101

Startup Lessons

An Entrepreneur’s Handbook

by

George Deeb
Blog Into Book
www.BlogIntoBook.com

Copyright © 2013 George Deeb

All rights reserved. Neither this book, nor any parts within it may be
sold or reproduced in any form without permission.
Table Of Contents
1 Strategy
Lesson #1: Drivers of Success for Startups. Do I have a Good
Business Idea?
Lesson #7: Key Components for Writing a Business Plan
Lesson #11: Considering Incubators or Accelerators For Your
Startup
Lesson #12: How to Structure Your Board of Directors or Advisory
Board
Lesson #17: Pitfalls to Avoid When Joining Someone Else’s Startup
Lesson #19: How to Identify your Competition
Lesson #37: The Plusses and Minuses of Franchising
Lesson #38: Things to Consider When Buying a Business
Lesson #43: Examples of Barriers to Entry for Your Startup
Lesson #45: Find a Business Mentor or Business Coach
Lesson #63: Determining Exit Options for Your Startup
Lesson #64: How to Find Buyers for Your Business
Lesson #65: How to Structure the Sale of Your Business
Lesson #81: Considerations for Global Expansion
Lesson #96: Vertical vs. Horizontal Growth Options
Lesson #100: The Definitive Checklist for Startup Success

2 Marketing
Lesson #6: Structuring Strategic Partnerships for Your Startup
Lesson #20: Setting Product & Pricing Strategy For Your Startup
Lesson #21: Setting a Sales & Marketing Plan For Your Startup
Lesson #22: How to Calculate ROI on Your Marketing Spend
Lesson #23: How to Design Effective Advertising Copy &
Creatives
Lesson #24: How to Choose a Name For Your Startup
Lesson #44: The Importance of Blogging
Lesson #48: Trade Show Strategies for Startups
Lesson #52: Viral Marketing Via Social Media
Lesson #53: Search Engine Marketing Strategies
Lesson #54: Incorporate Video Into Your Marketing Efforts
Lesson #68: Mobile Apps & Location-Based Services
Lesson #69: The Marketing Power of Free Publicity
Lesson #72: The 10 Basics of Website Design
Lesson #74: Brand Building for Your Startup
Lesson #77: The Basics of Email Marketing
Lesson #79: Determining Customer Lifetime Value
Lesson #88: The Basics of Online Display Ads
Lesson #95: The Basics of Telemarketing
Lesson #99: The Basics of Direct Mail Marketing

3 Human Resources
Lesson #2: Building the Right Team for Your Start-Up
Lesson #9: Spreading Equity to Key Employees and Partners
Lesson #13: Creating The Right Culture for Your Startup
Lesson #14: The Role of a Startup CEO
Lesson #15: Hands-On vs. Hands-Off Management of Startups
Lesson #16: The Plusses & Minuses of Virtual Employees
Lesson #18: The Right Work-Life Balance for a Startup
Lesson #30: When to Hire Employees vs. Contractors vs.
Crowdsources
Lesson #34: How Best to Recruit Employees For Your Startup
Lesson #35: How to Read Resumes & Screen Employee Candidates
Lesson #42: Is Working With Family Members a Good Idea?
Lesson #51: No Public Displays of Rejection
Lesson #55: Creating a Healthy Office Environment
Lesson #58: How to Determine Employee Compensation
Lesson #59: Determining Employee Benefits for Your Startup
Lesson #60: Importance of Employee Handbooks
Lesson #75: How to Implement Layoffs
Lesson #76: How to Implement an Employee Change
Lesson #83: Startup Roles & Responsibilities
Lesson #93: Make Your Employees Feel Appreciated

4 Technology
Lesson #36: Picking The Best Technology for Your Web Startup

5 Fund Raising
Lesson #4: How to Raise Capital for Your Startup
Lesson #5: Finding Angel Investors for Your Startup
Lesson #10: How Best to Approach VC’s or Angel Investors
Lesson #27: How VC’s Define a Backable Management Team
Lesson #32: How to Value Your Startup Business
Lesson #49: How to Get a Loan, or Not!!
Lesson #66: Preparing for a Due Diligence Process
Lesson #97: Securing a Small Business Grant

6 Finance
Lesson #61: Set Up Proper Accounting Controls
Lesson #67: Managing Accounts Payable & Accounts Receivable
Lesson #78: How to Build a Budget

7 General Business
Lesson #3: The Importance of Timing and Luck for Your Startup
Lesson #8: Startups Require Flexibility to Optimize Business Model
Lesson #28: Expect the Unexpected – Always Have a Cushion
Lesson #29: No Matter How Bad It Gets, Persistence Wins
Lesson #31: The Power of a Pivot - Thinking Out of the Box
Lesson #39: The Art of Negotiation
Lesson #40: Focus! Focus! Focus! Build One Business at a Time.
Lesson #47: The Importance of Networking
Lesson #50: Do What You Love!! Passion Drives Success
Lesson #71: Launch Fast! Fail Fast!
Lesson #85: Tap Into Your Local Startup Ecosystem
Lesson #86: Perception Often Outshines Reality
Lesson #87: The Art of Decision Making
Lesson #90: Proper Business Etiquette for Startups
Lesson #92: Building Your Personal Brand

8 Sales
Lesson #21: Setting a Sales & Marketing Plan For Your Startup
Lesson #25: How to Structure Your Sales Team & Procedures
Lesson #26: Designing Sales Incentives to Motivate Your Sales
Team
Lesson #98: Securing a Government Contract

9 Operations
Lesson #33: The Importance of Customer Service
Lesson #41: Security Considerations for Your Startup
Lesson #56: Frequent Legal Questions of Startups
Lesson #62: Insurance Protection for Startups
Lesson #70: Protect Your Intellectual Property
Lesson #73: Consumer Usability Testing
Lesson #80: Pitfalls to Avoid When “Reeling in the Whale”
Lesson #82: Project Management & Prioritization

10 Case Studies
Lesson #84: Lady Gaga—An Entrepreneurial Case Study
Lesson #89: Startup Lessons from Scrabble
Lesson #91: My Entrepreneurial Heroes
Lesson #94: Netflix—A User Experience Meltdown
11 Miscellaneous
Lesson #46: 23 Motivational Quotes for Entrepreneurs
Lesson #57: Required Reading for Startup Entrepreneurs
Lesson #101: Plusses & Minuses of Entrepreneurship

About George Deeb

About Red Rocket Ventures

1 Strategy

Lesson #1: Drivers of Success for Startups.

Do I have a Good Business Idea?
I am always asked what are the key drivers of success for a start-up.
And, honestly, there is no single right answer to this question. But,
what I have boiled it down to, is the fact that most start-ups require
the right mix of: (1) a good business idea/revenue model in a
sizeable market; (2) an experienced, hungry management team with
the right skills for the job; and (3) the right market timing with a
little bit of luck. And not necessarily in that order. There are
certainly more detailed factors like competition, product mix,
pricing, sales/marketing strategies, speed to market, etc. But, let’s
start with these three, and I will tackle the rest in future lessons.

So, let’s determine if we have a good business idea/revenue model

in a sizable market. Sort of three different concepts rolled up into
one. A good business idea comes down to whether or not you are
solving real needs for customers. A good revenue model comes
down to how profitable and scalable are your unit economics. And,
a sizeable market opportunity is pretty self-explanatory.

Let’s take a look at various business models in the online travel

space, with which I am familiar, as the founder and former CEO of
iExplore, the #1 adventure travel website.

For iExplore’s business opportunity, there was a real need in the

market for a one-stop adventure travel portal site, given how deeply
fragmented the industry was with no clear first-of-mind brand
leader to research and book off-the-beaten-path international travel.
So, we had no problem attracting over 1MM unique visitors to the
site with a unique solution in the market. However, it was a small
market opportunity, with only 10% of travelers interested in
adventure travel, and of those, only 30% were interested in traveling
overseas. So, instead of having the opportunity to serve the $240BN
overall leisure travel market, like Expedia, iExplore was really only
serving an $8BN international adventure travel market. Better than
being a whitewater rafting company in a $100MM market, but
iExplore would never scale to the heights of the major online travel
agencies selling air, car and hotel reservations that appealed to the
mass travel market. So, iExplore was a good business idea in a
niche market.

We determined Expedia had a much bigger market opportunity, but

did they have the right revenue model? The travel agency margins
on air, car and hotel reservations are razor thin, and you need
tremendous scale to have any chance and building a materially
profitable business in this space. So, at the end of the day, the online
travel agencies like Expedia had a weak revenue model in a mass
market.

So, who ultimately figured out the winning business model in online
travel? Planning sites like Trip Advisor, which was ultimately
acquired by Expedia to improve their business. Trip Advisor
appealed to all travelers looking for hotel reviews, so a mass-market
opportunity. But, unlike Expedia who was dependent on low margin
air, car and hotel bookings, Trip Advisor successfully built an
online advertising based revenue model that was wildly lucrative to
its bottom line. So, Trip Advisor won the best business idea in the
online travel space, with the biggest market opportunity and the
most profitable revenue model.

The most lucrative successes have been products that appealed to

everyone and had tremendous margins (e.g., Google, Apple,
Microsoft, Yahoo, Groupon, eBay). That doesn’t mean niche market
opportunities are bad businesses. It simply means, niche businesses
may not attract as much attention from the venture capital
community. The average venture capitalist receives 200 business
plans a year, and only funds their favorite 5-10 companies (typically
businesses targeting the biggest market opportunities with the best
revenue models). So, if you think you have a good business idea in
a niche market, that is OK too. Just realize you will most likely need
to fund those opportunities with friends/family/angel investors and
will be building a business of smaller scale.

Lesson #7: Key Components for Writing a

Business Plan
When writing a business plan, it is critical to do research and set
strategy across the following key topics: (1) your
industry/competition; (2) business/revenue model; (3)
sales/marketing plan; (4) management team; (5) cash requirements;
and (6) forecasted financials/expected ROI. When you are done,
you will end up with the necessary research to back up the key
assumptions of your plan. We will tackle each of these points in this
lesson.

Industry/Competition: To me, this is the most critical research that

needs to be done upfront. How large is your industry? Who are the
key competitors? How quickly is the industry growing? Are you a
first mover, or entering a crowded space? What share of the market
is reasonable to capture for your business? Investors like to invest in
large, growing markets as a first mover with limited competition
where a business can scale up to 10-20% share. So, pitching them
the “next Google search engine” is a very large market opportunity,
but would be very difficult to build with large, well-capitalized
competitors in the search space that would aggressively defend their
turf. On the flip side, pitching them the newest patentable
innovation in door hinges may be perceived as less competitive and
disruptive in the marketplace, but the market is really small to build
material scale. You need that right intersection of large market
opportunity, disruptive/defensible business and limited competition.

Business/Revenue Model: Now that you have found your ripe

industry opportunity, what kind of business are you building? A
hardware solution? An installed software solution? Software as a
service? And, more importantly, how are you going to make
money? One-time purchase? Recurring monthly revenues? Heavy
repeat usage? Where are your prices vs. competitors? What value
are you bringing vs. current solutions in the market? Investors
obviously prefer large and recurring revenue streams for disruptive
businesses that bring terrific value to their customers.

Sales/Marketing Plan: The next step is figuring out your go-to-

market strategy? Does the product appeal to business clients (B2B)
or consumers (B2C)? Is it dependent on building a big team of
salespeople? Does it require a heavy investment in consumer
marketing? If marketing, is it going to be driven by the search
engines online or direct mailers or trade shows? Does it require any
social media or viral elements for success? Typically sales-driven
B2B business are cheaper to launch than marketing-driven B2C
businesses. But, B2B businesses are sometimes harder to get
investor interest, as they have a much longer sales cycle (e.g., read
longer cash burn) and it is very difficult for a startup to break open
new B2B relationships, especially one going after large
corporations. And, B2C businesses that can be virally grown online
are much preferred to ones requiring heavy investment in expensive
TV, Radio or print (which frankly you should never use to launch a
business until the concept is proven out, given their heavy expense
and long-term branding aspects of such media). And, in all cases,
make sure the marketing or sales investment makes sense for the
scale of revenues you are trying to build (e.g., is there a reasonable
customer cost of acquisition metric compared to traditional industry
norms).

Management Team: To me, this is the most important element to

any business. I would rather have an A+ management team in a B-
industry, than a B- management team in an A+ industry. You want a
team that has “been there and done that” before in a start-up
environment, and will not be experimenting and learning with your
limited startup capital. Please re-read my previous lesson for more
details on how to build a team for your startup in a way that will
most appeal to investors.

Cash Requirements: Sales and marketing investment will drive

revenues. Revenues will have cost of sales. And the business will
have overhead and other employee costs. That will determine how
much of an operating loss you will need to fund. On top of that, will
be any capital expenditures that need to be put into R&D for your
product, capex for your office or whatever. So, fully think through
your cash requirements before approaching an investor. And, two
words of wisdom: (i) investors prefer lower burn rate, lower cash
need businesses (so a $1MM need has a better chance than a
$10MM need); and (ii) whatever the model says you need, double it
for your cash raise (as things ultimately go wrong and you will want
a cushion in place, to prevent going back to investors looking for
more later--most likely at worse terms).

Financial Requirements/ROI: The last check is a sanity check more

than anything else. Over the next 3-5 years, will the investor realize
a 3x return or a 10x return on their investment? And, there are two
drivers of that: (i) the scale of the revenues/profits in that period;
and (ii) the valuation at which the investor invested their money.
Obviously, investors are looking for 10x opportunities, so make
sure your financial model gives them a reasonable chance to achieve
such, either via scale or valuation.

Once you have completed your business plan, you would materially
pare back this information before presenting it to investors,
depending on your need (e.g., a 1-2 page executive summary for
preliminary introductions to investors via email; 14-15 slides for an
in-person presentation). Never lead with a 30-40 page document;
nobody will read it past the first page given limited investor
attention span and lots of competing investment opportunities. So,
make sure you get to the point, short and sweet. And remember,
graphic presentations always make a better impact than words,
where possible. So, provide screenshots of the product, instead of
describing it in sentences.

My uncle is a successful executive and investor, and he once said to

me: “if you can’t communicate your vision in one sentence, you are
making it too complicated for the listener to digest”. Good advice!!

Lesson #11: Considering Incubators or

Accelerators For Your Startup
One way to help get your business off the ground, is to leverage the
mentorship benefits of an incubator or an accelerator. First of all, a
quick definition of each.

An incubator is physically locating your business in one central

work space with 10-20 other startup companies, typically all venture
funded by the same investor group. You can stay in the space as
long as you need to, or until your business has grown to the scale it
needs to relocate to its own space. The mentorship is typically
provided by proven entrepreneurial investors, and by shared
knowledge of your startup CEO peers. Examples include Tech
Nexus and Sandbox Industries here in Chicago.

An accelerator is very similar, but has some distinct differences.

Your time in the space is limited to a 3-4 month period, basically
intended to jump start your business and then kick you out of the
nest. The cash investment into your business from the accelerator
itself is very minimal (e.g., $20,000), but your time in the
accelerator should largely improve your chances of raising venture
capital from a third party entity on the back end of the program.
And, mentorship could be coming from 40-50 entrepreneurs that are
affiliated with the accelerator (many of which are proven CEOs and
investors looking for their next opportunity or simply helping the
local startup community). Examples include Excelerate Labs in
Chicago, and the wildly successful Tech Stars, Y Combinator and
500 Startups in other cities. Here is a great list of accelerators by
city curated by Robert Shedd.

Deciding on whether or not you should pursue starting up your

business via an incubator or accelerator largely comes down to your
personal confidence in the defensibility of your business model,
your execution skills and your fund raising skills. If you have a
credible story and your business is nicely progressing on your own,
you probably don’t need to be part of one of these programs. But, if
you need help fine tuning your business model or revenue model, or
may be a first time CEO wanting to hone your skills from proven
peers and entrepreneurs, then this type of mentorship could be
perfect for you.

Here are the high-level advantages and disadvantages of programs

like this. The plusses are: (i) shared learning and mentorship
(helping avoid typical startup pitfalls and speeding up your efforts);
(ii) access to capital, either within an incubator or post an
accelerator; and (iii) the PR value and exposure you get from these
programs (not to be underestimated). The minuses are: (i) they can
be distracting at times, with lots of related meetings and events with
mentors and investors (getting in the way of focusing on your own
project); (ii) they can be confusing at times (getting 10 different
opinions from 10 different mentors), so you need a good “filter” on
any advice; and (iii) sometimes, sharing space with other companies
is not always a plus, especially in long term incubators that may be
carrying dead weight of underperforming companies.

Overall, I think these programs are terrific for first time CEOs who
can quickly get up the learning curve with the help of mentors and
investors that have “been there, and done that”. Plus, your odds of
raising capital are vastly improved given the tight screening
processes of these groups, which naturally raise the creme de la
creme to the top, from the 1000’s of applicants they receive each
year. Competition is naturally fierce to get one of these coveted
spots, so make sure you have a fine-tuned pitch and leverage your
network to help pull some strings for you.

Good luck!
Lesson #12: How to Structure Your Board of
Directors or Advisory Board
Properly structuring your board of directors and advisory board
could be one of the most important pieces of determining the
success for any venture. These are the people you are going to be
relying on for strategic direction, or voting on all key decisions. So,
it is important you get this right.

First of all, a quick definition for each. A board of directors consists

of the people who manage the CEO and formally approve all key
decisions of the company. An advisory board is a less formal group
of mentors that have specific industry knowledge, that bring their
consulting expertise to the CEO and increase your credibility with
potential investors.

In structuring your board of directors, here are a few obvious

recommendations: (i) it should be an odd number (so never a voting
tie); (ii) it should largely be comprised of parties friendly to you and
supportive of your vision (so no battles in the board room or being
forced into a non-desired direction); (iii) it should be a manageable
number, like 5 or 7 members (so easy to schedule meetings); and
(iv) members should bring real value to the story (e.g., specific
industry or startup expertise, to help you avoid known pitfalls).

For the not-so-obvious recommendations, firstly, you should

structure your board relatively in line with the equity ownership of
the company. For example, if one investor owns 20% of the
company’s equity, it would be fair for that investor to have one of
five board seats, or a 20% voice at the board table. Or, vice versa, if
you own 100% of your business, you may not want anybody on
your decision-making board, instead relying on your advisory board
for advice and direction. Secondly, when you have an outside
investor involved, it is important there is a mutually acceptable
third-party board member that has a non-biased perspective on the
business (e.g., not a manager and not an investor), who in essence
tie-breaks all disputes between management and the investors. I
typically want to identify and nominate that outside candidate (so I
know I can trust them), for approval by the investor. Don’t do the
reverse, as most likely they will be loyal to the investor. And,
thirdly, you do not want a passive board member, simply showing
up at scheduled meetings. You want a passionate member that you
can assign real work to, that is providing real effort and deliverables
in between meetings.

As for structuring your advisory board, this is much more flexible

and up to you. You can have as many or as few advisers as you
deem necessary to help you grow your business. But, what is key is,
these people need to bring specific skills to the table that you are
missing which will be important to the company’s success. And, the
bigger the adviser’s “brand name” in your space, the better. This is
for two reasons: (i) they are a big “brand name” for a reason, so
they have plenty of knowledge to share; and (ii) those “brand
names” will help get investors excited about investing in your story,
as credible references and mentors for the business (e.g., if “brand
name” likes it, so should I, as the investor). That said, it is hard to
get the attention of “brand name” advisers, who typically are busy
people and may not want to get involved with an unknown CEO or
business. So, where you can, leverage mutual colleagues that can
broker that introduction for you. If there are no known mutual
colleagues, approach the adviser directly with an equity incentive
for their participation (more details to follow).

As for frequency of your board meetings, you should meet with

your business based on the frequency of requiring strategic input.
For startups still tinkering with their models, that should be once a
month (so monies not wasted for too long). For more established
businesses, meetings should be once a quarter. Frequency for
advisory boards is not really relevant, as they typically do not
formally meet. Instead, you call on your advisors as you need them,
with one off questions over time.

The last key consideration for your board members and advisers is
to make sure they are appropriately compensated for their time
commitment, and incentivized to help you grow your business. For
you and your cash investors, you are appropriately motivated as is,
with your material equity stakes. But, for outside board members or
advisers, I would suggest setting aside a small piece of the
company’s equity to distribute between these key people based on
their level of involvement. Let’s say you set aside 5% of the
company for these purposes, and your outside board member may
get a 1% stake, and your 8 outside advisers may each get a 0.5%
stake (in the form of options or warrants). And, make sure all equity
grants have vesting periods, so earned over time invested, and can
easily be repurchased or recaptured if things go wrong down the
road, in case you need to make a change.

This is a lot to cover in one lesson, but hopefully you have a better
sense to the big picture items here.

Lesson #17: Pitfalls to Avoid When Joining

Someone Else’s Startup
Typically an entrepreneur starts up their own business. But, from
time to time, they will see a unique opportunity to join somebody
else’s startup, either as investing CEO or team member. There are
five areas you need to assess before making that leap: (1) your fit
with the founders, in terms of skillset and personality; (2)
management control; (3) equity ownership control; (4) board
control; and (5) corporate governance control. I will tackle each of
these points in the following paragraphs.

The fit with the team in terms of skillset and personality is obvious
enough. It is important you can get along with your new partners,
giving the long hours you will be working together. So, if you clash
in style or personality, it will never work. And, it is important that
you each are bringing a unique and non-overlapping skillset to the
table. So, if the company already has a strong tech leader and
operations leader, maybe you bring strong marketing or financial
skills to the table, to balance the team. You don’t ever want to be in
a situation where job roles are not clearly defined upfront, to avoid
stepping on eachother’s turf, especially when impassioned founders
are involved.

As for management control, let’s say you have been made an offer
to become the new CEO of the business. You need to be perfectly
clear up front that you have the final decision making authority in
terms of business direction, and that the founders are willing to
follow your lead, even if it may be in a different direction than the
company was currently heading. This could even include making a
change in management, if the CEO believes the founder is not the
right person in that position. That said, you have to do this in a
consensus building way, making sure you support any moves with
hard numbers that back up your assumptions. Since the founders
will clearly need an education to make a material move from where
they may have been heading, with firm and entrenched ideas there.

Equity control is your option, whether you are willing to work with
a majority or minority stake in the company. Your equity stake is
typically dictated by your level of cash investment and importance
of your role in the company. But, if absolute control of the business
is important to you, as a new CEO, for example, make sure you
invest enough to get you over that 51% threshold. Or, if
economically you cannot get there, put in a mechanic like super-
voting shares to make sure no strategic decisions get made without
your support.

Same story holds true for board control. If it is important to you as a

new CEO to control more than 51% of the board, make sure at least
51% of the seats around the table are friendly to you and your cause.
And, that most likely means these individuals will not be the
founders or their investors to date, which will most likely be loyal to
the founders. So, get good outside board members or new investors
that will have your back. And, worth mentioning, your board voice
is typically in line with your equity position. So, if you want 51%
board control, make sure you are prepared to invest enough to own
51% of the equity.

This last piece about corporate governance is the one that people
typically forget about, especially in LLCs. There are scenarios
where you may be the strategy leading CEO, with 51% equity
ownership and 51% board control, and still not control the key
change in control decisions of the company. The operating
agreement of an LLC, or the charter of a corporation, may have
special rules in place around changes in control. For example, it
may require the sole approval of a founder for any change in
control, who may veto any deal that you are a proponent of. So, get
your lawyers engaged, and read the fine print in the corporate
governance, to make sure nothing gets in the way of your long-term
desires.

I have run both my own startups, and other people’s startups, so

have learned these valuable lessons first hand. Good luck!

Lesson #19: How to Identify your

Competition
Webster’s Dictionary defines a competitor as “one buying and
selling goods or services in the same market as another.” Pretty self-
explanatory at the high level. But, I can’t tell you how many times
executives do not properly assess their full competitive set. The goal
of this post is to teach you how best to not miss any competitor that
could get between you and your goals.

I typically start with high-level industry research. Find the major

trade association in your industry and see who they are talking
about as key players in your space. Then do Google searches with
the same keywords that will be important for your business, to see
who is advertising around those keywords. If those keywords are
important to those advertisers, they are most likely directly
competitive with you for all, or at least a part, of their businesses.
That should pick up the launched businesses. But, you should also
look in the venture capital funding records at sites like Crunch Base
and Venture Beat, as well as searching patent registrations at the
USPTO to see if anything new is in the works, that directly overlaps
with your business.

Once the high-level research is done, you need to start digging even
deeper. This will include asking prospective customers of your
business, if they are aware of any similar businesses in the market.
And, similar businesses could also include tangential businesses that
could easily pivot into your space if you are successful. For
example, if you are launching an online restaurant reservation
software, competition could easily pop up from tangential players
like point of sale register manufacturers (e.g., Micros, Radiant) or
other large online businesses in the restaurant space (e.g.,
Restaurant.com, OpenTable.com, Zagat.com).

Another example includes making sure you think about all players
that are aggressively going after the same target audience, even if in
very different businesses. Let’s say you are building a fishing
website. In addition to all the fishing websites, you are also
competing with magazines like Field & Stream, cable networks
likes Sportsman Channel, retailers like Cabela’s, fishing gear
manufacturers like Daredevil lures and online portals like Yahoo
(that may have a fishing content section). All of these businesses
will be putting a lot of consumer marketing muscle to work to own
the online fishing space, so prepare for a lot of competition from
many different businesses all looking for the same fisherman
eyeballs.

Once you fully assess who your current or potential competitors are,
then you have to assess their strengths (e.g., customer base, revenue
base, cash resources, product offering) and weaknesses to see if you
can build a better “mouse trap” within your budget. Some
companies decide not to move forward at this point, because it is
simply too much of an uphill battle to win the space, or will require
much more monies than are available to spend. But, if you are
confident you can offer a better product, better pricing, better
marketing tactics or bigger budgets than your competitors, then
“bring it on!”

Lesson #37: The Plusses and Minuses of

Franchising
In this lesson, we will discuss the plusses and minuses of both: (i)
becoming a franchisee; and (2) becoming a franchisor, depending
on your needs.

