Category Archives: Management

Why Start a Company in a Regulated Industry?

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This post was originally posted on the TrueAccord blog.

We are nearing the end of the sales pitch, and the exec I’m speaking to is almost convinced. I feel it: he likes the product and likes the innovation but he has to ask; he can’t let me off the hook.

He leans forward and looks me right in the eyes. And then it comes. The question.

“Tell me more about your Compliance Management System.”

Without a word, I reach into my bag, and grab a folder. It’s massive with hundreds of pages, all properly categorized: FDCPA, TCPA, FCRA, ECOA, GLBA, you-name-it. Here are the results of hundreds, maybe thousands of work hours. I slap it on the table, and it makes a loud noise even in this cavernous conference room.

We both smile. I passed the test.

I confess, my dreams have been weird lately. This is what being a founder in hard-core financial services feels like. You should be ready for prodding questions, a lot of upfront investment, and heavy oversight. We aren’t alone: companies like Standard API, LendUp, Even, Vouch, Blend Labs and others all operate in highly regulated industries. So why take on a challenge like this, instead of building a messaging app, or a video-streaming app? Why work on “boring” problems, when you can build something that bloggers will muse about and any angel investor can love?

For my co-founders and me, and for others like us, the answer is three-fold: 1) solving real problems, 2) solving hard problems, and 3) unlocking huge opportunities. A heavily regulated market is a clear signal for all three.

1. Solving real problems

77 million Americans have a debt collection related item on their credit report. 106 million are unbanked or under-banked. 5.5% of adults nationwide have used a Payday Loan in the past 5 years. Think about these numbers: these are real people with real financial problems. They struggle daily.

I don’t know if there’s a financial bubble in tech, but there’s definitely a cultural one; many of us build meta-startups that help other startups get built or are plain me-too’s. We sometimes work on cool ideas that aren’t too meaningful. I once had an engineer decline an offer to fix debt collection, only to work for a mobile gaming company and promote modern day gambling.

I want my work to touch real problems because that’s how you make a difference outside of our echo chamber. Increased regulatory scrutiny comes on the heels of unscrupulous business tactics that exploit human suffering – real problems that need solving.

2. Solving hard problems

Did I mention we spent thousands of hours on our compliance policies? It didn’t stop there. Replacing dial-for-dollars call centers with a machine learning system takes time and dedication. So does underwriting mortgages or short terms loans. These industries require an understanding of human psychology, risk management, data science, predictive analytics, customer care – and all has to be delivered to pass intense regulatory scrutiny. Lending, collections and similar processes have been done manually for decades because building a machine to make nuanced decisions is hard. It’s hard to accumulate the data required to optimize them. It’s also hard to convince investors to be patient; the pool of funders and founders they are willing to support, is surprisingly small. That’s a worthy challenge. Again, regulated markets tend to create entrenched incumbents with little incentive to change – exactly where disruption is needed.

3. Unlocking huge opportunities

Payday lenders’ annual revenues are estimated at $11B. Debt collectors’ are at $15B. Thousands of companies pop-up in both markets due to surprisingly low barriers to entry, and disappear due to the complexity of continuous operations. Increased regulation favors organized, well funded market participants that can consolidate that activity in a way that is demonstrably better than the incumbents’ approach. Technology can help us solve these problems at scale, with convincing economics, and a compelling case for compliance and information security. Here, too, regulation signals the amount of money that flows through these markets – and the size of opportunity for those who can play.

Bottom line

Regulated industries present unique challenges, and require a mindset that combines technical daring and innovation with respect to the legal framework. When you do engage, though, they can present interesting, challenging problems that have huge impact and many opportunities. This, for me, is worth the hassle.

– Ohad

Hiring inexperienced employees helps me beat the talent wars. Here’s how I do it.

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Building a stellar team is one of the key activities for a new company. I’ve noticed that hiring dynamics (who gets hired or courted) and success stories (how CEOs discuss their hires) often focus on credentials: which school new hires went to, companies they were a part of, and roles they filled. Conversely, one of my competitive advantages in hiring is hiring the less experienced based on their aptitude and attitude, and helping them grow. This has worked well in FraudSciences, where all the analytics team (including me) had very little experience before coming on board; in Klarna, where the Risk team’s leadership is still comprised of talented people whose first job out of school was at Klarna; and even today, at TrueAccord. Experience is important when you have a specific problem to solve and limited time to solve it. At any other time, hiring inexperienced people is a competitive advantage when everyone else focuses on experience. Why, then, isn’t that a more common practice?

