Lesson #363: Trying To Scale Your Startup? The Odds Are Not In Your Favor!

 

My colleague and serial entrepreneur, Scot Wingo, of ChannelAdvisor, Spiffy and Triangle Tweener Fund fame, recently posted on LinkedIn, how hard it was to scale a business. He referenced data from a book by Verne Harnish, the founder of Entrepreneur’s Organization, called Scaling Up: How a Few Companies Make It . . . and Why the Rest Don’t. 

The core of the story was this graphic:

What the graphic basically says is, of the 28,000,000 businesses in the United States, only 0.061% actually get larger than $50MM in revenues. And 96% of all businesses, never get larger than $1MM in revenues. I was so taken back by the data here, that I thought it was worthy of a deeper discussion.

Why is It So Hard to Scale?

Very Few Best Educated Entrepreneurs. The US News & World Report only lists 39 universities as being the best undergraduate entrepreneurship programs. Let’s estimate that the average class size at those business schools is 1,000 per school and that 10% major in entrepreneurship (or 100 per school). So, there are 3,900 highly regarded entrepreneurship graduates per year. With an average career length of 44 years (from 21 to 65 years old), that means there is a pool of 171,600 people best trained in entrepreneurship. There are 333.3MM people in the United States, and 28.94% of them are “working age”, creating a pool of 96.5MM workers. That means only 0.18% of workers properly knew what they were signing up for in the world of entrepreneurship, before diving in headfirst. Now, all of a sudden, the numbers in the chart don’t look that far off of what should have been reasonably expected.

Worth mentioning, notice I focused on entrepreneurship majors. I intentionally ignored business majors. Most business degrees are pumping out graduates that work in large companies. And the skillsets needed for running a Fortune 1000 sized company are materially different than the skillsets needed for taking a piece of paper idea and turning it into a successful business.

You Don’t Do Your Homework Before Launching. For many businesses that launch, they do so without building a proper business plan, including doing homework on their industry and competition, identifying affordable sales and marketing opportunities, and ensuring there is a good product market fit. Would you take a test in school, without first doing your homework, or studying for the exam? Of course you wouldn’t. So don’t do it when launching a business, especially given the large amount of dollars you will be putting at risk, potentially getting flushed down the toilet with the low odds of success being talked about in this article.

You Don’t Have the Right Skills Needed. You have to be honest with yourself. Are you the right person to actually launch this business and execute the business plan? Do you have the right skillsets required for strategy, management and fund raising? You most likely don’t. So that means you need to hire the people with the right skills or surround yourself by mentors and advisors that have “been there, and done that” before, to help get you up the learning curve. There is very little room for making mistakes in the world of startups, given the capital requirements.

You Don’t Evolve As the Business Needs Change With Scale. The graphic above illustrates four “valleys of death”. These are the points where most businesses “stall out” in their growth curves. Why is that? Go back to the last paragraph; they don’t have the right skills needed for that next phase of the company’s growth. The skills it takes to grow from $1MM to $10MM in revenues are completely different than the skillsets needed to grow from $10MM to $50MM. The bigger you get, the more complexities there are. Bigger companies have to start thinking about things like international expansion and mergers & acquisitions, which were never given a thought for the smaller business. So, as you scale, you really need to re-assess your senior management needs to make sure that new team, has also “been there, and done that” for the skillsets needed for the next phase of your growth. They are materially different.

They Run Out of Money. Some startups run out of money for things out of their control, like a crash in the economy or the financial markets. And other startups run out of money, simply because they under-budgeted for what their entire needs would be, or they were too aggressive with their revenue growth assumptions. Oftentimes, by the time they realize they are out of cash, it is too late to raise new capital, as a fundraising process can often take up to six months. So plan far ahead and keep your eyes firmly glued to your “gas tank”.

When The Going Gets Tough, The Weak Throw in the Towel. Startups are full of disappointments and let downs. You may need to listen to 100 people say “no” before you find that one person that is willing to say “yes”. Not everyone has the “fire in the belly” needed to break down those walls and push the company on to future success in the face of all these headwinds. So, if you don’t like the idea of feeling like you are constantly “pushing water uphill”, you probably shouldn’t consider a career in entrepreneurship. It is not a career for the weak of heart.

Why Do Venture Investors Take This Level of Risk?

With this low level of success in scaling businesses, why do venture capitalists even invest at this stage?

