Introduction

“Subprime mortgage” to “credit-default swaps” have become part of our common language today. Leading economists have called the recent economic collapse the worst financial crisis since the Great Depression. There is a high degree (and appropriately so) of anxiety when you see the Dow Jones Industrial Average on any given day down over 700 points.

So, what does a start-up company need to do? As a leader, how do you adjust to this reality?

After the Internet bubble burst and September 11th 2001, Ross & Company identified some particularly effective industry leaders who demonstrated great determination and skill. As an executive recruiter, our firm was privileged to listen to a thousand tales of the struggle to survive and maybe even thrive during this prior economic crisis. Ross & Company decided to analyze our search work over that period. We then selectively surveyed and interviewed some the most effective leaders from venture-backed, start-up companies.

Taking advantage of over 100 years of combined executive recruitment experience, Ross & Company conducted over 20 interviews with CEOs and Venture Partners. We surveyed over 150 senior executives and analyzed hundreds of executive-level recruitment projects.  The most effective leaders were able to turnaround difficult, improbable situations to the delight of their shareholders. When dramatic business changes impact the market, what lessons in leadership can we learn from the preeminent people working with start-up companies?  The following white paper presents five key lessons in leadership from the most effective leaders in recent years. Ross & Company hopes that these lessons serve as an important reminder for today.

5 Key Leadership Lessons

#1 – CEOs Must Trust their Instincts
Most people believe that when you are the CEO, you are the boss. In reality the CEO is subject to the scrutiny of the shareholders, customers, employees, and countless others. Successful leaders have a great appreciation for the responsibility they hold and once in the leadership chair, they know how to trust their instincts. The first time Ray Sozzi (currently an Executive-in-Residence at Summit Partners and former CEO or general manager of multiple software companies) was appointed a Chief Executive Officer over 25 years ago, he called a confidant and mentor and said, “What am I doing in this role? I’m scared to death.” His mentor replied, “Good, you should be scared. Don’t worry, you’re ready and will do fine.”  Under normal circumstances, leading a company is daunting, then factor in one of the worst global economic markets in recent memory, and it seems like an impossible undertaking.

After the demise of dot.com mania, many leaders found themselves in challenging situations and, unfortunately, we are beginning to experience a similar situation today. The successful leaders were able to either validate or create a new strategy, and at the same time, cut expenses to the bone. The pressures are intense and a leader really has to take a pragmatic approach, putting ego aside.  When a CEO freezes and doesn’t make the appropriate shift, he/she can find themselves and their organization on the sidelines. Some leaders had what one venture capitalist recently described as “the deer in the headlights look”, failing to make adjustments by smartly taking action and trusting their instincts.

As Bill Daniel, CEO of Surgient describes it “cash is your fuel and runway. Unfortunately, you have to make tough decisions but that comes with the job.” When he walked into Surgient in December 2000, the company had $27 million in cash and was burning $2-3 million a month. He acted quickly, cutting the monthly burn to approximately $750,000. How did he do it? One of most significant negotiations was cutting the monthly lease payments. He had to negotiate the company out of two leased spaces that were not being used. The company would have been obligated to pay $8 million. Bill got the company out of that commitment.

Effective leaders who trusted their instincts just knew that in tough times, they needed to be even more decisive. The idea of rapid growth was dead, and these leaders knew it was more about survival.

# 2 - Build a Strong VC Firm Relationship
When the Internet bubble burst, Guy Kawasaki, founder/CEO of Garage Technology Ventures, states the difference between now and then was “all you had to be able to do was PowerPoint. Now you need to do PowerPoint and Excel.”[1] Times certainly have changed and Guy’s advice is all well and good, but what do the successful leaders do after raising venture funding; especially when there is macro-economic turmoil? They build strong venture capital firm relationships.

