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Start Up, New Venture

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.

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Simplicity Is A Key To Success - Three Tips

2/15/2014

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by Seth Temko

When you truly are passionate about a startup, you get excited and the "dream building" actually activates the pleasure centers of the brain.  Addiction? No.  Emotional, passionate  exuberance?  Most definitely.  In the wonder of our excitement we usually "build up the dream".  We think about the myriad markets to concur, the line of products we'll create and the many offers to buy us out.

But when it comes to building a product, plugging into a market and growing a business you have to take it one step at a time.  "How do you eat an elephant?  One bite at a time."

One of the keys to success is to limit how many bites you're taking.  Complexity adds risk of failure, time and cost.  The more features and functions you want to add to your product, more complexity.  The more distribution channels and methods for your sales strategy, more complexity.  The more markets you want to simultaneously enter, more complexity.

Complexity = more risk of failure, more time, more cost.

Tools to Check Against Complexity

1) Pick a single market to focus on.  The US is the largest economy in the world.  Just about any product or services market in it is at least $1 billion dollars in revenue.  Hair dryers?  Yes.  Wrapping paper? Yes.  Staplers?  Yes.  This is plenty large for any new company.  Choosing a single market will simplify your product, marketing and sales efforts.  (More on the topic.)

2) Pick a single go to market strategy.  You need to enter a market with products or services and the big question is how to do it - direct sales, web sales, affiliates online, retail, wholesale?  Your strategy dictates who you need, what you need to support the effort and how you structure pricing, support, etc.  As with markets, pick a single method for selling to start.  Every method is different with different support efforts required.  Choose your method, design your strategy, set metrics for measuring success and change course if you're not getting results.

3) Define your core offering and stick to it.  Whether you offer services, software or tangible goods stick to a defined AND LIMITED set of services, software features and product functions as you start your endeavor.  No entrepreneur wants to pass up an opportunity and often the impulse is to jump on any perceived opportunity - a business development deal, a sale, a customer request, etc.  Small startups have too few resources to truly be good at more than just a few things.  Most people point to small companies being nimble and quickly able to change.  This is a good value.  But change and an overly broad product/services offering is not the same thing.  Adding more and more to what you offer while maintaining everything else is a sure way to be "an inch deep and a mile wide".  That is not a good position for a startup to be in.

Acid Test of Simplicity

A good acid test for any of the three tips above is to choose some people in business that have a good grasp of business but don't necessarily know a lot about your company.  Describe to them your strategy with a market, market entry and product/service and watch their faces.  When you see them shift position, scrunch their eyebrows or look up and left with their eyes, that means they are uncomfortable with what you just said or trying to process (understand) what you said.

This usually means you're struggling to communicate your business and often your struggling because it's not a simple tale.  At the end of your "pitch" ask point blank, "does that sound simple or complicated".

Simplify, simplify, simplify your efforts.  Ask all the time is this what I should be doing, is this definitely important and is this the best priority for what we're doing?  Eyes on the prize.  Eyes on the priz

Best of success.


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Fighting in the Trenches? Choose Well.  Ability Isn't Trust.

11/8/2013

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by Seth Temko

I've been privileged to work with many business managers with exceptional abilities.  I have worked with sales aces, financial savants, fund raising gurus and technology wizards.  I've worked with many managers with great abilities but I can't say I'd pick many of them to be in trenches with me.

I've worked for several tech startups over 15 years and in a phrase, "it's never easy".  There is a special pressure of trying to "figure out" technology, markets and sales methods at the same time you're "juggling" the funding time bomb (article on that here).  When you're flush with a new round of funding everything seems achievable.  That's when you move into the "hiring binge" and all sorts of new characters enter the company.  You've run out of "known quantities".  The people you know and trust.  So now you're defaulting to "qualified people with great backgrounds".  In other words you're relying on abilities.

I know recruiters will argue with me but it's easy to hire people with good talents.  But the real test of someone's metal is when the fire turns up - when the product is delayed, when a key business partner breaks a deal, when money is tight, when sales don't meet expectations and when investors grumble.  It is amazing at this point how many people duck and cover, or worse still, start throwing others under the bus.  For those who stand with you constructively while others buckle, those are the people you want to reward and keep in the trenches with you.  Those are the people you want to recruit to your next endeavor.  Those are the people you trust.