Maybe because hiring inexperienced people early is difficult: they’re, well, inexperienced. Often they won’t come up with unique insights early on because they are unfamiliar with the domain. They will make rookie mistakes. They will be too much or little action driven. They definitely won’t help you hire them by signaling how or where they can help. But following just a few rules will allow you to define where inexperienced people can fit in your organization, make the best of them, and enjoy the advantages: a strong drive, a unique type of creativity sparked by zero pre- and misconceptions, and a much easier supply and demand dynamic. Here are a few pointers for succeeding in hiring inexperienced people.

First, know your domain and how to hire for it. I wouldn’t be able to hire inexperienced engineers, but for data science and operations roles it takes me roughly 20 minutes to know whether an interviewee is a right fit. Knowing the type of skills and mindset you’re looking for is imperative.

Second, you must have an initial mental model for the problem they need to work on, and some kind of onboarding plan (even if that only means a few hours of your time). You can’t just say “here’s a problem, solve it for me” – that’s setting your new hire to fail. The good news are that if you maintain proper documentation and involve every hire in a newer hire’s training, soon they will be able to do the onboarding themselves.

Third, invest a lot of time in mentoring. Identify when they need to “level up” and what that “leveling up” means, then guide them through the process. I learned that the ability to translate a perfect mental model to reality and deliver an MVP is a key capability. I’m ruthless in forcing team members to deliver when I feel they’re ready, even at the cost of their extreme discomfort. Once they’ve leveled up and understand the lesson, you’ll get constant improvement. Bonus: plan ahead and let them take on new roles in your team as they evolve. In the best-case scenario, inexperienced people are like stem cells. Having no previous experience, they’ll immerse themselves in your product, and become ideal candidates for product, marketing and customer success roles.

Fourth, teach them how to say no. By definition, being their manager and an experienced operator means that your opinion will be over-weighted. You won’t identify all of your mistakes in advance, and if the whole team follows you blindly, they’ll exacerbate the situation. You can hire opinionated people, but it’s also crucial to make them aware of your mistakes when you make them, so they don’t delude themselves that you’re perfect. Properly voicing your opinion is an acquired skill, and they need to learn to disagree.

Last, be prepared for mistakes. They will happen, and you’ll need to help them identify, analyze and correct them. Don’t just let them fail. However, know that hiring this way can definitely yield false positives, and be prepared to identify them fast. In the long run, no one likes being stuck in a role they clearly don’t fit.

Are inexperienced candidates the answer to all your hiring woes? Of course not. Experience still plays a huge role in leadership and specialist roles. Still, they represent an incredible talent pool. Especially nowadays, when talent is scarce in many tech hubs, hiring and growing them can fuel the growth you need to make your company successful.

STARTUPS DON’T GET SOLD. THEY GET BOUGHT.

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This was originally posted on Swedish Startup Space.

In 2008 I was the Head of Fraud Analytics for FraudSciences, an Israeli startup developing fraud prevention solutions for eCommerce. One evening in January of that year, we convened to talk about our annual plans. Our COO, a quiet guy in his 50s, said: “First thing’s first: the PayPal test results are in. They want to work with us. But they want us to bear their logo”. Then he let out a small smile, and went silent.

The room was completely silent, too. We’ve never contemplated an acquisition. Everything was going great. Last summer, we ran our system on PayPal’s data as part of due diligence for our impending C round. We were geared for war, and we felt like we were going to win. Nothing was going to stop us.

Other than a $169,000,000 acquisition offer from PayPal, that is.

ALWAYS HAVE A NUMBER.

Fast forward to 2011. I was the VP of Analytics for Analyzd, a predictive analytics shop I started with my brother, Yuval, after leaving PayPal in 2010. Our staff of four flew in to Stockholm from Israel, San Francisco and Berlin and we were running full speed with Klarna’s Risk team, trying to rethink strategy for Klarna’s European expansion as part of a consulting project. It’s been a few good months since we started working and spirits were high – the home team was open to our suggestions, and making a lot of progress. At the same time, Yuval was pitching VCs on an innovative merchant risk product Analyzd was working on. When Sebastian, Klarna’s CEO, asked me to join him in a meeting room, I was preparing for a status report.

