Friday, April 29, 2011

Lesson #27: How VC's Define a Backable Management Team

Having a great, defensible business idea in a scalable market is only half of the puzzle to attracting venture capital.  The other half is having a backable management team.  Today we are going to define exactly what that means, in the eyes of a venture capitalist.

The first thing a VC is looking for is domain expertise in the industry you are targeting.  How many years of experience do you have in that industry?  In what roles did you operate that were relevant to your new business?   Or, for tactical positions like CMO or CTO, what other marketing or technology roles have you had in the past, and were they relevant for a startup in this industry (e.g., a Fortune 500 CMO will not understand how to market a startup on a shoestring budget).  While in these positions, what successes can you share, and what failures did you learn from?  And, frankly, they care a lot more about your failures to see how resilient you were and how battle tested you are at getting your business through the bad times (which will always happen at some point).

The second thing they look for is credibility.  Is your business plan well thought out and are your revenues assumptions believable in relation to your industry size and marketing budgets.  So, be sure to re-read Lesson #7 on How to Write a Business Plan.  And, never come across as overly-pushy or too salesy.  The last thing a VC wants to back is a "used car salesman" trying to sell him the Brooklyn Bridge. 

The third thing a VC looks for is passion and energy.  Do you have the fire in the belly to wake up every morning and bust your ass to execute the business plan.  I think it is safe to assume most good entrepreneurs are not lacking in this area, but you would be surprised how many startups come in with unenthusiastic or boring presentations that doesn't get anybody excited, regardless of how great the idea may be.  And, if you cannot get your VC's excited, it is unlikely you will get potential business customers excited in driving revenues and hitting the VC's ROI expectations.

The fourth thing VC's look for are your listening and communications skills.  The biggest mistake an entrepreneur can make is to assume they are the only smart person in the room, and nobody else knows what they are talking about.  Hence digging in an entrenched viewpoints.  Let's not forget a good VC sees around 200 business plans a year, 2,000 plans a decade.  And, most likely, many very similar to your own, in one form or another.  So, they bring a ton of market intelligence to the table, to help you avoid known pitfalls.  It is critical they think you are flexible and will listen to input as needed.  And be prepared, at some point, a VC may make a recommendation to put in a new CEO with more skills than yourself.  So, listen with open ears, as protecting your 65% equity value is a lot more important than protecting your job title.  But, hopefully, you will never give them that opportunity by knocking the cover off the ball the entire way up.

The days of the dot com boom in the 1990's are long behind us.  No longer can a 21 year old with a high level idea on a piece of paper (without even a revenue model) walk into Silicon Valley and collect a $10MM check.  You are much better served with at least 5-10 years of real life work experience, and the relevant lessons therefrom.  And, frankly, a second time CEO, is a much better venture bet than a first time CEO, since that entrepreneur has already learned how to avoid many startup pitfalls and can point to a proven track record. 

That basically narrows the attractive pool of entrepreneurs down to a very small list.  But, there are ways to offset your own lack of past executive history, by surrounding yourself with a smart team of people that are proven experts in their field.  If you are launching a new search engine, and you have a Google engineer on your staff, that will get a VC's attention.  If your startup is dependent on Facebook for successful social marketing, and your CMO is an old Facebook executive, with a lot of relationships there, that will get a VC's attention.  Not to mention, the VC's will be impressed by your hiring skills (finding the best talent) and your sales skills (getting these proven winners to buy into your vision).  This deep team around the management table is exactly what the VC's want, to make sure your business is more than a "one man show".

Entrepreneurs are an eccentric bunch, often flying by the seats of their pants.  Living on the edge between reality and pipe dream the entire way up.  These trailblazers and visionaries are what makes startups so exciting, and potentially, a lucrative investment opportunity for VC's.  But, at the end of the day, a VC is looking for an experienced, credible, passionate, energetic and flexible team more than anything else.  Management teams make or break businesses, and they know good teams when they see them. 

As I have said before, and worth reiterating, VC's would much rather invest in an A+ team with a B+ idea, than an A+ idea with a B+ team.  So, keep that in mind.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Thursday, April 28, 2011

Lesson #26: Designing Sales Incentives to Motivate Your Sales Team

In our last lesson, we discussed how to structure your sales team and procedures.   Today, we are going to tackle the other part of designing a winning sales strategy:  designing motivational sales incentives for your team that accomplish your internal business goals.  So, there are really three pieces to this puzzle:  (i) what metrics do you want your sales team focused on for your business needs; (ii) what incentives will get the salesperson excited about acheiving that goal, while working for your business; and (iii) what is the frequency of paying out those incentives.  We will tackle each of these points below.

You may be thinking that revenue targets are the most logical and easy way to design your sales plan.  And, often times they are.  But, if you simply give your team a sales target, they may not be paying attention to other important metrics like the profit margin on their sales, or the conversion rate as a percentage of leads they are being given.  When at iExplore, we actually were driving our sales team on the latter, since if they were driving gross profit and converting a high percentage of the leads we were sending them, the top line revenues would naturally follow.  So, figure out what key metrics drive your business, and get your team religiously focused around those metrics, which may or may not be revenues for your business.

There is a second piece to this, which is incentivizing the team based on their individual performance vs. the company's overall performance.  There could be scenarios where the company has a bad month overall, but an individual does great, and vice versa.  In my opinion, it is important to reward good invidual behavior, in all scenarios.  So, at iExplore we said that 50% of the incentive would come from individual performance, regardless of company performance, and 50% of their incentive would come from company performance, regardless of their individual performance.  That did a good job of balancing the ebbs and flows of both the individual's and the company's sales cycles.

In terms of the incentive itself, every individual is driven by different things.  Most people like cold hard cash.  But, others may psychologically be better driven by a free vacation or new iPhone or whatever.  Or, maybe they are trying to earn equity options in your business, if available.  It is the job of the sales manager, to figure out what makes each individual tick, and tailor a plan that meets everyone's goals.  I do not think a "one-size-fits-all" strategy is the best.  I typically will set the overall incentive plan based on cash, and use trips or prizes as "bonus" incentives for the sales leader in each sales period, letting the sales leader pick whatever they want from a menu of options, which they had input in designing in the first place.

In terms of the percentage of base salary vs the percentage of incentive income, it really varies based on the complexity of your products and difficulty in hiring replacement staff.  If you are selling something simple, like window washing, most anybody could be trained to sell it.  So, maybe your salesperson has a $40,000 base salary and a $20,000 incentive if they hit reasonable goals.  If you are selling aerospace engineering components with big government contracts on the line (much tougher to find expert staff), you may have to pay that salesperson a base salary of $250,000, with incentives which could double that.  Do competitive intelligence to determine "market rate" for your industry, and plan around that.

In terms of the frequency of the sales incentives, there are plusses and minuses of monthly vs. quarterly vs. annual incentives.  If monthly, the individual will appreciated seeing cash faster, but it doesn't leave any real "hooks" to stay with the company.  The minute they find a better job, they could leave.  On the contrary, an annual plan will set the long term "hooks" (e.g., won't leave mid-year to lose their commissions), but the individual may not like only seeing checks one time a year.

The way to accomplish a happy middle ground is the following.  First, you could have a portion of the plan (e.g., individual-based incentives) paid monthly or quarterly, and the other portion of the plan (e.g., company-based incentives) paid annually.  In addition, if an annual plan is desired, perhaps there is a way for individuals with near team cash needs to take a "early withdrawal" on their annual commission based on performance to date, if there is some crisis they are dealing with at home (e.g,. unexpected medical bills).  The more you work with your sales team to help them acheive their individual needs, the more they will feel that you care about them, instilling long term loyalty to you and your business (which is the ultimate goal).

Worth mentioning, I always like the sales team to have a visual picture of where the company is and where the individual is in terms of their monthly sales goals.  Like a big pie chart on the wall that gets filled in each day the closer we get to the goal.  Or, a daily or weekly sales report by team member, which will create a healthy competition between the team members, and let underperformers know when they need to pick up their pace.