All the others?  I recommend looking for opportunities to move them out.  It sounds harsh but it can be the difference between success and failure.  It can also significantly reduce future stress for you personally.  If you're "lower on the food chain" then you should consider looking for a new place to work quickly.  This way you control the timing of your exit.

Of course by the time you and your company is stressed it might be too late.  But I can tell you that the signs of "weak metal" pop up all the time.  You just need to open your eyes to the situations and make note.  At some point "all the signs" will start pointing to trust issues and you have to ask yourself, "Do I want them in the trench with me?"

Here are some of the things I've noticed over the years.  There are many, many more.  I invite you to post your own examples (please no last names).

Irrational demands.  I worked for a CEO that wanted a technology that we just could not build.  It was not an issue of technical expertise.  It was not an issue of resources.  It was an issue that the data set we would need to accomplish the goals did not exist and could not exist unless the largest software vendor of that technology in the world changed, fundamentally, how they databased their sales information.  We were just a small company with no influence over that giant.  Also, because of network PCI security restrictions, we couldn't write and implement custom code on the protected servers.  At that time, with the constraints, the strategy could not be implemented.  That CEO found the conclusion unacceptable.  He would not listen to any logic.  He would not consider any alternatives.  He wanted what he wanted, and he refused to listen or consider otherwise.  Irrational demanders - out of the trench.

Stories of the past that don't sit well.  I'm a much better listener than a conversationalist.  Most managers go on social meals with other managers on business trips.  I've found this to be an excellent "getting to know you" time.  Most people are bored by other people's revere.  I find it fascinating because I listen to what they say, how they say it and the context by which they present themselves.  I've found that aggressive personalities tend to say a lot and sometimes probably say too much (if they ever thought about what they said).  This tends to especially be the case if they have a couple glasses of wine.  In that regards, I have the advantage, I don't drink.

I remember a senior executive telling me of the large tech companies he'd worked at and how he'd ingratiate himself with the founders and directors.  He then used those relationships to tear down and destroy the careers of people he didn't like.  He could tell by the reaction on my face he'd said too much and he tried to cover his statements.  He said, "Oh, I don't do that any more."  Yeah, right.  I made mental note and in the end he proved to be both a tyrant and a traitor to others.  Braggarts and bullies - out of the trench.

How partners are treated.  I'm sorry to write that I think most companies treat their partner vendors like step-children.  These are your outsource tech companies, parts suppliers, distributors, outsource manufacturers, etc.  These companies are vital and import, well, until the money is tight.  At that point they're not "really part of the family".  Startups have peaks and valleys with cash flow so there are times when you'll need to pick and choose who you pay in a given month.  That's just part of business.  How your company handles it is a big part of building trust.

Good managers will own the problem, inform the partner of the situation, answers their questions and create (and honor) a payment schedule.  You'd be amazed at how well this open and honest policy can work. 

Bad managers will hide the situation for as long as possible, blame the vendor for some made up issue to deny payment, require them to go through unnecessary administrative hurdles to delay payment, not schedule payments and not make payments if they are scheduled.  If this is how part of "your business family is treated" it's certainly feasible this is how you'll be treated if the money gets even tighter.  Disingenuous treatment of vendors - out of the trench.

The blame game.  Everyone has seen the blame game.  Everyone steps up for kudos when something goes right but everyone cringes when something goes wrong.  I don't expect people to be happy when things go wrong but I do expect people to own the situation collectively, consider how they contributed to the situation and offer solutions to improve the situation. 

And then there are the blamers.  These folks always point to other people.  A "blame gamer" will do this all the time.  Oh, at first you may not even catch the blaming.  They have it down to an art.  Subtle hints of someone having "trouble" or they have "concerns" is usually how it starts.  But, turn up the heat and the "kettle whistles loud and clear".  Blame gamers - out of the trench.

I'll stop at three examples.  I could go on and on.  I've probably worked closely with 50 experienced senior managers by this point in my career.  Almost all of them had excellent hard skills.  But when I think about it, I would probably only bring about a dozen of them into the trenches with me.