If you ever saw Sebastian, you know what his selling technique is. More than 190 cm tall, bright blue eyes, he stares directly at you as he makes his proposition. Now he was staring at me. And he was basically asking, “how much for the whole team?”

Were we planning to get acquired? Not really. We had a lot of incoming opportunities, and a brewing funding round. We knew that high growth startups are almost never valued the same way by founders and potential acquirers. We also knew that this wasn’t our last venture, and Klarna was a rocket ship destined for greatness. So we gave an audacious number; Klarna had to want us bad enough to agree, but wouldn’t feel ripped off if we delivered.

For better or worse, Sebastian accepted.

HOW DO I SELL MY STARTUP?

I get asked this question every few months, interestingly, never by people in the Bay area. The large number of talent acquisitions by Facebook, Google and Yahoo, driven by an incredible competition for talent, is misleading. A group of engineers getting acquired before releasing anything isn’t the norm, but rather the exception, and if you’re looking to flip a company before creating value, I can’t help you. This post discusses getting the offer and deciding whether to sell or not.

ARE YOU TIRED?

Tired founders are one of the most common reasons for selling. At FraudSciences, our team of 3 years was interested in fighting, but the founders had a 4 years’ lead on us, having started working on the technology as early as 2001. They were tired, and they wanted to cash in, and it was their right to do so.

If you’re tired and want to rest and vest, take the offer. Enjoy the short-lived fame of an acquired founder. Recharge, rethink, and then move on to your next thing. Leaving to start something new becomes much easier after some liquidity.

Before you sell, though, consider why you’re tired. Is the company doing well, but you’re tired of your role as CEO or CPO? Maybe getting a strong operator to help you can take some load off. Are you financially strained? VCs have become much more sophisticated in providing liquidity to founders and executives. Neither are reasons to sell if you don’t really want to.

IS THE ACQUISITION ROCKET FUEL FOR YOUR PRODUCT?

Why did you start this company? For many of us, the answer is that there’s a problem we’re passionate about and want to solve. When the acquirer is the right one, joining forces with them can supercharge your business. PayPal with eBay, Android with Google, there are many incredible examples.

In Analyzd, though a much smaller team, we wanted to build a think tank for risk management that will change the way the industry thinks about itself, its goals, and the way it operates. Driven by Klarna’s tremendous growth, we reached amazing achievements in two years, while Yuval built the company’s Product organization from scratch. Would we have reached the same goal going at it alone? I want to believe so. But we made it so much faster with Klarna, and were also able to participate in its amazing success. That’s an all-around win.

MONEY COMPETES WITH MONEY.

If you’re not tired, don’t view an acquisition as supporting your long-term goals and generally tend towards not selling, make sure you make the most out of it. A good acquisition offer effectively gives you a price. It may be a good opportunity to raise your next round and end up with a bigger war chest, with lower dilution than you would have otherwise. Money competes with money. Use the offer to jack up your price, stuff your coffers, and grow your business.

BOTTOM LINE

If you received an acquisition offer, congratulations! You already created value that someone is interested in. Startups don’t get sold, they get bought, and someone wants to buy you. Price negotiations aside, are you ready to sell? Should you sell? What are good reasons to sell? Don’t discuss an acquisition for the wrong reasons; negotiating the sale is much more than just the price, and it will wear you out and kill your business if it falls through at a too late stage. Consider your options, understand what you set out to achieve with your company, and go do it.

Working on risk and fraud prevention? Don’t dig your career into a hole

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I give this talk about Risk Management called The Top 8 Reasons You Have a Fraud Problem. I learn a lot from the way audiences respond to it, mostly from objections. Most commonly, objections tell me how risk managers paint themselves into a corner in day-to-day work, effectively limiting their ability to drive change or participate in key business decisions.

How do they do that?

First, they make losses their one and only benchmark. It’s easy to focus on reducing losses when the business is taking hits, it’s your job and it’s what’s expected of you. But overcompensating and focusing on aggressive loss reduction whenever possible, while rejecting troves of good customers, will not only limits your business’s growth prospects – it turns the risk manager into a single-issue player. Revenue enablement must be a core KPI for the risk team or it will lose relevance.

