Tuesday, October 17, 2017

Lesson #278: Entrepreneurs Mellow & Mature With Age

Posted By: George Deeb - 10/17/2017

I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book busin...



I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book business in college and launched my first venture capital backed startup -- an adventure-travel company -- in my 20's.  And, my entrepreneurial endeavors continue today. I'm in my late 40s, running Red Rocket, looking for companies to buy and advising hundreds of early-stage businesses. 

Given this winding road of past experience, my approach to managing businesses today is very different than when I was younger. The experience I now bring to the table has materially mellowed me as a leader. But, I didn't have that background or that perspective when I was younger.

EXPERIENCE COLLECTS WISDOM

I'm no longer a freshly minted CEO trying to figure it all out and making a lot of mistakes in the process. Decades of battle scars have sharpened my business thinking. With that hard-earned experience, I've accumulated years of learning. Not much thrown my way today is new. Chances are, I've already seen some version of it in the past. I simply dust off the old playbook and adjust from there, without having to think about the challenge as a first-time obstacle.

WISDOM DRIVES CONFIDENCE

Business decisions are like anything in life: The more you've done it, the more comfortable you get. With that comfort comes a sense of confidence that you're headed in the right direction. First-time entrepreneurs often lack that insight and second-guess their paths. Tom Brady didn’t become the greatest Super Bowl-winning quarterback overnight. It took years of practice, memorizing playbooks and logging game-time experience. Those combined effects propelled him to success, and he's now one of the most confident quarterbacks in the game. Entrepreneurship is no different.

CONFIDENCE LEADS TO EFFICIENCY

The better you know your subject matter, the more efficiently you can execute your plan. I don’t necessarily need to stay up all hours of the night trying to figure out how to do something. I can make decisions faster now, and I know how to best invest my time. I don't get bogged down in the weeds. I've discovered what actions lead to the maximum ROI on my time, research and energy.

EFFICIENCY THRIVES ON DATA

In the old days, I'd get all excited about the features and functionalities of the product or service I was building. Today, the product doesn’t matter so much. I'm more focused on the economics around that product or service. What is my average ticket? Gross margin? Repeat sale rate? Churn rate? Cost of Customer Acquisition? Lifetime revenues? Return on marketing investment? Without solid business economics, the rest is just noise. I've become increasingly data-driven in my decision-making. I'm always looking for the profitable levers that I can pull to help scale a business.

DRIVEN BY A WICKED SMART TEAM

Age has taught me I'm not in this battle by myself. Surrounding myself with the smartest people I know will also make me a more effective leader and executive. I'd go so far as saying I hope my direct reports are a lot smarter than me -- and no, that doesn't intimidate me. So many young entrepreneurs need to feel as if they're the smartest person in any room. I empower my team members to do their jobs, and then I get out of their way. I don't need to micromanage every one of their decisions as I did when I was younger.

WHO KNOWS NOT TO PANIC

Most important, I no longer panic when things start to go wrong. Many first-timers sound the alarm early and often. That's doubly unfortunate because panic typically creates unnecessary chaos and stress right when an organization needs to be its most focused on solving the problem at hand. Take a breath. It all will work out in the end.

IN SUMMARY

Here's my message to all the first-time entrepreneurs: gather up experience (directly or through mentors) to help bolster your confidence and help make you a more efficient, data-driven decision-maker who's comfortable leading a team of wicked-smart and empowered executives. And for goodness sake, don’t panic when things start to go wrong. There's always a logical fix.  If you follow this guidance, you can stop pulling your hair out in the wee hours of the night. Instead, you'll get that time back and can transition to living a well-balanced life -- all while watching your bank account grow along with your thriving business.

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



Monday, October 9, 2017

Lesson #277: Revenue Share Loans

Posted By: George Deeb - 10/09/2017

I recently met Benji Taylor Jones and Jim Verdonik, the crowdfunding team at Ward and Smith (a leading law firm in Raleigh) , who introd...



I recently met Benji Taylor Jones and Jim Verdonik, the crowdfunding team at Ward and Smith (a leading law firm in Raleigh), who introduced me to a new type of loan that I had never seen before, called a revenue share loan. Apparently, revenue share loans are being popularized by crowdfunding – especially in offerings to both accredited and non-accredited investors in Regulation CF and state crowdfunding offerings.  Let's learn more, to see if this is a valuable financing vehicle for your business.

WHAT IS A "REV SHARE" LOAN?

A revenue share is a loan that is paid back over time by the borrower "sharing" a percentage of its "revenue" at regular intervals until it has returned to the lender a fixed return.

For example:  let's say a local brewery needs $100,000 to expand (amount you can raise is capped at $1MM per year).  The business borrows $100,000 from investors with a promise to return to them a fixed amount (say, 1.5x the amount loaned) over time.  The business then pays off the loan by paying investors a percentage of its revenue (whatever is a comfortable amount for your business, say 5%-10%) in periodic (i.e., monthly or quarterly) installments until the fixed return (in this case $150,000) has been met.  As an investor, you would receive your pro rata share of such payments based the amount of money you loaned the business.  The business's obligation could be open ended (meaning the loan remains outstanding until the stated return is met), but more often it might pay the return back within a specific time window (say 3 to 5 years, which may also require the business to make a "balloon payment" at the end of that period if there is any shortfall).  The shorter the length of time the company takes to fulfill its obligation -- the quicker the payout, the higher the rate of return (ROI).  So, investors "hit the jackpot" on loans that have a five year maturity date if the company repays the loan in three years, because revenue increased faster than the company projects.

Revenue share arrangements have lots of labels– they can be called a "revenue share loan", a "revenue share note",  "revenue share agreement," "revenue share interest" or replace "revenue share" with "royalty" in all of the above.  But whatever it is called, a "Rev Share" (as Benji and Jim like to coin it) is a "security" and that makes it subject to federal and state securities regulation.

Rev Share is rapidly becoming a popular choice for companies using "investment crowdfunding" exemptions to access capital.  Crowdfund Capital Advisors recently released data focusing on the "small but significant group" of companies utilizing Rev Share to raise capital under Regulation CF.  Picking up on this trend, Startwise.com, the newest FINRA approved Regulation CF platform, is specifically targeting Rev Share, allowing anyone to invest in businesses for as little as $100.  LocalStake has been featuring Rev Share for the small businesses it helps raise capital for several years.  But Rev Share isn’t a new concept.  It has been used in the oil and gas industry, real estate and film and music industries for years.  Franchising, and even share cropping, are other forms of Rev Share that long preceded Ccrowdfunding for other business startups.

WHY ISSUERS SHOULD LOVE "REV SHARE" LOANS?

Crowdfunding is popularizing Rev Share, because many retail investors prefer an immediate monthly or quarterly investment return to waiting five to ten years for an equity investment to hit a home run.  Every dollar an investor gets back in monthly payments reduces investor risk.

It has the potential to be a great win-win for investors and small businesses – particularly those businesses that are close to, or already have a history of, producing revenue.  Take our brewery example, as an investor if you know that you basically get a penny of each beer the brewery sells each month (or sometime like that), then it's not hard to imagine where you will go for happy hour on Friday afternoons; whether you might buy that extra round for your friends while you are there or where you recommend your neighbor buy the keg for the next Labor Day cookout.  This makes it great for businesses with products to sell with relatively high margins and those with repeat customers (think food, booze, software).

Rev Share creates an incentive for investors to buy a company's products and services and to become marketing ambassadors for the business, which in turn builds revenue the company needs to repay its loan.