But, the most critical overriding point is: in whatever sales incentive plan you put in place, make sure it works for both the company and the individual.  Nothing will demotivate a sales team faster than an individual working their ass off, and not seeing any fruits for their labor.  And, we all know how hard it is to recruit good sales people, and keep them on staff.  So, think long term, not short term, with your sales team, even in the bad months.

There is no single right answer here. Solicit input and reactions from your team and tinker with it over time to find the right long term package that works for everybody.  Good luck!

For future posts, please follow me at:  www.twitter.com/georgedeeb

Wednesday, April 27, 2011

Lesson #25: How to Structure Your Sales Team & Procedures

Along with your marketing efforts, your sales strategies will make or break the success of your startup, as they are equally critical to your abilities to drive revenues.  Today, we will tackle (i) how best to structure your sales team; and (ii) how best to design internal sales procedures.  Our next post will tackle sales incentives for motivating your team.

There is no one right answer on how best to structure your sales team.  It is largely dependent on the size of your team, the complexity of your product, the size of your average transaction and what works best for your industry.  As a rule, sales teams are structured either as: (i) inside sales teams based in your home office, or outside sales teams working on the road; (ii) inbound call handlers vs. outbound callers; and (iii) geographically split based on regions of the country, or split on other industry-specific verticals (e.g., corporate clients, government clients, university clients). 

The inside vs. outside decision typically comes down to complexity of the product and the average transaction size.  It will be hard to close a $1MM complicated technology sale, without face-to-face contact to educate the client and instill trust in your company. On the other hand, selling a $199 airline ticket can easily be done over the phone, since people are pretty clear on what they are buying and it is a relatively small transaction size.

The inbound call handler vs. outbound callers decision is largely tied to the best marketing tactics for your business.  If you are a big online travel site selling airline tickets, the customers are typically coming to you researching air itineraries on your website, and then calling your customer sales desk with any questions or to book the flight.  On the other hand, especially for products that consumers are not naturally coming to you, telemarketing sales tactics are employed.  And, we all know how annoyed we get by telemarketing calls, especially around election time.  But, sometimes, telemarketing can be tastefully engaged if relevant to a consumer.  For example, "I was doing your neighbor's landscaping yesterday and saw that you needed your flower beds weeded."  Or for repeat clients: "we last washed your windows a year ago, and would like to schedule this year's service?"  Both examples are very tasteful, and should not upset the listener given its relevance to a real need they may have.

The geographic vs. client vertical split decision typically comes down to the size of the prospective market, and the varying needs of a particular industry vertical.  If you are serving 1,000 prospective clients, you could easily split sales efforts around Eastern U.S. sales and Western U.S. sales.  If you are serving 1,000,000 prospective clients, your geographic splits could get down to the city level.  Geography splits work fine, as long as there are an even mix of clients in each region.  But, let's say you are selling products to the entertainment industry largely based in Hollywood, maybe you split your sales team based on film producers vs. television producers vs. gaming producers, all based in Los Angeles.  Or, in another example, let's say you are selling digital video technology, and the needs of a film studio (e.g., entertainment driven ) are different from the needs of a corporate video client (e.g., marketing driven) and the needs of a government video client (e.g., intelligence driven).  In that scenario, different user cases and needs may require expert salespeople just around that user case.

As for designing internal sales procedures, a couple key points.  First, you want your best sales people spending all their time closing sales.  So, often times they may need an assistant to be helping with their cold calling efforts.  The assistant makes the 100 outbound cold calls looking for viable leads, and then hands off the 10 viable leads to the salesperson to close.  A very efficient use of everybody's time, if your budgets can afford it.  If not, the salesperson is making their own cold calls, which may be your only option (but not the most efficient use of their time or your budget).

The other key procedural point is the speed at which you respond to a new lead.  The faster you respond to a new lead, the higher your odds you close that lead, before one of your competitors calls the customer back.  At iExplore, customers would reach out to three or four tour operators while doing their research, and our sales conversion rate was directly proportional to the response time of our sales team (e.g., one hour response closed at 25% rate, 8 hour reponse closed at 10% rate).  And, if it was that dramatic for a four week sales cycle product, imagine the implications for a "real time" sales cycle product (e.g., I need business cards for a meeting tomorrow).

The final procedural point is the frequency at which you follow up with old leads.  I can't tell you how many startups simply deal with new leads and forget to follow up with old leads, or worse yet, forget to follow up with repeat past clients.  It is critical you use some type of CRM to catalog all your leads as they come in, and set follow up schedules for each.  If you have the budgets to afford an expensive product like Salesforce.com, great.  If you don't, often times a simple Excel spreadsheet will accomplish your goal just the same. 

In terms of frequency of the follow up itself, it is directly proportional to the immediacy of the sale.  If a client is calling for a July 1st vacation on June 1st, you better follow up with them in the next day or two, as they need to book their trip quickly.  If a client is calling to book travel for a 2013 family reunion on June 1st, 2011, you can probably follow up with them weekly or monthly given the long lead time before the trip.  But, the key point:  it is critical you set up an operational procedure to follow up with all old leads until they close or go dead, as well as a process for past repeat clients to stimulate a repeat purchase in a reasonable repeat sale timeline (e.g., their once a year summer vacation).

Hope you found this helpful at the highest level.  Our next post will dig into sales incentives to motivate your sales team, which is the other critical piece of the sales puzzle.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Tuesday, April 26, 2011

Lesson #24: How to Choose a Name For Your Startup

Startups are like giving birth to a new baby, including coming up with a new name and personality for the business.  When coming up with a name, you need to keep the following points in mind.

As for the name itself, you really have two roads to consider: (i) choosing an intuitive, descriptive name for your business (e.g., Restaurant.com, Toys R Us, YouTube, Netflix); or (ii) creating a whole new memorable name, not specifically related to your business (e.g., Google, Yahoo, Hulu, Twitter).  If you have tons of money to spend, maybe creating a unique name is the right way to go.  But, for the most of us, starting a business on a shoestring budget, I always vote for a clean and clear name that simply describes your core product offering.  It will take less marketing money to educate a consumer on your business the clearer your name is.  As an example, people will intuitively know Tennis Superstore is a place to go to buy tennis related products, without any other words or marketing message required.  Which is important for consumers with very limited attention spans, getting bombarded by marketing messages from every direction.

Now, there are alternative opinions that a unique name is the way to go.  And, I clearly understand their arguments.  For example, how great it would be for your marketing efforts, if your brand name became the de facto term for an industry.  Instead of saying "look for it on the search engines", you say "Google it".  Instead of saying, "overnight it to me", you say "FedEx it to me".  Instead of saying, "pass me a tissue", you say "pass me a Kleenex".  But, that typically takes a lot of money and a lot of time to build up to that kind of brand position in an industry.

I thought the most clever name for a startup in the last couple years was Groupon.  Because it did both things: it clearly explained their business (e.g., group coupons), and it was a cool and edgy name.  I think their name was as much a part of their marketing success than anything else, as the name was virally spread from friend to friend around the internet trying to take advantage of a special daily deal.  Customers saying "I bought a Groupon", sounds a lot cooler than "I bought a Living Social".

But, coming up with a name, is only half of the chore.  Making sure it is available and non-competitive is the other half of the chore.  More important than the name itself, is making sure your desired name is available for all potential uses and in all potential markets.  So, the first place I start is the U.S. and international trademark databases, to make sure nobody is already using, or has reserved the use, of a potential name in the industry and countries you plan on operating.

The next place I look is the WHOIS records of the domain name registries, to make sure the desired domain name is available in all the variations I may need (e.g., com, .co.uk, .com.au, .ca).   And, to me, a desirable domain name means a clean .com extension in the U.S., since so many people are familiar with .com addresses in the U.S..  So, BrandName.com is preferred to Brand-Name.com or BrandName.net.  Business struggles aside, there was a reason Yahoo renamed Del.icio.us to Delicious.com after it acquired the business (a lot more intuitive for consumers who may have been looking for the site at the latter domain).

