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Thursday, May 26, 2016

Lesson #237: The Hockey Stick Principles of Growth

Posted By: George Deeb - 5/26/2016

I recently got introduced to Bobby Martin, serial entrepreneur from First Research and Vertical...




I recently got introduced to Bobby Martin, serial entrepreneur from First Research and Vertical IQ fame, and author of the new book, The Hockey Stick Principles--The 4 Key Stages of Entrepreneurial Success.  I thought he presented some really interesting views of the four stages of a startup's typical growth curve, and he was nice enough to allow me to share it with all of you.

Introduction

Bobby conducted a study that plotted the revenue growth of 172 successful startups for the first seven years from launch, covering a wide range of sectors from web leaders like Google and LinkedIn to non-Web businesses like Chobani yogurt, TOMS shoes, and video camera maker GoPro. The data showed that all but eleven saw hockey stick growth.

Bobby then interviewed successful founders of all kinds of startups in depth, getting the details on exactly how they built their businesses, from how they came up with their ideas through to developing them into viable business models, how they designed and developed their products and services, how they launched, and how they built their customer base and sales thereafter. The more he delved into the founders’ stories and examined the growth curves for their businesses, the clearer it became that all successful startups go through four major stages of growth, which track along the hockey stick curve, and each of  these growth stages— which Bobby calls (1) the tinkering stage, (2) the blade years, (3) the growth- inflection point, and (4) surging growth— presents founders with its own distinctive challenges.

As Bobby compared the stories of more and more founders and how they faced  these challenges, the commonalities between the businesses that succeeded, including Bobby's own businesses,  were striking, as were the similarities of the mistakes that  were made by founders who failed. The result is that Bobby identified a set of core principles to follow in each stage of growth, which he calls the Hockey Stick Principles. Below is a very high level of what each stage is about.

1. Tinkering Stage

This is the time during which founders are beginning to explore the viability of their idea. It begins when they start to take action to examine the idea more seriously, and it ends when they fully commit to developing the business. While this is the least pressured of the stages,  because most often the founder  hasn’t yet quit his or her day job or committed to a launch schedule, it still presents many tricky challenges, and too many aspiring founders never get beyond this stage.

One of the most common mistakes made is that founders waste a  great deal of time developing elaborate business plans, which seems so obvious as a must-do, but is in fact, as  we’ll explore more fully, a terribly misguided action. Believing that you should develop a good business plan on the sole basis of an idea lends support to one of the biggest fallacies about the startup process: that you’ve got to begin with a good idea and everything  will flow from  there. Hockey Stick Principle #1 is: you don’t need a good idea.  Viable ideas for startups don’t just emerge whole from founders’ brains; they are developed over time.

This stage should be a period of actively experimenting with developing the product or service, getting out into the field and soliciting the feedback of potential customers, as well as canvassing suppliers and retailers, testing— and truly challenging— your ideas for the product and all aspects of your business model, and listening carefully to responses. It’s often from this experimentation and critical listening that crucial changes to initial ideas come, which make all the difference in eventual success.  Reluctance to share ideas and test for feedback results in failure to truly understand the market.

2. The Blade Years

This is the period of time when founders have fully committed to making the business work and are preparing to launch through to when they hit the growth-inflection point. This is a bumpy time of highs and lows, during which many founders lose heart or become overwhelmed. They’ve quit their day jobs in order to devote themselves full-time to developing the business, and they’re often not earning enough of a salary to pay their personal bills. Bobby's study shows that this stage usually lasts three to four years, during which revenue is often quite low, if any is coming in at all, showing up as the blade part of the hockey stick curve.

The lack of adequate earnings leads many founders to focus a  great deal of their energy on the quest for investment capital at this early stage, which too many founders think is the only way to fund the development process. They waste valuable time making elaborate pitches to potential funders, which most often fail to impress  because they have no tangible results to point to. And if they do raise significant investment capital, it often puts undue pressure on getting to market, which leads to its own common trip-ups. Hence Hockey Stick Principle #15: raise the minimum amount you need to get to launch; financing is scarce and expensive.

A better method for success is to bootstrap during this period and to develop an alternate stream of income. This frees you to throw yourself into what should be the twin focuses of your energy in this stage: developing the market  you’ve targeted, or searching for a different one,  and simultaneously improving the product or service, so that, by getting the combination of market and product right, you break through to fast growth. Key mistakes made during this stage include spending too much on marketing and sales efforts to try to bring in customers faster,  whether by pouring funds into an elaborately planned publicity push and advertising campaign or setting up an expensive sales operation.