THE TOP 10 BENEFITS OF "REV SHARE" LOANS FOR CROWDFUNDING:

1. Rev Share is NOT equity.  Investors are not buying any ownership interest in the business.  Investors who purchase Rev Shares have no rights to vote or control management.

2. Rev Share investors are creditors, not shareholders or owners.  Thus there is no "messy cap table" as a result of crowdfunding.  Once the promised return is paid, the obligation is cancelled and any contractual relationship between investor and the business is terminated.

3. Rev Share is NOT dilutive.  Rev Share does not dilute the ownership, control or economic interest small business owners (and their core investors) have in the business.

4. Rev Share avoids setting a "valuation" on the business.  The company does not need to set or negotiate a valuation of its business to sell Rev Share.  

5. Rev Share is offers investors liquidity and immediate ROI, assuming the business is close to or producing revenue.  The quicker the obligation is paid, the higher the ROI.

6. Rev Share does NOT require an exit strategy.  Most small businesses considering investment crowdfunding are run by owners looking to grow the company long-term and stay true to the mission that lays at the core of their business.  They are not looking to have an exit (by selling the company or going public sometime soon).  With Rev Share investors do not need to wait for an exit to earn ROI.

7. Rev Share reduces default risk.  With a Rev Share the amount a company owes each measurement period varies solely based on the amount of revenue it receives.  This reduces the chance of default when compared to traditional loans where the borrower must find cash to service set interest payments on a regular basis or risk default (and the bad things that accompany missed payments) irrespective of how it business is doing.

8. Rev Share is  based on projected cash flow and is good for companies with seasonal or variable sales.  Since Rev Share is based on projected cash flow, it is a really interesting alternative for companies that experience seasonality in their cash flows.  During months with higher revenues, they can repay more of their debt.  On the flip side, when sales are slower, their repayment would be less.

9. Rev Share has benefits when compared to traditional bank financing.  While it's true that the cost of this kind of loan can be more expensive than traditional bank financing (i.e., the implied interest rate paid to investors is higher than what a bank might charge), many small businesses that are good Rev Share candidates are not ideal candidates for bank financing.  In addition, a business using a Rev Share typically avoids bank requirements for collateral, personal guarantees, security interests on assets and other financial covenants.

10. Rev Share is stackable.  You can combine Rev Share with other types of financings to fund a single project.  For example, a business could raise capital through an accredited investor equity offering, a secured bank loan or equipment financing loan in addition to a Rev Share offering (if the other investors and bank permit).

Crowdfunding is mostly about giving ordinary people the chance to invest in businesses (and products and services) they love.  Rev share builds brand loyalty and incentivizes customer-turned-investors (who are already committed to the business) to buy more products and services and to encourage their friends, friends, neighbors and colleagues to do the same.  This in turn increases the company's revenue and, potentially, allows the company to pay the loan faster and at a higher ROI for its investors.  So, when all the stars align and things work as planned, Rev Share is an optimal solution for companies seeking capital and customers-tuned-investors looking to support the businesses they love while having access to a relatively quick and decent ROI.

WHAT TYPE OF BUSINESS IS A GOOD "REV SHARE" CANDIDATE

The business attributes Benji and Jim look for when they recommend Rev Share deals are:

Either track record of having revenue or certain near term prospects so that investors will start getting money back within a few months.

Companies that are or soon will become profitable.  You can't repay debt from revenue that you have to spend to pay your operating expenses.  Revenue growth without profit growth can cause borrowers to default, because their monthly repayments increase at the same time their other expenses are increasing.

High margins hold the potential for profitability, but that's only true if management controls expenses.  So, the best Rev Share candidates are business where expenses don’t grow as fast as revenue.

Projections for high revenue growth rates enable companies to repay their loans from the faster growth they generate from the loan proceeds.

The business can make a good case that every dollar invested in marketing or expanding production has historically resulted in multiple dollars of additional revenue.

Benji and Jim have developed financial modeling tools that they can use to help you set interest rates and projected repayment installments based on different terms you can consider offering investors, to help you determine if this is a good road for your business.  But, in a quick example, let's say your business is planning to grow from $1MM in revenues today to $3MM to $5MM to $7MM in the next three years.  If you raised the $1MM cap, meaning you need to repay $1.5MM (1.5x) within the five year cap, a 10% Rev Share would repay $300K in year one, $500K in year two and $700K in year three, for a total of the full $1.5MM.  Leaving you a two year cushion, in case things don't go to plan, which they never do.  And, don't forget, you can structure this with a lower Rev Share (e.g., 5%, and set up for a balloon payment in the final year), if more desirable to you to "push the can down the road", understanding the risks to cash flow in that last year.

THIS SOUNDS TOO GOOD TO BE TRUE, WHAT'S THE CATCH?

Well, there are few challenges with Rev Share:

1. Repayments can slow a business' ability to reinvest in long-term growth compared to equity. Selling equity promotes faster growth because there is more money to reinvest in growth every year (because you are not repaying debt installments).

2. Paying investors is an ongoing expense and headache.  It also requires sharing periodic revenue numbers with many people.  This info may leak to competitors and customers.

3. In an LLC or other pass through entity, owners will be taxed on phantom profits used to repay the loans.  Not a problem with equity.

4. Future lenders may be unwilling to make new loans to the company while the Rev Share debt is outstanding.

5.  Let's not forget, this is debt, and will default the company if it is not repaid.

CAN YOU RAISE "REV SHARE" FUNDS OUTSIDE OF CROWDFUNDING?

Rev Share is absolutely an available alternative to any kind of investment (not just crowdfunding) – the terms may get impacted by the typical goals of the "class" of investor and the degree to which it can be marketed to them.  For instance, Benji was just talking to a company that was looking at a form of Rev Share to use for an angel round.  Angels typically have higher ROR objectives than the crowd – so the structure may need to target a higher payout (3x to 5x) and the question becomes whether there is sufficient margin to reach that threshold.  So, it becomes a numbers game and whether the deal is marketable to specific types of investors.  But, practically and legally, there is no reason you cannot use a Rev Share in a traditional offering or combined with another offering (e.g., like combine Rev Share with a little less equity than you might offer in the normal angel deal).
This product is so new, that there is a lot of education that  needs to go on with all types of investors in this area. 

INVESTOR CONSIDERATIONS

Investors also should recognize that there are always risks associated with any kind of investment, and particularly investments in small businesses and startups.  There is no guarantee that the business you love will actually continue to operate successfully or derive sufficient revenue to repay your loan.  Many of the things that might be appealing for companies about Rev Share cut the other way for investors.  For instance, unlike equity, Rev Share investors do not have any voting, economic or management interest in the business.  Although they are creditors, they typically do not benefit from personal guarantees, security interests, financial covenants, or other restrictions that protect banks or institutional investors.  Often Rev Share loans can be subordinated to other borrowings by the business.

Although Rev Share could be an attractive diversification strategy and offer the opportunity to support the businesses you care most about -- it is important you consider all of the terms being offered by the company, including whether the company is generating revenue, to minimize your risk of not getting paid back and maximize your expected return.  You should consult your personal tax, accounting and legal advisors before making an investment.

LIVING TOGETHER AFTER THE DEAL CLOSES

Raising capital through investment crowdfunding is complicated.  Businesses need to be prepared for added regulatory and compliance costs, as well as the distractions that accompany taking investments from the "crowd".  Management must provide information and respond to these investors, even if they are not "owners" of the business.  Businesses utilizing Rev Share must manage the payout process carefully.  Rev Share has a more complex tax impact than say, straight debt or equity, due to the variable nature of the installment payments.  Businesses and investors alike will need to understand how tax payments and paperwork will be handled post-closing.  (Many platforms, like Streetwise and LocalStake, offer post-closing payment services to help companies manage these hurdles.)

