Cash flow is a simple concept but it still seems to take many entrepreneurs by surprise when they start actually operating their businesses and experience negative cash flow for the first time.  The cash flow issues in a startup are more related to people issues than is reflected in a typical textbook discussion.

Simply put, gaps in cash happen when you have to pay suppliers at one point in time, but you don’t receive revenues from your customers until a later point in time.  Even if costs are less than revenues (so profit is positive) until the money collected catches up with the money that goes out, the entrepreneur will be in a cash flow crunch which must be covered by reserves or other funds.

Cash flow might seem to be purely a financial issue, but people issues are interwoven.  On the cost side, for example, if you can get favorable terms from a supplier, as Rosa Sugrañes managed when she started Iberia Tiles (see Sugrañes video) because of strong personal relationships, that can make a big difference.  On the other hand, when you are a new player, like Chris Wilkerson, was when he founded his company EquipSystems, you can find that your customers (in his case, hospitals) are slow to pay and you have little recourse because you need their business (see video – Wilkerson).

Can entrepreneurs play the same game, promising to “put the check in the mail” but actually delaying payment?  Yes, but doing so can really sour personal relationships.  My brother, a social media expert and marketing guru (see his informative blog In the Loop), recently wrote to me about a situation where he and others did work for an acquaintance who had started a company.  The entrepreneur contracted work with freelancers but didn’t pay them for months (some are still chasing down their payments).

In my brother’s words:

“Maybe this particular company will succeed …. But I wonder what legacy is left behind with the people who get stiffed along the way.  I’m thinking it might not really impede a company’s ability to survive since most people aren’t going to sue to get their money.

Or are they?

A question to ask is yourself is whether you really want to found your company by unfairly squeezing the cash flow of other small companies.  What relationships do you want to establish with the people around you? After all, in life these things have a way of coming around to bite you.  Alternatives to stringing along your small suppliers?  Raise adequate cash at the outset of your company, bargain for good payment terms, and control your costs.

“Managing people is just one of those skills that you are either good at or you’re not.” That’s according to Aaron Rosenberg, founder of Sight Speed,  a startup that successfully exited through an acquisition by Logitech in 2008.  He goes on to admit that he is not good at handling employees because he likes to micromanage.   Listen to the clip to hear more.

What strikes me about his comment is how common it is among the hundreds of founders I have interviewed.  The majority don’t really like one aspect of the growth phase  of business, the part where you have to start adding and managing lots of employees.    My theory?  There is something about the founder mentality that doesn’t translate well into a management mindset.

After all, different skills are needed to found a company than are needed to manage a team really well.  The startup phase is all about flexibility, staying open to opportunities, turning on a dime to the dictates of the market, delivering the goods no matter how late you stay up (all night, in many cases).   Founders have to deal with, if not thrive on, a lot of adrenalin-based activity.  Well-managed growth is about putting systems in place, creating business processes, sort of ordering all the chaos that fueled the start of the business.

The problem is that employees cannot run at high speed all the time for long periods of time without burnout.  To be productive in the long term,  employees needs both a sense of urgency and periodic times when they are not running at a red hot speed. This phenomenon was studied by a previous colleague of mine, Theresa Welbourne, now a Research Professor at the Center for Effective Organizations, University of Southern California, Marshall School of Business .  Theresa came up with a way to measure and analyze the “pulse” of employees; development of her method led to the start of her company, eePulse,  focused on “optimizing the “energy” of everyone everywhere.”   And to optimize, managers need a careful balance between a sense of urgency and needed respite from highest levels of stress.

Entreprenuerial teams seem to have a capacity to run even on empty.  Nonetheless, sustained growth requires a different type of environment, one which can tolerate high performance individuals who will be there for the long haul.

Bottom line:  If founders 1) aren’t “naturals” at management and/or 2) are not motivated to learn how to manage people, and/or 3) don’t add someone on the team who is a good manager, it will hinder growth.

