In this discussion with Mason Matthies, Managing Director at Donnelley Financial Solutions, and Patrick Henry, CEO at QuestFusion, we discuss various challenges of managing rapid growth. This was a keynote speech at the 2017 San Diego Startup Week event.
Like all times in young growing companies, the CEO needs to focus on strategy, operations, people, and finances. The challenges in managing through rapid growth highlight particular challenges in all of these areas.
Mason: My name is Mason Matthies. I’m a managing director with Donnelley Financial Solutions. I’ve been working with private companies, helping them manage secure content and then ultimately file all the documentation with the SEC for 20-plus years. Patrick and I met when we were going through the Entropic project. There are some interesting stories that we’ll share. We wanted to come here and talk about managing through rapid growth.
Patrick is a serial entrepreneur, and Founder and CEO of QuestFusion, a San Diego based consulting company that provides strategic guidance to entrepreneurs and startup companies. Patrick is the former CEO of Entropic Communications where he took the company from pre-product and pre-revenue to a successful IPO on NASDAQ and an eventual billion-dollar valuation.
Patrick has raised over $200 million in equity capital for his companies and executed on over $2 billion in M&A transactions. He’s a regular contributor to Inc Magazine, Entrepreneur, Huffington Post and Fast Company. He’s the author of Plan, Commit, Win: 90 Days to Creating a Fundable Startup, which is available on Amazon.com, Amazon Kindle and Audible.
Patrick also loves working with entrepreneurs on their most challenging problems. He also enjoys golf, tennis, fine wine, snow skiing, angel investing and spending time with his family. You can also find Patrick on Twitter @QuestFusion.
Patrick: When Entropic made the decision to go public in late 2006, we had gotten to the point where we were worth too much for our large competition acquisition target to buy us. We had a conversation with CBS in January.
They said, “We want to pay this much.” My board felt the company was worth this much. We decided that we already had a backup plan in the event that we didn’t sell the company. I still felt like we were subscale to run a public company, so we had an intent to buy another San Diego company called RF Magic. We bought the company.
There was a lot of process to get that acquisition done because it was a stock-based transaction. Both companies were private. We got it done in mid-June to July. Then we went to the SEC filing process, which took about three months. It was a little bit complex. Eventually, around Thanksgiving, we were ready to go on the IPO roadshow. This is when I met Mason.
Mason does all the financial printing. At the time, he had one competitor. Now he has zero competitors. It’s a great business to be in. We were at the airport, ready to fly to New York for the IPO roadshow. Our second largest end customer didn’t threaten to sue us but made these allusions like, “What would happen if you went public, and the Monday after, we filed a lawsuit against you?”
In the background, the bankers and lawyers talked about this. We pulled back from the IPO. All of the employees thought that I was on the IPO roadshow, so I couldn’t go back to Entropic to work. I worked at Donnelley for a week, spending half the time in Denver negotiating with the customer and the other half of the time with Donnelley. That’s how Mason and I got to know each other. He would order me lunch every day from really nice places. It was a great experience.
Mason: The IPO is an interesting process. That is one of the other pieces that we’re going to talk about. When you’re going through that process where you file your information publicly—some of the rules have changed since Patrick did this with Entropic—you’re beholden to additional information that’s going to come out. Customers and other people might come out of the woodwork and threaten to sue you because you’re in a very public place at that point in time.
Patrick: I’d known this guy for many years. I went up there to Denver on a redeye flight. He said, “We don’t trust you guys anymore.” About halfway through the negotiation, we’re in this room. At this particular facility, you need an employee badge to get out to go to the bathroom. He handed me his wallet that had an employee badge in it and a couple thousand dollars. It was his way to get his last pound of flesh while he had some leverage. They got it and we ended up going public.
Mason: Today we want to talk about managing through rapid growth. Patrick and I were talking about the best way to present this. We wanted to make it more of an open forum. I’m going to start with some questions. Feel free to jump in.
How do you define rapid growth? What is that?
(We are talking about managing rapid growth.)
