Outlook

The journal of ideas that create the future

Special Edition

Brave new world

Eight steps to a successful startup

Outlook

Outlook Special Edition November 2001 Outlook is published by Accenture Joe W. Forehand, Chairman & CEO James E. Murphy, Global Managing Director, Marketing & Communications Editorial Editor-in-Chief: David Cudaback Senior Editor: Letitia B. Burton Associate Editors: Jacqueline H. Kessler (Copy Chief), Laura E. Peddy (Operations) Assistant Editors: Phyllis S. Kennedy, Carolyn Shea Contributing Writer: Susan Gurewitsch Design & Production Iridium Group Incorporated For further information about Outlook or Accenture, please contact Marketing & Communications: In the Americas 1345 Avenue of the Americas Suite 18031 New York, NY 10105 USA +1 917 452 2804 +1 917 527 5387 Fax In Europe/Middle East/Africa/India 60 Queen Victoria Street London EC4N 4TW England +44 20 7844 4000 +44 20 7844 4444 Fax In Asia Pacific 141 Walker Street North Sydney NSW 2060 Australia +61 2 9005 5000 +61 2 9954 3484 Fax On the Internet www.accenture.com By e-mail Outlook@accenture.com We welcome your comments and questions. Please contact us at: david.cudaback@accenture.com letitia.b.burton@accenture.com jacqueline.h.kessler@accenture.com laura.e.peddy@accenture.com
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The views and opinions expressed in this article are meant to stimulate thought and discussion. As each business has unique requirements and objectives, these ideas should not be viewed as professional advice with respect to your business.

The Long View

New secrets to start-up success

Mention the words dot-com or startup or new venture, and you are likely to get a dramatically different reaction from the one you might have seen a few years ago. Times change quickly, and much of the enthusiasm in this space has turned to frustration. Many dot-com advocates have become cynics. Funding that was previously available for hot prospects is in rare supply today. Investors want companies with true potential for long-term growth. Yet despite the difficulties so many companies have been through, I dont believe we have seen the end of the startup. Innovations in technology will continue to create opportunities for corporate success. Great ideas remain powerful. Every day, we at Accenture work with our clients and business partners to help them inject new ideas into their businesses. We also encourage our own people to act as entrepreneurs and to bring their ideas to life. Without question, it is not easy to convert a great idea into a flourishing new company or to sustain that companys successespecially in the current business environment. But there are some lessons that have surfaced in the dot-com era. This Outlook Special Edition explores the secrets to start-up success. As you read, you might reflect on how you can build these secrets into your own work, whether you are trying to get a company off the ground or you are considering ways to bring a new source of value to an established business. Great ideascombined with drive, ambition and attention to the lessons described in this studycan
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help entrepreneurs persevere through todays economic conditions. At Accenture, we have seen the value of these lessons in advising our clients and running our own business. There are examples of start-up success today, although they may not be as numerous or as carelessly hyped as they once were. I am personally encouraged by the pioneers who are finding new applications for emerging technologies, creating truly innovative companiesand raising the bar for all of us.

Joe W. Forehand
Chairman & CEO Accenture

From the Editors Desk

Cautionary tale
Surveying the damage left by the bursting of the Internet bubble, investors and entrepreneurs continue to search for clues about the future of the start-up sector. In the meantime, many bets are off: Venture capital investments during the second quarter of 2001 slumped by more than 40 percent compared with the first quarter of last year. At Accenture, weve been looking for answers as well. In this latest Outlook Special Edition, wed like to share the results of more than a years research conducted to determine what it takes to succeed in todays new venture environment. Brave new world: Eight steps to a successful startup was written by Elisabeth Armitage and Diane Wilson, whose perspective on the subject is particularly useful. Wilson has global responsibility for Accentures new venture consulting group, while Armitage manages this companys New York Business Launch Centre. (For more on the authors credentials and their methodology, see the following page.) In fact, Accentures Business Launch Centres could be regarded as a global network of start-up laboratories. Working at sites in 24 major business centers around the world, our professionals not only observe the dynamics of venturing firsthand but also participate directly in the evaluation, refinement and launch of new businesses and new business models. Running the firms New York center put Armitage in an ideal position, she says, to conduct disciplined research and concurrently test the results for myself and with my clients.
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Armitage and Wilson were able to draw on the experience of venturing specialists in other centers as well (who collectively have helped more than 300 new economy businesses get off the ground). But the heart of their research was a rigorous analysis of dozens of ventures in the larger start-up market; in most cases, they went to the sourcethe entrepreneurs and venture capitalists who had lived through the dot-com meltdown. The project was something of a roller-coaster ride. When we first began, the shared perspective among the start-up experts was bullish, recalls Wilson. Later, when the wheels came off the business, Wilson and Armitage went back and reinterviewed their venture capitalist universe. We concluded that the critical success factors that we had initially identified have a stability and permanence that transcend specific market conditions, says Wilson, that there is a set of management principles that can be applied in all market contexts. With its account of many of the missteps of the bubble years, the tale that unfolds in the following pages is distinctly cautionary. Yet in a very real sense it has a happy ending. We encountered countless entrepreneurs with remarkable courage and the vision to meet these challenges, affirms Armitage. This conclusion is reflected in the authors fresh, provocative insight into effective leadership and management practices at new ventures and suggests that the sector can have a bright future indeed. David Cudaback Editor-in-Chief

About the contributors

Elisabeth Armitage, an Accenture associate partner, manages the companys New York Business Launch Centre. She specializes in new and corporate ventures across industries, with an emphasis on electronics and high technology, and media and entertainment. Ms. Armitage has more than 10 years of consulting experience in business strategy. In addition to her consulting work, Ms. Armitage has more than seven years of line management experience in the financial services industry. Prior to her current assignment, she acted as interim chief operating officer for an early-stage venture. Her most recent client work focuses on developing business strategies and plans to accelerate new venture growth. elisabeth.c.armitage@accenture.com Diane Wilson is a partner in the Accenture Strategy & Business Architecture line of business, with global responsibility for the new venture group. She specializes in the creation of new business strategies in a broad range of industries, including retail, travel and transportation, communications and high-tech, and financial services. Dr. Wilson has more than 15 years of consulting experience in business and technology strategy; before joining Accenture, she managed her own global consulting company for nine years. She is an author, speaker and executive teacher on topics that include how to create value from new information technology investments, how to create successful new ventures and how to create promising business strategies for the Internet. Dr. Wilson is based in Boston. diane.d.wilson@accenture.com

About the research

These are unquestionably tough times for new ventures. What does it take to survive and even thrive in the current environment? To answer this question, we interviewed 35 venture capitalists and entrepreneurs around the world, as well as partners running Accentures Business Launch Centres, in the wake of the dot-com crash of April 2000. We asked them to tell us the secrets of start-up success now that the bubble had burst. A year later we went back to see if their perspectives had changed. We supplemented our interviews with secondary research into ventures that had survived the crash and those that had not.

