Founders Not Pulling Their Weight or Leaving
You shouldn't have someone permanently and significantly benefiting from company ownership for running a short fast "dash" of effort.
In this section is advice about doing something new. This can be a business, a partnership or initiative. If there is a specific topic you'd like us to write about please let us know.
I've come across a number of startups with 3, 4, 5 and even 7 founders involved in various startups over the past year. It's always debatable about the right number of founders but there definitely can be too many. Too many founders significantly affects the success of the company, the happiness of the founders and the financial results the founders may achieve personally.
How so? Read on!
Many founders focus on their percentage ownership in the startup. They tend not to talk about shares but percentage ownership. I own 100%, I own 50%, etc. Usually the more founders the less percentage of ownership each founder will have right at the start. This may seem obvious but think about this in the context of dilution over time.
Dilution Over Time. Assuming you'll be seeking financial backing and assuming you'll be giving up equity for money, your share of the company will be reduced with every investment of cash. This effect is cumulative in your reduction of company total ownership unless you intend to maintain personal anti-dilution rights. This means you get to put in your own money along side new investors to maintain your percentage of ownership. Most founders aren't in a personal financial position to do this. Most founders are "tapped" financially by getting the company off the ground and working for little or no money in the beginning. Even if you can afford to put in money it means your co-founders will get even more diluted and chances are they will not be happy with you.
The percentage you start with is not going to be the percentage you end with. Let's look at some scenarios so we can get a definitive feel for this.
Dilution Examples. Let's say you start a company on your own. You own 100% of the shares.
Investment 1 Let's say $1 million will be invested for 30% of your company. You will not be handing over 30% of your shares, instead the company will issue 30% additional shares and they will be assigned to the new investor. So your absolute number of share remains the same but you now own 70% of the total shares after the investment.
Result. You own 70% of shares. Investment 1 owns 30% of shares.
Investment 2 Now that you've successfully grown your business with the first investment you now raise a second round of investment. You get $2 million and give up 20% of the company for the money. This is real progress from your first investment. You've double your money raise and give up 33% fewer shares for the investment.
Result A. You own 56% of shares. Investment 1 owns 24% of shares. Investment 2 owns 20% of shares. If you're scratching your head wondering why investment one is lower it's because we're assuming they don't have anti-dilution rights. This means they lose the same percentage of share you do. They didn't put any new money in with the second round of investment so they diluted like you at 20%. The net effect is it saved you a percentage of the company. Also, you retain voting control. At 56% of the company you still have the majority of voting stock. This means you control the company.
Result B. Now let's look at the second investment assuming the first investment has anti-dilution rights. This means they get to put in money along side with the second investor and maintain their percentage of the company. THIS IS VERY COMMON. Most sophisticated investors will force you to accept anti-dilution rights as a term of their investment
You own 44% of shares. Investment 1 owns 30% of shares. Investment 2 owns 20% of shares. Guess what? You just lost voting control of your company.
So what happened here? Well, in this case investment 1 said "hey I want to maintain my 30% ownership" so they put in additional investment along with investment 2. So you didn't bring in $2 million, you brought $2.6 million. The extra $600,000 was invested by investment 1 to not get diluted in the round. So you, the founder, took the additional dilution.
If you wanted to maintain voting control then you'd needed to have taken in less money from investment 2, say $1.5 million, and restrict them to getting 16% or less of the company's total shares. Then the match from investment 1 would have kept you keeping over 50% of the stock. BUT, some investors won't accept less than the percentage they want. It's just not a "meaningful enough" ownership stake. If investment 2 insists on 20% you have a tough choice. Maybe you can convince investment 1 to not maintain anti-dilution rights but it's highly unlikely.
Now Bring On the Extra Founders. We saw in the simple example above the dilution of a single owner. Let's now assume there are five founders and each has 20% equal ownership of the stock to start with.
We're going to stay focused on you for this set of examples but keep in mind that all the founders are in the exact same boat. I'm assuming here that all five founders are fully vested in their 20% stakes to begin with and none of them have anti-dilution rights or the personal finances to invest additional money with the subsequent investors.
It requires the pool of three of the five founders to have voting majority of the company. 20% times 3 founders = 60% of the shares and therefore voting control.
Investment 1. $1 million comes in for 30% of the shares, anti-dilution rights are in place.
Result. You now own 14% of shares. The other four founders own 14% of shares each. Investment 1 owns 30% of shares. It requires four of five founders to pool enough shares for voting majority with the company.
