Lesson #28: Expect the Unexpected -- Always Have a Cushion

On the morning of September 11, 2001, I was sitting at my desk working on the final draft of a $4MM venture capital financing, that was due to close on September 15, 2011.  It was the last round of capital that iExplore would need to bridge it to profitability.  It was a very exciting time for the business and continued the validation of our business model.  Then I heard a commotion in the office, as our staff was gathering in the conference room, huddled around the television.  As I walked into the room, 45 people were glued to the news broadcast of two planes having crashed into the World Trade Center, in an obvious act of terrorism on the U.S. soil.

My head of sales and operations at the time was a seasoned travel industry veteran, formerly with Abercrombie & Kent, a leading tour operator in the industry.  He had remembered the first Gulf War and the negative impact that had on the travel industry.  By the look on his face, he was clearly troubled, and pulled me into the other room.  He basically said iExplore should prepare for the worse, that travel sales were most likely going to come to a halt in the wake of 9/11.  I was still wrapped up in the moment, trying to digest the falling towers in NYC, and wasn't really sure what was going to happen in term of future travel sales.

But, those words of caution surely proved true in the days that followed 9/11.  The investors that were supposed to fund our last round, got nervous and pulled their committed funding.  And, sure enough, travel sales fell off a cliff, at exactly the same time the company was nearly out of cash (optimistic the venture funding deal was only a couple days away).  But, in the words of show business, "it ain't over until the fat lady sings".  And, iExplore found itself with 45 employees, no cash, no prospects of cash, a ton of debt and no revenues, staring over the edge of the abyss and at the precipice of bankruptcy.  In one fell swoop, a really exciting time in iExplore's history, became its worst nightmare and darkest moment.

In the months that followed, we ultimately got through this difficult period (I will save the details for my next post).  But, the point here is to always have a cash cushion and plan far enough ahead.  I should have never let the cash position get near zero, on the 95% odds a venture round was closing in a couple days.  Regardless of the opposite advice I got from my board, I should have had at least a few months worth of cash on hand, by the time a venture capital round was supposed to close, leaving a cushion in case anything delayed the deal.  A valuable lesson for next time.

So, when doing your budgeting and fund raising, always assume you will need 2x the money you think you will need, 2x the timeframe to acheive profitability and 2x the length of time required to close any financing, and that should leave you with enough cushion to get through the bad times or any delays.  Building cash reserves like this is not always easy for a startup, but it is critical if you want to survive any and all scenarios.  So, where you can, keep your expenses razor thin until revenues or funding allow you to do otherwise.  And, do your best to "turn pennies into manhole covers".  You'll never know when you'll need them!

I hope you enjoyed today's post, coming out of today's news about the death of Osama Bin Laden.  Bringing back some very bad memories, not only for the country, but for iExplore, as well.

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Lesson #27: How VC's Define a Backable Management Team

Having a great, defensible business idea in a scalable market is only half of the puzzle to attracting venture capital.  The other half is having a backable management team.  Today we are going to define exactly what that means, in the eyes of a venture capitalist.

The first thing a VC is looking for is domain expertise in the industry you are targeting.  How many years of experience do you have in that industry?  In what roles did you operate that were relevant to your new business?   Or, for tactical positions like CMO or CTO, what other marketing or technology roles have you had in the past, and were they relevant for a startup in this industry (e.g., a Fortune 500 CMO will not understand how to market a startup on a shoestring budget).  While in these positions, what successes can you share, and what failures did you learn from?  And, frankly, they care a lot more about your failures to see how resilient you were and how battle tested you are at getting your business through the bad times (which will always happen at some point).

The second thing they look for is credibility.  Is your business plan well thought out and are your revenues assumptions believable in relation to your industry size and marketing budgets.  So, be sure to re-read Lesson #7 on How to Write a Business Plan.  And, never come across as overly-pushy or too salesy.  The last thing a VC wants to back is a "used car salesman" trying to sell him the Brooklyn Bridge. 

