Category Archives: business advice

Business advice.

Building teams with team-based budgeting

Recently, an executive coach was advising a CEO I work with on building teamwork in his company, and encouraged him to do “ra-ra” type activities (group outings, that kind of thing).

That’s meaningless.  While it’s always nice to get people together for a bit of fun, the real way to build teams is to get people working together on actual business problems.

Team-based budgeting is the method I have used for many years to perform the budget process and build teamwork, and it makes a lot more sense than what is often done.

In most companies, budgets are done by each manager turning in a budget to the CFO, the CFO puts it together for the CEO, the CEO cuts out expenses and adds additional revenue, and poof! – the budget is presented to the board.

Not really a workable process.

This brings me to the subject of team-based budgeting.

I’ll start with a story: Many years ago, I started as the president of a software company and found several things wrong with the accounting and finance functions:

– No one had responsibility for a budget.
– The VP of Sales was in a heated deadlock on commissions.
– Forecasting was done on a hope and a prayer.

At the time, the company was small — about $15 million in revenue — and so, at that size, it had largely been run on a sort of “financial dictatorship” by the major investor. Well, considering that this shareholder was dealing with a management team that didn’t really understand finance, his point of view was understandable.

However, it’s important to develop a team-oriented approach to forecasting and budgeting. By implementing this approach, I rapidly had the whole senior management team working together smoothly on the finance functions. Better yet, we were able to grow very fast, to nearly $50 million in revenue, without any outside capital. Because we responsibly controlled costs, as a team, we were able to do great things, without a lot of money.

But it really wasn’t that hard. All I did was:
– Rework the financials to make them clear and understandable.
– Make the managers responsible and accountable for their budgets.
– Implement team budgeting

Reworking the financials
Of the three financial statements required to run a business (P&L/income statement, cash flow and the balance sheet), the one that managers must have a good grasp of is the P&L. The other two can be worried over by the CEO and the CFO.

And there we run into a problem: GAAP accounting, which can muddy the scene. Revenue recognition, accruals, depreciation and amortization can make it like a company is bleeding money hand over fist, but when you really look into it, it’s actually doing just fine. Or, a company can look wildly profitable, but is a toxic mess (anyone ever heard of the old Computer Associates?). Reading a modern financial statement, especially for a software company, is a bit of an art in itself.

So first I pivoted the focus onto billings as the topline focus. Billings is what sales guys go for, what they see “on the board”. They closed a deal, and it was for $100k. That’s what they see, and that’s what motivates them, and that’s what you want them to get.

There are fine nuances to get into here, that aren’t worth cluttering up this article with. It’s different in a SaaS environment (where you typically compensate on MRR/ARR and make that your target), and yes, there are cases where you may not compensate on billings. But the bigger point is, get a number that’s real to the sales people, that they can go fight for.

So the first thing I got everyone around was the concept of one topline number. And it was the billings number. This was in direct contradiction to what the CFO had been doing earlier (bizarrely, paying commissions on recognized revenue).

Now to the expenses: there are expenses that managers have control over, and ones they don’t. They go out and buy something for $10,000, it’s $10,000. It’s not some amount amortized over a period of time.

I wanted the managers to know that if they bought something, it didn’t matter how we would book it from an accounting perspective: they bought it. Business live on cash flow, and the impact of cash decisions is vitally important for managers to understand.

So I went a step further, creating a “modified EBITDA”. Basically, I turned the P&L into a cash-based accounting system (we still maintained a separate set of standard GAAP financials for the board, investors and other external parties).

To create my modified EBITDA, I simply added back in certain capital expenditures to my EBITDA figure to get an income statement that reflected actual cash spend, making it easier for everyone to understand.

And then I got them all in room and we budgeted as a team.

Now, depending on your business, you can probably ignore the other pieces of advice here, but this last one is important.

The way you do team based budgeting is to you set the goals in advance of the meeting — a realistic target. Like: “20% operating income, 25% increase in sales.”, and so on.

You then give all the managers enough time to pull their numbers together. Each has a departmental spreadsheet for their own area.

For the sales forecasting side, I would work between the product teams and the sales teams to get our product launch dates figured out, new versions, etc. I would take the teams off-site and we would work through the product planning. (Product planning is a huge driver for revenue, and something to spend quite a bit of time on).

And then I got all of the management team in the same room. We sat with a large-screen projector, and our spreadsheet was built with links where I would have all of their files loaded at the same time. Then, we would go through every manager’s area, and they would have to account for their expenses. As we made changes to each department’s budget, the main P&L forecast was automatically updated, giving a very quick view of the impact of each little change.

Now, peer pressure is a powerful motivator. We’re all on the same team, so when the sales person says “I can’t get sales without more leads”, the marketing person is right there to answer him, and the CEO is right there to work with the team.