Look for the signs and head off those you don't trust.  Life is too short to settle for less.

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The Social Enterprise - L3C Legal Structure

11/6/2013

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PictureThe Social Enterprise - L3C Benefits
by Seth Temko

There are many entrepreneurs that are caught between doing social good and financially benefiting from their endeavors.  Do you Incorporate - LLC, or do you 501c3?  Now with a relatively new legal entity you may be able to do both in one legal structure.

My eyes were opened to this new legal structure via a business development meeting on Chicago's near south side at the Christopher Foltz Collaborative, L3C.  There I met with Christopher in an abandoned doctor's office turned into frenetic brain trust.  He talked of changing the world and he wasn't afraid to speak about making money either.  This was a relatively refreshing viewpoint for me since I don't think everyone needs to be a "Gandhi" in order to bring positive change to society.  I actually believe market solutions, in most circumstances, are the most efficient and sweeping ways to bring change.

After our meeting I did some research into L3C structures and it is certainly something every entrepreneur should consider as they think about corporate formation.  A L3C is a low-profit limited liability company that was created to bridge the differences between non-profit and for-profit endeavors.  The corporate structure meets IRS requirements for direct program contributions by private not-for-profit foundations.  These foundations account for $50 billion in US annual donations.

At the same time, a L3C is allowed to make and retain much of its profits.  In most states at least 5 percent of profits must be given to social causes (check with your state).  The L3C will also need to have some stated social purposes.  This profit allowance gives the L3C the ability to seek out traditional funding sources from private equity, convertible loans and traditional loans.  Donations from private individuals are not tax deductible to a L3C as they are with 501c3 organizations.

A L3C can leverage donations to enhance small margin returns to encourage private investment.  For example, let's assume a product is to be introduced that has a social benefit but for purposes of enhancing distribution its price and therefore its financial return is reduced.  Let's say, $100,000 is needed.  If a particular project would yield only a 5 percent return on that money, then it may struggle to find for-profit financing.  Instead, an L3C could find foundational funding for say, half the project, $50,000 in this case.  It can now seek half the for-profit funding, $50,000 instead of $100,000 and it can offer twice the yield on the investment, 10 percent.

In this case, the foundation achieves its social benefit goals for $50,000 instead of $100,000 and the for-profit achieves a higher financial return with half the capital at risk.  The entrepreneur is able to fund his full project, participate in some of the financial return and provide a social benefit.

Voila, The Social Enterprise is born. 

Please note that L3C structures are not available in all states and, of course, you should consult with an attorney in understanding this new type of legal structure.  If you are intrigued, I found the following Harvard Business Review article on the topic very helpful, "A New Approach to Funding Social Enterprises", by Antony Bugg-Levine, Bruce Kogut and Nalin Kulatilaka.  You can get it on Audible for $2 here.

If you're looking for inspiration on building Social Enterprises then "Rippling: How Social Entrepreneurs Spread Innovation throughout the World" by Beverly Schwartz is an excellent and entertaining read.

Liesel Pritzker Simmon's $50 million pledge to fund global for-profit, social enterprise networks.

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"No Lieutenant Your 'Product' Is Already Dead"

11/4/2013

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by Seth Temko

Lieutenant: "I think we can handle one little girl. I sent two units, they're bringing her down now."
Agent Smith: "No lieutenant, your men are already dead."

In the movie the Matrix, Agent Smith, addresses a police lieutenant as they are trying to capture Trinity.  It's a mission doomed to failure.  Your next product initiative is kind of like that scenario - doomed.  The problem right now is you're the over confident lieutenant unaware of the danger.

Bringing new tangible products to markets is a complex set of activities that involves many people with very diverse knowledge bases.  It's all orchestrated to create something new that works, that can be distributed into a market and that people are willing to pay a minimum price for.  A new product starts with thoughts turned to paper and ends up as functional goods in someone's hands that works and has value.  Yeah, doomed.

If you walk into any big box retailer (Best Buy, HHR Greg, etc.) and think that every individual product on a shelf or hanging on the wall went through a development process and then realize that those product lines turn over in 6 to 18 months, the scope and scale of new product activities really starts to come into view.