The third thing a VC looks for is passion and energy.  Do you have the fire in the belly to wake up every morning and bust your ass to execute the business plan.  I think it is safe to assume most good entrepreneurs are not lacking in this area, but you would be surprised how many startups come in with unenthusiastic or boring presentations that doesn't get anybody excited, regardless of how great the idea may be.  And, if you cannot get your VC's excited, it is unlikely you will get potential business customers excited in driving revenues and hitting the VC's ROI expectations.

The fourth thing VC's look for are your listening and communications skills.  The biggest mistake an entrepreneur can make is to assume they are the only smart person in the room, and nobody else knows what they are talking about.  Hence digging in an entrenched viewpoints.  Let's not forget a good VC sees around 200 business plans a year, 2,000 plans a decade.  And, most likely, many very similar to your own, in one form or another.  So, they bring a ton of market intelligence to the table, to help you avoid known pitfalls.  It is critical they think you are flexible and will listen to input as needed.  And be prepared, at some point, a VC may make a recommendation to put in a new CEO with more skills than yourself.  So, listen with open ears, as protecting your 65% equity value is a lot more important than protecting your job title.  But, hopefully, you will never give them that opportunity by knocking the cover off the ball the entire way up.

The days of the dot com boom in the 1990's are long behind us.  No longer can a 21 year old with a high level idea on a piece of paper (without even a revenue model) walk into Silicon Valley and collect a $10MM check.  You are much better served with at least 5-10 years of real life work experience, and the relevant lessons therefrom.  And, frankly, a second time CEO, is a much better venture bet than a first time CEO, since that entrepreneur has already learned how to avoid many startup pitfalls and can point to a proven track record. 

That basically narrows the attractive pool of entrepreneurs down to a very small list.  But, there are ways to offset your own lack of past executive history, by surrounding yourself with a smart team of people that are proven experts in their field.  If you are launching a new search engine, and you have a Google engineer on your staff, that will get a VC's attention.  If your startup is dependent on Facebook for successful social marketing, and your CMO is an old Facebook executive, with a lot of relationships there, that will get a VC's attention.  Not to mention, the VC's will be impressed by your hiring skills (finding the best talent) and your sales skills (getting these proven winners to buy into your vision).  This deep team around the management table is exactly what the VC's want, to make sure your business is more than a "one man show".

Entrepreneurs are an eccentric bunch, often flying by the seats of their pants.  Living on the edge between reality and pipe dream the entire way up.  These trailblazers and visionaries are what makes startups so exciting, and potentially, a lucrative investment opportunity for VC's.  But, at the end of the day, a VC is looking for an experienced, credible, passionate, energetic and flexible team more than anything else.  Management teams make or break businesses, and they know good teams when they see them. 

As I have said before, and worth reiterating, VC's would much rather invest in an A+ team with a B+ idea, than an A+ idea with a B+ team.  So, keep that in mind.

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Lesson #26: Designing Sales Incentives to Motivate Your Sales Team

In our last lesson, we discussed how to structure your sales team and procedures.   Today, we are going to tackle the other part of designing a winning sales strategy:  designing motivational sales incentives for your team that accomplish your internal business goals.  So, there are really three pieces to this puzzle:  (i) what metrics do you want your sales team focused on for your business needs; (ii) what incentives will get the salesperson excited about acheiving that goal, while working for your business; and (iii) what is the frequency of paying out those incentives.  We will tackle each of these points below.

You may be thinking that revenue targets are the most logical and easy way to design your sales plan.  And, often times they are.  But, if you simply give your team a sales target, they may not be paying attention to other important metrics like the profit margin on their sales, or the conversion rate as a percentage of leads they are being given.  When at iExplore, we actually were driving our sales team on the latter, since if they were driving gross profit and converting a high percentage of the leads we were sending them, the top line revenues would naturally follow.  So, figure out what key metrics drive your business, and get your team religiously focused around those metrics, which may or may not be revenues for your business.

There is a second piece to this, which is incentivizing the team based on their individual performance vs. the company's overall performance.  There could be scenarios where the company has a bad month overall, but an individual does great, and vice versa.  In my opinion, it is important to reward good invidual behavior, in all scenarios.  So, at iExplore we said that 50% of the incentive would come from individual performance, regardless of company performance, and 50% of their incentive would come from company performance, regardless of their individual performance.  That did a good job of balancing the ebbs and flows of both the individual's and the company's sales cycles.

