10 Things That Change When You Stop Bootstrapping

My name is Matt Holloran, General Partner of Cloud Apps Capital Partners. We lead Series A financings and cloud business application companies. Personally, I spent 12 years in three market leading companies, clarify data sweep and salesforce.com and go to market roles from marketing to sales and have 10 years of experience in venture capital and private equity. Prior to starting Cloud Apps Capital Partners, it is my honor to introduce Kristin Ko Goldstein, the founder and CEO of Scalus, a workflow automation platform. Let's hear it. And she also has experience as an operating executive and as an investor. And I think the combined experience over a number of periods and cycles you'll find helpful here today. Her topic I think is of interest to everyone in this room which are the 10 things that change when you stop bootstrack strapping. So with that, Kristen, Thanks Matt.

Good afternoon everyone. Thanks so much for being here. As Matt said, I'm the founding CEO of a company called Scaleless. This is my third company that I'm founding and I've spent the greater part of the last 20 years as either an early employee or a founder or a hired hand CFO of a number of very fast growing software companies. And having sat through hundreds of board meetings, I have probably a different perspective on connecting the dots and understanding what makes a SaaS company successful. The overarching change that you will feel once you raise that big $10 million round is that the complexity just seems to kind of explode on you because you go from building a product to building an entire company which is product, product, people and process working in concert, in sync. And having seen this movie before, I've been asked a number of times how this cycle is actually different than the last or not. And there's definitely a lot of differences. But the biggest one that I see is that during the Internet bubble it was really more about people people Harvard MBAs like myself and Matt kind of descending like locusts down into Silicon Valley. And we had these boil the ocean ideas and started companies with other people people and went into stealth mode. We went and hired as many product people as possible and burned through a lot of money without too much to show for it. And out of those ashes emerged the lean startup methodology. And we learned a lot from that experience. And today the environment is a little bit different in that the order of how the three Ps are executed has changed. We are seeing a lot more of very frugal and agile product people getting to a minimum viable product really quickly. But then they struggle to build out the team, recruit the people people to Graduate out of the one trick pony phase of the, you know, transitioning phase of a company, which really will determine your success or failure. And if you can't emerge out of the one trick pony stage, you will maybe become an acqui hire candidate or not. So it's really important to kind of think about the cycle in terms of the three Ps. And of course, without the product and people, part of process doesn't matter because there's no business there for you to scale to make repeatable. One of the first things that you'll notice after the big raise is that the mythical man month is real. The faster you try to hire people, the longer it's actually going to take you to build your business. And I know that's really counterintuitive, but it turns out that building trusted human relationships is a process and there's no real manual override button for it. And so the faster you recruit people, the more chaos there tends to be. And there's a certain percentage of new hires you can have in an organization at any given point before the chaos consumes you and you can't scale your business. And it's interesting that the R square to whether or not you can survive that phase is how young your work population is, your employee base. Because the, the younger they are, the more adaptable they are to change. So that actually matters. This is a hard one. You will learn very quickly that you will gain immediately a second or third job as a recruiter for your business, and it's literally never going to end. And you will remember that the first and last thing that your VC will tell you as the $10 million gets wired to you is that he expects expects you to spend 80% of your time building your team and recruiting for the company. And you're thinking the whole time, oh my God, I'm already working around the clock. If that's 80% of my time, how the heck am I going to continue to iterate on the products to stay competitive and build the business? So you kind of trick yourself into thinking that recruiting is a phase. And the sooner you get it over with, the better off you are because then you can go in and do the rest of your job. And that's really a mistake because you just can't again hit the manual override button. You have to hire slowly and fire quickly or you're not going to make it. And I know this from personal experience. I almost blew up one of my companies as a founder because I thought I was going to be clever enough to Avoid this natural process. We had a candidate who was going to be a transformational hire a brand name out of a brand startup, a branded startup that was that scaled to a thousand employees. And we managed to hire this person at about the same time. We closed this gigantic round from top tier VCs and you know, we did the victory lap around the building congratulating ourselves. And the first 90 days were great because it's the honeymoon period. You do a lot of, you know, singing around the fireplace, you know, kumbaya. And as CEO the next 90 days you start to think, well, things aren't happening. And this person seems to kind of be paralyzed by big company thinking, what do I do? And you tell yourself, well, you got to give the person a chance to be successful. So you kind of spend a lot of time trying to help them improve and you know, doesn't really work. And then the next 30 to 90 days after that, the third quarter that they're on your payroll, you give up and you try to think of a transition out and you start preparing your team to let this person go. I did this at month seven and it almost killed us. It was a huge morale hit and we had actually some turnover around it and there's a loss of confidence and I just feel lucky having seen this movie before a number of times. I knew better than to acquiesce to his request that I keep him for one full year so that his resume doesn't look so wrecked. Because a lot of first time founders kind of fall into that trap. And it's not really even the salary you're paying this person for the year. They're holding the spot of someone who could be executing. So you've literally burned a year of cash without much to show for it. And so this is why firing fast is really, really hard. It sounds correct academically, but the people side of leading a team will prevent you from being so heartless. And the first time that your terminated executive looks at you and shows fear that he can't pay his mortgage, or tells you that his daughter will now have to drop out of college because he can't pay her tuition, it'll crush your soul. And you'll think about that person for the rest of your life. And it's not any better the second, third, or even the 10th time. It's something that you have to accept as a founding CEO. This is really, really hard and really hard to get right, but you must do it.