Add to the scale of R&D that on average 40% of new development projects across consumer and industrial products fail (according to a study by Kellogg Graduate School).  That means the product never makes it to market.  If you combine the fact that of the products that make it to market many fail to be financially profitable. 
Take a look at HP's $14 billion launch disaster of its tablet computing product the Touchpad.  After just 3 months in the market HP announced they would no longer be producing any tablet computers.  According to Proctor and Gamble CEO Roger Crockett, only 15 to 20% of consumer packaged goods are commercially successful (profitable) in its industry space. P&G boasts a 50% success rate in the market place.  This is well above industry average but substantially below potential.

How big is this challenge? In 1997 the US spent $151 billion on industrial R&D and $32 billion on military R&D. The total is the equivalent to 2.5% of US gross national product for that year.

That is a massive amount of money spent and we have a success ratio of 50%.  That means all R&D is a flip of a coin - heads or tails.  We then have low probability of success in financially being profitable.  So fundamentally how we create products and how we bring products to market are tremendously flawed on a massive scale - yikes!

Here are the five key, high level questions you need to get answered in order to successfully bring a product to market. 
  1. Technical Viability (can it be created and work)
  2. Manufacturing Viability (can it be created at an acceptable cost, in an acceptable timeline with an acceptable defect rate)
  3. Distribution Appeal (do distribution partners want the product)
  4. Consumer Appeal (will end consumers [business as well] buy it)
  5. Financial Viability (will it generate profits)

These deceptively simple questions hold the keys to product success.  They also make for a great way for any entrepreneur or company to create an iterative go/no go research and decision matrix.  You have a great idea and you want to "light the world on fire".  Can you actually create your product and it will work?  This is usually referred to as a technical feasibility study.  It ends up being its own project and it is ABSOLUTELY worth the cost to conduct.

Even if something can be created you have to see if it can be manufactured.  Usually the biggest challenge is manufacturing cost.  What will it cost?  What will it cost in smaller volumes?  What will it cost in larger volumes?  You generally can't get to real numbers for this until you've built a BOM (build of materials) and you generally know what overall assembly effort will go into producing the product.  Expect cost overruns.  It almost always happens that way.

You have to do A LOT of homework about distribution.  How will you get your product out to market.  If you do direct sales that's your answer.  But otherwise you need to really hound your distributors, value added resellers and retailers about COMMITTING to the product.  Hopefully this is a contractual commitment.  "If it hasn't been written then it hasn't been said."  Many of them are really mercenary in outlook.  You will have to buy their loyalty - buy shelf space, buy warehouse space, etc.

How will you ever hope to be successful unless your end consumer really, truly values your product enough to pull out their wallet?  You need to test, validate - test, validate and, again, test, validate.  How do you do this?  Through a succession of individuals and groups and by using the increasing set of tools at your disposal.  You start with Q/A.  You present industrial design drawings.  You present 3D CAD photorealistic renderings.  You pretend you have the product and try to sell it over the phone.  You present 3D printed solid models.  You present functional prototypes.  You test in the field first articles of production.  And at each and every phase you assume everyone hates it.  Prove them wrong.

The last big question is will your whole endeavor make profits.  This is really difficult to validate.  You can create a revenue model through all the answers to the prior questions.  You can comb through, alter and change that model as you get new and better information.  But ultimately, it is the definitive answer of product life and death and it comes after you're all in, after "you've sent up two units".  Minimally you want good defined standards with your whole team on how you will define success in this area and on what timeline.  Most teams don't and it creates a lot of conflict down the road.

Break the mold.  Focus on your high level success factors and beat the odds.  It all starts by being aware of the danger.

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Start Ups Provide Diversity of Experience

8/22/2013

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by Seth Temko

If you don't know "what you want to do when you grow up", go work at a start up company.  It doesn't have to be a tech company.  It can be any small, new and growth focused company.  I'm a serial start up guy.  I've been working for one start up after another for over 15 years.  I do it primarily because I enjoy creating and growing a business AND I like to do many different things.