Second, risk managers focus on maintaining status quo. When one lacks tools and methods to control their environment, their first response is to try to make sure that nothing ever changes. It’s not the risk team’s job to say no to everything new; it’s their job to find a way to say yes. That’s where the technological and organizational edge is. Find ways to enable new business by shifting risk across your portfolio and finding detection and prevention solutions that support even the craziest marketing ideas. You may flail at first but long-term, you’re building an important muscle.

Last, they tend to distrust the customer. It makes sense – when faced mainly (and often solely) with the malfunctions of the operation, often caused by customers themselves, one tends to stop believing in people’s good intention. That starts becoming a problem when every product design process turns into a theoretical cat-and-mouse game where every possible abuse opportunity must be curbed in advance. You should let users be users, and that means that there will be breakage and there will be losses. Zero losses can easily be achieved by stopping all activity in your system; you should accept that some customers will be bad and find a way to detect these as they act in your system, rather than limit every customer’s ability to use your product.

As I often write, risk teams are multidisciplinary and must think about operations, data science, product design and more. Whenever one focuses on limiting risk instead of trusting users, challenging the status quo and enabling new business, they are contributing to turning risk into a control function, a technocratic add-on that doesn’t deserve a seat at the decision makers’ table. Make sure that’s not you.

(If you want to read some concrete advice on how to do that, take a look at my free eBook here)

How to get the most out of your acquired entrepreneur

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I have a friend, let’s call him Joe, who’s an entrepreneur. Joe’s company was acquired a couple of years ago by a larger company, and Joe was left in charge of a suite of products only he could run for this company. He was doing very well but had the usual corporate complaints: it was too rigid, it was too slow, he didn’t enjoy it. We shared some of our war stories.

Then, one day, Joe was walking by a conference room where his CEO was hosting a group of b-school students, talking about acquisitions. The CEO calls Joe in, introduces him to the class, and says: “do you know what is the first rule when acquiring a company? Fire the entrepreneur. They never fit in, and they give you bigger headaches than anyone else could”.

As Joe was telling me this, I think he agreed with his CEO. I did too. Entrepreneurs are often celebrated and applauded in the Bay area, hailed as business leaders and innovators. That’s often true. However, there’s another thing that’s true, that acquirers find out quite often: most of us are individualistic, unmanageable hotheads who can’t, or at least won’t, play well within the corporate culture. It makes sense, too: had most entrepreneurs been able to or interested in participating in the corporate power structure or dynamics, most of them wouldn’t have become entrepreneurs.

Since I first heard Joe’s story, it resonated in many stories I’ve subsequently come across. Entrepreneur meets CEO. They become business BFFs. CEO acquires entrepreneur, hoping for higher returns and synergies. The entrepreneur is exhilarated: finally, he’s able to super charge his strategy in a much bigger organization. Acquisition goals? We’ll get them in no time. I’ll just do what I always do. The time bomb starts ticking.

Fast forward 12 months and the situation is almost beyond repair. The CEO has an energy ball running around the building calling his middle managers lazy and their process folks idiots. Every second person in his company is irritated by this person sitting in meetings making everyone else feel stupid. Plus, the guy’s team has set up a barricade and is unwilling to integrate with corporate systems, come hell or high water, because theirs are better. In the meantime, the entrepreneur is plucking out hairs due to the slow pace. Everyone’s so slow! Everything requires permission! He’s being asked to provide status updates and someone can override his operational decisions! All hell is about to break loose.

Not an ideal scenario, is it? That’s the worst case, of course. The usual case is a much more tame version of the same problem, with the entrepreneur still being unhappy and looking to eject as soon as his vesting has crossed some major milestone. How do you prevent this from happening? Here’s some advice.