When I first loaded that spreadsheet, it was comical, as a first-pass budget always is. Everything was in the red, because sales people sandbag and managers ask for more money than they need. But after a marathon two or three-hour session, we started to get to reality.

The CEO is driving the process. But the CEO is letting the team work on the heavy lifting of figuring out where to get the money.

I’ve literally been in a situation where I said “not enough money for a Christmas party”. R&D and sales then began to horse-trade expenses back and forth to get the money for the Christmas party. We got our Christmas party. (I really doubt I would have killed the party, but it was the idea that counted — that we had to work out a way to cut more costs so that we could earn the luxuries.)

After one marathon session, managers are given homework, to go back and figure out ways to get the costs worked down more (or get the sales up). Department heads have individual break-out sessions with other department heads to work on the budget. And then we have another team meeting a week later.

After that, the budget is pretty much a wrap.

Getting to the target number becomes a game. And when you have a game where everyone works together, you have a team.

Key is that the managers own their budget. They are given leeway to execute on their plan, although I still had in place basic cost controls to ensure that costs were still being managed.

Pushing responsibility down into the organization is the way that company’s succeed. And team-based budgeting is the first step to correctly delegating and managing authority.

White lies to yourself about revenue may make you feel good, but the end always sucks

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Revenue: It’s what CEOs are judged by. But all too often CEOs give white lies about revenue to themselves, their staff and investors.

I’m not talking about criminal stuff. It’s just, well, not being totally honest about the state of the numbers.

Let’s look at a few that I’ve seen.

Reporting new license revenue and recurring revenue as one number.

This is so common, it’s almost a joke. I routinely talk to CEOs who say “our numbers are up”, and then I ask the question: “Is the new license revenue up?” and get the real answer.

New license revenue is what’s new. A new customer, and it is the single most important revenue number.

Recurring revenue is from customers renewing a subscription or a software maintenance plan.

Recurring revenue is driven by three things, in order of importance:

  1. product quality, price and relevance,
  2. quality of technical/customer support and
  3. renewal sales activities.

If you focus on these three key drivers, recurring revenue chugs along happily. For enterprise software companies, typically 75–90% of your customers will renew their subscription (or buy a maintenance plan). 85% is a good goal. I’ve experienced as high as 100%. But that’s an outlier, and if you have 100% renewal rates, you’re not as smart as you’re lucky. Customers do drop off in a normal world.

In consumer software companies, the number is typically lower, perhaps in the 65%–70% range.

(Of course, if you’re a pure SaaS/subscription business, you’ll focus on churn.)

The biggest mistake a sales manager can make is to confuse these two revenue sources. Recurring revenue reps should not be compensated as highly as new license reps (and they often are, because the numbers are so large). They should be compensated on a good base plan, with commission tiers or bonuses tied to the percentage of existing customers who renew their license subscription, with the total dollars booked being less important.

That’s not to minimize the revenue role of a renewal rep, as they should be compensated for aggressively selling add-on licenses, additional plans, and other revenue opportunities. The point here is to put the picture into perspective.

Focus on your new license billings as your number one priority.  Have that number as a KPI that everyone knows.

Then have a separate KPI for total recurring revenue dollars and the percentage of customers renewing.

Don’t hide poor new license billings by merging the number with recurring. That’s just lying to yourself and your investors.

How to calculate renewal revenue

Companies are all over the place in terms of how they calculate renewal revenue. And, you can play with the numbers to make yourself look better.

But again, we’re looking at an honest number to run your business. In the above link, Carbonite is a company that has a good approach.

To make it simple, keep two statistics:

Renewal Count

How many customers are up for renewal in a given period?  (a)

How many of those renewed? (b)

And you get:

b/a=renewal rate

It doesn’t matter if they renew in that month, or in a different month. One simply keeps track of the rolling average of renewal rates.

Renewal Dollars

What is the dollar value of the renewals in a given period?  (a)

What were the renewal dollars (including upsells, crossells, additional licenses, etc.) in that period (b)

And you get:

b/a=renewal dollar rate

 

The point is to separate thinking in the organization from existing customers and new customers.

Incorrectly calculated subscription revenue

Subscription-based revenue is another method that’s often incorrectly calculated, often completely innocently.

As you probably know, there are two key calculations in subscription revenue: MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue).

The formula for MRR is dead simple = Total # of Paying Customers  x  Average Revenue Per User.

Now, MRR/ARR metrics are commonly used in reporting, but they are not included in GAAP or other reporting schemes. But they are very important to investors, and to the management of a SaaS company.

So here are some common errors in SaaS reporting. Some of these are surpassingly common.

