Monday, December 19, 2016

Red Rocket's Best Startups of 2016

Posted By: George Deeb - 12/19/2016

Red Rocket gets introduced to hundreds of startups each year, in the normal course of doing business, or via our involvement with FireSta...



Red Rocket gets introduced to hundreds of startups each year, in the normal course of doing business, or via our involvement with FireStarter Fund, TechStars, Techweek, Founder Institute or other startup groups or events.  We wanted to honor the best of these startups that we met in 2016, in Red Rocket's 5th Annual "Best Startups of the Year".  This list is not intended to be an all-encompassing best startups list, as there are many additional great startups that we are not personally exposed to each year.  And, this list is not intended to be only for businesses that launched in 2016, it is open to startups of any age, that they or their advisors had some personal interaction with us in the last 12 months.  The business simply needed to have a good idea, good team or good traction, that caught our attention.  Congrats to you all!!

THE BEST STARTUPS OF 2016 (in alphabetical order):

AirMule (CEO Sean Yang) - B2C P2P express shipping via travelers

Bright (CEO Jeff Judge) - B2B revenue analytics platform for SaaS companies

Brightwork (CEO Josh Carter) - B2B backend development as a service

Bucketfeet (CEO Raaja Nemani) - B2C custom canvas shoes

CarLease.com (CEO Tim Sperling) - B2C online car leasing service

ClassicCars.com (CEO Roger Falcione) - B2C classic car buying marketplace

Cloud Craze (CEO Chris Dalton) - B2B cloud-based ecommerce platform

Collbox (CEO Chad Shuford) - B2B bad debts collection platform for SMBs

CompleteSet (CEO Gary Darna) - B2C marketplace for collectibles

Crowdfind (CEO Jay Sebben) - B2B lost and found platform for venues

Dough/Tasty Trade (CEO Kristi Ross) - B2C investing platform for do-it-yourselfers

Dorm It Up (CEO Shanil Wazirali) - B2C ecommerce for college students

Drivin (CEO Kayne Grau) - B2B used car marketplace for auto dealers

EatPakd (CEO Rebecca Sholiton) - B2C healthy meal delivery for kids school lunches

FitReserve (CEO Megan Smyth) - B2C central boutique fitness reservations

Gesture (CEO Jim Alvarez) - B2B mobile bidding app for fund raisers

Jiobit (CEO John Renaldi)- B2C location tracking wearable for your kids

Keeper (CEO Darren Guccione) - B2B and B2C secure password manager for mobile

OppLoans (CEO Jared Kaplan) - B2C sub-prime consumer lending

Opternative (CEO Aaron Dallek) - B2C online vision testing

ParqEx (CEO Vivek Mehra) - B2C P2P parking spot reservations

PenPal Schools (CEO Joe Troyen) - B2C online global education across borders

PeopleGrove (CEO Adam Saven) - B2B corporate mentoring social network

PhysIQ (CEO Gary Conkright) - B2B human body analytics

PrintWithMe (CEO Jon Treble) - B2C printing stations in public places

Q-BBQ (CEO Michael LaPidus) - B2C fast casual BBQ restaurant chain

Reverb (CEO David Kalt) - B2C online marketplace for musicians

Rewards 21 (CEO Cary Chessick) - B2B employee and customer rewards platform

Rithmio (CEO Adam Tilton) - B2B motion recognition technology for consumer products

Roost (CEO Jon Gillon) - B2C rent storage space from locals

Routific (CEO Marc Kuo) - B2B route delivery optimization platform

Savo (CEO Jason Liu) - B2B sales enablement platform

SkyMedicus (CEO Amy Holcomb) - B2C medical tourism booking

Socedo (CEO Aseem Badshah) - B2B business demand generation from social media

Tempus (CEO Eric Lefkofsky) - B2B data-driven cancer treatment

TenantBase (CEO Bennett Washabaugh) - B2B small office space online brokerage

TurboAppeal (CEO Badal Shah) - B2B and B2C online tax appeal platform

Uchange (CEO Avi Kugel) - B2C P2P currency exchange between travelers

Urban Leash (CEO Lina Pakrosnyte) - B2C dog walking reservation platform

Virsera (CEO John Diefendorf) - B2B gamifying business objectives

Xensr (CEO David Troup) - B2C 3D analytics for sports

ZooKKs (CEO Kishore Kotapati) - B2C ride sharing platform for commuters

And, don't forget to check out the 2012 winners, 2013 winners2014 winners and 2015 winners, many of whom continue to be doing great things.


