Wednesday, April 25, 2018

Lesson #292: Should You Clone Yourself When Hiring?

Posted By: George Deeb - 4/25/2018

Come on, we have all thought it as entrepreneurs, at one point or another in our careers:  “I just wished I could clone myself in findin...



Come on, we have all thought it as entrepreneurs, at one point or another in our careers:  “I just wished I could clone myself in finding new employees for my business.  Nobody works harder than me.  Nobody is as smart as me.  I don’t trust anybody to make decisions or manage teams better that I do.”  Sound familiar?  But, is cloning yourself really the right solution for your hiring goals?  There are clear advantages and disadvantages of a strategy like this, so you will need to figure out if cloning yourself will help or hurt your business, based on your business’s specific needs.  Read on.

WHAT EXACTLY IS CLONING YOURSELF?

Any of you fans of the Alien movie series?  Remember in the fourth installment, Alien: Resurrection, when they manufacture a clone of Sigourney Weaver’s Ellen Ripley character 200 years after her death (from DNA samples of her blood saved in storage), to go kick some alien butt again?  It is pretty much that, only for yourself, while you are still alive, building an army of lookalike “Yous” to go kick some competitors’ butts.

HOW DOES CLONING MANIFEST ITSELF IN YOUR BUSINESS?

Your clones are typically identified by you, personally or through your direction of your HR teams, during your recruiting process.  First, through the job descriptions, with every bullet point sounding like you were actually describing yourself.  Second, through the interview process, with you assessing every candidate as “is this person exactly like me”?  And, third, through the onboarding process, with you training your new “Mini Me” (think Austin Powers), to do the job exactly the way you would do the job.

THE ADVANTAGES OF CLONING YOURSELF?

There are many good reasons to try and clone yourself during your hiring process.  Looking for another similar personality that will fit with yourself and the team culture you are trying to create.  Looking for someone with exactly your same skillsets, that you trust to do the job required and potentially replace you down the road as your succession plan.  Looking for someone who is an optimist on the prospects for your business and can cheerlead that vision to your team with the same fervor and passion that you would.  As a few examples.

THE DISADVANTAGES OF CLONING YOURSELF?

For as many reasons you think cloning yourself is a good idea, I can envision an equal number of reasons cloning yourself could actually be a bad idea.  Maybe you don’t need a “glass half full” optimist like yourself, that is going to tell you everything you want to hear.  Maybe you need a “glass half empty” realist, who will bring a sense of caution to your investment decisions.  Or, you may need a similar “A-Type Personality” to lead your sales team efforts, to help jazz up potential clients.  But, maybe a “B-Type Personality” may be a better fit to manage your more introverted team of technology developers.  Or, why hire someone with your exact same experiences or vantage point, because maybe someone else can help you better identify a better process or avoid known potential pitfalls based on their different past experiences.  As a few examples.

WHAT IS THE RIGHT PATH FOR YOUR BUSINESS?

To me, the decision whether or not to clone yourself comes down to a couple key things.  First of all, what the business needs to be successful should outweigh everything else.  Let’s say you are hiring a head of finance, and one candidate has a dream resume and a track record of proven success for the position, but perhaps the personality is not as outgoing as yourself.  But, another candidate has an okay resume, but a great personality fit.  At the end of the day, who do you trust more to “have their hands on the steering wheel of your business”?  The person that has solid experience and references, or the person that could do the job, but you would rather have a beer with?  In a perfect world, you want everything you are looking for in one candidate.  But, more times than not, you will only get 80% of what you are looking for in one candidate, and you have to be careful to prioritize what of the 20% they are missing is going to do the least damage.

Secondly, it comes down to what do you need personally.  If you did a critical assessment of yourself, are you sure you really need a bunch of “Yous” running around the office.  What do people say about you in your employee reviews from your peers?  Are you creating more chaos than calm?  Are you pulling the company in different directions all the time, without a clear focus?  Maybe what you really need is the opposite of yourself.  You need your Anti-Me to help keep yourself organized, on plan and in check.  It really comes down to what you see as your personal strengths and weaknesses, and filling in any voids in your skillsets.  And, better yet, maybe it is less what you think about yourself, and more what your team thinks about you.  So, man up, ask the tough questions, and get honest feedback from your peers, when needed.

CONCLUDING THOUGHTS

I have tried to present both the plusses and minuses of cloning yourself in your business, and gave examples of when to do it, when not to do it.  But, if you forced me to side one way or the other on this topic, with all other things being equal, if you can find people that share your same passion, vision, energy, work ethic and skillset, good things should surely follow.  But, if you can’t find more “Yous”, that can be perfectly fine too, as greatness comes in many different shapes and sizes, and having new ideas and fresh perspectives can be equally invigorating for your business.


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



Tuesday, April 17, 2018

Lesson #291: Properly Classify 1099 Contractors vs. W-2 Employees to Avoid Legal Troubles

Posted By: George Deeb - 4/17/2018

Back in Lesson #30, we talked about when it is appropriate to hire employees vs. contractors .  But, often times, small businesses try ...




Back in Lesson #30, we talked about when it is appropriate to hire employees vs. contractors.  But, often times, small businesses try to permanently take the contractor path instead of hiring employees, to try to permanently avoid paying employee benefits and payroll taxes.  That can get you into a lot of trouble.  This post will help you know when staff members will legally be classified as employees vs. contractors in the eyes of the IRS, to help you avoid costly penalities down the road.  To help me with this post, I solicited the input of Maria O. Hart, a member of the employment litigation, trials, and appeals practice group at Parsons Behle & Latimer.

For most small businesses, labor is the biggest line item on their P&L statement — and it can be a vicious circle of needing employees but not being able to afford them. These businesses need employees to scale (and, in some cases, survive), but the true cost of an employee can push even the lowest paid workers off the budget. When that happens, business owners turn to 1099 contractors to fill in the blanks. But expecting these contractors (workers who aren’t entitled to the same benefits as full-time employees) to act as employees, and be treated as such, could result in a major Fair Labor Standards Act (FLSA) violation or, at the very least, some substantial tax fraud accusations.

So, how can you comply with federal labor laws? It starts with knowing the difference between 1099 contractors and W-2 employees. It’s not black and white, but there are a few ways to determine a worker’s correct classification, as you can read at this link at the IRS website and the summary chart below from Law Gives:



 Ask yourself, do they work on site? Do you control their schedule? Do they use the company’s tools and equipment to get their job done? Do you discourage or prohibit them from taking on more jobs or other jobs in your niche or industry? Do they work more than 30 hours per week? If you answered yes to one or more of the above questions, you might need to consider that contractor a full-blown employee.

