Category Archives: Nokia

Top Ten Mistakes of Startups Rising from Nokia’s Ashes

I usually tell people that most everything I learned about being an entrepreneur I learned by screwing up at my first company. Oh boy how I sucked as the first-time CEO. That’s how it usually goes. Therefore it is a great idea to do your mistakes as early as possible, learn, and then move on to build a great company.

I think the sign of a good entrepreneur is the ability to spot your mistakes, correct quickly and not repeat the mistakes.

In my role as sweat equity angel investor (yeah, more knowledge and work, less cash) and startup advisor, I have lately engaged with a large number of Nokia-based startups. I identified the top ten most common mistakes in Nokia-based startups, and decided to openly share and discuss them in a series of blog posts titled as Top Ten Mistakes in Startups Rising from Nokia’s Ashes. This is the summary post. The original introduction is here.

I wanted to share my observations as I believe that increased awareness helps to avoid certain mistakes. I, however, painfully recognize that good judgement comes from experience, but experience comes from bad judgement. So most entrepreneurs just need to do their own mistakes and learning from others’ mistakes thus has limited value.

While I have written the posts with Nokia angle, the mistakes and lessons are relevant for any startup as there is a strong connection to not applying lean startup principles.

So, below is a short summary of the posts.

1.     CEO Who Can’t Sell or Lead The Product

Startup CEO’s job is to transform a collection of raw ideas into a product that can be sold to paying customers. If he is not hands-on with the product and how it is sold – and I mean really, really hands-on – how could he drive the operations then? He can’t. Instead he becomes a helpless figurehead who runs around doing non-essential chores such as talking to press, networking with investors, or spending quality time with a beloved excel. While useful and important, these are not the core of a startup CEO’s job prior there is at the minimum a product prototype available. I have seen a number of these general management focused CEOs in Nokia-based startups. There, however, is nothing general to be managed in a startup until it has a sellable product. At the early stage, a CEO who can’t sell or lead the product becomes the worst-case free rider and cost center whose time has not yet come.

For more details, please read the blog post.

2.     The Free Rider Issue

Each co-founder with a working shareholder status is expected to contribute full time every single day while occasionally working one’s ass off day and night to get the startup off the ground. A co-founder whose skills and contribution are not relevant for a startup on a daily basis is essentially a free rider, or an advisor disguised as a working shareholder who should accordingly have only an advisor stake. Although the free rider issue is common in any startup, it is likely even more common in Nokia-based startups. Why? Nokia’s offsprings are oftentimes co-founded by a team that has been working together at Nokia. While the team’s composition and their combined skill set might have been a good fit in a product line with 100+ people, the fit is quite likely suboptimal for a startup employing five to ten people. The Nokia Bridge Program further negatively influences both the ownership structure and team composition. A free rider situation when it arises must be solved swiftly because if left unresolved it easily develops into a cancer that kills your startup.

For more details, please read the blog post.

3.     The Ownership Problem

If the founders’ pie is distributed evenly, it means in practice that no one is in charge. An equity stake for a co-founder is essentially a prepayment for expected future contributions. If we take an average Nokia-based startup with five co-founders, it is a good educated guess that each co-founder holds a flat 20% stake. So, their expected future contributions must then be equal as well? Not really! They just haven’t had either understanding or balls to talk  how to divide the founders’ pie. I strongly recommend co-founders, prior to founding a company, sit down and engage in these profound what-do-I-bring-on-the-table series of discussions. Potential free riders are spotted and a capital table that is collectively perceived as fair is nailed down. Things change over time, and especially so in a dynamic startup – and there is nothing wrong with that!  A shareholders’ agreement, especially stock vesting, helps co-founders deal with this change in a predetermined way.

For more details, please read the blog post.

4.     Culture Gone Wrong

Building a great startup starts with building a great culture. It glues unique, talented co-founders with diverse backgrounds and values into a high performance team with shared vision, common goals and winning attitude. What makes a great startup culture? It begins with the fact that you are valued based on your ongoing actual performance. This is in stark contrast how things work in any large corporation. In a startup, there are no silos and everyone does everything. A startup co-founder can have a family but when the servers are down, it is the wife’s (or husband’s) job to wait until a critical bug is fixed and the servers are up again. Low salaries, commitment, passion, sense of urgency are all key elements in a great startup culture.  It is a big challenge for any team coming from Nokia without relevant startup experience to succeed in building the right kind of culture for their first-ever startup.

For more details, please read the blog post.

5.     High Burn Rate

High burn rate in a startup means increased requirements for external funding and shortened runway to reach either profitability or critical milestones for the next funding round. I have seen catastrophic burn rates in many Nokia-based startups. I believe this problem starts with people who are used to pay a lot even for mediocre services as they have had the money in the budget, and who don’t have a clue on how to be frugal and run a lean startup. In a pre-revenue startup, salaries should be low, preferably in the range between 2000-4000€/month, with no relation whatsoever to previous salaries paid at Nokia. Other contributing factors are poor startup culture, easy money from Nokia combined with easy public funding leverage from Tekes, and the share ignorance how detrimental high salaries and premature scaling can be for a startup and its culture. High burn rate will kill Nokia-based startups in numbers.

For more details, please read the blog post.

