ecosystem look like?

https://koorandassociates.org/the-startup-journey/what-does-the-toronto-startup-ecosystem-look-like-v4/

Thomas Ripsam and Louis Bouquet, “10 Principles of Customer Strategy”, PWC Strategy& website, https://www.strategy-business.com/article/10-Principles-of-Customer-Strategy?gko=083a5

Tom Koor

What does the startup journey look like? V4

What is the purpose of this article?

  • To illustrate the growth stages of a company, from startup, to mature company, to crisis or decline.
  • This article is intended for the board of directors, company leaders, and investors – to enable their discussion and understanding.

You can download a PDF of this article from: What does the startup journey look like V4

 

What are the critical learnings in this article?

  • This article applies to any size company at any stage in their evolution. Why? Any company, division, or major market/product segment may be in a startup or may become a startup through crisis or decline.
  • The market place determines what stage the company is in, not the company/
  • 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.

How to read this article

Section 1 outlines some general concepts.

Section 2 outlines the journey from the perspective of obtaining customers.  There are 5 stages:

Stage 1 Find 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.

Stage 2 Create a repeatable, scalable, and profitable business model.

Stage 3 Scale and rapidly grow the company. At this point, no longer a startup.

Stage 4 Continuously changing a mature company.

Stage 5 Crisis or decline

Section 3 outlines potential financing journeys.

Section 4 outlines potential leadership journeys.

What are your risks and challenges?

  • There is no guarantee that you will progress from Phase 1 to Phase 4.
  • At any point, your company may move backwards, even from Phase 4 to Phase 1
  • Many large and long-established companies in Phase 4 don’t realize that they have dropped to Phase 1.
  • Many large and long-established companies in Phase 4 don’t realize that they need to be constantly changing.
  • The talent you need in Phase 1 may be very different from the talent you need in Phase 4 when you are a large global company.

Section 1 Some 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.

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 partnership?

Incubators and accelerators

  • Many startups work with incubators and accelerators.
  • Some startups work with several incubators and accelerators.

Section 2 The journey from the perspective of obtaining customers.

Stage 1 Find 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. 

Your journey is driven by your understanding of your potential cash paying customers. E.g. before building a beef ranch, you must understand whether or not your potential customers are vegetarians.

Phase 1 has 8 steps. Steps may be parallel and iterative.  Some steps may be combined.  You may have to go back some steps – your journey is not always moving forward.

Step #1 The founders have an idea

  • The founders have an idea. They first agree upon: equity split, their expectations regarding startup, how decisions will be made, the purpose of the company, and who has the title of CEO.
  • The never-ending process of interviewing and surveying potential customers and users begins.
  • Before building anything, 100 potential customers and users will be interviewed and 100’s more surveyed. This begins the never-ending process of understanding the problems of potential cash paying customers

Step #2 Understand the potential customers and users before building a solution.

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.

On day one, this canvas will be only assumptions.  The interviewing and surveying process will validate or invalidate assumptions and identify new assumptions.

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 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/

The business model canvas, value proposition, and customer journey map are continuously validated and revised throughout the life of the company.

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.

Step #3 Create a Wireframe

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

Step #4 Create 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 future MVP.

Step #5 Create a 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.

Step #6 Pilot Solution

This is the MVP, including onboarding, customer support, and exiting.  The customer may not be 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.

Step #7 MVP (Minimum Viable Product)

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 onboarding, customer support, and customer 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 and needs that the customer is willing to pay for 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 initial MVP will have a small number of customers and users.

Step #8 Evolve the MVP until there is product market fit

The MVP will be iterated and enhanced until there is product market fit.

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 not a 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.” The following is a link to the article with quote:  On product/market fit for startups

Conclusion of Phase 1

  • You have found 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.
  • The leadership may not be able to create and lead a company that can scale. e.g. A Chief Technology Officer who was a great coder many not have the skills to manage a team of coders.
  • The existing processes and technology may be inefficient and unable to scale cost efficiently.
  • Many processes to enable rapid growth will be missing e.g. the capability to recruit, onboard, and develop large numbers of employees, profitability analysis by customer segment, cohort, channel, and partner.
  • Customer acquisition costs may exceed the lifetime value of the customer.
  • Your metrics may show an unprofitable business with customer acquisition costs exceeding life time customer profitability. Your analysis will show the potential for a profitable business with life time customer profitability exceeding customer acquisition costs.,

Section 2 The journey from the perspective of obtaining customers.

Stage 2 Create a repeatable, scalable, and profitable business model.

  • Ensure the leadership able to create a company is in place.
  • Changes may be required at the board of directors, advisory board, CEO, C-Suite, advisors, and consultants.
  • Develop a plan to create the company. New and changed talent, processes, technology, channels, and partners are required.

Customer understanding continues

  • Interviews and surveys continue.
  • The solution is enhanced to enable the company to understand whether or not customers and users achieve value, and how many achieve that value.

Section 2 The journey from the perspective of obtaining customers.

Stage 3 Scale and rapidly grow the company. At ths point, no longer a startup

  • Execute the plan from Phase 2
  • Add additional geographies, channel, partners, and customer segments. Drop unprofitable ones.
  • Add additional and different types of employees.
  • The customers and users are profitable (i.e. life time customer value is much larger than customer acquisition costs). The cash flow and accounting statements may show a loss because the customer acquisition costs are incurred upfront while the customer profits are achieved over the lifetime of the customer.
  • Continue to maintain or improve the value achieved by customers and users. Improvement actions are based on: Ongoing customer interviews surveys, and analysis of customers; Ongoing analysis of the competition, adjacent market, trends in the ecosystem including  technology and customer behaviour.

Section 2 The journey from the perspective of obtaining customers.

Stage 4 Continuously changing a mature company.

  • Market size is constant or growing. Market share is constant or growing.
  • The company still needs to be continuously improved due to ongoing competition, changes in customers problems and needs, and trends in the ecosystem.
  • The company must continuously monitor the external world to determine if major changes are required. Blackberry and Nokia used to be leaders in phones.  Their leadership crumbled due to changing customer problems and needs combined with competitors focused on meeting those changes.

Section 2 The journey from the perspective of obtaining customers.

Stage 5 Crisis or decline

Market size is shrinking and or market share is shrinking.

