As a business advisor, I have too often seen technical entrepreneurs get a product or service off the ground with ease, but then struggle mightily when their business reaches a couple of million in annual sales, or the employee count grows beyond a handful. It’s at this stage that the job changes from creative and tactical to managerial and strategic. Many don’t survive the change.
In fact, I believe the majority of true entrepreneurs are not interested in this new role, and jump ship quickly by hiring an experienced CEO or merging with another company, to start their next entrepreneurial effort. For example, entrepreneur Sir Richard Branson has started over 400 companies, from record labels to space travel, so for him the joy is clearly in the startup.
Bill Gates, on the other hand, spent most of his career building Microsoft to a multi-billion dollar company, so he made the transition from startup to growth company. Both he and Branson are billionaires, so there is no one right way for entrepreneurs to succeed. Management of a growing company is a learnable skill, and in my view it starts with a focus on the following key principles:
Management is getting results through people and processes. That means your primary responsibly changes from building a solution, to building processes and directing other people. Effective communication is the key, both written and verbal, since the plan can’t exist just in your head. Everyone needs to know what they are responsible for.
Strategic planning takes priority over tactical planning. True entrepreneurs love the tactical and problem solving challenges. Good managers are more interested in anticipating and preventing problems. That means making sure the right people are hired, trained, and in the right place at the right time. Spend more time on the future than today.
Focus on volume growth and repeatability. With a startup, everything is an experiment. Now the experiments are over, and high productivity is the objective. Creativity and innovation are applied to increasing output and lowering costs rather than solution design and building a viable business model.
Implement metrics and set objectives for every organization. You can’t manage what you don’t measure. Processes and organizations that have no objectives will produce less and less over time as they attempt to remove risk and potential problems. Every process needs a feedback mechanism to ensure continuous improvement.
Practice leadership by example beyond your business entity. This requires spending visible influencer time on external initiatives and building relationships in your industry and your community. This is also the time for business development focus, related social causes, and exploring common ground (coopetition initiatives) with competitors.
Spend real time on people development and succession planning. Long-term success requires planning for leader development in every organization, rotation of high-potential employees through key roles, and support for outside executive education programs. Growing the company means growing people through mentoring and training.
Balance your own life for the long haul. The startup process is a sprint, and entrepreneurs tend to focus on it like there is an end in sight, forgoing personal relationships, healthy time off, and planning for retirement. Good executives and managers maintain a more balanced perspective, and plan for vacations and family.
Moving from startup mode to a sustainable business requires an overt effort on the part of an entrepreneur – it doesn’t happen automatically. The alternative is to lose the business or get pushed out by investors or Board of Directors, after a painful crisis or business growth failure.
Great entrepreneurs actually have much in common with great managers, including a focus on results and a focus on execution. In addition the best of both groups maintain a focus on customers, love to learn new things, and are always thinking. Anyone who can put all these attributes to work can survive and prosper in any environment. Just decide where you want to fit, and go for it.
Marty Zwilling
*** First published on Forbes on 08/05/2016 ***
Entrepreneurs seem to have blinders on when looking at competitors. Generally they are so focused on killing competitors that they fail to see the positive potential of a strategic partnership or some other type of collaborative relationship. Sometimes you have to put aside the emotion and the passion, and just look at what is best for your business.
Strategic partnerships in this context can take the form of joint ventures, intellectual property licensing, outsourcing agreements, or even cooperative research. All of these offer the potential for a win-win relationship with a nominal competitor, rather than a win-lose deal, as long as both sides can remain humble and not try to dominate the relationship.
Always start with a formal proposal, limited in scope to a specific common objective or technology, for a limited amount of time, bounded by a two-way non-disclosure statement. With this agreement in place, there are a host of ways that both sides can win:
Share common technology. Every startup has a core competency which should not be shared. Beyond that, there may be a large percentage of common technology where they both need to minimize cost to gain share from the big dinosaurs who already have this advantage.
Expand the market for both. Typically, there are market opportunities that neither of your core competencies can win alone. A strategic evolution of your combined strengths may be able to open up a new segment that neither of you could do alone in the same timeframe or at the same cost.
Up-sell related products or cross endorsement. If your customers would benefit by having products from both companies, you might negotiate the opportunity to include the other’s product as an add-on. Where your competitor isn’t really competing with your direct market, you can refer business to each other without anyone losing customers.
