High-Impact Entrepreneurship

Reprinted form A VC. Original article here.

By Fred Wilson

This week we are going to talk about cash flow. A few weeks ago, in my post on Accounting, I said there were three major accounting statements. We’ve talked about the Income Statement and the Balance Sheet. The third is the Cash Flow Statement.

I’ve never been that interested in the Cash Flow Statement per se. The standard form of a cash flow statement is a bit hard to comprehend in my opinion and I don’t think it does a very good job of describing the various aspects of cash flow in a business.

That said, let’s start with the concept of cash flow and we’ll come back to the accounting treatment.
Cash flow is the amount of cash your business either produces or consumes in a given period, typically a month, quarter, or year. You might think that is the same as the profit of the business, but that is not correct for a bunch of reasons.

The profit of a business is the difference between revenues and expenses. If revenues are greater than expenses, your business is producing a profit. If expenses are greater than revenues, your business is producing a loss.

But there are many examples of profitable businesses that consume cash. And there are also examples of unprofitable businesses that produce cash, at least for a period of time.

Here’s why.

As I explained in the Income Statement post, revenues are recognized as they are earned, not necessarily when they are collected. And expenses are recognized as they are incurred, not necessarily when they are paid for. Also, some things you might think of as expenses of a business, like buying servers, are actually posted to the Balance Sheet as property of the business and then depreciated (ie expensed) over time.
So if you have a business with significant hardware requirements, like a hosting business for example, you might be generating a profit on paper but the cash outlays you are making to buy servers may mean your business is cash flow negative.

Another example in the opposite direction would be a software as a service business where your company gets paid a year in advance for your software subscription revenues. You collect the revenue upfront but recognize it over the course of the year. So in the month you collect the revenue from a big customer, you might be cash flow positive, but your Income Statement would show the business operating at a loss.

Cash flow is really easy to calculate. It’s the difference between your cash balance at the start of whatever period you are measuring and the end of that period. Let’s say you start the year with $1mm in cash and end the year with $2mm in cash. Your cash flow for the year is positive by $1mm. If you start the year with $1mm in cash and end the year with no cash, your cash flow for the year is negative by $1mm.

But as you might imagine the accounting version of the cash flow statement is not that simple. Instead of getting into the standard form, which as I said I don’t really like, let’s talk about a simpler form that gets you to mostly the same place.

Let’s say you want to do a cash flow statement for the past year. You start with your Net Income number from your Income Statement for the year. Let’s say that number is $1mm of positive net income.

Then you look at your Balance Sheet from the prior year and the current year. Look at the Current Assets (less cash) at the start of the year and the Current Assets (less cash) at the end of the year. If they have gone up, let’s say by $500,000, then you subtract that number from your Net Income. The reason you subtract the number is your business used some of your cash to increase its current assets. One typical reason for that is your Accounts Receivable went up because your customers are taking longer to pay you.

Then look at your Non-Current Assets at the start of the year and the end of the year. If they have gone up, let’s say by $500k, then you also subtract that number from your Net Income. The reason is your business used some of your cash to increase its Non-Current Assets, most likely Property, Plant, and Equipment (like servers).

At this point, halfway through this simplified cash flow statement, your business that had a Net Income of $1mm produced no cash because $500k of it went to current assets and $500k of it went to non-current assets.

Liabilities work the other way. If they go up, you add the number to Net Income. Let’s start with Current Liabilities such as Accounts Payable (money you owe your suppliers, etc). If that number goes up by $250k over the course of the year, you are effectively using your suppliers to finance your business. Another reason current liabilities could go up is Deferred Revenue went up. That would mean you are effectively using your customers to finance your business (like that software as a service example earlier on in this post).

Then look at Long Term Liabilities. Let’s say they went up by $500k because you borrowed $500k from the bank to purchase the servers that caused your Non-Current Assets to go up by $500k. So add that $500k to Net Income as well.

Now, the simplified cash flow statement is showing $750k of positive cash flow. But we have one more section of the Balance Sheet to deal with, Stockholders Equity. For Stockholders Equity, you need to back out the current year’s net income because we started with that. Once you do that, the main reason Stockholders Equity would go up would be an equity raise. Let’s say you raised $1mm of venture capital during the year and so Stockholder’s Equity went up by $1mm. You’d add that $1mm to Net Income as well.

