Monday, December 19, 2016

Red Rocket's Best Startups of 2016

Posted By: George Deeb - 12/19/2016

Red Rocket gets introduced to hundreds of startups each year, in the normal course of doing business, or via our involvement with FireSta...



Red Rocket gets introduced to hundreds of startups each year, in the normal course of doing business, or via our involvement with FireStarter Fund, TechStars, Techweek, Founder Institute or other startup groups or events.  We wanted to honor the best of these startups that we met in 2016, in Red Rocket's 5th Annual "Best Startups of the Year".  This list is not intended to be an all-encompassing best startups list, as there are many additional great startups that we are not personally exposed to each year.  And, this list is not intended to be only for businesses that launched in 2016, it is open to startups of any age, that they or their advisors had some personal interaction with us in the last 12 months.  The business simply needed to have a good idea, good team or good traction, that caught our attention.  Congrats to you all!!

THE BEST STARTUPS OF 2016 (in alphabetical order):

AirMule (CEO Sean Yang) - B2C P2P express shipping via travelers

Bright (CEO Jeff Judge) - B2B revenue analytics platform for SaaS companies

Brightwork (CEO Josh Carter) - B2B backend development as a service

Bucketfeet (CEO Raaja Nemani) - B2C custom canvas shoes

CarLease.com (CEO Tim Sperling) - B2C online car leasing service

ClassicCars.com (CEO Roger Falcione) - B2C classic car buying marketplace

Cloud Craze (CEO Chris Dalton) - B2B cloud-based ecommerce platform

Collbox (CEO Chad Shuford) - B2B bad debts collection platform for SMBs

CompleteSet (CEO Gary Darna) - B2C marketplace for collectibles

Crowdfind (CEO Jay Sebben) - B2B lost and found platform for venues

Dough/Tasty Trade (CEO Kristi Ross) - B2C investing platform for do-it-yourselfers

Dorm It Up (CEO Shanil Wazirali) - B2C ecommerce for college students

Drivin (CEO Kayne Grau) - B2B used car marketplace for auto dealers

EatPakd (CEO Rebecca Sholiton) - B2C healthy meal delivery for kids school lunches

FitReserve (CEO Megan Smyth) - B2C central boutique fitness reservations

Gesture (CEO Jim Alvarez) - B2B mobile bidding app for fund raisers

Jiobit (CEO John Renaldi)- B2C location tracking wearable for your kids

Keeper (CEO Darren Guccione) - B2B and B2C secure password manager for mobile

OppLoans (CEO Jared Kaplan) - B2C sub-prime consumer lending

Opternative (CEO Aaron Dallek) - B2C online vision testing

ParqEx (CEO Vivek Mehra) - B2C P2P parking spot reservations

PenPal Schools (CEO Joe Troyen) - B2C online global education across borders

PeopleGrove (CEO Adam Saven) - B2B corporate mentoring social network

PhysIQ (CEO Gary Conkright) - B2B human body analytics

PrintWithMe (CEO Jon Treble) - B2C printing stations in public places

Q-BBQ (CEO Michael LaPidus) - B2C fast casual BBQ restaurant chain

Reverb (CEO David Kalt) - B2C online marketplace for musicians

Rewards 21 (CEO Cary Chessick) - B2B employee and customer rewards platform

Rithmio (CEO Adam Tilton) - B2B motion recognition technology for consumer products

Roost (CEO Jon Gillon) - B2C rent storage space from locals

Routific (CEO Marc Kuo) - B2B route delivery optimization platform

Savo (CEO Jason Liu) - B2B sales enablement platform

SkyMedicus (CEO Amy Holcomb) - B2C medical tourism booking

Socedo (CEO Aseem Badshah) - B2B business demand generation from social media

Tempus (CEO Eric Lefkofsky) - B2B data-driven cancer treatment

TenantBase (CEO Bennett Washabaugh) - B2B small office space online brokerage

TurboAppeal (CEO Badal Shah) - B2B and B2C online tax appeal platform

Uchange (CEO Avi Kugel) - B2C P2P currency exchange between travelers

Urban Leash (CEO Lina Pakrosnyte) - B2C dog walking reservation platform

Virsera (CEO John Diefendorf) - B2B gamifying business objectives

Xensr (CEO David Troup) - B2C 3D analytics for sports

ZooKKs (CEO Kishore Kotapati) - B2C ride sharing platform for commuters

And, don't forget to check out the 2012 winners, 2013 winners2014 winners and 2015 winners, many of whom continue to be doing great things.


Congratulations to you all!!  Keep up the good work.  


For future posts, please follow us at: @RedRocketVC

Monday, December 12, 2016

Lesson #252: Marketing ROI--The Metric That Matters Most

Posted By: George Deeb - 12/12/2016

For all you entrepreneurs trying to attract investment capital, this post will be the most important one you read.  If you cannot answer...



For all you entrepreneurs trying to attract investment capital, this post will be the most important one you read.  If you cannot answer the following customer acquisition related questions for your target investors, your fund raising process is over, before it even started.  Below will walk you through the inputs required to calculate the most important marketing metric for investors:  your return on marketing investment ("ROMI").

AVERAGE TRANSACTION SIZE

Your average transaction size will significantly vary based on your product and target consumer.  An ecommerce company selling arts and crafts supplies may have a $50 average order size, and an enterprise software company may have a $250,000 average order size.  For purposes of this post, I am going to focus on the consumer facing businesses.  Average order size is calculated by taking your total revenues in the period, and dividing it by the number of transactions in the period.  So, if you did $1,000,000 in revenues with 10,000 orders last year, your average transaction size is $100.

REPEAT CUSTOMER MIX

It is hard enough to acquire new customers, so it is important you don't lose your old customers.  You always need to be figuring out what percent of your current year transactions came from prior year customers (and improving that metric over time).  So, if you did 10,000 orders in total in the period, and 5,000 came from customers acquired in prior years, you have approximately a 50% repeat customer mix (where some customers may have made their second transaction with you, and others may have made their fifth transaction with you).  You can calculate this based on unique customer identifiers, like client numbers or email addresses in your system.  Anything north of 33% is acceptable, and if anything less, you may have a customer retention problem on your hands (which may spook investors).

