HBO’s Silicon Valley is funny – sometimes hysterically so, smart – sometimes ingeniously so, profane, and, ultimately, really, really entertaining. It is also, sometimes spectacularly so, a primer on business planning.
For those who may not be following Silicon Valley (if you own a startup, it is a must see, start from episode 1 of season 1 … now), it’s a half-hour comedy centered around a tech startup operating out of a Silicon Valley ‘incubator’ that looks a lot like a ranch house in the suburbs. Because it is.
The company is called Pied Piper (to everyone but the founder’s derision), it has developed an algorithm that could revolutionize file compression – making video, chats, and a whole lot of other internet stuff a lot faster.
The product has great potential. The company needs money. Through the first seasons the show takes a meandering, crooked, ultimately accurate path as Pied Piper deals with venture capitalists, non-disclosure agreements, trademarks, intellectual property, employment contracts, non-compete clauses, investment agreements, proxy fights, board of director formation/dissolution/reforming, succession issues, conflicting duties among officers, offer sheets, lawsuits … the show has them all, and a lot more.
Silicon Valley gets almost everything right. It’s been written about and talked ever since it first aired in 2014. It has been universally hailed as a dead-on look at start-ups and business in the 2010s.
When we started this post about a week ago, when HBO launched the new season of Silicon Valley, we had every intention of centering this post around a few of the many great real-life business scenarios the show has covered so far. Then, of course, tie it into what we see every day.
There was a lot there, and we’re reasonably sure it would have made a good post, but then a funny thing happened. We ran across an article from The New Yorker. It was about how Silicon Valley is written and filmed. The detail and planning involved in every episode – and each season – are simply mind-boggling.
The show has two hundred advisers and consultants, most of them volunteers. They include “academics, investors, entrepreneurs, and employees at Google, Amazon, Netflix, and other tech firms.” Everything that ends up on the TV screen has been vetted a dozen times.
How in-depth do they get? “If someone is holding a document on the show, that document is written out, in full, the way it would be in real life.” Post-it notes, lines of code, whiteboards, all have real formulas on them. The producers are convinced that the more work they do to make things real, the more “the process leads” them to better ideas, better shows.
In-depth planning, active, welcome involvement of outsider advisers and consultants, HBO’s Silicon Valley is doing what every company should be doing in the real world. Every company, that is, except for Pied Piper, if they ever used someone like us, the show would way too boring for TV.
On December 16, 1944 the German Army turned suddenly turned and attacked the American and British forces that had been chasing it through Luxembourg and Belgium. It was the beginning of the Battle of the Bulge. Despite the fact that the Allies had long since broken the German codes, the attack came as almost a complete surprise. Under heavy cloud cover and taking advantage of some really bad weather – and therefore negating the superior air cover of the Allies – the Germans rolled.
It’s hard to visualize this, today, when we know how it all turned out, but on December 19, 1944 the German Army was still formidable, large chunks of allied forces had been destroyed, cut off, surrounded. Since almost everyone fighting in Western Europe at the time thought the war would be over by Christmas, the attack was as stunning as it was unexpected.
So, when General Eisenhower, the Supreme Commander of all Allied Forces, held an emergency meeting of his field commanders on December 19th, it was serious. So serious, Eisenhower began the meeting by telling his generals to try and think of it as an opportunity, he wasn’t interested in panic. He was looking for ideas in the face of entire divisions reeling.
He didn’t get an idea from Patton, he got a plan. Patton would disengage from the German divisions in front of his Third Army and swing north to attack the Germans in the flank and relieve the cut-up and cut-off American Divisions. And, he would do it immediately. As soon as the meeting was over.
Ike and the other generals were incredulous, Ike went as far as to warn Patton to stop being ‘fatuous.’ Patton, though, was deadly serious. Patton was the kind of general who planned for … well, almost anything, even if the odds of something occurring were very low. Perhaps his greatest fear was to be caught unprepared.
Patton was a very serious student of military history, He knew that the German army had not taken the offensive since Frederick the Great. Yet, he had his staff plan for one nevertheless. Just in case.
