39: Lessons in SHIFTing gears from bootstrapped startup founder Jim Downs

TRANSCRIPT

Episode 39: Lessons in SHIFTing gears from bootstrapped startup founder Jim Downs

Shani Magosky: Welcome Leadershifters to another episode of the Leadershift Show with Shani. Happy New Year, it’s 2020 now. 2020 which is like a Buck Rodgers year, isn’t it? You are in for a treat today on my first podcast of 2020. Let me introduce to you Jim Downs, the CEO of Connamara and we will get into explaining what his business does in just a second. First I think the best way to introduce Jim is for me to read one of his favorite quotes. “If your business depends on you, you don’t own a business, you have a job. It’s the worst job in the world because you’re working for a lunatic.”

Jim Downs: That’s exactly right, yes.

Shani: Jim, welcome to the Leadershift Show.

Jim: Thank you, Shani.

Shani: Tell us a little bit about your background before we get into the meat of stuff because folks, this is a man who has shifted careers, several different times and has a very interesting professional history. What he started doing is not very similar to what he’s doing these days. Start us up with your engineering days and move us forward.

Jim: Sure, Shani, thank you. I was an electrical engineer graduate from Purdue University. I figured I’d be working as an electrical engineer all my life, except I wound up taking this class, my senior year about personal finance, which basically was how to balance a checkbook, how to, what’s life insurance and that sort of thing. They did cover something on investments, and at that point in time the equity options were just beginning just started trading. I kind of got the bug of saying–

Shani: You got hooked.

Jim: I did. It was like, this is really interesting. The most interesting part about it was that you could actually model it. I understood the math because I was much of an engineer. That’s where I got my first start. I didn’t work as an electrical engineer for Honeywell Avionics up in Minneapolis for a while. During that time, I started working and was recruited by the Central Intelligence Agency in Langley.

Shani: Nice.

Jim: I worked as an engineer there. It’s very technical-oriented always, that business.

Shani: Can you tell us what you did or if you did, you’d have to kill us?

Jim: No, I don’t have to kill you. I worked with the telemetry. We would decode telemetry from Intercontinental Ballistic Missiles in the Soviet Union. This is a while ago. That was our job. Basically, it was great, very interesting because you’re verifying the initial countries that were in place, making sure that they weren’t doing something outside the bounds of what they’re allowed to do by the treaty. There was that, but all during that time, I was trading options as a retail investor which was a bad idea. I lost lots of money that way, but I figured if someone else is making this money.

Shani: Back in the day, information was not shared equitably in the market, right? When you make the reference to retail investors back then, retail investors were the huge disadvantage to institutional investors. They are still at some extent but less so, right?

Jim: The disadvantage also was just time and place information. The second thing was that the bid-ask spread for options was a 16th or an eighth which was $6.25 or 12.50. That’s a huge edge to be giving up every time you get into the market along with the commissions being very expensive also.

Shani: TD Ameritrade, E-trade and all those low-cost brokerages back then either.

Jim: Zero commissions. I thought it was great when I was on the floor of that clearing firm only charging a buck of contracts. That was awesome. You trade up hundred thousand contracts a year that finally got crushed down.

Shani: Tell us about your days on the CBOE and the CBOT. For those of you who are not familiar with the Institute, those trading institutions in Chicago, if you could just give a two-second overview of what they both are for the listeners here.

Jim: Sure. The CBOE or the Chicago Board Options Exchange was the first exchange in the United States to list equity options or options on chairs. That started in 1973. I got the floor in 1981. It was still really young and really kind of a bit of a Wild West show in that regard. It was a place where you could go with a few thousand dollars of your own, lease a seat, become a market maker, and with any kind of luck or judgment, you could do quite well for yourself.

Shani: Sure.

Jim: The Chicago Board of Trade, which is just across the street, at the time we were in the same building, it is the old commodity exchange that traded mostly at the time grains, and then also treasury bonds. They were fortuitous contracts versus the option contracts which are traded on equities across the street. I was a local trader there. The reason why I traded both places is that the Chicago Board of Trade started the Chicago Board Options Exchange back in 1973. If you bought a Chicago Board of Trade, a membership, you could trade in both exchanges, which is what I actually ended up doing.

Shani: Nice. I can remember those buildings fondly from my days in Chicago, walking up and down Wacker.

