February 23, 1998

Edited by Dennis Berman

BUILDING A BANKABLE MANAGEMENT TEAM, PT. 2

Presented by the MIT Enterprise Forum of New York City

In part two of excerpts from the latest MIT Enterprise Forum of New York City, we find entrepreneur Glenn Myers explaining how he staffed his rapidly growing Internet design firm. Others on the the four-person panel include: Stephen B. Brotman, chairman and former CEO of AdOne Classified Network; Laura Ianuly of DoubleClick, a Web advertising network; and Thomas S. Nieman, partner at Ramsey Beirne Associates, an executive-search consultant whose firm has recruited CEOs or COOs for Netscape, Microsoft, Xerox, Taligent, and PointCast, among others.

The moderator is Beth Polish, managing director of new media at KPMG Peat Marwick.

GLENN MYERS: Just a little overview. I'm Glenn Myers, and I'm the president and CEO of a company called Rare Medium which is located here in New York. The company was founded in late 1995 as an Internet or Web developer. The term to define companies like ours has changed as rapidly as the rest of the Internet buzzwords that we're familiar with. The company is going on two years old.

When I got involved with the company, we had six professionals, five of whom were the founders -- multimedia artists and programmers and designers out of the School of Visual Arts. And they recruited a programmer from NSCA out of Champaign-Urbana [University of Illinois] who's a very bright kid out of school who worked in a computer lab on the Mosaic Project which became Netscape, as we know. And there were six guys in a room. And they were doing some great stuff with the founding client General Mills. And there was a germ of a business opportunity.

I came into the process having experience in the technology space. [I] started doing a startup out of school that helped integrate trading floors for financial-service firms as well as other local- and wide-area networks... I grew that company to about 150 professionals over a three-year period. Subsequently sold it to a large public company that was rolling up professional service firms in that space. Stayed on for a period of time thereafter. Took a fair amount of capital at a relatively young age and decided that the deal business was a lot more fun than delivering reels of cable and servers and all that other fun stuff. And proceeded to do a number of venture-related transactions, where I was less active but still supplemented the management team at a board level.

I got back involved in the Internet space about three, four years ago and saw the opportunity that we're all seeing come to fruition today. Back then it was an idea. There wasn't any real space to enable yet. So, it was difficult in trying to pick a business model vis-a-vis enabling technologies that were coming on track at that point. And what I decided would be the best opportunity for myself both professionally and financially was to try to find a service business that was going to be at the nexus of delivering services to help enable the Internet. So regardless of what the enabling technologies were, what the advertising model was -- whatever would work would work -- we'd be at a place to try to facilitate that.

Rare Medium solutions include general Web-site development, they include strategic consulting services, audience development services, services providing driving traffic to these sites that are built, and the use of analysis associated with determining and quantifying how successful the projects that we build are and what the market research components are. We also then worked into the back-end, doing application development, hosting, maintenance service-side applications, and those type of things.

I felt that this space had the best opportunity if you scaled it, if you executed properly, and recruited the best talent, that there was such a huge wind at your back with over $2 billion last year alone spent in deploying Internet solutions, that if we got in the way, we would be moderately successful, and if we really executed well, we could really build a huge business.

What I'd like to do, which would be most productive for everybody here, certainly for those that raised their hand regarding where they are in the startup process, is sort of just walk through my experience as it relates to having some venture experience and some operating experience, having grown a company from 6 to over 70...

It's very important that all employees are vested in the company. And that doesn't mean a founder or two founders. It means, literally, that at every level, from the senior recruits that you bring in down to the receptionist, there is a stock option program that everybody really feels ownership. These deals are too intense, the hours, the process is just too tough where people feel they have a job and they're making somebody else rich.

We wanted to recruit a senior chief technology officer. We couldn't afford to write a check for a quarter of a million bucks a year. We obviously had to offer equity to supplement that. There's obviously risks and rewards associated with those sort of decisions. So clearly vesting everybody in the company is very important.

The point I made earlier, top-down recruiting: Find those key people. Again, I'm at the CEO level, so for the senior staff positions of CFO, CTO, and executive VP of sales, executive VP of marketing, HR, put these people in place at the most senior level and let them build their staff and their teams. And even if they come from other related industries that are on the fringe of the Internet, in our case you are still in a much better position than trying to manage, you know, micromanage every single hire in the firm. You will not be able to scale sufficiently to stay ahead of the fast-moving curve that we have.