LIFETIME VALUE OF REVENUES

If your average transaction size is $100, and your average repeat customer rate is 50%, on average, one customer will drive $100 in year one, $50 in year two, $25 in year three, $12.50 in year four and $6.25 in year five.  So, that is a lifetime value of revenues (often abbreviated LTV) of around $194.  Understanding, the one customer that made five orders in five years, most likely spent $500, but they are the minority, and made up for the majority of the customers that only spent $100 for one order in five years.

COST OF CUSTOMER ACQUISITION

Your cost of customer acquisition (often abbreviated CAC), is the total marketing investment required to bring in one customer.  Let's say you spend around 10% of your $1,000,000 in revenues on advertising; so, you spent $100,000 to generate 5,000 new customers in this example.  So, your CAC is $20 per new customer acquired.  Notice, I did not divide the marketing cost by total customers in the year, I only divided it by NEW customers in the year, as I wanted to get a clean look at my acquisition costs without it being benefited by free customers generated from repeat sales or word of mouth.  Those items are the gravy, if they end up happening.

RETURN ON MARKETING INVESTMENT

And, now, what you have all been waiting for, the key metric that matters most to investors:  your ROMI.  This is calculated by taking your  LTV of $194 and dividing it by your $20 CAC, in this example.  So, your ROMI is almost 10x in this case study.  If you are doing 10x that is pretty terrific.  Most average companies are doing around 5x.  And, companies that can't exceed 3x typically lose money, after subtracting their cost of sales and operating expenses.  If you want to edit this calculation, don't use revenues, use gross profit as your numerator and shoot for a 5x return, understanding most companies will be around 2.5x with a 50% gross margin.

WHAT THIS MEANS FOR YOU

If your marketing investment does not drive a healthy return (5-10x on a revenues basis, or 2.5-5x on a gross profit basis), and does not have a quick payback period for investors (from the first transaction, in this example), you are going to have a really hard time of attracting investors.  And, know going in, consumer marketing for brand new companies, is going to be expensive and less efficient than established companies (e.g., one-third as effective, on average).  So, the sooner you start testing and optimizing your marketing efforts, to start illustrating healthy marketing returns, the sooner investors will start flocking to your business.

Don't forgot, as I have said many times in the past, your proof of concept is more important than your product when talking to investors.  And, having a solid ROMI is one of the key metrics they are going to be focusing on, in determining if you have passed your proof-of-concept threshold. This will make or break your fundraising efforts, so don't reach out to investors until you have identified, tested and optimized scalable marketing techniques which can be accelerated with the use of proceeds from your raise.  Investors prefer to pour gasoline on an established fire; they don't like to start the fire.

For future posts, please follow me on Twitter at: @georgedeeb.


Monday, December 5, 2016

Lesson #251: U.S. Ecommerce Companies, Beware The Looming Overseas Guillotine

Posted By: George Deeb - 12/05/2016

As many of you know, Red Rocket has been looking for an ecommerce business to buy over the last few months.  We have been doing due dili...



As many of you know, Red Rocket has been looking for an ecommerce business to buy over the last few months.  We have been doing due diligence on over 50 ecommerce companies during this time, and what an eye opening experience it has been.  My overall conclusion is: U.S. based ecommerce companies are going to see a lot of headwind in the coming years, and you better figure out how to defend yourself before the looming overseas guillotine falls.  Here are the details of what I have learned.

PHASE 1:  A QUICK HISTORY, ONLINE RETAILERS KILL OFFLINE RETAILERS

To put this topic into perspective, first a quick history on ecommerce.  After the first wave of ecommerce companies hit the market in the late 1990's, it was clearly only a matter of time before the offline brick and mortar retailers would succumb to death's grip.  Gone go Blockbuster, Borders, Circuit City, CompUSA, Linens N Things and Sports Authority, just to name a few.  Unless the retailers made quick pivots to the ecommerce channel, there was no way they could effectively compete with their huge investments in real estate, inventory and payroll, like a noose around their neck.

And, these trends still continue today.  Don't think for one minute the big chains like Wal-Mart aren't also worried about their long term future.  Why else would Wal-Mart make such a large $3.3 billion acquisition of Jet.com after only one year of launch?  To get them more formidably repositioned as a leading "ecommerce-first" company.  Especially since Jet.com was able to generate over $1BN in revenue run rate after only one year of being in business, with a lowest-price messaging, a title most covetedly held by Wal-Mart over the years.

PHASE 2:  AMAZON REDEFINES ECOMMERCE MERCHANDISING

Amazon quickly learned that there was a lot more product for sale than could possible be designed and managed by one company.  At the end of the day, they realized their core strength was marketing to a huge base of consumers and doing warehousing and distribution in mass.  So, what better to do that open up their website platform to millions of product sellers, both large and small, to basically become a "one-stop shop" for anything and everything on the web.  And, what a move that turned out to be; today, it is estimated that 40-50% of all consumer product searches on the internet now begin at Amazon.com, not Google.com.

PHASE 3:  U.S. BRANDS START TO KILL U.S. ONLINE RETAILERS

With that level of marketing and fulfillment power on Amazon.com, millions of "Amazon Only Sellers" were born in the last few years.  Now, an ecommerce startup no longer needs expensive investments in people, systems, warehouses or marketing; they simply need to design a product (typically manufactured by an overseas partner), get the product over to an Amazon warehouse, let Amazon do their magic, and sit back and collect checks for doing hardly any work.  Literally, two kids in a garage figure out best selling products on Amazon to knock off, from freely available Amazon sales data sources, and they generate $2-$4MM in revenues ($500K-$1MM in profits) in a year or two after launching.

And, that doesn't even talk about about the big national brands selling through national retailers and ecommerce sites today.  Amazon and other big online shopping platforms have embolded them into thinking they can sell products themselves, disintermediating the wholesalers and retailers they have typically relied on for sales.  And, as the product company, now they can undercut the retail price, make materially higher margins than they were before and really turn the screws on the online retailers, who are now starting to see their sales decline with this sales channel shift.

