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Memo From Our Founding Fathers: On Managing A Start-Up By JEFF BELLE & SAM KHALIL For the past nine months, the mainstream and financial press have attempted to find an explanation for the collapse of the Nasdaq and the demise of numerous dot-com companies. A large number of these stories relied on pundits and analysts, but the authors had a more unconventional choice. Believing that no one could provide a better historical perspective on succeeding in a revolutionary environment and guiding a young enterprise through a changing business model than George Washington, Alexander Hamilton and Thomas Jefferson, the authors sat down with America’s Founding Fathers for a lengthy discussion on topics ranging from start-up funding to entrepreneurial leadership to shareholders rights. Here is what they had to say… A: Gentlemen, thank you for being here. Let's start with you, President Washington. Obviously these are extraordinary times for entrepreneurialism. But while the current economic climate is still pretty strong, the technology sector, in particular Internet start-ups have been hammered. There are some analysts who say that the rash of dot-com failures, lay-offs and the Nasdaq’s bear market are indications that there really is no "New Economy". What advice do you have for the managers at Internet start-ups who are struggling to find their way through the current climate? GW: You know in the aftermath of the Revolution, we faced a similar situation. We had a Declaration of Independence, and we had a new country. And after the Treaty of Paris, we all kind of looked at each other and said, Well, now what? (laughs) There was a period there where morale started to waver; we were floundering through a depression. There were all kinds of administrative issues, payment of debts, dealing with pirates, various rebellions. We were a "New Country", but we weren’t really sure if we were going to make it or not… AH: Right. Those were times that really called out for strong leaders. I’m still amazed at the number of men who stood up to the call. I mean it wasn’t as if there was no personal risk involved. There was risk in everything we did. Had we lost, we’d all have been hanged. There are probably a few CEOs of start-ups out there who can empathize with that. But there was a real passion – people believed so much in what we were doing. We were just making things up as we went along, like any start-up. It’s not as if we had nothing to go on – we had Parliamentary procedures and the examples of the British and colonial governments. But while they were an example, they were also an example of what we didn’t want to be. TJ: Yes, we were full of new ideas, arguing about everything --particularly General Hamilton and me. We had a plethora of ideas and in retrospect not all of them good ones. I would venture to guess that the managers at start-ups, senior and middle, are facing similar dilemmas: which way do we go and what do we do? A: And what should they do? GW: Well first, I think you need to assess your own leadership abilities. Leadership --in business, politics, whatever-- hinges first and foremost on articulating a plan. You can go around in a circle once, maybe twice, before people start to question your vision. And even if your plan is bad, just by virtue of having one people will follow you around the circle maybe one more time than they would have. But without a plan, a road map, a clearly articulated vision of where you want your enterprise to go, and who you want to be, then you are lost as a leader. AH: I like to use Valley Forge as an example. The Continental army went through a tough, tough winter, and the only thing that kept those men from deserting were loyalty to George and the cause of liberty he constantly preached. The other piece of leadership is that once you have articulated a plan, you have to start reaching some milestones and achieving little victories building towards larger ones. Otherwise, no matter how dynamic a leader you are, your troops will desert or rebel against you. TJ: I agree with General Hamilton, for once, and I would like to add that a lot of people confuse having a plan with having a strategy. I'll submit that these are two separate things. A plan starts with a vision and ends, almost always, with a new plan. Meaning, if the execution of the plan was successful, the result calls for a succession plan. If the execution was unsuccessful, the result calls for a contingency plan. But, the execution's success or failure is largely dependent upon the strategy. Strategies can be debated between leaders and followers --visions cannot. When I wrote the Declaration of Independence… AH: …I knew you'd get that in. TJ: What? As I was saying, when I wrote the Declaration of Independence… AH: …Drafted. TJ: -Wrote! I had a clear vision of a new democracy. Now, Alex, I know you're not a big fan of "Democracy"... AH: Oh, that was two hundred years ago. Can we move on? TJ: …hold on –I was almost going to agree with you again. I was going to say that a start-up is no place for a "democracy". I personally don't think that in a start-up environment, there is enough time for much consensus