Outlook Special Edition, September 2001

Brave new world

Eight steps to a
By Elisabeth C. Armitage and Diane D. Wilson In todays unforgiving for poor product concepts, weak management teams and empty value the entrepreneur must manage within a focused, disciplined framework

winning startup
new venture environment, investors and analysts have little tolerance propositions. The rules of the start-up game have changed, and to win of eight critical success factors.

hat haunted look in the eyes of CEOs at most startups is understandable. They have been through a lot lately, none of it much fun. A key indicator of their current plight has been the performance of the venture capital funds so essential to any startups success. Venture Economics has reported that the 1,200 funds it monitors face potentially the worst year for the industry since the publication started collecting data in 1970. The back-to-back losses for the first two quarters of 2001 have forced many venture capitalists to commence a painful Darwinian process of squeezing out weak start-up management teams, poor product concepts and empty value propositions. Accentures own analysis suggests that this winnowing and upgrading of the quality of venture capitalists portfolios will continue for at least another 6 to 12 months. Investors and analysts are demanding that startups produce results soonerresults measured by burn rates, margins and profitability. They are looking for a rational business focus, excellent execution, and strong, disciplined management. In other words, today there is almost no tolerance for the nontraditional measures of business performance that characterized the Internet bubble. These sobering market and financial developments have yielded important lessons that the CEO of any new venture would do well to learn. Perhaps the most important is that many of the proven management approaches that underpinned the phenomenal success of the venture capital industry during the 1980s and early 1990s are just as valid for todays startups.
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Step by step
Eight factors critical to start-up success map the lifecycle of a venture. The factors can be captured within a management framework that has three dimensions.
Concept Shape Getting value from VCs Assembling the leadership team Securing launch customers Connecting people to the vision Forming alliances Disciplined experimentation Making founder transitions Creating scalable processes Build Scale

Strategic relationships Getting value from VCs Securing launch customers Forming alliances

Leadership and talent Assembling the leadership team Connecting people to the vision Making founder transitions

Core business processes Disciplined experimentation Creating scalable processes

Our research has identified eight critical factors that startups must get right early in their lifecycles and must manage effectively to be successful (see box). That old management adage Stay focused on two or three things you do well probably still works for a large, developed organization. But it is too simplistic for a startup. The

start-up CEO must be vigilant about keeping the entire constellation of these factors in focus. A new venture is extremely vulnerable; failure to rigorously apply even one of these factors could be fatal. This is easier said than done, of course. The startup begins life with two disadvantages: small size and

limited resources. Under these circumstances, the complexity and uncertainty associated with the effective management of these success factors is much greater than for a large organization, which typically has a deep bench of management talent, established control systems, and highly structured work processes and organizational infrastructure. New venture CEOs should manage within a framework that has three dimensions: strategic relationships, leadership and talent, and core business processes. Each dimension captures a different set of success factors. This framework is useful for anticipating and solving problems, reducing risk and setting new priorities. A matter of balance Our study also included analyses of hundreds of new startups to identify best practices for the eight critical success factors. Many of these case studies appear in this Outlook Special Edition. Beyond these specific examples, however, our research also led us to two broader conclusions about effective leadership and management practices at new ventures. We were surprised at how few startups successfully manage the balance between their short-term imperatives and their long-term challenges. In case after case, we saw how easily management teams can become overwhelmed by the sheer magnitude of immediate pressures and demands and, as a result, abandon the long-range planning so vital to identifying the next generation of products and customers, securing additional sources of capital and attracting new talent. Such management behavior puts the organization at risk; more often than not, the problem is not acknowledged until its too late.

We were also struck by the number of cases in which an individual exerted disproportionate influence over business decisions and thus the companys fortunes. These individuals were not in all cases CEOs, but rather other management team members; occasionally they were even found outside the management team and lower in the organization. These situations arise from the lack of established governance processes and effective control systems. When one strong personality dominates strategic dialogue and decision processes, the probability of success is dramatically reduced. The key management challenge for the start-up CEO is anticipating problems and unexpected market events. The framework we explore in more detail in the following pages provides a comprehensive and tested mechanism for structuring actions and decisions. By implementing programs that take into account all the success factors, the leadership team will reduce the risk of being driven by strong personalities instead of by sound plans, processes and accountability. Ultimately, the framework can help the leadership team avoid the two pitfalls most common to new ventures: focusing on the present at the expense of the future; and losing control over strategic direction, execution, discipline and growth.

Outlook Special Edition, November 2001

1.

Getting value from venture capitalists

A venture capitalist can be a startups best friend. Just ask the folks at E*Trade, Viva.com and Juniper Networks, where VC introductions and advice were critical to survival during the early stages of their existence. Venture capitalists have been around for a while, of course, at least since Ferdinand and Isabella bankrolled Columbus. For the past 30 years the modern VC has been offering valueadded services resembling those traditionally offered by corporate board membersproviding a management reality check, interfacing with other investors and advisors, and monitoring the companys performance. More recently, however, the VC profession has undergone two successive waves of change. The explosion of business set off by the Internet boom of the mid-1990s intensified competition among venture capitalists, leading many to add services to differentiate themselves. For example, Charles River Associates began offering computer consulting, legal advice, purchasing discounts and free office space, while Bessemer Venture Partners acquired an executive search firm to supplement its roster of services. Meanwhile, VCs created a network of companies that share information and business, a trend that originated with Kleiner Perkins Caufield & Byers and Softbank. CMGI formalized this concept of a venture network as a holding company, creating a cluster of businesses that would share resources and best practices and buy and sell products from one another.

The final change occurred in the wake of the dot-com start-up markets collapse as venture capitalists shifted their focus away from traditional services like capitalizing operations, networking and operating experience. Since April 2000 the most important service in the VCs arsenal has been providing bridge financing necessary while startups secure subsequent rounds of capital. Clearly, the business choices faced by startups today are more complex than ever. Our interviews with 35 venture capitalists, corporate investors and other experts confirm this. Some 80 percent claim that gaining value-added contributions from business partners is one of the three most important operational tasks for young Internet companies. These same experts, however, estimate that on average fewer than 10 percent of companies are truly effective in leveraging their relationships with venture capitalists. How can they improve the odds of success? By taking a more disciplined approach to screening, structuring and managing the relationship. Screening and structuring the relationship Once a startup is successfully off the ground, it must answer three questions concerning its VC partner. Which services do we need? So what if a VC boasts world-class recruiters or product marketing specialists? Does the startup really need such help? When in doubt, our experts advise, choose the basics from the menu of services: business advice, recruiting and introductions. Can the VC deliver the services we do need? How can we tell? Everyone turning to a venture capitalist for

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advice and introductions weighs the brand name of the VC firm, the industry expertise of its lead partner and the number of boards that partner sits on. But winners do morefor example, using the number of boards as an indicator of the lead partners ability to meet his or her commitment (that is, 5 board memberships is better than 14) and considering how much time the partner spends assisting companies versus evaluating new investments. And winners dont take the VC firms word that it can make introductions to other portfolio companies; they ask those companies about their experience. Before signing a deal, one leading online financial services company interviewed many VCs portfolio companies to check the breadth and quality of introductions provided by the contending firms. How can we make the VC want to add value? According to one

interviewee, A lot of VCs are smart, talented, connected and have a powerful brand name behind them. But they are often not motivated to bring their full resources to bear. To motivate VCs, ask for an investment substantial enough to give them a real stake in the venture and to ensure that successor failurewill have material impact on their overall portfolio performance. Successful companies also limit the number of venture capitalists, often to no more than two firms. Our philosophy is that non-lead investors have a very hard time getting their minds focused on the company, and hence rarely contribute more than money, one VC reports. Some companies make all investors co-leads, thus avoiding the touchy issue of hierarchy. Others examine personal dynamics and seek complementary VCs. For example, one VC might provide the largest share of the financing and take the board seat, while another provides operational expertise.

