Dinesh Moorjani Shares Tips on How Investors Evaluate Teams & Ideas, Navigating Growth, the Role of Your Board, and Pivoting
Dinesh Moorjani, an entrepreneur, CEO, and investor has incubated and built over ten early-stage companies, including the multi-billion dollar app, Tinder, as the former CEO of Hatch Labs. In an informal conversation with Shikhar Ghosh, Moorjani reflects on Tinder’s journey and the insights he gained starting and scaling the startup from an idea into one of the most iconic businesses of modern times. Drawing from his experience as an investor and advisor, he discusses how investors evaluate teams and ideas, and how rapid growth typically affects founders and teams. He offers advice to founders about the role of your board, and tactics to use when pivoting. A transcript follows the video.
Dinesh Moorjani interviewed by Shikhar Ghosh on September 25, 2019, at Klarman Studios, Harvard Business School.
Reflecting on the Founder’s Journey: Tinder’s Journey to Success, How Investors Evaluate Teams & Ideas, How Growth Affects Teams & Pivoting
SHIKHAR GHOSH: So then if you’re the co-founder of Tinder and that’s become an iconic, almost generation-defining app, my understanding is that Tinder almost got started by accident. Can you tell us how did you and the team actually create Tinder? What was the story behind it?
DINESH MOORJANI: Sure. First, thanks for having me here. I started a company in 2010 called HATCH Labs. We were a company to build our own companies, essentially, identify transformative products and experiences for the wireless generation that was migrating to mobile as their primary engagement with the internet. Although we build enterprise companies and consumer companies, one of the companies we wanted to build was around solving local merchant loyalty for small businesses throughout the United States and elsewhere. And that business eventually became called Cardify. When I hired the team for that– There’s a gentleman named Joe Muñoz, my original backend engineer, and Sean Rad, who is my product manager, my product director for that team. We put them together in Los Angeles in our new west coast office to build that company. But what we tried to do with refreshing ideas within HATCH Labs and also keeping people on their toes and getting a chance to work with different folks within the company was to run internal hackathons.
So, in February 2012, we ran an internal hackathon, and I paired Joe and Sean together to build a product to compete in our internal hackathon, which is typically over 24 to 48 hours. Joe had already built something in the past around an interest graph used for local, and I suggested it should be used for social, and encouraged him for this hackathon to maybe apply that interest graph.
SHIKHAR GHOSH: What’s an interest graph?
DINESH MOORJANI: It’s essentially a commerce graph or anything else where you’re finding the commonalities and correlations between people’s common interests. In this case, we did it on top of Facebook Connect, which has now, since then, been rebranded as this Facebook Login, so to find common connections between people and their common interests. And so we had an early version of that tool or capability, which was eventually refactored, but having encouraged Joe to do that, Joe and Sean began working on a concept which was originally called Match Box for this hackathon. It was essentially a social discovery service, and it could be used for anything for connecting people based on a mutual interest in friendship, dating, companionship, whatever it might be. And so, when we were done with the hackathon, which I was judging myself, so I had awarded them first prize, we put that concept in an ice box because we had hired this team to focus on local merchant loyalty. So for three months we built out the rest of the on product and backend engineering and front end engineering and came up with a concept.
SHIKHAR GHOSH: And the same team was actually going to be doing a B2B business to small and medium-sized businesses, way back then.
DINESH MOORJANI: That’s right. And we were at a point where we had entered that particular product into TechCrunch Disrupt finals in May of 2012. And in the finals, the team was on stage, but we hadn’t been approved in the App Store with Apple at the time. And that was largely because they didn’t understand why Cardify was collecting payment information but not using it to enable transactions. We were actually collecting payment transaction data and credit card information for the purposes of matching user behavior around where they had a tendency to spend money for local merchants.
Long story short, we didn’t want the team to be sitting around doing nothing while we’re waiting for Apple because three weeks had passed by already as they approached TechCrunch Disrupt, so we repurposed the team and decided that let’s defrost this concept that we were all excited about called MatchBox, but I had a few requirements. One, I needed to make sure the team was committed to changing their mental arc to focus on a new product that they had only worked on for 48 hours. Number two was we were going to rebrand it. We wanted something that resonated with everybody and not just with the original demographic, which was Match Box which indexed higher for men. We wanted it to be more gender neutral. And number three we wanted to make sure we could design the initial product beta to create a compelling user experience, and we met those requirements and refocused the team on Tinder, which is the new name of that particular product and launched it in August 2012.