Patrick: There have been three companies in my career where I’ve had the luxury of rapid growth. The marketing director of memory business at AMD, where we took the flash memory business from $1 million a quarter to $100 million a quarter over a three-year period of time. At CQ Microsystems, we took the video CD business and the DVD business from zero to several hundred million dollars over a two to three-year period of time.
Inc has a Fast 500. Deloitte has a Fast 500. We were part of the Deloitte Fast 500, which measures it over a five-year compound into a growth rate. It has to be 60% to 70% compound annual growth rate over that period of time. You’re growing very fast. There’s a lot of chaotic stuff that happens during that type of growth.
Mason: What are some of the biggest challenges you find?
Patrick: I’m assuming that most of you are CEOs and founders of companies. If you’re the CEO of a startup company, you have three main hats. You have to worry about the people. You’re building a culture. You’re building an employee base. You need to be worried about that all the time.
You’re worried about running the company and the operational piece. Then you worry about having enough money, or fuel in the tank to fuel the growth. Even if you’re going through this period of rapid growth and you’re not part of a larger company, you’re typically applying every dollar that you make back into it.
A lot of times, it’s more than that because you need to carry so much inventory. You need a big accounts receivable when you’re a small company, so you’re not getting the best credit terms. You are worried about all three of those things.
The challenges within managing rapid growth are still those same three things. But the focus moves from the core to the periphery. When you don’t have customers and you’re just focused on product development and R&D, that’s one set of challenges. But when you have customers and customer problems, you have a lot of problems on the supply chain side.
You also have it on the customer side where they’re complaining about stuff all the time. No matter how good things are, you’re always going to run into problems. You have to keep the product development engine going but you’re spending so much time out here. You have to do that. Otherwise, the whole thing breaks.
Mason: Do you want to jump into money? That’s always a fun one. Based on what you’ve experienced with the different companies that you’ve worked in, what would you do differently? What hindsight do you have around money?
Patrick: I’ve always had a bias towards making sure you have a little bit more than enough. I’ve never been fortunate enough to run a company that had tons of cash sitting around, where I needed a garden rake to clean it up. You need to have enough money and plan ahead.
A lot of the entrepreneurs that I deal with in my advisory business want to treat raising capital as an event. They think, “Now it’s time to raise money. Introduce me to your network.” A lot of times, they don’t have the toolkit necessary to go out and raise capital. Raising capital is a process. It’s not an event. Even in an IPO, which is the most accelerated version of that because there’s so much more money in the public markets, it’s a three-week process.
The process leading up to that is a good four to five months. When you’re raising private capital, it’s a five to seven-month process, whether you’re raising a seed round, a Series A or a Series B. You need to plan ahead and make sure you have enough runway so that you can make it through there and run the business. When you’re going through rapid growth, because the working capital requirements, you potentially have a lot of inventory requirements, if you have a product-based business. If you have a SAAS or software based business, you have a lot of things related to accounts receivable.
Sometimes, in a software business, that can be more problematic. You have these weird contracts that you’re in. People don’t pay on time. You have a bunch of different things you have to do. Making sure that you manage your cash is really important, especially managing through rapid growth.
Mason: We talked a little bit about fuel in the tank and when is the right time to try and go public. That’s a little further down the line for a lot of people in the audience. In terms of doing an A or B round, can you speak to that type of thing?
Patrick: I’m a proponent of, if you can avoid it, don’t ever take venture capital. You lose control of your life. You lose control of your company. There are some instances where it makes a lot of sense. If you need to raise $3 million to $5 million or more in a Series A, there are very few sources where you can get that amount of capital in the private markets.
You have to believe that you can drive a billion-dollar valuation, not just with that capital, but over the period of a Series A, B and C. That’s a different type of company. Not all companies are built that way. Prolonging that as much as possible, even if you have a company like that, is going to be to your benefit. Bootstrap as long as you can.
Get friends and family money. Get friendly angel money where people have really technical domain expertise in your company, they like you and what you’re doing technologically. That’s always good. When you start moving to that Series A round, there is a different set of requirements that venture investors are looking for.