This could be for many reasons: e.g. the number of customers who perceive they have a problem they are both willing and able to pay for declines, customers perceive that they can achieve a better value proposition from competitors, changing regulations impact customer problem and needs, and/or your solution, etc.

Section 3 Potential Financing journeys

Financing stages

The startup may bootstrap (i.e. no equity or debt financing other than friends and family) or go through one of more stages of raising external financing.

#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

  • Only 24% of angel deals in the US in 2019 were for pre-revenue companies.

https://www.angelcapitalassociation.org/angel-funders-report-2020/

  • in 2019, only 2.4% of the applications to Canadian angel groups received funding

https://investorreadiness.ca/cdn/bba/NACO-AngelActivityReport.pdf

#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

Types of financing

There are many types of financing:

  • Equity e.g. common stock, preferred stock.
  • 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 4 Potential leadership journeys

The skills, experience, and capabilities which leaders need to create value at each stage of the company are different.  Leaders need to learn and transform themselves, be replaced, or lead the company into failure.

  • The company starts out as a very small team, searching for a repeatable, scalable, and profitable business model. Efficiency, profitability, and scalability are not the day one objectives.
  • Then the company needs to create a business which has the potential to be repeatable, scalable and profitable..
  • The company then grows through rapid growth.
  • Finally, a mature company is reached – massive rapid growth has ended.

The types of board directors also change. The skills, experience, and capabilities needed to grow and preserve the value of the company change.

The role of the CEO changes. There are three things only the CEO can do, and no one else in the company:

  • Create and maintain alignment of people with the purpose of the company;
  • Nurture the company’s values, morals, and ethics (often referred to as culture);
  • Hire the leadership team and ensure they work well together. Up to 50% of the CEO’s time will go hiring and managing the leadership team. At least 1/3 of the leadership team hires will not work out and must be exited.

65% of the failures of high-potential start-ups are due to people problems: relationships, roles and decision-making, and splitting the income. More than 50% of founders are replaced as CEO by the C round of financing.  In 73% of these founder replacements, the CEO is fired rather than voluntarily stepping down.1

Footnotes

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

2“The Founder’s Dilemmas”, by Noah Wasserman. Pages 299, 301 Noah was the Professor of Clinical Entrepreneurship at the University of Southern California and the director of USC’s Founders Central Initiative.  The book is based on his study of 10,000 founders from 3,500 startups.

What are your next steps?

  • Determine what stage your company is in.
  • Determine your talent requirements for the stage you are in, and the stage you want to move to
  • Assess your talent, and talent process, relative to the stage you are in.

What further reading should you do?

“The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers” by Ben Horowitz.

Ben describes the incredibly tough challenges and experiences he went through in the process of his ultimately successful startup.  He then became a successful venture capitalist.

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

Tom Koor

Due diligence questions for a startup. V3

Due diligence questions for a startup. V3

 What is the purpose of this article

  • Provide a framework for founders and investors to identify due diligence questions.

This article does not provide legal, tax, financial, or investment advice.

You can download a PDF of this article from: Due diligence questions for a startup V3

What are the critical learnings in this article?

  • Due diligence begins before a startup asks for funding. Due diligence is not a one-time event.
  • Due diligence is based on more than the information a startup provides.
  • Detailed due diligence questions depend upon where a startup is in the investors’ analysis and decision-making process. Due diligence increases the further along a startup is in the funding process.
  • Due diligence is done for every kind of startup, including investment funds and angel investment groups.
  • Three overarching due diligence questions apply to any company or fund at any stage: How many cash paying customers are there with urgent problems and needs they are willing and able to pay for? How does the company enable customers and users to achieve more value than the competition? How is the leadership team competitively differentiated?

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.1

A business model describes how a company creates more value for C&U (customers, users) than the status quo and competitors. 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 C&U to achieve? What are the human and technology resources needed?  What are the channels and partnerships?

What are the startup stages?

  • You have some assumptions about an urgent problem or need that C&U have.
  • You meet with C&U to hear from their lips: that this is an urgent problem or need that they have, and the value to them of meeting this urgent problem or need.
  • Within a few months you have something in C&U hands which delights them. This is not the whole solution, but something which provides noticeable value.
  • You keep adding customers while enhancing your solution to provide more value to more customers. You may be changing direction several times during this phase.

A startup is no longer a startup when it has successfully searched 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 startup has learned what solution to build.  The temporary organization structure must change to one that can grow rapidly.

What are the three key sets of questions an investor asks throughout the life of the startup?

  • How many cash paying customers are there with urgent problems and needs they are willing and able to pay for?
  • How does the company enable customers and users to achieve more value than the competition?
  • How is the leadership team competitively differentiated?

The number of detailed questions in each of the three sets increases as the startup progresses through the due diligence process.

Your due diligence supports a series of decision that you, as an investor, make.

  • Why should you open (rather than immediately delete) a cold call email or introductory email from someone you know?
  • Why should you read the content of the mail?
  • Why should you read any attachments?
  • Why should you have a brief call with the startup?
  • Why should they have a meeting with you?
  • Why should they start a due diligence process with you?
  • Why should they start to negotiate terms and conditions with you?
  • Why should they decide to give you cash?

Due diligence begins before there is a funding deal to consider.

  • Early-stage funds encourage startups to: enter information into the funds’ databases at the pre-revenue stage and before asking for funds; update the data regularly; provide month updates to the fund; etc. Software tools analyze the data to identify high potential startups.
  • Early-stage funds are using software to build large databases of startups based on existing third party databases and their own tools to scan the web. Analytic tools identify high potential startups.
  • Many funds are now using software to determine which startups to actually contact. InReach Ventures in Europe has built custom software which created a database of over 95,000 startups. The software identified 2,000 candidates for management contact.2 Framework Venture Partners (Toronto Canada) has a 20,000 startup database with about 100 datapoints per startup.  Startups from the pre-revenue stage on can submit information and receive benchmark feedback.3

Due diligence also occurs at the deal sourcing stage

Only 12% of deals arise from companies applying to VCs. Each of the deal sources does some degree of due diligence.

Where do VCs source early-stage deals?4

31% Generated through professional network

23% Proactively self generated

22% Referred by other investors

12% Inbound from company management

09% Referred by portfolio company

01% Quantitative sourcing

02% Other

Once there is a deal, each step of the deal process has due diligence.