Investment 2. $2 million is invested by a new investor for 20% of shares.
Result. You own 7.9% of shares. The other four founders own 7.9% of shares. Investment 1 owns 30% (they invested an additional $600,000 to not be diluted). Investment 2 own 20%. You took in a total of $2.6 million total. The founders now have lost voting control of the company.
At this point, subsequent rounds of investment dilute you personally even more. If your company hits a problem and experiences a reversal of fortunes you're pretty much obliterated in your ownership percentage.
Theoretically, on the total value of your shares the 200,000 shares you own keep going up in value. This is a good thing and any general shareholders should be happy. As a founder you may have a very different outlook on things. After all, it's your baby.
Founders Not Pulling Their Weight or Leaving
The romantic notions of a startup and the realities are very different things. If the founders involved have started other companies, their eyes are wide open and everyone should have a good idea of the general effort, stress and dynamic pace they'll encounter. MOST HAVE NOT.
Those who have not started a business with no other means of financial income are in for lots of surprises. This is not for the faint of heart. Some will abandon the effort. Some will not be adequate for the task. Some will just be impediments to success and must be removed.
What happens to the share ownership of those that prove not valuable and not worthy? Nothing, unless you plan for it. Once stock is issued, they own it. Period. Founders shares are usually very cheap. They may be a penny a share of less. So even if a million shares are issued to the founders only $10,000 is paid by the founders to own the shares. That usually is far short of the capital that's going to be required to get the business off the ground.
The value to the company is going to be the fruits of their labors. That can be organizing and fundraising, creating operational plans, writing code, leveraging business networking, etc. The impact should be ongoing NOT just one-time. A startup is a marathon, not a sprint. You shouldn't have someone permanently and significantly benefiting from company ownership for running a short fast "dash" of effort.
You shouldn't have someone permanently and significantly benefiting from company ownership for running a short fast "dash" of effort.
Peter Thiel of Paypal founder fame likes to see two founders in a company. No more and no less. In his personal funding he finds that to be the magic number for execution and effectiveness.
In the groups of four to seven founders (yes, I've come across a startup with seven members) it tends to be a democracy, kind of like a band. One or two founders will have the strongest voice and front facing effort but decisions tend to be "group think".
When one of the principle advantages startups have is being nimble, group think slows things done. Also, quite frankly, it's a pain in the ass to work with a large group of founders as a coach, adviser, partner or investor. Hassle is friction and no one likes to get burned.
Resentment Waits for Low Value Producers. Nothing breeds more contention with founders than the guy who "doesn't pull his own weight". When a couple of founders are putting in major time and taking on major stress while another founder just isn't executing with the same passion, commitment and investment - resentment builds.
True Story. A dynamic duo had launched a hosted Ecommerce platform in the late 90's called Apollo Solutions. These young guys mortgaged their condos and went full steam ahead. The pair felt they needed an MBA involved so they brought in a third partner to write a detailed business plan to present to investors and bring in money. They felt his plan was terrible and he just didn't fit into the company. They fired him and moved on. They said he didn't do anything meaningful so they denied his stock grant. Within 12 months along came CNet to buy them out. Guess who came out of the woodwork, yep, MBA guy. He sued which put the sale on hold. This leveraged the founders to pay out a large settlement just so they could sell the business.
Short Timers. What happens when initial founders want out? They leave and they take their shares with them. The guys left are doing a ton of work and usually for reduced or no pay. Most founder shares are very, very cheap so there was no real cash contribution. What happens? They get to benefit from the remaining founders' efforts.
Some Remedies to Prevent Short Timers from Benefiting. First off, nothing says founder shares need to be fully purchased and handed out on day one. Instead you can carve out all or a large portion of shares and keep them in the "treasury" of the company.
Instead of handing out a big wad of shares on day one, you can divvy up stock options that vest over time. This would be similar to what you'd do with employees. I recommend three or four years to fully vest with a portion vesting immediately and upfront. So for example, if a founder is going to get 200,000 shares in total over three years then have 50,000 share vest immediately and 50,000 shares per year for the next three years. To keep people more on the hook you can have the shares vest equally every month at 1/36th of 150,000.
You'll have to work out some of the "what ifs", i.e. what if the company is bought (vest immediately), etc. What this does is allow people who want to leave, to leave, but it keeps a large pool of shares held by the company to give to employees, investors or new founders without having a big dilution effect on everyone overall.
