Tech Scenes with Troy Henikoff

Episode Transcript

Jeff Martin in conversation with Troy Henikoff of MATH Venture Partners

“There’s too much focus on fundraising and not enough focus on the accomplishments of the business as a business.” — Troy Henikoff

This transcript has been lightly edited for clarity and readability. Repetition, conversational filler, and obvious transcription errors have been cleaned up while preserving the substance and conversational tone.

Cold Open — 00:00

Troy Henikoff: There's too much focus on fundraising and not enough focus on the accomplishments of the business as a business.

Value is created—for both you as the entrepreneur and for your investors—in the delta between the post-money valuation of your last round and the pre-money valuation of your next round.

If that isn't intuitively obvious, think about it.

If you keep raising additional rounds and you do a round at a $10 million post-money valuation, and then your next round is at a $10 million pre-money valuation, you're basically just stacking capital.

The value of the company is equal to how much capital you've raised.

You haven't created value for anybody.

If you then sell the company at the post-money valuation of your last round, your investors get their money back and not much more.

And there's almost nothing left for common shareholders.

Real value gets created when you raise a relatively small amount of capital and ultimately create a company worth substantially more.

That's when everybody around the table wins.

Welcome Back to Tech Scenes — 01:27

Jeff Martin: Troy, welcome to Tech Scenes Unplugged.

Troy Henikoff: Awesome, Jeff. It's great to see you again.

Jeff Martin: Last time we did this, it was in person.

I should say welcome back to Tech Scenes.

Troy Henikoff: That was fun.

We had a good car ride.

Then we walked along Lake Michigan.

Not around Lake Michigan—that would've been a long walk.

But we walked along it.

It was great.

Jeff Martin: There was a photo of us from that day that was my LinkedIn background photo for years.

Troy Henikoff: I think that was North Avenue Beach.

We were out on the breakwater looking back at the Chicago skyline.

It was awesome.

Jeff Martin: It was a good time.

I loved doing Tech Scenes in Chicago.

I got to eat pizza.

I got to do all my favorite things.

MATH Venture Partners Today — 02:14

Jeff Martin: For people who don't know, give us a brief overview of MATH and where you guys are today.

Troy Henikoff: The quick trajectory is that I was a serial entrepreneur.

I built a bunch of companies.

Then I started getting involved in helping other companies through teaching at Northwestern and Kellogg.

I'm still at Kellogg today.

I teach one quarter each year.

I started angel investing.

I helped spin up an accelerator here in Chicago, originally called Excelerate Labs, which became Techstars Chicago.

Then we started investing through MATH Venture Partners in 2014.

MATH invests in early-stage digital technology companies.

And our thesis is going to sound very strange:

All of our successful companies had something in common.

They had a lot of customers.

So we like companies that have an unfair advantage in customer acquisition.

We believe that's the key that unlocks growth.

Why MATH Didn't Raise Fund Three — 03:16

Troy Henikoff: We raised Fund One in 2014.

Fund Two in 2018.

We had expected to raise Fund Three in 2022.

Given the economic conditions and what was happening at the macro level, we decided not to.

We said:

“Let's focus on the companies we already have.”

“Let's help them get to great exits.”

A great outcome would be if our LPs eventually ask:

“Why didn't you ever raise Fund Three? Funds One and Two returned so much money.”

We'll see.

Today we're not making new investments through MATH.

But we still have 43 active companies.

I'm on nine boards.

There's a lot of work to do.

People ask:

“Oh, are you retiring?”

I'm on nine boards.

Think about how much time that takes.

I'm also still teaching at Kellogg.

I'm doing a little angel investing, very specifically around Chicago.

And over the last several months, I've been helping David Cohen with some of what Techstars is doing as it returns to local communities.

Techstars Returning to Local Communities — 04:11

Jeff Martin: Is that similar to what they're doing with Techstars Colorado?

Troy Henikoff: Exactly.

Boulder is the first city where they're bringing this model back.

There will be others.

I can't announce them yet.

But if you think about cities I'm passionate about and places Techstars historically had a presence, you can probably imagine some of them.

The model is slightly different.

It's much more community-focused.

The accelerator is effectively owned by the community, while Techstars powers it.

You get the best of both worlds.

Local investors.

Local mentors.

Local capital.

Then, as companies succeed, more of that capital recirculates into the local ecosystem.

But you also get all of the knowledge, content, processes, and global network of Techstars.

I think it's going to be awesome for entrepreneurs.

I love helping entrepreneurs.

I wasn't necessarily looking for more things to do.

And I certainly wasn't looking for a job.

But when David called and asked if I'd help, I couldn't turn him down.

Jeff Martin: It's almost a community of communities.

Better Is Better — 06:11

Jeff Martin: Techstars has always been about community.

And this model makes a lot of sense.

In the early days, I don't think anybody imagined Techstars would get as big as it did.

Looking backward, you can see how the model could evolve.

