February 20, 1998

BUILDING A BANKABLE MANAGEMENT TEAM, PT. 1

Presented by the MIT Enterprise Forum of New York City

Edited by Dennis Berman

In this latest installment of the MIT Enterprise Forum of New York City, Inc., speakers focused on "Building a Bankable Management Team." BW Enterprise is pleased to provide excerpts from the meeting.

For entrepreneurs of emerging and high-technology companies and the investors who fund them, building of a solid management team is critical to the firm's growth and success. What skills and traits should founders look for in building their team?

Do potential investors look for the same qualities or do they have other requirements?

From start-up to Initial public offering, what are the different management skills and talents required at each stage of the company's development? Where do you find the optimal candidates for your management team: do you keep the search in-house or do you retain an executive search firm? How do you attract, motivate, and retain vital management personnel when you're short on funds? Do you pay a lucrative salary anyway, or try to load on incentives that tie their fortunes to the company's?

This panel features comments of four different entrepreneurs; Stephen B. Brotman, Chairman and former CEO of AdOne Classified Network; Laura Ianuly of DoubleClick, a Web advertising network; Glenn Myers, Chairman/CEO of Rare Medium, an interactive ad agency; and Thomas S. Nieman, Partner, Ramsey Beirne Associates, an executive search consultant whose firm has recruited CEOs or COOS for Netscape, Microsoft, Xerox, Teligent, and PointCast, among others.

Moderator: Beth Polish, Managing Director, New Media, KPMG Peat Marwick LLP

BETH POLISH: Welcome to Building a Bankable Management Team. This is part of the Business Builders series, which focuses on helping businesses grow, whether it be in putting together marketing plans, finding investors, or building a management team.

What we have done here is try and create somewhat of a life cycle of a company. We have Steve Brotman, who was the visionary who had the idea for his company, AdOne. And that kind of represents the first stage, where it was an idea for a company and he needed to build a product and get it financed.

Then you go to another stage, where it is going from an entrepreneurial company to a professionally run company, and the CEO might decide they're not the most appropriate person or not interested in building a professionally run company. And they might retain somebody like Tom Nieman from Ramsey Beirne to find a CEO to run the professionally run company. And at the end of that process, Tom hopefully would find a Glenn Myers to come on board as the CEO, someone who has got experience in building and selling a company.

And as part of putting this together, taking the company to the next stage and building out the infrastructure and the team of people that are going to really grow the company, Glenn might bring on somebody like Laura, who has been brought on by DoubleClick. Correct me if I'm wrong, Laura, but you've hired a lot of people in the last quarter -- 90 people. So, it's somebody who's in-house taking over the human resource function to make it a professionally run company.

Each person is going to introduce themselves, talk about their experiences in that stage of the company's life cycle, and at the end of their piece, we will take questions from the audience... Feel free to ask what you want to ask. And without further ado, Steve.

STEVE BROTMAN: Great. Thanks. My name is Steve Brotman. I am the founder and chairman of AdOne Classified Network. To give you a very brief background about AdOne, it was started in early 1995 with the goal to become the largest classified network of its kind online. The main strategy was to partner with the most powerful brand names in their local arena in that industry. That's the daily and weekly newspapers. And since early 1995 until I stepped down as CEO in August of 1997, AdOne grew from zero to 35 employees with seven figures in revenues and pretty bright prospects for the future. I'm going to get into that in a bit, but the main point here is that what I want to get to is really about what AdOne did to find and recruit management.

So I initially had the idea for AdOne. We built the product, which was an ad-serving product as well as a legacy-serving product. I want to just run through my hires very quickly. My first hire, actually, was a vice-president of sales and marketing. He was 25 years old. I paid him $2,000 per month. He came out of the New York Press. He was an ad sales associate with great dynamic, speaking ability. I actually knew him when I was in high school... He actually ran the sales and marketing organization for about a year and a half. And Roddy did a phenomenal job at doing what he was doing.

At one point, it got to where he actually did hire a sales team. And we did get up to, I think, about 100 newspapers under his leadership. At a certain point, however, it was clear that he was well in over his head. And we had to bring in a professional VP of sales. And this VP of sales came out of the audiotext business that also services the newspaper industry. And, I guess my point was that we had to deal with the implications this meant for the initial VP of sales and marketing. A 25-year-old kid, 26 1/2, 27, and we basically had to bring him down a notch.