  • Including quarterly or annual contracts at full value in a single month. Even if someone pays you a lump-sum quarterly or annually, you still need to divide the numbers up to match the MRR figure. (I know, it seems obvious, but I’ve seen this mistake done all too often). Bookings are different than MRR.
  • Underreporting by including fees in the MRR number. Don’t under-report the number by discounting, from the MRR number, credit card charges, delinquency, etc. It will throw off the true number. Instead, break those out separately.
  • Including one-time payments. Don’t bundle in one-time payments into your MRR. These are just that: one time payments, whether NREs, or license fees, or whatever. Report them separately.
  • Including free trials. Don’t include free trails in your MRR numbers. It’s fairly idiotic, but it does happen surprisingly more than one would expect.
  • Not netting out discounts. Net out your MRR net of discounts. In other words, if a customer gets 20% off per month for prepaying, then report the number net of discounts.

(Hat tip to Profitwell — and a shout-out, as they have a great free tool for SaaS reporting.)

Under-reporting can be almost as bad as over-reporting.
Under-reporting revenue (to be “conservative”) can also really kick you in the teeth, as I’ve learned first-hand.

Just get the right number, don’t play games and be completely honest with yourself and with your team and investors. You may not be popular in the short-term, but in the long-run, you’ll be running a better business.

And that, in the end, is what counts.

M&A done right

Many words have been spent over the years on bad M&A deals. I’ve been involved in a few of them… ugh.

The Linda/LinkedIn one strikes me as one that’s not bad at all. In fact, it’s really smart.

But what I liked even more about it was the work that both CEOs put into the acquisition to really explain it in clear terms. LinkedIn CEO Jeff Weiner’s video presentation makes the point clearly as to why this is such a sensible acquisition.

Yes, it was expensive.

But it’s a pretty smart move.

The biggest mistake you can make about employees

I’ve done a fair amount of turnaround work. It’s not my favorite work, but it is interesting and challenging.

Now, one thing that’s very easy to do when you go into a bad area is to blame the people. I hear about “bad” employees constantly. And yes, there is often astonishing incompetence that has to get fixed fast. In fact, usually the most important and critical change in a crisis situation is in rapidly evaluating and replacing certain members of management.

But when we look at a broader scene, there’s one observation I wanted to share with you:

  • Good people in a bad system become “bad” people.
  • Bad people in a good system become plainly obvious as bad people.

It seems like such an self-evident statement, but I have routinely worked with executives who categorize, without a lot of understanding, a group of employees as low-quality. Now, a good manager has a fine-tuned sense of what a good employee is and those opinions are useful. But all too often, I’ve seen managers immediately make assessments on employees, based purely on their own opinion.

So when I enter a turnaround scene, one of the first things I look at is the system (or scene, whatever you want to call it), and then look at the people.

I have worked in areas where the organization structure and management was toxic. And, of course, the employees similar looked “toxic”. They get painted with the broad brush. But here’s a truth: the majority of employees are all too happy to work well. What I have found is that only a minority are actually bad/lazy/stupid/incompetent/evil/etc.

I recall at one company we had terrible problems with product releases. The “reason why” that I started hearing were general statements such as “the developers are unwilling to work”, “they are lazy”, and so on. I didn’t buy it. A simple and radical change in the development organization system suddenly highlighted the very, very small minority who were actually bad actors. And the good developers were miraculously wildly productive. They were all good people stuck in a bad system. When you implement a good system, the bad actors become clearly obvious.

If you consider that a majority of your employees are idiots, well, careful — don’t throw stones in a very fragile glass house.

Let’s remember, however, that even good employees in a good system need to be motivated, given clear direction and kept productive. That is the art and science of building great teams and strong organizational structures.

So, I’m not advocating being a pollyanna. But the broader picture is worth remembering: Good system, good people. Bad system, bad people.

Can genius be learned?

UntitledI recently had the pleasure of hanging out with a fellow you’ve probably never heard of: Bob Duggan.

Duggan is quite a character, who is in the proces of netting himself a cool $3.6 billion from the sale of his pharmaceutical company to Abbvie.

It’s not his first fortune. If anyone can claim to have the Midas touch, it’s Duggan, who has had many success in the past. A two-time college drop-out (UCSB and UCLA), he has made his money entirely on his own.

So when he gives advice, people tend to listen.

What fascinated me is that he has implemented a program in his company of training and encouraging “genius characteristics”, discussed here in Investors Business Daily:

“I tell people, ‘You have genius potential’…Some think of genius as innate intelligence, as an inborn characteristic. But the dictionary defines it as an extraordinary intellectual power in creative activity. All of us have that potential.”

…Duggan, 70, believes so deeply in Barrios’ research that he has arranged for employees at Pharmacyclics to take a self-directed program to acquire the 24 genius traits. They might spend about one hour a week learning the characteristics — which include drive, courage and honesty — and complete the course of study over six months.