But they never would've gotten here if they hadn't simply gone and built it.

Troy Henikoff: Exactly.

I'm sure when David ran that first program in 2007, he didn't imagine how large it would become.

At some point, scale created some challenges.

And as David has come back, one of his commitments is very clear.

He tells the company:

“Bigger isn't better. Better is better.”

Bigger does not mean better.

Better means better.

So don't focus on scale for scale's sake.

Focus on delivering a better product for entrepreneurs.

The entrepreneur is the customer.

That's who we have to serve.

If you can do that while also supporting local startup communities, that's a trifecta.

Brad Feld and Founder Empathy — 07:21

Jeff Martin: I got to spend some time with David and Brad Feld at FounderCon.

David gave me a really nice blurb for my book, which I appreciated.

He's always been deeply founder-focused.

It's easy to connect with people who think that way.

Troy Henikoff: They both are.

And they're both good friends.

Brad isn't raising another Foundry fund, so he has a little more time and has become more engaged with Techstars again.

When I ran Techstars Chicago, we had 10 CEOs in the program.

Once a week, the 10 founders and I would sit in a conference room.

Brad would come up on the big screen.

Those 10 CEOs got an hour with Brad Feld every week for 12 weeks.

He did that for our program for four years.

It was awesome.

Pattern Recognition—and Something More — 08:30

Jeff Martin: The more cycles you have with companies, the more companies you're under the hood of, the more knowledge accumulates.

You don't necessarily have to be brilliant.

If you've seen the same patterns repeatedly, you start recognizing the obvious things much faster.

Troy Henikoff: There's definitely a lot of pattern matching.

But I think Brad has something else that's special.

He has an empathy for founders that not many venture capitalists have.

He's really good at understanding the difficult situations founders find themselves in.

He had his own journey as a founder and CEO.

I did too.

I was a serial entrepreneur long before becoming an investor.

I'm biased, but while I think you should have different kinds of investors around the board table and cap table, I think former operators often bring enormous value.

That's my self-serving opinion.

Execution Is Everything — 09:42

Jeff Martin: You and I both think from that operating perspective.

I fundamentally believe execution is everything.

People say it all the time.

But sometimes it becomes just another phrase.

Execution really is everything.

Troy Henikoff: Everything.

Here's how I explain it to students and entrepreneurs.

Sometimes they'll come in and they're afraid to tell me their idea because they believe the idea is the valuable part.

I'll ask:

“You really think the idea is what's valuable?”

And they'll say:

“Yeah. Nobody else has thought of this.”

Then I ask:

“What happens when you actually launch?”

Now your idea is public.

By definition, if you're selling it, you're talking about it.

You no longer have exclusivity on the idea.

So if the idea itself was the valuable thing and you no longer have exclusivity on it, what do you actually have of value?

That's when you see their face change.

They realize:

“Oh. I have to execute better than everybody else.”

Exactly.

That's the value.

MATH's Unusual Investment Thesis — 10:50

Jeff Martin: When I ask investors what they look for, the answers tend to sound similar.

Big market.

Founder.

Team.

You might be the only investor I've talked with who so explicitly says:

It's about their unfair advantage in getting customers.

Troy Henikoff: Acquire and retain customers.

If you can acquire and retain customers, almost everything else gets easier.

Can Investors Really Evaluate Execution? — 11:22

Jeff Martin: People always say they invest in the founder and team.

But I don't think investors necessarily spend enough time—or have a particularly good way—to evaluate whether the team can actually execute.

Most teams I come into have significant gaps in their operating systems.

A common pattern is that the CEO builds the original team.

Then the company grows into a team-of-teams structure.

They hire a head of product.

Head of sales.

Head of engineering.

They hire experienced people who have done it before.

But every one of those leaders arrives with their own system.

Sales wants OKRs.

Somebody else wants initiatives.

Another person wants EOS.

Now the CEO is trying to be collaborative and ends up stitching together an entirely new operating system out of pieces.

I see that almost everywhere.

So if you're investing at seed, Series A, maybe even Series B, how much are investors really evaluating:

Do these people have the right execution model?

Can they actually operate the company?

What Matters Changes With Stage — 12:59

Troy Henikoff: The relative importance changes dramatically based on the maturity of the company.

Let's take two extremes.

At the very earliest stage, when you're just a startup with an idea, the founders are almost the only thing that matters.

You have an idea.

You're going to test it.

Do customer discovery.

Pivot.

Pivot again.

Pivot again.

You keep moving until you find product-market fit.

Then you start executing against it.

The only constant from the moment I first meet you until you eventually get to execution is the people.

Everything else can change.

The target customer.

The market.

How you describe the product.

The actual solution.

So at the earliest stage, it really is about the founders.

That's why, in Techstars selection, we used to say:

Team. Team. Team. Market. Solution.

The first three are team.

At the Other Extreme: Public Companies — 14:08

Troy Henikoff: Now take the other extreme.

A publicly traded company.

