If you've been through a plan review with someone like a potential investor, think for a moment about the questions you get asked.
"How did you calculate the cost of goods?"
"What are your assumptions about how long it will take to get customers?"
"When do you expect the growth rate to stabilize?"
"Where do you expect to find these customers?"
"How many are there and who are the competitors?"
"What's the current solution these potential customers are using today?"
Behind all these questions is the idea of checking and validating assumptions. In the process of asking questions, and answering them, it's sometimes hard for this not to feel like grilling. If the conversation goes in that direction it can be a bit of a problem.
Think about having the same discussion in a different way - by preparing your sales forecast by making your assumptions explicit.
Sales to segment A will be $500 per customer. (Pricing assumption based on comparables in table 1 following)
Table 1:
Competitor XYZ is $450 but solution takes 30 minutes to implement each time; we are less than 30 seconds and feel we would test a $50 price increase in support. (NOTE: test concept underlies validation of the first assumption.) Etc
COGS assumptions of 35% are based on the attached 3 estimates from contract manufacturers. Please note that the scale required to reach these prices is 500 units per week which we will not achieve for three months (see scaling and growth assumptions following.) So for the test phase we will hand assemble first production products at $1,500 each, effectively eliminating contribution margin. Why? Because a fully committed scale up in manufacturing will cost $450,000 and we are not prepared to do that until we have growth rate assumption risk eliminated by actual sales test results.
Sales growth month to month is based on having an inside sales person (initially the CEO/entrepreneur) making ten calls per day. (A full time person we think can make 50). We hypothesize that we will get one order per 5 calls. If this holds true for one month, we will hire and train a full time sales person who will be productive (or terminated) by month 3. During this time the training and continued calling will be staffed by the CEO/entrepreneur. If the calling rate holds up (and there are more than 300,000 potential customers in the industry) we will add sales person two. By this time (in six months) we will be getting 20 orders per day from these two callers and our revenue will stabilize at that rate. In month seven, we will begin testing additional sales strategies including direct to buyer email, google adwords, bing and social media campaigns based on our sale success. A key part of this is the positive feedback and referrals we anticipate from our users. We will validate this assumption by direct to user contact from the CEO/entrepreneur during months two-six.
Here are the assumptions about our expenses:
You get the idea.
This is also the way I'd present it. That is, I'd walk through the assumptions on each item and explain them.
In every case, where I can get comparables, I'd use them. Where I cannot I'd say so. It's important to make sure that none of my assumptions are better than anything ever before achieved so that the whole financial results system is based on hypotheses that are within the realm of achievable.
This whole process avoids the common problem of sounding like you are overselling an opportunity and creating doubt when, in fact, if your assumptions are strong and your comparables reasonable, you arrive at the same numerical result with a confident and enthusiastic audience.
Then, what about "five year" projections that everyone seems to ask for?
They're an exercise in spreadsheet math, of course. Growth rate is based on the whoel equation of individual customer acquisition rate (like the 1 per 5 calls in the theoretical example above) the presence of alternative products or services for the target customer (did you include a Porter 5 Forces anaylsis in the presentation?) your ability to scale your sales efforts, future costs in acquisition, product, etc., presence of new competitors emerging over time, size of the served market, ability to expand, etc.
I'd think that a savvy investor gets to the same place pretty quickly. So instill confidence by your explicitly demonstrated ability to analyze and pivot your tactics and strategy, show the audience your assumptions about growth rate, and leave it. This really gives the investor the ability to assess you the entrepreneur - which is where the decision is going to inevitably end up.
It’s a deceptively simple question: what is the optimal way to finance a new startup?
And the answer is also devilishly simple: It depends.
Align Everyone’s Interests
This seems like an easy topic – debt where there is appropriate cash flow, equity when there isn’t. But details in each category vary dramatically.
The overarching idea, of course, is to reduce the cost of capital while maintaining appropriate flexibility for the venture.
And, while debt is less costly than equity, it can bankrupt a company more quickly than more expensive equity might.
