February 2003 Teams Human nature and human resources

February 2003 Teams: Human nature and human resources Building, managing and motivating Douglas Abrams - Parallax Capital Management

6 XXXX Teams: Human nature and human resources Ÿ The team is the most important thing Ÿ Building teams Ÿ Managing and motivating teams Douglas Abrams - Parallax Capital Management 2

6 XXXX The team is the most important thing Ÿ An excellent team can succeed with a less-than-perfect idea Ÿ A poor team will fail no matter how good the idea Ÿ Management team Ÿ Advisory board Ÿ Strategic partners Douglas Abrams - Parallax Capital Management 3

6 XXXX Describing the team in the business plan Ÿ Organizational structure Ÿ Backgrounds, experience and expertise Ÿ Balance Ÿ Needs Ÿ Founder/CEO and management team Douglas Abrams - Parallax Capital Management 4

6 XXXX What do investors look for in a team? Ÿ Completeness Ÿ Competence Ÿ Maturity Ÿ Initial team should be prepared to step aside Douglas Abrams - Parallax Capital Management 5

6 XXXX The more complete the team; the more likely the start-up will get funded Ÿ Investors don’t like to see holes in the management team Ÿ Especially marketing, sales and business development Ÿ Finding key people takes time Ÿ Slows down introduction of product Ÿ If team is not full; acknowledge and show willingness to correct and ideas for filling Douglas Abrams - Parallax Capital Management 6

6 XXXX Completing the Management team Ÿ Look for diversity of functional skills, backgrounds and experiences… Ÿ …to achieve complementarity of competencies and encourage creative tensions Ÿ …but maintain cohesiveness through shared vision and compatible styles/chemistry Ÿ Filling in the Key Roles: – CEO – Directors and Advisors – Functional VPs (CTO/VP Engineering, VP Marketing/ Sales, VP Operations, VP Finance) A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 7

6 XXXX The core team Ÿ Founders Ÿ Additional talent Ÿ Investors like to see that core team have worked together before Ÿ Reduces risk of team problems Ÿ Reduces time spent building a culture Douglas Abrams - Parallax Capital Management 8

6 XXXX The Team Building Process Ÿ The Founders Ÿ Allocation of Roles (directors, general mgt, functional mgt, core operational roles) Ÿ Bringing on board Investors & Mentors Ÿ Completing the core Management team Ÿ Strengthening the Board of Directors Ÿ Leveraging an Advisory board Ÿ Stepping aside for more capable people A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 9

6 XXXX Management team members Ÿ CEO Ÿ VP Marketing & Sales Ÿ VP Business development Ÿ CTO/CIO Ÿ VP Production Ÿ CFO Douglas Abrams - Parallax Capital Management 10

6 XXXX What is the best sequence to add people? Ÿ Technology leader - inventor or leader of engineering – Must have strong skills – Investors prefer a prior VP or veteran leader of teams Ÿ Experienced CEO Ÿ VP of Marketing – Should be part of creation of first product Ÿ VP of Business Development – May double as VP Sales or Marketing in early days Ÿ VP sales Ÿ VP Manufacturing or Operations – Must be on board in time to ship first product Douglas Abrams - Parallax Capital Management 11

6 XXXX CEO - Chief Executive Officer Ÿ Officer of the firm principally responsible for the firm's activities Ÿ Creates and communicates shared strategic vision Ÿ Defines the business Ÿ Defines corporate culture Ÿ Final decision-maker on all important issues Ÿ Coordinates direction of other executive officers Douglas Abrams - Parallax Capital Management 12

6 XXXX CEO - criteria for success Ÿ Primarily responsible for the overall success or failure of the idea, the business and the strategy Ÿ Effective formulation of business definition Ÿ Effective development and communication of the firm's vision Ÿ Ensures consistentcy and quality across the business plan Ÿ Competitive advantage Ÿ Makes the sale Ÿ Can share other function ("Acting CEO") Douglas Abrams - Parallax Capital Management 13