You have to prepare your startup or your organization to expand in terms of management. I think one of the key things that I imparted to my staff and my management team was that your goal is to grow the organization and to do whatever that takes. In a lot of ways some people would consider that a demotion. But in reality, Roddy's stake in the company, was 5% or 10% of the company at that point -- and he probably has more equity than the seasoned VP of sales that we have now. So in a way, he's helping hire someone else who is going to make his wealth even greater than it ordinarily is and also bring in a mentor who can help him get to the next level. But that is a touchy process and one that Tom deals with probably quite often.

My next recruit was a chief financial officer -- and very early on -- it was about nine months into AdOne's life. We had raised about $200,000, which is not a lot of money. But when you are paying people $2,000 a month, it goes a long way. And he demanded $4,000 a month, which I thought was outrageous.

There are two philosophies that I have. There are two ways to actually fail as a company. One is running out of money, and the second is being greedy with your equity. And if a startup can focus on those two things, one of the ways to make sure that you don't hit either No. 1 or No. 2 is to execute well in recruiting management. And we were very fortunate to bring [our CFO] on, and he is still the CFO.

In that capacity, we raised over $7 million in venture capital from Lawrence, Smith and Horey and Venrock as well as many, many friends and family and several angels. And it was a hell of a bet on a relatively inexperienced person. But that's what you have to do early on in a company. You're taking bets on people. It means that you don't necessarily have professional service firms -- you don't have professional HR people to make those judgment calls. So, it's incredibly critical at that stage.

The next hires that we made were mainly lower-level people. Eventually we got to the point that we were able to hire on a VP of sales and a VP of marketing. My VP of sales came out of Sun [Microsystems]. He spent five years at Sun and five years at [payroll processor] ADP. And for those of you who know ADP, it is quite a sales organization. And he has done a phenomenal job leveraging up our company. We were very fortunate: Rob came through Brian Horey, one of our venture capitalists, whose resume skidded across his desk as they tend to do from time to time.

You can't always count on luck, but we were very fortunate, also, to have brought on an HR consultant that we paid for two days a week. She spent 25 years in the industry with Times Mirror in the HR capacity. And we were very fortunate to have her on. She is very expensive. But the most expensive thing is not bringing on the right management team.

One of the things I learned very early on was that if you can listen to people who know a lot more than you do and really take their advice to heart, as an entrepreneur, or in any situation, but particularly in a startup, it's a very good skill to have. And we were very fortunate to bring her on to help sort through all the resumes that we looked at. And it was pretty cost-effective. We created process, we created a list of questions that were very critical. We really did a lot of the things that a professional headhunting firm would do but at perhaps a more cost-effective basis, especially considering that we might have had a couple of hundred grand in the bank at that time, maybe less. And, it's key -- because before you can even bring on a professional headhunting team, you need to have a base. You need to have some type of concern. Most important, you need to have some capital so those managers feel comfortable getting into a new environment and in a new situation that has a lot of risks.

I also brought on a VP of marketing from Dow Jones Interactive. And she also had experience at First Call. And one of the key things at least that I found critical in recruiting in the New York area was to try and find people who don't quite fit the corporate mold -- that are in the corporate world but might have had some experience early on in their career with a smaller concern, a more dynamic company, information-based company. And if you can see both of those, in addition to all the skill sets that they require to fill those roles, it is a very distinct environment. It is not for everyone -- getting involved in the types of businesses that our moderator and myself have gotten involved in, as well as some of the other people on the panel here. It takes a very special person.

I want to add, all this helps to get to the point where you can raise money in the venture sense. But then there are other people who are involved. There is a board of advisers that is absolutely critical to the whole process. If you have a very inexperienced management team, one of the most important things a startup company can do is create a board of advisers that can help them make some of those judgment calls that are so critical in terms of managing the day-to-day. Not be there all the time, but be a phone call away. And say, hey, "I have got this problem, I have got this employee issue, I have got this recruiting issue; I have got this deal on the table." And that is in times when you have not a lot of management depth, but you have a whole lot of very aggressive young managers, an advisory board is absolutely critical. And AdOne still to this date has an advisory board. And one of the key things in addition to advising the current management team is helping bring aboard more managers

Lastly, I want to get this on to the next segment of our discussion here, is that AdOne hit a point where we were growing; we had a semblance of a management team; there were some holes in the management team; we were starting to pick up some significant revenue; we had already done our venture round; and what we needed to do in the next round was a corporate and strategic round, which we anticipate to complete in the next quarter.

