In a previous post, I mentioned how I am a big fan of Edward Tufte.  One of the best things coming out of the Tufte school of thought is that you should be able to visually represent complex systems on a single sheet of paper that is dense with information while still making the general patterns inherent in the systems visually comprehensible.  Single graph, complex system.  It’s a challenge, but the results can be stunning if you look at some of the examples in his books.

So, in a prior company, I had the challenge of trying to represent a complex ecosystem of partners and competitors (we were doing Cloud Computing, so there were lots of big and small players vying for media attention) and make some sense of what was going on in the marketplace.  I decided to use a single chart that represented the competitors on a single chart that I embedded in presentations to the board.  I know, everyone does competitor checklists and spews about how much better their solution really is, how their competitors are missing features and missing the point, etc.  But, that’s not what an audience typically wants to see.  Usually the question is simple: 

“Who are our friends, who are our enemies, where are they vs. us, and when will they be a real threat?”

So, I felt that a chart that could answer this questions needed at least SIX dimensions.  For every competitor, we needed to understand:

DIMENSION 1: Threat magnitude:  If these guys were actually doing exactly what we are doing, how bad of a threat would it be to the business?  I created a 1-5 scale of measuring that threat. 

1 - No concern.  Even if they did the same thing, they really wouldn’t affect us at all.
2 - Probably not a threat.  Maybe they’d chip away at some parts of the market we are in, but overall, it wouldn’t be that dangerous.
3 - Careful. These guys could easily step on some toes and we could lose customers if we’re not careful.
4 - Danger.  This company, in our market, would significantly damage our ability to get new customers and keep existing ones.
5 - Severe.  Basically, they would crush us if they entered our market and would destroy our business.

DIMENSION 2: Threat Immediacy — i.e. how quickly will this company be in our market.  I looked at the world in terms of quarters.

These two dimensions provided the “grid” which I could use to visualise the competitors…. something like this:

Onto this grid, we are going to place “bubbles” that represent competitive companies.  The upper right of the grid (immediacy: NOW and threat level: SEVER) is where you don’t want to see any competition.  That’s why it’s red :-).

To represent the competitive companies, I wanted to capture a few other dimensions about the companies in question.

DIMENSION 3: Company Size. You can go nuts here and think about size in terms of revenues, employees, amount of funding.  To keep things simple, I just classified them as…
BIG BOY (you know who they are… Microsoft, IBM, Google, Oracle)
ESTABLISHED (public or non-public companies that are funded, have traction, funding, revenues, buzz or
STARTUP: newcomers to the game but worth watching, basically in the same boat as we are.
Since we are going to represent companies as bubbles, bubbles get different sizes based on this third dimension.  Like this:

 Next, realizing that not all companies are necessarily our enemies and that a part of a good marketing strategy is to turn competitive threats into alliance possibilities, I decided to use colors of the different bubbles to represent their relationship to us. So

DIMENSION 4:  Relationship.
ALLY: we are partners.  Not just on paper, but actually know each other, like each other, sell together, share customers
NEUTRAL: go to conferences together, shake hands, are signed up for the right programs, but don’t really have a strong co-selling relationship
ENEMY: easy enough 
The bubble colors look like this:

DIMENSION 5: Agility
Next, we want to indicate in some way how “agile” our competitor may be.  This is different from how smart they are.  Agile means they can pivot, change direction, come out with new products every quarter, quickly adopt new technologies.  There are very smart companies (s.a. Microsoft) that are no longer very agile because of their size and the size of their install base. Since TIME is represented as a horizontal dimension on the grid, these arrows are horizontal.  Red is dangerous, green is OK.  The bigger the horizontal arrow (agility) the sooner the company has a potential for becoming a threat. 

DIMENSION 6: Smartness
This is very subjective, but most people who spend their lives worrying about competitors have a “gut” sense of this aspect.  How smart is your competitor?  Look at their management team, look at their investors.  Listen to them on videos and podcasts.  Do they sound like a group of people that “gets” the market and is on top of the latest development trends and technologies?
Since “threat magnitude” is a vertical scale in the grid, the “smartness” arrows are vertical.  The smarter the company, the bigger the threat it can provide.

So, there are the six dimensions:  threat level, threat magnitude, size, relationship, smartness, agility.

We combine the circles, color, and arrows to create a visual representation of the company and place them on the grid (which indicates their current threat level and immediacy) to get an interesting visual competitive picture.

As my example, I’ll use the latest source of debate — FourSquare.  They are well known, have some major and minor competitors and are in a dynamic market. 

DISCLAIMER:  I AM NOT ASSOCIATED WITH FOURSQUARE IN ANY WAY (besides being a long-time user) nor do I mean this example to be in any way seen as anything coming from 4sq’s marketing team.  I am sure they have their own take on the situation.  However, whether they know it or not, they probably think about the problem the same way.

Let’s list FourSquare’s competitors and summarize our opinion of them along the six dimensions I described.  Please, please, please, don’t get offended by any of the labels.  I am not a LBS marketing guy — just someone making educated guesses.  I know that your company (fill in the blank) is the smartest, biggest, most agile thing out there, and that you pose a huge threat to every established software player in the world.

Now, we can create a visual representation of each of the competitors and place them on the grid.  For example, Google will look like this:

  Google is BIG, Google is SMART, Google is AVERAGE in agility, Google is NEUTRAL (as far as 4sq is concerned).  We will place this Google icon in the 2011(Q1)/DANGER square on the grid.

And so on for all the others.