6 XXXX CFO - Chief Financial Officer Ÿ Responsible for handling funds, signing checks Ÿ Keeping financial records Ÿ Financing and financial planning Ÿ Criteria for success – Thorough, realistic and professional financial plan and projections – Understanding of financial markets and company finances Douglas Abrams - Parallax Capital Management 14

6 XXXX CFO issues Ÿ Strong CFO/VP Finance is best for entrepreneur – Can negotiate fund-raising terms, degree of control over spending, choice of investors, etc. Ÿ VCs may prefer weaker CFO in order to retain more control over the company Douglas Abrams - Parallax Capital Management 15

6 XXXX CTO - Chief Technology Officer Ÿ Responsible for technology strategy and implementation Internal and external if technology company Ÿ Criteria for success - all – Internal technology solutions are efficient and cost-effective – Product comparison matrix Ÿ Criteria for success - technology product – Design – Research and development – Product development – On schedule and under budget Douglas Abrams - Parallax Capital Management 16

6 XXXX COO - Chief Operating Officer Ÿ Responsible for day-to-day management and operation of the firm Ÿ Critiera for success – Firm runs smoothly, efficiently and cost-effectively – Purchasing, manufacturing or processing – Operations – Distribution – Service – Channel management Douglas Abrams - Parallax Capital Management 17

6 XXXX VP Sales and marketing Ÿ Responsible for the formulation and execution of the marketing plan and sales strategy Ÿ Criteria for success – Well-thought-out and effective marketing and sales strategy and plan – Market and competitor analysis – Positioning theme – Competitive advantage – Product comparison matrix – Pricing, branding, advertising and promotion – Sales strategy and sales force Douglas Abrams - Parallax Capital Management 18

6 XXXX VP Business Development Ÿ New customers Ÿ Strategic partners Ÿ Potential investors Douglas Abrams - Parallax Capital Management 19

6 XXXX Beyond the management team Ÿ Other key employees Ÿ Board of directors Ÿ Advisory board Ÿ Professional services: accountants, lawyers, etc. Douglas Abrams - Parallax Capital Management 20

6 XXXX Role of directors and advisors Ÿ Represent investors and founders’ interest Ÿ Enhance credibility Ÿ Tap their experience, domain expertise, and network of contacts Ÿ “Sounding board”, coach, advice on key decisions Ÿ “Reality-check”: alternative, more detached view; avoid blind-spot Ÿ May play interim management role while looking for the suitable candidates Ÿ Oust and replace management if found ineffective Ÿ Advisors do not have the fiduciary responsibilities and power of directors A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 21

6 XXXX Strategic partners Ÿ Added sales channel Ÿ Industry buzz Ÿ Additional credibility Ÿ Access to expertise Ÿ Possible financing, possible exit strategy Ÿ Complementary technology Ÿ Improve branding and marketing, enhance value proposition Douglas Abrams - Parallax Capital Management 22

6 XXXX Consultants and contractors Ÿ Startups are short of talent Ÿ Contractors and outsourcing fill in missing skill sets at reduced cost Ÿ Enginerring contactors Ÿ Public relations Ÿ Recruiters Ÿ Acting executives Douglas Abrams - Parallax Capital Management 23

6 XXXX Attracting VCs without prior experience Ÿ Chances of raising funds increased if founder has prior start-up experience Ÿ Most start-ups led by people without years of experience Ÿ Be prepared to hire an outside CEO Ÿ VCs can help to find a CEO Douglas Abrams - Parallax Capital Management 24

6 XXXX Technologist or student starting business Ÿ Get started Ÿ Complete business plan Ÿ Attract key management talent later Douglas Abrams - Parallax Capital Management 25

6 XXXX Teams: Human nature and human resources Ÿ The team is the most important thing Ÿ Building teams Ÿ Managing and motivating teams Douglas Abrams - Parallax Capital Management 26

6 XXXX Don’t settle for average employees Ÿ Consider marginal quality of each new employee Ÿ Each new employee must be of higher quality than the current average Ÿ If marginal quality is below average quality then average quality will decline Ÿ Only if marginal quality is above average quality then average quality will continue to increase Douglas Abrams - Parallax Capital Management 27