A lot of folks that come to me to help them raise money say, “I want to raise $1 million.” I say, “That’s really hard. I can help you raise $250,000 to $500,000 from angels or I can help you raise $300,000 to $500,000 with some venture investors, but $1 million is a tough number.” You’re in no man’s land. You need to know what you want to do with the money, what milestones you can accomplish over the next 12 to 18 months. You raise money in 12 to 18-month increments. You have to think backwards with that type of plan and go from there.
Mason: On the milestones piece, what happens when you don’t hit those milestones, and you have to go back out and ask for additional dollars? That’s always a challenge that lots of companies have to face.
(We are talking about managing rapid growth.)
Patrick: No one ever hits all their milestones, I’m sorry. It just doesn’t happen. We all know that, in order for you to have a growth company, you need to have hockey stick revenue growth. I have this joke in the book about hockey stick revenue growth. They see these graphs all the time.
As an investor, I’m so excited to find out what the catalyst is that causes this hyper-growth. Then I’m completely disappointed and I might as well put an arrow that says, “The miracle happens here.” In the book, I talk about eight things that I’ve gone through that are catalysts. It’s one of those crazy things. If you’re in the right kind of market that does have the potential for explosive growth, there will be catalysts that make that happen.
You know it will happen but you can never predict it with complete accuracy. A lot of it is the explanation around it. Did you miss a milestone because you just made stuff up or is it because your assumptions were a bit wrong? Customers aren’t ramping here but they’re ramping here. We still have control and things are good.
Do your homework and know what the underlying triggers for those things. Some of those things would be, if you’re in a SAAS business, “I need to have 10,000 customers at this type of licensing or subscription level for me to get to the next level of validation and proof around this market.”
Maybe you only have 5,000 but there’s a reason why. Those can be valid reasons why things didn’t happen exactly as you expected them to.
Mason: What about when the terms first come back from the VC? You’re all excited. You finally get someone who is interested to give you some money. However, they want a very big chunk of your company. Is there a formula that everyone seems to use? Is there a better way to manage that?
Patrick: Typically, whether you’re doing a seed round, Series A or Series B, you’re going to give up somewhere between 15% and 25% of the company for whatever amount of money you raise. You have to work backwards with the amount of money you can raise. That determines the valuation. In a seed round, I see companies regularly raise $500,000 or even $1 million.
I have a buddy of mine who has raised $1.2 million in seed financing, in a convertible debt offering versus a priced round. He didn’t do it all at once. He did it over a two-year period of time. He’s had people write him $25,000 checks and $200,000 checks. You do see that happening. That typically doesn’t happen once you do your first price round, which would be a Series A.
Anytime I’ve gotten an initial term sheet, I was dancing in the hallways. It’s so exciting to have someone who is actually interested in investing in the company. You talk to so many people over so many months. Their natural bias is to say “no,” especially venture capitalists. They’re looking at hundreds of deals and hundreds of executive summaries. If you do get a meeting, they’re looking for a reason to say no.
Maybe it’s a stupid business idea. If it’s a good business idea, this is the wrong person or team. There is a lot of overcoming skepticism and setting expectations, exceeding them, setting milestones and meeting them over a period of months.
Anytime I’ve raised private money, there have been three or four significant touches and half a dozen other emails and phone calls before someone is willing to give you a term sheet. When that happens, a lot of it depends if you’ve done a priced round before. If you’ve done a priced round in a Series A, you want the Series B to be an up round. You don’t want the A guys to get diluted because they will get pissed off. That’s the most important thing.
Let’s make sure it’s at least an up round, and that the people who already invested are okay with what’s happening going forward. When you run into these write down situations, it gets very ugly. It’s a bad situation. It never works out very good. Sometimes a company gets shut down. Sometimes there is a washout of the existing investors. It’s never an easy situation.
Mason: Let’s say that someone in this audience gets someone to join their board. How much should they expect them to participate in thought leadership around what they’re going to be doing with the company? Talk about dry powder and having the additional wherewithal to jump back in, in the future. How much should they worry about that if they might be getting a couple different types of offers?