For a franchisee, franchises allow you the opportunity to start your

own business, but in a way that reduces your startup risk by piggy-
backing on the expertise of the franchisor. As an example, let’s say
you wanted to open new fast food restaurant. You could either
design your own business from scratch (which have all kinds of
startup risks), or license a franchise from an established chain like
McDonald’s. With a franchise, you get the power of the
McDonald’s brand name and marketing expertise, plus decades of
operational knowledge. All you need to do is be the investment
capital behind the new store location, and manage that business
going forward (with high level support from the franchisor).
McDonald’s will find the site, tell you how big the store needs to
be, provide the architectural/design specs, source the construction
team, source equipment, source systems, design the menu, source
food, etc. And, you write the check and run that business. Plus, you
will need to pay McDonald’s a percentage of the ongoing revenues
from the business, in exchange for their ongoing marketing and
operational support.

The downside of being a franchisee, is your long term financial

returns are typically not as high as they could have been, had your
launched your own business yourself. Whatever percentage fees are
going to the franchisor would have been long-term monies into your
own pocket. But, it is the classic risk/reward conundrum: although
the rewards would be higher with your own business, the risks and
work are certainly higher, as well (e.g., building business plan, store
design, location strategy, menu design, marketing plans). You just
need to figure out what your personal appetite for risk is, and go
from there. Do you want to piggy-back on McDonald’s coattails for
a smaller potential return? Or, do you want to launch the next great
fast food chain, for a bigger potential return (from a lot more work).

For a franchisor, the advantages are pretty clear: you have opened
up a near limitless supply of investment capital from your
franchisees footing the bill of your expansion. That is how
companies like Starbucks, Subway and Dunkin Donuts have seen
rapid expansion on a global basis. Yes, you now need to manage
this network of franchisees, which can be distracting. But, no more
so than managing your own growth. And, by franchising, you get
your brand to market much faster, before somebody else comes in
with a competing concept. And, what many franchisors do, is use
franchising to roll out the brand as quickly as possible, and then buy
back their best-performing franchisees over time, as cash from
operations start flowing through the business, and they have the
resources to scale up revenues with company-owned locations.
Quite a clever model, as the franchisor, with the franchisees taking
most of the financial startup risk. The only downside is the
franchisees may not be required to sell, so the franchisor may
permanently lose key markets long term (so, plan ahead for which
markets will be most critical for your long term strategy).

There are many websites where you can go to research or advertise

franchise opportunities. Here are a few to get you started:
Franchise.com, Franchise Direct, Franchise.org, Franchise Clique
and Franchise Gator. Entrepreneur Magazine also has a great annual
list of the Top 500 Franchises, where you can do additional
research. There are franchise opportunities in literally most any
business line (e.g., restaurants, retail, education, home services,
business services), so it is worth exploring for both entrepreneurs
looking for opportunities and established businesses looking for
ways to fund their growth.

But before you make any franchise decision as a franchisee: (i)

make sure you clearly read the obligations of the franchising
agreements (e.g., the UFOC franchise disclosure document), as the
devil is certainly in the details, for both the franchisee and the
franchisor; and (ii) make sure you have done your due diligence on
the franchisor (e.g., how long have they been in business, are they
well funded, are locations growing, are other franchisees happy).
The last thing you want to do is start a new franchise without
perfect information on your cash obligations or sale restrictions,
your franchisor’s committed contractual support or a franchisor that
is in a weak financial position to back up their promises. There is a
good article on Franchising.com about key things to look out for in
the UFOC. But, in all cases, call references and get a smart
franchise lawyer to help you!!

Lesson #38: Things to Consider When Buying

a Business
At times, it may make sense to acquire a business. Reasons could
include acquiring technology or other assets, patents, or a revenue
stream or client base. Or even, for simply taking out a potentially
competitive long-term threat. In today’s post, we will assess how to
go about: (i) identifying targets; (ii) approaching targets; (iii) things
to look out for during due diligence; (iv) valuing target companies;
and (v) structuring the deal.

As for identifying targets, my guess is you most likely have a target

in mind if you are reading this. But, if not, there are many places to
look for prospective targets. Most industry associations have lists of
key companies in their industry. Many journalists or bloggers have
specific industry or startup focus, and they may know about various
players in the space. As, do various investment bankers, many of
whom typically have a specific industry focus. So, use Google to
track down who these key players are, that can point you in the right
direction. In addition, there are several websites that advertise
companies for sale by industry, including BusinessesForSale.com,
BizQuest and BizBuySell.com, to name a few.

When you have found a target, how you approach them will go a
long way towards increasing your odds of getting to the finish line.
Sometimes it makes sense to approach them directly, and other
times it makes sense to approach them through a third party
intermediary. The latter is better with highly competitive businesses
or with executives that may not present well on a first call. And,
when you do approach targets directly, I recommend not jumping
right into merger discussions. This is all about building up a
relationship and comfort for the target company. So, I like to start
with “potential partner” discussions, that ultimately evolve into
“potential merger” discussions down the road. And, worth
mentioning, the word “merger” sounds less harmful than
“acquisition”, for the target who is not quite ready to let go the
reins.

During due diligence of the target company, make sure you have
your lawyer send over a detailed information request list, which
could include, review of: (i) all company financial statements,
historical and projected; (ii) all company ownership history and
shareholder records; (iii) list of all known assets of the business; (iv)
a list of all known liabilities of the business, or its shareholders; (v)
a list of all current and past employees by title, including resumes;
(vi) a list of all contracts of the business; and (vii) a list of all
intellectual property, to name a few. These schedules will become
the basis of any representations or warranties made by the seller in
the closing documents. But, more important than anything, make
sure you trust the people you are “getting in bed” with. So, make
sure there is a good personality fit, a good skill fit and a good trust
factor with the selling company and their shareholders. Call their
trade and personal references as a critical step during due diligence.

In terms of valuing a target business, the methodologies are no

different than how you would value your own startup business with
prospective investors, which we discussed back in Lesson #32. So,
please re-read that post for the details. But, with a merger, there is
one additional technique which can be used, which is a “relative
contribution analysis”. The relative contribution could relate to
revenues or profits or website visitors or customers or whatever
other metric the two companies can agree properly value their
relative contributions. So, let’s say the acquiring business has
$1MM of revenues and the target business has $500K of revenues.
In this example, Newco could be owned 66.7% by the acquiring
company and 33.3% by the target company, using this
methodology.

But, if you do not like what the relative contribution method has to
say, or if you don’t want any outside shareholders in Newco, cash
will be your primary currency using one of the techniques discussed
in Lesson #32. Beyond making the cash or equity acquisition
decision, other structural considerations include the following. The
most important is deciding between an “equity purchase” or an
“asset purchase”. The latter is preferred, as it leaves all the liabilities
and other “skeletons in the closet” with the target company’s
shareholders, and do not transfer to Newco. The timing of payments
is another consideration. If you don’t have all the cash day one, you
can structure payments over time if the seller is willing to take a
seller’s note from the buyer at closing. Or, if you cannot agree on
upfront valuation, you can put earn-out mechanisms in place, to get
the target future upside payments if certain projection thresholds are
met. But, earn-outs are complicated to write for both the buyer and
the seller, so get good legal advice here. The other structural
consideration is making sure the seller gives the buyer proper
representations and warranties (from both the company and their
underlying shareholders, individually and collectively), to make
sure there are refunds to the buyer if anything was not delivered as
promised after closing. And, don’t forget to make sure the target
company is delivered to you with an adequate amount of working
capital, in line with historical levels.

At the end of the day, there are a lot of things that go wrong with
acquisitions, and very few go perfectly to plan. So, be conservative
in your forecasts, and consider haircutting target revenues by 50%
as a cushion, especially if the “entrepreneurial fire” of the target’s
CEO are not going to be a part of Newco. And, before going down
this road in the first place, make sure you have done a complete
“buy vs. build” analysis for this decision. As, it may be cheaper to
ultimately build the solution yourself, and not have to deal with any
of the business combination or cultural integration issues of a
merger or acquisition. Proceed only with caution here, to not upset
the apple cart.

This is too complicated a topic to detail in a simple lesson, so get a

good lawyer to help you here.

Lesson #43: Examples of Barriers to Entry

for Your Startup
Anybody can start a business. But, very few businesses started have
long-term, defensible barriers to entry to protect against potential
future competitors. That is the one of the key things you need to
focus on in terms of building a winning a business model and
increase the odds you get a big pay day down the road. In today’s
post, we will talk about a few of these barriers to entry: (1) patents;
(2) difficulty of replication; (3) exclusive, long-term strategic
partnerships or contracts; and (4) high switching costs, to name a
few. I will give examples of each.

Patents are a double-edged sword for startups. They are great to

have to protect your idea and get investors excited about your
business. But, they are costly to set up (around $12K if straight
forward filing and process, and much more if not). And, patents are
very costly to enforce, taking hundreds of thousands of dollars in
legal bills to protect your idea, which most startups typically don’t
have. But, assuming you build to scale with enough of a first mover
advantage, hopefully your profits of the business will provide
enough defense capital to enforce your patent and keep others out of
your space.

Difficulty of replication typically comes down to complexities of

the product or the amount of capital or time required to duplicate the
product. As an example, it is very difficult to knock off a new
biotech or pharmaceutical line that has been in research and
development for the last 10 years. Or, it is very difficult to replicate
Google’s dominance in search technology, given the years of
knowledge that have gone into refining their search algorithms and
the billions of dollars in capital investment required to replicate
their international network of high-speed servers and data centers.
Or, imagine replicating AT&T, Comcast or ComEdison’s
infrastructure investments in wiring and powering all homes and
businesses.

Exclusive, long-term strategic partnerships or contracts can also be

a game changer for a startup. For example, at iExplore, we were the
exclusive adventure travel provider for five years to the National
Geographic audience. Or, imagine you are Waste Management with
the exclusive waste removal contract for the City of Chicago. Or,
Halliburton getting exclusive Department of Defense contracts to
rebuild infrastructure projects in Iraq. Or, maybe you are Lens
Crafters, as the exclusive in-store optical departments within a Wal-
Mart location, or Chase Bank as the exclusive ATMs inside a
Walgreen’s location. Anytime you are talking exclusivity and long
term in your contracts for customers or distribution, the better
barriers to entry you are building.

Products with high-switching costs are also great barriers to entry.

Once, a Fortune 500 company has implemented a new customer
relationship management platform, it is highly unlikely they will
swap out that platform in the near term, and have to reinvest in
technology and employee training all over again. Or, once LinkedIn
has built the “default business networking site” and users are
comfortable using it, it would be very difficult for a new site in the
space to get traction, since users will not want to make the change.
Same could be said about YouTube as the default place to store
videos, Flickr the default place to store photos or iTunes the default
place to store your music, and consumers not wanting to reload all
their a content a second time in a second place.

Hopefully, you get the point here: any startup requires long-term
defensible barriers to entry to attract investors, protect its turf and
increase odds of long term revenue growth. Critically assess your
own business, and look for opportunities to build your own barriers
to entry against potential future competitors.

Lesson #45: Find a Business Mentor or

Business Coach
I had the distinct pleasure of meeting and mentoring the 2011 class
of 10 startups in the Excelerate Labs accelerator program in
Chicago. There is nothing more invigorating than being surrounded
by a bunch of excited and motivated entrepreneurs, and trying to
help them achieve their goals of building world-class companies.
And, I am happy to contribute knowledge from my 20-year career to
help them get up the learning curve faster and for me to give back to
the local Chicago entrepreneurial ecosystem, of which I am a part.
When I was launching iExplore back in 1999, I wished I had a pool
of proven entrepreneurs I could freely approach to help show me the
way.

Mentors are one of the most valuable resources an entrepreneur

should tap into. Especially if the mentors are freely organizing
themselves into “on-call and free consultants” via incubator and
accelerator programs. The idea of launching a business should no
longer be a scary or daunting experience. It should be a
collaborative experience accumulating the knowledge of the scores
of local entrepreneurs who have already built successful businesses,
and can help you move faster and avoid known pitfalls based on
their years of experience, as an entrepreneur themselves.

And, what’s great about mentors or business coaches is that they

come in all shapes and sizes that can handle the myriad of topics
that you may be having a problem. So, search for the mentors based
on your various business size, your various industry, or your
specific business problem, on a case-by-case basis. Unlike finding a
long term person for your board of directors or advisory board, as
we discussed back in Lesson #12, mentors are more like “hired
guns” on one-off topics that present themselves over time.

As an example, one of the startups I met this week needed help in

structuring a strategic partnership with the leading media company
in their industry to assist them with promotion and building up an
audience. And, modestly, who better to help them than me, who
structured a very similar media-related strategic partnership with
National Geographic, while I was building iExplore. Having the
benefit of hindsight of cutting a strategic deal with a big media
company, I have first hand experience of where the plusses and
minuses of that relationship presented themselves after the ink was
signed, and it was too late to change anything in the agreement. So,
hopefully, this startup can benefit from my experience, and can
write a better agreement in their deal, than I did in mine.

In terms of actually finding these people, it should be as easy

working your offline and online business networks. And, if some
cases, willing mentors freely make themselves known on websites
of the various incubator or accelerator programs’ websites. For
example, here is the list of the Excelerate mentors you may be able
to research and politely approach, whether you are formally in the
Excelerate accelerator program or not. And, I am a big fan of
working my LinkedIn network (nationally) and my
BuiltInChicago.org network (locally in Chicago). The concept of six
degrees of separation to anybody and everybody has never held
more true: I am never more than two or three degrees away from
anybody that I am trying to reach out to. And, sites like LinkedIn
and Twitter makes it easy to search by keyword for domain experts
on any topic you may need help with.

And, don’t be intimidated or afraid to reach out to prospective

mentors. We don’t bite ;-) The worst thing that can happen is the
mentor may be too busy to handle your specific problem, and they
will politely decline or point you in the right direction to someone
who may be able to help in their absence. That said, you have to be
sensitive to the mentors’ time. It is one thing to get one random
question a month that requires a little bit of time to solve. It is
another thing to get ten random questions a week that requires a lot
of time to solve.

If you find yourself approaching this latter situation, now may be

the time to move that person to your formal board of directors or
advisory board with equity incentives to compensate them for their
time. And, in all cases, do not take your mentors for granted: if they
do something very helpful for you (e.g., help save you a ton of
money, or negotiate an even better deal), send them a thank you
note, or gift card, or bottle of wine or whatever to show you much
you appreciated their help and keep them excited to continue to help
you in the future.

Always remember: you are not alone in your startup efforts, there is
a wide base of mentors and business coaches you should tap into to
help you accelerate and optimize your efforts. Good luck.

Lesson #63: Determining Exit Options for

Your Startup
Hopefully, you are not already thinking about an exit for your
startup. But, it is always good to have a sense to what your long-
term exit options are, in case prospective investors (or you) are
curious about how to liquidate their investment down the road. Your
exit options basically come down to: (i) selling the business
outright; (ii) merging the business into another entity; and (iii)
taking the company public. We will discuss each of these options
below.

Selling your business outright is your most logical exit opportunity

for most startups. Here, we are talking about selling to a corporate
or financial buyer that sees value in what you have built (e.g., your
technology, market share, client list, cash flow, growth vehicle for
them). So, make sure value has actually been created in your
business over time, to attract a buyer long term. Most buyers are
going to look to management to stick around for at least some
period of time, to help transition the business. Corporate buyers will
need a 6-12 month transition and financial buyers could require you
to stick around longer term to lead the next phase of the company’s
growth. In this scenario, you have sold 100% of the assets or equity
of the business, depending on the deal structure, in exchange for
cash, equity or other compensation, either paid upfront or spreadout
over time.

In the merger scenario, it is largely the same as a corporate sale, but

instead of selling 100% outright, perhaps you merged with an
equally sized, similar business in a 50%/50% merger. In such case,
you most likely took equity, instead of cash upfront. Which means,
you would need to create a mechanism for the merged business to
distribute funds out to you over time, to repurchase your 50% stake
with cash from operations or otherwise. And, in this scenario, the
combined entity may not need your management team, since they
already have a team in place running a similar business. Although
cash sales for 100% are my preference, deals like this can
sometimes make sense where a bigger entity may be more appealing
to a long term buyer (e.g., you are too small to attract buyer interest
on your own, but combined with a bigger business you are more
attractive). And, this road also makes sense when you are trying to
phase out of the business, but don’t need immediate cash to
facilitate your exit.

As for an IPO, “fuhged about it” (said with my Robert De Niro

accent). Very few startups reach the scale of being able to take it
public, and of the ones that do, only the creme-de-la-creme actual
do go public. And, for most of the last few years, the IPO markets
have basically been closed altogether based on poor market
conditions, and only recently have premium companies like
LinkedIn, Zynga, Groupon, Facebook and Pandora decided to give
it a shot. And, if you are lucky enough to build a successful business
like that, running a public company is a complete pain in the ass,
dealing with public shareholders, reporting quarterly earnings and
disclosing all your financial information to all your competitors.
Unless the valuation upside is materially higher than a corporate
sale route, I suggest avoiding the IPO route altogether.

In following lessons, I will discuss “how to find and approach

buyers” and “how to structure the sale.”

Lesson #64: How to Find Buyers for Your

Business
Following my last lesson on Determining Exit Options for Your
Startup, in this lesson I will discuss how to find both strategic
buyers and financial buyers for your business.

Finding a strategic buyer for your business is the most likely

liquidity event scenario for your startup. Remember, a corporate
buyer is only going to buy you if you bring them some sort of value
to their business (e.g., your technology, market share, client list,
cash flow, growth vehicle for them). So, you need to critically
assess what the core assets of your business are, and identify a list
of targets that would find such assets most useful.

This could include direct competitors in your exact business,

looking to grow market share (e.g., Office Depot acquiring Office
Max). This could be a similar business looking to expand their
product line (e.g., Amazon acquiring Zappos to get into shoe
business). This could be a tangential business, serving the same
demographic, looking to diversify revenue streams (e.g., commerce
company Expedia acquiring media company Trip Advisor, both in
the travel space). And, this could include entirely different
businesses altogether that have synergistic technologies (e.g., eBay
acquiring Skype to allow commerce buyers an easier way to
communicate with each other). These are just a few examples.

When I was selling iExplore (online adventure travel website), I had

considered direct competitors like Away.com and Gorp.com, trying
to increase market share. Big online travel agencies like Expedia
and Travelocity, looking to get into the adventure travel space.
Offline travel companies like Abercrombie & Kent and TUI Travel,
looking to increase their expertise in online e-commerce. Travel
content companies like Travel Channel or Lonely Planet, looking to
add a commerce offering around their content. Companies like
Spafinder or Luxury Link selling into similar high-end
demographics. Big online portals like Yahoo or Google, wanting a
platform in the travel space.

So, critically assess your business and think creatively who such
targets could be. And, remember, the bigger the buying company,
the bigger your business needs to be to get their attention. Expedia
wouldn’t even talk to iExplore, without having $5MM in EBITDA,
since any acquisition smaller than that, was less than a decimal
point rounding error for their multi-billion dollar business. The
flipside of this is, the small the business you approach, the less
likely they will be able to fund an acquisition with free cash or
otherwise, which may push them to only considering a stock-based
deal (which may not be as attractive to you as a cash based deal).
So, prioritize your prospective suitors accordingly, to find the right
mix of business size and liquidity to increase the odds you get to the
finish line.

As for finding a financial buyer, it is very similar to How You Raise

Capital for Your Business, which we covered all the way back in
Lesson #4. The primary difference is the stage of the business and
the types of investors you approach. Most likely, by the time you
are ready to sell your business, you have grown to the scale of a
private equity investor (later stage), instead of a venture capital
investor (earlier stage). Private equity firms will be looking for high
cash flow businesses, which will allow them to lever up the business
with debt (to reduce their equity investment), and pay off the debt
over time with the cash flow from the business. So, make sure you
have at least $10-$20MM of revenues and $3-$5MM of positive
cash flow, before approaching a private equity firm that has
experience in your industry.

If you are less than this, you are most likely taking about
negotiating a “recap” with a venture capital firm, which is a lot
tougher to do, since venture capitalists prefer their cash to grow the
business, not take out selling shareholders. And, remember, both
private equity firms and venture capitalists are not going to play
unless a going forward management team is in place. So, plan
accordingly with members of your own team, or otherwise.

In my next lesson, we will discuss “How to Structure the Sale” of

your startup.
Lesson #65: How to Structure the Sale of
Your Business
Following my previous lesson on How to Find Buyers for Your
Business, next we are going to talk about how to best structure the
terms of your sale. Please understand, structuring the sale of your
business can be really complicated and has many different
considerations you need to weigh. So, make sure you get good legal
advice for more detailed thoughts beyond my high level guidance
below.

Valuation. Obviously, the first thing the parties need to agree on is

the valuation of the business. As you remember, we discussed How
To Value Your Startup back in Lesson #32. So, I won’t go into too
much more detail that that, as the valuation principles are largely the
same, whether you are doing a venture financing or selling the
business outright. So, please re-read that old lesson for details. The
only thing worth mentioning is strategic buyers will place different
valuations on your business than a financial buyer will, depending
on how important your business is to them (e.g., taking out a key
competitor, or simply adding a minor product line), and whether
you are filling a near team hole for them or bringing them a long
term revenue pipeline and growth vehicle. So, you can only
negotiate as hard, as you think you are important to their business.

Equity or Asset Deal. An equity deal is when the buyer takes over
100% of your capital stock, and all the related assets and liabilities
of the business. An asset deal is when the buyer only acquires the
key assets of the business (and whatever specific liabilities they are
willing to take on, like current accounts payable). For the most part,
buyers of startups are looking to do asset deals. It helps lower their
downside risk of not knowing what skeletons are in your closet to
creep up and bite them on the butt. So, that means, asset deals will
be your most likely requested scenario from your prospective buyer,
which is fine. Provided you understand you will need to resolve all
open liabilities not taken by the buyer with any proceeds you get
from the sale, which are hopefully enough to cover them.

Cash Now or Seller Note. Of course, getting 100% of your cash

upfront is your most desirable outcome. That said, you as the seller
may want to get additional performance-based upside, in the form
of an earn-out, which we will discuss below. And, certain buyers
feel more comfortable when the seller still has a little “skin” in the
game, not taking all your chips off the table day one. And, in other
scenarios, the buyer may not have 100% of the cash to fund the
business day one, and may ask to pay 50% now, and 50% over the
next year or two in the form of an interest-bearing Seller Note to
you. This is particularly true for smaller businesses with limited
capital. So, like negotiating valuation, you need to negotiate the
timing of the payments, based on what works best for both parties
and the circumstances at hand.
Earn-outs. Earn-outs are mechanisms to get the seller additional
cash payments over time, based on hitting some preset performance
metrics. These are great for sellers that feel “the best is yet to
come”, but still need to sell for other liquidity-driven reasons. The
timing of the earn-out can be whatever you want: my iExplore sale
was 18 months (very typical) and my MediaRecall deal was seven
years (very atypical). Buyers typically don’t like earn-outs that last
too long, since they want to fully control the business operations,
and won’t want to tinker with the business, and risk a lawsuit from
the seller, in the middle of the earn-out period. And, although sellers
like the upside opportunities from earn-outs, earn-outs are very
difficult to contract in a way that doesn’t leave the buyer with
loopholes to manipulate the payout calculation.

As an example, a seller will want revenue-driven earn-outs (to keep

it clean and simple), but the buyer won’t like that, since you can
load up expenses/losses to drive revenues. And, on the flip side, the
buyer will want profit-driven earn-outs (which you won’t want, as
the buyer can pushdown corporate overhead expenses to manipulate
your profits to levels the earn-out would not be paid). In addition, it
is preferable to having any revenues coming from promotional
support by the buyer, help to credit your earnings and earn-out as
the seller (which the buyers may or may not be willing to do, since
they are the ones helping to increase your earnings—and hence their
cash payouts to you for the business). So, it is a very delicate dance
to negotiate a happy middle-ground that works for both parties and
still has a lot of “teeth” both ways.

Net Working Capital at Closing. Net working capital is your current

assets less your current liabilities. The buyer will typically ask for
the seller to deliver the business with a historically average level of
working capital at closing. So, as an example, if your average net
working capital is $50K, they will want the business delivered with
$50K of net working capital. Any more than that, and the sellers
keep the overage as additional sale proceeds. Any less that that, and
the seller needs to fund it to the buyer, to catch them up. This item
by itself is a big negotiating point, especially since the balance sheet
used for such calculations (and related auditing of the sub-accounts
that comprise it), are usually prepared and calculated within the first
30 days after closing the sale, allowing opportunities for the buyer
to manipulate the numbers in between the closing date and the
calculation date. So, be careful in constructing language that is fair
and protects you here, so you are not going out of pocket to make
up for any shortfalls.

Representations & Warranties. Representations and warranties are

basically the seller’s guarantee to the buyer that what they have
communicated to the seller in terms of the assets and revenues of
the business is accurate, and the fact the seller is willing to back it
up in writing. So, in the event the buyer ever uncovers anything as
inaccurate (and, in essence, had them buy the business under false
pretenses), the buyer can come after the selling shareholders for a
refund of such amount. Now, typically there is a minimum basket
set aside to cover minor things (e.g., no refunds for first $100K of
issues). But, after that, they can get any monies paid to seller
refunded to them, in a like amount (e.g., $500K unknown issue,
means $400K refund to the buyer after the $100K basket is used
up). These warranties typically have a 12-18 month life before they
expire.

So, a couple of important things here. First, shoot to have any

indemnifications provided by the selling shareholders as “limited to
your own personal stake” in the business, not to be jointly and
severally liable, having to cover the liabilities of your other selling
shareholders, if they do not have the funds to refund their portion of
the monies. Buyers will firmly try to negotiate otherwise, to
maximize their protection. Secondly, because of this issue (the risk
of refunding monies), I would suggest holding 100% of all monies
paid for the business, in an interest-bearing escrow fund, not to be
distributed to individual shareholders until the warranty period
expires, and there is no risk of refunds. That ensures every
shareholder’s cash will be there, when and if you need to refund it.
That said, it will be a pain to you, if liquidity was the primary
reason for selling the business. So, weigh your pros and cons here,
before distributing any cash. Sometimes you can purchase
indemnification insurance to cover items like this, allowing
distribution of cash. But, insurance companies hate it, and it is very
expensive and often not worth it compared to the escrow option.

Once again, this was intended to be a very high level tutorial on a

very complex topic that only a seasoned M&A lawyer should help
you with. But, hopefully, it presented some key issues to consider,
so you are smarter in negotiating your sale, when that time comes.
Lesson #81: Considerations for Global
Expansion
For us internet entrepreneurs, we are smart enough to know that the
internet is a global medium, and many of us are already serving
international clientele through our U.S. websites. But, when do you
pull the trigger to formally enter a new international market?
Nobody should consider expanding internationally until they are
standing on solid footing in their core domestic market (e.g.,
meaningful market share, financial position). This is because
expanding overseas is like starting the company all over again. You
can’t simply take what you have and move it overseas. You have to
localize everything on a market-by-market basis.