Like in any marriage, having a long lasting mutually-beneficial relationship with Rev Share depends on whether your projections were realistic and how you manage your business.  So, be careful your love of Rev Share doesn't end in a messy divorce.

Thanks again, Benji and Jim, for helping me to share your wisdom with our readers.  If any of you would like to reach out to them for help, feel free to directly reach out to Benji at (919) 277-9142 or btjones@ wardandsmith .com.


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




Friday, October 6, 2017

In Sales, Silence is Golden

Posted By: George Deeb - 10/06/2017

I have written dozens of useful how-to lessons for driving sales , but perhaps none is more important than this one. This is the day tha...



I have written dozens of useful how-to lessons for driving sales, but perhaps none is more important than this one. This is the day that you learn that driving sales has very little to do with what you have to say. It has everything to do with what your client has to say.

The magic sauce to closing a transaction is knowing how to ask probing questions, then sit back and listen.  Keeping your mouth shut is typically a really hard concept for a salesperson to grasp. But, when they do, jewels of insights about your customer and their real pain points will quickly rise to the surface the more they say.

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

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


Tuesday, October 3, 2017

The 6 Steps to Taking Your Business Global

Posted By: George Deeb - 10/03/2017

If your business has seen successful growth here in the U.S., it most likely will see success in other countries, as well.  And you may...




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

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

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


Lesson #276: Lessons from Two Unicorns (LendingTree & Blackboard)

Posted By: George Deeb - 10/03/2017

At the recent CED Tech Venture Conference in Raleigh, I sat through the presentations of two successful entrepreneurs that both built c...



At the recent CED Tech Venture Conference in Raleigh, I sat through the presentations of two successful entrepreneurs that both built companies worth over $1BN (unicorn level valuations).  The first was by Doug Lebda, founder & CEO at LendingTree, the marketplace for finding loans, now a publicly-traded company with a market capitalization of approximately $3BN.  The second was by Michael Chasen, the founder & former CEO at Blackboard, the education software business that was recently sold to a private equity firm for $1.7BN.  It's not every day you get to learn insights from companies that scaled to unicorn levels, yet alone two in one day!!  So, my pencil was feverishly writing to keep up.

LESSONS FROM LENDINGTREE

The summary of Michael's presentation was that most entrepreneurs follow the wrong process on ideating and rolling out new ideas.  Most entrepreneurs follow a linear process of causal-based thinking, most typically in this order: study market, brainstorm, ideate, budget, approval, prototype, build, sell, go to market and pray.  This process can often take over a year of time, from start to finish.  And, is filled with pitfalls along the way, since it does not start the process by identifying your key strengths, assets and relationship to best exploit before you begin.

Instead, Michael follows the principles of effectuation, a process pioneered by UVA entrepreneurship professor, Saras Sarasvathy, in 2001, based on her research of 27 entrepreneurs in the late 1990's.  There are five core principles that define effectual logic, as documented on Wikipedia and as further shaped by Michael:

  1. The Bird in Hand Principle. Entrepreneurs start with what they have: who they are, what they know and who they know. The entrepreneur does not start with a given goal, but with the tools he or she has to work with.

  2. The Affordable Loss Principle. An entrepreneur does not focus on possible profits, but on the possible losses and how they can minimize those losses.  Manage to risks you can afford to take in terms of time, money or reputation.

  3. The Crazy Quilt Principle. Entrepreneurs cooperate with parties they can trust to make a pre-commitment.  You look for partners with "skin in the game" by asking the question "what would it take to get your commitment" on a barter or low-cost basis.

  4. The Lemonade Principle. How do you turn "lemons" (surprises) into "lemonade (pivots to new opportunities).

  5. The Pilot-in-the-Plane. The future cannot be predicted, but entrepreneurs can control some of the factors which determine the future.  This includes creating your own market, creating a culture "grounded in change" and having new hires "self-eject" themselves after their first 48 hours of not fitting in.

By following these principles, you are able to take an "unknown road" which can take a year to travel, down to a "known road" which you can navigate in a couple months.  And, we all know how important speed can be in increasing the odds of success for a startup.  Doug was able to get all 500 employees at LendingTree to think like entrepreneurs, and not a big company, by following these principles for all of the key decisions they made along their growth curve.

LESSONS FROM BLACKBOARD

Michael came up with his own five pieces of wisdom gained from his time at Blackboard:

  1. Be passionate about what you do (even if others are not).

  2. Focus on the business (not the office)

  3. Share the vision (but sell the execution)

  4. Constantly seek advice (but make sure you are the expert)

  5. Realize disruption changes everything (again and again)

Which he then amended to six pieces of wisdom by adding:  when you are done, do it all over again!!  He is practicing what he preaches, by recently taking over as the CEO at PrecisionHawk, a leading seller of commercial drone technology.  Hopefully, he is on his way to building his next unicorn company.


Anyway, I thought there were some good pearls of wisdom in here, from two guys that know what they are talking about.  So, I share these nuggets with you, to apply to your own businesses.  This is the follow on piece to Lesson #275:  Lessons from the Best VC Ever (John Doerr), also from the same conference.


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


Monday, September 25, 2017

Lesson #275: Lessons From the Best VC Ever (John Doerr)

Posted By: George Deeb - 9/25/2017

This last week, I attended the  CED Tech Venture Conference  in Raleigh, the leading technology and venture capital conference in the So...



This last week, I attended the CED Tech Venture Conference in Raleigh, the leading technology and venture capital conference in the Southeast.  The conference opened with a fireside chat with Silicon Valley legend investor, John Doerr of Kleiner Perkins.  John was the initial institutional investor in powerhouses like Google, Amazon, Uber, Twitter and Slack before they became the household names we all know to today.  It was safe to say, the room was silent in anticipation to hear what wisdom this "best of the best" investor would share with his venture capital industry peers. Luckily, for all of you, my pen was scribbling as fast as it could to share all of those learnings with you.

HIS SECRET SAUCE:  IT'S ALL ABOUT THE PEOPLE

Invest in great teams, as the execution is materially more important than the idea.  A good idea with poor execution, is simply "an hallucination".  What he looks for in his teams:  integrity, team first attitude, resilience to get through the bad times, smart, tenacious, an effective recruiter, with a big vision.  In that exact order, which was interesting as the big vision was the last thing he mentioned, normally one of the first things mentioned by others.  He looks for leaders that aspire to be "Level 5 Leaders" as defined in his favorite book, "Good to Great" by Jim Collins: leaders that are driven by "the triumph of humility and fierce resolve", like Sam Walton was at Walmart.

ARE INVESTMENT OUTCOMES PREDICTABLE?

Sometimes, you meet a guy like Jeff Bezos at Amazon, and you know his energy and vision are going to knock the doors down towards achieving his goal, clearly presenting themselves as someone you want to get involved with.  Other times you meet guys like Larry Page and Sergey Brin at Google, that "frankly, were cynical about business building", but you knew they were on to something big and would figure it out over time.

WHAT IS THE FUTURE OF TECHNOLOGY--HIS CURRENT INVESTMENT FOCUS?

He is a big fan of "AI with IA"--artificial intelligence with intelligent agents, as that is going to revolutionalize the way decisions are made and things get done.  He is also a big fan of the healthcare space overall.  He said companies like Google and Facebook are fighting over an $85BN online advertising industry, but the healthcare industry is a $3TN industry, 50x bigger, that is ripe for disruption and much bigger financial outcomes.  Even his portfolio companies, Google and Amazon, are trying to figure out how to play in healthcare related data, artificial intelligence and logistics.