PHASE 4:  OVERSEAS MANUFACTURERS START TO KILL U.S. BRANDS

When I read this article at Internet Retailer (click through all four pages), it pretty much scared the crap out of anyone looking at investing in the ecommerce space.  What it basically said is: with a "customer first mindset" (translated: a desire to get consumers the lowest prices possible), Amazon is romancing Chinese manufacturers to start directly selling on Amazon.com in the U.S.

Why does that matter?  Remember all those U.S. brands and "Amazon Only Sellers"?  Where do you think they are sourcing manufacturers for all their products?  Most of them from China!!  So, what does that mean?  If the Chinese manufacturers start selling direct on Amazon, at the same wholesale prices they are selling to their typical U.S. brand customers, they are going to force the U.S. brands to compete with them at basically a zero percent profit margin!!  Said another way:  that was the sound of the U.S. brands' necks snapping with the fall of the guillotine.

WHAT THIS MEANS FOR YOU

For all of you ecommerce lovers, like me, sorry to sound like the grim reaper here.  But, you better get ahead of this trend, and fast!!  How do you defend yourselves here?  There are many ways:

  • Create more "brand cache" (e.g., pants from Gucci and Levi's cost the same to make)
  • Don't sell commodity products, where price is the only differentiator
  • Focus more on consumer services or consumer entertainment, as harder to replicate
  • Add value-added upsells (e.g, make your money on the popcorn, not the movie)
  • Acquire some of your vendors or manufacturers, to vertically integrate with
  • Joint venture with international manufacturers as their exclusive U.S. marketing partner

So, before investing heavily in the ecommerce space, do your homework!  Make sure the business you are in, or are considering to be in, is not a sitting duck, already starting to feel the stranglehold of your vendors starting to sell direct (e.g., see if they are already selling against you on their own websites or on Amazon).  And, if you decide to move forward, do so with a long term defense plan in place, like the ones listed above.

Each generation of selling products, tries to do it better and more cost effectively than the generation before it.  Unfortunately, for most low-price-driven U.S. consumers, that means disintermediating the U.S. middlemen in what has become a global ecosystem.  Be careful what you ask for (e.g., low prices).  It may just put the entire U.S. retail, ecommerce and brand businesses, out of business for good, with a huge impact to the U.S. economy and the resulting jobs lost. All, but for Amazon, of course . . .  the last-standing fox in the hen house.

For future posts, please follow me on Twitter at: @georgedeeb.





Friday, December 2, 2016

You Get the Talent That You Pay For

Posted By: George Deeb - 12/02/2016

I get it. Most startups operate on fumes, in terms of available cash resources. So, the natural instinct of most entrepreneurs is to pay...



I get it. Most startups operate on fumes, in terms of available cash resources. So, the natural instinct of most entrepreneurs is to pay as little as they can for most of the expenses in their business. And, I agree with that for most all expense categories, except one: human talent. Building the right team for your startup is the single most important thing you will do in terms of putting your business on a path toward success or failure. You try to cut corners with your talent decisions and you are toast.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.


Thursday, December 1, 2016

Thinking of Joining a Family Business? Buyer Beware!

Posted By: George Deeb - 12/01/2016

I have previously highlighted the plusses and minuses of working with family members inside the same company .  But, should a third-part...



I have previously highlighted the plusses and minuses of working with family members inside the same company.  But, should a third-party employee sign up to work for a family-owned and operated business?   As you will read, you better do your research first, to help you avoid a lot of unexpected grief down the road, that can often come from working inside a family business.

Read the rest of this post in Forbes, which we guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.


Monday, November 28, 2016

16 Key Red Flags for Startup Investors

Posted By: George Deeb - 11/28/2016

I recently a read a good book called The Art of Startup Fundraising written by Alejandro Cremades, a serial entrepreneur and co-founder...



I recently a read a good book called The Art of Startup Fundraising written by Alejandro Cremades, a serial entrepreneur and co-founder of Onevest, a venture investing community platform.  One of the chapters in Alejandro’s book specifically talks about these 16 red flags for investors, and Alejandro was kind enough to let me share that list with you.

Read the rest of this post in The Next Web, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.


Monday, November 21, 2016

Lesson #250: Personality Testing On The Rise, But Why?

Posted By: George Deeb - 11/21/2016

For decades, personality tests have been used by big corporations to evaluate employee candidates during their hiring process.  But, more...


For decades, personality tests have been used by big corporations to evaluate employee candidates during their hiring process.  But, more and more, I am seeing early-stage companies using these tests to help them in their hiring process.  I am not sure who is pointing them in this direction, most likely the increased access to free online personality tests you can take, like this one.  But, just because they are there, doesn’t mean you need to use them.  They are often used as a crutch to help make decisions, instead of true leadership by hiring managers.  And, often times, the results learned about current employees, do not result in actionable changes within an organization.  Let’s dig deeper here.

What is a Personality Test?

As an example of the most used, back in 1945, Katharine Cook Briggs and her daughter Isabel Briggs Myers pioneered the Myers-Briggs Type Indicator (MBTI) personality test which sorts people into four different types of psychological classifications, based on the research of Dr. Carl Jung in the 1920’s.  For example, a person is either: (i) an Extravert or an iNtrovert; (ii) Sensing or Intuitive; (iii) a Thinker or a Feeler; and (iv) Judging or Perceiving.  You can learn more about the specific definitions for each of these classifiers at this infographic.  If you are curious about your personality type, or want to test your employees, there are several free online personality tests you can take, like this one.

What Am I?

I once took this test, and my four letter classification came back as an ENTJ.  According to the Myers Briggs website, that would describe me as: “Frank, decisive, assume leadership readily. Quickly see illogical and inefficient procedures and policies, develop and implement comprehensive systems to solve organizational problems. Enjoy long-term planning and goal setting. Usually well informed, well read, enjoy expanding their knowledge and passing it on to others. Forceful in presenting their ideas.”  I would say that is a fair summary.

