Lesson #44: The Importance of Blogging

All companies should have a blog, to demonstrate their expertise in a particular subject matter and provide a vehicle for two-way communications and engagement with their customers.

This blog that you are reading now is an example of that.  I, as the Managing Partner of Red Rocket Ventures, a startup consulting and fund raising firm, am trying to come across as an expert in startups who has lived through the same battles you now find yourself fighting through.  Not to mention, for many of you, this is your first time ever hearing about Red Rocket.  You may be asking, "why should I trust this firm to help me solve my startup-related problems?".  Well, hopefully the quality of the content on this blog not only educates the readers on various topics, but it also instills trust to get prospective clients to actually pick up the phone and engage with me on their various needs.

Also, this blog gives my readers the chance to voice their agreement or disagreement with various points that I am making.  For example, when I wrote my post on best practices for marketing, a reader rightly pointed out that offering deep discounts to attract new customers may work better for B2C facing businesses than B2B facing businesses.  Hence, further enhancing reader education on the topic, and creating a two-way dialog with my readers, so they too feel like they are participating in the discussion.

There are two other clear marketing advantages of writing a blog.  Firstly, search engines love rich content pages, and the more content you write, the more free search traffic you will drive into your website.  For example, this blog is only three months old, and is already getting 1,000 visitors per month, largely coming from people searching for information related to the posted topics via Google.  That is a lot a traffic for a small consulting firm, which I didn't have to spend one penny on, other than the 30 minutes or so that it takes me to write one post.

The second key marketing advantage is the virility of the content.  I have set up this blog to automatically post to my LinkedIn and Twitter status updates.  As of today (6/8/11), I have around 650 connections on LinkedIn and around 150 followers on my Twitter account that are receiving headlines to every one of my blog posts (Note: Twitter is up 3x from 50 followers three months ago when I started the blog--so extrapolate 3x per quarter from there).  And, since these connections and followers are largely business people related to startups or the digital media industry in which I have worked for the last 12 years, there are very high odds that: (i) the articles are not only interesting reading for them; but (ii) they will most likely forward or retweet the articles to their thousands of collective connections and followers of their own, all ripe new prospects for my own business (hence why Twitter followers are up 3x in three months and over 100 companies have reached out to me).

So, for the reasons above, consider a blog a vital component of your website, search marketing and social marketing strategies.  And, don't forget to ask for new followers, as I do in my last sentence below in all posts.

For future posts, please follow me at:  www.twitter.com/georgedeeb.

Lesson #43: Examples of Barriers to Entry for Your Startup

Anybody can start a business.  But, very few businesses started have long term, defensible barriers to entry to protect against potential future competitors.  That is the one of the key things you need to focus on in terms of building a winning a business model and increase the odds you get a big pay day down the road.  In today's post, we will talk about a few of these barriers to entry: (1) patents; (2) difficulty of replication; (3) exclusive, long-term strategic partnerships or contracts; and (4) high switching costs, to name a few.  I will give examples of each below.

Patents are a double edged sword for startups.  They are great to have to protect your idea and get investors excited about your business.  But, they are costly to set up (around $12K if straight forward filing and process, and much more if not).  And, patents are very costly to enforce, taking hundreds of thousands of dollars in legal bills to protect your idea, which most startups typically don't have.  But, assuming you build to scale with enough of a first mover advantage, hopefully your profits of the business will provide enough defense capital to enforce your patent and keep others out of your space.

Difficulty of replication, typically comes down to complexities of the product or the amount of capital or time required to duplicate the product.  As an example, it is very difficult to knock off a new biotech or pharmaceutical line that has been in research and development for the last 10 years.  Or, it is very difficult to replicate Google's dominance in search technology, given the years of learnings that have gone into refining their search algorithms and the billions of dollars in capital investment required to replicate their international network of high-speed servers and data centers.  Or, imagine replicating AT&T, Comcast or ComEdison's infrastructure investments in wiring and powering all homes and businesses.

