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Wednesday, February 7, 2024

Dead Weight Expenses Are Costing Your Business

Posted By: George Deeb - 2/07/2024

  In business, managing with a steady eye on efficiency is pivotal, of course, yet I have seen a great many operations carrying unrecognized...

 

In business, managing with a steady eye on efficiency is pivotal, of course, yet I have seen a great many operations carrying unrecognized burdens — from being overstaffed to spending too much for services, from poorly investing sales and marketing dollars and operating too many divisions to focusing on channels that don't have a material payback.  This post will help you assess your own enterprise — particularly with respect to growth prospects — in order to determine if there's pruning to be done.

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 5, 2024

Lessons in Leadership: A Jim Harbaugh Case Study

Posted By: George Deeb - 2/05/2024

  I am a graduate of the University of Michigan and lived through the roller coaster ride of the Jim Harbaugh era in Ann Arbor, which has re...

 


I am a graduate of the University of Michigan and lived through the roller coaster ride of the Jim Harbaugh era in Ann Arbor, which has recently come to an end with him returning to the NFL after winning the national championship at Michigan.  But, the last nine years has provided many nuggets for entrepreneurs to learn from, in terms of how to approach leadership.  This article summarizes the best of those leadership lessons to potentially apply in your businesses.

A Quick History

Michigan football is the winningest program in college football history, with a rich tradition of excellence and a rabid fan base that expect nothing less than winning championships every year.  But, when head coach Lloyd Carr retired after the 2007 season, nobody expected it would be followed by the lackluster coaching tenures of Rich Rodriguez and Brady Hoke between 2008 and 2014.  This had Michigan fans even hungrier to restore its championship ways.  And, who better to call on to "right the ship" than Jim Harbaugh, a true "Michigan Man", a beloved Bo Schembechler disciple and former Michigan star quarterback, that had realized head coaching success everywhere he had been (e.g., San Diego, Stanford, San Francisco 49'ers).  Jim Harbaugh agreed to take the reins of Michigan football starting in the 2015 season to "save" his beloved alma mater and return Michigan to greatness.

The first five years of Harbaugh's tenure as Michigan head coach were "ho hum" based on Michigan's goals.  He won 8-10 games in each of those years.  But that meant there were 3-5 losses in those years, and the losses were usually on the biggest stage, losing to ranked teams, in bowl games or to Michigan's arch rival Ohio State.  The fans were most panicked after the 2000 season (COVID year), when the team went 2-4 and people we calling for Harbaugh's firing.  But, the athletic director stood behind Harbaugh, they restructured his contract in light of poor performance, Harbaugh retooled the program, and then magic happened.  In the following three seasons, Michigan's record was 40-3, they beat archrival Ohio State in each of those years, they won three straight Big Ten championships and capped it off in 2023 with a 15-0 season and winning the national championship on the biggest stage.  Michigan had finally returned to being an elite program, and the fan base was beyond ecstatic.  After the season, Harbaugh decided to pursue his dream of winning a Super Bowl, and returned to the NFL as head coach of the Los Angeles Chargers.

Now, here are the resulting leadership lessons that come from this story:

Your Strategy Really Matters

When Harbaugh got started, he was talked into trying more of a spread-style offense, with speed in space, which was what the better teams were employing at the time.  But, with all the big bodies of the Big Ten, they simply weren't winning the battle in the trenches on the offensive and defensive lines.  It wasn't until Harbaugh reverted back to his "tried and true", "smash mouth" style of playing football, that he truly started to excel.  That wasn't a popular strategy, with slow style of play resulting in "three yards and a cloud of dust", but it was a strategy Harbaugh knew well and succeeded with in the past.  So, he pushed in all his chips, doubled down on that strategy, and the wins started to follow.  So, like with anything, do what you know and think is best, regardless of whatever "noise" would suggest otherwise.

Your Management Team Really Matters.  

Harbaugh cycled through a bunch of assistant coaches during his tenure.  It wasn't until he tapped into the defensive schemes used in the NFL, by his brother John Harbaugh at the Baltimore Ravens, that good things started to happen for Michigan. Harbaugh hired two defensive coordinators out of the Ravens, Mike McDonald and Jesse Minter, and those guys helped to turn Michigan's defense into the #1 defense in all of college football, in multiple years.   And, that doesn't even talk about adding in world class strengh and conditioning, and nutritional coaches, as Harbaugh knew those areas were just as important to success as learning the playbook.  So, surround yourself by the best people possible.