So, that’s basically it. You start with $1mm of Net Income, subtract $500k of increased current assets, subtract $500k of increased non-current assets, add $250k of increased current liabilities, add $500k of increased long-term liabilities, and add $1mm of increased stockholders equity, and you get positive cash flow of $1.75mm.

Of course, you’ll want to check this against the cash balance at the start of the year and the end of the year to make sure that in fact cash did go up by $1.75mm. If it didn’t, then you have to go back and check your math.

So why would anyone want to do the cash flow statement the long way if you can simply compare cash at the start of the year and the end of the year? The answer is that doing a full-blown cash flow statement tells you a lot about where you are consuming or producing cash. And you can use that information to do something about it.

Let’s say that your cash flow is weak because your accounts receivable are way too high. You can hire a dedicated collections person. You can start cutting off customers who are paying you too late. Or you can do a combination of both. Bringing down accounts receivable is a great way to improve a business’ cash flow.

Let’s say you are spending a boatload on hardware to ramp up your web service’s capacity. And it is bringing your cash flow down. If you are profitable or have good financial backers, you can go to a bank and borrow against those servers. You can match non-current assets to long-term liabilities so that together they don’t impact the cash flow of your business.

Let’s say your current liabilities went down over the past year by $500k. That’s a $500k reduction in your cash flow. Maybe you are paying your bills much more quickly than you did when you started the business and had no cash. You might instruct your accounting team to slow down bill payment a bit and bring it back in line with prior practices. That could help produce better cash flow.

These are but a few examples of the kinds of things you can learn by doing a cash flow statement. It’s simply not enough to look at the Income Statement and the Balance Sheet. You need to understand the third piece of the puzzle to see the business in its entirety.

One last point and I am done with this week’s post. When you are doing projections for future years, I encourage management teams to project the income statement first, then the cash flow statement, and then end up with the balance sheet. You can make assumptions about how the line items in the Income Statement will cause the various Balance Sheet items to change (like Accounts Receivable should be equal to the past three months of revenue) and then lay all that out as a cash flow statement and then take the changes in the various items in the cash flow statement to build the Balance Sheet. I like to do that in monthly form. We’ll talk more about projections next week because I think this is a very important subject for startups and entrepreneurial management teams to wrap their heads around.

Reprinted from Fred Wilson’s AVC.  See original article here.

Dr. Dana Ardi is a friend, former colleague, and an expert in the fields of talent management, organizational design, assessment, leadership, coaching, and recruiting. Dana has taught me a ton about these areas and was a partner at Flatiron Partners where we made a big investment in the talent side of the business. I asked Dana to “bat cleanup” on this series on People and she’s done that in fine form with snippets from her coming book on Betas, the new archetype of organizational leader.

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“When someone asks you, A penny for your thoughts, and you put your two cents in, what happens to the other penny?” It’s a really great question, as well as being one of my favorite among many George Carlin quotes. And it came to mind when Fred asked me to contribute a guest blog post.

Having just put the finishing touches on a book about organizations that’ll be out next year, I’m happy to toss that second penny into the ring.

I consider myself a corporate anthropologist. I’ve spent most of my life studying the cultures of organizations, how they evolve and intersect with what’s happening right this second, and how the people in them influence and shape their communities. My consulting mission isn’t to transform established, successful companies – they’re doing fantastically well the way they are. It’s to assist them and other entrepreneurial ventures with the positioning to succeed with today’s workers, in today’s new business environment, and to help them evolve.

In the Information Age, workers in today’s organizations are accustomed to being sold, not told. Robert Louis Stevenson once wrote, “Marriage is a long conversation,” but so today is business – which is why companies have to change or else risk going under.

It’s pretty clear to me that the Information Age requires a new approach to organizing groups of people, as well as to successfully function within those same organizations. This approach I call Beta, to distinguish it from the old Alpha paradigm, and it trickles down to corporate culture, recruitment, and most of all, leadership.

