Tuesday, September 19, 2017

Lesson #274: Do You Need a RE-Founder for Your Business?

Posted By: George Deeb - 9/19/2017

Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding them b...



Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding them back from ultimate success.  Maybe they lack the required skills or business experience required to identify or correct problems inside their product, process or team.  And, more often that not, as a new entrepreneur  “you just don’t know, what you don’t know”.  And, when the problems become material enough that it could potentially put the company out of business, maybe it is time to hire what I call a RE-founder for your company, to help put it back on the right course.

WHAT IS A RE-FOUNDER?

Everyone knows what a founder or co-founder of a company is; it is the person or persons who formed the business in the very beginning of the company.  It was often their business idea that they birthed from a piece of paper, into an up-and-running product and business.  Think what Mark Zuckerberg is to Facebook or Jeff Bezos is to Amazon or Bill Gates is to Microsoft.

But, nine times out of ten, a startup is not successful in achieving mass customer adoption of their product or service.  And, then, they have to make some important decisions?  Is the problem so bad they need to close up shop?  Or, they need to reset their sights from building a big venture-backed company, to only building a small lifestyle business?  Or, they potentially need to get a new strategy and leadership to pivot the company into a different direction that has a higher odds of seeing scalable success.

It is this last route where I am suggesting you need to hire a RE-founder of the company.  The RE-founder will be responsible for doing a critically-needed and non-biased strategic planning process, to thoroughly understand the company’s core strengths, weaknesses, opportunities and threats.  And, then they will produce a 3-5 year long term vision and action plan for which the company to follow in hopefully pivoting the business to new heights.

WHERE TO FIND A RE-FOUNDER

In terms of how best to find a RE-Founder for your business, the process is quite similar to the Where to Find a Co-Founder process I wrote in the past.  The only differences this time around: (1) you are looking for more of a turnaround expert to help you solve your known pain points; and (2) you are looking to reinvent an existing business, including any or all of the people, product or process.  So, instead of starting with a clean piece of paper, you have to rework what you have.  Which is more like building a foundation and framing for a new 4,000 square foot two-story single family home, and having to re-architect it to a 4,000 square foot four-family apartment building.  You need someone that is good with implementing change within the organization.

HOW TO WORK WITH THE RE-FOUNDER

As the company’s founder, taking on a RE-Founder will require a material shift in the way you have been operating to date.  Now, you need to be prepared to get in the “back seat” and go along for the ride.  Don’t weigh down the newcomer with legacy thinking or sacred cows—let them do the job you are engaging them to do, to fix the business.  This will be a really hard, but necessary, process for most entrepreneurs who like to control every aspect of their business.  But, you need to be honest with yourself—there is a reason the business is struggling, and you will most likely have a better outcome (and equity value) if you simply get out of the way of the new expert.

CLOSING THOUGHTS

I have previously written about the importance of failing fast as a startup, so you don’t waste a lot of unnecessary capital.  I guess what I am suggesting in this post is once you have hit that fail point on your own, you now have a second option to consider.  Instead of simply shuttering the doors, maybe it is as simple as handing the keys off to a different proven executive to take a crack at fixing your business before you close it down.  You can never underestimate the importance of leveraging a fresh set of eyes, as the potentially perfect prescription to your woes.

So, after a critical assessment of your business, do you think you need a RE-Founder for your business?  If so, let’s do this thing, as time is clearly of the essence.


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



Tuesday, September 12, 2017

Don't Start Marketing Until You Are Ready

Posted By: George Deeb - 9/12/2017

A solid marketing plan is crucial to support growth as you're scaling a company . But how do you know when you should flip the marke...



A solid marketing plan is crucial to support growth as you're scaling a company. But how do you know when you should flip the marketing switch and go live?  The answer is pretty intuitive: not until you're ready. The secret is knowing what that means for your business model, internal processes and external branding. Read on.

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

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


Wednesday, September 6, 2017

The 9 Types of Leadership

Posted By: George Deeb - 9/06/2017

I recently read a great book called The 9 Types of Leadership , written by Beatrice Chestnut, an authority on the topic of leadership.  ...



I recently read a great book called The 9 Types of Leadership, written by Beatrice Chestnut, an authority on the topic of leadership.  Below is a summary of those 9 leadership styles, including some thoughts thereon.  After you are done reading this list, figure out what type of leader you are, and what strengths and weaknesses that brings to your business.  I can see elements of each of these nine types in my own leadership style, so it is not necessarily "one size fits all".  But, if I was forced to pick only one, I am a Type Seven.  Why type are you?

Read the rest of this post here.

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



Lesson #273: Benchmarking SaaS Financial Metrics

Posted By: George Deeb - 9/06/2017

My colleagues at River Cities Capital Funds , a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in th...



My colleagues at River Cities Capital Funds, a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in the SaaS technology industry, has recently published a terrific new report with a treasure trove of operating and valuation benchmarking data in the SaaS space.  The report was based on studying the financial reports of 92 publicly-traded SaaS companies, to see how those companies grew over time.  For purposes of this blog post, I focused on the operating metrics only, to help give earlier stage entrepreneurs a blueprint on how to grow their businesses.

THE KEY DATA

To simplify reading the full 30 page report, I curated the most-relevant median financial metrics for the 92 companies studied into the below chart.


Now, you have a better understanding of what it takes to plan and budget for your own SaaS business, along every step of the revenue curve.  Especially, if you are venture capital backed, or plan to go head-to-head against other venture capital backed companies (and the deep pockets they will have in shooting bullets in your direction).

LEARNINGS FROM THE DATA

Growth:  Buckle your seat belts, and get ready for a wild ride.  These companies were averaging some pretty fast 40-50% growth rates, over time.  It only took these 92 companies an average of 6 years to grow from under $5MM in revenues to over $100MM in revenues. And, while growth is exciting, it sure brings a lot of headaches when trying to scale your business and processes along the way.  So, plan ahead.

Gross Margin:  I was surprised the 60-70% gross margins were as low as they were here.  You hear about how much venture capitalists like the SaaS space because of their high margins, but that is much harder to see in the above chart.  So, if you were planning to strike it rich with 80-90% margins, think again, as it looks like prices are coming down.

Sales & Marketing Investment:  In order to get to their first $1MM in revenues, they needed to invest $1.5MM in sales and marketing, on average.  To get to their first $1MM in gross profit, they needed to invest $2.4MM in sales and marketing, on average.  Hopefully, you have raised enough capital to put enough sales and marketing muscle behind your business, and fund these startup losses.  The investment here is material in the 40-50% range, and maintains itself at very high levels over time, resulting in almost a two year payback period!!  Don't forget to read this post on metrics specifically related to SaaS sales team metrics, for deeper-level benchmarks.

R&D and Capex:  Don't think you build a product and you are done with it.  These companies are plowing in tons of monies into improving their products over time.  Think 25% of revenues long term, and that takes a lot of capital backing in the absence of material profits.

EBITDA:  I understand that investing in long term growth requires a material investment, often resulting in near term losses.  But, I was surprised how long the losses continue, over many years.  These companies didn't really break even until they got to $75MM in revenues, on average.  And, even then, the bottom line profits were not all that exciting, at 4% of sales.  Yes, I know, the numbers will look a lot better at $200MM in revenues, than they do at $100MM in revenues, but that is a really a long time to have investors wait for a meaningful return on their investment.