The problem is, if I read any of the other 15 classifications on that page, there are elements of each of them, that also apply to me.  Trying to label employees in pre-defined buckets is a nice goal, but it isn’t really all that practical, as people behave differently in different scenarios and can live across categories.  For example, a good manager knows when to manage with an “iron fist” or “kids gloves”, depending on each situation and employee involved.

My Past Experience as a Candidate?

Several years ago, based on my personality test results, a large company that was hiring said my entrepreneurial skills were “off the charts” compared to their current employees (e.g., which they perceived as overly willing to take risks).  I didn’t get the job, despite a great personality fit with the team and a perfect skillset for the job.  I couldn’t believe this company was actually making hiring decisions based on personality type, as opposed to who had the best skills to get the job done and help the company hit its goals.  And, in this specific case, it explains why this same company is now teetering on the brink of bankruptcy, as they were not hiring any innovative “out of the box” thinkers that could help pivot them into new directions to help evolve with the times.

My Past Experience as an Employer?

I have never used personality tests in any of my hiring decisions.  To me, as a good CEO, I have my finger on the pulse on the desired culture and needs of the organization.  It is materially more important to hire a person that has the best skillsets for the job, so they can come out of the gate running and help us to achieve our business goals, than it is to have a specific personality type.  And, that strategy has served me well over the years, building several successful companies with great teams along the way.  So, don’t overthink the need for personality tests.  To me, they are a “nice-to-have”, not a “need-to-have”.  For more useful tips on how best to build your startup team and how to build a good business culture, check out these other posts on the topic.

What Are Personality Tests Good For?

Most hiring managers think personality tests are a good predictor of a candidate’s future job performance or fit within the organization.  I think that is hog wash for the reasons described above.  But, these tests do have some useful applications.  It gives managers a good sense to the varying styles of their employees, which they can use that information in training or coaching the staff, crafting a conducive work environment, and developing the team.  For example, if you see a young employee with high leadership potential, you can put them on a fast track to being a future manager.  Or, if one employee is a strong leader, pair them with someone who needs leadership development, to help develop their skills.

Concluding Thoughts

Just understand the results of a personality test are simply a data point.  They should not drive decisions!!  You need to stay flexible in your hiring practices, understanding that there are going to be different employee types in the office.  Salespeople are typically going to be your extraverts, and your web developers are going to be your introverts, as an example.  So, it is near impossible to recruit all the same types in one organization.  And, even if you could, why would you?  Different perspectives from different people can help the organization manage the business through a broader lens.  And, for goodness sakes, if you are going to make your current employees take the test, make sure the results become accountably actioned upon, otherwise you are never going to effectively lead to the organizational change you may be desiring.

For future posts, please follow me on Twitter at: @georgedeeb



Wednesday, November 16, 2016

[BRACKETOLOGY] Elon Musk Voted Most Admired CEO

Posted By: George Deeb - 11/16/2016

Over the last few weeks, CB Insights , the tech market intelligence platform, has been running a weekly poll of their subscribers, in th...



Over the last few weeks, CB Insights, the tech market intelligence platform, has been running a weekly poll of their subscribers, in the style of the NCAA Basketball Tournament, to determine which technology executive was most admired.  This week, the "champion" was finally announced, and it was none other than Elon Musk (Tesla and Space X), who handily beat Steve Jobs (Apple) in the final matchup.  A well-deserved winner for all the game-changing businesses Elon is involved with, from electric cars to space travel.  Anand Sanwal, the CEO of CB Insights, was kind enough to let me share the final bracket with all of you, below.



As you can see, this 64 entrepreneur field was loaded with talent, including the founders of many great technology companies, like Alibaba, Twitter, Netflix, Oracle, Airbnb, Dell, Snapchat and Paypal, to name a few.  So, it was really like splitting hairs between all the talent on this list.  What do you think?  Did the voters get this right?  Feel free to share your thoughts in the comments below.

From my perspective, back in 2011, I detailed my entrepreneurial heroes, including my rationale for each one.  That list included Steve Jobs (Apple), Bill Gates (Microsoft), Larry Page/Sergey Brin (Google), Jeff Bezos (Amazon) and Richard Branson (Virgin). All five of these guys made it to the Elite Eight in this tournament, so I very much agree with these results.  I was only missing Elon Musk, Mark Zuckerberg (Facebook) and Marc Benioff (Saleforce), all legends themselves.

The winner, Elon Musk, would have definitely made my list, if I had written my post in 2016.  But, I think I would have had Steve Jobs win this head-to-head battle based on sales results to date.  I think Elon's vision is a lot bigger than Steve's, but the proof is still in the pudding, so to say.  If he is successful in accomplishing his ambitious goals over the next decade, then I could definitely see making Elon the winner down the road.

If the above chart is hard to read, the original post can be found here on the CB Insights website.  If you are not already subscribed to the CB Insights newsletter, subscribe from their home page, as their market research by tech sector is invaluable to the venture community.  Thanks again, Anand, for letting us share this fun piece with our readers.

For future posts, please follow me on Twitter at: @georgedeeb.




Tuesday, November 15, 2016

Lesson #249: Executive Compensation Benchmarks for Growth-Stage Companies

Posted By: George Deeb - 11/15/2016

I am often asked to help Red Rocket clients with recruiting related projects, and one of the questions that comes up is how much should ...



I am often asked to help Red Rocket clients with recruiting related projects, and one of the questions that comes up is how much should they pay for their various executive positions.  Well, lucky for them (and you), the team at River Cities Capital Funds (RCCF), a growth stage venture capital fund based in Cincinnati, just recently surveyed 19 private growth-stage companies in the technology and healthcare sectors which clearly helps us answer that question.

My colleagues at RCCF were kind enough to let me share their survey results with all of you, below.  And, you can find the full survey results on their website, which includes trend data over time.


Not only does this chart show the base salary for each position, but it also details the typical annual bonuses, commission plans and stock option ownership for every level.  In addition to showing the overall averages (in the big numbers), it also shows the range of the data points from low to high, for each role (in the smaller numbers).  Hopefully, this will be very helpful for all your recruiting efforts.