What do all the most successful leaders, companies and workers have in common? In a nugget, it’s the trait we call self-awareness. In Heart, Smarts, Guts and Luck, a recent business title published by Harvard Business Review Press, co-author Anthony Tjan argues that all successful business leaders are skilled at just that. Of the four core qualities that he has observed make up most successful entrepreneurs and business-building, they know when to dial up…or dial town. They know when to emphasize passion, lower the pitch on assertion and bypass analytical smarts in favor of creative thinking or relational skills. In short, they’re as fluid and adaptable as the businesses they run.

What if you want to be there, but you’re not there yet? Here are a few things to to bear in mind about today’s and tomorrow’s winning-est organizations.

The Most Successful workplaces of the Future…

• Do away with archaic command-and-control models. Winning workplaces are horizontal, not hierarchical.Everyone who works there feels they’re part of something, and moreover, that it’s the next big thing. They want to be on the cutting-edge of all the people, places and things that technology is going to propel next.

• Instead of knives-out competition, these workplaces put a premium on collaboration and teamwork, and on building a successful community with shared values.

• Oh, and I’m not saying workplaces should become democracies – that would never work – simply thatpeople are empowered and encouraged to express themselves.

• Winning contemporary workplaces stress innovation. They believe that employees need to be given an opportunity to make a difference – to give input into key decisions and to communicate their findings and learnings to one another.

Corporate Culture matters more than you think

• The best teams are hired with collaboration in mind. People who remain in the culture are those who are dedicated to the ideal that that the whole is more than the sum of the parts.

• In the most winning corporate cultures, everyone has something to contribute. Leadership is fluid and bend-able. Integrity and character matter a lot. Everyone knows about the culture. Everyone feels the culture. Everyone subscribes to the culture. Everyone recognizes both its passion and its nuance.

• In winning corporate cultures, roles, identities and responsibilities mutate weekly, daily, sometimes even hourly. There’s a focus on social, global and environmental responsibility. No, these initiatives aren’t just good ideas, they really matter.

Today’s Most Successful Organizations…

• …look less like an advancing army and more like a symphony orchestra. They are divided up into sections rather than functions. Each section has a leader and every player is a member of a team that works in synchrony. The orchestra conductor may direct what the orchestra does, but he knows he’s not completely in charge. His sole mission: To impel the other orchestra members to play to the very best of their ability, while integrating those efforts into a concerted group effort.

• In life as in business, most people are not generals, they’re lieutenants. Nor do they necessarily want to be generals – they want to be impact players. Frankly, most of us are happy to have the opportunity to accomplish what we’re good at, and what we enjoy, so long as we receive adequate recognition and reward.

• The most successful contemporary cultures convey the message that it’s okay to be yourself, and to do your best. You don’t always have to move up; you can also move across. More important is that you are happy, fulfilled, contributing to the community and feeling productive and rewarded.

The Leaders of Today have to be self-aware – and top-down mandates no longer work

• There will always be the need for decisive leadership, particularly in crisis times (and there’s a touch of the autocrat and control freak inside every successful entrepreneur). But today’s world is all about collaboration –and launching and maintaining that “long conversation” that Stevenson talked about.

• The leaders of tomorrow need to practice ego management. They should be aware of their own biases, and focus as much on the present as on the future. They need to manage the egos of employees by rewarding collaborative behavior and teamwork.

• Leaders should strive to become what Michael Maccoby dubbed “Productive Narcissists,” tempering high self-esteem and confidence with empathy and compassion. Mindfulness, of self and others, by boards,executives and employees, may very well be the single most important trait of a successful company. Companies have to define the culture; the culture can’t define them. So pre-define it!

• Finally, companies need to understand that every individual in the organization is a contributor; and the closer everyone in the organization comes to achieving his or her singular potential, the more successful the business will be. Successful cultures encourage their employees to keep refreshing their toolkits, keep flexible, keep their stakes in the stream.

Rethink Recruiting

• Diversity is key – and by diversity I mean of thought, style, approach and background. You’re building a team, not filling a position. Cherry-picking candidates from name-brand universities will do nothing to further an organization and may even work against it.

• Don’t buy resume or credentials. Buy competence, track record, character and culture fit.

• Avoid hiring only superstars. It’s about company teams, not just the individual. Sure, it’s totally tempting to create an All-Star team, but in case you hadn’t noticed, those people don’t pass the ball, they just shoot it.