Misclassifying an employee as a 1099 contractor could land you in some hot water with the U.S. Department of Labor, or you may find yourself defending against an FLSA lawsuit from an unhappy employee or contractor — after all, misclassification lawsuits are on the rise. That’s because the line between employee and contractor is blurrier than ever. More and more workers are able to work remotely using their own devices and equipment. It’s a technological loophole the FLSA’s creators couldn’t have imagined when they drafted the statute in 1938 — and more business owners are falling prey to this deadly sin.

Avoid a potentially catastrophic lawsuit by classifying your workers correctly from the start and reclassifying them as needed. Know what your workers are doing and how they’re doing they’re assigned duties. Circle back frequently and perform annual audits to ensure everyone is classified as they should be. When in doubt, put yourself in their shoes. Would you feel taken advantage of if you were in their situation? And, of course, always check with your attorney or employment counsel.  Because if you don't, the price could be steep, including penalty payments plus unpaid past taxes all coming due obligations of the business and its owners (even if they think they are protected from limited liability company structures).

Thanks again, Maria, for your help with this post.  If you have any further questions on this topic, feel free to reach out to Maria at  208-562-4893 or mhart@ parsonsbehle .com.

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


Friday, April 6, 2018

5 Essential Media Buys for First-Time Marketers

Posted By: George Deeb - 4/06/2018

Getting the word out about your startup business is always a challenge. But at least there are a handful of techniques you can focus on...




Getting the word out about your startup business is always a challenge. But at least there are a handful of techniques you can focus on to jump-start your early marketing efforts, all of which are available on a cost-effective basis.

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

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


Friday, March 30, 2018

Lesson #290: Too Many Meetings Suffocate Morale & Productivity

Posted By: George Deeb - 3/30/2018

Early stage companies have many demands on an employee’s time.  From getting the product built to marketing for new customers to getting...



Early stage companies have many demands on an employee’s time.  From getting the product built to marketing for new customers to getting the capital lined up, it is a never ending battle to fit in all that work in a limited amount of time.  But, what I often see is productivity gets squeezed by early-stage entrepreneurs scheduling way too many meetings, which gets in the way of employees having enough time to do their actual jobs.  And, when productivity slows, the company’s bottom line suffers and employees start looking for the door in frustration.  Let me explain further.

Why So Many Meetings Get Scheduled

There are many reasons to schedule a meeting.  Some are recurring meetings between bosses and their direct-reporting employees, for weekly check-ins and collaborative needs of the team.  Some are one-off meetings for non-recurring items, like annual strategic planning, putting out a client fire or team building events.  But, most get set because entrepreneurs are inexperienced and don’t know any better.  That is largely related to their not trusting the team to do their jobs or their needing to control every single decision that is made.  It is this last category that is the killer.

The Negative Impact on Employees

Employees get frustrated when a couple things happen around meetings.  First, they think it is a waste of time, and they are not even sure why they are needed in the room (so don’t invite everyone to every single meeting, only invite the ones that actually need to be there).  Second, they get frustrated they are sitting in a meeting, and not sitting at their desk getting their actual work done in a more timely fashion (so maximize their time at their desks, not yours).  Or, third, they get offended that they are not trusted to do their job, by a boss that feels they need to keep tight oversight on all of the decisions (so empower your people to make decisions without you).  All of this is a recipe for a disaster, often having employees looking for the exit, where the resulting employee turnover can be crippling to a young company needing to race full steam ahead, as quickly as possible.

Case Study

I was once getting started as an interim executive at a new client and was given a team of people to manage.  On my first day I was handed a calendar of all the weekly meetings that I needed to participate in with my team.  I looked at the long list and realized that about 40% of my time was in meetings, many of which that I deemed as unnecessary, a legacy process from a prior manager.  I didn’t have two days a week to lose in getting my job done.

So, I pulled the team together and asked what each of the meetings were trying to accomplish, and we agreed we didn’t need as many, merging many of the meetings into one.  And, I asked each of the employees to look at their own personal schedules, and to cut out any unnecessary meetings.  One of those persons said they were being included in meetings that were eating up a whopping 80% of his time each week.  I asked how he got any work done at all?  He said he didn’t!!

He said, it was mandatory that he be in those meetings, and he didn’t have a choice.  To which I replied he need to cut his meeting time down to a cap of 20% of time, shedding 75% of his meetings.  He turned white as a ghost saying that was impossible.  I dug in and said it was not only possible, but required by the end of the week.  After a bunch of rethinking his time, he prioritized only the most important meetings, cut his meeting load down to the target, and actually started getting his own work done, reversing years of complaints that he was the bottleneck to others in getting their work done.

How Many Meetings Should Be Scheduled

To me, I try to cap my recurring weekly meetings at 20% of my time.  One one-on-one meeting with each of my direct reports, one meeting with the person managing me and one meeting with my peers to collaborate on needs between departments.  That leaves plenty of other time for the one-off meetings that come up during the normal course of business, again which should be capped within this 20% framework.  This keeps me efficiently working on the most important work that needs to get done, and keeps my team efficiently working on their most important work.  And, when people start checking projects off their to-do list, they feel a sense of accomplishment, the business moves forward and a healthy vibe is maintained in the office.

Flat Organizations Thrive Best

So, my appeal to all you entrepreneurs, don’t suffocate the life out of your companies with too many meetings.  Hire smart people, trust them to do their jobs, and get the heck out of their way, so they can do the jobs they were hired to do.  You don’t have to micro manage every single decision.  Empower your team to make their own decisions in a flat organizational structure.  Even if they make mistakes, that is fine, they will learn from them.  But, the team will be moving twice as fast at getting things done, than if they were burdened with a bunch of meetings.  And, as we know, speed matters with startups.

Concluding Recommendations

Challenge yourself and every employee in your company to cap their recurring weekly meetings at 20% of their time.  That is one day a week, or 8 hours in a normal working day.  That is up to 16 thirty-minute meetings they can schedule, so plenty of slots to work with.  Yes, I said thirty minutes, efficient meetings don’t need to be longer than that.  So, that means come to the meetings organized with a set expectation on how they are going to be run each week.  And, if there is nothing new to update on this week, there is nothing wrong with cancelling meetings.  Give your team the flexibility to only do meetings that they feel are absolutely needed.