building. Feedback and some amount of consensus are important for morale. When I was elected to my first term, consensus building was necessary to get anything done, but I'd submit that it is an exercise that doesn't work in a start-up environment, so to truly get things done – and I’m thinking of the Louisiana Purchase now - I had to massage a few things through the "regular channels" and I went around regular channels on other things. I think any struggling young company that has to manage by committee is doomed. A start-up needs a strong leader immune to criticism and passionate that his or her vision is right and attainable. AH: A big part of leading a start-up is inspiring the troops. Unlike President Jefferson, President Washington is too modest to toot his own horn. I mentioned Valley Forge earlier, and the fact is we owe a great debt to President Washington for his leadership and courage. In spite of great odds and obstacles, he managed to inspire his troops, to articulate a vision and a strategy, and then achieve some small but notable victories that inspired his troops. I don't think you can underestimate the value of morale in an enterprise's success. And hand in hand with that goes team building. That team encompasses everyone, from senior management through the corporate hierarchy to the receptionist. GW: Thank you General for those kind words. I would agree with your statement that the team building encompasses the entire enterprise, and add that at the end of the day, everyone in your office should at the very least be able to recite your mission, vision and goals by heart. If you are a really good CEO, every single person in the organization will know the company strategy as well and will understand his or her role in finding a way to help you achieve it. A: One of the early "truisms" about Internet start-ups was that speed was essential and thus the phrase "doing business in Internet time" was coined. How essential is speed vs. deliberation, President Jefferson? Is there a managerial "turtle and hare" lesson to be learned from the failure of so many start-ups? TJ: Well, the right answer, of course, is that you need to do very thorough deliberating very quickly. I would say speed is definitely key, but not at the cost of developing a sound business. When I made the Louisiana Purchase, we had a lot of competition for the land and its resources. It seemed like half of Europe had claims to parts of the land. While those countries were an ocean away, the real risk was from British traders with bases in Canada that had made inroads with different Native American tribes and established routes as they explored different areas. I understood that we quickly needed to solidify our claim on that area but we couldn’t do it by antagonizing the local tribes, I believed it would be cheaper to co-opt them with trade than beat them with bullets. The latter would be even more difficult with a powerful competitor right next door that was trading with and wooing the native tribes. What I understood is that the early bird may get the worm, but the bird needs to make sure it is not eaten by a cat. AH: What? TJ: It would appear to me that this lesson was lost on many Internet companies. Many of them felt that if they established a brand name, got some customers and revenue, and went public that they would block out future competitors and would be well on their way to becoming the next Wal-Mart. This was proved not only to be incorrect but foolish. Furthermore, many of these companies were spending money faster than Benny Franklin on one of his "diplomatic missions" (makes Italics with fingers) to Paris. A: President Washington do you agree? GW: I do, I had to sign Franklin’s expense reports. A: No, I mean regarding President Jefferson’s portrayal of the Internet businesses. GW: Certainly, and I would add that winning the battle does not necessarily mean you win the war. The Battle of Trenton was a turning point but not because of the scale of the military victory. It was a turning point for morale of a ragged Continental Army and to demonstrate to the British that we could attack them anyplace and anytime. I believe this example is relevant because many Internet start-ups ignored the fact that going public is only the initial step in becoming a successful enterprise, but the market and shareholders would demand revenue and expense targets would need to met every quarter without fail. Only then do you have a successful company that can earn a staggering valuation. TJ: This is not unlike our own experience in creating a new nation, it didn’t happen over night and it certainly didn’t happen in "Internet time". A: General Hamilton, President Washington raises a good point on the rush to go public. Two follow up questions: First, was that driven by the market euphoria? Or was it an inherent factor in the funding of these start-ups? Second, how important is an exit strategy in starting a new business? And should it always be an IPO? AH: Well, I’ve always felt that profitability is the best exit strategy. When I use the phrase "exit strategy", I define "exit" to mean moving away from a situation where you’re relying on someone else to keep you going. This can mean going