• Hire competencies but remember: hire with your heart. Make sure new workers fit into the preexisting culture, while also importing their expertise. Become their sponsor – onboarding is essential. Spend time listening. Give them what they need to succeed.

• Sometimes you need to hire aliens – folks outside of the culture who bring new ideas and best practices from other places. These people become culture-influencer and agents of change.

• New hires are more than just the college or university they attended. In short, don’t hire credentials, hire people.

• Character matters. Most people don’t succeed in teams not because they are unqualified or incompetent, but simply because they are not a good cultural fit.

• Act now. One of the big mistakes entrepreneurs make is they don’t act quickly enough. Put aside perfectionism, don’t wait for the perfect person – he or she may not exist. Hire track record and potential.

• If, looking back, you realize someone is not a good cultural fit, or is not getting it done, don’t wait to make the change. Sometimes it is just as simple as readjusting their position or redefining their role. If they really don’t get it done, then it’s time to make the tough call.

Be on the lookout for signs of a lack of emotional commitment from employees:

• People complain about the hours they’re putting in;
• Turnover is high, particularly among young top achievers;
• Recruitment is difficult; there’s little innovation or creative thinking; and
• There’s more politicking that there is actual dialogue.

Take note of those employees who have an emotional commitment to the organization:

• People give extra effort voluntarily;
• They become your best ambassadors
• Employees make personal and professional sacrifices to stay rather than leave;
• People feel free to think outside the box; and
• Meetings often result in lively debates and team action.

The employees of tomorrow plays to their strengths

• Rather than aspiring to omnipotence, and acting as though they’re the masters of all they survey, Betas focus on what I call “motivated skills,” e.g., the things they know they do exceptionally well. And instead of exploiting their peers’ weaknesses in order to attain and hold onto power, they encourage their fellow team-members to play to their own strengths so that the entire team and organization can succeed.

Self-Awareness is all (but don’t think for a moment it means you’re soft)

• What is self-awareness but bringing an intellectual and emotional understanding of your strengths and their weaknesses, your goals and their motivations to a given situation?

• Ensure that you hire self-aware people. Give them the proper tools, techniques and feedback, as well as the proper levers of success and sponsorship. Onboard people with the belief that they’ll be successful. Then make sure it happens.

• That said, organizations cannot be whole-heartedly responsible for their employees’ development; employees have to play their roles, too. Beta leaders are skilled at assembling employees, encouraging them to think new thoughts in different ways and challenging them to do new things.

If there’s a single takeaway from years of consulting, recruiting and observing both old and new organizations it’s this: People really truly matter. They are your strategy. They need to be encouraged and coached to pursue what they do best; to keep doing what they enjoy, and to participate in the success of your company.

To survive and thrive today and into the future, business leaders need to grow and develop their own self-awareness. Self-awareness means that you are willing and able to collaborate with employees, directors, customers and yes, even your competitors. It means that you understand that every individual in your organization is a contributor with varying degrees of potential – and that the closer everyone comes to attaining a high level of self-awareness, the closer the organization comes to achieving its potential. It means that your self-awareness feeds into your employees’ own self-awareness, which in turn ignites the overall success of the venture.

Now that Fred has made me the cleanup hitter, I’ll leave with this parting shot: Hire smart and hire the very best people you can. Don’t just onboard someone to fill a slot. Instead, build a community. Keep asking yourself not just what you want and need, but what’s best for the organization to grow and evolve. And remember what George Carlin said: “If you haven’t gotten where you’re going, you’re probably not there yet.”

Reprinted from A VC. Original article here.

By Fred Wilson

I will be doing office hours today at 6pm eastern. You can watch them here on this link. If you want to submit questions for office hours, you can do that here. Just like last week, I will review a few business model canvas projects and then will answer questions for the rest of the office hours.