As you can probably tell, I am not a fan of scheduling too many meetings.  It often leads to combatting issues like analysis paralysis, management by committee, micromanagement, disgruntled employees and an overall loss of business productivity.  So, instead, take more of a hands-off role in managing your team, kick your business into the next gear and start getting all those unnecessary meetings off of everyone’s calendars.  You will be shocked how much more work will actually get done!!


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




Wednesday, March 7, 2018

Lesson #289: Our First Acquisition--Red Rocket Acquires Restaurant Furniture Plus

Posted By: George Deeb - 3/07/2018

As many of you know, Red Rocket has been looking for a business to acquire for the good part of the last two years.  I previously wrot...





As many of you know, Red Rocket has been looking for a business to acquire for the good part of the last two years.  I previously wrote about all the challenges and hard work you can expect when doing M&A related projects, so I won't repeat those. But, I am excited to announce, Red Rocket closed our acquisition of Restaurant Furniture Plus last month, in partnership with Kessler Warshauer Ventures.  And, what a wild ride it was, getting our first acquisition to the finish line.  Let me elaborate with a few learnings from this process for your educational benefit.

OUR OVERALL M&A PROCESS

In the last two years, we looked at over 260 businesses for sale.  We made offers on around 20 of them.  That is a lot of hours invested to simply find 8% of them that were interesting enough to make an offer.  From that list of offers, we agreed to financial terms, and started a formal due diligence process with around 6 of them.  And, we got one to the finish line, successfully unscathed through the due diligence process and negotiations of the formal purchase agreements.

IT'S NOT A DONE DEAL, UNTIL IT'S SIGNED

At one point or another, over the last two years, I would have thought, with 80% certainty, that I was approaching the finish line towards acquiring a pet supplies, beauty products, candy maker, auto leasing, educational toys, and fitness video business.  But, there are many reasons why these deals did not close.  We learned something bad during due diligence.  The seller gets scared away by the agreement terms.  The seller tries to increase the price, after agreeing to a lower price in the letter of intent.  And, in one case, the seller liked our plan so much, they decided not to sell and try to grow the business themselves with our plan!  So, the deal is never done until the agreement is signed by both parties, as the process is laden with many potential pitfalls along the way.

OUR CRAZY MONTH OF NOVEMBER

Normally, serious conversations are pretty well spaced out.  So, with 20 offers made in two years, a normal spacing is around one big deal a month.  But, in November 2017, it was insanity.  We had six different deals that were all in competitive bid situations that we needed to pick one to focus on, and risk losing the other five deals in the process.

We originally passed on Restaurant Furniture Plus, picking a pet supplies business doing creative Facebook marketing, with a very large customer list, that was being sold at a very attractive purchase price.  But, we learned in due diligence that their Facebook marketing economics were deteriorating, the customer email list was really very low quality and with a declining profit base, the purchase price multiple of earnings was increasing by the day.  So, we passed on that deal in the 11th hour of negotiating the agreement.

We went back to Restaurant Furniture Plus and one other business to see if they were still available.  But, they were already under letter of intent, and off the market.  So, we focused on a candy seller on Amazon, that we liked their proprietary branded product line and their attractive purchase price.  But, when we learned their private label product was really branded candies by other manufacturers, that the purchase price did not include inventory (taking the purchase price way up) and there were scores of negative product reviews online speaking to the quality of the product, we got nervous.

At that same time, Restaurant Furniture Plus called back saying they were unhappy with their buyer, trying to change the purchase price last minute, and asked if we were still interested.  We always liked this business, and decided to shift direction and strike the deal with them.  So, I guess the third time of talking with them, really was the charm!

WHAT WE LIKED ABOUT RESTAURANT FURNITURE PLUS

As a lesson for what to look for in a good acquisition, Restaurant Furniture Plus really had it all.  They were serving a big market with a clearly differentiated service offering.  They had terrific unit level economics, with a high return on marketing investment.  They were growing over 67% per year, with a 50% conversion rate on leads, and a loyal repeat customer base making up over 50% of their orders.  It was a lightweight fulfillment model, with very little working capital needed, as their suppliers dealt with inventory and warehousing needs.  The founders were really smart and impressive, with terrific procedures in place, making it simple to transition.  And, it was a way to satisfy my marketing itch, with a service-driven B2B business model that was not going to go head-to-head with Amazon in the B2C space.

OUR THOUGHTS ON THE E-COMMERCE SPACE

With Amazon controlling 65% of all shopping searches, it is really hard to compete with their marketing muscle and pricing power.  Especially with Chinese manufacturers starting to sell direct on their website at wholesale prices (re-read this post about this threat to U.S. ecommerce companies).  So, to be successful in e-commerce, in the era of Amazon and Alibaba (re-read this post about Ali Express's threat to U.S. ecommerce companies), we think you need a couple things.  First, a proprietary branded product or service that you can call your own (preferably not manufactured by overseas suppliers selling the same product to others or themselves on Amazon).  Second, you need to find a category that Amazon isn't going to want to dominate themselves.  Restaurant Furniture Plus offered us both of those things.

KEY LEARNINGS ABOUT SMALL CAP M&A

As for a few learning to share about the small cap mergers & acquisition market, it is materially different than the middle or larger cap markets.  First of all, the entrepreneurs have typically never sold a business before, so they are new to the process, and unknowingly create a lot of friction to getting a deal done (e.g., having never seen a purchase agreement before, which can be scary to them).  And, secondly, they are typically not getting great advice from often less-experienced business brokers (which was not the case with Restaurant Furniture Plus, who was instrumental to helping us getting the deal done).  So, do your homework before engaging a business broker, to make sure they are really good at getting their clients to the finish line.

Compare this to bigger companies.  When a business is put up for sale, it is really for sale with low odds the owners change their minds (so low odds  you are wasting time, spinning your wheels).  And, the investment bankers are much more sophisticated at bridging the gaps and getting both parties to agree on deal terms.  Not to mention the stability and professionalism that comes when buying later stage, higher cash flow producing businesses that have their documents in place, which makes due diligence much easier.  It was frustrating for me being a former big-bracket investment banker at Credit Suisse, running through a process like this.

