David Rahn (CSU Faculty of the Month) - Chicostart

David Rahn, Director e-Incubator at CSU, Chico

Hi, I was invited to describe myself a bit and tell a story of a business I started and what I learned for the January CfE Newsletter. I am happy to share! 

To date, I have taught nearly 20 courses for the Department of Management and I enjoy them all. I am currently enjoying teaching Entrepreneurship and Strategy, coaching the Collegiate Entrepreneurship Organization, and running the e-Incubator.

I studied Computer Science and Artificial Intelligence at the University of California, Santa Cruz.  I was invited to work in Palo Alto for a startup building Expert Systems for fortune 500 companies. The technology we developed originally came out of the Stanford Artificial Intelligence Lab.  I thought I was going to be a software developer, and I was, but they also trained me from day 1 to be a consultant. I learned how to work on a team to evaluate a major problem for a Fortune level company, create a proposal and deliver a pitch. This would become very important a few years later when another opportunity arose. Working at the AI company was interesting, but that is a story for another time. 

The story I am going to share describes how a business can come into being when you least expect it, and in fact are not even look for it specifically! I share how it came into being and then share some lessons I learned. 
Two long time colleagues and I were at a social gathering and we learned from a friend of a friend of ours at a major financial services company, that they were struggling to obtain technical personnel in New York.  They had a big project they wanted to accomplish and it required talent with newer programming language skills, and much more.  This company was predominantly COBOL based developers, engineers, and systems.  Apparently finding enough software engineers, system architects, and project managers with more current language and architectural skills were difficult in this geographic region. It also followed that finding someone to run a project like that was also difficult because none of their existing project managers understood these newer tools and approaches.  They had built large systems that were run on mainframe computers using large batch transactions. There was no way to do ad hoc queries and get managers information rapidly for decision making.  In addition to the data warehousing, they also wanted to develop applications for laptops their agents could use to sell financial services products, and none of those on their staff had the skills or experience to that either. Our acquaintance blurted out that they were considering a proposal from a major consulting company, and he felt the cost of the project was hideous and that they were being taken advantage of. 

My colleague pointed to me and blurted out that I was very experienced doing projects for companies his size, was an expert at building commercial software environments and that I could look at the proposal and give him some feedback on how reasonable the project was.  I laughed and thanked my colleague for changing my weekend plans! We all chuckled at this.  He looked to me and greeted me with great hope in his eyes and I could feel the level of stress he was facing on this project.  He asked to learn a bit about me, and I described how I had just reorganized a company to bring their software development department from an undisciplined, always late, group with a poor reputation, into a high-quality, on time and under budget, commercial software development organization. I briefly explained some of the approaches, tools, and methodologies asking him about how things worked in his world. If it sounded helpful, I said, I would review the proposal and give him some feedback. He said he would pay me to do the review and provide feedback.  I smiled and told him I would take a look at it over the weekend and get back to him. He ran out to his car on the spot and brought the proposal back in and gave it to me. 
I spent the weekend pouring over the proposal. It was indeed a high-priced initiative. I was amazed at how overpriced everything was. This was typical though of these large consulting firms. I knew this from the consulting work I had done previously. It became clear to me almost immediately that I could turn this contract into a project for myself and a team if I played my cards right. I was already trusted because I had been recommended through a trusted network. I saw the room in the initiative to build a profitable project around it. I was concerned though that if I just proposed I take it over that it would not feel right. I was trusted but had not yet established my authority and credibility which is crucial in selling.  I decided to give away a good bit of information and insight into how my new potential client could approach this project and get a much better result. I spent the whole weekend writing up about thirty pages of the report. I explained at a high level how the project could be better staffed, better built, and better integrated. My acquaintance had a morning flight, but we had time, so I presented this at breakfast on Monday morning – to a very eager and receptive new friend. He asked a lot of questions and took a lot of notes. This is excellent he said and again and again and once more asked if he could pay me. I told him no, that I was happy to help a friend of a friend and wished him luck. He asked me if I would ever consider moving to New York and we both had a good laugh at that. I told him he could call me if he had any questions. We both knew what was possibly emerging, it is a bit of a dance. 

Two days later he did call and had urgent questions. He was on a break he explained, from giving a presentation to peers and bosses and just wanted to clarify a few things. I hustled up the answers like a coach giving instructions on a key play and sent him back into the game. He called me a few hours later sounding greatly relieved. He told me how well the presentation had gone and then started asking me if I could do some of the parts of the project. 