It's completely reasonable for me to invest in a public company where I've never met the CEO.

I might not even know the CEO's name.

Who's running IBM today?

I have no idea.

Could I still invest in IBM based on numbers?

Earnings per share.

P/E ratio.

Operating performance.

Of course.

So at one end, the investment is almost entirely about people.

At the other end, it can be almost entirely about numbers and operations.

As the business moves along that continuum, those things change in importance.

The Founder Who Starts the Company May Not Be the CEO Who Scales It — 15:00

Troy Henikoff: The skills needed to build something from nothing are also very different from the skills needed to take something from a Series B to a Series C.

At that later stage, you already have product-market fit.

You have processes.

You're incrementally improving and scaling.

Most of the time, the leadership required in those two phases will be different.

Sometimes it isn't.

We can point to Zuckerberg.

Bill Gates.

Larry Ellison.

There are examples.

Jeff Martin: One in a million.

Troy Henikoff: Exactly.

The vast majority require different skills.

Troy's Realization at SurePayroll — 15:28

Troy Henikoff: When we started SurePayroll, the first internet payroll company in the country, I told my wife:

“This is the dot-com boom.”

“We're going to build this.”

“We're going to take it public.”

“I'm going to be the CEO of a public company.”

“This is a once-in-a-lifetime opportunity.”

Then a number of things happened.

One was that I eventually realized I would've been a really bad public-company CEO.

I never would've made it.

I'm a pretty good founder.

I'm really good at:

Scrappy.

Bubble gum and duct tape.

Finding product-market fit.

Bob and weave.

Talking to customers.

Getting dirt under my fingernails.

But by the time we got to around 80 employees and I had managers reporting to me about the people they were managing, I wasn't enjoying it.

I don't know whether I didn't like it because I wasn't good at it, or I wasn't good at it because I didn't like it.

But it wasn't the cloth I was cut from.

I wanted to go do another startup.

I'm a good founder.

I'm not a good scaled-company CEO.

The Operating System Becomes Critical Around Team of Teams — 16:52

Jeff Martin: That's where I see an important shift too.

At day one, you don't need the same kind of operating system that you need later.

The founder is running something closer to the scientific method.

You have hypotheses.

You test things.

Maybe you put some wireframes in front of people.

You try a different positioning.

You see what gets traction.

When the founder is directly managing everybody, that works.

Once you get to roughly 20 employees and you start hiring people who themselves manage people, you're becoming a team of teams.

Then it changes.

You can't personally manage everything anymore.

If you try, you become the system.

You're the person who constantly tells everybody:

Here's where we're going.

Here's what we need.

Here's what you should do.

Then you check whether they did it.

You're the single point of failure.

That's a bad setup.

Micro-Pivots Never Stop — 18:07

Jeff Martin: Once you move beyond the one-pizza-team stage, you need a model.

But execution still involves continuous iteration.

People sometimes treat “pivot” like it's a bad word.

But companies are constantly making micro-pivots.

You're always testing.

Learning.

Dialing things in.

So if I'm evaluating a leadership team, I'm interested in:

Where have you iterated?

Where have you changed course?

How quickly did you learn?

How well did you share that learning?

How quickly could you focus the organization around what mattered most?

I think the best teams are able to test a lot, learn, adjust, and find their way.

Intellectual Honesty Is a Founder Superpower — 19:42

Troy Henikoff: You're describing the activities successful teams engage in.

As an early-stage investor, I'm trying to identify the characteristics that cause people to behave that way.

I'm looking for intellectual honesty.

I'm looking for people who take accountability.

Someone who says:

“I tested this.”

“It didn't work.”

“That's okay.”

“Here's what I learned.”

“And here's where I'm going next.”

What's interesting is that many great entrepreneurs have big egos.

They're stubborn.

Those traits can be useful.

But if the ego gets too large and the stubbornness becomes too extreme, it gets in the way of intellectual honesty.

You need to be able to admit:

I'm not always right.

The customer is right.

What does the data tell us?

What do the results of these experiments tell us?

How do we use that information to guide our decisions?

Those are characteristics I see in founders I enjoy working with and founders who often become successful.

Don't Model Yourself After the Exception — 20:58

Troy Henikoff: The problem is that the exceptions get all the press.

Think about Steve Jobs.

I never met him, but I'm guessing he had a pretty large ego and was fairly stubborn.

People I know who worked with him would probably confirm that.

He doesn't exactly fit the personality I just described.

And yet he built one of the biggest companies in the world.

His investors got frustrated with him.

They kicked him out.

The company got worse.

Eventually they brought him back.

You can find other exceptional stories.

But founders will read about some company that went from zero to a billion-dollar valuation in two years and think:

“That's what I should do.”

And I tell them:

You read about it because it's not normal.

If it were average, nobody would write about it.

Nobody writes:

“Troy Henikoff got out of bed today and walked across the street.”

That's normal.

That's not news.

They write:

“Boy gets struck by lightning three times.”