Phantom Shares and Warrants. For minor partners or those recruited late to the game, sometimes phantom shares are useful although most investors won't like them. This is a contractual promise to issue shares to people if they meet contract goals and objectives and often there are restrictions. So these persons often get upside financial gain if the company sells for example (phantom shares turn into real shares and are automatically converted into the sale). Phantom shares have no voting rights and no immediate dilution impact. Warrants are similar. They give someone the option but not the obligation to buy shares of the company stock at a set price. Often there is an expiration on this right. They aren't good forever.
Get it right from the beginning. Don't have too many founders and put a vesting plan into place for all the founders to start. This will get commitment and best efforts and still allow people to leave on agreed terms if something doesn't work out. You'll all feel better about your role as a founder and have better odds of personal success.
If you've been carefully building a patent portfolio... every business process patent you have or are working on is probably "trash on the beach" thanks to the US Supreme Court unleashing "Hurricane Alice". It's one of the biggest patent cases that you've probably never heard of and chances are your patent attorney probably didn't bring it front and center to your attention. Why? Because the supreme court has given every federal court in the land the precedence of "obvious" business processes not being patentable. The case? Alice Corporation vs CLS Bank. The decision? Unanimous that a bank's patent claims about processing digital bank records was an abstract idea and could not be patentable.
The implications are huge for business patents because the surpremes basically said if something is obvious and often done in the real world then turning it to software does not meet the criteria for being patentable. And with that, billions of dollars in patent work just blew out the door.
The worst part? The supremes didn't provide any specific test guidelines. Often to help guide lower courts, the supremes will outline a logical test to determine if something meets a definition or not. In this case -- there is pretty much nothing. What are the implications? Just about any Federal Judge who doesn't understand the finer details of technology, and let's face it that's most, can simply throw out a case by saying Alice Corp.
What are the practical ramifications?
The good news is it's much more unlikely that "patent trolls", people who buy rights to worthless software patents and sue just to get settlements, will be in the dog house. So your software business is less likely to get attacked. The bad news is if you've been heavily relying on software and business process patents to be the value of your business or its protector then you're probably SOL. EVERYTHING is now of questionable value. It also means that business process patents probably should NOT be part of your overall business strategy. There are a few exceptions such as proprietary algorithms, etc. but be very careful your patent attorney can be trusted to give a FAIR AND OBJECTIVE opinion. After all, patent attorneys should be seeing a lot less work because of this case. Whether they'll tell you about it is a different case.
What Is Not Affected
Other types of patents such as utility or use patents are safe from "hurricane" Alice. If you rely on engineering, chemistry, biochemistry, etc. and all the complexities that make your business better then patents in these areas (physical) are untouched.
Here is a link to a good editorial article that pulls specific court language, etc.
There is something completely fun about walking up to a fruit tree and picking low hanging fruit. Quick, easy and potentially delicious - low hanging fruit is quick gratification and potentially fully satisfying and nurturing. Oh, the fruit up high might be much larger from exposure to the sun and indeed its tempting. But what does it take to pick? Time, effort, equipment and risk of falling all play in selecting the choicest fruit.
In any startup I advocate for identifying and pursuing low hanging fruit. The fruit can be sales, investor funding, product development - pretty much anything. If it adds value, even a little, and it's quick, cheap and low effort to achieve then grab it first. Grand business plans are fine but usually ineffective for the short and medium term. Traction in your business motivates everyone. Traction in generating cash flow greases the wheels for everything else. Prove your revenue model and the investor world is your oyster.
Low Hanging Fruit Ranking Exercise
1) List all your opportunities.
2) REWARD. Place a value next to each one in the opportunity reward. It can be potential revenue, product benefit, open door opportunities, etc. Values are 1-10 with 10 best. The higher the value the greater the business reward.
3) COST. List the cost (in money) and time efforts (hours of work) for each and create a value. Values are 1-10 with 10 highest. A low number here is the least cost.
4) TIME. Finally, put a REALISTIC time to opportunity realization (this is your sales cycle, product development time, etc.) and assign a value. Values are 1-10 with the least time needed as 10. Low time values are best (so the scale goes 1 high time involvement, 10 almost no time involvement).
5) Rank order them by combined values. The formula is (REWARD - COST) + TIME.
6) Enjoy the fruit of your labors!