6.     Not Being Close to The Customer

It is hard, if not impossible, to develop a world-class product in a lab far from where the lead customers and key ecosystem players are. The place to be is rarely Finland, often USA, China or an emerging market in Asia or Africa. This is an arena where Nokia-based startups could excel if the founding team has members physically located in target markets to bring instant reach and local customer development. In some Nokia cases, I have been delighted to see this local customer development element in play from day one. In way too many cases, the customer development part is handled from Finland via Skype and email, by using local agents, and once and awhile hopping on a plane to have face-to-face meetings with far away customers and partners.

For more details, please read the blog post.

7.     Minimum Viable Product

For engineers with Nokia background, it seems rather natural to build gigantic MVPs. Nokia is not known for its agile, iterative software development capabilities, but rather on the fact that whatever they were building, it always required a hundred engineers to begin with. It takes a lot of product vision to define a meaningful MVP, and not having lean customer development operations at the vicinity of lead customers and partners makes it even more difficult. I believe that avoiding excess funding, having a small nimble software core team comprising three to five people on average, and establishing a feedback loop with a few lead customers early on are keys to keep the MVP scope reasonable and focus tight.

For more details, please read the blog post.

8.     Product-Market Misfit

I have been thunderstruck that some teams with Nokia background are not laser-focused on end users and their needs. They rather have a product and channel-centric mindset where building an average product based on internal product specification and perhaps on light feedback from prospective channel partners is the way to go. With a long product development cycle this is truly amazing, as it means a team is willing to bet their future on unvalidated product specification. They don’t know if there is any real end user driven demand, and therefore a sustainable market, for the product or not. It would make a lot of sense to pay more attention to end users as they will ultimately decide which products will fly or die.

For more details, please read the blog post.

9.     The Arrogant A**hole

Most startups are broke. To get things done, entrepreneurs need to leverage their own network and the networks of their co-founders, investors and advisors. Sometimes you need to get service from previously unknown service providers at below market price or paying with equity only. People don’t move their asses and do favors just because you say so and some time ago used to have a Nokia’s badge, and certain authority that came with it. To help you out, people want to get something in return – like feel good in helping you out, or get a pole position to offer their services later on when you can pay with real money. A startup co-founder, and this applies especially to the CEO, has to know how to ask help, and how to get people do things for him while most of the time the only instant payback is his gratitude. But make no mistake, earning someone’s gratitude and trust, and thus being able to someday ask help yourself, that’s incredibly powerful..

For more details, please read the blog post.

10.     Go-To-Market Strategy

Selling an unknown product built by an unknown startup is not easy. Some Nokia-based startups do have marvelous go-to-market plans that could work, but only if the startup had both the credibility and resources of a larger, more established company. As they don’t have either, the plans will most likely fail miserably. Every startup desperately needs an entry point to its market, an entry point to close the first customer, then second, and so on. Problems with go-to-market strategies stem from not understanding customers and their needs well enough, and perhaps with Nokia history it is a little bit easier to have an attitude problem and think that distribution and scaling up are not issues – as they never were while working at Nokia. Yeah, right.

For more details, please read the blog post. Not much extra here this time though.

Always make new mistakes!

I have received a lot of interest from startups to work with them on the above described issues. After thinking a while, I concluded that perhaps a workshop is the best way to address this need. The workshop is now available and is called the Tough Love Workshop, and If interested you can read more and order it here.

And here is a condensed set of slides on the topic. You can, for instance, use slides for facilitating important yet tough discussions in your startup.

Nokia-based startups can also have unique strengths.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

P.S. I also want to voice out, before anyone brings it forward, that some of the best startups I have seen lately are Nokia-based, and thus not all Nokia-based startups share these mistakes while most do.

 

Nokia Startups Mistake #10 – Go-To-Market Strategy

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction.

Selling an unknown product built by an unknown startup is not easy. Some Nokia-based startups do have marvelous go-to-market plans that could work but only if the startup had both the credibility and resources of a larger, more established company.

As they don’t have either, the plans will most likely fail miserably. Every startup desperately needs an entry point to its market, an entry point to close the first customer, then second, and so on. Problems with go-to-market strategies stem from not understanding customers and their needs well enough, and perhaps with Nokia background it is just a little bit easier to have an attitude problem and think that distribution and scaling up are not a big issues – as they never were while working at Nokia. Yeah, right.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #9 – The Arrogant A**hole

“Don’t be an *sshole.”  

This article originally appeared on ArcticStartup.

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. This is a somewhat difficult mistake for me to write about as I haven’t personally witnessed it in my interactions with Nokia-based startups. Some angels and VCs, however, have mentioned enough times that they think quite many ex Nokians suffer from being arrogant. This behavioral trait most likely is rooted in how things were done at Nokia Corporation.

Let me first define what is understood with arrogance here.

In authoritarian leadership style a Nokia executive while still at Nokia directed his subordinates and especially external vendors to make various things happen without providing any intrinsic or monetary motivation beyond punishment in case of non-compliance. This style may work in a large corporation where an executive holds undisputed authority over his subordinates, and vendors are at the mercy of the corporation and its dictators.

When a Nokia executive who has lost his beloved badge, and the authority and recognition that came with it, continues to command external people and service providers without offering any other motivation than his lost authority – that’s what we call as arrogance.

Why arrogance can be bad?

