Here is the introduction to my guest post on TechFlash today.

For the last decade, I have been convinced that the three most important factors in determining the success of a start-up are (1) team, (2) product or service, and (3) market (timing, size, etc.). Take an A+ entrepreneur, with a great idea for a new product or service, at the right time, and about as fast than you can tweet Susan Boyle you’d have a success brewing.

Recently, I have added one factor to the must-have list: the right start-up culture. In other words, add a dose of bad culture to a team of superstars, a killer product and good market opportunity, the result is almost always death by a thousand backstabs.

What defines a great start-up culture? Justice Stewart’s “I know it when I see it” standard seems particularly apt here, but not actionable. I am hoping to start a dialogue about what a great start-up culture is and what it isn’t from those of you who are actually living it day-to-day. To kick off the debate, below is my best attempt at defining the characteristics of a great start-up culture. I was aiming for a top 10 but ended up with a bakers’ dozen (because in life it’s hard to beat a free bagel). How does your company’s culture stack up?

To read the list click over to Techflash.

Getting the Right Driver on the Bus

In Good to Great, Jim Collins recommends that one of the first steps in building a great company is to get the right people on (and off) the “bus.” Not surprisingly, therefore, selecting the driver of the bus, the CEO, is certainly one of the most important tasks any board of directors undertakes. From the perspective of a venture capitalist working in the world of early stage companies, I have seen the huge, and often immediate difference the right leader can make. Now, I’m not talking about how to find great entrepreneurs who have started a company. While also a difficult process, this series of posts assumes we have already backed a good company, with great technology, but one that is in need of the right business leader.

Selecting the right CEO, however, is difficult, mostly un-scientific and often complicated because of personality and timing issues. Often, in very early stage companies, the “CEO” holds that title simply because he/she founded the company, and not because of any special qualifications or company-building experience. A few founders recognize that they don’t have the requisite skills to drive the bus, but many others figure that if they can drive stick shift in a sedan, how much harder can it be driving the bus? And that might be fine for a short drive at slow speeds, but as the company picks up speed, the probability of a major crash increases. So, many times, the first step in getting the right driver on the bus is convincing the current driver to step away from the wheel. It is often beneficial to have the founder remain involved with their company, just not always as CEO.

Timing is often a further complicating factor. Perhaps the current CEO has left unexpectedly (or been asked to leave immediately) or there is a financing that hinges on the recruitment of a new CEO. The board is under the gun, without the luxury of 6-9 months to do a thorough search for just the right candidate. Having had experience recruiting CEOs and knowing what qualities to look for can help make this challenging process more effective.

Several years ago Madrona surveyed our investment professionals, ranging from analysts just a few years out of college to veteran Fortune 500 CEO’s like Jerry Grinstein, Bill Ruckelshaus and Jack Creighton, who serve as our Strategic Directors.  We wanted to construct a profile to see if there was consensus on the relative importance of various personal attributes, skill sets.

The following graphs reflect the survey results (click on the graphs to see a magnified version).

Over a series of blog posts I will discuss the specifics of some of these attributes, what makes certain qualities more important in a CEO than others, and how, once you have determined what you are looking for, you know you have found it in the candidate. After all, what serious candidate is going to acknowledge that they lack good judgment? In the meantime, join in the dialogue by taking the survey and we will post the results and comments from the community.

Click Here to take survey

Unless you have been avoiding your in-box in the past month or so, you probably got the widely circulated email containing “the world is coming to an end” slide deck from a major venture capital firm. The essence of the presentation is that if you survive the current economic meltdown, you win. That means cutting heads and getting to cashflow break-even as soon as possible. The advice is well timed and important, but incomplete. The winners will not just survive this recession—they’ll need to take full advantage of it, strategically and tactically.

On the strategic front, companies should revisit the basic questions they answered when drafting their initial business plans, this time with the words “in this market” at the beginning:

·           In this market, who are our customers?

·           In this market, what is our value proposition?

·           In this market, what is our business model/how do we make money?

·           In this market, who are our competitors?

·           In this market, what is our competitive advantage?

·           In this market, how do we differentiate our product?