6 XXXX Hire the best people you can find Ÿ Better people; less risk Ÿ A players attract more A players Ÿ Top-quality people can emerge from bankruptcies Ÿ Top managers from defunct companies Ÿ “Better to hire a leader who learned from mistakes than someone who was just lucky” Douglas Abrams - Parallax Capital Management 28

6 XXXX Pick outstanding talent Ÿ Will represent company to investors Ÿ Must make an excellent impression Ÿ Track records Ÿ Skills Ÿ Depth of experience in areas important to SCA Douglas Abrams - Parallax Capital Management 29

6 XXXX Where to find the right people Ÿ Strong ties and weak ties Ÿ Friends, colleagues and personal recommendations Ÿ Advisors and networks Ÿ Employment agencies Ÿ Headhunters for senior positions Ÿ Advertising Ÿ Job posting at schools A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 30

6 XXXX Recruitment Ÿ What kind of person do you want? Ÿ Who would be the ideal person for this job? Ÿ What background? Ÿ What experience? Ÿ Career goals? Ÿ Why would they want to join? Ÿ Compensation? Douglas Abrams - Parallax Capital Management 31

6 XXXX Finding and retaining the right people Ÿ Specific technical skills, which are the least important characteristics to look at in hiring technologists are often the most heavily weighted in hiring decisions, Ÿ Most important characteristics in technology people are: intelligence, interest in the business, teamwork, good attitude. Douglas Abrams - Parallax Capital Management 32

6 XXXX In reviewing resumes, look for: Ÿ Logical progression of responsibility and level Ÿ All transitions explained Ÿ Consistency and direction Ÿ Look at achievements, not just responsibilities Ÿ Domain knowledge or not Douglas Abrams - Parallax Capital Management 33

6 XXXX Look for well-rounded employees Ÿ Extra-curricular activities Ÿ Community activities Ÿ Artistic achievement Ÿ Language skills Ÿ Sports Douglas Abrams - Parallax Capital Management 34

6 XXXX Try to look beyond the resume Ÿ What are they passionate about? Ÿ What is their potential? Ÿ What makes them special? Ÿ Look for people who want to work for a start-up, small company, entrepreneurial Douglas Abrams - Parallax Capital Management 35

6 XXXX What qualities to look for in employee Ÿ Intelligent and good creative problem-solving skills Ÿ Highly motivated and self starting Ÿ Appropriate risk profile Ÿ Focussed Ÿ Good fit Douglas Abrams - Parallax Capital Management 36

6 XXXX Before the interview Ÿ Shortlisting Ÿ Preparation Ÿ Format Ÿ What questions do you want to ask? Ÿ What do you need to tell the candidate? Ÿ How should you assess the interview? Douglas Abrams - Parallax Capital Management 37

6 XXXX In the interview Ÿ Have more than one person conduct the interview Ÿ Standard questions – Where do you want to be five years from now? – Why do you want to work in this industry/company? – What three accomplishments are you most proud of? – Teamwork-related Ÿ Tricky – Creative problem solving – Estimation questions Douglas Abrams - Parallax Capital Management 38

6 XXXX Good candidates will ask their own questions Ÿ What will constitute successful performance? Ÿ What are your biggest challenges going forward? Ÿ What do you like the most about working here? Douglas Abrams - Parallax Capital Management 39

6 XXXX After the interview - make the decision Ÿ Right skills? Personal qualities? Good fit? Ÿ Have they done their homework? Ÿ Best compared to the rest? Ÿ Look for red flags in the CV Ÿ Passing on good candidates hurts less than hiring bad employees Ÿ Follow up with offer Douglas Abrams - Parallax Capital Management 40

6 XXXX What does “fit” mean? Ÿ Do you want to work with them every day for the next three years? Ÿ Will they easily fit into corporate culture? Ÿ Will adding them the average performance of the team? Douglas Abrams - Parallax Capital Management 41