Perfect I thought!  He then described a bit more of the situation and at one point I stopped the conversation and told him that we had a major sticking point. I informed him in no uncertain terms that myself, nor my team, would be willing to report to the VP of Development. I insisted we had to directly report to the President of the company, or it was no go. He was shocked and I could hear the stress returning to his voice. I explained that it just would not work that way and detailed several important reasons why. He began shaking his head yes and exclaimed that he could see the issues I was pointing out, and that I was in fact right, and further that he would ask but that this was a big ask!  He took a deep breathe. I told him to ask the President, not the VP. This was a technique I had learned in my earlier training as a younger consultant. He called back the next day and said it was a go!  I called two of my colleagues and got them together and made the pitch. We had to fly to New York in a few days and make a presentation. We all agreed that it was a cool opportunity. We would go for it. 
That was the start of our niche consulting company that provided consulting and software development services to a major financial services company.  This “project” became a rapidly growing company and had a nice run of several successful years prior to my selling my portion to my colleagues. Along the way I learned several very interesting lessons. Here are some of them.

  • Under promise and over deliver. Good news fast – bad news faster. 
  • If you are coming in to solve a problem that the current management is not able to solve, think hard before agreeing to reporting to them. In most large companies these people will find a way to drag you down with them. I learned this early in my consulting career and it helped considerably. Being outside those constraints allows you to get exceptions to your budget, your plans, etc. since you are connected to a person higher than the management you need to avoid. 
  • When you start out there is a grace period during which you can ask for things you need or that might make life better for your employees working as consultants for them. Take advantage of this if you can. 
  • These large companies also pay all the costs of consultants to fly to meetings, stay in hotels, and meals you incur, although like many, they are adamantly against paying for cocktails. 
  • If you insist you need to be in California to run your business, and convince them that you can succeed remotely, they may also offer to cover an apartment located nearby so you can fly over on a regular basis for meetings. 
  • They will pay your fees in advance of the month of work, if the project is important enough and you explain in clear terms the costs of meeting their needs for hiring top talent and getting them up and running. 
  • You can charge a large financial services company up to 5 times, and even more in special cases, the annual salary that you pay your employee, to rent that employee out to them as a consultant. When you put together a large team to work this way, you have a successful business model. 
  • A proposal from a large, reputable consulting company will be sold by a few high-powered consultants, and fulfilled by a large group of younger, bright, talented up and comers.  Staff and grow your company the same way but be sure to instill strong social fabric. Start with anchors – high paid experienced people who “anchor” the various areas of your company. Then hire many young, bright, fast learners, who are eager to learn from the anchors. They do not have to have a lot of experience, rather they need to be fast learners. This will allow you to pay them less at the beginning but raise them up fairly quickly, so they remain satisfied that they are “on the move up,” and getting regular recognition.  They must be connected to mentors, both technical and career. Ladder and structure your organization to instill this as standard operating procedure.  Train everyone to be excellent mentors, then bestow mentoring positions when people earn it and you are experiencing growth. Imagine everyone in the company being connected to multiple mentors and you see a thick graph of connectivity that is social fabric that makes a great culture. 
  • Quickly show the door to anyone who does not work with a demonstrable ethic of care – and is unwilling to teach others or be taught. 
  • Develop transparent processes in which every project is reviewed, and learning occurs related to how to do things better next time. Document and share this. 
  • A large company like this can be considered an entire market, not just a client. Over the course of our engagement, we expanded from software in one area to software in other areas and into org design and even marketing. These expansions should relate to the core work you are doing, add value beyond what you are doing in a way that makes sense.  
  • As a leader in this company your job is to showcase people and their accomplishments. Take very little credit for anything. Make sure your people are regularly having their successes celebrated.  Simple activities like Friday afternoon presentations give people exposure and kudos. 
  • Finally, you can sell your position in a company like this and be rewarded for building the venture. First, choose the right timing – while the company is still growing and has no signs of trouble.  Next, negotiate in good faith and be willing to clearly leave something on the table so that your partners see that you are not trying to take every last cent of your valuation out with you. Then, by doing a multiples valuation, and further considering the reliability of the earnings, and a few other factors, you can arrive at an agreeable number that is a win-win for everyone. 

I look back on this experience with a lot of joy and satisfaction. I am still in touch with some of those great people on the crew!  The sale of my portion of the company enabled me to become semi-retired, debt-free and to make a major life change I desired. If any student is considering a business along these lines I would be happy to speak more on the subject. *******************************************