When we talk about localization, we are talking about tailoring: (i)

your core product; (ii) your name, packaging and marketing
materials; (iii) your pricing and currency hedging strategies; (iv)
your call center fulfillment processes; (v) your distribution center
locations; and the list goes on and on from here. The point being
you need to fully grasp each country on a stand alone basis, and
customize your services for their culture, religion, demographics,
language, currency and ways they currently do business.

Here are a couple real life examples. McDonald’s needed to have an

alternative to beef for their hamburgers in India, since cows are
sacred in their religion and would never be eaten. Chevrolet tried to
sell their highly popular Nova car in Spain, and nobody bought
them because Nova translated to “don’t go” in Spanish, which is not
good for a car. Most of Africa consumes their media through their
cell phones, as most of the population doesn’t have computers or
televisions. Most teenagers in China need to access the internet in
internet cafes, since their parents are ultra conservative and do not
allow them to access the internet from home. You get the point.

I think each country is so specific, that you can’t enter a market

without a resident expert that knows the intricacies of the local
market, and can help navigate through all these issues. So, find your
on-staff country manager or local consulting firm that is going to
help you make the required localization decisions.

In terms of prioritization what specific countries to expand into, I

think the market size for your product or services rules the day. If
France can lead to $1BN market potential, but Serbia can only lead
to a $100MM market potential, it is pretty clear France is where you
start. So, you need to research the global market for your products
and services on a country-by-country basis, and sort the list
accordingly, from highest potential to lowest potential. Then start at
the top of the list and move down from there.

One wrinkle in this sorting is language. Many American businesses

just feel more comfortable expanding into Canada, England and
Australia first (and in that order). They start with Canada because it
is geographically closer to the U.S., making it easier to manage.
Then comes England because it is the largest English-speaking
country in the world, next to the U.S. And then comes Australia, the
next biggest English speaking market. If it helps you feel more
comfortable getting your international “sea legs” beneath you in
English speaking markets, great, go for it. But, I would personally
follow the Dollars (or Rupees or Yuan), to see where the biggest
market could be made.

In terms of determining the speed of your international roll out, I

think there are many factors that drive speed: (i) how many
potential competitors are breathing down your neck trying to target
the same markets; (ii) what are your available cash resources; and
(iii) how much do you want to try to bite off at once. In more
mature markets, it is OK to move slower, as the business hasn’t
changed for decades. But, with a hot new technology with you
leading the market in the first mover position, you want to keep
your first mover position globally and further distance yourselves
from your competitors before they have a chance to own a market
before your do.

As for a case study here. Groupon believed they were a first mover
with a unique product and that they needed to move at light speed to
expand their product in most major global markets overnight. But,
they had hundreds of millions of dollars in venture capital to work
with, and could afford that call. That said, some would argue that
they expanded too fast, as in China, where they are having a tough
time with operations and are already going through a round of
layoffs there.

And, on the topic of China, it has proved a very difficult market to

crack for many other companies, as well. We all remember
Google’s stand-off with the Chinese government, pushing for an
open internet there (immediately followed by China shutting off
Google). And, China is the only major market that YouTube has not
been able to gain a leading market share for internet video, far
behind Youku and Todou in visitor traffic. So, the key learning
here: in certain international markets, like China and Japan, it really
makes better sense to find a key, respected local company to work
with as your in-country partner (instead of trying to tackle the
problem alone). Their culture will allow them to be much more
accommodating to “their own” than “outsiders.”

Which brings up the topic of international acquisitions. If you can

find reputable international businesses with leading market share
positions doing largely the same thing as yourself, I would suggest
you acquire those overseas businesses, instead of trying to build a
new business yourself in those markets. The advantages of the
acquisition route are: (i) you acquire country specific expertise with
a team that firmly understands the local market; (ii) you have an
overnight base of revenues and clients (no longer a startup); and (iii)
you take a competitor out of the way in the process. But, don’t force
the acquisition route. If the team doesn’t gel or you don’t share a
vision or you can’t make the economics work, you’ll have no choice
but to go it alone with a lot of headwind in the process.

Global expansion is a very complicated topic with a different

answer for every business and for every country, so make sure you
seek good counsel from proven international expansion veterans
that can assist you in avoiding the known pitfalls along the way.

Lesson #96: Vertical vs. Horizontal Growth

Options
For most startups, I give them the clear message to focus on
building one business at a time, like we learned back in Lesson #40.
But, what happens when you are huge success in that business and
need to look for additional growth options? Those decisions
typically revolve around vertical vs. horizontal growth strategies.
Vertical growth is getting deeper in your current line of business.
Horizontal growth is getting into new product areas that are not
directly associated with your current line of business. We are going
to discuss assessing these options, and a few variations to this
theme.

VERTICAL GROWTH—DOMESTIC

I am going to use iExplore as the example company looking at

options to grow its business throughout this lesson. iExplore was a
tour operator for adventure travel in 100 countries, serving an
affluent demographic. Domestic vertical growth options for
iExplore could include things like: (i) launching high-end tours in
additional countries; (ii) launching a line of more affordable trips to
appeal to the middle-market; or (iii) launching a line of tours that
are less “active” (e.g., hiking, biking, diving) and more
“experiential” (e.g., culinary, wildlife watching, expedition cruise).
In each of these examples, iExplore’s growth is around their core
business of running adventure tours. This is usually the first place
startups will look for growth, in their core business. The only things
to be sensitive about here are things like: (i) will any changes to
your product or price impact your current brand positioning (e.g.,
less expensive trips could tarnish a high-end brand name); and (ii) is
there really enough demand for the new products under
consideration (e.g., do enough people really want to travel to South
Sudan to justify building a tour?).

VERTICAL GROWTH—INTERNATIONAL

International vertical growth options for iExplore would mean

taking its core trips today and marketing them to people who live in
countries outside of their U.S. home. There would be many things to
consider here: (i) is there a demand for your product overseas (e.g.,
do people in Europe buy adventure travel, or do they prefer cruises);
and (ii) what will you need to do to localize the product (e.g.,
designing tours with native language tour guides, brochures,
websites, call centers, etc.). Please re-read Lesson #81 for
Considerations for Global Expansion for more detailed thoughts
here, as you assess your options around international growth.

SEMI-VERTICAL GROWTH

Continuing on with iExplore’s growth options, maybe they have

tapped out all their growth options in their core adventure travel
category. In a category I call semi-vertical growth, iExplore may
want to remain being a seller of travel as its core business, but is
considering: (i) vertical integration within adventure travel; or (ii)
new travel verticals altogether. Vertical integration would be
iExplore wanting to acquire its on-site suppliers, hotels or sub-
contractors that it uses to fulfill its tour service, to get a higher
margin or to better control their inventory position. The problem
with this route is running a hotel is very different than running a
tour operator marketing business, with a huge capital expense for
acquiring and maintaining properties, staffing the hotel and keeping
it at full occupancy. As for new travel verticals, iExplore may want
to start selling cruises, spas, lodges, vacation rentals, ski trips,
golfing vacations or other travel categories beyond adventure travel.
The question here: is there demand for such verticals from
iExplore’s existing customers (lowest hanging fruit for marketing
such new services), and how will getting into those businesses
impact its brand positioning (e.g., adventure travelers wouldn’t be
caught dead on a Carnival cruise ship).

HORIZONTAL GROWTH—ENDEMIC

I split horizontal growth into two categories, endemic to your

industry and non-endemic to your industry. Endemic horizontal
growth for iExplore, would be extending their travel brand into new
travel-related businesses. That could include: (i) launching a line of
iExplore branded tour books; (ii) launching an iExplore travel show
on Discovery Channel; or (iii) starting an iExplore branded travel
insurance company. All of these businesses require completely
different skills than being a tour operator (e.g., book publishing, TV
programming, insurance underwriting), but all can easily be sold to
the same iExplore demographics and customers (e.g., buy a trip and
we’ll sell you the travel insurance, read our books while on your
trip, watch our TV programming while not on vacation). Just make
sure you have the appropriate management skills required for each
of these distinct businesses, before drifting too far from your core
strengths.

HORIZONTAL GROWTH—NON-ENDEMIC

Non-endemic horizontal growth for iExplore, would largely revolve

around turning iExplore into a “lifestyle” brand, and selling those
iExplore travel customers, everything else they need for their high-
end lifestyle. For an affluent lifestyle, that could include selling
iExplore customers opportunities around fashion, automobiles,
boats, homes, restaurants, event tickets, etc. As you can imagine, the
skills for selling fashion is pretty far removed from the skills for
selling adventure tours. So, I would highly advise tapping out all
other logical growth options, before taking it this far.

Hopefully, you have a better sense to the various vertical or

horizontal growth options you can consider for your business. I
have roughly put them in the order I would prioritize such efforts.
That said, sometimes markets will let you take your time and grow
them in a sequential process. And, other times you don’t have that
luxury. As an example, look how quickly Google evolved from a
search engine, to also being an email, calendar, social networking,
news, maps, web browsing, content, mobile, etc. business in their
attempt to take over anything and everything internet related. But,
that took a lot of venture capital and management bench strength to
pull off growth like that. And, not all of us have that luxury. So,
don’t bite off more than you can easily digest.
Lesson #100: The Definitive Checklist for
Startup Success
Over the 99 lessons, I have shared many first-hand experiences with
you on how best to build your startup. Below is a checklist of the
most important “must-haves” for any successful startup:

___ A good business idea—“secret sauce” solution to real world

problem (Lesson #1)
___ A well-thought-out business plan and recurring revenue model
(Lesson #7, Lesson #78)
___ A firm handle on current and future competition (Lesson #19)
___ Defensible barriers to market entry (Lesson #43)
___ An experienced board of directors or advisors (Lesson #12 and
Lesson #45)
___ A deep network of colleagues in your startup ecosystem
(Lesson #47 and Lesson #85)
___ A motivating and credible CEO (Lesson #14)
___ An experienced and backable start-up team (Lesson #2, Lesson
#27 and Lesson #83)
___ Appropriately compensated employees (Lesson #58 and Lesson
#59)
___ Equity in hands of key managers (Lesson #9)
___ An entrepreneurial office culture (Lesson #13)
___ A healthy office environment with work-life balance (Lesson
#18 and Lesson #55)
___ A religious focus on putting your customer first (Lesson #33)
___ The right product and pricing strategy (Lesson #20)
___ A profitable and tested “go to market” sales and marketing plan
(Lesson #21)
___ Infectious enthusiasm and passion for business (Lesson #50)
___ A clear management focus on what you are building (Lesson
#40)
___ Speed to market and knowing when to cut losses (Lesson #71)
___ Disciplined decision making skills (Lesson #87)
___ Flexibility to fine-tune model and navigate challenges (Lesson
#8 and Lesson #31)
___ Persistence in goods times and bad (Lesson #29)
___ The right mix of intangibles that investors are looking for
(Lesson #86)
___ Market timing and luck (Lesson #3)

And, more specifically, do not approach professional venture

investors until you have achieved:

___ A good mix of the “must-haves” above

___ A sufficient proof of concept based on key milestones (e.g.,
revenues or visitor traction)
___ Your planned go-to-market strategy tested and profitable
___ Meaningful customers under contract who would be solid
references
___ A sizable pipeline of customers in the works
___ Key industry partnerships with brand-name marketing partners
___ Clarity you fit the types of investments your target investor
makes
___ A fine-tuned elevator pitch, to get their attention
___ A credible “road map” for investor to realize 10x returns within
5 years
___ Realistic thoughts on potential exit options and buyers
___ A realistic expectation on valuation to attract capital (Lesson
#32)
___ Clear handle on how much money you need, including cushion
to last 18 months
___ Logical use of proceeds invested in future growth (not past
debts)
___ A debt/equity investment structure that works for the investor

For this second list, please re-read Lesson #4—How to Raise

Capital for Your Startup and Lesson #10—How Best to Approach
VC’s or Angel Investors. And, be sure to watch this video
presentation I made on How to Pitch Venture Investors.

So, keep this startup checklist handy. If you check-off most of the
items on the above list, you should be “off to the races” in building
a winning business that should attract smart venture investors for
your business. Wishing you the world of success (and luck) in your
entrepreneurial adventure.
2 Marketing

Lesson #6: Structuring Strategic Partnerships

for Your Startup
Overall, I am a huge fan of strategic partnerships, if they are
structured correctly and both parties are incentivized to see the
success of your business. I built both iExplore and MediaRecall
with equity owning strategic partners: National Geographic for
iExplore and Getty Images for MediaRecall. In this lesson we will:
(1) define a strategic partnership; (2) highlight plusses and minuses
of relationships like this; and (3) list critical items to consider when
contracting these relationships.
First of all, what is a strategic partnership? They come in multiple
shapes and sizes. Some are simply biz dev relationships with cross
marketing. Some are revenue share relationships. Some are equity
owning relationships. To me, the deeper the better, to truly qualify
as a strategic relationship. So, don’t be afraid to spread the equity to
partners that can material change the upside of your business.

We structured a deal where National Geographic acquired 30% of

iExplore, for cash and promotional support. On the face of it, it
sounds like a big number (as in my experience strategic equity
owners are typically in the 5%-20% range depending on the level of
support). But, when you realize National Geographic is one of the
most trusted brands in the world, with one of the highest-end
demographic readerships to market high-end adventure travel, it
was really a match made in heaven for a startup travel business.
And, iExplore clearly saw the benefit of that strategic relationship
from a couple of perspectives: (i) their brand association provided a
25% increase in sales (vs. an unknown iExplore brand as a startup);
and (ii) when times got tough around 9/11/01, having that National
Geographic relationship made the venture capitalists more
comfortable continuing to fund our business (e.g., if NG still likes
the story, then so do we). Without that relationship, I doubt we
would have been able to stay in business given the 9/11/01 impact
to the travel industry.

But, a strategic relationship is more than just giving equity to

partners that can help you to materially scale up your business than
you could on your own. It is also, making sure that the strategic
partner is contractually on the hook for the marketing support you
need to implement that growth. For example, in the National
Geographic deal, there were tons of advantages for iExplore: (i) co-
branding use of their logo; (ii) exclusive trip finder on their website;
(iii) discounted rates to purchase advertising in their magazines; (iv)
access to their 5MM customer direct mail list; and (v) access to
other internal marketing partners, like their cable television and
merchandising divisions. Which at the time the deal was cut in
August 2000, when iExplore was flush with cash, was a really
terrific deal.

But, after 9/11/01, when iExplore found itself in a cash-tight

position, we quickly learned that that deal was not properly
structured for a downside scenario where we didn’t have cash to
spend. Accessing NG’s direct mail list required money to produce
direct mailers. Buying print ads in NG’s magazines, even if at 50%
off rate card, required money. So, when you are structuring deals,
make sure the promotional support will be there in good times and
in bad. Part of that means, making sure the day-to-day managers of
the relationship have a vested interest in your success. We
structured our deal with the CEO and CFO of the National
Geographic Society. They were not the people in the trenches that
were going to implement the marketing support—the editors and
publishers at three magazines, a cable channel and website (who
frankly are all busy people managing their various fiefdoms to care
about building iExplore).

As for the advantages and disadvantages of strategic relationships,

the plusses are: (i) they can help you grow your business faster and
cheaper than you could on a stand alone basis, if structured
properly; (ii) they get venture capitalists more excited about the
upside of your business; and (iii) it makes other business partners
more excited and comfortable with working with you. The minuses
are: (i) working with one partner (e.g., National Geographic), may
make it difficult for you to work with competitive other partners
(e.g., Discovery Channel), so be sure to pick the biggest, best
partner to work with; and (ii) venture capitalists may think you have
limited their exit options by working with one key partner, so make
sure nothing in your deal requires you to sell your company to that
partner or limits your exit options in any way. It is fine to give the
partner a right of first offer or a right to match offers with tight
timelines, but nothing that guarantees they walk away with the
business in all scenarios.

A few key considerations for any deal: (i) make sure the equity
component is fair in comparison to the level of marketing support
being provided (e.g., put a cash value on that support as a percent of
your company valuation); (ii) make sure the marketing support is
well documented so when it gets handed down from the biz dev
department to the people in the trenches, they have to execute it
with no wiggle room for interpretation; (iii) make sure the deal
works in good times (cash rich) and in bad times (cash poor); (iv)
make sure the strategic partner invests some amount of cash (even if
minimal), so they have skin in the game to help protect their
investment; (v) make sure the partnership has tight performance
deadlines to implement your marketing support, as big companies
can move very slowly without them; and (vi) make sure nothing
impedes your marketability to venture capitalists or limits your
potential exit options down the road, as discussed above.

Overall, as I mentioned, I am a huge fan of strategic partnerships,

and spreading equity to players that can materially change your
destiny. But, as always, the devil is in the details!!

Lesson #20: Setting Product & Pricing

Strategy For Your Startup
Product and pricing are two of the four big “P’s” from your
Marketing 101 class. Your startup will never succeed if you screw
up your product/service offering or pricing strategy.

When setting your product or service offering, you must first do an

in-depth study of competing products and services currently in the
market place and set a plan on how you will differentiate yourself.
When I was at iExplore, we differentiated on the basis of offering
adventure tours, compared to the big online travel agencies selling
air, car and hotel reservations. And, versus other adventure travel
companies, we further differentiated based on offering customizable
tours leaving on any date versus the normal packaged group tour
leaving on set dates. Given the clients a lot more flexibility in
designing their dream itinerary around dates that worked best for
them.

What is going to make your product or service different or set you

apart from your competitors? Is it a core ingredient (e.g., veggie
burgers vs. beef burgers, cherry vodka vs. plain vodka)? Is it a core
upsell (e.g., free fries with any burger order)? Is it a faster
technology or more efficient crowdsource? Is it some feature or
functionality that sets you apart, like a past customer reviews
database to given clients more confidence in their purchases?
Without a unique differentiator, you are just one of many companies
trying to push your story uphill. The downhill comes with that
eureka moment when the customer says, “Wow, that is really
different and better than what I am doing today.”

The perfect example is Google’s search technology. They were not

the first search engine to the market, there were several others like
Excite, Alta Vista, Inktomi and Lycos. Remember these guys?
Probably not. So, how did Google take over the search business?
With a better product!! When people searched key words, they
actually got very relevant results that quickly took them to what
they were looking for. And, how did they do that? With a new
technology that studied the backlinks of third party websites linking
to those pages? If big Expedia is linking to iExplore for “adventure
travel” terms, iExplore must bet pretty important for “adventure
travel”, so let’s move them up the list of results. Or, if 1,000 people
are linking to a site using the same keyword, they must be pretty
important for that keyword, and more important than the site with
only 10 people linking to them. And, the rest is history as Google’s
quickly dominated the world wide web.

But, product is only part of the offering; price is the other key
driver. If you are not offering your clients a substantially better
value than current solutions, you might as well pack up your bags
right now. At iExplore, we not only offered a unique product in the
market, as described above, we offered it at a price point 35% lower
than similar products in the market (the exclamation point behind an
already terrific product offering). And, at my other business,
MediaRecall, our entire value proposition was largely around price
(and speed). Why spend $10MM on your project, when we can do it
for $1MM (in a fraction of the time)?

In determining the right price for your product/service, the first

thing to do is see where competing products are priced today. And,
then set your prices at a material discount, at least to start, to get the
attention of your prospective buyers. If customers are currently
spending $150 per hour for a certain service, and you can offer than
exactly the same thing for $50 per hour, who isn’t going to listen to
that pitch? You are going to save them a ton of money, and make
them look like a genius to their boss. The percent discount is largely
driven by the difficulty of market entry in that industry (e.g., big
entrenched Fortune 500 competitors), the quantity of competitors
(e.g., hundreds of companies vs. a handful), and obviously, your
cost structure that can profitably sustain those prices.

Shoot for a minimum of 33%-50% savings versus current

competitors, to have a reasonable chance to get the attention of your
customers. Unless you are in a very consolidated industry with a
handful of players selling a high frequency product, where a
10%-20% savings could mean a material improvement to their
bottom line. And, if you are a technology or software company,
remember you are continually dealing with a “buy vs. build”
psychology of your clients. For SaaS models, price your product (on
an annual basis) at 10% of the equivalent “build” price for clients
(getting them 10 years of outsourced value for a product that you
will continually improve vs. 5 years of built value for a static
product they build themselves).

And, on the world wide web, prices are often moving to FREE, with
alternative ad supported revenue models. Why do you think all the
newspapers are going out of business? Because people do not want
to pay for day-old content that a user can now find up-to-the-minute
on the internet for free. Why do you think the music industry has
been struggling? Because people do not want to pay $14.99 for a
whole album of songs, when they can simply buy the one track they
like for $0.99 on iTunes or find it for free on any of the file sharing
services. This trend is particularly true for mobile apps. In my
opinion it is better to offer it for free, for some period of time, to
build up mass user adoption and word of mouth, and then
implement your revenue model later. That is exactly what Google,
Twitter and Facebook did, and we all know what happened to those
companies, dominating the web..

Anyway, product and pricing are complicated topics with tons of

variations you can pursue. But, most importantly, start with your
best offering, as it is very difficult to change a customer’s first
impressions down the road. Good luck!

Lesson #21: Setting a Sales & Marketing Plan

For Your Startup
Sales and marketing planning are my favorite part of building any
company, as they are the key drivers of the company’s revenues.
The lack of a solid sales or marketing plan is typically the #1 reason
a business fails, as any shortcomings here will result in revenues
and profitability falling short of goals. So, this area requires intense
focus for any startup to succeed.

First of all, what is the difference between sales and marketing?

Sales is typically human driven, with a salesperson introducing your
company to prospective customers. These salespeople can either be
inside salespeople, residing in the home office, or outside
salespeople, traveling to clients’ offices. What drives the ultimate
success of your sales plan, is the quality of the salespeople in terms
of their training, skill base, and Rolodex. So, hiring the right
salespeople with the right relationships will make or break your
efforts here. In addition, it is critical to make sure these people are
appropriately incentivized with a meaningful commission plan for
closing sales and hitting their targets.

Marketing is typically media driven, where an advertisement or

other communication is introducing your company to prospective
customers. Marketing can be driven via multiple channels, including
the internet, social media, word of mouth, print, television, radio,
billboards, events and direct mail, to name a few. What drives the
ultimate success of your marketing plan is a smart marketing team
that has properly studied your prospective customer demographics,
and placed the appropriate marketing messages in front the
appropriate media placements where these customers are looking.
So, hiring the right marketing team with proven experience working
within your industry and desired budgets will make or break your
efforts here.

Most B2B companies are sales driven organizations, and most B2C
companies are marketing driven organizations, with numerous
examples of companies overlapping between the two. The reasons
most B2B companies are sales driven are three fold: (i) they are
usually dealing with a much smaller base of customers, more easily
reachable by a sales team; (ii) corporate customers are typically
relationship driven, and want the comfort of working with a
salesperson that best understands their needs; and (iii) the average
transaction size can get very large, often into the millions, which
needs the comfort provided from a face to face meeting to close a
sale (e.g., the trust factor).

So, for example, if you are an auto parts manufacturer, your

prospective calling list in the U.S. is pretty small, with GM, Ford
and Chrysler your primary prospects. But, as you can imagine,
given the size of those companies, tons of auto parts manufacturers
are trying to get their attention, since any one order can make or
break their business. And, only a salesperson with solid
relationships in the industry can break through that clutter, get the
attention of the key buyers and closes those sales.

The key downside of a sales-driven organization, particularly for

large ticket orders, is the lead time can be very long before
transactions start to close (e.g., 6-24 months, depending on the
product). So, it will take a lot of money to keep the business funded
until revenues start driving, especially when trying to break into big
Fortune 500 companies, where established relationships and
processes are hard to change.

The reason most B2C companies are marketing driven organizations

really comes down to one primary reason: media is the most
efficient way to get in front of millions of prospective customers. It
would not be practical building a sales team to call on 300MM
Americans. Media comes in multiple forms and reach, from
500MM unique monthly visitors on websites like Google, YouTube
or Facebook, to 100MM households on cable channels like
Discovery Channel or History Channel, to 10MM people that drive
by a certain billboard each month to 5MM people you can direct
mail to the National Geographic subscriber list to 1MM people that
read the Chicago Tribune. You get the point, lots and lots of
different marketing options, based on your desired medium, reach,
demographics, frequency and budget.

As a startup, your marketing budgets typically can’t afford that

thirty second ad on the Super Bowl for $3MM, despite almost one
billion people watch the game worldwide. You need to be much
more frugal in your initial spend, looking for cost effective (or even
free) tactics. Especially since you want to test all tactics first, with
small budgets, to make sure they are working as planned, before
hitting the accelerator and spending a bigger budget. Here you are
talking about doing search engine optimization of your website for
free inbound traffic, keyword based advertisements in Google’s
search results on an affordable cost per click basis, leveraging the
powerful word of mouth benefits of social media via Facebook or
Twitter, affiliate or cross marketing relationships with similar
businesses, and PR based communications, to name a few.

The downsides of marketing are: (i) it can get expensive for any
budget, so you will need to have cash resources to spend; (ii) the
results are not always perfectly attributable to a specific marketing
piece, so you may not be able to know with 100% certainty which
tactics are working better or worse than others; and (iii) we are
living in a world where small budget startups are competing with
big budget brands for the same marketing real estate.

Given the importance of these topics, I will dig into more details in
following lessons.

Lesson #22: How to Calculate ROI on Your

Marketing Spend
The worst thing an entrepreneur can do is dump a bunch of money
into marketing spend, without having the appropriate reporting in
place to track the results of such spend. Although marketing can
often feel like a “creative” area of the business, which it is, it is
more importantly, one that requires religious “financial” discipline.
In this post, we will discuss how you infuse ROI disciplines into
your marketing DNA and team.

Let’s start with internet marketing, one of the most trackable

mediums in the history of marketing. Based on ad tracking tags,
web server logs and other software, you can track each ad
impression, and the resulting clicks, leads and transactions
therefrom. Whether that is search engine marketing, or email
marketing, or social media efforts, or affiliate partnerships with
third-party websites, the data is easily captured. But, the key is to
make sure you are using these ad tracking tools and reporting on
each of these inputs.