Most startups are broke. To get things done, entrepreneurs need to leverage their own network and the networks of their co-founders, investors and advisors. Sometimes you need to get service from previously unknown service providers at below market price or paying with equity only. People don’t move their asses and do favors just because you say so but instead they want to get something in return – like feel good in helping you out, or get a pole position to offer their services later on when you can pay with real money. A startup co-founder, and this applies especially to the CEO, has to know how to ask help, and how to get people do things for him while most of the time the only instant payback is his gratitude. But make no mistake, earning someone’s gratitude and trust, and thus being able to someday ask help yourself, that’s incredibly powerful.

What then motivates people help each other?

So far we have firmly established the following two things:

  1. To get things done fast on a timely manner, and to operate at low costs in the early days, a startup needs to tap into the network of its co-founders and advisors, and once and awhile source important services while not being able to pay any significant money.
  2. Being arrogant, i.e. trying to exercise authority on people you don’t have any authority, is not going to help you win people on your side.

So, how should you then deal with people?

What are the six weapons of influence?

Robert B. Cialdini is my hero. He is the author of one of the greatest business books ever written: Influence: The Psychology of Persuasion. This book is a must read for anyone who ever needs to deal with other people, yeah – it’s like a bible is for believers. The book is fun to read and reviews many of the most important theories on and experiments in social psychology.

I have just summarized here Cialdini’s thoughts for your convenience, but to truly grasp them you should read the book.

  1. Reciprocation. We humans are unique amongst all animals as we incur debt from services and gifts from other people, and then we feel a growing urge to pay back. Likewise if we say no to someone that tried to sell us something, we become more prone to buy something from the same guy later on.
  2. Commitment and consistency. Once people have made a choice or taken a stand, they are under both internal and external pressure to behave consistently with that commitment. When you get someone to commit verbally to an action, the chances go up sharply that they’ll actually honor that commitment.
  3. Social proof. This is a very powerful shortcut that many smart and dumb people take in the times of information overload. Most investors are sheep that follow one other, and thus getting a lead investor that serves as a credible social proof will get you the rest.
  4. Liking. People love to say ‘yes’ to requests from people they know and like. And people tend to like others who appear to have similar opinions, personality traits, background, or lifestyle. More people will say ‘yes’ to you if they like you, and the more similar to them you appear to be, the more likely they are to like you.
  5. Authority. Most kids are raised with a respect for authority. Authority plays internally little role – yet it has a role – in startups which are meritocracies, and to get external people do things for you just because you say so – yeah, that’s arrogance and probably doesn’t work.
  6. Scarcity. Opportunities seem more valuable when they are less available. This, again, is a very important principle e.g. when raising funding or recruiting new people.

To summarize:

Startups should be meritocracies and thus ruling by authority doesn’t work inside or outside the company. To get outside people do favors for you, besides paying money for their services, you need to offer them incentives grounded to social psychology. Asking for help, for instance, is a very powerful way to empower people. People, in general, like to help other people when nicely asked, as long as the effort required is decent, and you pay back with your gratitude.

And, read the Cialdini’s book – you will have lots of fun, and the probability that you will be able to raise funding from investors or buy services below market rate increases.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #8 – Product-Market Misfit

“Imaginary products based on pure guesswork won’t typically sell well.” 

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction.This post builds upon previous posts about being far from your customers and the minimum viable product.

The single point I want to highlight in this post is the fact that a channel partner is not your customer.  Therefore you should not pay too much attention to their requirements. This is a common mistake for all entrepreneurs but perhaps even more common to Nokia-based startups as both Nokia and its network part are known for designing their products to mobile operator requirements. While this approach back in time was a competitive advantage for Nokia, the same approach won’t work for a startup.

Your channel is not your customer

I have been thunderstruck that some Nokia-based startups are not laser-focused on end users and their needs. They rather have a technology-driven and channel-centric mindset where building a product starts with internal product specification shaped lightly by feedback from prospective channel partners. Unlike a fragile startup, mobile operators with fear of Google and Apple, have all the time in the world to specify imaginary products that would in their dreams help them to stay relevant and compete against Google/Apple juggernauts. Most of these imaginary products can’t be pushed to end users unless they really want them.

Focusing on an imaginary product without true end user pull means typically a bitter death for a startup. Some products, e.g. many telecom products, have relatively long product development cycle, which further increases the overall risk. And this because you burn all the cash and when the real end users reject your product, then the channel rejects your product too, and at the end of the day there simply is no more money left for a pivot.

If you build a product to your channel, you don’t know if there is any real end user driven demand, and therefore a sustainable market for your product or not. You are practically betting your startup’s future on guesswork by a middle man. How stupid is that?

It makes a lot of sense to pay most attention to end users as they will ultimately decide which products fly or die. This is not to say that channels wouldn’t be important – yes, they are – but do design your product with real end users’ needs in mind.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #7 – Minimum Viable Product

“A minimum viable product that is anything but minimum.” 

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. This post is directly related to previous posts about the culture, the high burn rate, and being close to the customer.

For engineers with Nokia background, it seems customary to build gigantic minimum viable products (“MVP”). Nokia is not known for its agile software development practices. On the contrary, according to many Nokia alumni, it always took a hundred engineers to build anything at Nokia – no matter how small.

It takes a lot of product vision to define a meaningful MVP, and not being close to the customer makes it even more difficult.

How to keep the product minimum?

  1. Avoid excess funding,
  2. Slideware, paper prototypes, UI sketches are an excellent way to test market.
  3. Start with a small nimble software team comprising one to five people. If you need a bigger team, it is unlikely that you are building the minimum.
  4. Use agile and iterative software development practices.
  5. Get out of the room and establish a feedback loop with a few lead customers early on.

