Balanced Scorecard

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I've spend a fair share of my life as a consultant. Management consultants usually have a bag of tricks and recipes for every possible situation that can happen in business. Unfortunately mostly for large corporations (they can pay!) and not startups.

However  there are ways to adapt them and make sense of it. Let's look at the Balanced Scorecard. It's a strategic performance dashboard where you track your strategic performance through time. The idea is to  mix quantitative and qualitative KPIs onto one sheet.

The Scorecard is divided into four sections:
- Financial: how business perform
- Customer: how customers see us
- Internal: how our processes run
- Growth: how do we improve

For each section decide on 3-5 KPIs that measure respective aspects and indicate important aspects of your business. I.e. for the Customer section you can measure retention, pageviews and similar. For Growth you can watch sales pipeline, investments in education, number of programmers using your API and others stuff that makes your business  better and bigger.

When you set it up, you can than observe changes on various aspects of your business in time and see where you have to put more emphasis in your business and where you excel.

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Big Ego Leaders

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Big ego leaders are not the same as strong leaders. They are loud, outspoken, do millon things at the same time, however often the things they do are not linked to their business, but often designed to boost their personal brand. In fact I think that often than not, some big ego leaders are a threat to their business. I'm often surprised how that are praised just  because they are so visible.

Let's think through what big ego leadership brings to the table:
- confidence: That's the positive side of a big ego. Confidence is an essential part of a leadership. All great leaders had it, have it and will have it.
- promotion: Having a big ego forces the leader to be present everywhere and have opinion about everything. I think that's actually bad for the business, though many argue that any promotion is good. Take same visible CEOs of internet startups who have blogs, organise conferences, have opinion about everything. What about their business track records? Usually not so bright. Often they have one thing in common: they got lucky somewhere in the past, usually during the internet boom. Which is good in itself, but doesn't really makes them a good leader.

However there is one criteria that distinguishes good big ego leaders from bad ones. Steve Jobs or Larry Ellison comes to mind. They have a big ego, but the also have substance, they built business, not just self promotional platforms.

Trouble is that in my view quite often startups fall into the big ego trap. Either founders try to mimic the visible people with big egos or, even worse, think about hiring some sort of big ego leaders. Here I get nervous. Big ego means very little in terms of increasing the value of the business. Might be good for short term promotion, but that's about it.

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Basic Rules of Startup Presentation

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I often see presentations by startups that even if they are content wise thought through, they fail on some basic presentation rulse. So here they are:

- do not read from slides... present them!
- 3 items per slide ... exceptions are possible, however people tend to remember three things not 4, 5 or 6...so help them remember your presentation
- use one liners on slides,  not whole sentences, explain the lines if they aren't completely straightforward
- 2-3 minutes per slide...do not jam 15 slides into 5 mins presentation
- product ...show the product, you do not need live presentation (screenshot is enough)
- readable fonts, 4 fonts changes per slide/presentation max! font change is anything that changes a font: size, bold, italics!

That's it, it's very simple, but often neglected. Check your last presentation you did and try to apply the above rules. You want you're listeners to be engaged not annoyed.

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Motivating with share options

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Quite often European startups get their first taste of share options only when US or UK investors step in. In most cases investors recommend founders to set aside options for the team and require that the management issues options to all team members. There is nothing wrong with it per se, however there is and important difference in the goals they try to achieve. 

Options are a part of compensation in US. They are just something extra in Europe. They bring no motivational value to the developers, simply because the culture is not developed yet. Employees get motivated by the thrill of the environment, a chance to work for an international start up, exposure...they aren't motivated by options, since it has only an abstract value.

It gets worse. In quite a few European countries tax law is totally unprepared to handle employees with options, to the point that in some countries people get tax at the time of grant!

So what to do in environment where share options are a novelty:
- trust the managerial instinct, how would management motive employees, would it come up with option scheme on their own?
- top management team members should get inline with world practices, so get options, since they'll be the ones who'll promote the concept further
- for employees from environments where option based compensation is the norm, offer competitive packages
- if you really want to issue options to everyone, offer to grant a generous amount of option for a 10-15% salary cut ... in that case options will get value
- check how your country handles options, can it be substituted for share grants? There is nothing worse than a promise of something for which you have to pay additional money for after some period.

All in all, don't stubbornly pursue models that work in some environments and try to cut/paste them to your environment.  Think what motivates your employees, particularly engineers, offer things that produce leverage!

KPIs

Key Performance Indicators are the primary abstraction for investors. The concept is simple. KPIs are basically performance measurements, ratios or can even be soft goals. They have two characteristic, both of them useful, but can be problematic as well:
- they are simplification of the situation
- they have a tendency to be superficially comparable

Simplification is actually a good thing since it makes life easy for everyone involved. In an interent business its easy to say "our conversion (eg. trial to payable users) ratio is 30%". And that's good.

The trick is that quite often people compare KPIs that have the same name, but actually mean different things. Let's take number of users. This is one of the most abused KPIs. First you start to ask:"in which period"?, unique?, if unique how do you measure unique - within an hour, day, week?... all sorts of problems arise from something that at the first glance look really straightforward. However every time you read news, they just say that a company has X million of user.

KPIs are a great tool for making and tracking company performance. You just need to understand what they mean.

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America vs European Investor Relations

I've learned that there is a significant cultural difference between European and American entrepreneurs in respect to their relationship to investors. In Anglosaxon culture, the management runs the company and even though investors often have some formal rights in respect to approving certain decisions, it's usually expected that the management makes up their own mind. If investors really don't like the way the startup is run, they have the ultimate power to change the management.

