Building on Bedrock

by Derek Lidow

  How Much of a Team

  Sam Walton built his team one person at a time. His first official hire when he started over in Bentonville was a stock boy. By the time he opened his second store, he needed to find a store manger to run it. He hired an already experienced and successful store manager to run Fayetteville while he concentrated on running Bentonville, ordering goods from Ben Franklin, and finding deals from other suppliers that he could use to lure customers into their stores. He built his initial constellation of profitable Ben Franklin franchised stores by using the simplest metrics and the simplest processes implemented by proven, savvy store managers.

  Twelve years later, when Sam opened his first Wal-Mart, he was still using the same basic processes—the only difference was that he had more helpers. But five more years and six Wal-Marts later, Sam was sensing that things would get out of control if he didn’t install far more sophisticated processes to manage his stores. And for that he realized he needed to augment his team in a major way. He brought in Ron Mayer, whom he met at an IBM workshop on how to use computers to control retail operations. Ron was a young head of finance for another small retailer of the time. He also hired Bob Thornton, someone he knew excelled at managing a distribution center for a large national retail chain. He let Ron and Bob coach him in how to control Wal-Mart so that it would continue to grow. Their recommendations included bringing on additional staff, more sophisticated processes, and eventually, a distribution center and a mainframe computer.

  Assuming you have the leadership skills to inspire a team to work productively together, or maybe have somebody working for you as a CEO that has that skill (like Steve Jobs did with Mark Scott), then the success of the enterprise hinges on evolving the team with increasingly sophisticated skills. Evolving and enhancing the skills of a team—particularly a startup team, which is always in flux—is extremely challenging. This evolution unfolds in four distinct stages:

  Stage one. The team must possess the skills required to develop a product or service that customers want badly. You need jack-of-all-trades, get-it-done, creative types to figure out how to develop and configure a product that makes customers as happy as possible so they’ll hand you as much money as possible. In some businesses one person can do all this set-up stuff, as with Vidal, Jordan and Sam (with help from Ben Franklin), but sometimes it requires a team with creative skills or other specific abilities, as with Stephanie and her partner, Steve. Steve, a creative, all-purpose, get-it-done computer engineer, was an ideal co-founder at this stage.

  Stage two. Once customers start buying the product, the team needs to grow large enough and skilled enough to 1) deliver the product reliably, 2) sell to more and more customers, 3) make sure customers are happy, and 4) make sure the company operates properly (pays salaries, accounts for monies flowing in and out, fills out regulatory paperwork, keeps the space clean, etc.). Performing these four distinct yet equally critical tasks requires different skills than those used for the initial product development. You and your team must figure out how to turn these four tasks into routines, otherwise the product and a great customer experience cannot be reliably delivered to a growing number of customers, and you can’t be sure the cash will be in the bank when you need it. This means that every startup in stage two needs people with process design skills. Even Sam, who started by relying upon some basic Ben Franklin ordering forms, needed to develop his own simple processes (remember the thumb tacks and eventually the cubbies in his office) to actually operate effectively and to make sure everything was ordered correctly and accounted for. Having these routines allowed Sam to continue to spend most of his time in front of customers to make sure they were happy with his store and its service. As he got more stores and delegated much of the inventory management and filling out of ordering forms to his experienced store managers, these processes became somewhat more sophisticated. Sam could then spend an increasing amount of his time visiting stores to meet customers and the sales associates that knew what their customers wanted.

  Entrepreneurs, particularly entrepreneurs building sophisticated new products and services, can’t keep things as simple as Sam, and often run into trouble in this stage. Stephanie ran into trouble with her partner Steve at this stage because Steve was not as responsive to requests to enhance his software as their customers expected, which created unhappy customers. Steve was unable to delegate any of his favorite software development tasks to others, even if customers were waiting for the new feature. Stephanie could have just settled for running a small software company, basically ceding the market she developed to anyone that could set up a more effective software development process than Steve’s. Many entrepreneurs in Stephanie’s position accept the limitations of their partners. Many entrepreneurs also break up with their partners at this point, but are unable to attract the equivalent level of commitment and expertise from their new hire, making matters even worse. As we describe in the How To chapter, Stephanie, with the help and support of her Board of Directors, handled the issue in a very effective manner, making it work out for everyone.

  Stage three. But competitors come after almost any business that’s successful, and the team needs to evolve and expand again to the extent necessary to put in place processes and systems required to make the company scalable, productive, and flexible enough to compete effectively and grow. Sam’s ambition to expand and his ability to compete with Kmart and Target was ultimately limited by his processes of using his office cubbies to figure out what orders to place. Sam realized he needed expertise to help him develop the processes Wal-Mart required to scale up and compete. So he brought into the company retail executives experienced in running distribution centers and computer systems. And they developed as good or better processes than any other retail chain had at the time, which enabled Wal-Mart to expand faster than any retail chain in history.