LESSONS FROM GOOGLE AND AMAZON

The two companies were similar in that they both "imagined a world ahead of us".  They were both "moonshots" with 10x return goals.  Amazon was driven by a much more extrovert culture and customer-focused obsession.  Google was driven with a technology and data science first focus.  Two completely difference ways of eventually turning into multi-billion dollar companies.

HIS FAVORITE ENTREPRENEUR:  STEVE JOBS

There was a point in the presentation that John Doerr visibly got choked up, and that was when he pulled out the original iPhone that had been signed by Steve Jobs, who obviously meant a lot to John.  John said that Steve Jobs once told him that "this iPhone nearly killed our company", with the drive to really change the world of mobile computing from the palm of your hand, forever. And, with over 700MM iPhones sold to date, what a testament to that drive and success.

John referred to Steve Jobs as the best entrepreneur he had ever known.  Sound familiar?  He shared stories about Steve being ruthlessly honest in his opinions, with a clear and crisp vision around the product.  But, he kept his "blinders open" to be flexible over time, as Steve originally didn't want third party apps on the iPhone, and we all know where that ended up, millions of apps later.

CLOSING WORDS OF WISDOM

Embrace technology, don't be scared by it.  Stay well-grounded, and close to your family.  And, let's aspire to a technology and venture community that embraces diversity and creates equal opportunities for women.

Wow, what a ton of learnings, in a very short period of time.  Thanks John for sharing your life's lessons with us.  And, thanks to the CED for adding him to the roster of speakers.  It really was the highlight of the event, for me.


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


Tuesday, September 19, 2017

Lesson #274: Do You Need a RE-Founder for Your Business?

Posted By: George Deeb - 9/19/2017

Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding them b...



Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding them back from ultimate success.  Maybe they lack the required skills or business experience required to identify or correct problems inside their product, process or team.  And, more often that not, as a new entrepreneur  “you just don’t know, what you don’t know”.  And, when the problems become material enough that it could potentially put the company out of business, maybe it is time to hire what I call a RE-founder for your company, to help put it back on the right course.

WHAT IS A RE-FOUNDER?

Everyone knows what a founder or co-founder of a company is; it is the person or persons who formed the business in the very beginning of the company.  It was often their business idea that they birthed from a piece of paper, into an up-and-running product and business.  Think what Mark Zuckerberg is to Facebook or Jeff Bezos is to Amazon or Bill Gates is to Microsoft.

But, nine times out of ten, a startup is not successful in achieving mass customer adoption of their product or service.  And, then, they have to make some important decisions?  Is the problem so bad they need to close up shop?  Or, they need to reset their sights from building a big venture-backed company, to only building a small lifestyle business?  Or, they potentially need to get a new strategy and leadership to pivot the company into a different direction that has a higher odds of seeing scalable success.

It is this last route where I am suggesting you need to hire a RE-founder of the company.  The RE-founder will be responsible for doing a critically-needed and non-biased strategic planning process, to thoroughly understand the company’s core strengths, weaknesses, opportunities and threats.  And, then they will produce a 3-5 year long term vision and action plan for which the company to follow in hopefully pivoting the business to new heights.

WHERE TO FIND A RE-FOUNDER

In terms of how best to find a RE-Founder for your business, the process is quite similar to the Where to Find a Co-Founder process I wrote in the past.  The only differences this time around: (1) you are looking for more of a turnaround expert to help you solve your known pain points; and (2) you are looking to reinvent an existing business, including any or all of the people, product or process.  So, instead of starting with a clean piece of paper, you have to rework what you have.  Which is more like building a foundation and framing for a new 4,000 square foot two-story single family home, and having to re-architect it to a 4,000 square foot four-family apartment building.  You need someone that is good with implementing change within the organization.

HOW TO WORK WITH THE RE-FOUNDER

As the company’s founder, taking on a RE-Founder will require a material shift in the way you have been operating to date.  Now, you need to be prepared to get in the “back seat” and go along for the ride.  Don’t weigh down the newcomer with legacy thinking or sacred cows—let them do the job you are engaging them to do, to fix the business.  This will be a really hard, but necessary, process for most entrepreneurs who like to control every aspect of their business.  But, you need to be honest with yourself—there is a reason the business is struggling, and you will most likely have a better outcome (and equity value) if you simply get out of the way of the new expert.

CLOSING THOUGHTS

I have previously written about the importance of failing fast as a startup, so you don’t waste a lot of unnecessary capital.  I guess what I am suggesting in this post is once you have hit that fail point on your own, you now have a second option to consider.  Instead of simply shuttering the doors, maybe it is as simple as handing the keys off to a different proven executive to take a crack at fixing your business before you close it down.  You can never underestimate the importance of leveraging a fresh set of eyes, as the potentially perfect prescription to your woes.

So, after a critical assessment of your business, do you think you need a RE-Founder for your business?  If so, let’s do this thing, as time is clearly of the essence.


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



Tuesday, September 12, 2017

Don't Start Marketing Until You Are Ready

Posted By: George Deeb - 9/12/2017

A solid marketing plan is crucial to support growth as you're scaling a company . But how do you know when you should flip the marke...



A solid marketing plan is crucial to support growth as you're scaling a company. But how do you know when you should flip the marketing switch and go live?  The answer is pretty intuitive: not until you're ready. The secret is knowing what that means for your business model, internal processes and external branding. Read on.

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

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


Wednesday, September 6, 2017

The 9 Types of Leadership

Posted By: George Deeb - 9/06/2017

I recently read a great book called The 9 Types of Leadership , written by Beatrice Chestnut, an authority on the topic of leadership.  ...



I recently read a great book called The 9 Types of Leadership, written by Beatrice Chestnut, an authority on the topic of leadership.  Below is a summary of those 9 leadership styles, including some thoughts thereon.  After you are done reading this list, figure out what type of leader you are, and what strengths and weaknesses that brings to your business.  I can see elements of each of these nine types in my own leadership style, so it is not necessarily "one size fits all".  But, if I was forced to pick only one, I am a Type Seven.  Why type are you?

Read the rest of this post here.

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



Lesson #273: Benchmarking SaaS Financial Metrics

Posted By: George Deeb - 9/06/2017

My colleagues at River Cities Capital Funds , a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in th...



My colleagues at River Cities Capital Funds, a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in the SaaS technology industry, has recently published a terrific new report with a treasure trove of operating and valuation benchmarking data in the SaaS space.  The report was based on studying the financial reports of 92 publicly-traded SaaS companies, to see how those companies grew over time.  For purposes of this blog post, I focused on the operating metrics only, to help give earlier stage entrepreneurs a blueprint on how to grow their businesses.

THE KEY DATA

To simplify reading the full 30 page report, I curated the most-relevant median financial metrics for the 92 companies studied into the below chart.


Now, you have a better understanding of what it takes to plan and budget for your own SaaS business, along every step of the revenue curve.  Especially, if you are venture capital backed, or plan to go head-to-head against other venture capital backed companies (and the deep pockets they will have in shooting bullets in your direction).

LEARNINGS FROM THE DATA

Growth:  Buckle your seat belts, and get ready for a wild ride.  These companies were averaging some pretty fast 40-50% growth rates, over time.  It only took these 92 companies an average of 6 years to grow from under $5MM in revenues to over $100MM in revenues. And, while growth is exciting, it sure brings a lot of headaches when trying to scale your business and processes along the way.  So, plan ahead.

