Targeted Marketing Has Never Been Easier . . . or Cheaper!!

The marketing world has substantially evolved over the last few years, in terms of how you can target prospective customers for your business.  Before, your primary options for targeting, were largely around demographics or geographies through media buys on larger websites and ad networks, or through keywords through the search engines.  But, the major social networks have made some very interesting strides in the last couple years, in terms of letting advertisers drill down like a laser beam on very narrow targets within their broader audience.  Below are a few examples of what I am talking about.

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

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10 Things You Need to Know When Responding to RFPs

If you are in the B2B space, odds are you will need to respond to requests for proposals (RFPs) from prospective customers throughout your normal course of business. But the RFP process is typically filled with potential pitfalls along the way. Here's how to identify, and more importantly, avoid them.

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

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Lesson #222: Measuring Your Company’s Culture Can Pay Big Dividends

Building the right culture for your startup is a critical driver of its success or failure, as we learned back in Lesson #13.  It is one thing to talk about building the right culture.  It is an entirely different thing to actually know you have built it.  I recently got a crash course on this subject from my colleague Barry Saltzman at Culture Measures, a culture consulting firm, who taught me that measuring culture has become a science.  And, once harnessed, it can help turn culture into a competitive weapon for your business.  I wanted to share those learnings with you.

To start, and to be perfectly clear, your company’s culture is a direct driver of your business performance (e.g., customer satisfaction, employee satisfaction, productivity).  The better your culture, the better your business output (e.g., throughput, variable costs) and business outcomes (e.g., net profit, equity value) will be.

But, how do you measure culture?  Barry, suggests there are four key drivers of a company’s culture: (i) your people (and them feeling empowered, being trusted and getting engaged); (ii) your process (which should be adaptable with continuous learning and improvement); (iii) your clarity (in terms of clearly communicating and understanding the company’s vision and values); and (iv) your execution (in a way that is productive, accountable and collaborative).  Unless you can clearly track and measure these four different areas, and the numerous sub-categories therein, you really won’t know what is working, and what is not working, with your company’s culture.

If you feel you have a culture issue in your company, companies like Culture Measures can help you clearly identify where the problems lie.  Or, you can try to solve these items on your own by: (i) introducing the concept and survey to your team and getting all issues aligned; (ii) reviewing the results with the management team; (iii) appointing an in-house culture leader to plan steps to address issues raised; (iv) build a metrics dashboard to measure your success over time; (v) make sure goals are set and are in line with the company’s priorities and financial metrics; and (vi) roll out the program to  your employees with clear near term and long term objectives.

If you do this right, not only will your culture and employee productivity improve, but it will lead to data-driven buy-in from your senior management to know they are getting a clear ROI on their culture investment which is perfectly in alignment with the company’s goals.  Pretty cool stuff, bringing hard data to a formerly hard to measure area of the business.

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Lesson #221: The Internet of Things is Coming, Hang on to Your Hats!!

I recently completely a deep dive on the Internet of Things (IoT) space for one of my clients, and I was blown away with what I learned.  If we think the consumer Internet as we know it is a big deal, IoT will become an even bigger deal, over time.  Gartner predicts the IoT industry to be $1.9TN in size by 2020, and McKinsey thinks it could be as large as $6.2TN by 2025, in terms of economic impact.  Yes Trillion!!  Intel forecasts 15BN devices will already be connected to the internet in 2015 alone.  That's a lot of demand for embedded smart modules, cloud computing, connectivity, data security, mobile apps and analytics reporting alone.

To be clear, when I talk about IoT, I am largely talking about devices connected to the internet (e.g., think a Nest thermostat), or Machine-to-Machine (M2M) technologies.  IoT applications run across these primary sectors:  Consumer, Commercial, Industrial, Buildings, and Government.  And, get further segmented across these major industries:  Retail, Transportation, Security/Safety, IT, Manufacturing, Automotive, Energy and Healthcare, to name a few. Research suggests Manufacturing and Healthcare are the largest two of these industries, in terms of potential and investment to date.  From there, it drills down even further.  For example, in the Security/Safety space, it splits out into Real Time Alerts, Asset Tracking, Fire Safety, Environmental Safety, Elderly/Child Protection, Power Protection, Supply Chain Visibility and beyond.