3. The Growth-Inflection Point

This is the wild ride of a time when revenue turns sharply upward. It’s an exhilarating stage. At this point,  you’ve honed your model, and sales are coming so much more easily. Venture firms and other investors may come calling, offering tantalizing deals that will allow you to leverage this growth momentum and scale your business way up. But this stage also poses many dangers; primary among them is scaling up too fast, so that rather than sustaining strong growth many startups crash and burn.

Scaling too quickly has been identified as the number one reason for startup failure. So much has been said about the need to “go big fast,” but too often this leads instead to going bust fast. In this stage, founders must always keep in mind Hockey Stick Principle #51:  don’t spend lots of money to fuel fast growth  until  you’re pouring it into a high-performance engine. The primary job of this inflection stage is to carefully calibrate the growth of your operations so that they are in sync with your growth in revenue. Otherwise, scaling up isn’t really growing; it’s inflating. Too many founders invest too heavily in ramping up staff, purchasing or renting larger office space or manufacturing equipment, and expanding retail space and facilities. Before they know it, their costs have escalated way beyond their continued increase in revenue, and even though they’ve found a good market and are off and running, they’re running out of gas.

4. Surging Growth

If innovative start- ups manage the growth inflection stage well, they will proceed into a stage of continuing acceleration of growth. During this period, entrepreneurs come to many crossroads. Their market is exploding, but so is the complexity of managing and leading a larger organization. Meanwhile, alluring offers to buy the company are often made. One way or another, a founder must grapple with the difficult transition from scrappy entrepreneur to corporate manager. He or she has three main choices: remaining CEO by learning how to further professionalize the business; hiring a CEO to manage the business, most often either then taking on another role, such as heading up research and development or becoming chairman of the board; or selling the company.

Many founders stumble when making the transition to corporate chief and fail to recognize that they must master the requirements . . .  The qualities that were so important in taking the risks to launch the business and in bootstrapping and experimenting with new things are less called on during this time, and  those of a corporate leader become primary. Too many founders fail to appreciate this and neglect to appoint top-quality managers with first-class experience to take charge of the major functions, instead often hiring from within their personal networks and promoting unqualified people from within.

Thanks again to Bobby for sharing his wisdom with all of us.  Be sure to check out his book The Hockey Stick Principles--The 4 Key Stages of Entrepreneurial Success for more details on this topic.

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



Monday, May 23, 2016

Lesson #236: E-commerce Fulfillment Strategies

Posted By: George Deeb - 5/23/2016

E-commerce is one of the digital tech spaces I follow more closely than others, given my natural...



E-commerce is one of the digital tech spaces I follow more closely than others, given my natural love of B2C startups.  In the past, I have written about how to grow your e-commerce company and the best e-commerce platforms for small businesses.  This post dives into the various fulfillment strategies to consider for early-stage e-commerce companies.  To help me here, I solicited the help of Connor Gillivan, an expert in the e-commerce space.  Connor authors an e-commerce blog and is the CEO at eCommetize, which helps e-commerce companies build and manage their online stores.

Defining the Types of Fulfillment

At the end of the day, your goal is to get your product to the customers that are interested in buying it. In certain scenarios, you will be the manufacturer of the product, while in others, you will be the retailer selling other people’s products. There are three main strategies that you can take to move the product to the end customer:

Strategy #1: Self Fulfillment

In this first strategy, you take full responsibility for the shipping and fulfillment process. A customer places an order on your website, you process the order, find the product in your warehouse, attach the shipping label, and give it to the shipping company for delivery. In this case, you either stock your products in your own warehouse or you have enough space in your office where you can run your fulfillment. This strategy also requires that you have a team of individuals solely focused on order fulfillment and physical inventory management. There are many pieces of software that can make the system simpler, but you will still need someone on your team to specialize in the work.

Pros
  • Complete control over fulfillment process
  • Access to larger brands that only offer wholesale purchasing
Cons
  • Extra costs to purchase products, warehouse, and labor up front
  • Can only sell what you have in your warehouse

Strategy #2: Third Party Fulfillment

In this second strategy, you team up with a third party fulfillment company (e.g., Amazon FBA, Shipwire, or Shipstation), so that you are not fully responsible for shipping the product to the end customer once you have received orders through your site. If you are the manufacturer of the product, you make the product and have it shipped directly to the third party fulfillment warehouse. If you are sourcing the product from a variety of manufacturers or distributors, you purchase the products from them in bulk and ship it directly to the third party fulfillment center.