First of all, professional venture capitalists are exactly that . . . professionals! They have done this for a living for decades and have listened to thousands of entrepreneurs pitch their businesses and know what it takes to succeed. So, for many of them, they are confident in their own experiences from their past portfolio companies to “defy the odds”.

Secondly, they employ a portfolio strategy: out of any one fund they make 25-30 investments. They know 90% of them will break even or lose money. But they also know the 2-3 that breakthrough will generate a large enough return to generate an impressive return for the entire fund. For example, if they make 20x return on 10% of the portfolio, and break even on the rest, the fund still yields a 25-30% annual return to their investors over a five-year period. Point here: diversification is key, don’t put all your eggs in one basket.

Lastly, the best venture capitalists know how to game the system. Let’s say they are investing in marketing software companies. The good ones have relationships with CMOs at many companies, that can help them do due diligence on the merits of the startup’s idea and become initial customers for that startup (which is the hardest part of scaling—finding customers). What will be your “unfair advantage”?

Should You as an Entrepreneur Take on This Level of Risk

After reading this article, do you think you have what it takes to be one of the 0.061% that can break through to over $50MM in revenue, which is what investors will be listening for? Do you have a good, well-researched idea? Do you have the right team in place? Do you have the capital lined up to succeed, in both good times and in bad, with enough cushion in place for the unexpected hiccups, for which there will be many? Are you prepared to hand over the CEO reins for the next chapter of your growth? Do you have the intestinal fortitude to plow through all the roadblocks? Do you have an “unfair advantage”, that will help you with customer acquisition? If so, maybe we will be singing your praises in the years to come. But there are very high odds, based on the data above, that we will not. So, be honest with yourself before rolling the dice and putting your life savings at risk. Especially, since you won’t have the luxury of a portfolio strategy, like a venture capitalist has, with all your eggs in one basket. Batten down the hatches, it should be wild ride. Prepare for the worst, and hope for the best.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] Why Entrepreneurs Need to Keep It Simple Stupid

 

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how entrepreneurs need to follow the K.I.S.S (Keep It Simple Stupid) method in approaching their business.  As you will learn, if entrepreneurs want to increase their odds of success, staying religiously focused on one thing, is a lot more effective than chasing multiple "flavor of the month" tangents down rabbit holes.  I thought this video turned out great, and I wanted to share it with all of you to make sure you are simplifying your strategies and processes throughout your organization. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

The First 100 Days of Onboarding New Employees

 

You probably have heard the importance of the action plans of the "first 100 days" after a new President takes office or after you begin integrating two companies after a big merger, but I am guessing you haven't heard it applied to your recruiting and onboarding efforts with each of your new staff members. In many marriages, couples date for years before getting married. In contrast, in recruitment, someone can join your organization after only a few hours of interviews, which means you are essentially living and working together from the start of their employment. These "first 100 days" will dictate whether this union will work or not, and how you handle these first few months is critical.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #362: Firing Long-Term Employees is Hard, But May Be Necessary

I consulted a client that had to do something they had never done before—they had to cut a long-term employee that had been with the company for over 5 years.  Once an employee has been with a company for that length of time, they have basically become “family”, so that is the equivalent of cutting your “brother or sister.”  And, most employees that get to 5 years of service, must have been doing something right during their employment, otherwise they wouldn’t have lasted that long.  But, things can change.  And, in this case, the employee no longer was a high performer, they had quickly become a poor performer, and that was causing broader challenges for the business, as described below.  This post will teach you how to handle situations like these, and why cutting your “brother or sister” may be the only option you have.

A Little Background

For purposes of this article, let’s say the employee here is named James.  James was part of the sales team.  He started out of the gate slow in his first year, but he quickly picked up steam with training and effort in his second year.  He was a high performing sales person for a couple years straight.  James loved his job and the company, and the company and his peers loved him.

But something happened in year five; his sales levels cut in half of the previous years and there were much higher instances of clients becoming very upset with James for lack of responsiveness and for making mistakes on their projects.  So, not only were revenues down, customer complaints and resulting fixes required were way up, which meant the rest of the entire team needed to step up and fill that void.  Many conversations would happen with James, trying to get him to improve his performance, and each time he said he would try to get better and that it would never happen again.  After a year of underperformance, and repetitive missteps by James, the company finally hit its breaking point and terminated James.  So, here a few lessons out of this story.

Employees Can Change

Good performers can go bad, like in this example.  And, bad performers can become good.  People are humans, and things are happening in their everyday lives.  Maybe their health goes bad?  Maybe their kids are becoming a bigger burden?  Maybe they are caring for ailing parents?   Whatever.  So, just because you had a good performer, doesn’t mean they will stay one, and you need to reassess their performance, as if the clock was starting new every quarter.  Which can be really hard for employees you have grown very close to over the years.

