Archive for category Strategy
Enthusiasm does not make up for reality
Today I sat in on a student presentations for the English department at Southern Methodist University. Teams of approximately 12 to 16 students were given the assignment of presenting a proposal of putting a business into a foreign country. They were broken up by management, HR, public relations, logistics and operations. The point of the exercise was to teach a combination of presentation, marketing, and cultural sensitivity. My wife was reviewing their presentation skills and I was a there just as a surprise guest questioner.
I think my job was to ask irritating questions. I did a good job but I tried to be nice and ask them questions that would only demonstrate if they could think on their feet. Although they were not expected to present something that a VC would really be able to approve, they should be able to address out of the box questions.
One group was presenting the concept of a fast food burger joint in Australia that was organically certified. There are a lot of different regulations, purchasing requirements, and organizations they will have to manage. They pointed out that the government does scheduled and surprise inspections. I asked the management group how would they insure that they would pass these inspections and get the employees to comply (I intentionally left it vague). The response was perky (with the student bouncing happily): We think the employees will be enthusiastic to support an organic only vision.
I will tell my response in a moment… but for those of us that have experience in getting employees to comply all the time, what about all those myriad of regulations and organizations that will probably make it confusing and inconvenient? What about those employees that will not really understand how to do all this?
How do you get employees to comply with this? Simple, through training and reinforcement by someone whose duty is to do this. Complexity invites mistakes. Extreme complexity like all the organic laws and organizations they spouted tells me that mistakes are very very likely. Furthermore, for their main message to be that they are an ORGANIC burger place, they should be concerned about that one issue.
My answer was short: I think your enthusiasm is great, but you may want to consider having someone hired to focus on this task.
That person could even be call the second COO: Chief Organic Officer.
In any business where you have extreme complexity whether its just the quality assurance or its the key uniqueness (i.e. ORGANIC foods in a fast food place) you should consider having someone take a leadership position in that role. It does not have to be enforcement like a cop, but more like education and support. It will really help out the employees, improve the working environment and insure that the business stays on its marketing message.
Just because you are enthusiastic about something does mean it will translate 100% to your employees 100% of the time. Reality is that you need reinforcement and that someone takes responsbility.
Maps – using them in your business
A picture is worth a 1000 words. What is a map worth?
Maps are much more valuable than simply telling you where you are and where you are going. They can be used as a decision tool; what is most economical path to get there? What destination should we choose? When you change this idea from a map to a graph, where position represents something other than longitude and latitude this can provide further meaning for you as a strategist directing your business.
The idea is called visualizing data. I got this idea from article by Manav Tanneeru on today’s CNN “A New way of looking at the world” . They also recommend a website by Ben Fry at benfry.com called Ben Fry (simple enough).
The approach is to take advantage of the information in data that you might never use and present it in a way that addresses a question and allows you to draw a conclusion. Evidently, there is a programming language called, “Processing” that allows you to explore and explain data. This can be researched in a book called, “Vizualizing Data” by Ben Fry.
The bottom line is that a map or smart graph can effectively communicate to people the direction they need to go … in business. You can use this in your decision making, presentations, and daily communication to not only get the idea across, but to get it done.
By getting it done (and done right) your business will be more successful.
Check out Ben’s web site. It is interesting.
Staging can save money
Posted by Steve in Capitalization, Strategy on October 29, 2009
Two days ago I introduced the idea of creatively reducing costs to lower or avoid the amount of funding needed for investors and to offset a higher sales ramp-up. Yesterday I discussed the idea of finding alternative solutions to just spending money. Today we look at the idea of staging.
Joe wants to start a web design shop. His idea is to have four salespeople, two project managers, and ten developers in house. The project managers would also use contract labor for the overflow. To do this he needs an office (furniture, computers, and a break room) for seventeen people. Quick calculations show that he needs about 150 sq feet per person, and at the current rate of $12/sq ft per year in his area he would need $30,600 per year (or $2550 per month). Furthermore, he would need $1,140,000 in sales in the first year if everyone was to make an average salary of $60,000 (keep in mind we have to take into account payroll taxes). Assuming utilities and miscellaneous come to another $20,000, the total in the first year is $1,220,000.00. This is a burn rate of $102,000 per month.
If Joe lands a large project, he could fund the entire company for a year or two. Otherwise, he would need to come up with sales at this level. Four salespeople would have to do about $25,500 per month in sales. This is actually feasible, considering that once a sales pipeline is started, the sales people could do that. The reality is that most new web shops cannot get this fast up to speed.
Instead, Joe might stage it. First, he needs sales, project management, and production. He can do sales and project management himself and find someone else to work with to do production. Once he lands the first project, he brings on the programmer. As he lands more projects he brings on more programmers and eventually moves into office space. Maybe he uses an executive suite until such time it makes sense to get his own office space. An executive suite is more expensive per square foot but the overall cost is lower and he would get assistance with answering phones, etc.