Because that's abnormal.

Sometimes consuming too much startup press is a disservice.

Lifelong Learning — 22:14

Jeff Martin: I've narrowed high-performing teams down to five behaviors.

One of them is learning.

You have to be a lifelong learner.

Maybe more importantly, you have to learn how to learn.

You could even use Steve Jobs as an example.

Whatever his personality was, he was constantly learning.

People who are eager to learn are the ones who can change.

And if you can't change, you can't evolve.

The same applies when hiring into venture-backed companies.

If you're doing something that's never been done before, you need learners.

Ask candidates:

What are you learning?

What do you love learning?

Give me examples of something you had to teach yourself.

If people aren't willing to learn, they're not willing to change.

And if they're not willing to change, your company isn't going to grow.

Investing Is a License to Learn — 23:29

Troy Henikoff: That's one of the greatest gifts of being an investor.

I'm not investing today because I need to pay my mortgage this month.

I continue doing it because I love learning.

Think about what I get to do.

I sit at a table—or on Zoom these days—and people come in and tell me how they're going to change the world.

They tell me about the next great technology.

About how they're going to make the world a better place.

Out of a few hundred of those conversations, maybe I get the opportunity to work closely with one and help them try to achieve that dream.

The only way to do that well is to stay open-minded.

To keep learning.

Not just new technology.

Customer behavior.

New ways to approach business.

Everything changes.

If you don't want to be a lifelong learner, you can't sit in this seat.

Why Troy Still Teaches — 24:05

Troy Henikoff: That's also why I teach at Kellogg.

I learn so much from the students.

I'm about to take a group of 12 students to San Francisco for an AI-focused trip.

We're going to spend three days meeting with people at places like OpenAI, Google, Nvidia, and Techstars.

I feel like I learn more than the students do.

People ask:

“What are you going to do when you retire?”

And my reaction is:

“When I what?”

Why would I retire?

This is what I want to do for the rest of my life.

What are you going to do when you stop learning?

I don't want that ever to happen.

When the CEO Is the Problem — 25:21

Jeff Martin: About 18 months ago, a fintech CEO came to me.

She said:

“My team isn't aligned.”

“Product wants to go one way.”

“Sales is saying something different.”

“Customer success isn't mature enough.”

It sounded like the types of problems I hear all the time.

We started talking about cadence.

Goals.

OKRs.

The systems seemed like they were mostly there.

But the deeper we got, I started hearing things like:

“I'm telling them to do this, but they're not doing it.”

“Everything has to come through me.”

“I'm sick of making every decision.”

“This team isn't doing what I told them.”

Eventually I realized the fundamental problem wasn't really the system.

The CEO simply wasn't collaborative.

She believed she knew what needed to happen and everybody else just wasn't getting onboard.

We ultimately decided it wasn't a good fit for us to work together.

She was standing in her own way.

Supporting the CEO Instead of Managing the CEO — 27:15

Troy Henikoff: I see a version of that from the board seat too.

I've had five board meetings in the last two weeks.

It's board-meeting season.

When I was running companies, I viewed my role as supporting the people who were running each function.

Now, as a board member, I view my job as supporting the CEO.

First-time founders can come into their first board meeting feeling like a fifth grader sent to the principal's office.

They think they're there to report what happened.

After a couple of meetings with good board members, they start realizing:

“No, wait.”

“These people are here to help me think through difficult problems.”

“To give me different perspectives.”

“To help me create solutions.”

If they ask my opinion, I'll give it.

I won't sugarcoat it.

But at the end of the day, if you're the CEO and I'm the board member, I'm going to say:

“Jeff, you decide.”

The CEO's Job: Direction, People, and Money — 28:39

Troy Henikoff: When I was CEO, I saw my role similarly.

I wanted to clear things out of the way so my people could do their jobs.

If I did three things reasonably well, we'd probably succeed.

One: articulate where we're going so everybody is rowing in the same direction.

Two: make sure we have the right people in the boat.

Three: make sure we never run out of money.

I didn't dictate how everybody did their work.

I helped define where we were going.

They had to figure out how to get there.

That made the work more interesting for them.

It made it more fun for me.

That was my style.

There are lots of styles of successful CEOs.

Mine was collaborative.

What Great Board Meetings Look Like — 29:30

Jeff Martin: Board meetings are similar to the weekly operating meeting I teach.

Hopefully everybody gets the board materials ahead of time and knows the basic numbers.

The meat of the meeting should be:

New opportunities.

Big issues.

Relevant experience.

Inputs that help the CEO make decisions.

Bad board meetings are often just a bunch of presentations with no real conversation.

Troy Henikoff: One hundred percent.

I've had five board meetings in the last two weeks.

And I had this exact conversation with the management team after the last one.

The best board meetings are formulaic in a useful way.

The company has a consistent set of charts, graphs, and metrics that gets published every quarter.

Always the same format.

That's good for two reasons.