In terms of the incentive itself, every individual is driven by different things.  Most people like cold hard cash.  But, others may psychologically be better driven by a free vacation or new iPhone or whatever.  Or, maybe they are trying to earn equity options in your business, if available.  It is the job of the sales manager, to figure out what makes each individual tick, and tailor a plan that meets everyone's goals.  I do not think a "one-size-fits-all" strategy is the best.  I typically will set the overall incentive plan based on cash, and use trips or prizes as "bonus" incentives for the sales leader in each sales period, letting the sales leader pick whatever they want from a menu of options, which they had input in designing in the first place.

In terms of the percentage of base salary vs the percentage of incentive income, it really varies based on the complexity of your products and difficulty in hiring replacement staff.  If you are selling something simple, like window washing, most anybody could be trained to sell it.  So, maybe your salesperson has a $40,000 base salary and a $20,000 incentive if they hit reasonable goals.  If you are selling aerospace engineering components with big government contracts on the line (much tougher to find expert staff), you may have to pay that salesperson a base salary of $250,000, with incentives which could double that.  Do competitive intelligence to determine "market rate" for your industry, and plan around that.

In terms of the frequency of the sales incentives, there are plusses and minuses of monthly vs. quarterly vs. annual incentives.  If monthly, the individual will appreciated seeing cash faster, but it doesn't leave any real "hooks" to stay with the company.  The minute they find a better job, they could leave.  On the contrary, an annual plan will set the long term "hooks" (e.g., won't leave mid-year to lose their commissions), but the individual may not like only seeing checks one time a year.

The way to accomplish a happy middle ground is the following.  First, you could have a portion of the plan (e.g., individual-based incentives) paid monthly or quarterly, and the other portion of the plan (e.g., company-based incentives) paid annually.  In addition, if an annual plan is desired, perhaps there is a way for individuals with near team cash needs to take a "early withdrawal" on their annual commission based on performance to date, if there is some crisis they are dealing with at home (e.g,. unexpected medical bills).  The more you work with your sales team to help them acheive their individual needs, the more they will feel that you care about them, instilling long term loyalty to you and your business (which is the ultimate goal).

Worth mentioning, I always like the sales team to have a visual picture of where the company is and where the individual is in terms of their monthly sales goals.  Like a big pie chart on the wall that gets filled in each day the closer we get to the goal.  Or, a daily or weekly sales report by team member, which will create a healthy competition between the team members, and let underperformers know when they need to pick up their pace.

But, the most critical overriding point is: in whatever sales incentive plan you put in place, make sure it works for both the company and the individual.  Nothing will demotivate a sales team faster than an individual working their ass off, and not seeing any fruits for their labor.  And, we all know how hard it is to recruit good sales people, and keep them on staff.  So, think long term, not short term, with your sales team, even in the bad months.

There is no single right answer here. Solicit input and reactions from your team and tinker with it over time to find the right long term package that works for everybody.  Good luck!

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Lesson #25: How to Structure Your Sales Team & Procedures

Along with your marketing efforts, your sales strategies will make or break the success of your startup, as they are equally critical to your abilities to drive revenues.  Today, we will tackle (i) how best to structure your sales team; and (ii) how best to design internal sales procedures.  Our next post will tackle sales incentives for motivating your team.

There is no one right answer on how best to structure your sales team.  It is largely dependent on the size of your team, the complexity of your product, the size of your average transaction and what works best for your industry.  As a rule, sales teams are structured either as: (i) inside sales teams based in your home office, or outside sales teams working on the road; (ii) inbound call handlers vs. outbound callers; and (iii) geographically split based on regions of the country, or split on other industry-specific verticals (e.g., corporate clients, government clients, university clients). 

The inside vs. outside decision typically comes down to complexity of the product and the average transaction size.  It will be hard to close a $1MM complicated technology sale, without face-to-face contact to educate the client and instill trust in your company. On the other hand, selling a $199 airline ticket can easily be done over the phone, since people are pretty clear on what they are buying and it is a relatively small transaction size.