Business success is the ultimate goal. But, what constitutes success for the parties involved – investors, entrepreneurs, employees, and customers – can vary dramatically. Misaligned interests that lead to poor financing choices are often very problematic for first time entrepreneurs in young companies. And – they can be avoided if both parties – investors and entrepreneurs – are knowledgeable and well-informed about each others’ goals and interests.
Can you bootstrap your way to positive cash flow?
When will the company have positive cash flow? If the answer is relatively soon, then bootstrapping is a very serious consideration. Even if it isn’t soon, early bootstrapping can reduce risk and increase chances for success, resulting in more aligned interests for entrepreneurs and investors.
But, this should lead to a thorough, well-planned review of bootstrapping alternatives, since bootstrapping can reduce cash requirements in the pre-cash flow phase.
One common reaction to that statement, though, is the need to accelerate the business, often for competitive reasons in the marketplace.
However, this need for acceleration necessarily occurs only after thorough, cheap and fast initial testing has been performed – and financed – by the entrepreneur to eliminate or reduce the opportunity for failure based on a faulty hypothesis.
In other words, the need for acceleration isn’t in conflict with bootstrapping – it is step two. Sometimes, the bonus in bootstrapping is that the venture finds it doesn’t need acceleration financing. See Greg Gianforte’s story (http://www.timkeane.org/2009/04/bootstrap-your-venture.html)
So, if time to cash flow is well understood, and estimates have been as thoroughly supported by testing as possible, then we consider two broad choices.
If cash flow is far in the future and not guaranteed, (but early testing has proven we have a viable opportunity) then the entrepreneur probably is not going to have the wherewithal to support a current debt payment[1] structure. Some form of patient capital will be required. (Do not mistake the meaning of “patient” capital. Here it only means that no debt service is required in the near term, or perhaps at all, but an agreed method for repayment will almost certainly be involved in the investment agreements.)
If, on the other hand, there is some near term prospect of cash flow (say within six months or a year) but no ability to repay in the meantime, then the entrepreneur may try and find a way to finance his “pre-revenue period” using friends and family money that accepts a somewhat lower payment in recognition of a relationship beyond just investing.[2]
Aligning interests in structure: cost and risk
Risk in a given company varies by investor
It’s axiomatic that in a perfectly priced market, a specific level of investor risk in any business should price identically across all companies. Things don’t work that way in the real world, of course. One investor who has market knowledge and/or the ability to help affect the outcome may either accept a somewhat lower price since he perceives his risk to be lower, or may take advantage of comparables to obtain a higher price and make a higher return based on his added value.
What are the reasons to choose one financing structure over another?
Example one: Sustainable net operating income with some growth in a stable market.
John has had ten years of successful experience in cabinet-making and has established a loyal following in his hometown of 750,000 people. He sells entirely locally and bids his own work and often provides design assistance for cabinets purchased by homebuilders. His entire income is based on his personal output and he’d like to hire several woodworkers, expand his sales to existing customers, and generate a profit in addition to his contributed labor. He needs $250,000 of expansion capital.
First question: What are John’s plans to repay this money? This is a critical alignment of interest question. If he would like to pay it back out of future cash flow that leads to one set of options; if he would like to sell the business to a competitor within a fixed period of time that may be[3] another set of options.
Second question: Does John have the cash flow to support debt payments? If he can support partial payments, perhaps some sort of accelerating payment plan might work.
Third question: Based on the answers to questions one and two, who are the likely lenders/investors?
Possibilities:
1. If plenty of cash flow regardless of plan for sale/retention of business:
Senior bank debt based on cash flow coverage and new assets. Appropriate covenants. Maybe Small Business Administration guaranteed loan. Least expensive alternative but also least flexible.
2. If not enough cash flow but with the desire to retain the business --
Insider junior debt with annual or quarterly payments beginning at the appropriate time - year or so? - based on available free cash flow up to some sort of limit – i.e., 2x in three years – then a percentage of the cash thereafter, as in 3% of revenue – up to a limit and then a fixed price buyout. This would imply a recap. More expensive than #1 but more flexible.