Exclusive, long-term strategic partnerships or contracts can also be a game changer for a startup.  For example, at iExplore, we were the exclusive adventure travel provider for five years to the National Geographic audience.  Or, imagine you are Waste Management with the exclusive waste removal contract for the City of Chicago.  Or, Halliburton getting exclusive Department of Defense contracts to rebuild infrastructure projects in Iraq.  Or, maybe you are Lens Crafters, as the exclusive in-store optical departments within a Wal-Mart location, or Chase Bank as the exclusive ATMs inside a Walgreen's location.  Anytime you are talking exclusivity and long term in your contracts for customers or distribution, the better barriers to entry you are building.

Products with high-switching costs are also great barriers to entry.  Once, a Fortune 500 company has implemented a new customer relationship management platform, it is highly unlikely they will swap out that platform in the near term, and have to reinvest in technology and employee training all over again.  Or, once LinkedIn has built the "default business networking site" and users are comfortable using it, it would be very difficult for a new site in the space to get traction, since users will not want to make the change.  Same could be said about YouTube as the default place to store videos, Flickr the default place to store photos or iTunes the default place to store your music, and consumers not wanting to reload all their a content a second time in a second place.

Hopefully, you get the point here:  any startup requires long term defensible barriers to entry to attract investors, protect its turf and increase odds of long term revenue growth.  Critically assess your own business, and look for opportunities to build your own barriers to entry against potential future competitors.

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Lesson #42: Is Working With Family Members a Good Idea?

My immediate reaction to this question is no, working with family members is not a good idea, for the many potential issues I will detail below.  But, if structured correctly, a family-related team can work.

The biggest reason I think the answer is no, is the normal work-life balance can get completely thrown out of alignment.  Normally, you have your work life and relationships, you go home after work, and enter your personal life and relationships.  A nice balance of ying and yang.  When you work with the same people in your family, there is a risk that balance is not acheived.  You never get a break from eachother.  And, frankly, it becomes too easy to bring work home with you, and you never get a break from it.  And, vice versa, too easy to bring personal life back to work with you.  So, for a family working relationship to work, there has to be a clear understanding:  work issues stay at work, and personal issues stay at home.

In addition, when working with family members, and no different than with any employee relationships, it is critical there is a clear definition of roles, responsibilities and reporting.  If you are going to be equal peers at the same executive level, then there has to be a clear definition of what decisions and tasks are in each person's control (e.g., marketing decisions by wife, operating decisions by husband).  If one of the family members is going to be reporting into the other (e.g., father CEO and son VP-technology), then: (i) the managing family member needs to manage with "kid's gloves", no pun intended, to not ruffle long term family feathers; and (ii) the managed family member needs to understand that ultimate control and decisions rest with their boss, in this case, their dad.

The last consideration relates to succession planning.  With parent-child working relationships, there needs to be a clear long term succession plan put in place from the beginning, and both parties must live up to their promises in that plan.  For this, I will use an example from one of my clients.  The father CEO hired the daughter COO with the message she would learn the business, and she would take over for him in five years, when he would retire at age 65.  But, ten years later, the father was still CEO at age 70, micromanaging the daughter and driving her crazy to the point she wanted to quit.  But, since the father had no other person to transition the business to, the daughter played the "retire or I quit" card.  The strategy worked and they hired a consultant to help facilitate and enforce that transition.  But, it should have never got to that point, as it created a ton of stress for that daughter, dealing with an extra five years of uncertainty and management by her father.

These are just a few things to think about before starting a working relationship with your family members.  If you can, I would avoid it.  God knows, my wife would kill me if she had to work with me, as my "work personality and expectations as CEO" are very different than my "home personality and expectations as husband".  And, I would never want to worry about walking on eggshells in driving a successful startup business, which is stressful enough as it is.

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Lesson #41: Security Considerations for Your Startup

Security is certainly not one of my glitzier topics, but it is equally important to discuss for any startup business.  And, security has multiple levels: (1) the physical facility and files; (2) electronic files and internal systems; and (3) your website and other externally accessible systems.