Harvard Business Review published the findings from a survey of 885 venture capitalists at 681 firms.5

For each deal that closes, on average:

  • 101 deals are considered;
  • 28 deals proceed to a meeting with company management;
  • 10 deals are reviewed at partner meeting;
  • 8 deals have detailed due diligence;
  • 7 deals result in negotiation; and
  • 1 deal actually closes.

What is one example of the questions asked at the screening stage?

Going VC has pass/fail factors in their one-page screening test:6

  • Fit with the fund themes and areas of focus.
  • Addressing problems in the fund’s target industries/sectors.
  • Startup stage aligns with the fund’s target stages.
  • Startup target geography aligns with fund’s target geography.
  • Quality of the referral.
  • Strengths of the startup’s partnerships, customer traction and suppliers.
  • Startup’s market size aligned with fund’s target market size.

What are the most important factors for VC investment decision making?4

What do VC’s say is the most important factor when they make the final investment decision?

53% team

13% fit with the fund

12% product/technology

07% Business model

07% Market

06% industry

02% fund’s ability to add value

00% valuation (not a typo – 00%)

Why is the team the most important factor at investment decision time?  Capital is unlimited but the talent to search out a large market and supporting business model is very scarce.  The team must have demonstrated that: they can work together, learn a variety of skills very quickly, build relationships quickly, make fundamental changes in direction when required, have integrity and trust worthiness, maximize the results from careful cash management, etc.

Andreessen Horawitz looks for three things in a startup: huge market, differentiated technology, incredible people.7

 What are the three areas I assess when hearing someone making a pitch?

#1 What is the market risk and value proposition risk

How many potential customers have an urgent need or problem they are willing and able to pay to address?

Red flags for me are:

  • Focusing on customer and user “needs”. Everyone has lots of needs. Not every need is urgent enough to warrant spending money.
  • Market size is based on a chart from a consulting firm.
  • Market size is focused on users i.e. not the cash paying customers
  • Not knowing who the cash paying customer is.
  • Not having interviewed and surveyed potential customers to understand the problems and needs they are willing and able to pay to address.
  • Market size is based on the founders opinions and hopes rather than the understanding of potential customers.

#2 What is the technology/solution risk?

  • Can the founders explain the competitively differentiated technology/solution so that anyone can understand? Albert Einstein supposedly said “If you can’t explain it to a six-year-old, then you don’t understand it yourself.”
  • If I have current and relevant knowledge of the technology/solution, what is my assessment?
  • If there is someone who I trust, and who has current and relevant knowledge, what is their assessment?

#3 What is the talent risk?

  • Is the CEO presenting or some else?
  • Do I understand what the CEO is saying?
  • Does the CEO understand the customer and market place metrics?
  • Do I trust the CEOs answers to questions?
  • What does the CEO (and team) know what competitors do not know?

What are your next steps

If you’re an investor:

  • Ensure you have an investment thesis.
  • Define your due diligence process and questions. You’ll need several stages of due diligence to quickly screen out companies for which you’ll put in the time and resources for detailed due diligence.

If you’re a startup:

  • Write down your answers to the three overarching due diligence questions apply to any company or fund at any stage: How many cash paying customers are there with urgent problems and needs they are willing and able to pay for? How does your startup enable customers and users to achieve more value than the competition? How is your leadership team competitively differentiated?
  • Define how you communicate these answers to investors and your team: in person or video calls, in presentations, in seminars, in your newsletter, on your website.
  • Research your target investors to understand their due diligence process and detailed questions.

If you’re a company past the startup stage:

  • Follow the same steps as a startup, described above.

If you are a company that is not planning at any point to raise capital:

  • Follow the same steps as a startup, described above. Note that you need to communicate with any existing capital providers

 Footnotes

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

2 Maija Palmer, “Artificial Intelligence is guiding venture capital to websites”, Financial Times, https://www.ft.com/content/dd7fa798-bfcd-11e7-823b-ed31693349d3

3 Framework Venture Partners, “What is world class – how do we benchmark venture companies?”, https://www.framework.vc/blogs/what-is-world-class-how-do-we-benchmark-startup-companies/

4 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, Medium,  https://medium.com/vcdium/venture-capital-decision-making-c3258bc1b09c

5 Paul Compers, Will Gornall, Steven N. Kaplan, Ilya A. Strebulaev, “How do venture capitalists make decisions”, Harvard Business Review, https://hbr.org/2021/03/how-venture-capitalists-make-decisions

6 GoingVC Team, “Screening Scorecard”, GoingVC,  https://www.goingvc.com/post/venture-capital-due-diligence-the-scorecard

7 Corporate Finance Institute, “How VCs look at startups and founders”, Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/other/how-vcs-look-at-startups-and-founders/

What further reading should you do?

How do venture capitalists assess teams?

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

/

Tom Koor

Traditional corporate governance dooms your company to failure. V2

Traditional corporate governance dooms your company to failure. V2

 What is the purpose of this article?

Help shareholders, investors, founders, the board of directors and C-Suite discuss and improve corporate governance.

You can download a PDF of this article from: Traditional corporate governance dooms your company to failure. V2

What are the critical learnings in this article?

  • You need to have a common understand about the purpose and value of governance.
  • You must focus governance on value creation and the ability to survive crisis.
  • You need talent that is qualified to make decisions which result in value creation and enable surviving a crisis. This talent must be supported by processes and technology.

What are some definitions of corporate governance?

#1 “Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

Since corporate governance provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure”1

#2 The Globe and Mail Board Games survey of corporate governance produces a score of a company’s governance based on 38 sets of criteria in 4 areas: 2

  • Board Composition
  • Shareholding and compensation
  • Shareholder rights
  • Disclosure

#3 OSFI (Office of the Superintendent of Financial Institutions), the Canadian Federal Government Regulator of Financial Institutions, has published its guidelines.  There are 4 major areas:3

  • The Board of Directors
  • Risk Governance
  • The role of the Audit Committee
  • Risk Appetite Framework

#4 Law firms often discuss corporate governance in terms of government laws, regulations, and court rulings.

What are the fatal flaws with many approaches to corporate governance?