Obviously, this level of compensation is for venture-capital backed, growth-stage companies (e.g., think $10MM to $100MM in revenues).  So, if you are earlier stage than this, the compensation will be less than what is illustrated above.  And, if you are later stage than this, the compensation will be higher than what is illustrated above.  But, in any case, this is very useful data to benchmark yourself against.

Also, worth mentioning, these salary levels assume there is a stock option plan in place.  So, if you don't currently have a stock option plan, it would be good to consider adding one.  And, if you prefer not to offer stock options, then you are going to have to offer materially higher salaries than are listed above (e.g., 25%-50% more), in order to make up for the less perceived value without the stock options.

So, the real question here is: are you paying your executives a market-rate compensation package?  If not, there are thousands of other companies that are, and you don't want to risk losing your best talent to other companies, or handicap your recruiting efforts in any way. So, right size your executive compensation packages to position your company in the best light compared to others.

For future posts, please follow me on Twitter at: @georgedeeb.



Friday, November 4, 2016

A Secret Tactic for Quick Growth: The Roll-up

Posted By: George Deeb - 11/04/2016

I recently wrote about how to set your strategies around mergers and acquisitions , but I wanted to go into more detail about one type o...



I recently wrote about how to set your strategies around mergers and acquisitions, but I wanted to go into more detail about one type of M&A strategy: the roll-up. A roll-up is when you plan to buy multiple businesses within one industry. And there are many potential ways to execute a roll-up.

Read the rest of this post in Entrepreneur, which I guest authored this month.

For future posts, please follow me on Twitter at: @georgedeeb.


Wednesday, November 2, 2016

7 Potential Pitfalls With Mergers and Acquisitions

Posted By: George Deeb - 11/02/2016

I have always been a fan of considering mergers & acquisitions as a viable way to more quickly scale your business.  But, this road ...



I have always been a fan of considering mergers & acquisitions as a viable way to more quickly scale your business.  But, this road is not foolproof by any means.  Below are some of things that can go materially wrong with M&A, so do your research and plan accordingly to avoid these known pitfalls.

Read the rest of this post in Forbes, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.


Thursday, October 27, 2016

Lesson #248: Sales Not Closing? Know When to Panic!

Posted By: George Deeb - 10/27/2016

Most B2B businesses are sales driven organizations, often with a team of expensive sales people in the market trying to hunt down and cl...



Most B2B businesses are sales driven organizations, often with a team of expensive sales people in the market trying to hunt down and close new clients.  This is typically a really stressful process for early-stage startups, as they typically are incurring the costs of the sales team, well ahead of the sales actually closing and running through the income statement.  The key is learning what the normal sales cycle should be for your specific business, and when the sales slowness is due to the normal cycle versus a weak salesperson or conversion process.  It is critical to learn when you have a real problem on your hands, and when you don’t, so you do not unnecessarily panic when sales are slow to materialize.

Key Drivers of Sales Conversion Timing

When closing sales, these are typically the key drivers around timing of the sale: (1) the quality of the salesperson and their ability to ask for the sale (or on the flipside, bullshit management into thinking that leads are real when they are not); (2) your nurturing process to move clients from upper funnel to lower funnel leads; (3) constraints of your clients, like available budgets or multiple decision makers; and (4) the average ticket of the product you are selling, where bigger ticket products take materially longer to close than smaller ticket products.  When you are worried about sales not closing, you need to dissect your business into each of these core components, to get to the real reason sales are not closing.

The Wide Range of Enterprise Selling

On one end of the spectrum, you can have very low cost software-as-a-service products that are priced at a low fee per user with a pay-as-you-go model, without a material long term financial commitment.  Those are pretty easy and fast to close, assuming your product solves a pain point for that customer.  At the far other end of the spectrum, you can have multi-million dollar installed software solutions.  These can be torturous to sell.

The big ticket sales often hit multiple departments, meaning multiple decision makers.  The business people need to see a business need for your product.  The technology department needs to approve it for compatability with its other systems and policies.  The procurement department needs to make sure they are paying the lowest price possible.  And, the finance department needs to make sure a budget actually exists to afford your solution—where it is much harder to sell if no current budget exists versus replacing another vendor with an existing budget.  Furthermore, the more consultative the product is to sell, the longer it takes to educate the business people that they have a real need for the product.  And, the more seasonal your clients planning process, the easier it is to miss the prime selling months, and lose an entire additional year in the process.

So, what does this all mean?  It means that some enterprise sales can be closed in a matter of days, or they can be closed over years of selling time.  Yes, years!!  So, you need to make sure you are clear on where your business falls within that spectrum, so you are not placing unnecessary pressure on your sales team to close faster, when in fact, it may not be their fault sales are not closing faster.

Learning When It is the Salesperson’s Fault

When you have a long sales cycle product, that means you are carrying a lot of salesperson costs over time, before the sale actually closes.  And, the worst thing you can do is carry a weak salesperson along for an extended period of time.  When you have long sales cycles, you need to be putting measurement around the four key sales drivers above, especially around the movement of clients through the sales funnel.  Set clear “proof points” along the sales cycle, and measure accordingly.  That could be number of initial calls made, number of initial meetings, number of proposals sent, number of contracts sent, number of contracts closed, etc.  If you are seeing good progress in these metrics, you most likely have a good salesperson.  If not, cut your losses as fast as possible, as you can’t afford any mistakes here.  This post will help you learn how to best screen your sales candidates for success.

Don’t Panic Too Early

I had a client that was making the pivot from selling lower ticket products into agencies to higher ticket products into enterprise-scale companies.  They made a huge investment in sales and marketing budgets to help propel their growth.  But, when they did not see the sales closing as fast as they used to close, they assumed they had a problem on their hands, and unwound their entire initiative half way into the normal process.  What a mistake that was!!  They just didn’t understand the new flows of enterprise selling, and basically, flushed a material startup cost down the toilet, and making any reasonable chance of materially accelerating their sales that much harder and longer-term in nature.  What a mess!!

In Conclusion

So, the keypoints here: (i) know where you are on the sales cycle curve, and set reasonable expectations for management and the sales team; (ii) measure everything, so you can get clear visibility into progress being made, even when sales are not closing; and (iii) for bigger ticket items, patience is a virtue (young Jedi), so make sure you have enough capital to afford the long sales cycle without panicking.