Valuation:  Think about this--a $100MM revenue SaaS business is worth $380MM at the 3.8x average multiplier cited in the report, which means it is trading at a whopping 95x cash flow.  I'm sorry, I just don't see the logic in that.  There are tons of other cash-generating businesses you can buy for a lot less money, and actually have a lot more to show for it. So, buyer beware!

Thanks again to the River Cities team to putting all that hard work into their research report.  Now we all can benefit from it, in terms of modeling our own SaaS businesses.


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



Tuesday, August 29, 2017

Raleigh-Durham's Best Lawyers for Startups

Posted By: George Deeb - 8/29/2017

Getting a good startup lawyer right from the beginning, can often be the difference between "off to the races" and "oops,...



Getting a good startup lawyer right from the beginning, can often be the difference between "off to the races" and "oops, why didn't we think of that before".  Picking a good lawyer often revolves around their expertise with startups, expertise in your industry, expertise for your specific project, bench strength of their firm, affordability, references and personality fit with your organization.  So, speak with several, to assess who is best for your business and liking, before making your decision.

There are several worthy full-service lawyers in the Raleigh-Durham area, with deep expertise in serving the startup community.  Below is a list of some of my favorites (in alphabetical order of law firm name), having met with most of them.  You will be well-served by any of their counsel.

Neil Bagchi at Bagchi Law
Location:  Chapel Hill

Online Bio:  http://bagchilaw.com/team/
Contact:  (919) 537-8159 or neil@ bagchilaw .com
Firm Size: 5 attorneys ($)
Industries:  technology and life sciences

Involvement:  CED, Idea Fund

James Forrest at Forrest Firm
Location:  Chapel Hill, Raleigh, and Durham
Online Bio:  http://forrestfirm.com/people/james-r-forrest/
Contact:  919.267.1646 or james@ forrestfirm .com
Firm Size: 20 attorneys ($$)
Industries:  technology and life sciences


Jesse Jones at Fourscore Business Law 
Location:  Raleigh
Online Bio:  https://fourscorelaw.com/team/
Contact: 919-307-5356 or jesse@ fourscorelaw .com
Firm Size: 2 attorneys ($)
Industries:  technology and life sciences


Fred Hutchison or Justyn Kasierski at Hutchison PLLC
Location:  Raleigh
Fred's Online Bio: http://www.hutchlaw.com/people/attorneys/fred-d-hutchison
Justyn's Online Bio: http://www.hutchlaw.com/people/attorneys/justyn-j-kasierski 
Fred's Contact:  919.829.4300 or fhutchison@ hutchlaw .com 
Justyn's Contact:  919.829.4337 or jkasierski@ hutchlaw .com
Firm Size: 21 attorneys ($$)
Industries:  technology and life sciences

Involvement:  CED, First Flight, NC IDEA, UNC, NC State, Duke, Launch Chapel Hill, Triangle TechBreakfast, HQ Community, LaunchBio/BioLabs NC

Randy Whitmeyer at Morningstar Law Group
Location:  Raleigh
Online Bio:  http://morningstarlawgroup.com/author/rwhitmeyer/
Contact:  919-590-0369 or rwhitmeyer@ morningstarlawgroup .com
Firm Size: 26 attorneys ($$)
Industries:  technology and life sciences

Involvement:  UNC, Raleigh Chamber, CED, NCTA

Glen Caplan or John Fogg at Robinson Bradshaw
Location:  Chapel Hill and Durham
Glen's Online Bio:  http://www.robinsonbradshaw.com/professionals-Glen-Caplan.html
John's Online Bio:  http://www.robinsonbradshaw.com/professionals-John-Fogg.html
Glen's Contact:  (919) 328-8807 or gcaplan@ robinsonbradshaw .com
John's Contact:  
(919) 328-8806 or jfogg@ robinsonbradshaw .com
Firm Size: 130 attorneys ($$$$)
Industries:  technology and life sciences
Involvement:  CED, Duke, UNC, NC State, Exit Event & Groundwork Labs

Some Clients:  Dude Solutions, Automated Insights, Distil Networks, Validic, WedPics, IDEA Fund, Cofounders Capital, Sony Ericsson, Digitalsmiths, Cloupia, ExtraOrtho, Bull City Ventures, River Cities, RTI, Inlet Technologies, Get Spiffy, Filter Easy and Valencell.
Other:  Glen and John both have past experience working in Silicon Valley for Wilson Sonsini (Glen) and DLA Piper (John).

Merrill Mason at Smith Anderson
Location:  Raleigh
Online Bio:  http://www.smithlaw.com/professionals-Merrill-Mason
Contact:  (919) 821-6733 or mmason@ smithlaw .com
Firm Size: 81 attorneys ($$$)
Industries:  technology and life sciences

Involvement:  UNC, TAP, Idea Fund, CED

Jim Verdonik or Benji Taylor Jones at Ward & Smith
Location:  Raleigh
Jim's Online Bio:  http://www.wardandsmith.com/attorneys/james-verdonik
Benji's Online Bio:  http://www.wardandsmith.com/attorneys/benji-jones
Jim's Contact:  (919) 277-9188 or  jfv@ wardandsmith .com
Benji's Contact:  (919) 277-9142 or btjones@ wardandsmith .com
Firm Size: 95 attorneys ($$$)
Industries:  technology and life sciences

Involvement:  CED, Raleigh Chamber, NCTA, Duke
Other:  Jim wrote the book on crowdfunding.

Rob Tyler at Williams Mullen
Location:  Raleigh
Online Bio:  http://www.williamsmullen.com/people/j-robert-rob-tyler-iii
Contact:  (919) 981-4085 or robtyler@ williamsmullen .com
Firm Size: 230 attorneys ($$$$)

Industries:  technology and life sciences 
Involvement:  CED, NC Idea, NC State

Larry Robbins or Chris Lynch at Wyrick Robbins
Location:  Raleigh and Durham
Larry's Online Bio:  http://www.wyrick.com/our-people/larry-e-robbins
Chris's Online Bio:  http://www.wyrick.com/our-people/j-christopher-lynch
Larry's Contact:  (919) 865-2800 or lrobbins@ wyrick .com
Chris's Contact:  
(919) 865-2807 or clynch@ wyrick .com
Firm Size: 90 attorneys ($$$, but flexible for lower budgets)
Industries:  technology and life sciences

Involvement:  CED, BB&T, NCTA
Other:  Chris is a former Silicon Valley lawyer with Wilson Sonsini and Harvard Law grad.


If you think I am missing anybody, or think you should be included in this discussion, feel free to add your thoughts in the comments field below.

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


Monday, August 14, 2017

Lesson #272: Do You Bet on the Jockey or the Horse

Posted By: George Deeb - 8/14/2017

Secretariat Wins the Triple Crown in 1973, with Ron Turcotte as Jockey There have been several articles written that talk about how ve...

