My regular update regarding my learnings and unlearnings

The purpose of staying in touch with you is to share my learnings and unlearnings, with the hope that some will be of value to you.

Personal Update:

  • My mentoring program with 1st year Rotman Business School MBA students, for the 2022-2023 school year is in the planning stages. Many students in consulting hope to work for McKinsey, Bain, or BCG with a starting salary of over $200,000/yr.
  • Devoting significant effort learning about and be part of the Toronto startup ecosystem, which is global in scope. It is critical to understand how early stage companies are disrupting and destroying traditional established companies.
  • Mentoring a startup at the University of Toronto Department of Engineering – Hatchery. Helping them think through how to disrupt and transform the world.
  • Being an advisor at the Holt Xchange, a global fintech fund and accelerator.
  • Being a member of the Angel One Investor Network, which is a member of Equation Angels.
  • Being a Patient Family Advisor at the Odette Cancer Centre – Sunnybrook Hospital.
  • Continuing my long-term fundraising for the Geoff Carr Fellowship at Lupus Ontario. Over the past 16 years family, friends, neighbours, and colleagues have contributed over $251,000. There is a contribution link at the end of this update.
  • Continuing to share with you, and on my website, some of what I’ve learned with the intent that some of you will find of value. The learnings are applicable to any size company, ranging from an early stage startup to large global enterprises.

My biggest learnings in the past three months

  • The distribution of people performance follows a power law. The top 1% of workers generate 10 time the output of the average worker.
  • The distribution of company economic profit follows a power law. The top 20% of companies earn 90% of economic profit. 60% of companies earn little economic profit.
  • The best way to determine how someone will perform in a job is a work sample test e.g. assess a potential board director in an observer role for 1 year, prior to putting them forward for election. Years of experience are a poor predictor of job performance.
  • The major of founders of companies which achieved a $1 billion U.S. valuation had less than two years of relevant domain experience.
  • Company leaders may need four types of third party support: Strategic Advisors, Coaches, Consultants, and Trainers.
  • It’s hard for a company to beat competitors who have better board’s of directors and C-Suite executives.
  • Warren Buffet supposedly said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two.”
  • Successful growing companies and VC funds all agree that: Must focus on customers who believe that they have urgent problems and needs they are willing and able to pay to address. Many companies leaders I meet don’t believe that they don’t need to understand what customers think, feel, and value.
  • Successful startup founders regularly mention that the key to their success was talking to customers on a going basis. Dominic Barton, when he was global managing director of McKinsey, talked with two CEOs (or equivalent) every day.

Sharing my learnings

My website (https://koorandassociates.org/) contains my points-of-view regarding key issues and questions regarding value creation and growth in for-profit businesses. Each point-of-view is a brief article designed to enable discussion among founders, owners, shareholders, investors, CEOs, boards of directors, and advisory boards. I do not address not-for-profits, government, or other non-profit oriented organizations.

 Below are links to my website containing: new and revised points-of-view since my last update in April.

Points-of-view links:

Critical learning from Collision 2022 (North American startup conference for founders and investors

https://koorandassociates.org/creating-business-value/critical-learnings-from-collision-2022/

Elite talent – what is the purpose?

https://koorandassociates.org/creating-business-value/elite-talent-what-is-the-purpose/

Strategic Advisor vs Coach vs Consultant

https://koorandassociates.org/creating-business-value/strategic-advisor-vs-coach-vs-consultant/

Billion dollar startup characteristics

https://koorandassociates.org/creating-business-value/billion-dollar-startup-characteristics/

Why are values, morals, and ethics important? V2

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

How can a private company sell securities in Ontario? V2

https://koorandassociates.org/selling-a-company-or-raising-capital/how-can-a-private-company-sell-securities-in-ontario/

What will be the board and C-Suite talent requirements? V2

https://koorandassociates.org/creating-business-value/what-will-be-the-board-and-c-suite-talent-requirements/

 To support the Geoff Carr Fellowship at  Lupus Ontario

https://sna.etapestry.com/fundraiser/LupusOntario/research2022/individual.do?participationRef=12744.0.303532049

Critical learnings from Collision 2022

What is the purpose of this article?

  • Share my critical learnings from my three day attendance at Collision 2022 in June 2022. Collision was a North American startup conference with 35,000+attendees, ranging from pre-revenue founders to large established companies, and investors ranging from angel investors to multi-billion dollar funds.
  • These learnings may be from a single person or a composite from many people. In many cases, I’m quoting directly.
  • I believe that these learnings apply to any size company.
  • The learnings in this article are only a tiny subset of my 45 pages of notes.

You may download a PDF of this article from: Critical learnings from Collision 2022

What are the critical learnings in this article?

Partners of investment funds said that there is always money available, they are continuing investments in new companies and portfolio companies

  • The key criterion is that companies are solving urgent problems for customers.
  • Companies must cut costs asap if they are: not solving problems for urgent customers, losing customers, spending too much to get customers, targeting customers who provide declining profits, etc.

Don’t spend any money on advertising or scaling your company until you have customers who are crying in happiness because they have your solution. Customers should be coming to you.

You need to be constantly talking to your customers, regardless of what stage your company is at.  You need to ask them what they’re doing in the 15 minutes before and after they use your solution.

Every company is a data company

  • What do you know about your customers and users that no-one else knows?
  • This unique knowledge drives: your solution, the customer/user experience you create, your marketing and sales approach.

What did the CEO do when the business customers’ urgent problems changed, resulting in 60% of customers leaving and CEO terminating 1/3 of the staff?

  • The CEO talked with every business customer to understand their new urgent problems and needs
  • Using this new knowledge, the CEO then changed the solution, the customer support processes, marketing and sales approaches.
  • The result was a hockey stick revenue growth curve.

How did a startup, working from their kitchen table, get their very first sale, to a company with a $15.7 billion market cap?

  • Solve an urgent problem that is causing pain every single day.
  • Enable the customer to get a 10X performance improvement rather than an incremental 30% improvement.
  • Know more than anyone else about the problem, and how the customer can solve it.
  • Build strong internal relationships with the customer.
  • Take extreme accountability for customer results.

I asked one successful founder (well past the startup stage) “What should an investor do if the startup doesn’t want to talk to customers and users? How can the investor persuade the startup?”  The founder had a two word answer” “Don’t invest”.

The early stage CEO advisor compensation must be 100% equity based. The advisor must have faith in the CEO.

The CEO and investor(s) must have a commonly understood set of expectations for each other. Expectations change over time.

  • The CEO must have a job description for the investor.
  • There are major differences among: lead investor vs major investor vs smaller investors to fill-out the round.

How did a startup founder get 450,000 users in 10,000 businesses in two years with zero spending on customer acquisition?

  • Solve an urgent problem.
  • The user can easily understand the value proposition.
  • It’s easy for the user to get value quickly – ideally in 0 (ZERO) seconds.
  • CEO and developers spend 10% of every single day talking to customers and users.
  • Be obsessed with tracking by customer segment: Acquisition, activation, retention, revenue, and referrals.

The fundraising skillset is different from the sales skillset.

One startup raised funds with no product or solution – absolutely nothing. Except, 400 letters from companies stating they’d buy when the solution was available.