Your Employees (Players) Really Matter--Win The Recruiting Battle

When Harbaugh got started, he did everything he could to stand out with recruits and push the envelope within the rules of the NCAA.  He would set up satellite football camps in other states that were recruiting hotbeds, with the logic if they won't come to visit Michigan, we will bring Michigan to them (which irritated the competiting football programs in those states).  He would take his team on big international team building trips (to give the players more than a football experience at Michigan).  He would have dinners and sleepovers at recruits' houses, to show those families how important that recruit was to him.  He launched a documentary about the Michigan football team on Amazon Prime, to get the program more media exposure nationwide, with an "inside look" at how business is done in Ann Arbor.  He may have gathered a lot of strange looks along the way, but there was clearly a method to his madness. Figure out what you need to do to attract the best talent, and stand out from your competitors.

Your Employees (Players) Really Matter--Recruit the Right People

Equally important was recruiting the right type of player.  Harbaugh was critcized for not recruiting enough five-star players.  But to him, it was more about the character of the person he was recruiting, knowing he would "coach up" a three or four-star player, into a "five-star" NFL prospect.  He wanted the guys that were underappreciated, had a chip on their shoulder, had a lot of hurdles they overcame.  He wanted that drive and mindset, as you can't teach that.  So, when the going gets tough, he would have a tough-minded team that would get going, driven to succeed no matter what challenges they were presented with.  And it worked, as evidenced by this year's Rose Bowl, when Michigan's 2 five-star players beat Alabama's 18 five-star players.  So, make sure your hires fit your desired culture, as you can't afford to have any "bad apples" in the bushel.

Your Team Culture Really Matters

I have watched over 40 years of Michigan football, and I have never seen a "team first" culture like this year's team.  They all had the singular goal of winning a national championship (after getting so close the previous two years), they knew they all needed to do their part on the field and in the weightroom, they all truly loved and inspired each other, and they were all "selfless".  Quarterback J.J. McCarthy sacrificied individual passing stats, if the coaches thought Michigan's vaunted running game would win the game.  Back-up running back Donovan Edwards, who could have easily started at any other school, was happy to play second string behind Blake Corum, if the coaches thought that would help them win the game.  Culture is one of the hardest things to build, and Harbaugh masterfully built his. You need to do the same.

Patience Is a Virtue

It would have been very easy for Athletic Director, Warde Manuel, to cut ties with Harbaugh after their dismal season in 2020.  But, Manuel believed in Harbaugh, and was willing to give him another chance.  It may have taken 9 seasons instead of 5 seasons to win a national championship, but Harbaugh ultimately delivered on the goal of restoring Michigan to greatness.  So, when making your hiring and firing decisions, be sure not to throw out "the baby with the bathwater".

Sometimes You Need to Eat "Humble Pie"

You have to know that Harbaugh was frustrated with his performance in 2020.  He was hired to restore the Michigan brand as one of the elites.  He wanted that more than anybody.  But, Harbaugh was willing to make the hard sacrifices.  He voluntarily cut his lofty salary in half, and made it more of a pay-for-performance structure, where the better the team did, the higher he got paid.  And, he pushed more of the team's salary budget, into the hands of his assistant coaches to increase their rewards for their hard work.  And, during COVID, even took personal monies to save certain staffers from getting fired.  That was not normal actions in the egomaniacal world of college football coaching.  But, these actions all instilled trust with the adminstration and loyalty by his team.  What can you do for your teams, to replicate this level of trust and loyalty to you?

Don't Publicly Disclose Your Actions Unless You Have To

The one big criticism of Harbaugh was his perennial flirtation with the NFL.  In 2022, it was with the Minnesota Vikings.  In 2023, it was with the Denver Broncos.  In 2024, it was with the LA Chargers who ultimately hired Harbaugh. Even if Harbaugh's intent was to create negotiating leverage for his contract renewal with the University of Michigan, you don't do it publically in the media, for all the current players, coaches and recruits to see.  It doesn't create a sense of stability, and would naturally have everyone looking for the door, especially with rival coaches fueling that messaging in their recruiting pitches.  Which is part of the reason Michigan's recruiting class ranks suffered.  So, keep your cards close to your chest any time your actions could have a negative impact on the team.

Timing Is Everything

If Harbaugh had left Michigan after his disastrous 2020 season, his reputation would have been permanently stained.  It would have been his first real failure, and his reputation with the university he loves, would have gone from beloved Michigan Man to a pariah.  But, by righting the ship, and leaving after winning the national championship, all is good with the world.  Harbaugh accomplished his goals, the fans are euphoric and he will be fondly remembered as the man that "saved" Michigan football.  And, even if he wants to go scratch that itch of coaching in the NFL and leaves Michigan, sobeit, we wish you the best.  In three short years, Harbaugh legacy evolved from "loser" to "legend".  And let's be real, there is only one way to go when you are at the top, and it was unlikely for Michigan to have another undefeated season in 2024 with top ten programs like Texas, Washington, Oregon, USC and Ohio State on the schedule, in the wake of four Pac-12 teams joining the Big Ten next season.  Timing is a critical compotent to your success and reputation, so use it wisely in your own efforts.