Once the products have arrived at the third party fulfillment center, they become responsible for shipping each product to the end consumer as you communicate orders to them from your website. You are responsible for processing orders through your website and communicating the customer/shipping information to the third party fulfillment company, so that they can ship it to the correct customer.

In this case, you lose the need for someone on your team that will specialize in fulfillment and shipping operations. However, you will need someone who is solely responsible for communicating with the fulfillment company so that everything runs smoothly. Most third party fulfillment companies now have software that can link directly to your online store making the order fulfillment process simple and efficient.

Pros
  • Having fulfillment experts handling your order fulfillment
  • Discounted shipping rates because of third party fulfillment shipping volumes
  • Access to larger brands that only offer wholesale purchasing
Cons
  • Additional costs of storage, fulfillment, etc. dependent upon the third party fulfillment company that you decide to work with
  • Can only sell what is at your fulfillment center

Strategy #3: Drop Shipping

In this third strategy, you work directly with manufacturers that have the ability to ship their products directly to the end customer. This particular strategy makes it so that you never have to touch the product as the online retailer. You are responsible for obtaining the correct product data to list the manufacturer’s products on your online store and they are responsible for shipping the product to the end customer. As you receive orders from your website, you communicate them to the correct manufacturer.

Although it may seem like the simplest option for running your online store, the drop ship fulfillment strategy calls for a greater deal of data management. If you are working with a large number of manufacturers through drop shipping, your team will be tasked with keeping your product’s inventory status updated, communicating with a large network of manufacturer reps, and creating a system to efficiently communicate orders.

Pros
  • Ability to sell products without touching them
  • Ability to have larger inventories or test products until you find the best selling ones
Cons
  • Lower product wholesale discounts and drop ship fees
  • Need to manage inventory feeds from manufacturers you are working with
  • Can only work with brands that have drop ship capabilities

Making a Fulfillment Strategy Decision

All three options for fulfillment can and are utilized by profitable retail companies around the world. Before Amazon had its own fulfillment warehouses sprinkled strategically around the world, they were drop shipping products to the customers. The strategy of fulfillment that you choose to grow your business will very much depend on your short and long term goals.

By weighing all of the factors above, you should be able to make an informed decision on which fulfillment strategy best meets your needs as a growing company. Are you making your own product and interested in distributing it through your website and online marketplaces? If you can afford it, working with a third party fulfillment company may be the best option so that you can focus on continuing to produce new iterations of the product.

Do you have a strong following online already that is interested in a specific niche of products? If you know the products that your customers already want, it may be best to stick to self fulfillment or third party fulfillment, so that you can get access to the larger brands. You can hand pick an inventory you want for your online store, purchase the products, then decide on the best method to fulfill.

Finally, are you a growing online store looking to expand your inventory into new product niches without the initial investment of buying products in bulk? If so, the drop ship fulfillment strategy is a great option to test the waters and move forward with which products sell best.

Thanks again to Connor Gillivan for helping me with this post.  Be sure to follow him on Twitter at @ConnorGillivan for future learnings.

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


Thursday, May 19, 2016

Document Your Processes Before They Walk Out the Door

Posted By: George Deeb - 5/19/2016

Let’s face it, most entrepreneurs are really busy people. They are focused on launching their ne...



Let’s face it, most entrepreneurs are really busy people. They are focused on launching their new products, raising capital or a multitude of other things. And, with the limited number of hours in a day, who could fault them if they let documenting their business processes slip down their priority list. That is, until one of their key employees quits with all that institutional knowledge undocumented in their head, and you are screwed, scrambling to pick up the pieces with no roadmap to help you.

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

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


Tuesday, May 17, 2016

Lesson #235: How to Take Your Business Global

Posted By: George Deeb - 5/17/2016

If your business has seen successful growth here in the U.S., it most likely will see success in...



If your business has seen successful growth here in the U.S., it most likely will see success in other countries, as well.  And, you may want to lock up those markets, before some other company does.  I recently met a startup that had successfully tripled its revenues, largely from the results of a successful international expansion effort.  I wanted to share those learnings with all of you.

