Archive for December, 2009

Top startup articles from last week

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Finally caught up on my reading after a nice long weekend.  Here are some good articles from last week.  Enjoy.


Financial modeling for a new product or service

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I don’t have an MBA. I have never even taken an accounting class. Yet in my years as a product person I’ve had to help generate numerous financial models to help figure out whether a new products and/or services makes economic sense.   Through my mentors, I learned just enough to generate the tables and charts that would show me whether the product or service deserves to be built.

In my mind, financial modeling for a vaporware product is a framework to help the team think through these questions:

  • How many units do we think we can sell in the next few years?
  • What is the average sales price?
  • How much does it cost to sell each unit?
  • How much do we need to spend to develop and sustain this business?

The toughest question to answer is the unit projection question.  Some people pull projections out of you-know-where.   I think a little analysis goes a long way here.  I tend to do this with a top-down approach, then cross check against a bottom-up approach.

The top-down approach is a market sizing and analysis exercise:

  • Use analyst reports and other sources of quantitative data (e.g. US Census) to size your target market segment.
  • Take it down as necessary to accommodate constraints imposed by your technology platform.
  • Come up with a percentage ramp that predicts the market penetration you will achieve over time.
  • Cross check your projected market share growth against competitors (quarterly or annual reports from public companies in adjacent or comparable markets are a great resource).
  • Apply the sniff test: do you think you can sell enough to make this product worth your while?

Once the top down approach passes the sniff test, you can try the bottom-up approach:

  • Build up the number of units you think you can sell via each distribution channel in the plan.
  • Use hard data as much as possible – for example, if you are selling through retail outlets, check your projections against sell in/sell through data for comparable products through those outlets or classes of outlets to make sure your estimates are not out of whack.

Now that you have your top down and bottom up number, compare them and see if they match.   If they don’t, figure out why.  It may be that your top-down scenario is too rosy and the channels are fundamentally not equipped to support that kind of volume. Perhaps the distribution strategy needs to be revisited.  Or it may be that your channel projections are too rosy and assume an unreasonable growth in market share.  It’s an iterative process until both approaches pass the sniff test.  At this point I would use the bottom-up estimates as a basis to calculate gross revenue projections.

Having a credible unit sales / gross revenue projection is half the battle. The other half is to figure out whether the economics of the business makes sense. This is where the value chain analysis comes in.  Lay out everybody in the product’s ecosystem, figure out who gets paid how much and by whom, tally up all the costs out of your own business and calculate the cost of sales.  At this point, you are ready to calculate the gross margin of the product based on the expected average sales price.

Lastly, let’s count all heads and operating expenses directly attributable to the new business line.   There is the upfront cost (to develop the new product or service) that skews towards R&D.  Then there is the long term cost where R&D spending goes down into maintenance mode and sales and marketing costs go up to fuel growth.

Once all this is done, it’s time to tally it all up and make a nice hockey stick picture – the net income chart.  Typically the income will go up exponentially a couple of quarters after the product or service is introduced.   If it doesn’t, figure out why.  If you can’t make the net income look reasonable, perhaps the product or service doesn’t make sense for your business after all.

Contractors or permanent hires?

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In this uncertain economy, a startup is often caught in a Catch 22 situation when it comes to staffing and team building.  What do you do when you have a lot of work now, but you cannot predict whether the work will be there in 6 or 12 months?

Nobody likes to let good people go.  A decision to take on a permanent new hire is not something I take lightly.  To avoid hiring on spec, a lot of people turn to hiring consultants or contractors to get the work done while mitigating risk.  The thinking is that we can plug the current need with contractors now without resulting in a long term bump in the company’s operating budget. If the work stays and there is budget for it, wonderful.  If not, no hard feelings – we simply part ways when the work goes away.

This method can work wonders, but I have seen it being taken too far.  This is particularly problematic if some specific and esoteric domain knowledge is required to build the product itself.  So the next time the company needs to get something done, they have to incur the learning curve all over again.

I believe in striving for balance between the conflicting needs of not over-hiring and not building core competencies. I like the following model:

  • Hire contractors with domain expertise to address specific and transient project needs
  • Hire excellent generalists to become permanent members of the team. Do temp-to-hire if possible so we can test-drive the relationship and make sure the team member will thrive in the company in the long run.
  • Have the contractors work with in-house staff to complete their projects.  The project is done as quickly as possible, the in-house staff is cross trained in a new area they are unfamiliar with, and the company gets to build up its core competencies. It’s a win-win situation.

How have you addressed this challenge in your company?

Top 10 startup articles of the week

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Here are 10 great articles I read last week.  Enjoy and have a good weekend.

Cultivating a sense of community in the workplace

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Last night I went to a holiday party with a bunch of ex-coworkers from one of my prior lives.   As we caught up with each other and shared memories about funny people we knew and funny things we did, I had an incredible sense of community.  Here we were, many years later, fondly remembering the time we worked together as a team, and thinking of ourselves as a group even though our career paths have dispersed us far and wide.

Why did this team feel such lasting loyalty to each other?  While many of us are the same age, some are more than 10 years north or south of the median.  Some of us worked together during the so-called golden years when we took our technology to market for the first time (before we realized what can’t be done), but others joined well after that time.   There is no discernable pattern in our backgrounds – some are engineers, some are in sales and marketing, and we are ethnically all over the map.