Most people consider insurance a burdensome administrative necessity but it really needs to be part of your strategic plan in starting and building a business. Can you imagine months or years of effort and money invested in a business to find it completely threatened with extinction because of a lawsuit? Worse still, imagine that not only is your business on the brink but your personal assets could be as well. A worse case scenario? No, not at all.
Michael Gregg, a partner with the law firm of Merlo, Kanofsky, Gregg and Machalinsky, Ltd, lives, breaths and has made his living for decades with insurance contract law.
Below is Mike's advice you can use to your best advantage in leveraging insurance.
Keep It in Perspective. People can sue your business for just about any reason. They may be emotional and you may be emotional but the bottom line is "money is the only 'satisfaction' any party will receive". It's not about right or wrong. It's about money. In the case of insurance it's about risk transfer. There is a risk a law suit will put you out of business so you pay an insurance company to assume some, but usually not all, the risk of doing business.
Get a Brokerage Firm, Not Just a Broker. Most businesses rely on their broker as the key source of wisdom and guidance with insurance. Larger firms have distinct advantages in being able to draw from ALL the insurers in the nation to get the best quality insurance coverage at the most affordable price. Independent brokers and small firms tend to work with just a couple of insurance companies.
Larger agencies can also provide additional services such as contract reviews, briefs on legal changes and consulting services.
Make Sure You're Upfront and Honest in Applying for Insurance. Most commercial insurance coverage requires lengthy questionnaires be filled out. Make sure you are honest in all the answers. If there is a legal claim and the insurer determines you lied then they can invoke contract clauses that rescind the entire policy from the start of the issue date. Not only that, but now you'll be asked if a policy has ever been rescinded in any future applications - answer truthfully, yes, and they may deny you a policy or charge more.
Make Sure You Have the Right Kind of Insurance and the Right Amount. Many small businesses make the mistake that a general liability policy will cover "everything". This is far from the case. Your particular business and industry may require very specific additional kinds of insurance. This could be errors and omissions insurance in the case of white collar professionals, environmental insurance in the case of industrial companies, earthquake insurance in the case of specific "acts of God", business disruption insurance if a fire causes you to not be able to operate your business until you're back up and running. You have a risk - there is most likely an insurance that specifically covers it.
TIP on Coverage. Before you meet with the insurance broker write out a bunch of "what if" scenarios. Make this mundane all the way to "crazy". What if a mad man walks into the office and starts shooting people? What if someone says I slandered them in a blog posting? What if an earthquake causes a fire and shuts down my business for 5 months? What if's will make the "legaleze" translate into something you can wrap your brain around.
TIP on Saving. Often once you have primary insurance - adding additional coverage is less expensive. For example, if you have general liability insurance then often umbrella insurance for several additional million dollars in coverage over and above that is a fraction of the cost of the initial policy. This is often the case for specific other coverage items or increasing the total insurance coverage. Why? The likelihood of a loss to the insurance company decreases as the amounts get higher in general. This means they can charge less for the reduced risk.
Don't Just Take Your Brokers Word on Something. You really should review the specific language of any insurance policy. Pay particular attention to exclusions. Exclusions shift asset liabilities from the insurance company to you. Think of it this way. Every exclusion means you get less insurance for your money.
Also, understand specifically what the exact words mean. For example, there could be an exclusion for a child's entertainment business from the use of trampolines. You might say well inflatables aren't trampolines. CHECK WITH THE UNDERWRITER and get their answer in writing. Odds are they will say trampolines and inflatables are the same thing and not covered. At least you know and can make a business decision on that information. Don't just cross your fingers and hope the legal gods smile on you.
File Your Own Paperwork on a Claim. In every insurance policy there will be a written process on how and when to file a claim. Do not rely just on your broker. Clauses will state in your policy that missed deadlines can mean denial of claims. That legal precedence has been upheld in courts. Your broker's office isn't perfect. If it's important have them file and file yourself. MAKE SURE TO SEND IN THE DOCUMENTATION WITH DELIVERY CONFIRMATION. If your broker messes up and your insurer denies the claim then you'll end up having to sue the broker. Talk about major hassle! You'll have "two lawsuits for the price of one".
Get Retrospective on What You Do. New businesses change and evolve over time. What you do in one year is not necessarily what will be done in the next. Every year you will renew your insurance. This is your opportunity to ask yourself, "Does my insurance cover what I do and is the coverage adequate for the size my business is currently?"