I'm a man of many hats.  I am CFO, CIO, human resource specialist, business development executive, in-house lawyer, copywriter, sales person, accounts payable and office garbage man.  Hey, someone has to haul it to the dumpster.  I work at a start up and I fill the gaps.  I wouldn't have it any other way.  The thought of doing one principle function, day-in and day-out, year after year is just not appealing.  There are many things I don't like doing but I know it's only going to be a small part of my week.  I also like to learn and I have a tremendous opportunity to learn many new things constantly.  I speak with people in all sorts of industries with all sorts of job functions and I make it a point to understand what they do, why they do it and how it relates to my company and me.

I speak with many people starting out in the business world and when they aren't sure what direction to go I tell them go work for a start up.  If you have a brain and the ability to be a self-starter then a new business is your oyster.

Here are some tips on broadening your experience working at a start up:
1) Look for balls being dropped and pick them up.  The signs are all around you - bills are missing payment, a potential client needs to be picked up at the airport, no one has thought of sending holiday gifts to business partners, there is a stack of state communications from unemployment no one wants to read, no one has proof read the sales proposals, the insurance broker wants to review liability policies... you get the picture.
2) Listen to your co-workers and listen for stressors.  What are the things they are so far behind on they are struggling?  Pitch in.
3) Think about opportunities to help progress the business.  What are some of the barriers?  Remove them.
4) Flat out ask the owner/founder what's the most critical goals of the company this quarter and say "how can I help reach them".  It doesn't have to be big things.  Just freeing up others from little things can be an enormous help.
5) Take a problem off someone's plate and fix it.
6) Help promote your company on social media, chat forums and professional groups.

Once you show initiative others will be happy to start turning over responsibilities.  Look for opportunities and jump on them.  Pretty soon, people will naturally start coming to you.  The more you know, the more you grow.  Start ups are an exceptional opportunity to do this.

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Decency Always Pays Off in Business

7/19/2013

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by Seth Temko

We had a great business deal just handed to us last week.  We provide youth sports programs and we partner with cities, park districts, companies, etc.  It's pretty rare for us to lease our own facilities.  We rely heavily on the partnerships we create.  Well last week a city in CA with GREAT facilities called us up, arranged a meeting and said, "it's all yours" pointing to large outdoor fields and an indoor gymnasium.  When someone just hands you a business opportunity it always surprises me, but when you think about it, it makes sense.  You see people prefer to work with people they know, like and trust.  Oh, that doesn't mean they won't work with others.  "Bidding you out" helps keep you honest.  But let's face it, when all else is the same, you want low risk and low hassle and to reward those that have been good to you.  It's natural and it's something EVERYONE should cultivate.  You should cultivate that in your personal life, as well as, your professional life.

Let's just call it our interpersonal golden rules.  It makes for a good person and a good business.
1) Treat everyone with respect.  Before you say "well of course" really do a little self-examining.  Do you treat an accounts payable person at a company with the same regard as the CEO?  It ends up our new deal came courtesy of an assistant manager at a city we partner with who moved over and up into a new position in the new city.  We make it a point to treat everyone with respect regardless of position, rank or authority.  It sure came back to us.  How do you treat the secretaries, interns, admins and for that matter the janitor that happens to be in the bathroom at the same time you're using it?
2) Take the time to know something personal about people and really remember it.  I like to find out what interests outside of work people have and get some more details on personal life.  Children and pets as topics usually bring a smile to people's faces and their whole body posture just seems to relax as they talk.  I find it really helps me relate better to people as "people" and not just positions or symbols of what I can gain when I learn personal information.  It also helps me remember that person even if I don't see them for some time.  By the way, give people the opportunity to know a bit about you as well.  You shouldn't create a one-way "syphon" of personal information.
3) Always consider how you can help someone.  Really think about it.  It could be as simple as information that you spend extra time to adapt for their business use, thus saving them time and effort.  It could be an article online or a special report or piece of information that is relevant to them personally or professionally.  It shows you are listening to them and you're thinking about them.  Barring that, always send thank you notes or emails after meeting with people.  You'd be surprised how often people focus on setting up a meeting but don't really follow through after with even basic communications.
4) Learn to give without expecting anything in return.  I find that success and forward motion in life has more to do with our relationships than our specific talents.  If we respect people, know about them personally and truly want to help them then giving without expectation of reciprocation is natural.  You will also find that when you need something many, many people are eager to help.