Secretariat Wins the Triple Crown in 1973, with Ron Turcotte as Jockey

There have been several articles written that talk about how venture capital investors prefer to bet on the jockey (the entrepreneur), over the horse (the startup idea).  As I have often said, I would much rather invest in an A+ team with a B+ idea, than a B+ Team with an A+ idea.  So, I agree with this premise of the jockey being more important than the horse, usually.  This post will tell you when one outweighs the other.

WHEN THE HORSE OUTSHINES THE JOCKEY

Unless the idea is a material one in the first place (e.g., it has a chance to become a billion dollar business), why waste your time when shooting for VC types of returns.  Said another way, would you rather invest in Jeff Bezos, one of my entrepreneurial heroes, building a white water rafting business in the arid Sahara Desert, or me, a proven serial entrepreneur (albeit a fraction the talent of Jeff Bezos) trying to build a next-generation artificial intelligence technology disrupting a $200BN industry?  The former has very little prospect for driving material revenues, and the latter could become the next unicorn size startup, so a relatively easy decision.

So, there is an inflection point, where the idea is worth betting on, more than the entrepreneur.  But, the reality is, a smart venture investor would try to convince me that I am not nearly as qualified as someone like Jeff Bezos to actually pull off this grandiose vision, and to have me hand him the reins to take my business to meteoric heights.  Which I may or may not do, depending how confident I was in my own abilities vs. the equity value upside I could realize from getting someone like Jeff Bezos in charge.

Which is exactly my point of this piece.  It is not the jockey OR the horse.  It is the jockey AND the horse.  That is how to build terrific venture returns—with A+ teams building A+ ideas.  And, whatever you can do to make that happen, is the Holy Grail of venture investing.

SOME INSIGHTS FROM HORSE RACING

As a little fun, to help me further illustrate this point, I took a look at some horse racing data to see if I could glean some insights on this topic.  First, I looked at the last four Triple Crown winning horses: Secretariat (1973), Seattle Slew (1977), Affirmed (1978) and American Pharoah (2015).  And, compared them to a typical Top 100 winning race horse in 2016.  The data was pretty incredible—the Triple Crown winners won their races 79% of the time (compared to the Top 100 that won 48% time).  That is a pretty good argument for the horse.

Then, I looked at the last four Triple Crown winning jockeys:  Ron Turcotte (1973), Jean Cruguet (1977), Steve Cauthen (1978) and Victor Espinoza (2015).  And, compared them to a typical Top 100 jockey in 2016.  I was surprised to see the Triple Crown jockeys won 15% of the time, a little less than the Top 100 jockeys who won 16% of the time.  That basically suggested, the jockey didn’t matter at all, as long as they were a good one.  Said another way, any of the Top 100 jockeys could have lead any of the Triple Crown horses to their wins.  Another data point speaking to the importance of the horse.

But, as an entrepreneurial leader rooting for the jockey, that left me unsatisfied, so I dug a little deeper.  There I learned, Steve Cauthen’s better than average 19% win rate (twenty percent better than the average Top 100 jockey win rate of 16%), could have been a major contributor to Affirmed’s Triple Crown win—as the horse’s 76% win rate was below the 80% win rate of the other Triple Crown winning horses.  A good argument for the jockey taking a great horse, and making him even better.

Until I learned, Jean Cruguet only won 12% of his races, far behind the 16% average of the Top 100 jockeys.  But, Seattle Slew, the horse he lead to a Triple Crown, had won 82% of his races, in excess of the 78% average win rate for the three other Triple Crown winning horses.  Chalk one up for the horse, making a jockey look better than he really was.

WHAT IS THE POINT OF ALL OF THIS?

Based on the above examples, from both the business world and the horse racing world, there are times where the jockey is more important and there are other times where the horse is more important for driving success.  With all other things being equal, always bet on the jockey to take a good idea and make it better.  But, when the idea is so big, you have no choice but to bet on it, assuming a competent leader is in charge.  But, if need be, upgrade an average entrepreneur for a proven winner, and that will be like putting gravy on top of your turkey dinner (one that is guaranteed to fully cook and taste great in the end).

A key lesson here for most of you entrepreneurs: lose the ego and the pride of feeling you are the only person who can build your startup, as your personal equity value from your big idea could become worth materially more money in somebody else’s hands.  Separate your CEO hat from your Chairman hat, and figure out what would truly be best for your shareholders (of which you are presumably the largest).

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


Friday, August 11, 2017

Don't Shuffle People Into the Wrong Job Just Because They're Already on the Payroll

Posted By: George Deeb - 8/11/2017

The old adage that a “bird in hand is worth two in the bush” may work in some instances in business, but slotting people into employee r...



The old adage that a “bird in hand is worth two in the bush” may work in some instances in business, but slotting people into employee roles is definitely not one of them. I can’t tell you how many times I see early-stage entrepreneurs put someone in a role simply because it's convenient. This is particularly harmful when the individual already is known to the team and operating in an entirely different role. Stop this madness! Do you want the quickest solution to your hiring needs or the best solution?

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

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


Monday, July 31, 2017

Lesson #271: Want to Scale Revenues? It's All Math!

Posted By: George Deeb - 7/31/2017

Over the last several weeks, I have been networking with key influencers in the tech startup community in the Raleigh-Durham area.  I ha...



Over the last several weeks, I have been networking with key influencers in the tech startup community in the Raleigh-Durham area.  I had the joy of meeting Alex Osadzinski, a seven-time successful serial entrepreneur  and venture investor in town.  Alex's career took off as an early employee with Sun Microsystems between 1986-1994, helping lead their meteoric rise to over $1BN in revenues in only a few years. And, since then, he has helped enterprise software companies rapidly scale their businesses to new heights, most recently as the CMO at Relias Learning, whose sales have almost tripled to almost $200MM since he got involved in early 2016.

ALEX'S PLAYBOOK FOR SCALING REVENUES

I asked Alex the secret to successfully scaling businesses, over and over again; his answer was short and sweet, "it's all math".  Which I loved!  I have never personally scaled a business to over $100MM, but I had always said to entrepreneurs trying to accomplish this goal, "it's all math".  And, now I am hearing those exact words come out of the mouth of a proven veteran that has actually done it, several times over.

Alex continued to talk through the other key drivers of successfully scaling companies.  He highlighted the importance of not scaling until the product is ready to scale, with all the kinks worked out.  The importance of having good metrics with which to manage the business, "with rigor".  The importance of  scalable processes and learning programs to quickly onboard new employees and promote older employees each year.  The importance of knowing when new products, new market verticals, global expansion or new acquisitions will be needed to help propel the company to new heights, when the original product is fully saturated in the market.  The importance of hiring people that have a base understanding of your industry, to help shorten the learning curve.  Knowing that complexity multiplies with rapid scale, given 50% of your staff is brand new to the company each year and employees no longer know everyone else in the organization, nor being centrally-located in one office.  Etc.  My pencil couldn't write fast enough to document every nugget shared in this valuable crash course.

IT'S ALL MATH

I wanted to share Alex's wisdom with all of you, and to help give you more concrete examples of what is meant by, "it's all math".