SHIKHAR GHOSH: Though, even after it launched, Cardify then got approved and so you had this choice of which one to pick.
DINESH MOORJANI: Yeah, that was a really tough decision. There were a lot of factors that weighed into that decision, but eventually I focused the team to continue with Tinder instead of reverting back to Cardify, and the reasons were multifold. First, I didn’t want the team to experience whiplash moving from one product to another product. We wanted to make a commitment. Number two is you get a sense for the DNA of a team where their ethos is what they’re excited about, their product sensibility. There’s a number of behavioral attributes that lend themselves well to perhaps an enterprise-grade software product versus a hit-driven consumer product. And this team was very much trying to catch lightning in a bottle. And so that’s what we did. We focused on Tinder. Also, the early metrics were Tinder suggested there was something worthwhile pursuing and it doesn’t mean we couldn’t find another team to pursue Cardify at some point down the road, but clearly we were onto something with Tinder.
SHIKHAR GHOSH: And then Tinder just took off. It’s never looked back since then.
DINESH MOORJANI: Yeah. Even though we seeded it with a couple ideas and eventually some of the guerrilla marketing worked. The fact is that the viral coefficient was very high and it started propagating without bound, not just in the regions we focused on but across the U.S. And other countries. And so we joke around that perhaps we could have just kept a few people in the office to keep the lights on. It still would have propagated and grown and become a valuable social discovery tool simply because it was self-perpetuating by that point.
SHIKHAR GHOSH: So do you find in your experience that things that are going to take off, consumer apps in particular, that you kind of know really early if it has suddenly tapped into a vein that’s going to move it forward, or is it that sometimes that happens and sometimes it takes years and years and then through a lot of marketing you get it to work?
DINESH MOORJANI: It’s really the latter. There are so many distributions of outcomes. Sometimes early metrics are deceiving. You might get high user engagement but have really terrible retention. Ultimately, your quality of retention matters a lot because it indicates the efficiency of the marketing spend used to acquire customers or users. In addition, sometimes you may retain those users, but there’s no economic model that supports the company, so ultimately they can’t monetize, whether it’s through advertising, some form of subscription, some form of transaction revenue, or whatever it might be, to support the company being a company rather than a product. Sometimes it’s a very valuable feature that should sit inside another company and it’s not really a business that should be a standalone company.
And then lastly, sometimes you have false starts. You have early metrics where you have high adoption, but it doesn’t represent a sustainable either acquisition model or a sustainable number of users that can support the business continuing to operate or to become an enduring company. So there’s lots of situations where early metrics are not indicative of what happens. In the case of Tinder, we not only had excellent early engagement, very promising engagement, we also had a high viral coefficient, and we had a social discovery category broadly defined with one subcategory which was dating that had a well-established, monetizable path. So we didn’t have to worry about the economic model being something that we could justify later on with these early metrics. There was a path that proved that the market was willing to pay for these services.
SHIKHAR GHOSH: When you think about the evolution of Tinder, one of the things you just said was, early metrics can be deceptive, they can be indicated, but there are many other risks that could occur. Now as a VC, you look at a lot of ideas and people will come to you and imagine with some early metrics of saying, “Here’s the idea. Here’s some early results.” How do you then judge that knowing that it could be a distribution that can go any way?
DINESH MOORJANI: Well, it depends if it’s a very early stage of business or if it’s a later stage business. If it’s an early stage of business, we’re really spending more time looking at the team than we are the metrics. To the earlier point, some of the metrics could be false starts or deceiving or not sustainable. It’s really important to focus on the quality of the team and their ability to deal with the battle of figuring out how to pivot the business if they need to pivot the product or marketing or any other function within the company. Their ability to deal with adversity along the path, their product sensibility and understanding of who they’re selling their product to, whether it’s an enterprise SaaS company or it’s a consumer business trying to strike lightning in a bottle. We spend more time on the team and less about the metrics. I think the early metrics are very helpful and give us a good indication that there might be product-market fit, but it’s really about the team in those early stages of the company.
SHIKHAR GHOSH: So when a team walks into your office, or when you just meet them for a coffee, what do you– People have got to the point where you could look up the web and come up with the ten different slides you need to make a pitch deck. They’re actually services that will help you make a really, really professional looking pitch deck. And, since you don’t have any real data going forward, what are you looking for in the team other than what they say in that page? How do you evaluate it?