When locating and setting up your office, make sure that: (i) the building is secure, with a doorman or keypad entry; (ii) your office unit is secure, with dead bolts or alarms; (iii) any rooms with sensitive information or equipment, are locked at all times; and (iv) any file cabinets with important or confidential documents are locked at all times.  This will prevent any external theft and limit internal access to key documents on a "need to know" basis.

In terms of protecting your internal intranet and electronic records, make sure that: (i) access to your entire systems are password protected by user (so you can track activity person by person); and (ii) for any shared file drives, limit access to such drives to employees in the respective departments that need to access such information.  And, never publically store any sensitive documents, like employee records, contracts, financial information, ownership records, website code, that you do not want desiminating through the entire office.  And, it makes sense to save any shared files as "read only", to prevent any unauthorized changes to the base documents.

In terms of protecting your website or other external access to your systems, make sure that: (i) there is a firewall installed that prevents external hacking into your systems; (ii) any confidential information, like credit card information, is encrypted and stored on secure servers; and (iii) that your server room is secure in a controlled environment (with air conditioning and fire protection).

You just never know what "evil" is lurking in the night, both by disgruntled employees or competitors sniffing around for information.  So, better safe, than sorry.

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Lesson #40: Focus! Focus! Focus! Build One Business at a Time.

The other day, I had a Red Rocket client pitch their startup looking for funding.  The pitch went something like this.  They were part services company and part technology company.  The technology was both an online video platform and an advertising sales platform.  They had B2C and B2B components to their sales and marketing plan.  Their B2B sales were selling into entertainment, corporate, government and university clients.  They had revenues from both product sales and advertising.  And, they were convinced they had a game changing business poised for success.

But, all I could think was the founder lacked focus.  The skills necessary to succeed vary wildly between services businesses and technology businesses, or B2C marketing vs. B2B sales businesses.  And, clients in different industries have different end-product requirements.  And, they didn't think of the channel conflicts of both selling technology to advertising companies, while at the same time, trying to compete with those companies with an advertising sales model of their own.  It was a mess indeed.  And, when I communicated that to the founder, all I got was a blank stare of disbelief.

It is really an easy mistake for an entrepreneur to make.  In those early months of getting a business up and running, many entrepreneurs float like dust in the wind, throwing a bunch of darts up in the air, just to see what is going to hit.  And, when people are desperate for revenues from anywhere and anyplace to stop their burn rate, they think that is the right thing to do.  But, all it does is create confusion for everyone and anyone:  both internally with the employees building the company and externally with clients trying to understand exactly what your core strengths are.  At the end of the day, to be successful, you really need a very simple business plan in a very targeted market with one key revenue stream.  You can't be all over the place, and everything for everybody.  Hence, the title of this post:  Focus! Focus! Focus!

I, myself, was not immune to these mistakes while I was a first time entrepreneur building iExplore in the adventure travel space.  At the same time during the early years of the business, I was trying to build: (i) a leading internet portal website; (ii) an adventure travel agency; (iii) an iExplore branded tour operator business; (iv) a corporate events vendor; (v) a fund raising events management company; and (vi) an advertising sales representation company.  It was simple too much, with each business having different requirements, pulling the company in different directions.  It wasn't until we laser focused our business around building the largest website in the industry, supported by an advertising revenue base, that the bottom line profits really started to take off.

So, I challenge you to all study your current businesses and make sure it is designed as simply as it can be for long term success and focus.  If you cannot simply describe your business in one sentence, it is too complicated.

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Lesson #39: The Art of Negotiation

Strong negotiating skills are often the single most important differientor between closing good deals vs. great deals, or not closing any deal altogether.  That is because negotiation is more of an art, than a science, as it involves creatively "reading" your audience, and knowing when to dig in, and when not to.  In today's post, we will present some high level guidance on how to negotiate your best deal.