3. If even less cash flow but with the desire to retain the business:
Friends and family money on junior debt terms. About the same cost as #2 but more flexible if repayment terms slip a bit.
4. Cash flow levels inadequate as in #2 and #3 but desire to sell the business:
Junior debt with a variable repayment schedule based on available cash (i.e., 85% of all available cash goes to debtholders until they get 2x back, then some percentage of the business proceeds go to them at sale of business within a fixed period of time, (i.e., five years.)
Example two: Explosive market share growth and revenue in an expanding market with acquisitive players available.
Sarah is a scientist at a national research university focused on water quality. She has developed a water additive that purifies brown water making it suitable for drinking. Substantial market testing has proven its scalability in use and early manufacturing tests by a major chemical manufacturer indicate it may be economically feasible from a manufacturing cost point of view. The marketplace of buyers seems to be expanding worldwide. The company is pre-revenue and Sarah’s intention is to sell the company within three years.
This is an equity example, of course. Depending upon Sarah’s ability to prove the assertions she’s made about scalability and early testing, and convince investors she or her team can deliver, she should be able to get favorable pricing and terms with all of the repayment happening at the sale of the company.
If Sarah wanted to keep and run the company, she may be able to structure some sort of junior-debt like cash flow repayment as previously discussed. In most cases sophisticated investors will want a larger guaranteed multiple for this kind of business.
If in addition to keeping the company Sarah needed less than $200,000 or so, she can probably doe a more favorable terms friends and family financing.
Example three: High growth in a stable market.
John the cabinet maker has decided to expand to several cities within several hundred miles of his location, to develop several standard lines of custom products, and to seek growth at annual double digit rates. He feels now is an excellent time based on his local experience and believes the high end of the homebuilding and remodeling market is seeking new solutions.
This is also now an equity situation. It’s likely the cash required won’t be repayable for several years and the risks of failure are relatively higher. John’s former track record helps mitigate that risk but an investor perceives this as a new stretch. Depending upon whether he chooses to retain or sell the business in the future, the same sorts of scenarios as previously discussed – probably apply.
Example four: substantial milestone-based progress that does not generate cash but will attract an acquirer or facilitate an IPO.
Angelina is an orthopedic surgeon with a specialty in hip replacement surgery. She has designed several new devices that promise to allow arthroscopic hip replacement surgery. Given the approval cycle required for a radical new innovation, she knows the time to revenue will be long and difficult but feels this is breakthrough technology. She needs $4MM to get the product through the normal approval cycle.
Aside from the attractiveness of a particular industry at a given time, this is an equity investment repaid at the sale of the company. If there are substantial milestones that prove value as Sarah goes along she can consider raising a smaller amount at each milestone thereby increasing the value to her at each stage. She does this by reducing perceived risk for each stage of investment and finding investors at each stage with appropriately matched appetites.
None of this is exhaustive. And I’ve avoided beginning to describe specific terms in this note. Specific terms are an additional way that investor and entrepreneur interests get aligned in the investment process. In addition there are several new intersting methods - royalties is one - that help in term structuring.
Note: Thanks to Bill Stone of Townbank in Delafield, WI for his comments and work in helping me prepare this note.
[1] From a lender’s point of view, of course, the conditions under which the lender accepts a fixed interest rate in return for the promise of regular payments is based on considerations beyond the ability to repay.
[2]One of the huge mistakes entrepreneurs make at this stage is accepting friends and family money and assigning huge valuations to the company to reduce the size of future payments required. This practice will do that, but, if other investment is ever required, the inevitability of a reduced valuation leading to a lot of heartburn is highly likely. Always better to do this with some sort of convertible debt instrument.
[3] I say “may be” because if the business will support senior debt then that is less expensive and allows more flexibility whether John intends to keep the business or sell it.
