In a recent fireside chat, Dennis Chookaszian, the long-time CEO of CNA Insurance and more recently a substantial angel and early-stage investor and advisor to numerous companies, departed from the usual plethora of pompous pieties that seem to pass for content at technology panel discussions of late.  Instead, he got down to sharing some concrete and very specific advice for startups as well as some concise rules of thumb he uses to handicap a newbie's success. He also added some thoughts on the criticality of scaling swiftly, and about the importance-- early on--of paying attention to matters of ethics and core values of the business you're trying to create. As I like to say, you can't build value if you have no values. See How Far Will You Go to Be Loved.  In terms of sheer content, straight talk, and take-aways, this was one of the best discussions and Q&A sessions we've ever had at 1871.

Dennis is a guy who--as much as it's ever possible to do so-- has really refined his investment approach, making a science of how he looks at prospective ventures. It's clear that he's thought long and hard about exactly how he advises young entrepreneurs on what they can realistically expect on their journeys, and the best ways to prepare themselves and their companies for the precarious paths ahead. He noted that he's often approached by folks for help in raising early-stage capital or providing senior level introductions for them to large firms. And--as often as not, he says-- while he could help, he won't. Why?  Many times he doesn't think that it's the right time for them to raise capital or that taking in investment capital (even if abundant and available) is the right approach for the development stage of their businesses. In a startup, you eventually learn that a quick and honest rejection is a lot more helpful in the long run than a grudging or half-hearted favor that ultimately does neither party any good.

As you might expect, the discussion started with what he called the "rule of three," which is a simple way to think about the need to focus the scarce resources and bandwidth of the entrepreneur on the most critical and pressing issues. He said that as a general proposition it's almost impossible to pay attention and devote your energies to more than three or maybe four critical concerns at a time.

The three most important areas that Dennis felt every startup needed to concentrate on were:

(1) Substantial and Sustainable Revenue Growth

If you can't determine early on who is going to pay you for your new product or service and you haven't demonstrated that the dogs are gonna eat the dogfood, then it's highly likely that you don't have a viable business. In addition, your business model and your actual results need to demonstrate an achievable size and a path to securing market share sufficient to yield early, exponential revenue growth. Dennis's shorthand for this criteria is T2D3, which means that your year-over-year revenues are expected to triple in each of the first two years and then to double in each of the next 3 succeeding years.

Dennis shared some very specific criteria about the need for each business to look at the nature and quality of its revenues to determine whether it's on the right path. The four critical factors are: (a) businesses with recurring revenue bases--like a renewable subscription -- are far better than ones dependent on constantly securing new customers; renewals are much easier and less expensive to secure than new sales; (b) customer retention is absolutely critical-- all customers are very costly to acquire and very easy to lose in a world of almost infinite choices; (c) businesses based on products that require constant replacement or renewal (the "razor blade" model) are much more attractive than durable goods businesses (like selling refrigerators) where the products have very long repurchase or replacement life cycles and where the market could even fairly quickly reach saturation points; and (d) businesses that offer products or services that had a predictably high rate of obsolescence were much more attractive than those where the products had long, useful lives.

Dennis was brutally frank about how frequently startups fail. While he believes (as noted above) that the most recurring cause of early business failures is a lack of sufficient and rapidly-expanding revenues, he also noted the problem with pointless perseverance. He said that very often the biggest mistake an entrepreneur can make is trying to stay the course-- waiting too long to either pivot quickly or shut down if a business is not making the necessary progress. I like to say that there's nothing worse than profitless prosperity, where your top line keeps growing, but there's no bottom line in sight. He pointed out that establishing some milestones or benchmarks for measuring your success over a fixed period of time and then sticking to those metrics in deciding your next steps is a form of management discipline that is essential. See The Future of Tech Metrics .

 

(2) Resisting Raising Too Much Capital Too Soon

 

           Dennis is a bootstrapping hardliner. He doesn't agree with the "appetizer rule," to wit: that the time to eat the appetizers (or raise new money) is when they're being served or available. He believes that you should raise as little as you can for as long as you can regardless of how easy it might be at a given point to secure new funding. (For a contrary view, see: Take the Money .) He also said that you should seek outside investment, and only as much of an investment as you realistically will need, once it's clear that you have an actual business with provable revenues that is going to prosper. Otherwise, the outside money will cost you too much and--probably worse for you and the business-- conceal the unhappy realization that you haven't really figured how to operate and scale the business profitably. He noted that mega-incubators like 1871 are great places to get started because they enable entrepreneurs to avoid all kinds of costs and commitments that are bad uses of their scarce capital and-- at the same time-- to secure access to enormous amounts of "free" resources, education, networking and mentoring that will be crucial to their long-term success.

 

(3) Leadership and Ethical Values

The smartest investors bet on the jockey, not the horse and nothing is more important for a successful business than the strong leadership skills of the senior management team. And, because the required skill sets will change dramatically over time as a business grows, it is also critical that the management be sufficiently flexible that it can adapt to the new requirements of the firm. Dennis noted that this is a very rare outcome and that it is unusual for the startup CEO to survive in that role once a company gets beyond a certain revenue and market share.  It's very clear that entrepreneurial and managerial skills are quite different, and specifically the CEO's role. The CEO's involvement in various functions and parts of the company will need to change materially as the years go by-- or the CEO will need to be changed.

What cannot change, and what is critical from the outset, are the values that a company develops as it creates its own internal and external culture. Here again, it is the CEO whose behaviors and attitudes are the most critical in providing the essential role model. Mission statements are a dime-a-dozen and all the talk doesn't mean a thing if your behaviors aren't aligned with your professed beliefs and values. Over time, business priorities and considerations may change somewhat, but values must be sacrosanct. Because it is very hard, if not impossible, to ever recover from the damage that results from broken promises and commitments. By and large, values don't abruptly break; instead they crumble a bit at a time. I like to say that it's much, much harder to live up to 99% of your values than to honor them 100% of the time.

Dennis said that each of us needs to determine which values are most important and that we all need to establish an ethical framework. Once you have established those ground rules, it's crucial that you also make it clear that there are boundaries and bright, red lines that simply cannot be crossed. While people are people and we are all fallible, there are just some behaviors that no business can abide or afford. In other situations, understanding and forgiveness and a second chance might be the most appropriate response.

In his view, everyone has a three-tier ethical framework, and behaviors will fall into one of them. The three tiers are: (1) Zero Tolerance; (2) Possible Rehabilitation; and (3) Everything Else. Behaviors that fall into the first tier are (a) honesty/integrity breaches and (b) any kind of abusive behavior. There is simply no way back from these kinds of problems and any proven violations must result in immediate termination. Violations that impair the core values of the business cannot ever be tolerated.

Other issues that fall into the second tier-- personal problems, substance abuses or performance problems-- can potentially be remedied by giving the offender a chance to correct the problem.  But these cases must be strictly a one-shot opportunity to get things straight. Repeated bad behavior needs to be swiftly dealt with--see Tier 1.

Everything else can and should be handled through the normal management and HR processes. Most of these cases should not involve senior management. Only those instances that impact the business's basic culture and mission are serious enough, central enough, and important enough to be reinforced through the involvement of the business's leaders. People, since time began, have paid attention not to what we say, but to what we do. Some things never change.

 

Published on: Dec 8, 2015