Some seed stage VC funds (targeting startups with 2-12 people) are taking a different approach with what is done with the yearly 2% fund compensation fee.

  • The cash going into partner pockets is being reduced with cash being spent on people to support portfolio companies e.g. providing part-time Chief People Officer, having an on call CFO, helping to structure interviews and surveys, helping to put in place customer metrics such as Net Promotor Score. Two such funds are Primary Venture Partners and First Round Capital. These funds believe that spending to maximize the long-term 20% performance compensation results in the startups, investors, and partners all making more money in the long-term.
  • A partner from one of those funds told me one-on-one that investors considering investment into VC funds should ask how the yearly 2% compensation fee is distributed, and how much goes into partner pockets vs helping portfolio companies.

Some startups said investors should provide a flying squad to help portfolio companies. This flying squad should do actual work (e.g. HR) and not just provide advice.

What are my summary observations after over 40 presentations as well as one-on-one discussions?

  • At Collision, successful investment funds and startups of all size talked a lot about customer/user problems, and customers/users getting value from having problems and needs addressed. g. startup founder who got 400 letters from customers wanting to buy, before spending one cent on building/creating a product solution.
  • Prior to Collision, many of the companies I meet, ranging from pre-revenue to long-term established, talk a lot about their solution. Many of the startups I’ve met first build something and then hope to find customers that have a problem their solution addresses.

What are your next steps?

  • Document your process for understanding customers, including facts, analysis, resulting business changes. Have a third party review and challenge you process, facts, analysis, and resulting business changes.
  • The above critical learnings reflect a number of different scenarios. Compare how your company leadership has responded to these scenarios in the past and would respond in the future.

 What further reading should you do?

Do you understand your customers?

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

Is your company planning to fail?

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

ou may download a PDF of this article from: Elite talent – what is the purpose

What are the critical learnings in this article?

  • Elite talent and elite company performance are rare.
  • Beating the competition requires talent that is better than the competition.

What is the value and need for elite talent?

In today’s competitive business environment, there is unlimited capital for companies that have major competitive differentiation. This requires competitively differentiated talent

What are the characteristics of the elite talent that can create and transform companies?

#1 Leading strategy firm (when hiring MBAs) and global early stage investment funds (when assessing startup founders) are looking for the same type of talent”.

  • Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge. The founders of the majority of unicorns (startups which achieved a $1 billion valuation) had no previous domain experience.1 Roche paid $1.9 billion US for Flatiron Health, a cancer electronic records company.  The Flatiron founders (Nad Turner and Zach Weinberg ) had no background in cancer. They came from advertising. 2
  • Fast and deep analytical skills.
  • Fluid intelligence: the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. For example, successful startup founders, identify problems and needs that have not been well addressed before and create solutions that have never existed before
  • Curiosity – the passion to learn about the world around them and not be silo focused. This broader ecosystem knowledge provides a context for their deep ecosystem knowledge.

#2 Early stage investment funds also look for:

  • The drive and ability to deeply understand customers and users – their problems, issues, emotions, and what influences behaviours.
  • Perseverance: passion and energy to overcome all odds and difficulties to achieve goals. For example, Airbnb was short of cash in the early days. To make money they sold Cap’n McCains and Obama O’s cereal during the Obama McCain presidential run.  The following is a link to the current Airbnb site which still contains the original advertising. (https://www.airbnb.ca/obamaos)
  • Values, morals, and integrity: 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.”

Business performance follows the power law distribution, not a bell curve.

If you want your company to enable your customers to achieve 10 times more value than the competition, some of your key talent must be 10 times better than the competition’s talent.

  • The distribution of company economic profit follows a power law. McKinsey’s study of 2,393 large corporations from 2010 to 2014 showed that the bulk of the economic profit was made bay a small number of companies e.g. the top 20% earned 90% of the total economic profit with the top 2% earning more than the next 8%. 60% of the companies earned little economic profit.3
  • People performance follows a power law distribution, and not a bell curve. Top 1% of workers generate 10 times average output .4
  • Half of all senior hires fail within 18 months.5

How do you recruit elite talent?

  • The best predictor of how someone will perform in a job is a work sample test (29%) 6 For example, when recruiting board directors, they should serve for one year as a board observer, to enable assessing them.
  • The two second best predictors are: are tests of general cognitive ability (26%); 7 and structured interviews (behavioural (tell me about a time) and situational (what would you do if) (26%). 8
  • Four interviews predict whether to hire someone with 86% confidence and each additional interviewer adds 1% confidence. 9 This assumes that you are clear on what value the role provides, the specific characteristics of people who can deliver that value, and do a combination of work sample and structured interviews.

Can your company be competitively differentiated without a competitively differentiated board of directors?

Some people believe that a company can succeed in spite of the board of directors.

What if the board:

  • Appoints the wrong CEO?
  • Has poor decision making regarding major transactions (e.g. M&A), plans, and policies?
  • Demonstrates poor values, morals, and ethics to employees and other members of the companies ecosystem?
  • Etc.

A poor board can certainly impact your company’s success.  However, I have seen cases where an extraordinary CEO has enough influence, persuasion, and guidance to overcome a poor board. I can recall one partner from a major private equity firm saying that with one board seat, he can turn the company around.

What are the implications for your company below the board and C-suite level?

  • With the right processes, technology, and development programs, your average employees can enable your customers to achieve more value than the competition. What’s key is hiring people at all level who have the potential to learn and unlearn.
  • When Google first built their Human Resources team, 1/3 of hires came from traditional HR background, 1/3 from top tier strategy consultants (because good at figuring out problems), 1/3 deeply analytic, with at least a masters degree in analytical fields (physics to organizational psychology).10 Google took the approach building HR practices with ongoing fact-based analysis rather that commonly accepted best practices. Many best practices are actually myths rather than facts.

What are your next steps?

  • Document the past performance of the company, including economic profit, and impact on key ecosystem members such as customers.
  • Outline the future scenarios for your company.
  • Define the required skills, knowledge, experience, networks, values, morals, and ethics required by each board director and C-Suite member to enable success in the future scenarios.
  • Assess your board and C-Suite relative to the above requirements.
  • Assess your competition’s board and C-Suite relative to the above requirements.
  • Identify: improvements to be made to existing directors and C-Suite, members to exit, and members to appoint.

 Footnotes:

1 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, 49

2 Ibid., 53

3 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)

4 Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 182

5 Ibid., 294

6 Ibid., 91

7 Ibid., 91

8 Ibid., 91

9 Ibid., 103

10 Ibid., 361

Elite talent – what is the purpose?

What is the purpose of this article?

Enable the investor, founders, board of directors and C-Suite to discuss the role of elite talent in their company’s success.

You may download a PDF of this article from: Elite talent – what is the purpose

What are the critical learnings in this article?

  • Elite talent and elite company performance are rare.
  • Beating the competition requires talent that is better than the competition.

What is the value and need for elite talent?

In today’s competitive business environment, there is unlimited capital for companies that have major competitive differentiation. This requires competitively differentiated talent

What are the characteristics of the elite talent that can create and transform companies?