Benchmark your practices against a true peer. The best way to do this is to establish specific performance targets with incentive-based rewards for meeting and exceeding these targets. The information exchange from day-to-day interactions of engineers and marketers will drive you enhance your own processes to be more competitive.
Expand core competency and solidify strengths. Both partners must not forget they are still competitors. By sharing and learning in non-competing areas, they can focus their limited resources on solidifying their core competencies, and expanding their unique segment of the market. Let market response dictate a later split, merger, or acquisition.
Willing to learn from each other. Learning from each is part of the win-win equation. No entrepreneur has all the insights they need, and none should be so arrogant as to assume they hold all the cards. Of course, it’s important to start with a bounded agreement which clearly lays out expectations and areas that are off-limits.
Think about the future. Once you have established your credibility and value, a strategic partnership may extend to a financial relationship. They may have the finances you need to invest in a business area they know, where you have the core competency. Longer term, when ready, it may be time for merger or acquisition.
While most entrepreneurs think of strategic partnerships as big company deals, it actually works better for small companies. In large corporate environments, competitor cultures may be so set that collaboration is difficult, while I find that small company peer competitors usually have no trouble at all getting along. The industry leader arrogance has not yet set in.
Even for small companies, it is critical that all employees be well-informed about what skills, technology and information can be shared with their partner and what is off-limits. This will offset the normal instinct to think of a competitor only as a threat. It is smarter to capitalize on the positive aspects of a competitive situation rather than killing each other so no one wins.
Marty Zwilling
As a startup advisor and investor, I find that more and more entrepreneurs avoid using the term “profit” in pitching their new venture. They seem to feel it conveys a message of personal enrichment at the expense of others. My view is that the purpose of every business is to make a profit, as fuel for growth, sustainability, and social impact. Without profit there is no business.
By profit, I simply mean offering a product or service to customers for a price that exceeds the total costs associated with the solution, thus providing some basis for recovering sunk costs and generating a return for stakeholders. Of course, I understand and don’t condone bad actors who get greedy, and exploit ways to unjustly squeeze customers and employees.
Thus I was pleased and a bit surprised to see a new book, “The Purpose Is Profit,” by Ed “Skip” McLaughlin, an entrepreneur who has both succeeded and failed in starting multiple businesses. He lays out very plainly his own experiences on both sides of this equation, and I particularly enjoyed his summary startup roadmap of twenty-one steps to success, which add real content to the eight that I recommend to every entrepreneur:
Select an idea you can clearly communicate in thirty seconds. Every entrepreneur needs a good “elevator pitch” which succinctly describes the idea, the customer value proposition, and business profit. Customers and investors are looking for specific solutions, not abstract ideas or complex technology concepts not yet materialized.
Solve a painful problem for customers who have money to spend. Solutions that are “nice to have” or “improve usability” are easy to give away but hard to sell. The same is true for solutions to some social problems, like feeding the hungry, who don’t have any money. Remember you can’t sustain a business or social cause with no revenue or profit.
Be able to differentiate your offering from competitors. The best differentiation is a patent or other intellectual property that also provides a barrier to entry. A commitment to work harder than competitors, or survive on lower margins, is not convincing. Customers typically won’t switch to a new vendor for less than a twenty percent cost advantage.
Validate your business model on real customers. Giving free beta copies of your solution to customers to elicit testimonials does not validate a business model. Investors look for sales at full price, to people you don’t know, to validate demand, price, and margin. The best business models benefit social needs as well as business needs.
Show an aggressive marketing and sales plan. With today’s rapid pace of change and information overload, word-of-mouth and social media alone is not a viable marketing plan. Every business requires spending money to make money. The smart ones identify and budget innovative approaches, and use metrics to tools to monitor effectiveness.
Generate a 5-year financial forecast from opportunity data. If you don’t set some financial targets for your business, investors won’t be interested, and you won’t know if you are making progress toward profitability and sustainability. Commitment to a set of financial objectives is the point where an entrepreneurial dream becomes a business.
Show that your team has the distinctive competence to win. The right people make all the difference in a winning business. This is why investors invest in the team, rather than the idea. Investors look for key leaders who have domain expertise and prior startup experience. Experience in other business areas and large corporations is not enough.
Build a long-term growth strategy and exit plan. Successful entrepreneurs look beyond profitability to change the world and leave a lasting legacy. Investors look for an exit strategy to allow them to capture a return on their investment. Customers and employees want a business with staying power and constant innovation for longevity.