While I was at iExplore, my marketing dashboard told me data like:

1MM visitors came to my site that month, sourced 50% from search
engines and 50% from affiliate partner sites, resulting in 1,000
people contacting our call center to book a trip and 200 actual
transactions. And, more importantly, I could dissect my search
engine performance between Google, Yahoo and Bing, and even
further, between paid search and free search efforts within each. I
also knew that my affiliates like National Geographic were driving
more leads and sales than affiliates like Travelocity. This was very
valuable data, if studied and used, to dial up and down my
marketing spend online, moving monies from underperforming
vehicles to over performing vehicles, to maximize my marketing
ROI.

Although it is harder to do, you can also use the same level of
tracking on your offline marketing activities. As an example, if you
send a direct mailer, use a unique promotion code that the customer
shares at the time of purchase with your call center staff. If you are
promoting a 1-800 number in your TV advertisements, use a unique
1-800 number for each cable channel you are advertising on, or
more specifically, each specific program you are advertising on. In
your magazine buys, use different promotional URLs to point your
traffic by magazine (e.g., .com/TimeMagOffer). Not all consumers
will end up contacting you via these tracking mechanisms, going to
your main website instead. But, a good portion will, and you will be
able to make smart interpretations and extrapolations from there.

The overriding point, where you can, is to track each distinct

marketing effort on its own stand alone merits, to assess whether or
not you want to continue investing in that vehicle going forward.
And, worth mentioning, never start spending your full budget day
one. Take 10% of your budget, test a bunch of different vehicles
you are considering, and then invest the remaining 90% of your
budget in the best performing vehicles from that initial test.

Then, once you know the profitable metrics for your business (e.g.,
never spend more than a $2CPM on any online banner ads), you
need to religiously live by those metrics. Only buy ads that fall
below that criterion. And, often times, your desired sites will not
allow you to buy committed advertising at a level well below their
rate card. So, in those cases, you need to be really creative when
negotiating those deals. Tell them you don’t need to buy committed
space at $10CPM, you are willing to buy remnant, unsold inventory
at $2CPM, which may be more digestible to them instead of letting
remnant inventory going unsold for zero revenues.

If you cannot get the appropriate line-by-line tracking of your

marketing investment, then you need to make sure you are studying
the overall impact on your business from that aggregate marketing
investment. For example, if you put an additional $1MM in
marketing dollars to work in January, what was the resulting
incremental lift in overall revenues in the following months and did
the incremental profits justify the investment. But, when you do
this, it is critical you are comparing apples-to-apples data. For
example, make sure seasonality isn’t skewing your data (e.g., a
retailer’s big Christmas sales season naturally took up revenues, not
the increased marketing).

And, it is equally important you know your normal sales cycles

between the time marketing is placed and the time a transaction
actually closes. For iExplore, it was a three-month sales window,
and for MediaRecall it was a 6-12 month window (so study the lift
in revenues in the appropriate sales window for your business). But,
for long sales cycle businesses, you do not want to keep your
marketing running for too long without knowing whether or not it is
profitably working. So, instead of waiting for actual closed revenue
data, study inbound sales leads immediately after the marketing
period, to ensure the leads pipeline is building up fast enough to
justify the marketing investment (based on your estimated and
historical sales conversion rates).

Marketing departments are typically run by “creative” types that

don’t necessarily understand the “financial” side of the business. It
is up to you, to make sure these financial disciplines are followed to
avoid potentially wasting a lot of misspent marketing dollars.

Lesson #23: How to Design Effective

Advertising Copy & Creatives
Now that we have learned how to set a marketing plan for your
business, the devil is in the details in terms of executing that plan.
This is especially true for the copy and creatives you use in your
advertising materials. In this lesson we will tackle some dos and
don’ts to maximize the success of your advertising efforts.

Let’s start with an example print advertisement that we used at

iExplore (a sea kayaking trip to Alaska):
The mandate I gave our CMO was to turn iExplore into the “trusted
first-of-mind brand for once-in-a-lifetime adventure travel.” And, at
the high level, this creative does exactly that. You certainly get the
sense of once-in-a-lifetime from the lone sea kayaker paddling in
close proximity to an orca whale and a tag line that said “Come
Back Different”. And, you certainly get the sense of trust from the
“Inspected by Expert #34” tag. And, if iExplore has 34 experts, they
must be pretty big, and I trust them as a leading player in the space.
We had this same type of strategy behind our online banner ads and
video ad creative (I was really pumped when I first saw this video!).

So, as a first time CEO, I was really excited about the prospective
results from this campaign. And, the advertising industry would
have certainly guessed the same, as this campaign won a ton of
awards for best creatives in the travel industry.

Then reality hit us in the face like a ton of bricks. This campaign
was not selling any trips!! We were spending a lot of money buying
double page print ads in expensive magazines like National
Geographic, Conde Nast and Travel & Leisure (and even NYC
billboards in Times Square!!), but there were very little revenues to
cover the massive costs of this effort. So, we were hemorrhaging the
cash provided from our venture capitalists.
Ignoring the fact we were spending a lot of money offline, when we
should have been better spending most of this money online, as an
internet company, let’s study what was specifically wrong with
these creatives. The first problem was the creative size itself.
Buying double page spreads in the major travel magazines was
VERY expensive as a startup company. We would have been much
better served with single page, or even half page ads to start,
stretching out our budget over a longer period of time.

The second problem was the iExplore name and business was
unknown to anybody, and the tagline did not do a good job
describing the business. Instead of an inspirational message like
“Come Back Different”, it should have been more descriptive about
our business, like “Adventure Travel Experts”. It is perfectly
acceptable for Nike to use the brand-building tagline “Just Do It”,
when they were a 20-year-old company, and everyone already new
them as an athletic apparel and footwear manufacturer. But, not for
iExplore, a brand new company that needed to educate the market
on its core business offering. We thought we were doing a good job
explaining the business in the paragraph of copy at the bottom of the
ad, but didn’t realize that magazine readers turn the page at an
average flip time of two seconds. Nobody was reading the
paragraph in two seconds, and we needed to get the message out
faster.

The third problem was the biggest of them all. Where was the call to
action?? There wasn’t one!! There should have been a message like
“Book Your Trip by December 1st and Save 10% “, or “Free
Airfare with Any Tour Purchase by December 1st”. This tells the
reader more about the business (e.g., that we sell trips), gives them a
special deal (e.g., to save money), and gives them a sense of
urgency to make an action (e.g., by a certain date). We could have
easily doubled our revenues from this campaign with more call-to-
action oriented messaging.
A fourth problem was the limited frequency of the print ads. In the
travel magazine world, new issues were coming out once a month.
And, it typically takes 6-7 ad impressions before it catches
someone’s attention to make it actionable. So, that meant 6-7
months of expensive print ad buying before we would really know
the full success from the campaign. Travel sections of newspapers
would have been a much better vehicle, since the ads were coming
out daily/weekly, not monthly. Or the travel sections of the Yahoo
or MSN websites would have been even better, since the ads would
be running online, and the action is simply “one click away”,
instead of print readers having to get to their computers to make an
action.

At the end of the day, this campaign was a complete disaster, for all
the reason mentioned above. And, to make matters worse, we ended
up pulling the campaign after only 3-4 months, which meant that
any repeated impressions we were building up towards the 6-7
month requirement, were entirely flushed down the toilet midstream
(no pun intended). Believe me, after that first year at iExplore, we
never made those same marketing mistakes again!! And, we
established key disciplines for tracking our marketing ROI on a
line-by-line basis, as discussed in our last lesson.

This is just one example of the things you need to consider when
designing the copy, creatives, frequency and placements for your
advertising efforts. The summary is: (1) startups need to be crystal
clear on what they do with as few words as possible; (2) there needs
to be a strong, time-sensitive call to action, to trigger a transaction;
(3) design your campaign with maximizing frequency in mind, to
build up repeated impressions; (4) pick creative sizes that are most
affordable to your budget; (5) if possible, make sure the campaign is
easily cancellable if not working; and (6) place ads in the medium
most logical for your business (e.g., e-commerce companies should
bias online advertising).
I hope this post saves you a lot of misspent advertising dollars. I
surely wished I had all that venture capital back, to do it right the
second time!

Lesson #24: How to Choose a Name For Your

Startup
Startups are like giving birth to a new baby, including coming up
with a new name and personality for the business. When coming up
with a name, you need to keep the following points in mind.

As for the name itself, you really have two roads to consider: (i)
choosing an intuitive, descriptive name for your business (e.g.,
Restaurant.com, Toys R Us, YouTube, Netflix); or (ii) creating a
whole new memorable name, not specifically related to your
business (e.g., Google, Yahoo, Hulu, Twitter). If you have tons of
money to spend, maybe creating a unique name is the right way to
go. But, for the most of us, starting a business on a shoestring
budget, I always vote for a clean and clear name that simply
describes your core product offering. It will take less marketing
money to educate a consumer on your business the clearer your
name is. As an example, people will intuitively know Tennis
Superstore is a place to go to buy tennis related products, without
any other words or marketing message required. Which is important
for consumers with very limited attention spans, getting bombarded
by marketing messages from every direction.

Now, there are alternative opinions that a unique name is the way to
go. And, I clearly understand their arguments. For example, how
great it would be for your marketing efforts, if your brand name
became the de facto term for an industry. Instead of saying “look for
it on the search engines”, you say “Google it”. Instead of saying,
“overnight it to me”, you say “FedEx it to me”. Instead of saying,
“pass me a tissue”, you say “pass me a Kleenex”. But, that typically
takes a lot of money and a lot of time to build up to that kind of
brand position in an industry.

I thought the most clever name for a startup in the last couple years
was Groupon. Because it did both things: it clearly explained their
business (e.g., group coupons), and it was a cool and edgy name. I
think their name was as much a part of their marketing success than
anything else, as the name was virally spread from friend to friend
around the internet trying to take advantage of a special daily deal.
Customers saying “I bought a Groupon”, sounds a lot cooler than “I
bought a Living Social”.

But, coming up with a name, is only half of the chore. Making sure
it is available and non-competitive is the other half of the chore.
More important than the name itself, is making sure your desired
name is available for all potential uses and in all potential markets.
So, the first place I start is the U.S. and international trademark
databases, to make sure nobody is already using, or has reserved the
use, of a potential name in the industry and countries you plan on
operating.

The next place I look is the WHOIS records of the domain name
registries, to make sure the desired domain name is available in all
the variations I may need (e.g., com, .co, .uk, .com, .au, .ca). And, to
me, a desirable domain name means a clean .com extension in the
U.S., since so many people are familiar with .com addresses in the
U.S.. So, BrandName.com is preferred to Brand-Name.com or
BrandName.net. Business struggles aside, there was a reason Yahoo
renamed Del.icio.us to Delicious.com after it acquired the business
(a lot more intuitive for consumers who may have been looking for
the site at the latter domain).

But, as we all know, .com extensions are the oldest, and the
toughest to find good available names, at least for a low price still
owned by the registries. But, if you can afford it and it is not too
expensive, sometimes it makes sense to acquire a domain name
from a third party, if it helps you achieve your long term branding
and marketing goals. As an example, I acquired iExplore.com for
$20,000 back in 1999. Although this was a painful short-term move,
it was a minimal long term investment for building the optimal long
term brand for the business (in this case, an online adventure travel
company). The “i” indicated internet based and the “Explore” was
the core word we wanted to leverage for global exploration.

That said, if I could have found a better name for $19.99, I would
have gone that route. But, Conquest.com,
TheAdventureExperts.com, Explorama.net and BananaPlanet.com
didn’t fit my desired brand or marketing goals. Conquest was too
“hardcore” and “macho”. People would type
“AdventureExperts.com”, not “TheAdventureExperts.com”. People
would type “Explorama.com”, not “Explorama.net”. And, is
BananaPlanet a place for adventure travel, fruit or porn?

As a last step, you should do U.S. and international Google searches

around your prospective name, to make sure no other competing
companies have similar names. For example, at iExplore, we
subsequently found out there were also adventure travel companies
called Explore in the U.K. and iXplore in Australia, which created
confusion for travelers in the marketplace (which is global online).
So, if different, but similar names are being used in the industry,
pick a different name.

Whatever your business name ends up being, make sure it can

clearly stand on its own feet: (i) clearly communicating your
business line and brand goal; (ii) without violating any trademarks
worldwide; (iii) without being too similar to others in the market; or
(iv) without being too confusing for consumers to find.
Lesson #44: The Importance of Blogging
All companies should have a blog, to demonstrate their expertise in
a particular subject matter and provide a vehicle for two-way
communications and engagement with their customers.

The blog that provided this content for the book you are reading
now is an example of that. I, as the Managing Partner of Red Rocket
Ventures, a startup consulting and fund raising firm, am trying to
come across as an expert in startups who has lived through the same
battles you now find yourself fighting through. Not to mention, for
many of you, this is your first time ever hearing about Red Rocket.
You may be asking, “Why should I trust this firm to help me solve
my startup-related problems?”. Well, hopefully the quality of the
content on this blog not only educates the readers on various topics,
but it also instills trust to get prospective clients to actually pick up
the phone and engage with me on their various needs.
Also, the blog gives my readers the chance to voice their agreement
or disagreement with various points that I am making. For example,
when I wrote my post on best practices for marketing, a reader
rightly pointed out that offering deep discounts to attract new
customers may work better for B2C facing businesses than B2B
facing businesses. Hence, further enhancing reader education on the
topic, and creating a two-way dialog with my readers, so they too
feel like they are participating in the discussion.

There are two other clear marketing advantages of writing a blog.

Firstly, search engines love rich content pages, and the more content
you write, the more free search traffic you will drive into your
website. For example, when my marketing blog was only three
months old, it was already getting 1,000 visitors per month, largely
coming from people searching for information related to the posted
topics via Google. That is a lot a traffic for a small consulting firm,
which I didn’t have to spend one penny on, other than the 30
minutes or so that it takes me to write one post.

The second key marketing advantage is the virility of the content. I

set up this blog to automatically post to my LinkedIn and Twitter
status updates. As of 6/8/11, when I wrote this chapter as a post, I
had around 650 connections on LinkedIn and around 150 followers
on my Twitter account that were receiving headlines to every one of
my blog posts (Note: Twitter was up 3x from 50 followers three
months prior when I started the blog—so extrapolate 3x per quarter
from there). And, since these connections and followers are largely
business people related to startups or the digital media industry in
which I have worked for the last 12 years, there are very high odds
that: (i) the articles are not only interesting reading for them; but (ii)
they will most likely forward or retweet the articles to their
thousands of collective connections and followers of their own, all
ripe new prospects for my own business (hence why Twitter
followers tripled in three months and over 100 companies have
reached out to me).

So, for the reasons above, consider a blog a vital component of your
website, search marketing and social marketing strategies. And,
don’t forget to ask for new followers, as I do in my last sentence in
each of my posts.

Lesson #48: Trade Show Strategies for

Startups
Following up on my previous lesson, about The Importance of
Networking, I figured it would be good time to talk about trade
shows and how a startup needs to incorporate them into their
marketing strategies.
To start, it is my recommendation that B2B facing trade shows are
more relevant than B2C facing trade shows. Given the high costs of
participating in trade shows, B2C companies are typically better
served in redirecting those marketing dollars to higher reaching,
higher ROI vehicles (e.g., search engines). As an example, a
$10,000 investment in a booth at a consumer show may get you in
front of 10,000 people at a trade show, versus 50,000 people via the
search engines. Now that doesn’t mean B2C executives shouldn’t be
networking at trade shows, as they definitely should. But, they
would be much better served attending more industry-related events
where they can learn and network with their peers (e.g., gathering of
online marketing executives).

But, for B2B companies, trade shows can be one of the most
important and targeted ways to market their businesses to
prospective clients, given the highly targeted nature of the audience
at that show (e.g., corporate buyers of their product or services). As
an example, if you are a developer of a digital video platform for
government clients (e.g., Department of Defense, NASA), where
better to find targeted clients than at the annual Government Video
Expo, where sellers of government facing technologies exhibit to
government buyers of such technologies in this very niche market
segment (where all key people will be in one place at the same
time). So, as a B2B company, it is critical you research the key trade
shows in your industry, and incorporate them into your marketing
plans. And, the more targeted the trade show the better (e.g.,
Government Video Expo, better than Video Expo, in this example).
So, prioritize accordingly.

Now, identifying the trade shows is only half of the exercise. More
importantly, you need to decide how you plan on participating at
these trade shows. Will you exhibit with a booth? Or, sponsor the
show? Or, be a presenter or a panelist? Or, simply attend? The
answer to that question is directly proportional to: (i) the importance
of the show to achieving your overall sales goals; and (ii) your
budgets to afford the various options.

As a rule, sponsoring a show tends to be very expensive, but can be

a good way to get branding benefits for your business and exposure
in front of all the attendees of the show, both during the show, and
in any marketing materials for the show. If you feel sponsoring the
show would be important for you, find the least expensive options
to get your name out there (e.g., buying nametag lanyards with your
logo on it, would be cheaper than buying the entire lunch for the
event).

Exhibiting with a booth is also an expensive proposition. Not only

do you have to pay for the design of the booth itself, but you have to
pay to ship the booth to and from the show, store the booth after the
show and pay for the time and travel expenses of the people who
will be running the booth. As a startup, you only want to go down
this road if having a booth presence at the show is mission critical.
As an example, if all your key competitors are exhibiting with live
demos of their products via booths, perhaps you should also be there
with an equal presence. But, only if the audience of the show are
direct buyers of your products. For example, if you are selling
technology to CTOs, you want to make sure the CTOs are the ones
attending the show, not CMO’s. And, where you can, focus on
shows with CTOs (in this example), not lower level technologists
that ultimately will not be making the buying decisions. But, this is
not always possible, and you may have no choice than to meet the
junior level person and then work up the chain of command.

Simply attending a show is a very inexpensive way to have a

presence at the show, gathering business cards as you roam the
room and network with other attendees and exhibitors. But, where
you can, actually getting invited to be a featured speaker or panelist
at the show, is typically free to attend and gets you quickly exposed
to everybody at the show. And, as we talked about in the previous
post, it is always preferable to be the “hunted” at shows like this,
where prospective clients are searching for you, than having to track
down your prospects on a one-off basis. So, apply to be a speaker or
panelist at all of these events, and come up with a unique pitch to
the event producer on why you would add value to the official
program (e.g., “hottest new innovation in the industry”, “real life
data you can share with audience”).

So, in summary, trade shows typically work better for B2B

companies than B2C companies, given the lack of better marketing
alternatives. Both, B2B and B2C executives need to participate in
trade shows where their peer executives are participating. And, you
need to prioritize your participation at these trade shows (e.g.,
sponsor, exhibit, attend, present), based on the importance of the
show to your revenue goals and the budgets you have to spend.
Lesson #52: Viral Marketing Via Social
Media
Although I consider myself an internet marketing pro, after 12 years
in the industry, it is amazing how quickly the online marketing
tactics change and your skills can go stale. So, to make sure I was
fully up to speed on the current trends in the industry, I enlisted the
help of Katy Lynch, an expert social media consultant at
www.SocialKaty.com, to help me create this post on best practices
used today by viral marketers trying to drive word-of-mouth via
social media, a very cost effective strategy for startups.

First of all, why focus on social media (e.g., Facebook, Twitter,

blogs) at all. The simplest answer is: there is nothing cheaper than
driving new leads from word-of-mouth marketing, and social media
has made it easier than ever to directly identify and engage with
your customers and target audience. And, with the current
generation of social media analytics technologies, tracking a direct
ROI from these efforts has never been easier. Not to mention, with
all the clutter from marketers these days, “likes” and “tweets” from
your friends and colleagues carry a lot more weight in terms of
stimulating interest and demand for new products and services.

Based on Katy’s direct experience with clients (e.g., the Where I’ve
Been travel site grew from zero to 145,000 Twitter/Facebook
followers in 2.5 years from very inexpensive efforts), she believes
that a successful startup needs to focus on the following five things
in setting their social media strategies, and hopefully terrific viral
growth with follow: (i) stay educated on the latest trends in the
social media industry; (ii) create domain expertise within your own
industry; (iii) identify and motivate brand ambassadors that help
you spread the word; (iv) integrate social media throughout your
entire user experience, not just in marketing activities; and (v) hire a
social media expert whose sole job is to grow your business through
these channels. We will tackle each of these points in the following
paragraphs.

Study The Latest Trends. By the time this chapter is written, there
may already be a new favorite tactic being used by social marketers.
So, it is important to stay on top of these key tactics. As an example,
the hot strategies today include the use of viral videos (like Evian’s
roller-blading babies), social gaming tactics (like Farmville) and
customized Facebook company pages (like Coke). The other key
tactic being used today, is the use of hashtags within Twitter posts,
to assists users looking for similar content within Twitter (just like
users search keywords in Google). Hashtags.org is a great resource
to see what topics users are searching and to see what topics you
should be engaging with for your business, to get in front of an
immediate and targeted audience.

Create Domain Expertise. People are more likely to spread viral

messages from people they trust, or whom are experts in their field.
So, for example, Katy not only helped Where I’ve Been increase
their follower base, she tried to position them as a domain expert in
anything and everything related to the travel industry, whether it
was directly related to their core business, or not. So, when
consumers would be looking for travel tips, news, forums or
whatever, Where I’ve Been would come up within the results as an
expert in the space, hence attracting a large follower base of
passionate travelers. A great way to position yourself as an expert
on a topic, is to write compelling content on a blog, as I am doing
right now in this post, hoping you forward these lessons to your
colleagues (driving new leads for my business).

Seed The Community/Identify Brand Ambassadors. You typically

need a 100-1000 follower base, before viral marketing magic kicks
in. And, this base is the hardest part to build. So, Katy recommends
buying advertisements on Facebook around your targeted
demographic to help get your base up to this level faster than you
could on your own. Based on Katy’s history, it will cost you about
$1 per follower, so budget $1,000 for Facebook advertising to get
your base up to 1,000 followers. In addition, don’t forget to leverage
any other in-house marketing lists you have, to help jump-start your
efforts. As an example, one of Katy’s other clients used an in-house
email list of 40,000 names to help seed 1,000 Facebook fans after
only one mailing.

From there you need to identify and motivate your brand

ambassadors. This could be your most impassioned followers,
continually singing your praises to their network. Or, it could be
third-party ambassadors who are domain experts themselves (e.g.,
key influencers/bloggers in your industry). Good places to identify
these prospective ambassadors are: (i) from Google searches around
your keywords; (ii) researching members of key Twitter Lists for
your key topics, which you can search at www.Listorious.com; and
(iii) www.invesp.com/blog-rank/ to identify key bloggers and
domain experts by topic. And, don’t forget to reward your
ambassadors for their efforts, with thank you gifts or other
giveaways over time based on their activity.

Integrate Within Your Business. Social media should not be a

marketing tactic, in needs to be integrated into your overall user
experience. As an example, there needs to be “like” and “tweet”
buttons around your core product pages on your website. The reason
social media-based games, like Mafia Wars and Farmville, built into
huge successes with millions of users was the fact that each time the
player played the game or reached a new level, the activity posted to
their Facebook profiles, exposing the user’s entire social networks
to the game, driving viral word-of-mouth and new users for their
business.

Hire An Expert. Managing your social media efforts is more than

writing a blog, tweeting on Twitter or posting information on your
Facebook fan page. You should constantly be looking for new
followers and trying to figure out how to create a “personality” for
your business. And, the odds are, you as a startup executive are
going to be too busy to do this any justice on your own. So, hire an
on-staff expert, or engage a third party agency, to help you focus on
these efforts full time. And, the advantage of an agency is they have
access to and expertise with the sophisticated engagement and
analytics software you will need to implement and track your ROI
from this campaign (e.g., TweetDeck, HootSuite, Twitter
Analytics).

In addition to Katy’s list, I would add a couple other things. Firstly,

the more you can build your entire business model around word-of-
mouth driven engagement, the better. The one example I am
specifically thinking about is Groupon. The whole idea of a 500-
person tipping point for the deal to go through, bound by a 24-hour
ticking clock before the deal expires, was pretty genius. That means
every day, users are forwarding deals to all their friends trying to
get their desired deal fully subscribed, day after day. It created a
viral marketing machine, and the rest is pretty much history. That
said, don’t fool yourself that viral marketing was the only key to
Groupon’s success. Groupon was also spending millions of dollars
of marketing each month to help drive their meteoric growth.

The second thing I would add is that there are some great tools out
there to help you forecast the timing and scale of your word-of-
mouth efforts based on: (i) how engaging your message is (e.g.,
what % of forwarded information gets acted upon); and (ii) the viral
cycle time (e.g., how much time before the recipient forwards the
message to their friends). Check out this terrific Viral Growth
Model and Tutorial by David Skok, a five time serial entrepreneur
turned VC at Matrix Partners.

Thanks again to Katy Lynch, for her terrific insights. Be, sure to
reach out to her at www.SocialKaty.com for any additional help
from here.
Lesson #53: Search Engine Marketing
Strategies
As a startup, there is no more cost effective, targetable and trackable
marketing tactic than marketing through the search engines (e.g.,
Google, Bing, Yahoo). So, driving search engine traffic should rank
very high as a priority within your overall marketing budget. In this
lesson we are going to discuss the two primary search marketing
tactics: (i) search engine optimization (SEO) for organic search; and
(ii) search engine marketing (SEM) on a pay-per-click (PPC) basis.

But, before we jump into that, you first need to do a little bit of
research as to what specific keywords are most important for
driving traffic for your business. Some businesses are very simple to
market for, with only a handful of keywords they need to optimize
for. And, some businesses are very complicated to market for, with
millions of keywords they need to optimize for based on the breadth
of their product offering (e.g., think about every SKU available for
sale at Amazon or eBay). And, to make matters worse, you need to
think through all the numerous variations and typical misspellings
of the keywords, and include those in your efforts, as well (e.g.,
“startup consultant” different than “startup consulting”, “Israel
travel agent” different than “Isreal travel agent”).

A great place to research all the various keyword options is the

Google Search Term Suggestion Tool. Here, you type is a keyword
for your business, and it estimates the monthly traffic for that search
term, and suggests other keywords that are similar to your keyword,
that you may not have even thought about. So, prioritize your
keyword efforts around the highest trafficked keywords for your
business. Also, be sure to research which keywords your
competitors are optimizing for at sites like Open Site Explorer (for
organic traffic) and SpyFu (for paid traffic), to see if there’s any
interesting knowledge there.
Now that we have decided what words we want to optimize for, we
are ready to start our SEO and SEM efforts. In terms of SEO for
organic traffic, there are several things that the search engines are
looking for when deciding what links to push to the top of their
search algorithms. This includes: (i) age of the site; (ii)
size/reputation of the site; (iii) amount of backlinks pointing to the
site, with your desired anchor key words; (iv) content density (e.g.,
amount of times that word is on the page); and (v) title tags, image
tags and meta tags using your desired keywords. This is just a few
to mention, with content density on the page and backlinks from
third party sites carrying a lot of weight. So, all of this needs to be
considered when writing the content and coding the pages of your
website.

