What early stage startups can learn from the NBA free agency

You love the NBA and Entrepreneurship. You know that the NBA is a business and Business is oftentimes referred as a game to win.

And, if you’ve ever wondered about the similarities between the NBA and Tech startups, here’s what you need to know.

“Early Tech startups can learn from NBA cap space & the strategy involved.” — Ryan Smith, co-founder Qualtrics

Refresher…Salary Cap? Cap Space ?

The Salary Cap is a spending limit designed to promote and enforce competitive balance across the league. Like early tech startups, NBA teams operate in a highly competitive environment where “resources” are limited.

Cap space (or Cap room) is the amount of money that a team has available to spend on players’ salaries.

1. When to Be Aggressive Signing “Deals”

When Talent is Scarce, Timing is Key.

You probably know that the NBA free agency is a short period when teams can negotiate with free agents. (Players with expired contracts). During that time, we usually see a lot of player movement. General Managers (GMs) have to work through their salary cap.

NBA Teams need to find the right balance between being aggressive early to sign players and waiting to get the best deals. This summer, most teams decided to be aggressive early to maximize their chance to sign the best players.

Obviously, a few teams missed out on their targets like the “New York Knicks”. Afraid of being left empty-handed, the Knicks rushed to sign “2nd tier” free agents. A better strategy could have been to wait and acquire draft picks through trade. They would have been the only team left with available”Cap Space”.

For your startup, you could decide to be aggressive when it comes to equity and terms negotiation while fundraising. Giving too much equity too soon or getting the wrong investor can have catastrophic outcomes for your business. If you miss out on your target, avoid rushing decisions and know that there may be a better strategy.

2. The Bad Contract Trap

“Un-tradable contracts” or “albatross contracts” are not unusual in the NBA. Having these contracts mean that the team has over-committed resources on a player. In short, the player is a bust but costs a fortune.

It is not a secret that these overpaid players can have terrible consequences for any NBA team. General Managers get “stuck” with the contracts and left with no choice but to give up valuable assets in order to move the contract to another team.

The best GMs rely on much more than past production when they need to determine the salary of a player. Players get paid based on future projected production, fit with the team, and the team cap situation.

For your startup, the cost of a bad hire can be deadly as well, a bad apple can destroy culture, halt growth and put your company off track. To avoid this problem, take into consideration the stage of your company and be crystal clear on the job that needs to get done at your company, not just what someone has done at a “big name” company. Once you’ve determined that a candidate can do the job well, follow up by having other team members conduct cultural interviews. Their evaluations should help you know whether the candidate will make an effective — or disruptive — member of your team.

3. Develop Your Own Talent

Most of the best NBA teams have “solid to great” players acquired through the draft. The NBA Draft is an annual event happening at the end of June where each team can add young players to their roster. These young players are “affordable” compared to established players and are a vital aspect of small-market teams that might have a harder time attracting top talent.

For your startup, you can and should develop your own people. You’re most likely to attract a great talent just out of college than someone more experienced. Look for a lot more than just experience in the industry. Place bets on highly talented folks who may not have as much domain experience. They can learn quickly with company support and will bring great dividends down the line.

4. How to Attract a Superstar

Be Patient. Find the Stars.

The hardest thing in the NBA is to attract a Superstar. A Superstar is a player that make the team an instant championship contender.

The latest NBA Free agency was loaded with Superstars talent like Kawhi Leonard, Kevin Durant, and Kyrie Irving. It’s no accident that the teams that were able to attract these superstars were universally recognized for having a great culture AND a solid management in place. Steve Ballmer & Jerry West (arguably the best NBA Executive of all time) for the Clippers, Sean Marks for the Brooklyn Nets. These two teams did their homework, took the time to build a solid team for years with great complementary players . Both teams made the playoffs last year exceeding expectations.

For your startup, culture and team building are keys to attract great talent.

“Game recognizes Game”

First and foremost, the best players want to play with other great players. The best talent wants to be surrounded with other great talent. Build an environment where good people attract others.

Play the long game. The Clippers were courting Kawhi for almost a year. You too, can engage with the superstars over a long period of time. Start building relationships. When the time come, your startup will be the one they’ll consider.

Employer brand is key. The Knicks, universally known as a moribund franchise were chasing “Big Time” Free agents. They didn’t “close” one. Why? Because of how the franchise was perceived by the players.
Follow the example of Stripe, known for their great culture and their ability to nurture a pipeline of talent.

5. Evaluate Undervalued Assets

As mentioned, NBA teams are working with limited resources, imposed by the NBA. You will also have limited resources for your business, imposed by your bank account.

In the NBA the obvious best players are well known, easily recognizable and expensive. However, a lot of value comes from the team ability to identify “undervalued assets”. Undervalued assets are “underrated talents” that did not get the chance they actually deserve. These players have an “on-court production” far superior to their contract value. Small-market teams need to be great at detecting and evaluating underrated talent and placing strategic bets on them.

For your startup, consider yourself as a small-market team. You probably won’t be able to afford talent from the most prestigious schools or famous big tech companies. Yet, what you can do, is to identify underrated talents and remind yourself that talent comes in many shapes and forms. Spot these people and design the processes that can help them grow in your company!

6. You Can Always Find “Cap Space”

In the NBA, a team needs to have “Cap Space” to sign free agents.

At the beginning of free agency, some teams were capped out, meaning that they had “no money” to spend to attract new players. In other words, they were put in a corner, and no-one expected them to make noise during free agency.

We see in the NBA that a team can almost always get out of a situation where they don’t have cap space. GMs are extremely creative and think outside of the box to find solutions to create cap space and trade players. What’s special about the NBA is that teams can’t do it alone. They need to rely on trading partners (i.e. other NBA teams) to make things work.

In the business world, your trading partners are your customers, vendors, or technology partners. Think, that you can always cooperate with them and propose creative solutions in order to build a win-win situation that can boost your business, improve your sales and finances.

7. Chasing the Whale

Kawhi Leonard is the Whale.

He was seen as the transcendent superstar that would change the fate of the franchise that would sign him. A few teams (Lakers, Clippers, and Raptors) were chasing him. During that time, they were not in a capacity to sign other players while waiting for Kawhi’s decision.

The Lakers didn’t end up with Kawhi, and had to fill their roster with 2nd tier free agents. They lost a lot of opportunities to get better players.

For your startup, the whale is the huge prospect that could change your business overnight. These customers usually take much, much longer to make their decision. You might even have to commit a lot of resources and time that will prevent you to close other more realistic deals.
Getting a pilot with a larger company can be an amazing opportunity, but you must also continue to pursue your regular prospects. Getting into extensive talks with big prospects does not always translate to real customers. The feedback you will receive from just one large customer may not be representative of the entire customer segment.

Hope you find the above lessons interesting. I would love to hear your thoughts. What other lessons could we get from basketball? I am trying to apply them to my new project WelcomeAboard.

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