Monday, November 26, 2012

Lesson #129: "Productize" Your Business for Maximum Efficiency

In the startup world, "customized solutions" really makes investors nervous, as customized typically means: (i) lots of human involvement (which can get expensive); (ii) difficulty in profitably scaling the business (compared to non-customized technology offerings); and (iii) inefficiencies in your sales and fulfillment teams (reinventing the wheel over and over again).

So, where you can, you need to "productize" your business offering for maximum efficiency.  Instead of offering clients anything and everything they want (because you cannot efficiently be all things to all people), focus on designing core products or services that you can easily sell and fulfill over and over again, without having to reinvent the wheel for each client or sale.  Even if customization is one of your key selling advantages versus competitors, there are ways to offer customization in more efficient ways.

Let's look at an example.  When I was at iExplore, one of the ways we differentiated our tour offering was to allow travelers to customize their vacations to their exact specifications.  In the early days of this business, we would let our customers customize anything and everything they wanted, including their desired destinations, activities, trip length, dates of travel, hotels, etc.  This wreaked havoc on our travel agents, having to source travel services from suppliers all of the world, over and over again.  And, whatever higher prices we were able to get from a highly-customized solution, we were giving it entirely back in terms of much higher fulfillment costs and lower margins.

To fix this, we "productized" our tour offering to allow customers ways to customize their trip, but in ways that made better financial sense for the business.  We did this as follows: (i) we did not offer customization to 225 countries around the world, only the 50 countries that we deemed to be our best sellers; (ii) we did not offer clients any hotel of their choosing, we designed five star "Gold" versions of our trips (staying at hotels like the Ritz Carlton) and four-star "Silver" versions of our trips (staying at hotels like Marriott), picking the best hotels in each price point in such regions; (iii) we created preset itineraries with key activities that would be provided on each trip (e.g., safari game drive at Masai Mara Kenya), with pre-bundled upsell opportunites (e.g., hot air balloon ride); and (iv) we worked with a fewer number of preferred ground operators where the fulfillment process could be fine tuned and we could negotiate the best volume discounts.  We still let the travelers pick their desired dates of travel, which was the most important thing to them.

By doing this, we had taken 90% of the "heavy lifting" out of the customization process with preset procedures and processes our sales team could sell by, and our operations team could fulfill by.  And, at the same time, offered a product that was still largely customizable by consumers, differentiating us from our pre-set packaged tour competitors, but in ways that did not cripple our business.

So, where you can, offer a fixed product or service offering to maximize efficiency in your business, biasing technology-driven solutions over human-driven solutions for maximum scalability.  But, if customization is required, look for ways to "productize" your offering, to help simplify your ability to sell and fulfill these products or services.

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Monday, November 19, 2012

Lesson #128: Try to Kill Your Startup Before You Start

Earlier this year, I had the pleasure of sitting on an investor panel with Joe Dwyer, a partner at OCA Ventures, a good colleague of mine.  I thought he made a very interesting comment, that I told him I was going to steal (with his permission).  He was counseling the startups in the room to "try to kill your startup!". 

My initial reaction was: that is a very strange comment to make to a room full of aspiring entrepreneurs trying to successfully get their businesses off the ground.  But, as Joe went on to explain it, he said "if you have done everything you could have done to kill your startup, and were unsuccessful in doing so, then you are truly on to something that is defensible and worth building."  Which I thought presented very interesting pearls of wisdom.

So, what does trying to kill your startup actually mean?  You need to poke and probe across all areas of the business, looking for holes that could lead to potential shortfallings in the business or which can facilitate potential moves by competitors that will impede your own efforts. 

Any macro level issues?  Industry too small?  Space not of interest to VC's?

Any competitive issues?  Pricing out of line?  Product not as good as others?

Any management issues?  Any weaknesses in the current team?  Is the team economically motivated for the long haul ahead?

Any revenue related issues?  Is there a real business model here?  Can revenues easily scale?