It is much easier to work with the problem definition and play with various paper prototypes etc. longer when there is only you and perhaps your co-founder. The whole situation changes mentally when you have even a small software team in place, and guess what they start to do?

Yeah, right – they start to code while it in many cases would be much wiser to keep working with the problem definition and cheap paper prototypes.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #6 – Not Being Close to The Customer

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction.

“It is hard to develop a world-class product in a lab far away from lead customers and key ecosystem players.”

Your success begins from understanding who your customers are, and what are their true needs. To be clear on this, your success does not begin from your lab.

In many cases, your lead customers, the ecosystem and its dominant players are not in your home country but on the other side of the ocean. The long distance makes it a challenge to understand the evolving customer requirements, intricate details of the ecosystem and its power structure, and what your competitors are up to.

It is very important to be visionary but it is downright stupid not to try your best to understand what the customer needs.

Why all locations are not equal?

In Finland, with the near end of existence of Nokia and its ecosystem, we are not particularly an epicenter of anything beyond the mobile gaming. The winners are typically born close to dominant ecosystems where all the action and latest knowledge is. Or close to the first few leading customers who are first to take into use a novel or just different approach to their problems due to their innovativeness, or unique external environment circumstances at the time.

Interesting geographies from ecosystem, market size and new tech adoptation point of view include naturally USA, China, and emerging markets in South East Asia and Africa.

How to do customer development from distance?

In some Nokia cases, I have been delighted to see this local customer development element in play from day one. In other cases, the customer development part is handled from Finland via Skype and email, by using a network of local agents, and once and awhile hopping on a plane to have face-to-face meetings with far away customers and business partners.

Outsourced business development or too lean business development from distance is not the way to go if and when your early success depends on closing the first customer out of a handful few whose purchase window is open now. If you want to close deals and accelerate to the product-market fit (or pivot), you better be close to your customers and get used to spending a lot of quality time in planes and hotels away from your family. Yes – time away from your family, until you have some traction and you can start doing things differently.

The Nokia alumni is a vast network that spans the whole world. People who you either know in person or at the minimum share the Nokia experience with. This is a great asset – use it!

To be close to your customers at minimal cost, I suggest the following approach:

  1. Recruit a local business developer, perhaps a Nokia alumni, as part of your founding team or early employee with a strong vested interest to help you understand your customers.
  2. Use external agents only to open doors, never rely on them do drive your sales and customer development.
  3. Don’t use any time drafting lengthy distribution agreements until you have a product/market fit established. And even then rather work with your agents and business partners, close the first joint deal, and formalize the relationship only then.

As the final remark: be lean but, more importantly, understand what the customer needs. 

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #5 – High Burn Rate

“High burn rate will kill Nokia-based startups in numbers.” says the Tough Love Angel. 

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. I suggest you also read my previous post about the culture as the poor culture is the root cause for high burn rate, but it is the high burn rate that eats your cash and kills you, not the culture itself.

High burn rate in a startup equals increased requirements for external funding and shortened runway to reach either profitability or critical milestones for the next funding round. I have seen catastrophic burn rates in many Nokia-based startups.

This problem starts with people who are used to pay a lot even for mediocre services as they have had the money in the budget.  And people who also don’t have much clue on how to be frugal and run a lean startup. Other contributing factors are “easy” money from Nokia combined with easy public funding leverage from Tekes, and the share ignorance how detrimental high salaries and premature scaling can be for a startup and its culture.

Just to make sure everyone understands it. The key factors that cause high burn rate:

  1. Premature scaling. A seed stage startup is three to five persons, NOT 10 or 20. Hold your horses and don’t scale up until you have established the product/market fit.
  2. High salaries. In a pre-revenue startup, salaries should be low, preferably in the range between 2000-4000€/month for co-founders, with no relation whatsoever to previous salaries paid at Nokia.

My advice this time is dead simple.

Be lean, my friend!

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #4 – Culture Gone Wrong

“When the servers are down, it is the wife’s (or husband’s) job to wait.” says the Tough Love Angel. 

This article originally appeared on ArcticStartup.

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. It is a big challenge for anyone with a long work experience in a large corporation, including Nokia, to succeed in building the right kind of culture for their first startup. It is a huge challenge even if you have a lot of startup experience.

In many Nokia-based startups, the key cultural problems I have seen are the following:

  • A way too many people on the payroll
  • Sky high salaries in case they have been able to attract funding
  • Consensus-driven culture and lack of sense of urgency

And finally this 08:00 – 16:00 work mentality that just won’t work in any ambitious product startup. This rotten work mentality is a wider Finnish issue beyond Nokia-based startups, with its roots in our welfare state where life is so much more than work. It shows here, and it sucks.

Why culture eats strategy for breakfast?

Building startups is tough. There will be an unthinkable amount of challenges ahead, and to survive these challenges and keep the team together in rough waters the entrepreneur and his founding team needs to build and maintain a strong startup culture.

I believe a strong culture is a leadership tool with two main purposes:

  1. It makes people more productive while executing strategy towards a shared vision.
  2. It keeps the team together in times of change when vision falls apart (= pivot), strategies fail and the company is in the brink of bankruptcy.

Visions change, strategies alter but the glue that keeps everything together is – the culture combined with strong leadership. A great culture must be built upfront before facing a crisis. Crisis, however, is the only real acid test to see whether you have a strong culture or not. Complicated!

