Transcript – Heuristic Podcast with Tobi Walter

Below is the transcript of the Trust Heuristic Podcast with Tobi Walter about human nature and incentives. You can find the video podcast here on Youtube.

Alicia Parr: Hi, this is Alicia Parr with Performentor and another Heuristic podcast. Today we’re talking to Tobi Walter. Tobi is a venture capitalist with Co-Founders Capital, and he’s a former technology entrepreneur, he is experienced with scaling businesses, he’s done it from an operations perspective, a CEO perspective, and a board member perspective, that really gives him an incredible insight into how to leverage human nature for business growth and success. Seems like a great person to talk to about our Heuristics. Anything you’d like to add to that? Toby?

Tobi Walter: Thank you so much for having me, Alicia. No, absolutely. I think that’s right, yes. I started and started two companies from scratch myself, and sat in the entrepreneur chair for the longest time of my career, just a couple of years ago, switched over to the investor site, and it’s been an absolute pleasure, looking at from this site into a number of different startups, getting to know entrepreneurs, their teams, how they work, and seeing very similar patterns, often time on issues I ran into with my own companies.

Alicia Parr: Yeah, I agree. I definitely see the patterns too, and these patterns are what these heuristics come from. So, today we’re going to talk about Human Nature Isn’t What We Wish It Were. Plan and design accordingly. And the reason why I came up with this one is that, so very often, leaders, HR professionals, maybe even investors, might have this idea about like, wouldn’t it be great if people just did the thing that I want them to do? And so, very often people are humans and they aren’t a hundred percent logical. They’re not a hundred percent irrational either. But there are certain things that you can’t expect from humans as a group. And to sort of build that into your expectations is sort of what I’m pointing at. And if you often, as a reminder that we can’t create a design that’s always going to work perfectly if it doesn’t work perfectly, usually it’s don’t blame the person, don’t blame the people. Just respond and figure out how to leverage what people are bringing to the table based on their nature. So, anyway, that was very long, but I guess, what do you think of it, I know that we were talking about incentives and some other things in our earlier discussion.

Tobi Walter: Yeah, absolutely. I would say on a higher level, I read the chapter in your book too. I think a key part for me in this is it’s not malicious intent necessarily. We’re not talking about moral hazard and bad actors that have a hidden agenda and try to manipulate. It’s oftentimes just this idea of us forecasting or projecting that our own thoughts might be the exact same or the same thought process in other people, that we have unexpected parts that we don’t think might play a role, but actually do. So, a couple of the first tactical things that jumped into my mind that I’ve had experiences with it at my companies, when I heard the topic was incentive systems that you just mentioned on the one hand, and a fairly common, issue I would say in trying to incentivize people to do the right things and work on what, quote-unquote, the right thing would be for a company.

But realizing afterward that I might have designed an incentive system wrong, and it pushed them, again without malicious intent to work on things that were in fact not helpful to the company. But when I looked later into how I designed their incentive system, it made sense to me that that was what their focus was. Again, not meaning that but by simply influencing people, and I had a few others in mind too. 

So, let me take a minute on that first notion. Incentivizing salespeople, and business development people was a common, common issue I had. And it was about do I give them simply a commission, which is a very typical incentive system. So, hey, you go close the deal and if you do right, I’ll give you part of the deal that you close, and that should align us because we want more deals, and you make money that way.

But then you realize at times that there might be some more strategic things you want to work on. There might be some deals that are maybe further out that take longer, and it pushes a person to potentially work on the things that are right in front of them. Rather than maybe taking the time to work on the thing that could have an effect six or 12 months down the road. 

But that’s simply how human nature works. If you have a specific incentive system for you, you’re trying to hit goals, put check marks behind boxes, and things like that, and it might often steer you in the wrong way. That was one I think of the realizations I had and having to chat about that topic a bit more. The other two second one I thought about in that topic was the idea of how often a very common, I think, early-stage startup problem was seen, or an idea of how much founders have in their own mind.

This idea of transferring it to everybody on a team, is, I think, a really important second topic that I had in mind there. I heard a guy put this from a kind of bad connotation to good connotation ones, and it was more about mental health for founders, but he said, he set this line that stuck in my memory for years. He said, well, you could have a day, and at the end of the day you could say, God, damn it this morning I had to explain the same thing for the fourth time to my whole team! Or you could say, I already know that it takes 20 times to explain the same thing to the team until really the last person in the room has the same vision in their mind that I do.