And, worth mentioning, although there are many services which can
help you grow your backlinks, and there are many “black hat”
tactics your developers can consider when coding your pages (e.g.,
content stuffing with hidden white text), you should avoid these
efforts. As the last thing you want is to end up blacklisted by
Google and de-indexed from the results by trying to game the
system. Google is very smart to know when companies are trying to
game them (e.g., can see when backlinks are adding too quickly), so
don’t even go down that road. Always use a very reputable SEO
expert.

In terms of PPC traffic from SEM, there are many things you need
to optimize for besides the list of keywords. This includes: (i) your
cost per click objectives for driving ROI; (ii) where the ads will
display (e.g., in search only, or in related content pages too); (iii)
what variations of the keywords (e.g., exact match or broad match);
(iv) the copy used in the ads (e.g., title/descriptions/offers); (v) the
landing pages used for the inbound traffic (e.g., to targeted/unique
pages matching the keywords); (vi) any geographic targeting (e.g.,
users in specific cities or countries); (vii) any day-parting (e.g.,
display ads on specific days, or during specific time ranges) and
(viii) your budget (e.g., unlimited or capped each day). So, as you
can see, there are a lot of moving pieces to PPC that you need to
optimize for to ensure a healthy and profitable campaign. Here too,
there are many reputable services and technologies you can use to
assist you with your campaign design, management and
optimization.

The most important thing for PPC marketing is to make sure you
have a clear understanding of the relationship between paid clicks
and the resulting leads/sales, to ensure you are driving a good ROI
from your efforts. So, don’t spend full force out of the gate. Do a
bunch of testing to start, at various ranking positions, various CPCs,
with various creatives, with various landing pages until you get the
right mix for your business. Therefore, it is critical you have a way
to track all inbound leads/sales activity from this campaign (e.g.,
inbound tracking links on e-commerce bookings or email leads or
call center surveys), so you know exactly how much revenue is
coming from your PPC spend, to ensure you are covering your
costs.

And, worth mentioning, certain keywords are highly competitive

and are nearly impossible to drive an ROI (e.g., “travel” that is used
for branding objectives, not ROI objectives, by Expedia and others).
So, you will either need to sacrifice rank (below #1, #2 or #3
position) for these types of words, or you will need to focus on more
targeted words with much less competition (e.g., “Morocco hiking
trip”), where you can profitably achieve a top three position within
your desired CPC/ROI objectives. And, there is no one right answer
for all businesses. A $1.00 CPC could be suicidal for one business
and drive a wild profit for the other, depending on the industry and
resulting sale economics. So test, test and test again, until you get
the campaign optimized for your specific business.

It makes sense to engage an employee or firm to help you with these

efforts. One, because you will not have enough time/focus to do this
justice on your own. And, two, because the “rules of engagement”
are constantly changing, with the search engines updating their
search algorithms all the time, requiring you to change your tactics
over time. Also, unless proven otherwise, it could make sense to
engage two employees/firms for your search work, as the skills
required for good SEO (e.g., tech coding and copy writing) are very
different than the skills required for good SEM (e.g., online
marketing testing and analytics). It is very difficult to find both
skills in one solution.

It is tough to summarize all the moving pieces around search

marketing in one short lesson, but hopefully this high level tutorial
was enough to point you in the right direction. Good luck!

Lesson #54: Incorporate Video Into Your

Marketing Efforts
No longer is video an expensive medium, only used by, and
afforded by, major brand marketers for their television advertising
campaigns. Today, video is being used by everybody and anybody,
big or small, B2C and B2B, particularly for use on the internet,
where it is easy and affordable to create, publish and distribute
videos. The primary uses for videos are largely around: (1)
educational videos about your company; (2) educational videos
about your products or services; (3) videos for advertising purposes;
and (4) videos for viral marketing purposes. We will talk about each
of these uses in the following paragraphs.

It has gotten to the point that website users are expecting to see a
corporate branding video front and center on the home page of any
company’s website. Gone are the days of the static, text-intensive
“About Us” pages, and welcome the era of dynamic “story-telling”
via videos. Videos create emotion, personality and excitement much
better than static text, and helps you to better communicate your
corporate brand message. And, a professionallyproduced corporate
video can be produced for as little as $2,500, with many production
shops fighting for your business (e.g., Switch Video, Vismo Media,
How It Works Media, Kicker, PixelFish, Say It Visually). There is
even a crowdsource of video animators and producers called
Wooshii, where you name your video desires and budget, and
interested contractors submit their ideas to you (with you only
paying for your favorite contractor, if you decide to move forward
with them).

And, corporate videos are not limited to videos within a video

player, several companies are using video spokespersons to
introduce users to their website. So, if you are interested in this type
of execution, there are several companies than can help you here,
including I Speak Video, Website Talking Heads, Live Actor, Video
Spokesmodel, Laser Stream Video, Your Website Spokesperson,
Model2Web, Website Actor Live, VSP Worldwide and Tweople, to
name a few. And, these can often be produced at a very low cost
(under $100). So, check out these sites, and see the quality of their
productions, models and story telling. If you like what they have
done for themselves, promoting their own business, you should like
what they will produce for your business.

And, videos should not be produced only for your overall corporate
brand message, you should figure out how to leverage it around all
your products and services. Nothing can teach a user how to use a
product, or better explain the benefits of a service, than video. And,
the better you educate your consumers on the value of your offering,
the higher odds they will convert into sales. As an example, when I
was at iExplore, we added this South Africa Tour Video, to our
South Africa tour description pages, and we saw a 4x increase in
leads and sales for that tour. This four-minute video did a lot better
job of “dream creation”, than one page of static text and one still
photo could do. Not only did it tell a “better story”, it helped to
better position the business as a trusted, high-end tour operator in a
competitive space, which means a lot to consumers ready to plunk
down $5,000 per person on a trip half way around the world in a
foreign destination.

The third primary use of video, is around your marketing efforts. No

longer does a static banner ad cut through the clutter in terms of
getting attention for your advertising online. Consumers have a very
short attention span, and a moving video tends to get their attention
better than anything else. So, where you can, use video ads in your
marketing efforts, instead of static images.

The fourth primary use of video is for viral marketing purposes, to

get the video seen by (and your product exposed to) as many people
as possible, on YouTube or otherwise. Here are a couple examples
of the Best Viral Brand Videos of 2010. And, with around 50
million views, one of my all-time favorites is the Evian Roller
Babies. But, this was obviously a lot more expensive to produce
than the other examples. That said, viral videos can be produced
cost effectively as a startup. My venture capitalist colleague, Andy
Whitman at 2x Partners, told me that his startup portfolio company,
Orabrush, was able to drive 15 million views with this Orabrush
Viral Video for its tongue scraper that fights bad breath, of all
things.

As you will see, what do these viral video examples all have in
common: really funny humor or interesting content that people want
to share with their friends. So, if your product lends itself to
something funny or interesting, maybe you will hit the social media
jackpot with the next big viral video to spread over the web. To stay
on top of the best viral videos overtime, be sure you bookmark this
Top 10 Viral Video Chart, updated weekly by Visible Measures and
Ad Age with the most watched viral videos of the week.
If a picture is worth a thousand words, then a video is worth a
million words, in our attention-deprived culture where nobody likes
to read anything. So, the earlier you embrace video, the sooner your
marketing efforts will flourish.

Lesson #68: Mobile Apps & Location-Based

Services
Mobile apps and location-based services (LBS) for smart phone
users have been the rage for the last couple years, and rightly so.
People have their phones with them all the time, and over 350,000
app developers are fighting for their attention in the iPhone app
store alone (and over 250,000 in Google’s Android market).
Because smart phones are GPS enabled, users are tapping into many
location-based services that previously were never imaginable as a
consumer, or as a marketer. The goal of this lesson, is to highlight a
couple of my favorite “next generation” mobile applications, to help
stimulate thinking about ways you can take your business mobile.

In the beginning, mobile apps were largely built as a mobile version

of a company’s website, for users to take with them while they were
on the go, away from their desktop PC. This included apps for
news/information, maps, video, photos, music, social networking, e-
commerce, games, travel, business tools, etc. This generation of
apps was all about convenience for people on the go. Examples
include checking-in for a United flight with United’s app, getting a
map for your current location from the Google Maps app, making a
real-time tweet with the Twitter app or getting reviews on a near-by
restaurant on Yelp.

The current generation of apps, is all about targeting offers and

services based on a smart phone user’s location. As an example of
how businesses are evolving their apps, Groupon is less concerned
with showing you the same daily deal from their website, and is
more concerned that Groupon Local is showing you real-time deals
to stores and restaurants that you are in close proximity to, based on
the GPS signal from your phone. Below are a couple other really
interesting case studies.

Last summer, I was one of the mentors to Fango, a startup within

Chicago’s Excelerate accelerator program. Their app was really a
great use of mobile technology, allowing you to order your hot dog
and beer while in a sports stadium from your phone (avoiding lines
and missing the game), and having it delivered right to your seat
based on your GPS location. Very cool! But, as we studied their
business, even bigger market opportunities emerged for mobile
ordering and delivery, in industries they had never previously
thought about. As an example, hotel guests could pre-order their
room service meals from their phone, to having it waiting for them
in their room upon arrival at the hotel (and not lose an hour waiting
for room service if ordered when they returned). Or, long haul
truckers could pre-order truck parts from the road, to have them
waiting for them at the next supply depot (instead of losing valuable
driving time waiting for parts had they ordered when they arrived at
the depot).

Another interesting example is Aisle Buyer. The Aisle Buyer app

not only delivers you timely and targeted offers while you are still
shopping in a grocery store (better than Catalina Marketing that
spits out coupons at the register after you have checked out), but it
also allows you to check-out real-time while you are shopping. So,
as you are putting items in your cart, you scan the items bar code
with your phone app, and drop it in a shopping bag. No longer do
you need to unload your cart at the register, wait in long checkout
lines or deal with slow baggers. When you are done shopping, the
app charges your credit card and you walk right out the door with
no hassles at all. Nice!
Another example is Geotracker, an app from Venture DNA, which
offers GPS-enabled tours of the national parks. Based on the
location of your car within the national park, the “tour guide” app
describes the various sites you are currently looking at, at that exact
point within the park, and provides driving directions to the next
point of interest. And, Uber will have a private sedan sent to your
exact GPS location within five minutes of your request for a taxi.

As you can see from these few examples, mobile technologies and
location-based services are really improving the user experience in a
wide array of uses and industries. I challenge you to take a critical
look at your own businesses, to see how mobile apps or location-
based services can dramatically improve efficiencies for your
business, and more importantly, for your customers’ businesses.

Please re-read lesson #36 on Picking the Best Technology For Your
Startup, as it discusses various ways to build-out mobile apps.
Lesson #69: The Marketing Power of Free
Publicity
Before you put a penny into traditional marketing activities, you
need to figure out how to get the free buzz started in the media via a
formal public relations (PR) effort. And, I am not talking about
engaging an expensive PR firm here, as that does not make sense
for the tight cash position of most startups. But, what I am talking
about, is identifying all the places where potential customers are
reading, watching, listening or engaging about products and services
for your industry, and reaching out to the various
editors/producers/bloggers of such magazines, websites or radio/TV
programs.

Keep in mind, when you approach these key influencers, you need
to do so with “kid’s gloves”. They are often bombarded by a lot of
other startups trying to get free publicity for their business. So, you
need to figure out a way to approach them in a win-win kind of
way, that clearly distinguishes your product or service from the
masses of others. But, the good news is, they are already in the
“news” business, and are constantly on the hunt for the next big
thing in their industry. So, they should be open to hearing from you.
But, do so in a way that helps them look smart, not is a way that
tries to simply promote your company.

For example, with the trade media, you don’t open with “I want to
introduce you to my new startup”. You open with “this key
trend/pain point is happening in the industry, and I think we have
the right fix which may be interesting to your readers”. The
difference is, you are helping to make them smart on a particular
industry topic, which will be the feature of the article. But, you will
get mentioned and quoted in the article as an expert in the space,
which accomplishes your goal of getting the free exposure you
desired. Sending the media free samples of your product or service,
also goes a long way to getting their attention. And, for smaller
publications, actually helping them write the articles as a guest or
ghost writer, can assist them with the heavy legwork and speed up
the process.

In addition to the low-cost, high-return benefit of getting your

startup mentioned in the media, it is also a great way to get a
“trusted stamp of approval” to help stimulate more sales. As an
example, after your company has been featured in USA Today, you
can add an “as featured in the USA Today” logo to your home page
(including a link to the article), to help new users build trust and
gain confidence in using your product or service. The logic being: if
the expert editors of the trusted USA Today like it, so should I.

And, don’t forget, public relations is more than magazines or

radio/TV programs. It is very much an online world today, ripe with
industry websites and blogs that you need to reach out to, as well. I
recommend re-reading Lesson #52 on Viral Marketing via Social
Media, as it discusses how to identify the key professional bloggers
in your industry, whom you want to educate on your business and
get them to be trusted, third-party brand ambassadors and
cheerleaders for your business.

I am a huge proponent of getting the media to spread the free word

on your business, especially if you can dig up the key media
relationships on your own and not waste money on a PR firm. And,
then, once such relationships are identified, they need to be properly
nurtured over time to build long-term trust between the parties.
Then, good things should most likely follow with free media
mentions from key industry influencers and the trusted stamp of
approval benefits therefrom.

Lesson #72: The 10 Basics of Website Design

We have all visited great websites, and we have all visited terrible
websites, and have a good sense to what users are expecting in
delivering a terrific user experience. The primary design decisions
are centered around the site’s: (1) look and feel; (2) competition; (3)
usability; (4) site navigation; (5) headers and footers; (6) home
page; (7) interior page layout; (8) content/SEO goals; (9) templates;
and (10) social elements. We will discuss best practices for each
below.

Look and Feel. Here, we are talking about the graphics, colors and
mood your site creates. Such look and feel should be consistent with
your brand. So, the color scheme should match your logo and other
marketing materials. And, use graphics that are most consistent with
your brand image and desired demographics (e.g., photos of teens, if
you are targeting teens). In addition, I am always of a fan of keep a
site clean and uncluttered, doing more with less. And, keep in mind,
B2C sites are designed differently than B2B sites. And, even within
B2C, best practices for e-commerce sites are different than content
sites or social networking sites. So, plan accordingly for your
industry.

Competition. You can’t launch any website without first studying

the key competitors in the marketplace to know what you are up
against. So, as an example, if you are launching an online video
portal website, what are users used to seeing from sites like
YouTube, Hulu, Netflix and Vimeo. And, not only offering the core
set of features and functionalities that these sites offer, but how are
you improving on such experience to distance yourself from the
competition, and emphasizing such key differentiators within your
design.

Usability. If a user can’t easily and quickly find what they are
looking for from a website, they typically get frustrated and move
on to the next site. To me, this element is the most important
element in any website design. As an example, Craig’s List is not a
pretty website by any means, but at least it is easy to use, which
satisfies the needs of millions of users. So, make sure your users can
find what they are looking for easily and quickly in your website
design, within one click from the home page, where possible.

Navigation. There are major navigation buttons, typically at the top

of the page, including deep links therefrom as you scroll over the
tab. And, there are sub-navigation buttons, typically below major
navigation buttons. The major navigation buttons should most
simply summarize the major content areas of your website. For
example, at iExplore, we had a “Trip Finder” tab to find trips, a
“Guides” tab to research destinations, a “Community” tab to engage
with other travelers, and a “Deals” tab for special travel offers.
These were the four primary areas of our website. In addition, we
had deep links therefrom, to assist with one click navigation from
our home page. As, an example, when you scrolled over the “Trip
Finder” major navigation tab, the user could easily and quickly drill
down to “Africa Trips”, “Europe Trips”, and “Asia Trips”. Sub-
navigation tabs should be used for other important areas of your
site, typically determined by key marketing objectives of the
company. These could include tabs like “Our Newsletter”, “Our
Blog”, “Special Offers” or other important pages you think are
important for your users to know about.

Beyond the content areas of your site, you need to incorporate other
key elements into your major or sub navigation tabs, including
“Contact Us” and “About Us” as two most expected tabs from any
website. I am also a fan of using a wayfinder bar, so the client
knows where they are within the navigation of a site, from any page
therein (e.g., Home > Trip Finder > Asia Trips > China Trips). And,
in all cases make sure your site includes a Site Map page, for users
that need help navigating the site (and for the additional SEO
benefits site maps provide).

Header/Footer. The header is the top of every page on your website,

and typically includes your main navigation buttons. This is very
valuable real estate, above the fold (within initial screen view) from
any page a user is looking at. Sometimes web publishers use areas
of their header to publish advertising, or add website analytics
tracking codes. The key with your header is understanding that not
all users enter your website from the home page. Most likely, users
are entering your site from an interior page indexed by Google. So,
use your header for the most important elements of your site that
you want all users to know about, as it is often their first
introduction to your site. The footer is the bottom of every page on
your website, and typically includes business or legal related links
like “About Us”, “Contact Us”, “News”, “Terms & Conditions”,
and “Privacy Policy” (which should be clearly stated on all
websites). So, think through which elements are most important for
your headers (above the fold) and which elements are most
important for your footers (below the fold).
Home Page. A user needs to understand your business as quickly as
possible from your home page. To me, that typically includes a
simple one-sentence description of your business front and center.
And, more often these days, that includes a prominently featured
brand video for your business. So, don’t over clutter your home
page with a lot of unnecessary clutter. Make sure your corporate
messaging is clearly understandable within the first five seconds
after a user lands on your website. In addition, whatever core site
functional that drives revenues for your business should also be
front and center. As an example, on Expedia’s website, their
Air/Car/Hotel Search Engine is prominently featured, as it is the
core of their business.

Interior Page Layout. As for interior page layout, there a lot of ways
to design a page. You could have one column, two columns or three
columns, depending on your needs. The number of columns is
typically driven by business needs (e.g., showing related links to the
page you are on) and advertising needs (e.g., making room for
advertisements to be published on your site). As an example, on
iExplore’s “Guide” page for Egypt, we would have a left column
including a table of contents for the Guide (e.g., When to Go, What
to See, Geography, Climate, Culture, Photos, Videos), and our right
column would publish advertising. Figure out the needs of your
business, and plan your interior page design accordingly.

Content/SEO Goals. Website content can only be consumed in

small amounts. So, I recommend only a few paragraphs of content
on each page, above the fold where you can. Users simply won’t
read long pages of dense content online, as they would in a printed
newspaper or book. So, keep your content messaging short and
sweet. And, if you need lots of content for whatever reason, break it
into digestible amounts on separate pages. But, more importantly,
content is king for getting you indexed in the search engines. The
more content pages you can publish, the better it is for getting lots
of pages into Google’s index and driving free traffic for your
website. So, as part of this, make sure you put as much attention
into the code of your page (e.g., title tags, photos tags, content
density of keywords, metatags), as you do into the content itself.

Templates. Design your website in a way that it can easily be re-

skinned for third parties. For example, iExplore not only ran their
own website, they also ran the adventure travel websites for
Expedia, Travelocity, National Geographic, Discovery Channel,
Lonely Planet, Fodors and Frommers. Each of these strategic
affiliates required iExplore to publish such sites in their respective
look and feels, and with their headers and footers, for a seamless
user experience. So, if affiliates could be important to your
marketing efforts, make sure your website is built in a way that it
can easily be re-skinned and templated per the needs of your
partners.

Social Elements. Socially driven functionality has become

mandatory in any site design these days. This not only includes
links to your blog, Twitter page and Facebook page, this includes
incorporating the ability for social sharing within the actual user
experience. So, when a user sees something they think their friends
will like, then can easily email it, or post it to their own Twitter and
Facebook pages, to get that viral buzz growing for your business.
And, more sites these days are including the “Feedback” buttons on
the left side of all pages, to get real time feedback from their users,
to help improve their user experience.

My recommendation is to engage a website designer that has a

proven track record of success and is up to speed on all the current
user expectations. Make sure to look at their portfolio of sites, to see
if you think they are nicely designed. And, be sure to ask to speak to
their references, to see how the design process went, including
listening to guidance, providing valuable input, hitting desired
timeline and hitting desired budget. There are many good design
firms out there, including Doejo here in Chicago. But, let’s be clear:
not all designers are created equal. You have to do your homework
to save a lot of unnecessary heartache and wasted redesign expenses
down the road.

But, more important than anything is doing a lot of focus groups

and consumer usability testing early in your design process, to make
sure users “get it” and understand how to use your site, as intended.
I will tackle usability testing in my next lesson.

Lesson #74: Brand Building for Your Startup

There is no instruction manual for building a brand. A brand
position and reputation is something that is slowly built up and
earned over time. That said, as you are planting the early “seeds” of
your brand, the actions you take from the start of your business, will
dictate where your brand is heading long term. And, it is important
you get this right, as it is often more difficult to change a tarnished
brand image, than it is to start from scratch. I will summarize the
key drivers of building a brand below.

Your name. Something as simple as your company name, will

impact your brand. When I was first naming iExplore, it was
actually the third name the business began with. The first name was
Conquest Travel (which ultimately felt too “macho” for our targeted
demographics). The second name was The Adventure Experts
(which was better, but the word “adventure” meant too many
different things to different people, from highly-technical rock
climbing to a luxury safari in Africa). The third name, iExplore,
accomplished our goals the best. The word “explore” was more in
line with our global exploration trips and the desires of our targeted
demographics, and the “i” suggested we were an internet-based
business. So, give very good consideration to your company name
and what reaction consumers will have to it, as it could impact your
marketing and branding initiatives.

And, don’t forget, building a brand name around a made-up word,

like Hulu, Expedia or Google, is often more expensive than naming
a business around your product, like NetFlix, YouTube or
Hotels.com, due to the longer consumer education process. But,
once the brand is built, they can be even more impactful to your
brand long term, as your name could become the default lingo for
your industry (e.g., “Google it” instead of “search it”).

Your logo. Your logo is the first visual a consumer gets about your
company. What does your logo visually represent about your
business. When we built the iExplore logo, we wanted a globe as
the “o”, as we wanted consumers to know iExplore could help them
explore the world. When we built the Red Rocket logo, I wanted
startups to think we could help their business take off, like a rocket
ship. Amazon added the smile to their logo, because they wanted
you to feel happy about your customer experience with them. So,
make sure your logo “tells the right story” for your brand message.

Your marketing tactics. The demographics you market to, and the
vehicles you market with, will directly impact your brand position.
You don’t see Gucci or Armani promoting their brand in Walmart
or Sears. You see them seeking distribution in Saks Fifth Avenue
and Neiman Marcus, luxurious department stores firmly focused on
serving affluent consumers. You don’t see the Four Seasons or Ritz
Carlton hotel chains cutting their prices, or offering deep discounts
at Travel Zoo. You see them maintain their prices, at 2x the level of
a Hilton or Marriott, because they want you to have the perception
they are the best, and worth the extra price. So, give careful
consideration to whom and how you market your business, how you
set your prices and where you distribute your products, as these will
all impact your brand.

Your marketing graphics. Back in Lesson #23 I shared some

iExplore advertising creatives. We wanted our travel brand to ooze:
(i) high end; and (ii) trusted; for (iii) once-in-a-lifetime experiences.
I think these creatives did exactly that with: (i) spectacular images;
(ii) “inspected by” expertise; and (iii) our “Come Back Different”
tag line. As did iExplore’s Corporate Branding Video which
layered-on additional emotions with heart-pulsing music and an
inspirationally written script. So, the pictures you use and the words
your write in your marketing materials will clearly emphasize your
brand message.

Your communications. How do you describe your business on the

“About Us” page of your website? What are you saying about your
business in your press releases? What does the media say about
your business? What media outlets are picking up your story? All of
these communications related topics can and will impact your brand
position. So, make sure your pitch is firmly crafted and the media is
fully grasping your story, both in terms of messaging and desired
placements.

Your social media reputation. In today’s social media driven

society, it is impossible to hide your mistakes. Consumers have
more power than ever to communicate their likes and dislikes of
products and services via Facebook, Twitter and other vehicles. You
need to constantly monitor what is being said about your business,
and take ownership for your mistakes and address them accordingly.
You will win more long-term loyalty by properly handing your
mistakes, than by pretending they never happened or trying to delete
bad reviews. And, I have news for you: angry customers will always
find a way to get their message heard (in a louder way the longer it
takes to get the issue resolved). So, tackle issues head on, in a quick,
user-friendly kind of way.

Your customer service. Does your customer service experience back

up the claims of your marketing efforts? Because if it does not, your
brand is dead. Back in Lesson #33, we talked about The Importance
of Customer Service. Make sure you re-read that lesson and ensure
your operations team knows the impact their actions have on
building the brand. Put the customer first, always!!

Your employees. Most importantly, branding is much more than

your marketing or operations department. Your brand needs to be
instilled in every employee of your company, regardless of their
role. Every staff member needs to know that their actions directly
impact the company’s brand, in one way or another. How fast did
the call center staff member respond to a lead? How fast does your
technology serve a web page? How quickly does the finance
department cut refund checks for bad service? So, keep this in mind
in hiring staff that are passionate about your product, and make sure
they are well-trained that they all need to “live the brand” in their
day-to-day jobs.
Lesson #77: The Basics of Email Marketing
Some people will say that email marketing is slowly going the way
of the dinosaur, as the new generation of tech users are much more
reliant on their phones than their PC’s (e.g., text messaging, smart
phone apps). But until that day happens, email marketing should
continue to be an important part of your communications and
marketing strategies. This lesson will summarize best practices and
key considerations for setting up your email marketing efforts.

Select an email platform. There are plenty of very sophisticated

email management software packages out there. And many, like
Cheetahmail, come with a very expensive price tag, often way too
expensive for early stage companies to afford (e.g., starting at
$5,000 per month). My recommendation for startups is to use one of
the free software out there, like Mail Chimp, until your business and
list size scale to the point you can afford and may need the
additional functionality from the more sophisticated software
programs. I use the free Mail Chimp software for Red Rocket
mailings, and it works perfectly fine for my needs.