One of the keys to our success is low turnover. Of 70 full-time hires, we've had less than four people in terms of turnover in that two-year period. And, you know, that's a remarkable number especially if you know the Internet space, let alone just any startup...

Raising capital. [It's] the CEO's role, clearly, whether brought in at a very high level by a Ramsey Beirne or whether they can migrate as the entrepreneurial founder, which is clearly very difficult to do, or they come in at some point in the process like I have. Raising capital and raising an adequate amount of capital is key to the success of any company. You always have to raise more than you think. You never hit plan. It always takes longer. Those are all the same issues that any company has. But, the reality is that this space is moving so quickly, and if the leadership of the company is not, you know, in the foxhole day-to-day dealing with the issues related to client-service issues, dealing with the strategy, the cutting edge of what these big interactive engagements are, then you're out there trying to stock capital day in and day out. You'll lose so much touch with the day-to-day of your business that you really won't be effective. You will become ineffective as a leader in the company, a strategist, which is ultimately what's most important for a CEO to deliver.

It's important, I think, to not burn employees out. You know, in our business, the more successful companies have scaled dramatically. However, in an effort to do that, some have taken the road of trying to work people around the clock for two, three days in a row, 15-, 18-, 20-hour days, taking in much too much work knowing that they don't have the resources to deliver. You know, you get whopping turnover. I've heard 150%, 200% annual turnover at some of the production teams in these companies. The quality of the work deteriorates dramatically. Morale obviously becomes ugly. You can't work somebody three days in a row, you know, a team of people on a big account, and buy them a pizza and think that life is good. Pizza Internet, ponytail days have sort of left us. These are businesses that have to be managed right and professionally, and I think all the things I'm going through have been key to making us successful in the space.

I think that while you have to be aggressive and ambitious, you can't be too ambitious. You've got to be focused on what your objective is. I've seen so many companies go down a path, hit the inevitable or proverbial roadblock, and then change their strategy. Or read Wired magazine over the weekend, and now they're in a different niche in the business. It doesn't work. You have to really stay focused on what you're doing. It doesn't mean that you can't change your business model. You have to do that, clearly. You have to leverage talents. You have to add, as I mentioned, our full solution. You know, we didn't start with a full solution. We started with a narrow, technical production resource, and we built a broad service solution by bringing the right people in and the right skill sets. Be ambitious, be aggressive, but really be focused and don't take your eye off the ball. Don't try to enable products out of a service platform, like in the business that we're in, thinking that you've built the best mousetrap. Deploying a product in the software business is a difficult task. And there's lots of these Web developers -- interactive agency application developers -- that implement large-scale solutions, come up with a widget and think that they're now going to be a product company and Microsoft is going to buy them for 15 million bucks. Now if they were a free E-mail company that may be the case [in reference to Microsoft's recent purchase of free-mail provider Hotmail], but this is not...

I think you have to respect your employees. Little things like we give employees free lunch a couple times a week. We have a free cafeteria. We have a refrigerator, that kind of thing. We have flexible hours. We run, sort of like, two shifts. Some folks like to work into the late-night hours and come in a little later. Other folks like to start a little bit earlier. Try to be flexible. I mean the old time clock scenario does not work, again, in the Internet space. But you have to be prudent and fiscally responsible in managing that.

I think you also have to be selective with client engagements. You cannot be all things to all people. You can't overpromise and underdeliver. Our perspective was that these big Fortune 500 companies like Procter & Gamble, all these companies took bets on us, and we delivered, and because of that, we were able to build our portfolio and capture a vertical [market], like consumer products, where we have Nabisco, Nestlé, Johnson & Johnson, and General Mills. If you overpromise, more often than not you're just not going to be in the business anymore, and you're going to have clients that are very upset. And these tainted clients now come around our way, and they are so shell-shocked from their past experience they'll overbudget, and those, I think, are big issues...

I think in terms of expansion we've expanded dramatically on an organic basis. We've also expanded somewhat on an acquisition basis, and we continue to look at both. There are many companies that are committed to grow organically or through acquisition. And then there are companies that are in the roll-up mode, where they're sort of holding companies or have been financially engineered to acquire other companies. It's difficult to deliver the high quality of creative and technology and service through that kind of model. I think you have to be open-minded...