If It Isn't Broken, Don't Fix It

On the heels of Michigan's first national championship since 1997, losing your head football is not what an athletic director wants to deal with.  But, Manuel's actions were swift, and rightfully so.  He promoted Offensive Coordinator, Sherrone Moore, to head coach. Why?  Firstly, because Harbaugh said he was the next guy to carry the torch, and Manuel trusted Harbaugh's opinion.  But, more importantly, the players loved him, and he would maintain Michigan's very unique culture going forward, hopefully giving the team increased odds for additional championships in the future with a "winning recipe" in hand.  And, everyone remembers Moore's success filling in for a Harbaugh during his three-game suspension last season (for the sign stealing scandal), winning all three games against Michigan's three toughest opponents that year (Penn State, Maryland and Ohio State).  So, he was a known entity.  Could Michigan have hired a big name coach out of another program? Sure, it could have.  But, it would have risked toppling the entire apple cart in the process.

Closing Thoughts

Thank you Coach Harbaugh for everything you accomplished during your tenure at Michigan, you exceeded everyone's goals with three straight wins over OSU, three straight Big Ten titles, three straight trips to the College Football Playoff, and a national championship this year.  It may have taken you a couple extra years, but you ultimately did it.  The Michigan fan base wishes you nothing but success in Los Angeles.  And, for all you small business owners out there, see if you can apply any of these leadership lessons in your businesses. Go Blue!


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


Wednesday, January 17, 2024

[VIDEO] How Passion Drives Entrepreneurial Success

Posted By: George Deeb - 1/17/2024

I was recently interviewed by  ASBN , an online "television network" serving the small business community, about how passion is a ...


I was recently interviewed by ASBN, an online "television network" serving the small business community, about how passion is a key driver of entrepreneurial success.  As you will learn, without passion and a true love of what you are building, it will be very hard to get your business to succeed, especially through the bad times.  I thought this video turned out great, and I wanted to share it with all of you, to make sure you are doing all the right things to instill a passion for the business in all of your employees.  I hope you like it!!



The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.


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

Wednesday, January 3, 2024

Increasing Conversion Rates Can Materially Boost Revenues

Posted By: George Deeb - 1/03/2024

It's common to close approximately 20% of leads and lose 80%. What's frequently overlooked in the search for growth, however, is tha...


It's common to close approximately 20% of leads and lose 80%. What's frequently overlooked in the search for growth, however, is that increasing that conversion rate by just 10 percentage points can be the equivalent of increasing revenues by no less than 50%. That's why, in my experience, a rigorous analysis of lost opportunities is among the most pivotal steps to consider when a change in strategy is needed.

Some missed sales are directly related to the selling company, including the product and its pricing and marketing. Some are related to buyers' companies, including having management approval and budgets in place. Some are related to individuals involved in a transaction, including salespeople, the buyer at a customer's company or some other middlemen. Finally, some are related to entirely external factors, including competition and economic conditions. The key is figuring out which of these is/are the reason you lost each opportunity, and then putting detailed actions into place to address each.

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

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



Thursday, December 21, 2023

Red Rocket's Best Startups of 2023

Posted By: George Deeb - 12/21/2023

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


Red Rocket gets introduced to hundreds of startups each year, in the normal course of doing business, or via our involvement with various startup groups or events.  We wanted to honor the best of these startups that we met in 2023, in Red Rocket's 12th Annual "Best Startups of the Year".  This list is not intended to be an all-encompassing best startups list, as there are many additional great startups that we are not personally exposed to each year.  And, this list is not intended to be only for businesses that launched in 2023, it is open to startups of any age, that they or their advisors had some personal interaction with us in the last 12 months.  The business simply needed to have a good idea, good team or good traction, that caught our attention.  Congrats to you all!!


THE BEST STARTUPS OF 2023 (in alphabetical order):

Atom Limbs (CEO, Tyler Hayes) - B2C next-generation artificial limbs

AvaWatz (CEO, Rajini Anachi) - B2B AI platform for robotic teams in military

Overplay (CEO, Caroline Strzalka) - B2C turn any video into a game

Power Hero (CEO, Esmond Goei) - B2B car charging stations for apartment buildings

Pure Blue Tech (CEO, Ryan Vogel) -B2B self-cleaning membranes for water reuse

Vehiko (CEO, Edward Agabs) - B2C reverse auction car buying (dealers bid for sale)


And, don't forget to check out the 2012 winners2013 winners2014 winners2015 winners2016 winners2017 winners2018 winners2019 winners2020 winners, 2021 winners and 2022 winners, many of whom continue to be doing great things.