  • The focus is on the processes and the degree to which processes are carried out. The impact on profitability and value creation for members of the company’s ecosystem has little or no consideration. Two examples; a) a company could score very highly on the Globe and Mail Board Games, while at the same time losing market share and shrinking profits. b) Facebook has transformed the world and generated enormous profits, while not being a great example of corporate governance.
  • Talent requirements often have little or no consideration in corporate governance. Competitively differentiated talent is the key to the company’s value creation for ecosystem members and for the company’s very survival.  The talent criteria and talent assessment of board directors and the C-Suite often have a limited role in corporate governance.
  • Following all the laws, regulations, and court filings do not result in large numbers of cash paying customers.  Many rapidly growing companies are in areas with limited laws etc.  Innovation often is far ahead of government regulation.
  • Corporate governance objectives and practices in a public company with no controlling shareholders are very different from those with a controlling shareholder or in private companies, especially those with unanimous shareholder agreements.
  • The traditional concept of a skills matrix for board directors is obsolete. Early-stage companies, Venture Capitalists, and Private Equity seek directors who are able to enable value creation.  g., I was in a meeting when a director asked if they were going to be nominated for another year.  The response was “what value are you going to provide next year?” A value creation matrix (formal or informal) is being used by companies focused on value creation.
  • Leaders get confused about their roles i.e. the degree to which they coach and mentor talent vs make decisions about talent. g., some board directors attempt to coach and mentor the CEO. It then become difficult to challenge the CEOs recommendations when the directors were involved in the creation of the recommendations.
  • Corporate governance is often focused only on the board of directors and C-Suite. Corporate governance is much broader than that.
  • The skills and experience necessary to make decisions is unclear. g. some governance advisors believe that no skills and experience are required when voting on whether to appoint a CEO or terminate a CEO.  The advisors cite the example of U.S. Congress or Canadian Parliament, where no skills or experience are required for any vote by any member.  Other advisors use the example of the Supreme Court, wh,ere every single justice must have the skill and experience to vote on every decision.
  • The competitive differentiation of the board of directors is often ignored. It is challenging to have a competitively differentiated company without a competitively differentiated board.
  • There is no clearly defined link, and common understanding, of how corporate governance specifically enables your company’s long-term value creation and ability to survive crisis.

 

What are your next steps?

  • Read “Is your company planning to fail?”4 I observe that most companies are successfully executing their plans to fail.
  • Agree upon the purpose of your company.
  • Agree upon your company’s definition of governance and the purpose of governance.
  • Assess your company components (talent, knowledge, processes, technology) relative to your definition of governance and the purpose of governance. This assessment includes the board of directors and C-Suite.
  • Prepare your plan to improve governance.

Footnotes

1 Investopedia 2022 August 22

https://www.investopedia.com/terms/c/corporategovernance.asp

2 Globe and Mail Board Games – 2022 August 222

https://www.theglobeandmail.com/business/careers/management/board-games/article-article-canada-corporate-boards-ranked-2021/

3 Office of the Superintendent of Financial Institutions – Corporate Governance – Sound Business and Financial Practices – September 2018

https://www.osfi-bsif.gc.ca/eng/docs/cg_guideline.pdf

4 Is your company planning to fail? Koor and Associates

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

What further reading should you do?

  • What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

  • What is corporate governance?

https://koorandassociates.org/corporate-governance/what-is-corporate-governance/

  • What is a competitively differentiated board of directors?

https://koorandassociates.org/corporate-governance/what-is-a-competitively-differentiated-board-of-directors/

  • What are the decision-making challenges faced by directors?

https://koorandassociates.org/corporate-governance/what-are-the-decision-making-challenges-faced-by-directors/

  • How can the board of directors create value?

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

  • What are the core components of talent?

https://koorandassociates.org/creating-business-value/core-components-of-talent/

Tom Koor

How can M&A create value? V3

How can M&A create value? V3

What is the purpose of this article?

  • Enable the board of directors, C-Suite, and investors discuss how to achieve value from M&A.

You can download a PDF of this article from: How can M&A create value V3

What are the critical learnings in this article?

  • More than half of all deals destroy value for investors.
  • Focus on creating long-term value for the merged company’s ecosystem members, especially customers.
  • Create the VCO (Value Creation Officer) role. The VCO’s focus is on value creation.

What are the five types of companies doing M&A?

  • Traditional operating companies that will integrate talent, processes, technology, etc.
  • Private Equity firms, which control their companies, acquiring portfolio companies or add-ons to portfolio companies.
  • Venture Capital firms, which will be actively involved in the portfolio companies.
  • Financial investors, who will be passive and not actively involved.
  • SPACs (Special Purpose Acquisition Vehicle) and Search Funds.

Some of the comments below apply to every type of M&A, some apply only to some of the types.

More than half of all deals destroy value for investors.1

The root causes of M&A failure at the deal stage are:

  • The M&A target does not fit the business strategy and future business model.
  • Synergy estimates (both revenue and costs) are optimistic. Relevant external benchmarks are not used. No bottom-up analysis.
  • Weak due diligence.
  • Those accountable for delivering the benefits are not involved at the deal stage.

The root causes of M&A failure at the integration stage are:

  • Taking too long to put in place the leadership accountable for delivering results.
  • Poor change management.
  • Poor planning and execution.
  • Limited ongoing communications with stakeholders.
  • Losing customers.

The value of the integrated company must be greater than the value of the standalone companies.

I have had the luck to be at a board of directors meeting at which the newly appointed CFO presented the results of the company’s past acquisition to: the board and the newly appointed CEO. The combined sales and profits after the merged company were significantly lower than the pre-acquisition sales and profits.  I assume this is what led to appointing a new CFO and a new CEO.

Why are you doing M&A?

  • Support the purpose of your company.
  • Provide increased value to the members of your company’s current ecosystem and the future merged ecosystem. These members include: customers, employees, investors, suppliers, partners, the broader public etc. Some members may be negatively impacted (e.g. employees let go due to cost cutting).  You’ll also have the challenge of allocating value creation among the members.

How will you create long-term value?

#1 Increase the capabilities of your company’s talent pool to drive long-term value growth.  Talent includes everyone in your company, starting with the board of directors.  It’s possible you may have to exit inappropriate talent.

#2 Enable more customers to achieve more value from your company.

  • More customers with more problems and needs they are willing and able to pay to address.
  • More customers perceive your competitively differentiated value proposition.

You may have to exit some unprofitable customers.

#3 Enable key members of your company’s ecosystem to achieve value.

#4 Increase the ability of your new pool of assets to provide value.