Any sales and marketing issues?  Is your cost of acquisition too high compared to revenues?  Does your lifetime customer value provide compelling economics and repeat sales?  Is it a long sales cycle or a short one?

Any technology issues?  Is it easy replicated by others?  Is it patentable?

Any human resources related issues?  Is it tough to find talent in this space?  Can you afford the talent you will need? 

Any finance related issues?  Do you have enough money to not only build the product, but to test the initial marketing economics?  Is it a small capital requirement, or a major fund raising exercise?  Do you have compelling unit economics, including a high gross margin? 

Any investment related issues?  Is there a logical buyer for this business?  Can a 10x return be easily acheived?

Etc., Etc., Etc. 

At the end of the day, this reiterates a lot of the points we talked about in my Definitive Checklist for Startup Success.  So, pull out your pistols and daggers and start firing away at your startup, much like your competitors will be doing.  If you survive that dog fight, then the hard work of building your business can really begin!!  Thanks, Joe, for pointing us in this direction.

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Tuesday, November 13, 2012

Lesson #127: How to Screen Salesperson Candidates

Back in Lesson #35, we talked about How to Read Resumes and Screen Employee Candidates overall, so I am not going to repeat those points.  But, I do want to specifically drill down on how to screen salesperson candidates, as often times, the quality of your sales team will make or break your revenue stream.  So, keep reading if you are a salesperson-driven seller of B2B products or services.

Here are the key things you need to ask sales candidates (in addition to the generic questions in Lesson #35), to assess if they will be good sellers for you:

Industry Expertise.  A good salesperson can sell most anything, with training.  But, if they come from your specific industry, that would be preferred, as they are materially up the training curve, understanding your industry's vocabulary and needs.

Startup Expertise.  Living within an often less-structured startup environment may or may not work for certain candidates, who may be used to selling within a more formal big company structure.  Make sure they have the right startup DNA for the job.

Enterprise or SMB Sales.  Selling into Fortune 500 companies, is different than selling into small and medium sized businesses, with the former typically much harder and longer lead cycle than the latter.  So, where you can, find candidates that match your target customer markets.

Outside, Virtual or Inside Sales.  Some salespeople are fine working out of their homes, others need comradery with other employees in the office and others may or may not be willing to do the required travel for the job, depending on where they are located or their family situation.  So, make sure what you are offering them is within their interests and skillsets.

Job Hops.  I always get nervous when I see a lot of job changes within a short period of time (e.g., five different companies in five years), especially for salespeople, since they may have been forced out for low sales productivity.  Make sure there is a logical explanation for each move, some of which may or may not be within their control.

Complex or Easy Product.  Selling a next-generation technology is a lot harder than selling a pencil.  Determine if your product is a complex sell or an easy sell, and find candidates with the matching skillsets here.

Support Team or By Themself.  Did the candidate entirely support their own sales process (e.g., cold calls, proposal creation, contract creation, lead nurturing, invoicing), or did they have a team working with them.  Depending on your budget and situation, make sure they are OK rolling up their own sleeves.

Active Rolodex.  This is probably the most important point: do they have an active Rolodex of clients that would be most logical buyers of your product or service.  If you are selling to CMO's, make sure your sales guys have plenty of CMO relationships they can immediately bring to the table.

LinkedIn Connections.  To me, you are not a good salesperson if you are not actively shaking up leads and networking within business social networks like LinkedIn.  Check out their LinkedIn profile to see how many connections they have (hopefully 500+), and connect with them to see if the titles of the people they know are people that would most likely buy your products or service.

Direct or Reseller Sales.  Some salespeople sell client-direct, and other salespeople sell to middlemen or resellers (e.g., the difference between Pepsi or their ad agency).  It is typically best to find salespeople with deep direct sales experience and success, as that is much harder to drive big volumes of business and you know they have the key client relationships needed.

Lead Generator or Recipient.  Some salespeople are hunters, tracking down their own leads via cold calling.  And, others are the beneficiary of leads from the marketing department, the website or an administrative cold caller.  Find the candidates with experience and interest in "dialing for dollars" on their own, if that is all your budgets can afford.