BETH POLISH: I just want you to talk about yourself -- why were you appropriate, considering your background, and how you came to start AdOne, and what qualities did you have that were appropriate to starting the business and building that initial core that got you this money? And then, what were you looking for in somebody else if you didn't seem appropriate for you, in getting to the next stage and bringing on David?

STEVE BROTMAN: I'm 29 years old. I went to Duke undergrad And I came out of Duke as an Andersen consultant. I lasted about eight months. As you can imagine, it's definitely a hard-core, blue-blooded type of firm and -- which I highly respect, by the way. They make a lot of money. I value that experience very much because I realized that, guess what, I'm not a corporate guy. And I had a different perspective on that work lifestyle. After I sort of flunked out of Andersen Consulting, I went on to law and business school and had a good amount of experience working with a number of different firms while I was in school.

My last summer associateship I spent with Bear Stearns, which is as close to the rough and tumble entrepreneurial environment as you can get, from my perspective. And I still didn't feel that I was really fulfilled as an individual. And, in my last semester, I really came to the dynamic conclusion after interviewing with lots of law firms and lots of investment banks, which I highly respect, and now employ a lot of them, that to be in the arena is the thing that I wanted to be.

I wanted to be the guy slinging it out, blood and guts, making it happen... And at the end of the day, if you can create that value, you can make a nice little business and maybe earn some money for yourself and others along the way. And that's who I am. And, I guess, it took me a while to figure that out.

It got to the point, however, at AdOne where I had about 25 employees, which is nice little company. And we were cranking along, we were making sales, I was bringing on management and it's not quite the same. You're dealing with a slew of different issues than "Hey, let's storm the ramparts, take the city, I don't care how you do it, let's just do it Rambo style." And that only works for so long. In the early adopter stage, you're really proselytizing a product. You're really saying, well, we've got 60% of what you want. Will you give me some money, and I'll deliver the other 40% down the road? From my perspective, that's where I fit the best, in creating that momentum, going forward.

When you get stuck down in some of the day-to-day issues of this employee wants this bonus and "Well, you didn't tell me that was the objective this week or this month." And, I don't like my job anymore... You hire people eventually to take care of those things. That's what I decided I wanted to do.

And actually, very early on, when we received the first round of venture capital from Lawrence, Smith and Horey and Venrock, it was very clear to me that that was the direction we wanted to go in. And if you think about it, it's certainly in my best interests. There is a lot at stake for me at AdOne... At the stage that AdOne is at, bringing in a CEO was relatively cheap from my perspective to make sure that the company was successful. A lot of my wealth is tied up in AdOne at this point. And why not bring in a dynamic, great CEO who's done this before over and over again for 5 to 10 points in the company. You know, that's not a lot.

I think that it's really important in terms of skills, that you're selecting candidates and managers that you profile them in terms of resumes and so forth but you also get down to the skill level. And when you're you talking, spend the time up front. If it takes two hours to go through their story, try and dig a little bit beneath the surface. Try and get to, great, sales increased 100%. How did that happen? How were you personally involved? And there's certain skills that I look at -- action-oriented people, people who build team spirit, command skills, customer-focus skills, hiring staff, that's a critical skill to have: A guy who can hire staff. You'd be surprised how many candidates we talk to who said, "Oh, my HR Department handles that." And you're just at a loss because it's so critical. You have to have someone who can learn on the fly, who can listen, who has perseverance, who has presentation skills, who's good at priority setting, and can make timely decisions, and who is results-oriented. Those are the types of things that we looked at.

BETH POLISH: The question is, a lot of time is spent on recruiting new people and not on coaching existing staff in a dynamic situation... You could help them grow and change with the company and not spend a lot of time recruiting, unnecessarily, new people or money on helping them move onto a job outside the company. Anybody on the panel can take this.

LAURA IANULY: There's a couple of things. I think, in the beginning, it's very important to manage expectations. I'm Laura Ianuly. I work for DoubleClick, and we've grown our workforce dramatically over the past two years. We currently have 185 employees, and the company was started in January of 1996. And in the interviewing process, I make it very clear -- we all make it very clear -- that it's a very fast-paced, ever-changing environment. And our management is very solid. It's a very bankable management team. And I'll explain that in detail when I speak on my own section. But we are making decisions as management much more quickly on much less data than we've ever made decisions before. And the key is that you've got to be able to do that, but you also have to be able to recognize when you've made a mistake and need to readjust and do something differently. And that's one half of the equation, I think, a management team being prepared to manage in that way.