Which brings us to Villanova’s NCAA National Championship game against North Carolina last April. If you watch the last few seconds you’ll note the following: UNC’s Marcus Paige drained a ridiculous double-pump game tying three pointer with 4.7 seconds left. Timeout, the Villanova players went to their bench – all except ‘Nova’s 6’11” center Daniel Ochefu. He was busy mopping a wet spot just below the half-court line. It was a curious sight, a seven-footer busy with a mop while the rest of his team huddled.
The announcers joked about it, wondering aloud while 35 million people listened why he was working a mop in a tied game with 4.7 seconds left for the National Championship.
The answer was simple: he was making sure the spot was dry because he knew it was the spot where he was going to set the pick that would spring Ryan Arcidiacono to drive over half-court and set up the shot to win it. He was making sure neither of them slipped.
How did he know to do that? Simple. Villanova had practiced the game winning play – called Nova – hundreds and hundreds of times. They had planned for this precise moment for years, 4.7 seconds left was almost the optimum time for it.
There was no discussion in the huddle, no frantic whiteboard X’s and O’s and arrows. The Wildcat’s coach, Jay Wright, said “Run Nova,” Ochefu went over to the sweat slick and did the only preparation the team needed.
Arcidiacono had several options as he dribbled, all planned back in 2002. He had made that run with 5 seconds on the clock hundreds of times in practice. Every kid on the floor with him had been through it and all its variations time after time – always at the end of practice when everyone was tired and wanted to go home – just like the end of a draining game.
In the fourteen years Jay Wright has coached Villanova, they never had the opportunity to run the play in a game. It would have been easy to self it. But they didn’t and it just so happened that the first time they needed it it was there to win the National Championship.
That’s the thing about planning – great planning plans for contingencies that may never happen. Because, they do. Sometimes.
Imagine that there’s a business that started in the early ’60’s, out of a garage in the Mojave Desert close by Edwards Air Force base. The founder was strangely charismatic, not something you could really out a finger on, but indisputably charismatic. He dove into his craft with a singular passion. Whip smart, cutting edge, daring, yet with a business sense that bordered on the surreal.
From the mid-’60’s through the beginning of the ’90’s he constantly adapted, changed his product(s) as times and tastes changed. Enormously influential on countless others in his field, he was also the face of his industry, even appearing before Congress when regulation threatened it.
While he had dozens – if not hundreds – of partners in various ventures over the years he always retained control of his company/products. Along the line he married, raised four children, two of whom followed him into the business. He was diagnosed with prostate cancer somewhere around 1992, with his usual laser-intensity he designed his estate so that the business would thrive for generations.
He died in 1993. He left his wife as the new CEO, the children all had management roles, the two who had followed their father into the industry directly continued on with his work. It was perfect. Until his wife died. No provisions had ever been made for a successor to the wife as, effectively, the CEO. In reality, she was probably as much referee as chief executive (although we know many CEOs who would claim the same) and without her things fell apart.
Because the ‘shares’ hadn’t been exactly equally distributed to start with, two of the kids manged to get, barely, control over the company. They do not get along with the other two – the two still working in their fathers medium. There is no consensus and the odds don’t look as if there ever will be. Parts of the company are breaking up, being sold off piecemeal; the two children on the outside have been estopped from using their father’s name in their business – the name is its selling point. There is a major sale of assets scheduled for November, litigation is threatened and seems a certainty.
The father, the business, is Frank Zappa, one of the most influential musicians of the 20th Century. And businessman. (we’ve pointed out more than once in past posts that artists certainly own businesses). He learned early that he should own his own songs, then he learned that he should own his own record labels. He executed that as well as any entrepreneur.
He structured his companies and his succession planning admirably, except for one thing. It’s the one thing that many, many owners of family owned businesses also fail to do – account for emotions. Simply, everything that can make a Thanksgiving miserable can mess up a family owned business.
It’s a contingency that has to first be acknowledged, then planned for regardless on how far-fetched it may seem. When it’s not, well, it’s pretty hard for a family owned business of any size to survive long.