Welcome to your employee’s life

When he was running his wings restaurant Mugzees, Kurt Zitzner (now owner of 24 Hour Home Renovations LLC) learned that it is all too easy to let the boundary slip between the owner and the employee.  One day, one of his best employees shows up carrying his belongings in a garbage bag because of being evicted.  Before he knew it, Kurt was entangled, offering a place for the employee to stay and helping him out of the jam.  It left Kurt worrying how to drawn the line between the personal and professional.

The theme in Kurts’ story—the difficulty of navigating the boundary between being the boss and the personal side of dealing with employees–has been echoed by dozens of entrepreneurs I have interviewed.  No magic formula has emerged. I’m left with the message that entrepreneurs need to monitor, evaluate and evolve their own mode of operation.  The payoff, as noted by Jim Farrell, CEO and Founder of F’Real is that you get up everyday and know that what you are doing has helped to support other people and their families.

Entrepreneur, Know Thyself

One thing that I find takes entrepreneurs by surprise is that employees may be motivated quite differently from the founders.  I recall my dismay in an early interview when a startup entrepreneur expressed his outrage that his employees expected to be paid on the same day every week.  When I mildly suggested that it might be because they had to pay their daycare providers or rent bills on time, he just huffed and said that everyone should be focused on making the business a success, not on getting paid on a certain day.

Danny Stein, founder of eMusic, looks at it completely differently.  He recommends that entrepreneurs go through the “high anxiety of critical self-evaluation” so that by knowing themselves, they can build a team that will be balanced and diverse.  In the process, the entrepreneur needs to pay attention to exactly what inspires employees to engage, which can be emotional, financial, social or some other motivation.

Entrepreneur, Know thine environment

In one of my favorite clips, Miguel Morales,  from Monsanto, says “managers need to be aware that there is a natural resistance to change and there’s nothing wrong about that. A manager needs to have the ability to identify opportunities to help their employees to cope with change.”  If that is true in corporate America, it is even more evident in an entrepreneurial setting, where change is the norm.   It is hard on employees when strategy, product, marketplace, and personnel shift over and over again, even though that evolution is carrying a startup firm to success.  One element of managing employees in such an environment is to acknowledge that it can be unsettling.

Staffing Up – A sign of success

Imagine your startup company, after months of negotiations, has just signed a joint venture deal, the first big growth milestone of the business.  The deal vaults you into a production scenario that is going to bring in revenues just in the way you promised your early investors it would.  And to grow that fast you need to “staff up.”

But “staffing up” does not come easily to most entrepreneurs.  Used to working with a nimble and devoted small team, CEOs of small companies find themselves scrambling to find people with the right talent and temperament to fit into the culture of the business.

Working in an entrepreneurial company is not for everyone

Hiring based on skills alone does not always work well for companies that are growing aggressively.  While she was growing AgraQuest, Pam Marrone (who also recently founded Marrone Bio Innovations) found that although people with corporate backgrounds might have the technical knowledge she needed, they could not always adjust to the speed and work ethic needed in her innovative and rapid growth company.

Hire slow and fire fast

For Steve Leveen, CEO and Co-founder of Levenger (note: their products are to die for if you love high-quality pens and other things for the office), he wanted employees that were agile.  But he learned the hard way that it is critical to “hire slow and fire fast. ”  Why? Because it is expensive and painful to fire someone when you find out the fit is not right.

Just ask Diane Darling, CEO of her own consulting firm, who had to fire an employee who was also a good friend.  After seeing a few red flags, she finally found that her employee did something that was out of step with Diane’s company values.  The result?  Sleepless nights, legal fees and personal disappointment when the employee then started a competitive business.

To hear other entrepreneurs talk about firing employees,

Check out:  Rachel Trimarco, Founder & CEO of Bridal Flower Divas talk about and Miki Agrawal, Founder and CEO of The Slice talk about their experiences.

How do you hire right so you avoid hiring?

When he hired his first set of employees to start up his restaurant Mugzees, a Kurt Zitzner followed a vigorous set of hiring practices, based on what he learned at Cornell’s Hotel School and what he could find online regarding conducting interviews.  That worked fine and led to long-term hires.   But when the business grew quickly and he needed to hire someone in a rush, he let those first “best practices” fall to the wayside.  The result?  Substandard employees, who he ended up having to fire.  After being burned by hiring too quickly, Zitzner quickly returned to a more systematically sourcing and filtering of employees.