PICK YOUR MARKETS

There are 195 countries in the world.  How do you even know where to start?  Many U.S. companies go after the path of least resistance: in other English speaking countries, like Canada, the United Kingdom, Australia and New Zealand, typically in that order of closest to home.  While that is certainly a good strategy, a better strategy is figuring out which countries have the highest demand for your products.  For example, if you are selling into the auto industry, perhaps big auto markets like Japan and Germany may be the best place to start.  Like anything, there will be an 80/20 logic here, where 80% of your international sales will come from 20% of your international markets.  So, carefully prioritize your efforts.

PICK YOUR STRUCTURE

There are many ways to take your business global, with various levels of complexity and investment.  You are going to need to decide between opening our own office overseas, leveraging key in-country distributors or striking channel partnerships with key companies that have access to your target customers, based on your goals and budgets.  And, the solutions you use in one country, may not be the same solution you use in others, depending on the challenge in those markets.  For example, in China, you will need a local company to partner with, to help you navigate the local market.  Where you can, setting up your own efforts, either as a startup or via an acquisition of a local player, will typically exceed the results of piggy backing on the efforts of others.

LEARN THE LOCAL RULES

Every country has different "rules of engagement".  And, when you are getting started, it is often helpful to engage an international expansion consulting firm, that can help you quickly learn all the local laws, regulations, accounting rules, business taxes, government taxes, employment vs contractor rules, compensation rules, privacy rules, etc.  And, don't underestimate the downside risks from things like bribery payments, organized crime and other corruption in various countries, which you never want to partake in, or risk going to jail.  These varying rules can make the difference in deciding whether or not those markets make sense for you.

LOCALIZE YOUR PRODUCT

The product you use in the U.S., most likely will not be the same product you use in different countries.  You will need to think about localizing your product or service for local languages, currencies, laws, etc.  So, make sure your core product has been "internationalized" for each country, before launching it those local markets.

LOCALIZE YOUR FULFILLMENT

You will have to think through all the back office tasks for your business and how it will be different overseas.  Who will be answering the phones (in the local language and during local business hours), how will products be warehoused and shipped, how will you collect payments from customers, how will you process payroll payments, into which bank accounts, who is going to train your local customers, who is going to service local customers post sale, etc.  Often times, it is like building a whole new fulfillment process from scratch.

LOCALIZE YOUR MARKETING EFFORTS

Every country has a unique culture of its own.  And, you need to tailor your marketing creatives into the messaging that will most resonate with the local market and stand out against local competitors (who are most likely different companies than the ones you are competing with in the U.S.).  And, if you are already successfully selling into global companies today, be sure to ask your U.S. contacts at those companies for introductions to their counterparts in the countries you desire to enter.

Anyway, hope you found this high level introduction to the topic helpful.  Global expansion is a really tricky topic to cover is a short post, given all its complexities by country, so be sure to surround yourself with expert consultants, lawyers and other global entrepreneurs that can help you here.

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


Thursday, May 5, 2016

Is Anybody Else Worried About Our Future?

Posted By: George Deeb - 5/05/2016

I am not a classically trained economist.  But, I am well-versed in common sense.  And, my spide...



I am not a classically trained economist.  But, I am well-versed in common sense.  And, my spider sense is telling me something doesn't feel right about our country's economic future.  Tell me if anything below strikes a chord in your life, and if you agree.  Or, if you think I am way off.

THE FACTS

The Rising Cost of Living.  Everyday costs keep going up and up at alarmingly fast rates.  Healthcare insurance alone is growing 20% per year, not to mention the rising deductibles on those policies.  As is the cost of higher education.  I am estimating that I need to make about 50% more in income that I did ten years ago, just to maintain the exact same lifestyle.

Flat Compensation.  At the same time, salaries are not growing anywhere near that fast.  Salaries, if you are lucky, grow at the basic rate of inflation of around 3% per year.

Investments Stagnant.  And, investment returns have been pretty abysmal.  Banks pay close to zero interest.  Real estate is no longer a guaranteed grower.  And, the stock markets bump up and down within a relatively tight range over the last few years, blowing in the winds of a global economic mess.

Outsourced Staffing.  To make matters worse, corporations are biasing  part-time 1099 contractors where they can, to avoid having to pay high payroll taxes and benefits to full-time employees.  Making it harder for workers to find meaningful long term work and affordable group health insurance rates.

People Retiring Later.  And, with rising costs and limited savings, the senior work force no longer feels comfortable retiring as early as past generations did.  Which means, they are not opening up jobs for the younger generation at the bottom of the workforce funnel.