DINESH MOORJANI: It’s a good question. As humans, when we meet someone, we’re always making an implicit or explicit judgment about that other person or a group of people. It’s not something that’s always conscious. It’s subconscious and sometimes there can be implicit bias there, but the reality is there are a few things that we explicitly look for that we cannot always determine in the first meeting but over a series of meetings and building a relationship with that team or that particular founder that we can suss out in order to form a coaching point of view.
The first is the attributes we look for that we’re uncompromising on. Number one is integrity. We cannot compromise on integrity. We know for a fact that a startup is going to go through curve balls, challenges, obstacles that they have to overcome. How the founding team deals in that pressure cooker will determine whether that company succeeds or fails, but if they’re doing it in a way which compromises integrity, it puts not only the company at risk, it puts their employees at risk, the customer’s at risk and certainly their investors at risk and so we cannot take that chance. Now, sometimes our view on integrity could be off, but we try to spend a lot of time with founders, making sure we’ve identified that we’re not putting the company at risk because of that.
SHIKHAR GHOSH: Can you give us some examples of hypothetical kinds of behavior that you’d look at and you’d say that’s sort of a warning sign?
DINESH MOORJANI: Yeah, there’s a few things. One is aggrandizing or self-promoting extensively beyond what the metrics or early indicators of the business suggest. Number two is if a company has meteoric growth, or early indicators that they’ve really hit product market and fit in very fast. In fact, sort of like Tinder did, but the numbers actually are not real. We have to dig in and do a sanity check. Did they really prove that this company was the exception to the rule because those are the companies that are typically getting backed with those types of metrics. The more impressive the metrics are, the higher our antenna is, to figure out if these metrics are real, where we really need to go into the Google Analytics dashboards or the other analytics packages. Look at bank accounts. Look at Stripe data, for example, if there’s transactions, and figure out and match and reconcile whether the real performance of the business reflects the reality that the founders have conveyed to us.
SHIKHAR GHOSH: And if you see that they’re exaggerating the numbers or moving every unknown in their favor, that gives you an indication that this is a team that you can’t fully trust what they’re saying.
DINESH MOORJANI: That’s possible. Yeah. In most cases, if it’s a clear delineation, we’re going to pass in that investment no matter what because all we’re doing is kicking the can down the road to have a problem later. If it’s a matter of interpretation, then we’ll talk to the team and better understand how they’re interpreting it and why they’re overconfident about how they’re presenting the metrics.
SHIKHAR GHOSH: One of the things that founders are often told is that VCs are shooting for the 100x return. That’s the way they make their money. And that one of the things they have to do is to present this giant vision and they have to create this reality distortion field, so they should take the small idea and make it look really big. And what you’re saying is if you do that too much, then it raises a lot of questions about your integrity. What’s the balance between pointing out how big this could be and this is amazing so that you can see that versus the uncertainty that you always have as a founder?
DINESH MOORJANI: Yeah, that’s a really astute question. There’s a distinction between the facts on the ground, for example, metrics and financial performance of the company, which leave very little room for interpretation outside of the insights you could maybe draw about the potential of a business, and the distortion field created by the entrepreneur that reflects the gravitas and capability that you absorb from having spent time with that entrepreneur or that founding team. The distortion field is real, and sometimes you meet entrepreneurs that are larger than life, and they could sell a rock to a dead person. The fact is if they have that sales capability or they have the horsepower or the vision or their ability to deal with uncertainty outperforms other entrepreneurs you meet, that distortion field can really be real.
SHIKHAR GHOSH: And if they actually believe it, then you know that the energy is going to go into it, and they’re going to try really hard to get to that distortion field. And some of them will, some of them won’t, but it’s worth taking a chance on it.
DINESH MOORJANI: Potentially. You want to look at their track record. We do a lot of reference-checking to make sure that the distortion field isn’t—that we’re not blinded by it. We want to look at what happened with their past companies if they’re a serial entrepreneur. We want to spend time looking at the view investors and their peers have had of them. You typically cannot disrupt without breaking some glass, so we acknowledge that sometimes references are not all going to be perfect, but we want to understand why. The key reason is why. So if they’ve checked the integrity box, and they have a distortion field around them and the metrics look promising, certainly it’s worth spending more time with the company and we’re aggressively pursuing it. But there are a number of other factors that then determine outside of the pitch deck, whether that founding team has the capacity to build a remarkable company.