Patrick: Board seats are one of your most valuable assets as a founder or startup CEO. You have to be very picky about who you put on your board. As a private company, you might have a co-founder and it’s just the two of you on the board initially while you’re in the bootstrapping and friends and family phase.
Maybe you get some kind of high-powered angel investor that has a lot of domain or technical expertise in your area. Maybe you make them a board member. Typically, when you raise a Series A with venture capital, you are going to give up a couple of board seats. You want to make sure that you’re working with people who are going to be reasonable.
Deal terms outside of valuation are sometimes as important or more than the valuation. What’s important in valuation is that you’re looking at the end zone. Where do you want to end up, from an ownership stake, when you sell the company or take it public? You’re going to have a lot of bumps in the road during that period of time.
If you have something that has massive antidilution privileges or write downs, a lot of people are focused on the unicorn valuation, but any new money that comes in below a certain valuation completely washes out all the founders. You have to be very careful about that.
You have to be careful about corporate governance and who you get on the board. Are they going to be a reasonable person? A future investor will look at your existing investors and say, “I don’t want to work with that person.” They can be poison for your company to getting future investors. Have your eyes open around all of that.
(We are talking about managing rapid growth.)
Audience: How many different boards have you been on?
Audience: Board of advisors, directors or a little bit of both?
Patrick: Those are board of directors. I’ve been on some other advisory boards.
Audience: Do you prefer one over the other?
Patrick: Yes. I think being on the board of directors is more fun. You have a more active role. There is typically more involvement. There is regular involvement when things are good and then there’s very active involvement when things go sideways. To me, that’s part of the fun of it. Three of those are companies that I’ve run. Two were on other companies.
Audience: There’s fun in it when it goes sideways?
Patrick: No, it’s not fun if you’re a CEO and things are going sideways. You have board meetings every week and daily action items.
Audience: What are some signs to tell if a venture capitalist is trying to take advantage of you versus trying to help you?
Patrick: What do you mean by taking advantage?
Audience: They are strong-arming you in the negotiation. If you’re a first-time entrepreneur, how can you tell if that’s happening? Are there red flags?
Patrick: There are so many different deal terms, other than valuation, that are important. It’s important to get a good corporate counsel who has seen a lot of deals and has worked with VCs. They’ve worked on M&A transactions. They’ve worked on IPO transactions. They have real-time data. Then they will know what’s standard versus what’s not standard.
You can talk to them about that. Aside from that, there are rules of thumb. If you’re raising a round, you’re typically going to give up about 15% to 25%. I have people approaching me for angel investment and they want to give up 5% of their company. I don’t see how the numbers work around that. I don’t go in and say, “Give me 35%.”
If a VC if really interested in a company, maybe they’re going to push a little harder. It’s a negotiation. When you’re doing any negotiation, you want to create scarcity. If there is no scarcity, you will be taken advantage of most of the time. Will you be taken advantage of to the point that it’s predatory?
Maybe, maybe not. How important are you to the company? If you’re really important to the company, they’re going to want to take care of you. They will want to make sure that you stick around, and that you’re driving the business.
Audience: Do you have a technique for creating scarcity?
Patrick: I’ve never been in one of those situations where people are throwing money and term sheets at me. Everything is hard. You’re grinding. Having a good list, working the list, making sure you have good touch points, keeping in touch with people, don’t directly play people off each other are all good things. You’re trying to get that first person to come in.
In the venture industry, everyone is a follower. That is unless it’s Kleiner Perkins or Sequoia and they know the entrepreneur. They’ve done business with someone on their board before. All the rest of us are commodities. They have to figure out if it’s real. There is so much stuff out there as far as bad ideas or bad management teams. T
hey want to test us over a period of time. If they get to know, like and trust you, then there is a possibility that they get interested. Because of the way they think and the metrics they use, you’re going to get multiple people interested at the same time. Then you have to try and close. You try to get a term sheet.