The inbound call handler vs. outbound callers decision is largely tied to the best marketing tactics for your business.  If you are a big online travel site selling airline tickets, the customers are typically coming to you researching air itineraries on your website, and then calling your customer sales desk with any questions or to book the flight.  On the other hand, especially for products that consumers are not naturally coming to you, telemarketing sales tactics are employed.  And, we all know how annoyed we get by telemarketing calls, especially around election time.  But, sometimes, telemarketing can be tastefully engaged if relevant to a consumer.  For example, "I was doing your neighbor's landscaping yesterday and saw that you needed your flower beds weeded."  Or for repeat clients: "we last washed your windows a year ago, and would like to schedule this year's service?"  Both examples are very tasteful, and should not upset the listener given its relevance to a real need they may have.

The geographic vs. client vertical split decision typically comes down to the size of the prospective market, and the varying needs of a particular industry vertical.  If you are serving 1,000 prospective clients, you could easily split sales efforts around Eastern U.S. sales and Western U.S. sales.  If you are serving 1,000,000 prospective clients, your geographic splits could get down to the city level.  Geography splits work fine, as long as there are an even mix of clients in each region.  But, let's say you are selling products to the entertainment industry largely based in Hollywood, maybe you split your sales team based on film producers vs. television producers vs. gaming producers, all based in Los Angeles.  Or, in another example, let's say you are selling digital video technology, and the needs of a film studio (e.g., entertainment driven ) are different from the needs of a corporate video client (e.g., marketing driven) and the needs of a government video client (e.g., intelligence driven).  In that scenario, different user cases and needs may require expert salespeople just around that user case.

As for designing internal sales procedures, a couple key points.  First, you want your best sales people spending all their time closing sales.  So, often times they may need an assistant to be helping with their cold calling efforts.  The assistant makes the 100 outbound cold calls looking for viable leads, and then hands off the 10 viable leads to the salesperson to close.  A very efficient use of everybody's time, if your budgets can afford it.  If not, the salesperson is making their own cold calls, which may be your only option (but not the most efficient use of their time or your budget).

The other key procedural point is the speed at which you respond to a new lead.  The faster you respond to a new lead, the higher your odds you close that lead, before one of your competitors calls the customer back.  At iExplore, customers would reach out to three or four tour operators while doing their research, and our sales conversion rate was directly proportional to the response time of our sales team (e.g., one hour response closed at 25% rate, 8 hour reponse closed at 10% rate).  And, if it was that dramatic for a four week sales cycle product, imagine the implications for a "real time" sales cycle product (e.g., I need business cards for a meeting tomorrow).

The final procedural point is the frequency at which you follow up with old leads.  I can't tell you how many startups simply deal with new leads and forget to follow up with old leads, or worse yet, forget to follow up with repeat past clients.  It is critical you use some type of CRM to catalog all your leads as they come in, and set follow up schedules for each.  If you have the budgets to afford an expensive product like Salesforce.com, great.  If you don't, often times a simple Excel spreadsheet will accomplish your goal just the same. 

In terms of frequency of the follow up itself, it is directly proportional to the immediacy of the sale.  If a client is calling for a July 1st vacation on June 1st, you better follow up with them in the next day or two, as they need to book their trip quickly.  If a client is calling to book travel for a 2013 family reunion on June 1st, 2011, you can probably follow up with them weekly or monthly given the long lead time before the trip.  But, the key point:  it is critical you set up an operational procedure to follow up with all old leads until they close or go dead, as well as a process for past repeat clients to stimulate a repeat purchase in a reasonable repeat sale timeline (e.g., their once a year summer vacation).

Hope you found this helpful at the highest level.  Our next post will dig into sales incentives to motivate your sales team, which is the other critical piece of the sales puzzle.

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Lesson #24: How to Choose a Name For Your Startup

Startups are like giving birth to a new baby, including coming up with a new name and personality for the business.  When coming up with a name, you need to keep the following points in mind.

As for the name itself, you really have two roads to consider: (i) choosing an intuitive, descriptive name for your business (e.g., Restaurant.com, Toys R Us, YouTube, Netflix); or (ii) creating a whole new memorable name, not specifically related to your business (e.g., Google, Yahoo, Hulu, Twitter).  If you have tons of money to spend, maybe creating a unique name is the right way to go.  But, for the most of us, starting a business on a shoestring budget, I always vote for a clean and clear name that simply describes your core product offering.  It will take less marketing money to educate a consumer on your business the clearer your name is.  As an example, people will intuitively know Tennis Superstore is a place to go to buy tennis related products, without any other words or marketing message required.  Which is important for consumers with very limited attention spans, getting bombarded by marketing messages from every direction.