SHIKHAR GHOSH: Nowadays, it’s more the norm that you have a founding team, it’s two or three people together. What are you looking for sort of between them? You have three people who walked in, they have different roles and different backgrounds. When you look at this team, you say, “This is a great team,” or, “This one I have some questions about.”
DINESH MOORJANI: We’re looking for founding teams that operate in a very cohesive way but are comfortable debating each other to get to a better outcome. That usually involves a few attributes. One is a healthy mutual respect for each other. Number two is diversity. I don’t mean just ethnic or gender diversity. This could be diversity of experience. People that bring together diverse points of view, and I think the data has proven this out, lead to better outcomes over the course of their discussion debate and how teams work together to get to an outcome.
SHIKHAR GHOSH: Are you thinking about somebody who has a finance kind of point of view versus a technology point of view, or are you thinking about, someone who’s African-American versus Caucasian? Diversity occurs in so many different ways, how do you put that in?
DINESH MOORJANI: Yeah. I think insight diversity is the end game, but it starts with different points along that journey to get to your insights. It could be through their personal life experiences and their struggles. That could be due to their ethnic diversity or their gender diversity, for example, or their geographic desert diversity, where they grew up-
SHIKHAR GHOSH: Or economic conditions growing up.
DINESH MOORJANI: That’s exactly right. And some of those other factors could play a role in that. It could be their professional diversity. One comes from finance, one comes from technology. They view a problem. But both perspectives, looking through those lenses and bringing them together, might lead to a better outcome. One might be a right-brain thinker, one might be a left-brain thinker. I think if we could merge the two hemispheres of the brain and be at the nexus point, we’d all be better off. The diversity on the management team is really important, but if they’re cohesive, they respect one another and therefore listen to each other’s ideas. I think we’re really looking to make sure they work as a team as opposed to working as a star on that particular team. And then that plays right into the other factor that we look for, which is when that team goes to market, they need to have an obsession bordering on unhealthy-
SHIKHAR GHOSH: With that problem or that company?
DINESH MOORJANI: With that problem and what they’re trying to do with the business to solve that problem. And there needs to be an equal motivation among the founders. If one of them owns a lot more in the cap table and is far more motivated, for example, and the other one’s far less motivated. That can also be a warning sign. So in an ideal world, and it doesn’t have to be this way, we look for egalitarian cap tables among founders. But ultimately what matters is that the value alignment and contribution to the company should be congruent with the amount of equity that that person has to contribute to the success of the business.
SHIKHAR GHOSH: So if you see a cap table in which three founders have roughly equal, 33% each or something like that, that’s not a red flag. It’s actually something that says, “I’ve got three people who are committed, and this is not going to be an issue.”
DINESH MOORJANI: It reduces the likelihood of an issue later under the premise that their value/contributions in their respective functions is roughly equal.
SHIKHAR GHOSH: So when you’re looking at a team, sometimes the team that is the skills that are necessary to start up. A period of uncertainty. You have lots of experimentation. You do prototypes. You do things that break. And then you move on to a point where you’ve got product-market fit and it’s about execution, and the skills are often different and it’s sometimes really hard for people to move from one stage to another stage. And some people, if you had a team of three, maybe two of them can make that shift and one person can’t. What’s your role as an advisor, a board member, an investor to keep the team strong and what’s the best way of sort of getting the team to be the right team for the stage in which the company is at?
DINESH MOORJANI: Yeah, it’s a great question. The lens that we look through is typically as a fiduciary on the board or as an investor. And so we’re trying to optimize for what’s the right thing for the company to increase the statistical likelihood of success for that particular business to become a standalone enduring company. If that’s the end objective and this company is-
SHIKHAR GHOSH: And the company is bigger than any individual including the founders.
DINESH MOORJANI: Absolutely. Including the investors. It’s bigger than the investors, as well. We want this to be a standalone enduring company. Along that journey, it’s going to go through different phases and the company is going to evolve. The leaders that are well suited to be resourceful and scrappy and find funding in the early stages of a company, call it the angel money friends and family, the institutional seed, or the Series A investment, in a venture-backed company because you don’t always have to raise venture capital, are oftentimes lending themselves to very different skills to when a company’s maturing through the expansion capital phase, scaling and becoming a growth equity business with a line of sight to becoming a public company for example. And if founders have a set of skills that are well suited for the early stage but not the late stage, we take a hard look at the management team, and we take a hard look at ourselves as investors. First, are we the right investors to support the company through that journey, and how would we transition if we’re not? And if we are the right investors, how do we work with the management team to also transition and change the shape of that leadership team?