I agree with you that for everyone in the room thinking about the right talent and the right people is forever. And it's really hard. I also agree with you that it will never ever and should never be easy to have that hard decision. How about hiring slow? Can you expand on that?

Yeah, hiring slow is really hard because no one believes Mythical Man Month until they realize it's real. You really get tricked into believing that the faster you can get through through the hiring phase, you can go back to building your product and your business and you end up hiring way too fast. And then because it was your mistake, you feel bad, you fire really slow. It's a pretty vicious cycle. This is also about the time when you raise the big round that you start hiring outside of your circle, which is fraught risk. And I'll talk a little bit more about that in this slide. It happens around 20 employees. You go from a a culture of a family to one of a village. And as CEO, you're spending all your time being the referee of the neighborly disputes. You end up spending a lot of time trying to maintain what I call battle rhythm, which is essential to success. And it's really hard to define. And the best I can describe it is to explain what it feels like when you don't have battle rhythm. When, which is that you waste all your gas revving in neutral, going nowhere because your cross functional team is speeding up and slowing down out of sync. And it's because the culture of the company has changed and you go from an early stage founding team of people who can read each other's minds to oh, I have to explain everything now. And that's really hard and it's slowing me down. And again, this process of going from being a family to being a village is a pretty tough transition for most companies to make. And of course, any sustained period lacking battle rhythm actually sends the company into what I call the sine wave of death, where the early stage company never quite conquers the inevitable product debt of the early stage before the premature selling hits again. And then just when you get out from under that debt, the premature selling hits again and the company just never survives. And that's when product development and sales and marketing are totally out of sync as much as they try to be in sync.

And where do you think that you need to start being explicit about culture and really talking about it? Is that something that's late or early? How do you think about that?

