Fold The Company vs Doing Everything You Can

Twitter Summary: Happy to report there is still “No Magic” in how to fund and keep a start-up going.

Repeating the obvious, to keep a startup alive you need to bring in more money then you spend, and you need the determination to keep up that effort. I recently received documents from a two year old start-up summarizing the steps the company has taken to keep itself alive. In the past year the company looked to raise another round of funding, but with issues surrounding raising money for advertising based startups, they were not able to get a valuation the founders and the seed round investors deemed reasonable. Rather than dilute themselves or run out of money, they chose to: a) Eliminate staff to just the founders, b) Reduce and eliminate compensation to those founders, and c) Take consulting opportunities that are related to the company’s mission but not directly to their goals to sustain the business.  These consulting opportunities relate more to the expertise of the founders, rather than the goal of the company.  They acknowledge that this is not the original long-term plan, but fortunately, the consulting clients are potential future customers of the company’s product.

In reading  “between the lines” of the documentation, I could see that there have been opportunities for the founders to just call it a “good try “and move on to other startups, jobs, or consulting without the overhead of funding this venture.  However, the team is determined to keep on with their mission, and found a revenue source that was “good enough” to help bridge and get to their eventual goals.

Paul Graham’s essays about startups is one of my favorite reads about how start-ups succeed and fail. More important than brains is the commitment to deliver on the goal and to do everything it takes to support the startup. The decision is actually easy: If the money truly runs out, and there are no consulting opportunities, revenue or additional funding, then it really is time to shut the company down. If revenue can be assembled then the next most necessary element is the determination to continue to deliver on the goal.

Innovation = Good Idea + Implementation + Measurement

Twitter Summary: We aspire to be innovative, but unless we are willing to implement ideas and measure them, they will just remain ideas.

I have a new post up at blog@CACM, “Innovation = Good Idea + Implementation + Measurement” about the three necessary components to innovation.

Included with this one is a story about the early days of Amazon.com. The blog post idea came after a morning run with a friend and Googler where we were talking about all the “good ideas” that circulated our respective environments. What distinguished things from being  “neat” to actually “good” was invariably the ones that had the developers actually supplying the metrics with the implementation of their idea.

Manager Skill: Short Attention Span Theater

Twitter Summary: In transitioning roles from engineer to manager, the hardest skill to learn to enjoy was “Short Attention Span Theater”

I loved being employed as a software development engineer.  Technologies and toolkits evolve so quickly that every time you think you have mastered one, there is something new to learn for the next project. Last year’s assumption that machines are too expensive evolves into next year’s plan that includes machines ten times as powerful as the ones you had before for the same price. Last decade’s assumption that disk space is too expensive evolves into this year’s plan that includes more disk space then you thought was possible and for barely any money.  If you’re a person like me that likes to learn, grow and change, it’s a good discipline in which to be employed.

This continuing education, the time spent planning and developing software requires focus that quickly puts engineers in the very desirable mental state of Flow (wikipedia). The experience of getting into a mental flow state is difficult to achieve, but but once there is very enjoyable. You can achieve it in any activity that requires skill and focus. In sports you hear about players getting “In the Zone.” In music you hear about musicians getting “Into the Groove.” As a software developer, my flow was 10pm to 2am when I wasn’t getting interrupted.

Transitioning from an engineer to a manger of engineers requires a change that is completely contradictory to “Flow” and what I affectionately call “Short Attention Span Theater.”  As a manager you are required to coordinate projects and people to be successful. Given the nature of communicating via email, one-on-one meetings, status reports, and conflict management, and the fact that these often happen in short bursts of time, there is no time to get into a “Flow” state. The skills that make a great engineer will not make a great manager.  What this translates to practically is that every time someone walks into your office you have only about 30 minutes to focus on the issues at hand so the person walking in gets the information they need to make themselves and their project successful.

“Short Attention Span Theater” really requires changing your engineering mental framework in order for you to be successful in a manager’s role. As a manger, it is necessary to take the short time you have with each of your team members and make it valuable. “Short” is the operative word since you are expected to provide the same focus on the team and the organization goals at the same time.  Any attempt to achieve “Flow” while being a manager will likely lead to personal or team frustration as it is difficult to both manage and develop software at the same time without some issue getting dropped.  If you embrace “Short Attention Span Theater” as the key to making a whole team of people successful, then although you won’t personally achieve “Flow” state, you will make it possible for a larger group of people to deliver a successful product.

