Dr. Earl R. Smith II

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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Recently, I was recently invited by three different investors to ‘take a look’ at companies that they had invested in. The pattern that I found was so strikingly similar that I set to thinking about what I was finding. I began to think about the roots of the pattern. The more I thought about it, the more I found myself staring at one of the principal reasons that only one in ten start-up companies make it to their fifth anniversary.

In order to take you along on my journey of understanding, I’ll boil these three experiences down to one fictionalized version. So let me introduce you to John Long – CEO of Dip Stick LLC.

John is in his early thirties and has launched a series of failed companies. Some of them were bootstrapped but the current one was investor backed. John’s major assets seems to be the ability to dream dreams that do not come true and then sell those dreams to his ‘team members’ – and, if he is lucky, to an investor. He is marginally charismatic – good at making positive initial impressions – a salesman of ideas – but not much of a salesman for the services of his company. John describes himself as a ‘generalist’ and tends to talk with mild disdain about the technical-types that he has to induce onto his team.

After doing a bit of background research on the company, I scheduled an initial meeting with John. Here is how it went:

The Lethargic CEO: My first interview is always with the CEO. I want to take the measure of the ‘team leader’ – find out what kind of person they are and what kind of leadership they are providing. I start with questions focused on how they spend their days. So, my first question was, “John, tell me about what you are working on right now?”

The key to the question is the length of the answer and the granularity of the response. CEOs that are ‘phoning it in’ tend to give very brief responses couched in general terms. Engaged and productive ones tend to provide a very detailed description of the tasks on their plate along with a direct connection to the results desired. The devil, as they say, is always in the details – or lack thereof.

John’s response took all of half a minute. I immediately got the feeling that he was not engaged in the process of building a business – more in the mode of being a ‘founder’ and hoping that a very few things would come through to make the business a success. Out of frustration, I asked John how he spent his days. “Look”, I said, “there are sixty or so hours in an entrepreneur’s week”. (Based on my past experience, I was being conservative) “How did you spend last week?” The response was illuminating. His description of the prior week’s activities was so paltry that I suggested that “he could have accomplished all that in an afternoon.” As you might image, my suggestion did not go down very well.

The key here is a sense of accountability. The right kind of CEO feels an overarching need to make things happen and spends a lot of time and energy trying to figure out what it will take – and then accomplishing them. Accountability means that ‘it is up to me to make it happen – anyway that I can’. The drive of a successful entrepreneur is always focused that way. The successful leader always lives in the real world – and that real world is a cold and unforgiving place. If you are going to win, you have to be better at making good things happen than your competition – and better than any other member of your team. John seemed to be living in Never-Never-Land – where never is heard a discouraging word, and the sky is sunny all day.

Living Off the Good Guys and Paying Off the Bad Guys: One of the early tests of any entrepreneur is the formation of the initial team. John had been good at gathering the ‘easy and low hanging fruit’ but that ‘easy way out’ had caused problems as the business began to encounter the inevitable growth pressures that any business faces. The ‘sales people’ were ineffective at selling, the marketing people were pure overhead and the team ended up wasting a lot of time on efforts that had little chance of yielding revenues. The dollars that were flooding out the door were yielding little but an increasing flood of red ink. John’s ability to judge and productively manage people was sorely lacking.

John’s history in building and leading a productive team was spotty at best. All of his initial team members were either gone or in ‘retirement’. A couple of them, after taking overly-generous salaries and producing little or nothing but overhead expenses, had either left the business or been asked to leave. It was the nature of those departures that caught my attention. All of them had received ‘separation payments’. The clear intimation was that they had been paid off to keep them from causing the company any problems after their departure. In the end, scarce financial resources were twice wasted on unproductive team members – once during their tenure and again in funding their departure.

It was the mechanism that John chose to ‘fund’ these expenditures that caught my eye. He was deferring compensation to his vendors – the very people who were providing the valuable guidance and revenues that might have given the company a better chance to succeed. When I pointed this out to him, John’s response was that he was doing ‘what was necessary’. I felt pretty sure that his vendors did not see it that way. I also suspected that the departing team members were spending their ‘separation payments’ without feeling at all guilty about it. The net result was that the company had developed a reputation of living off the good guys and paying off the bad ones. This was negative branding at its very worst.

However, there was a deeper problem. In John’s case, it quickly became clear that the company was suffering because he was not delivering on his obligations. The ‘good guys’ were covering their bases – some of them were exceeding expectations – but John was not. He was the point man on the sales efforts. He also was responsible for generating the projections that ‘mapped’ the company’s journey to profitability. The projections were not being met – in fact, they were constantly recast. The sales effort was anemic – John simply could not turn opportunities into closed deals. So expectations were not met and projections were revised. This destructive cycle came to dominate the company’s reputation and results.