For future posts, please follow me on Twitter at: @georgedeeb.


Monday, October 24, 2016

[VIDEO] George Deeb Teaches Product Development for Startups

Posted By: George Deeb - 10/24/2016

I recently had the pleasure of mentoring the 2016 class of entrepreneurs at Founder Institute Chicago. Here is the presentation I delive...



I recently had the pleasure of mentoring the 2016 class of entrepreneurs at Founder Institute Chicago. Here is the presentation I delivered on "Product Development for Startups". The lesson provides high level guidance on: (i) doing your market research; (ii) setting the product vision and roadmap; (iii) creating product specifications; (iv) building a development plan; (v) doing UX testing; (vi) when to build internally or externally; (vii) building budgets; and (viii) setting development KPIs to manage by. This is a must see for any entrepreneur, to learn how best to build their first products.


Red Rocket's George Deeb Teaches Product Development for Startups from Red Rocket Ventures on Vimeo.

The matching slide show on SlideShare can be found here:




I apologize for the low quality of the video, but the substance of the speech is what I wanted you to focus on.  I hope you pick up some good learnings here, to help your business.


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

Thursday, October 13, 2016

Lesson #247: The Key Drivers of Company Culture

Posted By: George Deeb - 10/13/2016

Way back in Lesson #13 we talked about how to create a good company culture .  But, I recently read a research report on the topic from ...



Way back in Lesson #13 we talked about how to create a good company culture.  But, I recently read a research report on the topic from The Alternative Board ("TAB"), shared with me by their CMO, Jodie Shaw, which was summarized in this blog post on their website. It included a lot of quantifiable and actionable items around building a good company culture.   Jodie shared the base dataset from the survey results with me, and there were a lot of gems in there that were not highlighted in their original post, that I thought were worth sharing with you.  Jodie was kind enough to let me share them with you below.

SUMMARY OF SAMPLE STUDIED

TAB interviewed 100 small businesses in gathering the below results.  Approximately two-thirds were B2B companies and one-third were B2C companies.  They came from a wide base of industries, where professional services (31%) an manufacturing (29%) made up the majority.  Their mean age was 14 years old and their mean size was around 25 employees and over $2MM in revenues.  Which probably describes a lot of you reading this blog--either today or where you see yourself in the near future.

WHAT IS CULTURE & WHO DRIVES IT?

When you think about culture, most people are thinking about: management style (39%), employee experience (30%) and company reputation (18%).  Which are most impacted by: business owners (45%), business executives (23%) and the employees (21%).  Where 63% say business owners are the MOST important driver here, not executives or employees (which is a little surprising, as many owners are not often visible within the company).

WHAT IS THE OUTCOME OF A GOOD CULTURE?

Driving a good culture empowers people (43%), delivers business results (25%) and promotes good teamwork (22%).  And, the benefits therefrom include: shared goals between management and employees (47%), connecting employees to its customers (24%) and fosters a collaborative environment (18%).  Which in turn, drives productivity (39%) and improves morale (39%).

IT ALL STARTS WITH RECRUITING . . .

It all starts with hiring the right people who fit your culture, right from the start (91%), as it is difficult to get people outside of your desired culture to change.  When recruiting employee candidates, you can best assess their fit for your company culture through:  personal interviews (91%), employee feedback (64%), observing their interaction with staff (56%), calling their references (49%), hiring on a trial basis first (43%), reading their social media conversations (42%) and having them take a personality test (37%).

. . . AND KNOWING WHAT IS MOST IMPORTANT TO EMPLOYEES . . .

Employees are motivated by having trust in strong leaders (44%), more transparency around key issues impacting the business (21%) and more control in their day-to-day decision making (21%).  Employees are most interested in enjoying their work environment (91%), being mentored (90%), having advancement opportunities (83%), getting training and continuing education opportunities (80%) and flexible work hours (66%).  Only 30% thought telecommuting, working from outside of the home office, was important here.

. . . AND NOT LETTING KEY HURDLES GET IN THE WAY

The key obstacles and challenges to driving culture are: making sure you practice what you preach (43%), maximizing culture and profits at the same time (34%) and trying to make everyone happy, which is nearly impossible (18%).

MEASURING CULTURE IS CRITICAL TO SUCCESS

Like with any business decision, you can't manage what you don't measure.  So, you need to be measuring your company culture, to make sure your company culture is improving towards desired outcomes.  The companies in this study that had a strong culture, had a net promoter score (NPS) of 8.4 (out of 10), based on employee feedback about their company.  The companies that had a weak culture, had an NPS of 6.2.  With the average company had an NPS of 7.4.  So, if you are below 7.4 when you test your own employees, you most likely have a culture problem on your hands.


Hopefully, you will agree there was a LOT of great data coming out of this TAB survey.  Be sure to incorporate these learnings into actionable strategies within your business.  Thanks again, Jodie, for allowing us to share these learning with our readers.

For future posts, please follow me on Twitter at: @georgedeeb.



Friday, October 7, 2016

You Can't Expand While Your House is On Fire

Posted By: George Deeb - 10/07/2016

Building a business or product offering is comparable to building a house. First you lay the foundation, then the rough carpentry, roofi...



Building a business or product offering is comparable to building a house. First you lay the foundation, then the rough carpentry, roofing, plumbing, electrical, HVAC, drywall, flooring and finishings, in that order. God forbid you try to install the plumbing after the drywall has gone up, otherwise you will have to rip it all down and start again, at double the cost. And, unless an architect has provided the builder with a clear blue print on what is being built, chaos will surely follow.

But, that only talks about the initial construction. Unlike a house, a good business or product offering is fluid in its design and is constantly trying to improve, to keep up with its competitors and its customers’ needs. Think of it as evolving from version 1.0 to version 2.0 over time, captured by the mantra: continue to innovate or die a slow death. But, the worst thing you can do, is try to build features of version 2.0 on top of flaws embedded in version 1.0. That is the equivalent of building a house of cards, where the whole thing can topple over with one wrong move.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter: @georgedeeb.