Be Careful on Overreaching. Often entrepreneurs want to take in business however they can. Make sure your insurance matches how you're reaching. For example, if you're a contractor constructing a building and the owner asks you to make architectural changes so you take on the planning, designs and complete work, chances are you reached beyond your current coverage. Now if the building is faulty or someone is injured you can be on the hook and your insurer could deny your claim.
TIP on Covering New Opportunities. You almost always can expand your insurance coverage. You don't have to wait for policy renewals. Also, if that new business opportunity doesn't work out, you can cancel that part of your insurance. Keep in mind though, sometimes it can take weeks or months to get the new kind of insurance in place.
Don't Forget Your Legal Shield. Although you can get insurance without incorporating, insurers may count it against your insurance application that you are not incorporated. This could mean denial of application or paying a hirer premium. You also directly open up your personal assets to a law suit. NOTE: In order to maintain the legal benefits of a corporation you must operate your business finances and your personal finances completely separately. Don't pay for personal items directly from the business. "Pierce the corporate veil" and you can suffer the consequences.
TIP on Incorporating. It only costs a few hundred dollars in most states to incorporate. Once you get your articles of incorporation from the state go on the IRS website and apply for an EIN (employee identification number). Once you have those two things you can open a business checking account and you've just set up a new layer of protection. Make sure to renew your business with the state (pay the fee), keep a basic shareholder meeting (it can be all of a couple minutes and a paragraph of writing) and file your annual tax returns (remember federal returns are due one month before personal returns are due).
NEED EXPERT ADVICE? Reach out to Michael Gregg, www.merlolaw.com or call 312-553-5500
Why is it we just can't make it easy on ourselves? Have you been working on a new business and wondering "why is everything so hard"? Well I think there's a lot of psychology involved in the answer to that question and it goes way beyond business. The barrier to success, in many things, is we are caught up in being the hero of our own story. Hear me out. This is interesting.
Why do we lose money in the stock market? Pick the best performing funds over a 20 year history and don't look back. You'll do well. Why can't we lose weight? Just take in fewer calories than you need. You'll lose weight. It's simple but it's not easy. Why, because we feel we must be involved, be in control and be the hero of the story of our lives.
I think that "syndrome" is even more pronounced in business. We have been raised in the myths of inventors, entrepreneurs and innovators. Edison, Bell, Hewlett, Gates, Buffet, Jobs, Brin - you'd think they single handedly slew dragons and raised kingdoms all the while fighting off "barbarian hordes". We see the success and create the idealized story to that success. I think most of us, me included, want to live that kind of "fairy tale". We want our business story to be our story, and of course, we want to be the hero.
"We want our business story to be our story, and of course, we want to be the hero."
That's just ridiculous and it's taken me a couple of decades of experience to really start to "get it". I can finally fully and completely embrace "someone else's idea". It used to really bother me if it didn't come from me. I'm less concerned with a good idea and more concerned with a business that can achieve success. Success occurs when a business story is about many people who share a vision and fill the many pages in the many volumes of the story of a business success. Do this and your successes will occur more easily, more quickly, with far less stress and to a much larger extent than you can imagine.
Signs You're Being The Hero and What to Do About It
1 You go back and forth about equity share and ownership control in a business barely off the ground. I hear Golem in my head from lord of the rings, "precious, precious". Who cares! Your business is WORTH ZERO. Give up whatever it takes to pull the team together that will build value.
2 When people talk to you about potential size of your business you can't help but smile. GROW UP. Recognize that the emotions you are feeling are based on the pleasure centers of your brain. This is the same psychology that makes us happy to receive money, have sex, etc. It doesn't lead to rational thinking - quash that and move your thinking on. Assume you'll do a lot of work and get zero. There is no value so focus on creating some.
3 You keep going back and forth on business strategy. You are caught up in the romance of the decision. Oh, "where will our hero go? Slay the dragon, conquer the mountain?" Get back to basics. What strategy will be the least risk, the shortest learning curve and the greatest potential return? Create a matrix and jump on the path to the easiest success.
4 Founder and CEO. Founder? CEO? Of what? How many people are in your company. Everyone says "oh, it's just a title." Is it? Really. Would you dare print a business card with no title under your name? Secretly do you covet the "perception" of the title? Titles can have a business use - but usually only in a business development perspective. I am telling you now a high flying title is a barrier to the people around and particularly under you in a startup. Give up the ego. Throw out the founder/CEO and create a title that truly reflects how you want to benefit the company. Visionary, Cheerleader, Engineer, Enthusiast, etc.