Audience: How much time can you expect someone to give you as a board member? If I put someone on my board, how many hours am I entitled to from them per month?
Patrick: A lot of that is a good conversation to have with them prior to putting them on the board, based on what you want. I tell people, “If you want me as an advisory board member, I’m available by phone for an advisory board meeting every other month or once a quarter.”
Board members of private companies, you have some committee work, but the committee work is relatively light compared to a public company. Maybe they’re on the audit committee and they have to be available for a meeting once a quarter. They have to be available once every six weeks for board meetings.
When you’re public, it’s different than quarterly board meetings unless things are going bad. Then they’re having board meetings behind your back. Being available by phone, if there is a someone who is a real expert, you can have a handshake agreement up front.
You can say, “I want to be able to bounce ideas off you or ask you for an introduction.” You can clear that up front. If you want them to come in, work and do projects, if I’m on a board and someone says, “I want three months of your dedicated time to help me work through my product plan,” I say, “That’s not implicit within our agreement. I’ll do a consulting deal with you but that’s beyond the scope of being on your board.”
Audience: How do relationships change as you go into A and then B? The growth and the people you’re working with, your colleagues. I don’t want to throw out particular titles. That is one of the most interesting challenges of managing. I haven’t seen it or experienced it. What are those relationships like and how do you manage the growth with them?
Patrick: It depends on the individuals involved. Let’s say you have a VP of marketing or engineering. In the case of Entropic, I had a VP of sales. He was our first VP of sales. He was an awesome guy. He’s still a friend of mine today. He was great working with a team of five people and some reps, but he was the wrong guy to run a multi-national organization with managers all over the world.
There was a time when I knew it wasn’t going to work. I said, “We’re growing too fast. We need to make a change. I’d like to find a spot for you doing this.” He wasn’t interested so he decided to be a VP of sales somewhere else. You need to be honest with people in situations.
Here is another situation that you run into. I came into Entropic at a relatively early stage. They had product development but they didn’t have any products. They didn’t have any revenue. They had four founders, but one of them was sidelined when I got there. Three were left when I got there.
The guy who was the founding CEO, I had known him for 15 to 20 years when I came into Entropic. He’s a great guy. The other two guys are also great guys but they’re startup guys. What I mean by that is, when you want to start a revolution, you need anarchists. When you want to establish law and order, anarchists can be extremely disruptive.
Sometimes people aren’t willing to make the adjustment. When you’re in those situations, you have to say, “How much value is there versus collateral damage?” on a daily basis. The reason why I have so much gray hair, it’s partially hereditary but it’s partially from dealing with founders in three different companies. It’s challenging. Sometimes it works. Sometimes it doesn’t. We all made money.
Sometimes you have to part ways because it just doesn’t work. In Entropic, there was management team 1.0, 2.0 and 3.0 at various stages of the company. I was there 11 years. We were seven years as a public company. When we bought RF Magic, it was this blended management team. That was 2.0. We worked through that. We started getting bigger and doing a lot of acquisitions. It became a much larger company.
Audience: I’m sure that everyone is different, but do you find that board of directors care about membership classes and e-shares, especially if the owner is 100%?
(We are talking about managing rapid growth.)
Patrick: Yes, they definitely care about preferred versus common. They want to be preferred. They want the founders and employees to be in common stock. That’s part of the deal terms. What kind of preferences do they have with that preferred stock? As you get to different classes of preferred, like A, B and C, it really depends on the negotiation that goes on during that financing round.
With the Series A preferred, they don’t want the Series B preferred to have preferences versus them, but they will. How does the participation happen? There can be a lot of technical details that go on. That’s why having a good attorney really helps to work through that. Having a good finance person that sees a lot of deals is really helpful.
Mason: How many people have raised money or are in the process of doing it right now? (10 people in the audience raise their hands.)
Audience: Sometimes you have a bad management team. How do you figure that out? Often, people like the CEO hide what is going on in the company to the board.
Patrick: Are you saying, as a board member or investor assessing the management team?
Audience: Yes, as a board member.