Board members know how to read it.

And management doesn't have to reinvent the presentation every quarter.

They simply update the numbers.

Use the Pre-Read as a Pre-Read — 30:50

Troy Henikoff: Then there's additional background on the actual strategic topics you want to discuss.

That goes out as a pre-read about a week before the meeting.

And you say clearly:

“We are not going through these slides in the meeting.”

“If you have questions, send them to me.”

Then at the beginning of the meeting, spend 15 or 20 minutes addressing those questions.

“Someone asked about slide five.”

“Here's what that dotted line means.”

Clarify it.

Discuss it if necessary.

Move on.

Then say:

“Here are the three strategic questions we need to discuss today.”

Should we go up-market or down-market?

How should we think about CAC and LTV?

Whatever the actual issues are.

Then spend the rest of the meeting on those.

Board Meetings Should Help You See the Forest — 31:28

Troy Henikoff: That's more fun for the board because it's interactive.

But more importantly, management actually gets useful feedback.

A board meeting is a once-a-quarter opportunity to get out of the trees and see the forest.

The management team is in the weeds every day.

Board members are far enough away from the details that they can help you look at the bigger picture.

Those are the most productive board meetings.

They're more fun.

They're less stressful.

A board meeting should not feel like being dragged into the principal's office.

If it does, you either have the wrong board or the wrong board dynamic.

You should think:

“I can't wait to talk about this with my board.”

“I want their perspective.”

Weekly Leadership Meetings Should Work the Same Way — 32:35

Jeff Martin: That aligns almost exactly with how I teach leadership teams to run weekly meetings.

Annually, we define the three-year vision.

The one-year plan.

Then the OKRs for the next quarter.

Weekly, we review those OKRs.

On course?

Off course?

We look at the KPIs we established from the annual plan and break them down monthly or weekly.

Anything that's off goes into what we call triage.

Then we have updates.

But there should be very few.

The rule is:

An update is just an update.

It should be prepared ahead of time.

It should matter to most of the people in the room.

And there's no discussion because it's an update.

Stop Wasting Meetings on Status Updates — 34:00

Jeff Martin: Most teams spend huge amounts of time going around the room giving updates.

The reason is that they didn't do the upfront work.

They never really defined:

What are we trying to accomplish?

Who's responsible?

When will it be done?

Everybody has sat through that meeting.

You get to Steve.

And you know Steve is going to talk for 15 minutes because he wants everybody to know he's working hard.

It's a waste of time.

If you've already aligned around OKRs and KPIs, you don't need that.

You review them.

Then move into triage.

Spend Meeting Time Solving What's Off Course — 35:00

Jeff Martin: In triage, we ask:

What's off course?

Which KPIs?

Which key results?

Which objectives?

Is there anything else urgent or important?

Rank them.

Pick the top three or five.

Then go one at a time.

What's actually happening?

What's the core issue?

What's the solution?

What's the next action?

Track it.

Then move to the next.

Don't spend the meeting rehashing everything that's already working.

Solve problems.

Talk about opportunities.

Then come back next week and inspect what changed.

That's how teams make those constant micro-pivots.

Troy Henikoff: I think about that as management by exception.

Communicate everything else in advance.

Board packet.

KPIs.

OKRs.

Then spend your synchronous time on the exceptions.

Problems.

Opportunities.

Why waste meeting time on everything that's on course?

Visibility Without Micromanagement — 36:32

Jeff Martin: I probably go another layer deeper philosophically.

The CEO should know what people are doing and how things are progressing.

But they shouldn't have to tell everybody exactly how to do the work.

It should be collaborative.

A visionary CEO needs vision forward.

But they also need visibility inside the organization.

And they shouldn't have to burn energy constantly zooming in and out by chasing people for information.

The system should already provide that visibility.

A lot of CEOs spend their time dropping into sales to solve a problem.

Then engineering.

Then marketing.

But the whole leadership team should understand what's happening across functions.

An engineering milestone affects marketing.

Marketing affects sales.

These teams are highly cross-functional.

Lack of visibility is often what stalls execution.

What Makes a Great Board Member? — 37:51

Jeff Martin: You sit in a lot of board meetings.

What makes a good board member?

Troy Henikoff: I don't think there's one definition.

If I were building a board today, I'd want diversity across multiple dimensions.

Ethnicity.

Gender.

Race.

Different life experiences.

Not just because diversity is intrinsically valuable, but because people with different experiences bring different perspectives.

My job as a board member is to give the CEO my perspective.

The CEO still makes the decision.

The more varied the perspectives around the table, the more useful information the CEO gets about employees, customers, and the market.

A Board Is More Like a Football Team Than a Basketball Team — 38:57

Troy Henikoff: I also want diversity of skill sets.

I think of a board more like a football team than a basketball team.

On a basketball team, every player can do many of the same basic things.

Dribble.

Pass.

Shoot.

A football team is much more specialized.

One person's job is to kick.

Another passes.