Here is the final thing to keep in mind.  The golden rules above don't fit neatly into a business plan, a financial projection or a sales pipeline.  It is not something you can "bank on".  Some people would discard this as "soft skills".  But what it tends to yield is a series of pleasant surprises that multiply again and again and at an accelerating pace the longer you stay with your business and interact with people in your industry.

So the next time you meet with someone new please spend the first 5 minutes getting to know things about them personally and commit those facts to memory.  Follow the golden rules and the rewards will follow.

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Your Employees Don't Want Stock

7/4/2013

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by Seth Temko

You suffer from motivation bias.  We all do.  We assume other people are motivated by the same things that motivate us.  Being entrepreneurs we assume everyone wants "a piece of the rock".  We assume that motivation for our employees, our board members and our key vendor partners.  We assume they want equity in the venture.  And for almost all of them, the answer is no.  Given a choice between a cash bonus and stock options - 9 times out of 10 they'll take the cash.  The studies on risk verses reward scenarios have been widely studied with stock market investing and they apply here as well.

This is not to say your employees, board members and partners don't believe in you or your company.  They are working for you so obviously they do.  BUT, the key words are they are working "for you".  And that decision makes all the difference in motivation.  Entrepreneurs come in different shapes and forms, interests and backgrounds but ultimately they need the business to be theirs.  It's that complete vestment in the venture that is the difference.  The money will come with the growth of the business.  For most entrepreneurs it's not even very much about the money.  It's about providing their idea "right to the world".

For most other people they don't want stock options or profit sharing.  They want a good working environment and they want some stability in income.  There will be exceptions.  They tend to be the opportunists in your organization.  Usually it's the sales people and the business development persons that have these motivation traits.  But that kind of motivation tends to be "coin operated".  Keep feeding the meter or their time at your company "expires".  You will also find a few key executives will see the long term picture.  But in general, stock options are wasted on the "rank and file".  By wasted I mean it really doesn't motivate them and it really isn't appreciated.  You may say, "well I'll give it to them anyways".  That is your decision, but isn't the point to motivate them?  Aren't you looking to retain them?  If that is the case then discover what they want.  It is different with different people.  Do they want bonuses, advancement opportunities, a flexible work schedule, health benefits, stock options, performance bonuses?

Action Items

1) Here is an easy test.  Go to survey monkey and create a basic online survey.  Ask the employees to fill it out.  Ask some questions like:
"Pick the two benefits you'd like the company to focus on giving employees" and lay out your laundry list. 
"Did you choose to work for the company because of the stock option plan?" 
"Are you counting on the company stock options to fund your retirement?"

I think you get the point.  I also think you'll be surprised by the survey results.

2) Okay, so what about new employees?  Give them a choice.  When you are hiring a new employee give them the choice of a bump in pay to start OR stock options.  It could be $10,000 difference on a $100,000 salary.  The difference there is 10 percent.  Give them the choice.  If indeed your company will be successful it will save the shareholders a lot of money on financial exit to save unnecessarily giving out options and it puts the stock options to use where they are most effective.  It will also put the motivation choice in the hands of employees.  Nove

Take Away

Watch out for your own bias as you make decisions in your company.  Don't assume what you like and want is what everyone wants.  Start with stock options and work from there.

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Set the Course, How Much for How Long?

6/6/2013

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by Seth Temko

"How much for how long?" I asked the twenty-something inventor across the restaurant table from me.  He looked like a deer in headlights.  Such a simple question.  "How much money are you personally looking to make from your endeavor and in how many years?", I rephrased. 

After a long pause he said, "I never really thought about that.  This is my passion. I guess I could do this for the rest of my life."

"Well", I said, "I'm not exactly sure how I can help you get funded and you're going to have a heck of a time building a financial model for the business.  You're really going to have to think more about your answer."

How much and for how long?  That is a key question that needs to be answered upfront for setting the course of your business strategy.  Critical?  Absolutely!  Let me explain why.