  But potential for conflict amongst the team grows at this stage because the highly skilled people brought in to run and improve operations, sales, customer service and/or money management/finance want to hire their own people. They may need to create mini-cultures within their departments to enable their processes to be practiced at the highest level of performance. The incumbent team may not have their new teammates’ skills and may not be sensitive to their needs—and the new teammates may not be sensitive to the needs of the incumbents. Only savvy leadership can prevent schisms between early team members and these more recent highly skilled hires.

  This stage-three transition was extremely challenging for Sam. His store managers felt de facto demoted because many decisions they previously could make were then being made by the Home Office. Sam spent a great deal of time facilitating understanding between these two groups and ultimately his sincerity, his clear description of the need for the new systems and processes, and his relentless focus on fixing the issues brought up by his store managers—and the managers at the Home Office—enabled Wal-Mart to become the most efficient retail chain on the planet.

  This is the transition that gets many entrepreneurs fired by their VCs and replaced with professional managers that have previously succeeded in making a similar changeover work. Many bedrock entrepreneurs try to bring on new expertise but themselves become uncomfortable with what they perceive as a loss of control to people more expert than they. So many bedrock entrepreneurs fail to assemble teams capable of this transition, and their companies stagnate and are eventually overtaken by competitors.

  Stage four. The team must continue to evolve even after the company is highly competitive and scalable because the business must innovate in order to become truly self-sustaining. Every company needs to be able to do more than replace the customers it loses due to external forces beyond its control. This final stage in the evolution of an enterprise requires a sophisticated team that feels comfortable taking risks while remaining focused on delivering the most cost-effective, high-quality product possible. However, the team that feels responsible for making the company competitive and succes
sful with its original customers can feel threatened by team members working to develop very different products, once again calling on the leadership skills of the entrepreneur.

  Making sure the key players on the team have the right skills and the right level of skills, and that everyone on the team is motivated to practice their skills in harmony with everyone else, is perhaps every entrepreneur’s greatest challenge—no matter the size of the company.

  The challenges of building and leading a capable and productive team through these four stages remain the same for both bedrock and high-risk entrepreneurs, but the consequences of lacking the right skills and the right people working productively and harmoniously as a team loom larger for high-risk entrepreneurs. They spend money and effort to accelerate growth through larger and more experienced teams—experience being a surrogate metric for the level of mastery of specific skills. High-risk entrepreneurs also invest more heavily in systems like equipment and software used to automate processes than do risk-averse bedrock entrepreneurs. Mistakes in team formation are therefore more costly and demoralizing in high-risk ventures and require greater leadership skills to mitigate. High-risk entrepreneurs backed by VC money will get fired for those mistakes. There’s too much money being spent too quickly in high-risk ventures to make it worthwhile to coach the founders on how to be more reliable and skilled leaders.

  Bedrock entrepreneurs must either live with their mistakes in team building or try to undo them. Many bedrock entrepreneurs live with their mistakes and accept the resulting stagnation and lower productivity. Other bedrock entrepreneurs take the initiative to learn from mistakes. They seek out and invest in advisors and coaches who can help them rebuild their team and reinvigorate growth.

  Time Versus Money

  The question, “How much time?” is actually two questions: “How much time do I need?” and, “How much time can I get?” We also have to make sure we understand that these “how much time” questions do not mean, “How much time will it take to get into business?” Instead, all these questions are about, “How much time will it take to become consistently profitable?”

  Every business needs some amount of time to set up, to develop their product or service, and then enough time to get some minimum number of customers happy enough to buy the product so the business becomes profitable. Some businesses can be set up and launch their product or service quickly and achieve profitability quickly. 1-800-AUTOPSY was profitable almost instantly because Vidal had a large initial customer and he could perform his autopsies at the VA’s facility.

  Nonetheless, most businesses need considerable time to develop before they become profitable. Medical and healthcare businesses take time to get regulatory approvals, while other businesses can take time to build up the large numbers of users required to attract advertising or to build large manufacturing capacities necessary to compete.

  Furthermore, it’s hard to predict how long some tasks will take, particularly when doing something for the first time. And unpredictable external factors can come into play; my business’ ramp up was set back by months because of 9/11. All entrepreneurs need more time than they think, but that costs money.

  Money can accelerate or slow down the passing of entrepreneurial time—the time it takes to achieve profitability. Here’s how:

  Money can reduce the estimated time to achieve critical cash flow milestones. Money accelerates entrepreneurial time by eliminating constraints. It enables you to get more people, more publicity, more space, more locations, and more of whatever is available, taking you where you need to be, sooner. More money is therefore a competitive advantage in businesses that need to grow faster than the competition in order to survive.