Jim: There was a nice ebb and flow, the equities are usually busy, first half the year, first quarter of the year anyways, and then the grains will pick up with the planting season. If you wanted liquidity, you would trade those stocks in the spring and then you walk across the street, and hopefully it’d be a drought or something that caused some disruption in the grain markets, and you could trade there. Once the harvest starts coming in, you know what the harvest is then you go back to its last about September.

Shani: Let’s get out of nostalgia mode and get into Connamara mode. Tell us, first of all, what does the business do, who are its customers, and how and why did you start it, including kind of the bootstrap story. I think that is really interesting to some of the listeners because we had a lot of entrepreneurs who subscribe to the Leadershift philosophy. Most people think, oh, if I’m going to be an entrepreneur, I’ve got to go get some VC money, or at least some friends and family round or something. I’m interested in all those things.

Jim: I was lucky in a few ways. First of all, just to step back in time, one more time is that all during the time that I was trading options, I also was writing software to value options, that’s kind of a link that happened there why I kind of want to come about. Just quickly about Connamara Systems, we’ve been in business for over 20 years. We provide software engineering services to capital markets pretty much exclusively. Our clients are proprietary trading firms, brokerages, exchanges, and startup exchanges. Anyone on the front side of the trading, which is what I understand, can be and what has been a client of ours.

From there, I started Connamara though back, probably in 1998. As I said, I was writing software for myself. After 1987, the flow, it changed, the market changed, the bid-ask spreads tightened up. As an independent market maker without using anyone else’s capital, it became very competitive. This time with bigger groups, trading groups moved in and they had a different risk profile than someone like myself have. Being able to get on the trade was hard.

I owned a membership, leased it out, and thought I’d take a stab at writing software for other people. That’s how we started. At the same time in 1998, what was happening, the markets were evolving away from this open outcry, standing in the pit, yelling and screaming all day to electronic trading. I would like to think I was looking forward to it but it was one of these things that this looks like an opportunity that I can use this skill that I have learned over the last 17 years. That writing software for capital markets and maybe with the markets evolving, I won’t go the way of the floor trader and just be put out of business.

Shani: Yes, well let me pause for a second because I follow a futurist named Bob Johansen from the Institute of Future in San Francisco, they’re a think tank and they don’t predict the future. They study what’s happening and they identify trends that they think are highly likely to burgeon, right? One of the things he says is, the future is already here. It’s just not widely distributed. What you just said is a perfect example of that, like you could see the trend, things going from outcry to more electronic and you are on the leading edge of taking advantage of that trend.

Jim: Yes, and it was sort of fortuitous because it was more one of these things where it was getting harder and harder to make money trading on the floor, it was just being sucked away, the edge was being sucked away, because like I mentioned earlier information was becoming more widely available. So you lost your advantage of being in time and place advantage of being in the market for standing there and risking your own capital. So as I said, I was fortunate because at that point, I was able to see around me, this change that was coming and I also had the right skill set.

So when I did my first work as an independent consultant, what I really found was that I could write software for clients, that was not a problem, but it was a little bit different than writing it for myself. Because I was not trained as a programmer, I was trained as a circuit designer. What I did find out was I knew a lot about trading, I understood what the client was saying to me when they said they wanted to do this strategy, or they wanted to do this, some other sort of system, they wanted to build, within probably 10 minutes, I had mapped out my mind how this was actually going to work. So that was really fortunate that I kind of had that. So I found that that was really my strong suit. So rather than just writing code, I actually and that’s part of what Connemara brings to the table today is just a deep domain expertise in capital markets, and we understand what our clients are trying to do.

Shani: Sure. Take us through the trajectory of growing the business over 21 years from inception, oh, okay, I’m writing software and I can actually turn this into a business, to where you’re hiring people who are smarter than you in some areas, right? Because that’s not how all business people start, surely.

Jim: Right. Yes, I guess if there was a mini shift, if you want to talk about it was the idea early on where I said, well, yes, I can write software. But I actually know a lot about capital markets. But I can hire other people to write software better than I can. I can explain to them when they need to write the programs they need. That was the one case. Again, we were in a really fortunate place of this market evolving, kind of the right place at the right time, where there’s a pretty good demand for software engineers and that new bout capital markets, especially in Chicago, there’s a lot of demand for that. So I just one by one to start hiring people, we had projects, successful, branched down to New York, did some projects on New York Stock Exchange, and just over time, just slowly from the bootstrap just reinvested back in the business and just grew the business from there.