But, as we all know, .com extensions are the oldest, and the toughest to find good available names, at least for a low price still owned by the registries.  But, if you can afford it and it is not too expensive, sometimes it makes sense to acquire a domain name from a third party, if it helps you achieve your long term branding and marketing goals.  As an example, I acquired iExplore.com for $20,000 back in 1999.  Although this was a painful short term move, it was a minimal long term investment for building the optimal long term brand for the business (in this case, an online adventure travel company).  The "i" indicated internet based and the "Explore" was the core word we wanted to leverage for global exploration.

That said, if I could have found a better name for $19.99, I would have gone that route.  But, Conquest.com, TheAdventureExperts.com, Explorama.net and BananaPlanet.com didn't fit my desired brand or marketing goals.  Conquest was too "hardcore" and "macho".  People would type "AdventureExperts.com", not "TheAdventureExperts.com".  People would type "Explorama.com", not "Explorama.net".  And, is BananaPlanet a place for adventure travel, fruit or porn?

As a last step, you should do U.S. and international Google searches around your prospective name, to make sure no other competing companies have similar names.  For example, at iExplore, we subsequently found out there were also adventure travel companies called Explore in the U.K. and iXplore in Australia, which created confusion for travelers in the marketplace (which is global online).  So, if different, but similar names are being used in the industry, pick a different name.

Whatever your business name ends up being, make sure it can clearly stand on its own feet: (i) clearly communicating your business line and brand goal; (ii) without violating any trademarks worldwide; (iii) without being too similar to others in the market; or (iv) without being too confusing for consumers to find.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Monday, April 25, 2011

Lesson #23: How to Design Effective Advertising Copy & Creatives

Now that we have learned how to set a marketing plan for your business, the devil is in the details in terms of executing that plan.  This is especially true for the copy and creatives you use in your advertising materials.  Today, we will tackle some dos and don'ts to maximize the success of your advertising efforts.

Let's start with an example print advertisement that we used at iExplore (a sea kayaking trip to Alaska):















The mandate I gave our CMO was to turn iExplore into the "trusted first-of-mind brand for once-in-a-lifetime adventure travel".  And, at the high level, this creative does exactly that.  You certainly get the sense of once-in-a-lifetime from the lone sea kayaker paddling in close proximity to an orca whale and a tag line that said "Come Back Different".  And, you certainly get the sense of trust from the "Inspected by Expert #34" tag.  And, if iExplore has 34 experts, they must be pretty big, and I trust them as a leading player in the space.   We had this same type of strategy behind our online banner ads and video ad creative (I was really pumped when I first saw this video!).

So, as a first time CEO, I was really excited about the prospective results from this campaign.  And, the advertising industry would have certainly guessed the same, as this campaign won a ton of awards for best creatives in the travel industry.

Then reality hit us in the face like a ton of bricks.  This campaign was not selling any trips!!  We were spending a lot of money buying double page print ads in expensive magazines like National Geographic, Conde Nast and Travel & Leisure (and even NYC billboards in Times Square!!), but there were very little revenues to cover the massive costs of this effort.  So, we were hemorraging the cash provided from our venture capitalists. 

Ignoring the fact we were spending a lot of money offline, when we should have been better spending most of this money online, as an internet company, let's study what was specifically wrong with these creatives.   The first problem was the creative size itself.  Buying double page spreads in the major travel magazines was VERY expensive as a startup company.  We would have been much better served with single page, or even half page ads to start, stretching out our budget over a longer period of time.

The second problem was the iExplore name and business was unknown to anybody, and the tag line did not do a good job describing the business.  Instead of an inspirational message like "Come Back Different", it should have been more descriptive about our business, like "Adventure Travel Experts".  It is perfectly acceptable for Nike to use the brand-building tag line "Just Do It", when they were a 20 year old company, and everyone already new them as an athletic apparel and footwear manufacturer.  But, not for iExplore, a brand new company that needed to educate the market on its core business offering.  We thought we were doing a good job explaining the business in the paragraph of copy at the bottom of the ad, but didn't realize that magazine readers turn the page at an average flip time of two seconds.  Nobody was reading the paragraph in two seconds, and we needed to get the message out faster.

The third problem was the biggest of them all.  Where was the call to action??  There wasn't one!!  There should have been a message like "Book Your Trip by December 1st and Save 10% ", or "Free Airfare with Any Tour Purchase by December 1st".  This tells the reader more about the business (e.g., that we sell trips), gives them a special deal (e.g., to save money), and gives them a sense of urgency to make an action (e.g., by a certain date).  We could have easily doubled our revenues from this campaign with more call-to-action oriented messaging.

A fourth problem was the limited frequency of the print ads.  In the travel magazine world, new issues were coming out once a month.  And, it typically takes 6-7 ad impressions before it catches someone's attention to make it actionable.  So, that meant 6-7 months of expensive print ad buying before we would really know the full success from the campaign.  Travel sections of newspapers would have been a much better vehicle, since the ads were coming out daily/weekly, not monthly.  Or the travel sections of the Yahoo or MSN websites would have been even better, since the ads would be running online, and the action is simply "one click away", instead of print readers having to get to their computers to make an action.

At the end of the day, this campaign was a complete disaster, for all the reason mentioned above.  And, to make matters worse, we ended up pulling the campaign after only 3-4 months, which meant that any repeated impressions we were building up towards the 6-7 month requirement, were entirely flushed down the toilet midstream (no pun intended).  Believe me, after that first year at iExplore, we never made those same marketing mistakes again!!  And, we established key disciplines for tracking our marketing ROI on a line-by-line basis, as discussed in our last post.

This is just one example of the things you need to consider when designing the copy, creatives, frequency and placements for your advertising efforts.  The summary is:  (1) startups need to be crystal clear on what they do with as few words as possible; (2) there needs to be a strong, time-sensitive call to action, to trigger a transaction; (3) design your campaign with maximizing frequency in mind, to build up repeated impressions; (4) pick creative sizes that are most affordable to your budget; (5) if possible, make sure the campaign is easily cancellable if not working; and (6) place ads in the medium most logical for your business (e.g., e-commerce companies should bias online advertising).

I hope this post saves you a lot of misspent advertising dollars.  I surely wished I had all that venture capital back, to do it right the second time!

For future posts, please follow me at:  www.twitter.com/georgedeeb

Friday, April 22, 2011

Lesson #22: How to Calculate ROI on Your Marketing Spend

The worst thing an entrepreneur can do is dump a bunch of money into marketing spend, without having the appropriate reporting in place to track the results of such spend.  Although marketing can often feel like a "creative" area of the business, which it is, it is more importantly, one that requires religious "financial" discipline.  In this post, we will discuss how you infuse ROI disciplines into your marketing DNA and team.

Let's start with internet marketing, one of the most trackable mediums in the history of marketing.  Based on ad tracking tags, web server logs and other software, you can track each ad impression, and the resulting clicks, leads and transactions therefrom.  Whether that is search engine marketing, or email marketing, or social media efforts, or affiliate partnerships with third party websites, the data is easily captured.  But, the key is to make sure you are using these ad tracking tools and reporting on each of these inputs.

While I was at iExplore, my marketing dashboard told me data like: 1MM visitors came to my site that month, sourced 50% from search engines and 50% from affiliate partner sites, resulting in 1,000 people contacting our call center to book a trip and 200 actual transctions.  And, more importantly, I could disect my search engine performance between Google, Yahoo and Bing, and even further, between paid search and free search efforts within each.  I also knew that my affiliates like National Geographic were driving more leads and sales than affiliates like Travelocity.  This was very valuable data, if studied and used, to dial up and down my marketing spend online, moving monies from underperforming vehicles to over performing vehicles, to maximize my marketing ROI.

Although it is harder to do, you can also use the same level of tracking on your offline marketing activities.  As an example, if you send a direct mailer, use a unique promotion code that the customer shares at the time of purchase with your call center staff.  If you are promoting a 1-800 number in your TV advertisements, use a unique 1-800 number for each cable channel you are advertising on, or more specifically, each specific program you are advertising on.  In your magazine buys, use different promotional URLs to point your traffic by magazine (e.g., .com/TimeMagOffer). Not all consumers will end up contacting you via these tracking mechanisms, going to your main website instead.  But, a good portion will, and you will be able to make smart interpretations and extrapolations from there.