So, don't try to be all things to all people, find your sizeable niche and dominate it.  Understanding a lot of big companies are also carving out their niches.  As examples, in just the smart home space, niches are being created around lighting control (Hager, Legrand, Leviton, Lutron, Matsushita), access control (Honeywell, Siemens, Tyco, UTC), connected home security (Alarm.com, Bosch, Kwikset), energy efficiency (Belkin, Nest), home automation (e.g., Smart Things) and appliance control (GE, LG, Maytag, Samsung).  So, even if you pick a good niche, odds are some big companies are already trying to figure out solutions in that space.

And, with this kind of next-generation market opportunity, it is attracting a lot of investment from a lot of big players.  In terms of financial investors, over $1.6BN was invested into IoT companies by venture capital firms in 2014 alone.  And, as for strategic players putting a lot of investment into IoT opportunties, it is an impressive list of expected companies, including Apple, AT&T, Bosch, Cisco, Eaton, Emerson, Ericsson, Fujitsu, GE, Google, Hewlett Packard, Hitachi, Honeywell, IBM, Intel, Johnson Controls, Lantiq, Microsoft, NEC, Oracle, Phillips, PTC, Qualcomm, Rockwell, Schlumberger, Schneider Electric, Siemens, Texas Instruments,Tyco and Verizon, to name just a few. So, get ready for a slug fest from a lot of well-funded companies that are also trying to get their piece of the overall IoT pie, across all industies.  These will most likely be the companies you sell your successful IoT startup, down the road.

The IoT is going to change everything.  In your homes, lights will automatically turn on and off as you drive your car in and out of your driveway.  In buildings, fire departments will exactly know who is in the building and where they are, in case of emergencies.  In corporate offices, window shades will automatically open and close based on the weather, to save on energy costs.  In restaurants, food will be re-ordered based on how many times the refrigerator door is opened or closed.  In logistics, police will be immediately notified if trucks veer off course.  In healthcare, drones will deliver medical supplies faster than ambulances. In factories, data from parts usage will predict when a machine will break, and automatically order the part and a repairman before it does. As you can imagine, life in 2025 will look materially different than it looks in 2015, as the pace of technology change accelerates, thanks in large part to the coming IoT boom.

So, if you are a startup looking to hitch your wagon to a rising tide, grab the coattails of the coming IoT tidal wave, and hang on for the ride of your life.

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

Mark Suster's "Venture Outlook 2016"

We just read Mark Suster's recently published "Venture Outlook 2016" and needed to share it with all of you.  Mark is a successful serial entrepreneur turned venture capitalist at Upfront Ventures, and author of the Both Sides of the Table blog.  Mark's post, linked above, is jammed packed with great stats about recent tech valuations and whether or not we are in the middle of another internet bubble, with valuations ahead of themselves. SPOILER ALERT:  Mark says we are.

Directly quoting Mark's high level outlook for 2016:

1. "I suspect 2016 will be the year that the over heated private tech markets cool but I’ve been saying that for 2 years so who the fuck knows. I do know the markets are over valued but one individual actor can’t change market prices, which is why the Bin38 scandal was always a red herring. I will keep funding early-stage technology companies who have a vision to fundamentally change some part of an industry over a normal (8-12 year+) time horizon. There are no quick bucks in venture outside of bubbles.
2. We will continue to see over-funding of late-stage venture financings until the bloom comes off the rose and then I predict rational non-VCs will return to their day jobs chasing returns in other corners of the financial world and we people who only know how to do venture will continue doing just that.
3. The rise of crowd-funding as a viable alternative to VC will continue to grow unabated. Too much capital will be allocated to this channel relative to its value until the next downturn when many unsophisticated investors will be burned or until the SEC begins to crack down on the less reputable platforms or investors in these platforms. I suspect this won’t pop until after 2016 when retail investors tire of the promise of easy money in tech.
4. In the meantime, the arc of technical progress will continue whatever the interim valuation scorecards of startups show. Technology continues to have profound impacts on society and industry and will continue to capture an increased portion of the total economic pie. And I suspect for the long-term venture capital will play an important role in helping support great entrepreneurs."