Shani: Okay, and so, one of the things that we talked about pre-call was four or five years ago, you had a pretty significant shift in how you look at running the business such that it’s more important to work on the business than in the business. So tell us about that journey and what changes that has led you to take in the leadership of your company.

Jim: Yes, this is the part I’m really finding interesting and what really gets me excited in the morning to come into work and do this, is that I read a blog post by a fellow by the name of Andrew Wilkinson and it’s called Lazy Leadership, I would highly recommend it to anybody.

Shani: Lazy Leadership, okay.

Jim: Lazy Leadership, Andrew Wilkinson, and there was a couple takeaways from there one of them was that I needed to stop working in my business, and then I need to start working on my business. The other point he made was that if you don’t like doing something in your business, you’re probably not that good at it you’re not doing your best. So you should probably hire somebody and leverage that person’s talent who wants to do that job to grow your business. So that to me was like, that’s kind of like a watershed moment or shift that it’s like, wait a minute, okay. I kind of had this wrong for the last 15 years or whatever.

Shani: Yes, and was it hard to let go of that stuff once you had the mindset shift? Did action follow easily?

Jim: It actually did because it just made sense to me, but there was a separate- he references a couple of things also so it wasn’t like an overnight thing. So he also references Ray Dalio principles and I went into that rabbit hole, which has, it’s highly recommended that it is a bit of a rabbit hole. But what really got added to this feeling of mine that I needed to change was that Dalio describes business as a machine. So as an engineer, that makes sense to me. It has inputs and I have desired outputs. So what I need to do is build a machine that actually takes the inputs, whatever the constraints of those inputs might be, and then build a machine that gives me the desired outputs. So it’s just a feedback mechanism If you did an engineering or whatever.

So what I ended up doing is that Looking at my business and stepping back from that business and saying, Okay, if my business is a machine and I visualize my businesses as having a box with gears in it where talent goes in, clients go in, money comes out the other side. That’s the way I look at it. But I realized there were a couple of gears that were actually missing. I never had a sales team, never ever did marketing. We were all word of mouth, and we’re really successful; we just were word of mouth. I mean, Oli used to say that we were the most important software engineering firm in the capital markets that no one has ever heard about. We did some really large scale projects. Excuse me.

Shani: That works until it doesn’t, right? Then you start to get nervous about the pipeline and–

Jim: The ups and downs, absolutely. Luckily, we were able to always cobble it together especially in the services business, right? I didn’t have a sales team but I said, well, I hate doing sales. I don’t actually like the sales process. I like closing deals and that’s probably because I was a trader but the sales process, I don’t like, so the first kind of shift was like, okay, I need to take 18 months here and find me a salesperson. Who can I find and I went through quite a long interviewing process. So maybe that was actually not an exact shift and maybe it did take longer than I think, but it’s about 18 months that I searched for a salesperson because it was going to be a big deal.

Shani: Yes, you were shifting your model for business development from referral to full sales, prospecting blah, blah, blah, all the way.

Jim: Yes, and I had no marketing team so I was able– after I had a sales team, I had no marketing gear that was going to put leads into my sales team that they could close so I went out and I found a crack marketing team, so that really focused just on capital markets and that was the next one. I also had never had a board of advisors or I never had a board telling me what to do because we’re bootstrapped. So I had no one- there’s a double-edged sword of having a board right and having investors. They’re pretty smart individuals that you can bounce ideas off of. I didn’t have that. This is just me sitting here thinking it might be a good idea to do that.

Shani: Yes. Did you have an informal board of directors of–

Jim: Nothing.

Shani: No, nothing. So is that something you would do differently and recommend if others are going to bootstrap and you don’t have any sort of advisory board to find some folks?

Jim: I absolutely would without question because also I and this is fairly recent. Within this last year I actually instituted the board of advisors and we’ve had a meeting too and hey it’s good ideas. I was just on the phone with one of them yesterday. Kicking around some ideas that got some good input. That’s the shift that I went through. I went from realizing that I can’t– that I should be hiring people that do things that I don’t like to do, that I should be working on the business and my business is a machine, and then look at that machine and see what parts I’m actually missing inside of it and try and design that machine to actually have those parts. That’s where we are.