Gross Margin:  I was surprised the 60-70% gross margins were as low as they were here.  You hear about how much venture capitalists like the SaaS space because of their high margins, but that is much harder to see in the above chart.  So, if you were planning to strike it rich with 80-90% margins, think again, as it looks like prices are coming down.

Sales & Marketing Investment:  In order to get to their first $1MM in revenues, they needed to invest $1.5MM in sales and marketing, on average.  To get to their first $1MM in gross profit, they needed to invest $2.4MM in sales and marketing, on average.  Hopefully, you have raised enough capital to put enough sales and marketing muscle behind your business, and fund these startup losses.  The investment here is material in the 40-50% range, and maintains itself at very high levels over time, resulting in almost a two year payback period!!  Don't forget to read this post on metrics specifically related to SaaS sales team metrics, for deeper-level benchmarks.

R&D and Capex:  Don't think you build a product and you are done with it.  These companies are plowing in tons of monies into improving their products over time.  Think 25% of revenues long term, and that takes a lot of capital backing in the absence of material profits.

EBITDA:  I understand that investing in long term growth requires a material investment, often resulting in near term losses.  But, I was surprised how long the losses continue, over many years.  These companies didn't really break even until they got to $75MM in revenues, on average.  And, even then, the bottom line profits were not all that exciting, at 4% of sales.  Yes, I know, the numbers will look a lot better at $200MM in revenues, than they do at $100MM in revenues, but that is a really a long time to have investors wait for a meaningful return on their investment.

Valuation:  Think about this--a $100MM revenue SaaS business is worth $380MM at the 3.8x average multiplier cited in the report, which means it is trading at a whopping 95x cash flow.  I'm sorry, I just don't see the logic in that.  There are tons of other cash-generating businesses you can buy for a lot less money, and actually have a lot more to show for it. So, buyer beware!

Thanks again to the River Cities team to putting all that hard work into their research report.  Now we all can benefit from it, in terms of modeling our own SaaS businesses.


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



Tuesday, August 29, 2017

Raleigh-Durham's Best Lawyers for Startups

Posted By: George Deeb - 8/29/2017

Getting a good startup lawyer right from the beginning, can often be the difference between "off to the races" and "oops,...



Getting a good startup lawyer right from the beginning, can often be the difference between "off to the races" and "oops, why didn't we think of that before".  Picking a good lawyer often revolves around their expertise with startups, expertise in your industry, expertise for your specific project, bench strength of their firm, affordability, references and personality fit with your organization.  So, speak with several, to assess who is best for your business and liking, before making your decision.

There are several worthy full-service lawyers in the Raleigh-Durham area, with deep expertise in serving the startup community.  Below is a list of some of my favorites (in alphabetical order of law firm name), having met with most of them.  You will be well-served by any of their counsel.

Neil Bagchi at Bagchi Law
Location:  Chapel Hill

Online Bio:  http://bagchilaw.com/team/
Contact:  (919) 537-8159 or neil@ bagchilaw .com
Firm Size: 5 attorneys ($)
Industries:  technology and life sciences

Involvement:  CED, Idea Fund

James Forrest at Forrest Firm
Location:  Chapel Hill, Raleigh, and Durham
Online Bio:  http://forrestfirm.com/people/james-r-forrest/
Contact:  919.267.1646 or james@ forrestfirm .com
Firm Size: 20 attorneys ($$)
Industries:  technology and life sciences


Jesse Jones at Fourscore Business Law 
Location:  Raleigh
Online Bio:  https://fourscorelaw.com/team/
Contact: 919-307-5356 or jesse@ fourscorelaw .com
Firm Size: 2 attorneys ($)
Industries:  technology and life sciences


Fred Hutchison or Justyn Kasierski at Hutchison PLLC
Location:  Raleigh
Fred's Online Bio: http://www.hutchlaw.com/people/attorneys/fred-d-hutchison
Justyn's Online Bio: http://www.hutchlaw.com/people/attorneys/justyn-j-kasierski 
Fred's Contact:  919.829.4300 or fhutchison@ hutchlaw .com 
Justyn's Contact:  919.829.4337 or jkasierski@ hutchlaw .com
Firm Size: 21 attorneys ($$)
Industries:  technology and life sciences

Involvement:  CED, First Flight, NC IDEA, UNC, NC State, Duke, Launch Chapel Hill, Triangle TechBreakfast, HQ Community, LaunchBio/BioLabs NC

Randy Whitmeyer at Morningstar Law Group
Location:  Raleigh
Online Bio:  http://morningstarlawgroup.com/author/rwhitmeyer/
Contact:  919-590-0369 or rwhitmeyer@ morningstarlawgroup .com
Firm Size: 26 attorneys ($$)
Industries:  technology and life sciences

Involvement:  UNC, Raleigh Chamber, CED, NCTA

Glen Caplan or John Fogg at Robinson Bradshaw
Location:  Chapel Hill and Durham
Glen's Online Bio:  http://www.robinsonbradshaw.com/professionals-Glen-Caplan.html
John's Online Bio:  http://www.robinsonbradshaw.com/professionals-John-Fogg.html
Glen's Contact:  (919) 328-8807 or gcaplan@ robinsonbradshaw .com
John's Contact:  
(919) 328-8806 or jfogg@ robinsonbradshaw .com
Firm Size: 130 attorneys ($$$$)
Industries:  technology and life sciences
Involvement:  CED, Duke, UNC, NC State, Exit Event & Groundwork Labs

Some Clients:  Dude Solutions, Automated Insights, Distil Networks, Validic, WedPics, IDEA Fund, Cofounders Capital, Sony Ericsson, Digitalsmiths, Cloupia, ExtraOrtho, Bull City Ventures, River Cities, RTI, Inlet Technologies, Get Spiffy, Filter Easy and Valencell.
Other:  Glen and John both have past experience working in Silicon Valley for Wilson Sonsini (Glen) and DLA Piper (John).

Merrill Mason and Mikal Shaikh at Smith Anderson
Location:  Raleigh and Durham
Merrill's Online Bio:  http://www.smithlaw.com/professionals-Merrill-Mason
Mikal's Online Bio:  
http://www.smithlaw.com/professionals-Mikal-Shaikh
Merrill's Contact:  (919) 821-6733 or mmason@ smithlaw .com
Mikal's Contact:  
(919) 821-6753 or mshaikh@ smithlaw .com
Firm Size: 130 attorneys ($$$, but willing to consider creative alternatives)
Industries:  technology and life sciences

Involvement:  Launch Chapel Hill, CED, IDEA Fund, HQ Raleigh, Carolina Angel Network, 1789 Venture Lab, Triangle Angel Partners, UNC, Duke, NCSU
Other: We are a team of startup lawyers at a full-service law firm enabling us to leverage in-house tax, employment, IP, licensing, securities and real estate expertise.

Jim Verdonik or Benji Taylor Jones at Ward & Smith
Location:  Raleigh
Jim's Online Bio:  http://www.wardandsmith.com/attorneys/james-verdonik
Benji's Online Bio:  http://www.wardandsmith.com/attorneys/benji-jones
Jim's Contact:  (919) 277-9188 or  jfv@ wardandsmith .com
Benji's Contact:  (919) 277-9142 or btjones@ wardandsmith .com
Firm Size: 95 attorneys ($$$)
Industries:  technology and life sciences

Involvement:  CED, Raleigh Chamber, NCTA, Duke
Other:  Jim wrote the book on crowdfunding.