Spend ten minutes talking to any investor in the community who sees a lot of deals and inevitably you find that the companies that've been around are largely the same. The good ones (whatever your definition is) and the not so good. And, when the "not so good" come back around every six months or so it makes it harder and harder for them to get any traction.
In the latter category, it strikes me how often the common characteristics arise that prevent these companies from reaching their goals.
Some of those characteristics include, of course, product issues. I looked at a medical product recently and asked the obvious questions about competition, distribution strategy, pricing, and so forth. I sort of knew a couple of the probable answers but assumed the entrepreneur knew more. What I got for a response consisted largely of "we're not worried about that," but without any ability to explain why. I took it as "whistling past the graveyard."
I once spent a lot of time talking to an entrepreneur about an energy product for which he claimed there was no competition. After a half hour of web searching I found Khosla Ventures investing in essentially the same thing - to the tune of $10MM or so. When I next met him and asked, he said "Well, yes if they succeed we'll probably get killed," but then went on to add "I didn't mention them because I don't count them as competition since they're not launched yet."
I wish that entrepreneur appreciated how that sounded. We moved on.
On the flip side, sitting through pitch two recently (I'd also heard pitch one) in introducing the company I overstated the size of the upside potential and was promptly corrected by the entrepreneur. Made the opportunity look less good but the entrepreneur looked a lot better. We wound up investing.
To be in the "good" category - beyond the product and market and competitive issues -- be prepared to:
Have a good grasp of comparables for your stage of development;
Talk about uses of funds as the fastest path to risk reduction in the shortest time for the least money;
Explain the facts and the hypotheses and where they diverge be prepared to explain your Plan B and how you'll get there.
Realize there are always two things going on - questions and answers and an underlying test for integrity and knowledge.
And finally realize that you leave a trail. Make it a great one.
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.
I'm in Dublin this week and was at the Halo Business Angel Network meeting on Monday evening. They're an impressive group, kind of an association of all of the angel groups in Ireland who work together to achieve results.
We had an opportunity to talk at some length about the qualities of entrepreneurial leaders and not surprisingly, there seems to be a lot of agreement.
All of us like leaders of ventures who:
Have a passion for the customer, and a deep understanding of the customer's business.
At the same time, understand their own business and its key achievements required for success.
Sell first - even in developmental companies. This raises the chances for success as it keeps the company itself very close to the customer needs and desires.
Build strong teams focused on the business and have the ability to achieve success. From an investors point of view, the ability to select and hire is a critical element in assessing the entrepreneur herself.
Are focused on business success and are proactive in defining their own role going forward to maximize their contribution to the venture.
Understand bootstrapping and its central role in the development of almost every business.
Appreciate investor goals and investment styles and strategies.
Ask for and get material assistance from investors and maximize their value to the enterprise.
Test and stabilize the inevitably evolving (morphing?) business model to reduce hypotheses to facts.
Remarks to the Visionary Companies Conference, Billings, MT May 27, 2010
It’s a fact that all net job creation since the
1980s has comewith under
100 employees.You are all the
future of job growth, wealth creation and better communities.
In brief, my own story involves a software company
called RTMS in Milwaukee.
It was bootstrapped.We had a customer and a value proposition.It was simple- Reduce costs and improve consumer experience for the large
retailers.We were fortunate
enough to have customers like Boston Store, Carson’s, Penney’s, Sears, GNC –
and they loved our exceptional customer service and ability to deliver a better
value to their customers – and more sales and customer satisfaction to
them.We had a hardworking team of
great people to pull it off.
The company grew to 250 employees in two
states.We paid millions in wages
in two communities and saw hundreds of employees achieve their dreams of
college for kids, second homes – whatever their dream was.It was sold in 2000 and today is the
customer service arm of Fidelity Financial in Florida.
I’ve been fortunate enough to be teaching aspiring
entrepreneurs at Marquette University ever since.Today, we have an angel investor network, the Golden Angels, as well as an entrepreneurship center
to spread the entrepreneurial word across campus.