And that evening, Bob discussed these genius characteristics, based on the work of Alfred Barrios.

These characteristics include:

  • Drive
  • Courage
  • Devotion to goals
  • Knowledge
  • Honesty

…and another 18. You can read them here, in a presentation he made several years ago.

The key argument is that geniuses are made, not born, and that anyone can develop these same characteristics as Einstein or Shakespeare.

It seems to have worked well for Duggan and his now very wealthy team, some of whom have made staggering sums of money with Duggan.

 

The words I never want to hear: “There’s no budget for that”

Im_having_an_out_of_money_experience_hat-re5694050474b4cafa619600b9039fe02_v9wfy_8byvr_324Over my long and sometimes entertaining career, I’ve had the pleasure of working on many product launches.  Some have been wildly successful. Some, not so much.

There’s one thing I found in common with all launches: Marketing funds didn’t necessarily play a part in the success of the product. I’ve seen products released without a big budget do incredibly well. I’ve seen products launched with a big budget do poorly.

Hence, there’s one statement I’ve heard over the years that personally drives me a bit batty: We don’t have the money to launch the product. 

It is utter nonsense.

Obviously, the ideal is to have a great launch budget! However, don’t get yourself tangled up on the need to have money. You actually don’t need much to market successfully these days. In fact, you didn’t need much 20 years ago, either.

What you really need for a successful launch is some smarts and, most importantly, the intention to have a successful launch.

The “smarts” part of it comes from experience, which can be learned.

As an example, many years ago, I launched a product at a startup which had nearly zero revenue. With very little in launch funds, we built an amazingly successful brand (we didn’t even have to pay our costs up-front, as we negotiated payment terms with most of our suppliers”).

I spent a big portion of my budget on a ton of surveys of potential customers.  This allowed me to get my positioning and messaging right. I spent a lot of time on this part. This allowed me to have the confidence to push hard on the rest of my marketing, because I knew what the customer wanted, and how to get the customer to buy the product. (You don’t even need to spend a lot of money doing surveys. You can do them yourselves at the local mall, or use Google surveys. Or, go to online groups where your typical customers congregate and ask them to do a survey using Surveymonkey.)

The second thing I did was heavily leverage the press to write about the product. These days, press is “dead”, but that doesn’t mean you can’t still use similar communication channels. There are still many writers out there that people read, such as blogs and sites like CNET or ZDNET.

(In order to determine the correct communication channels, one does what I call a “customer work-back”. You define the customer, and then work back where they get their information and where they purchase.  This allows you to a) determine the communication channels and b) the distribution channels. For example, if your customers are system administrators in mid-sized companies, you simply find out where they get their information from and where they typically purchase. And there’s your basic communication and channel strategy.)

The rest of the launch was pretty much block-and-tackling. This product was going into both online and retail, and there is a bit of detail around these two parts that aren’t worth getting into in this blog.

But the broader idea was that we did a lot of homework up-front, got our messaging nailed down, used free communication channels to promote it, launched the product with a lot of confidence, and the rest was history.

So here’s some quick ideas as to how you can marketing very inexpensively these days:

–  Websites are ridiculously cheap, so you don’t need to spend money on expensive designers. You can create a stunning website yourself in a day or two using great WordPress themes like Avada.  Use free graphic services like logomakrTheNounProjectpicmonkey and pixlr. Or, use inexpensive services like 99designs, guru or elance. And don’t bother using ugly stock photos. There are so many incredible free images out there, it will make your head spin. I won’t get into all the tips and tricks. This stuff is pretty straightforward given a will to get something done.

–  Mail, mail, mail. Use a good mailing service like GetResponse or Aweber to really build your fat funnel and do things like using auto-responders. Learn about this stuff. It really works. All of the big email marketing companies have tons of videos. You can also look at classic direct mail, which, believe it or not, still has a place.

There’s a funny thing about mailing; you don’t always see the results directly from the mailing, but you see it elsewhere.  The key thing is to focus constantly on quality communication out.

–  Use leverage wherever possible. The incredible thing about the internet economy is the idea of leverage — one keystroke can get your message to many, many people. QuickSprout has a useful infographic which describes the leverage strategy for low-cost marketing. It focuses on using communities; incentivizing users to share; using affiliate programs; doing blogger and youtuber outreach (as well as guest blogging); using your existing network; getting your friends to share; and getting out there in person.

–  Learn to hustle. Don’t be embarrassed by getting out there and hustling for business. Most people respect a bit of hustle. People who don’t are not the people you should care about.