Revenues & Recruiting:  Let's say you are trying to grow from $50MM to $100MM in one year.  If your typical salesperson can handle $1MM in sales each, that means you need to have 50 new salespersons up and running at the beginning of the year.  But, with 30% typical attrition in a sales organization--half from voluntary resignations and half from involuntary terminations, it really means you need to have 80 salesperson up and running to ensure you actually hit your goal.  But, to be "up and running", that means you most likely needed to recruit them 6 months before the year even started, and get them fully trained and ready for selling in the 3 months you actually want them to be selling.  So, it becomes crystal clear, that in order to double revenues in 2018, you actually need to start working on that plan early in 2017, to have have any reasonable chance of hitting your goal.

Market Share and Common Sense:  Let's say your product serves an industry that is only $300MM in size, and with four key competitors in the market it would be very unlikely to grow your product sales more than $75MM stand alone.  That means simply adding salespeople is not enough; you most likely are going to have to introduce a couple new products that will increase your market size potential, to have any chance of hitting your $100MM revenue goal.  And, product development takes time, it could take a year or two, to ideate, design, manufacture and prepare a product for sales.  Again, if we are trying to drive sales in 2018, we should have been thinking about adding new products back in 2016, otherwise it is too late to realistically start driving revenues in time.

Mergers & Acquisitions:  So, what if your board is really clamoring for doubling revenues this year, and there is no realistic way to drive that internally?  That leaves you with only one viable option: M&A, provided you think about it early enough in the year, as it typically takes 6-12 months to get through an M&A process, from identifying and reaching out to targets, to negotiating the deal, to constructing the closing documents, etc.  But, you should really only go down the M&A route, if you are willing to tackle all the added complexities and potential pitfalls involved with trying to merge two businesses.  That said, after you get to $100MM in revenues stand-alone, you most likely will need to be giving M&A options a serious look, in all cases.  But, a word to the wise, if you are merging two $50MM businesses, you most likely won't end up with $100MM, after attrition of employees and potential clashes in culture, so build a cushion in finding a company large enough to hit your goal, net of issues like these.

WHAT THIS MEANS FOR YOU

As you can see, driving credible growth, with a realistic plan, is largely about having your arms around the math, as it really is a numbers game.  Stop living in the present, managing your business day-to-day, and actually think through how big of a business you want to have three years from now, and then, back into the mechanics of how best to get there.  It most likely means you will have to start investing in market research, new salespeople, onboarding processes, bigger real estate, product development, corporate development, etc., sooner than later.  For enterprise sales, your current year is pretty much already "maxed out", based on the investments you made last year.  So, the efforts you are making in 2017, is most likely going to dictate your sales success in 2018 and 2019, depending on the tactics you plan to use.  So, get way ahead of your planning for future years, now.  Otherwise, you have no chance of hitting your target. Duh . . . it's all math!!


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


Wednesday, July 26, 2017

Lesson #270: Benchmarking SaaS Sales Team Metrics

Posted By: George Deeb - 7/26/2017

I recently read this terrific blog post by David Skok , an expert on SaaS businesses and a General Partner at Matrix Partners , an early...



I recently read this terrific blog post by David Skok, an expert on SaaS businesses and a General Partner at Matrix Partners, an early-stage venture capital firm based in Boston.  This post included a lot of terrific sales-related benchmarking metrics for SaaS businesses collected by David and The Bridge Group.  David was kind enough to allow me to share his learnings with all of you.  So, here it goes.

Sample Studied:  The study interviewed 384 SaaS executives.  89% in North America, $20MM median revenues, $25K median contract value, 60 day median sales cycle.

Territories:  Companies keep it simple as long as they can; 61% of companies under $5MM have no territories--which falls to 10% for companies over $250MM in sales.  Companies under $50MM that do create territories, do so: 63% by geography, 23% by named accounts and 9% by industry vertical.

Outside Sales Reps:  Outside salespeople are expensive, especially for lower ticket products where you can't make the lifetime value of revenues exceed the cost of acquisition.  So, no surprise that only 9% of the sales pipeline of a company under $5MM was generated by outside salespeople (leaning on marketing or inside salespeople instead), which jumps to 38% of the pipeline for companies between $50-$100MM in revenues, where they can better afford the costs.

Specialized Roles:  Every client can have up to three people covering them--a sales development rep that close the first sale, an account executive that manages the long term relationship and future sales and a customer success person that manages operational fulfillment.  Only 22% of companies under $5MM have all three roles, which increases to 44% for companies between $20-$50MM.  And, the higher the average order value, the higher odds you get multiple roles filled (8% fill all three roles with under $5K ticket, which jumps to 56% with $100K+ ticket given the higher complexity of the sale).

Location:  24% of companies under $5MM have sales reps in multiple locations, which jumps to 95% for companies over $500MM.  Surprisingly, the cost of that person is largely the same as the home office team, regardless of which market they are operating from.

Tenure:  The average tenure of a salesperson is 2.4 years with the company.  But, that increases with the average order value of the product:  only 8% of salespeople stay with the company over four years in companies under $5K ticket, but jump to 31% with over $100K ticket.  That speaks to more complex sales and the need to retain those selling experts--and, the higher compensation those salespeople are making with no need to look elsewhere for a new job.

Turnover:  The average employee turnover in the sales team was a whopping 30%, half of which from involuntary terminations and half of which from voluntary resignations.  The old adage bears true:  never stop recruiting.  And, what a painful process for your sales managers, having to retrain a third of their sales team every year, and the negative impact that has on sales productivity.

Compensation:  The average compensation was $126K, comprised of a $62K base salary and a $64K commission for on-target sales.  Understanding there is a wide range here, based on average ticket of the product.  But, compensation is steadily rising; the amount of salespeople making more than $120K has increased from 18% to 51% in the last five years.

Quotas:  The average quota was $770K, or 5.3x their total compensation for on-target sales. But, quotas increase with average ticket, from $578K for $5K ticket to $1.3MM for $100K+ ticket.  That assumes selling low ticket products is easy and you should close 115 transactions a year (10 a month) and selling high ticket products is hard, selling only 13 transactions a year (one a month).  Quotas have been increasing about 8% over the last two years, faster than inflation, as companies are asking their salespeople to do more production.

Commission Plan:  On average, 37% of companies offer a flat compensation plan (regardless of sales production), 24% offer a gradually increasing commission plan, 28% offer a sharply increasing commission plan (that accelerates with achievement over plan) and 11% offer a steeply increasing commission plan (often with a sales cliff before material commissions kick in).  I am surprised a third of companies don't tie compensation to performance--please fix that!!

Demos:  The number of demos is dependent on average ticket.  Companies with an averge ticket under $5K do 11.3 demos a week (closing around 25% of them) and companies with a ticket over $100K do 3.6 demos a week (closing about 7% of them, on average).  I am surprised the close rate was not higher than 10% in all cases, which I typically shoot for.  That is the difference of 43% more sales!!

Tech Spend:  Excluding the base CRM costs, the average salesperson spends around $477 on additional software to help them with their jobs.  That typically gets you email automation, contact data appending, contract e-signatures and LinkedIn's Sales Navigator tools.  The more sophisticated companies spend an additional $500 to get call recordings and conversion analytics tools.  The below chart shows even more advanced technologies which are early in their adoption curve.