If Joe focuses entirely on sales and assuming he is a decent salesperson (which he is), he figures he could do about $200,000 in the first year (ramping up to $25,000 per month in four months, and then doing about that much). With that amount he should hire a salesperson, and a programmer. He could do the project management as well as lead generation. Furthermore, Joe invests his own money into himself and instead of taking $60,000 takes only $30,000 in the first year. This leaves $33,000 for other expenses (remember payroll taxes). An executive suite setup may cost $1000 per month, which leaves another $21,000 for other expenses. This is definitely doable and Joe may be able to fund the entire company himself for the first year without having to worry about loans or investors.
The staging comes to play as Joe lands bigger jobs and more work. Every $100,000 he plans on adding one salesperson and half a project manager. When enough work is going out the door to warrant hiring a full time programmer they hire someone. As they grow they stage each expansion until the point they have 16 employees and the ability to support to the sales and production of $1,220,000 per year.
Had Joe not staged it and hired everyone at once, but each salesperson only brought in $200,000 then that would result in a shortfall of $420,000 in the first year. If Joe does not have that money he goes out of business within 8 months.
This is also known as bootstrapping. As you grow you expand, and you start at a point that is sustainable. By staging his growth, Joe saves $420,000 in the first year and saves his company.
First Ascent Ventures final say on Microseed accelerators
I really suggest this website, especially for these three articles on microseed accelerators. In their last article on the subject, they look at the success rate. Without going into the detail I recommend you read the article; they recommend that you seek out the accelerators if that fits your business model.
The only drawbacks they point out is the unwillingness of some entrepreneurs to part with 6% of stock for 25k. The reality is that this is not a tremendous amount of money, but at the same time, you are more likely to get this funding, which in turn will make you more likely to get later funding through their contacts. This investment typically values a company at $416,000. However, with the next level of investment you can value a company between $2,000,000 and $8,000,000; meaning that another 25% to 50% stake can get you $500,000 to $4,000,000 in more working capital.
Until you have been through the rounds trying to get money or working with VCs considering money you do not realize how hard it is to get investment. By lowering the barriers to getting investment (smaller dollars, willingness to take on higher risk) microseed accelerators could be opening the doors to a lot more entrepreneurs to get investors. At the same time the accelerators are providing tangible benefits of training and contacts. Translate contacts into future sales.
My only concern is on the investor side: is the risk to return ratio good enough for the microseed accelerators to make money. Right now, its too early to tell, but I hope to address this at least theoretically in a future post about this subject.
The reason behind Microseed Accelerators
Yesterday, I wrote about James St. Jean’s January article about New Venture Capital Models. He also wrote a part 2, addressing why these new business models are cropping up. Go read his article.
In summary, he said that it was first started by Paul Graham in 2005. Graham was new to the investing scene, a creative thinker and not tainted by the old ways. Sound familiar? This is how most entrepreneurs start when they break off from a large company. Unwilling to say “because that is how we always do it” entrepreneurs are willing to take a look at new ways that may offer advantages. Graham did this to investing.
Furthermore, it seems that NOW is almost a “perfect storm” for investing in small startups. You have products becoming cheaper to build and launch, a shift in traditional venture capital funds to larger investments leaving a vacancy for small investors, and the role of the internet in providing services (and products) to niche markets in a profitable manner. This leaves an opportunity for these microseed accelerators to fill.
The conclusion that St. Jean draws is since smaller capital is at risk the penalty for failure is a lot lower and so this fosters more creative and risky ideas. I agree that this is probably the governing reason for the idea of investing in smaller amounts but not that this is the reason behind providing the extra support.
My supposition is that certain people see a value in a skunkworks: A small team of dedicated developers focused on one goal with little or no distractions of a large bureaucracy but with the support and the skills that a major corporation provides. These certain people came from large companies and business schools where these skills and situations were studied and fine tuned. Realizing they could duplicate this in a skunkworks scenario it is just a matter of finding funding and the right entrepreneurs to make this work.
What makes the right entrepreneurs is THE discussion for this blog. Ultimately, it will not be just skills and experience, but also the entrepreneurs’ willingness to learn and grow into the role of a successful company.
Innovation is Insurance against the Future
Yesterday, I wrote about how innovation is the fourth arena of excellence. The importance to investors is that a highly innovative company is one of the best ways to insure their investment against the changing needs of the marketplace.
For example, examine a company that has a very popular product. An investor puts their money into the company hoping that the company grows over five years and then is purchased for a much higher value. That purchase could be by the public in an IPO or by another company, but that purchase provides the investor with their exit plan.
The company value increases as the company increases its sales and likelihood of future sales. This in turn only happens if the product (and products) continues to sell. If something happens in the marketplace that makes the product unpopular (another product from a competitor) then the company needs to be innovative again and come up with an improved offering (or another offering) that insures the investor will get their money.
One of the barriers to getting that investment is that companies often do not show signs of future innovation but rather an inability to identify growth points. Without these insurances against marketplace changes, the investors are not likely to provide their money.
Just as likely investors will not provide their money, customers will not buy products from young companies because they are unsure of the lasting power. If they know that the company will continue to innovate and provide their customers with future advantages, the potential buyer will more likely take a chance and buy.