Friday, September 30, 2016

Lesson #246: Buying a Business is Hard Work!!

Posted By: George Deeb - 9/30/2016

As you may know, Red Rocket has been on the hunt for a business to buy.  We are specifically looking for digital technology companies wi...



As you may know, Red Rocket has been on the hunt for a business to buy.  We are specifically looking for digital technology companies with at least $500,000 of profit, where we can apply our sales and marketing expertise to help grow those businesses.  We have looked at over 50 businesses in the last few months, but have yet to get to the finish line.  I wanted to share some learnings with all of you, in case you are ever on the hunt to buy a company.  As you will read: buying a business is really hard!!

LOTS OF HUNTING REQUIRED

You need to explore multiple channels in terms of knowing where to look.  Leveraging your network, reaching out to investment bankers or business brokers in your space and even searching online, on sites like BizBuySell, BizQuest and BusinessesForSale.com, are all fair game.  And, it is a fluid market, so new stuff comes up all the time, so you need to constantly be working these channels in high frequency, to make sure you don't miss anything important and be able to move quickly.

CUTTING THROUGH THE CLUTTER

Firstly, there is the process of narrowing down the targets that are most interesting to you.  Even if you are narrowly focused, on something like e-commerce businesses, as an example.  There are so many different types of products being sold across a wide range of revenue size, and needing to narrow them down to the ones which are most interesting for your needs.  And, secondly, how a company markets itself for sale, does not always match up to the reality of the situations once you start due diligence.  For example, they said they have $1MM of profit with the way they had been running the business (on a shoestring budget), but fully loading expenses on a going forward basis, maybe it only has $500K of profit, which materially changes the story.

DUE DILIGENCE SHORTFALLINGS

In addition to the financial due diligence shortfalling described above, there is often times operating issues that get uncovered during due diligence, as well.  As an example, you think you may be buying a strong e-commerce business with a lot of direct traffic to their own website, but often times they are simply Amazon dependent sellers that look to Amazon for marketing to customers and fulfilling orders.  That creates problems like, Amazon owning the customer list, not the business, and risks Amazon disintermediating this product seller with similar product or squeezing them on margins long term, putting the future financial health of the business at risk, entirely dependent on Amazon.

LOTS OF COMPETITION

There is a lot of money on the "sidelines", looking to be invested into interesting businesses.  And, the more attractive the business, or more profitable the company, the exponentially more investors looking at the same business.  Which means you need to be prepared to move quickly (with capital lined up) and potentially pay premium prices to outshine the other offers, or risk losing the deal.

INSANE VALUATIONS

Many companies just don't have a reasonable expectation to what their business is really worth, with them proposing very high asking prices.  For example, if they are in the venture world, they drink the Kool Aid of "unicorn-level" valuations multiples (e.g., 10x revenues).  When the reality is, without them venture funded and growing a lot slower, they are typically valued at more reasonable 3-4x cash flow multiples.  So, finding a seller with reasonable valuation expectations is not always easy.

MULTIPLE PARTIES TO PLEASE

There are typically three parties involved in any transaction:  the seller, the buyer and the financing source.  If you can finance the transaction yourself with your own cash or equity, that is preferred, given one less party to make happy.  But, if outside private equity investors are required, it materially complicates things.  Because not only do you need to like the business, but the investors need to like the business too.  If any one of the "three legs to the stool" is wobbly, the whole deal can fall apart.

LOTS OF HOURS INVESTED GOING NOWHERE

Based on all the issues above, you often need to invest many hours of work into any single project before realizing it will never get to the finish line.  This is not a really efficient use of time, but the process is what it is, and you really don't have a choice, unless you outsource the deal searching, due diligence process and fund raising process to others.  So, be prepared to be frustrated and spin your wheels.

Hopefully, this gives you a good expectation of what to expect when starting to hunt for businesses to buy.  But, if you are persistent and patient, all it takes is one deal to get to the finish line!!

Be sure to read these companion articles on Things to Consider for M&ASetting M&A Goals and Potential Pitfalls with M&A.

For future posts, please follow me on Twitter at: @georgedeeb.


Tuesday, September 27, 2016

Lesson #245: You Cannot Cut Your Way to Growth

Posted By: George Deeb - 9/27/2016

I recently wrote about the war between driving growth and profitability , and that you cannot successfully maximize both at the same tim...



I recently wrote about the war between driving growth and profitability, and that you cannot successfully maximize both at the same time.  The key point here was driving growth requires additional investment in your business, in the form of new sales and marketing activities, the expenses of which put negative pressure on your bottom line.  But, what happens when that additional investment takes your business into a short term loss position?

You would be surprised how most entrepreneurs would answer that question, especially in family-run businesses where every business expense is perceived as taking monies away from their personal expense needs.  There seems to be a general aversion to losses and taking on debt to cover those losses.  So, instead of raising the required capital needed to fund the full need, they try to cut expenses in other areas of their business to make room in the budget for the sales and marketing need. Or, they simply lower their growth objectives to a more affordable level within their current budgets. All, reactions of entrepreneurs that typically don’t know what is required for long term success.

Why You Should Fund the Full Amount Needed for the Plan

At the end of the day, your long-term goal, should remain your long-term goal.  If your management has collectively been hired to help you grow a $10MM business into a $100MM business over the coming five years, you are going to ruffle a lot of internal feathers if you suddenly switch directions to building a $20MM business.  Those executives signed on to help be part of an exciting 10x growth story, not a 2x growth story, and you most likely will lose them with that move.  Especially, if they were recruited with an equity stake in the business, and they suddenly realize it is only worth 20% of what they thought it was going to be worth.  So, think through the ripple effects of your actions.