Jake with the Orioles
Since about mid-way through the 2014 baseball season, one of the best pitchers in baseball has been – and continues to be every fifth day – Jake Arrieta of the Chicago Cubs. He was the National League’s Cy Young award winner last year after an historic season in which he put up numbers not seen since Bob Gibson in 1968.
It shouldn’t be all that surprising, Arrieta was a top draft pick out of TCU in 2007. He was drafted by the Baltimore Orioles and quickly rose through the minor leagues. He made the big club in June 2010 and won his first start – against the Yankees.
He was known for great ‘stuff’, ‘filthy’ in baseball parlance, four pitches, and a very idiosyncratic windup. He had everything needed – including an almost fanatic work ethic – to be an ace. But he wasn’t, that start against the Yankees was pretty much the highlight of his first seasons in the majors.
Arrieta crashed and he crashed hard. How hard? He set the record for the worst ERA ever recorded by a starting pitcher for the Orioles. The Orioles’ history, by the way, goes back to 1901. This despite the fact that dozens of well-known players – including a few future Hall of Famers – said that Arietta had the best stuff they had seen in years.
So, what happened? It’s really relatively simple. Arrieta’s throwing motion and pitch selection didn’t fit the Orioles
Oct 7, 2015; Pittsburgh, PA, USA; Chicago Cubs starting pitcher Jake Arrieta (49) reacts coming off of the field after pitching a complete game shutout against the Pittsburgh Pirates in the National League Wild Card playoff baseball game at PNC Park. The Cubs won 4-0. Mandatory Credit: Charles LeClaire-USA TODAY Sports
pitching ‘metrics’. He threw across his body, he threw from the first base side of the pitching rubber, he kept his hands low, he loved his cutter (almost unhittable). The Orioles organization wanted their pitchers to throw a certain way, Arrieta, according to their pitcher standards, did everything wrong. And, they forbid all their pitchers to use the cutter.
They broke Arrieta’s pitching down and rebuilt him to fit their notions of what made an effective major league pitcher. Along the way, unsurprisingly, they lost the Arrieta they had drafted. The results were a disaster, he was demoted to the minors, he came within a whisker of quitting baseball forever.
Then, he was traded to the Cubs. In his first meeting with Cub management, he was told to do what came natural to him – to be himself. They, in essence, would plan around him.
The results were virtually instantaneous – his first full season with the Cubs he finished 9th in the National League Cy Young Award voting, his second year he won it, this year he’s still off the chart good.
By now, you can probably see where this is headed – call it ‘pigeonholing’ or ‘cookie-cutter’ or generic or a dozen other things, but trying to wedge people or businesses into preconceived, pre-planned, slots is at best counter-productive, at worst disastrous.
Jake Arrieta is a business worth millions, it just happens to revolve around his ability to pitch a baseball. Cookie cutter planning almost destroyed his business.
Imagine this scenario: there’s a new startup in a very competitive field. It’s off to a shaky debut but has real promise. The CEO is tall, aristocratic, smart, taciturn – the perfect qualities, he is indispensable. Above him is a board of directors that is divisive in the best of times. They spend most of the time arguing among themselves, in the two years the company has been in existence only two directors have bothered to visit the physical plant.
Below the CEO are two highly capable, much needed for completely different reasons, officers. They have the same title, diametrically opposed personalities, and are untied only in the written-in-stone belief they are both more qualified than the CEO and the CEO needs to go. The CEO suspects this, but has no proof, even if he decided to act on his hunch and save himself much grief down the road, he can’t fire either of them without board approval.
Just below the two bickering officers is an upper management type who’s brilliant, improvisational, but high strung. He is devoted to the CEO.
With the company on the verge of bankruptcy the manager pulls off a miraculous product launch that succeeds far beyond all expectations. It is one of the greatest success stories in history. The company rejoices, the markets respond accordingly.
But, there’s a problem. One of the officers takes all the credit, doesn’t even mention the manager in his emails or press releases. The manager, as anyone who ever met him in any capacity would guess, takes it poorly and snaps – he issues his own emails and press releases and appeals directly to the CEO for relief.
The officer that took the credit is a political animal, he immediately goes to the board over the head of the CEO and moves to have the manager fired – for cause. The board runs with it, the CEO is buried in day to day operations and, regardless, shuns politics, so he leaves it to them to work it out.