DINESH MOORJANI: First and foremost, what we spend time thinking about is that founder’s ability to contribute to the original vision and motivation of the company still integral to the success of the business? And if it is, maybe that founder would be better suited in a chief scientist role, chief medical officer role, chief architect role, chief creative officer role-
SHIKHAR GHOSH: Executive chairman.
DINESH MOORJANI: –or move to on the board, an executive chairman role, or role where they can provide guidance and vision and their handprint is still on the company while we bring in a professional operator to help scale the company. And oftentimes they’re dual roles, they’re on the board and they have a CXO role that we’ve sort of carved out and defined for them. The reason that’s important is not just to contribute their handprint on the company as it evolves as the original visionary, for example, oftentimes this person was the founder and CEO. But it’s also because that person probably has a large stake on the cap table, and if they own a majority of the equity or they own a meaningful portion of the equity before a company goes public, sometimes that CEOs down to sub 10%, but still oftentimes it’s a double-digit percentage number. If they own that much of the cap table, that’s effectively dry powder that’s not being used elsewhere to move the ball forward in the company.
And so if you can utilize the expertise of that particular founder to stay involved in the company and help navigate the ship, it’s really helpful. But the execution and operating sophistication required to manage teams and inspire people and the discipline required at scaling a company looks very different than the scrappy early-stage entrepreneur. And so that management shift is something we always anticipate inside companies. And once in a while, there is a rare founder who is well suited to adapt to being a scrappy, resourceful early-stage company builder, and at the same time, can scale with the company, learn and is open-minded enough to grow that business. Those are remarkable founders that we need.
SHIKHAR GHOSH: If you think about a founder who doesn’t scale, let’s say a co-founder that doesn’t scale with the company, from a founder’s perspective, that can be a really hard thing to have spent four or five years building up a company that’s now becoming successful and you’re either asked to leave or being moved to the sideline in that process, and yet it’s your responsibility as the guardian of the collective to do that. How have you found the best way to do that so that the founder feels like they’ve been respected, that their contributions have been accepted, that they have another career where they can actually do well? It’s as much an emotional thing as it is a financial or an equity thing.
DINESH MOORJANI: Yeah. How you deal with it is very emotional. It’s a human dynamic thing. I’d say there’s not one perfect answer because it depends on the circumstances of the company. It depends on the emotional, economic, and professional commitment. That particular founder that you want to migrate out has made to the company. And it depends on what the dynamic is on the board and within the management team. There’s a lot of factors at play when we look at something like this. The key is to see it through every lens and to put yourself in the shoes of the person you’re going to be speaking to. Typically what you’re doing is you’re optimizing for what that person cares about as they’re making a transition out of the current role they’re in. Sometimes that means being still affiliated with the company and being an external cheerleader that maybe still maintains a capacity of an advisory role, potentially a board role, or just an advocate who has a lot of equity committed to the company and hopes they’re successful.
DINESH MOORJANI: But what you’re trying to do is make sure you’re building advocacy and not creating a confrontational situation where that person feels they were left out in the cold. It’s something that depends on the maturity of the individual that you’re talking about. And I think framing that conversation around thinking about what’s best for the company as opposed to any other individuals that that person has worked with separates the anxiety that individual might have that someone else is more important and more about the transition the company’s going through and less about the transition the individual’s going through. And if you could create a reward system and a set of career currencies that are an offset to what you’re possibly taking away from that individual about the role, that can help fill the gap and essentially create a cheerleader that continues on the journey with the company but in a different capacity.
SHIKHAR GHOSH: As an investor and a board member, I’m going to give you a false choice, but three choices. So imagine that you had a choice between describing yourself as a surgeon, comes in and does the operation, takes out the right parts; a therapist, who sort of working on the mind and the emotion; versus an analyst, who’s looking and saying, “This is my diagnosis of the problem.” I know you do all of them. What’s the weightage that you give and is that different based on stage?