Shani: That’s awesome. Let’s pause for a second. Leadershifters, as you listen to this, think about your own businesses whether they’re small or your business is a division or a niche within a larger company. What does your machine look like and are all of your gears present, and if they’re all present are they all working seamlessly? Right? Is it a well-oiled machine if you will? Be honest about it and take a look at where are you missing gears and where you maybe have the wrong gears hooked up in your machine? Because absolutely that’s super important to have everything moving and to then let the gears do their jobs. Talk to us about how you were able to step back and let the people with the expertise in marketing and sales do their jobs with your oversight but not with your day to day micromanagement which might have been more prevalent in the areas that you were interested in more of the engineering pieces of the business.

Jim: Well, on the engineering side, one of the things that I’m really proud about here at Connamara is that the engineers that we hire, when they come in we give them great latitude in their decision-making. I don’t know. Well, you’d have to ask my employees, but I don’t think I’m a micromanager. Maybe in some ways, I think about it, sometimes I am when I need to be, but what we do there with our engineers is we actually allow them to make mistakes. Writing software is not the easiest thing in the world, so you’re going to make a mistake. I’ve tried to take that approach of being able to make mistakes and not penalize someone for making mistakes and go forward with that with my salesman, he had a ramp-up of a year. You have to expect that. He was really nervous about it and I was like, “Just don’t worry about it. You’re doing the right things.”

Shani: Yes. What you’re describing is the culture that you’ve created within your organization which is one of the biggest shifts that I work with companies to make is to shift the cultures. In fact, my informal tagline for the Leadershift project is I help leaders and organizations get their shift together. Mostly, it’s around culture because a lot of times companies have not given sufficient thought to the environment that they’re creating. It’s like if instead of a machine, let’s think of the company as a greenhouse, right? Well, if we don’t have the air in the greenhouse or the right nutrients and the plants in the greenhouse, the garden in the greenhouse is not going to thrive. Same thing with culture. We can have the nicest seeds in the world, great ideas, whatever, but they will not thrive if the culture isn’t right. Number one, hearing you say that you have a culture that doesn’t punish mistakes.

Jim: That’s right.

Shani: Which is huge because how else are people going to learn?

Jim: Yes, and that’s the way we see it. Actually in 20 years, we’ve only actually let go one person.

Shani: That’s amazing.

Jim: We have a really good hiring process but we’re very careful about how we hire but besides that, we’re going to be, it’s just– we’ve also had some of my oldest or longest employees that left and come back.

Shani: That’s like a high form of compliment, isn’t it?

Jim: Yes I’m very proud of that. We call it the Rumspringa after the Amish; the Amish have a tradition where if you’re a young man or young woman you can leave the community once and come back.

Shani: I did that at Goldman Sachs but we use financial jargon. We call that a repo.

Jim: Yes, right? It goes out, it comes back overnight.

Shani: Yes. I repoed. Awesome. What other elements of your culture do you think have allowed you to attract and retain such great folks?

Jim: Well, I believe I think first and foremost I think that idea about making mistakes I think it is number one.

Shani: Yes, huge. Most companies are punitive with mistakes even if they don’t do anything actively. There’s a subtext of don’t fuck up again.

Jim: Yes, exactly. The other part when I started hiring people and having employees is that I wanted to have an environment where you could have a nice balance between your family and your outside activities in your work. A lot of people give that lip service but for me it was this idea because my wife also works. We raised two children together and that, but there was this– what I noticed was that this time at the beginning of the day and the end of the day, like a couple of hours window there is really important for families.

Shani: Sure.

Jim: It’s the school play or it’s doctor’s appointment or is that. We really instituted this idea where I need eight hours out of you for the day, but if you need to come in at 10 and leave at six that’s fine. If you want to come in at eight and leave at four that’s fine too. I need you between 10 and two, but at the office– now we’re on remote now but that’s how we started, but that just carried through.

Jim: That’s great. Treating people like responsible adults. Imagine that.

Shani: Yes. Well, the interesting thing about that is the code works or it doesn’t. If you’re not doing your work, it’s pretty evident– we haven’t really seen that. We’re on a very remote policy. I think I’ve got a couple employees out today that are remote. I think one’s going to bring his daughter in for Girl Scout cookies later to sell. 

Shani: Thin Mints for everybody.

Jim: Yes. Another round of Thin Mints for everyone.

Shani: Really, I like the ones with the coconut and the chocolate, what else was those called?

Jim: I don’t know.

Shani: They’ve got the hole in the middle but they’re like chocolate and coconut.

Jim: I like the savannas that’s what I go for.

Shani: Those are good too. All right. Any last words of wisdom to share with Leadershifters about really any of the shifts that you’ve experienced over the years in your career and leadership journey?