I’d like to think that our programs are helping
students live lives of meaning through the benefits of entrepreneurship.To me that includes being independent
in the sense of having the confidence, through experience, to stand on your own
and make decisions to achieve your goals; to control resources beyond what you
own; and to achieve at very high levels.
For me, right now, the challenge is what’s next?
I enjoy golf, but not enough to aspire to the “He
had a single digit handicap” epitaph.I’d rather see how many people I can help to grow businesses that create
challenging and worthwhile livelihoods – achieving their dreams.In short my challenge is “how many jobs
can I create?
So
as we think about entrepreneurship, it probably helps to think about our
goals.When I was a kid, children
wanted to be firemen or policeman or airplane pilots.
When
asked today a lot say “I want to be rich.”
That’s
a sad comment.Last time I
checked, I didn’t think that greed was a virtue.
Living
a life of meaning is. And to me that means competing – and winning – in
business – with an eye toward the purpose that we strive for.
The
question before us today: What’s a visionary company? Here’s a list to
consider.
Most
of these, to an entrepreneur, seems ordinary.But to large bureaucracies, it seems pretty extraordinary.
1.Visionary companies solve real problems
for people.
2.They create wealth for themselves,
their employees and their communities
3.They bring hope to their workforce
4.All of their employees see a dashboard
of financial results every month – and understand them
5.Everyone understands the companies’
belief system – and signs on to it.
6.There are clear statements of “thou
shalt not”-- boundary systems
that give everyone the freedom and responsibility to apply their full knowledge
and ability to daily problems.
7.They are outstanding executors of
strategies for growth
8.They have excellent interactive systems
for coaching, mentoring, providing feedback, for everyone in the company
9.They have a growth metric – one
measurement of success – that focuses the attention of the entire enterprise.
Ours was increasing business from current customers.
10.
The entrepreneur knows that if clarity of purpose, accountability, and
responsibility begin to fade in his organization, then politically gifted
bureaucrats begin to rise to positions of power and spread like noxious
weeds.The best always have a weed
whacker handy.
Let
me ask another question --
Why
does the world look to America for Entrepreneurship?
What
makes us unique enough that other countries come to us to figure out how to
encourage the growth of new ventures, owned by the people who started them?
It’s
capitalism, of course.But not the
capitalism of the big bailout or the failed bureaucracy.It’s the people willing to take risks,
on the basis of ideas that solve a real problem, to innovate – to do something
better and faster.It’s growing
businesses that in turn create real jobs.
Why
the US?Because we uniquely seem
to know how to start and grow companies.Our entrepreneurs have an independence of mind and a stubborn unwillingness
to accept things as they are.
This is the bigger issue and a lot of us take it for
granted.I have been lucky enough
to have been involved in a small company in Europe – and let me tell you, it’s
not the same.
We know how to not only grow our own opportunities
but also how to get the best from the people that join us – to help others
grow, and succeed, and achieve.And this powerful combination creates significant wealth.
It’s interesting how often the people who join us
are not the most experienced, sought after folks – because we can’t afford
them, or they won’t join us.Yet
we outperform the companies that hire those same folks.
We
inspire others.After all, what is
the American experience except the desire to make a real difference – to control
our own destinies – what might really be called the entrepreneurial spirit?
People have come here for generations – wave after
wave – because they often had no economic opportunity and they wanted a chance
in America.
They
came here for the promise of freedom – for the ability to catch the
entrepreneurial wave - to have permission to fail as much as to succeed.
Today, the best and the brightest still come here to
start new enterprises.And, as the
world struggles with one economic crisis after another, the call for
entrepreneurship – once faint and seldom heard elsewhere in the world – is
beginning to emerge as a louder call.
The American experience and environment are
difficult to replicate.The rest
of the world has a long way to go.
In the EU, for instance, it’s virtually impossible
to dismiss anyone – for non-performance or anything short of outright theft –
caught on video tape by a government certified camera operator.