Design email collection forms. The more data you ask for in your
sign-up form, the less people will actually take the time to fill in the
form. So, my suggestion is to keep your form very simple to start, to
get them to hand over their email address. And, then you can
subsequently collect additional information over time, from follow
up emails. So, don’t initially ask for a ton of data fields (e.g., name,
title, company, address, phone, age, gender, education level, income
level, interests). At a minimum, you can simple ask for their email
address only or other basic information you will need to fine tune
your marketing efforts (e.g., name, age, gender).

Design your sign up incentive. When you ask to collect an email

address, you will have much better success if you provide the user
with a reason to hand over their very private email address. That
could include things like special member-only discounts, unique
content or a sweepstakes entry for email users that sign up. I am fine
with the first two examples, but I would avoid sweepstakes. You get
a bunch of garbage sign ups from sweepstakes from users simply
trying to win a prize, and they have no real affinity or interest in
your core product. And, about 50% of sweepstakes subscribers
unsubscribe within a few months after the promotion. I much prefer
“sign up for 10% savings” or “sign up for member only benefits”.

Link to an example emailing. Give the user a visual of what an

example emailing looks like, by linking to old emails. It will give
the user a much clearer understanding of the nature of the email
content. And, by indexing the old emails on your website, those
additional content pages will also help you drive additional traffic
from the search engines.

Link to your privacy policy. Put a link to your privacy policy right
next to your sign up request. And, add a note that “we will not spam
you”. This will help the user feel more comfortable handing over
their email address, if they know you take their privacy seriously.

Determine opt-in vs. opt-out strategy. Opt-in means the user needs
to click a check box to sign up. Opt-out means the users needs to
unclick a check box to not sign up. You will get a lot more names
with opt-out, but you will get a lot higher quality from opt-in. So,
decide what is best for your business, given the nature of your
product. And, keep in mind, the cleanest list will come from a
double-opt-in strategy, that the user not only checks the sign up box,
but needs to click a confirmation link on a test email that goes to the
user. I am always a fan of double-opt-in for getting the best list and
ensuring email addresses actually work.

Grow your list internally. From your own website, you want your
sign up form accessible everywhere it is logical to do so. That could
include a main navigation button or email entry box in the header of
your website (e.g., “Sign Up for Newsletter”), that is seen on every
page of your website. And, this can include adding the opt-in check
boxes around all other contact entry forms (e.g., when user is
buying a product, also ask them to join your list).

Grow your list externally. You can grow your list via banner ads
that run on third party websites. Or, via co-registration campaigns
on third party websites (e.g., user can sign up for your list too, while
signing up for someone else’s email list from that site). Or, you can
buy/rent email lists for your use. Banner ads could get expensive for
this purpose, combining cost of the media placement with the cost
of the incentive to sign up the user, so I would be careful here. I
really like co-registration campaigns, if done on sites with very
similar demographics (e.g., iExplore did co-registration with Conde
Nast Traveler Magazine’s website). But, make sure you are not
paying too much for the co-registration (e.g., a two way free
campaign is best, allowing partner to sign up names from your site
too). I would avoid buying/renting lists as the quality is usually
garbage and it is not worth the price paid.

Target your list. While growing your list, you also want to be
targeting your list. The more you can target your users’
demographics and interests, and deliver them customized and
relevant content, the better your email efforts will perform.
Targeting can be done on demographics, like gender, age or
education. Or, based on psychographics, figuring out what interests
the user has. Or, based on asking their current demand (e.g., what
are users currently looking to buy). As an example, when iExplore
promoted an Alaska trip to people that previously indicated they
wanted to travel to Alaska, our open rates and conversion rates were
4x better, than sending that same Alaska trip to the entire list.

Design your email content. The content of your emails need to be:
(i) consistent with what you promised the user at the time they
signed up; (ii) customized to each targeted user, where desired and
possible; and (iii) provide really compelling offers and unique
content. The better the offers, the more your users will forward the
emails to their friends, further helping your acquisition efforts. I
also like to include: (a) main navigation links back to the website, in
case the email reminds them to buy something else not offered in
the email; (b) simple unsubscribe buttons, so you don’t piss off
users that don’t want your emails anymore; and (c) a link to a
webpage of the newsletter, in case they are having trouble reading
the email format itself.

Design your subject line. Short, sweet and impactful is the best
strategy for subject lines. The subject line can make or break
whether a user opens the underlying email. Something generic like
“monthly newsletter” is less exciting than highlighting a juicy offer
therein, like “50% Off All Orders This Month”. And, make sure
your company name is clearly mentioned, either in the subject line,
or the “From” field of the emailing, so the user knows the emailing
is coming from you.
Be sensitive to spam filters. Most email software has built-in “spam
testing”, which you should always use prior to sending any
emailing. Certain keywords in the content of your email or subject
line, may trigger spam alerts to the major ISPs, directing your email
to the spam folders of your users, instead of their inbox. You don’t
want any of these words (like “special”, “deal”, “free”) to hurt your
efforts, so filter them out ahead of time. And, the additional
advantage of using an established email software program like Mail
Chimp or Cheetahmail, is they usually have “white list”
relationships with the ISPs, and can quickly get you off any “black
lists” for spamming. Also, at the time of registration, let your users
know to add your email address to their personal “white lists”, so
your emails don’t end up in their spam folder by mistake.

Determine frequency. You should set your emailing frequency

based on: (i) how often are you sourcing special offers or content;
(ii) how often will be acceptable to your users (and consistent with
what you promised them at the time of sign up); and (iii) what
works best for your business/marketing objectives. As a rule,
weekly or monthly emails is best. Daily can lead to user fatigue and
anything longer than monthly are you are losing valuable marketing
opportunities to your users.

Track your results. You always want to track your new subscription
rate, your unsubscribe rate, your open rate, click rate and sell
through rate from any emailing. Constantly test what vehicles are
doing the best to grow your list, what emails upset users to the point
of unsubscribing, and how your emails are performing versus
industry averages. As a rough guide, a generic mailing to your
entire list should see a 15%-20% open rate (on number sent) and a
15%-20% click rate therefrom (2%-4% click rate on number sent).

Lesson #79: Determining Customer Lifetime

Value
Customer lifetime value (LTV) is the net present value of dollars
attributed to one customer over their entire life as a customer. LTV
is a critical calculation in your marketing efforts, in determining an
appropriate customer cost of acquisition (COA). With the ever-
rising costs of customer acquisition, LTV is playing a more
important role in determining the ROI efforts from your marketing
spend.

The formula for calculating LTV is: (i) your average transaction
size; (ii) times your average gross margin; (iii) times your average
number of transactions per year; (iv) times the number of years a
customer buys product from you; (v) times your retention rate of
customers from one year to the next; (vi) less any marketing costs
required to retain your customer over time; (vii) discounted back to
present day dollars. For number of years, I wouldn’t model anything
greater than five years. For retention rate, I wouldn’t model
anything greater than 80% of the preceding year’s customer base.
And, for your discount rate, that should be your weighted average
cost of capital (somewhere around 10%--blending 5% cost on your
debt and 15% required return on your equity, in one example).

As you can imagine, these inputs can wildly vary from one business
to the next. So, let’s run through a couple examples. In the first
example, we have restaurant business, whose average transaction
size is $50 and customers come to the restaurant about 4x per year.
That suggests $200 in revenues in year one, and then attrition down
(at 80% a year) to $160 in year two, $128 in year three, $102 in year
four and $82 in year five. So, total five-year revenues per customer
of $672, on average, and total gross profit of $224, assuming this
restaurant averages a 33% gross margin.

If the average company spends 10% of their lifetime customer

revenues to acquire the customer in the first place, that suggests this
restaurant could spend up to $67 in initial COA marketing. As you
can see, that would be a big loss looking at the first transaction in
isolation ($50 revenues less $67 marketing). But, you make up for
the initial shortfall within the first year given the high frequency of
purchase. And, on a five-year basis, this example will yield a
profitable customer ($224 in gross profit less $67K in acquisition
marketing less $97 in retention marketing in years two through
five). To estimate retention marketing, assume retention marketing
costs in year two are up to half of the original $67 acquisition cost,
or up to $33 in year two. Which then attritions down with the
smaller customer base (the same 80% of the prior year level) to $26
in year three, $21 in year four and $17 in year five, for a total of $97
in years two through five.

So, net, at the end of five years, the customer drove $672K in
revenues (or $224 in gross profit), less $67K in original COA
marketing, less $97 for four years of retention marketing for a total
profit of $60, prior to discounting these cash flow back to their net
present value. The net present value of these cash flows using a
10% discount rate is $44, the LTV in this example.

In a second example, let’s say we are a manufacturer of vacuum

cleaners, whose average transaction size is $250 and customers only
buy one vacuum cleaner in the entire five-year period. That doesn’t
leave a lot of room for error in your marketing efforts, as you need
to drive your entire LTV and a solid ROI on your marketing COA
all at once. With a 30% gross margin, or $75 gross profit, this
company needs to keep its marketing COA under $50, to have a
chance to drive a $25, or 10%, profit. And, even then, that doesn’t
take into account any back office and overhead costs, so it is
probably better to cap COA at $40 to cover those items. So, your
LTV in this example is $250 in revenue (or $75 in gross profit), less
$40 in acquisition cost, for a profit of $35, your LTV.

Theoretically we could have modeled this customer over forty

years, buying a new vacuum cleaner every ten years. But, given the
infrequent purchase behavior over a very long period of time, I
would be conservative and make sure you drive a healthy profit
from the first transaction, as who knows if you or your customer are
going to be around ten years from now, waiting for that second
transaction to close.

So, incorporate LTV into your thinking for all marketing activities
and build your LTV model according to the specifics of your
business.

Lesson #88: The Basics of Online Display Ads

We have all seen graphic-based display advertising running on
various websites. Today’s lesson is going to discuss: (i) when you
buy these ads; (ii) the various placements; (iii) the various
technologies; (iv) levels of targeting; (v) committed vs. remnant
placements; (vi) approximate rates/expected clicks; and (vii)
tracking, of these ads.

First of all, display ads are much less cost effective than other
online marketing vehicles, like search engine marketing, email
marketing or affiliate marketing. So, I suggest not launching a
display ad campaign until you have tapped into these other more
cost effective vehicles first. That said, display ads are designed
more for use as a “branding” tactic, than a “marketing” tactic.
Which means they are used less for immediate transactions and
ROI, and more for driving long-term awareness and recognition for
your brand. And, most startups do not have the luxury of spending
branding dollars, given the longer-term payback. So, plan
accordingly, based on your available cash resources and desired
timeline for customer engagement.

In terms of display ad placements, they come in numerous shapes

and sizes and locations, almost too many to detail. But, I will
highlight a few of the more popular ones. Most publishers that offer
display ads offer them in three sizes: (i) the leaderboard at top of
page (728 pixels wide x 90 pixels tall); (ii) the skyscraper on right
side of page (120 wide x 600 tall); and (iii) the big box either in
right column or interior of page (300 wide by 250 tall). Other
popular display ad placements include: (a) pop-ups in a new
window over the page you are reading; (b) pop-unders in a new
window under the page you are reading; (c) interstitials inserted in-
between two-pages you are reading; (d) within an emailing; and (e)
within or around a video player. These latter examples are bigger,
more productive placements, and typically come at premium rates
than the first examples above, which we will detail further below.

The creative technologies you can deploy within these ads can be as
simple as a static image, to moving parts (with technologies like
Eyeblaster), to expandable size when rolled over with the user’s
mouse (with technologies like Pointroll), to data-entry forms for
sign-ups, to moving video. There are also pullback technologies you
can deploy, that drops a cookie on the user’s PC when they first
visit your site, and then pushes them ads on third-party sites after
they leave your site, to try and get them back. As you can imagine,
the more complex the creative is to build, the more expensive it is to
run. As an example, producing a video is much more labor intensive
than creating a static image ad. And, using technologies like
Eyeblaster or Pointroll, comes at the additional cost of $3-$5 cost
per thousand impressions (CPM) to serve ads using their
technologies.

The great thing about online display ads is you have many ways to
target the placements of your ads. You can either run ads run-of-site
(ROS), on any page of a publisher’s website. Or, preferably, you
can target your ads based on: (i) demographics of the user; (ii)
subject matter of the content (or behavior of the user); or (iii) time
of day/week, to name a few. But, although the performance of deep
targeting is materially better than ROS ads, publishers typically
charge a premium for each level of targeting you desire. For
example, a ROS ad for “general travel” may cost you $2-3CPM and
a deep targeted ad for “rich adventure travelers looking at Kenya
content” could cost you $10-$20CPM, depending on how many
levels of targeting you desire (e.g., rich, adventure, Kenya in this
example).

There are typically two ways to buy display ads. One is on a

“committed” basis, which means your order secures a guaranteed
placement in the time period you desire. The other is on a
“remnant” basis, which means your order will be run only if there is
unsold space available in that period (which means it is not
guaranteed to run if there are committed advertisers willing to buy
the space). Committed placements come at a much higher CPM
than a remnant placement. But, when you can get it, remnant ads are
definitely the way to go for a startup, given the material cost
savings. And, publishers should be happy to consider remnant buys,
as getting a little bit of revenues at a much-reduced rate, is better
than letting the space go unsold for zero revenues.

Typical CPM rates for display ads come in a very wide range. They
can be $0.50CPM for a static graphic ad on a remnant ROS basis, to
$10CPM for a committed/targeted basis, to $35CPM for a video ad,
to $50CPM for a targeted email inclusion. Of course, rates are
typically tied to expected click performance of these placements,
where clicks can be 0.05% for that cheap remnant ROS ad, all they
way up to 5.0% for a targeted email inclusion. And, don’t forget,
CPM’s and clicks also rise for using various technologies or
targeting your placements, as we discussed above. As an example, a
static ad may get a 0.2% click rate and a moving/expandable ad may
get a 0.6% click rate. Or, a ROS ad may get a 0.2% click rate, and a
deep-targeted ad could get a 0.6% click rate. So, make sure you ask
about expected clicks from each placement, to justify any higher
CPM’s. And, where you can, ask for CPC (click), CPL (lead) or
CPA (acquisition) advertising opportunities, which is always better
than CPM (impression) based placements, since the user has made a
known action on your site.

And, finally, the best thing about online display ads is the ease of
tracking the results therefrom. You should be using unique tracking
codes for each specific placement you buy, to track the
effectiveness of which sites/placements are performing better or
worse than others (from a small test campaign). And, then optimize
the bulk of your remaining budget/campaign into the best
performance vehicles from the initial test. And, where you can,
tracking should be implemented at the click, lead and transaction
level, to determine which clicks/vehicles do a better job of leading
to customer engagement and conversion.
Lesson #95: The Basics of Telemarketing
Depending on the nature of your business, telemarketing can be a
useful tool to cost-effectively drive targeted leads and sales for your
business. There are two types of telemarketing strategies, outbound
and inbound, that we will cover in this lesson.

OUTBOUND TELEMARKETING

Outbound telemarketing is often referred to as “cold calling”. This

tactic is most used by B2B businesses looking to sell their product
or services, B2C companies that are selling home-based services or
other organizations looking to raise funds or awareness for their
cause (e.g., donate your clothes, support our candidate, police
fundraiser). I much prefer cold calling for B2B, as that is the
expected normal way of doing business in the industry. For B2C
companies, traditional marketing is a much better way to reach a lot
of people faster. However, for local service companies (e.g.,
window washers, landscapers, chimney sweeps, cable TV
upgrades), that can logically open a dialog with a target (e.g., doing
work next door for your neighbor, did work for you before), cold
calling (or in this case warm calling), can be a very effective tool.
But, just be sensitive to how much consumers hate receiving
unexpected cold calls to their homes from businesses they don’t
know or for services they have no interest, so research accordingly
and craft your pitch around those hurdles.

A successful outbound telemarketing campaign is determined by: (i)

quality of the list; (ii) the pitch; (iii) the process; and (iv) the
conversions. For quality, you want to make sure you are calling on
people that are actually interested in your product or service, and
preferably the decision maker who can pull the trigger on the order.
So, for example, maybe that is using a service like Hoovers or
D&B, to pull a list of phone numbers of nationwide CFO’s for small
and medium sized businesses that may be interested in learning
more about your state-of-the-art financial software system. Or, in
another example, you can work with AT&T to pull a list of phone
numbers in the 60093 zip code, a ritzy Chicago suburb, to market
your handyman services business.

In terms of the pitch, the more relevant it is to the listener, and the
more trusted you come across to the listener, the better it will be for
your efforts. So, for example, mentioning mutual colleagues or
references can go a long way to warming up the client to listen more
closely. Intros like “I was referred to your by John Doe, one of your
CFO colleagues” or “I am doing work next door for Mrs. Smith”
starts to build trust of you already doing business for people they
know and trust. The other key part of the pitch is getting it out as
quickly and sweetly as you can, in one sentence, not one paragraph.
Just as if you were pitching a VC, the listener has a very short
attention span and is trying to get you off the phone as quickly as
possible. So, an opening pitch like “we are an award-winning
insurance agency that can save you 80% on your healthcare costs
using your current providers” will get their attention.

As for the process, where you can, avoid wasting the time of your
best salespeople on cold calling. Use an administrative sales
assistant to carry the heavy workload of “dialing for dollars” in
mass, as an “appointment setter” for your key salesperson to swoop
in can close the hot lead. But, in many startups, for budgetary
constraints, you may have no other choice than having your
salesperson do their own cold calling. There are also many
professional appointment setting services you can use here, but I
find their costs are typically 2x-3x the cost of you hiring your own
admin and doing the calls yourself.

Finally, in terms of tracking expected conversions, here are the

historical metrics I have experienced, which you can use as a
benchmark. You will need to make 100 phone calls to get 5-10
serious leads, and of those leads, you can expect around 20% to
close. Obviously, these metrics may vary based on the appeal of
your core service and the price point of such service. But, as you
can see, on average, it takes a lot of work to get the sale (1 sale in
50 tries), so make sure you are covering the labor and phone costs
of your cold calling, with a large enough margin from your service.
For example, if the labor for 50 calls at three minutes each costs $40
and the phone bill for those 50 calls cost $10, make sure your gross
margin from successful sales is at least double the $50 investment.
The economics get wildly better from cold calling, the more
expensive your product. But, that also requires a much more
educated/expensive sales person and a longer lead time to close the
sale.

INBOUND TELEMARKETING

Inbound telemarketing is built around supporting a 1-800 number in

your marketing materials and on your website. It is much easier to
close an inbound sales lead, since the clients have pre-selected
themselves as initially interested in what they have read about your
product or service. So, unlike cold calling, you should typically
have a receptive listener on the other end of the phone.

A successful inbound telemarketing campaign is determined by: (i)

the pitch; (ii) the process; and (iii) the conversions. For the pitch, it
is listening to the needs of the consumer, and giving them the exact
thing they are looking for and reasons why they need to buy that
product from you. So, for example, in a competitive space like
travel, with a high $5,000 luxury price point like we had at
iExplore, we would differentiate ourselves with competitive
advantages like: (a) building your dream itinerary to spec—you pick
the dates/sites; (b) privately guided trips without the “herd” of other
travelers; (c) exclusive professionally-trained naturalist guides; (d)
five star hotels at three star prices; (e) unique experiences only
available at iExplore; and (f) a list of happy past traveler references.
You get the point and can tailor this strategy for your business.

Equally important as the pitch, is the creative opportunity to upsell

the client, to increase your average ticket and drive a higher ROI
from the sale. So, continuing with the iExplore example, this could
include things like: (i) while you are all the way in South Africa, it
is a quick extension to take in “must see” Victoria Falls while you
are there; or (ii) while at Machu Picchu, I would recommend you
paying a little bit more for the Sanctuary Lodge, it is the only hotel
right at the ruins site and you will have the ruins entirely to yourself
after the busloads of tourists leave.

As for the process, most inbound call centers are organized around
key product specialties. So, for example, when you call Comcast,
dial one for cable TV, dial two for internet and dial three for phone,
is sending you to different product experts on the back end, most
qualified to answer those questions. Continuing with iExplore, we
organized our inbound sales team based on geographies of the world
(e.g., Africa sales to Marlyn, Europe sales to Rosemary). So, figure
out how to most-efficiently organize your inbound sales efforts and
make sure the team is highly trained in educating, closing and
upselling clients.

The conversation metrics are much better in inbound call centers

than outbound call centers. So, expect 10-20% of the inbound calls
to close (5-10 of 50 is 5x-10x better than the outbound
telemarketing metrics we discussed above). And, once again this
will vary based on your price point and the ease and availability of
competitive products.

Underlying all of the above is the necessity for great salespeople

that will ultimately make or break your telemarketing efforts. So,
make sure you are hiring the best talent you can afford, with
experience in your industry, that you can highly train and
incentivize to succeed. Be sure to re-read Lesson #25 on how best to
structure your sales team and Lesson #26 on how best to incentivize
your sales team.

Lesson #99: The Basics of Direct Mail

Marketing
With the invention of email and mobile marketing, I assumed the
direct mail marketing business would slowly die on the vine, given
the heavy expense of producing and mailing the marketing
materials. That may ultimately become its fate, as younger users,
who prefer electronic media, get older. But, today, particularly for
an older demographic, direct mail is still heavily used, particularly
by catalog retailers, tour operators and vendors of local services.
This lesson will summarize the basics of direct mail marketing.
The key things that drive the success of a direct mail campaign are:
(i) the cost to produce and mail the piece; (ii) the
type/quality/customization of the marketing piece; (iii) the
quality/targeting of the mailing list; (iv) the quality of the offer; and
(v) proper conversion tracking on the backend. I will address each
of these points below.

The cost of the marketing piece has six components: (a) the cost of
the list; (b) the cost of design; (c) the cost of printing; (d) the cost of
shipping; (e) the size of the mailing; and (f) the cost of the offer, if
any. If you are mailing your in-house mailing list, there is no cost of
mailing to your own names. But, if you are renting a mailing list
from the major services like Experian, or dropping to a targeted
media partner’s list like Forbes Magazine, there are typically fees of
$25-$50 per 1,000 names pulled to access such list (which can
certainly add up the more names you pull). The cost of design will
be cheaper by using your on-staff creative designer than using an
agency, which can cost 15% more for the hourly time invested in
the piece. Design costs can certainly add up depending on whether
you are dropping a one-side post card or a 100-page catalog.

Printing costs can wildly vary based on where you have the piece
printed and how big the piece is. One of the cheapest places for
printing is South Korea, even after including the overseas shipping
costs. So, depending on the size of your run, consider both domestic
and overseas options, via the assistance of printing management
companies. And, the per piece printing costs can vary from $0.10
per piece for simple postcards to $2.00 per piece for fancy catalogs
(understanding per unit prices will be lower for higher volume runs
than lower volume runs). A typical test run would not be less than
5,000-10,000 pieces, since the conversion rate on direct mail is only
like 0.2%, on average. Dropping any fewer pieces is unlikely to
deliver any conversions. And, on the high end, mailings can get into
the millions depending on your budget and the size of your target
market (e.g., marketing toothbrushes that appeal to 100% of market;
or Kenya safaris that appeal to 10% of market).

In addition, variables like four-color printing on thick page stock,

will cost more than black and white postcards on thin page stock, so
plan accordingly in your budgets. But, don’t cheap out here. You
are trying to break through the clutter of junk mail going to the
mailbox that most likely gets tossed unnoticed (hence the low
conversion rates). So, an eye-popping creative will get their
attention better than a bland creative. And, where possible, digital
printers now have the flexibility to customize the printing to the
recipient level. They can swap-in a person’s name into the creative,
or swap-in a man’s photo for male recipients vs. woman’s photo for
female recipients. So, ask about these customization options with
your printers.

And, don’t forget, you are going to have to pay the U.S. Postal
Service to get these pieces to the homes of your target recipients.
Postage rates can vary significantly (from $0.15 to $2.00) based on
the size of the piece, and whether or not they are pre-sorted. So,
don’t forget to include the postage costs in your budgeting process,
and use a mailing service to assist you here with the pre-sorting
process to help lower your postage costs.

Given the huge expense of direct mail, I am always a fan of doing

more with less with your creatives. Dropping a postcard with a
50%-off offer, with more details available on the website, is more
cost effective than dropping a multi-page piece detailing the offer
by mail. Think of it as using the piece to get recipients to “self
select” themselves into wanting to learn more. Tour operators are
pros at this. They don’t use 100 page catalogs for new customer
acquisitions, given the heavy expense. Instead, they send a post card
asking the recipient to profile themselves in terms of their desired
trips and activities. And, then, they drop targeted catalogs to such
recipients after they get their postcards replies back.
More important than anything is making sure your mailing is
targeted to users that are actually interested in your products. As an
example, at iExplore we had a lot more luck direct mailing the
National Geographic list, than we had direct mailing the Gourmet
Magazine list, even though they both served similar high-end
demographics. And, as another example, if you are selling a new
computer networking product, that is going to get a much higher
response from CTO’s than CEO’s, and better yet, a list of systems
network administrators would perform better yet. And, as another
example, if you are a Nursery School looking for new students for
your school in Winnetka, IL, limit your direct mailings to zip code
60093, the most logical direct marketing area (DMA) to pull
students from. You can do sophisticated PRISM analyses to help
you identify which zip codes are most appropriate to market your
product or services (e.g., which zip codes have the highest average
income). The better the targeting, the better your ROI. Period.
And, don’t forget, mailing lists go stale at a rate of 20% per year
with people moving to new addresses. So, make sure you are
dropping to a freshly updated list to make sure your mailing gets to
your desired recipient. I would avoid any lists older than one year
old.

The quality of the offer is also important. And, what you think may
be exciting to consumers, may not be. So, do a few small tests with
variable offers to see which one performs best, before dropping to a
much broader list. But, in all cases, I am a huge fan of: (a) some
special offer; and (b) a deadline to redeem such offer, to create a
sense of urgency. So, at iExplore, we would not send a generic
“learn more about iExplore” mailing. We would send a specific and
meaningful offer like, “save $1,000 on any new booking made
within 30 days” (which can materially increase the cost of the
overall direct mailing including the other costs above, so make sure
you have enough margin to work with here to cover all costs,
including the offer).

And, if you are a catalog marketer. Think of each quarter page of

your catalog as a unique piece of real estate. You want to slot
merchandise in each quarter page that converts at the same high
level. If you have any slow sellers, swap them out for higher
producers. Each inch of real estate matters in optimization the ROI
from your expensive direct mail efforts.