#1 Leading strategy firm (when hiring MBAs) and global early stage investment funds (when assessing startup founders) are looking for the same type of talent”.

  • Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge. The founders of the majority of unicorns (startups which achieved a $1 billion valuation) had no previous domain experience.1 Roche paid $1.9 billion US for Flatiron Health, a cancer electronic records company.  The Flatiron founders (Nad Turner and Zach Weinberg ) had no background in cancer. They came from advertising. 2
  • Fast and deep analytical skills.
  • Fluid intelligence: the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. For example, successful startup founders, identify problems and needs that have not been well addressed before and create solutions that have never existed before
  • Curiosity – the passion to learn about the world around them and not be silo focused. This broader ecosystem knowledge provides a context for their deep ecosystem knowledge.

#2 Early stage investment funds also look for:

  • The drive and ability to deeply understand customers and users – their problems, issues, emotions, and what influences behaviours.
  • Perseverance: passion and energy to overcome all odds and difficulties to achieve goals. For example, Airbnb was short of cash in the early days. To make money they sold Cap’n McCains and Obama O’s cereal during the Obama McCain presidential run.  The following is a link to the current Airbnb site which still contains the original advertising. (https://www.airbnb.ca/obamaos)
  • Values, morals, and integrity: 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.”

Business performance follows the power law distribution, not a bell curve.

If you want your company to enable your customers to achieve 10 times more value than the competition, some of your key talent must be 10 times better than the competition’s talent.

  • The distribution of company economic profit follows a power law. McKinsey’s study of 2,393 large corporations from 2010 to 2014 showed that the bulk of the economic profit was made bay a small number of companies e.g. the top 20% earned 90% of the total economic profit with the top 2% earning more than the next 8%. 60% of the companies earned little economic profit.3
  • People performance follows a power law distribution, and not a bell curve. Top 1% of workers generate 10 times average output .4
  • Half of all senior hires fail within 18 months.5

How do you recruit elite talent?

  • The best predictor of how someone will perform in a job is a work sample test (29%) 6 For example, when recruiting board directors, they should serve for one year as a board observer, to enable assessing them.
  • The two second best predictors are: are tests of general cognitive ability (26%); 7 and structured interviews (behavioural (tell me about a time) and situational (what would you do if) (26%). 8
  • Four interviews predict whether to hire someone with 86% confidence and each additional interviewer adds 1% confidence. 9 This assumes that you are clear on what value the role provides, the specific characteristics of people who can deliver that value, and do a combination of work sample and structured interviews.

Can your company be competitively differentiated without a competitively differentiated board of directors?

Some people believe that a company can succeed in spite of the board of directors.

What if the board:

  • Appoints the wrong CEO?
  • Has poor decision making regarding major transactions (e.g. M&A), plans, and policies?
  • Demonstrates poor values, morals, and ethics to employees and other members of the companies ecosystem?
  • Etc.

A poor board can certainly impact your company’s success.  However, I have seen cases where an extraordinary CEO has enough influence, persuasion, and guidance to overcome a poor board. I can recall one partner from a major private equity firm saying that with one board seat, he can turn the company around.

What are the implications for your company below the board and C-suite level?

  • With the right processes, technology, and development programs, your average employees can enable your customers to achieve more value than the competition. What’s key is hiring people at all level who have the potential to learn and unlearn.
  • When Google first built their Human Resources team, 1/3 of hires came from traditional HR background, 1/3 from top tier strategy consultants (because good at figuring out problems), 1/3 deeply analytic, with at least a masters degree in analytical fields (physics to organizational psychology).10 Google took the approach building HR practices with ongoing fact-based analysis rather that commonly accepted best practices. Many best practices are actually myths rather than facts.

What are your next steps?

  • Document the past performance of the company, including economic profit, and impact on key ecosystem members such as customers.
  • Outline the future scenarios for your company.
  • Define the required skills, knowledge, experience, networks, values, morals, and ethics required by each board director and C-Suite member to enable success in the future scenarios.
  • Assess your board and C-Suite relative to the above requirements.
  • Assess your competition’s board and C-Suite relative to the above requirements.
  • Identify: improvements to be made to existing directors and C-Suite, members to exit, and members to appoint.

 Footnotes:

1 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, 49

2 Ibid., 53

3 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)

4 Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 182

5 Ibid., 294

6 Ibid., 91

7 Ibid., 91

8 Ibid., 91

9 Ibid., 103

10 Ibid., 361

 

Strategic Advisor vs Coach vs Consultant

What is the purpose of this article?

Enable your company’s board of directors and C-Suite to discuss the need and value of Strategic Advisors, Coaches, Consultants, and Trainers.

You may download a PDF of this article from: Strategic Advisor vs Coach vs Consultant

What are the critical learnings in this article?

  • Strategic Advisors, Coaches, Consultants, and Trainers are different but may overlap.
  • Strategic Advisors and Coaches are focused on changing an individual or small group (e.g. the board of directors or a board committee).

Why do you need Strategic Advisors, Coaches, Consultants, and Trainers?

  • Your leadership talent will not improve by itself.
  • In today’s competitive business environment capital is unlimited but talent remains scarce.
  • Olympic gold medal winners need world class coaches.
  • Sports teams need coaches and trainers.
  • All levels of the military have ongoing talent development.
  • The best Strategic Advisors, Coaches, Consultants, and Trainers are rarely the best company leaders or the best athletes.

When does your board of directors or C-suite need the four different types of third party support.

  • Strategic Advisor: There may be little clarity regarding: your company’s direction; what the major problems actually are, rather than just the observable symptoms; how to make a strategic decision; or your goals are unclear. You may also want your directions, goals, and decisions challenged, etc.
  • Coach: your leader(s) need help in thinking through how to reach their goal(s).
  • Consultant: you need external expertise and external resources to collect data, analyse it, make recommendations, or implement a solution. Your company’s direction is clear and you know what problems are
  • Trainer: providing your leader(s) with specific skills.

What are the three types of coaches?

  • Life coach – this focuses on dealing with life challenges. Many companies make therapists, psychiatrists and other medical professionals available.
  • Career and behavioural coaching – this includes helping executive settle into new roles, prepare for new roles, and managing the people complexities of existing roles. Psychologists and psychological testing are often used.
  • Business coach: Thinking through business problems, issues, and risks. The leader is accountable for recommendations, decision making, and successful execution.  The coach helps the leader think things through. The coach does not prepare any reports, presentations, or recommendations – the leader does this

What are some of the biggest mistakes you make when obtaining third party support?

These mistakes include:

  • You have your Strategic Advisor present recommendations to your board for their approval. You should be the one committing to the board the results you promise to achieve, and be able to justify your recommendations and decisions to the board.
  • You hire a Consultant to recommend a direction or solution to a major problem. Consultants can provide significant value by: doing fact based analysis of your company, you customers, your competitors and your company’s ecosystem. Consultants should only provide input to your decision making process or assist with implementation.  You need a Strategic Advisor if you don’t have an appropriate decision making process in place.
  • You hire a Coach but the goals are not clear. What you need is a Strategic Advisor.
  • You hire a Strategic Advisor to implement a solution. What you need is a consultant.
  • You hire a Trainer but the skills are not focused on addressing critical long or short-term value creation needs.