6 XXXX Do you like the person? Are they: Ÿ Intelligent? Ÿ Enthusiastic? Ÿ Passionate? Ÿ Sincere? Ÿ Do they appear to like you? Douglas Abrams - Parallax Capital Management 42

6 XXXX Admissions mistakes Ÿ Settling out of desparation Ÿ Ignoring red flags Ÿ Lawsuits and legal entanglements Douglas Abrams - Parallax Capital Management 43

6 XXXX Lawsuits and legal entanglements Ÿ Investors do not like lawsuits or even the possibility of legal issues Ÿ Make sure employees get out clean Douglas Abrams - Parallax Capital Management 44

6 XXXX Make sure employees got out clean from previous employer Ÿ Take nothing with you Ÿ Take no notebooks, meeting notes, schematics, drawings, business plans, or portions thereof Ÿ Make no copies of anything, not even magazine articles with your handwritten notes in the margins Ÿ Tell your supervisor the whereabouts of any electronic information storage devices that you had access to or used Ÿ Do not write any portion of the business plan until well after you have left your employers Ÿ Do not create even the appearance of taking anything with you Ÿ After leaving your employer, have your lawyer write a letter to your former employer stating your plans to start a business and asking what specific proprietary information the employer may feel you possess Ÿ Talk to no one from or at your former employer until your lawyer gives you the all-clear Nesheim - High Tech Startup Douglas Abrams - Parallax Capital Management 45

6 XXXX Remuneration packages Ÿ Salary Ÿ Stock options Ÿ Profit sharing and bonus schemes Ÿ Pension plans Ÿ Commissions Ÿ Cars and travel expenses Douglas Abrams - Parallax Capital Management 46

6 XXXX Packaging the Offer Ÿ Pay – Salary + Performance Bonus – Signing bonus Ÿ Generally low to conserve cash, but made up with. . . – Stock & stock options – Up-front stock offer – Stock options & vesting schedule/buy-back conditions Ÿ Other benefits – Generally non-existent/lower for start-ups, but should look at “Learning opportunity” and “Greater challenge/ excitement factor” A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 47

6 XXXX Stock Options Ÿ % of stock reserved for non-founder employee stock options Ÿ higher for more knowledge-intensive start-ups Ÿ split between founders, key employees (CEO, VPs) and other employees Ÿ Incentive stock options vs. nonqualified stock options Ÿ Vesting & Buy-back conditions Ÿ Stock option cuts both way: above vs. under water Ÿ trend in Silicon Valley of giving stock option for not just employees, but for all kind of services, has been reversed after the Nasdaq meltdown A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 48

6 XXXX Teams: Human nature and human resources Ÿ The team is the most important thing Ÿ Building teams Ÿ Managing and motivating teams Douglas Abrams - Parallax Capital Management 49

6 XXXX Team building principles Ÿ Effective corporate governance – Separation between ownership and management, strategy and execution – Alignment of incentives – Accountability to stakeholders Ÿ Effective management structure – Build chain of command – Strategic direction – general mgt – functional mgt – core operations – Overlap mechanisms for cross-functional teamwork – Extend shared vision from the core to embrace the new, create corporate culture around core values A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 50

6 XXXX Organizational structure for a new venture: some practical issues Ÿ Breaking the “catch-22” vicious cycle: Which comes first, the right people or the money? Ÿ If you have two “lines” of business, do you structure it as one or two companies? A holding company with two subsidiaries? Ÿ Asset-light organizational design strategy: – Outsourcing operations wherever possible – Managing external partner relationships vs. organizing internal team members – Building trust through non-binding relationships before inviting to join the organization A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 51

6 XXXX Managing people Ÿ Management theories – Traditional hierarchical structure – People-oriented structure Ÿ Motivating factors Ÿ Groups and teams Douglas Abrams - Parallax Capital Management 52

6 XXXX Traditional hierarchical structure Ÿ Assumption that people do not want work and have to be made to do so through coercion, control and threats Ÿ Motivation: pay and the stick Ÿ Status demarcation between management and workers Ÿ Clearly defined, task oriented roles, little job flexibility Ÿ Jobs tend to be repetitive Ÿ Most management effort spent on fixing things when they go wrong - management by exception Douglas Abrams - Parallax Capital Management 53