After raising capital from a new investor or existing investor group is challenging in good times, when faced with a tough economic environment, it can seem next to impossible. When successful leaders were hired after 2001, in most instances, they were trying to raise capital from existing investors and most likely this will be the case again. Consider this, it was reported in October 2008 that venture capital investment over the past three-month period which was the second consecutive quarter with a decline in investment. The number of deals declined 13% to 583 during the quarter, reaching the lowest level since 2005 and information technology investments posting the least amount of deals seen in a single quarter, only 270 deals in that sector, since Dow Jones began tracking the data in 2002. [2] As one CEO mentioned in the Ross & Company survey “The advice I would give would be to secure adequate funding [and] preserve cash.” And in a recent conversation with a venture capitalist, he noted, “I think people are hunkering down and expecting the worst.” Under these conditions, the key lesson for the CEO to learn is that his/her business may need additional capital and that requires building relationships with the partnership, not just the partner who invested.

Looking back to June 2002, for example, one of our placement’s Jim Hemmer joined Antenna Software as CEO. He knew he needed to raise additional capital, and later in 2002 he did just that from the likes of existing investors - Northbridge Venture Partners and Polaris Venture Partners. When raising capital, Jim believes in the old Boy Scout rule, “It’s just like gathering the firewood, you [should] always gather more than you think you need. After you do that, make sure to build relationships with the VC partnership.”  The successful leaders need to identify the value in other VC partners who can help their business. These conversations are important to both the CEOs and the company outside of the immediate strategic or tactical need.  Better to be prepared to “gather more firewood” after you have nurtured that VC firm relationship, rather than trying to do so that when the cash is almost gone.

# 3 - Stay Close & Avoid Surprises with the Board & Team
CEOs make tough decisions that affect the lives of so many. Human beings naturally want praise, approval, and popularity over criticism, dismay, and contempt. Some ineffective CEOs practice what has been termed - “mushroom management” - meaning that they found it better to hide and keep employees in the dark rather than be open and candid. Effective leaders demonstrated and learned that strength of their convictions and honest communications across the company; especially with the board of directors and senior management, are vital to their continued success. One way to do this was making sure that members of the senior management team presented to the board of directors.

When members of the management team present on their area of expertise, it reflects well on that leader.  “I get concerned when a CEO doesn’t do this,” says Ray Sozzi, “If that CEO is not doing this, I question and reflect that there maybe something wrong at the company. We are not seeing everything.”  The poet Robert Frost wrote, “The best way out is always through.” By building consensus with the senior management team, these leaders learned how to manage through, not over people.  This way the successful leaders stayed close and avoided surprises with the Board and team.

These leaders want senior management to learn, grow and mature in their careers with the idea that one day those people could become a CEO.  As Kevin Bethke, former CEO of Interactive Video Technologies (backed by Tudor Ventures), remarks, “It's more critical to be a "we" versus an "I" and to give credit to the "we" that deserves it. I find it valuable to have my team listening and even presenting at board meetings for many reasons.” We have consistently heard these effective leaders point to how important it was for senior management to witness the sometimes less than flattering exchanges with the board of directors. Another benefit was that the CEO did not have to go back to his team and explain what happened at the Board meeting. The team knows what happened and why a particular decision was made. By fostering the team, these leaders were able to create a winning and transparent culture that gave confidence to the Board that there were no surprises.

#4 - Hyper-focus on “Meaningful Value” for Customers
The old mantra was like the voice from the movie Field of Dreams: “if you build it, they will come.” Management teams used to define markets and shape new product segments. With the financial markets in disarray, those days are over for now. When a dramatic economic shift occurs, the effective leaders get hyper-focused on their company’s “meaningful value”. What we heard time and again, was an almost obsessive commitment to establishing credibility, demonstrating market knowledge, and providing the verification that their company had a solution that worked and would be supported after implementation. As Eric Loeffel, CEO of Compass Learning stated, “with software, it used to be all about the feature and function of an application, but now it’s about the ‘meaningful value’ of a given solution.”

The credibility of a start-up company and its leaders begin with knowing that the product that is being delivered does what it purports to do. 

But how does a leader have the confidence that the product works? Unless you are the technology founder, most leaders lack the depth to conduct their own technical due diligence. This is especially critical with technology-based start-up businesses, because unlike other industries, the products tend to be somewhat invisible. Some the most effective leaders who lack this technical competency have used a trusted third party to help validate or invalidate the product. Just as customers need to trust that what they are purchasing will work and provide “meaningful value” to their organization so does a new CEO.