Some companies make all investors co-leads, thus avoiding the touchy issue of hierarchy.

A strategic partnership
A startup's venture capital partner offers service at two levels.
Most involvement Serving as a sounding board to entrepreneurial team Obtaining alternative sources of equity Interfacing with investor group Monitoring financial performance Monitoring operating performance Obtaining alternative sources of debt financing

SOURCE: "Venture Capitalists' Involvement in Their Investments: Extent and Performance," Ian MacMillan, David Kulow and Roubina Khoylian, Journal of Business Venturing, 1988, Volume 4

Most value Serving as a sounding board to entrepreneurial team Interfacing with investor group Monitoring operating performance Monitoring financial performance Recruiting and/or replacing CEO Assisting on short-term crises Obtaining alternative sources of equity

SOURCE: "The CEO, Venture Capitalists, and the Board," Joseph Rosenstein, Albert Bruno, William Bygrave and Natalie Taylor, Journal of Business Venturing, 1993, Volume 8

Outlook Special Edition, November 2001

Winners constantly question VCs logic and conclusions, and vet their suggestions with other advisors.

Winners also remove barriers to commitment. Failed online retailer Boo.com lost investor interest, partially because distance made face-to-face meetings problematic. Far-flung investorsItalian, French, Arab and Americanroutinely skipped board meetings; some simply dialed in from airports. Choosing investors outside the home market requires creating a means whereby the portfolio company can access the VC firm with minimal difficulty. Managing the relationship Winners actively manage their relationships with venture investors, applying four distinctive practices. Request something specific. Consider one small business portal. Like many Internet companies, it depends heavily on relationshipsin this case, with content suppliers and distributors. Because its VC has strong contacts with many potential partners, the companys vice president of business development sends the VC a weekly e-mail listing targets and requesting contacts. The result: dozens of introductionsfar more than for most other companies in the VCs portfolio. Tailor communications to the relationship. Use routine communications with care. Having learned that most Friday communiqus are just chatty news bulletins, many VCs ignore them. As a general rule, send e-mails or voicemails only to sound an SOS. For less urgent issues, organize a monthly or semimonthly meeting, as the Brazilian B2B exchange Mercado Electronico does with GP Investimentos, also of Brazil. Seek strategic advice. In the welter of new services offered by venture capitalists, its easy to forget that strategic advice remains a VCs greatest contribution.

Consider Juniper Networks. When founder Pradeep Sindhu won Kleiner Perkinss backing, Juniper was just one man with an idea for a new enterprise router technology. From the start, Vinod Khosla, Kleiners lead partner on the deal, provided advice that put Juniper on an astonishing growth path. Khosla pushed Juniper to expand the business from enterprise routers into then unfamiliar Internet routers. He then helped the company define its market, articulate a strategy for attacking it and establish a blueprint for building the business. Maintain a healthy skepticism. More than a decade ago, Harvard Business School professors Howard Stevenson and William Sahlman counseled entrepreneurs to manage their advisors, specifically by finding the best ones and involving them deeply in the companyand then by being skeptical of their credentials and advice. This wisdom is particularly apt for startups. Even the best VCs sometimes offer bad advice. Winners constantly question VCs logic and conclusions, and vet their suggestions with other advisors. Bottom line: Picking the wrong VC, structuring the relationship badly, failing to manage it for full valuethese are critical mistakes that winners rarely make.

2.

Assembling the leadership team

In an ideal world, a startup would have a complete management team in place from the time its conceived as a business. But in the real world,

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this is often neither practical nor a good idea. Entrepreneurs rarely have all the skills to manage rapid growthwhich can mean going, within a year, from 5 employees to 100, from one function to a full business system, and from no customers to hundreds of them. Most startups lack the reputation, contacts, money or time to field an all-star leadership team from the start. Others have the resources but lack the incentives, like a cuttingedge technology or a novel business model, to attract top-flight talent. In fact, it may be unwise for early-stage companies testing the market to invest in a full lineup of leaders. For example, shifting from a direct to an indirect sales channel can radically change what a company is looking for in sales executives. You need to strike a balance, says one observer. You dont need all the senior VPs from day one.

Most startups should build the core leadership team graduallyfinding three or four people to complement the founders and then expanding the roster later. To determine what those key positions are, the wise startup evaluates all candidate positions by asking a series of questions concerning five key criteria. 1. Does the nature of our business require us to have someone to perform the work associated with this position in the next 6 to 12 months? 2. Does the founder team truly lack someone with the inherent talent and skills to fill this position? 3. Does this position, if filled early on, make it easier for us to attract top talent to other leadership positions?
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A founder can make a great head of business development, providing the understanding, passion and influence on company decisions that mark an effective deal maker.

4. Would someone in this position be likely to have the skills and temperament to wear other leadership hats temporarily? 5. Would it be unwise or impossible to use an outsider (venture capitalist, interim executive) to fill this position temporarily? Most companies have a handful of executive positions to fill (CEO, COO, CFO, CTO, CIO, general counsel, and VPs of business development, marketing, sales and human resources). The positions that score the most yes answers to the questions above should be the launch priorities. Beyond this, there are four important considerations to keep in mind. Focus on the CFO. Our interviewees call the CFO a must-fill position. Says one, A lot of people run startups by the seat of their pants, and really have no idea what levers affect their business success. Its this lack of control that leads to $30 million television advertising campaigns and management teams that dont have what it takes to run a larger enterprise. A strong CFO can make all the difference. An experienced CFO provides access to the financial markets. Thus, Richard Li, founder of Pacific Century Group, a Hong Kongbased holding company, wooed Francis Yuen, a well-connected former investment banker who had been the chief executive of The Stock Exchange of Hong Kong Limited. Yuen got Pacific Century listed on the Hong Kong stock exchange and raised additional capital. Despite its recent challenges, Pacific Century is now a multibillion-dollar company. Setting other priorities. Our interviewees suggest additional ways to determine which of the other positions should be priorities.