  • Your assets include: Processes, technology, intellectual property, partner, suppliers, channels (marketing, sales, distribution).
  • Your new pool of assets may require a number of changes and exits. Duplication should be reduced. Assets which are obsolete or provide little or no value must be eliminated.

The M&A process may also require divestures of: assets, business functions, business units, subsidiaries, etc.

What will be your synergy targets?

Only 58% of acquiring companies publicly announce synergy targets.  Of those that do announce synergy targets, only 29% update investors regarding progress against targets. Successful acquirers have higher internal targets than what is externally communicated.1

What are your next steps?

Your next steps depends upon what type of company you are what type of M&A you are contemplating.  In call cases, you need the VCO (Value Creation Officer) role, which is focused on the achievement of long-term value from M&A.  The VCO recommend the structure, processes, talent, and decision making principle required. The VCO has no decision making authority. If your company decides to ignore the advice of the VCO, you increase the chances of failure.

Some of the things the VCO will consider include

  • As soon as you start thinking about M&A, create the VCO (Value Creation Officer) role. The VCO is focused on creating long-term value from M&A.
  • The VCO will: outline the overall stages and journey of M&A, ranging from first considering M&A through to the eventual achievement of value; outline how Value Creation should be built into the M&A process; not be a decision maker but will suggest the decision making process and criteria (utilize existing governance structures as much as possible); be a temporary role, and without any direct full-time reports.
  • Help define the decision making principles, process, and participants for each stage of the overall M&A process. Decisions will have to be made regarding the allocation of value creation, and value destruction, to the members of your company’s ecosystem.
  • Outline the purpose of your company and of the post-merger company.
  • Document the purpose of M&A.
  • Describe the ecosystem members of the merged company and the impact on them of the merger. Model how much more value will be created by the merged company compared to the standalone companies.
  • Describe your approach for creating long-term value.
  • Describe why you’ll be able to create more value than competing bidders.
  • Help determine the maximum amount you are willing to pay. This will depend upon the terms and conditions.
  • Outline the various teams e.g. deal team, integration team, talent team, due diligence team. There may be multiple teams e.g. the talent team addressing changes to the board of directors may be different from the team addressing the C-Suite which may be different from the team addressing customer contact centre. Each team is accountable for the creation of their plan and achievement of the benefits arising from plan execution.

The scope of the plans may include changes to: board of directors, C-Suite, talent throughout the company, the organization structure,  processes, technology, channels, partners, etc.

The talent team(s) considerations include the following:

  • Outlining the CEO, President, Chief Operating Officer, C-Suite and C-suite direct reports roles and organization structure for the merged company.
  • Assigning accountability for the roles, within the merged company, which will be accountable for achieving value. Set the targets for each role. If the people occupying the roles will not commit, then replace those people. If the people who will occupy the roles will come from the merged company, then determine their commitment to targets as soon as possible.
  • The people accountable for value achievement are also accountable for the plans to achieve that value.
  • Those who will be accountable for creating and achieving value must have a degree of involvement with the due diligence.
  • Before exiting talent, consider their improvement or reallocation potential, if they had advisors, coaches, or trainers.
  • The two critical ways of looking at talent are; the value of the role and the value (current and potential) of the person in the role.

Who is the VCO?

The VCO may be a part-time or full time role for someone already part of your company OR may be a temporary outsider. Who might the VCO report to?

  • The controlling shareholder (if a private company);
  • The board chair; or
  • The CEO.

 

Footnotes

1 “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

Further reading

Do you understand your customers? V2

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

Do you understand your company’s external ecosystem?

https://koorandassociates.org/strategy-and-strategic-planning/do-you-understand-your-companys-external-ecosystem/

Is your company planning to fail?

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

“The six types of successful acquisitions”, McKinsey, 2017 May

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

“Change management in merger integration” Bain, 2017

https://www.bain.com/insights/change-management-in-merger-integration/

2023 Global M&A Report – Bain

https://www.bain.com/globalassets/noindex/2023/bain_report_global_m_and_a_report_2023.pdf

 

Tom Koor

Do you understand your company’s external ecosystem?

What is the purpose of this article?

Help founders, the C-Suite, board of directors, investors, and others understand your company’s external ecosystem.

You can download a PDF of this article from: Do you understand your company’s external ecosystem

What are the critical learnings in this article?

  • Not understanding your company’s external ecosystem can doom your company.
  • An ecosystem is broader and more complex than your company’s stakeholders.

What is an ecosystem?

A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.1

A stakeholder is a party that has an interest in a company and can either directly affect or be affected by the business. 2

An ecosystem is broader than your company’s stakeholders, interact with each other, and may indirectly affect or be affected by your company.  Ecosystem members may be competing, may emerge in the future, or disappear in the future. The members may not even be aware of your company.

Who are some of the potential members of your company’s external ecosystem?

Cash paying customers, users, suppliers, distributers, established companies, competitors, legislators, regulators, NGO (non-governmental organizations), not-for-profits, technology researchers and academic institutions, communities ranging from local to global, industry consortia, governments at national and local level (including legislators and regulators), entrepreneurs or startups, etc.

Why do you need to understand your external ecosystem?

Imagine if you don’t understand:

  • Why your customers buy from you rather than other companies? How your customers perceive your competitive value proposition?
  • How potential employees perceive the value of joining your company?
  • How current and potential investors perceive your company, relative to other investment opportunities?
  • And so on.

Lack of understanding can doom your company.

What are the three types of interaction with your company?

  • One-on-one people interaction e.g. individual email, phone or video call, in person face-to-face.
  • One-on-one software interactions e.g. chat bot, using the software components of your solution, browsing your website.
  • Indirect interaction e.g. mass emails, reading about your company on social media.

Ecosystem members can impact your company, even if there is no interaction.

  • Some members may have no interaction with your company? E.g. NGOs (Non-Governmental Organization) which drive changes to laws and regulations impacting your industry and your company.
  • Another example is researchers developing and rolling out new technology. E.g. ChatGBT signed up over 1 million users in five days. Netflix took 3.5 years, Twitter took 2 years, Facebook took 10 months, Spotify took 5 months, and Instagram took 2.5 months.

What do you need to understand about your external ecosystem?

All these questions need to customized for your specific situation.

The following are questions regarding members who interact with your company

  • Who are the members of your external ecosystem?
  • How many members are there, of each type?
  • Which members interact one-on-one with people in your company?
  • Which members have one-on-one software interactions?
  • Which members have interactions?
  • What are the members problems, needs, and issues?
  • What are the members perceptions regarding your company, its leadership, employees, and the specific points of interaction?