Innovation in what gets a startup company created. Too many startups stop at that innovative step…by examining how they innovate and can continue to innovate, startup companies can be more attractive to both potential customers and investors.
Do The Right Thing
Spike Lee made a movie about it.
Fareed Zakaria writes about it the June 22, 2008 issue of Newsweek (“Greed is Good“). One of the points he makes is that the reason the cycles of boom and decline are coming faster is because people are no longer doing the right thing. In the last twenty years it has been obvious that people are taking advantage of short term gains and suffering long term catastrophes. It is becoming the motto of our generation.
Read Zakaria’s articles. He does not offer a solution but identifies the problem: the lack of thinking about what is right. He points out that people are not breaking the law, but rather, running inside the law, and doing everything the law allows. Ethics and morality (which have always been difficult to enforce in a free society) are stretched beyond breaking.
Unfortunately, part of the problem is that our metrics are all wrong. Instead of being measured by long term growth and stability, we are only measured by our stock value every quarter.
How do we solve this? We set metrics that focus on continuous growth, long term stability, and success for the stakeholders. Zakaria suggests we simply do a gut check: if it does not feel right, we should not be doing it…never mind that everyone else is doing it. Its not about being better than them right now, it is not even about being better than the other guy ever. It is simply about growing and delivering what people really want: happiness.
So, when you set the metrics in your company, think about what those metrics really mean. If it means that your company might not be around in three years, then maybe you have the wrong metrics. Ultimately, what do you want to achieve with your company? If you only care about the here and now, then I hope when you are looking for a job in a few years you can think of some happy memories. If you want to achieve long term growth and success, then you need set the metrics and the priorities now. Talk about what they mean with your team, and continue to talk about them to get everyone on the same page.
As Zakaria writes, Capitalism is the greatest invention and has lifted many countries of the world out of poverty. As part of capitalism, we talk about greed and some aspects of greed are good…but only to a point. Past that point and greed becomes destructive and ruins everything that capitalism achieves. Do not get past that point, always remember to “Do the right thing.”
Plan for the Up and Down Cycles
Fareed Zakaria writes in the June 22, 2008 issue of Newsweek (“Greed is Good“) about how the economics of capitalism have changed. He brings up two points. The first is that the cycles of prosperity and recession are coming at an ever faster rate. The second is that the reason for these problems is that people are no longer doing the right thing.
The cycles of growth and contraction are a fact of life. The 20th century saw the Great Depression and then post WW-II boom as the very extreme versions of these cycles. Zakaria points out that the cycles are getting shorter. We had a boom in the late 90s followed by a crash in 2001. The next boom was in 2004 followed by the crash in 2008 and 2009 of first derivatives and then housing. The cycles of growth and decline will continue. Companies will succeed and fail. The cycles are getting as short if not shorter than five years.
If five years is the typical projection for a business, then should not a business plan with these cycles in mind? It is difficult to forecast these cycles, and if one could predict them then they could take advantage of them. Instead, you can plan for the contingency. What if things go horribly wrong? What if things go horribly right? The reality is that if things go horribly right you usually continue to do what works, but if things go horribly wrong, then you have a problem: what do you do next? Contingencies need to be planned and expected. Diversification in product and service offerings, capabilities and in execution should be examined before it happens.
My prediction is that contingencies will become more important in business plans in the future. What else could this company do? What do they do when in three years their primary product is no longer successful?
Address it and you can ride the cycles up and down.
Government business is costly to gain
Posted by Steve in Miscellaneous, Strategy on July 13, 2009
Taking another quick break from discussing executive summaries, since something just cropped up that is worth mentioning:
Every now and then one of my clients has the opportunity to pursue a deal with the government. It does not matter whether it is the local government, state or federal but I always ask them the same thing: have you done this before? I mean, have you worked with bureacrats before. If they have not (and most of them have not) then I often caution them to walk away.
Government entities rarely have the impetus to make it a timely decision or cost effective for you to pursue the opportunities. Typically, they put things out to bid, and expect each bidder to answer their hundreds of questions which in the end they will pick whomever is cheapest and can fulfill the requirements to the minimum. The cost in pursuing these deals often eclipses the profit gained.
Unless the bid request is something you can fill out easily, or you have the time, the infrastructure, and the fortitude to jump though many hoops, I recommend you shy away from government deals. However, once you do get the deal, there are two distinct advantages. Very few other companies will want to jump through the same hoops to get that deal from you, and since you now have the experience (and the documentation) you can pursue other government deals.
You can make money off of government deals… but it will cost you.
Two Prerequisites to Creating your Marketing Website
Posted by Steve in For Job Seekers, Miscellaneous, Plan, Strategy on May 27, 2009
Yesterday, I wrote about Kenrick Chatman and his web site: www.kenrickchatman.com and that it is a great way to market yourself.There are two pre-requisites to market like this. First, figure out a subject area you really like. Second, write out a long outline of subjects or speaking/writing topics that can be further expanded. To keep up an interesting site, you need to provide material. If you cannot do this with your subject area, then either choose a broader subject or find another subject.
Provide variety, but stay on topic. Keep people interested in you.