6 XXXX People-oriented structure Ÿ People naturally want to work but are prevented from doing so by the organization Ÿ Given a supportive environment, people will seek and accept responsibility and will control their own work when they understand are committed to common objectives Ÿ Motivation is carrot or reward Ÿ Flat management structures, participative and inclusive Ÿ Little demarcation between workers and management Douglas Abrams - Parallax Capital Management 54

6 XXXX Differences in the structures Ÿ Hierarchical structures have poor internal communication and are slow to adapt or change Ÿ People-oriented structures have good internal communcation and adapt well to change Ÿ Most successful, knowledge-based businesses are people-oriented Douglas Abrams - Parallax Capital Management 55

6 XXXX Maslow’s hierarchy of needs Self actualization Esteem & status Social and affection Safety and security Physiological Douglas Abrams - Parallax Capital Management 56

6 XXXX Management structures Ÿ Hierarchical – Authoritarian, like the military – Vertical communication OK; horizontal poor Ÿ People-centered – Matrix structure Douglas Abrams - Parallax Capital Management 57

6 XXXX Groups Ÿ Definable membership Ÿ Group consciousness Ÿ Collective purpose and identification Ÿ Interdependence Douglas Abrams - Parallax Capital Management 58

6 XXXX Developing a team Ÿ Forming Ÿ Storming Ÿ Norming Ÿ Performing Ÿ Adjourning Douglas Abrams - Parallax Capital Management 59

6 XXXX Networking is critical for successful teams Ÿ Failure to network can create: Ÿ Inter-group hostility Ÿ Insularity and inward thinking Ÿ Not invented here factor Douglas Abrams - Parallax Capital Management 60

6 XXXX Managerial styles Ÿ Authoritarian, autocratic – Solve problems alone – Dictate decisions Ÿ Consultative – Discusses problems – Makes decisions Ÿ Democratic, participative – Chairperson – Agrees problem – Creates consensus Douglas Abrams - Parallax Capital Management 61

6 XXXX Other important management issues Ÿ Communication – Poor communication is a major cause of management failures Ÿ Meetings – Usually a waste of time – Brainstorming – Formal meetings – Board meetings Douglas Abrams - Parallax Capital Management 62

6 XXXX Performance reviews Ÿ Conducted regularly between manager and employee Ÿ Self-assessment - 3+/3Ÿ Manager assessment Ÿ Key objectives Ÿ Development plan Ÿ Action steps Douglas Abrams - Parallax Capital Management 63

6 XXXX Problem situation interviews Ÿ State the problem Ÿ Ask the employee to explain their side and explain circumstances Ÿ Announce formally the findings, any warnings Ÿ Work on a resolution and support needed Ÿ Follow-up actions and dates Douglas Abrams - Parallax Capital Management 64

6 XXXX Managing Exit Ÿ Safeguard Conditions in Employment Agreement – vesting schedule, buy-back terms on stock options – non-compete agreement – non-disclosure agreement Ÿ Assignment of invention Ÿ Disclosure of invention pre- and post-employment Ÿ “Alumni”-Network Building Ÿ Exit interview closes existing relationship amicably, minimize litigation risk and cost Ÿ Turn employee into independent contractor relationships Ÿ Leveraging ex-employees for business contacts, partnerships, staff recruitment, etc. A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 65

6 XXXX Motivating & Retaining Employees Ÿ Visionary leadership Ÿ Stock Options and other Performance-based Reward System Ÿ Actual Growth Performance of the Company: Keeping the Vision Alive Ÿ Corporate Culture: How to make your company a “great company to work for” Ÿ “Room to Grow” for Employees: Need to Balance Internal Promotion vs. Bringing in External Expertise A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 66