DINESH MOORJANI: It is different based on stage. We play all three roles. I focus on earlier stage investments. Number one, I’m probably therapist. Hands down. Especially with the formation of companies, at that formation stage, all the way through Series A and product-market fit. I think it shifts a little bit more to surgery as I’m working with my companies through their growth equity phase of growth. You’re always an analyst, so you look through everything through an analyst lens so that never changes, and I lean to be left-brained. And so you can’t take that away when you look at something, but the difficulty with building a company is typically not about the analysis. The business acumen that we’ve tuned is reasonably straight forward. A few people in a room looking at the same business problem might have different points of view, but their analysis can be reasonably objective. It’s the human condition that varies.
And so we all have in a startup, people, time and money, and the people, time are measurable and finite. It’s really the innovation that’s coming from the elasticity of people, their ability to have time that they can put into a venture, the creative problem solving, the critical reasoning, the incredible ability to bend space to sign up customers, even though you don’t have a business at scale that should be able to sign up those customers. That’s the source of innovation. And so our ability to be a therapist for the difficult times that that entrepreneur is dealing with problems they didn’t anticipate, that becomes sometimes the most valuable thing for early stage companies. And so I think in early-stage companies we over-index as therapists, but I think we’re surgeons a little bit later, and we’re all as analysts.
SHIKHAR GHOSH: Okay. If you think about one of the roles that most, particularly, firsthand founders have never done, and there isn’t that much guidance on it, is in managing the board. Either putting the bullet together, but even keeping the board well-informed, understanding how to run a board meeting. And there’s a lot of material on this, what have you found are the best practices for that, but also some mistakes that you’ve seen people make that they could have done better and it created more noise than it should have?
DINESH MOORJANI: Sure. The point of being a good fiduciary and board member is to help govern that company into a healthy place, ideally with predictable outcomes, where there are still opportunities for innovation to create as much shareholder value as possible while still being to the employees and your community. In doing that, most of the hard work happens in between board meetings. And so the dirty secret of good board governance, I think, comes down to not the board meeting, which is in some ways as a capstone or recap of the quarter and to share important updates and take votes on consent that’s needed for actions the board is going to take with respect to governance or committees or whatever it might be, but it’s really about the hard work that happens in between boards. The other important-
SHIKHAR GHOSH: Just when you do that, can you describe what’s the hard work that occurs between boards?
DINESH MOORJANI: Sure. Sometimes the company’s engaging in a new initiative. It could be anything from considering an M&A transaction to making a cut in headcount in a particular area of the business. And just because you are considering voting on that in an upcoming board meeting doesn’t mean you need to learn the facts on the ground and peel the layers back on the onion well before the board meeting to understand what’s happening. And if you have a different proposal, it’s worth teeing that up well before the board meeting so the analysis can be done so the board can be presented with options. So there’s a lot of hard work that goes into that cannot be encapsulated in 30 minutes as one section of a board meeting that you have to take a vote on. So the real hard work, the real analysis, the real understanding, the human condition, both for the employees, the customers, what’s happening inside the company, what’s working, what’s not is happening in between board meetings.
SHIKHAR GHOSH: And how much do you expect that the CEO will be discussing these critical decisions that are going to come up at the board meeting with you as a director?
DINESH MOORJANI: It depends on your area of expertise. If your area of expertise is specific to something the CEO is taking a decision on, he or she will probably reach out to you. But the fact is, as a board member, it’s your fiduciary responsibility not only be informed but in fact to go seek out areas where you can be helpful. And so it depends on what the topic is, but ultimately the onus is on the board member to be informed and stay on top of areas where they can contribute value. The other areas where we see effective board governance is focused on asking the right questions and getting involved in the committees where you can really make a difference, whether it’s the audit committee, governance committee, compensation committee. We ultimately have a lot of responsibilities especially as boards mature in the growth equity phase of a company or in a public company. Early-stage boards don’t always have those committees, but understanding your source of value and what your superpower is in order to be able to demonstrate that value and contribute to the health of the company in that function, that becomes the board members responsibility.
The one mistake I see often in boards of directors is new board members that feel they have to contribute or add value and they end up sucking up a lot of oxygen in the room but not actually contributing to moving the conversation forward or adding any new insights. This is often an area that new board members should be very careful about. Just because you don’t say much doesn’t mean you don’t have a lot to contribute and, again, a lot of that can happen in between board meetings. So probably the most dangerous thing that can happen in a board where you have finite time over the course of somewhere between two and four hours in a board meeting is spending half an hour listening to someone dribble about– because they want to hear themselves being heard rather than actually advancing the mission of the company at that particular board meeting.