Why it is Perfectly Acceptable to Incur Debt

Where in the Business 101 handbook did it ever say debt was bad and should be avoided at all cost. That certainly could be the situation for companies with no reasonable way of paying the debt back, forcing them into bankruptcy if they miss their payments.  But, for most healthy companies that are producing long term cash flow, debt is a perfectly acceptable vehicle with which to fund your short term needs.  It is certainly a lot more affordable than diluting your equity ownership with a new equity financing.  So, debt is not a bad word, it is a perfectly acceptable way to capitalize your business for up to 50% of its needs, provided you have a credible plan to pay it back.  How do you think private equity firms make all their super-sized returns on their portfolio investments—it is not by investing 100% equity for those companies.  Debt helps them leverage their equity resources, to stretch their equity farther and drive a higher return on their equity investment.

Why it is Perfectly Acceptable to Take on Losses

If you look at the growth curve of any startup, almost all of them start by incurring losses in their formative months or years, as the revenues are simply not there yet to cover their startup expenses.  It is absolutely no different for later stage companies: think of your increase in growth investment as like another startup-like event that is perfectly normal and expected.  It is not a bad thing to incur losses if there is a logical reason for the expenses, like needed investment to help jump start long-term revenue growth.  That $1MM loss today, could be the difference between $50MM and $100MM in revenues five years from now.  So, don’t focus on the short-term impact of the loss, focus on the opportunity cost of what you are leaving on the table by not incurring the loss.

Why You Don’t Cut Monies from Other Departments

And, taking money from other departments is not the answer either.  Let’s say you need $1MM of new investment in sales and marketing.  But, your technology department also needs $1MM for new product development needs.  And, you only have $1MM of free cash flow to work with.  Sure, you could give each $500K, but that only helps the business accomplish half of its desired goals.  But, if you tell the technology department to delay your investment in new products for a year, it is not long before your engineers quit or your customers are not seeing innovation and move to your competitors.  And, then you will have an even bigger financial mess to deal with.

Concluding Thoughts

The only time you should take out the hatchet and start cutting expenses, is when your business is broken and your economic model is flawed.  Or, if there is an economic slump you are trying to navigate through.  But, if you have a healthy business and you are trying to accelerate your growth, you really shouldn’t take the hatchet to any part of your business in order to better afford the additional expenses.  Instead, you should finance the full need of the plan, either with debt or equity, whatever is more appropriate for your specific situation.  And, if you are simply trying to avoid diluting your ownership stake, I ask you one question:  would you rather own 100% of a $20MM company or 80% of $100MM company?

For future posts, please follow me on Twitter at: @georgedeeb.


Monday, September 12, 2016

Lesson #244: Stop Selling the 'What', Start Selling the 'Why'

Posted By: George Deeb - 9/12/2016

You gotta love entrepreneurs.  All their passion and excitement around the innovative new products they are building.  And, they ...



You gotta love entrepreneurs.  All their passion and excitement around the innovative new products they are building.  And, they love talking about their products with others, detailing every feature and functionality of their offering.  They are laser-focused on getting others to love their products as much as they do.  But, then they realize, sales are not coming in.  They question how can that possibly be, given how great our product is?  It’s about that time I usually need to tell them, their customers don’t really care about the product itself (e.g., the “What”), they care much more about how it can improve their business (e.g., the “Why”).  The sooner you learn to ditch focusing on the “What” and start focusing on the “Why” to get their attention, the sooner your sales will start to accelerate.

Defining “Why”

For most customers, the things they truly care about are: (i) how will this help me drive more revenues; (ii) how will this help me lower my costs; or (iii) how will this improve my user experience (e.g., where users can either be their customers or their employees).  Sure, there are other things, but these are the big ones.  And, the bigger you can economically illustrate the impact of your product or service to helping them achieve one of the above three goals, the more attention they will give it (e.g., a 10% boost will resonate a lot better than a 1% boost).

Calculating “Why”

If you are pitching a revenue lift to their business, first you need to research what their current revenues are, and ideate ways on how your business can help them grow their revenues (where a minimum lift of 5-10% should get their attention).  If you are pitching a cost savings rationale, you need to estimate how big their current costs are, and how your product can help them lower those costs by at least 5-10%, where costs savings on their biggest expense line items will get more attention (e.g., help them maximize their overall margins and cash flow).  In both scenarios, you don’t want to price your product or service any higher than 10-20% of the overall revenue lift, or the overall cost savings estimated (e.g., a gross gain of 10%, may only net them 8-9% after they pay your fees).  Again, the bigger the lift, and the more of the lift they keep for themselves (vs. paying it to you), the better it will be for them.

A Case Study on “Why?”

When I was at iExplore, building my adventure travel business, I was trying to close a strategic relationship with National Geographic, and was pitching their CEO and CFO on the idea.  I tried to put on their hats?  What would get their attention?  With the traditional magazine industry hurting, I knew they were on the hunt for material new revenue streams with which to pivot their business (e.g., cable channel).  I also knew that the demographics of their readers, were frequent adventure travelers, buying active and experiential vacations like the ones iExplore offered.

I told them the collective reach of National Geographic was around 100MM households across their magazines, websites, cable channels, etc.  If we could get 1% of them to buy a vacation from National Geographic at iExplore’s average price of $10,000 per transaction, that would result in a $10BN revenue opportunity, or around 20x the $500MM in revenues they were generating at the time.  Needless to say, I had their attention, and we closed the deal.

I didn’t lead with the cutting edge features of our website, or the 5,000 trips we offered in our database or our snazzy marketing plan.  I focused on the economic impact of what it would mean to their business and the estimated financial return they could make from their investment in iExplore.  And, I gently let them know other media companies, like their direct competitors at Discovery Channel, were also interested in working with us.  That was simply the icing on the cake, creating the fear of missing out on a big opportunity to one of their rivals.

Summary

At the end of the day, you are selling compelling stories, not products. Hopefully, from this post, you have learned that the key to successful sales is putting on the hat of your customers.  How are you going to materially improve THEIR business (as they don’t care on how it is going to help your business)?  And, how are you going to make them look smart to their boss, so they can get the personal win?  Stop focusing on the “What” (as they don’t really care how it works, as long as it works) and start focusing on the “Why”, and good things will surely follow. 
Once you hook them on the “Why”, then you can backfill on the “What”, after you already have their attention.  Because, the “What” alone, may simply put them to sleep and your revenues on life support.  


For future posts, please follow me on Twitter at: @georgedeeb 


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