A culture is part of the bigger whole

A big vision of something worthwhile – something that is going to change the world – serves as the anchor point. A great vision ignites people and gives them a sense of direction in the ocean of uncertainty.

It is the CEO’s job to communicate a vision that both founders and early employees find as understandable and worthwhile pursuing. In an early-stage startup, a vision typically centers on the core problem to be solved and on the more detailed vision how to solve it, i.e. product vision. There has to be adequate mutual respect between the leader and the troops, for the leader to be able to lead his troops, and for the troops willing to follow their leader. Agreeing on the vision is not enough.

Among the troops there must likewise be an adequate compatibility and mutual respect too. Folks must like each other to the extent they appreciate each others’ work and working together is at least efficient and smooth if not always super fun. The troops, however, don’t need to be best friends. Culture is what takes a group of individuals with diverse backgrounds and values, and melds them into something greater.  Into a high performance team with common goals and winning attitude.

There are super talented individuals who can’t efficiently work together no matter what culture, but you can take that to the bank that without a great culture, there is no high performance team.

What are the key ingredients of a great startup culture?

  • Hard work. Everybody must work really hard. A co-founder’s typical continuous weekly load should be at 60 hours. Work less and achieve more is nonsense most of the time.
  • First priority. It is very important to create and maintain a sense of urgency in a startup. Startup must be the first priority at all times. If a server is down, it is more important at that time than a nagging (or crying) wife.
  • Wearing multiple hats. A team of five (or less) must do the job that in a large corporation would be assigned to a small army of, say, 50 people. Be flexible. If no one knows how to build a great UX, it is then everyone’s vested interest to contribute and come up with a solution. No silos!
  • Being frugal. Watch every penny, and create a frugal attitude towards everything. 2000-3500€/month is the right salary range in a small, non-profitable, underfunded startup.
  • Having fun. Very important! You are likely going to fail anyway, so try at least to enjoy the journey and have fun.
  • Openness and transparency. Share almost everything. Don’t create any information silos. It is the right of all co-founders and early employees know precisely what is going on in their company. Being transparent and open creates trust and fosters creativity.

How to build a great startup culture?

The early culture decisions set the trajectory and course of the company. The foundation for a startup’s culture is built in the early days – during the first few months to be precise. Here is a check list how to do it:

  • Cultures are not put together by an individual.
  • While a founder or a founding team can have a dominant voice in establishing the culture, it’s the founding employees who cement it.
  • Each person a company brings on board should not only be talented and work hard but also fit smoothly into the company’s core values and be compatible with the rest.
  • The CEO must interview every new hire up until a certain threshold.
  • Define what your company’s culture is, and what do you expect from each employee and co-founder until hiring, and make sure they understand and agree on expectations. Be specific.
  • If someone, no matter how important employee or co-founder, continuously violates your culture and thus sets a bad example – fire him immediately.

Did I miss something you believe to be an integral part of great startup culture?

A collection of related links can be found from Kippt here. Watch especially a video by Mårten Mickos, where he brilliantly explains why he thinks entrepreneurialism is a belief system. If you know a relevant link that you would like to share with others,  please feel free to send it via email to mika (at) marjalaakso (dot) com.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #3 – The GODDAMN Pie

“It never makes sense to give anyone equity without vesting.” says the Tough Love Angel. 

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. My previous post discussed the free rider issue partly amplified by the Nokia Bridge program itself. The ownership problem results from the combination of inexperienced CEO, more than one founder, and the Nokia Bridge incentives.

What is the ownership problem?

The ownership structure illustrated in the cap table of a company is about fairness and control.

  • Fairness. The sense of fairness is a crucial factor to startup’s culture. The cap table should reflect the relative contributions and risk taken of each shareholder over time.
  • Control. Startups are not a democracy. There are many tough choices in a startup. It will increase the probability of success if there is a single party that can quickly call the shots when needed.

A cap table that shows a fair allocation of equity with someone clearly in charge is a good one. If the equity is not allocated fairly – you have a problem, if no one is in charge you have a different problem. Who then calls the shots in difficult situations? Having said this, perceived fairness is much more important than having someone in charge.

How to divide the founders’ pie?

It is always an interesting and mind-boggling exercise. First a few guiding principles summarized from Fred Wilson’s post on the topic:

  • Fairness, and the perception of fairness, is much more valuable than owning a large stake.
  • It never makes sense to give anyone equity without vesting.
  • Ideas are pretty much worthless.
  • Only people working full time count as founders.

I would like to add one more:

  • A co-founder’s opportunity cost or how much money he needs to feed his family are his problems.

If each co-founder invested an equal amount of time, this would lead to a social democratic split of the pie, each co-founder having a 25% share of the pie, right? The social democratic pie makes only sense and is actually fair if each co-founder delivers exactly the same value to the company – which is practically a fairy tale. So, we are looking at this pie thing through the company’s eyes, not from a co-founder’s perspective. This is the key thing to understand.

It is typically the CEO’s job to get the co-founders around the same table, and then have more or less intellectual discussion about who contributes and what (Frank Demmler explains here in more detail the philosophy behind.) To get this discussion going, here’s a rough idea how it works:

  1. You first define a few most relevant factors (attributes) that create value to your company.
  2. Then you add weight to these factors to indicate their relative importance in value creation.
  3. And finally you specify the relative contributions of each co-founder against these factors.