Annual Sales History/Average Ticket.  Probe on their past sales experience in terms of sales per year to see if it aligns with your own needs for this position.  But, also drill down on the average ticket of their past products sold, as selling one contract for $1MM is not the same amount of work/productivity/success as selling 10 contracts at $100K each for the same million dollars. 

Exceeded Past Quotas.  The proof is in the pudding.  Ask them their past sales quotas and how often they missed, met or exceeded such levels.  So, if their quota was $1MM a year, they better have been selling in excess of $1MM a year.

Team Management Experience.  If your company is experiencing rapid growth, a good salesperson hire today, may quickly evolve into a sales manager of a team of salespeople down the road.  So, inquire if they have interest or past experience in this regard.  But, you have to be clear, their #1 job is driving personal sales for at least the first year.

Technology Experience.  Are they used to using a sophisticated tool like Salesforce.com as their CRM.  Or, were they simply managing leads in an Excel spreadsheet.  Make sure their technology desires and past skills, align with the tools you will be providing to them.

Compensation/Commission History.  Make sure your compensation package aligns with their needs.  If you are offering a $80-$120K base salary (the normal range for a good salesperson), compare that to what they were making at past jobs, to make sure it covers their current lifestyle.  Same, thing for total compensation including commissions.  If they are used to living on a $250K all-in package, they won't stick around if they are only making $150K with you.  And, the last thing you want is heavy turnover in your sales team.  So, critical you get this right.  And, where you can, offering equity in your startup, may be just the right incentive to pull a rock star sales guy out of their current job.

Have Them Sell You Something.  Nothing demonstrates good sales skills better than having them sell you something.  This could be something from their past jobs, or a hobby of theirs, or even your own product with no training just to see how they would approach it.  Particularly assess their listening skills, and ability to pull useful information out of you.

Speak To References.  It is critical you talk to their past sales managers, the people they directly reported into, who can speak to the candidate's abilities in driving sales and exceeding quotas better than anyone.

Hopefully, this list has provided you with the right questions to ask your sales candidates during the initial interview process, to ensure you have the best chances of assembling an all-star sales team for your company.

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

Thursday, November 8, 2012

Lesson #126: What Startups Need to Secure a Bank Loan

Back in Lesson #49, I talked about How to Get a Bank Loan.  And, as you remember, I was quite bearish on the prospects of early-stage startups securing financing thru traditional banks, given their stringent lending criteria.  But, for those of you that can meet those requirements, there are traditional and non-traditional banks that could be a good source of capital for you.  In this post, I will summarize what it will take to secure bank financing through both of these channels.

To help me with this post, I reached out to my colleague Mike Kohnen, the head of the Midwest Region for Silicon Valley Bank ("SVB").  SVB is a "non-traditional" bank, with deep expertise in serving startups, particularly in the technology space that many of us operate.  As you will read, SVB is very "startup friendly", and often can do loans for rapid growth, high margin companies, even if they are losing money and without requiring personal guarantees or other forms of collateral or restrictive convenants.  This was a breath of fresh air to learn.

Below are the key things you need to think about to secure loans from both the SVB's (non-traditional banks) and traditional banks of the world (biasing your local community banks over the big national banks where you may have a higher odds of success):

Industries.  SVB specifically focuses on technology and life sciences.  But, traditional banks are often generalists, for most any company's needs.  Traditional banks can often prefer the retail, restaurant and asset intensive companies, that the traditional VC's don't like to fund.  The reason being they have tangible assets to secure their loans.

Management Team.  Any bank is going to be looking for a strong management team.  Preferably one with deep experience in the company's industry and a proven track record of startup success.  SVB is particularly strong in assessing team's best-suited for startups, given their sole focus here.