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


For future posts, please follow us at: @RedRocketVC

Wednesday, December 13, 2023

Lesson #357: Prioritizing Investment Return Objectives

Posted By: George Deeb - 12/13/2023

I was recently talking to an entrepreneur that passed on an investment because it would not need yield the company at least a 10x growth opp...


I was recently talking to an entrepreneur that passed on an investment because it would not need yield the company at least a 10x growth opportunity.  I told him those level of returns are reasonable when investing in small businesses under $5MM, but that he should consider lowering his ROI threshold when investing in larger companies.  My logic was twofold: (1) bigger companies are harder to grow as quickly as small businesses, so the growth percentages will be lower; and (2) you can make “oodles” more money in dollars on the bigger company investment, even if the ROI was only 3x-5x.  This post will help you know when to focus on percentage returns vs. dollar returns when assessing your investment opportunities.

Path One—Invest in a Small Company for a 10x Growth Opportunity

Let’s say you are looking to invest in a $2MM revenue business that you can grow to $20MM in revenues (10x opportunity).  That $2MM business was generating $200K in cash flow and you purchase it at a 3x EBITDA multiple for $600K.  And, when you sell it, the business is doing $2MM in EBITDA, and you can realistically achieve a 4x EBITDA multiple on the sale as a bigger business.  So, you sell it for $8MM, which results in a pretty 13x return on invested capital. You made $7.4MM in the process, over the five years you owned the company—that is a whopping 68% average annualized IRR.  Nice job!

Path Two—Invest in a Medium Company for a 5x Growth Opportunity

In this case, you are investing in a $20MM revenue business that you can grow to $100MM in revenues (5x opportunity).  That $20MM business was generating $2MM in cash flow and you purchase it at a 4x EBITDA multiple for $8MM.  And, when you sell it, the business is doing $10MM in cash flow, and you can realistically achieve an 8x EBITDA multiple on the sale as a materially bigger business, as private equity investors are willing to pay a premium for high cash flowing companies.  So, you sell it for $80MM, which results in a nice 10x return on invested capital.  You made $72MM in the process, over the five years you owned the company—that is an impressive 58% average annualized IRR.  Amazing!

Comparing Both Paths

If you were the entrepreneur that I mentioned earlier, you would have only pursued the first path, as that is the one that enabled the 10x growth opportunity.  And, you would have been happy at the end of the day with your 13x return on invested capital and 58% annual IRR.  But, should he have been happy?  If he can gone down path two instead, which was only a 5x growth opportunity, he would have returned $64.6MM more capital, albeit it a lower 10x return on invested capital and lower 58% annualized IRR.  He was so focused on hitting that one 10x growth metric, that he lost sight on the big picture of there being a ton of money left “off the table” by not investing in path two.

Key Things to Understand

One of the key things to digest in this comparison is what happened to the business valuation multiples as businesses get larger.  The business in path one started at 3x EBITDA multiple as a $200K EBITDA business, and expanded to a 4x EBITDA multiple as a $2MM EBITDA business.  That means 25% of the return had nothing to do with the growth of the business, it had everything to do with how investors value bigger businesses.

And then, if you continue this exercise for the sale of the bigger business in path two, the EBITDA multiple grew to 8x as a $10MM EBITDA business, after starting at a 4x valuation.  That means 50% of the return had nothing to do with the growth of the business, it had everything to do with how investors value even bigger businesses.  The point here, there are material economies of scale here when valuing companies, and bigger is typically better for driving a higher sale multiple.  Several roll-up stories are modeled on that exact hypothesis: buy 10 companies at 3x and sell them at 8x without having to do a single thing operationally.  You simply put the businesses together into one entity to create shareholder value.

Closing Thoughts

So, what does this all mean for you?   Don’t be so focused on hitting your one single metric (10x growth in this case study), that you lose sight of the forest of through the trees.  Would you rather be bragging about your 10x growth story that helped create $7.4MM, or your 5x growth story that helped create $72MM.  I don’t know about you, but the latter certainly sounds a lot more appealing to me.  Hopefully, you have a better grasp on when to focus on multiples or percentages of growth, and when to focus on the dollar growth instead.  Good luck resetting your growth and return objectives and you will be celebrating all the way to the bank.


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



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