First, the companys founders should think creatively about their own skills. Are they all engineers? That doesnt mean theyre qualified to fill only the CEO or CTO positions. A founder can make a great head of business development, for example, providing the understanding, passion and influence on company decisions that mark an effective deal maker. ePocrates, an online medical information company, tapped both of its founders as VPs of business development to make full use of their talents at dealing with customers and business partners. Second, companies should seek external validation of their leadership choices. According to one interviewee, Like anyone, founders tend to have certain biases about their own strengths and weaknesses. It can be incredibly helpful for a VC or advisor to challenge these assumptions. Getting the right people. In screening candidates, our interviewees advise looking for pied piperspeople who will attract other top talent. Juniper Networks initially focused on recruiting its engineering team, pulling talent from Cisco Systems and Sun. This talent, in turn, attracted a world-class CEO, Scott Kriens, founder of StrataCom. According to Kleiners Khosla, Juniper needed the technical layer in place first, because without it we could not have attracted the top management talent. Most ventures proceed from CTO to CEO to all others. Once the CEO is in place, notes one VC, there is a waterfall effect where all the organizational boxes get filled in fast. To be sure, the CEO position is difficult to fill, as the person needs to be appropriate for the particular stage in the evolution of the business. For Napster, attorney Hank Barry was the right choice, given the legal challenges

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the company faced; however, with the litigation now behind it, Konrad Hilbers, former chief administrative officer of BMG Entertainment, has the appropriate skills to develop the company in the future. Building a strong launch team takes more than a good staging strategy. Recruiting must be a main focus of the lead founder, who, as the heart and soul of the enterprise, is its most convincing recruiter. Larry Ellison, chairman and CEO of Oracle, interviewed every engineer the company hired until 199720 years and tens of thousands of employees after he had founded the company. Without the founders attention, the company falls into a vicious recruiting cycle: Slow recruiting, which prolongs the trials of managing shorthanded, which leads to the loss of top-tier talent, further straining the skeleton management team. This ultimately results in a cultural mismatch, which creates an unstable foundation for building the company. Managing shorthanded. Creating a lean launch team leaves certain positions unfilled. How do successful companies cope? Many use outsiders as a stopgap measure. Specialists, like recruiters and attorneys, can shoulder part of the burden. Likewise, venture capitalists and advisory board members can help refine strategy and support business development for example, by generating leads and making introductions. Another option is temporary executivesexperienced managers who, for 1 percent or 2 percent of the equity in the company, assume a functional role, like head of marketing or finance. Several interviewees, however, urge caution when contemplating this

particular approach. Its not that these are bad people, notes one observer. Its just that when the permanent person is hired, they invariably redo everything. Take finance executives. Theyre just like software developersthey dont want to use someone elses code. Bottom line: For startups, finding the three or four most essential hires to complement the founders skills is critical. Once these executives are comfortably in harness, expand the leadership team to the full roster needed to manage growth.

3.

Securing launch customers

Securing the right launch customersthe first two to five users of the companys products or servicescan deliver powerful benefits. As sources of fast and rich feedback, initial customers provide an invaluable way to ensure that products or services meet user needs. For example, Akamai Technologies learned how to ready its service for prime time from launch customer Yahoo! In addition, launch customers create market momentumthe power to attract new investors, partners, employees and customers. Optical networking products maker Sycamore Networks went public with one launch customer, telecom equipment maker Williams Communications, and soared to a market value of $24 billion with just a few customers. And launch customers
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are sources of cash to sustain the company before it becomes profitable. For example, Advanced Telcom Group made a three-year commitment to Quantum Bridge, an optical access networking equipment provider, worth up to $50 million. But not just any customers will do. They must be among the most respected players in a space so other companies will follow as customers, partners or investors. Launch customers should also be representative of future customers. Finally, the best launch customers tolerate and even embrace the entrepreneurial spirit that guides startups, messy though it can often be in all its ambiguity, experimentation and lack of process. Although selecting the right launch customers is crucial, our interviews suggest that startups pick the wrong ones as frequently as 30 percent of the time. Three mistakes are common.
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Embracing a random enthusiast. As one interviewee explains, Sometimes a startup will receive an order from someone in a remote geography, and because theyre beating down the door, the company welcomes them in. A customer like this generates neither the momentum nor the valuable feedback a good launch customer will provide. Choosing a respected company that does not represent the wider customer base. One financial management software startup reportedly signed Oracle as a launch customer without understanding that its future lay with large companies in the US Midwest and East that had more in common with Procter & Gamble and General Electric than with a new economy company in Silicon Valley. Making the selection criteria so narrow that only a few firms can make the cut. Successful ventures manage the trade-off between speed

and impact, and understand that the search for great launch customers may need to shift to securing a few good candidates. As a general rule, the screening criteria should produce 10 to 20 viable candidates. Few startups can afford such mistakes. Launch customers are their main sometimes their onlysource of customer information. Operating under intense financial and time constraints, they have few resourcessometimes none at allto invest in other sources of feedback. Even if they choose their launch customers well, startups often face the challenge of overcoming those companies reluctance to risk working with a small newcomer. Besides defining selection criteria carefully, startups can take two steps to address the challenges of securing launch customers. Secure introductions from investors, advisors and partners. Access to desirable launch customers does not come easily. One route is to convince an executive or engineer at a potential customer to join an advisory board, usually in exchange for a modest piece of equity. This advisor then becomes a powerful advocate for the startup, which often presages the decision to become a launch customer. Make the relationship too attractive to turn down. Deep discounts, exclusivity, warrants or equity can prove persuasive to potential launch customers. Many new ventures have struck deals with their first customer realizing that they are trading profitability for the ability to cite a marquee client. Securing the desired customer relationship is, in fact, only the first step. That relationship must then be carefully managed. Here are some of the key considerations.

Actively solicit customer feedback. Startups want the most from the relationship. Since gaining information from the customer is the prime benefit, robust feedback systems (formal and informal) are critical. Top-performing startups solicit feedback on all components of the businessthe business model, culture, management team and morenot just on their actual products and services. Our interviewees recommend developing a process for collecting and interpreting customer feedbackfor example, asking managers to keep track of launch customers ideas and criticisms and meeting weekly to discuss the input. This helps the company see patterns, extend awareness and, above all, act. No matter how the feedback comes in, says one expert, companies must be willing to change their behaviors based on it. Otherwise, the feedback will dry up. Jamcracker, an application service provider (ASP) aggregator, surveys the satisfaction of its approximately 90 customers and has lost remarkably few launch customers. Avoid overcustomization. Although listening to their launch customers is essential, successful startups nonetheless take pains to maintain perspective. They resist the temptation to overcustomize products or services to meet a customers unique needs. As one interviewee warns, There is a real risk that intimacy with a launch customerespecially a launch customer as respected as Cisco Systems or GEwill lead the startup to add features only one company wants. Good insurance against falling into this trap: Have several launch customers. Or hold miniforums at which launch customers can share ideas, generate new ideas and challenge one anothers feedback.

Successful startups take pains to maintain perspective. They resist the temptation to overcustomize.