Titles:  Titles materially vary by size of company--a VP in a small company may be the equivalent experience of a Director in a medium company or a Manager in a big company.  The most senior person in a company under $20MM is typically a VP or CXO, 45% of the time.  Where the most senior person in a company over $100MM, may have the Manager title, 71% of the time.  So, be careful how your craft your job postings and ask smart questions during interviews to make sure you are not comparing apples with oranges.  As a rule of thumb:  Directors are great strategists/leaders, Managers are great coaches and Team Leaders are great role models in a hybrid contributor/manager role.  Team leaders typically manage a team of 7.2 account executives, excluding themselves.

Struggles:  I am guessing you are all in good company here.  49% of companies struggle with team productivity/performance; 30% with recruiting/hiring; 26% with onboarding/training and 19% with forecast accuracy.  Numbers which have not materially improved over the years, despite all the advancements in technology.  Driving sales is never easy.


Hopefully, you agree that are some great sales benchmarking metrics herein, which can help you in managing your own SaaS sales organizations.  Thanks again, David, for allowing me to share some of your insights with our Red Rocket readers.  Be sure to read the full blog post for more details and you can follow David on Twitter at: @bostonvc.  Happy hunting!

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


Friday, July 7, 2017

A Good Entrepreneur Evolves Over Time

Posted By: George Deeb - 7/07/2017

I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book busin...



I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book business in college and launched my first venture capital-backed startup -- an adventure-travel company -- in my 20s.  My entrepreneurial endeavors continue today. I'm in my late 40s, running Red Rocket, looking for companies to buy and advising hundreds of early-stage businesses. My approach to managing businesses today is very different than when I was younger. The experience I now bring to the table has materially mellowed me as a leader. But, I didn't have that background or that perspective when I was younger.

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

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


Wednesday, July 5, 2017

5 Considerations When Setting Your M&A Goals

Posted By: George Deeb - 7/05/2017

Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As I have discussed in...



Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As I have discussed in the past, M&A can be very distracting to an early-stage business still trying to optimize their stand-alone business.  Especially when things can often go awry in merging businesses, management teams and employee cultures.  But, assuming you have done your homework on those fronts, and you are comfortable in taking the leap into world of M&A, here are five considerations when setting M&A goals for your business.

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, June 29, 2017

Raleigh-Durham Private Equity Firms

Posted By: George Deeb - 6/29/2017

Following up on our list of Raleigh-Durham Venture Capital Firms & Angel Networks , below is a list of private equity firms in the r...



Following up on our list of Raleigh-Durham Venture Capital Firms & Angel Networks, below is a list of private equity firms in the region, serving later stage companies.  I included a high-level summary of their investment criteria, as communicated on their websites.

Aiglon Capital Mgmt. --  mfg., dist., svs., $20-$250MM revs, $2-$20MM EBITDA.

Capitala Group --  diversified. $3-$10MM checks, under $4.5MM EBITDA, $1BN fund

Cherokee Fund --  brownfield real estate, $2BN managed + VC in env./energy

Davie Poplar Capital --  health, educ., med., svs., mfg., dist. Up to $20MM revs, $500K-$3MM EBITDA, recurring revs., capex light.

Eli Global --  fin., health, ins., mktg., other.

Halifax Group -- biz svs., franchising, health, infrastructure.  $5-$30MM EBITDA, $25-$75MM checks, $50-$250MM valuations.

Hargett Hunter --  hospitality, restaurants.  $10-$30MM checks. $150MM fund, 5-50 stores.

Hawthorne Capital --  health, tech.  $3-$20MM checks.  $2-$100MM+ revenues.

Investors Management Corp. --  diversified, franchisable.  $5-$25MM EBITDA.

Meriturn Partners --  diversified.  $20-$300MM revs, control oriented.

Morgan Creek Capital --  health, energy, nat. resources.

Mosaic Capital Partners --  biz svs., chem., CPG, env., food/bev.., health, dist., mfg., log..  Over $10MM revs, reliable cash flow.

NovaQuest Capital Mgmt. --  life sciences, health.  $1.6BN mgd, $20-$100MM revs, up to $500MM valuations.

Plexus Capital  --  diversified.  $950MM mgd., $12MM average check, middle market.

Triangle Capital Corp. (TCAP) --  mfg., dist., transport, energy, comms., health, restaurants, other.  $5-$50MM checks, $20-$300MM revs, $5-$75MM EBITDA.


OTHER PRIVATE EQUITY FIRMS IN NORTH CAROLINA (INVESTING IN REGION)

Blue Point Capital Partners (Charlotte) -- eng., env., ind., metals, dist.  $20-$300MM revs, over $5MM EBITDA.

Cadrillion Capital (Charlotte) --  info., health, agric., biz svs., fin., other.  Over $1MM EBITDA.

Carlyle Group (Charlotte) --  aero., defense, govt., cons., energy, fin., health, ind., RE, tech, biz svs., telecom, media, transport.  $53BN mgd., $130MM average check.

Carousel Capital (Charlotte) --  biz svs., cons. svs., health svs.  Over $3MM EBITDA,  up to $150MM valuation.

Coleville Capital (Charlotte) --  mfg., dist., biz svs., diversified, ind.  $10-$100MM revs, $2-$6MM EBITDA.

Copeley Capital (Charlotte) --  health, svs., bldg., waste, ind., CPG.  Over $2MM EBITDA.

Falfurrias Capital (Charlotte) --  cons., food/bev, biz svs., fin., mfg., ind., energy, health.  $3-$25MM EBITDA.

Fidus Investment Corp. (Charlotte) --  diversified.  $10-$150MM revs.

Five Points Capital (Winston-Salem) --  biz svs., ind., mfg., dist., health, educ., tech., mfg.  Over $3MM EBITDA, $5-$25MM checks.

Global Endowment Mgmt. (Charlotte)  --  manage money for foundations

Kian Capital (Charlotte) --  biz svs., dist., health, mfg.  $5-$15MM checks, $15-$150MM revs, $2-$15MM EBITDA.

Pamlico Capital (Charlotte) --  biz svs., comm., health, tech.  $15-$200MM revs, $20-$100MM checks.

Ridgemont Equity Partners (Charlotte) --  ind., svs., health, energy, telecom, media, tech.  $25-$100MM checks, $5-$30MM EBITDA.

Salem Investment Partners (Charlotte) --  biz svs., mfg., CPG, dist., recurring revs.  $1MM+ EBITDA, $10MM+ Revs, $2-$10MM checks.

Summit Park (Charlotte) --  biz svs, cons. svs., mfg., dist.  $150MM fund.  $20-$100MM revs, $4-$12MM EBITDA.

Tidewater Equity Partners (Wilmington) --  mfg., svs., tech, fin., energy, retail, health.  $10-$30MM revs, $1-$3MM EBITDA.


Be sure to dig deeper on their websites to make sure they invest in your specific industry, revenue stage, geography and desired minority/majority deal structure before reaching out to these investors. Red Rocket can help make introductions to many of these investors, so please leverage our relationships here.

For future posts, please follow us on Twitter at: @RedRocketVC




Thursday, June 22, 2017

Lesson #269: Want Hard Workers? It Starts With You!

Posted By: George Deeb - 6/22/2017

Startups require a lot of hard work, with no rest for the weary.  And, since you need to be moving at light speed to gain first mov...