Now, there are alternative opinions that a unique name is the way to go.  And, I clearly understand their arguments.  For example, how great it would be for your marketing efforts, if your brand name became the de facto term for an industry.  Instead of saying "look for it on the search engines", you say "Google it".  Instead of saying, "overnight it to me", you say "FedEx it to me".  Instead of saying, "pass me a tissue", you say "pass me a Kleenex".  But, that typically takes a lot of money and a lot of time to build up to that kind of brand position in an industry.

I thought the most clever name for a startup in the last couple years was Groupon.  Because it did both things: it clearly explained their business (e.g., group coupons), and it was a cool and edgy name.  I think their name was as much a part of their marketing success than anything else, as the name was virally spread from friend to friend around the internet trying to take advantage of a special daily deal.  Customers saying "I bought a Groupon", sounds a lot cooler than "I bought a Living Social".

But, coming up with a name, is only half of the chore.  Making sure it is available and non-competitive is the other half of the chore.  More important than the name itself, is making sure your desired name is available for all potential uses and in all potential markets.  So, the first place I start is the U.S. and international trademark databases, to make sure nobody is already using, or has reserved the use, of a potential name in the industry and countries you plan on operating.

The next place I look is the WHOIS records of the domain name registries, to make sure the desired domain name is available in all the variations I may need (e.g., com, .co.uk, .com.au, .ca).   And, to me, a desirable domain name means a clean .com extension in the U.S., since so many people are familiar with .com addresses in the U.S..  So, BrandName.com is preferred to Brand-Name.com or BrandName.net.  Business struggles aside, there was a reason Yahoo renamed Del.icio.us to Delicious.com after it acquired the business (a lot more intuitive for consumers who may have been looking for the site at the latter domain).

But, as we all know, .com extensions are the oldest, and the toughest to find good available names, at least for a low price still owned by the registries.  But, if you can afford it and it is not too expensive, sometimes it makes sense to acquire a domain name from a third party, if it helps you achieve your long term branding and marketing goals.  As an example, I acquired iExplore.com for $20,000 back in 1999.  Although this was a painful short term move, it was a minimal long term investment for building the optimal long term brand for the business (in this case, an online adventure travel company).  The "i" indicated internet based and the "Explore" was the core word we wanted to leverage for global exploration.

That said, if I could have found a better name for $19.99, I would have gone that route.  But, Conquest.com, TheAdventureExperts.com, Explorama.net and BananaPlanet.com didn't fit my desired brand or marketing goals.  Conquest was too "hardcore" and "macho".  People would type "AdventureExperts.com", not "TheAdventureExperts.com".  People would type "Explorama.com", not "Explorama.net".  And, is BananaPlanet a place for adventure travel, fruit or porn?

As a last step, you should do U.S. and international Google searches around your prospective name, to make sure no other competing companies have similar names.  For example, at iExplore, we subsequently found out there were also adventure travel companies called Explore in the U.K. and iXplore in Australia, which created confusion for travelers in the marketplace (which is global online).  So, if different, but similar names are being used in the industry, pick a different name.

Whatever your business name ends up being, make sure it can clearly stand on its own feet: (i) clearly communicating your business line and brand goal; (ii) without violating any trademarks worldwide; (iii) without being too similar to others in the market; or (iv) without being too confusing for consumers to find.

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Lesson #23: How to Design Effective Advertising Copy & Creatives

Now that we have learned how to set a marketing plan for your business, the devil is in the details in terms of executing that plan.  This is especially true for the copy and creatives you use in your advertising materials.  Today, we will tackle some dos and don'ts to maximize the success of your advertising efforts.