The manager gets wind of the complaint to the directors, that’s soon followed up by notice of a hearing in some indeterminable ‘near future.’ Meanwhile, six other managers are promoted over him.
This is a good place to note the following: this startup spun off from a long established company that had settled into the doldrums. The spin-off happened in a flash, virtually overnight, what few documents the founders drew up before launching were knock offs from the original company. No one had had the time – or inclination – to do more than hastily incorporate. Operating agreements, much less employment agreements and guidelines, do not competes and non-disclosures were never enacted.
With the hearing continuously postponed and daily leaks to the media about the manager’s ‘malfeasances’, the manager breaks – he’s had it – but he doesn’t resign, he becomes uncharacteristically quiet.
He arranges to sell one of the company’s most sensitive properties to the competition – the original parent company. It will ruin the start-up, virtually insure its demise. At that point, the best it could hope for would to be bought out by the jilted parent, though heads would roll.
The manager is stopped only by sheer, good luck moments before the handoff. By the end of it all, the manager is
The Board of Directors
hired by the parent company; the two officers subsequently disgrace themselves – one is fired, the other allowed to retire; the company gets its act together and gets to all the documents and agreements it should have had from day one, several lawyers pitch in to plan it all out; the CEO becomes chairman of board.
Without even looking at the images, you probably knew early on that the start-up is the United States circa the Fall of 1777. The CEO is, of course, George Washington; the board is the Continental Congress; the officers: Horatio Gates & Charles Lee; the manager Benedict Arnold; the miraculous occurrence – Saratoga. By the way, one of the two members of Congress to ever travel to the ‘front’ was also the oldest member, Benjamin Franklin.
It just goes to show that there’s nothing really new – the United States went into business virtually overnight – few could have anticipated the Battle of Lexington and Concord; no one could have foreseen the carnage of Bunker Hill (really, Breed’s Hill but …) cementing the deal.
The United States was a vast undertaking and it was done on the fly and under intense pressure – the kind you can only get ticking off the most powerful nation on the planet.
In other words, it was hardly planned and in its early days that lack of planning was almost fatal. Several times.
In the long run – except for the citizens of New London, Connecticut, the British Brigadier General Arnold burned it to the ground in 1781 – the lack of planning and the Arnold affair did not have any real long term effects.
But it could have – Arnold warned General Cornwallis not to base his army out of Yorktown, he was, thankfully, ignored.
History – a lot of lessons for a lot of businesses.
They are an iconic image from childhood for anyone who ever has as much as leafed through a DC or Marvel comic book. Sea Monkeys. Always on the back page, right next to the ad for X-Ray Spex glasses.
How iconic? Both The Simpsons and South Park have had entire episodes that revolved around Sea-Monkeys. Sea-Monkeys – brine shrimp in a package that magically come to life when dropped in water. Then, well, using magnifying glasses built into the plastic containers, you could, theoretically, watch them do brine shrimp things for hours.
You had to be eight or nine to buy into it but generations of kids did. And do, Sea-Monkeys are a $3.5 million a year business.
The story behind the ‘invention’ of Sea-Monkeys is bizarre, flamboyant, and fascinating – a kind of early ‘50s film noir meets The Addams Family kitsch. They were developed by Harold von Braunhut, a motorcycle racer/TV producer/magician/agent for carnival acts/inventor/salesman.
Novelty items like those on the back pages of comic books were apparently a pretty big business in the early ‘60s. It was dominated by Wham-O – the guys who sold the Hula Hoop, Frisbee, Slip n’ Slide, and a lot more.
In 1960, Wham-O sold something called ‘Instant Fish’ – a package of freeze-dried African killifish that were supposed to come to life when water was added. Sales dried up like the fish when buyers found out that no power on earth could revive ‘Instant Fish’.
Von Braunhut, however, took the idea and worked with a marine biologist in Montauk to selectively breed a species of brine shrimp that could lie dormant for long periods. It was, actually, something of a scientific breakthrough. The biologist created a hybrid form of brine shrimp, von Braunhut named them Amazing Live Sea-Monkeys and they took off. The rest is history.