How much money you want to get from selling your business (assuming you ever want to sell) sets your valuation goal.  How long to exit and cash out sets the timeline for your business.  Believe it or not but those two answers set pretty much the pace of your entire business model, financial model and business plan.  Critical?  Oh, yeah.

So your cash out price sets your business valuation.  Let's say you want to earn $10 million dollars at the end of it all.  If we assume you took in financial investment then your business needs to sell for more than $10 million.  How much is a matter of how much equity you give up to bring in the money.  Let's assume you were shrewd and executed well.  So you gave up 40 percent of your equity.  This means your business needs to go for $16.67 million total in sale.  $10 million for you and $6.67 million for your investment partners.

Let's call this your destination.  Your mountain peak.  Your island in the sea.

Now you need to factor in how long?  How many years do you want to invest (because your life is an investment) to reach your financial goals?

This is the time to "climb your peak" or "sail the seas".

Now all you need to is work backwards.  In your hypothetical business let's assume you want to reach your goals in 5 years.  Depending on your business model and valuation method you can figure out how much in revenue (for article click here).  Let's assume your business and financial model allow for your business to sell for 2 times gross revenue.  Now we know you need half of the $16.67 million valuation you seek as a minimum in annual company revenue (not profits) to achieve your goal.  So that's about $8.4 million.  At the end of year five you need to do $8.4 million in revenue.

We now have a very specific goal for our ficticious business.  How do we get there?  Now we need to work both ends of the timeline.  How long will it take for you to get your business in a position to make money?  This really varies by your business and your model and the business circumstances.  Are you working with an existing business?  Why not buy to jump start the model?  It is something to consider.  Starting from scratch?  Then you have to factor in how long to raise money, do research and development, get your first customers and launch.

In our model let's assume we want to do a brand new tangible product.  We need to do industrial design, research, prototypes, tooling, manufacturing and distribution.  We'll factor in 1 year to do it.  That is being really optimistic.  We now need to grow revenues from zero to $8.4 million in four years.

We need to figure out the scale.  $1 million the second business year.  $2 million the third year.  $4 million the fourth year.  $8.4 million the fifth year.  Of course there needs to be a WHOLE plan around this pace of financial objectives but it gives you a course.  If it all seems too challenging or risky then question your timeline or your financial number.  Or, maybe it's the first sign that THE great idea has a big risk you may not have realized.

At that same dinner was another twenty-something.  I asked him how much and how long.  Without skipping a beat he said $7 million in 6 years.  Now that's an answer I can work with.

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Timing Your Golden Parachute Moment

4/27/2013

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by Seth Temko

I can't stress enough that your business strategy from the very start needs to have an exit goal.  Exit is how you "cash out".  This is true for any business other than a hobby business (you do it mostly because you love the effort) or a legecy business (pass it to your children).  For everyone else you need a valuation goal AND you need it right from the start.

If you have partners in your business a great exercise is to write the gross amount of money you're looking to get when you sell and in how many years.  Once you write down the information flip over the paper and exchange the answers.  You'll probably be surprised how far apart you might be and it'll spark a healthy conversation.

Time and valuation on exit - that is the key to your exit goals.  Building a buisness takes time and how long will dicatate many, many things including initial investment, operational strategies and quarterly and annual business goals (like product development, customer acquisition pace, etc.).  Please be realistic in your business.  It takes years to build a financially stable business with good positive cash flow.  If you are hanging your hat on a "dot com" build it and sell it flash bang company - it happens, but the odds are very much against you.

Time to sell  - It can also take a year or more to find a buyer, settle a deal and then exit yourself (you are free and clear of time commitments).  I have a friend that owns fifty percent of a technology company to process credit cards.  They create the hardware and software that allows tens of thousands of similtaneous card swipes into transaction approvals in a matter of seconds.  This busines space has been "boring" and stabily growing for years.  It does millions of dollars in revenues and is profitable.  The managing partner had been reluctant to sell.  But, then there was a large market shift.  Square and competing companies (read about it here) created easy to use and inexpensive credit card swipers for phones and tablets and BOOM this market is red hot and popular to investors and potential buyers.  So they see the opportunity for their "golden parachute" moment.