The greatest mistake is hiring a Strategic Advisor or Coach  but being unable or unwilling to: learn new things, unlearn old things, change how you think and behave.

What are the characteristics of working with each type of third party support?

  • Strategic Advisor and Coach; Typically, they do not prepare reports or do analysis. That is your accountability.  You may draw upon your staff, Consultants, and other third parties (e.g. lawyers) to assist you.
  • Consultant: Prepares reports and analysis based on the information they collect from: your company, others in your ecosystem, benchmarking, and other research. Implementation consultants may require significant resources from your company and work with others in your ecosystem.
  • Trainer: You go through a structured process to transfer skills and knowledge to people at any level in your company, including the board of directors.

The third party support may work with just one person e.g. the CEO or a team e.g. the board of directors.

Roles may overlap e.g. A Strategic Advisor may help with the decision making process for a strategy and then coach the CEO on how to get everyone in the company focused on the strategy as well thinking through how to make the necessary compensation and process changes. It may be easy to approve a strategy.  You only get value if people are focused on the right actions, behaviours and daily decision making.

What is the support time frame?

  • Strategic Advisors may have a multi-year time frame. g. They may be on the CEO’s advisory board, meeting quarterly. The real benefit of strategic advice is achieving measurable value, which may take many months or several years.
  • Coaches have no more than a 90 day timeline. The focus is on short-term progress and results. There may be a series of consecutive coaching contracts, with evolving outcomes.
  • Consultants may have a broad range of time frames. E.g. achieving results from a global enterprise wide software installation may take several years.
  • Trainers have less than a 90 day time, ranging from a few hours to a few weeks of training. Training may be followed by coaching to ensure that results are being achieved. E.g. there is a difference between taking a sales training course and actually increasing sales.

How do you determine the value of third party support?

  • Who has the problem, need, or opportunity? How do others perceive the problem, need, or opportunity?
  • Why now? What is the impact if there is no 3rd party support or the support fails?
  • What are the desired outcomes and metrics e.g. financial results? C-Suite members not quitting due to a toxic CEO? Improved 360 evaluations? Increased shareholder support for the board and CEO?
  • How will the members of your company’s ecosystem perceive the value of the outcome?
  • Are the goals and long-term directly clear and supported by everyone in the company?
  • When do you need an impact? E.g. within 90 days? Within 5 years?
  • What degree of improvement is required? 5% 25% 100%
  • How important is this to the individual(s) overall role and performance expectations? How will the individual(s) be personally better off?
  • What are the intangible benefits? E.g. risk reduction?
  • Who and how will the judgement be made regarding value? g. A Strategic Advisor who is fun to work with may be of little value.  A Strategic Advisor who asks difficult questions and helps a CEO undergo a stressful major personal transformation may be of tremendous value.
  • Why will the impact if the third party support is a failure?

 What are your next steps?

  • Answer the questions in the above section “How do you determine the value of third party support?”
  • If the answers are unknown, or unclear, you should first start with a Strategic Advisor to enable you to answer the questions. It’s you, and not your Strategic Advisor, who must be able to answer the questions and explain your answers.

 What further reading should you do?

  • Is your company planning to fail? I’ve observed that many, if not most, companies are passionately executing their plans to fail.

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

Billion dollar startup characteristics

What is the purpose of this article?

  • Generate discussion among founders, investors, boards of directors, and C-suite regarding the characteristics of billion dollar startups.
  • Enable the discussion to be fact based rather than base on myths and anecdotes.
  • This discussion should be held whether you are startup or a long established global company.
  • This article refers to three fact based analytical books and reports and includes only a small amount of the enormous collection of factual analysis.
  • This article doesn’t tell you what to do. Just because information is correlated, does not mean there is a cause and effect relationship.

You may download a PDF of this article from: Billion dollar startup characteristics

What are the critical learnings in this article?

  • A billion dollar startup requires a large number of customers who believe: they have urgent problems and needs; are willing and able to pay to address those problems and needs; and that they can obtain better value from your company that the competition.
  • Success depends upon understanding customers better than the competition. This understanding must be fact based using interviews supplemented by survey and analysis of customer actions.

Characteristics of unicorns – startups which achieved over $1 billion U.S. valuation.

Ali Tamaseb studied over 200 unicorns founded between 2008 and 2018.1

What were the founders’ backgrounds?

  • A founder’s age doesn’t correlate strongly with success. Median age was 34. 2
  • The #2 person had an even wider age distribution, from 16 to 76 at time of founding. Founders of health and biotech companies skew older. 3
  • 20% of unicorns had a sole founder. 36% had dual founders, 3 co-founders 28%; 4 co-founders 12% more than 4, 4%. 4

What was the founders’ education?

  • Education: 36% had bachelors; 22% had MBA, 33% had another advanced degree. College dropouts less common than founders with PhDs. 5
  • Of those that went to university: about 35% each went to global top ten vs not in global top 100. About 30% went to global 11 to 100 universities. 6

What was the founders’ work experience?

  • 30% of unicorn founders had only worked for themselves before.7
  • 58% of those who had worked for other companies, (i.e. 70% of all founders), had worked for Tier 1 companies with rigorous hiring processes and reputation for hiring the best. 28% had worked for Tier 2 companies (large and well known). 14% had worked for companies not well known.8
  • Over 50% of founding CEOs and founding CxOs had less that 1 year of relevant industry or work experience. 9
  • 75% of healthcare and biotech founders had directly relevant industry experience; 40% of enterprise technology; and 30% of consumer unicorns. 10
  • What seems to matter was: quickly learning about a new space with unbiased mind, soft skills like building a network, managing a team, hiring and firing, raising money. 11

What was the founders experience with previous startups?

  • 59% of unicorn founders had been a previous founder, sometimes successful, sometimes not. 12
  • Those who had run a company before, experience ranged from a year to 27 years. Most common was 2-3 years (about 25%), about 54% were up to 5 years experience. 13

How severe and urgent were the customers needs and problems?

  • Two approaches: Pain killer (well defined and deeply annoying pain point) or vitamin (customers get better value, efficiency, entertainment or joy) 14
  • 68% of unicorns were pain killers. 15
  • Close to 40% of unicorns address productivity; about 20% address saving time; 11%-15% each are: convenience, entertainment, health. Safety and security are around 2-5% 16
  • Close to 50% of unicorns were system integration (bringing together existing technology. Value add comes from unique business model or marketing strategy). About 25% were technical i.e. fair amount of engineering. About 25% were deep tech i.e. it’s all about being able to create the new technology or drug. 17
  • Over 2/3 of unicorns were highly differentiated from competition. Less than 1/3 were incrementally differentiated. 18

What was the market demand?

  • More than 60% of unicorns started in large markets with well established demand. They either took market share or expanded the market. About 25% started in medium sized markets. About 15% started in small markets. Few unicorns created new demand or waited for the market to mature. 19
  • 68% of unicorns competed for market share. 32% created a new market. 20

When did the founders enter the market?