And, underlying all of this is proper conversion tracking on the

backend. There is a reason all catalogers ask you to read them the
six digit tracking code in the pink box on the back of the catalog.
They want to know what piece you are calling from, and see if the
buyer is the same person the catalog was sent to, or if a new person
not on the original list is calling, who borrowed the catalog from a
friend. But, most importantly, they are adding up all the sales/profits
from the direct mail piece, to compare it to their total costs of the
piece for calculating the ROI from that initiative. Then, they are
able to fine tune and tweak future pieces with the knowledge
therefrom. The best direct mailers are the ones that have done it for
years and have optimized accordingly with each iteration (e.g., so
not necessary the best tactic for startups with limited budgets).

Direct mail is a very big topic that deserves more space than
allocated in this short lesson. But, frankly, as a startup, your
marketing dollars may be more efficiently spent in other areas (e.g.,
search engine marketing, emails, social media). So, make sure you
have fully exhausted your higher ROI tactics before getting into the
expensive world of direct mail.
3 Human Resources

Lesson #2: Building the Right Team for Your

Start-Up
In an earlier lesson, we talked about key success factors for any
start-up and determining if you have a good business model. In this
lesson we are going to drill down on one those factors: things to
consider when setting up your management team. The key drivers
of that are finding employee partners that have: (1) the required
skillsets for the job; (2) prior experience with start-ups; (3) a
personality fit with the rest of the team; (4) shared vision with the
rest of the team; and (5) fire in the belly.
Let’s talk about the first two together, as they go hand in hand.
You’d think it would be pretty self-explanatory that for a Chief
Marketing Officer hire, as an example, you should find a candidate
with strong marketing skills. But, the tactics differ for different
types of marketing vehicles (e.g., digital, print, TV, direct mail),
different industries require different expertise (e.g., e-commerce
business vs. catalog business) and B2C companies require different
skillsets vs. B2B companies (e.g., marketing vs. sales skills). So, it
is important prior to hiring, to make sure you find someone that has
deep knowledge of your specific industry and has successfully
scaled up businesses within your desired budget range.

For example, don’t put a $1BN budget Proctor & Gamble CMO, in
charge of your $1MM start-up budget. The P&G guy most likely
only knows how to build brands with big teams and big budgets, not
how to organically and virally grow your business on the cheap in
new kinds of ways (e.g., social media, mobile, SEO), rolling up his
sleeves and doing it himself on a shoestring. So, past start-up
experience is a definite plus.

As we all know, startups are a 24/7 type of job. So, you are going to
be spending a lot of time with your co-workers. It is critical there is
a good personality fit between the team, as in those late night hours,
the last thing you need is someone getting on your nerves. Or,
having one member of your inner circle the pariah within the
company that nobody wants to work with. You don’t have time for
these types of issues while you are trying to win the start-up race.

Equally important, it is important each member of your team share a

consistent vision on exactly what you are building. As an example,
let’s say we want to build a car, which seems clear enough at the
30,000-foot view. But, when you drill down to the specifics, it is
important the team know we are all specifically building a mini-van
for families, not an SUV, or a pickup truck or a luxury sedan, which
appeal to different user markets, have different costs to build and
require different marketing tactics.

And, most importantly, it is critical that all involved have a deep

passion for the product and fire in the belly to move at light speed to
own your market. This is not a 9 to 5 job. This is a passion you are
living and breathing in real time. Going back to our Chief
Marketing Officer example, somebody that has come from a cushy
role, managing a big team of employees with private secretaries and
big budgets, most likely is going to have a really tough time going
back into the trenches, putting in the required long hours.

So, in the words of Bo Schembechler, the old Michigan football

coach: it is all about “The Team! The Team! The Team!” that will
ultimately win you your championship.

Lesson #9: Spreading Equity to Key

Employees and Partners
As a rule, entrepreneurs are very protective of their equity, and try
to keep 100% ownership for themselves. Usually this is fine,
provided that important key parties (e.g., employees, partners) are
appropriately motivated to help you succeed. Sometimes that
motivation comes in the form of cash compensation (e.g., lucrative
sales commission plan, profit share plan), and sometimes that comes
in the form of equity or equity linked incentives (e.g., stock,
options, warrants).

For employees, my rule of thumb is to set aside 10%-20% of the

company’s equity for the key members of the team. You can spread
that as far as you like, from as few as your senior executives (e.g.,
2-4% per senior exec), to as many as the entire organization (e.g., 1-
2% per senior exec, 0.1-0.2% for junior staff). I typically reserve
equity for the key individuals that are going to help my business the
most, regardless of title. For example, if your key developer has
been critical to building and maintaining the code of your site, and
you require his long-term commitment for R&D improvements,
make sure he is motivated to stick around. And, it is important the
employee thinks they are properly being motivated. Each employee
beats to a different drum, some prefer a smaller cash based package
and others prefer a bigger equity based package. So, design a
package that works for both parties. I typically give them a matrix
of options (e.g., big cash/low equity, medium cash/medium equity,
low cash/high equity), and let them pick what works best for them.
And, worth mentioning, equity should only be given to employees
you deem are full-time, long-term partners of the business (not part-
time contractors that may come and go over time).

And, when we talk about giving equity, there are many structural
considerations. Unless they are a co-founder at the time the
company is formed, giving an employee stock outright has two
problems: (i) the recipient and the company will both have
immediate tax implications, as stock grant would be treated like
immediate compensation; and (ii) if that employee quits tomorrow,
you don’t want them to walk away with the equity. So, to address
these issues, you would set up a stock option plan, or something
similar, where the employee: (i) has the right to purchase equity at
today’s fair market value; and (ii) the options have a vesting
schedule with the employee’s purchase rights being earned over
time (e.g., over four years, 25% of the grant is earned in each year).
That keeps the employee more committed for the long term, which
is what you want, and only rewards them for actual time invested
with the business. Also, be sure that the stock option plan provides
the company with a mechanism to easily repurchase any exercised
shares from the employee at any time, so you can easily recapture
ownership down the road (if things go awry with the employee, or if
there is an impending change of control that requires recapturing
100% of the outstanding shares).
If you don’t want to spread actual equity or options, you can easily
accomplish the same goal with a “phantom equity” plan, that
basically mimics equity ownership via a profit share plan or
otherwise. For example, employee could own 5% of all net income
created each year, instead of 5% of equity. Or, employee could own
5% of the company’s valuation at a mutually acceptable revenue,
EBITDA or net income multiple. These plans typically are paid in
cash, or accrue as interest bearing debt until paid out, so make sure
you anticipate having the cash resources to relieve these claims
before going down this road.

In Lesson #6 we talked about the importance of strategic partners to

help you grow your business. And, as we mentioned before, it is
important to spread the equity/upside with such partners, as well, so
they are motivated to see you succeed. Typically with strategic
partnerships, you are simply granting them stand alone, 3-5 year
warrants with a strike price of today’s current fair market value,
with similar repurchase options for the company. Strategic partners
could get 5%-20% of the equity, depending on how important they
are for your business.

Now, you might be saying, you just gave away 10-20% for key
employees and 5%-20% for the key strategic partner, that totals
15%-40% of the company. First of all, you didn’t “give” it away,
the employees and the partner have to earn their upside before they
exercise their options or warrants (e.g., grow the company’s
business and valuation, bound by vesting rights that accrue over
time). But, more importantly, I would rather own 60-85% of a
wildly successful business, than 100% of a business where the staff
and partners are not invested in our mutual success.

Also worth mentioning, if the business requires outside capital, all

parties would share pro-rata in the dilution from that equity
financing. So, an example, post a financing, your ending ownership
table could look like: founder 50.1%; investor 30%; partner 10%
and employees 9.9%. So, forecast your desired ending ownership
well ahead of time, to protect yourself from losing majority control
of your business down the road (unless you are OK doing so).

It is hard to do this topic justice with one simple post, given all the
variations to a theme for motivating your team and partners, but
hopefully it gave you a good sense to the importance of this topic
and a few mechanics you can use to implement such.

Lesson #13: Creating The Right Culture for

Your Startup
A company’s culture is usually determined from the initial brush
strokes of its design. And, when talking about culture, we are
talking about the “softer” aspects of business. This includes the
types of people that are getting hired, management styles,
communication styles, work-life balance, incentive structures, etc.
Although there is no one right answer here, I will do my best to
summarize a few preferred methods, based on my past experiences.

You cannot have culture without people, and that is where it all
starts, right from your initial hiring decisions. To me, this comes
down to an individual’s smarts, internal startup DNA and
personality fit. It is critical you find the smartest people you can
find, to help you build your business. I would rather have a smart
person that is a quick study and no industry experience, than a
marginal industry veteran. If you don’t have the fire power in the
brain to think creatively out of the box, which is always required
with a startup, then your business will never succeed. And, don’t be
afraid to hire people that are smarter than yourself. Sometimes
managers are worried about being made to look stupid by their
subordinates. But, I say the smarter the better, to help raise
everyone’s skills around the table.

But, it is more than just having smart people around you. They must
also have the right startup DNA. Someone that is passionate about
the product that is getting built and is excited to come into work
each day, and put in the long hours required. Someone that is going
to motivate the rest of the team to do the same. Someone that is an
extrovert A-type personality that is going to cheerlead when
necessary and lead by example. Someone that has a great
personality fit with their peers, managers and subordinates.
Someone that is not easily rejected, and won’t bring a bad mood to
the office. I always say, “We are all paddling together in a
whitewater raft navigating the rushing rapids, and need all paddlers
rowing in unison and as fast as humanly possible to survive.”

As for management styles, the less hierarchical the better. Sure there
needs to be a clear chain of command, but it is critical an
employee’s voice is always heard and that they feel their smart
ideas are being listened to. There is no faster way to lose an
employee than to constantly shoot down their ideas, or by making
them feel stupid. And, when doing employee reviews, always do
360-degree reviews: manager reviews employee, employee reviews
manager, peers review eachother and employee reviews themself.
This way everybody participates in the process and both manager
and staff problems can get addressed.

In terms of communication style, I always prefer open

communications with the team. That means make sure the entire
staff, from top to bottom, is always clear on the company’s goals,
and has regular communications from management, on both the
good news and the bad news. We are all in this together, so don’t try
to hide anything. Employees are smart enough to know when things
are going wrong, and would rather hear what the problems are, so
they can help try to fix them. And, have the confidence in knowing
management “has their back” and isn’t trying to hide anything from
them.

Work-life balance can sometimes be hard to achieve in a startup

environment, when everyone is putting in the required long hours.
But, it is critical you take time every now and then to recharge the
batteries. It is hard to do good work, when you can’t even stay
awake, or if you are always upset you are not spending more time
with your family. It is not all about working hard. It is about
working smart, prioritizing your efforts and making time for
yourself to maintain the proper work-life balance. This could also
include things like flex time or working from home, letting staff
members set their own schedules that work for them to meet their
personal needs.

When Google was getting started, they even went as far as letting
staff members take 20% of their time (one day a week) to work on
any personal pet projects they wanted, many of which lead to
amazing innovations and the next growth vehicles for the company.
And, don’t get mad if staff wants to blow of steam with a midday
video game or trip to the gym. As long as they are doing the work,
hitting their goals and putting in the effort, there is no need to micro
manage their hourly schedules.

As for incentives, every employee beats to the tempo of a different

drum. So, properly set incentives on a person-by-person basis, for
what personally drives them. Some people are motivated by cash,
others by equity or others by perks. Figure out what the magic
incentive is for each, and put achievable performance thresholds in
place to achieve such. It should not be a “one size fits all”
discussion. And, targets reasonable need to be achievable. There is
nothing more demotivating than working your ass off and not seeing
any fruits from your labor. So, there needs to be both “company
targets” and “individual targets”, so employees feel they have
control over their own incentive destiny.

This is a high-level snapshot of a complicated topic. But, hopefully

it gives you a better sense on how to best set up your business
culture right from the start. As, it is very difficult to change down
the road.

Lesson #14: The Role of a Startup CEO

Chief Executive Officer? Chief Visionary? Chief Cheerleader?
Chief Salesman? Chief Funding Officer? Chief Communications
Officer? Chief Team Builder? Chief Lightbulb Changer? Chief
Coffee Maker? Yup, all of these titles apply to the role of a startup
CEO. It is perhaps one of the hardest job to do in the business
world, given the wide range of skills required to excel. This is one
of the reasons only 5-10 startups in 100 actually succeed, as it takes
a really special person that has the right combination of skills and
startup DNA. In many ways, a much harder job than a CEO of a
Fortune 500 company, minus the big salary!!
When it comes down to the core skills required, a startup CEO
needs: (i) a clear vision of where the ship is sailing; (ii) a finger on
the pulse of the industry and competitive trends, to navigate the ship
over time; (iii) solid team management skills to keep all employees
sailing in the same direction; (iv) impeccable sales and motivational
skills, while maintaining credibility with clients, investors and
employees; and (v) to keep the business on plan, on budget and
liquid. I’ll tackle each of these points below.

The first two points really go hand in hand. In order to create the
clear vision, you need to have a good sense to what is going on in
the industry and with competition. That is really the first step to
building a winning business plan. It is not enough to say, “we are
building a great travel website”, as there are tons of travel websites
out there. You must shape the vision in a way it is more unique and
competitive than current solutions in the market. My previous
startup, iExplore, positioned itself as a niche killer for adventure
travel (compared to the general online travel agencies like Expedia).
And, within the adventure travel sector, iExplore marketed
“privately-guided, made to order” tours (compared to the traditional
packaged group tours with set itineraries) at a price point 25% less
than similar tours being offered (leveraging the cost efficiencies of
the internet, compared to brick and mortar agents). This vision for
the business created a unique product in the market place, which
consumers ultimately flocked to with over 1MM unique visitors per
month coming to the website.

But, the CEO’s job is not done setting the initial vision. He or she
must stay on top of those competitive trends to navigate the ship
over time. For example, after 9/11/01, iExplore needed to evolve
from a travel agent of other tour operators’ trips, into an iExplore
branded tour operator of its own in an effort to get more margin to
the bottom line during a difficult economic climate. And, at the
same time, iExplore opened up a whole new revenue stream from
online advertising, to get the company to profitability. It is the
CEO’s job to constantly watch these kinds of economic, industry or
competitive movements over time, and to respond accordingly to
keep the ship afloat.

Another job of the CEO is to make sure all employees are clear on
the vision, and that all staff are sailing in the same direction. In the
iExplore example for adventure travel, you can’t have your tech guy
building a cruise seller, your operating guy building a hotel seller
and your finance guy building an airfare seller. Everyone is building
an adventure travel seller, and the CEO’s job is to make sure all
staff have contributed in building that vision, so all players are on
the same page as to what they are building. Therefore, the CEO is
not only the communicator of the vision, the CEO is the consensus
builder for that vision. You will never be successful if your team
does not buy into the vision, or if they feel their good ideas for
improving the vision are not being listened to. Then once everyone
is firmly on board, keep them clearly focused on the goal.

Once the vision is set and being maintained over time, now comes
execution. And, one of the key execution requirements for any
startup CEO is to be its Chief Evangelist. This includes
cheerleading the staff, from top to bottom, and getting prospective
business clients and investors excited about getting involved with
the company. Everyone has been around that infectious personality
that lights up the room, and you can’t help but be excited by that
person. That is who you need to be. But, and this is a big but,
everyone has also been around that person who you feel is trying to
sell you the Brooklyn Bridge. So, it is important that your sales and
motivational skills are tempered with equally important business
judgment and intellect to come across as credible and backable to
all parties involved.

Keeping the business on plan, on budget and liquid is a no brainer

requirement for any startup CEO. The CEO needs to set achievable
proof of concept points, and put key managers in place for hitting
those goals. That means building a management dashboard of the
key drivers for your business, that are going to dictate its success or
failure. For iExplore, it was all about: (i) driving traffic to the
website; (ii) getting those visitors to contact us; and (iii) getting
those contacts to convert into a sale. So, all energy went into driving
those three datapoints, with one key manager in charge of each
datapoint (e.g., head of marketing drove traffic, head of web design
drove contacts, head of call center closed transactions). Figure out
your key drivers, and get the right team members to manage them
accordingly. But, more importantly, you need to be able to quickly
identify when things are not going to plan, so you can put new
initiatives in place to make up for any shortfall. The longer you let
cash-using problems go unfixed, the shorter your liquidity runway,
and the higher odds you will run out of money and potentially go
out of business. So, plan accordingly.
The worst thing that can happen to any startup is running out of
capital mid-launch or prior to full proof of concept, that would
attract additional capital. So, it is the CEO’s job to make sure those
proof of concept points are clear to the entire staff, a reasonable
timeline has been created to achieve those points and the company
has enough cash (including a cushion) to get to those goals. The
best people to solicit proof of concept input are your prospective
investors. Ask them, “what are you looking for before you would be
willing to fund our business?” and firmly focus on hitting those
targets. And, when raising money, always raise more than you think
you will need, to leave a material cushion for when things go
wrong, as they always do with startups.

There is no single right answer for “who makes for the best startup
CEO?”, as everyone is different in terms of skills, style and
personality, and every business is different in terms of economic,
industry and competitive dynamics. But, the above is a good
summary of the types of people that have the best odds for success
in becoming a successful startup CEO.

Lesson #15: Hands-On vs. Hands-Off

Management of Startups
Startups have so much work to do, that it is typically much better to
hire a smart management team, and let them do their jobs in a
hands-off kind of way. That does not means letting them run
entirely unmanaged, as you should at least have weekly update
meetings with your team, both individually and as a group. But, it
does mean letting loose the reins, once you are sure you and your
team are sailing in the same direction. A hands-off style allows the
business to be more nimble, making quicker decisions, and also
instills confidence in your team, that you trust them to do their jobs,
and they will certainly appreciate not being micro-managed.

This is particularly true when dealing with start-ups, where you are
in a race to win market share and client adoption as quickly as
possible. I always tell my team, I would rather you get it right 90%
of the time, and move at light speed on your own, than to get it right
100% of the time, and rely on me for input, which slows down my
own work efforts. Or, said another way, if you can deliver an A-
result in one week of effort, that is much better than an A+ result in
two weeks of effort, given the diminishing margin of return on that
extra 50% of work time.

That said, there are a few times when a hand-on style is required.
The first time while you are still learning the business. It is critical
you have a deep understanding of all aspects of your business, to
ensure that all input you are getting from your team makes sense
and is justified by your own experiences. For example, when I was a
first-time CEO, I had no experience in running different areas of a
business, like marketing, technology and operations. So, I hired
team members with deep experience in these areas, and relied on
them to make key business decisions in those areas. The problem
was, their experience only revolved around big companies, not
startups that required different skills. We made a lot of mistakes in
those early months, and we could have saved lots of money, had I
been more hands-on right from the start, until I had a firm grasp of
the key drivers of the business. You never want to be in a position
where you are getting advice from your team, and don’t know
whether or not what they are saying is the right advice, or at least
credible based on your own personal experiences with the business
or otherwise.

The second time a hands-on style is required is when things start

going wrong, which will require you to come in like a “fireman”
with water bucket in hand to put out the fire. I typically use the
three-strike rule, before resorting to this hands-on involvement. The
first time the mistake is made, a simple communication and
guidance should be sufficient to resolve the problem. The second
time the same mistake is made, a little firmer communication and a
warning that the next time it happens, you will have no choice but to
get more involved. Then, after the third time the same mistake is
made, you will need to jump in and try to resolve the problem
directly.

But, overall, a hands-off management style typically rules the day,

assuming you have hired the right team with the right skills to get
the job done, and you are comfortable in your own core knowledge
of the business requirements.

Lesson #16: The Plusses & Minuses of Virtual

Employees
The internet, web video and mobile technologies have clearly made
working from outside of the office easier than ever. And, now, we
are seeing more and more “virtual companies” getting staffed with
employees located in numerous cities around the country, or in
some cases, around the world. But, is building a virtual company the
best thing for your business? I believe the “inside vs. virtual” hiring
decision really comes down to three points: (1) how critical is it that
position be located at the home office; (2) how hard is it to recruit
for that position; and (3) are there business efficiencies created by a
virtual workforce.

The first point is pretty obvious: it would be pretty hard to hire a

virtual call center manager if the call center employees are all
centrally located in the home office. You can never beat that face-
to-face engagement with your staff, especially in a team building or
sales-driving environment. But, the flip side to that, it would be
pretty easy to have your outside sales team remotely located in
cities around the world. Salespeople are largely independent and are
constantly on the road meeting with clients. So, no harm if your
sales team is virtual, as they typically aren’t in the office anyway.

As for ease of recruitment, let’s face it, certain positions are easier
to fill than others. If you need a simple web designer, there is a large
and fertile pool of prospective employees in any major city. So, I
would try to fill that position locally for any permanent staff
positions, for better team building and communications with the rest
of the tech staff. But, if your office is located in Kalamazoo,
Michigan and there are very few hard core tech developers with
C++ or C# experience, you may have no choice by to hire a virtual
tech developer in Chicago or elsewhere, including India where labor
rates are a fraction of what they are in the U.S.

In terms of business efficiencies, virtual employees bring a ton of

potential economic value. You don’t need to pay rent in the home
office to house them, you don’t have to pay relocation costs to move
them, you have access to lower salaried employees in smaller
markets, willing to do the same job for less, etc. And, there are ways
to take this model to far extremes with crowd-sourced solutions
over the internet. At MediaRecall, our secret sauce was a distributed
work force of 2,000 digital media professionals that worked from
their homes all over the country. We were able to hire talent at $10
per hour (compared to our clients paying on-site engineers $40 per
hour) and we were able to throw hundreds of bodies at a project
(getting work done in months, not years with in-house solutions). In
this example, the virtual workforce became our entire value
proposition to clients and was the foundation of our entire business.

Overall, I think the core management team needs to be centrally

located, in order to facilitate easier communications between the
team. But, for non-critical positions, that can easily be completed
and managed remotely, virtual employees are a great way to go.
Lesson #18: The Right Work-Life Balance for
a Startup
Let’s face it, startups often feel like an all-out sprint to get your
product to market before your competitors do. That typically means
you are living and breathing your startup around the clock, often
putting in long hours. And, you typically can’t ever get away from
it, even in your limited free time. Your friends want to talk about it,
your best thinking is while you are alone in the shower, you get that
great idea while at the gym, etc. That is all fine and dandy, until you
realize that a sprinter can only go all-out for a limited period of
time, before collapsing from exhaustion. So, I prefer to think of a
startup as more of a marathon (albeit a really fast-paced marathon),
and not a 100 yard dash. So, like any good athlete, you are going to
make sure you set your pace accordingly with the proper work-life
balance.
You have to make time for your personal life, to clear your head,
and start fresh each day. You simply can’t think clearly if you are
continually exhausted, working the midnight oil seven days a week.
Now, this is going to sound completely out of character for a typical
startup executive, but why can’t you work a normal 8am-6pm,
Monday to Friday work week, leaving your evenings and weekends
for yourself, if you are religious about your work prioritization and
how you actually spend your work time.

Prioritization is the absolute key to solving the work-life balance for

any startup. Every minute you spend on non-mission critical items,
requires you make up that time in other ways, late at night or on the
weekend. Do you like to sit back and chit chat about last night’s ball
game? If so, do it in a minute, not ten minutes. Do you like to
brainstorm ideas with your team. Fine, do so in a pre-scheduled
hour, not an impromptu four hours, tying up your time, and your
team’s time. Do you really need to call your phone service to
resolve a billing dispute, or can someone on your team do that for
you.

I try to prioritize all tasks (for myself and all team members) in a
way that will maximize revenues and increase the odds of hitting
our business goals. So, if ten projects are on the list, you have to
knock off #1 before you start wasting any time on #10, since your
prioritization efforts dictated a higher ROI from those efforts. And,
guess what, if you were right in your assumptions, revenues and
profits will be soon to follow, and then you will no longer feel you
have that “cash burn-out gun” constantly pointed at your head
(which is never healthy to any startup executive’s peace of mind).

A lot of time gets wasted in startups, particularly from the

perspective of reinventing the wheel. You are not the only startup to
ever launch, quite the contrary. So, surround yourself by proven
entrepreneurs that have “been there, and done that” that can be your
sounding board on various issues you run into. Because the odds
are, nine times out of ten, that they have already run through the
same problems before, and can help you solve it in one hour, not
one day. So, piggyback on their learnings to save you the time from
trying to solve that same dilemma from scratch. And, if you don’t
directly know people that can help, there are tons of online Q&A
sites, like Quora and ChaCha, and business networking sites, like
LinkedIn, that may be of use. If you can free up all those wasted
hours, now you have more time to focus on the problems that really
matter, issues specific to your business. And, did I mention, more
free time to spend on your personal life.

Also, it is important to avoid the usually time sink a founder

experiences: their inability to hand off tasks and key projects to
their staff. You are not doing this all by yourself and you are not the
only smart person in your office, if you are hiring correctly. So,
delegate where you can, to get back some much needed time for
other things, while at the same time empowering your team and
making them feel like they are valued and contributing to the
overall success.

To me, your personal life is the ying to your yang (work life). You
simply cannot have one without the other. How can you possible
focus on your work, if in the back of your head you know you are
missing your kid’s school play. Or, your marriage is suffering
because your spouse feels they never see you. Or, you just need a
change of scenery from a quick vacation to clear the head. You have
to make time for these kinds of things to recharge your batteries and
make your work time that much more efficient (the key word to all
of this). And, equally important, you have to encourage and permit
your staff do the same, offering flexible work hours or otherwise (in
this case, preaching what you practice).

Lesson #30: When to Hire Employees vs.

Contractors vs. Crowdsources
Employees are on-staff individuals working for your company,
accruing benefits and where the company controls their working
hours and how they are paid. Independent contractors are
individuals engaged as a third-party entity, not accruing benefits,
setting their own hours and invoicing the company as they complete
their work. There is a good article on the differences between
employees and contractors on the IRS website. A new category of
workers, called crowdsources, are the same as contractors, but you
have them in mass, with hundreds of potential workers competing
for work at typically much reduced prices.

Crowdsources have been built in nearly every type of human work

category, including graphic design (Crowdspring, DesignCrowd,
Kluster, Fellow Force, 99 Designs, Genius Rocket), search bid
management (Trada), banner ad creation (Data Pop), professional
writing (Contently) and market research (Crowdtap), just to name a
few. These crowdsources are typically offering companies much
more selection to choose from, at a fraction of a price. As an
example, let’s say you need a new logo. You post your need on one
of the graphic design crowdsource websites, and you will get 100-
200 logos to choose from (designed by 100-200 different designers
trying to win your business), and only pay for the one you decide to
buy (typically at a fraction of the price a logo design agency would
charge for only a couple options to choose from). Crowdsources are
very clever businesses!