Jim: Well, as I look back and I think about it, we’re still shifting, I’m still trying to– my latest shift is now to get my organization away from being flat, to being hierarchical. That’s a bit of a challenge. That’s what I’m working on right now. As far as the advice, I would say is don’t be afraid to try something. I think making a decision is better than delaying a decision. Just make the decision. Have a fallback plan if you need it, but go forward, because you’re going to learn so much from that. Just for making that decision. That sounds a little overplayed, but I think proof is in the pudding here.

Shani: I couldn’t agree more. A lot of times indecision is what keeps people stuck because they’re waiting to make the perfect decision with no risk. It’s like well, the world doesn’t work that way. We don’t have a crystal ball that enables us to say, “Oh if I take that path everything will work out a hundred percent perfectly.” Yet so many people stay frozen in indecision; almost nothing is irreversible. I agree. Just try it.

Jim: I think that I learned that on the trading floor is that if I stand there and not make a trade, I’m definitely not going to make any money.

Shani: That’s right.

Jim: You’re going to make any money whatsoever. Then you’d make a trade and there’s a winner, there’s a loser.

Shani: Well, then you make another trade and another trade.

Jim: Yes. You got all the disciplines of saying, okay I’m in this position, should I sell out now or not? The discipline is, well, if I didn’t have this position on, would I buy or sell at this point? That’s the mindset you have to get yourself into. I think that goes through to any kind of decision you have to make in your life. You got here and this is the position I’m in, and I need to make another change. Should I? I didn’t have this position on what my decision would be.

Shani: That is actually one of the coaching questions in another format that I use with clients. I love the trading nuance to the way you think about it. If I didn’t have it, would I buy or sell right now? I always say, if you were starting from scratch right now, what would you do, or something like that. In a perfect world, if you didn’t have all the other factors that are clouding your decision-making process, you could just do anything. What would you do? You’re also a coach and maybe you didn’t know it.

Jim: You can’t think about the money either, right? If you have a big loser, a big winner, you can’t think about the money in your next decision. You got to take that off the table.

Shani: Yes. Not be attached, because if you stay attached to an old decision, it’s going to preclude you from making new decisions to move you forward.

Jim: Absoutely.

Shani: Thank you so much for your insight today. I think this was brilliant. I’m just going to do a couple of bullet points by recap of all the fabulous learning that we had today. First of all, I’m going to start with what you ended with, which was don’t be afraid to make a change. What I love about what Jim described was his shifts actually, while they might seem extreme, they really weren’t, because you took an inventory of things that you like to do and were good at, both things that you were already getting paid for and things you did on the side and parlayed it into a successful business. I think not enough people take the time to step back if they’re not happy doing what they’re doing and say, “Okay. You know what? I’ve got all these transferable skills and interests that I can use to make a change.” Then go for it and see what happens.

Of course, we have your recommendation about the book Lazy Leadership by Andrew Wilkinson and the related inspiration of Ray Dalio in terms of thinking of your business like a machine. I’ll ask that question again. What gears, what pieces of your machine are missing or aren’t working? Let’s start to fix those right away. Lazy Leadership, by the way, doesn’t really mean lazy, does it? It means stepping back and not doing it all your goddamn self. Hiring the people to do things and actually delegating and letting people who are good at their respective functional areas do their jobs and setting them up for success.

The third thing that I want to highlight are just the elements of culture that have allowed Jim and Connamara to be so successful over 21 years both in growing the business and retaining high-caliber loyal employees. The culture around it’s okay to fail, assuming the failure isn’t ill-intentioned. Failure in the spirit of trying new things and innovating. That’s good and should be encouraged, not punished, either actively or passively.

Then, of course, the culture of balance and appreciating that people have lives outside of work and focusing on the results. Does it work or does it not work? Did they produce the results or didn’t they? Has nothing to do with face time in the office. I think those are all amazing things that you’ve instituted. My hat is tipped to you, because I work with a lot of leaders and CEOs who have not learned some or any of these lessons, quite frankly. Thanks again for joining us today.

Jim: Thanks. Thanks for having me.

Shani: If anybody has any questions for you, what’s the best way to reach you?

Jim: Jcdowns@connamara.com.

Shani: Fabulous. Jim, thanks again. Leadershifters, thanks for joining us today. We will see you next time on the Leadershift show. In the meantime, if you have any comments or suggested guests, you know how to hit me up, hello@theleadershiftproject.com. Until next time.