In Europe investors are perceived as coowners of the business, so they have the right to influence daily decisions. Quit often if a coowner (particularly a powerful one) suggest something, it's perceived as an order, even if the management isn't quite aligned with it. It will get executed.

It's the conflict of the two concept that causes many troubles in quite a few occasions, particularly with first time entrepreneurs. Management is responsible for running the company, investors may suggest something, however management should view that only as an advice, not as directions. Investors won't take responsibility for the actions, but they will demand it.

As with all cultural conflicts responsibility to overcome them lies in hands of both parties. Investors should be aware that in the eyes of European entrepreneur they have more power than they are used to. And entrepreneurs should constantly demand themselves that investors are partners, not the owners with ultimate power. After all if they new how to run the business they wouldn't just invest in it... they would run it.

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Should advisors be paid?

Short answer is no. Long answer is: it depends!

The idea of an advisor is to advise, not to work. When you ask an advisor to work for you, she might expect to be paid. Of course it boils down to the definition of work.

Advisors are usually paid with equity and it's my views that that's the right way to do it. Amount of reward depends, but I think somewhere in the sub 1-0.5% range is the right amount.

For that you can reasonably expect your advisors to:
- have a meeting with you, call or email exchange from time to time (eg. once a week, but short ones)
- read short documents and give you opinion, from time to time (eg. once a month/quarter)
- intros (if an advisor doesn't introduce you to anyone that he could, fire him)
- be your champion when appropriate  wherever they happen to be

You cannot expect an advisor to do the following for you for free:
- make your presentations
- negotiate for you
- giving you extra benefits from their daily business (though if you really go along well, that's often the case)
- generate ideas for you

Think of an advisor as a wise man who can jump up and help you out when you don't know what do to. But be reasonable with what you expect. Whatever you asked them to do, don't be a time hog. Advisors answer questions, preferable closed ones (where they can answer Yes or No). Be smart. Use them wisely.

Advisory Board

Advisory board is a fancy name for a group of wise man. In my experiences, there are two type of advisory boards:
- shiny ones
- hands on ones

In a shiny advisory board you'll have a bunch of well known names that you can put on your web site and use them for name dropping. Some investors are particularly eager to push startups to signup big brand names. In a lot of cases people used in such boards have the ability but quite often don't have time to work with you.

A hands on advisory board is a group of people that are willing work with you. Those are the ones you want to talk to and sign up. As a startup you'll need all the help you can get. You can expect them to go through your product, make some calls and do intros, read through some one pagers and give you their opinion.

When to setup advisory board? Well, first it's not a formal structure that you have to establish right at the beginning. Recruit the advisors you need as you need them.  Advisory board are more or less a name on the paper. They usually don't  meet or have a structured form. It's just a name for a list of people that you work with on a non regular basis.

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Virtual Real Estate

One of the most popular models on the internet is advertising. Effectively companies managed to figure out a way how to create real estate. Virtually all big services have that kind of model. Look at CNN.com for example. Their main business is to have: a) as many readers as possible and b) as many pages as possible on which they can run adds on. That's it. They virtually create new real estate that catches views.

Analogy of the real world is building new building and putting a bilboard on it's side. Marketers quite often figure out how much that bilboard is worth. They look at the numbers of people that passess by each hour, location, correlation with other bilboard .... And it's exactly the same on the internet. We look at the number of unique users, page views and other.

As with classical marketing it's the numbers game. Since it's not worthwhile for you to put up a marketing sign in your living room, it's not worth to base a modestly visited side on ads. Unless you can build a really big site with a valuable real estate.

Why Free Service?

Startup often offer free service as an investment into marketing. With that they hope to get as many users as possible, that will allow them to monetize them later. A classic example is Facebook or Google. It's free for users, however in exchange, the company creates real estate, virtual real estate which they monetize.

Another example is freemium model. A service is free, but for premium features, users pay. An example would be Skype. Skype-Skype calls are free, but when you want to call  a number outside the Skype world, you pay.

The trick is that all mentioned examples have a very clear strategic path from financing adoption (giving the service for free) to monetizing it.


On the other hand there are quite a few startups that want to go out and start giving the service away for free, without actually having a monetization path. In a small number of cases that might make sense, but much safer bet is to understand the mechanics of the service first and than target marketing, promotion and monetization efforts accordingly.

Virality and it's misuses

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One of the key features of consumer oriented online services is virality. It's the cheapest form of distribution... if you hit it right. Unfortunately it's extremely hard to design, since you never know if something is viral or not.

Americans often recommend three step process: iterate, iterate, iterate! Europans often take more time and want to think things through. I believe that the truth lies in between. You should think and iterate fast.

Virality is achieved when users promote the service to others while getting a utility by using it. 

It's a white hat version of a pyramid scheme, only that's legal. In fact it relies on the same mechanisms. You get rewarded in some way for promoting the service, while using it. It's a neat scheme and can be used often. Quite often people try to force virality on business that are actually not viral at all. Even worse, they start to design viral features, just to get recognition and not improve the business.

Non viral products examples:
- clients for social networks are not viral, underlying networks are
- stand alone products Apache, Firefox, MySql

Viral services examples:
- Skype: having others using Skype extends my utility
- Social networks: viral almost by definition :)

Don't get me wrong. Non viral products can use some tricks to complement their distribution strategy (e.g Gmail with invitations), however if they based their strategy solely on virality it would cause the team to misfocus their product development from creating utility to focus solely on distribution features.

Unfortunately that's often what some startups choose to do.

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