  Money can buy you more time to reach profitability. More money means an enterprise can survive longer before reaching profitability. Money is therefore a competitive advantage in businesses that require a significant amount of time to set up.

  Money can also buy entrepreneurial time in two indirect ways:

  Money can almost always buy needed skills and resources. Money can buy you people with skills or contacts you need to compete. Rather than taking the time required to develop a new skill, you can hire the highly skilled people you need, or you can engage them as consultants.

  Nonetheless, sometimes a required skill or contact can be so specialized that no amount of money can buy it. In the early days of a new technology, few people may understand it or know how to work with it. If your team lacks a critical skill and no one with that skill wants to partner or work with you, then you will have to devise a plan for someone to learn it. This is one of the few cases where money cannot buy time.

  Money can mitigate the fatality associated with many types of entrepreneurial mistakes. Money also increases the time available for undoing mistakes.

  Time and money are inextricably linked for all entrepreneurs, but in different ways depending on whether your venture is bedrock or high-risk. Bedrock entrepreneurs and high-risk entrepreneurs perceive time and money differently:

  Bedrock entrepreneurs make decisions to reduce the risk of personal loss—of money, status, and relationships. Bedrock entrepreneurs believe money is something that’s easy to lose and time is something that’s easy to waste. They therefore take actions to minimize the chances of losing either. Bedrock entrepreneurs therefore focus on starting businesses where the time needed to reach profitability is minimal.

  High-risk entrepreneurs base their decisions on maximizing personal gain—money, status, and networks. High-risk entrepreneurs believe that money multiplies potential outcomes and that time can be bought as necessary.

  If you are in a race with competition to achieve scale or install a network, then your time is fixed by external factors associated with how fast factories or networks can be built. In these cases, you want to use money to accelerate time.

  How much time is often just a consequence of the patience of the entrepreneur. Because many entrepreneurs never were really motivated to make scores of people happy and ask for money in return, they lose motivation to be an entrepreneur with time, and stop their efforts even when there’s the cash in the bank to keep going.

  How Much Money

  Money is last on the list of things you need. You can decide how much money you need only after you understand how much of everything else you expect to be able to put in place, how much time is required, and how much time you already have. In many cases, once you’ve thought about how to best set up the other prerequisites, you don’t need much money.

  Money does matter in entrepreneurship, but not as much as you might think. Vidal Herrera started with literally nothing. Stephanie DiMarco and Estée Lauder started with next to nothing. Sam Walton borrowed just enough money to buy a bankrupt business, and as the story of William Shockley so vividly illustrates, no amount of money and no amount of everything else will be enough if you’re not motivated to do what it takes to succeed.

  Money is rarely ever the critical issue and is often a distraction. When you’re a highly motivated, competent leader who has assembled a team that actively works toward delivering a reliable, desirable product or service, you will find the money. In fact, once you demonstrate how you and your team can make lots of people happy, the money often finds you—which can also cause problems.

  Theoretically, you need only enough money to develop a working product or service, find your first customer, and then deliver the product or service in exchange for enough money to enable you to deliver the same product or service to your next customer. Beyond what you have to spend to build the physical product or deliver the service, you will always incur extra expenses, but they don’t have to be much. You don’t need a fancy place of business to begin. Stephanie DiMarco started with a tiny rented office (as did I). Michael Dell put together computers in his dorm room until he had saved enough money to rent a bigger space. Vidal Herrera worked as a contractor for the VA and used their tools to start his business. Jordan needed to rent a food stand
on Venice Beach. Setting up work surfaces with doors on sawhorses or with used furniture costs little. In short, starting businesses that are inherently profitable can be done frugally.

  You do need enough money to establish your product or service. Stephanie had to buy computers and networking software so that her partner Steve had the equipment and systems he needed to develop their sophisticated accounting software. She also had to fund almost two years of Steve’s salary. Jordan Monkarsh needed money to buy some sausage-making equipment.

  Plenty of digital-age companies continue to use the same model of developing and offering a product that makes the customer instantly happy and the company quickly profitable. 37signals and MailChimp are two well-known companies that fit this model.[20] Jason Fried, the founder of 37signals, developed excellent productivity tools for his web consultancy that his customers asked to use. He charged them, but the customers loved the software so much they told others about it. Jason soon made so much money from selling the software that he decided to shut down his consultancy. Ben Chestnut and Dan Kurzius took a similar route after being laid off of their corporate web design jobs. To keep money flowing in, they offered web design services to clients. The email tools they developed for their customers worked so well that the word spread. Seven years into their business, they shut down the web consultancy to focus exclusively on their MailChimp business, which is profitable to this day. Many other famous digital-age companies have been profitable immediately by design: GoPro, GitHub, Zoho, and most of the companies on the Inc. Magazine’s annual list of 5,000 fastest growing companies.