End the drama, be inclusive in building a successful business with those around you. Make THE STORY a story of many hands building. Stop being the hero.
If you ever do sports you'll always read and hear you need to focus on your core muscle group. Your core muscles are the foundation everything else if built on. This concept applies to start ups as well.
In creating something new you almost never have have enough resourcs (people, money and time) to do all the things that need doing and do them well. So don't try. Instead decide on the one or two (not three or four) things you need to do very well. Is it sales? Is it a very specific few software features? Is it consulting specialty? You get the idea.
Create a Mind Map and Chart the Money
I like to use mindmaps. Create circles and boxes representing functional areas and draw arrows to how the pieces flow. In that map indicate dollar spend (in red ink) and dollar generation (in green ink). Everywhere you spend and make money rate it 1 low spend/generation and 5 high spend/generation.
I find this an easy way to identify, "boy we spend most our money here and generate most our money here - we better be pretty darn good in those specific areas."
Build your core around those areas. That means you should probably either make those area "in-house" people or very vetted and highly skilled outsourcers.
Everything else - deemphasize. Those areas are the best ones to outsource or "downgrade" internal hiring.
It might sound very simple, but mind mapping your business and charting your money against it is the easiest way to identify what "business muscles" to develop. Enjoy your work out!
by Seth Temko
What a whirl wind! We just had the grand opening of the Hi-Five Sports Zone this past Saturday. It's our first small box, youth sports location. It's in a retail area on Geary Blvd in the Richmond District of San Francisco. We had over 500 people participate in the four hour grand opening. This exceeded our expectations. We're following three marketing principles that anyone can apply. We're getting a lot of community buzz which is exactly what any local retail location needs.
Stage One Announcement - We're Here!
The first stage is to get the word out that you're opening up. You have to start as soon as you lock in your lease.
Put Up Temporary Signage ASAP. Put announcements in your windows and a temporary banner up high before your permanent signage comes "Coming Soon XXX". Go to the local sign copy. We had good service from Fast Signs.
Hit the Local, Local Media. Locate and contact all the local newspapers (the community ones). You want to hunt online for all the online community bloggers. Sometimes this is the same source but in more urban areas they'll be different people. You want to write a basic press release announcement. Call them first and tell them in a couple minutes what you're doing. Follow up via email with the press release. Ask them to at least write about your grand opening.
Create Contests and Give-A-Ways. Our business is focused on youth sports so we gave away a number of birthday parties to local schools to auction and a blogger to contest away. We received hundreds of contest participants who gave us their emails in exchange to enter. Most of our costs are fixed and we're just opening so we have lots of time "to give away". We can't save the rental time - just like a hotel or airline. Make the offering appealing. For every entry you get between 4 to 5 people will read your name and learn a bit about you. In our case we figure that's a few thousand people. It's well worth the effort. Also, give-a-ways to some non-profits are tax deductible.
Street team. Create a basic small opening announcement and get it professionally printed. You can use the local printer to build a local business relationship. If that's not possible I like www.48hourprint.com. You can always find an online coupon for them. Try to be different and get attention. You have to go to other shop owners, community leaders, public officials, etc. We spoke with the city supervisor, principles at schools, shop owners, PTA leaders, anyone who would listen. She if the shop owners will let you put a promotional flyer in their space. You'll return the favor for them down the road.
In our case, we have a full mascot costume. It was custom made and cost a few thousand dollars but in our case, youth sports, it's dead on to our market. We send out two employees, one in costume and one to speak with people and hand out fliers. Kids love our Hi-Five Murphy.
Affiliate With a Charity. It is good to give and charities are always looking for new ways to raise funds. You can do good and help promote your business. In our case, we partnered with the UCSF Benioff Children's Hospital. We give $1 from every program registration for a class we receive and we raise funds outside our programs as well. Don't just pick any charity. Pick one that fits and benefits your community. In our case, we know two of the top three children's conditions the hospital treats is child obesity and diabetes. Our business promotes an active lifestyle with children. This is a good charity and a great fit for us. (Read article Public Relations, A "Secret" Weapon DIY)
Stage 2 Awareness - What We're About
It's great to get your name out but people need to know what you're about. We provide youth sports classes, leagues, birthday parties and recreational sports space for adults to rent. You can start by crafting your message and details in signs in your windows. In our case, we put the description on our permanent signage 20 feet up in giant letters. Hey, you're paying premium rents to be in a retail space so you should invest in excellent signage. We doubled our initial budget. Yeah, it's just that important plus we get tens of thousands of cars passing along on Geary Blvd every day.