Outside Investors.  Outside investors are not required.  That said, having funding, or the potential of funding, from big name venture capital firms certainly doesn't hurt.  Especially if those firms have a long history and proven track record of working with the bank.  At SVB, outside investors are typically required for longer-term loans, but not for everyday working capital needs or near term growth capital, provided there is a clear path to repayment down the road (e.g., high odds of venture financing down the road or a likely path to a cash flow positive operations).

Age of Company.  SVB doesn't care how old your company is, they are investing in your credible projections for high growth in the sectors they focus in (e.g., technology, life sciences).  But, all traditional banks will most certainly want to see a couple years of history and financial statements, before approving a loan, since they are going to be looking for sustainable cash flow to repay that loan.

Revenues.  As I mentioned, SVB is looking for material, recurring and defensible revenues to be credibly acheived in your projections, but does not require a big base of historical revenues.  Most community banks are going to be looking for $1-$3MM of recurring revenues first.

Growth Rates.  SVB is looking for hypergrowth (25%-50%+ per year) from high gross margin businesses (50%-90%), where the technology is already built and execution of the growth plan has begun.  Most traditional banks are afraid of too rapid a growth plan, given the additional risks that imposes on the predictability of revenues and cash flow streams, with which to repay loans.

Profitability.  At SVB, profitability doesn't matter for early stage businesses, as they understand investing in growth may require material startup losses.  Profitability becomes more of an issue for them for later stage startups, to ensure the unit economics of the business are solid, and the company is starting to produce a profit as it scales.  All traditional banks are going to require a history of profits to ensure their loans get repaid.

Debt Ratios.  At SVB, they are not focused on debt ratios in early stage startups, but do start to focus on them for later stage startups.  Most banks will want to keep your debt-to-capital ratios below 50%.

Coverage Ratios.  For later stage startups, most banks are going to want to see a plan where you are driving at least 1.25-1.50x of EBITDA in excess of your debt service costs (e.g., any principal and interest payments owed).

Personal Guarantees.  SVB does not initially lead with requiring a personal guarantee.  Personal guarantees will only be asked for, if your credit approval is "on the fence" and the personal guarantee will help to approve the loan.  Most traditional banks are going to require a personal guarantee from the founders, to back up the loan in case the business cannot meet its obligations.

Securable Collateral.  SVB does not require loans to be secured by assets, although adding collateralized assets can often be used to help make the credit decision easier.  They understand the enterprise value of its tech startups is often tied up in its intellectual property.  But, most traditional banks are going to look for whatever assets they can secure (e.g., accounts receivable, real estate, equipment).  Banks will traditionally lend up 80% for accounts receivable, 50% for inventory, 60-80% for property/plant/equipment and 50-80% for real estate.

Interest Rate.  Interest rates vary based on the types of the loan.  Lines of credit can be 5%-7% (prime plus 2%-4%) for interest only loans.  Traditional banks can be a bit more aggressive here, since they have all the personal guarantees and securitized assets to protect them.  Longer term loans (e.g., 3 year notes) can be a little higher than this, given the higher principal repayment risk.  As a comparison, non-regulated venture debt funds (e.g, Western Tech, Hercules, Oryx Capital) can be in the 10-15% range.

Timeline to Repayment.  Lines of credit are typically set up for 1-2 years in length (the riskier your business, the shorter the term).  And, term notes are typically in the 3-5 years length (remembering term loans will require outside venture capital at SVB).  But, once you raise capital, getting a term loan on top of the equity, can be a unique way to turn a $3MM equity financing into a $5MM debt and equity financing, without diluting yourself for that extra $2MM raised from the bank.

There are many nuances to the above (e.g., variances between term loans, lines of credit, asset-based lending, factoring, equipment leasing), so don't read the above as set in stone.  But, hopefully it helped you assess whether or not your business is even close to being credit-worthy in the eyes of both traditional and non-traditional banks.

If you have any questions from here, Mike Kohnen at SVB has made himself available to learn more.  Mike can be reached at 312-704-9517 or mkohnen@svb.com.  But, please don't contact Mike unless you reasonably believe you have met the above criteria.

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