To complete your picture of your external ecosystem, you also need to identify and understand:

  • Who are the members who can impact your company but don’t interact with your company?
  • How do all these external members interact with each other?

What is the current challenge most large companies face regarding their external ecosystem?

PWC’s 26th annual global CEO survey showed that few companies were collaborating with ecosystem members to generate business value or address social issues. 1

  • With established companies or competitors: 26% to create business value, 13% to impact social issues
  • With industry consortia: 20% to create business value, 16% to impact social issues
  • With entrepreneurs or start-ups: 20% to create business value, 10% to impact social issues.
  • With governments at the national or local level: 19% to create business value; 18% to impact social issues
  • With academic institutions: 16% to create business value, 12% to impact social issues
  • With non-governmental organizations: 10% to create business value, 14% to impact social issues.

What are your next steps?

Recognize that understanding your external ecosystem members will be an iterative, evolving, and ongoing process. This understanding is part of what drives your company’s short and long-term plans and execution. The first few steps include:

  • List your current external ecosystem members.
  • For each one, customize the questions above and answer them. If you don’t have fact based answers, then document your assumptions.
  • Identity the potential short-term impacts on your company.
  • Look 5-10 years into the future and create scenario of ecosystem members and answers or assumptions to the questions above.
  • Identify the potential long-term impacts on your company.

Footnotes

1 Adapted from Investopedia 2021 Jan 20

2 Adapted from Investopedia 2023 Jan 09

3 PWC’s 26th annual Global CEO Survey, Page 18

https://www.pwc.com/gx/en/issues/c-suite-insights/ceo-survey-2023.html

 What further reading should you do?

Do you understand your customers? V2

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

Tom Koor

Values – U.S. Army V2

What is the purpose of this article?

  • Enable investors, the board of directors, C-Suite and others to discuss the values of your company.
  • Help identify the role of values in selecting, assessing, and exiting: board directors, C-Suite, and other members of your company.

You can download a PDF of this article from: Values – US Army V2

What are the critical learnings in this article?

  • Values are doing what is right – which is far more than following the law.
  • Acting and behaving on values may come with great personal pain.

 What is the purpose of the U.S. Army?

“To deploy, fight and win our nation’s wars by providing ready, prompt and sustained land dominance by Army forces across the full spectrum of conflict as part of the joint force.”1

“THE ARMY OF 2030

As the Army comes out of the conflicts in Iraq and Afghanistan and refocuses on the pacing challenge of China and the acute threat posed by Russia, Army leaders are directing the most significant reorganization and technical innovation since the end of the Cold War — ensuring our adversaries cannot outrange or outpace us on traditional battlefields, or the new frontiers of space and cyberspace.

The world is changing, and the Army is changing with it.”1

 I observe that the U.S. Army purpose is focused on the long-term future, not the past or near-term.

What are the values of the US Army?1

 LOYALTY

Bear true faith and allegiance to the U.S. Constitution, the Army, your unit and other Soldiers. Bearing true faith and allegiance is a matter of believing in and devoting yourself to something or someone. A loyal Soldier is one who supports the leadership and stands up for fellow Soldiers. By wearing the uniform of the U.S. Army, you are expressing your loyalty. And by doing your share, you show your loyalty to your unit.

DUTY

Fulfill your obligations. Doing your duty means more than carrying out your assigned tasks. Duty means being able to accomplish tasks as part of a team. The work of the U.S. Army is a complex combination of missions, tasks and responsibilities — all in constant motion. Our work entails building one assignment onto another. You fulfill your obligations as a part of your unit every time you resist the temptation to take “shortcuts” that might undermine the integrity of the final product.

RESPECT

Treat people as they should be treated. In the Soldier’s Code, we pledge to “treat others with dignity and respect while expecting others to do the same.” Respect is what allows us to appreciate the best in other people. Respect is trusting that all people have done their jobs and fulfilled their duty. And self-respect is a vital ingredient with the Army value of respect, which results from knowing you have put forth your best effort. The Army is one team and each of us has something to contribute.

SELFLESS SERVICE

Put the welfare of the nation, the Army and your subordinates before your own. Selfless service is larger than just one person. In serving your country, you are doing your duty loyally without thought of recognition or gain. The basic building block of selfless service is the commitment of each team member to go a little further, endure a little longer, and look a little closer to see how he or she can add to the effort.

 HONOR

Live up to Army values. The nation’s highest military award is The Medal of Honor. This award goes to Soldiers who make honor a matter of daily living — Soldiers who develop the habit of being honorable, and solidify that habit with every value choice they make. Honor is a matter of carrying out, acting, and living the values of respect, duty, loyalty, selfless service, integrity and personal courage in everything you do.

INTEGRITY

Do what’s right, legally and morally. Integrity is a quality you develop by adhering to moral principles. It requires that you do and say nothing that deceives others. As your integrity grows, so does the trust others place in you. The more choices you make based on integrity, the more this highly prized value will affect your relationships with family and friends, and, finally, the fundamental acceptance of yourself.

PERSONAL COURAGE

Face fear, danger or adversity (physical or moral). Personal courage has long been associated with our Army. With physical courage, it is a matter of enduring physical duress and at times risking personal safety. Facing moral fear or adversity may be a long, slow process of continuing forward on the right path, especially if taking those actions is not popular with others. You can build your personal courage by daily standing up for and acting upon the things that you know are honorable.

What are your next steps?

  • Compare your company’s purpose and values to the U.S. Army purpose and values.
  • Outline the purpose of your company.
  • Describe how your company’s values enable the achievement of your company’s purpose and your company’s long-term competitive success.
  • Describe how values are used to: select, assess, and exit – board directors, the C-Suite, and other employees, contractors, suppliers and partners.

Footnotes

1 U.S. Army website November 14, 2022

https://www.army.mil/about/#:~:text=Our%20purpose%20remains%20constant,part%20of%20the%20joint%20force.

 What further reading should you do?

Why are values, morals, and ethics important?

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

Society’s trust in corporate leadership and political leadership is low.

https://koorandassociates.org/values-morals-and-ethics/societys-trust-in-corporate-leadership-and-political-leadership-is-low/

Tom Koor

What does the Toronto startup ecosystem look like? V6

What is the purpose of this article?