The complete grid looks like this:

HIGHER-RES IMAGE OF GRID IS HERE

What does this tell us?  Well, our company (in the upper right hand corner) faces some threats.  Some are coming from big players, some from small.  Some are more agile and smarter than others, etc.  It gives us a chance to start worrying or stop worrying at the right time.

If you produce one of these charts every month and compare them over time, you can see the ecosystem evolve.  You can see new players emerge and change color.  For example, before the Facebook “places” announcement, the color and threat immediacy of Facebook on the chart above would have been different.  You can assess the effect of an acquisition by a large company of one of your smaller competitors (chances are, their smartness and agility improves, but is not inherited).

That’s the basic idea.  One slide that says it all.

Once again, my apologies to the companies mentioned in this post.  All my conclusions are just my opinions and I am not affiliated with any of them.  I just thought a real example would be better than “NEWCO”  — the standard VC term.

Even before getting any funding, VCs always ask “how long will this money you are raising last?”  After funding, the question is still the same but phrased as “So, when is our cash out date?”  They are absolutely right to make this ”running out of runway” a top concern at a young startup.

Running low on cash makes you do stupid things, like…

1. Turns every decision into a tactical “expense” decision instead of a strategic “growth” decision
2. Makes you fire people you shouldn’t (sometimes a good thing, but, often, a myopic forced knee-jerk)
3. Gives the existing investors and new investors low-ball the next round of funding because you really need the money
4. Eventually kills the company

In other words, running out of cash = death.  And playing chess with death is a game that takes caution and planning.

Here’s a simple way of modeling “runway left” that lets you think about the problem using nothing but one simple variable — how many people are working for me?  The assumptions being made in this model is that you are generating no revenue (safe assumption for a lot of early stage startups), that your expenses are fairly predictable (you can add exceptional expenses into the model) and that you have raised some cash, started spending it, and have an idea of what the monthly burn has been for the last few months.  The rest, you can extrapolate.

So, let’s say you are a small company that raised some money, got yourself to a headcount of 10 full time employees, and have $1.5M cash still in the bank.  (You probably did a $2, $2.5M round if you started with just a couple of founders).

Calculate like this:

1. What is the average cash burn every month?  Get this from your financials, try to ignore the extraordinary items (Beta Launch, quick jet trip to the Caymans, etc.) [Let’s say it’s $150K/month]

2. How many people do you have, full-time, on staff.  This is the most important independent variable over which you have full control.  Unfortunately, sometimes people have to be cut, and, fortunately, sometimes people need to be hired.  In the days of open source software, cloud computing, Scrum, etc. your expenses will be almost entirely determined by how many people you have to pay every month.  People are expensive. [Let’s assume there are 10 full time employees]

3. Divide the burn by the people and get the average burn per person. [$150K/10 = $15K/employee/month]

4. So, assuming no revenues (if revenues come in, you can add it to the cash balance before the next board meeting), you currently have $1.5M/$150K = 10 months of runway.  If you added two more people, your monthly expenses would be $180K and you would have 8.3 months of runway.

5. Compromise with your investors on what the “danger” signals should be coming from the “months of cash in the bank” number.  I always started fundraising when that number dropped to 9 months and below.  If it got to 4 months, your fundraising should be in full swing and you should start freaking out if you don’t see any term sheets on the horizon.  Below 4 months is danger territory and you should be starting to negotiate with the existing investors and sending clear danger messages.

6. Create a matrix that shows your headcount on one axis and months on the next.  Each cell contains how much cash is in the bank.  Something like this:

Explanation:  The left-most column is the decisions you’ll be making — how many people will you be hiring or cutting.  The next column shows the resultant headcount after you make that decision.  The “Hire: 0” row means you’re keeping things stead and not changing headcount.

The colored numbers represent months of cash left in the bank (again, remember, no revenues assumed) in the month indicated in the column header.

The colors depend on your definitions of “OK, danger, panic” as discussed below.  Here, GREEN: 9+months is OK, YELLOW: 9-4 and you should be fundraising (start at 9 months left), RED: 4 and below, you’re in trouble.  GREY: 1 or zero, you’re out of cash and, basically dead.

I try to use this matrix on a single slide in the board deck to answer the question:  “How are we doing on cash?” which will always get asked.

The company above, for example, should start looking for cash immediately if it hires two people next month.  If it cuts two people, that can wait until January 2011.

The model, of course, can get more complicated.  When you hire and cut affects the runway positions.  Revenues coming in change the cash balance.  New rounds of financing dramatically alter the whole thing.

Here’s a link to an Excel spreadsheet with where you can do some tweaking: HeadCountMath.xlsx

The lessons from this exercise:

1.  People are your biggest expense (I am talking about software companies, the only thing I know).  Headcount affects cash burn more than office spaces and lunches by far.

2. Remember that employee expenses are not just salaries — benefits, computers, software, soft drinks, etc. all add up and are roughly proportional to the number of people you have on staff.  Therefore, taking your burn and dividing by the number of people gives you a good approximation of the loaded cost of taking on new employees.

As CEO, you should be able to get a call in the middle of the night from one of your investors and answer the following without even thinking about it:

1. How much cash do I have?

2. When will we have to get more money?

3. What would cutting two people do to the above answer?

4. What would hiring three more engineers you’re dreaming about do to that answer?

Another interesting thing that comes from seeing this visually and knowing things in terms of dates is that you can start timing company announcements, events, customer wins, etc. on the basis of when you need to raise cash according to the chart.

Don’t know what the rest of you think, but I’m both a quantitative guy and an Edward Tufte fan.  I like analytics that manifest themselves VISUALLY.