No Metrics – No Matter: Once I get a sense of how the CEO is approaching his role and how the company is branding itself, I turn to the question of performance metrics. My question to John was, “how do you know if you are doing a good job – how do you know if you are fulfilling your obligations to the company and the team”. As you might expect, the response was similar to the one elicited by my first question. There were the generic references to being ‘the best of the best’ – a board statement about his role as team leader – but no hard metrics at all. Without hard metrics, a team quickly becomes a gaggle and this was certainly the case with Dip Stick, LLC.

As interesting part of his response turned on his justification of his role in the company. “I am the founder and own the bulk of the stock – so I am the CEO and leader”. This legalistic interpretation is always a red flag for me. From experience, I have come to accept that it is meaningless to suggest to such a person that a leader should lead by example – by producing at levels above the other members of the team. The reason that that argument is a non-starter is that it assumes accountability and accountability was not part of John’s vision of being a leader. For John, leadership was a prerogative that came from being the lead founder.

It is hard to overestimate the corrosive effects of this assumption of prerogative. The mere presumption poisons the pool. If the CEO does not apply hard metrics to his own performance, how can he expect that other team members will? My subsequent meetings with other members proved how unreasonable this expectation can be. None of them saw the need to substantively measure their performance. None of them saw their compensation and participation in the company in terms of their actual contributions to its future. In fact, all of them simply assumed that their presence on the team was sufficient to justify that compensation and participation.

The Rich Uncle Syndrome: And now I come to the true enabler of this tragedy – the ‘rich uncle’ who was funding the company. Sometimes it is an ‘angel investor’ – other times it is an ‘venture capitalist’ – but it always comes down to a rich uncle – that soft, benevolent character who, without the toughness that any company requires, simply writes checks and attends a series of mind-numbing meetings. John’s rich uncle was a venture capitalist who ‘liked the idea behind the company’. The money flowed in without oversight or established metrics. It was like giving a two-year-old a loaded revolver and sending him out to play. The results were predictable.

My meeting with John’s investor took me back to my days in Manhattan. In those days the coops along upper Park Avenue were occupied by what we derisively called the ‘Nuevo Riche’ – the newly rich. These people took it as a badge of honor to overpay for everything – they never engaged in the classic New Yorker’s drive to buy wholesale – in fact they not only insisted in paying retail but on paying the dearest retail available. It was a badge of honor to be taken for a ride – it demonstrated that they had so much money that it didn’t matter at all how much of it they lost. I realized that I was sitting across from the very embodiment of those Park Avenue denizens.

The investor – let’s call him Fred – took a very casual approach to the company’s prospects. He was helping out the ‘kid’ – putting him in business. I got to wondering how many lives this person had ruined with this approach. It was a very frustrating session. I kept going back to a poem by the Russian poet Yevgeny Yevtushenko:

Forgive no error you recognize, it will repeat itself, a hundredfold and afterward our pupils will not forgive in us what we forgave.

I wanted to grab Fred by the lapels and shake him. “Can’t you see the damage you are doing to these young lives? John is living the life of Riley – he draws his salary and produces very little in return. He thinks that is his due – his entitlement. You are enabling his disintegration. How could you do such a thing?” But, I kept quiet. I realized that to do otherwise would be the equivalent of a kamikaze raid on a vacant lot. The checks would keep on coming until it was clear to everybody and his dog that the cause was lost. The road to hell is, indeed, paved with good intentions. Fred would take a tax write-off and John would wander off in search of another idea and a new rich uncle.

The Morals of the Story: Investors should be fierce in their demands for discipline, focus and metrics – fiercer than the potential customers of the business. They should brook no foolishness – tolerate no lethargy – demand accountability – insist on meaningful metrics – and hold feet of the entrepreneur and his team to the burning fire of the terrible immediacy of the present. No part of the business should be taken for granted – including the participation of the CEO.

Oversight should be unblinking – unremitting – unbending. The investor should insist on a prerogative which comes from providing the initial capital which gives the entrepreneur and his team a chance to build a business – the prerogative to set the culture – to set the rules of engagement – to define the responsibilities of the team and the manner of holding them accountable.

The role of the CEO and his team should be clearly understood – to provide the investor an abundant return on his investment – not next year or next decade – but as soon as possible – period, paragraph. Without this focus on generating a return ASAP, you don’t have a company, you have a science project.

Finally, there is the matter of morality – another kind of moral. Investors need to come to terms with the damage they are doing if they don’t follow these simple rules. Most are not sadists – most do not enjoy helping people fail. But, most do not approach their role with the fierceness required. Maybe it’s because they want, above all, to be liked or avoid confrontation. But, whatever the reason, the damage occurs on their watch. They need to hold themselves accountable. Give me a fierce, driven investor any day – I prefer winning.

© Dr. Earl R. Smith II

Related Articles:

* Angel Investing – The ‘Elevator Speech’ Antidote
* Angel Investing – Hard Choices or Hard Times
* Angel Investing – Governance
* Angel’s Sins
* Attitudes, Agendas, Interventions and Compromises
* Entrepreneurial Planning and Goal Setting

Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

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