Von Braunhut died in 2003. His widow, Yolanda – whose background could fill a Netflix series – inherited the company, the secret formula, and the immense estate on the Maryland side of the Potomac River that the Sea-Monkeys had built.
Von Braunhut, however, had been a strictly hands-on manager and his loss was keenly felt. Yolanda needed help and wasn’t all that interested in continuing the Amazing Live Sea Monkey business. She turned to Big Time Toys out of Lexington, Kentucky, name-wise a fitting successor to Wham-O.
She gave Big Time Toys the license to package and sell Sea-Monkeys while her company supplied the packets with the desiccated shrimp. She also agreed to sell the entire company to Big Time Toys in the future. Big Time was to pay $5 million for the licensing agreement and another $5 million later, over a period of years, for her company. Yolanda was looking at a Sea-Monkey free future.
It’s probably not much of a surprise that a company with such a fictional sounding name defaulted on the agreement(s), but Big Time Toys did. Basically, they went to China and got their own source of brine shrimp and announced they now owned the Sea Monkey kingdom.
The gate of the house that Amazing Live Sea-Monkeys built.
Lawsuits have been winding their way through federal courts for some years now, all the cases revolve around some fairly knotty contract law issues, trademark infringement, as well as the catchall issue of – ‘if Sea-Monkeys aren’t really real, then how real is the company that sells them?’
The case is in court and will be for years to come, Yolanda has the house and little else. She cannot afford the heat and electricity of such a mammoth home and lives in two rooms closed off from the rest.
Meanwhile, Sea-Monkeys still sell, Big Time Toys has them in Walmart and Toys r’Us as well as the ubiquitous comics.
The point is, this is just another example – albeit a most entertaining one – of the botched sale of a company. An operating, profitable company, the death of the owner, a ‘quick’ sale by the heir, then years of litigation. All of it was avoidable with proper planning.
The Wild Bunch is an iconic movie of the ‘60’s. A western when westerns were fading away to irreverence, it brought a modern sensibility to the genre. It’s bloody, sarcastic, cutting, and has a scene that should be mandatory viewing for anyone dealing with a family business … or estate . . . or …
It happens fairly early in the film. William Holden, Ernest Borgnine and their gang rob a railroad office in a small, dusty (everything in the movie’s dusty, I’m sure when it was shown in movie theaters sales of soft drinks reached record highs) Texas border town.
Mayhem follows, choreographed as only Sam Peckinpah could, eventually, most of the gang gets away with its haul – bags of coins. Except, it’s not, the bags are filled with steel washers. Thousands of worthless washers. The whole thing was a set-up, they have nothing.
Holden tells his men not to worry, he’ll come up with a new business plan. He wanders off into the desert to be inspired. When he returns, he reveals the new plan – they will start running guns to Mexico; either to the bandits, Poncho Villa, Zapata, whoever will pay.
The gang’s Mexican member immediately asks if there’s a chance they’ll end up selling guns to the men who razed his village and killed his family.
Holden takes a very short moment before answering, “Angel, ten thousand dollars cuts a lot of family ties.”
“Ten thousand dollars cuts a lot of family ties.” That’s pretty cynical but that doesn’t take anything away from its basic truth. As many attorneys, CPAs, family therapists and more will attest.
In my experience, however, things go deeper than that. Sure, money is, well, money, but usually, for me, it represents something else. Or rather, it’s part of something else – a business. The money that severs family ties is usually the result of poor or no planning.
A promise here, an off-the-cuff remark there, over a period of years, across generations, and expectations are built. “Someday this will all be yours,” is a cliché, but that doesn’t mean it’s not said or certainly implied a hundred times a year across all manner of family owned businesses.
The bigger the family, the more successful the company, the more this is taken to heart. Problems start when planning isn’t done – real planning, taking into account death, disability, the estate, family not actively involved in the business, mergers, offers to buy, selling out, any of a dozen exit strategies.
In the absence of a plan, and the uncertainty that follows, it’s inevitable that the people involved will begin focusing on the lowest common denominator. When that happens, it takes a lot less than ten thousand dollars to cut family ties.