KEY LEARNINGS POST CLOSING

Make sure you have all your ducks in a row in how you are going to handle your post-closing training and transition period.  There is a LOT to learn in your first 30 days, if you are lucky enough to get that amount of time from the seller.  Make sure you have the right list of topics to get trained on.  And, the right list of technologies and other assets that need to be quickly transferred.  And, make sure the founders are on board to assist as consultants for some period of time after closing.  Preferably, a seller who is flexible to work with you when things ultimately go wrong when trying to transition systems, bank accounts, credit cards, supplier accounts, payroll processing, etc. on a flip of the switch.  Don't plan on running the business for the first month, as you will be knee deep in transition items.  And, the smoother the transition, the less opportunity something falls through the cracks to create problems for you down the road.  And, the first thing to do--hug all your new employees that you plan on retaining, with material incentives, as they will ultimately dictate your success or failure.  You don't want them looking for the door, the minute you arrive, or else you are toast as all their institutional knowledge walks out the door.

OUR PLAN FROM HERE

So, we are obviously excited to have our newest company in our portfolio.  And, I am personally excited to get back into a CEO role again, alongside my partner on this deal, Art Kessler.  But, Red Rocket will continue to be business as usual.  As you have business needs, continue to bring them our way, and our team will be happy to help.  I will do my best to keep the new blog posts coming on a regular basis.  We very much look forward to this new adventure.  And, if you know any restaurant chains looking to source new furniture, you know where to send them!!


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



Friday, March 2, 2018

How to Calculate What's Working When Marketing on Multiple Channels

Posted By: George Deeb - 3/02/2018

Long gone are the days of blindly spending marketing dollars without a data first mindset to clearly calculate and prove you are driving ...


Long gone are the days of blindly spending marketing dollars without a data first mindset to clearly calculate and prove you are driving a return on your marketing investment (your “ROMI”). This previously linked post demonstrates how to track your ROMI at the 30,000 foot view, based on your overall business revenues vs. costs, or at the unit level of an average transaction. But, if you want to really fine tune your efforts to maximize your ROMI, the best marketers turn to marketing attribution tools to help optimize marketing within every sub-channel of their business. Let me explain.

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, February 12, 2018

Lesson #288: How to Build a Startup Ecosystem

Posted By: George Deeb - 2/12/2018

I have previously written about Chicago’s exploding startup ecosystem .  But, startup ecosystems are popping up all across the country a...



I have previously written about Chicago’s exploding startup ecosystem.  But, startup ecosystems are popping up all across the country and the world, with varying levels of success.  I wanted to talk about the mix of ingredients that are needed to make a startup ecosystem thrive over time.  So, leaders in your local communities can have a blueprint with which to follow to propel your startup ecosystem, and hopefully, your own success in the process.

THE MOST IMPORTANT INGREDIENTS

Access to Great Ideas.  Great ideas turn into great businesses.  Think building “platforms” over “features”, or “wisdom” over “widgets”, or “painkillers” over “vitamins”.  Startups are hard in all cases, might as well be working on really big ideas.

Access to Talent.  Great entrepreneurs, preferably serial entrepreneurs that have learned from prior mistakes, are ultimately going to dictate the success of their businesses, and in turn, the success of the ecosystem.

Access to Capital.  The best ideas and the best talent are useless without the capital to fund their vision.  If that capital is local, great, as investors like to invest close to home.  If that capital is located in another city, that is also great, provided investors in those towns are willing to deal with travel (which they often don’t).  It is critical that the capital is available to embrace each stage of development, from seed to early to growth stages of your business.  Having seed stage, but not Series A or Series B stage, is a recipe for a likely “flame-out” of that startup, when they hit the wall in that level of their growth.

Access to Customers.  To me, this is the most important piece.  Customers drive revenues.  Revenues impress investors.  Investors fund growth.  Growth leads to big exits.  Big exits leads to a robust ecosystem.  This often means tight partnerships between early stage ideas with later stage companies to buy those services (ones who are supportive to helping the local startup community).

THE KEY PLAYERS

Entrepreneurs.  Duh, you need experienced teams running the startup businesses.  With an equal balance of needed skillsets from strategy, to marketing, to technology, etc.

Mentors.  First time entrepreneurs need to be able to ask questions of experienced leaders, to help get them up the learning curve, without making the same mistakes of their predecessors.

Investors.  Whether these are individual angels, organized angel networks, venture capital firms, private equity firms, family offices, corporations or other funding sources doesn’t matter.  What matters is the money is flowing from whoever can cut the checks for that stage of a business’s growth.

Incubators.  This category picks up everything from shared office spaces for startups, all the way up to formal startup accelerator programs with formal educational curriculum.  The point is, entrepreneurs can learn from each other, when they are in close proximity to each other.

Universities.  A lot of the biggest business ideas are born from the research inside of universities.  Having a healthy technology transfer process for these ideas to be monetized by business leaders is key.  And, university professors need to know, it is perfectly acceptable to try and monetize their ideas, at the same time they are trying to win a Nobel prize (which many don’t agree with).

Corporations.  The big companies in town help in many ways.  They invest through corporate venture capital funds.  They become potential customers of new local startups.  They have pain points of their own, that a local startup can build and solve for them.  They are often the exit for startups that have gotten large in size. You need a really healthy interaction between the startups and corporations working towards a common goal.

Associations/Events.  There are many groups in town that help organize and propel the ecosystem.  This could be industry trade associations, venture capital associations, entrepreneur networking groups, chambers of commerce, economic development groups, etc.  Leverage these groups of like-minded people at their big annual events or leverage their tools (e.g., job boards on their websites).

Government.  Whether it is at the city, county or state level, your local government can play a very important role.  That could include providing tax incentives for startups to launch in their city, tax free profits on any capital gains in a startup (to help stimulate investment), passing ecosystem friendly laws (like free access to the internet), or establishing venture capital funds with a portion of their treasury.

Service Providers.  The lawyers, accountants, bankers, recruiters, agencies, advisors, and consultants in your community all play a role.  The more experienced they are with startups, the better advice they will bring to the ecosystem.

OPTIMAL OWNERSHIP & ECONOMICS

Spread Equity Deep.  Most entrepreneurs concentrate equity into only a couple people at the top of the organization.  It is better to spread equity deep into other employees, as well.  Why?  Because if employees have a vested interest in the business, they will work harder towards hitting the goal.  And, when the company sells for $1BN, it creates hundreds of multi-millions that have new-found funds to start their next startup, powering the ecosystem to the next level.