The overriding point, where you can, is to track each distinct marketing effort on its own stand alone merits, to assess whether or not you want to continue investing in that vehicle going forward.  And, worth mentioning, never start spending your full budget day one.  Take 10% of your budget, test a bunch of different vehicles you are considering, and then invest the remaining 90% of your budget in the best performing vehicles from that initial test.

Then, once you know the profitable metrics for your business (e.g., never spend more than a $2CPM on any online banner ads), you need to religiously live by those metrics.  Only buy ads that fall below that criteria.  And, often times, your desired sites will not allow you to buy committed advertising at a level well below their rate card.  So, in those cases, you need to be really creative when negotiating those deals.  Tell them you don't need to buy committed space at $10CPM, you are willing to buy remnant, unsold inventory at $2CPM, which may be more digestible to them instead of letting remnant inventory going unsold for zero revenues.

If you cannot get the appropriate line-by-line tracking of your marketing investment, then you need to make sure you are studying the overall impact on your business from that aggregate marketing investment.  For example, if you put an additional $1MM in marketing dollars to work in January, what was the resulting incremental lift in overall revenues in the following months and did the incremental profits justify the investment.  But, when you do this, it is critical you are comparing apples-to-apples data.  For example, make sure seasonality isn't skewing your data (e.g., a retailer's big Christmas sales season naturally took up revenues, not the increased marketing). 

And, it is equally important you know your normal sales cycles between the time marketing is placed and the time a transaction actually closes.  For iExplore, it was a three month sales window, and for MediaRecall it was a 6-12 month window (so study the lift in revenues in the appropriate sales window for your business).  But, for long sales cycle businesses, you do not want to keep your marketing running for too long without knowing whether or not it is profitably working.  So, instead of waiting for actual closed revenue data, study inbound sales leads immediately after the marketing period, to ensure the leads pipeline is building up fast enough to justify the marketing investment (based on your estimated and historical sales conversion rates).

Marketing departments are typically run by "creative" types, that don't necessarily understand the "financial" side of the business.  It is up to you, to make sure these financial disciplines are followed to avoid potentially wasting a lot of mis-spent marketing dollars.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Thursday, April 21, 2011

Lesson #21: Setting a Sales & Marketing Plan For Your Startup

Sales and marketing planning are my favorite part of building any company, as they are the key drivers of the company's revenues.  The lack of a solid sales or marketing plan is typically the #1 reason a business fails, as any shortcomings here will result in revenues and profitability falling short of goals.  So, this area requires intense focus for any startup to succeed.

First of all, what is the difference between sales and marketing.  Sales is typically human driven, with a salesperson introducing your company to prospective customers.  These salespeople can either be inside salespeople, residing in the home office, or outside salespeople, traveling to clients' offices.  What drives the ultimate success of your sales plan, is the quality of the salespeople in terms of thier training, skill base, and Rolodex.  So, hiring the right salespeople with the right relationships will make or break your efforts here.  In addition, it is critical to make sure these people are appropriately incentivized with a meaningful commission plan for closing sales and hitting their targets.

Marketing is typically media driven, where an advertisement or other communication is introducing your company to prospective customers. Marketing can be driven via multiple channels, including the internet, social media, word of mouth, print, television, radio, billboards, events and direct mail, to name a few.  What drives the ultimate success of your marketing plan is a smart marketing team that has properly studied your prospective customer demographics, and placed the appropriate marketing messages in front the appropriate media placements where these customers are looking.  So, hiring the right marketing team with proven experience working within your industry and desired budgets will make or break your efforts here.

Most B2B companies are sales driven organizations, and most B2C companies are marketing driven organizations, with numerous examples of companies overlapping between the two.  The reasons most B2B companies are sales driven are three fold: (i) they are usually dealing with a much smaller base of customers, more easily reachable by a sales team; (ii) corporate customers are typically relationship driven, and want the comfort of working with a salesperson that best understands their needs; and (iii) the average transaction size can get very large, often into the millions, which needs the comfort provided from a face to face meeting to close a sale (e.g., the trust factor).  

So, for example, if you are an auto parts manufacturer, your prospective calling list in the U.S. is pretty small, with GM, Ford and Chrysler your primary prospects.  But, as you can imagine, given the size of those companies, tons of auto parts manufacturers are trying to get their attention, since any one order can make or break their business.  And, only a saleperson with solid relationships in the industry can break through that clutter, get the attention of the key buyers and closes those sales. 

The key downside of a sales driven organization, particularly for large ticket orders, is the lead time can be very long before transactions start to close (e.g., 6-24 months, depending on the product).  So, it will take a lot of money to keep the business funded until revenues start driving, especially when trying to break into big Fortune 500 companies, where established relationships and processes are hard to change.

The reason most B2C companies are marketing driven organizations really comes down to one primary reason: media is the most efficient way to get in front of millions of prospective customers.  It would not be practical building a salesteam to call on 300MM Americans.  Media comes in multiple forms and reach, from 500MM unique monthly visitors on websites like Google, YouTube or Facebook, to 100MM households on cable channels like Discovery Channel or History Channel, to 10MM people that drive by a certain billboard each month to 5MM people you can direct mail to the National Geograpic subscriber list to 1MM people that read the Chicago Tribune.  You get the point, lots and lots of different marketing options, based on your desired medium, reach, demographics, frequency and budget.

As a startup, your marketing budgets typically can't afford that thirty second ad on the Super Bowl for $3MM, despite almost one billion people watch the game worldwide.  You need to be much more frugal in your initial spend, looking for cost effective (or even free) tactics.  Especially since you want to test all tactics first, with small budgets, to make sure they are working as planned, before hitting the accelerator and spending a bigger budget.  Here you are talking about doing search engine optimization of your website for free inbound traffic, keyword based advertisements in Google's search results on an affordable cost per click basis, leveraging the powerful word of mouth benefits of social media via Facebook or Twitter, affililate or cross marketing relationships with similar businesses, and PR based communications, to name a few.

The downsides of marketing are: (i) it can get expensive for any budget, so you will need to have cash resources to spend; (ii) the results are not always perfectly attributable to a specific marketing piece, so you may not be able to know with 100% certainty which tactics are working better or worse than others; and (iii) we are living in a world where small budget startups are competiting with big budget brands for the same marketing real estate.

Given the importance of these topics, I will dig into more details in following posts.

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Wednesday, April 20, 2011

Lesson #20: Setting Product & Pricing Strategy For Your Startup

Product and pricing are two of the four big "P's" from your Marketing 101 class.  Your startup will never succeed if you screw up your product/service offering or pricing strategy. 

When setting your product or service offering, you must first do an in-depth study of competing products and services currently in the market place and set a plan on how you will differentiate yourself.  When I was at iExplore, we differentiated on the basis of offering adventure tours, compared to the big online travel agencies selling air, car and hotel reservations.  And, versus other adventure travel companies, we further differentiated based on offering customizable tours leaving on any date versus the normal packaged group tour leaving on set dates.  Given the clients a lot more flexibility in designing their dream itinerary around dates that worked best for them. 

What is going to make your product or service different or set you apart from your competitors?  Is it a core ingredient (e.g., veggie burgers vs. beef burgers, cherry vodka vs. plain vodka)?  Is it a core upsell (e.g., free fries with any burger order)?  Is it a faster technology or more efficient crowdsource?  Is it some feature or functionality that sets you apart, like a past customer reviews database to given clients more confidence in their purchases?  Without a unique differentiator, you are just one of many companies trying to push your story uphill.  The downhill comes with that eureka moment when the customer says, "wow, that is really different and better than what I am doing today".

The perfect example is Google's search technology.  They were not the first search engine to the market, there were several others like Excite, Alta Vista, Inktomi and Lycos.  Remember these guys?  Probably not.  So, how did Google take over the search business?  With a better product!!  When people searched key words, they actually got very relevant results that quickly took them to what they were looking for.  And, how did they do that?  With a new technology that studied the backlinks of third party websites linking to those pages?  If big Expedia is linking to iExplore for "adventure travel" terms, iExplore must bet pretty important for "adventure travel", so let's move them up the list of results.  Or, if 1,000 people are linking to a site using the same keyword, they must be pretty important for that keyword, and more important than the site with only 10 people linking to them.  And, the rest is history as Google's quickly dominated the world wide web.