public, selling out to a competitor, becoming profitable, or worst case, going out of business. So obviously, if you use that definition, it’s very important to have an exit strategy laid out up front. GW: I agree with that. Regarding the first part of your first question, yes, obviously the market prior to the Nasdaq’s collapse was a self-fulfilling prophecy. I mean, there was just too much money available to fund any idea, but there weren’t enough good ideas to spend all that money on. But as far as exit strategies go, the days of "flipping" are clearly over. There just isn’t the mania out there anymore that will let you cash out in an IPO without a clear path to value. A: OK. General Hamilton began by talking about the risks faced during the Revolution. Let's go back to risk-taking and the role of the manager. How do you balance the need to assume huge risks in this environment while maintaining a fiduciary responsibility to shareholders? GW: First of all, start-ups are all about risk. It’s not like you’re walking down to the corner Classifieds to buy milk. AH: Depending on your neighborhood… GW: Agreed (laughing). I think in today’s world, you have a fiduciary duty to assume large amounts of risk, but to do it responsibly. The key is to work within an adaptable business model. President Jefferson talked earlier about how a plan starts with a vision and always ends with another type of plan. We recognized that the Articles of Confederation were weak, but frankly after the Revolution it was the best we could do to keep the colonies together into some type of union. It quickly became apparent that it was not viable, and that upstart Shay really helped demonstrate the need for a strong central authority to help with certain key duties. We adapted that initial model with a much more viable framework, that has allowed future generations to adapt and amend where they needed. A: Then how do you view the large number of shareholders’ cases filed against the management of companies who’s stock has taken a nosedive? TJ: Shareholders are the fuel of the capital markets and must be protected. You can’t have shareholders wondering if the information they are receiving from executives, analysts and auditors is suspect. That is not to say that they can expect to be shielded from all risk - there should be a certain element of caveat emptor too. Like George said, buying stocks isn’t like buying milk. The risk is what creates the value. But that risk really should be limited to market and talent speculation, not ethical speculation. So, if you make a bad investment without being mislead, you have no one to blame but yourself. But look, I bought Cisco at 25. Before it split. Ask the General over there when he got into Amazon. A: General? AH: OK, OK, I got caught up in the excitement...I bought in at 113. TJ: This from your Treasury Secretary, George! GW: I know. A: Let’s get back to the theme of adapting the business model. The conventional wisdom only a few years ago was that the traditional "clicks and mortar" retailers had to either adapt quickly or like dinosaurs perish in the face of the Internet wave. Is that no longer the case, President Jefferson? TJ: After our Revolution, and particularly after the French Revolution, it appeared that the days of the aristocracy, which I abhorred, and of course Alex loves, were numbered. It appeared that aristocracy was outmoded as a form of government and that rapid changes would sweep across Europe. The only question was would it leave the chaos of the Jacobins or a relatively ordered revolution like ours. In that example, it was not a zero-sum game and I believe it is a similar case where the traditional companies who have established competitors must continue to fight for market share and profitability. The Internet will provide them with another marketing channel to achieve those goals. Some of the Internet start-ups will survive, and thrive, but they must start demonstrating some fiscal responsibility, as we did in working to pay off our national debt after the Revolution, a policy that was proposed by General Hamilton. A: General Hamilton, perhaps you can expand on the issue of fiscal responsibility. How do you balance the spending of funds between a "land grab" mentality and the need to produce profits? AH: I call this the "Black Jack Principle". If you have infinite funding, you can’t lose at Black Jack, you just double your bet every hand you lose until you’re up. But without infinite funding, you can only double your losing bets to the extent of your bankroll. Some of these dot-coms thought they had infinite funding with their inflated market caps to use as currency. But when the bubble burst, a lot of them were actually valued at less than their cash on hand. In hindsight, the quickest path to profitability is probably the best path. That still doesn’t rule out M&A activity. But I do understand the land grab mentality that drove a lot of the excess. When George asked me to take over at Treasury it was clear that revenue was the most important issue facing us. We had to go through the exercise of weighing investment in westward expansion versus shoring up our immediate financial situation. We were deeply in debt. We