Smartphones and Health Systems Research at Intel Seattle

I have a new post up at blog@CACM, “Smartphones and Health Systems Research at Intel Seattle“, about a recent open house I attended at Intel Seattle research labs.

One of the biggest factors to success in weight loss and management is if you are able to simply write down what you eat and have a support group help you along the way. If you can make a tool that makes it trivial to do both you would be more successful in your weight loss goals. The iPhone has some applications for this, but so far the applications I have seen aren’t as seamless as I think they should be in computing food eaten and sharing results with people who are looking to help you.

[For those who like the science behind the statements, the research article was published in August 2008 in the American Journal of Preventive Medicine.]

Patents — Continuous patent reform

Twitter Summary:  Why the patent system should be continuously reworked to reflect innovation.

The rationale for patents is exchanging explicit information for how something is done for an exclusive right to do it that way until the patent expires.  This appealed to me as a software developer. As an open source software supporter, and a life-long student I have always appreciated reading algorithms, source code and processes to figure out how something is done.  Given that we are all standing on the shoulders of giants, it seems only right to share as much as we can to further advance the development of better software and systems.  Developers should be paid for their work, and the companies that invest in sharing how they do something should be given the opportunity to benefit for their contribution.

Unfortunately the perceived and actual misuse of patents in the software industry are legendary. The GIF patent issue in 1994 suprised many developers that a widely understood algorithm was patented and that anyone who used a common image rendering software owed Unisys a usage fee. The Alcatel-Lucent patent infringement lawsuit which is still under litigation generated a $1.52 billion judgment against Microsoft in 2007 for its use of the MP3 encoding/decoding technologies.  Even more tragic are the patent issues for HIV/AIDS related drugs, where  patent protection has made it difficult for poor countries to afford the drug for their populations. India recently rejected the patent applications so that they can provide the drugs at a more affordable price to their citizens.

Given the value created by the patent system in encouraging the sharing of information, a continuous review process would improve the agility of the patent system to reflect the changes and innovations all people would like to see. Microsoft would like to see the patent system be unified into a global patent system.  I think this is an excellent idea on three levels:

  1. It would compel a conversation and hopefully create a unified standard about what types of inventions should be patented and for what duration they should be patented.
  2. It would compel people, organizations and countries to think globally about the impact of their inventions and create a standard that they should achieve if they want patent protection.
  3. All these conversations and standards would have an organization committed to examining and re-examining if it is achieving the desired goal of increased innovation, increased information sharing, and adequate time for inventors to recoup their investment.

Such a patent organization could periodically re-align itself to achieve inspirational goals like the XPrize Foundation and support innovations that would benefit society.  It could offer a 100 year patent to the first organization that creates a cure for cancer, or creates an affordable non-polluting vehicle that can travel thousands of miles. It could create shorter patent durations for software or other technologies that have a short life-span. Given the many approaches to patent reform, it should all be with the end goal of encouraging the sharing of information, providing a standard for establishing the uniquness of an idea, and allowing the inventors enough time to benefit from the exclusive ownership of the patent.

Patents — Should we patent this?

Twitter Summary: Should we patent this?

Software patents their use and their mis-use have generated lots of heated discussion on the web. The Cato Institute recently released a document critical of the software patent process.  Tim O’Reilly has been using his media organization to spearhead efforts to reform software patent laws and why it should be done.

However, until these reforms are implemented every startup that invents a novel or unique “something” has to make the decision: Should we patent this?

In a cash strapped startup, patents are expensive and committing money for them gets prohibitive quickly.  Patents  cost $15K to get filed and another $15K in maintenance. In addition, they cost developer time in writing up the invention instead of spending time improving the product. Some of the cost can be deferred for a year by filing a provisional patent for a few thousand dollars, but that just delays the inevitable price tag.  If a patent is contested or you want to file internationally the price only goes up. Patents take several years before they are granted (if they are granted) and then you need to pay to defend them which will cost more developer time and legal fees.

Deciding what to patent can be as hard or easy as you want but it depends on the available budget. In a large company with a large budget for patents, there are the resources to build up an arsenal of intellectual property. There is typically a patent submission form, an internal patent review process, and eventually a prioritization for how well the patent aligns with the company goals.  Anything novel and unique would be considered as patentable and submitted so that they can be someday used as defense from other organizations, when the inevitable infringement lawsuit occurs.