I know an attorney who did a fair amount of business and estate planning in the late ‘90s in the Greater New York City area. He told me the following story:
“I had a client who owned brownstones in Manhattan and apartment complexes in Brooklyn and Queens.
Neat guy – French aristocracy, Big Wig in Big Oil in the ‘50s and early ‘60s, he started buying New York real estate in the Mayor Lindsey era when it was considered insane to do so.
I always met him at either his office in a brownstone off Madison Avenue or at his club on Fifth. Great guy, very laidback, lots of stories about France, art, history, Manhattan in the ‘70s. Not the most forthcoming of clients, it took forever to get all his info – business and personal – but it was a hardly onerous to be doing it over lunch overlooking Central Park.
It took time, which was fine because it was very complex. Family issues, personal and business assets completely interwoven, real estate, brokerage accounts on two continents, daughters getting married, lots, lots, more.
But, finally, we got it done, produced documents for him, his wife, the business, the works. It promised to be a long signing, the client decided that we should do it over a meal in his home on Park Avenue.
I was thrilled with the idea – after all, I had seen the current appraisal for his two floor co-op in a landmark building and the Louis XVI furniture inside. We’re talking Louis XVI furniture that had a pretty good chance that Louis himself had actually at least walked by at some time before the storming of the Bastille. The real deal.
I walked in and was blown away – it was like walking into Versailles. After the initial ‘WOW’ moment I settled down and started to recognize pieces and artwork from the appraisals.
He had brunch laid out – every meeting with him always revolved around food – we piled up plates, sat down, he and his wife on a couch I was nervous eating within ten feet of, the rest of the family scattered around an ornate, sparkling, three-foot-high coffee table that Napoleon had probably snacked on.
It was all nice and relaxed and so very civilized. We talked, as always, about history and politics and whatever, somewhere along the line the framed drawing hanging over the couch caught my eye, then grabbed it. It was … interesting, the signature, well, I had to ask.
“Ah, Jean (not his real name), is that a Picasso?”
A Gallic shrug and, “I suppose so.”
Not Jean’s ‘Sort of a Picasso’
“Suppose or know, ‘cause I think I’d know.”
“Well,” he started, then launched into this: he worked in the Cote D-Azur in the late Fifties. He always woke early, went to the same café for breakfast every morning without fail. The same crowd was there every day, everyone kept pretty much to themselves. One of the regulars was an older, somewhat familiar, balding man.
One morning, the man approached Jean, told him he had forgotten his wallet and could he ‘impose’ on Jean and pay him back the next day. Jean, as I can attest, was nothing if not generous with food, and he invited him to sit with him.
The talk was amazing, breakfast melded into lunch, then dinner, wine flowed. Late in the afternoon, Jean’s new friend said, “I had such a great time, I must pay for this.” Before Jean could object the man pulled pens out of his pockets, had the table cleared and a new, linen tablecloth brought over and proceeded to – with Jean now in awe – sketch out a drawing. Then he signed it.
Also not Jean’s ‘Sort of a Picasso’
“Great story” everyone but me gasped.
I caught Jean’s eye, he must have seen the utter resignation in them for he said, “Does this effect what you’ve been doing? I am sorry I forgot all about my Picasso.”
“That’s okay, Jean,” I answered, “I forget about mine all the time.”
He had the grace to laugh, “But does it? Alter what you’ve done?”
“Depends on the valuation.”
“Oh, I’ve never had it appraised.”
I left my tongue firmly in cheek but started to put the pile of documents back in my briefcase, “Well, let’s get it to Sotheby’s and see what happens, maybe we’ll get lucky and you just ran into a Picasso imitator and all you got out of the day was a nice drawing.”
He laughed, I called a friend at Sotheby’s, went back to my office and waited. Two weeks later I ended up shredding the documents. The drawing was worth more than one of his Manhattan brownstones.
I love this story and I’m posting it here, now, because the moral is simple – when doing business planning, particularly rolling it out, it’s vital to know what the company owns, what it’s worth, and it’s not always that easy to figure out.