had relied on printing paper money along with foreign loans to finance the Revolution, and like any start-up, after it was over, we desperately needed our own revenue model. We’d ended up with hyperinflation from all the money printing, but really, it was our only practical solution at the time. Finally, we were able to calm the chaos with a reasonable taxation and a legitimate banking system. Only later, when we were on more solid footing, could we think seriously about financing an expansion. TJ: I think it's an issue of economies of scale, which is the holy grail of the start-up. In the early going, like Alex said, we were heavily dependent on a depreciating currency and foreign aid. But when we were in a better position financially, a brilliant M&A move, again, a little something I call the "Louisiana Purchase" created an enormous economic windfall, doubling the size of the country overnight. We had to debt finance it, of course, there was no other choice. But the deal paid for itself almost immediately in new taxes and trade. So, larger is better if you can leverage your existing infrastructure as you expand. You know who handled that deal for us? Barings – you know the English investment bank that went broke a few years back when that trader in Singapore kept covering up his bad derivatives trades? There’s your Black Jack Principle. Anyway, the feeling of Manifest Destiny that a lot of these start-ups feel certainly isn't unprecedented when held up to that light. We had a huge competitive advantage in terms of location and we used it to take away the very lucrative fur trade from the British, and later the vast natural resources of the area west of the Mississippi. GW: I would like to follow up on President Jefferson’s comments if I could. At the time there was not a consensus on his "M&A move", and it was a risky endeavor that helped to make this country what it is today. However, there appeared to be an overwhelming agreement among those in the financial sector that the only way to become the predominant Internet power was through land grab fueled by an incredible cash burn. Few, if any, analysts believed that there was another avenue to achieve this goal --of course you can’t get any of them to admit it now. President Jefferson once spoke of the danger of entangling alliances, and I think we have seen some of that over the past few years with the alliance of venture capitalists, investment bankers and lawyers, each with very entrenched interest in the companies they were involved with going public at incredible valuations. A large number of these companies frankly had neither the revenues nor a sustainable business model to justify being a public entity. If you looked at their business plans and the projected revenues and expenses were so ludicrous they should have just written "a miracle happens and we become profitable!" Of course none of this prevented the companies from going public and once they did and began their spending sprees, that cash worked its way into the pockets of other entangled alliances --recruiters, realtors, advertising and public relations agencies, consultants, interior designers with bean bag chairs and fooz ball tables, even washed up rock stars for IPO parties! My point is that there is a difference between legitimately spending money to become the dominant player in a market and the negligence we have witnessed over the past 3 years. A: One of the buzzwords these days, or catch phrases rather, is "Idea Economy". The notion that, as business continues to move faster and faster, ideas will become the currency of the future. Do you agree that new ideas are becoming more important to the economy? TJ: I think the question is misleading – you’re misrepresenting the issue. Ideas have always been important. I don’t think we’ve ever not had an "idea economy". Maybe we just didn’t have enough easy money to get to all of the good ideas before. Now we have almost the opposite situation. I do agree with the thesis that infrastructure costs that prevent good ideas from spreading will become less of an obstacle as technology progresses. This country was founded on a great idea…We had a lot of disagreements in the late 1700’s over the exact role of the Federal government versus the States, but in a larger sense, we were all on the same general page compared with the thinking in the rest of the world. It was a slow and bloody process, but here we are. But then, its not like we had a ton of VCs funding other ideas about how to run a government. A: And on that note, gentlemen, I want to thank each of you for your time and insights. ---------------------------------------------------------------------------------------------- Jeff Belle is Business Manager/Product Manager for EoExchange, a San Francisco enterprise search services firm. He can be contacted at jbelle72@cs.com. Sam Khalil is a Product Manager with Telcontar, a provider of location-based software and services, and his parents are happy he has finally found a use for his history degree. He can be reached at sam_khalil@yahoo.com. George Washington, Alexander Hamilton and Thomas Jefferson are dead and cannot be reached.

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