6 XXXX Effective management Ÿ Require that they understand both the business model and the technology vision for the firm Ÿ Give them ownership of their area Ÿ Provide them with an attractive career path Ÿ Support them when things go wrong Ÿ Promotion criteria in many organizations almost guarantee that the wrong people will move to the top Douglas Abrams - Parallax Capital Management 67

6 XXXX Keeping people happy Ÿ Teamwork Ÿ Areas of responsibility Ÿ Integration into the business creates motivation Ÿ Mix of consultants and staff Ÿ Analyst program approach to career management Ÿ Chiefs who understand the technology: can ask the right questions and see through obsfucation Douglas Abrams - Parallax Capital Management 68

6 XXXX Corporate Culture: People work for start up for much more than money Ÿ Commitment model, not Control model Ÿ Share vision and beliefs Ÿ Emphasize Integrity as a counter-weight to Greed Ÿ Share fruits of success widely Ÿ Learning Organization Model: Share information, learn from mistake, encourage employee feedback Ÿ Make it Fun Ÿ Celebrate Every Little Success Ÿ Public Recognition of Efforts and Contribution (individuals, teams) A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 69

6 XXXX When should the Entrepreneur step aside? Ÿ Interim from the start until better person is found Ÿ Changing competency requirements as a venture grows: the skill to manage a $2 mil business is different from that of a $50 mil business, or a $500 mil. one Ÿ Start-up Excitement vs. Execution “Grind” Ÿ Planning management transition: The role of the CEO and the Board of Directors Ÿ Stepping aside: From CEO to functional, advisory or “evangelist” role Ÿ Stepping out: Serial entrepreneurship, CEO-for-rent, angel investing, venture capitalist A/P Wong Poh Kam - NUS Douglas Abrams - Parallax Capital Management 70

6 XXXX Exercise - Middle management muddle Ÿ Divide the class into three. One part is workers, the second are managers and last are senior managers. Senior managers can only communicate with managers, and managers can only communicate with workers. All vertical communication must be in writing, but horizontal communications, including those across teams, can be verbal. Ÿ On a table there are 144 majhong tiles, arranged into three piles of 47, with three extra tiles. Each worker team is assigned one of the tiles and tasked with creating an ordered row of 47 tiles. (the exact order we still need to determine - original idea is to have each team responsible for one of the suits (millions, bamboos or coins). No matter what the originally assigned order, we will switch this in the middle of the game. Ÿ We give the senior managers the goal - sort the tiles into ascending order. All tiles must be sorted. We give them the goal both verbally and in writing. The team that completes their row first will win, but only after all rows are completed. Ÿ Teams go in turns trading one tile for another, one tile at a time. Ÿ All communications with the CEO must go through Executive VP (you). Ÿ Although we won't tell the senior managers this until they ask, the way to claim one of the three extra tiles is to obtain an authorization memo from the CEO. Each team can only claim one extra tile. Ÿ It is not possible to complete the game, because one of the three extra tiles is blank. Ÿ The game is over when all three senior managers agree that there is no way to complete the task. Ÿ If they all agree, all the groups win. Ÿ If they don't all agree, all the groups lose. Douglas Abrams - Parallax Capital Management 71

6 XXXX Lessons learned from the game Ÿ Communication and teamwork in a hierarchical organization Ÿ Issues in vertical and horizontal communication Ÿ Team motivation versus group motivation Ÿ Thinking outside the box - realizing that the problem cannot be solved. Douglas Abrams - Parallax Capital Management 72

6 XXXX Sources and suggested reading Ÿ High-Tech Start-Up (2 nd edition) by Prof John Nesheim Ÿ Lang, J. (2002), The High Tech Entrepreneur's Handbook, Ft. com Douglas Abrams - Parallax Capital Management 73

6 XXXX Contact us Ÿ Douglas Abrams Ÿ Managing Director Ÿ Parallax Capital Management Ÿ dka@parallaxcapital. com Ÿ www. parallaxcapital. com Ÿ 65 -6238 -3492, 65 -9780 -5381 (hp) Ÿ 390 Orchard Road, #11 -01 Palais Renaissance, Singapore 238871 Douglas Abrams - Parallax Capital Management 74