  • 30% of the time unicorn was first to the market. 30% of the time 2-5th in market.  40% later than 5th in the market. 21

 What are the characteristics of companies which achieved $1 billion in revenue?1

  • More than 60% of new public companies between 1980 and 2010, no longer existed in 2010. 4% of new public companies achieved $1 billion in revenue. 34 public companies a year achieved $1 billion in revenue, regardless of economic cycle.  Only 4% of $1 billion revenue companies make it to $10 billion in revenue. 2
  • 11,000 companies did IPO since 1980 and to end of 2007. Only 4% (410) grew to $1 billion in revenue, but 72% of all IPO taxes, 63% of IPO employees (i.e. 9 million), 64% of market value (i.e. $2.6 trillion), and 69% of all IPO revenue (i.e. $3 trillion).3
  • Failing companies had blind passion, did not self correct, did not adjust to changing customer needs, ran out of cash.4
  • Exponential growth companies continue to grow through tough economic times and recessions.5
  • Exponential growth companies created and sustained break through value propositions – High order benefits or exceptional value as perceived by customers 6
  • Exponential growth companies exploited high growth market segments: created new markets, redefined markets, or created category killers (i.e. killed incumbents). Imported ideas from other industries. Kept redefining market segments. 7
  • Growing to $50 million revenue requires brute force speed. Create and grow customer advocacy community and market momentum as quickly as possible. After $50 million in revenue, have thoughtful speed.8
  • The key to growing a startup to $10 million revenue was based on analyzing 2,000 business plans.9  Create a powerful value proposition. It must address a deep, frequent or changing unmet need. The company has a unique ability to deliver on that need. Contrast the company benefits to the competition. Talk with customers to understand the “frustration” or “What’s not working well”.10

What are the characteristics of SaaS unicorns which became public?1

This researched examined 1,000 SaaS companies in Canada and the U.S.s 400 of which became Unicorn by going public. Many of these went public after 2013.

  • On average, companies needed $125 million in revenue to become a unicorn when they went public. This required $212 million of invested capital. 2
  • The TAM (Total Addressable Market) size when going public needs to be at least $25 billion.3 The % of TAM at IPO time can range up to 2.2%4. Facebook’s yearly revenue at the time of its 2012 IPO was $4.2 billion. The prospectus stated the addressable market was $588 billion, thus % revenue was about 0.7% of addressable market.
  • Most startups do not reach the IPO point but are acquired. The TAM required for acquisition is much smaller than $25 billion.
  • You need a 50% differential in how customers measure competitive differentiation. Customers perceive quality, speed and cost. The customer’s costs may be far higher than what they pay your company. 5
  • You have product market fit when your net promotor score is at least 30 and the % of customers that would be very dissatisfied if they did not have your solution is at least 40%.6
  • Current year marketing and sales as % of current year revenue. 7 About 63% when revenues are $10-50 million. About 52% when revenues are $40-$250 million. About 38% when revenues are over $250 million. The implication is that unicorns usually lost money for many years. Investors provided the capital because lifetime customer profitability exceeded the one time customer acquisition costs.
  • Current year marketing and sales as a % of next year’s revenue should be less than 33% at IPO time. 8
  • The higher the growth rate, the higher the valuation, in terms of revenue multiple. 9

 What are your next steps?

  • Assess your understanding of your customers e.g. how they perceive you, the value they obtain from you, their profitability, etc. Improve your understanding of your customers.
  • Review the facts in your plans. Identify the source of each fact.
  • Review the assumptions in your plans. Determine if there are facts and analysis which would change your assumption. Be clear on which assumptions are opinions and guesses.
  • Be clear on the urgent problems and needs of potential customers and determine how many are actually willing and able to pay for a solution.
  • Recognize facts, assumptions, and analysis are only input to the judgements and decisions you make. E.g the amount of revenue you need to be a unicorn when you IPO may be very different from the average.

Footnotes

1 Ali Tamaseb, Super Founders (New York: Hatchette Book Group, 2021)

2 Ibid., 15

3 Ibid., 16

4 Ibid., 17

5 Ibid., 32

6 Ibid., 34

7 Ibid., 44

8 Ibid., 45

9 Ibid., 49

10 Ibid., 51

11 Ibid., 52

12 Ibid., 60

13 Ibid., 67

14 Ibid., 114

15 Ibid., 114

16 Ibid., 117

17 Ibid., 118

18 Ibid., 122

19Ibid., 131

20Ibid., 133

21 Ibid., 145

1 David G. Thomson, Mastering the 7 essentials of high growth companies (Hoboken, New Jersey: John Wiley & Sons, 2010)

2 Ibid., 3

3 Ibid., 9

4 Ibid., 21

5 Ibid., 22

6 Ibid., 32

7 Ibid., 33

8 Ibid., 75

9 Ibid., 163

10 Ibid., 164

1 Charles Plant, “Unicorn Math  an Algorithm for Rapid Growth”, Narwhalproject.org, Charles Plant, https://narwhalproject.org/wp-content/uploads/2020/06/Unicorn-Math.pdf

2 Ibid., 3-4

3 Ibid., 5

4 Ibid., 6

5 Ibid., 7

6 Ibid., 10

7 Ibid., 11

8 Ibid., 11

9 Ibid., 15

 What further reading should you do?

  • Read the two books and website article referenced by the footnotes.
  • Do you understand your customers? V2

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

What will be the board and C-Suite talent requirements? V2

What is the purpose of this article?

Enable the board of directors and C-Suite to have a discussion regarding their talent requirements and how to manage those requirements.

You can download a PDF of this article from:  What will be the board and C-Suite talent requirements V2

What are the critical learnings in this article?

  • A company without a competitively differentiated board of directors and C-Suite will not survive.
  • Define the current and future value contribution required from each role. Assess each candidate’s capabilities in terms of their historical impact on value and their future potential to impact value.

What type of company is this article appropriate for?

  • Public companies with no controlling shareholder or group of shareholders (e.g. no founders with dual class shares, no voting trust).
  • This article is not designed for private companies with a unanimous shareholders agreement reserving key decisions (e.g. CEO appointment, value creation/strategic plan approval) for shareholders or investors.

Your company’s future is uncertain.

  • The future global environment is uncertain. (e.g. technology, politics, the economy, climate change)
  • Both the future members of your company’s ecosystem, and their interactions are uncertain. Members of your company’s ecosystem include: customers, employees, local communities, society, and investors.
  • Becoming or remaining a large company requires understanding the problems and needs of customers who are willing and able to pay. These problems and needs often change over time.
  • Becoming or remaining a large company requires creating and maintaining competitively differentiated solutions and assets. These solutions and assets will be constantly changing and evolving in your company’s uncertain future.

Why do you need a talented and competitively differentiated board of directors and C-suite?

  • It is your company’s competitively differentiated talent which develops competitively differentiated solutions and assets based on a competitively differentiated understanding of your company’s ecosystem members.
  • Capital availability has grown dramatically over the past 10 years, and is close to unlimited. The availability of quality talent has had little growth.  The scarcest talent of all are those people who are able to grow and develop the capabilities of others. Great teams need great coaches and advisors.

What drives talent requirements for the board of directors?

The director can enable long-term success and value creation via the decisions they make; and the actions they take.