Serial Exits.  Selling companies for big returns impress investors.  But, often times a first time entrepreneur, will see a $50MM sale as “big money”, and sell too early to put some cash in the bank for a rainy day.  But, a second or third time entrepreneur has already banked cash from their first exit, and now they are in a position to “roll the dice”, walking from a $50MM sale, in hopes of a $500MM sale down the road.

Reinvest Returns.  Money that simply goes into the bank account, or into safe real estate investments, does not help the ecosystem.  The money needs to round trip back into the community.  So, if you sell for $100MM, hopefully a good chunk of that is funding other startups in the ecosystem.

Shoot for the Moon.  Many investors are simply too conservative for a startup ecosystem to be successful.  Silicon Valley prides itself on “failure as a badge of honor”, as the lessons learned in one bad startup, will apply to the next good startup.  If you are too conservative, trying to cross potential “strikeouts” off your list, you are most likely crossing off potential “home runs” at the same time.

IN GENERAL

It Takes Leadership.  It takes a couple cheerleaders at the top that are going to “plant the flag” and have everyone rally around those goals for the community.  Preferably, somebody that can put their money where their mouth is, and can lean on their deep rolodex of key relationships in your region (e.g., the governor, the mayor, the local billionaires).

Leverage Local Strengths.  Figure out what your region does better than others, and focus your efforts around those industries or skills.  For example, New York would be a great place for financial startups and Los Angeles would be a great place for entertainment related startups, given the high concentration of experts in those areas.

It Requires Startup Density.  It will be really hard to build a robust community in very small towns.  There simply isn’t enough activity, breadth of industries or depth of expertise in any one industry to be effective.  So, either live in a town big enough to support an ecosystem, or prepare for a lot of travel between a bunch of smaller regions that have been aggregated into one community.

Collaborate Across Regions.  Don’t think a startup ecosystem is isolated to your city.  The best startup ecosystems feed off each other.  Think about the collaboration happening between New York and Boston startups, given their close proximity to each.  Or, between Detroit and Germany, because they both serve the auto industry, as examples.

Publicity Helps.  The rest of the country needs to know what you are up to.  Less about your desire to build an ecosystem.  But, more about the venture capital flowing into your region, or big exits being realized at big valuations.  So, celebrate your successes, and put those success stories locally “on display”, or nationally “on the road”.  That will get investors and talent to want to check it out.

Progress Must Be Measured.  Like with any business endeavor, you must have good measurement with which to manage it.  Quantify key metrics like the amount capital raised, investor value created, companies formed, jobs created and material exits in your market, and shoot to have those metrics improve year over year.

It Can’t Be Forced.  The community needs to share a common goal.  The goal of building a robust community can’t simply be embraced by a few, to be forced on others; it has to be embraced by everybody participating in the community, for it to be successful.

It Takes Time.  Don’t expect miracles overnight.  Ecosystems are not built in years, they are built over decades.  That is why Silicon Valley’s startup ecosystem is as big as it is; they have literally been working on it since the 1970’s, a fine tuned machine after 40 years of optimization.


Hopefully, you now have a better understanding of what it takes to build a robust startup ecosystem.  You can’t do it by yourself; you must collaborate as a symbiotic community with a shared set of common goals between people that are equally happy helping others, as they are at helping themselves.  Layout the blue print for your city, let it percolate for a couple decades and hopefully good things will come.


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



Friday, February 9, 2018

The Case for Your Startup to Hire Former CEOs

Posted By: George Deeb - 2/09/2018

A common mistake most entrepreneurs make when setting up their management team is filling it with people they feel are easier to contr...



A common mistake most entrepreneurs make when setting up their management team is filling it with people they feel are easier to control or won’t make them look stupid. That typically means an older, former CEO would never get a reasonable look as a direct report to the CEO of most early stage companies. But, is that fear justified?

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, January 29, 2018

Lesson #287: Stop Using Overly Aggressive Marketing Tactics

Posted By: George Deeb - 1/29/2018

Red Rocket has studied over 200 businesses to potentially acquire in the last couple years, and I have seen a lot of questionable market...



Red Rocket has studied over 200 businesses to potentially acquire in the last couple years, and I have seen a lot of questionable marketing tactics being used by a few of these companies, sometimes bordering on outright fraud.  Or, at a minimum, abusing their relationship with their customers, with overly aggressive marketing efforts.  I am going to share a few of these examples with you, so you don't repeat these mistakes with your businesses.  It is hard enough to acquire customers in the first place, yet alone to scare them away long term with tactics like the below.

A CASE STUDY

We were looking at a dropshipping ecommerce business that was marketing a "get a free product if you pay for shipping" offer.  That by itself was fine.  But, when I learned that once the customer was in their shopping cart funnel, buried in the fine print . . . very fine print . . . was a small footnote that said by accepting this offer, they were also signing up for their $39.99 per month subscription model.

We didn't pick up on the problem until we saw that their churn rate of lost customers, was off the charts.  Their average life of a customer subscription was only two months (not 6-10 months, like most good subscription offerings).  This was because customers were getting pissed by seeing $39.99 charges showing up on their credit card, for something they had no idea they had signed up for.  And, to make matters worse, the company made it very difficult to contact customer service to call and cancel the subscription.  Which lead customers to the customer review websites to publicly incinerate this business.  And, once the bad reviews are out there in mass, it is almost always too late to recover.

When we asked the business broker if he was aware of this situation, I found his answer humorous: "yes, the founder is aware that he is using 'aggressive marketing' tactics".  That was an understatement.  He would have been a lot closer by saying "suicidal marketing" tactics!!

MORE EXAMPLES

Here are a few more examples of overly aggressive marketing tactics we have seen:

  • Adding Better Business Bureau and eTrust certificates to their website, when in fact, they were not approved or highly rated by those services.  Flat out lying.

  • Keeping the hundreds of positive customer reviews published on their website, and curating out the thousands of negative customer reviews.  Dude, time to stop the presses and figure out why you are getting so many bad reviews in the first place.

  • Having their friends manipulate customer reviews on third party websites.  On a Monday, they had 50 only negative reviews published, and when we brought it to their attention, by Tuesday, there were 300 positive "fake" reviews added on the same site.

  • Not disclosing to their customers, pre-order, that products were being shipped from overseas, and that could result in 30-40 day delivery times.  Resulting in thousands of disgruntled customers trying to track down what they thought were lost shipments (many of which being missing gifts during Xmas season).

  • Selling a completely "snake oil" type of product, claiming certain benefits of the product that were not scientifically supported, and using fictitious before and after photos to enable the sale.