  • Help participants of the Toronto Startup Ecosystem understand the broad scope and many components.
  • This document focuses on the high-tech and software startup ecosystem, and outlines the different types of members comprising the ecosystem.

You can download a PDF of this article from: What does the Toronto startup ecosystem look like (V6)

What are the critical learnings in this article?

The Toronto Startup Ecosystem is global, with hundreds or even thousands of interreacting members.

What is a business ecosystem?

“A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, society, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.” 1

What is the value of taking an ecosystem perspective?

  • Members who have no direct involvement with your company may have a massive impact on your company. e.g. social license to operate.

How do you picture an  ecosystem?

  • Each ecosystem member is in a circle.
  • Each member has a line to every other member.
  • You’re right – this is a complex diagram.
  • It is reality today e.g. a local community around a proposed mine in a third world country has the potential to stop the development of the mine, thus impacting your company’s profits.

The Toronto ecosystem is global in scope

  • Startups based in Toronto may have global customers, investors, employees, etc. Toronto funds may invest globally.

The following is a list of the 26 components of the Toronto startup ecosystem,

The is not intended to be 100% complete. It’s my current understanding.

#1 Founders

May be in Toronto, or anywhere in the world.

 #2 Cash paying customers and users

May be in Toronto, or anywhere in the world.

 #3 Employees

May be in Toronto, or anywhere in the world

#4 Accelerators and incubators

There are a broad range of incubators and accelerators and almost every one is different. As a startup evolves, it may move among several different types of incubators and accelerators.  Incubators and accelerators focus on startups where they  can have maximum impact by utilizing admittance criteria and processes. Common characteristics of incubators and startups are:

  • Links to investors.
  • Access to lawyers.
  • Access to mentors and advisors
  • Networking with other startups.
  • Financing is sometimes provided.

Incubators

The goal of an incubator is to help take a start-up to the point where there is a MVP (Minimum Viable Product). The process takes 12 to 24 months.  The founders decide what incubator resources to draw upon and at what time.

The key characteristic of an incubator is co-located office space with other start-ups.

Accelerator

The goal of an accelerator is to quickly grow the size and value of the startup to enable future funding. The key characteristic of an accelerator is taking a start-up company (which already has a Minimum Viable Product) through a very structured 3-4 month process. Actions and outcomes are required every 1-2 weeks.

As of November 21, 2022, Toronto has more than 97 incubators and accelerators2

  • Toronto startups also join incubators and accelerators elsewhere in Ontario, and around the world.

#5 Venture studios

A venture studio comes up with an idea, assembles a team of founders, and provides capital for the Startup. A venture studio has some combination the of the following 6 characteristics:3

  • The Guild: The internal resources of a venture studio. Includes a strong core team of startup operators, financial capital, space, connections, and infrastructure.
  • The Idea: venture studio either generates ideas internally or sources them externally.
  • The Structure: venture studio either operates as a holding company or has a holding company and VC fund.
  • The Funding: venture studio provides the financial capital to source, test, and validate the idea but then have the option to continue funding in-house or seek outside investment.
  • The Volume: The number of startups to work on at any one time is a differentiating factor among venture studios.
  • The Focus: venture studios either operate as generalists or specialists within an industry, technology, or region

As of Nov 21. 2022, Toronto has more than 43 funding organizations.  Countless more from around the world invest in Toronto based startups.2

#6 Angel investors

There are individual angel investors as well as angel investor groups. Angel investor groups have government supported infrastructure (e.g. staff, office space), but the government does not provide capital to startups applying to the angel investor groups.  The capital comes from the angel investors.

 #7 Funding platforms

  • Non-equity. This may only be a donation, the investor may receive some type of tangible award, or the investor receives a future product once it is available. g. Kickstarter
  • Equity and debt. The investor does get equity or debt. The OSC (Ontario Securities Commission) has several prospectus exemptions which a crowding platform may utilize.  Depending upon the legal structure of the platform, and investor characteristics, an investor may be able to invest any amount.   g. AngelList, Gust.
  • Private placement e.g. DealSquare.

#8 Equity Investment Funds

  • There are a large number based in Toronto. There are many funds outside of Toronto and outside of Canada that also invest in Toronto startups.
  • Most have specific investment criteria e.g. where is company headquarters, type of customers or market, type of technology, whether or not the startup has a specific social purpose.

#9 Corporate Venture Capital

A large established company (not an investment fund)  takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.

#10 Debt Investment Funds

  • Traditional bank loans, line of credit, etc.
  • Venture debt for startups and companies that don’t have significant assets or positive cash flows and therefore often don’t have access to traditional bank loans or material amounts of bank financing.

#11 Income revenue sharing funds

The capital is repaid from a percentage of the startups cash flow. E.g. Clearbanc.

#12 Investment dealers/underwriters

Sartups can raise equity by listing on the CSE (Canadian Securities Exchange), or on the TSX Venture Exchange.

#13 Organizations to buy or sell your company

These organizations will help you sell your startup, once it’s achieved some success.  They can also help you buy other companies.

#14 Organizations to meet your talent requirements

  • Outsourced or offshore talent providers. These provide contract resources.
  • Talent acquisition. There may acquire employees for the startup, from around the world.
  • Talent development. These aim to improve the capabilities of your existing talent.

#15 Associations

There are associations focused on specific types of ecosystem members e.g.

  • Angel investor groups e.g. AIO (Angel Investors Ontario), NACO (National Angel Capital Association – Canada), ACA (Angel Capital Association – United States)
  • Founders e.g. BFN (Black Founders Network)
  • etc.

#16 Advisors – legal, financial, functional

Every startup requires a range of advisors.  For example, financial software can collect and report on a broad range of information.  An accountant can advise on how to set the software up.  Lawyers are key to providing advice on the range of legal and regulatory requirements, and how best to meet them.

#17 Tools and services for startups

These address a range of issues including:

  • Understanding customers and users
  • Creating prototypes
  • Building and maintaining the solution
  • Marketing and sales
  • Customer onboard and ongoing
  • Billing, payment processing, payroll, financial reporting, etc.

#18 Reviews of startup companies

Some companies are focused on reviewing startup solutions.  Other companies enable reviews of startups as a sideline to their main business (e.g. job boards enable employee reviews of the CEO).

