Startup Lessons from an Unusual Source

As some of you know, I’ve spent the past few months, and will be spending the next few months, studying for the Level III CFA exam.  While it may seem counter-intuitive that someone writing a blog called vc2bd.com will also be taking a finance-focused exam, my participation in the program is rooted in my banking background.  I first decided to enter the program as a second-year banker, and took the Level I exam in 2006.  Having an undergraduate engineering degree, I had a great quantitative background, but never felt that my finance and accounting skill-set was as strong as that of my finance and economics degreed colleagues.  I decided to take Level I as a way to build those skills.  In 2007, I had just moved out to San Francisco, and with some extra time on my hands, decided to continue the program with Level II.  In 2008, I shifted into Venture Capital and with a large work-load and a long commute, decided to defer the Level III exam.  Now that I’m back in NY, I’ve decided to complete the program.

While most of the material we cover is uncorrelated with life in a startup, there are actually a few lessons from my studies that mirror lessons from the startup world. While not perfectly analogous at first glance, they actually line-up quite nicely when you dig-in. The power of review classes, the creativity of derivatives, and the harmful practice of Style Drift are a few of these lessons.

Review Class

Each Tuesday this Spring, I head over to a professional classroom on 53rd and 7th for a 3 hour review class.  Each class is meant to re-enforce the material studied independently the prior week, through discussion, examples, and in general, just by taking a second look.  Sometimes I leave class feeling like I’ve learned a tremendous amount, and other times, less so, although I’ve never left feeling like it was a waste of time.  The simple act of taking a step-back and reviewing the materials I had studied the prior week, often with a different perspective, has helped me to fill-in blanks and generate a more complete understanding of the material.  Additionally, a second time through the material often makes me realize better ways to attack the material and simply just being in a different atmosphere helps me to absorb information in a different way.  Its not unlike a college class, although having been out of the classroom for a half-dozen years, these classes are somewhat of a renewed experience for me, and I go through them with a slightly different perspective then I did back then.

I think that startups (and really any organization) should take similar steps to “complete the picture.”  Periodic reviews of your activities let you take a step-back and look at things with a fresh perspective.  Strategy sessions outside the office, and away from daily activities and grind of the office (or wherever you work), can function much the same as my CFA review classes.  Breaking for the normal rhythm gives you an opportunity to think about what your doing, absorb what has happened over the past few weeks or months with a fresh perspective, and let you more easily plan for the future.  At IGC, we did a team off-site at least once per year, a group off-site at least once every two years and a firm-wide off-site once every three years.  It was a fantastic time to review and plan, while also spending time with colleagues from other offices.  

Derivatives

One of the recent topics reviewed in class were derivatives, a family of financial instruments that have gotten significant heat over the past several years, and rightfully so.  The recent collapse in the financial markets was driven much by derivatives.  However, it was really propelled by the abuse and misuse of derivatives – using things like credit default swaps in ways they were never intended and retraunching CDOs to create high grade security classes out of low grade securities.  However, when used correctly, creative thinking around derivatives can be a powerful way to reduce risk and change the nature of a portfolio to better fit the investor (such as when you have a large debt portfolio and want to diversify into equities but can’t afford to incur the transaction costs).

In much the same way, creative thinking can be a powerful tool for start-ups to maintain lean, cost-effective growth.  Obviously any start-up needs to be creative in its business-model order to succeed against incumbents or even more so, to forge a new industry, but it also helps in day-to-day operations as well.  As I wrote in my last post (http://bit.ly/fRsUFz), having excellent individuals that can provide several functions for the organization and successfully fill in gaps can be critical to building a lean and efficient business.  Brainstorming and coming up with creative solutions to IT, communications, management, marketing and other aspects of the business can mean the difference between high-growth with motivated employees and burning through capital while treading water or even drowning.

Style Drift

Similarly, the lessons learned in the manager evaluation sections of the CFA curriculum, in particular, those sections around Style Drift, also provide an important start-up lesson.  Investment managers are typically hired to focus on one asset class (e.g., large-cap equities or investment-grade debt) and Style Drift simply means that an invesment manager is slowly moving into investments that he or she is not supposed to focus on.  This can cause problems for the portfolio manager who hired him or her, as there will likely be cross-over with other managers in the portfolio, and he or she may simply not have the capability to work beyond a certain expertise.  

In much the same way, its important for start-ups to avoid Style Drift, and to keep focused on their core business.  While its important to maintain the ability to change course or “pivot” into a different direction, a gradual dispersion of focus on the product portfolio (beyond means and before the product is proven out, of course) will likely hurt the business.  With a lack of focus, the engineering team can become overwhelmed, the product team can be stretched too thin, and overall communication to other areas of the business will likely suffer.  Its important to maintain focus on the core business to help drive the business forward and prove out the product or service, while avoiding situations where new business lines are introduced and compete for resources before the originals have either taken hold, or have been dropped in favor of the new.

Overall, these weeks of studying the CFA material have caused me to think a bit differently about not only the finance profession, but also business in general.  These are just a few of the similarities I’ve seen thus far.  I’ll likely write another post on the subject later on in the Spring, or after I’ve completed the course and taken the exam.  As usual, please comment below and let me know if you think I’m right-on, partially there, or completely off-base.

 

 

23. March 2011 by Jonathan Drillings
Categories: Imported from VC2BD | Leave a comment