Middle Class Under Pressure.  Collectively, the issues above are starting to squeeze out the middle class, with many families no longer able to make ends meet.  With many having to consider ways of materially lowering their cost base, or taking on multiple jobs across multiple earners.

A Government Underwater.  And, the U.S. government that is drowning in $21TN in debt and huge annual budget deficits.  With no way to reasonably pay for all the crumbling infrastruture improvements needed and underfunded Medicare and Social Security liabilities.  While the people can't afford to pay higher taxes to dig us out of that hole.  Which means defaulting on our debts or printing new currency, will eventually devalue the U.S. dollar, weakening our position within the global economy.

Education Curriculum Antiquated.  All while kids are learning an antiquated curriculum built for a different generation.  There is simply not enough focus on teaching the kids the skills they need for this generation of jobs (e.g., huge demand for technology coders, as an example).

THE IMPLICATIONS

Expensive Housing is in Trouble.  I am already starting to see many of my neighbors talking about moving to cheaper markets than Chicago, or cheaper homes in other suburbs.  And, as people are running out of cash, they need the equity in their homes to cover costs, creating a big demand for rentals that are hard to find.  And, I collectively, think this trend is going to reduce the demand for owning expensive homes, and put a lot of negative pressure on those home prices.

Few Building Wealth.  This generation simply is not saving or building up wealth like past generations did.  Many are living check by check, treading as fast as they can, just to remain in the same position.  And, the parents' generation is no longer leaving a material estate to their kids, making the kids have to work that much harder to fill the gap.

Younger Workers Not Finding Work.  And, the Millennials are having a hard time getting hired, even with college degrees.  Many graduate with $50K in college debt, which you can't write-off in bankruptcy, and no income to pay it off.  Often, living with their parents into their 30's, trying to save costs.

Pending Defaults.  And, at some point, all of the debt people have incurred on their credit cards and home mortgages are at risk of default, as people won't have the means to pay it down, especially as home prices begin to fall below mortgage values.

Kids Not Employable Out of High School.  As many families won't be able to afford the $250,000 burden of sending kids to a good university, the students are going to need to be trained with the right skills to make them employable right out of high school (which they are not today).

Students Look For College Alternatives.  Or, families are now considering other college alternatives altogether, in order to save on costs.  For example, many are considering sending their kids to the best European schools (they teach in English in Germany, as an example), at a fraction of the cost of their U.S. counterparts.

Healthcare Needs Reform.  And, the health insurance companies can no longer break the world into individual versus group plan rates, where the prices are materially higher for individuals.  Too many independent contractors are getting hurt by insurance costs that are twice as high as group plan rates, at the same time corporations are shifting towards 1099 contractors to avoid paying benefits.

Government Needs Reform and Focus.  All while the Democrats and Republicans are in a stand-still in Congress.  More interested in fighting with each other and protecting their own jobs, than doing what is right for its citizens.  I think we need a complete restart here with fresh blood, or a third strong party to help break the log jam.

The Economy and Markets Not on Solid Footing.  The issues above collectively have me feeling our economy is on very shaky ground, regardless what the professional economists are telling us.  Just like we saw the mortgage crisis unexpectedly take down the economy in 2008, I have a very strange feeling that we are staring over the edge of the abyss and nobody is really talking about it.

MY PLEA

It's time to wake up and smell the coffee.  We can no longer keep kicking the can down the road for some future generation to deal with it.  We need leaders that are solving these major problems, and not simply throwing stones at each other across party lines.  We have been given a bunch of second tier candidates to choose between in this upcoming election, because the smartest talent would never want the job.  So, force the candidates to speak to solving our country's real issues at hand, with clearly detailed plans and a bi-partisan approach.  Otherwise, it is not going to be long, before our country is in an economic hole too deep to dig out of.

Please add your additional thoughts in the comments.  And, please share this with your networks.

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


Wednesday, May 4, 2016

The Birth of Crowdfunding Agencies

Posted By: George Deeb - 5/04/2016

I have previously written on the rapid growth of crowdfunding as a financing vehicle for startup...



I have previously written on the rapid growth of crowdfunding as a financing vehicle for startups.  What I didn’t realize, until recently, is that there is a a growing base of agencies that are serving startups that are trying to attract capital through crowdfunding, to help them break out from the crowd of competing companies seeking funds.

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

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


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