But, product is only part of the offering; price is the other key driver.  If you are not offering your clients a substantially better value than current solutions, you might as well pack up your bags right now.  At iExplore, we not only offered a unique product in the market, as described above, we offered it at a price point 35% lower than similar products in the market (the exclamation point behind an already terrific product offering).  And, at my other business, MediaRecall, our entire value proposition was largly around price (and speed).  Why spend $10MM on your project, when we can do it for $1MM (in a fraction of the time)?

In determining the right price for your product/service, the first thing to do is see where competiting products are priced today.  And, then set your prices at a material discount, at least to start, to get the attention of your prospective buyers.  If customers are currently spending $150 per hour for a certain service, and you can offer than exactly the same thing for $50 per hour, who isn't going to listen to that pitch?  You are going to save them a ton of money, and make them look like a genius to their boss.  The percent discount is largely driven by the difficulty of market entry in that industry (e.g., big entrenched Fortune 500 competitors), the quantity of competitors (e.g., 100s of companies vs. a handful), and obviously, your cost structure that can profitably sustain those prices. 

Shoot for a minimum of 33%-50% savings versus current competitors, to have a reasonable chance to get the attention of your customers.  Unless you are in a very consolidated industry with a handful of players selling a high frequency product, where a 10%-20% savings could mean a material improvement to their bottom line.  And, if you are a techology or software company, remember you are continually dealing with a "buy vs. build" psychology of your clients.  For SaaS models, price your product (on an annual basis) at 10% of the equivalent "build" price for clients (getting them 10 years of outsourced value for a product that you will continually improve vs. 5 years of built value for a static product they build themselves).

And, on the world wide web, prices are often moving to FREE, with alternative ad supported revenue models.  Why do you think all the newspapers are going out of business?  Because people do not want to pay for day-old content that a user can now find up-to-the-minute on the internet for free.  Why do you think the music industry has been struggling?  Because people do not want to pay $14.99 for a whole album of songs, when they can simply buy the one track they like for $0.99 on iTunes or find it for free on any of the file sharing services.  This trend is particularly true for mobile apps.  In my opinion it is better to offer it for free, for some period of time, to build up mass user adoption and word of mouth, and then implement your revenue model later.  That is exactly what Google, Twitter and Facebook did, and we all know what happened to those companies, dominating the web..

Anyway, product and pricing are complicated topics with tons of variations you can pursue.  But, most importantly, start with your best offering, as it is very difficult to change a customer's first impressions down the road.  Good luck!

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Tuesday, April 19, 2011

Lesson #19: How to Identify your Competition

Webster's Dictionary defines a competitor as "one buying and selling goods or services in the same market as another."  Pretty self explanatory at the high level.  But, I can't tell you how many times executives do not properly assess their full competitive set.  The goal of this post is to teach you how best to not miss any competitor that could get between you and your goals.

I typically start with high level industry research.  Find the major trade association in your industry and see who they are talking about as key players in your space.  Then do Google searches with the same keywords that will be important for your business, to see who is advertising around those keywords.  If those keywords are important to those advertisers, they are most likely directly competitive with you for all, or at least a part, of their businesses.  That should pick up the launched businesses.  But, you should also look in the venture capital funding records at sites like Crunch Base and Venture Beat, as well as as searching patent registrations at the USPTO to see if anything new is in the works, that directly overlaps with your business.

Once the high level research is done, you need to start digging even deeper.  This will include asking prospective customers of your business, if they are aware of any similar businesses in the market.  And, similar businesses could also include tangential businesses that could easily pivot into your space if you are successful.  For example, if you are launching an online restaurant reservation software, competition could easily pop up from tangential players like point of sale register manufacturers (e.g., Micros, Radiant) or other large online businesses in the restaurant space (e.g., Restaurant.com, OpenTable.com, Zagat.com).

Another example includes making sure you think about all players that are aggressively going after the same target audience, even if in very different businesses.  Let's say you are building a fishing website.  In addition to all the fishing websites, you are also competing with magazines like Field & Stream, cable networks likes Sportsman Channel, retailers like Cabela's, fishing gear manufacturers like Daredevil lures and online portals like Yahoo (that may have a fishing content section).  All of these businesses will be putting a lot of consumer marketing muscle to work to own the online fishing space, so prepare for a lot of competition from many different businesses all looking for the same fisherman eyeballs.

Once you fully assess who your current or potential competitors are, then you have to assess their strengths (e.g., customer base, revenue base, cash resources, product offering) and weaknesses to see if you can build a better "mouse trap" within your budget.  Some companies decide not to move forward at this point, because it is simply too much of an uphill battle to win the space, or will require much more monies than are available to spend.  But, if you are confident you can offer a better product, better pricing, better marketing tactics or bigger budgets than your competitors, then "bring it on!"

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Monday, April 18, 2011

Lesson #18: The Right Work-Life Balance for a Startup

Let's face it, startups often feel like an all-out sprint to get your product to market before your competitors do.  That typically means you are living and breathing your startup around the clock, often putting in long hours.  And, you typically can't ever get away from it, even in your limited free time.  Your friends want to talk about it, your best thinking is while you are alone in the shower, you get that great idea while at the gym, etc.  That is all fine and dandy, until you realize that a sprinter can only go all-out for a limited period of time, before collapsing from exhaustion.  So, I prefer to think of a startup as more of a marathon (albeit a really fast-paced marathon), and not a 100 yard dash.  So, like any good athlete, you are going to make sure you set your pace accordingly with the proper work-life balance.

You have to make time for your personal life, to clear your head, and start fresh each day.  You simply can't think clearly if you are continually exhausted, working the midnight oil seven days a week.  Now, this is going to sound completely out of character for a typical startup executive, but why can't you work a normal 8am-6pm, Monday to Friday work week, leaving your evenings and weekends for yourself, if you are religious about your work prioritization and how you actually spend your work time.

Prioritization is the absolute key to solving the work-life balance for any startup. Every minute you spend on non-mission critical items, requires you make up that time in other ways, late at night or on the weekend.  Do you like to sit back and chit chat about last night's ball game?  If so, do it in a minute, not ten minutes.  Do you like to brainstorm ideas with your team.  Fine, do so in a pre-scheduled hour, not an impromptu four hours, tying up your time, and your team's time.  Do you really need to call your phone service to resolve a billing dispute, or can someone on your team do that for you.

I try to prioritize all tasks (for myself and all team members) in a way that will maximize revenues and increase the odds of hitting our business goals.  So, if ten projects are on the list, you have to knock off #1 before you start wasting any time on #10, since your prioritization efforts dictated a higher ROI from those efforts. And, guess what, if you were right in your assumptions, revenues and profits will be soon to follow, and then you will no longer feel you have that "cash burn-out gun" constantly pointed at your head (which is never healthy to any startup executive's peace of mind).

A lot of time gets wasted in startups, particularly from the perspective of reinventing the wheel.  You are not the only startup to ever launch, quite the contrary.  So, surround yourself by proven entrepreneurs that have "been there, and done that" that can be your sounding board on various issues you run into.  Because the odds are, nine times out of ten, that they have already run through the same problems before, and can help you solve it in one hour, not one day.  So, piggyback on their learnings to save you the time from trying to solve that same dilemma from scratch.  And, if you don't directly know people that can help, there are tons of online Q&A sites, like Quora and ChaCha, and business networking sites, like LinkedIn, that may be of use.   If you can free up all those wasted hours, now you have more time to focus on the problems that really matter, issues specific to your business.  And, did I mention, more free time to spend on your personal life.

Also, it is important to avoid the usually time sink a founder experiences: their inability to hand off tasks and key projects to their staff.  You are not doing this all by yourself and you are not the only smart person in your office, if you are hiring correctly.  So, delegate where you can, to get back some much needed time for other things, while at the same time empowering your team and making them feel like they are valued and contributing to the overall success. 