Startups require a lot of hard work, with no rest for the weary.  And, since you need to be moving at light speed to gain first mover advantage, it often means a lot of late nights in close quarters alongside your fellow team members.  Not everyone can thrive in that type of environment.  But, it is important the founding team can, as capital will be tight, and you will need to stretch your human resources as far as you can, without breaking the bank.

RECRUIT THE RIGHT PEOPLE

You want a hard working team?  It all starts with recruiting the right people out of the gate.  In addition to seeing if they have the right skills for the job, you have to see if they have the right attitude and hard work ethic for the job.  And, don’t take their word on it, as everyone will say they have the “right stuff”.  You have to talk to their former employers as references, and have them give you real examples of how they have functioned in that capacity in the past.

FOSTER THE RIGHT TEAM CULTURE

Once you have the right people, now you need to surround them by the right types of hard-working peers.  Create a culture of “all for one, and one for all”, prepared to do whatever is necessary to help the company win the race.  Create realistic targets for them to hit by certain dates, and create a competitive spirit within the company, where people can show off their skills.

REWARD DESIRED BEHAVIOR

When people are showing your desired hard-work ethic behavior, reward them.  Give your key team members a piece of the equity.  Give them a gift certificate to their favorite restaurant.  Take them to a ball game.  Create an employee of the month program.  Do whatever you need to do to make sure they know their hard work did not go unnoticed, and was appreciated by the team.

BE SENSITIVE—DON’T PUSH THEM OVER THE EDGE

All work and no fun, makes Jack a dull boy.  Working around the clock can be exhausting.  And, you don’t want the team to burn out.  After a big sprint, let the team take a day off to catch their breath, and spend time with their friends and family, away from the office.  People are human, and you need to foster an even work-life balance, to retain your team for the long run.

DON’T TELL THEM, SHOW THEM

When you have something that needs to get done, it is important you show the team how to get it done, as opposed to simply telling them to do it.  Don’t leave anything ambiguous, that will leave the team spinning their wheels in frustration, not clear on what you exactly need.  When you show them what to do, that leaves nothing up for interpretation, and will more quickly get you to your desired end product.

HOOK THEM WITH YOUR DAILY BEHAVIOR

And, it all starts with you.  If your employees do not see you putting in the hard work you are asking of them, they will never give it to you.  So, roll up your sleeves, tell your spouse you may be late for dinner, and jump into the mosh pit with your team.  That will help you gain credibility as a leader and camaraderie as one of their colleagues, prepared to jump into the trenches of battle. 

So, as you can see, if you are complaining about not having a hard working team, you really only have one person to blame . . . yourself!!

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


Thursday, June 8, 2017

Lesson #268: The Art of the Follow-Up

Posted By: George Deeb - 6/08/2017

Given how important good selling techniques are to driving revenues, I am shocked how many entrepreneurs and salespeople are just bad at...



Given how important good selling techniques are to driving revenues, I am shocked how many entrepreneurs and salespeople are just bad at working their leads. This includes things like not following up on leads (or following up too much) and not knowing how to break down barriers, to get the lead to actually listen to your pitch. This post will help you become a master at properly working your sales prospects.

CONTACT THE RIGHT PERSON IN THE FIRST PLACE

If somebody is not getting back to you, often times it is because they are the wrong person in their organization to make decisions about your product or service. So, before you even send your first outreach, make sure the person you are reaching out to has decision making control for your solution. For example, if you are selling a social media management software, it is most likely the head of social media communications at that company—not social media advertising, not their head of marketing, not their CEO, etc. And, if you are unclear who is the right person—ask to be pointed in the right direction, or send outreach to all logical candidates, until you find the right person to engage with you.

MAKE THE RIGHT FIRST IMPRESSION

Another reason people don’t get back to you, is they don’t like what you have to say. Often times salespeople are so excited about the “what” they are selling, that they don’t focus on the more important benefits of “why” a customer would want to buy it. Simplify your pitch to the point you are helping them understand you are selling a need-to-have “painkiller” for their problems, not a nice-to-have “vitamin”. As an example, for the social media management software, it is less about how it integrates with Facebook and Twitter for easy communications, and more about how it will help them double their base of social media followers and help them generate more revenues. So, put on their hat, not yours, to figure out would resonate most with them.

FOLLOW UP IN THE RIGHT FREQUENCY AND RIGHT FORMAT

It shocks me how many times a salesperson forgets to follow up with their old leads. Thankfully, marketing automation software (e.g., Pardot, Eloqua, Marketo, Hubspot) has helped bring automated follow-ups to a formerly manual process. But, you need to know how to program that software with the right business rules. I typically live by the three strike rule within a once-per-week follow-up schedule. So, for example, if you first email them on March 1st, your first follow-up will be on March 8th and your second follow up with be on March 16th. If they don’t get back to you after three tries, it is time to move on, but don’t forget about them. Put them into a long-term nurturing schedule, sending along interesting research or insights that shows them you are smart on their space, for them to want to engage with you in the future. Then you can restart a more direct selling effort again in the following quarter.

And, shake up the methods is which you make your outreach. Email is easy and can be automated. But, it is a lot less personable than a phone call, where they can better hear your voice and personality shine through. And, you never know, you may call and they just might actually pick up their phone. This is particularly effective in the 8-9am or 5-6pm range, while they are most likely in the office, but their assistants are away.

SHAKE UP YOUR MESSAGING

You can only browbeat a person so many times with the same message before it falls on deaf ears. You need to shake up your messaging. Start with an introduction about your business and its benefits to them. If that doesn’t work, send them some interesting market research, that shows you are smart on their space. If that doesn’t work, invite them as your guest to some key industry event. And, if all else fails, everybody loves a free lunch, golf invitation or tickets to the ballgame. An unexpected gift sent to their office also works well, where they will hopefully call to say thank you. Do whatever you need to do, to get them on the phone or to a meeting, to hear what you have to say. Persistence without being annoying is the key here.

BREAK DOWN BARRIERS

It also surprises me that when a salesperson hits a wall, they stop trying, instead of tearing down that wall. For example, if a target lead is not responding to you, try to develop a relationship with their assistant or co-workers. If you get to a dead end with one person in the department, start again with another person in the department. Or, if the CMO won’t listen to your pitch, try calling their CFO to talk about the cost savings or revenue lift they can expect from your product, so the CFO can help you get the attention of their CMO. Or, if there is an entrenched competitor, cut them out of the equation with a materially better price. And, as always, leverage mutual connections -- especially if they are your customers that can help sing your praises as a credible third party. To me, there is no such thing as a dead end -- keep trying until someone gives you a chance.

Hopefully, now you are better armed to put your outreach efforts on steroids -- and drive your qualified sales leads and revenues in the process.  Happy hunting!

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



Saturday, June 3, 2017

The Case for Hiring a Re-Founder Before You Pull the Plug on Your Startup

Posted By: George Deeb - 6/03/2017

Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding it bac...



Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding it back from ultimate success. Maybe they lack the required skills or business experience required to identify or correct problems inside their product, process or team. More often that not, as a new entrepreneur  “you just don’t know, what you don’t know.” When the problems become material enough to potentially put the company out of business, maybe it is time to hire what I call a RE-founder to help put it back on the right course.