After this exercise, you read the resulting ownership figure from the bottom line to get the ball park.

Let me explain the process through two different simplified yet practical examples.

Case A assumptions: “A high performance team built around the product guy”

  • A CEO with a strong capability to sell and lead the product, credible in the eyes of other co-founders and investors, knows how to raise funding, can lead the team
  • A credible CTO who can code hands-on, and can recruit top-notch talent form US and Finland
  • A world-class UX designer
  • A bunch of top-notch coders
  • A bunch of top-notch business developers
Attributes Weight Parties / Relative Contributions
 CEO  CTO UX Others
Idea & IPR 5 % 60 % 30 % 10 % 0 %
Product Contribution 35 % 50 % 10 % 30 % 10 %
Domain Expertise 10 % 80 % 20 % 0 % 0 %
Time 20 % 25 % 25 % 25 % 25 %
Responsibilities & Risk 30 % 50 % 30 % 15 % 5 %
Idea & IPR 3 % 2 % 1 % 0 %
Product Contribution 18 % 4 % 11 % 4 %
Domain Expertise 8 % 2 % 0 % 0 %
Time 5 % 5 % 5 % 5 %
Responsibilities & Risk 15 % 9 % 5 % 2 %
Targeted Ownerships   48,50 % 21,00 % 20,50 % 10,00 %

The CEO is clearly in charge here, though doesn’t own a controlling stake. The CEO and the CTO jointly own close to 70%.

Case B assumptions: “A less high performance team with free riders”

  • A CEO with no startup experience, may have been even General Manager at Nokia, no clue how to design a (killer) product, can lead a large division, nice guy
  • A CTO who doesn’t code, can define great architectures and evaluate top-notch tech guys, may, however, not be able to recruit killer hackers
  • A business development person who develops business
  • An excel guy, with either a degree in law or financial administration, doesn’t sell or contribute to the product, works full time but there are no daily tasks to match his skills
Attributes Weight Parties / Relative Contributions
 CEO  CTO BizDev Excel guy
Idea & IPR 5 % 15 % 70 % 15 % 0 %
Product Contribution 30 % 40 % 60 % 10 % 0 %
Domain Expertise 10 % 70 % 10 % 10 % 10 %
Time 30 % 25 % 25 % 25 % 25 %
Responsibilities & Risk 25 % 40 % 35 % 20 % 5 %
Idea & IPR 1 % 4 % 1 % 0 %
Product Contribution 12 % 18 % 3 % 0 %
Domain Expertise 7 % 1 % 1 % 1 %
Time 8 % 8 % 8 % 8 %
Responsibilities & Risk 10 % 9 % 5 % 1 %
Targeted Ownerships   37,25 % 38,75 % 17,25 % 9,75 %

In this case, the CTO is the product guy, and the excel guy is an adviser disguised into a founder, and gets most of his stake through contributing time while his real contribution to the company remains unclear.

Remarks & Recommendations

Here are a few remarks:

  • The number of co-founders is the biggest driver of how many shares you get in the beginning.
  • Each case is different and have to be worked in detail.
  • You can start with yourself or take at most one or two co-founders, define the business you are in, and recruit the rest of the gang with much higher valuation later on (here is a related article from Venture Hacks).
  • Work out first how to split the equity among the co-founders, when done with that you can simulate what happens to your equity share through dilution because of new equity issued for investors and future employees.

I would like to recommend the following:

  • Start with less co-founders. Don’t take additional co-founders if you really don’t need them.
  • Do the founders’ pie discussion openly before incorporating with your co-founders.
  • Always sign a Shareholders’ Agreement with stock vesting before incorporation. If you don’t do this, you are an idiot.

A collection of related links can be found from Kippt here. if you know a relevant link that you would like to share with others,  please feel free to send it via email to mika (at) marjalaakso (dot) com.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.

Nokia Startups Mistake #2 – The Free Rider Issue

fairness = the quality of treating people equally or in a way that is right or reasonable

This article originally appeared on ArcticStartup.

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. My previous post discussed a special case where the CEO is a free rider, you can read it from here. This post is a lengthy one, hopefully not too dull, and discusses the more generic free rider issue that goes beyond the CEO.  So please take a seat, get yourself a warm cup of coffee, and enjoy the reading.

This post is divided into three parts. First, I will describe the Nokia specific setting, then I will talk why the free rider issue is a big deal in general, and finally I will share a few tips how to deal with the free rider situation, and how to fix a broken bridge.

What is Nokia Bridge program about?

The Nokia Bridge Program, which was set up by Nokia in early 2011, aims to help Nokia employees who have lost their jobs as a result of the company’s strategy change. The program goes significantly beyond what the employment laws require in any of the countries in which Nokia operates, but was widely regarded internally as “the right thing to do”. As part of the program, Nokia supports entrepreneurship and offers seed funding for newly established companies.

I think the Nokia Bridge program itself is a truly remarkable and honorable initiative of corporate social responsibility on Nokia’s behalf. Good stuff!

The now famous Jolla amongst many others has received seed funding from the Nokia Bridge, and according to the press they have been very happy about the program.

The horizontal axis describes the ambition level of a startup, while the vertical axis identifies whether a startup was born out of necessity or not.