  • Firing away emails to their 500,000 person list, when the tactics used to build the list resulted in a very poor quality list only converting 0.01% of such customers into sales (1/100 of what it should be), and pissing off 500,000 people each week with unwanted emails in the process.

  • Selling prescriptions of certain hormone drugs to be used in off-label types of ways (e.g., weight loss in men), when the hormone was originally designed for other purposes (e.g., fertility in women).

  • Saying they were featured in major publications in their industry, when in fact, they simply bought advertising space in those magazines and did not have a featured editorial article.

  • Having a shopping cart funnel flow that tried to upsell customers additional products at seven different times during the purchase process.  Not illegal, but certainly ill-advised and abusive to the user experience.


Any of these tactics sound familiar in your own businesses??  If so, time to stop using strategies like these.  And, time to start building your business in more credible and customer-first ways.

WHY "AGGRESSIVE MARKETING" WILL KILL YOU LONG TERM

I know how hard it is to drive initial customers for your business.  But, if you need to resort to tactics like the above, yes you are helping your short term sales, but you are slicing your long term throat in the process.  Once bad customer reviews are out there, it will be near impossible to attract new customers.  Once investors learn these questionable tactics are being used by you, you will lose credibility in their minds, and they won't want to invest in your business.  And, once your customer funnel and access to capital dry up, there goes your business, right down the drain.

CLOSING THOUGHTS

As I have said in the past, with startups, perception often outshines reality, with many entrepreneurs doing the "smoke and mirrors" dance trying to get the attention of potential customers.  But, there is a very fine line between "stretching the truth", and flat out lying, or being overly aggressive with your marketing efforts.  So, if you are thinking about doing it, don't!!  As it will eventually come back to bite you in the ass.  A snake oil you certainly don't want coursing through your veins.


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


Monday, January 22, 2018

Lesson #286: Want to Sell More? Keep Your Mouth Shut!

Posted By: George Deeb - 1/22/2018

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 th...



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.  And, it is everything to do with what YOUR CLIENT has to say.  The magic sauce to closing the transaction is knowing how to ask probing questions, sit back and LISTEN.  Keeping your mouth shut is typically a really hard concept for a salesperson to grasp.  But, if they do, jewels of insights and real pain points of your customers will quickly surface to the top the more THEY talk.

YOUR PRODUCT IS LESS IMPORTANT THAN SOLVING PAINPOINTS

A salesperson’s first instinct is to pull out a demo of their product and start talking about all the bells and whistles built into the features and functionalities of that product.  [Insert Yawn!]  First of all, you never lead with the “what”, you always lead with the “why” your product can help them to drive more revenues, cost savings, customer experience improvements or whatever.  But, more importantly, you should never blindly open the pitch until you know exactly what your client’s pain points are.

IDENTIFY YOUR CLIENT’S PAINPOINTS

In order to learn your client’s pain points, you have to start by asking them what they think their pain points are.  In some cases, the client’s will know exactly what they are trying to improve in their business, as it relates to your product.  But, in many other cases, your client will not even know they have a problem, and you will need to educate them on the problem they have.  But, be sensitive to the fact many customers will not want to admit they have a problem, keeping their cards close to their chest for negotiating advantages.  So, it is up to you, to tease it out of them.

ASK PROBING QUESTIONS

A good salesperson knows how to ask the right questions, that will help them get to the meat of learning their client’s real pain points.  Sometimes you can tackle the question head on, like “tell me more about what you don’t like about your current product?”  Then, when ready, focus your pitch specifically around those elements they most care about.

But, sometimes you need to get to the answer through the back door, instead of the front door.  Maybe questions like “can you tell me more about your conversion rate you are seeing with your current tool, as I can help you benchmark that to what I am seeing with our other clients”.  That one question may go in many directions: (1)  they may not know their conversion rate (pain point #1); (2) they will certainly be curious what their peers are achieving, in comparison to themselves (pain point #2); and (3) any smart manager will want to learn how to improve their business if they are lagging behind (pain point #3).

Either way, the more probing questions you ask, the more intelligence you gain to craft a perfect pitch that exactly meets your client's needs, and the more learnings you can pass back to the product development team, for them to build additional features into your product, that can help next year's upsell with that client.

A CASE STUDY

I was working with a social media listening company.  This was a relatively new industry, compared to old school market research based on human focus groups. The sales team needed to help educate and entice their clients with questions like: (1) did you even know you could glean market research intelligence from social media; (2) would you be interested in listening to billions of social media conversations, to bubble up the three most important insights your customers are saying about your brand, versus asking the 100 people in face-to-face focus groups with expensive travel costs to ten different cities; and (3) did you know you are spending $1MM a year on traditional market research, and we can get you 10x better insights for only 10% of the price?   Not once did I say: look at this cool feature or functionality of our product, or pull out my demo.  You get to that later, after they are already drinking the Kool Aid at the strategic, higher level, and then you set the hook with the product.

CLOSING THOUGHTS

If you jump right into pitching your product, your odds of closing the sale are going to materially decrease.  Why?  Because you have no idea yet, what your client actually needs.  I argue you should not even pitch your product at all in the first meeting.  Build a relationship with them first, asking the key questions, learn their pain points, and THEN set up a second meeting that specifically addresses their most pressing needs.  This way, your odds of closing the sale will materially increase.  The biggest mistake most entrepreneurs have is having “diarrhea of the mouth”, when it comes to peddling their product.  All that does is put your customers to sleep in that first meeting.  And, that first meeting is the most important, to making sure you get the next meetings and the sale!  So, the next time you want to open your mouth in a first sales meeting—it better be asking questions and not pitching products.


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



Wednesday, January 10, 2018

Lesson #285: How to Recruit & Retain Rockstar Talent

Posted By: George Deeb - 1/10/2018

You have heard me preach over and over again how great teams build great businesses.  That I would rather invest in an A+ team with a B+...



You have heard me preach over and over again how great teams build great businesses.  That I would rather invest in an A+ team with a B+ idea, than a B+ team with an A+ idea.  Well now, you can learn exactly how to recruit and retain rockstar talent for your business.  My close colleague Jeff Hyman, the Chief Talent Officer at Strong Suit a Chicago-based executive recruiter than specializes in VC and PE backed companies, just published a new best selling book called Recruit Rockstars--The 10 Step Playbook to Find The Winners and Ignite Your Business.  It was like everything that was in my head on this topic, just magically found itself in print in Jeff's must read book.  Jeff was kind enough to let me share some of his wisdom with you in this Red Rocket post.