Rob Tyler at Williams Mullen
Location:  Raleigh
Online Bio:  http://www.williamsmullen.com/people/j-robert-rob-tyler-iii
Contact:  (919) 981-4085 or robtyler@ williamsmullen .com
Firm Size: 230 attorneys ($$$$)

Industries:  technology and life sciences 
Involvement:  CED, NC Idea, NC State

Larry Robbins or Chris Lynch at Wyrick Robbins
Location:  Raleigh and Durham
Larry's Online Bio:  http://www.wyrick.com/our-people/larry-e-robbins
Chris's Online Bio:  http://www.wyrick.com/our-people/j-christopher-lynch
Larry's Contact:  (919) 865-2800 or lrobbins@ wyrick .com
Chris's Contact:  
(919) 865-2807 or clynch@ wyrick .com
Firm Size: 90 attorneys ($$$, but flexible for lower budgets)
Industries:  technology and life sciences

Involvement:  CED, BB&T, NCTA
Other:  Chris is a former Silicon Valley lawyer with Wilson Sonsini and Harvard Law grad.


If you think I am missing anybody, or think you should be included in this discussion, feel free to add your thoughts in the comments field below.

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


Monday, August 14, 2017

Lesson #272: Do You Bet on the Jockey or the Horse

Posted By: George Deeb - 8/14/2017

Secretariat Wins the Triple Crown in 1973, with Ron Turcotte as Jockey There have been several articles written that talk about how ve...

Secretariat Wins the Triple Crown in 1973, with Ron Turcotte as Jockey

There have been several articles written that talk about how venture capital investors prefer to bet on the jockey (the entrepreneur), over the horse (the startup idea).  As I have often said, I would much rather invest in an A+ team with a B+ idea, than a B+ Team with an A+ idea.  So, I agree with this premise of the jockey being more important than the horse, usually.  This post will tell you when one outweighs the other.

WHEN THE HORSE OUTSHINES THE JOCKEY

Unless the idea is a material one in the first place (e.g., it has a chance to become a billion dollar business), why waste your time when shooting for VC types of returns.  Said another way, would you rather invest in Jeff Bezos, one of my entrepreneurial heroes, building a white water rafting business in the arid Sahara Desert, or me, a proven serial entrepreneur (albeit a fraction the talent of Jeff Bezos) trying to build a next-generation artificial intelligence technology disrupting a $200BN industry?  The former has very little prospect for driving material revenues, and the latter could become the next unicorn size startup, so a relatively easy decision.

So, there is an inflection point, where the idea is worth betting on, more than the entrepreneur.  But, the reality is, a smart venture investor would try to convince me that I am not nearly as qualified as someone like Jeff Bezos to actually pull off this grandiose vision, and to have me hand him the reins to take my business to meteoric heights.  Which I may or may not do, depending how confident I was in my own abilities vs. the equity value upside I could realize from getting someone like Jeff Bezos in charge.

Which is exactly my point of this piece.  It is not the jockey OR the horse.  It is the jockey AND the horse.  That is how to build terrific venture returns—with A+ teams building A+ ideas.  And, whatever you can do to make that happen, is the Holy Grail of venture investing.

SOME INSIGHTS FROM HORSE RACING

As a little fun, to help me further illustrate this point, I took a look at some horse racing data to see if I could glean some insights on this topic.  First, I looked at the last four Triple Crown winning horses: Secretariat (1973), Seattle Slew (1977), Affirmed (1978) and American Pharoah (2015).  And, compared them to a typical Top 100 winning race horse in 2016.  The data was pretty incredible—the Triple Crown winners won their races 79% of the time (compared to the Top 100 that won 48% time).  That is a pretty good argument for the horse.

Then, I looked at the last four Triple Crown winning jockeys:  Ron Turcotte (1973), Jean Cruguet (1977), Steve Cauthen (1978) and Victor Espinoza (2015).  And, compared them to a typical Top 100 jockey in 2016.  I was surprised to see the Triple Crown jockeys won 15% of the time, a little less than the Top 100 jockeys who won 16% of the time.  That basically suggested, the jockey didn’t matter at all, as long as they were a good one.  Said another way, any of the Top 100 jockeys could have lead any of the Triple Crown horses to their wins.  Another data point speaking to the importance of the horse.

But, as an entrepreneurial leader rooting for the jockey, that left me unsatisfied, so I dug a little deeper.  There I learned, Steve Cauthen’s better than average 19% win rate (twenty percent better than the average Top 100 jockey win rate of 16%), could have been a major contributor to Affirmed’s Triple Crown win—as the horse’s 76% win rate was below the 80% win rate of the other Triple Crown winning horses.  A good argument for the jockey taking a great horse, and making him even better.

Until I learned, Jean Cruguet only won 12% of his races, far behind the 16% average of the Top 100 jockeys.  But, Seattle Slew, the horse he lead to a Triple Crown, had won 82% of his races, in excess of the 78% average win rate for the three other Triple Crown winning horses.  Chalk one up for the horse, making a jockey look better than he really was.

WHAT IS THE POINT OF ALL OF THIS?

Based on the above examples, from both the business world and the horse racing world, there are times where the jockey is more important and there are other times where the horse is more important for driving success.  With all other things being equal, always bet on the jockey to take a good idea and make it better.  But, when the idea is so big, you have no choice but to bet on it, assuming a competent leader is in charge.  But, if need be, upgrade an average entrepreneur for a proven winner, and that will be like putting gravy on top of your turkey dinner (one that is guaranteed to fully cook and taste great in the end).

A key lesson here for most of you entrepreneurs: lose the ego and the pride of feeling you are the only person who can build your startup, as your personal equity value from your big idea could become worth materially more money in somebody else’s hands.  Separate your CEO hat from your Chairman hat, and figure out what would truly be best for your shareholders (of which you are presumably the largest).

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


Friday, August 11, 2017

Don't Shuffle People Into the Wrong Job Just Because They're Already on the Payroll

Posted By: George Deeb - 8/11/2017

The old adage that a “bird in hand is worth two in the bush” may work in some instances in business, but slotting people into employee r...



The old adage that a “bird in hand is worth two in the bush” may work in some instances in business, but slotting people into employee roles is definitely not one of them. I can’t tell you how many times I see early-stage entrepreneurs put someone in a role simply because it's convenient. This is particularly harmful when the individual already is known to the team and operating in an entirely different role. Stop this madness! Do you want the quickest solution to your hiring needs or the best solution?

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

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


Monday, July 31, 2017

Lesson #271: Want to Scale Revenues? It's All Math!

Posted By: George Deeb - 7/31/2017

Over the last several weeks, I have been networking with key influencers in the tech startup community in the Raleigh-Durham area.  I ha...



Over the last several weeks, I have been networking with key influencers in the tech startup community in the Raleigh-Durham area.  I had the joy of meeting Alex Osadzinski, a seven-time successful serial entrepreneur  and venture investor in town.  Alex's career took off as an early employee with Sun Microsystems between 1986-1994, helping lead their meteoric rise to over $1BN in revenues in only a few years. And, since then, he has helped enterprise software companies rapidly scale their businesses to new heights, most recently as the CMO at Relias Learning, whose sales have almost tripled to almost $200MM since he got involved in early 2016.

ALEX'S PLAYBOOK FOR SCALING REVENUES

I asked Alex the secret to successfully scaling businesses, over and over again; his answer was short and sweet, "it's all math".  Which I loved!  I have never personally scaled a business to over $100MM, but I had always said to entrepreneurs trying to accomplish this goal, "it's all math".  And, now I am hearing those exact words come out of the mouth of a proven veteran that has actually done it, several times over.