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Seek outside feedback. Companies should also consider supplementing launch customer feedback. Within months of launch, e-commerce software provider Ariba had interviewed 55 prospective customers and had gathered feedback from more than 100 Fortune 1000 participants in customer council meetings. These gatherings included 95 procurement customers that focused on identifying the products and features that would be incorporated into future product releases. The customer advisory council lives on as two subcommittees segmented by participant interests. Usually after six to nine months, startups must expand beyond launch customers. This is a particularly vulnerable moment for a startup. Launch customers often get used to the attention and turn resentful when it fades. As one venture capitalist describes the situation, When a launch customer gets a little pouty, unsuccessful startups think its no big deal so long as other customers are arriving. But a lukewarm Lucent Technologies or Cisco Systems will not provide much of a testimonial to other customers seeking references. How do successful companies manage this transition? By doing two things, according to our interviewees. First, they set specific expectations upfront. Make it clear that being a launch customer is a short-term proposition. Second, they effect a gradual transition. For instance, launch customers can still be active on an advisory council without being the star of the show. Bottom line: Feedback, momentum and revenueall are critical to startup success, and all are accessible to companies that secure the right launch customers and manage relationships effectively.
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4.

Connecting people to the vision

Vision serves a fundamentally different purpose for a startup than it does for a mature organization. It provides a necessary context and basis of connecting that existing organizations already have imprinted in their corporate DNA. This connection creates stability and gives employees something to hang on to in times of high uncertainty. Consider America Online in its formative years. Its visionmake it easier and more convenient to do online the everyday things people do offlinepermeates every aspect of the organization: its approach to content presentation (from no-nonsense prose to simple layouts of message boards and chat rooms), its choice of partners (from Gateway and Time Warner to others demonstrably committed to the mass market), its corporate work environment (from the khakis-andpolo-shirt dress code to the headquarters location in suburban Virginia). As a venture expands, how do its founders ensure that new employees share their vision for its success? Great visions spring from great founderspassionate people with the personalities and communication skills to make a vision persuasive, people like Alain Rossmann of Phone.com and Jerry Yang of Yahoo! Another legendary example is Jeff Bezos of Amazon.com. Over lunch, Bezos tried to dissuade Joe Galli, former president of Black & Deckers worldwide power tools division, from accepting an offer to be president and CEO of Frito-Lay and join

Amazon.com instead. When Galli went to New York and signed on with the food company, Bezos, unfazed, followedand convinced him to change his mind. Yet these examples appear to be the exceptions. Our interviewees estimate that only 20 percent of startups succeed in conveying this kind of passion for their visions. Why are there so few compelling visions? For one thing, many founders dont take the time to communicate or refine their visions. Others equate an IPO and stock options with vision. Still others predicate their business models on technology and intangible products that are hard for employees to connect with. The failure to articulate a clear, compelling visionto establish those unifying connectionscan have dire consequences. Without a vision it will be nearly impossible for a company to address most of the other factors that contribute to start-up success. It will be difficult to attract and retain investors, partners, customers and talented employees. Time management can become a nightmare when employees are unable to differentiate between critical actions and merely important ones. And a company with no unifying vision is highly vulnerable to market fads. Crafting a compelling vision is hard work. Our interviewees offer some guidelines. Keep it simple. For all their passion and good intentions, entrepreneurs can have a surprisingly hard time communicating their vision, most often because it is too complicated. One venture capitalist has been pressing the founders of a European telecom startup to simplify its vision, even though the company has only three employees. In the beginning,

he suggests, its okay to say, Our vision is to go from A to B to C to D. But very soon the leaders need to say, Our vision is to go to D. The speed of growth demands that start-up companies do this very, very early. Incredibly, some founders never do explain their vision. They assume that everyone wants to go across the desert with them, without ever explaining why that desert is worth crossing, notes another VC. Focus on the unmet customer needs the company will satisfy. A meaningful vision revolves around the customer and what the company will do for that customer. Winners deliver small but constant reminders of whom they serve. Mission statements and customer profiles are classic tools. But as they confront todays fierce competition, many companies do more. Nothing focuses attention on meeting customer needs better than aggressively measuring customer satisfaction. Ariba, the e-commerce software provider that has experienced dramatic growth since its launch five years ago, has written a playbook. Says cofounder and interim chairman and CEO Keith Krach, Its our vision, our mission, our values, our team rules, our long-term goals. It means more than just having happy customers. Its being able to go out there and quantifiably measure that success. That is what separates us, I think, from everybody else. Ariba has also borrowed from Cisco Systems and others to develop a customer satisfaction index based on its core vision. Each quarter, the company measures 60 indicators. Think carefully about what rewards employees value. Stanford Business School research identifies three personal rewardslove, work and

Without a vision it will be nearly impossible for a company to address most of the other factors that contribute to start-up success.

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Successful startups monitor whether employees are connected to the customer and the company vision.

moneyimportant to employees in high-tech startups. Our interviews suggest that the visions and mission statements of successful ventures integrate all three. For example, Siebel Systems 2000 annual report says, Our mission is clear. We are here to build a great company. A company that has achieved the highest levels of customer satisfaction. A great place to work. A good member of the community. A provider of exceptionally high-quality products. A company that carries itself in the marketplace with the highest levels of business integrity and business ethics. A company comprised of dedicated, accomplished professionals, committed to the customer. We are here to build a company in which we can all take great pride. Select recruits who embrace the vision. Companies can improve their odds of success by recruiting people who are passionate about the vision. The Motley Fool, the irreverent personal finance site, hires 40 percent of its workforce directly from the Fool.com online community. Many of its employees received offers after responding to a single request: Please write a paragraph or two on what Foolishness means to you. Successful startups monitor whether employees are connected to the customer and the company vision. Indicators of this connectedness include work ethic (Are employees making personal sacrifices for the company?), turnover (How many are leaving and why?) and innovation (Are employees suggesting new ways to solve customer problems?). Bottom line: Vision must define the founders intent. Translate it into common parlance. Make it permeate the business.

5.

Forming alliances
New ventures love alliances, and for good reason. These arrangements, in which two or more companies integrate their operations partially but deeply, offer fast, flexible access to critical resources including customers, products and know-howoften at lower cost than with internal development or acquisition. Alliances also enable companies to maintain a small workforce, manage risk and learn. A number of new ventures have active alliance programs (see chart, page 19). But alliances are extremely hard to do well. (For a related article, see Building better alliances, Outlook, July 2001.) Between 50 percent and 70 percent of all alliances never meet the parent companies initial strategic and financial goals. Our interviews reveal that when it comes to alliances, Internet startups fare no better than any other would-be partnersand that they are apt to fare worse. A startup seldom fits the profile of an ideal partner; it is risky by definition, and usually has little to bring to an alliance. As one VC puts it, Not only do these companies have a 20 percent or 30 percent chance of success in an alliance once formed, but probably something like a 2 percent chance of ever forming a desirable alliance in the first place. Adds another, The real issue is all those alliances that never happenedthose company-transforming ventures that died before they were ever born. To avoid becoming such a casualty, startups need to focus on three key

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aspects of alliance formation: setting alliance strategy, gaining access to the best partners and securing relationships. This runs counter to the conventional wisdom that says alliances are easy to form but hard to manage. That may be the case for large companies, where top performers differentiate themselves in post-negotiation tasks. But for a new venture, the first challenge lies in securing alliances. Setting alliance strategy. Why, how, when and where will the company use alliances? The answers belong in the business plan. Articulating them forces the company to confront the often-ignored issue of why alliances are better than standard market transactions or internal development.