Patrick: Even if a board member is good, they get 90% of their information from the CEO. It’s hard to assess that. In the case of the companies I’ve run, they were established when I came in. The board had communication with the founders and me. I always provide a high level of transparency. I had my management team in board meetings. I had them presenting. If a board member does that, I think it’s a good thing. If the CEO does that without a board member asking, I think it’s a good thing.
There is a difference between managing the CEO and managing the company. In my view, the board’s job is to manage the CEO. If a board wants to manage the company, I’ll give them the keys to the car. I can’t do that. With limited information and not knowing what’s going on, you’re going to tell me exactly what to do? I can’t do that.
You always get that testing period in the beginning of a company. They want a lot of information so you write a 15-page memo that says, “This is why I did the negotiation this way.” You get their confidence so they know you’re not an idiot. Over time, you build trust with them. There are still those friction times. There is never a right answer. How do you defend yourself without becoming defensive? It’s hard.
Audience: I care about the people. I’ve seen really bad things happen with CEOs. We get people who are like CEOs, good business people who bring in the revenue, but they are destroying their company from the inside.
Patrick: My opinion from being involved and living in Silicon Valley for 10 years is that boards care about performance. Performance is primarily about the top line and the bottom line. If things are good on the top and bottom lines, as long as someone isn’t psychotic, they don’t care. If they’re going to be embarrassed by a psychotic CEO, they’ll fire the CEO.
Audience: With social media and other factors will board be more active in addressing issues with the CEO more proactively?
Patrick: I think there is more of that. There are other influencers based on that. That is happening. You see it in sports. You see it in business. You see it all over the place. You’re generally dealing with a very homogenous set of board members. Ninety-five percent of venture capitalists are white guys. Most of them are between 35 and 65. Diversity really doesn’t exist. It doesn’t exist much on public boards either, although it’s getting better.
Over time, as those shifts change, some of the things I’m talking about will change. I’m just being realistic and tell you what I’ve witnessed. Henry Nicholas at Broadcom was crazy. But until the board was scared that they were going to get in trouble, then they finally took action. He did a great job in many ways. He built an incredible company.
Audience: Quite often, when companies get to A and B rounds, they have one product. At what point do you start wondering if there needs to be a second trick? How do you manage that?
Patrick: It depends on how good the first trick is. If you’re in the microprocessor business and you’re Intel, they had memories before that, but it was a great trick. It was a 20 to 25-year trick. In packaged software, Microsoft had a great trick. They had a side trick of the Office Suite.
In the packaged software business, that was a pretty good run. That was a 30-year run based on three products. Qualcomm, based on CDMA technology had a pretty good run. There are the unusual handful of companies, like Google and search. Google spends tons of money on all of this other stuff that doesn’t really matter. But search is what generates all the revenue and they have 85% market share.
I met Sergey and Larry at a Kleiner Perkins thing back in 2002 and Google had already been around for five to seven years at that point. They had a good 20-year run on search. Who thought search would be that valuable? It really depends on the company. How big is the market? How fast is the market growing?
How much are you able to differentiate yourself and continue to generate a lot of cash by doing that? Most companies don’t have that luxury. Broadcom was different. Broadcom had two products initially. They had cable modems and they had ethernet. By the time they got sold to Avago, they were in every communications technology on the planet. T
hey did have to do a lot of diversification. They did most of their diversification through acquisitions. It was the same way with Sysco. Sysco built up a company initially in routers, but then they did 50 acquisitions of smaller companies. I think it depends. In my situation, we had to come up with some other products. The technology business, and the chip business in particular, isn’t the good business it used to be 20 years ago. It’s much tougher. There is a lot more consolidation going on.
It’s really tough to build a chip company. With a software business, I think it’s still pretty good. It’s good to get to revenue and initial growth. It’s hard to scale on enterprise software beyond that because the established players are so big with the big companies that, getting channels to market and getting access to those customers is tough.
Mason: Talk a little bit more about that with the operations piece. Going through rapid growth, focus more on the operations.