So, this morning I was able to complete the fourth out of 20 times. Now, I only have to say it another 16, and then everyone will fully get it. It sounds really comical, and it sounds bad, and it’s this idea of, well, why wouldn’t people just get it, if I just put our vision of the company on a PowerPoint slide once, why it’s not my whole 20-person team on the same page with me? But it’s exactly that, it’s no malicious intent, it’s the question of… or it’s the part of us projecting that people will think about it the exact same ways that they will come to the same conclusion that they have the same train of thought and the same inflection points, and that’s typically not true with people looking at this from very different lenses, looking at it with their own experiences, with their own upbringing, with the own way, how they have solved problems for years or decades, and oftentimes in that way, coming to different conclusions, unless right, you over reiterate time and again, and, and try to ultimately get the team to a somewhat cohesive, uh, plan coming out of that.

Alicia Parr: Wow, I don’t even know where to start, because all three of those things are things that I see all the time in our clients and also experience as an entrepreneur myself, like, where do we go from here? I think one thing…

Tobi Walter: Not a third, maybe a tactical area and the new area to go off. So, one of the things, and this was the realization when I read through your book again, and this idea of… well, people try to appeal to others they try to get validation, and things like that, and that reminded me of one other story coming, a bit more out of the academic world, during my master thesis, I was writing a thesis about how to scale companies, and how you quickly go from a very small team to a very large and one of the things I remember from literature review and papers was that a lot of people and in your area in HR were recommending panel interviews over individual interviews.

And the key reason they mentioned that was to say that it’s natural for a human to adopt their personality a little bit to who they’re speaking with. So, when you interview me for a podcast, I might have different answers, and I might word them differently than if it was a different person that interviews for the same podcast even with the same questions. And this is human nature of, I’m trying to appeal to you, to the person that is sitting across from me, I’m actually mimicking personalities or the way I talk or things like that, either way, the conclusion on that, at least from the academic, world, was to say, do more panel interviews because you’re getting a better average of the person than if four people would all interview them one on one after each other because then that person’s going to try to appeal to each of them. And you’re probably going to have a better impression when you’re interviewing somebody one on one than if you’re making it a panel, and they kind of have to appeal to all of these same personalities at the same time.

Alicia Parr: Yeah, that’s a really interesting way of looking at it that I hadn’t really fully thought of. I do know, it kind of depends on the person. I know we get really careful about using panel interviews when it’s, maybe it’s an engineer and they’re very introverted and you have them having to talk to like four different people, it can really take them so far out of their comfort zone that they don’t communicate well. But if it’s somebody whose job in part is communicating with groups of people. I can see how that would be very valuable.

Tobi Walter: I think that’s right. As with all of these heuristics especially. It’s, you have to apply them, of course, to specific situations. So, if it’s not somebody’s job to actually be in front of people, right, or talk to multiple people at the same time, or be very one-on-one centric, that might not make as much sense as exactly what you were saying, and building, especially interviews to those specific roles and things like that. 

I do remember one tidbit I learned in sales interviews from the first VP of sales I hired at my company here in Durham at Shoebox. What he did is whenever he had a sales application, he would give them a very specific and somewhat odd time to call him. So, he would reply to an email and say, give me a call at 2:25 PM tomorrow for an intro call. And it was one of the checks on a salesperson is, well, if you’re promising to call a customer at 2:25, you better call him at 2:25 on dot. If you call them at 2:30, that’s already my first knock on a salesperson. So, putting them into those situations that they’re going to see every day during the interview process was a pretty interesting lesson for me as well.

Alicia Parr: Yeah. Well, you’re using a little bit of behavioral stuff to figure out whether they attended details or not.

Tobi Walter: This idea of past performance is still the best indicator of future performance. So, as much as you can check on what they’re actually doing, rather than just all the great things they might just tell you in an interview.

Alicia Parr: Yeah. One thing that comes up in something that I experience is what you reference about business owners. Like how many times do I need to talk about our core values and our purpose and our mission and our vision? Man, haven’t I talked about it enough? Well, however many times I or you or the other leader has talked about it is, but a fraction of the amount of times that you’ve thought about it in the creation of them, in the first place.

Tobi Walter: That’s it. That’s right. Again, that’s so hard to project or get out of your own head because in your mind it’s so crystal clear, you have spent thousands of hours, you’ve probably dreamed about it a lot like there’s probably a lot of sleeping hours that you actually spend on figuring this out again, and going through what happens here or there and you easily project that other people would have the same kind of basis. 

I think those are the parts that are often pretty hard to lift yourself out of and take a piece of paper again and think about what could that person have understood about what I said. What are all the different options? They might get something that is very different from the intention that I was trying, to project onto them, and it’s very interesting every time, again, seeing that, seeing that in practice.