Another catches.

Another blocks.

A board is like that.

I want somebody with deep industry expertise.

I want someone with scaling experience—not where the company has been, but where it's going.

If I'm at $10 million in revenue, I want someone who's taken a company from $10 million to $30 million to $100 million.

I want deep financial expertise.

Someone who can help me think about and connect into the next financing round.

I want operational expertise.

Someone I can call and say:

“I have two VPs who are fighting.”

I may want deep sales experience.

Fill the Gaps Around the Management Team — 40:00

Troy Henikoff: Think of all the expertise the business needs as a Venn diagram.

Some of those skills already exist on the management team.

If they're there, you don't necessarily need them duplicated on the board.

Identify the holes.

Then use the board to fill those knowledge gaps.

You're never going to fill every hole perfectly.

And you shouldn't build a gigantic board.

An early-stage company's first real board might be three people.

Later, maybe five.

Once boards get much larger than that, scheduling, signatures, and coordination become harder.

So people often have to fill multiple roles.

I'm an operator first.

I have lots of operating experience.

I also have decent financial skills and teach financial modeling.

Maybe I fill two of the gaps.

That's how I think about board construction.

Why Troy Isn't a Big Fan of Formal Advisory Boards — 42:04

Jeff Martin: If there are still gaps after the management team and board, how should founders fill them?

Troy Henikoff: Other investors can be really useful.

People who aren't on the board but still have a vested interest in the company.

Early-stage companies often have angel investors who can provide expertise.

I'm not a huge fan of formal boards of advisors.

Part of that is based on my own failure.

At SurePayroll, I had a board of advisors.

Four world-class people.

And it didn't provide much value.

I want to be very clear:

That was not their fault.

It was mine.

I didn't have time to manage the company, manage the actual board, and then properly manage another board of advisors.

You Get Out of a Board What You Put Into It — 43:00

Troy Henikoff: We had quarterly advisory-board meetings.

I'd throw together a deck an hour beforehand.

“Here's revenue.”

“Here's what's happening.”

“Here's this.”

“Here's that.”

Ninety minutes later, they'd say:

“Sounds like everything is going well, Troy. Can't wait to hear another update in three months.”

Then they'd leave.

I got nothing from it.

I could probably do a better job today.

But managing two boards is a lot of work.

Managing one board properly is a lot of work.

And I want entrepreneurs to hear this:

The rewards are 10x what you put into it.

If you put very little into the board relationship, you'll get very little back.

If you keep board members updated, prepare thoughtful materials, and make sure the board and management are aligned, the board can become one of your most valuable resources.

How Transparent Should a CEO Be With the Board? — 43:45

Jeff Martin: A lot of CEOs aren't sure how transparent they should be.

How much information does the board really need?

Troy Henikoff: I have a very strong opinion on this.

If you're not comfortable being 100% transparent with your board, something is wrong.

Maybe your attitude is wrong.

Maybe you have the wrong board members.

Maybe the relationship is broken.

But it's a failed relationship.

That doesn't mean you dump every piece of information on them every time.

You'll overwhelm them.

They won't have enough time to process everything and identify what actually matters.

Those are two different things.

Full Transparency Doesn't Mean Information Overload — 44:24

Troy Henikoff: You should feel totally comfortable with your board having visibility into anything inside the company.

But for the meeting itself, give them the standard reporting package.

Something consistent.

Something they already understand.

Then decide:

What are the most important things happening right now where the board can actually help?

Provide the information necessary to direct the conversation toward those topics.

I'm not telling you to withhold information.

I'm telling you to curate the information so the conversation is useful.

“The Shit Hit the Fan. I Need Your Help.” — 45:19

Troy Henikoff: I know I've succeeded as a board member when a CEO I've invested in calls me and says:

“The shit hit the fan. I need your help.”

If I'm their first phone call on the worst day, I know we have the right relationship.

I have a number of CEOs where that's the case.

I cherish those relationships.

They know I'm there to help.

They know they can be completely transparent.

On their darkest day, they call me first.

Then I know we've built trust.

Budget vs. Forecast — 45:53

Jeff Martin: Let me ask you something related to planning.

Let's say we're in Q3 planning.

We're reviewing KPIs.

OKRs.

What worked.

What didn't.

Then we plan the next quarter.

We also revisit the one-year plan.

Suppose the company originally planned to hit $35 million in ARR.

Reality now says they're probably going to hit $25 million.

Some teams want to change the target.

Others say:

“No. We committed to $35 million. Leave it.”

I've even had the reverse.

They're going to outperform the goal and still don't want to change it.

As a board member, how often should teams change those numbers?

Intellectual Honesty in Financial Planning — 47:43

Troy Henikoff: I'm going to unpack that because there's a lot in there.

I believe strongly in intellectual honesty.

The way I've landed on this has two components.

First:

Once we establish the annual budget, we keep the budget.

Jeff Martin: Expenses?

Troy Henikoff: Revenue too.