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, June 1, 2017

Marketing ROI--The Metric That Matters Most To Investors

Posted By: George Deeb - 6/01/2017

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").

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

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


Lesson #267: Score One for Brick and Mortar Retail--An EZContacts.com Disaster Case Study

Posted By: George Deeb - 6/01/2017

It is no surprise that the internet has been killing offline retail.  Gone are chains like Blockbuster, Borders, and Sports Authority, t...



It is no surprise that the internet has been killing offline retail.  Gone are chains like Blockbuster, Borders, and Sports Authority, to name a few. And, the blodshed is far from over, with chains like Sears, Macy's and JC Penney hanging on for dear life.  They just can't compete with the internet prices, that don't have to cover the huge investment in brick and mortar real estate, inventory and employees.  Is there any retail category that is safe from the internet's death grip . . . I may have found one!!

THE BACKGROUND

I recently needed a new pair of eyeglasses.  I went to my local LensCrafters store for my eye exam and to browse new frames.  But, I did something I had never done before at an optical store, which I always had done in other stores . . . I wrote down the SKU of the frames and started searching for them online when I got home.

And, for good reason.  The same Polo brand frames I has seen at LensCrafters for $250, were available online for half the price of $125 from several vendors I had never heard of.  After doing a little online research, I felt EZContacts.com was worth giving a shot (despite their brand name, as I assumed they started in contacts and evolved into glasses too).  Online they made it pretty simple.  I could easily enter my prescription, they showed me how to measure my pupil distance and gave me a wide range of lenses to choose from.

I picked their most expensive lenses, at $199, assuming they were going to be the best, with all the bells and whistles needed, like anti-reflective coatings, thin construction and crystal clear definition.  I paid for the transaction on March 23, sat back and waited for my new glasses to arrive.

WHAT HAPPENED AFTERWARDS

I got a call the next day from an optometrist that said he worked for EZContacts.com saying that he had my prescription and all looked good, and asked if I had any questions.  I thought that was a nice touch, and I felt that I was in good hands.  Although, I did find it strange that the caller ID came in as a different company name called Sharper Image.  I assumed EZContacts.com had subcontracted the fulfillment to a local optometrist, which was fine given the price savings I was getting.

But, after the 5 business days of advertised delivery time, nothing showed up.  I gave them another week, and called them on April 6th asking why they were more than a week late; as I needed these glasses to see!!  They apologized, said there were abnormally busy, and shipped them out on April 9th, which I received the next day.

Excited to finally get my new glasses, I opened the box and tried them on.  And, I couldn't see clearly through them at all.  The prescription didn't feel accurate.  There was no anti-reflective coating, which distracted my vision.  And, they felt like a crappy lens--with a cloudy haze.  Anything but what I was expecting.

CUSTOMER SERVICE BREAKS

I called to complain, and was greeted by a message that their office was closed on April 11th and 12th for the Passover holiday break (even though every major retail optical chain were open those days).  And, when I called back on April 13th, there was such a back log of customer service calls that I ended up on hold for over two hours behind around 100 other callers.  Probably people like me, disappointed with their purchases??

When I finally spoke to the company, they said to ship them back and gave me a link to their returns page, which was not easily found on their website (forcing me to lose two hours on the phone hunting it down).  It was like they were intentionally hiding it, so people couldn't send back their purchases.  About a week or two after shipping back my glasses, I got a call from their support team saying my lenses were missing the anti-reflective coating by mistake, and that they would send a new pair.  To which I said, I don't really trust you guys anymore with my eyesight, and asked for a full refund, given how bad my customer experience was with them.

But, they told me they could only refund 50% of the $199 lens cost, since they were already cut.  So, I was going to have to eat around $100 for giving this online retailer a chance: an amount that was elevated by the fact I thought I was buying the best lenses possible to avoid exactly this situation.

THE OUTCOME

Given the bad experience I had online, I marched right back into LensCrafters, where I could physically see the quality of the lenses before buying them, and have them professionally measured (as I wasn't exactly sure I was doing it right on my own, from home).  I didn't end up buying new frames, I re-used my old frames to save on the costs, given the above out-of-pocket costs I incurred.  So, instead of getting new glasses and frames for around $300, saving $100 versus retail.  I ended up paying $300 for lenses only, including the $100 I lost from EZContacts.com.  Not the outcome I had in mind by going to the internet to save money.

CONCLUDING THOUGHTS

I may or may not buy frames only online, depending on how high the lenses costs are alone.  The offline retailers are smart--they deeply discount lenses by 50% if you buy frames from them, but you have to pay full price for the lenses if you don't.  So, whatever savings you are getting from buying frames online, you are most likely giving it back in the form of higher lenses prices offline.  So, until an online optical store can more seemlessly replicate the offline buying experience, I think the brick and mortar optical stores will survive to live another day.  Score one for brick and mortar retail, in the sea of otherwise carnage.

WHAT THIS MEANS FOR YOU

If you are in the brick and mortar retail business, you are most likely going to lose on price to the internet retailers every time.  And, price is a huge driver of a consumer's purchase decision.  You are going to have to figure out how to offer something unique and different, that the online guys don't have to compete.  In this case study, that included things like the onsite doctors, physical lenses to look through before you buy (privately branded and unique to them, so you couldn't hunt them down online) and pricing models that make the consumers feel indifference whether they buy online or offline.

And, as for EZContacts.com . . . buyer beware!!  I should have know better to buy eyeglasses from a company branded as a contacts seller.


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




Tuesday, May 23, 2017

Raleigh-Durham Venture Capital Firms & Angel Investor Networks

Posted By: George Deeb - 5/23/2017

Below is a list of selected venture capital firms and angel investor networks that are actively investing in the Raleigh-Durham area.  Mo...


Below is a list of selected venture capital firms and angel investor networks that are actively investing in the Raleigh-Durham area.  Most are split between a technology or life sciences focus, although many invest in additional industries, as well.  Please research them at their linked websites, to see who may be the best fit for you.  I organized this list in terms of stage of investment focus, from early to late stage investors.  So, please don't reach out to VC's if you do not fit their target criteria.  And, be sure to research their specific technology focus on their websites (e.g., healthcare, education, digital media, SaaS), to make sure your business is a fit for them.  Also, as a reminder, don't blindly cold call these companies.  It is always best to have a warm intro into one of their partners, where Red Rocket or others may be able to help here.