You need an elevator pitch. It is the one sentence that gives a summary of what you do in a very positive way. "We're the most environmentally friendly way to clean your carpets." "We're a spa day for your dog." People can quickly pick up on what you provide, weed out your business for themselves and remember what you do when they tell others.
Hand Out Information All the Time. We used our dog mascot character, Murphy, to create a free standing 4 foot tall - brochure caddy right at the door. Foot traffic had about 100 information pieces taken out of the caddy per day. It cost a couple hundred dollars to custom make but it was way cheaper than having someone stand outside the building and awkwardly say "hello" and offer a brochure.
Direct Mail Your Opening. Direct mail is still a good return on investment for grand openings. It will cost you about 80 cents a piece for the printed material and bulk rate postage but it allows you to reach far more households than you can with specific targeted efforts. If you're ambitious you can use door hanger flyers that loop onto door knobs but that's a lot of running around. It also doesn't work well for areas with apartments. Repetition is useful if you have the budget. Ideally you'll send the piece 3 times to the same households.
Local Newspaper Advertisements. I must admit I'm not a big fan of media buys in general. In our case, we focus on adults ages 24 - 44 and that's the generation that's giving up traditional media. If you want to do it then look for a barter deal with the paper (read article How to Double Your Marketing Budget).
Contact Community Bloggers. They love to report on what's new in the community. If you open your doors to them and treat them like a VIP they will give you a lot of print. They also like providing contests so make sure to offer that option to them.
Local Social Media. You want to ask people in the community to like your social media pages. Don't be shy, put it in your promotional pieces. People are interested in what retail and services are new in their community. You can also add some special discount or coupons for social media only. This helps you distinguish what is working. It also gives people something to chat about.
Talk to Passers By. Lots of people will look in the windows. Take a few minutes and let them step in. Tell them what you're about and hand them a marketing piece. Personal contact means you're friendly and inviting.
Stage 3 Participation - Try It, You'll Love It
Ultimately you need people to try what you offer. Make your grand opening a big event. This is the time for you focus on gaining customers and not focus on revenues. Set aside a "freebie budget". That is an amount of give-a-ways, discounts, etc. that are part of your marketing budget. You need customers to enjoy what you offer and tell others. Create a positive relationship, ask for some way to contact them (email is best), and give them a reason to try, to buy and to tell others.
We provide youth sports and recreation so we had sports stations and half-time events every hour with a DJ, cheerleaders, a break dancer and of course our mascot Murphy. We offered kids prizes for participating and being active with our games.
We also offered steeply discounted birthday party events at our facility to everyone who registered through our grand opening. Each party is 20 - 30 children and their parents who get to experience our quality facility, our great sports coaching and how much we care about children. We know that for every one party we throw, we'll get between 2 to 6 future party registrations. We have 12 parties booked through our grand opening. This is a great "viral tool".
For your business you may want to try risk free services. If they don't like it you'll refund. You can aim for deep discounts on unfavorable hours of operation (when you're usually idle). You can discount retail items steeply that usually are purchased with high margin counterparts. There are many, many strategies to try.
Retail is not easy, fully 53% of new retail operations fail within their first four years according to Statistic Brain. But beat the odds with a very strong opening and follow the zen of the three marketing phases.
If you want to follow our grand opening results, visit Hi-Five Sports Zone online and watch our grand opening video feature, of course, our mascot Hi-Five Murphy.
by Seth Temko
I was in Silicon Valley this week and traffic was snarled, yes way worse than normal. Why? Obama was in town and he was going out to visit Sergey Brin at Google. If that isn't startup to money, power and influence - I don't know what is. That dorm room, garage, basement to president inconveniencing tens of thousands of commuters to see you is perhaps the classic startup fairy tale. The reality is most startup artists don't make a dime and honestly, hard work is better rewarded working at the big companies.
Here's an example. Coca-Cola has announced a $1.8 billion bonus pool for 2014 for 5,600 execs and managers. Average that and you get a whopping $321,428.57 average per employee.
So let me see - big, safe, stable company with all the benefits and perks. A big salary and a potential $321k bonus in it (per year). What sucker am I to be doing startup after startup? A good friend of mine who's been in the VC game for many decades puts it plain as day. "You have to be crazy to do a startup."