Cutting Friends is Hard, But Sometimes You Have No Choice

In this story, James was integrated into the fabric of the company, and he was well liked by everyone.  Which bought him some “leeway”, in terms of a runway to fix his mistakes, as compared to a brand new employee with no history with the company.  But, you can’t let your friendship with an employee blind you to his performance.  When customers are complaining, your brand is getting tarnished with negative reviews.  When your fellow staff are complaining, your credibility as a manager is getting questioned as to why are you continuing to let this poor performance happen (as it is directly impacting the rest of the team’s day-to-day job cleaning up his mess).  Make the tough decision and part ways sooner than later.  It should not have taken over a year in this case to resolve the situation.

Unpunished Poor Performers Get Increasingly Bold The Longer They Get Away With It

If you set a line in the sand, and the employee crosses it, you need to live by your word and take action.  In this case, the line was set in the sand, James crossed it on three separate occasions, but he continued to keep his job.  All that did was embolden James to believe he would never get fired, regardless of his actions, and he continued in his old bad ways, as he believed there was no real punishment coming his way.  And, when the punishment finally came, a year late, he was pretty much in shock that it actually happened.  So, if you set a line in the sand with an ultimatum, in terms of expected performance of a staff member required to not be terminated, you need to live by it if that goal is not met.

Never Lose Your “Street Cred” With the Rest of Your Team

The longer you let a “bad apple” stay with a company, the higher the risk that employee spoils the “whole bushel” and has everyone looking for the door.  Employees want to work in reasonable working environments, and repetitively doing extra work to put out other employees’ fires is not a desirable situation for anyone.  And, employees want to work for a boss they can trust to do the right thing, even if it means making the hard decisions.  They are looking to you as the leader, to help them “put out the fire” created by other bad employees.

The Economic Impact of Keeping a “Bad Apple” Employee

In the case of James, his sales dropped to half of the rest of the sales team.  That was worth about $500K in revenues and $50K in company profit per year.  That is not an insignificant amount that a replacement salesperson could have retained.  And, the economic impact of hundreds of upset customers spreading negative reviews online or to their peers, could be worth 3-4x this amount.  I always said, you gain 2-3 customers from positive word of mouth, and you lose 8-10 customers from bad word of mouth, as customers are much more vocal when they are upset, than when they are happy.  So, when you add those two factors up, lost sales plus lost prospective sales, this was a $200K-$250K bottom line impact to this business.  That’s why you need to take action, sooner than later.

Closing Thoughts

So, hopefully, none of your long term high achievers will turn into poor performers in your businesses, as that rarely happens.  But if they do, don’t repeat the mistakes my client made in this case study.  Act swiftly, making the hard cuts within three months of the poor behavior not getting resolved.  And, act fairly, treating a long term employee with respect (e.g., offer a high severance payment for their long tenure with the company).  It is never easy cutting employees, especially long-termers which you view as “friends and family” of the company.  But, sometimes, you just have no choice.

For future posts, please follow me on Twitter at: @georgedeeb.

Do Major Holiday Discounts Help or Hurt Your Business

 

What is it about Memorial Day, July 4^th, Labor Day and the Christmas season?  They bring out all the big discounts, which gets shoppers flooding to the malls to save money, especially on big ticket items like cars and mattresses, as examples.  And the sellers of those products bring out their best prices during these holiday seasons, trying to capture has much market share against their competitors as they can.  But the question I ask is: why?  Yes, you are driving more revenues, with the holidays often representing 30% of their total annual volume.  But, if you are sacrificing material bottom-line profits by slashing prices in the process, why play that game?  This post will dive deeper into whether you should or should deeply discount your products, during the holiday season or in general.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #361: Let Ad Campaigns ‘Breathe’—Over Optimization Can Suffocate Results

 

I have been a digital marketer for over 30 years, living by the mantra of making data-driven decisions that maximize your return on ad spend (ROAS).  Like any good marketer you will always be testing and tinkering with your ad campaigns to optimize your copy, creatives, lading pages and messaging in a way that will get you the best results, in the form of your highest ROAS or lowest cost of customer acquisition (CAC).  But something happened with one of my businesses in the last few months, where over-optimizing the campaign actually caused the wheels of the bus to fall off.  I had never seen that before, and I thought this case study was worth sharing with you, so you don’t repeat this same mistake.