Alicia Parr: Yeah, and so for sales, and obviously we’re in services. So, it’s maybe a little different than maybe a more concrete item to sell might be. Oone thing I’ve noticed, is that I’ve been working with a fractional business development person who we have brought on as a W2. And so, for much of that time what she’s trying to do, she’s trying to remember the stories that I tell, right? And so, finally, I got her placed as a consultant on a few clients, and now she’s starting to have her own stories to tell. 

I think that that was super interesting, and that has me wondering, what other opportunities are there for getting a salesperson up to speed? Maybe getting them a little taste of what it’s like to be in different parts of the business or from the customer’s perspective so that they cannot just remember a script, but then also be able to tell a compelling story that is personal to them. I don’t know have you experimented with that at all?

Tobi Walter: I’m trying to think saw, I’m noticing a few times where I’ve done that myself, especially coming into a new role, I would copy what the CEO said about what the business is for a while or joining Co-Founders Capital. I joined about two and a half years ago, so the first times that I would speak one on one with an entrepreneur and would tell them about our fund, that probably sounded exactly like what my partners Tim and David, how they were explaining the fund, and I think the first few months, that’s a very common one too. You copy what you see and that way you can do it wrong, but you might have not fully ingested, it and kind of added your own experience and examples to it, and I think it’s a progression.

I do remember, I think after three, four months in, I would maybe then start using just tidbits of what I heard from them before and kind of fill that out with my own stories or add other examples of what that felt like for me and why we were looking at specific investments in a specific stage, or what I thought was unique for us compared to other VCs I’d seen out there before. So, you start then bringing in small intricacies of your own experiences as an example until I think at some point, it takes a while. You truly build your own story.

Alicia Parr: Yeah, people love stories, that’s what sticks. Do you want to talk a little bit about, sales comp or incentives? I know we talked about it a bit, like through, no bad intention. We often create incentives that incentivize some things that are kind of good, but then also have bad stuff with it unintentionally. Have you, I guess, what have you learned in terms of what to avoid doing?

Tobi Walter: Yeah, so I have, my progression was I started building incentive systems, like we kind of learned them in school and business school on paper. So, you come up with, all right, what’s my commission schedule for the sales reps? And then it starts getting pretty complex. 

Saying, all right, you get one time the monthly recurring revenue, if you’re at quota, if you’re below quota, you get 0.75 of the MR. If you were above quota, you get 1.5 x the MR that you’re selling. You start coming up with fairly complex systems, and I think the other part that is hard about incentive systems because you’re dealing with people is it’s hard to test or iterate on that. 

Whereas at least software and tech entrepreneurs are probably very used to doing. So, we’re very used to saying, well, let me start with the pricing page that says 19.99 and I’ll see how many conversions I get in a week, and then let me up that price to 29.99 and I’ll see what the comparison is in conversions on the ideal way that AB split tested.

That is, it almost impossible to do you’re going to drive your sales reps crazy if three weeks later you’re coming up and saying, hey, I’m going to change this for the next month a little bit, and then I’m just going to watch the numbers to see, do my call volume go up right now? Do my close business go up? Or which metric goes down? Where do I have to incentivize more? Do I have to incentivize more on activity metrics versus closing and result metrics or vice versa? 

It becomes a somewhat complex system because you’re trying to do small changes not too often, but with things that you are seeing where you think you’re lacking in the pipeline. And as for me, it was after I iterated on a few of those things for a few years, it came to me kind of this realization of now I incentivize something wrong.

And it was looking into why are they not trying cold calls like, I thought our, our, my idea was the make or break right now of whether sales will work here is can I actually have some OI on doing cold calls and not just following up with the warm leads? But when you look into the incentive system, right, and again, by no malicious intent, it’s just a this was easier and it made the same money. And so, it’s clear cut for an employee probably too, to say, well, I’m doing my job great. If I’m playing on the upper part of the incentive system, I must be doing a good job because that’s what you put forward for me. So, I had a point at my last company where I went backward and said, Folks, before I incentivize people wrong, let me just do this.

Let me just give people stock options and equity in my company because then theoretically we should all be on the same page, then we should be working on whatever increases the company value. Then I had my next realization in there that is this idea of incentive, systems for employees being in their control, you can control your outcome, and it being tangible too in the outcome, but also in time. So, then I kind of came around with the second issue in that is, well now theoretically we should all be incentivized to do the same thing, but it’s hard for an employee to pull that out and say, well, okay, so maybe in five years I’ll make some money there too and I don’t know how much it really is and really can I have an impact to that?