I remember many years ago going to a tradeshow with a few boxes of product along with me. We were a tiny startup with zero funds. So I entered as a tradeshow attendee, found an empty table and started selling product, right there on the tradeshow floor. No, I didn’t pay for a booth. But darn it, we needed the money, so we sat there and paid for our trip, selling right there on the floor.  Then, after selling all of our product, we spent the rest of the day hustling on the tradeshow. I would also go to user groups and sell directly to user group members — an easy way to generate lots of cash. I even snuck into major industry conferences through the back-door without paying (okay, that’s a bit bad, but we really had no money), and then would hustle business at the conference. Tradeshows are a great place to hustle, especially if you’re selling to other companies (such as an OEM product). Go directly to the booth and ask for the person “in charge of …”, and if they’re not there, get their contact information.

I admit, I have a bit more hustle than most people, and I often wonder why people are too scared to get out there. But I suppose I don’t have a big problem with rejection. If you do, get over it. All businesses have a lot of rejection, but if you don’t get out there and hustle, something terrible will happen: nothing.

–  Barter. Do the $5 marketing plan.

–  Use LinkedIn and send free gifts. The most powerful business networking tool is LinkedIn. Or, use other data services to find potential target customers. Then, send the target a free gift, and ask for a meeting. At one company I work with, this “gift” strategy yielded some of their best leads. Another company I’ve worked with would send an email to a target customer, offering “to buy them lunch” (really, a $20 gift card). The exchange was to do a survey, which ultimately lead to the customer being educated on the product. $20 for a highly qualified lead? That’s not bad.

There are many other ideas. The point is not to get tied up in “we have no budget”. That’s very dangerous (and false) thinking. Some of the most successful tech companies companies today have had no marketing budget (Facebook, DropBox, AirBnB and many others). What they had was a great product or service, a lot of desire and a lot of persistence. And in the end, these three ingredients have no equal when it comes to success.

Tech company valuation for noobs, and how to sound cool when talking about it

I recently had a conversation which seems to repeat itself time and again — an entrepreneur wants to start a business, calls me for some basic advice, and then we get into some of the details.  Invariably, we get around to the subject of valuation.

Since this is a blog where you can feel comfortable asking “stupid” questions, I’ll make it safe for you. So, here’s the reality: Your high-tech business is worth as much as you can get for it.

There’s no formula.  There’s no cash flow model which can justify a startup’s valuation.  There’s just what you can get.

Jim Clark, after successfully starting Silicon Graphics, went on to start his next venture, Netscape.  He arbitrarily set a valuation in the mid-teens (I recall it being around $15 million, but my memory is a bit vague).  Of course, this is a ridiculously large valuation, but he could get it.  He did the same thing again with WebMD.  He got the most he could get from the market.

Others may not be so lucky.

How it all happens is the art of raising capital, and for better or worse, a major job of the entrepreneur.

Pre- and post-money
As you probably know, key terms are pre-money and post-money (often referred to as the “pre” and “post”). Pre-money is the valuation before you raise money. Post-money is the valuation after you raise money.

It’s dead simple: Your dilution (how much of the company you give away) is simply determined by dividing the amount raised by the post-money valuation. Let’s say you value your business at $4 million (the “pre-money”).  You raise $1 million (the “raise”).  You now have a $5 million post-money. Divide $1 million by the post-money ($5 million) and you see that you gave away 20%.

Often, for pre-revenue startups, founders raise angel money first, which then converts at the valuation of the Series A. The Series A is the first real round of funding, and startups hope that it is an institutional round. In my opinion, it is more favorable for the entrepreneur to raise angel money to convert at the Series A valuation. However, angels sometimes would rather go straight into a valuation discussion.

Valuing a tech business that has revenue
After your business is running a while, you will likely want to look for an exit.  If you’re like most entrepreneurs, you’ll tell your investors that you want to go public, but really, most tech companies get bought rather than go through the cumbersome IPO process.

What valuation you get is, again, a subject of some considerable subjectivity.

The acquirer (and the bankers), will typically go with a combination of models that justify the valuation.

There are three primary models used in valuing companies:
–  Discounted-cash flow
–  Comparable public company valuations
–  Precedent transactions

Discounted-cash flow (DCF) — if you don’t know what this is, let the banker worry about it.  In tech company valuations, it’s not a vital model, but it’s heavily used in non-tech industries, where the business is predictable and well-established (or, similarly, in tech companies where there is an established and predictable business). The DCF simply presumes a set of cash flows occurring annually over a future period of time, assigns a terminal (end) value of the business, and then discounts the cash flows to the present (because cash in the future is worth less than cash today).  How it discounts is based on old mathematical models dating back literally 150 years, but is now automated in any spreadsheet program.  Again, it’s not worth worrying about too much.