The Situation

We had been growing our Restaurant Furniture Plus ecommerce business pretty consistently over the last few years.  The growth strategy was almost entirely Google Ads focused, where if we wanted to increase revenues, all we needed to do was spend more money with Google year-over-year.  And, that we did, increasing our annual advertising budget from $100,000 to $2,000,000 over the last few years.

Things were largely going fine.  As we scaled advertising spend, our revenues scaled along with it in a pretty consistent straight-line kind of way.  We weren’t overly optimized in our efforts, we simply managed the campaign with a few high level metrics to make sure we were heading in the right direction.  Those metrics included our ROAS and our Cost Per Lead (CPL), which were largely unchanged over the years, ignoring one-time anomalies in the market, like COVID in 2020.  We biased CPL over CAC since we could easily tie Google Ads into our Call Rail tracking data at the campaign level, and we couldn’t easily connect our CRM data to Google, at the time.

But, after we upgraded our CRM with one that better enabled a direct data tie to Google Ads,  we thought the campaign could perform more profitably if we engaged a more sophisticated marketing agency that had more experience in running campaigns based on CAC instead of CPL.  An agency that would be more “in the weeds” than we were as business executives, optimizing everything within the campaign, including the keywords, creatives, landing pages, product segmentation, audience targeting, etc.  We felt the biggest opportunity was managing the campaign at the CAC level, as opposed to the CPL level, since we figured knowing if a customer purchased from us was more important than if they contacted us.  Sounded pretty reasonably, right?  But, keep reading.

Our Ad Agency’s Plan

Our advertising agency was very bullish on connecting our CRM data directly with Google Ads, to let Google know which ads of theirs lead to actual buying customers.  The agency had a lot of success with their other clients with this strategy, and there were confident it would work for us.  We did a lot of work to set that up, and launched it, crossing our fingers it would lead to a material decrease in our CAC and a material increase in our ROAS.

But, what followed had us all scratching our head.  Instead of improving our campaign, this action actually hurt our campaign.  All of our marketing metrics started to move in the opposite direction—our CAC doubled and our ROAS cut in half.  None of us really had an explanation for what had gone wrong, until we started to do a little more digging.

What Happened?

The single change we made, which we thought would help us, actually hurt us.  We changed our primary data point that we wanted Google to optimize for from number of leads (e.g., phone calls and email form fills) to number of customers (e.g., closed transactions in our CRM).  And, more specifically, we didn’t care about online customers that purchased on our website, we only cared about offline customers that purchased with our team of expert project managers, because our average order size of offline orders was 3x that of our average order size of online orders, by adding that personal human connection and having the opportunity to upsell the order.  But, from a data perspective, that meant we went from sending Google 1,000 datapoints a months, from the phone calls and emails, to only sending Google 100 data points a month, from the offline transactions that were directly sourced from Google.

Remember, Google is an algorithm, and it needs data to digest to do its work.  And, the more data, the better.  By making this move, we were effectively “starving” Google, by cutting back the datapoints.  And, what does Google’s algorithm do when there isn’t enough data to work with?  It becomes paralyzed and doesn’t know what to do?  So it starts “spraying and praying” across its entire network, where it can hopefully generate more useful data and results to work with.  And, what happens to your advertising effectiveness during this time?  It basically gets flushed down the toilet.

The Fix

Once we learned what the issue was, it was a simple fix:  we basically return to our old ways, telling Google to optimize on the leads data, instead of the transaction data.  That started feeding Google’s algorithm again, and good things happened.  Our ROAS and CAC returned to the historical levels, once the campaign wasn’t strangled and suffocating anymore.

The Lessons Learned

There were many lessons learned here.  First of all, we mentioned it above, Google needs data to work with, and there is a minimum amount of data that Google needs for its algorithms to successfully do their job.  We had basically choked it.  Secondly, there were a lot of very smart veteran marketers around the table that all collectively bought into the strategy that failed.  So, even experts can make mistakes.  In this case, the agency’s success with other clients was due to those other clients being materially larger than we were, sending Google a lot more data than we were able to send them.  And, lastly, there is a point in your marketing campaigns that you simply have “over-sharpened” your pencils, to the point the tips break off when you press on them.  Yes, campaign optimization is good and needed, but over-optimization could end up being the noose around your neck.  So, as you are tuning up your campaigns, don’t turn the dials up too high, or you may bust a few springs along the way.

For future posts, please follow me on Twitter at: @georgedeeb.