First and foremost, for any negotiation to work, both parties need to feel like they are getting a good deal.  It can't be lopsided in one way or another, for the deal to have any reasonable chance for success.  So, structuring deals means working towards a win-win outcome for both parties.  Make sure the other party has clear responsibilities that meet your goals, and vice versa.  You know both parties have done a good job negotiating, when they both feel "good" about the deal, not one party feeling "great" and the other party feeling "lukewarm".

Secondly, most smart parties never lead with their best offer.  They always leave some wiggle room.  So, as an example, when you are buying a property listed for $1MM, it is not uncommon for your first offer to be $900K and the parties agree to somewhere in the middle near $950K.  That 5% discount was already built into the seller's going in psychology, and they were prepared for that move.  But, had you started with a $500K offer for that $1MM listing, the seller could be insulted by such a low offer, and the conversations could end before they even got started.  So, take advantage of building in cushions, in both your asking price when selling, and bid price when buying, so the other party feels like they have negotiated a good deal too, through the process.  But, don't go overboard in your starting positions, or risk a deal never happening.

Thirdly, it is important to know how to use time to your advantage.  Sometimes, to get the best deal, you need to move very quickly.  As an example, putting an expiration date on any offer, before the other party has the luxury of more time, to shop the deal to other potential parties.  In our real estate example above, this could be making an offer that expires before their scheduled broker open house which will open up potentially more interested buyers.  In other scenarios, dragging out a discussion, could work to your advantage.  If you feel the other party is "hot and heavy" to work with you, but is not budging on a key point, there is a good chance they budge, the longer it takes to close the deal, as they will not want to lose the deal to another company in the interim.

Which takes us to the fourth point: in order to get the best terms, the other party needs to feel you have a "hot product" and that they are in competition with other bidders.  If the other party thinks they are the only bidder at the table: (i) they may get nervous about proceeding, and that they may be missing something; and (ii) they have no reason to move on terms, if they think you are desperate, and need them, more than they need you.  As an example, when iExplore negotiated our strategic partnership with National Geographic, in a subtle and non-threatening way, I was sure to let them know I was having similar conversations with multiple other parties, including Discovery Channel, their archenemy they would not want to lose the opportunity.

The last point involves construction of the contract.  Most often, the parties negotiating the deal, are not the same parties executing the deal.  And, you do not want to leave any desired partnership points "up for interpretation" or undocumented, including key deliverable dates.  In that same deal with National Geographic, we cut the deal with their CEO and CFO, but then got handed off to 50 execution people in the trenches: various publishers and editors at three magazines, a cable channel, a website, a retail store and direct mail list.  All fiefdoms trying to grow their own businesses, with no clear incentives to see iExplore succeed.  I just assumed our senior level contacts would be our internal champions company-wide.  And, they were to open up those doors, but it was ultimately up to the execution people to fulfill any obligations.  So, the devil is in the details.

And, worth mentioning, negotiating is also about the intangible things, like watching facial expressions, listening to tonal inflections in their discussions and creative presentation of information that can support your case, to determine where the real pressure points are, and to assess when parties are bluffing, or not.  When, I had to settle old iExplore creditor debts for $0.10 on the dollar after 9/11/01, we would have never been able to accomplish that without a draft bankruptcy filing filled in, and the creditors seeing their name far down the list, behind the senior creditors that would get 100% of any liquidation monies, if the company filed bankruptcy (therefore making $0.10 a better option than zero). 

But, big picture, if you think it is important to make a deal, then get the deal done without trying to carve every last penny out of it.  As an example, I thought the National Geographic strategic partnership discussed above was worth 25% equity to them, but they dug in on 30%.  I wasn't going to quibble over that extra 5% equity stake, at the risk of losing the deal altogether, when their brand association and marketing support had to potential to double our business over night.  But, if you are far apart on important points to you, hold your ground, and don't flinch.

I hope you found these tricks of the trade useful to you in negotiating your next deal. 

For future posts, be sure to follow me at:  www.twitter.com/georgedeeb