Earlier the better. At Scaleless, we spent a little over a year being a product organization and you know, product and operations people live in a state of what I call pure Truth. And we just recently hired the entire go to market team. And I actually sat all my engineers down. And, you know, we have a fairly young team of engineers, mostly in their 20s, and I had to explain to them we're about to invite a whole new cluster of people into our village, and they live in a world of aspirational truth. And this is why they're not lying. Their job is to see within line of sight, hopefully not too far. And some salespeople can see way too far what should be. And it's actually their job to make that aspirational truth, real truth. And if you burst their bubble, the company will fail. So you literally have to explain to the engineers the how people and the product managers the what people, that although it's been okay to live in pure truth, we're now about to emerge into a community of aspirational truth. And it's important that you explain that or the team won't gel and there'll be great distrust between the two sides of the house. Struggling to maintain battle rhythm is one of these slow creeps that you really have to conquer at this stage. The other slow creep is that it'll be much harder for you to kind of rat out the bus drivers from the organization because they'll be disguised as bus builders in the very early stage. Everyone is fiercely entrepreneurial and they are builders playing offense. And they live and die by output and results, and they're measured by and they're proud of it. And you'll know when you get that first bus driver because he'll cry you a river about how hard he's working, how, you know, many hours he's putting in, and will really insist on being judged by input. And the problem is results are really easy to measure. Efforts really are not. And what you end up doing if you let this happen is that you allow politics to enter the company when you just can't afford politics to be there. Because guess what? The entire team will average down to the lowest common denominator if the guy working hard, producing no results is allowed to do what he does. Why do I have to work so hard? So this is a really important thing to get right because it just, it's a slippery slope down if you don't rat them out. This one's a doozy. You will wake up when Dan realize you're actually the biggest problem at your company because what made you so good in the early stages, you know, you're adaptable, you're full stack and you jump all over the place. Fighting Fires is exactly what will make your team not successful. Because it's really hard not to be a micromanager if you keep that style. And the team is now many times bigger. And of course at the same time, the number of hours you're spending with your team becomes less and less because once you raise all this money from VCs, they'll, every single investor will want you to spend time with every single person they've ever known in their lives and ask them how they can help your company. And so you're spending less and less time with your team. So when you actually finally do like come back and spend time with them, you will be overly critical, without context. You'll demoralize a team that all of a sudden is second guessing themselves. And over time you become the untrustworthy person because you're everywhere and nowhere and giving them lots of feedback without giving them the opportunity to internalize the feedback. And this is the stage where you realize, wow, it's really hard to systematically and consistently share the information I'm bringing back from the field. And this is an especially big problem for introverts like me because what I like to do is kind of look in my own head and process information and then kind of present what I think. And that doesn't always work for people who kind of want to be an active participant in that thinking process, which is much more natural to extroverts. This is really hard. So what do you do here? You have to systematically and consistently share information with a team that desperately needs the feedback. You'll immediately think about adding more hierarchy to make the information sharing more predictable and less random and risk bringing too much organizational hierarchy to the organization. So you'll kind of be like Goldilocks. It's either too little or too less and both are pretty dangerous and paralyze your team. If you have too much hierarchy. I mean, it's called politics. You'll have gatekeepers to information and that doesn't always end well at this very early stage. And so so far you've hired outside of your circle. You're trying really hard not to be a micromanager, which is very hard. And you are afraid to add hierarchy. But you need hierarchy. So how do you get all this done right? This is when you have to start really thinking about how to bring process into the company to make the success of the initial team repeatable. This is pretty hard. Remember, you're going from a phase where the founders can operate while reading each other's minds to actually having to systematically and consistently share information across the board with team members that actually speak a different language. Again, your engineers speak the how language. They want to know how something is going to work. They could care less about the what or the why. Product people want to know the what every pixel, and the business people want to understand the why. So in this context, you really have to communicate very consistently the same message or you're going to be misunderstood and your organization will fail just from the lack of repeatability of what you're trying to do. So your job as the founding CEO at this point is that you have to manage this tension that's growing between empowering your team to achieve the impossible through inspiration and motivation, with the chaos of an increasing number of people on the team trying to determine how things get done. And it's really hard. You have to somehow motivate a group of people to share best practices, which are continually changing in a way that works for everybody. And the way I've been able to achieve it is to first start with trust. You have to trust the people doing the work, that they know how to do it the best. You can't second guess them, you can't micromanage them. And trust comes from the top. Everyone will feel it if you don't trust. And once you instill that sense of trust on the whole team, you have to make sure sharing the best practices is actually seamless so that the accountability and the visibility is there. And you have faith that the best practices, as it morphs, is really truly best practices. It's only under this environment that you're actually going to be able to grow the business in a systematic way.

And how do you think about this when you're hiring your first executives, you know, part of the nucleus of your executive team and helping the company to scale.

No amount of words can prepare for that types of transition, especially when you're bringing in the people who, you know, what I call the processizers. And as you know, I had to build an entire app to kind of help organizations make the creation of process feel a lot more natural and less confining, you know, because the creative members of your team will fight this tooth and nail and tell you how it's keeping them from innovating. And this is the part that you mentioned, I learned the hard way, I mean, I got my butt kicked more than once that once you get that big raise from institutional investors, they expect you to scale the business. And scale is a lot less about the quality of your product or service delivery, which is what the Very early stages were about before you got the big round. Scaling is about making your product or service delivery consistent. Rinse and repeat, rinse and repeat, rinse and repeat. Because if you don't do that, you don't have to success that's repeatable or repeating and you just have a bunch of smart people on a one off fashion creating a business which becomes really a custom dev shop. It's not anything that's repeatable. And so what do I really mean by scaling? You have to become a metrics driven organization and again your creative people will fight it. But it turns out it's really hard to gauge consistency without hard data behind it. And if you don't have the hard data, you become a political organization. And this is the point in time you bring in the executives, the specialists to join the team of generalists that are agile and I call them the processizers. And this is one of the riskiest points of scaling a business because the processizers tend to be glass half empty people who are successful because they worry about all the things that went wrong in the rearview mirror and then obsess about what could go wrong in the future. And you know that type of perspective is oil and water compared to the early stage entrepreneurs who are very positive anything's possible and refuse to take off the rosy colored glasses. So as CEO, your ability to incorporate the processizers that make success repeatable into an organization of creative innovators is really hard to do. And I have not seen a company scale and be successful without this happening. And so the timing and sequencing of again nailing the three Ps product people and process is pretty important. And in my mind that process is actually called execution. There's a lot of talk about execution, but this is what it really means. Everyone talks about it in words that aren't really tangible and this is what it is.