Congratulations to you all!!  Keep up the good work.  


For future posts, please follow us at: @RedRocketVC

Monday, December 12, 2016

Lesson #252: Marketing ROI--The Metric That Matters Most

Posted By: George Deeb - 12/12/2016

For all you entrepreneurs trying to attract investment capital, this post will be the most important one you read.  If you cannot answer...



For all you entrepreneurs trying to attract investment capital, this post will be the most important one you read.  If you cannot answer the following customer acquisition related questions for your target investors, your fund raising process is over, before it even started.  Below will walk you through the inputs required to calculate the most important marketing metric for investors:  your return on marketing investment ("ROMI").

AVERAGE TRANSACTION SIZE

Your average transaction size will significantly vary based on your product and target consumer.  An ecommerce company selling arts and crafts supplies may have a $50 average order size, and an enterprise software company may have a $250,000 average order size.  For purposes of this post, I am going to focus on the consumer facing businesses.  Average order size is calculated by taking your total revenues in the period, and dividing it by the number of transactions in the period.  So, if you did $1,000,000 in revenues with 10,000 orders last year, your average transaction size is $100.

REPEAT CUSTOMER MIX

It is hard enough to acquire new customers, so it is important you don't lose your old customers.  You always need to be figuring out what percent of your current year transactions came from prior year customers (and improving that metric over time).  So, if you did 10,000 orders in total in the period, and 5,000 came from customers acquired in prior years, you have approximately a 50% repeat customer mix (where some customers may have made their second transaction with you, and others may have made their fifth transaction with you).  You can calculate this based on unique customer identifiers, like client numbers or email addresses in your system.  Anything north of 33% is acceptable, and if anything less, you may have a customer retention problem on your hands (which may spook investors).

LIFETIME VALUE OF REVENUES

If your average transaction size is $100, and your average repeat customer rate is 50%, on average, one customer will drive $100 in year one, $50 in year two, $25 in year three, $12.50 in year four and $6.25 in year five.  So, that is a lifetime value of revenues (often abbreviated LTV) of around $194.  Understanding, the one customer that made five orders in five years, most likely spent $500, but they are the minority, and made up for the majority of the customers that only spent $100 for one order in five years.

COST OF CUSTOMER ACQUISITION

Your cost of customer acquisition (often abbreviated CAC), is the total marketing investment required to bring in one customer.  Let's say you spend around 10% of your $1,000,000 in revenues on advertising; so, you spent $100,000 to generate 5,000 new customers in this example.  So, your CAC is $20 per new customer acquired.  Notice, I did not divide the marketing cost by total customers in the year, I only divided it by NEW customers in the year, as I wanted to get a clean look at my acquisition costs without it being benefited by free customers generated from repeat sales or word of mouth.  Those items are the gravy, if they end up happening.

RETURN ON MARKETING INVESTMENT

And, now, what you have all been waiting for, the key metric that matters most to investors:  your ROMI.  This is calculated by taking your  LTV of $194 and dividing it by your $20 CAC, in this example.  So, your ROMI is almost 10x in this case study.  If you are doing 10x that is pretty terrific.  Most average companies are doing around 5x.  And, companies that can't exceed 3x typically lose money, after subtracting their cost of sales and operating expenses.  If you want to edit this calculation, don't use revenues, use gross profit as your numerator and shoot for a 5x return, understanding most companies will be around 2.5x with a 50% gross margin.