  • Fire the entrepreneur. Joe’s CEO’s advice still holds. Hiring entrepreneurs to do what they did with their companies, only internally, seldom works. If you need a team, get the team. If you need the product, get #2 in the company to run it. Move the entrepreneur aside and let him work on something interesting and open ended, usually solving a really hard problem.
  • Keep them self sustained. The best use for an acquired entrepreneur is as head of a business or functional unit, separated from others and hopefully with its own infrastructure. Let them run free. If you put an entrepreneur in a role that requires them to touch all parts of the organization – well, they will. Big time. That can prove successful in one use case only: when you put them at the top, like eBay did with David Marcus. Otherwise, be ready for some turmoil. Entrepreneurs didn’t get to where they did by setting up committees and inclusive communication, and there’s no reason to believe that they’ll start when you acquire them.
  • Manage by KPIs/challenges. Once you have them overseeing a well defined area, give them concrete targets to hit. An unchallenged entrepreneur will get bored and either eject or try to redefine his mission, which often means stepping on other people’s toes. Set goals. If they’re met quickly, set more aggressive goals. Aggressive targets and the free hand to pursue them is what drives entrepreneurs. Give it to them and you’ll get an effective force. Let it slip and you’ll get mayhem.

Entrepreneurial people can be a positive force, if I may say so myself. Acquisitions happen because they, we, create value. However mismanaging an entrepreneur often results in both sides being less happy and successful than they could have been. Taking a few precautions can help your acquisition dollars do so much more for you.

 

Lost knowledge and failing teams: how managers undermine successful cultures

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My last year at the army was as a cadet instructor. This was the last step in the training of officers in my core, training young platoon commanders, and we all took pride in the structure of the course which – after having gone through it with several cadet groups – we felt like we almost perfected. When we finished our last course two months ahead of getting discharged, the team spent all this time to document and preserve the methods, drills and exercises we ran our cadets through.

One single month after most of us left, the course commander was promoted to a senior position within the core, and a replacement was pooled from within the ranks. His first move? Throwing all of the documentation out the window and declaring it obsolete. Now, were we the best instructors who ever lived? Probably not. Did he know a thing or two about cadet instruction? I should hope so. Was this move smart? No way.

The same thing happens every day in the business world, especially in medium and large companies. Lately I’ve been investigating a new industry and wondered why some very simple optimization steps haven’t been adopted. I kept wondering until I ran across an experienced advisor, who told me the story of how my suggestions were implemented in the early 90s. Wait, I asked, so why aren’t they doing it now?

They forgot, he said. They forgot. Spend a moment to realize how interesting this is.

People remember, organizations forget, and the vehicle of that forgetfulness is managers who are too short term focused to recognize that an aspect of the culture has to be maintained or improved. They tend to neglect knowledge transfer and maintenance until the loss of key employees leads to key knowledge having to be re-learned over and over again.

How do you make sure this doesn’t happen to you?

  • You must have a work manual, your “bible” so to speak. The manual is where your methods and terms are kept and what new employees get trained on, repeatedly, until they speak your language. Organizational culture doesn’t evolve bottom up on its own, or rather it does when you don’t pay attention to it but not necessarily as you’d need it to. Anything from how you treat your customers to expense report ethics is impacted by what you instill.
  • The manual must evolve. In my teams most of the new entrants were required to add to the training plan, based on material they were missing when they went through it, as close as possible to their start date. The “beginner’s mind” is priceless in challenging your status quo and your manual’s assumptions. Use that.
  • No single points of failure. Code must be documented, responsibility must be shared or at least have some redundancy. Everybody should be replaceable – that doesn’t make them expendable or not important, just not single points of failure. If you need to contract a developer who left last month since he is the only one who knows his part of the code, you did something wrong.
  • Have a succession plan. This is related to the previous point but very hard to implement in fast paced organizations and war-time. Still, as long as you’re growing, your team must be filled with people who are ready, and preparing, to step up. You will usually not enjoy the luxury of a transition period for any of your key hires, and being left without anyone to take a job will spread you thin and rattle the team.
  • You don’t have to make a change. I’m not saying “If it ain’t broken, don’t fix it”. What I’m saying is that if it clearly works well, don’t change it. You don’t have to leave your mark on everything. Find what’s not working and fix that before going after the low hanging fruits of your comfort zone.
  • Last, but maybe most important: Always understand the reason. Aristotle is attributed with the saying “Law is mind without reason”. Many senior managers never bother learning the details of the day to day work of their teams, and thus remain unqualified to make some very important decisions, that they take anyway. If you don’t understand why something was put in place, if the reason behind a norm or method is lost, investigate. Don’t assume it’s wrong. Understand your subject matter, then use your best judgement to decide.

The worst thing you can do as a succeeding manager is break something that works well. The best thing you can do is build on strong foundations to continue driving your team to success. Doing that is pretty straightforward, albeit not very easy.