To me, your personal life is the ying to your yang (work life).  You simply cannot have one without the other.  How can you possible focus on your work, if in the back of your head you know you are missing your kid's school play. Or, your marriage is suffering because your spouse feels they never see you.  Or, you just need a change of scenery from a quick vacation to clear the head.  You have to make time for these kinds of things to recharge your batteries and make your work time that much more efficient (the key word to all of this).  And, equally important, you have to encourage and permit your staff do the same, offering flexible work hours or otherwise (in this case, preaching what you practice).

Now, stop wasting time reading this blog and get back to work!  ;-)

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Friday, April 15, 2011

Lesson #17: Pitfalls to Avoid When Joining Someone Else's Startup

Typically an entrepreneur starts up their own business.  But, from time to time, they will see a unique opportunity to join somebody else's startup, either as investing CEO or team member.   There are five areas you need to assess before making that leap: (1) your fit with the founders, in terms of skillset and personality; (2) management control; (3) equity ownership control; (4) board control; and (5) corporate governance control.  I will tackle each of these points in the following paragraphs.

The fit with the team in terms of skillset and personality is obvious enough.  It is important you can get along with your new partners, giving the long hours you will be working together.  So, if you clash in style or personality, it will never work.  And, it is important that you each are bringing a unique and non-overlapping skillset to the table.  So, if the company already has a strong tech leader and operations leader, maybe you bring strong marketing or financial skills to the table, to balance the team.  You don't ever want to be in a situation where job roles are not clearly defined upfront, to avoid stepping on eachother's turf, especially when empassioned founders are involved.

As for management control, let's say you have been made an offer to become the new CEO of the business.  You need to be perfectly clear up front that you have the final decision making authority in terms of business direction, and that the founders are willing to follow your lead, even if it may be in a different direction than the company was currently heading.  This could even include making a change in management, if the CEO believes the founder is not the right person in that position.  That said, you have to do this in a consensus building way, making sure you support any moves with hard numbers that back up your assumptions.  Since the founders will clearly need an education to make a material move from where they may had been heading, with firm and entrenched ideas there.

Equity control is your option, whether you are willing to work with a majority or minority stake in the company.  Your equity stake is typically dictacted by your level of cash investment and importance of your role in the company.  But, if absolute control of the business is important to you, as a new CEO, for example, make sure you invest enough to get you over that 51% threshold.  Or, if economically you cannot get there, put in a mechanic like super-voting shares to make sure no strategic decisions get made without your support.

Same story holds true for board control.  If it is important to you as a new CEO to control more than 51% of the board, make sure at least 51% of the seats around the table are friendly to you and your cause.  And, that most likely means these individuals will not be the founders or their investors to date, which will most likely be loyal to the founders.  So, get good outside board members or new investors that will have your back.  And, worth mentioning, your board voice is typically in line with your equity position.  So, if you want 51% board control, make sure you are prepared to invest enough to own 51% of the equity.

This last piece about corporate governance is the one that people typically forget about, especially in LLCs.  There are scenarios where you may be the strategy leading CEO, with 51% equity ownership and 51% board control, and still not control the key change in control decisions of the company.  The operating agreement of an LLC, or the charter of a corporation, may have special rules in place around changes in control.  For example, it may require the sole approval of a founder for any change in control, who may veto any deal that you are a proponent of.  So, get your lawyers engaged, and read the fine print in the corporate governance, to make sure nothing gets in the way of your long term desires.

I have run both my own startups, and other people's startups, so have learned these valuable lessons first hand.  Good luck!

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Tuesday, April 12, 2011

Lesson #16: The Plusses & Minuses of Virtual Employees

The internet, web video and mobile technologies have clearly made working from outside of the office easier than ever.  And, now, we are seeing more and more "virtual companies" getting staffed with employees located in numerous cities around the country, or in some cases, around the world.  But, is building a a virtual company the best thing for your business?  I believe the "inside vs. virtual" hiring decision really comes down to three points: (1) how critical is it that position be located at the home office; (2) how hard is it to recruit for that position; and (3) are there business efficiencies created by a virtual workforce.

The first point is pretty obvious:  it would be pretty hard to hire a virtual call center manager if the call center employees are all centrally located in the home office.  You can never beat that face-to-face engagement with your staff, especially in a team building or sales-driving environment.  But, the flip side to that, it would be pretty easy to have your outside sales team remotely located in cities around the world.  Salespeople are largely independent and are constantly on the road meeting with clients.   So, no harm if your sales team is virtual, as they typically aren't in the office anyway.

As for ease of recruitment, let's face it, certain positions are easier to fill than others.  If you need a simple web designer, there is a large and fertile pool of prospective employees in any major city.  So, I would try to fill that position locally for any permanent staff positions, for better team building and communications with the rest of the tech staff.  But, if your office is located in Kalamazoo, Michigan and there are very few hard core tech developers with C++ or C# experience, you may have no choice by to hire a virtual tech developer in Chicago or elsewhere, including India where labor rates are a fraction of what they are in the U.S.

In terms of business efficiencies, virtual employees bring a ton of potential economic value.  You don't need to pay rent in the home office to house them, you don't have to pay relocation costs to move them, you have access to lower salaried employees in smaller markets, willing to do the same job for less, etc.  And, there are ways to take this model to far extremes with crowd-sourced solutions over the internet.  At MediaRecall, our secret sauce was a distributed work force of 2,000 digital media professionals that worked from their homes all over the country.  We were able to hire talent at $10 per hour (compared to our clients paying on-site engineers $40 per hour) and we were able to throw hundreds of bodies at a project (getting work done in months, not years with in-house solutions).  In this example, the virtual workforce became our entire value proprosition to clients and was the foundation of our entire business.

Overall, I think the core management team needs to be centrally located, in order to facilitate easier communications between the team.  But, for non-critical positions, that can easily be completed and managed remotely, virtual employees are a great way to go.

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Monday, April 11, 2011

Lesson #15: Hands-On vs. Hands-Off Management of Startups

Startups have so much work to do, that it is typically much better to hire a smart management team, and let them do their jobs in a hands-off kind of way.  That does not means letting them run entirely unmanaged, as you should at least have weekly update meetings with your team, both individually and as a group.  But, it does mean letting loose the reins, once you are sure you and your team are sailing in the same direction.  A hands-off style allows the business to be more nimble, making quicker decisions, and also instills confidence in your team, that you trust them to do their jobs, and they will certainly appreciate not being micro-managed.

This is particularly true when dealing with start-ups, where you are in a race to win market share and client adoptance as quickly as possible.  I always tell my team, I would rather you get it right 90% of the time, and move at light speed on your own, than to get it right 100% of the time, and rely on me for input, which slows down my own work efforts.  Or, said another way, if you can deliver an A- result in one week of effort, that is much better than an A+ result in two weeks of effort, given the diminishing margin of return on that extra 50% of work time.

That said, there are a few times when a hand-on style is required.  The first time while you are still learning the business.  It is critical you have a deep understanding of all aspects of your business, to ensure that all input you are getting from your team makes sense and is justified by your own experiences.  For example, when I was a first-time CEO, I had no experience in running different areas of a business, like marketing, technology and operations.  So, I hired team members with deep experience in these areas, and relied on them to make key business decisions in those areas.  The problem was, their experience only revolved around big companies, not startups which required different skills.  We made a lot of mistakes in those early months, and we could have saved lots of money, had I been more hands-on right from the start, until I had a firm grasp of the key drivers of the business.  You never want to be in a position where you are getting advice from your team, and don't know whether or not what they are saying is the right advice, or at least credible based on your own personal experiences with the business or otherwise.

The second time a hands-on style is required is when things start going wrong, which will require you to come in like a "fireman" with water bucket in hand to put out the fire.  I typically use the three strike rule, before resorting to this hands-on involvement.  The first time the mistake is made, a simple communication and guidance should be sufficient to resolve the problem.  The second time the same mistake is made, a little firmer communication and a warning that the next time it happens, you will have no choice but to get more involved.  Then, after the third time the same mistake is made, you will need to jump in and try to resolve the problem directly.