Pundits may argue that recent business successes through user growth, including Twitter and WhatsApp achieving unicorn status (billion dollar valuations), show revenue and profit are no longer needed. I will assert that these represent the exception, rather than the norm, and most sources agree that this is a fading anomaly, rather than a model for future business startups.
Therefore I recommend that profitability be carried as a key objective by every new entrepreneur, rather than an embarrassment. Social entrepreneurs need profits to supplement those unpredictable donations if they are to achieve sustainability and a lasting social impact. Certainly, profitably alone is not business success, but business success without profit is hard to imagine.
Marty Zwilling
*** First published on Forbes on 08/02/2016 ***
Despite the fact that the number of IPOs (Initial Public Offerings) for startups have continued to decrease, I still hear it touted often as the preferred exit strategy. I suspect the exuberance for an IPO is still being driven by the highly visible successes of several companies a few years ago, including Facebook, Yelp, and Twitter. Everyone dreams of becoming a billionaire overnight.
In fact, IPOs are down again this year, with just 31 companies going public in the U.S. in the first five months. That’s down from 69 in the first five months of 2015, and 115 over the same five-month period in 2014, according to Barrons. The total proceeds raised in Q2 2016 from IPOs diminished by three-quarters compared to Q2 2015.
Concerns over valuations being reset to a new normal, and a soft exit market, are seen as key drivers. Yet I believe the trend will continue down as entrepreneurs become more aware of other considerations that make the IPO route less and less attractive. These include the following:
Taking a company public is an expensive process. It will take many months and require endless amounts of time, money, and energy. According to a dated but still relevant study by PricewaterhouseCoopers, companies average $3.7 million spent directly on their IPO, in addition to underwriter fees of 5 to 7 percent of proceeds. It takes real money to find money.
Make sure you can effectively use a big cash infusion. There is a big difference between needing a million dollars versus $100 million, or even a billion. New stockholders will expect to see rapid growth. You better have lined up a major international expansion, some major acquisition candidates, or a wealth of unfilled orders.
There are real ongoing costs of maintaining a public company. You will need an experienced CFO, and the best legal and accounting help to comply with the audit requirements of the Sarbanes-Oxley Act. PwC estimates that public companies incur an average of $1.5 million in annual recurring costs as a result of being public.
Exposure to increased liability risk. Public company executives are at civil and even criminal risk for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations or speaking out in public and SEC reports. Executives shoulder new risks for insider trading and employment practices.
The public company corporate culture may not fit you and your startup. Public ownerships usually lends prestige and credibility to your sales, marketing, and acquisition efforts, but it may work counter to your vision of saving the world. Most startup founders voluntarily exit or are pushed out, and the fun is gone. Analysts want escalating profits.
Public companies bring new expectations of benefits. If you want to give stock options, or have already been giving them, the employees will love the liquidity of their options, and the thought of selling shares for a profit. On the other hand, “competitive” salaries will likely go up, and health and retirement benefits will jump to a new level.
Market volatility usually hits public companies first. Private companies can often fly under the radar in turbulent times like the recent recession. Public stockholders are more easily swayed by emotion and the activities of the crowd, rather than real market conditions, and all performance numbers are public. Shareholders can jump ship quickly.
Before you forge ahead to an IPO, I recommend a thorough readiness assessment, to quantify the need, as well as to identify potential gaps within processes, areas needing internal controls, and positions requiring enhanced technical accounting skills to operate as a publicly-traded company.
The costs of an aborted IPO are sizable, and may not be deferred to a later period or offering. Along with the time and effort required, this can severely cripple your company for an extended period, not to mention your entrepreneur lifestyle.
While the wins can be big, I still see the IPO option as one to be considered only under exceptional circumstances, rather than as the default exit option. Your odds of hitting the lottery may be better.
Marty Zwilling
Contrary to popular opinion, viral marketing has not eliminated the need for old-fashioned lead generation to bring customers to a startup. Indeed, while the rules and technologies for lead generation have changed, Forrester and other experts still see it as the most effective way for businesses with limited budgets to maximize their return on marketing investment (ROMI).
One of these experts, David T. Scott, published a book a while back that I like, ”The New Rules of Lead Generation,” highlighting the changes wrought by the internet and social media. His professional background includes having held marketing-executive roles at big companies as well as startups.
Here is my summary of the seven most successful lead-generation vehicles he and I still recommend today, despite the popularity of viral marketing:
Search-engine marketing. For new product startups, search engine marketing (SEM) is still one of the most cost-effective and scalable lead-generation approaches. It’s also one of the most accountable, with in-depth data provided by search engines about performance. You can start an SEM campaign with as little as $50 today and get results very quickly.