The decisions may include:

  • Appointment, termination, and compensation of the CEO.
  • Review and approval of the CEO’s value creation plan (often referred to as the strategic plan)
  • Ensuring there is a pool of successors for the CEO and the C-suite.

The value creation actions may include:

  • Representing the company with key members of the ecosystem such as government.
  • Introducing the company to the directors’ network of relationships such as: investors, potential employees (including CEO and C-suite successors), suppliers, business partners.

The directors must have history of enabling value creation.

  • Directors are like airline pilots. They aren’t needed when the company is smoothly executing the flight plan.  The directors are needed when there are problems, crisis and black swan events. E.g. replacing the CEO.
  • Each director needs a history of decisions which have resulted in major value creation. For example, past appointments of CEOs who successfully executed their value creation plans. If a director has no history of appointing CEOs, or approving C-suite members, then you need to carefully consider whether they should be nominated. Director education is insufficient.  You cannot learn to ride a bicycle by only reading about it.  You actually have to get on the bicycle and ride it, and perhaps fall many times.
  • If directors are expected to directly create value by their own actions, then they should have a history of actions which have created value.
  • The directors as a whole need relevant current understanding of: customers, target markets, adjacent markets, key components of the company’s ecosystem, and the global environment.

What drives talent requirements for the CEO?

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.

The CEO must be able to oversee the creation and execution of the value creation plan for the company, and modify the plan quickly as circumstances change.

What are the common talent characteristics of the board and C-Suite?

  • They must have fluid intelligence. Fluid intelligence is the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. The uncertain future means that decisions must often be made for which past experience and knowledge is obsolete.
  • They must be able to quickly learn new facts, knowledge, processes etc. and unlearn what is obsolete.
  • They must be passionately curious to understand the world around them.

What are the other sets of critical talent supporting the board and C-Suite?

  • World class teams need world class coaches. The athletes who win gold at the Olympics also have the best coaches in the world.
  • The CEO needs a coach or advisory board, as part of the ongoing development of the CEO. The board of directors cannot coach or mentor the CEO due to conflict of interest.  g. A director could not vote on something which the director has coached the CEO to create – the director would be voting on themselves.
  • The board chair also needs a coach or advisory board.
  • Some members of the C-Suite may also need coaches, especially if they are potential CEO successors

What are your next steps?

Create ongoing process for managing Board of Directors, CEO, and C-Suite talent.

  • Outline the members of your company’s ecosystem, including customers.
  • Describe the components of the global environment which may impact your company’s ecosystem.
  • Create multiple future scenarios for your company.
  • What are the implications for the talent you may need: board of directors, C-Suite, CEO advisory board, and Coach(es) for directors.
  • A company without a competitively differentiated board of directors and C-Suite will not survive.
  • Define the current and future value contribution required from each role. Assess each candidate’s capabilities in terms of their historical impact on value and their future potential to impact value.
  • Determine whether or not the board has a role and accountability for value creation. e.g. relationships with 3rd In private companies, the board and shareholders/investors often have a role and accountability for value creation. In many public companies the board does not have a value creation plan. The only value creation plan is the one the CEO is accountable for.
  • Prior to a new director being nominated, they should be a compensated board observer for one year. This allows them to be evaluated.

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/

What is the purpose of your company?

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

Is your company planning to fail?

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

Traditional strategic planning dooms companies to failure.

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

How do you grow your company’s value? V3

What is the purpose of this article?

Enable a company’s leaders and investors to begin the discussion on how to prepare the company’s value creation plan.  This article outlines the principles that can be used to create and manage the discussion.  This article is not intended to be 100% comprehensive in both breadth and depth. The principles apply to any size company.

You can download a PDF of this article from: How do your grow your company’s value V3

What are the critical learnings in this article?

  • Growing you company’s value requires a competitively differentiated value creation plan, addressing the critical members of the company’s ecosystem e.g. customers, but not only customers.
  • Your company requires competitively differentiated talent in order to develop a competitively differentiated value creation plan. g. if the board of directors and C-Suite are less capable than the competitors’ boards and C-Suites, the company fails at value creation.

Who in the company’s ecosystem are you creating value for?

Ecosystem members could include:

  • Customers
  • Employees
  • Board of Directors
  • C-Suite
  • Shareholders
  • Suppliers and partners
  • The communities in which the company operates
  • Broader society

What is the value you enable your ecosystem members to achieve?

  • Value to customers might include: productivity, saving money, entertainment, improving health, and improving security.
  • Value to employees could include: compensation, enabling their life’s purpose, increasing their value to the current company as well as long-term market place value.

What value do ecosystem members provide your company?

  • Customers might provide: payment, recommending others to your company, and improving your company’s reputation.
  • The community may provide the company with the social license to actually operate. Natural resources companies in many countries now need to consult or even get the support of local communities

How do you share the value obtained by the company?

  • Sharing customer payments includes: deciding how much to charge customers, how much should employees be paid, (for example, should full time employees and full-time contractors be able to make a living income), how much should the board of directors be paid, how much should be allocated to dividends and share buy backs), how much should be spent on activities which improve local communities but generate no income, etc.

How do you decide on how to share the value?

  • The decision process may include consideration of: the company’s purpose, the company’s values, morals, and ethics, laws and regulations, expectations of shareholders and local communities.
  • The board of directors may make these decisions directly, through board approved policies, or delegate some of this decision making to the CEO.

How do you create value for ecosystem members?

  • The specific way your company creates value depends upon your company’s specific situation and characteristic.
  • The assets your company has available include: people (board of directors, C-Suite, employees, contractors, consultants, advisors), processes, technology, intellectual property, trade secrets, supplier/partner relationships, relationships with ecosystem members, and capital.  The reason I put capital last is because there is unlimited capital available for companies that are success at value creation.

What are your company’s challenges is achieving value growth?

Your company is facing competition, often from around the world.  Competitors are always working to be better than your company at:

  • Enabling customers to achieve value and perceive a superior value proposition.
  • Enabling talent (including the board of directors, C-Suite, employees, and contactors) to achieve value. This impacts how talent is attracted retained, developed, and exited.
  • Being productive or lower cost.
  • Attracting the best suppliers and partners.
  • Having better support from the ecosystem.

It can be difficult to assess the root causes of historical value growth.

  • Was success due to competitively differentiated talent and processes OR poor talent and processes but lucky?
  • Was failure due poor talent and processes OR competitively differentiated talent and processes but unlucky?

What are the two most important things to focus on to enable value growth?

  • Meeting the problems and needs of customers better than the competition. This is a combination of growing the number of customers and increasing the problems and needs which are being met. Without customers and without cash, the company does not exist.
  • The most important thing to focus on is the talent. The talent creates and executes the plans to achieve results. There are two groups of talent that must be competitively differentiated: the board of directors and the C-Suite. They company will fail if board the board of directors and C-Suite are less capable than the competition.

Your next steps to create your value creation plan.

In the next three months, you will understand the process to develop your value creation plan.  You’ll go from beginning to end, making whatever assumptions are needed to complete within three months.  Your focus will be on customers and talent – specifically the board of directors chair and the CEO.  In future, you’ll consider more members of your company’s ecosystem.

