Startups and angels: Along the way to success

Market Math

If your business sells to a quantifiable and identifiable group of business customers who are in the tens of thousands, or less, there's really no reason not to individually identify every one of them and track all of your contacts with them. There are plenty of examples of easy cloud apps to enable you to do just that really easily.

And while that seems like an "of course" sort of thing, I'm constantly surprised at how few entrepreneurial companies in growth mode (which depends almost entirely on excellent execution) do a good job of it.

If you only sell to half of the customers in your physical market, how many non-buyers have you called on?  If you are using a sales force making customer visits, how much behavior is driven by territory size and quotas as opposed to market coverage?  (If my territory is 100 square miles but I exceed my quota by covering about half of it, what motivates me to go further and do more?)

What do the non-buyers buy, and from whom?  How often have the people who buy changed or moved?  Any former customers from other places now working there?  

If your penetration is 50%, do you spend additional resources to call on the remaining or is this a competitive share issue?  Do you attempt to sell more to your 50% or acquire the remainder?  How would you do both?  Is there some way you've inadvertently left the door open for competitors?

And, of course, there are plenty of near real-time distribution statistics available if your capture system works.  Which salespeople/partners/territories are the best?  Which need help?

It's tempting as a sales manager to manage sales results by manipulating the rewards systems and leaving the intermediate work - number of calls, on whom, for what, and so forth - to the sales people.  It's a bad idea.  

The element of measurement enforces sales discipline and helps the company own its customer information and at least reduces the need for detailed rebuilding after each sales personnel transition, 

If you are going to survey customers, you can use their buying or non-buying history to pre-segment the samples to yield different views of the data.

Venture growth is largely dependent upon excellent execution.  Market math is one important ingredient. 

Are You Ready to be Quantitative?

I'm in Ireland today in a meeting of a company board of which I'm a member.  The company has had a very good year - a great one, really - based on a lot of hard work and know how on the part of the leaders.  It's been several years in the making and has paid off for them pretty well.   

Now, as their revenue grows substantially, it's time to make the shift toward a more quantitative management environment. 

To me, this means moving in the direction of managing more to factual data to help managers make key decisions.

As one example, think about forecasting sales based on market potential and competition, rather than simply on historical results by salesperson. 

If we see that our total accounts are underpenetrated in one market, can we test how much it costs and how long it takes to acquire  new ones?  If that leads us to needing additional sales people, can we forecast the benchmark for productivity based on past results?

If we see that one sales person does better on a per account basis than others, can we hypothesize why and then test our suppositions to find the facts?  Once we have some idea of the "why," can we replicate this to other territories?

Can we quantify success in terms of calls, visits, customer sizes, and so forth?

Can we produce a market map to track what our customers want, and from whom they are getting it?

Can we, in short, develop knowledge that other competitors do not have to reduce our sales cycle and increase results?

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As another example, can we reduce our costs to the level of best practices in our industry?   If our automated warehousing system is state of the art and provides us a 10% increase in Net Operating Income, what can we do with that money?  Can we keep it to use as a war chest to expand in other areas?  Add another sales capability?  Build our internal capacity to grow? 

If our competitors have already achieved state of the art costs, and we are already at a disadvantage, what can we do about that, if anything?

Also, are we waterfall forecasting  every month to spot trends and react more quickly?

Smart managers who know their business can move closer to major gains in their business goals, whether market share, lower costs, both, or other, with this kind of proprietary knowledge.

How Not To Manage Customer Satisfaction

Perhaps this is a little off topic.  Perhaps its not, though.  In any venture, managing customer satisfaction is an important part of the process, of course.  We all live and die on the basis of repeat customers and/or word of mouth in the market on our business and its practices.  Aside from issues of the quality of our customer service, though, the basic integrity of the business ought to be rock solid and non-negotiable. 

Here's a story.  I recently had used an outpatient facility at a local hospital.  (I'm fine; thanks for asking.)  They sent me a survey asking how they did.  I wasn't real happy about several non-medical interchanges with their staff, and said so on their survey.  When asked if I would like to provide my name and contact information on the form, I declined.  I figured what was important was the feedback.  OK, I also didn't want the followup phone call.

Well, imagine my surprise when I got the call anyway. 

At first I thought perhaps they'd figured out who I was deductively from the information I provided.  But, after the expected conversation, I asked how they "found" me.

"Well," said the manager making the call, "we encode the form secretly."  She went on to say that she thought this was a bad idea and had talked to management about it, but they felt the ability to follow up was more important than honoring their agreement on the form.

My comment to entrepreneurs - don't do this. 

People will repeat the story for a long time.  And, if their integrity at this level is shaky, what else will they cut corners on?

Thinking about pricing

When mapping a market, it's important to study pricing strategy.  This seems like an obvious comment.  Of course, everyone understands that somewhere in the equation there's revenue, whether directly or indirectly. 

I'm amazed, though, how often companies get it wrong and then are slow to react and change.  Here are two examples.