I have tried to illustrate in the picture above how new companies coming out of the bridge differ from each other. On the left hand side, we have lifestyle businesses from restaurants to flower shops – in essence people employing themselves through entrepreneurship. On the right hand side we have startups that are aiming to be more scalable. On the top right quadrant we have the most promising new ventures, highly motivated top-notch teams (I hope) that have the right attitude with raw product ideas (idea 1,2,3,4 …), or more mature product ideas stemming from the know-how of technologies, markets etc. that the team has acquired while working for Nokia. On the bottom right quadrant, we have perhaps the largest number of new ventures with the right attitude (or not) and perseverance to build a scalable business but still searching and iterating the core problem to be solved, and their hunger more based on necessity entrepreneurship.

I happen to think a good marriage may result from a conventional dating as well as from being accidentally drunk in a bar and ending up having a one night stand with a stranger. This, analogically, means that I also choose to believe that unless otherwise proven, great things – including lifestyle and scalable startups – can be built even the initial trigger would have been the non-conventional necessity. If I am right, this is good news.

The free rider issue is valid for all companies. It, however, is much less vital factor for lifestyle businesses. Why is this? Well, if there is a free rider issue in a lifestyle business, it doesn’t prevent their growth to the same extent it does in scalable startups. And issues with co-founders in lifestyle businesses are perhaps a bit easier to solve with small money as future expectations and valuations are much, much lower.

For a scalable startup, a free rider on board entails stormy weather. Most Nokia-based startups I have discussed with are overall very satisfied to the Nokia Bridge program (and they should be!) but also think that the existing Nokia Bridge program structure and its terms are a bit foolish, as they on their part practically bias and corrupt the ownership structure and support equally distributed ownership, which may not reflect well expected contributions per co-founder.

I share this view.

What’s wrong with the bridge then?

After pondering this question for a while, I came up with the following three factors – one related to bridge terms, two to the setting itself – that are likely to increase the probability of free riders in Nokia-based startups:

  1. The Nokia Bridge seed funding structure and terms. The Nokia Bridge seed funding key deal terms are as follows: i) 25,000€ per employee, max. 100,000€ / new company and ii) to be eligible, a minimum equity stake per co-founder is set at 25%, that needs to be held at the minimum one year.These terms alone create a distinctive monetary incentive to form teams of four to maximize the available seed funding. I think that having four co-founders is too much, and increases the free rider risk.  No one owns a majority equity ownership to be in charge, which makes it more difficult to solve the free rider issue should it emerge.  The question of how many founders is optimal, is a controversial topic. Mark Suster – a famous VC, entrepreneur, and blogger – has two related blog posts on this topic here and here that I suggest you to read.
  2. Democratic corporate culture that embraces working in teams and political correctness (a guess!). What if you realize just prior to incorporation that your colleague may indeed be a free rider in the upcoming startup context? Do you have balls to voice that out in a constructive manner while endangering your important friendship? Many first time entrepreneurs who are used to not to piss of their bosses and conform, yes – they remain silent and accept. (The feedback I received from my sources within Nokia on my first post was mixed. Some had liked it a lot while others had thought it to be politically incorrect.) 🙂
  3. Opportunistic vs. necessity entrepreneurship. Many of the Nokia startups rising are born out of necessity. This may have some impact on the free rider issue, as when you are building a scalable startup you naturally structure it for growth and also receive higher quality advice for free, while a startup for necessity is exactly that, you create it to pay the bills and having free riders onboard might not perhaps be your first priority.

Why a free rider situation is such a big deal?

Let’s first define what is a free rider.

A free rider is someone who enjoys the benefits of an activity without paying for it. In startups, the free rider issue deals with the question of how to prevent free riding, and should the free rider problem arise how to limit the negative consequences for the company. The free rider issue is very common in all startups and it can be born from a number of reasons along the journey, and – most importantly – if left unresolved, it can develop into a cancer that kills your company.

Each co-founder with a working shareholder status is expected to leverage their competence and put in hours day in, day out for the success of the company. A co-founder whose skills and contribution are not relevant for a startup on a daily basis is essentially a free rider. Non-working shareholders, excluding investors, i.e. advisors and board members are also free riders if they don’t contribute commensurate with their compensation and set expectations.

A collective sense of fairness is a key factor in a great startup culture. A free rider in a house is essentially a continuous attack against sense of fairness, and thus against the great culture. Fairness is important everywhere but it is far more important in a small startup where co-founders are paid low salaries, and still expected to move mountains. It is also good to remember that fairness is not an exact science but rather a highly perceptional and emotional matter influenced by one’s personal preferences, prior experiences and values.

You can have free riders in the very beginning, they may emerge especially when you pivot and the required competences change, or a co-founder may face a sudden situation in his private life that limits his contribution. In the beginning, for instance, you may have a specialist onboard as a co-founder whose services are needed only periodically or half-time. If that is the case, don’t be mistaken, what you have is indeed an advisor disguised as a working shareholder, who should accordingly have an advisor equity stake, not a stake reserved for a working shareholder, and thus definitely not a quarter of a new company.

In addition, I have occasionally come across to free riders that I call as option holders. In this particular situation, there is an agreement amongst co-founders that others start immediately at low salary while the remaining co-founders join as soon as there is “an adequate funding” in place to pay reasonable salaries (which often are not reasonable, by the way). This, frankly, is absolute madness, as the working co-founders take all the risk while the option holders look from the balcony and wait and see what happens. So, free riders emerge at all times and take many forms. Beware!