WHAT THIS MEANS FOR YOU

If your marketing investment does not drive a healthy return (5-10x on a revenues basis, or 2.5-5x on a gross profit basis), and does not have a quick payback period for investors (from the first transaction, in this example), you are going to have a really hard time of attracting investors.  And, know going in, consumer marketing for brand new companies, is going to be expensive and less efficient than established companies (e.g., one-third as effective, on average).  So, the sooner you start testing and optimizing your marketing efforts, to start illustrating healthy marketing returns, the sooner investors will start flocking to your business.

Don't forgot, as I have said many times in the past, your proof of concept is more important than your product when talking to investors.  And, having a solid ROMI is one of the key metrics they are going to be focusing on, in determining if you have passed your proof-of-concept threshold. This will make or break your fundraising efforts, so don't reach out to investors until you have identified, tested and optimized scalable marketing techniques which can be accelerated with the use of proceeds from your raise.  Investors prefer to pour gasoline on an established fire; they don't like to start the fire.

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


Monday, December 5, 2016

Lesson #251: U.S. Ecommerce Companies, Beware The Looming Overseas Guillotine

Posted By: George Deeb - 12/05/2016

As many of you know, Red Rocket has been looking for an ecommerce business to buy over the last few months.  We have been doing due dili...



As many of you know, Red Rocket has been looking for an ecommerce business to buy over the last few months.  We have been doing due diligence on over 50 ecommerce companies during this time, and what an eye opening experience it has been.  My overall conclusion is: U.S. based ecommerce companies are going to see a lot of headwind in the coming years, and you better figure out how to defend yourself before the looming overseas guillotine falls.  Here are the details of what I have learned.

PHASE 1:  A QUICK HISTORY, ONLINE RETAILERS KILL OFFLINE RETAILERS

To put this topic into perspective, first a quick history on ecommerce.  After the first wave of ecommerce companies hit the market in the late 1990's, it was clearly only a matter of time before the offline brick and mortar retailers would succumb to death's grip.  Gone go Blockbuster, Borders, Circuit City, CompUSA, Linens N Things and Sports Authority, just to name a few.  Unless the retailers made quick pivots to the ecommerce channel, there was no way they could effectively compete with their huge investments in real estate, inventory and payroll, like a noose around their neck.

And, these trends still continue today.  Don't think for one minute the big chains like Wal-Mart aren't also worried about their long term future.  Why else would Wal-Mart make such a large $3.3 billion acquisition of Jet.com after only one year of launch?  To get them more formidably repositioned as a leading "ecommerce-first" company.  Especially since Jet.com was able to generate over $1BN in revenue run rate after only one year of being in business, with a lowest-price messaging, a title most covetedly held by Wal-Mart over the years.

PHASE 2:  AMAZON REDEFINES ECOMMERCE MERCHANDISING

Amazon quickly learned that there was a lot more product for sale than could possible be designed and managed by one company.  At the end of the day, they realized their core strength was marketing to a huge base of consumers and doing warehousing and distribution in mass.  So, what better to do that open up their website platform to millions of product sellers, both large and small, to basically become a "one-stop shop" for anything and everything on the web.  And, what a move that turned out to be; today, it is estimated that 40-50% of all consumer product searches on the internet now begin at Amazon.com, not Google.com.

PHASE 3:  U.S. BRANDS START TO KILL U.S. ONLINE RETAILERS

With that level of marketing and fulfillment power on Amazon.com, millions of "Amazon Only Sellers" were born in the last few years.  Now, an ecommerce startup no longer needs expensive investments in people, systems, warehouses or marketing; they simply need to design a product (typically manufactured by an overseas partner), get the product over to an Amazon warehouse, let Amazon do their magic, and sit back and collect checks for doing hardly any work.  Literally, two kids in a garage figure out best selling products on Amazon to knock off, from freely available Amazon sales data sources, and they generate $2-$4MM in revenues ($500K-$1MM in profits) in a year or two after launching.