THE 10 STEP PLAYBOOK

First of all, here is a good summary of the book, featuring the 10 Step Playbook for hiring rockstars.  It compares what most recruiters do, and what rockstar recruiters do.  Notice the key steps from starting with setting up an upfront scorecard for what will make a great candidate, focusing on the candidates with the right DNA, taking candidates for a test drive, paying special attention during onboarding and pruning mis-hires within the first 60 days, to name a few.
APPROACH RECRUITING LIKE A MARKETER, NOT A RECRUITER

I especially liked the section that said recruiters need to entirely change their mindset in terms of how they approach recruiting.  Recruiting talent for your business should be no different than the marketing tactics you would use to attract new customers for your business.  So, put on your marketing hats and figure out how you are going to build a great "employer brand" in attracting the best talent for your business.
RETAINING ROCKSTARS IS JUST AS IMPORTANT IS HIRING THEM

Here is a quick excerpt from Jeff's book on the importance of retaining your rock stars once hired, and how exactly to do that:
_______________

THE ALL-IMPORTANT FIVE CS

"After hiring a Rockstar, the real work begins—getting the most out of them. I’ve studied and tried countless leadership styles. I’m convinced that authenticity wins—be yourself. But ensure that you provide what I call the five Cs to your Rockstars. They value these more than treadmills, ping pong tables, and notoriety.

CHALLENGE

First and foremost, provide them with interesting work. Give them customer problems to solve and a variety of people to deal with. Ask them to figure out how to make things faster, cheaper, and better within the organization. Countless studies show that challenge is the most important factor to job satisfaction for Rockstars, ranking even higher than money.

CAREER PATH

Rockstars are not only interested in their current role, but in their next one. They want to understand their likely career advancement and progression. That doesn’t necessarily mean an annual promotion. It can include lateral moves to broaden skill sets or working in a different geography. You can also say, “Here are some potential options for what might come next. I can’t promise them to you today, but if you do an outstanding job in this role, in a year, here are the kinds of things we see someone like you doing.”

The average new hire will work with at least fifteen companies during their career. The average tenure at a company is two years. So, if you can keep a Rockstar aboard your “train” for longer than that, you’re doing well. Go ahead and tell them, “My hope is to make this the best job of your life. If I do that, you’ll likely stay with us for a sustained amount of time. My expectations are high, but they’re realistic. My job is to get the best from you and provide the most fulfilling
job you’ve ever had.”

There’s no need to have the career discussion more than every six months, but you need to understand their aspirations and how they evolve over time. That way, you can begin to think about their advancement and what other roles might make sense for them. Provide it before some headhunter does.

Part of career progression entails succession planning, so that when you experience a departure, you have a potential successor identified. The best companies in the world often have a successor in mind for every role; that way, if someone leaves, they have a replacement named by the end of the day. The injury-riddled occupation of football has addressed this issue with the motto, “Next man up.” Be prepared because you never know when a role will need to be refilled.

Bear in mind this will sometimes mean promoting a Rockstar who’s not quite ready for the next step—you can do so on an interim basis. This is often better than taking the chance with an outside recruit, who would come with risk and could be the reason your Rockstar departs when passed over for the role. Always search inside first; at the very least, when considering outside candidates, run all viable internal candidates in parallel through the same fair and objective process.

CANDID COACHING

Most Rockstars respond well to candor, because they have an insatiable need to improve their performance. They recognize the path to promotion, to taking your job, and the CEO role perhaps one day, is to continually improve. To get better, they need and crave your feedback. So, provide it frequently. Ban the annual review; your Rockstars hate it as much as you detest cramming to write those missives over Christmas week. Instead, implement a monthly or quarterly coaching cycle. Find just two or three messages—not the laundry list given by most managers—that you want to reinforce, give specific examples, and then watch for improvement. When you catch them doing something right, reinforce it by letting them know you noticed and by recognizing them publicly if possible. Your two or three things should be tied to the skills they need for their next career move.

A powerful yet underused tool to help you give candid feedback is the Socratic method. Ask a few simple questions. “How do you think the (meeting/product launch/etc.) went? What could you have done differently? What could have gone better?” Rockstars are often their own toughest critic. Often, they are aware of what could have gone better or what they could have done differently. You can say, “What can I, as your manager, do next time to make sure your performance is better?”

Rockstars appreciate a work environment where candor, or a debate-and-align structure, is valued. This structure supports productive disagreements focused on the idea, not the person. Once a decision is reached, regardless of whether the group agreed or the leader reached a decision, everyone agrees to align behind that decision.

CONTACTS

Open your personal network—including your LinkedIn network—to your team. Introduce them to mentors outside the organization. This is especially important if yours is a small company where there just aren’t many people for them to learn from. You might know people who would be great role models for your Rockstars. Some managers won’t do this because they want to keep their Rockstar a secret, but when you introduce them to people who can broaden their knowledge, they will be grateful. And that increases loyalty.

COMPENSATION

Compensation isn’t everything, but it’s something. I’ve found that more important than the fixed base salary, however, is the variable upside. Rockstars respond well to a challenge, and they respond well to currency tied to upside performance. Lay out specifically how they earn it. Be clear with what percentage they can earn and when it will be paid out. And don’t change the rules halfway through the game.

Rockstars don’t respond well to black-box, or subjective, variable compensation. No matter how well they do, they don’t know what they’ll earn. That’s not motivating, and so you’re wasting your money and frustrating your top performers. Avoid capping your variable compensation. If they can deliver three times what you expect them to deliver, they should receive a meaningful variable compensation payout.

Perhaps my greatest frustration with regard to compensation is that so many leaders apply the “peanut butter” approach. They spread money around, approximately the same to all employees, in an effort to keep the peace. Instead, use differentiation, the concept of not treating everyone equally, to separate Rockstars from B- and C-Players. It means promotions, titles, and public recognition for great performances. It means fair compensation tied to performance. So rather than giving everyone 2 to 5 percent raises, give 20 percent raises to the ones who deserve it. And yes, that means you’ll fund it by giving no raise this year to many. And those C-Players may choose to leave because of it. And that’s okay."

______________


So, as you can see, there is a lot of terrific wisdom in Jeff's new book.  It is a must-read if you going to build really great teams for your business, as there are a lot more how-to details in the book than are shared in summary in this post (here is the link to the book on Amazon).  Thanks, Jeff, for allowing us to share this gem with our Red Rocket blog readers.