Patrick: As a CEO, you have to go where the problem is, even if it seems like the minutia. I remember a situation in Entropic. We were ramping our business. Our suppliers didn’t believe our forecast. Our forecast ended up being under the actual volume requirements.
We were constantly on the phone with TSMC, which was our big chip supplier and Amcor, our packaging supplier. Amcor had this problem where we couldn’t get enough substrates. It’s the thing that they put the chip on top of before they put it in the package. First, my operations guy got on the phone with them. I said, “Who is the substrate manufacturer?” They said, “I don’t know. We have to look it up.” They looked it up.
I said, “Tim, let’s get on a plane and meet these guys to see if we can get more substrates.” We showed up at this place. They had never seen anyone like us. We were like gods to them, they were so far down the food chain. They had never met people who actually sell the products. We said, “We have this problem. Can you help us out?” They said, “Sure.”
The problem was solved in a week. Whereas, if we had just dealt with Amcor, it may not even be solved today. You have to jump on those things. You have to say, “Where is the pain point and what does this mean to my business? Where is this causing a problem?” It might seem stupid to go on a 14-hour flight to meet with your supplier’s supplier, but sometimes you have to do that, if that’s where the problem is. It’s the same way with customers.
Maybe they’re a midsize customer, but they can destroy your reputation. You have to go out and meet with them, find out what the problem is and give them face time. I’m a proponent of giving updates even when there’s no update. I get on the phone with a customer.
They’re so upset, so I get on the phone with them the next day. I say, “I just wanted to update you that we’re still working hard on it. We don’t have a solution yet but we’re focused on this. We’re going to solve this problem.” It’s not even an update but it makes them feel better because they know that I’m thinking about them.
Mason: What about diversification of your product? Do you worry about product line diversification as opposed to having more focus on a second version of something that’s coming out in an iteration?
(We are talking about managing rapid growth.)
Patrick: That’s a big topic. As an early-stage startup, I am not a proponent of going after these large, horizontal markets where you’re going to have 1% to 3% market share in this multi-billion-dollar market. I don’t think you can win that way. I’ve never seen a company win that way.
I think you have to carve out a target product market segment where you can have a dominant position. Get 100% of the market share and then maybe end up with 70% or 80% market share over time. Then island hop and get into adjacent markets or adjacent products over time. Build off that base.
When do you make those hops? It’s when the baby is not going to die anymore. You don’t have babies and toddlers that need caring and feeding every single day. They’re like teenagers. You still need to watch them like a hawk but you can have more babies and do other things. It’s hard for someone who is a great parent.
If it’s the first time you’ve raised children or started a company, that can be really challenging. That’s why I think Broadcom was very successful. When they did acquisitions, the CEOs of those companies stuck around.
The Henrys incentivized them, did the right things and let them run their own show. He was in everyone’s face, but at the same time, he had very capable managers who were running those adjacent product lines.
Mason: Talk a little bit about that. I’ve heard you say before that building companies is a team sport. As you start to bring on additional people to raise these children, how do you think about doing that and keeping the culture the same?
Patrick: I think it’s like the schizophrenia of being a startup CEO. You want to spend and invest a lot, but you also want to be frugal. You want to give your employees a lot of room to operate but you still have to know the details of what they’re doing.
You have to be in the details. There is that delicate balance. When people say, “What is your management style?” I say, “It’s situational.” If the house is burning down, I’m grabbing a bucket and hoses. We have to put this fire out. Whereas, if you’re building houses, it’s a different type of management.
It depends on the people. Sometimes it depends on the people on a certain day. Maybe Bob is like this on Wednesdays and then Bob is like this on Fridays. You have to manage him differently depending on the day of the week.
As you go higher up in management, instead of first-line management, you don’t run into those problems as much. I was a first-line manager for seven years before I became a manager of managers. You see all sorts of crazy stuff. You just deal with it and figure out what works and what doesn’t.
Audience: We’re very small. There are three of us. We need to hire or bring on some people. What I tend to find is, I spend all this time training them and doing stuff, and then they don’t really do it. How do you realize when you’re better off to do it yourself or when you’re better off spending your time training people who may or may not work out?