But I also think, it's managing expectations of your employees. Because the growth at DoubleClick, for example, is so incredibly rapid, we have not had, fortunately, we have not had a lot of zigs and zags in our objective and in our strategy. But we've had a lot of other pressures of growing so quickly. We have enormous space constraints. And we're hiring people in very senior positions who are used to their own administrative staff support person, a much larger team than they're going to get when they start with the company, and perhaps an office with a window. And people come into DoubleClick in a bullpen situation. The trade-off is good because when you're learning in that environment, you're overhearing what your other work colleagues are saying and other people in other divisions. So you're coming up to speed a little more quickly. But, many people are not comfortable with that. And I think that's a two-part approach: managing expectations of your employees as they come in, and having a qualified management staff that can make quick decisions on little information.

AUDIENCE QUESTION: Once they're employees, say for a year, how do you continue to manage them?

STEVE BROTMAN: I just wanted to throw this out. And it goes to good management, and that's why we're all here. We need to find good management. And good management is telling your employees, what his goals and objectives are, what the behaviors are that you expect, and what the consequences are. You want to give them feedback from time to time that says, hey, you did a good job. You met these objectives or you did a bad job. You didn't make these objectives. And these are the reasons why. And you do need to spend the time, it's not a churn and burn game, you are moving very quickly, but the management principles don't evaporate just because you're in a startup situation. And, management, good management, understands that and yes, I 100% agree with what Laura had to say about you have to give warning and say hey, look. And actually, in terms of your recruiting, recruit people who are flexible. Recruit people who can say, well these are the situations that I've been involved in and you can say this guy's a pretty flexible guy or this gal is a pretty flexible person. But management doesn't fly out of the window just because you're in a fast-paced world. Does that answer the question?

AUDIENCE QUESTION: You chose to bring in a CEO because you were tired of day-to-day operations?

STEVE BROTMAN: I think that's one element. At the end of the day, it's fear and greed.

TOM NIEMAN: I'll go ahead and jump in from there. Thank you for your comments. My name is Tom Nieman. I'm with Ramsey Beirne Associates, and we're a leading retained search firm, predominately in and around the world of technology.

A lot of what Steve has just walked through is kind of a microcosm of what I see on a larger scale every day. And, we were talking earlier, and one of the issues I was going to address is: "So when does the search firm get called in?" Steve's actually hit on a lot of those. You know, I think to boil down how you answer that question "when do you use a search firm?", the short answer is that when it's absolutely critical that you maximize an opportunity, you need to consider a retained search. If you're looking just to hire or to fill a position, it's probably not critical. But when you actually need to maximize an opportunity is generally when we get the call.

There are four distinct, different scenarios that we see on a day-to-day basis with regard to doing searches. And one is Steve. He is what we'll call kind of the 'seed stage CEO.' He's the visionary entrepreneur. He's come up with a great product or a great idea. He's had the ability to attract investors to this opportunity and has probably landed a couple of flagship customers, whether it's two or five or a dozen of them, and really justify the marketplace so that the investors realize there is a market. He's running a business. There are revenues. But the opportunity is such that he knows that his net worth as well as his well-being of both he and his family are tied into this company. It's probably worth getting 'seasoned' management on board. That's typically when we'll get a call to work with investors or Steve. The beautiful situation with Steve is that he wanted to go... There was no 'founder in residence' syndrome as we like to call it.

The second type of scenario where we often get a call is kind of a 'next-stage company.' It may well be a founding CEO who wasn't necessarily your propellerhead or technical geek who had no ability to go out and deal with customers or investors but had maybe a bit of a sales and marketing bent and had the ability to go out and go beyond a couple of early adopter customers and actually secure a solid revenue stream, begin to attract additional talents around him, as Steve did, and have the makings of a real management team. That's kind of that next-stage company. An example of a situation where I was involved was a company called E-Trade. There was a gentleman by the name of Bill Porter who was in his early sixties. He'd done a great job running the company. Customers loved him. He'd built a decent management team around him. Revenues were roughly $20 million. But there was a market opportunity in front of E-Trade at the time that was clearly beyond what the company was. We sat down with the investors in the company and with Bill Porter. He was ready and willing to give up the chairman's seat. You know, he was going to stay and hold the office open until we could bring someone on. And we went out and we recruited Christos Cotsakos to come on board as the CEO. And he's taken it from $20 million to $200 million and some odd million dollars in revenues through a public offering and been incredibly successful. So, that's another type of company in the evolution that we've talked about.