A companys alliance strategy should also identify what kinds of alliances best meet its needs. Most startups pursue two to five types, grouped by the nature of the value created (for example, technology co-development alliances, supplier alliances, marketing affiliations). Management needs to understand the comparative merits, requirements and basic economics of various alliance types. For example, a company looking to form marketing alliances with large banks should ask itself why a large bank would work with a startupan inherently risky proposition from the banks point of view. Selecting potential partners. When it comes to alliances, less is more.

A startup should target two or three relationships central to its business model and pursue these vigorously. As one venture capitalist says, Ive seen so many startups where the initial business plan called for 200 alliances in the first 12 months of operations. Its just silly. Winners also distinguish two kinds of alliance relationships: anchor partners and momentum partners. Anchor partners offer critical functional capabilities. China Resources (Holdings) Co., Chinas largest import/export company, partnered with Accenture and Oracle to redesign the companys supply chain. Accenture brought vertical market experience and delivered supply

A little help from their friends

Historically, a number of ventures have had active alliance programs.
Average number of alliances formed per year 120 110 111

80 70 60 50 40 30 20 10 0
iVillag e.com LookS mart MapQ uest Mons ter.co m Pricel ine.co m RealN etwor ks The S treet.c om Ticket maste r.com Vertic alNet Amaz on.co m

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36 26 15 9 19 14 7 25 25 28 22 22 24 15

40 32 22 15 16 16

Yahoo !

AOL Ask J eeves Autow eb.co m

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SOURCE: Alliance Analyst database (sample from March 1998 March 2000)

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WebM D

E*Trad e

Go2N et

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Propose big and long-term alliances. While the proposal will probably be scaled back during negotiations, a grand vision can create many benefits.

chain design strategy, while Oracle provided supply chain management software. As a result, the number of transactions China Resources can process has increased significantly. Momentum partners can help spawn additional relationships. One Internet media startup wooed Sony at least partially for its perceived momentum power. And, in fact, the startup has had lots of suitors since allying with Sony. The best momentum partners also provide alliance opportunities within their own walls. For example, one startup that partnered with FedEx soon found that the initial link with one operating unit sparked relationships with five other operating units. Securing partners. Alas, the partners you want dont necessarily want you. Smart startups leverage the contacts of advisors, investors and customers to overcome these barriers. The CEO of one interactive television startup had the good luck to call his venture capitalist about problems with a potential marketing partner while the head of business development from another well-known, more mature startup was sitting in the room. This chance contact led to an alliance between the startups. Winners also trade on the credibility of the CEO to drive alliance deal making. Reports one serial entrepreneur: A large company has no idea whether the vice president of business development represents the company. Early-stage companies have one bullet in the chamberand if the CEO is not there saying the company wants to pull the trigger, its hard to take the proposal seriously. Winners are not shy in other respects either. They do not approach meetings with potential partners as loose

brainstorming sessions. Instead, they bring explicit hypotheses about what the alliance will accomplish and how. Consider Indeliq, an e-learning startup. The company believed that entrepreneurial management would be a key topic in these turbulent times. As a result, Indeliq successfully approached Babson College with an alliance offer to create an e-learning training module on entrepreneurial management. Most startups assume that a modest alliance proposala short-term pilot or trialhas a better chance of success. Our interviewees counsel the reverse: Propose big and long-term alliances. While the proposal will probably be scaled back during negotiations, a grand vision can create many benefitslike leading the potential partner to include a senior executive in the discussions, who becomes a champion for the alliance. Finally, winners recognize that they are sellingthe alliance, the company, everything. One online medical services startup approached alliance discussions with a large healthcare provider with the same seriousness and pitch mentality it used when meeting VCs. This was reflected in an extremely professional summary of the company and its business model, product and management team, as well as an outline of the proposed alliance. The startup also brought along an executive from a leading hardware company that would provide a critical piece for the startups product. And the founders focused relentlessly on the alliances benefits to the potential partner. They won, despite having a staff of fewer than five. Bottom line: Its not that alliance management doesnt matter but that alliance strategy and formation matter too. Without those, startups have no alliances to manage.

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6.

Disciplined experimentation
Experimentation is a way of life on the Internet. If youre not experimenting, you can be sure youll be shut out, cautions Kleiners Vinod Khosla. Experimentation is critical for new ventures. The earliest stages of life bring the greatest uncertaintiesand hence benefit the most from disciplined or controlled experiments. Conventional wisdomattributable at least in part to self-deprecating comments by successful entrepreneursholds that Internet experimentation is haphazard. According to Sergey Brin, cofounder and president of google.com, an Internet search engine company, The more you stumble around, the more likely you are to stumble across something valuable. Cofounder and former president Mark Gainey of Kana Communications, an e-mail message management software company, agrees. Im the best person here at making mistakes, he says. Thats how you learn to build a business. But our interviews reveal that the most productive experiments are disciplined, not random. They reflect a deliberate approach to resolving uncertaintieswhether through individual initiatives like pilots or through broader efforts to create a corporate culture comfortable with exploring new ideas. Unfortunately, many new ventures play fast and loose with experimentation. They label failed or recently

introduced initiatives experiments when, in fact, no experiment was intended. Or they begin experiments poorly preparedunsure of what theyre testing, or testing too many things. The result: The company wastes time, burns cash and learns nothing. Indeed, some 90 percent of our interviewees say that the average new venture lacks the discipline for consistently successful experiments. Sure, sometimes a company will hit the jackpot. But as one venture capitalist notes, Just because a random lunge works once does not mean the company is a skilled experimenterat least no more than someone who is lucky with a stock pick can be called a skilled investor. New ventures need the discipline of Hong Kongbased online payment company AeOn-SPOT. To determine whether home Internet is the best way to reach computer-literate teens and young professionals, the company is testing alternate channels, including Web kiosks and call centers. When the experiment ends the company will lock in on the most effective channel. Productive experimentation knows no formula. Internet startups can take some lessons from science and from traditional consumer goods marketers like Procter & Gamble, but they will probably find these classic experimentation models too slow and expensive to be of much practical value. Nevertheless, our interviewees advise following certain guidelines for coping with uncertainties, generating insights and converting insights into actions. Prioritize risk factors. Successful experimenters identify the 5 to 10

Good experimenters look at risk through the eyes of future customers, employees and investors.