But, overall, a hands-off management style typically rules the day, assuming you have hired the right team with the right skills to get the job done, and you are comfortable in your own core knowledge of the business requirements.

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Friday, April 8, 2011

Lesson #14: The Role of a Startup CEO

Chief Executive Officer?  Chief Visionary?  Chief Cheerleader?  Chief Salesman?  Chief Funding Officer?  Chief Communications Officer?  Chief Team Builder?  Chief Lightbulb Changer?  Chief Coffee Maker?  Yup, all of these titles apply to the role of a startup CEO.  It is perhaps one of the hardest job to do in the business world, given the wide range of skills required to excel.  This is one of the reasons only 5-10 startups in 100 actually succeed, as it takes a really special person that has the right combination of skills and startup DNA.  In many ways, a much harder job than a CEO of a Fortune 500 company, minus the big salary!!

When it comes down to the core skills required, a startup CEO needs: (i) a clear vision of where the ship is sailing; (ii) a finger on the pulse of the industry and competitive trends, to navigate the ship over time; (iii) solid team management skills to keep all employees sailing in the same direction; (iv) impeccable sales and motivational skills, while maintaining credibility with clients, investors and employees; and (v) to keep the business on plan, on budget and liquid.  I'll tackle each of these points below.

The first two points really go hand in hand.  In order to create the clear vision, you need to have a good sense to what is going on in the industry and with competition.  That is really the first step to building a winning business plan.  It is not enough to say, "we are building a great travel website", as there are tons of travel websites out there.  You must shape the vision in a way it is more unique and competitive than current solutions in the market.  My previous startup, iExplore, positioned itself as a niche killer for adventure travel (compared to the general online travel agencies like Expedia).  And, within the adventure travel sector, iExplore marketed "privately-guided, made to order" tours (compared to the traditional packaged group tours with set itineraries) at a price point 25% less than similar tours being offered (leveraging the cost efficiencies of the internet, compared to brick and mortar agents).  This vision for the business created a unique product in the market place, which consumers ultimately flocked to with over 1MM unique visitors per month coming to the website.

But, the CEO's job is not done setting the initial vision.  He or she must stay on top of those competitive trends to navigate the ship over time.  For example, after 9/11/01, iExplore needed to evolve from a travel agent of other tour operators' trips, into an iExplore branded tour operator of its own in an effort to get more margin to the bottom line during a difficult economic climate.  And, at the same time, iExplore opened up a whole new revenue stream from online advertising, to get the company to profitability.  It is the CEO's job to constantly watch these kinds of economic, industry or competitive movements over time, and to respond accordingly to keep the ship afloat.

Another job of the CEO is to make sure all employees are clear on the vision, and that all staff are sailing in the same direction.  In the iExplore example for adventure travel, you can't have your tech guy building a cruise seller, your operating guy building a hotel seller and your finance guy building an airfare seller.  Everyone is building an adventure travel seller, and the CEO's job is to make sure all staff have contributed in building that vision, so all players are on the same page as to what they are building.  Therefore, the CEO is not only the communicator of the vision, the CEO is the consensus builder for that vision.  You will never be successful if your team does not buy into the vision, or if they feel their good ideas for improving the vision are not being listened to.  Then once everyone is firmly on board, keep them clearly focused on the goal.

Once the vision is set and being maintained over time, now comes execution.  And, one of the key execution requirements for any startup CEO is to be its Chief Evangelist.  This includes cheerleading the staff, from top to bottom, and getting prospective business clients and investors excited about getting involved with the company.  Everyone has been around that infectious personality that lights up the room, and you can't help but be excited by that person.  That is who you need to be.  But, and this is a big but, everyone has also been around that person who you feel is trying to sell you the Brooklyn Bridge.  So, it is important that your sales and motivational skills, are tempered with equally important business judgment and intellect to come across as credible and backable to all parties involved.

Keeping the business on plan, on budget and liquid is a no brainer requirement for any startup CEO.  The CEO needs to set acheivable proof of concept points, and put key managers in place for hitting those goals.  That means building a management dashboard of the key drivers for your business, that are going to dictate its success or failure.  For iExplore, it was all about: (i) driving traffic to the website; (ii) getting those visitors to contact us; and (iii) getting those contacts to convert into a sale.  So, all energy went into driving those three datapoints, with one key manager in charge of each datapoint (e.g., head of marketing drove traffic, head of web design drove contacts, head of call center closed transactions).  Figure out your key drivers, and get the right team members to manage them accordingly.  But, more importantly, you need to be able to quickly identify when things are not going to plan, so you can put new initiatives in place to make up for any shortfall.  The longer you let cash-using problems go unfixed, the shorter your liquidity runway, and the higher odds you will run out of money and potentially go out of business.  So, plan accordingly.

The worst thing that can happen to any startup is running out of capital mid-launch or prior to full proof of concept, that would attract additional capital.  So, it is the CEO's job to make sure those proof of concept points are clear to the entire staff, a reasonable timeline has been created to achieve those points and the company has enough cash (including a cushion) to get to those goals.  The best people to solicit proof of concept input are your prospective investors.  Ask them, "what are you looking for before you would be willing to fund our business?", and firmly focus on hitting those targets.  And, when raising money, always raise more than you think you will need, to leave a material cushion for when things go wrong, as they always do with startups.

There is no single right answer for "who makes for the best startup CEO?", as everyone is different in terms of skills, style and personality, and every business is different in terms of economic, industry and competitive dynamics.  But, the above is a good summary of the types of people that have the best odds for success in becoming a successful startup CEO.

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Thursday, April 7, 2011

Lesson #13: Creating The Right Culture for Your Startup

A company's culture is usually determined from the initial brush strokes of its design.  And, when talking about culture, we are talking about the "softer" aspects of business.  This includes the types of people that are getting hired, management styles, communication styles, work-life balance, incentive structures, etc.  Although there is no one right answer here, I will do my best to summarize a few preferred methods, based on my past experiences.

You cannot have culture without people, and that is where it all starts, right from your initial hiring decisions.  To me, this comes down to an individual's smarts, internal startup DNA and personality fit.  It is critical you find the smartest people you can find, to help you build your business.  I would rather have a smart person that is a quick study and no industry experience, than a marginal industry veteran.  If you don't have the fire power in the brain to think creatively out of the box, which is always required with a startup, then your business will never succeed.  And, don't be afraid to hire people that are smarter than yourself.  Sometimes managers are worried about being made to look stupid by their subordinates.  But, I say the smarter the better, to help raise everyone's skills around the table.

But, it is more than just having smart people around you.  They must also have the right startup DNA.  Someone that is passionate about the product that is getting built and is excited to come into work each day, and put in the long hours required.  Someone that is going to motivate the rest of the team to do the same.  Someone that is an extrovert A-type personality that is going to cheerlead when necessary and lead by example.  Someone that has a great personality fit with their peers, managers and subordinates.  Someone that is not easily rejected, or bring a bad mood to the office.  I always say, "we are all paddling together in a whitewater raft navigating the rushing rapids, and need all paddlers rowing in unison and as fast as humanly possible to survive."

As for management styles, the less heirarchical the better.  Sure there needs to be a clear chain of command, but it is critical an employee's voice is always heard and that they feel their smart ideas are being listened to.  There is no faster way to lose an employee than to constantly shoot down their ideas, or by making them feel stupid.  And, when doing employee reviews, always do 360 degree reviews:  manager reviews employee, employee reviews manager, peers review eachother and employee reviews themself.  This way everybody participates in the process and both manager and staff problems can get addressed.

In terms of communication style, I always prefer open communications with the team.  That means make sure the entire staff, from top to bottom, is always clear on the company's goals, and has regular communications from management, on both the good news and the bad news.  We are all in this together, so don't try to hide anything.  Employees are smart enough to know when things are going wrong, and would rather hear what the problems are, so they can help try to fix them.  And, have the confidence in knowing management "has their back" and isn't trying to hide anything from them.