ANGEL INVESTOR NETWORKS IN RALEIGH-DURHAM

Carolina Angel Network --  UNC angels for UNC related entrepreneurs

Carolina Seed Investors --  life sciences focus

Duke Angel Network --  Duke angels for Duke related entrepreneurs

Eagle Angel Network --  UNNC angels for UNNC related enterpreneurs

Investors' Circle --  impact investing

RTP Capital Associates --  technology centric, or low-tech execution driven

Triangle Angel Partners --  high tech and life sciences

Triangle Venture Alliance --  UNC, Duke, NCSU, NCCU consortium of networks

Wolfpack Investor Network --  NC State angels for NC State related entrepreneurs


SEED STAGE (Up to $250K checks from $0 revenues)

Cofounders Capital --  software focus

Contender Capital --  technology focus

Full Tilt Capital --  technology focus

Inception Micro Angel Fund (IMAF) -- generalists

Madison River Ventures -- ecommerce, SaaS focus

Solidarity Capital Group --  social impact (community dev, economic dev, sustainable agric., energy/environmental, social finance)


EARLY STAGE (Up to $1MM checks in up to $1MM revenues) 

IDEA Fund Partners --  technology focus

Bull City Venture Partners --  software, internet focus


SERIES A STAGE ($1MM-$5MM checks in $1MM-$5MM revenues)

Cato BioVentures --  life sciences focus

Cherokee Investment Partners --  real estate, environmental, energy, others

SJF Ventures --  impact investing


SERIES B  STAGE ($5MM-$20MM checks in over $5MM revenues)

Hatteras Venture Partners --  life sciences focus

River Cities Capital Funds --  healthcare and technology focus

True Bridge Capital Partners --  into funds early or mid-to-late stage direct, tech focus


ALL STAGES

Echo Health Ventures --  healthcare focus

Pappas Ventures -- life sciences focus


STARTUP STUDIOS

Bluedoor --  healthcare technology

Bootstrap Advisors --  consumer products

8 Rivers -- sustainable infrastructure innovations in future-critical areas

Excelerate Health Ventures -- healthcare focus

Golden Pine Ventures --  biotechnology and biomedical focus

The Launch Place --  generalist

Rex Health Ventures --  UNC related, healthcare focus


OTHER NORTH CAROLINA FIRMS WHO INVEST IN RALEIGH-DURHAM

Asheville Angels (seed stage, Asheville)

Blue Ridge Angel Investor Network (seed stage, Asheville)

Charlotte Angel Fund (seed stage, Charlotte)

Double Time Capital (growth stage, Charlotte, sustainable energy)

ECU Investor Network (seed stage, Greenville)

Frontier Capital (growth stage, Charlotte)

Lowe's Ventures (all stages, Mooresville, emerging tech, retail tech, home tech)

North Carolina Innovation Funds (Charlotte, state fund co-invests behind other VCs)

Piedmont Angel Network (seed stage, Winston-Salem)

SunBridge Partners (early stage, Charlotte, technology with global applications)

VentureSouth Piedmont (angel network, Piedmont area)

Wilmington Investor Network (seed stage, Wilmington)


OTHER FIRMS

I would also recommend reaching out to investors outside of North Carolina who are open to investing in the region.  So, research venture investors in the surrounding states in the Southeast.  Or, even further beyond, as I know a lot of Chicago venture capitalists are open to investing in smart companies, wherever they are located, and for the right companies, Red Rocket can make introductions to our relationships there.


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


Monday, May 15, 2017

Lesson #266: Managing for Net Cash Flow vs Net Profit

Posted By: George Deeb - 5/15/2017

As many of you know, Red Rocket has been looking for a businesses to buy.  We have previously written about all the challenges that come...



As many of you know, Red Rocket has been looking for a businesses to buy.  We have previously written about all the challenges that come with buy-side mergers and acquisitions work.   But, there is a new wrinkle we have been running into, that is worth talking about.  Most businesses we have looked at were managed to maximize net profit, which is typically a good thing.  But, when trying to attract an acquirer, they really should have been managed to maximize net cash flow.  As at the end of the day, that is really want matters most to investors--getting visibility into a near term return of their invested capital, that hopefully can pay back in 12-18 months, not 4-5 years.  Let me explain further.

DEFINING THE DIFFERENCE BETWEEN NET PROFIT AND NET CASH FLOW

Net profit is a pretty straight forward calculation; it takes all the revenues of the business collected from customers in a time period and subtracts all the expenses of the business in that same period.  Those expenses include things like the cost of goods sold and all the selling, general and administrative costs of the business (e.g., marketing, payroll, home office).  Net profit is an income statement output.

Net cashflow is a cash flow statement output.  It starts with the net profit calculated above and then adds back non-cash items like depreciation and amortization, and then subtracts other longer term investments made in the business, like build-up of inventory for future months' sales, research and development costs made for future product offerings and other capital expenditures (e.g., for new equipment or capitalized software investments).

WHY MANAGING TO CASH FLOW MATTERS

Let's say we had a business with $5MM in revenues generating $800K in profit before taxes and $1MM in EBITDA when you add back $200K of non-cash items, like depreciation.  Since most businesses are valued on a multiple of EBITDA, this business may be worth 4x cash flow, or $3.2MM to a potential acquiror, depending on how fast it is growing.

But, then the potential buyer of that business starts to peel back the layers of the onion on the cash flow statement, and uncovers the business is making $1MM of off-income statement investments to support their growth, into things like building up inventory for future months and R&D investments into future products.  That takes the net cash flow of the business down to zero.

So, with most acquirers looking for businesses with high net cash flow, with which to attract bank financing and to have funds from operations with which to pay down their loan and interest over time, this presents a major challenge for the buyer.  Instead of getting a business that they thought was generation a lot of profits (which is valuable to them), they are getting a business which is cash flow neutral (which is not that valuable to them, given the nature of their business).  What worked well for the entrepreneur in growing their revenues at the expense of short term distributions, does not work well for most private equity investors or acquirers of your business.

WHEN THIS IS NOT THE CASE

Obviously, if you are not trying to sell your business, making potential investors or acquirers happy doesn't matter.  You can do what you like in those cases.  And, the reason most businesses don't care about not driving huge positive cash flow, is because they are more focused on re-investing all cash flow into the company, to help propel the business to new heights in future years (not caring about the impact to profits or cash flow in the current year).  Amazon is a great example of a company that has had major success with a strategy like this, although it ruffled the feather of many of their early investors as a public company, since it was counter to the norm of maximizing near term profits.

CASE STUDY

We were studying the potential acquisition of an ecommerce seller of branded shoes.  They were showing very impressive revenue growth from $5MM to $10MM to $15MM over a three year period, and net profits were growing right along with it, from $1MM to $2MM to $3MM.  That would attract the excitement of most any investor or buyer.

Until, we looked at the cash flow statement in more detail.  And, we learned, they needed to invest the full $3MM of profit into their future inventory investment required to support the next year's expected revenues of $20MM.  With a 50% cost of sales ($10MM) and a 3x inventory turnover ratio ($3.3MM of inventory needed for next four months), they needed every penny of the prior year profits, and more, to fund their growth.

So, yes, if the plan was to shut off the growth at $15MM, and milk the $3MM of profits out of the business in perpetuity, that would appeal to certain buyers.  But, if the plan, was to grow a $15MM business into a $50MM business, all while distributing a portion of profits to the shareholders or the lenders along the way, this business wouldn't attract anyone.

WHAT THIS MEANS TO YOU

Yes, profits are important and should be maximized.  Especially since they are the root driver of EBITDA which is relied on heavily in valuing companies.  But, if at the same time, you are not being sensitive to maximizing cash flow during growth periods of your business, you are going to have a hard time attracting new investors, lenders or acquirers for your business.  At the end of the day, there has to be enough cash left to distribute out to the investment partners in a business (e.g., banks, private equity firms), along the way, in order to get their upfront attention.  So, plan accordingly.


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


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