Well, 10 powerful things that change when you stop bootstrapping. Some great challenges and some hard truths Right Shared with this group here today. Are there questions?

Thank you. Very interesting, thanks a lot. Quick question about firing fast. That's a difficult thing to do. So you know, in relatively small teams you're often dependent on one person and you wish you could fire him, but you're worried a bit about the effect when you don't have an alternate for him. So I'll be happy to hear your thoughts about it. If you sometimes had to wait before you fired fast like you wanted because you didn't have an Internet or you just fired and then went on looking for an alternative.

The dangerous situation you can get into when you feel held hostage by the person that you want to fire but you can't fire is that unless you fire that person, you feel no urgency to replace them. And you need that urgency because the name of this game is executing within a window of time. It's not finite, and you'll lose that window. I've learned the hard way that firing fast, as fast as you can is actually an imperative to being successful. And I've never regretted firing sooner ever. It's deliberating.

Thanks.

Question. Over here, left side. Your left side. Over here, way on the side. Sorry. A lot of the talk, or a lot of your talk about scaling included taking around or taking funding. Do you see this as a necessary step in leaving bootstrapping to scale your company, or do you see an organic approach where you literally just fuel it off of sales? Just take it until I believe that.

You should bootstrap for as long as you possibly can. And then some companies don't ever need institutional funding. I took one of my companies to 3 million in revenue at a very high profit margin before I took any money. And I did so primarily for reasons of recruiting. It turns out when you have brands like Google and Sherpa behind you, hiring is a lot easier. And that's really the only reason why I did it.

Awesome. Thank you.

Thank you so much. I'm from Atlanta, so a lot of our talent resources obviously are not as prevalent as they are here or in a number of other cities across the country. I use upwork to find a lot of our talent, and what I'm running into now approaching 80% of our company being contractors is this awkward cultural issue where they're not an employee, but they need to be close enough to the fire, where they actually need to understand the direction to do what they do. How do you handle contractors and the bleed over that you have to get to them when it comes to the culture that you're trying to build at such an early stage.

Actually, when your workforce consists mostly of contractors, culture is actually not the biggest problem you have. You actually have a much bigger HR problem in that you're not allowed to tell contractors how to do their job. So the consistency in product and service delivery is actually pretty impossible. When companies like Zirtual and homejoy went out of business, I got a lot of calls about how it's possible that backoffs is profitable and thriving employees through and through. And the accountants on that network literally process known workflows in a task list. With videos attached to every task in the task list. And that team has a standard where any smart person could be walked off the street and do the job. So it's really that consistency and being able to tell the contractor how to do their job, that's actually a bigger problem than the culture. I converted right away all the contractors to employees.

Thank you. As you were talking about firing fast and later on talking about integrating culture as you have to hire different types of people, sounds like there's a bit.

Of a tension there that you're going.

To want to try to get rid of people that are, that are challenging to the growing organization, but you're also bringing people that are challenging the other people of the organization. Can you talk a little bit more about reconciling that as you're, as you're growing?

I think you're asking how to manage the turmoil of turnover as you try to build culture and trust. Is that correct? Okay. I actually have a methodology. I'm a process wonk where I believe that if you frame a situation in a certain way and include the right stakeholders to have a part in the decision making, it's the only way that you can operate to instill that level of trust. Whenever any of my employees come to me with a problem, I literally put them through the same framework. Okay, well, let's make sure we understand the problem to solve and agree what are our goals to solve this problem. Let's identify together what are the three options we always want three, as well as the pros, cons, risks and benefits of those three options. And believe it or not, the process of going through those options, you all get to the same conclusion at the end and you have buy in because the entire team of people in the room who needed to be part of that decision heard it. And so you don't have the, you know, the problem of the meeting after the meeting, which is a killer.

Well, please join me in thanking Kristen for sharing these thoughts today.

Thank you.