In Italy, if you bankrupt your business, you lose
your driving privileges until you get a job and pay off all of the creditors.
In Greece, 10% of the populace works for the
government at higher than average wages.Risk taking is discouraged.
The big money model of business development is
utterly predominant.The large companies
grow and provide stable, well-paid, secure lifetime employment.The entrepreneurial venture is frowned
upon as risky. So the big guy gets bigger, protected by a system of imposing
costs and inefficiencies that makes true entrepreneurship pretty difficult.
It’s an environment that virtually legislates
against individuals taking risks – for their own good.
Most real entrepreneurs don’t much like being told
what’s for their own good.
It’s ironic that just as the rest of the world is
coming to America looking for entrepreneurial knowhow, we are in danger of
becoming a European style bureaucracy.
In the United States, average civilian
federal wages per full-time employee were $79,197 in 2008, compared to private
sector wages per full-time employee of $50,028, according to Bureau of Economic
Analysis data.
Including benefits, total compensation per
employee was $119,932 in the public sector compared with $59,909 in the private
sector.
The premium for federal employees over private sector employees has increased
since 1998 in wages from 36 percent to 58 percent and in total compensation
from 70 percent to 100 percent.
We should all be concerned about where this is all
going.
Entrepreneurs are independent of mind and stubbornly
unwilling to subjugate themselves to an established order.
Remember Victor Kiam, best known for his “I like it
so much I bought the company” line?In discussing his views of entrepreneurship, he said
“Entrepreneurs are
risk-takers, willing to roll the dice with their money or their reputation on
the line in support of an idea or enterprise.They willingly assume responsibility for the success or
failure of a venture and are answerable for all of its facets.”
Here in America, 95+% of all entrepreneurs never
have had any external investment financing.They’ve relied on their ability to generate sales from
improved and innovative products and services and have bootstrapped their
businesses to success.
None of this is new or recent.Benjamin Franklin was an entrepreneur;
so was Henry Ford.Ford worked –
for Thomas Edison’s Edison Illuminating Company – until he began Ford in
1903.
“Make the best quality
possible at the lowest price possible, and pay the highest wage possible,” he
advised.
And
“A business absolutely
devoted to customer service will only have one profit problem – it will be
embarrassingly large.”
Real entrepreneurs focus on customers – they know
how to sell. They know that customers are the only real game in town and with
them comes success.And customers
will tell you what they need and want – if you listen.
Would you go to the doctor and tell your symptoms to
an intermediary who would go and talk to the doctor and come back and tell you
what the solution is?Why do this
with customers?
“I find out what the world
needs, “ said Edison, “then I proceed to invent.”
Look at Greg Gianforte right here in Bozeman.He founded RightNow Technologies in a
spare bedroom in his home in 14 years ago - by bootstrapping.He called lots of people in customer
service functions in lots of companies to ask what they needed – he proposed
it, and when he got it right, he invented it – wrote the code himself.
Today, Right Now is the largest commercial employer
in Bozeman, where they’ve been responsible for $500MM in local economy
wages.Today they have over 400
employees in Bozeman.
This continues to have a huge impact on the local
In these economic times, and since 1980, all new job
creation has come from startups, just like this one.And just like all of ours.
It’s always all about the people.
Every time I look at a business opportunity –
several hundred a year – the people in the business are key to success.
–Not the idea;
–Not the technology;
–The people.
–Because the successful
entrepreneur provides leadership and the ability to attract other great
people.
–And to lead them in a way
that gives them the opportunity to contribute fully and completely and to
realize their own dreams.
So
why don’t entrepreneurs work for big companies?What makes people want to do their own thing?
1.The quality of leadership in
any company is absolutely critical for the company to get maximum benefit from
the contribution of every employee.How much has been written about this?Jim Collins, Good To
Great is just one example.It
seems sad that entrepreneurial leadership in large corporations is so
exceptional that a book has to be written about how leaders who lead achieve
great results.