Be sure to also read Mark's great SlideShare presentation on this same topic:

Final venture outlook 2016 from Mark Suster

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So, You're a Startup CEO, What Do You Do All Day?

Chief Executive Officer? Chief Visionary? Chief Cheerleader? Chief Salesman? Chief Funding Officer? Chief Communications Officer? Chief Team Builder? Chief Lightbulb Changer? Chief Coffee Maker? Yup, all of these titles apply to the role of a startup CEO. It is perhaps one of the hardest jobs to do in the business world, given the wide range of skills required to excel. This is one of the reasons only 1-in-10 startups actually succeed, as it takes a really special person that has the right combination of skills and startup DNA. In many ways, it is a much harder job than a CEO of a Fortune 500 company. 

Here are the core skills a startup CEO needs.

Read the rest of this post in The Next Web, which I guest authored this week.

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

Lesson #220: Venture Debt Financing, A Hybrid Between Debt and Equity

Back in Lesson #109, we compared equity to convertible debt to bank debt as finacing options for your early stage business.  There is actually another class of investment called venture debt, which is structured as a hybrid between equity and bank debt.  It has a lot of the debt features associated with a loan, although at typically higher costs, plus some equity-based incentives through the form of warrants or other royalty on revenues.

The weighted average of cost of capital for venture debt ends up around 25% per year, in the middle of bank debt at 5-10% per year and equity at 40-50% per year.  And, it is designed for companies that financially sit in between the two stages (e.g., have some revenues and traction, but not large enough to secure a typical bank loan).

Below are representative terms for venture debt:

Amount:  Depending on lender, but in the $250K to $2.5MM range
Term:  Up to 5 years (more flexible than bank debt at up to 2 years)
Interest Rate:  10-12% (which is about double a typically bank loan)
Structure:  It is a debt instrument and must be repaid (unlike equity which does not)
Ranking:  Suborbinated to senior bank loans, and senior to everything else
Security:  It is often secured by the assets of the company (just like bank debt)
Paydown:  Interest only for two years, then principal paydown starts in last three years (vs. bank debt which is interest only until balloon payment of principal at end of term)
Board Rights:  Most venture debt lenders want rights to participate with your board of directors, as member or observer (much like equity investors, but unlike bank debt that does not typically require any board rights)
Equity Incentive:  1% to 5% "equity value" through warrants to purchase stock or some other royalty on revenues, based on the amount raised (where bank debt has no equity incentives, and equity investors would want a much larger stake).

In terms of a few lenders in the venture debt space, here are some that I am aware of:  Super G (Novus), Monroe Capital, Gibralter, Point Financial, Triple Point Capital, ATEL Capital Group, Trinity Capital Investments, Western Tech, Plymouth Ventures, Aldine Capital, Amerifi and Cambridge Capital Mangement.  And, sometimes hedge funds like Citadel and Fortress play this space, depending on size.  I am sure there are many others to research, as well.  But, before reaching out to them, research their industry focus and investment criteria on their websites, to ensure a good fit.

But, beware the key pitfall to consider here:  venture debt must be repaid, just like bank debt.  So, only take on debt, of any form, if you are 100% sure you can pay it back per the terms of the agreement.  Otherwise, any inability to repay your debt will be a noose around your neck and could force you into bankruptcy.

So, if you are having trouble raising bank debt, but you have pretty good traction and revenues (at least $1MM), venture debt could be the way to go.  Especially, if you are trying to protect dilution of your equity and stockholders, and are willing to pay a high cost of capital to do that (albeit not as high as raising straight equity).