So, I ultimately got to somewhat of a joint system between the two and being very vocal with my folks too and saying, look this is a system I know works, so we’ll do an annual bonus based on this scorecard or something like that, or here’s what I don’t know yet. So, I know you want to be incentivized. I’m we’re going to together come up with quarterly goals and quarterly bonuses and we’ll change them together every quarter, and we’ll say, what is the most important goals for our next three months? And if so, right, can I incentivize you correctly against them? That took a lot of work. It was manageable for me in the last company with about 40, 50 employees. I don’t think it would’ve been at hundreds at that time it still works. So, that’s kind of where I think felt my stride and the idea of, I want the bigger picture incentive to make sure that was somewhat aligned. And they might not be always a monetary incentive. It’s also this idea of just creating this atmosphere of an us against the world. That’s one thing that I still love in startups is you get this team atmosphere of is it’s this small team fighting against the rest of the world to make something happen that nobody has made happen before.

I think it’s those kinds of right soft incentives, and things like that play a huge role in that too, and can even out punch truly extrinsic motivation and incentives but that’s ultimately the conclusion that I’ve arrived to is kind of bundling the two systems of a bigger high-level incentive and then to make sure that when I didn’t know what really the right work was going to be for a role to be very vocal and said, We’re going to decide together every quarter again, what your incentive systems are, what your goals are to make sure that we’re not right going different rounds potentially in…

Alicia Parr: Well, that really taps into human nature in terms of that what we get a chance to coauthor play a role in setting, in combination, even if it’s with somebody else who’s our boss. We’re going to be a little more like, you know, its part is our goal, like not a goal because it was handed down to us from up high, but because we played a role in setting it and putting it in place. So that’s definitely going to be a lot more motivating. 

Another thing that occurred to me that I think you sort of pointed out a little bit is that sales incentive systems have got a lot of different parts. You can incentivize your leading indicators in terms of the number of cold calls, etcetera. You can incentivize the end results, which I guess would be more of your lagging indicator of success. And then there’s this temptation to try and make a perfect scorecard that’s got eight dimensions to it. And I’ve heard that’s one thing I’ve heard from a lot of people who say, “I don’t understand how it works, it’s just got a lot of numbers in it.”

Tobi Walter: I think that was one of my lessons learned too. It fell to me in designing incentive systems, whenever you can get it to one KPI, it’s one number that people can watch ideally in real time too. It’s somewhere on a monitor in the office, and it’s not just for salespeople on the revenue, it could be, for one example we had it in our development team, in our product team, we incentivized the whole team to get, we looked at an activation funnel. 

So, we said, how many users do we acquire in a month? What percentage of them activates, which was a specific right thing that they had to do in the software that we would call them? Now, they are activated, then what do we need to do to retain them? There’s a percentage of people that would come back the second week and do those same actions again.

And at that point we would say, now we have a good customer. That’s the idea customer journey, and only if they get through the first three steps, do we call them a retained customer that is likely going to be a customer for life. So, for our developers and engineers that were working on the product and trying to figure out, all right, what can I do to get more customers?

My last company was about organizing receipts. So, back then it was about how could I get more customers to submit their first receipt and see the magic of what our app then does for them. How do I get more customers to then submit another receipt in the second week? And so, what we did for them is we put that funnel onto a dashboard that would run through the monitor. We give that whole team an incentive and said, look, guys, your goal right now is to get that retention metric to 20%.

We are 12%. You guys go when that happens, and I can’t remember what the incentive was, either was a thousand dollars bonus for everybody on the team, or it was a team event, or we did something like that, but so they could watch that number every day with every weekly release. They would see set numbers starting to trend higher, is it going down where the funnel is something changing? 

I think that was one of my key parts of thinking about one KPI that you can in fact influence and that you see ideally in a real-time basis on a daily basis, you always know where you’re tracking against it if you’re getting better. That seemed to me something that worked very well, at least in that case.

Alicia Parr: And this was a team-based bonus, not an individual?

Tobi Walter: Yeah.

Alicia Parr: This incentivizes people to collaborate and cooperate, even if you have a free rider here and there. So, as long as you’re removing them from the pool in an appropriate manner. Now, I see that we’re running a little bit tight on time. I have a little bit of time and I feel like we could talk about these topics for much longer, but I want to respect your time.

Tobi Walter: Unfortunately, we have to jump to my next call in a minute here. But I absolutely agree and I’m looking forward to more discussion with you from your viewers too. If anybody wants to reach out and have further discussions about this, I love chatting about those topics.

Alicia Parr: Oh, wonderful. Yeah. So, we’ll do this again for sure. I appreciate your time and all of your insights. I’m really looking forward to going back and listening and thank you for your time, Tobi. Until next time.

Tobi Walter: Thank you again for having me. This was great, Alicia. I appreciate you doing this.

Alicia Parr: You bet.

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