#19 Conferences

Conference organizers manage Toronto conferences focused on startups.  Many of the organizations in the Toronto ecosystem also host events.

#20 Regulators

Every startup needs to be aware of regulatory requirements as soon as they start raising capital.  Financial Services startups must be compliant with many more regulatory requirements.

#21 Federal government programs

Startups can benefit from tax credits, financing, and advisory support. When going global, Canadian trade commissioners are based in 160 global cities.  The startup Visa program enables a foreign employee with a job offer to quickly obtain a visa to work in Canada.

#22 Ontario government programs

The Ontario government has numerous programs.

#23 Municipal programs

Toronto has the Startup Here program and other programs.

#24 Ecosystem researchers

  • Some individuals and organizations analyze and publish research regarding the ecosystem e.g. Charles Plant
  • A variety of databases have collected different types of information regarding the ecosystem e.g. Crunchbase, HockeyStick, etc.

#25 Startup charities

The Upside Foundation focuses on startup companies donating stock options.

#26 Coworking space companies

Once the startup leaves the founders’ homes (or accelerator) they may move to a coworking space. Coworking spaces also enable a startup to quickly establish a global physical presence.

Footnotes

1 Adapted from Investopedia 2021 Jan 20

2 Startup HereToronto   https://startupheretoronto.com/startup-support/

3 https://medium.com/datadriveninvestor/how-to-differentiate-startup-studios-d3cb394e3ecf

 What further reading should you do?

What does the startup journey look like?

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

Is your startup planning to fail?

https://koorandassociates.org/the-startup-journey/is-your-startup-planning-to-fail/

Tom Koor

What is a competitively differentiated board of directors?

What is the purpose of this article?

  • Enable investors, founders, the board of directors, and C-Suite discuss the value of a competitively differentiated board as well as the process for creating and maintaining this differentiation.
  • This article only considers those companies where all decisions are made by the board as a whole. This excludes companies with: controlling shareholders, shareholders agreements, golden shares, one director dominating and controlling board behaviour, etc.

You can download a PDF of this article from: What is a competitively differentiated board of directors

What are the critical learnings in this article?

  • A long-term competitively differentiated company required a competitively differentiated board of directors, decision making processes, and supporting technology.
  • There are several components to the director selection process, concluding with an evaluation of their value contribution during a one-year period as a board observer.

 Why do you need a competitively differentiated board  of directors?

I assume that a competitively differentiated board results in a competitively differentiated company.

  • Directors are ultimately responsible for the long-term success of the corporation.1
  • It is difficult for your company to competitively succeed if your board makes poor decisions regarding: CEO appointment and termination, strategies, budgets, crisis management, etc.
  • Sometimes luck plays a role, but you must not depend upon luck to be successful.

How do you measure your company’s competitive differentiation?

Competitive differentiation is perceived differently, by different members of your company’s ecosystem.  Every perception is a combination of facts, analysis, and emotions.

  • Investors may consider total shareholder return over a number of years, or at exit time if a private company.
  • Bond holders may consider their returns and no default.
  • Your company’s economic performance is in the top quartile or even decile. You company may not be the #1 economic performer relative to your competition. Why? You company is balancing the sharing of economic wealth among ecosystem members such as: employees, local communities, overall society, etc.  For example, I know companies with a fantastic economic result but: employees are not paid a living wage, there is zero concern about the impact on local communities, etc.
  • Employees may consider: alignment of company purpose, values, morals, and ethics with their own views, and compensation. Your employee’s rating of your leaders and recommendation of your company to people they know is higher than the competition. Other companies poach your employees because you’ve been able to develop and grow them. This isn’t a problem for your company, because it’s easy to hire new people. People want to work for your company rather than your competition.
  • Customers: Market share increases because your company better understands customers and provides solutions from which the customer gets more value from, relative to your competition
  • Local communities and society think highly of, and trust, your company’s board of directors and C-Suite.
  • etc.

What are the characteristics of a competitively differentiated board?

There are three parts: talent, processes, and technology.  Poor talent, combined with poor processes, and poor technology results in a poor board. A company with a poor board is counting on luck in order to beat the competition.

  • The board as a whole is competitively differentiated team.
  • Each board member has 1 or more characteristics where they are competitively differentiated.
  • The board has differentiated decision making processes.
  • The board may also have differentiated technology support.
  • Every single board member must have the required values, morals, and ethics.

What are your next steps?

  • Review the purpose of your company.
  • Identify the key members of your company’s ecosystem.
  • Determine how the key members of your company’s ecosystem currently measure your company’s differentiation.
  • Decide what differentiation will look like to each key ecosystem member. You will have to do trade-offs – your company can’t be the everything for every member of your ecosystem.
  • Determine what collective board decisions, actions, and behaviours will result in the desired perception of differentiation. Director actions and behaviours will be visible in many ways, including: at the Annual General Meeting, management meetings, social media, and countless interactions with a variety of people and organizations.
  • Outline the board’s decision making processes, for both the board as a whole and each board committee. The intent is to have a better process than competitors.
  • Based on the above, define what relevant past experience, skills, and expertise are required for the board as a whole, for each board committee, and for each individual director. Assess each individual director for: cognitive skills2, fluid intelligence3, and perseverance. Behavioural interviewing and psychological testing are key.  Director candidates should also undergo a simulation. This results in competitively differentiated directors.
  • Value, morals, ethics, and integrity are mandatory. Warren Buffett supposedly said “..looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  • Each potential director nominee should spend one year as a board observer, with their value contribution being assessed prior to being nominated and elected.
  • Establish an ongoing process to understand how ecosystem members perceive your company’s competitive differentiation. This must be done yearly as well as when any major external changes or crisis occur.
  • Regular assess: the board as a whole, each director, the board decision making processes, and supporting technology. Every year, you need to make the decisions on whether or not your have the best directors OR if should exit some directors.  This is the same concept as zero based budgeting.
  • Your crisis management process must include the board of directors. g. every year, run a simulation with the board using a potential crisis.  I assume that you have a crisis management process, a leader (or team) supporting the process, and a crisis war room.

Footnotes

1 Professor Didier and Estelle Metayer, “Does your board really add value to strategy?”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/

2 What are cognitive skills?

https://www.mindmattersjo.com/what-are-cognitive-skills.html

3 Fluid vs crystallized intelligence

https://www.simplypsychology.org/fluid-crystallized-intelligence.html