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uncertainties most likely to block success. Can we build this technology? Will consumers want what we offer? How much will they pay? Do our founders have what it takes to lead the company? Can they recruit the right talent? Good experimenters look at risk through the eyes of future customers, employees and investors, seeking the one or two uncertainties where resolution would matter mostsay, persuading an experienced executive to join the firm or a venture capitalist to put up funding. In online gaming, the measure of success may be product profitability; in consumer technology, adoption rates. Regardless of the industry, it pays to get insights from knowledgeable stakeholders. Approach experimentation in a disciplined manner. Professor David Garvin of Harvard Business School has identified two experimentation models. The first, an open-discovery experiment, involves an open-ended

search to understand unknown territory. The second, a hypothesisbased experiment, seeks to prove or disprove a stated best-guess answer. Internet companies should favor hypothesis-based experiments, since their narrower focus speeds insights. Neither model should be confused with a science project, however. Good experimentation imposes time limits, settles for 70 percent or 80 percent certainty, and simplifies issues whenever possible. LifeMinders shows how this discipline works. The company, which provides online reminders of personal events like birthdays, pilots every marketing and product extension idea with a small customer segment. It also limits all experiments to three weeks, so employees can meet deadlines. Since new ventures tend to experiment under severe cost and time constraints, testing samples are often small and the number of trials

Something completely different

While in the start-up phase, certain businesses have developed strong reputations for their discipline in extracting value in different areas from experiments.
Some areas of experimentation AOL Amazon.com Cisco Systems eBay google.com Freeserve IDEO Intuit The Motley Fool Netscape QXL.com Trilogy
SOURCE: ACCENTURE ANALYSIS

New customer-acquisition programs New pricing models New technologies, Internet-related investments New technologies, advertising techniques New technologies, products New technologies, products New organizational structures New business model New products New technologies New technologies New ventures, products

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limited. Under such conditions, results are not always clear; interpretations often conflict. Reviewing results from diverse perspectives can help locate causeand-effect relationships and reveal the right insights faster. Observers should generally include people likely to be responsible for future implementation. Customers, venture capitalists and members of advisory boards are also good candidates. Move quickly from experimentation to insight to action. Experiments can outlive their usefulness. Once they yield insights, the company must transform those insights into action quicklyexpanding (or retracting) its commitment. Thus, UK banking giant Barclays videotaped customers physical and emotional reactions during usability testing of its website. The insights led to significant redesign. Our interviewees have two recommendations for ensuring that experiments do not linger too long or have only partial commitment from the startup. To measure performance effectively, the company should define upfront what constitutes success; this quickly distinguishes winners from losers. Companies should also make sure that leadership is actively involved. This increases the chances that someone has the authority, fortitude and perspective to kill low-potential initiatives and expand high-potential ones. Successful experiments require a culture that pushes individuals to test their ideas and systems that make initiatives heard and acted on. Successful experimenters turn ideas into sales. Bottom line: Start-up experimentation is unlikely to win a Nobel Prize. But it shares the discipline of those who do.

7 .

Making founder transitions

Few entrepreneurs have the skills and temperament to lead a startup from the idea stage to its emergence as a large public company. Most startups must navigate at least one leadership transition early on, without the benefit of experience or conventions dealing with when and how founders should step aside. New ventures face particular transition challenges. Since startups can grow from 5 to 500 employees and from one function to a full business system within 18 months, founderCEOs dont have time to learn on the job. Moreover, transitions typically occur under intense investor scrutiny, while a company is still proving itself. As one venture capitalist puts it, For new ventures, the need for transition arises within five months, not five years. How do new ventures manage the transition? A few (5 percent to 10 percent), like Amazon.com and Loudcloud, escape the need. Their founders had the management skills to take them all the way. Others, like Cisco Systems, eBay and Yahoo!, recruited top managers with the requisite skills. Companies that take this approach must then determine in what capacity the founder should remain with the company. It is so important to have the founder still in there, notes one VC, pumping people up, keeping the company focused on its vision, and finding new ways to compete. Our interviews show three transition practices common across successful companies.

Transitions typically occur under intense investor scrutiny, while a company is still proving itself.

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Founder resistance is a natural part of transition, so organize the CEO search in a way that minimizes the pain for everyone.

Confront the issue. At successful companies, investors, advisors and company executives think about transitions from the outset. They define where they want the company to go and ask whether their founders can lead it there. For their part, wise entrepreneurs dont assume they have what it takes to be a long-term CEO. They honestly assess their leadership skills, especially with investors. At one European telecom startup, the venture capitalist and entrepreneur agreed that they would launch a CEO search 12 to 18 months after the initial investment was made. They also agreed that the founder would be a serious candidate. According to the lead investor, We knew he had a great technology but had no way to assess his ability to lead a company with more than 10 people. Despite having 15 years of large-company experience, the entrepreneur accepted the chance to prove that he had the right stuff. Communicate whats happening. As the transition approaches, successful companies discuss it openly, both internally and externally. Recalls Andrew Beebe, cofounder of Webtool provider Bigstep, As soon as we made the decision, we shared it with the entire company. People worried, but they had the same worries I had: Could we find the right person? Would this change the culture? Being upfront quelled the rumor mill. Getting the word out also allowed Bigstep to present its story in its own way. The startup didnt get cast as a company in trouble but as a successful enterprise looking for the best possible talent. Winners often employ the Bigstep strategy and position their own transition as just such a quest. Winners recognize that founder resistance is a natural part of transition, so

they organize the CEO search in a way that minimizes the pain for everyone. Our interviewees suggest that this resistance commonly takes one of two forms on the part of the founder: Setting superhuman standards and dismissing candidates as substandard, or being so hostile during interviews that candidates turn the company down. Cautions one venture capitalist, The candidates see this guy who is a total jerk, owns 30 percent of the company, has a very loyal following, and that they are going to need to work closely with him. No thanks. How do you overcome such resistance? First, conduct a few casual meetings with the candidates; bring an outside advisor along. After each interview, the founder and the advisor should discuss the candidate, with the advisor challenging negative founder comments. According to one investor, After a couple of these pilot interviews and follow-up discussions, founders tend to relax and realize that a great CEO need not excel on every front. In addition, seek the counsel of experienced entrepreneurs. The 29-year-old founder of a European mobile telephone startup shifted his views after the companys chairman, a veteran entrepreneur, explained that he was a millionaire, rather than a billionaire, because he had refused to turn his first company over to someone with real operating experience. That combination of message and messenger proved extremely effective, reports one VC involved with the company. In general, the best leadership transitions keep the founder with the company. But finding the optimal new position can be tricky. Dont rush the process and dont feel compelled

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to follow common practices, advise our interviewees. Many entrepreneurs have taken nontraditional roles. Joe Rajko, founder of Youreable.com, a portal for the disabled community, stepped down as CEO to head public relations, applying his incredible energy and charisma to gain the support of the general public. Today Youreable.com has partnerships with top companies, including Ford and Barclays. The question is, what role will both energize the founder and benefit the company? The answer may be to have the founder return to tasks he or she once loveddeveloping products or writing codeor concentrate on specific leadership responsibilities. Marimba founder Kim Polese recently stepped aside as CEO of the e-commerce software concern to do the stuff that turns me onproduct strategy and making alliances and partnerships. Nextel Communications

cofounder Morgan OBrien became the companys vice chairman, focusing on evaluating M&A activity, a role well suited to his legal background. Success also requires striking the right relationship with the new CEO, which takes time. Bigstep hired veteran Wells Fargo executive vice president Lucy Reid to succeed Beebe as CEO. Six months later the company was still fine-tuning the ex-CEOs role. Meanwhile, Beebe acted to help cement Reids authorityfor instance, fading into the background at big meetings and choosing to report directly to the new boss. I didnt want to leave any room for ambiguity over whos really in charge, he says. Bottom line: Founder transitions should not be about putting a companys first-generation leaders out to pasture. These transitions can be critical rites of passage in advancing from bright idea to successful public company.
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Growth is often so overwhelming that the company has no time for mid-course process corrections.