SHIKHAR GHOSH: And so from a founder’s perspective, what have you seen that certain founders have done really well in the way they involve their boards and others that have done that have created noise, turmoil, disturbance?
DINESH MOORJANI: The best founders or CEOs of companies, number one, have looped in their whole management team. They’re not managing the board on their own. And given that they’re already a board member, in most cases and a fiduciary, the CFO is involved. The COO is involved to the extent, they have a COO, and they’re exposing a particular function team leaders to the board to show insight a few layers deeper about what’s happening inside the company. It could be on product, it could be on marketing, it could be any other area. So there’s a lot of exposure. And most of that is happening not just in the board meeting, and we might carve out time for that, but it’s actually happening in between board meetings. So good CEOs are spending time not only updating board members on specific action that might be taken in a board or a board consent that might happen prior to a board meeting in laying out the detail and fact-finding and business case behind something, but if there’s a challenges with letting people go or hiring talent, a lot of that again is happening in between board meetings and good board members are communicating that effectively in a timely fashion well in advance of getting everyone together on a quarterly basis.
SHIKHAR GHOSH: While the opposite is obviously true their bad or early or inexperienced board members often don’t do that, are there particular things that you’ve seen CEOs do that actually create more trouble than sort of bad practices in some ways?
DINESH MOORJANI: I’ve been fortunate with the CEO’s I’ve had an opportunity to work with. I haven’t seen an extensive number of bad practices. The ones that perhaps stand out is not being able to provide all their appropriate reporting. These are typically for earlier stage companies because they’re a first time CEO. Number two is they haven’t thought about actions or votes that need to happen in that board meeting so they’re not well-prepped for it. Or number three, they have a seat for an independent board director and they’re reluctant to fill it because they’re too caught in their own echo chamber, and they’re not really looking yet for outside points of view. I think the independent board members play a pivotal role in the success of the thinking and the diversity of ideas that lead to action on a board and sometimes leaving that role unfilled can be at the peril of the company.
SHIKHAR GHOSH: Can you talk a little bit more about the– This is something that very few people spend a lot of time thinking about, the role of the independent board member. How do you see them and what does a good independent board member do for the company?
DINESH MOORJANI: So oftentimes an independent board director will be assigned to a board collective, largely because you need an odd number of board members, and the way the financing worked and the way the founding team has common stock board seats is you need a fifth board member so you’ll assign an independent. And that’s okay. But the key is that you pick an independent, not just for advocacy for a particular group on the board, either it’s investors or the founder, because in some ways that that independent board member who brought them on, there’s this implicit sense of loyalty to the relationship that may have already existed or the investor or founder group that brought on that board member. But the fact is that the independent should have an independent voice and really contribute to the diversity of thought on the board rather than voting simply as a stocking vote alongside a particular constituency on a board.
DINESH MOORJANI: Okay. When a company goes through a pivot, if they’re transitioning from a consumer-oriented business to an enterprise-oriented business or a B2C or B2B, a company moving from one to the other, it’s not just that they have a pivot because of the market data they’ve collected suggests their current path is unsustainable and that they have a clever idea about an adjacency that leverages the resources and/or existing product to focus on a new market or new opportunity to build a business. They have to ask themselves a few questions. First, if they’ve taken outside money from investors, is that money best spent on pivoting the company or should they recognize that the core business that they were going after, which is why they got funded, is no longer valid? And they must ask themselves, is the right thing to do to give back the money to investors if they took outside capital? And I think investors give a lot of credence to CEOs that are mature enough to recognize that the money’s better given back, even if it’s pennies on the dollar, than it is spent focusing on an idea that wasn’t part of the original mission.
SHIKHAR GHOSH: That’s one of the signs of a mature CEO who actually respects the investor’s money.
DINESH MOORJANI: Absolutely. It doesn’t mean that the new idea doesn’t have validity. I think the goal for that founder or CEO or management team is to present the new idea to the investors and have a recommendation, whether it’s to give the money back or say we can repurpose the product and focus on this new market. And if that new idea is both compelling, substantiated and worth the investor and board’s time and the management team’s time to refocus, it’s certainly a potentially good use of capital.