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


Friday, January 5, 2018

The Pros and Cons of Hiring a Clone of Yourself

Posted By: George Deeb - 1/05/2018

Come on, we have all thought it as entrepreneurs, at one point or another in our careers: “I just wished I could clone myself in findin...




Come on, we have all thought it as entrepreneurs, at one point or another in our careers: “I just wished I could clone myself in finding new employees for my business. Nobody works harder than I do. Nobody is as smart as I am. I don’t trust anybody to make decisions or manage teams better that I do.”  Sound familiar? But is "cloning" yourself really the right solution for your hiring goals? There are clear advantages and disadvantages to a strategy like this, so you will need to figure out if cloning yourself will help or hurt your business, based on your business’s specific needs. 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, January 3, 2018

Lesson #284: How To Calculate Your Total Addressable Market Size

Posted By: George Deeb - 1/03/2018

I have written many posts about the importance of determining your industry size for strategic planning or investor pitch purposes.  Bu...



I have written many posts about the importance of determining your industry size for strategic planning or investor pitch purposes.  But, determining your industry size is not always easy, and more importantly, determining your total addressable market (which I will define later), is even more important and an even more nebulous calculation.  So, here is everything you need to know to make sure you are correctly calculating your total addressable market and going after the biggest total addressable market you can (which will attract more investors for your business).

THE DIFFERENCE BETWEEN INDUSTRY SIZE AND ADDRESSABLE MARKET

In this lesson, let's use the example that we are selling social media marketing software into small businesses.  If you go to Google to search for "marketing software industry size", you will stumble on many industry research reports written by professional research firms, that estimate the marketing software industry was approximately a $37BN market size in 2017, on a global basis.

Many entrepreneurs will just stop there, and say they are serving a $37BN industry.  But, are you really?  First of all, you are not selling globally today, you are most likely only selling in the U.S.  And, with the U.S. around 30% of the global market, your market size just cut to $11BN.  And, you are only serving social media software, not other types of marketing software.  So, estimating that social media only makes up 20% of all marketing software, that means your market has just cut down to a $2BN market.

But, it doesn't stop there.  Perhaps half of the social media marketing software business is for managing free social communications, and the other half is focusing on managing paid social media advertising campaigns.  Let's say, you only do the latter, so now your industry size is down to $1BN.  But, remember, we only serve small businesses, not large enterprise-scale corporations.  With small businesses comprising 50% of the U.S. economy, now you are down to a more realistic $500MM total addressable market size.

Furthermore, assuming there will be plenty of big competitors going after this exact same space, it is unlikely that you will ever drive in excess of $100MM in revenue, with a hefty 20% market share in this space.  So, don't show your revenues ever getting larger than that . . .  unless you broaden your product offering or expand your target client base or take your business global.

THE DIFFERENT WAYS TO CALCULATE TOTAL ADDRESSABLE MARKET

There are a few different ways to calculate total addressable market size.  The above example was a TOP DOWN look, starting with the overall industry size and paring it back to the market you are actually serving.

A second way to calculate it would be BOTTOM UP.  That would start with actual data from what you are actually selling today, and grossing it up for your potential future selling efforts.  Let's use this same example as above, and take a bottoms up look.

Let's say you have been in business for a year and already have $1MM in revenues at a selling price of $25,000 per customer (serving 40 customers today).  Let's say there are 16MM small businesses in the U.S., but only half of those are B2C marketing driven companies (taking us down to 8MM B2C small businesses).  But, only 10% of them would ever be able to afford a software like this, since the average small business only does $5MM in revenues.  So, there are 800,000 potential customers over time.  Of which, you would not be able to get more than 20% market share, so 160,000 potential clients of yours.  So, that suggests a total addressable market of $20BN (or $4BN to you with a 20% market share), as your current $25,000 selling price.

A third way to calculate total addressable market would be the value-created model.  That says your solution is going to help your customers drive additional revenues, or save future costs, and they will share a portion of that with your business.  So, let's say there is $30BN in social media advertising spent every single year in the U.S., half of that by small businesses, or $15BN.  Let's say your software can save them 10% on their marketing expense, with better efficiency from your tool.  So, $1.5BN in value created.  And, let's say you sell them on giving 10% of those savings to you, creating a $150MM market opportunity for you and your competitors (and a $30MM revenue opportunity for you, assuming you get a 20% market share).

NOW COMES THE SANITY CHECK

We tried to calculate the total addressable market in three different ways, and got three completely different answers.  Top down suggested $500MM, bottom up suggested $20BN, and value-created suggested $150MM.  We obviously were too aggressive with our bottom up thinking.  It is not rational for us to serve a $20BN market in bottom up analysis, when the overall marketing software industry in top down is only $11BN.

So, I would go back to the drawing board on bottoms-up, or ignore it altogether.  On the second try, I would cap it based on how many sales people I can afford to hire in the next five years.  So, if we have 20 sales people in year five, each doing $1MM in sales each, that suggests your business is $20MM in size and serving at least a $100MM market.  If not more, as you will most likely not have a 20% market share as early as your fifth year.  Maybe you only have 5% market share by then, and the market is really $400MM in size.

That leaves us with two reasonable numbers with the top down and value-created analyses.  But, two thoughts here.  First, I would always lean towards the lower number, to be conservative, or the $150MM value-created number in this case.  And, second, I would also lean to a bottoms-up or value-created number, over a top down number, as those are more real based on known data points for your business, as opposed to pie-in-the-sky estimates from the industry research created by an analyst you don't know is any good, or not.

WHAT DOES THIS ALL MEAN FOR YOUR  BUSINESS & FUND RAISING

So, hopefully, you know have a better understanding on how to calculate total addressable market for your business.  Stop embarrassing yourself with inflated numbers trying to impress investors.  They will be more impressed with your more scientific, data-driven approach to a more conservative and realistic number.  So, put that number in your investor presentations.

But, in all cases, venture investors are trying to build $1BN companies, so if you can't reasonable build them $100MM revenue company that can be sold at a 10x revenue exit multiple, you might need to either expand your product offering to attract more revenues, or know that your business will most likely not attract venture investor attention.  So, in this case, the value-created model only gets us to $30MM in revenues.  That will not be enough.  Back to the drawing board, if venture investors are what you are looking for.


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


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