Alex continued to talk through the other key drivers of successfully scaling companies.  He highlighted the importance of not scaling until the product is ready to scale, with all the kinks worked out.  The importance of having good metrics with which to manage the business, "with rigor".  The importance of  scalable processes and learning programs to quickly onboard new employees and promote older employees each year.  The importance of knowing when new products, new market verticals, global expansion or new acquisitions will be needed to help propel the company to new heights, when the original product is fully saturated in the market.  The importance of hiring people that have a base understanding of your industry, to help shorten the learning curve.  Knowing that complexity multiplies with rapid scale, given 50% of your staff is brand new to the company each year and employees no longer know everyone else in the organization, nor being centrally-located in one office.  Etc.  My pencil couldn't write fast enough to document every nugget shared in this valuable crash course.

IT'S ALL MATH

I wanted to share Alex's wisdom with all of you, and to help give you more concrete examples of what is meant by, "it's all math".

Revenues & Recruiting:  Let's say you are trying to grow from $50MM to $100MM in one year.  If your typical salesperson can handle $1MM in sales each, that means you need to have 50 new salespersons up and running at the beginning of the year.  But, with 30% typical attrition in a sales organization--half from voluntary resignations and half from involuntary terminations, it really means you need to have 80 salesperson up and running to ensure you actually hit your goal.  But, to be "up and running", that means you most likely needed to recruit them 6 months before the year even started, and get them fully trained and ready for selling in the 3 months you actually want them to be selling.  So, it becomes crystal clear, that in order to double revenues in 2018, you actually need to start working on that plan early in 2017, to have have any reasonable chance of hitting your goal.

Market Share and Common Sense:  Let's say your product serves an industry that is only $300MM in size, and with four key competitors in the market it would be very unlikely to grow your product sales more than $75MM stand alone.  That means simply adding salespeople is not enough; you most likely are going to have to introduce a couple new products that will increase your market size potential, to have any chance of hitting your $100MM revenue goal.  And, product development takes time, it could take a year or two, to ideate, design, manufacture and prepare a product for sales.  Again, if we are trying to drive sales in 2018, we should have been thinking about adding new products back in 2016, otherwise it is too late to realistically start driving revenues in time.

Mergers & Acquisitions:  So, what if your board is really clamoring for doubling revenues this year, and there is no realistic way to drive that internally?  That leaves you with only one viable option: M&A, provided you think about it early enough in the year, as it typically takes 6-12 months to get through an M&A process, from identifying and reaching out to targets, to negotiating the deal, to constructing the closing documents, etc.  But, you should really only go down the M&A route, if you are willing to tackle all the added complexities and potential pitfalls involved with trying to merge two businesses.  That said, after you get to $100MM in revenues stand-alone, you most likely will need to be giving M&A options a serious look, in all cases.  But, a word to the wise, if you are merging two $50MM businesses, you most likely won't end up with $100MM, after attrition of employees and potential clashes in culture, so build a cushion in finding a company large enough to hit your goal, net of issues like these.

WHAT THIS MEANS FOR YOU

As you can see, driving credible growth, with a realistic plan, is largely about having your arms around the math, as it really is a numbers game.  Stop living in the present, managing your business day-to-day, and actually think through how big of a business you want to have three years from now, and then, back into the mechanics of how best to get there.  It most likely means you will have to start investing in market research, new salespeople, onboarding processes, bigger real estate, product development, corporate development, etc., sooner than later.  For enterprise sales, your current year is pretty much already "maxed out", based on the investments you made last year.  So, the efforts you are making in 2017, is most likely going to dictate your sales success in 2018 and 2019, depending on the tactics you plan to use.  So, get way ahead of your planning for future years, now.  Otherwise, you have no chance of hitting your target. Duh . . . it's all math!!


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


Wednesday, July 26, 2017

Lesson #270: Benchmarking SaaS Sales Team Metrics

Posted By: George Deeb - 7/26/2017

I recently read this terrific blog post by David Skok , an expert on SaaS businesses and a General Partner at Matrix Partners , an early...



I recently read this terrific blog post by David Skok, an expert on SaaS businesses and a General Partner at Matrix Partners, an early-stage venture capital firm based in Boston.  This post included a lot of terrific sales-related benchmarking metrics for SaaS businesses collected by David and The Bridge Group.  David was kind enough to allow me to share his learnings with all of you.  So, here it goes.

Sample Studied:  The study interviewed 384 SaaS executives.  89% in North America, $20MM median revenues, $25K median contract value, 60 day median sales cycle.

Territories:  Companies keep it simple as long as they can; 61% of companies under $5MM have no territories--which falls to 10% for companies over $250MM in sales.  Companies under $50MM that do create territories, do so: 63% by geography, 23% by named accounts and 9% by industry vertical.

Outside Sales Reps:  Outside salespeople are expensive, especially for lower ticket products where you can't make the lifetime value of revenues exceed the cost of acquisition.  So, no surprise that only 9% of the sales pipeline of a company under $5MM was generated by outside salespeople (leaning on marketing or inside salespeople instead), which jumps to 38% of the pipeline for companies between $50-$100MM in revenues, where they can better afford the costs.

Specialized Roles:  Every client can have up to three people covering them--a sales development rep that close the first sale, an account executive that manages the long term relationship and future sales and a customer success person that manages operational fulfillment.  Only 22% of companies under $5MM have all three roles, which increases to 44% for companies between $20-$50MM.  And, the higher the average order value, the higher odds you get multiple roles filled (8% fill all three roles with under $5K ticket, which jumps to 56% with $100K+ ticket given the higher complexity of the sale).

Location:  24% of companies under $5MM have sales reps in multiple locations, which jumps to 95% for companies over $500MM.  Surprisingly, the cost of that person is largely the same as the home office team, regardless of which market they are operating from.

Tenure:  The average tenure of a salesperson is 2.4 years with the company.  But, that increases with the average order value of the product:  only 8% of salespeople stay with the company over four years in companies under $5K ticket, but jump to 31% with over $100K ticket.  That speaks to more complex sales and the need to retain those selling experts--and, the higher compensation those salespeople are making with no need to look elsewhere for a new job.

Turnover:  The average employee turnover in the sales team was a whopping 30%, half of which from involuntary terminations and half of which from voluntary resignations.  The old adage bears true:  never stop recruiting.  And, what a painful process for your sales managers, having to retrain a third of their sales team every year, and the negative impact that has on sales productivity.

Compensation:  The average compensation was $126K, comprised of a $62K base salary and a $64K commission for on-target sales.  Understanding there is a wide range here, based on average ticket of the product.  But, compensation is steadily rising; the amount of salespeople making more than $120K has increased from 18% to 51% in the last five years.

Quotas:  The average quota was $770K, or 5.3x their total compensation for on-target sales. But, quotas increase with average ticket, from $578K for $5K ticket to $1.3MM for $100K+ ticket.  That assumes selling low ticket products is easy and you should close 115 transactions a year (10 a month) and selling high ticket products is hard, selling only 13 transactions a year (one a month).  Quotas have been increasing about 8% over the last two years, faster than inflation, as companies are asking their salespeople to do more production.

Commission Plan:  On average, 37% of companies offer a flat compensation plan (regardless of sales production), 24% offer a gradually increasing commission plan, 28% offer a sharply increasing commission plan (that accelerates with achievement over plan) and 11% offer a steeply increasing commission plan (often with a sales cliff before material commissions kick in).  I am surprised a third of companies don't tie compensation to performance--please fix that!!

Demos:  The number of demos is dependent on average ticket.  Companies with an averge ticket under $5K do 11.3 demos a week (closing around 25% of them) and companies with a ticket over $100K do 3.6 demos a week (closing about 7% of them, on average).  I am surprised the close rate was not higher than 10% in all cases, which I typically shoot for.  That is the difference of 43% more sales!!