This week I’d like to talk about company culture and how it impacts sustainability. If you want to be in business forever, you need to build a culture that sustains the business. I talked a lot about this in a post on culture a while back. You should give that a read as part of the assigned reading for this course. Here is the money quote from that post:

“Companies are not people. But they are comprised of people. And the people side of the business is harder and way more complicated than building a product is. You have to start with culture, values, and a commitment to creating a fantastic workplace. You can’t fake these things. They have to come from the top. They are not bullshit. They are everything. There will be things that happen in the course of building a business that will challenge the belief in the leadership and the future of the company. If everyone is a mercenary and there is no shared culture and values, the team will blow apart. But if there is a meaningful culture that the entire team buys into, the team will stick together, double down, and get through those challenging situations.”

I bumped into a friend last week who works at a company that is going through a difficult time right now. I asked him about the “talent drain” that is going on in his company. He said “the ones who were in it for only the money are long gone, the doubters are gone now too, and we are left with the true believers now.”
I thought to myself that the mistake the CEO of that company made was bringing the mercenaries and doubters into the company in the first place and allowing them to stay.

Mercenaries have no place in your company and your culture. Doubters are a bit different. You certainly don’t want to create a culture of “yes maam” in your company. So some doubting is healthy. But it should be out in the open. The doubts should be expressed upfront and they should be discussed and debated. But once the decisions have been made, everyone needs to get behind them. Ongoing doubting is not helpful to a culture.

True believers are required to get through the hard parts. And you need to be the leader who inspires the true believers. Watch this short video where @dens described what he did when Facebook launched a competing product to Foursquare.

You get true believers in your company by giving them something to believe in and someone to believe in. That is you. Even if you are scared shitless or bummed out, you can’t show that to the team. You have to lead if you want the team to follow.

The thing that you give them to believe in is called a vision. Make it a long one, a very long one. I like Bill Gates’ vision for Microsoft:

“When Paul Allen and I started Microsoft over 30 years ago, we had big dreams about software,” recalls Gates. “We had dreams about the impact it could have. We talked about a computer on every desk and in every home.”

A computer on every desk and in every home. That was a big hairy audacious goal in the late 70s. And it is exactly what happened, at least in the developed world.

The cool thing about that vision is it is drop dead simple to understand but took decades to execute. That’s a long vision that your team can buy into and stick with for the long haul. That’s what you need.

So if you want to build a business that lasts, you need a big and long vision and you need to be a leader who can inspire the team to believe in the vision and to believe in you. You need to hire folks who will stick around for the long haul and you need to be open to the doubts and doubters. But if they keep doubting, you need to part company with them. Don’t hire mercenaries. They won’t work no matter how hard you try.

Building a culture that can sustain the business is the most important investment you can make in your company. Once you’ve gotten a product into the market and proven product market fit, there is nothing that is more important than team, culture, and values. It is the glue that holds the whole thing together for the long haul.

Reprinted from Feld thoughts. Original article here.

By Brad Feld

A few weeks ago an entrepreneur of a fast growing consumer-oriented company told me that he has every new employee do customer support for two weeks. Their approach is they onboard the new person, given the a one week “get settled into your role / get up to speed on the company” period and then they spend weeks two and three full time in the customer support organization.

I’ve let this roll around in the back of my head and think it’s absolutely brilliant. The first week is a typical “first week at a new company” which includes a formal day of orientation on the first day. The next four days are structured around on-boarding the person and getting them involved in their role and their team, but not too deeply. This allows there to be a “break in period” where the person is learning the systems and structure of the company.

Week two is a full time immersion in the customer care organization. Total front-line stuff. The same first week any new customer care rep would get. Day one is whatever the normal orientation is followed by four days of “training wheels customer care.”

Week three is a fly on the wall from a managers view of customer care. Rather than front-line support, this is involved in all the meetings – up and down the customer support organization – to understand what people are dealing with. The last day includes a debrief meeting with the CEO.

I think a version of this process could be created for virtually any size company in any market segment. You are trying to have the person do three things: (1) be on the front-lines of the company and understand what that looks like, (2) engage directly with the product and customers, and (3) understand how the organization works from the customer point of view.

There’s a powerful second order effect, especially if every employee does this regardless or rank or title. In the first month of their tenure, they see the organization from the inside out. This creates a powerful common view that can generate an entirely different set of early actions for anyone in a new role. It also creates a powerful culture dynamic. And it does a little of what we try to do in the first month of TechStars – which is to “slow down to speed up.”