In a small company with fewer resources deciding what to patent is simpler because you ONLY patent if your novel and unique approach is

  1. Directly attributable to your ability to make money, and
  2. You are willing to go to court to stop other people from making money using the same technique.

If your idea doesn’t satisfy both those constraints, then go on making software and with luck you will be able to avoid most of the patent issues that larger companies need to manage. For example, if you are an online advertising firm you would patent intellectual property associated with advertising and not spend the resources to patent a spell checker that isn’t tied to any revenue source.

Building up a patent portfolio for the sake of patent portfolio is not a way to be successful. Admittedly, patent portfolios can help with valuation of startup, but only if the organization has a viable business model which is independent of any of the patenting decisions.  For a startup company, if the patents do not satisfy the first criteria of being core to the money making ability of the business, then there is no point filing a patent since it will not have the resources in the long term to continue to build the organization, much less defend the patents.

Other people’s postings

Two posts came out in the past few months that I would like to highlight as they both served to remind me that just about every organization is striving to make great environments for their employees and their customers.

The first is the Netflix “Reference Guide on our Freedom & Responsibility Culture” slide presentation outlining how Netflix chooses to distinguish itself from other organizations. So many great comments are available about it, I will merely add this would be a great resource to crib from if starting a new organization or if you are looking for a successful culture to model.

The second is from Kate Roth that highlights how a high service organization like the Ritz-Carlton encourages and allocates money per employee to impress their guests. I liked this one because it made me think of what employees at a web startup could do to “wow” their customers. In cash strapped start-ups, the “wow” may not be directly monetary, but can certainly be budgeted into the time it takes to deliver a piece of functionality.  This extra functionality would hopefully be something that amuses, astounds or makes the customer’s experience uniquely satisfying in their use of the product.

SCRUM Project Planning

Twitter Summary: An advocacy post for using SCRUM for your project management needs.

My affection for SCRUM as a project management tool emerged from my dislike in writing project status reports. SCRUM is a project management process that has its roots in Japanese new product development. It focuses on increasing the speed of delivery and functionality.  The advantage of using SCRUM is that it creates a single common vocabulary throughout the company. Thus, when the delivery of a project is discussed everyone is using the same language and tools to communicate priorities, progress, rate of progress, roadblocks, and amount of work remaining. There is so much good information about SCRUM available, I will use my blog post just to highlight the interesting side effects that I have seen.

I have used SCRUM-like techniques to track projects and deliverables in most of the organizations I have worked in the past 10 years.  Yet most of the projects still had many elements of the Waterfall development model that I learned and used in college and used while developing medical and avionics applications. These ad-hoc project management practices mostly worked, but there were occasional lapses in deliverables that caused the usual scrambling to determine why some pieces were late and why we the delays weren’t know about sooner. It wasn’t until my last startup, that we adopted the full SCRUM process at the encouragement of our advisors.

The biggest change in adopting the full SCRUM process was the use of the “Information Radiators” which were either simple white boards with sticky notes to indicate: Product Backlog, Sprint Backlog, Blocks List, or lined paper with a graph that showed the Burndown Chart of how many activities were remaining to be done.

The beauty of using SCRUM and all its information radiators meant that I no longer had to write a project status report. Everybody in the company was educated in SCRUM and how it worked. Anyone could walk into the project room, review all the information radiators and know exactly where we were in the project, how the current sprint was progressing, and what amount of work was remaining before we could call the sprint “Done”.   We took advantage of being a small single office team and just posted everything using the available wall space. (Our implementation would not work well for a team member working remotely, but web based toolkits are available that make remote SCRUM project management a possibility.)

After several sprints of product delivery we realized each of the information radiators had a special role in helping improve the process for the next sprint. If we neglected to update the burndown chart, it was because we were slipping. If we neglected to update the product backlog, it was because our priorities were changing. If we neglected to update the sprint activities, it was because something was incompletely understood and we didn’t know what it meant to be “Done”. Any time we neglected an information radiator, it was usually because whatever information that element was trying to communicate was failing and we didn’t want to write it down.

The keys to our successful adoption of SCRUM were:

  • Require everyone involved either directly or tangentially to read the book. Agile Software Development with SCRUM
  • Leave the SCRUM on a page [pdf] littered around the SCRUM area so that people can be reminded of all the critical components and roles of SCRUM.
  • Get your SCRUM Master trained by a 3rd party to get used to working with the flow of the project.
  • Use the Information Radiators as they provide a constant status and reminder to the whole team as to how the project is progressing.
  • Make sure that the Sprint Review Meeting is held and that there is time spent focusing on how to make the next Sprint better. This was critical in helping us get better at delivering, and building a stronger product every sprint.