·           In this market, what are our core assets?

The answers to all of the above (and many more) questions may have shifted in the last three months. If your customers were small start-ups, you may need to adjust your focus to a customer base that has money to spend.

Are there certain companies that might find your value proposition more compelling because of the downturn? Should you refocus your value proposition and messaging around helping customers cut costs? If your business model was based on certain advertising CPM (cost per thousand impressions) rates, those may no longer apply. Your list of competitors may have shrunk or changed, so rethinking what you need (and don’t need) in your competitive feature set is now relevant. Is the next version of your product really what your existing customers want, or is it what potential customers wanted but no longer can afford to buy? Your existing customer base now may be your core asset, rather than your intellectual property.

To win, your strategy needs to be appropriate for the new market dynamics. Big companies cannot be as nimble as small ones, so smart entrepreneurs should be able to take advantage of thoughtful, but swift, changes in strategy.

Tactics are also critically important, but shouldn’t be confused with strategy. Cutting your burn rate is a tactic in a downturn, but it doesn’t lead to success unless the company also has the right strategy to go along with it. The companies that came roaring out of the last technology downturn not only had exceptional survival skills but, more important, they had a superior product focus and business model.

On the tactical front, the much-circulated VC presentation mentioned earlier pinpointed the major one: cost-cutting. Financing in this market will be much tougher, so increasing your runway is essential for survival. CEOs should scrutinize every expense item and try to renegotiate every contract. That said, cost-cutting is only one of many tactics that companies should consider. Tactical opportunities exist on the upside in this market as well.

·           Hiring. There will never be a better opportunity to upgrade the quality of your team. Start-ups that are well funded and well positioned should have the pick of the litter when it comes to new hires and upgrading talent. Employees may be more flexible on compensation packages than they were several months ago.

·           Marketing. Media always gets cheaper in a downturn, which presents a unique opportunity to acquire customers profitably. If the lifetime value of your customers has remained stable and now you are able to acquire customers for less than their lifetime value (through inexpensive media), you can make a killing in a difficult economy. Classmates.com is a wonderful case study. When the technology bubble burst in 2000, Classmates.com was able to buy Internet display inventory for a fraction of what it had cost earlier. The company knew what a customer was worth (more specifically, what a customer would pay for a subscription) and, therefore, how much it could spend to acquire that customer. The team at Classmates.com was maniacal about tracking conversion rates and focused on buying display media only if it met company goals for conversion. Does your business model enable you to take advantage of less-expensive media? Publishers with undifferentiated inventory should have an especially difficult time selling inventory. Look for screaming deals!

·           Tying Expenses to Performance. In a down market, you may have the opportunity to link your cost structure specifically to performance. Tying employee compensation to performance criteria is the obvious example. On the marketing side, as publishers lose leverage, they, too, are more willing to sign performance-based or CPA (cost per action) deals, instead of CPM deals. No publisher is going to announce it, but companies should be persistent in asking for it.

·           Pricing. Aggressive pricing can be an important weapon against weaker competitors who cannot match your prices or will eat into their cash balances if they do.

·           Mergers and Acquisitions. Even some attractive companies with strong IP or a large customer base will struggle to make it in this environment. Banks are not the only ones who will be looking for good M&A deals. As a buyer, some questions that you might ask include: Would an acquisition be relevant to your new strategic focus, or would it dilute your focus? How long will it take this acquisition to get to positive cash flow? Are you buying people, technology, revenue, or customers? How hard have you scrubbed the projections? How will you finance an acquisition in this market?

No doubt the current market presents added challenges, but it also offers new opportunities for those companies looking to do more than just survive. The companies that refocus their strategies in light of market realities and creatively consider the tactics they employ will be in the best position to win when the economy starts moving again.

The famous Spanish philosopher, George Santayana,  once remarked that ”those who cannot remember the past are condemned to repeat it.”  So, a natural question in these times of financial turmoil, when it is hard to stave off a sense of impending doom, is: how will this “bust” be different from (or the same as) the dot com bust that began in 2000?  More precisely, what will be the differences and similarities as they relate to venture financing and early stage companies in the Pacific Northwest?

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