Revenue.

Expenses.

Everything.

That's the budget.

Then as the year unfolds, reality diverges from that plan.

That's what we call the forecast.

So at the board meeting, we show:

Budget.

Forecast.

Actuals.

Actuals look backward.

Budget and forecast look forward.

That gives you both perspectives.

What did we originally plan?

And based on everything we know today, where do we honestly believe we're going to land?

The Forecast Should Be a 50/50 Shot — 48:25

Troy Henikoff: The forecast should be a 50/50 shot.

Fifty percent chance you land above it.

Fifty percent chance you land below it.

It should represent management's intellectually honest assessment of where the business is going.

That gives you both pieces without rewriting history.

Using a Waterfall to Track How Your Thinking Changes — 48:53

Troy Henikoff: The second tool we use is a waterfall.

I use it in all my board meetings.

Imagine laying out expected monthly revenue for the year.

Then January happens.

You replace January with actual results.

And you update your forecast for every remaining month.

Then February happens.

Replace February with the actual.

Update the rest.

As you move down the year, you can see how your view evolved.

“I thought we'd finish at $25 million.”

“Then $25.5 million.”

“Then $26 million.”

“Then the world changed and I thought $24 million.”

“Here's what I believe now.”

The beauty of the waterfall is that it shows how your perspective changed over time.

Again:

Intellectual honesty.

ARR Is Not a Leading Indicator — 50:00

Troy Henikoff: We usually do waterfalls for three major metrics.

Those vary by company.

Could be ARR.

Cash.

Number of customers.

Churn.

Whatever the three most important measures are.

But there's one thing you said earlier that I disagree with.

You used “leading indicator” and ARR in the same sentence.

ARR is not a leading indicator.

Jeff Martin: You're right.

It's a trailing indicator.

I'm thinking of the leading indicators of sales.

Troy Henikoff: Exactly.

Pipeline.

Number of leads.

The things happening earlier in the funnel that will produce future ARR.

Manage the Levers You Can Control — 50:43

Troy Henikoff: Ultimately you need to hit ARR.

But what I'm more interested in is:

What activities can you control that will affect ARR?

When we're building a financial model, we don't just type:

“ARR will be $35 million.”

We model things like:

How much are we spending on advertising?

How many sales reps do we have?

What's the conversion rate?

Those are the drivers.

Those are the levers that ultimately produce ARR.

OKRs Should Build the Capabilities Needed to Hit the Metrics — 51:09

Jeff Martin: That's also how I think about OKRs.

A lot of teams use—or try to use—OKRs.

But there are nuances to doing them well.

I use OKRs as a way to build the capabilities in the organization necessary to hit the metrics.

If the target is $35 million ARR, then ask:

What must we build or accomplish in the next 90 days to make that more likely?

That's where OKRs become powerful.

They're not separate from the job.

They're the most important things you're doing to build the company.

“I Already Have a Job. Now I Have OKRs Too?” — 51:35

Jeff Martin: Sometimes people say:

“I already have my normal job.”

“Now I also have these OKR things to do.”

But in a company that's actively building and growing, the OKRs should represent the work required to build the organization.

If you're inside a huge, stable enterprise with thousands of employees, maybe most of your job is maintaining an established system.

But in an early-stage or growth-stage company, part of your job is building what doesn't exist yet.

If you've chosen the right OKRs, they shouldn't feel like a second job.

They should reinforce what's most important in your actual job.

Troy Henikoff: In an early-stage company:

OKRs are your job.

If you're spending a lot of time on things outside the OKRs, either:

The OKRs are wrong.

Or you're doing the wrong work.

Jeff Martin: Or you're the wrong person for the role.

Troy Henikoff: Okay. Three options.

Alignment Is the Real Power of OKRs — 53:01

Jeff Martin: That's often the conversation.

People say:

“This is extra.”

And I have to remind them:

No.

You're in a growth company.

This is the job.

When OKRs are done properly—and layered properly—they can be an incredibly powerful tool.

They create transparency.

Cross-functional collaboration.

Alignment.

But there are nuances.

Troy Henikoff: I completely agree.

They also make sure everybody is rowing in the same direction.

If everybody knows what everybody else is doing and it all aligns, then the work and the OKRs are the same thing.

That's how you create alignment.

What Venture Doesn't Talk About Enough — 54:12

Jeff Martin: Two last questions.

First:

What do you think people aren't talking about enough in the venture and technology world?

What's important but under-discussed?

Troy Henikoff: The world is changing right now.

Part of why we chose not to raise our next fund in 2022 was that people weren't talking enough about creating real business value.

They were focused on:

“How much money did I raise?”

“At what valuation?”

There was a valuation bubble.

It got crazy.

We made very few investments after 2021 when the market ran up.

In hindsight, that was a smart decision because the market ultimately came back down.

Stop Celebrating the Fundraise — 54:56

Troy Henikoff: People get wrapped up in the venture world and obsess over:

“How much money did I raise?”