DINESH MOORJANI: The key thing that the team needs to recognize is even if this market is more attractive, there’s a path to be successful, whether it’s a sales effort or if it’s a B2B company moving to a consumer company and there an acquisition strategy for acquiring users and consumers to grow that business. They need to understand whether they’ve aligned the teams properly. So the DNA of a business to build an enterprise SaaS business for example, or an SMB SaaS business in the technology space is radically different than the nature and DNA of the team to build a consumer social or marketplace or commerce business. If the team doesn’t recognize that, they’re going to apply the wrong DNA to maybe the right problem, which is a bad outcome. You need the right team and you need the right problem to go solve to get to a good outcome.
SHIKHAR GHOSH: And then that transition is always going to be a hard transition because people who worked really hard on this first problem, now they might not be the right fit. Emotionally, it’s a hard thing to do to go back to your team and say, “You were the head of sales,” or customer development in this case, “I need to find somebody else because your skills don’t match,” where they worked seven days a week for the last two years.
DINESH MOORJANI: That’s very difficult, and yes, that has to happen sometimes. You’re selling an enterprise software product, and you don’t need a head of sales and a sales team anymore, and you have to transition them out. You need a really great marketing team because you’ve shifted to be a consumer product or a B2B2C product, whatever it might be, and you need a phenomenal acquisition marketing team. So you not only have to transition people and align the DNA, but the management team themselves and the founding team needs to have the DNA to be able to have the product sensibility, market outlook and maturity to be able to shift directions. Because they themselves have their own DNA, they have to look inward and see if they recognize the distinction between what it would take to build one company versus another by repurposing a product or marketing or whatever asset that’s already inside the company. The last thing is the metrics of success look drastically different inside an enterprise SaaS company, using that as an example, and for example a consumer commerce or marketplace or a social business for example.
SHIKHAR GHOSH: Yeah. The way these companies get valued, all of that, is different and you’ve got to re-put gauges on your dashboard.
DINESH MOORJANI: That’s right. All your KPIs are different. So an enterprise SaaS company, you might be looking at your sales productivity, your recurring A/R, your annualized run rate on your gross revenue, your gross margin, your recurring revenue, if you have a portion that services, as well as your SaaS recurring revenue. There’s a number of other KPIs focused on enterprise SaaS companies, for example. Inside the consumer business, if you’re building a social consumer startup, you might be spending all of your time on your MAUs, your DAU/MAU ratios, your WAU/MAU ratios, your viral coefficient, your CAC spent on install of an app, for example, relative to your LTV and your CAC payback period. And how large that audience is before you turn on monetization, which could include advertising, or whether you’re charging consumers directly for that or it’s a freemium model.
DINESH MOORJANI: So the fundamentals of the business are measured differently. How you have your weekly or daily management meetings will look radically different in those two companies, and the inputs will be different from different stakeholders. So I think those pivots have to be managed very carefully, but the starting point is that the founding team and the board needs to ask, is this the best use of capital? And if we embark on this, have we reoriented the company internally to be able to align with the external market?
SHIKHAR GHOSH: Right. And sometimes what people don’t fully get is that, yes, there’s revenue and profit, and those accounting measures are the same in both companies because you’re standardized on that, but right below that, the way you get to every one of these numbers is completely different. And below that, the team that gets you through those numbers is completely different. And that’s really a radical change. And so there’s an external pivot, but there’s an internal pivot that follows that.
DINESH MOORJANI: Yeah, I think you described it perfectly. It’s a very astute observation you made. In fact, think of the financial performance of the company, the income statement, balance sheet, cash flow, for example, as the lag metrics on financial performance. And the lead metrics that lead into the transfer function of the business, I’m thinking like an engineer now, but the magic that happens inside the black box of the business, is what converts the lead metrics, the KPIs you’re monitoring about the potential promising health of the business that gets converted into the lag metrics. And so you have to change the transfer function itself. You have to look at the lead metrics totally differently. And even though you can compare apples to apples on the lag metrics, the interpretation of the lag metrics is very different because the leeway you would give a consumer business on losing money in a standard J-curve loss before it begins monetizing the large audience, for example, might look very different to the acceptable patterns of losses or turning on revenue inside an enterprise SaaS company where you need to be making out of the gate money on every potential pilot that you’re running, converting into a regular customer. So even parameters and buffers that you have on financial performance look different and your latitude for how that you let those companies operate look very different in those two different scenarios.
SHIKHAR GHOSH: Great.