And, that doesn't even talk about about the big national brands selling through national retailers and ecommerce sites today.  Amazon and other big online shopping platforms have embolded them into thinking they can sell products themselves, disintermediating the wholesalers and retailers they have typically relied on for sales.  And, as the product company, now they can undercut the retail price, make materially higher margins than they were before and really turn the screws on the online retailers, who are now starting to see their sales decline with this sales channel shift.

PHASE 4:  OVERSEAS MANUFACTURERS START TO KILL U.S. BRANDS

When I read this article at Internet Retailer (click through all four pages), it pretty much scared the crap out of anyone looking at investing in the ecommerce space.  What it basically said is: with a "customer first mindset" (translated: a desire to get consumers the lowest prices possible), Amazon is romancing Chinese manufacturers to start directly selling on Amazon.com in the U.S.

Why does that matter?  Remember all those U.S. brands and "Amazon Only Sellers"?  Where do you think they are sourcing manufacturers for all their products?  Most of them from China!!  So, what does that mean?  If the Chinese manufacturers start selling direct on Amazon, at the same wholesale prices they are selling to their typical U.S. brand customers, they are going to force the U.S. brands to compete with them at basically a zero percent profit margin!!  Said another way:  that was the sound of the U.S. brands' necks snapping with the fall of the guillotine.

WHAT THIS MEANS FOR YOU

For all of you ecommerce lovers, like me, sorry to sound like the grim reaper here.  But, you better get ahead of this trend, and fast!!  How do you defend yourselves here?  There are many ways:

  • Create more "brand cache" (e.g., pants from Gucci and Levi's cost the same to make)
  • Don't sell commodity products, where price is the only differentiator
  • Focus more on consumer services or consumer entertainment, as harder to replicate
  • Add value-added upsells (e.g, make your money on the popcorn, not the movie)
  • Acquire some of your vendors or manufacturers, to vertically integrate with
  • Joint venture with international manufacturers as their exclusive U.S. marketing partner

So, before investing heavily in the ecommerce space, do your homework!  Make sure the business you are in, or are considering to be in, is not a sitting duck, already starting to feel the stranglehold of your vendors starting to sell direct (e.g., see if they are already selling against you on their own websites or on Amazon).  And, if you decide to move forward, do so with a long term defense plan in place, like the ones listed above.

Each generation of selling products, tries to do it better and more cost effectively than the generation before it.  Unfortunately, for most low-price-driven U.S. consumers, that means disintermediating the U.S. middlemen in what has become a global ecosystem.  Be careful what you ask for (e.g., low prices).  It may just put the entire U.S. retail, ecommerce and brand businesses, out of business for good, with a huge impact to the U.S. economy and the resulting jobs lost. All, but for Amazon, of course . . .  the last-standing fox in the hen house.

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





Friday, December 2, 2016

You Get the Talent That You Pay For

Posted By: George Deeb - 12/02/2016

I get it. Most startups operate on fumes, in terms of available cash resources. So, the natural instinct of most entrepreneurs is to pay...



I get it. Most startups operate on fumes, in terms of available cash resources. So, the natural instinct of most entrepreneurs is to pay as little as they can for most of the expenses in their business. And, I agree with that for most all expense categories, except one: human talent. Building the right team for your startup is the single most important thing you will do in terms of putting your business on a path toward success or failure. You try to cut corners with your talent decisions and you are toast.

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

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


Thursday, December 1, 2016

Thinking of Joining a Family Business? Buyer Beware!

Posted By: George Deeb - 12/01/2016

I have previously highlighted the plusses and minuses of working with family members inside the same company .  But, should a third-part...



I have previously highlighted the plusses and minuses of working with family members inside the same company.  But, should a third-party employee sign up to work for a family-owned and operated business?   As you will read, you better do your research first, to help you avoid a lot of unexpected grief down the road, that can often come from working inside a family business.

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

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


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