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The Right Way to Give Equity to Your Employees

As a rule, entrepreneurs are very protective of their equity, and try to keep 100 percent ownership for themselves.  Usually this is fine, provided that important key parties (e.g., employees, partners) are appropriately motivated to help you succeed. Sometimes that motivation comes in the form of cash compensation (e.g., lucrative sales commission plan, profit share plan), and sometimes that comes in the form of equity or equity linked incentives (e.g., stock, options, warrants).

Read the rest of this post in The Next Web, which I guest authored this week.

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

What Would Entrepreneurs Have Done Differently?

I have previously written about the importance of planning ahead for proof-of-concept marketing based on my first-hand experience seeing the same consistent mistakes being made by the hundreds of startups calling Red Rocket for help: too much focus on product, and not enough focus on planning for a proof-of-concept around that product (which is what most venture capital firms are looking for before they make an investment in a company). And, to achieve such proof-of-concept, it requires inexperienced entrepreneurs to seek out experienced coaches or mentors to help create smart customer acquisition strategies and to budget for them accordingly.

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

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

5 Things to Look For in Your Startup Team

Once you determine if you have a good business idea or not, the first step in building your business is putting the right team in place.  There are five key drivers to consider when setting up your management team.

Read the rest of this post in The Next Web, which I guest authored this week.

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[NEWS] @RedRocketVC Client on Hunt for Tech Companies to Buy

We have a private equity firm client that is looking for a lower-middle market business to buy, or several synergistic businesses to buy, which can be rolled up into one larger firm (if you have been wanting to grow your business through acquisition).  They have up to $100MM to invest into any one platform investment (the initial acquisition, follow on acquisitions, and growth capital from there).  Growth plans can be organic or via acquisitions over time.

Target companies should be in the B2B or B2C digital technology space.  Or, they can be a services business, selling into either SMBs or enterprise scale clients, where the services can be productized into a technology platform over time.  Target financials should be in excess of $10MM in revenues and $2MM in cash flow out of the gate, either stand alone or post the rollup of known targets.  And, live within a market sector that can easily support growing into at least a $100MM revenue business within 3-5 years.  You must be able to clearly speak to a track record of growth and success, or have a reasonable explanation and turnaround plan in mind.  Companies need to be based in the U.S.

They most likely will put their own CEO in place, to help scale the business to the next level and to integrate any M&A efforts.  But, they are open to taking on the current management team in other executive capacities.  Or, they can assist the current team in transitioning out of the business after a reasonable transition time (although that may raise red flags, unless you are retiring).

So, if your business profile fits the description above, or applies for others you know, please contact us via the Red Rocket website with more information about your business.  Understanding we will keep everything confidential between us and our client, interested parties should provide us with the following:  (1) a link to your website; (2) summary of your business; (3) summary of your industry/competition; (4) summary of your growth vision; (5) a summary of any current challenges; and (6) summary of your historical and projected revenues and cash flow, to assist us with our analysis.  We may not be able to respond to all inquiries, but we will follow up with ones where we see a clear fit.  Serious inquiries from successful businesses with reasonable valuation expectations only.

Thanks for helping us spread the word to your connections.

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Lesson #219: Stock Option & Incentive Plans for Startups

I previously wrote about the importance of spreading equity to your employees or key partners. Stock options or other similar incentive plans are a great way to attract talent, incentivize employees and build long term employee loyalty for your business.

Some companies prefer to grant them only to senior management.  But, I am a fan of distributing them through the entire organization, so everyone feels invested in your success together.  Plan to set aside 10-20% of your equity value for your expanded team (e.g., 1-5% for senior execs; 0.5%-1% for middle managers; 0.25-0.5% for entry level staff). This is assuming they are normal salaried employees, and not a co-founder, where equity values could be materially higher (re-read this post on how to split equity between co-founders).