Even though they have good market position, patented technologies and a good client base it's taking time to get their "deal".  What's involved?  A deal with an investment bank to find a buyer and a "road show".  Scheduled meetings with potential companies to buy in many cities.  It's like a 1 hour concert tour.  At the end of the day it will be tens of millions of dollars in a sale but it takes a couple hundred thousand dollars in consulting and business development costs and a board member working half time to get a deal done.  They want multiple offers just like when you sell a house.

Watching for golden parachute opportunities - Every industry has cycles, often in terms of a decade or more, when there is a better time to sell.  This is your "golden parachute moment".  You'll know because there is a lot of new companies formed, more merger and acquisions happening or companies from other industries getting involved in the market.  Usually financial media or industry professional publications will begin to "buzz" about consolidations, venture capital, etc. in the market space.  Public companies will see a PE (price to earnings spike) with multiples of PE rising rapidly and then holding or growing from there.  Even though you're small and private, public companies are a very good barometer for how well your business may be valued.

Stay on top of your industry - You also need to network in your industry.  Go to the industry tradeshows.  Get to know industry vendors and have regular conversations (they speak to many, many of your competitors).  Stay on top of public companies in your industry and get to really know their strategies and performance.

Patient entrepreneurs -  tend to be the ones that have highly profitable and easily sellable businesses at the end of their run.  How long?  Most successful entrepreurs that I know need five to ten years to start reaching their "parachute" valuation goals.  The funny thing is at that point they usually don't want to let go and for good reason.  They have highly profitable businesses that support a good lifestyle and their personalities and egos become highly tied to their businesses.  They are Zen with their business or perhaps it could be more defined as co-dependent.

If five years sounds like an eternity to you then perhaps you need to reconsider your venture or at the very least realize that your timing goals to exit are very aggressive and this increases your risk of failing to meet those goals.

Other Articles on this Topic:
Maximize Your Valuation
What Buyers Want in a Business and How to Prepare

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Your FREE Executive Research Assistant is Right Next Door

3/15/2013

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by Seth Temko

When you're in a small business you need information, especially when you're doing market research.  I had a conversation with a small business owner this week in California and he's filling out maps.  He partners with cities and parks to provide youth soccer programs.  Three states, 40,000 kids a year and he needs to expand.  He spends a lot of time examining population demographics and it takes a lot of time.

I gave him one tip at a free resource which puts a research assistant right into his hands and it's no farther than your closest library.  It's your reference librarian and before you cast a frown face, yes, they are business literate. My wife happens to be a HR director for a public library and she turned me onto a great business resource with the reference librarians.  If you're uninitiated to libraries, and most people are, people with degrees in librarian science (and almost all of them have master's degrees) choose a focus for their studies.  It can be youth, research, reference, etc.  Reference librarians are familiar with all of the databases, government publications, business periodicals, etc. that the libraries license and purchase.  And in case you haven't been in a library for a while, YES, they know technology and are modernized.  Libraries have been spending ever increasing percentages of their budgets away from paper over the years and into digital: networking, wireless, RFID, digital books, digital music, databases, etc.  You will be pleasantly surprised.

Now before you run out to your local library please realize that small communities, with small libraries have small staffs so they may not have a reference librarian.  Call first.  What you want to do is ask if they have a business and/or reference librarian.  If they do then ask to be transferred and speak with them about what research you're doing.  Don't be afraid to get to the nitty gritty details like SIC codes, zip codes locations, etc.  They will tell you about obvious sources you're familiar with like Fed data and then they'll give you a list of private licensed data sources.  Some of these will be available to you online via your library card.  They will train you on the data retrieval at a minimum.  My local library actually will "take my data order" and email me data results.  Yes, they do most of the leg work for me and shoot it over!  They're very knowledgable.  If they don't do that then go to the public library online because many of the libraries have live chat and can shoot you links to resources.  Resources and rules for assistance vary by library and to some extent, each librarian.  Some libraries offer one-on-one appointments

What they won't do is synthesize the data for you.  If you want to cross reference sources of data that's up to you but just getting appropriate and relevant data is half the battle!  So go ahead and grab you're backpack because you're going to be amazed at how much you're going to love you're local library for your business life.  And no, my wife didn't put me up to writing this article.

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