The third scenario would be what I call a large stand-alone, publicly traded, entity... We typically get a call when there is a real strategic need for a large publicly traded business. It is not when there are 10 manager positions that need to be filled. It is when there is a critical hire that needs to be made...

The fourth situation where we often get calls is what I'll call a material change in ownership... The investors and the money behind the company often determine what is the management going to look like, what is the caliber of talent that we really want to go out and try to attract to this company. And that's often the situation where we'll get a call, too.

In years past there were an awful lot of startups, not nearly the numbers that are being founded today, but it was all about, first, eliminating technological risk, which is where founders and engineers got together and created a concept and investors were always looking at a potential startup saying, "O.K., the technological risk is eliminated, and the entrepreneurs were looking to eliminate financial risk, which is something that the investors could take care of."

If you look at the amount of the money that's been raised today, and the sheer amount of money that's needed trying to get put to work in starting up companies and buying out companies, it greatly outnumbers anything from the past. And I think everyone is finally realizing that it is not about technology risk, it's not about financial risk any more, it's about eliminating management risk.

I'm fortunate to be part of an organization that happens to be right in the middle of that; but, I think it's key. And I think if you talk to anyone who's, I shouldn't say anyone that's a pretty big generalization, but in the venture-capital world, I think the biggest challenge they have is building the right teams. Because relative to the number of companies being born today, there's a huge, huge dearth of talent. And, to find someone, to be able to recruit someone who's been there, done that, or is going to help you achieve whatever your objectives are as a business, it's difficult to rise up above the noise level and to marshal the resources necessary to go and try to attract an executive of the caliber that you need for your business. So, that's my perspective on it. Steve's example is one of those four. I guess my job is to go out and recruit Glenn.

AUDIENCE QUESTION: Are there some times when an entrepreneur should not be hiring you?

TOM NIEMAN: Sure. What I just laid out for you was pretty tailored toward going out and conducting a CEO search, which maybe isn't fair in your example. I mean, you as an entrepreneur may realize, "Hey, I'm hitting every one of the objectives that I've set forth for myself, for the company and for my investors, and things are going great." We don't get called when that's the situation. But, you're going to have to attract the right team around you as well. The best example is the one that Steve gave me, the 25-year-old vice-president of sales for a startup situation. He takes on a boatload of equity and ends up being a regional manager out in California.... Is that a real demotion? The right answer is, not necessarily. I mean, if you can put ego aside and realize that you're doing this to create a legacy business, or you want to create a company that's going to dominate a market, you're going to play the role that is best suited for that. And, you know, God bless you if you're building a business and there are none of those hiccups because you're doing a remarkable job then.

GLENN MYERS: The other issue is that regardless of opportunity and luxury, the reality is that if you're at the capital-raising stage of trying really to go to the next level, whatever venture firm or private equity fund you may be dealing with is going to typically require you -- unless in some rare case, some entrepreneur is nothing to add to the park operationally that has a track record -- they're going to require you, especially in the Internet, to retain somebody like Ramsey Beirne or Christian Timbers or somebody with a track record recruiting, you know, senior management people in that area. And they will not fund the company if you don't...

TOM NIEMAN: Yes, there's a real chicken-and-egg type of situation out there. We get calls all the time saying, "Hey, I've got a great product and what I need you to do is help us find a CEO or a VP of sales so that we can go and get the right investors behind us." And by the same token, you hear investors saying there's no way I'm going to invest in that company without the right team in place. Now, increasingly, which I think is an interesting situation, we have had people, we've gotten word of directly or been told directly or asked permission, by entrepreneurs to say, "Listen, I'd like to go out and as part of my presentation to say that you are on retainer conducting a search for a CEO for my business." This has worked out to be a very happy medium, we have gone on retainer and capital has been committed to a business with the word that we're going to go conduct a CEO search or some other search along this line. Which I think is an interesting development.

Coming next: Part 2 of "Building a Bankable Management Team"