This eClip cites Priceline.com founder Jay Walker, who says, “I’d rather have an “A” Team aggressively executing a “C” idea then a “C” team trying to deliver the best idea in the world.”  That’s because the top notch team won’t settle for the mediocre idea, but will tweak it until it works.  But a dysfunctional management team will run a company into the ground no matter how good the original concept seemed.

So how do you put an “A” team in place during the startup phase?   Those individuals who give birth to a company make certain decisions that have profound consequences down the line, even though they may not realize it at the time.  Choices with a long tail include:

• Distribution of power/equity
• Decision-making structure
• Funding – choosing investors and staging
• Legal structures/entities

Most often, such decisions in startup teams are made at the height of entrepreneurial optimism, much like deciding to get married during the heady period of falling in love.  But if startup entrepreneurs don’t think through the future and all it could hold, their “marriages” (and the company) simply won’t last.

To illustrate I will tell three stories.

1. Paul Joseph (now founder and CEO of Contexed) started a bartending business while he was a student at Cornell with his best friend from childhood.   Things were terrific….for a while.  But Paul and his partner wanted different things from the business and eventually it became clear they had to split.  Not only did this lead to contentious debate over who had the rights to what they had developed [link here to the video], but it led to a longterm rift in their friendship.  When I interviewed Paul for the first time in 1993, he became visibly emotional about that loss.   Now, years later, he and his former partner are friends again, but Paul always cautions students about thinking through the long term when forming a partnership.

Bottom line:  If you are going to start a business with another person, especially a friend, plan out what will happen in both the best and the worst of circumstances. Have the difficult conversations up front and plot a pathway through the dissolution of the partnership (which you may never have to use).

2.  Novomer is one of the most exciting companies in the new materials space. The core concept was named by Esquire as one of the “One of the Six Ideas That Will Change the World” — using carbon dioxide as a major input in a competitively priced, precision-quality, chemical process that produces a class of uniform polymers, plastics and other chemicals (for a layman’s explanation, listen to this audio interview).    The company was founded by chemists Geoffrey Coates and Scott Allen.  Allen had been a Ph.D student in Coates’ lab and ran the company in the early years of the startup.  His successes led to growth and at a certain flex point, Charles Hamilton was hired to serve as President, which he did for nearly three years. As the company grew and attracted funding, another flex point occurred and the current CEO, Jim Mahoney joined the firm.

Why did the leadership change?  Success.  Each leader worked to grow the company, preparing it for the next phase of leadership. Scott stayed with the company as VP of Catalyst Development at Novomer, while Charles moved on to found his own company, Adenios.

Bottom line:  When a company is successful and starts to grow, the role/demands of the leader may change.  “A” teams know when/how to put a leader in place who has the highest probability of taking the company to the next major milestone.

3. Prendismo (my company) was founded about 18 months ago.  The President and co-founder, Kirsten Barker, is a brilliant Cornellian with whom I had worked for years.  Tony Eisenhut, Charmain and co-founder was a talented previous student of mine who had gone on to considerable success in the commercialization of university technologies.

As a startup team, Tony, Kirsten and I have that key thing that every textbook, article, blog, and expert contends is needed to be an “A” team – diversity.  Among the three of us, we are diverse in terms of background, skill set and ability – an ideal portfolio of talent.

But we have learned in this short time is that diversity in abilities also brings diversity in temperament and working style.  So working together is a journey in appreciating and tolerating these differences.  How do we make it work?  At the base of it all, we have a deep foundation of trust that allows us to be a highly functional team (see an excellent explanation of the role of trust by Patrick Lencioni, who authored my favorite book on teamwork).

Bottom line:  Startup teams should be made up of people who differ from each other.  As Jay Walker puts it:  “The more wackos you’ve got in the room, the better, as long as they’re smart, they’re honest, and they’re educated.”