  • Document your company’s purpose and your company’s values, morals, and ethics. These will guide your decision making and execution.
  • Determine what your customers believe is the value they obtain from your company and how your company is competitively differentiated. Be specific regarding the problems and needs being addressed and the benefits they achieve. You’ll have metrics associated with then.
  • Define internal company customer metrics such as life-time profitability, and customer acquisition costs.
  • Outline future customer scenarios. Describe what is driving changes to: customer problems and needs, the number of customers willing and able to pay for your solution, what customers will be paying.
  • For each scenario, outline the changes and milestones for your company in the next five years in order to grow the total value customers achieve from you and thus grow your profits.
  • Determine the implications of the future scenarios on the required capabilities and characteristics of the board chair and CEO. This requires describing how the board chair and CEO enable company success in the above scenarios.
  • List the changes required to the board chair and CEO selection, assessment, development, and succession processes. This includes describing the type of coaches the board chair and CEO require.
  • Create the ongoing process to monitor, validate and update the value creation plan.
  • Determine which additional elements of the company’s ecosystem need to be included and which assumptions need to be validated as the value creation process evolves.

Further reading

There is overwhelming evidence that most companies are successfully executing their plans to fail and to not grow their value.

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

Do you understand your customers?

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

How can the board of directors create value?

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

What are the three types of talent successful companies require?

What is the purpose of this article?

To enable founders, investors, the board of directors, and the C-suite to discuss what type of talent is needed to create and maintain world-leading companies.  I recognize that many companies do not strive to be a world leader or leader in their own country.

You can download a PDF of this article from: What are the three types of talent successful companies require

How do you read this article?

This article uses the analogy of athletes that strive to win at the Olympics.  They seek to be the best in the world.

What are the three types of talent associated with global winners?

  • The team members. These are the people who actually have win the race. They must beat the competition in order to stand on the podium.
  • The trainers. They use a structured process to improve specific aspects of each team members skills e.g. using videos of the team members show what specific changes need to be made. The trainers are deep experts in specific skills.
  • The coaches. They focus on the members minds and mental state. For example, if an athlete cannot visualize in their mind what it looks like as they cross the finish line, they likely will never win. “People cannot do things they cannot imagine”1.  The athletes must also cope with frequent failure. Few win every single competition.

What are the characteristics of the journey to become a global champion?

  • There are fundamental differences between the team, the trainers, and the coaches. g. great coaches are rarely great athletes and great athletes are rarely great coaches.
  • It takes time to become a global champion.
  • People must have the ability to transform themselves, to learn, unlearn, and constantly improve.
  • No one stays a global champion forever.
  • The coaches and trainers change over time. Global champions are supported by trainers and coaches that are also the best in the world.
  • People need to have the potential to reach the next level. People don’t immediately jump to become global champions.
  • Not everyone will become a global champion. It is very competitive. Not everyone has the potential.
  • Very tiny changes in results differentiate global champions from 4th It could be a few hundredths of a second for an athlete.
  • Trying very hard, by itself, is not enough to become a global champion.
  • Luck also plays a role e.g. a leading coach becomes available; a competitor suffers an injury.

What are the three types of talent in your company?

  • The team is comprised of all of the company’s full and part-time employees. This includes everyone from the board of directors to front line staff.  The company is constantly developing the talent of its employees.
  • The trainers include external experts. (e.g. lawyers, accountants, consultants who are industry and functional experts), educational organizations, etc.
  • The coaches go by many names e.g. coach, strategic advisor, mentor.

What are the implications for you and your company?

  • In today’s virtual global economy, you may be competing against global champions, even if you’re in a local market. E.g. Nigeria’s largest ride sharing company is Bolt, based in Estonia, with a valuation of $4.3 billion.
  • It’s hard to become a global champion if your talent (team, trainers, and coaches) is not among the best in the world.
  • Talent around the world is constantly improving. The talent that was successful 20 years ago loses to today’s talent.
  • Growing the value of your company requires growing the value of your talent.

What are your next steps?

  • What is your company’s value creation plan: for the next 1-3 years; for the next 4-6 years?
  • What are the three types of talent you will need in the future?
  • What changes in talent are needed?
  • What is your ongoing process for acquiring, retaining, developing, and exiting your team talent?
  • What is your ongoing process for assessing and changing your training and coaching talent?

 Footnotes

1 Peter Jensen (Olympic coach), Igniting the third factor, Toronto, Performance Coaching Inc., 2008, page 105

How can the shareholders agreement focus everyone on value? V2

What is the purpose of this article?

This article discusses how a shareholders agreement in a private company could help focus everyone on value creation and extraction.

I am not providing legal advice. Please consult a lawyer if you need legal advice on creating, reviewing, or updating a shareholders agreement or other legal governance documents.

You can download a PDF of this article from: How can the shareholders agreement focus everyone on value V2

What are two types of shareholders agreements

#1 USA (Unanimous Shareholder Agreement)

“The written agreement among all of the shareholders of the corporation can wholly or partly restrict the powers of the directors to manage, or supervise the management of the business and the affairs of the corporation”1

#2 Voting trust or pooling agreement

“Some shareholders of a corporation may choose to enter into voting arrangements such as voting trusts, pooling agreements or shareholder agreements under which they agree to vote their shares in a consistent manner.  Voting arrangement of this sort….do not have the effect of reducing the powers and liabilities of directors”1

What are some potential shareholder expectations regarding their investment?

  • limiting some decisions to only the shareholders e.g. hiring, termination, and compensation of the CEO; sale or wind down of the company; terms and conditions of future financing.
  • requiring shareholder approval of various documents: e.g. Board of directors mandate, board committee mandates, company policies, strategic plan, budget.
  • defining the process used by the shareholders to make the above decisions and approvals.
  • defining what information needs to be reported to shareholders at what time and in what format.
  • constraining the business e.g. limit geographical operations, which products and services may or may not be provided, pricing.
  • defining the process and constraints for shareholders to sell their equity.
  • defining the dispute resolution process. This process could result in a forced sale of shareholder equity.
  • describing the ways specific shareholders extract value from the company e.g. dividends; products and services; future sale of shareholder equity.
  • describing how shareholders will support the company e.g. introductions; financing guarantees.

The shareholders may have other expectations as well e.g. the purpose of the company

Some or all of the above expectations might be included in the USA.

How might the USA impact on value creation and value extraction?

I assume the company has a value creation plan and the shareholders have a value extraction plan.  The plans can be directed and constrained by shareholder expectations which are in the USA.

What are the risks of not documenting the shareholder expectations?

The short-term risk is a series of immediate disputes, which could harm both value creation and extraction.  For example, what if the shareholders don’t understand and agree that some shareholder will extract value through low-priced products and services while other shareholders extract value through dividends arising from high priced services to customers. How will management create and execute strategies when they are attempting to limit profits and grow profits at the exact same time?

The long-term risk is that shareholder expectations could change, especially when shareholders are companies.  The companies’ strategies for their investment could change and new executives representing the companies could have different expectations.

What are your next steps?