Work-life balance can sometimes be hard to acheive in a startup environment, when everyone is putting in the required long hours.  But, it is critical you take time every now and then to recharge the batteries.  It is hard to do good work, when you can't even stay awake, or if you are always upset you are not spending more time with your family.  It is not all about working hard.  It is about working smart, prioritizing your efforts and making time for yourself to maintain the proper work-life balance.  This could also include things like flex time or working from home, letting staff members set their own schedules that work for them to meet their personal needs.

When Google was getting started, they even went as far as letting staff members take 20% of their time (one day a week) to work on any personal pet projects they wanted, many of which lead to amazing innovations and the next growth vehicles for the company.  And, don't get mad if staff wants to blow of steam with a mid day video game or trip to the gym.  As long as they are doing the work, hitting their goals and putting in the effort, there is no need to micro manage their hourly schedules.

As for incentives, every employee beats to the tempo of a different drum.  So, properly set incentives on a person by person basis, for what personally drives them.  Some people are motivated by cash, others by equity or others by perks.  Figure out what the magic incentive is for each, and put acheivable performance thresholds in place to acheive such.  It should not be a "one size fits all" discussion.  And, targets reasonable need to be acheiveable.  There is nothing more demotivating than working your ass off and not seeing any fruits from your labor.  So, there needs to be both "company targets" and "individual targets", so employees feel they have control over their own incentive destiny.

This is a high level snapshot of a complicated topic.  But, hopefully it gives you a better sense on how to best set up your business culture right from the start.  As, it is very difficult to change down the road.

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Wednesday, April 6, 2011

Lesson #12: How to Structure Your Board of Directors or Advisory Board

Properly structuring your board of directors and advisory board could be one of the most important pieces of determining the success for any venture.  These are the people you are going to be relying on for strategic direction, or voting on all key decisions.  So, it is important you get this right.

First of all, a quick definition for each.  A board of directors are the people that manage the CEO and formally approve all key decisions of the company.  An advisory board is a less formal group of mentors that have specific industry knowledge, that bring their consulting expertise to the CEO and increase your credibility with potential investors.

In structuring your board of directors, here are a few obvious recommendations: (i) it should be an odd number (so never a voting tie); (ii) it should largely be comprised of parties friendly to you and supportive of your vision (so no battles in the board room or being forced into a non-desired direction); (iii) it should be a manageable number, like 5 or 7 members (so easy to schedule meetings); and (iv) members should bring real value to the story (e.g., specific industry or startup expertise, to help you avoid known pitfalls).

For the not so obvious recommendations, firstly, you should structure your board relatively in line with the equity ownership of the company.  For example, if one investor owns 20% of the company's equity, it would be fair for that investor to have one of five board seats, or a 20% voice at the board table.  Or, vice versa, if you own 100% of your business, you may not want anybody on your decision making board, instead relying on your advisory board for advice and direction.  Secondly, when you have an outside investor involved, it is important there is a mutually acceptable third party board member that has a non-biased perspective on the business (e.g., not a manager and not an investor), who in essence tie-breaks all disputes between management and the investors.  I typically want to identify and nominate that outside candidate (so I know I can trust them), for approval by the investor.  Don't do the reverse, as most likely they will be loyal to the investor.  And, thirdly, you do not want a passive board member, simply showing up at scheduled meetings.  You want a passionate member that you can assign real work to, that is providing real effort and deliverables in between meetings.

As for structuring your advisory board, this is much more flexible and up to you.  You can have as many or as few advisers as you deem necessary to help you grow your business.  But, what is key is, these people need to bring specific skills to the table that you are missing which will be important to the company's success.  And, the bigger the adviser's "brand name" in your space, the better.  This is for two reasons: (i) they are a big "brand name" for a reason, so they have plenty of learnings to share; and (ii) those "brand names" will help get investors excited about investing in your story, as credible references and mentors for the business (e.g., if "brand name" likes it, so should I, as the investor).  That said, it is hard to get the attention of "brand name" advisers, who typically are busy people and may not want to get involved with an unknown CEO or business.  So, where you can, leverage mutual colleagues that can broker that introduction for you.  If there are no known mutual colleagues, approach the adviser directly with an equity incentive for their participation (see more details below).

As for frequency of your board meetings, you should meet with your business based on the frequency of requiring strategic input.  For startups still tinkering with their models, that should be once a month (so monies not wasted for too long).  For more established businesses, meetings should be once a quarter.  Frequency for advisory boards is not really relevant, as they typically do not formally meet.  Instead, you call on your advisers as you need them, with one off questions over time.

The last key consideration for your board members and advisers is to make sure they are appropriately compensated for their time commitment, and incentivized to help you grow your business.  For you and your cash investors, you are appropriately motivated as is, with your material equity stakes.  But, for outside board members or advisers, I would suggest setting aside a small piece of the company's equity to distribute between these key people based on their level of involvement.  Let's say you set aside 5% of the company for these purposes, and your outside board member may get a 1% stake, and your 8 outside advisers may each get a 0.5% stake (in the form of options or warrants).  And, make sure all equity grants have vesting periods, so earned over time invested, and can easily be repurchased or recaptured if things go wrong down the road, in case you need to make a change.

This is a lot to cover in one post, but hopefully you have a better sense to the big picture items here.  Let me know if you have any questions.

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Tuesday, April 5, 2011

Lesson #11: Considering Incubators or Accelerators For Your Startup

One way to help get your business off the ground, is to leverage the mentorship benefits of an incubator or an accelerator.  First of all, a quick definition of each.

An incubator is physically locating your business in one central work space with 10-20 other startup companies, typically all venture funded by the same investor group.  You can stay in the space as long as you need to, or until your business has grown to the scale it needs to relocate to its own space.  The mentorship is typically provided by proven entrepreneurial investors, and by shared learnings of your startup CEO peers.  Examples include Tech Nexus and Sandbox Industries here in Chicago.

An accelerator is very similar, but has some distinct differences.  Your time in the space is limited to a 3-4 month period, basically intended to jump start your business and then kick you out of the nest.  The cash investment into your business from the accelerator itself is very minimal (e.g., $20,000), but your time in the accelerator should largely improve your chances of raising venture capital from a third party entity on the back end of the program.  And, mentorship could be coming from 40-50 entrepreneurs that are affiliated with the accelerator (many of which are proven CEOs and investors looking for their next opportunity or simply helping the local startup community).  Examples include Excelerate Labs in Chicago, and the wildly successful Tech Stars, Y Combinator and 500 Startups in other cities.  Here is a great list of accelerators by city curated by Robert Shedd.

Deciding on whether or not you should pursue starting up your business via an incubator or accelerator largely comes down to your personal confidence in the defensibility of your business model, your execution skills and your fund raising skills.  If you have a credible story and your business is nicely progressing on your own, you probably don't need to be part of one of these programs.  But, if you need help fine tuning your business model or revenue model, or may be a first time CEO wanting to hone your skills from proven peers and entrepreneurs, then this type of mentorship could be perfect for you.

Here are the high level advantages and disadvantages of programs like this.  The plusses are: (i) shared learnings and mentorship (helping avoid typical startup pitfalls and speeding up your efforts); (ii) access to capital, either within an incubator or post an accelerator; and (iii) the PR value and exposure you get from these programs (not to be underestimated).  The minuses are:  (i) they can be distracting at times, with lots of related meetings and events with mentors and investors (getting in the way of focusing on your own project); (ii) they can be confusing at times (getting 10 different opinions from 10 different mentors), so you need a good "filter" on any advice; and (iii) sometimes, sharing space with other companies is not always a plus, especially in long term incubators that may be carrying dead weight of underperforming companies.

Overall, I think these programs are terrific for first time CEOs, that can quickly get up the learning curve with the help of mentors and investors that have "been there, and done that".  Plus, your odds of raising capital are vastly improved given the tight screening processes of these groups, that naturally raise the creme de la creme to the top, from the 1000's of applicants they receive each year.  Competition is naturally fierce to get one of these coveted spots, so make sure you have a fine tuned pitch and leverage your network to help pull some strings for you.

Good luck!

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