Comparable public company valuations — A more important metric, this method uses the valuation of public companies in your space to determine how the broad market is valuing the business. In technology, there are a number of multiples that are used, but often, a multiple of revenue is employed.  You can get an idea yourself of comparable public company valuations by assembling a list of public companies in your space, and looking up the multiples on any major finance website (Yahoo has a nice section that shows the key multiples for any company, under “key statistics” on any public company quote page).

What companies you choose for your valuation has an impact, but be careful not to BS too much by only selecting the hot companies in your space, as any reasonably intelligent acquirer knows very well what companies are comparable to yours.

So, for example, if you’re in the security space selling an advanced firewall product, you might choose Symantec, Palo Alto Networks, Fortinet and FireEye (not the best examples, but I’m just giving examples here).   Take the core valuation metrics (multiples of cash flow or EBITDA, multiples of revenue, etc.) and then calculate the average and the median, and apply it to your own numbers.

Key multiples typically used are multiples of revenue and multiples of EBITDA.

EBITDA is a very important metric for some buyers, in particular private equity and growth equity investors. [As a side note, I will add that Cash Flow is not the same thing as EBITDA, and this is important to remember for working through your financials and your strategy. I got caught in a trap years ago between Cash Flow and EBITDA. I was heavily Cash Flow focused (specifically, Cash Flow From Operations — CFFO). For technical reasons not worth getting into here, my EBITDA was poor, but my CFFO was wonderful.  I thought I could explain it away to investors. I couldn’t: they simply cared about the EBITDA.  It was shortsighted on their part, but in the end, it was my fault for not realizing just how important EBITDA was to these institutional buyers. I’ll never make that mistake again.]

Plenty of bankers publish information on financial metrics for prospective clients; Pacific Crest Securities has one of the better models, published every few weeks. I’m sure if you contacted them, they’d be delighted to put you on their mailing list.

Precedent transactions — this is the most important valuation metric, as it is what other companies in your space are being acquired for today.  Any banker has access to services which provide this vital data, but you’ll likely have your own list of companies that have been acquired, what they got acquired for, and what the multiples were.  Again, you’ll apply this to your own numbers. Keep track of deals in your space.

Muddling through
After looking at precedent transactions and comp public multiples, you’ll have an idea of what your company should get valued at. A good banker is very, very useful in this process.

Now, different buyers have different metrics.  Financial buyers typically pay on a multiple of cash flow (perhaps 3–6x cash flow for a highly leverage acquisition, perhaps 7x-10x cash flow for a non-leveraged situation, sometimes more for something that’s important to them).  Strategic buyers (in other words, non-financial buyers) are all over the map.  If they believe it’s strategic, the sky, literally, is the limit.  I’ve seen numbers that are stratospheric.  I’ve also seen numbers that are surprisingly low.

In the end, get what you can get. This is where the art of negotiation really, really matters.

Of course, never lie and fudge your numbers.  You can get in awful trouble post-acquisition, and besides, do you really want to make all that money in a sleazy way?

So good luck and feel free to contact me if you want any advice in this process.

Focus on the importances. Empower others. Be happy.

UntitledIf you’re heavily stressed as a business leader, the business is running you — not the other way around. Chances are you’re not prioritizing correctly, and you’re not delegating.

I’ve worked with CEOs who put in an insane amount of hours and don’t do any better than CEOs who work a fairly normal schedule (granted, usually 50–60 hours a week).

One could describe a leader as someone who establishes and communicates clear goals, gets the right people in place, gets everyone working toward these goals and focuses on what’s important.

Culture is an additional ability of leadership. Culture is less important, actually, than fanatical execution on a clear set of goals. Ping pong tables, beautiful offices — nice — but not vital.

The core is figuring out where you’re going, getting the right people going in the same direction, and focusing on what’s important.

Sounds easy, but it’s an art.  It’s why great CEOs are paid a lot of money and are in high demand, because it doesn’t come intuitively or naturally to a lot of people.  However, it can be learned.

Teaching leadership skills, however, isn’t the purpose of this blog post.  I’m just going to tell you what’s important.

There are just a few things that you have to do really, really well in this business.  If you do those well, everything else follows.

Many years ago, one of my early mentors told me, “if you just focus on creating a great product, support it well and do a good job on PR, you should do just fine.”

Not bad advice.  I’ll expand on it with a bit of my own experience.

Here is the scale of importances in running a product or services business.

1. The product or service.
2. The quality of the product or service.
3. Support/customer service
4. PR and marketing
5. Sales
6. HR
7. Finance/administration/legal

Assign KPIs to each area (you can’t manage what you can’t measure…). At the beginning of every week, go through each of these areas by yourself. And then go through these with your senior staff at your Monday morning staff meeting.

The funny thing is that as an executive, you may find yourself spending a tremendous amount of time keeping people focused on doing the important things. And, you may find yourself burdened down with things that aren’t that important. People add complexity to everything they do.  It’s a natural tendency, but it generally means that they are not confronting what really needs to get done (either because they don’t know, or because they don’t understand something).