Social-media advertising. Social-media advertising relies on popular social media sites (such as Facebook, LinkedIn and Twitter) to generate leads through pay-per-click ads and tweets on sites that target customers in specific demographics. You bid on the amount you are willing to pay for a click or promoted tweet (such as $2), and a daily budget (like $1,000).
Display advertising. To use online display ads to generate leads, you post ads on websites frequented by your target audience or ones with content related to the ad. Display ads on mobile devices, including video and audio, also offer a new opportunity to reach target customers.
Email marketing. This one has been around a long time but still works well if your target demographic is well defined and you do your homework to buy or rent a top-quality mailing list. New technology allows for psychographic targeting (such as finding people who like to travel) and geotargeting (specifying a certain neighborhood) for improved response and spam avoidance.
Direct mail marketing. Some consider direct mail very expensive or dead as a lead-generation tool. Yet it is more alive than ever before. About $20.5 billion is being spent annually on direct mail, according to the U.S. Postal Service; the amount has been increasing each year. Compared with other methods, it does require the largest up-front investment, mostly for printing and shipping.
Cold calling. This is still one of the best vehicles if your business has a small, well-defined purchasing audience as do government agencies or medical establishments. You need to first purchase or build a targeted list of clients from a trustworthy source, then refine it with some new tools, like LinkedIn and Gist, before contacting them with a good script.
Trade shows. Such forums are still the best opportunity for you to meet face-to-face with people who should be interested in your products or services and to display your goods in person. Pick the right shows, start small and work hard ahead of time on your marketing materials, giveaway tchotchkes and booth staffing.
In all cases, it is crucial to set specific goals for each lead-generation campaign, keep track of the overall costs and measure the return on your marketing investment in terms of cost-per-action and cost-per-sale. Don’t hesitate to use small test projects to compare the results of multiple approaches.
Technology and consumer feedback have indeed changed the landscape. Telemarketing and robocalls, once a popular approach to lead generation, have been the subject of continuing legislation, which many believe will soon eliminate these options. The last thing a new business needs is to antagonize potential customers or become embroiled in controversy.
Plus lead-generation strategies can be updated by the flood of new technologies and software, including use of near-field and Bluetooth communications, QR codes, social check-in promotions, mobile search, mobile web, text, SMS, MMS and geolocation.
Whether you are an entrepreneur with a new startup, or even a more mature business charged with improving your growth and competitive posture, don’t fall into the trap of assuming that the new social media initiatives and focus on viral will mitigate your need to do proactive lead generation. How many of these lead generation techniques are funded in your business plan?
Marty Zwilling
All too often as a startup investor, I hear the term “disruptive technology” from an entrepreneur, played like a trump card that should override any other potential business qualms. In fact, most investors avoid disruptive technologies as extremely risky, with long waits for a payback. They can point to the many examples of innovative technologies that have failed in the marketplace.
Even the best investors, when they hear the words disruptive technology, always look harder and deeper at all the other elements of the business model. While struggling to net out what they are looking for, I found help in a new book, “Wicked Strategies,” by John C. Camillus, who has studied this challenge for years at Harvard and with several Fortune 500 companies.
He outlines a set of guidelines which resonate with me as having a high potential to transmute disruption and chaos into cash flow in an investor’s lifetime. With the key ones paraphrased here, a new startup has a great chance to complement a disruptive technology with an innovative business model, to gain a real competitive advantage and add new economic value:
Define extraordinarily ambitious goals. Real breakthroughs in business, as well as in technology, usually start with BHAGs (Big Hairy Audacious Goals). Achieving stretch business goals requires more than a disruptive technology. These normally require an innovative new business model, non-linear thinking for marketing, sales, and distribution.
Build an entrepreneurial, risk-taking culture. Disruptive technologies sound so good on paper that they often attract risk-limiting managers and professionals rather than a culture of visionary leadership and thinking outside the box on all business elements. In mature companies, no one wants to risk the existing market share or sunk costs.
Relate emphatically to the customer. Advances in technology don’t always translate directly to customer problems. Yet business success requires solutions which satisfy customer needs. Engineers relate best to the technology, while the rest of the business has to find customer value propositions. Investors want to see quantified customer value.
Integrate social responsibility into the business model. These days, prioritizing sustainability and social responsibility is an effective way to bridge from technology to customers and employees. It’s the best way to uncover new markets driven by culture changes, underserved geographies, and new economic realities around the world.