I have yet to find a better project management technique for developing products for the web. In running  a project using SCRUM, the activities bear a strong resemblance to what is done with Openspace Technology to run meetings. In using both techniques to communicate and plan, we were able to create an environment where the team members were participants, actors, and communicators in helping evolve the project and the company.

Alternate Compensation Models

Twitter Summary: Examples of alternate compensation models that focus on fairness in compensation.

In my continuing research on compensation models, I was led to two different articles that offered interesting models on how to structure compensation. One article focused on how to structure compensation for a legal firm’s partners and the other was  “The Hacking Business Model”, which offered a compensation model and complete structure for creating a company for distributed software development.

The Partner’s compensation plan primer is an interesting read. It highlights that compensation is tricky because employees desire a sense of “fairness,” but people’s definition of fair is different. The recommendation for legal firms is for them to decide  compensation plans a year ahead of the compensation review, and support decisions with records that are comprehensive, reliable and available.  Basic questions that need to be addressed are: (1) Who makes the allocation decisions? (2) Are allocations based on percentages or units of participation? (3) Are distributions allocated based on prior work or when current the year is complete? (4) Will profits be distributed and how much will be allocated for overhead? (5) Are there principals that get compensated regardless? The article re-enforces the notion that whatever model you choose,  a) you need to create the expectation among the employees that the plan will change for continuous improvement and b) you will communicate the changes ahead of their implementation.

The “Hacking Business Model”  is a model focused on creating a worker owned company and implements an open compensation plan. When I first showed this to some of my friends, their initial reaction was to quote Monty Python and the Holy Grail:

“We’re an anarcho-syndicalist commune.
We take turns to act as sort of an executive officer for the week.
But all the decisions of that officer have to be ratified
at a special biweekly meeting
by a simple majority in the case of internal affairs.
– But by 2/3rd’s majority …”

Despite the similarities to humorous sketch, I like the Hacking Business Model’s attempt to lay out not just a compensation plan  but a documented philosophy and approach to how the business is focused, how it is structured and how it is allowed to change. The compensation model it advocates is vague on salary and simply states that pay is competitive, but does focus on the goal of the company being to generate bonuses. Bonuses are a function of hours worked (units of participation) and a VIP multiplier based on their relative importance to the company. Although I am not sure how many companies have been successful using this business model, it certainly is open and understandable.

Companies strive to have a “fair” compensation model.  Since being “fair” is subjective, a better plan is to be clear as to how you compensate your employees, have a documented way to decide how compensation is determined, and the process for how it will change from year to year.

Giving the company away

Twitter Summary: To grow a business, you have to give pieces of it to others who also will benefit from its growth.

In my continuing research on alternate equity plans, I spoke with the founding member of a real estate company that originally started with 6 partners, and has grown to an 80 partner firm. The founding of the company was that each partner bought 1/6th of the company and any future distributions would be divided equally among the members.   At the inception of the company, there wasn’t enough revenue to actually have any distributions, but everyone was providing sweat equity and the real estate sales model comes with a well defined commission structure.

The biggest hurdles for the company was when the 6 original partners had to make a decision of whether to keep the company small or to broaden the ownership to include more of the associates and employees.  The two times the company had to make the transition it almost destroyed the company as you had to deal with partners who didn’t want to grow the company bigger or dilute the equity they have created within the company.  The majority of the partners argued that by broadening the equity participants you could get even larger returns.  The company ended up choosing to broaden the number of participants in the equity plan, which fortunately also coincided with a growth of the business which brought greater returns for everyone. In retrospect, the founder thought that Bill Gates, Jeff Bezos and many of the internet startups got it right from the start by starting off with an options and equity plan so that the incentive to help everyone participate in the growth of the company was broadly distributed throughout the organization.

The hardest part about building a business is that if you want growth you end up having to give your business away. You have to give ideas, equity, incentives, and successes to people you have enlisted to help you grow the business. By broadening the base of the number of people working to make your organization to grow and flourish you increase the probability that you will be successful. The transition from growing “my idea” to “an organization of ideas” is likely to be the biggest issue in managing the growth of an entrepreneur started organization.

Customer Joy. Employee Success. Investor Wealth.