Even if the product works, the management team that has the business relationships and industry expertise must re-evaluate the “meaning value” of the product. Hyping a product that doesn’t work is unacceptable, but trying to hype something that customers don’t value anymore is foolish. As Jay Goldberg, General Partner at Hudson Ventures with over 30 years of operational and venture capital experience, observes “over the past (few) years, the Fortune 500 have been reluctant to buy from small, unproven tech companies.”  The most successful leaders know how to start with the customer and work backwards. There are competitors battling to offer other solutions that supposedly solve a customer issue, but effective leaders discover creative ways to deliver solutions, such as aligning their solution with other relevant customer initiatives. “It’s all about matching the compelling business benefit to the incremental spend”, observes Tom Bogan, General Partner at Greylock and former Chief Operating Officer of Rational Software. “This requires a slow and steady management because customers don’t move quickly (especially in a recession).”

# 5 - Manage an Exit as it Emerges
During the late 1990s, the major question potential CEOs asked when joining an early-stage company was “how soon will it go public and how many options will I receive?” By early 2001, these CEOs wisely started asking about monthly burn-rates and capital formation structure; they focused particularly on how much “runway” a company had left. The successful leaders know that a CEO cannot often predict a company’s liquidity event, so they had to be prepared and manage the emerging scenario. When people ask Bill Daniel, CEO of Sugient about whether or not he has an exit strategy, he quips, “I don’t care. My focus is on building the best software company in Austin, TX.” His point is that the exit strategy will present itself.  A CEO should therefore be prepared and think about the potential scenarios, but must focus those thoughts around maximizing shareholders returns.

In order to manage a potential exit when there is a severe business shift similar to the Internet bubble burst, the most successful leaders were either prepared or acted decisively to consider alternative exit strategies. These leaders read the landscape and made changes to their businesses. In February of 2000, for example, Larry Bohn, then Chief Executive Officer of NetGenesis (and now Managing Partner at General Catalyst), led this market leading software and analytic solutions provider in a highly successful public offering which raised over $80 million.  However, by 2001, he decided it was time to actively court potential acquirers, and by December of that year, NetGenesis was sold to SPSS for $46 million. Over the years, based on his own operating and venture capital experience, Larry notes, “Mergers & acquisitions are a rollercoaster ride. I’ve seen potential acquisitions with some of our portfolio companies die four or five times before we actually got it done.” Leaders have to keep their options on the table rather than be wed to one particular exit strategy. If they cannot see the emerging possibility, then those leaders run the risk of steering a company in the wrong direction.

Larry’s experience serves as a reminder that today a CEO must consider various exit strategies. There is always one option that he/she outwardly promotes and hopes to achieve. However, the leader is thinking about option B and option C, just in case option A does not materialize. These leaders have the confidence to potentially discuss these scenarios when appropriate with the board of directors. A leader will think through the options, consider the angles, and provide a realistic view about each potential scenario.

CONCLUSION 
The successful leaders have learned valuable lessons about managing a start-up company during the most recent market meltdown. What these leaders learned was how to manage during market change, business change, and technology change, especially as those changes become hyper. When that happens, he/she recognizes the opportunity for big market share gains, big revenue gains, big margins, or at the other end of the spectrum to stem losses, perform turnarounds, and recover. In the end, it's all about shareholder value and how best to maximize their returns. In Harper Lee’s To Kill a Mockingbird, there is a quote which seemed to summarize the start-up experience. Atticus, speaking to his daughter Scout says, “I wanted you to see what real courage is…It’s when you know you’re licked before you begin, but you begin anyway and you see it through, no matter what. You rarely win, but sometimes you do.”

Footnotes
[1]Kooser, Amanda C. “How Tech Got Its Groove Back”. Entrepreneur, June 2004, page 82.

[2]Calnan, Christopher. “VC Investment in New England tech companies plummets in Q3”. Mass High Tech, October 18, 2008.

[3]Gardner, W. David. Software Market On The Upswing, Studies. Information Week, May 2, 2005.

About Ross & Company
Established in 1992, Ross & Company has emerged as a leading retained executive search firm. We specialize in conducting general management, Board of Director and Vice-President level engagements for prominent venture capital and private equity funds whose primary investment focus lies in the technology and life sciences sectors. To learn more, please visit www.RossSearch.com