I have summarized the key ideas of the free rider issue into three main points below:

  1. A free rider situation occurs when there is not strong enough fit between what a startup needs now and what a co-founder contributes – on a daily basis
  2. A startup is a dynamic beast, as it should be. Things change over time. It is life. It is the norm. These changes occasionally give birth to a free rider situation.
  3. A free rider situation when it arises must be solved swiftly. Why? Because it influences the all important culture, and a scalable startup just can’t afford any extra fat.

How to deal with a free rider issue?

A free rider issue is a way easier to prevent than fix. Here is my check list:

  1. I strongly recommend co-founders, prior to founding a company, sit down and engage in these profound what-do-I-bring-on-the-table series of discussions. Potential free riders are spotted and a capital table that is collectively perceived as fair is nailed down
  2. Things change over time, and especially so in a dynamic startup – and there is nothing wrong with that!
  3. A shareholders’ agreement, especially the stock vesting schedule, helps co-founders deal with this change in a predetermined way.

“A free rider in a house is essentially a continuous attack against sense of fairness, and thus against the great culture. A free rider can kill your company.” says the Tough Love Angel. 

If you do have a free rider issue, and the shareholders’ agreement alone doesn’t help you to solve it, what then? First you need to asses the depth of the issue, i.e. do the free rider own 2% of your company or, say, 40%? Sometimes it is just okay to let the free rider go, and let him keep the equity he may not entirely deserve, as dealing with a free rider is an energy drainer. The typical tool box how to get rid of a free rider and not let him walk a way with an unearned compensation is as follows:

  • First trying to be really nice and explaining why he can’t continue anymore in the company (this usually works only in the very early phase when the other co-founders still can easily set up a new company with no IPR etc. problems).
  • Applying increasing amount of social pressure (this is also hard for many, as the free rider after all might be a really nice guy or even a close personal friend, not just producing anything valuable for the company).
  • Playing cat and mouse; offering nothing while the free rider wants everything, and then ending up something in the middle, but preferably closer to nothing.
  • Assigning non-meaningful tasks for the free rider and excluding him out of everything that has any significance for the company.
  • Being a cold asshole.

As you can see, you really don’t want to go there. No one wants be an asshole. Likewise no one can’t stand being a subject to this kind of treatment for long either. There will be a solution but it can take some time, and this process itself can easily kill any company too. This is the CEO’s job. And while giving this treatment to a free rider, the CEO’s focus is only in that – he becomes quite useless too. So, it definitively is an excellent idea to craft and sign a shareholders’ agreement that helps you all stay sane and deal with these issues, as they arise, in a more humane and more predetermined way.

The VCs and angels play an important role in solving free rider situations, as they increase the social pressure by not investing unless the situation is solved first.

And finally a few ideas on how the fix the broken Nokia bridge.

How to fix a broken bridge?

Idea and contribution first, funding second. Please do set the target equity shares based on what is your best assessment on what each co-founder brings to the company in the long-term.That’s what matters. Additional 60-70,000 euros more capital is extremely lousy reason to screw your capital table – definitely not worth it.

I suggest you would craft a specifically tailored shareholders’ agreement (shortly just “SHA”) to work around the inherent flaws in the Nokia Bridge program, with the following key elements:

  • Figure out who brings and what over the next four years; and divide the founders’ pie accordingly (contribution-based ownership structure).
  • Start with the capital table (e.g. 4 x 25%) that optimizes for the bridge funding (nokia-brige-driven ownership).
  • After 12 months has elapsed, enjoy the automatic switch from the the nokia-bridge-driven to the contribution-based ownership structure.
  • Four year vesting for all co-founders with one year cliff; a buy back option to buy out and pay back the departing co-founder’s Nokia Bridge money on a pro rata basis

I think it would make a lot of sense to have this kind of SHA available for everyone interested. If any of the Nokia Bridge teams thinks this would make sense, please do express your interest by sending an email to mika (at) marjalaakso (dot) com with your name, your company’s name, and contact information. I have arranged a deal with a really good lawyer in Finland, that in case if at least ten teams think this makes sense, he is willing to prepare a standard Fix-the-Nokia-Bridge-SHA at around 500€ / team (I am not getting any money here but just thought this would be a practical, while politically incorrect, way to solve this problem). If there is a strong interest towards this, the best would be to pay once,and get the basic template free for everyone.

I would like to conclude by saying that overall the Nokia Bridge program is an admirable thing and shows great corporate social responsibility on Nokia’s behalf by encouraging and offering a safer path to entrepreneurship. So, it is a great and positive thing, and the team behind the Bridge is great too. It is just almost an impossible task to design a combined seed funding and employment program with reasonable administration costs that would simultaneously align the interests of lifestyle and scalable startups, and social democratic fairness – and this is where the Bridge also fails.

Any scalable startup, however, must design their ownership structure solely based on co-founders’ contribution expectations. A CEO with startup experience understands this, but this may come as a big surprise for the inexprienced one.

Please do not screw your ownership structure because of the Nokia bridge. It is quite okay to start a company just by yourself, or with one partner – available funding terms should not drive really any important decisions like the number of co-founders, and how to divide the founders’ pie. That’s it.

And what comes to free riders, they are everywhere, but nobody just talks about them as it in many cases is too personal, too painful, too shameful – which is why I think it is a super important topic to talk about.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

If you would like to get notified of a new post, please follow me on Twitter, and subscribe to the blog and its Facebook page.