Let's start with an example print advertisement that we used at iExplore (a sea kayaking trip to Alaska):

The mandate I gave our CMO was to turn iExplore into the "trusted first-of-mind brand for once-in-a-lifetime adventure travel".  And, at the high level, this creative does exactly that.  You certainly get the sense of once-in-a-lifetime from the lone sea kayaker paddling in close proximity to an orca whale and a tag line that said "Come Back Different".  And, you certainly get the sense of trust from the "Inspected by Expert #34" tag.  And, if iExplore has 34 experts, they must be pretty big, and I trust them as a leading player in the space.   We had this same type of strategy behind our online banner ads and video ad creative (I was really pumped when I first saw this video!).

So, as a first time CEO, I was really excited about the prospective results from this campaign.  And, the advertising industry would have certainly guessed the same, as this campaign won a ton of awards for best creatives in the travel industry.

Then reality hit us in the face like a ton of bricks.  This campaign was not selling any trips!!  We were spending a lot of money buying double page print ads in expensive magazines like National Geographic, Conde Nast and Travel & Leisure (and even NYC billboards in Times Square!!), but there were very little revenues to cover the massive costs of this effort.  So, we were hemorraging the cash provided from our venture capitalists. 

Ignoring the fact we were spending a lot of money offline, when we should have been better spending most of this money online, as an internet company, let's study what was specifically wrong with these creatives.   The first problem was the creative size itself.  Buying double page spreads in the major travel magazines was VERY expensive as a startup company.  We would have been much better served with single page, or even half page ads to start, stretching out our budget over a longer period of time.

The second problem was the iExplore name and business was unknown to anybody, and the tag line did not do a good job describing the business.  Instead of an inspirational message like "Come Back Different", it should have been more descriptive about our business, like "Adventure Travel Experts".  It is perfectly acceptable for Nike to use the brand-building tag line "Just Do It", when they were a 20 year old company, and everyone already new them as an athletic apparel and footwear manufacturer.  But, not for iExplore, a brand new company that needed to educate the market on its core business offering.  We thought we were doing a good job explaining the business in the paragraph of copy at the bottom of the ad, but didn't realize that magazine readers turn the page at an average flip time of two seconds.  Nobody was reading the paragraph in two seconds, and we needed to get the message out faster.

The third problem was the biggest of them all.  Where was the call to action??  There wasn't one!!  There should have been a message like "Book Your Trip by December 1st and Save 10% ", or "Free Airfare with Any Tour Purchase by December 1st".  This tells the reader more about the business (e.g., that we sell trips), gives them a special deal (e.g., to save money), and gives them a sense of urgency to make an action (e.g., by a certain date).  We could have easily doubled our revenues from this campaign with more call-to-action oriented messaging.

A fourth problem was the limited frequency of the print ads.  In the travel magazine world, new issues were coming out once a month.  And, it typically takes 6-7 ad impressions before it catches someone's attention to make it actionable.  So, that meant 6-7 months of expensive print ad buying before we would really know the full success from the campaign.  Travel sections of newspapers would have been a much better vehicle, since the ads were coming out daily/weekly, not monthly.  Or the travel sections of the Yahoo or MSN websites would have been even better, since the ads would be running online, and the action is simply "one click away", instead of print readers having to get to their computers to make an action.

At the end of the day, this campaign was a complete disaster, for all the reason mentioned above.  And, to make matters worse, we ended up pulling the campaign after only 3-4 months, which meant that any repeated impressions we were building up towards the 6-7 month requirement, were entirely flushed down the toilet midstream (no pun intended).  Believe me, after that first year at iExplore, we never made those same marketing mistakes again!!  And, we established key disciplines for tracking our marketing ROI on a line-by-line basis, as discussed in our last post.

This is just one example of the things you need to consider when designing the copy, creatives, frequency and placements for your advertising efforts.  The summary is:  (1) startups need to be crystal clear on what they do with as few words as possible; (2) there needs to be a strong, time-sensitive call to action, to trigger a transaction; (3) design your campaign with maximizing frequency in mind, to build up repeated impressions; (4) pick creative sizes that are most affordable to your budget; (5) if possible, make sure the campaign is easily cancellable if not working; and (6) place ads in the medium most logical for your business (e.g., e-commerce companies should bias online advertising).

I hope this post saves you a lot of misspent advertising dollars.  I surely wished I had all that venture capital back, to do it right the second time!

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