There are typically four types of incentive plans for you to consider, with various rules and tax consequences for the company and the recipients, as summarized below:

1. Non-Qualified Stock Option Plans (The Most Typically Used, Given Advantages Below)

Who Can Receive:  Anyone (e.g., employees, directors, partners)
Waiting Period to Exercise:  No restrictions.  Exercise anytime after they vest.
Exercise Price:  At any price, but taxable to recipient if less than fair market value (FMV)
Transfer Rights:  May or may not be transferable, depending on how you set up the plan.
Term of Options:  Exercisable anytime, provided plan is not set up otherwise.
Value of Underlying Stock:  No limit at time of exercise, provided plan is not set up otherwise.
Taxes to Company:  Deductions allowed from grants, at time recipient recognizes income, provided the company fulfills its withholding obligations.  This ordinary expense is equal to the ordinary income declared by the recipient.
Taxes to Recipient:  No tax at time of grant or exercise.  The recipient receives ordinary income at time of exercise for the difference between sale price and strike price. (So, people don't typically exercise until close to a known liquidity event where they will receive proceeds to cover taxes).

2. Qualified Incentive Stock Option Plans (Not Typically Used, Given Restrictions Below)

Who Can Receive:  Employees Only
Waiting Period to Exercise: One year.
Exercise Price:  At least equal to fair market value (or at least 110% of FMV for 10% holders)
Transfer Rights:  May not be transferred to anyone.
Term of Options:  Exercisable no more than 10 years after grant.
Value of Underlying Stock:  Cannot exceed $100,000 at time of exercise (in one calendar year).
Taxes to Company:  No deductions allowed from grants.
Taxes to Recipient:  No tax at time of grant or exercise.  Capital gain on sale of underlying stock (provided they hold the stock for at least one year after exercise, ordinary income if not).

3. Phantom Stock Option Plans

For some companies, the founders do not want any dilution to their equity.  But, they want to incentivize their employees with the same economic value they would have realized by owning equity.  In this scenario, you would launch what is known as a Phantom Stock Option Plan.  Instead of given rights to purchase stock, you are giving rights to receive the same economic value they would have made by owning the stock, without actually owning the stock.  These cash payouts are typically tied to a liquidity event or exit for the company. For tax purposes, phantom stock is treated the same as deferred cash compensation. Phantom stock payouts are taxable to the employee as ordinary income and tax deductible to the company.

4. Profit Sharing Plans

Another way to accomplish the same incentive, is to establish a profit sharing plan for the company.  So, instead of splitting up the equity and ownership of the business, you simply split up any profits that are generated each year.  The benefit to the individual is getting more control (easier to influence driving profits, than sale of company), in a more timely fashion (paid out annually, instead of at unknown time of sale of the company).  The problem with this route is early-stage businesses should not be distributing cash to its employees, it should be reinvesting that cash into accelerating the company's growth during its early-stage years.  So, if you plan on being a heavy cash user for growth, I would avoid this route.

Vesting, Acceleration & Other Key Terms

In all of the above cases, it is important you put a vesting schedule in place for the recipients before they are able to exercise their options.  Most vesting schedules are set over a four year period of time, to create long term hooks for retaining employees.  Typically, 25% vests per year, where it is a cliff vest in the first year (you have to wait all 12 months before first 25% is earned).  That ensures if an employee is not working out, you can terminate them without losing any equity.  Then after the first year, 1/36 of the 75% is earned monthly, over years two, three and four.  In the event there is a change in control of the business, you would typically accelerate the vesting to 100% earned, so the recipient can get the value created in the sale.

In addition, you want to make sure the company has a mechanic to buy back the underlying stock at the then fair market value and does not allow the recipients to transfer equity to other third parties outside of the company, without your written approval.  You typically don't want equity in the hands of strangers or "unfriendly" parties.

And, worth mentioning, you don't typically grant stock outright, as you do not want to trigger any immediate compensation tax consequences for the recipient or the company.  And, if you don't want to have the expense of setting up and maintaining a formal stock option plan, there are ways to motivate specific individuals, by granting them individual warrants to purchase stock, often with the same economics and vesting you would see with a stock option plan for many.

Hopefully, you found this high level education useful.  But, these are really complex issues.  So, as always, when setting up your plan, seek the counsel of a good startup lawyer to help you avoid the many known pitfalls (here is a good list of startup lawyers in Chicago).

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