He's right. Lots of time, risk and effort into something that barely yields a unicorn (Waze valuation kind of sale). I love the challenge of startups but after a couple decades of the battle --- hmmmm...
by Seth Temko
And I think this is where it all starts to get stupid because it has opened my eyes to the bigger issue. I think the new round of startup jockeys think that after 20 years tech startups, everything must be kind of formulaic.
So if you have to summarize your business in one sentence you are forced to compare yourself to another company. "We're a virtual McDonald's with digital burgers. We're Facebook meets pro wrestling. We're the Ebay of pure breed dogs auctions." And if you're getting validation from comparing yourself to another company - why not just copy their business model and growth history.
By Seth Temko
It was September 11th and my plane landed early a.m. in Houston, TX for my business trip. It was a little ahead of schedule. The airport was strangely slow. "Well Houston isn't really a hub", I thought. I exited the plane and walked out into a completely empty waiting room. All the airport employees were crowded around a TV showing a skyscraper in flames. "Oh, a skyscraper fire," was my thought. "I hope everyone will be okay." The taxi line was empty. I jumped into a cab. The cabbie turned to me and said, "oh, what city were you trying to get to?". I was completely puzzled. "Houston, I'm in Houston", I said. He paused and then his eyes opened wide. "Oh, you haven't heard. Planes are flying into the World Trade Center. All planes were ordered to land at the nearest airport. You're lucky you made it to your destination."
The World Trade Center?... That's New York... That's our largest market! This was my first real experience being Blind Sided when you're actually executing a startup business.
It really wasn't fair. We were $43 million into our startup funding. We'd identified our markets, built our products and we were gaining traction. We'd moved up the food chain from small businesses to regional companies and we were working on some national brands. But New York was our largest market and one we'd invested a lot of resources into. For 6 months we had no business coming out of New York at all after 9/11. Heck, we didn't even know if our employees there were buried under rubble that first week (fortunately they weren't).
I wish I could say that was the only time my business had been blindsided. Flash forward 8 years. I was working at a different company. We'd sell RFID equipment into large hotels, resorts and casinos. It's the kind of deals where you work on some pilots and then you get roll outs. The roll outs expand your business in waves. We were just about to "ride" a wave. This coming roll out was going to double plus our revenues for the year. Then, the "great recession" hit. Hospitality was especially hard hit. Properties say occupancy rates dropped as much as 80 percent. All of our clients froze capital spending. All clients at once said "stand by indefinitely until we figure out what's happening". The only guys buying at the time were Indian Gaming Casinos. Those clients saved our business. But it was a fluke that we had them. They never were really our target market.
So for all you out there planning your startups, fund raising, executing your plans and striding forward - plan for being blind sided.
1) Have a slush fund or line of credit. When business suddenly dies fast then you need cash to plug the hole. This means you need a minimum reserve of cash and/or untapped line of credit. A combination of both is ideal. You have to call this your "D Day" money. It's not to be touched - ever. There is no warning when major environmental issues occur - terrorism, economic turmoil, natural disaster, etc. It will just happen.
2) Get properly insured. Too many companies hold liability and workers comp insurance only. You can get insurance for just about anything else you can think of. It can address all the major issues. Also, consider getting insurance for business disruption. This is particularly true for bricks and mortar kinds of businesses. If a building burns down you can go out of business from the cash flow disruption alone. Get properly insured.
3) Don't put all your eggs in one market "basket". Be careful on focusing too much on just one geography, industry, major client, etc. If 60 percent or more of your revenue comes from just one market you are very vulnerable to down turn.
4) Have a down turn plan in hand. The best way to prepare for a down turn is to have a plan in place ahead of time. You should work with finance to determine financial criteria in which you cut costs. You should work with operations to determine which personnel would be cut if your business drops. When you cut payroll do it fast and do it deep (as many upfront as you dare). You should work with everyone to determine the order of priority for paying vendors because you will have to pick and choose who gets paid how much and when. No one will get paid in full and on time.
I hope we continue to see some smooth sailing overall in the economy but between the designs of man and the acts of God we will see future disruptions. Do yourself a favor and don't get blindsided.
This article is dedicated to Jon Ecker, Patrick Blair, David Hong and Richard Rodriguez for working with me in the trenches during the crazy times post 9/11. Thank you all for your dedication.
Seth Temko Entrepreneur, Marketer, Technologist
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