Select blue-chip advisers. So you've got to be able to afford them. A lot of them will take a risk with you, whether they're legal, PR, accounting, what have you. Find the guys that are committed to you business, that are smart, that are willing to make a bet. Mitigate your capital at the front end, but again, the chick and the egg. Like Tom mentioned, you need that advice, you need that support.

And lastly, I would just suggest that there's a huge opportunity in our space. The Web is growing dramatically. The potential business opportunities and solutions that are available to everybody as consumers or to their business models are huge. And we're happy to be well positioned in the space.

BETH POLISH: Actually, we promised questions along the way, but I'd to get on to what Laura's doing because it's really the next stage of a company and making it so.

LAURA IANULY: O.K. I like to click off some important dates in the history of DoubleClick. And then I'll tell you when I dropped into the company. The company started in January of 1996. And it was originally a joint venture between Poppe Tyson and a small company in Atlanta called Internet Advertising Network, which [provided] the CEO of our company and the chief technology officer. And Poppe Tyson approached them and said -- and they're both engineers -- we'd like you to build the Internet advertising solution for the Web. And that's what they did. And it was a million-dollar investment in the joint venture. Slowly we grew that company, within the first six months, really by referrals. People that Kevin and Kevin, our CEO and COO, had worked with before...in the industry. We got to the point where we had about 35 employees in the company, and then we started to develop different divisions within the DoubleClick structure...

Early in 1997, we started to grow by using an outside resource. Largely, Greg Grossman, from Pathway, who is here in the audience, was an outside recruiter that helped us fuel and fund the growth of DoubleClick. DoubleClick was investing in its future, investing in growing, and at this point it was a market-share question. The topic of tonight is Building a Bankable Management Team and, I think, demonstrated by DoubleClick's venture-capital money that we raised in July of 97, which was $40 million...

What's interesting, though: As a part of raising that venture-capital money, they [the investors] interviewed every single member that was on our Executive Committee. And as a part of, or contingent upon, giving us that $40 million to fund our future growth, the investors made a recommendation that one member of the team would be promoted into a president and COO position. So, similar to what we have here in the evolution of what we've laid out, DoubleClick went through the exact same thing. It was a time to put the operational responsibility into the hands of one person and have the strategic vision of the company stay with the CEO.

I joined the company in August. It was two months after we raised $40 million. At that point in time, DoubleClick decided that they were going to use a large portion of that money to fund their future growth.

So, in the past five months that I've been with the company, we've been growing very aggressively... We announced in December of 1997 that we were planning on doing an IPO. And what my job has become is to continue to build out the staff so that we can have a very successful IPO and continue phenomenal growth beyond that point.

I think what's very important in terms of scaling and growing the management team is at every stage to continue to define the workforce and the skills sets and the attributes of the people that work for you. Like Rare Medium, and we're going to explain, we've experienced an extraordinarily low amount of turnover. We have an incredible amount of change occurring at the company -- not strategic change, not visionary change, but things are growing very quickly -- and the profile that we are looking for are very intelligent people who possess a skill set that we need...

BETH POLISH: Let me just repeat the question, which is: Growing that rapidly, 90 people in a quarter, how do [you] manage the process? How do you make sure you're hiring the most capable people with the best skill set for those jobs?

LAURA IANULY: Every time that I was recruiting for a position, we had weekly management meetings and an ongoing running list of open positions. And that list is never shorter than 40 open positions. Today... I know what our recruiting plan is quarter by quarter this year. We just finished presenting to the board, and it's been approved. So, we know what we're looking for. We're scaling our growth. That is what, I think, has made it so successful for us.

BETH POLISH: When you're trying to secure talented people to join your company, what is your mindset in terms of the compensation package that you put together? Is it market plus options? Is it below market plus a lot of options? What is in... I would just like to ask that the panel address this in the context of the stage of the company.

STEVE BROTMAN: An undercapitalized company obviously can't afford to pay anything. So, you're going to dramatically underpay market wages and give a lot of equity for that rate. My CTO refused to do that, so we paid him market rate for the first eight months of the company. And he got market wages for eight months. But, he has about a fifth of the equity that his other management peers have. So, we recruited him, we brought him on board, he's the guy we brought on board. He's kind of sad today. But not everyone is in a position to do that, and you've got to go on a case-by-case basis. But generally at this stage of the company, in a second stage, where you're going the strategic round, you can't really get away with that. You've got to pay what they're earning in the previous enterprise and equity on top of that, but not as much, of course.