1.  Don't price where there is no value.  We tried to buy some software recently that the vendor wanted to price on the basis of third party uses, a category of activity uncontrolled by us.  In addition to an unlimited liability, the vendor wanted to charge the third party visitors a fee, which isn't standard in this business.  It seemed like a universally bad idea.  The vendor stuck to this model through beta and launch.  People bought the software but grumbled about the pricing idea.  Eventually, the vendor abandoned the pricing model when initial users started canceling subscriptions.  Now that information was available right from day one.  The customer comments were entirely negative.  And now, the vendor has spent a lot of money communicating not just a product but a price.  What will it cost to re-communicate?  And how long will it take?

2.  Price competitively by reducing costs.   We have another company that has "a better mousetrap," a manufacturing technology device.   The price for the current product in the market is about $750.  Our fully loaded cost is coming out at about $65 (!).  We can be in the market at $750 and be great -- and have lots of room to move if there is any need.  Think of what leverage you lose if your cost of goods is OK but your expense structure adds hundreds of dollars to the fully loaded cost.  Yet, companies add expenses every day without thinking about what those expense additions do to pricing flexibility.

Pricing strategy is a big topic.  We communicate to customers and competitors by how we price, and it is not simple to change.

It's Always The People

I've been talking to a friend who leads a now midlife growing venture that was a startup.  She has the market down cold; knows the competition down to the product line; who is selling which parts of what solution to whom.  The software development process is locked and loaded; financials are strong; a great team is in place.

The attitude is both disciplined and can-do. I know this sounds a bit over the top, but I've seen it.  It's there.

So what's the current biggest risk on the path to success?

Well it seems to be that a founder has been elevated in his own mind to a position requiring a lot less work.  Coming in late, leaving early, and starting to drop in and give advice to all kinds of teams in the now-growing enterprise.  When the business was just starting he was eager and enthusiastic.  Now, he acts as if he's arrived, and can coast.  He's so far resisted quiet conversations about the need to change.

As they say, "can't live with him; can't shoot him."  This is going to be a real fixer-upper.  Bill, the founder, is valuable.  Has good marketplace credibility.  Knows a lot of people.  And is a good person, really.  I think he has the company's best interests at heart, and he is worth saving.

But it is going to take a disciplined process that has both consequences and allows Bill to change with his self respect intact.  Our CEO is going to have her hands full for a while.  And, of course, ultimately if Bill is intransigent, no one is worth the large time distractions that come with intransigence. 

But, this is a world of scarce resources when it comes to high level knowledge workers.  People with experience to really do what you want done are very precious. 

And, in the end, these are the issues that often get in the way in growth companies.

• Do we move quickly to acknowledge and give credit to the people and teams that make the difference?
• Do we offer course correction guidance privately and with an eye to personal growth?
• Do we have an infection of group think, where consensus is the most important team value?
• Do we get the right people on the bus, or do we hire expeditiously, instead of deliberately? 
• Do we hesitate to move the wrong people off the bus for non-core reasons?

Do angels use this kind of stuff for screening?  (Punch line -fill in the blank for your favorite version):   IS THE _______    __________?  or DOES A ______   ______ IN ____ ________?

Using Boards of Directors

I've been fortunate to have had a great board at RTMS right from the beginning in 1989 until the harvest in 2000.   Over the years, they were invaluable in both strategic matters and in helping company leadership over its, well, lack of experience in certain critical aspects of the business (that's me.) 

I've reviewed the following material from the Kauffman Foundation's eVenturing website and it's thorough and compelling.  There are a couple of stories, three or four articles about tools to use in building and using boards, and even a couple of lists of board related templates. 

If you're in growth mode, a board can be a critical success factor for you.  Using Boards of Directors (Kauffman)

Stories, how-to's, tools and templates.

Waterfall forecasting

Here is a link to Using the Waterfall from Josh Kopelman's blog, "Redeye."  This is really worth a look.  (You'll find an actual example of the spreadsheet there as well.)

One of the interesting questions to ask in a funding discussion is "how have you done versus your forecasts at various stages over the last X years?"  It gives the investor a view of the dynamics of the market and the company's reaction to them.

This spreadsheet encompasses that process in an easy to read, straightforward way.  I think I'm going to ask our portfolio companies to start using it.  It incorporates the quarterly re-forecasting paradigm as an expectation rather than an idea, and prompts a monthly - or more often - look.

Pizzas, People and Progress

Entrepreneurial companies seem to run on pizzas. 

So, one day, about 11 a.m., I hear a lot of commotion in the parking lot.  A couple of key employees are standing around a pile of metal, plastic and tools arguing about design.

"What'cha doin'?"  I ask innocently. 

"Why," they reply enthusiastically, "We're building a car so we can go pick up a pizza."

OK, so I made it up.

But the point is - be sure you aren't doing this very same thing every day.

We have all spent a lot of time and money working diligently to build capabilities that exist somewhere else.   My rule of thumb is that I'd like a couple - not just one - acknowledged experts to listen to my plan and affirm that the capability that I think is the genesis of a unique idea doesn't yet exist.  Often, entrepreneurial enthusiasm masks a lack of real domain expertise. 

Software companies have a particular affinity for this problem - inventing what exists already - but it can happen to any of us.

Do we know if this capability is something we can find somewhere else?  In another industry?  Or closer to home?  Let's check before reaching for the wrench.