If you establish an organization with this set of importances, you’ll increase your chances of doing well.

The mistakes I’ve made are when I’ve reversed the priority — too much emphasis on finance, or sales, etc. The product (or service) is the most important thing to focus on (read my other post, The Product is All). Give the accountants the problem of worrying how to book the revenue. Give the sales and marketing guys the problem of actually getting the revenue.  And get the product guys firmly lined up with what’s needed and wanted from the market, and delivering it.

And lead a less stressful life.

The product is all

type-setI loved Bob Lutz’ book, Car Guys vs. Bean Counters.  It is a virtual ode to product people.  Lutz is one of the most important people in the history of the American car business, because the supremely ugly American cars we saw back in the 80s were made by committee, but the great cars that we’ve been seeing lately have come from product folks.

It brings to mind a memory as a young marketing manager starting out on my career. I was standing outside with an old geezer of a sales guy while he puffed away on his 50th cigarette of the day. “If the dogs won’t eat the dogfood, it won’t sell. I don’t care how many pretty pictures you put on the packaging”. Sage advice.

The product (or service) really is everything.  It seems like an obvious statement, but it’s of such vast importance that if it’s not made a key importance, you’ll never succeed wildly.

People talk about the magic of Apple.  Why?  Because their products are incredible. Customers don’t know you through your income statement, nor your legal department.  They know you through your products.

The worst sales team in the world is transformed into the “greatest” sales team with a good product.   A weak marketing department is suddenly on fire with a great product.  PR comes easy with a great product.

So what is your product or service?  How do you make it?

Good product development starts with a something that is actually desired and in need.  This does not come about through theorizing.  It comes about through talking to customers and prospective customers.  One of the most successful consumer products of all time came from an in-home visit.

I rarely released a product without doing extensive surveys to understand customer needs and wants.  Pragmatic Marketing, which runs product management and product marketing seminars, has an acronym – NIHITO.  It stands for Nothing Important Happens In The Office.  All this means is that a product manager who is sitting in his office, not talking to customers, is not getting the real story as to what’s actually needed by the customer.

It’s good advice.

Sometimes you have an absolute genius (or you are one yourself) who can think up the most amazing product ideas that are all wildly successful.  Consider yourself lucky if you have a spare Steve Jobs lying around the office.

But the reality is, most companies don’t have geniuses like this.  You need to work for it. You need to talk to the customer.

If you talk to the customer, the product ideas roll out naturally.  If you don’t, you’ll find yourself arguing theoretics in meetings at the home office.  I’ve been there too many times.

So talk to the customer and figure out what they want.  Then document it and use the information when you talk to the people who make the product (the engineers, the developers, whomever is making the product in your company).

In an online world, you can do surveys for nothing.  We used to run surveys for $20k-$30k just per product. Now, services like Surveymonkey.com or Google’s consumer survey service make the cost negligible. Give survey respondents a chance to win a gift card, keep the survey short and sweet (longer surveys lose respondents), create questions that have meaning (don’t ask stupid questions because some guy in the office insisted – ask questions that will give you a real answer) and most importantly, get it out and use the data. There are also tricks, like using Google’s keyword finder to locate what people are looking for online right now.

It sometimes occurs that product developers (or others) don’t believe survey results.   This is normal and I’ve had this problem.  You don’t need to be combative (“I have the survey and you are an idiot for not believing it” doesn’t always work).   Developers really do have good ideas, but the broader point is that the customer cannot be ignored in the process.

There are examples when surveys were a bust.  However, on further analysis, it was because the surveys didn’t get the right answer.  A famous example is the battle between Steve Jobs and the marketing department at Apple.  The marketing folks had surveyed customers about what type of printer they wanted.  They asked for a daisy-wheel printer (for those of you who weren’t around back then, this was basically a typewriter attached to a computer).  Jobs, in his typical fashion, refused to agree and argued that customers would want a laser printer.  He won the argument, and there was the birth of desktop publishing and so much more.

However, the problem is fairly clear.  Reading through the results, the customers were asking for a letter quality printer.  They didn’t know about laser printers, they knew about daisy-wheel printers.  The survey could have been done quite a bit differently with much different results.

Surveys can also take the form of surveying your competition or using secondary research (meaning, outside analysts firms that create research).    Secondary research is often a bit dangerous.  Whole fortunes have been lost following the lead of an outside analyst.  You need to keep your wits about you and try to filter out what’s important.  However, analysts do create a lot of noise and they are worth listening to.  Just use your own common sense.

You can also just use a prototype or a beta to figure out if customers will like the product. A famous story is Dropbox.  The creator, Drew Houston, created a YouTube video of the product, still in prototype form (this is the idea of a Minimally Viable Product).  People loved it.  The rest was history.