2.Poor leaders use information
as power, manipulate the very people who have offered them their most precious
resource – their time and attention – and do it all to avoid the very qualities
that make corporations worth working for – accountability and achievement in a
higher purpose.
3.It’s not an accident that
every country singer on the planet is required to write a song called “Take
this job and shove it” or some variation thereof before they’re allowed to buy
their first Stetson.
4.Some entrepreneurs left
where they were because they felt underutilized, underappreciated,
under-everything, and in the face of a great idea, decided that was their
opportunity.Many of you did.
And a lot of people admired
you when you pulled it off.
What
is the point of all of this?
One
of our biggest challenges in entrepreneurial ventures is growth.Growing means
–turning one-off activities
and disparate tasks into a series of routines
–that run well and lower the
costs and increase the quality of outcomes
–and begin the process of
sustainable growth
And,
if we have learned from the non-entrepreneurial climates we’ve been exposed to,
we can work that experience to our advantage when we set out to do this.
Why?
Because
we can best achieve this with a group of motivated, dedicated people who
believe in the company and its vision.
So to
achieve sustainable growth, we ask ourselves:
·Do we engage our teams to create processes that both bring out the best
in people and build efficiency?
·Does every employee see the company P&L every month?Do we discuss the big challenges with
them?
·Do we have a belief system that everyone supports?
·Do we have a real dedication to training and education?
·Do we give people responsibility?
There’s
a great Harvard case called Altex Aviation.In it to aspiring entrepreneurs bought an aviation operator
at a small airport.The company
was command and control oriented, had what appeared to be weak employees, and
was failing.They paid $100,000
for it.
The
new owners immediately – within weeks – made each little unit – gas sales,
flight school, maintenance and so forth – an independent business.They helped people learn how to manage
their new responsibilities.They
really lost no one. They became
profitable, grew sales from $2MM to $30MM in eight years, and sold the business
for $3MM. That’s a thirty times return in eight years.
Their
employees, and the employees of great entrepreneurial companies say:
The
best leader I ever had was a person who…
·Listened to me
·Helped me make a valuable and lasting contribution
·Cared about my success
·Let me do my job the way I thought it needed to be done
·Let me make mistakes
·Coached me and saw potential in me
·Challenged me
·Taught me
·Gave me the confidence to hire people better than me.
So:
Who’s the future of your business?
How do you account for the talent you’ve
been given the opportunity to work with?
Here's an inspiring piece of video. If you're Gordon Gekko. Can you believe these guys? Greed is not only a virtue, apparently it's the only one. So it's ok to bash people. I know, it's reality TV, and people volunteer. Nonetheless, it's a terrible example for naive investors who think this kind of behavior is somehow acceptable.
"Will the Sharks take the bait on any of these ideas? Your guess is a
good as ours. The only thing we do know is that if there's money to be
made, the deal will get done. So stay strong all you brave entrepreneurs
because, as you already know, sharks can smell fear." ---ABC Shark Tank Website
I cannot imagine any circumstances under which real entrepreneurs with real opportunities would subject themselves to this kind of treatment. I'm surprised by (a few) angel investors who think this is "fun," and is within the bounds of the way people can and should be treated.
A weak idea obviously doesn't merit investment, but it probably does merit a dignified, helpful response. Rather than this stuff.
Several months ago, I'd posted an article about term-sheets. Based on a lot of feedback, I've added some new comments about put rights and made more explicit my philosophy about working together with entrepreneurs to achieve mutually satisfactory results. Here's a link to
A Philosophy of Valuation and
Term Sheet Calcs the accompanying spreadsheet.
The overarching theme is that if both groups (not sides!) the entrepreneur and the investor, can get aligned on terms that hold each side responsible for what it says it will do, and this process makes these promises explicit, the relationship begins on a solid footing. Beware the potential business partner, whether entrepreneur or investor, who says something like "This isn't really important, but our (lawyers, mothers-in-law, or other interested parties) insisted on it." Seems to me it's a poor way to build a relationship.