Patrick: There is this old joke. If you point the finger at someone, there are three pointing back at you. Is this a consistent problem? If it’s a consistent problem, is it you or is it them? That’s hard for me to tell. Are you not letting go?
Audience: We’re small and we’re scrappy. You pay people in commission. They’re all gung ho. They tell you they want to do this. Then they waste your time. I say to everyone, “Please don’t waste my time.” I don’t call people if they don’t call me back. At what point should I just keep doing it myself?
Patrick: You have to scale. When you’re scaling the company, you have to say, “What are the skill sets that I need to bring into this company? What do I need to get done?” Work backwards from that. Is this part of my differentiation? Is this part of my sustainable competitive advantage? Is it part of my unique value proposition?
If it’s that type of core competency, you hire a person. You find the right person who has that skill set. You bring them on board. Hopefully, if you’re a small company, they don’t need a lot of training. They might be a bit of a mercenary. Hopefully you’re able to hire for culture a little bit.
If you don’t hire for cultural fit with the ability to work up the team, you’re going to end up with a bunch of psychotics. Then you have 100 of them. Then you’re out of control. That’s most companies. When I’m interviewing executives, I meet with them at least four times, plus talk to them on the phone. I meet them at dinner. I meet with them at breakfast. I do something else.
I think, “Would I put this person in front of a customer?” I want to see how they are and if they’re someone I can work with. I need to be able to work with people. I’ve been on management teams where there are brilliant people but they hated each other. There was back biting. It was insanity. It wasn’t any fun.
Audience: I do workplace culture and efficiency. In that case that you were talking about, what do you do in that situation? Who can set people straight and help lead the team better? You need to make sure that money is well spent, time is not wasted and that there’s no drama. People need to communicate. How do you work through that?
Patrick: I’m not a huge believer in cultural change, especially for large companies. With smaller companies, maybe there is a chance. A lot of it is what the CEO and management team does, not what they say. People are watching your feet more than they’re watching your lips.
If they truly want to change things, they are in enough power and authority to make changes. I remember at CQ Microsystems, there was a big problem in our consumer business. I was running corporate strategy. The CEO said to me, “Can you jump in and help with this?”
I said, “I really don’t want to.” He said, “I want you to do it.” I jumped in and it was a mess. I had a 40-person team. You can’t fire 20 people. You won’t get any work done. You say, “This person is good but they should be in this role. This person is a disaster so I have to get rid of them.”
Over a year and a half, I cleaned it up. We went from 40 to 30 and we were much more productive. You can’t expect short-term fixes. It’s a process. It’s not an event. It’s not like I lay my hands on the company and it’s magically healed. I’m not a faith healer. This is hard. All of it is hard.
Like I said, I’m a grinder. I’ve never been in one of those positions where it was easy. I see over the horizon that we’re going to have a problem, so we have to solve problems to avoid some of the things that are coming down the road.
Audience: I feel like I hold back. It starts to move and I think, “We don’t know what we’re doing.” Is that normal? You see it launching and you hold back.
Patrick: The unknown is scary. Maybe you feel, “I don’t have the skill set to do that.” Then get a mentor. Get someone who is a guide by your side, who has been through that, knows your business and does that.
That would be the best advice if you asked what I would do different. I would consciously develop mentoring relationships. I’ve been very fortunate that I’ve had some really good mentoring relationships that have just happened in my career.
Seek out the right people that you trust and respect, that have traveled the path before, that you can have a good dialogue with. I’m not everyone’s cup of tea. Having a mentor that doesn’t like your variety of tea is not a good thing. How are you going to deal with someone like that? You want to be able to listen to them and trust them.
Get in a mastermind group. Get in a group of likeminded peers and individuals. Get in an accountability group of six to eight people where you meet on a regular basis, at least once a month. Go through your business plan. Bounce off your business ideas. Do things like that. That can really revolutionize how you think and how you do work.
Mason: Thank you, Patrick.
(We have been talking about managing rapid growth.)
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.