QUESTION: Did you promise the equity up front, or did you say you would take care of it later?

STEVE BROTMAN: At the very earliest companies, a lot of companies are started by relatively young people who were relatively naive. And they recruit other young people who are relatively naive. And... this actually happened to my first employee. But I took care of him in the right way because you lose that person. Otherwise, if you don't treat them fairly and honestly -- but the best thing to do is to do it up front and be honest. You can always go back and say, "You know, you're at this level, and we want to give you more equity."

TOM NIEMAN: If you need more cash, you can sacrifice it on the equity. In going out and recruiting, it's not smart to go out and try to recruit a world-class executive talking about compensation. It should be the last thing that you deal with. Because at the end of the day... you find the right person, and they're excited enough about the opportunity. No one's good enough to stand in the way, of screwing that up. It's a matter of figuring out what the right deal is and making that happen. And there are really no rules of thumb.

BETH POLISH: What are the top five questions that you would ask somebody you were recruiting to fill a senior role coming from an established company into an entrepreneurial company? Anyone want to take that?

LAURA IANULY: What's your motivation? What do you want to do? What's currently happening in your organization that you're presently affiliated with that is causing you to consider perhaps wanting to make a change? Those are three. Do you have any?

TOM NIEMAN: I don't think you're going to be able to determine whether that person's going to be successful making that transition based on 3, 5, or 10 questions. I think it's a combination of a number of things. It's going to be personal disposition. It's culture. It's fit with the rest of the management team. I don't think there are going to be right or wrong answers that determine whether or not it makes sense to proceed with someone like that.

BETH POLISH: Does Glenn or anybody else have some sort of metric about how you calculate what is the right amount of equity to give to all the different employees that you have?

GLENN MYERS: We try to target sort of middle-tier, you know, professionals. We're not going to attract the guy that could afford to work for the dollar a year like a big enterprise company, like a Compaq or some of the other folks Ramsey Beirne recruits, and give them all upside and give away 20% or 25% of the company. That's not our model. On the other hand, we're not either going to pay what they made at a Fortune 500 company, say, in the technology area. We're not going to pay that market.

You don't have to wear a suit and tie to work everyday. They're not going to punch a clock. They're going to be able to take some risks on some R&D efforts on technology. So there's so many benefits both creatively and professionally to working at a company like ours. In terms of the upside, we try to blend sort of the market compensation, or slightly below market compensation, within our space -- not within the client-server space, where someone can make, like, half a million dollars a year if they're a crack programmer. We try to blend that, because people need to make money. And if you think you're going to attract killer talent, they're going to come through your door with an MIT computer-science background. There not going to work for nothing on a promise. You're just going to get what you pay for. So we try to blend it. We try to get maturity in the door where you recognize that they want upside, but they want to blend it with current compensation.

BETH POLISH: I think, to follow on, it's probably typical to see somewhere between 10% and 15% reserved for your employees. And the important thing to do is to figure out the number of employees that you're going to have over a period of time and then look at their different levels and make sure that there's consistency -- so that you don't find that you've given to your first three top employees... 3% and find that you're left with 6% to give to everyone else.

The key really is to plan and to plan it early. Getting to the other gentleman's question about: Do you settle these things now or, do you say that you'll do it later? Sit down and spend the time to think. This year I'm going to get up to 10 employees. At the end of that period of time, I'm going to be hiring another 20... If I'm not having financing, the odds are that I'm not going to be increasing the pool that is available to my employees. So really plan it out in stages. Look at how many people you're going to hire in this next phase of your life cycle, phases being probably based upon raising capital. And then literally spend the time to calculate out on different levels what percentages you want to give. If everybody's a VP, you know you're pretty standard at 0.75%, because you're going to have five of them, and you're going to have 10 people at the next level below. Just find the time to do it. And also, seek some advice from people who have done it before, whether it be your lawyer or accountant or your friend who's an investment banker. Get a flavor. But about 10% or 15% is probably where it's at.

Read Part 1 of Building a Bankable Management Team