  • Shareholders should discuss and document their expectations regarding value creation and value extraction. Agreement and consensus are not always required.
  • The challenge is to figure out how to reconcile conflicting expectations. (e.g. one founding shareholder might want to stay with the company for the rest of her life.  Another founding shareholder might want to exit and sell her equity in 5 years for maximum value). This expectation setting process is carried out without lawyers and there is no legal document as an outcome.
  • Then lawyers review the shareholder expectations document. The lawyers point out potential issues and risks, which may result in further shareholder negotiations regarding expectations.  The shareholders decide among the legal options.
  • I assume that the USA will be one of the selected options. The lawyers must craft this.  The process of creating the legal USA may well results in more issues, requiring a negotiated update to the shareholder expectations document.
  • The lawyers will have to craft a dispute resolution process into the USA which is able to deal with future changes of shareholder expectations. Potential outcomes of dispute resolutions include: sale of the company, existing shareholders buying out some other shareholders.
  • The shareholder expectations document needs to reviewed on a regular basis and must be reviewed every time there is a potential new shareholder or change to an existing shareholder.

Footnotes

1 Barry Reiter, Bennett Jones LLP, Directors Duties in Canada, 5th edition, Page 95

Further reading

How can founders and investors create a shareholders agreement?

https://koorandassociates.org/corporate-governance/how-can-founders-and-investors-create-a-shareholders-agreement/

How profitable is angel investing? V2

What is the purpose of this article?

  • Share with you some fact-based profitability analysis from the U.S. angel community. I am not aware of similar detailed fact-based based analysis of the Canadian angel community.
  • Enable you to think about whether or not you want to make money as an angel investor and what you might have to do to make money.

You can download a PDF of this article from: How profitable is Angel Investing V2

There are three ways to look at angel investing profitability data.

  • As an overall asset class, considering a large number of angel investors.
  • As an individual angel group or angel fund.
  • The profitability of an individual angel investor, such as yourself.

You have the potential to make money as an angel investor if:

  • You or your co-investors have deep market knowledge of each portfolio company’s customers and market.
  • You devote significant time to due diligence.
  • You remain involved with the company post-initial financing.
  • You have the financial resources to create a diversified portfolio of at least 25 companies and to make follow-on investments.
  • You can wait 10 years to achieve a significant financial return.

How profitable has angel investing been in the period leading up to 2007?1

This study examined the results from of 1,137 exits ((acquisition, IPO, or company closure) from 539 angel investors in angel associations over a 20-year period, with most of the exits occurring after 2004. The average return was 27% (excluding out of pocket costs and assuming zero value for the investors’ time).

Due diligence had a large impact on investor capital returns.

  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.1 X capital.

Investor knowledge of the portfolio company’s industry had a large impact on capital returns.

  • Investors with at least 14 years of relevant industry experience had double the capital returns of investors who did not have relevant industry experience.

Ongoing involvement with the portfolio company (e.g. coaching and mentoring, being the lead investor, serving on the advisory board or board of directors) has a large impact on investor returns.

  • Angels who interacted with the company twice a month achieved a 3.7X return.
  • Angels who interacted twice a year received a 1.3X return.
  • Interacting more than twice a month does not improve returns. The quality and type of interaction was more important than frequency.
  • 52% of all exits were at a loss.
  • 7% of the exits returned more than 10 times the money invested, and accounted for 75% of the total returns.
  • 39% of the investors had portfolios that lost money.
  • The top 10% of investors earned 50% of the returns.
  • 45% of the startups had no revenue when they received the angel investment.

How profitable has angel investing been in the period leading up to 2020? 2

The data scientists at AngelList analyzed 10,665 investor portfolios. The analysis showed that the realized and unrealized IRR for all of the investments is 15%. The 2007 study above only examined realized IRR.

The median IRR return for investors is heavily driven by the number of companies in their portfolio.

  • 50 company portfolios had a median IRR of about 10%; 11% of these investors lost money.
  • 20 company portfolios had a median IRR of about 7% ; 16% of these investors lost money.
  • 10 company portfolios had a median IRR of about 6% 32% of these investors lost money.
  • 1-5 company portfolios had a median IRR 0%.

What has been the performance of some individual angel funds in the U.S. in 2020?

The ACA (Angel Capital Association) Investor Insights report for 2020 shares insights from some large, long established U.S. angel groups.  My article does not name those groups.  You should refer to the report if you wish the names of the groups. The report is available to members of the ACA.

Angel group A analyzed 159 outcomes (exits and shutdowns) since 1997.

#1 A large portfolio is key to large returns

  • Equal sized investments in all the companies would have generated 4.8X return.
  • 3 of the 159 exits generated 74% of the total return.
  • Monte Carlo simulation showed that only 26% of investors with 5 company portfolios would have obtained 4.8X return
  • Even with a portfolio of 50 companies, there was only a 37% chance of achieving 4.8X return.

#2 Large returns require investors being able to wait 10 years.

  • It takes 4.5 years for investors to get their initial investment back. There are lots of failures in the first few years.
  • It takes 10 years to achieve 4.8X return. After 10 years, there is a very modest increase in returns.

Angel group B analyzed the return of their 27 members over 20 years.

  • A large portfolio is key to large returns. Investors with 25 company portfolios had 4.5 times the IRR return of investors with 1-4 company portfolios.

 Your next steps

  • Review your overall investment thesis e.g. what asset classes will you be investing in, why, and what expected returns (this includes volatility, and time to achieve returns)
  • Determine is angel investing would be a charitable activity or an asset class that is helping you achieve your overall investment thesis. Many angel investors are not interested in financial return, and their angel investments are not part of their financial return focused investment portfolio.
  • Define your angel investment thesis.
  • Determine if you have the skills, knowledge, and finances to create your own diversified portfolio or if you will invest with fund managers or if you will join a group of angel investors.
  • If you are investing with a fund manager you must do due diligence. It is key to analyze their cash returns over 10 years. I have come across many funds that include unrealized returns.  Unrealized returns are not cash in the bank. You will also have to assess their talent and processes.  If the funds returns are driven by only one exit, you have to determine if their overall results have been driven by luck or by knowledge, skills, experience, and processes.
  • If the fund manager is just starting their fund or has only been in operation for a few years, then you need to do more detailed due diligence, just as you would for any other startup. If you don’t have deep relevant experience in the fund industry, then you need some with that experience to work with you. Your due diligence focus will be on talent assessment and the fund’s investment thesis.
  • If you decide to invest via an angel investor group, you need to do due diligence. You need to asses whether the processes and talent will help you build and manage a profitable long-term portfolio. It is key to analyze the groups metrics and cash returns. One large U.S. angel group tracks 83 (yes 83) metrics for every investment made by a member. Some U.S. angel groups have detailed metrics regarding their members. If the group’s return is driven by one large exit, then you have to determine if their overall results have been driven by luck. Assess which members have deep relevant industry experience aligned with your angel investment thesis. Assess the angel group processes. If you don’t already have deep relevant angel investing experience, then you need help from those who have that experience.

Footnotes

1 Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf

2 “How portfolio size affects early-stage venture returns”, Nigel Koh and Abfraham Othman, AngelList, https://angel.co/pdf/lp-performance.pdf

Further reading

Are you an angel investor or a gambler?

https://koorandassociates.org/selling-a-company-or-raising-capital/are-you-an-angel-investor-or-gambler/