I finally realized that we were the product of a company culture where people were expected to work hard AND play hard.  The playing seems to make all the difference.  I remember the time when my entire engineering team went AWOL in the middle of the day.  One of my software managers had spontaneously organized everybody to go see “Star Wars: Episode II”.  This happened only once in the 7 or 8 years I was there.  It would have resulted in an inquiry in any other company I worked for.  Here, everybody knew the engineers would make up the lost time, we didn’t slip any deliverables, and it was a vastly better bonding experience than any other organized company outing they attended.

This team was well socialized and it showed. They worked together well, they helped each other out, information and knowledge was shared freely and spontaneously.  This team was one of the highest performing teams I’ve worked with.

Of course, this only works if the coworkers genuinely like each other.  This starts with recruiting for cultural fit as well as technical skills, and is fostered by a work environment where there are occasions for people to hang out socially while at work (by providing free lunch or free beer on a recurring basis).

Team building is an art and a science, but when done right it can elevate the workplace into a community that people are proud to be a part of.  I am proud to be an alumna of this team and will always use it as a template for team building in the future.

Truly memorable holiday parties

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It’s party time!  If you want to make your company’s holiday party stand out in memory, consider borrowing a page from one of my previous employers featured below.  I promise your employees will be talking about it for years to come.

Do a harbor cruise and neglect to note the time the cruise will leave

One year my CEO decided to party on a harbor cruise.  Nice and classy.  We had drinks and snacks while docked at the pier.  We then waved a fond goodbye at probably a third of our coworkers, including my own boss, who arrived only to see the cruise ship pull away.  We aren’t sure what all the shouting and yelling and jumping up and down and gesticulating was all about, but I am sure it was in good holiday cheer.

Have a children’s party late at night

Another year my CEO decided to make the holiday party celebrate children.  So we went to the Children’s Museum for a 7-9pm party.  We had 4 kids show up in total.  Every last one was screaming their heads off because they were overtired.  Note to CEO: if you want to have a children’s party, have it over lunch!

Do a Partisentation

My company made significant progress during the year, so we were thankful for all the things we have accomplished. So much so that the management team used the occasion of our lunch party to do a 2-hour presentation to show our success.  That was my first holiday party that involved no talking by employees.  A new word was coined: “partisentation”.

Celebrate the holidays next door to a wake

The same company that did the partisentation took our feedback to heart, and planned hard for a fun party with a DJ the following year.  Well… on party day, we were greeted with two welcome signs: one for us, and one for the folks attending a wake in the next room.   Enough said.

In my book, the best holiday parties are the ones that are low key, relaxed and not overplanned.  This only works if the folks in the company get along well and want to hang out with each other though  (hmm, maybe this explains the four wacky parties above.)

Do you have any unique holiday party memories to share?

Top 10 startup articles of the week

Here are ten great startup articles from the past week. Enjoy!

Peanut butter resource allocation

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I came across a great article on the peanut butter approach to resource allocation. Here’s how it works.

  • Start with way too many programs to be properly staffed or funded with current resources.
  • Experience extreme reluctance to axe any of these programs (because they are all such good ideas).
  • To keep everybody happy, spread a thin layer of available resources across everything, so everyone gets a share.

Everything is staffed lightly, so nothing dies.  However, nothing really takes off either, because no single program is staffed for success.  At the end of the day you have a swarm of zombie projects that collectively spell failure.

My take: keep the peanut butter in the pantry.  Step up and make the hard choices.  Figure out what’s important and axe what’s not important.  Not doing it is an invitation to a spectacular flop.

When your first product isn’t selling

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I’m a big fan of the lean startup philosophy.  Applied judiciously, this can save a lot of startups from developing a bloated product that nobody cares about.

While I don’t think the minimum viable product concept can be naively applied to hardware products, I do think that the basic principle of not over-designing the product and testing early and often with real customers are the key to developing a great product and a successful business around it.

One of the key tenets of lean startup is the pivot.  Eric Ries has a great post that explains this concept. The core idea is that when your product isn’t performing in the market, pivot, don’t thrash.  Change direction, but stay grounded in what you have learned.   Take prudent risks. Over time and across multiple pivots, the company could end up in a substantially different place from the  original vision, but it will have done so over multiple iterations with a process oriented approach, always grounded in facts and in customer feedback.

Pivoting is easier said than done. Generally when something doesn’t work, the leadership team does one of two things:

  • Prematurely announce the product is a dead loss, and launch a new product development effort to chase the Next Big Thing
  • Refuse to give up and doggedly try to get it to work long after all rational alternatives have been exhausted

None of these are helpful.  Abandoning ship prematurely throws away valuable customer learnings and brings the company back to square one, resulting in thrashing.  Doing the same thing over and over again in hopes it will work eventually is a measure of insanity.

The trick is to find the courage to acknowledge there is a problem, take a deep breath, and find a way to do a course adjustment that is solidly grounded on facts and learnings, that will hopefully lead to the right solution.  Easier said than done… but it’s the only responsible thing to do most of the time.

Top 10 leadership articles of the week

Here are ten great articles on team building and leadership from the past week. Enjoy!

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