Doing surveys to define products is a bit of an art form and takes some practice.  But the key point is – don’t design products in your own little bubble.  Get the customer involved with the product creation process and you’ll win.

Term Sheet Math — When Is Your 66 Percent Really 52 Percent

Good overview of dilution by my friends at Foley.

When negotiating valuation for a financing, an investor may conduct detailed due diligence and then present you with a term sheet that reflects multiples, discounts, comparables, and so forth. In the end, you are negotiating for percentage — how much of the company will the investor get, and how much will you keep? Your investor is focused on maximizing return on investment. You are focused on keeping meaningful upside for your innovation and hard work.

For example, if you raise $5 million on a $10 million pre-money valuation, you will be giving the investor 33 percent of your company. You keep 66 percent. But that 66 percent may not be really be 66 percent even before you take into account any later dilution by subsequent rounds of investors. There are at least three reasons why.

Link here.

Starting your startup. The pitch deck. And what it all means.

photo-1422479516648-9b1f0b6e8da8Entrepreneurs constantly ask me how to pitch VCs. Most of the time, I push them to a different route.

To have a great business does not mean you have to have outside venture capital. I have run businesses backed by VCs, and those without. These days, you don’t actually need a tremendous capital base to get started. You can start a company for very, very little.

It’s worth reading The Ultimate Cheat Sheet for Starting and Running Your Business. There’s also a great list of free things on the web to help you bootstrap your business.

However, inevitably, most entrepreneurs want to try to pitch their business to someone. The pitch may only be to family and friends (always the best place to start), or to a big Sand Hill VC. And they also want to know how to write a business plan (the two are not the same).

Pitch decks are those spiffy, slick and often meaningless presentations that are supposed to get you the millions your company deserves.

The problem is, like everything in the Valley these days, it’s all the same. Going to this site [or this one] will dazzle you with the sexiest pitch decks (dare I say the “bubble in the making” here?). However, it’s an orgy of homogeneity, a grand sameness that’s a testament to a startup culture that’s trying to be different, by being the same.

Where’s the risk in putting together a presentation that looks the same as everyone else’s? Not much. What’s riskier is not having a great idea and a great team.And therein lies the essential question: What do investors really care about?

Just two things stand out: a big idea and a great team.

A big idea has the following characteristics:

– It addresses a big, big market. Like – billions and billions being spent. Going after a $20 million market,meh. Going after a $300 billion market,hmmm…

– There’s a big, fat opportunity. There’s something missing in the market, or something that’s going to be happening, that opens the door to your product or service being a massive success. Your technology needs to be different, disruptive and interesting. And if you can’t reasonably forecast your company getting to several hundred million in revenue, then rethink the VC route.

– It’s different. Being the 10th also-ran player in a market is not interesting. That doesn’t, however, mean you have to be obsessed with being different. It’s just you need something that sets you apart from all the rest. (A good start is to read the 3 most powerful words every brand needs.)

But let’s dig a little further. Venture investors (as opposed to private equity investors) aren’t investing in startups just to get 2-3x return on their money. The venture model is fairly simple: each investment has to have the potential to generate outsized returns –10x return – a “ten bagger”.

So, you need an idea that will generate outsized returns.The classic pitch deck, as outlined by a colleague (Mark Wright at BCVC) has the following elements:

1. Investment highlights

2. Platform/Business Description

3. What compelling problem does it solve

4. Target Customers

5. Competitive dynamics/ current customers – if any

6. Barriers to entry

7. Management team

8. Holes in team

9. Financial model

10. Amount being raised/Use of proceeds

11. Operational and financial milestones/How is our performance to be judged

12. Three year quarterly projections that includes the quarterly can burn rate

13. Client references

14. Repeat investment highlights.

Good. That’s a start, and a good checklist to keep in mind.

Basic rules for the pitch itself are to accept questions and interruptions during the pitch. Give it 45 minutes max. Do not send out the pitch in advance. And don’t ask a VC to sign an NDA. Most won’t.

Business plans, on the other hand, are largely meaningless for raising capital (I’m excepting, of course, where it’s a prerequisite, such as an SBA loan). A good Powerpoint deck is often enough to get the discussion going from institutional investors.

However, you should write a business plan for your own use. Writing a great business plan means that you write something that will be a living, breathing document that gives an insightful analysis into the business objectives, priorities, plans, and methods of measurement. It is for use, not necessarily for investors. If you’re just going to print one up for investors and then forget about it, it’s a waste of time.

And if you’re looking for a template for a business plan, the reality is that there is no really good template for a business plan. Great business plans are real documents that reflect the mission, objectives, and plans that you expect to actually implement.

In other words, there is no template for common sense.