8.

on to the details of organizing a rapidly growing company. Our research confirms these views. More than 80 percent of our interviewees believe that startups tend to underinvest in internal processes. There are three main reasons for having formal processes. Processes offer an immediate dose of needed clarity. They are not just about future growth but also about immediate productivity gains. Startupswith young staffs operating in constant crisis modecan be highly inefficient workplaces. To be sure, the energy, enthusiasm and work ethic often mask these problems, but they cant overcome them. Inefficiency takes many forms, including the desire to tackle every issue and an excessive concern for consensus, which can delay critical decisions. Companies dont have time to make process changes when growth begins. Growth is often so overwhelming that the company has no time for mid-course process corrections. According to one venture capitalist, Once into the tornado, companies can afford to do nothing but ship productno one makes it out by stopping to undergo an internal process review or change program. Once embedded, processes are extremely hard to change. People get comfortable with certain forms of interactionmeeting styles, reporting requirements, general modes of communication. Not only are individuals slow to alter their own behavior, they will also instill these preferences into later hires, further embedding initial practices, however ad hoc. But even managers who find these arguments compelling have a nagging

Creating scalable processes

Scalable is a familiar word to entrepreneurs. They understand the importance of being able to expand or retract an element of the business with a limited investment so they can grow fast under unpredictable conditions. Scalable business models, for example, can penetrate multiple markets or lead to numerous product extensions. Scalable technologies can be built out, as needed. But the need for scalable processes is less obvious. Yet to be successful, new ventures must create them. The problem typically begins with a misunderstanding about processes themselves. According to conventional wisdom, startups dont need formal processes; they dont need protocols for how the company operates, shares information and makes decisions. Processes just introduce bureaucracy and delays, the thinking goes, destroying the main competitive advantage startups have over established firms. Moreover, processes turn people off. Potential employees want an environment that embraces diverse and idiosyncratic work preferences. In fact, processes are critical to the success of startups. Says who? Jeff Bezos of Amazon.com, for one. He wishes his company had instituted more formal processes earlier to better position Amazon for growth. Marc Andreessen, founder of Netscape Communications and Loudcloud, concurs. He says its a mistake to assume that startups must do everything fast and dirty. He urges startups to attend very early

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fear: How do I balance flexibility and control? The answer is scalable processes. Our interviewees highlight four keys to their success. Set the stage with corporate culture. The foundation of scalable processes is the employees informal beliefs and understanding of how the company operates. One venture capitalist calls these the companys common reflexes. We call them culture. A strong corporate culture delivers many benefits. It provides a common framework for interpretation, reducing uncertainties and binding members together. It makes expectations clear, creating social order. It perpetuates key values and norms, providing continuity. And it offers a vision of the future, stabilizing and energizing forward movement. Startups need to ensure the existence of this shared understanding. According to our interviewees, this takes active intervention on the part of the founders. They should take time to explain things like Heres how we work with others or Heres how we solve problems. Shaped by the founders personalities, this embryonic corporate culture will shift and deepen as the company encounters challenges. Define decision processes first. Our interviewees strongly advise that startups ready to implement formal processes should start with decisionmaking protocolsframeworks for how decisions are made, such as who is involved, the nature of their involvement and the limits of authority. These decision processes establish the context for other core processes, clarifying responsibilities and accountabilities, identifying who should make the decisions on other processes and generally increasing speed to value.

The trick is to define and use such protocols without smothering flexibility and entrepreneurship. Our interviewees counsel developing a simple model that shows people how to map decisions, leaving managers free to be creative. The best models make clear distinctions between a few decision roles (for example, decide versus consult) and decision makers. Having built a model, management should apply it visibly in a complex and important area. One Internet services company, for example, has applied the model to recruiting. According to one founder, the protocol aims to answer such questions as: Who can hire someone? How many people need to be part of the decision? Should consensus or majority rule? Does the CEO always have veto power? Pick a few critical launch processes and proceed from there. Beyond decision making, new ventures should focus on one or two critical core processes. These launch processes should touch everyones work, like recruiting or product testing. Yahoo! followed this course, focusing its early efforts on processes that support bottom-up decision making. According to one interviewee who worked with the company in its earliest days, these processes were formalized and understood when Yahoo! had fewer than 30 employees. LifeMinders has created formal processes in marketing and product testing. Every new idea is converted into hypotheses that are tested on a small customer segment. Only if the tests provide positive feedback is the idea rolled out to the wider customer base. HelloAsia, a company established a little more than two years ago that

The trick is to define and use protocols without smothering flexibility and entrepreneurship.

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provides free e-mail services in four Asian markets, has seen phenomenal growth. It has hundreds of thousands of subscribers, 100 corporate partners and more than 130 employees, and it attracted one of the largest firstround investments ever. To manage this growth, HelloAsia installed process discipline across the boardfrom role definition to the creation of operating plans. Notes one of its founders, A lot of start-ups think theyre too dynamic to plan. But we didnt feel that we had a choice. Use process to guide interactions, not determine results. When startups build formal processes early, they must guard against those processes taking on lives of their own. A process is a protocol, not a set of rules for how you do business, says Ben Horowitz, CEO and cofounder of Loudcloud, a company that built many formal processes from the start. If the process owns the result, then you have a bureaucracy. To avoid this trap, implement formal processes only for activities that involve many people and occur repeatedly. And constantly ask: Is this process making our work easier? Bottom line: No one questions the value of scalable business ideas and technology systems. Scalable internal processes should join the list.

In the absence of these assets, a new venture is more vulnerable to a number of potential threats that can seriously undermine success. The domination of all important decision making and actions by a single strong individual. An imbalance in managements attention to long-term challenges and priorities on the one hand and to short-term demands on the other. The lack of a cohesive framework, action plan and accountability system for addressing all, not just a subset, of the eight critical success factors. The need to focus attention on best management practices has perhaps never been greater than it is today for entrepreneurs and their partners in the venture capital industry. For the CEO of any new startup, a clear and steady focus on the constellation of factors critical to the ventures long-term viability is an important first step toward reducing the risk of failure and enhancing the likelihood of success. s

arge organizations have the advantage of management assets typically not available to start-up ventures. There is a stable platform from which to launch new initiatives, steer change in existing programs, and weather volatile market and economic conditions. And the value of managements experience working together, sound core business processes, and established relationships with customers and alliance partners cannot be underestimated.

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Outlook Special Edition November 2001 2001 Accenture All rights reserved