The better question is:

“Am I actually delivering value to customers?”

I've heard it put this way:

There are venture capitalists and there are valued customers.

I'd much rather have valued customers.

Entrepreneurs don't focus enough on customers.

And there's another thing very few founders fully understand:

Their cap table.

Where Enterprise Value Is Actually Created — 55:35

Troy Henikoff: Value is created for both the founder and the investor in the delta between the post-money valuation of your last round and the pre-money valuation of the next round.

If you raise at a $10 million post-money valuation, and your next round has a $10 million pre-money valuation, what have you actually accomplished?

You stacked more capital into the company.

But you didn't create additional enterprise value.

If you eventually sell at roughly the post-money valuation of your last round, investors may simply get their capital back.

There may be almost nothing left for common shareholders.

Real value creation is:

Raise a relatively small amount of capital.

Build a much more valuable business.

Exit at a substantially higher number.

That's when everybody wins.

Fundraising Is Not an Accomplishment by Itself — 56:20

Troy Henikoff: There's too much focus on fundraising.

Not enough focus on the actual accomplishments of the business.

Jeff Martin: I think capital efficiency should be one of the CEO's most important areas of focus.

I almost see the CEO as an investor.

They're allocating resources inside a portfolio of opportunities within the company.

Investors Have Portfolios. Founders Have One Company. — 56:37

Troy Henikoff: That's an important distinction.

Most venture investors have portfolios.

And founders should understand something:

The larger the investor's portfolio, the less any one individual company necessarily matters to that investor.

Some investors use a spray-and-pray strategy.

Hundreds of investments.

Maybe thousands.

Their model works if a tiny number become enormous winners.

That means they can encourage companies:

Raise a ton.

Go big or go home.

Swing for the fences.

Because if 995 fail and five become giant winners, the portfolio can still work.

But the entrepreneur has a portfolio of one.

That's your company.

If you take extremely high-risk, high-reward bets, maybe one works.

But statistically, a lot of those bets go to zero.

With a portfolio of one, I would think very carefully about that risk.

Why Troy Likes Boring Businesses — 57:30

Troy Henikoff: I'd focus on:

Capital efficiency.

Creating real value.

Growing enterprise value.

That's part of why I've always been attracted to boring industries.

We made a bunch of money in payroll.

What could be more boring than payroll?

But every business has to do it.

They can't simply ignore payroll.

They need a solution.

We built a better one.

Steady growth.

SaaS.

Recurring revenue.

Maybe boring by startup standards.

But very real.

CEOs Allocate Capital, Time, and Energy — 58:18

Jeff Martin: I think about the CEO operating on a timeline.

You bring capital into the company.

Then your job is to deploy that capital efficiently.

Make sure the team focuses on the right things.

Make sure you have the right people.

And recognize the team only has so much energy.

So I think of it as:

Capital creates resources.

People create energy.

Time creates the constraint.

The CEO has to allocate all three.

It's almost like one of those old strategy games.

You have a finite amount of gold.

Stone.

Workers.

You decide how to allocate everything.

You fail once.

Then realize there's a logic to it.

Eventually you understand how the system works.

The Power of Saying No — 59:00

Troy Henikoff: I'll boil it down even further.

Entrepreneurs have two finite resources:

Time and money.

When you say no to one thing, you create the ability to say yes to something more valuable.

Many times, what you say no to is more important than what you say yes to.

Saying no is incredibly powerful for an entrepreneur.

It preserves your time.

It preserves your money.

Then you can deploy those resources toward something that matters more.

Jeff Martin: You only have so much.

The Desert-Island Album — 59:45

Jeff Martin: All right.

Last question.

It's actually more of a scenario.

Unfortunately, you're trapped on a desert island for the rest of your life.

It's a beautiful tropical island.

You have all the resources you need.

Food.

Shelter.

Healthcare somehow.

The one thing you don't have is entertainment.

Luckily, an old '80s boombox washes ashore.

Unlimited batteries.

But you're only allowed one album to listen to for the rest of your life.

Any genre.

Any era.

What's the album?

Troy Henikoff: If it had to be from the '80s—

Jeff Martin: It doesn't.

Troy Henikoff: I was just having this conversation with my daughter.

She's 23.

She picked an album that I think many younger entrepreneurs today may not even know:

Warren Zevon's Excitable Boy.

That's an amazing album.

It would absolutely be on my list.

I love '80s music.

That's when I was in college.

I'm an old man.

Van Morrison's Poetic Champions Compose is amazing.

If I wanted something more upbeat, maybe Bowie.

But—

Jeff Martin: Final answer.

Troy Henikoff: Final answer.

I'm going Warren Zevon.

Excitable Boy.

If you haven't heard it, go listen to it.

Jeff Martin: Awesome.

Thanks for joining me on Tech Scenes for the second time.

Troy Henikoff: It's great to see you.

I'd love to keep the conversation going.