Tech Spend:  Excluding the base CRM costs, the average salesperson spends around $477 on additional software to help them with their jobs.  That typically gets you email automation, contact data appending, contract e-signatures and LinkedIn's Sales Navigator tools.  The more sophisticated companies spend an additional $500 to get call recordings and conversion analytics tools.  The below chart shows even more advanced technologies which are early in their adoption curve.



Titles:  Titles materially vary by size of company--a VP in a small company may be the equivalent experience of a Director in a medium company or a Manager in a big company.  The most senior person in a company under $20MM is typically a VP or CXO, 45% of the time.  Where the most senior person in a company over $100MM, may have the Manager title, 71% of the time.  So, be careful how your craft your job postings and ask smart questions during interviews to make sure you are not comparing apples with oranges.  As a rule of thumb:  Directors are great strategists/leaders, Managers are great coaches and Team Leaders are great role models in a hybrid contributor/manager role.  Team leaders typically manage a team of 7.2 account executives, excluding themselves.

Struggles:  I am guessing you are all in good company here.  49% of companies struggle with team productivity/performance; 30% with recruiting/hiring; 26% with onboarding/training and 19% with forecast accuracy.  Numbers which have not materially improved over the years, despite all the advancements in technology.  Driving sales is never easy.


Hopefully, you agree that are some great sales benchmarking metrics herein, which can help you in managing your own SaaS sales organizations.  Thanks again, David, for allowing me to share some of your insights with our Red Rocket readers.  Be sure to read the full blog post for more details and you can follow David on Twitter at: @bostonvc.  Happy hunting!

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


Friday, July 7, 2017

A Good Entrepreneur Evolves Over Time

Posted By: George Deeb - 7/07/2017

I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book busin...



I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book business in college and launched my first venture capital-backed startup -- an adventure-travel company -- in my 20s.  My entrepreneurial endeavors continue today. I'm in my late 40s, running Red Rocket, looking for companies to buy and advising hundreds of early-stage businesses. My approach to managing businesses today is very different than when I was younger. The experience I now bring to the table has materially mellowed me as a leader. But, I didn't have that background or that perspective when I was younger.

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

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


Wednesday, July 5, 2017

5 Considerations When Setting Your M&A Goals

Posted By: George Deeb - 7/05/2017

Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As I have discussed in...



Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As I have discussed in the past, M&A can be very distracting to an early-stage business still trying to optimize their stand-alone business.  Especially when things can often go awry in merging businesses, management teams and employee cultures.  But, assuming you have done your homework on those fronts, and you are comfortable in taking the leap into world of M&A, here are five considerations when setting M&A goals for your business.

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

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


Thursday, June 29, 2017

Raleigh-Durham Private Equity Firms

Posted By: George Deeb - 6/29/2017

Following up on our list of Raleigh-Durham Venture Capital Firms & Angel Networks , below is a list of private equity firms in the r...



Following up on our list of Raleigh-Durham Venture Capital Firms & Angel Networks, below is a list of private equity firms in the region, serving later stage companies.  I included a high-level summary of their investment criteria, as communicated on their websites.

Aiglon Capital Mgmt. --  mfg., dist., svs., $20-$250MM revs, $2-$20MM EBITDA.

Capitala Group --  diversified. $3-$10MM checks, under $4.5MM EBITDA, $1BN fund

Cherokee Fund --  brownfield real estate, $2BN managed + VC in env./energy

Davie Poplar Capital --  health, educ., med., svs., mfg., dist. Up to $20MM revs, $500K-$3MM EBITDA, recurring revs., capex light.

Eli Global --  fin., health, ins., mktg., other.

Halifax Group -- biz svs., franchising, health, infrastructure.  $5-$30MM EBITDA, $25-$75MM checks, $50-$250MM valuations.

Hargett Hunter --  hospitality, restaurants.  $10-$30MM checks. $150MM fund, 5-50 stores.

Hawthorne Capital --  health, tech.  $3-$20MM checks.  $2-$100MM+ revenues.

Investors Management Corp. --  diversified, franchisable.  $5-$25MM EBITDA.

Meriturn Partners --  diversified.  $20-$300MM revs, control oriented.

Morgan Creek Capital --  health, energy, nat. resources.

Mosaic Capital Partners --  biz svs., chem., CPG, env., food/bev.., health, dist., mfg., log..  Over $10MM revs, reliable cash flow.

NovaQuest Capital Mgmt. --  life sciences, health.  $1.6BN mgd, $20-$100MM revs, up to $500MM valuations.

Plexus Capital  --  diversified.  $950MM mgd., $12MM average check, middle market.

Triangle Capital Corp. (TCAP) --  mfg., dist., transport, energy, comms., health, restaurants, other.  $5-$50MM checks, $20-$300MM revs, $5-$75MM EBITDA.


OTHER PRIVATE EQUITY FIRMS IN NORTH CAROLINA (INVESTING IN REGION)

Blue Point Capital Partners (Charlotte) -- eng., env., ind., metals, dist.  $20-$300MM revs, over $5MM EBITDA.

Cadrillion Capital (Charlotte) --  info., health, agric., biz svs., fin., other.  Over $1MM EBITDA.

Carlyle Group (Charlotte) --  aero., defense, govt., cons., energy, fin., health, ind., RE, tech, biz svs., telecom, media, transport.  $53BN mgd., $130MM average check.

Carousel Capital (Charlotte) --  biz svs., cons. svs., health svs.  Over $3MM EBITDA,  up to $150MM valuation.

Coleville Capital (Charlotte) --  mfg., dist., biz svs., diversified, ind.  $10-$100MM revs, $2-$6MM EBITDA.

Copeley Capital (Charlotte) --  health, svs., bldg., waste, ind., CPG.  Over $2MM EBITDA.

Falfurrias Capital (Charlotte) --  cons., food/bev, biz svs., fin., mfg., ind., energy, health.  $3-$25MM EBITDA.

Fidus Investment Corp. (Charlotte) --  diversified.  $10-$150MM revs.

Five Points Capital (Winston-Salem) --  biz svs., ind., mfg., dist., health, educ., tech., mfg.  Over $3MM EBITDA, $5-$25MM checks.

Global Endowment Mgmt. (Charlotte)  --  manage money for foundations

Kian Capital (Charlotte) --  biz svs., dist., health, mfg.  $5-$15MM checks, $15-$150MM revs, $2-$15MM EBITDA.

Pamlico Capital (Charlotte) --  biz svs., comm., health, tech.  $15-$200MM revs, $20-$100MM checks.

Ridgemont Equity Partners (Charlotte) --  ind., svs., health, energy, telecom, media, tech.  $25-$100MM checks, $5-$30MM EBITDA.

Salem Investment Partners (Charlotte) --  biz svs., mfg., CPG, dist., recurring revs.  $1MM+ EBITDA, $10MM+ Revs, $2-$10MM checks.

Summit Park (Charlotte) --  biz svs, cons. svs., mfg., dist.  $150MM fund.  $20-$100MM revs, $4-$12MM EBITDA.

Tidewater Equity Partners (Wilmington) --  mfg., svs., tech, fin., energy, retail, health.  $10-$30MM revs, $1-$3MM EBITDA.


Be sure to dig deeper on their websites to make sure they invest in your specific industry, revenue stage, geography and desired minority/majority deal structure before reaching out to these investors. Red Rocket can help make introductions to many of these investors, so please leverage our relationships here.

For future posts, please follow us on Twitter at: @RedRocketVC




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