Utilize design thinking and data analytics. Design thinking seeks to build empathy with the client or customer and stimulate creative responses to the customer’s needs. With big data and analysis, businesses now are able to derive powerful insights about the customer that can support innovative value propositions from disruptive technologies.
Find disruptive opportunities along the entire value chain. Innovation across the entire value chain can be promoted by engaging other stakeholders in the creation of value to access untapped markets and strengthen competitive advantage. Key players in the value chain include suppliers, business partners, distributors, and sales channels.
Add dynamically to the range of competencies in the venture. Eastman Kodak had a deep competency in film technology, but they were slow to expand their knowledge of digital imaging, displays, computing, and medicine. Their technologists never found a market. Market experts tend to find breakthrough technologies, not the other way around.
In his book, Camillus argues that with these principles, disruptive technologies can be integrated into new and innovative business models to conquer the “wicked” challenges of increased complexity and global competition present in every market today. I would challenge every entrepreneur, and every business executive, to build wicked strategies to win these challenges.
Marty Zwilling
*** First published on Forbes on 07/30/2016 ***
When I heard a friend and business mentor say, “Your startup won’t fail if you don’t quit,” I realized that every entrepreneur should adopt “never give up” as their mantra. Rather than quitting, there are always alternatives, like pivoting the business model or merging with new partners for support. Either could improve the statistic that most startups fail within the first five years.
Nothing is more discouraging to aspiring entrepreneurs than the high failure rate. So why do most startups fail? Many experts say that running out of money is not the primary reason. The number one reason seems to be that the founders just walk away. Of course, they may be out of money as well, but that is often more of an “excuse” than a reason.
Here are some common face-saving excuses that I hear from entrepreneurs abandoning their startup, along with some suggested alternatives to the hard stop and exit:
“I’ve lost my passion. I’m not enjoying this anymore.” This suggests that you’ve become discouraged with your current business model, possibly because of an unanticipated problem or pivots you made to avoid a competitor or make more money. My suggestion is to morph the current business idea back into one than you can love and enjoy rather than your quitting and accepting an employee role that’s not your preference.
“My idea is just too far ahead of its time.” You probably realize that the leading edge is very near the bleeding edge, where only early adopter customers dare to tread. On the other hand, if you wait for competitors to get there first, you may be left in the dust with no customers. Yet if you already have some early adopters, that’s a good indication that real marketing and education will likely bring your product or service mass acceptance. So hang in there and get busy.
“I can’t find any trustworthy investors these days.” If you can’t bootstrap the venture yourself, find a partner, friend or family member, rather than a professional investor to carry some financial weight. Otherwise, look for advances from distributors, vendors or even future customers. Try bartering services you have for something you need. I’ve seen countless creative solutions to the cash-flow problem by entrepreneurs who don’t quit.
“The people on my team are not really committed.” We all make people mistakes or set employees’ expectations too high. So you made some bad hiring or partner decisions. Now is the time to face up to these issues and reset your expectations or move out the people who don’t fit. The sooner it’s done, the happier you all will be.
“I just don’t have the business skills I need to compete.” Acquiring business skills is not rocket science; they can be learned on the job, as well as supplemented by coaching from an experienced team and advisors. If you knew all the answers, you would be bored and lose interest (see number 1). Half the fun lies in the learning challenge, so don’t quit now.
“It’s now obvious that there is no market for what I created.” It has never been enough to build a solution and then wait for people with the right problem to find you. There are a wealth of tools available today, relying on social media and marketing, to create or foster the market your company needs. Big markets never spring up fully grown out of the ether.
“My company grew too fast, and the pressure and costs are killing me.” Perhaps it’s time to reset your course to focus on business basics, so you can lighten your load. Or maybe it’s time to scale back and focus more on organic growth. But quitting right as your company is encountering success is foolish. Professional investors would love to help you scale your business
Most people agree that entrepreneurs learn more from their mistakes and pivots than they do from easy successes. Investors tell me that they are wary of funding an entrepreneur who refuses to admit any prior failure. So it’s smart to admit your struggles, rather than let them defeat you or drive you to excuses.
It’s worth remembering that nothing really important is all that easy. Starting a business is just like building a new relationship; it takes work. At times you might feel like running your business is not worth all the effort, but just walking away is not very satisfying. Learning, solving some hard problems and achieving success are a lot more fun than failing. Why not make “never giving up” your mantra?
Marty Zwilling