Now, when is it best to use employees vs. contractors vs.

crowdsources? The answer typically comes down to: (i) is the
position long-term in nature, or temporary; and (ii) does the
complexity of the work require onsite management or not. In all
cases, you want to avoid adding employees, unless absolutely
necessary. Employees come with expensive payroll taxes and
employee benefits, which are typically 20% more monies on top of
their base salary. And, when you terminate them, any
unemployment benefit claims, will ultimately get paid by the
company in the form of higher unemployment insurance premiums.
And, management level employees may also have big severance
packages (which should be avoided, if you can). Not to mention, the
mindset of an employee is that they are a long-term team member,
and any layoffs will dramatically impact company morale for the
remaining staff, if they see their friends cut.

That said, employees are the way to go for permanent jobs, as

employees salaries are typically a lot lower than the hourly rates
that can be charged by an independent contractor. As an example, if
the company needs C-level management or an office manager, these
are most likely long-term jobs that will never go away. These would
be employee hires.

Independent contractors, on the other hand, are better for projects

that are more interim in nature. As an example, if you need a new
website design, that is typically a three month project and then the
designer is done with their work. You don’t want to take a person
on your employee payroll for an interim project like this. Unless
your company has full time design needs (e.g., web site changes
throughout the year, marketing materials throughout the year), it is
preferred to hire an independent contractor in this example. It makes
your overhead that much more variable in nature, allowing your
cost structure to move up and down as your work needs ebb and
flow. This is much preferred to carrying fixed overhead.

Now, in terms of hiring an independent contractor or using a

crowdsource, it comes down to the complexity of the work. If it is
something simple, like designing a logo or website header, that can
easily be done by anybody worldwide, and it would be beneficial to
get a bunch of different examples to choose from. Not to mention
the dramatic costs savings of the crowdsources, compared to
independent contractors. But, for complex work, like architecting
your website backend and making all the database, network,
hardware and software decisions, that is most likely best served by
an in-house independent contractor working hand-in-hand with your
CTO.

So, long story short, keep your long-term overhead (e.g., employee
base) as low as possible, and structure your human resources in as
variable a way as you can. While at the same time, maximize your
selection of options and keep your costs low with crowdsources,
when complex work is not involved. Start researching crowdsources
on the web, there is most likely one for most any of your needs.

Lesson #34: How Best to Recruit Employees

For Your Startup
As a startup, odds are you will not be able to afford a dedicated HR
person or 30% headhunter fees, and will most likely need to be
doing the recruitment yourself. In today’s post, we will offer a few
tips on how to find the right talent for your business, in a way that
brings in the best candidates and reduces any distraction from your
main business focus.

There are lots of different job posting sites out there, some are huge
(e.g., Monster, Career Builder, Craig’s List) and others are small
(e.g., job boards for trade magazine sites). Some offer national
candidates, and others local candidates. And, some are targeted to
senior executives (e.g., The Ladders, Netshare, Execunet) and
others for specific entry-level jobs. So, before randomly placing a
job posting, figure out which audience is most relevant for your
position.

For example, I may go to Dice or Craigslist for technology

developers, LinkedIn for mid-level managers and the Travel
Industry Association website for national travel agents. But, in most
cases, I will first look for local job boards in your home city (e.g.,
Chicago Interactive Marketing Association for marketing people in
Chicago), since I will not have budgets to relocate employees.
Unless national job boards are your only option, and then I will
detail no relocation budget within the posting, so candidates know
we cannot afford to relocate them or pay for their travel to interview
with you.

And, let’s not forget the power of working your network and word
of mouth marketing via LinkedIn, Twitter, Facebook or otherwise.
It is a lot better to find a “colleague of a colleague”, with firsthand
references in place, than to start blind with a random candidate,
where you can. Frankly, sites like LinkedIn are my favorite
recruiting sites, simply because I can learn a lot about the candidate,
above and beyond their simple resume data. How many connections
do they have? Who are those connections, and can they help me?
Do I have any overlapping connections that I can call as a
reference? Also, it provides really good insights to how socially
engaged the candidate is and the types of connections they can bring
to your business.

Once you have identified where you want to be recruiting, now you
need to figure out what your job posting should say to: (i) stand out
from the thousands of other job postings a candidate may be looking
at; and (ii) limit the clutter of resumes coming into your office, to
simplify the screening process. I would not be vague in your copy,
and disclose as much as you can to ensure the reader knows all the
plusses and minuses, so only the most interested will apply. That
means, disclose your company name (so they can research your
business on your website) and disclose the specific salary range (so
people desiring a salary above that range do not apply). The only
time you need to be more confidential in your posting, is when you
don’t want an existing staff member to know you are recruiting a
replacement for their position, or if you are worried about a
competitor learning you are hiring for certain skills. But, as a rule,
more disclosure is better than less for all involved.

Also, if there is specific information that would be useful to you in

screening candidates, make sure you ask for such information to be
provided in your posting. For example, if you need a technologist
with strong C# coding experience, make sure that is detailed as a
requirement for all candidates, and that they need to rate themselves
on a scale of 1 to 10 for that skill in their cover letter. If there are
many skills that are required, and can easily be assessed by some
simply Q&A, set up an online Q&A recruitment form on your
website, so you don’t have to waste time on the phone asking the
same questions over and over again (since answers can easily be
screened via the online responses). I also think video can be a very
effective tool to dig deeper than just a resume. So, maybe set up
your Q&A form with a video-based recruitment site, like
Expressume, where you will get video responses to your questions,
and can learn a lot more about the candidates’ communication skills
and personality fit in the process (again without wasting time on the
phone).

The big picture point is: waste as little time as possible in the
minutia of recruitment, as that is time better spent on your business.
Put processes in place that allow for very efficient screening of
candidates (e.g., detailed posting, Q&A forms, video responses), so
only the most appropriate candidates apply, and they can easily be
screened from there. Then, once you find your favorite three
candidates, now is where you dig in and spend quality time learning
more about the candidate.

Finding the right team members for your startup are critical for its
success, so you have to invest the time here to get it right. But,
make sure that time is most efficiently spent (e.g., interviewing the
best candidates, and not on preliminary screening of all that apply).
You never want to rush a hiring decision or take a marginal
candidate just to fill a position, as long term, it will never work out
for either party’s long-term interests. And, it is a lot more expensive
and time consuming to remove a poor performer down the road,
than to get it right the first time.

In a following lesson, I will help you learn how best to screen a

resume, so you are asking the right questions.

Lesson #35: How to Read Resumes & Screen

Employee Candidates
In my last post, we learned How Best to Recruit for Employees and
get high quality resumes coming in. We also talked about ways to
automate the candidate screening process, so your time is more
efficiently spent on interviewing your best candidates. So, now you
are down to “reading between the lines”, in finding the best
candidate for your open position, by properly reading a resume and
asking the right questions during the interview.

For any candidate, I am trying to ensure: (i) they have the right
skills for the job: (ii) they have a proven track record of career or
educational success for the position; (iii) I can afford them; (iv) they
have the right personality fit with the company; (v) they have
references that will validate their claims; and (vi) they fit the
company on other tangential topics. I will tackle each of these
points below.

Making sure a candidate has the right skills for the job sounds
intuitive enough. For example, a candidate with 20 years of
marketing experience, should know something about marketing.
But, the devil is in the details. Was that marketing person in your
industry, as marketing tactics vary wildly by industry. Was that
marketing person a B2C marketer, when you need a B2B marketer?
Was that person spending huge budgets in mass media, when you
have small budgets needing viral social media? Did the person do
the marketing themselves, or were they relying on a big team they
managed? You get the point: drill down from the 30,000-foot view
to ground level, where the boots hit the ground.

As for a proven track record in their educational history, I am

looking for the following. Does the candidate have the right college
degrees for the position (e.g., majored in accounting or finance for a
CFO), with post college degrees carrying more weight than
undergraduate degrees (e.g., MBA in Finance worth more than a
B.A. in Liberal Arts). What school did they go to, as a Harvard or
Stanford degree in business is worth more than a Southern Illinois
or Ball State degree? Did the candidate get good grades while in
school, with A students typically smarter, more studious and more
diligent than B students. But, there are always exceptions to the rule
(e.g., grades impacted by working two jobs to put themself through
school), so read accordingly.

As for a proven track record in their career, you need look for these
kinds of things. Was the candidate in big companies their entire
careers, or do they have real startup experience, which is more
important for startups. Has there been nice upward promotions
overtime, with titles increasing in importance from manager to
director to Vice President to Executive Vice President? Does the
candidate have longevity from position to position? I get really
nervous about candidates with 10 jobs in 10 years being poor
performers or simply bored easily, and am looking for a minimum
of 2-3 years per company, unless there are logical reasons for quick
job moves (like the company was sold). Was the candidate cut
during a layoff, as sometimes, but not always, companies typically
cut their underperformers when they tighten their belts. Are their
quantifiable successes they can point to that illustrates they have led
and managed rapid startup growth and success in a similar
environment to your own? Ask for examples.

Affordability of a new hire is pretty straight forward, but sometimes

a candidates says they are willing to work for $100K salary just to
get in the door, but are really looking for $150K and don’t tell you
until you are “sold” on them as your key addition to the team. In
that scenario, think creatively out of the box. Will they accept
$100K salary plus $50K in performance based bonuses or other
incentives? If appropriate for the position, would they accept a four
day a week schedule, allowing the open day to make more money
elsewhere? Would they work for equity until we close our
financing, and then will pay you $150K after funding closes? But, if
there are any long term discrepancies between what you can afford
to pay, and what a candidate thinks they are worth, they will most
likely be looking for another higher paying job down the road.

Personality fit perhaps is the most critical to the whole candidate

review process. You are going to be spending a lot of time working
with this person. Entrepreneurs tend to be A-type personalities and
like to be surrounded by other A-type go-getters, which help to
infuse that energy into the rest of the company. Nobody wants to be
around a perpetual pessimist, constant downer or pain in the ass, so
make sure the candidate fits your desired company culture,
regardless how good they are on paper. It’s just not worth it, if you
can’t get along with the person.

References are always good. But, remember, a candidate is going to

provide you their best references that will most likely only say good
things about them. So, a couple things to consider. Did the
candidate give you references that are relevant to the position (e.g.,
their former bosses and former direct reports and former investors)?
If not, there may be a red flag that they are trying to hide something.
So, be sure to ask to speak to those people that can speak best to
their skills, if possible. And, frankly, do a little digging on your
own? Do you share any colleagues in LinkedIn that may be able to
speak about this person? And, in all cases, remember, the person
you are calling could be worried about violating employment laws
with any negative reviews, so take references with a grain of salt.
And, if you don’t get a response to your reference call, that
sometimes means they didn’t have anything nice to say and
preferred to avoid an awkward phone call. So, read between the
lines.

To get a sense of how a person thinks on the fly in the topsy-turvy

world of startups, I like to see how candidates handle random
questions on random topics. First, on something they are familiar
with, perhaps related to their favorite hobbies (e.g., ask a book
reader how they would go about writing a book). And, second, on
something completely random (e.g., how would you determine the
weight of a jumbo jet). You are simply trying to determine how they
think and see how logically their brain works in unknown situations,
which often a startup can lead to.

And, there are other things to consider. What is going on in their

personal life that may require a lot of time away from the office?
Can you deal with 10 smoking breaks a day? How far does the
candidate live from the office, as a long commute won’t last long,
before they start looking for a new job down the road? As people
get older, they typically have less energy, so make sure they have
the stamina for a startup? But, tread lightly on these areas, avoiding
direct questions about gender, age, pregnancy, etc. which violate
employment laws.

There is no one right way to recruit for candidates, given the wide
variety of people, talents and personalities, but hopefully this will
point you in the right direction.
Lesson #42: Is Working With Family
Members a Good Idea?
My immediate reaction to this question is no, working with family
members is not a good idea, for the many potential issues I will
detail below. But, if structured correctly, a family-related team can
work.

The biggest reason I think the answer is no, is the normal work-life
balance can get completely thrown out of alignment. Normally, you
have your work life and relationships, you go home after work, and
enter your personal life and relationships. A nice balance of ying
and yang. When you work with the same people in your family,
there is a risk that balance is not achieved. You never get a break
from each other. And, frankly, it becomes too easy to bring work
home with you, and you never get a break from it. And, vice versa,
too easy to bring personal life back to work with you. So, for a
family working relationship to work, there has to be a clear
understanding: work issues stay at work, and personal issues stay at
home.

In addition, when working with family members, and no different

than with any employee relationships, it is critical there is a clear
definition of roles, responsibilities and reporting. If you are going to
be equal peers at the same executive level, then there has to be a
clear definition of what decisions and tasks are in each person’s
control (e.g., marketing decisions by wife, operating decisions by
husband). If one of the family members is going to be reporting into
the other (e.g., father CEO and son VP-technology), then: (i) the
managing family member needs to manage with “kid’s gloves”, no
pun intended, to not ruffle long term family feathers; and (ii) the
managed family member needs to understand that ultimate control
and decisions rest with their boss, in this case, their dad.

The last consideration relates to succession planning. With parent-

child working relationships, there needs to be a clear long term
succession plan put in place from the beginning, and both parties
must live up to their promises in that plan. For this, I will use an
example from one of my clients. The father CEO hired the daughter
COO with the message she would learn the business, and she would
take over for him in five years, when he would retire at age 65. But,
ten years later, the father was still CEO at age 70, micromanaging
the daughter and driving her crazy to the point she wanted to quit.
But, since the father had no other person to transition the business
to, the daughter played the “retire or I quit” card. The strategy
worked and they hired a consultant to help facilitate and enforce
that transition. But, it should have never got to that point, as it
created a ton of stress for that daughter, dealing with an extra five
years of uncertainty and management by her father.

These are just a few things to think about before starting a working
relationship with your family members. If you can, I would avoid it.
God knows, my wife would kill me if she had to work with me, as
my “work personality and expectations as CEO” are very different
than my “home personality and expectations as husband.” And, I
would never want to worry about walking on eggshells in driving a
successful startup business, which is stressful enough as it is.

Lesson #51: No Public Displays of Rejection

Startup employees look to their CEO’s for inspiration,
communication and any hints of “perspiration”, hanging on every
word and action of their leader, as their primary source of
information as to whether or not the business is in trouble, or not.
When an employee is paddling along with you in a “river raft
adventure” of a startup, they want to make sure their lifeboat is not
taking on water. And, the CEO is typically the first person to know
when things are not going as planned, and frankly, whether or not
the business is going to survive and the employees will need to be
looking for new jobs to pay their mortgage.

Back in Lesson #13, we talked about Creating the Right Culture for
Your Startup, including having an open-style of communication
between the CEO and the employees for the good, the bad and the
ugly. During difficult times, you need to learn how to communicate
any bad news to the team in a way that will keep them informed, but
motivated and confident at the same time. The last thing you want is
your staff to become demoralized, when they need to be energized,
putting an already struggling business into a death spiral.

What this typically means for a startup CEO is: no “public displays
of rejection.” A staff seeing their leader worried, depressed or losing
confidence is the equivalent of their swallowing a poison pill. When
a staff lives and breathes with each other, they know everybody’s
specific habits, personality and style. And, any change from the
norm from their CEO, can often set off red flags with the staff.
So, when communicating with the team, use the same tone,
personality and facial expressions you always would, in both good
times and bad times. This especially means keeping up your energy,
confidence and eye contact, regardless of the problems at hand.
And, do your best to maintain your normal routine: keep all normal
meetings with staff, do all the normal birthday celebrations,
continue to keep the door open to your office, keep a normal
presence in the office, don’t come across frantic in your daily
activities, etc.

A consistent and confident captain, will instill trust and confidence

in his shipmates. That said, your staff are smart people, and will
typically know when confidence is unjustified and will not
appreciate you trying to sell them a bunch of bull. So, keep it honest
at all times, and upbeat where you can.

As we discussed in Lesson #29, iExplore was staring over the edge

of the abyss after 9/11/01. But, despite how ominous it looked that
the business could survive, I was able to convince the core staff of
nine employees to “hang in there”, with them willing to work
without any current income for the four month period it took me to
raise the additional capital required to resume normalcy to the
business. I had built up their trust over the years (which was key,
never promising anything I couldn’t deliver, and successfully
navigating the business through prior bad times). So, if I said “trust
me, we were going to get through this”, then by George (pun
intended), we were going to get through this, and all hands on deck
to batten down the hatches. It would have been much easier for
these employees to start looking for a new job, which I even
encouraged them to do, as a back-up Plan B to protect themselves.
But, we were all clear, saving iExplore was Plan A, and we were all
on board to give it the college try, despite any personal sacrifices we
needed to make.

And, it was largely due to the delivery of the message. Had I walked
into that room with my head down, crying with my tail between my
legs (how I really felt), it would have been game over. Instead, it
was business as usual, with an open and honest message of the fact
we were in a difficult position, but had a clearly communicated plan
on how we would get through it. And, the fact I acknowledged their
personal fears of them potentially losing their jobs if the business
went under, by allowing them time to interview for new jobs for
Plan B, deepened their trust in me and had them wanting to work
with me that much harder.

So, keep an even keel in both smooth and choppy waters, regardless
of how much pressure or stress you may be under during the bad
times. If you can avoid letting your stress or fears pass along to your
team, the odds of you successfully getting through those bad times
just increased ten-fold.
Lesson #55: Creating a Healthy Office
Environment
Back in Lesson #13, we talked about Creating The Right Culture
For Your Startup. In that lesson we talked about different
management styles, communications styles and maintaining the
proper work-life balance for your employees, to help build morale
amongst your team. Directly related to building morale is your
office environment itself. Nothing can dampen morale faster, than
working in an uninviting or dysfunctional workplace.

We have all been inside exciting workplaces, where everybody is

feeding off the energy of everyone else in the office. You get this
vibe inside offices like Google, YouTube and Groupon. These are
typically more open floor plans, without high cubicles, without a lot
of private offices, where you can see and hear all of the action and
buzz of the staff engaging amongst themselves. These are places
where employees are pumped up to come to work each day. So, it is
not coincidental really great startup companies, also have really
inviting work spaces, which help them to attract and retain great
employees.

We have also all been inside workplaces that are better defined as a
“morgue”. These office spaces are typically not well-lit (or lacking
windows), where employees are buried in their private offices or
behind high cubicles and you can often hear a pin drop in the office.
No employee conversations, no music, no energy at all. This kind of
office space is a recipe for disaster for a startup, as employees will
only deal with that type of environment for so long, before they will
go stir crazy. Especially “A-type” personalities that want to get
involved with exciting startups.

Now, I am not saying startups need to go spend a ton of money on

fancy desks and office build-outs, as that would be foolish. What I
am saying is: (i) locate your office in fun neighborhoods, with good
local conveniences that are easy to commute to; (ii) prioritize
“edgy” loft buildings with high ceilings over cookie-cutter high rise
office spaces; (iii) set up workstations (or folding tables) without
high cubicles which shut off employees from each other (impeding
upon open collaboration and communication); (iv) make sure there
is a good vibe in the office, with background music or otherwise;
and (v) set up a room with a TV, video game player or ping pong
table where employees can blow off steam, when putting in the long
hours (provided these luxuries do not get in the way of their doing
their jobs).

If you can find pre-furnished, pre-wired or previously built-out

space, that is the best alternative to keeping your furniture, build-out
and rental costs at a minimum. And, if you need furniture or
equipment, look for vendors of used furniture to save you a lot of
money compared to full retail prices for new furniture or equipment.
And, I wasn’t joking about considering folding tables. iExplore
bought all of its first desks at $19 per folding table to stretch our
startup budget.

I was in the office the other day of a company trying to reposition

itself as a high-flying dot com startup in a major turnaround story.
And, my immediate reaction was, “not until you break down these
walls and infuse more energy into this space”. Morale was bad
enough, with the company trying to recover lost sales and get the
business back to profitability. Yet alone, layer on the additional
negative vibe of employees feeling like they were coming to the
“morgue” each day.

Little things like this can really matter to employees, especially with
lots of other startups out there for them to choose from. And,
sometimes, your office environment can be the difference between
“high flying” and “six feet under.”
Lesson #58: How to Determine Employee
Compensation
At the end of the day, a couple key themes rule your employee
compensation strategies: (1) the market is the market, so you need
to pay competitively to attract talent; (2) you get what you pay for;
and (3) you can creatively lower cash salary with equity-based
compensation, to keep your cash burn rate at a low. I will tackle
each of these points below.

There is a “market rate” for each job within your company. And, the
market rates for any one position can wildly vary based on: (i) the
stage of your business; (ii) the industry/competitive skills you are
hiring for; and (iii) the city you work in. As an example, check out
Crains Chicago’s 2010 Wage and Salary Survey to get a good sense
to average wages and salaries by job position for employees in the
Chicago area. You should try to find something similar for your
home cities, or use the Chicago numbers as a rough ball park,
understanding bigger/more competitive cities, like New York and
San Francisco, have be pay more, and smaller cities can pay less
than what is paid in Chicago (given the lower cost of living in those
smaller markets). And, don’t forget the laws of supply and demand
for specific roles. As an example, if tech coders with expertise in C+
and Ruby are in high demand and short supply in your town, they
are going to be paid more than people with more readily available
HTML coding skills.

Sometimes you will see CFO’s being recruited in the $100K salary
range, and other times you see them being recruited in the $1MM
salary range. Why the huge discrepancy? Because proven Fortune
500 companies have to report to their public shareholders and need
proven CFO veterans with public company expertise and a track
record of successfully managing multi-billion dollar P&L’s. But, a
CFO of a startup does not need that level of expertise, and most
likely can get away with a less experienced CFO, who would
probably be more of a VP level executive within a bigger company.

But, the message “you get what you pay for” never holds more true
than in your recruiting efforts. So, you never want to be “cheap” in
your recruiting efforts. If you want a battle-tested startup CFO, as
an example, you are going to have to pay more than you would for a
first time CFO with limited startup experience and no track record.
But, that past startup experience is worth its weight in gold. In the
CFO example, knowing how to “stretch pennies into manhole
covers” and attract outside capital could be the key difference
between getting your company funded or successful. So, don’t
always go with the cheapest alternative. Go, for the best alternative
you can afford.

That said, there are creative ways to structure compensation

packages to attract “A Players”, without having to pay “A Prices”,
and that typically comes down to offering them rich equity packages
in your business. As an example, the CFO who takes a straight
salary may get $150,000 in a startup company. But, you may only
need to pay them $100,000 if you add 2.5% stock options to their
package. And, frankly, if they are not willing to “put some skin in
the game” and work for some piece of equity, they may not have the
risk profile for a startup or the confidence in their own abilities, and
perhaps should not be pursued for the position.

I typically offer employees a matrix of options to choose from

including a mix of high salary/low equity; medium salary/medium
equity; and low salary/high equity, and letting them choose the right
mix for them. But, if your goal is to keep cash low, then you have to
do an equally compelling job of selling them on the future value of
the company, and their resulting equity value (where a lot of equity
is their best option).

There is no exact science or “one size fits all” to creating a

motivating compensation structure for all employees, as every
employee has their own specific objectives and cash cushions to
rely on. So, it is usually best to let the employee throw out a starting
salary that works for them (validated by asking their most recent
salary history), and then negotiate it down from there with equity.
But, be realistic and disclose your “salary range” in your job
postings, to ensure you are pulling in candidates you can reasonably
afford.

Lesson #59: Determining Employee Benefits

for Your Startup
Following my previous lesson on How to Determine Employee
Compensation, I thought this would be a good time to talk about
deciding what employee benefits your startup should offer its
employees.
Before we jump into the details, it is worth mentioning that many of
these programs only can be offered if a certain minimum number of
employees are met (e.g., 10 person staff size). And, in my opinion,
they should only be offered if the company can actually afford them
(so wait until proof of concept is behind you). Yes, employee
benefits will help you to attract and retain employees, but some of
the below carry more expense than others, so budget and phase-in
overtime, according to where you are in your growth curve.

Let’s start with the “cheaper to implement” benefits. Offering your

employees vacation days and holidays off is pretty much expected
in any company. At the time of hiring, entry-level employees
typically get 10 days of paid vacation and executives typically get
up to 20 days of paid vacation. In addition, employees can typically
earn one additional vacation day per year, for each additional year
of service with the company, capped at up to an additional five
vacation days. When designing your vacation plan, structure them
in a way that employees can carry-over no more than five unused
vacation days to the following year. Which, in essence, is like
saying “use it or lose it”, so you are not building up huge unpaid
vacation day liabilities at the time an employee terminates their
employment with the company.

Another easy to implement benefit is offering employees flexible

time, to work whatever days/hours are most convenient for their
personal schedules. This allows the working parent flexibility to
drop off and pick up their kids from school, when a rigid 9am start-
time can often get in the way. It also allows them to schedule
doctors appointments or home repair services during the day,
provided they work late that night or on the weekend to make up for
it. Don’t manage your staff based on their “face time” in the office
during the normal work day. Instead, manage them based on the
work quality and output, regardless what hours they are working (as
long as they are working, one way or another).
Offering “employee pricing” on your products and services is also a
nice benefit. When I was at iExplore, our staff could purchase any
of our trips at cost, typically saving them 35% of the retail prices, a
savings up to $1,000 per person. And, we extended these benefits,
not only to the employees, but to their friends and families, as well.
So, there can be some real savings and benefits to employees from
programs like these.

Another low cost benefit is offering your employees basic life

insurance, accidental death and disability insurance. These benefits
are typically offered as an inexpensive add-on to your base health
insurance package, which we will discuss below.

Now come the more expensive benefits. The first of which is

offering your employees healthcare coverage. At a minimum, that
could simply be medical insurance, or it could also include other
perks like dental insurance, vision coverage and flexible healthcare
spending accounts. There are also many variations on a theme, to
keep your costs at a minimum. This includes deciding: (i) if you are
only offering a low cost HMO option, or also an expensive PPO
option; (ii) if the plan will be provided by a big brand insurer like
Blue Cross, which can be expensive, or a cheaper provider; (iii)
what percentage of plan expenses will the company pay for (with
market rate at least 50%); (iv) what basic coverage levels will be
provided by the insurer (with 90% in-network expenses and 70% of
out-of-network, a typical plan); and (v) what level of annual
deductibles are required of the employee (typically in the $500 to
$1000 range).

So, depending what mix of the above decisions you make, will have
a material impact on your overall healthcare benefit expenses. But,
cost of the plan is only part of your thinking, as you should also
make sure whatever plan you offer is “juicy” enough to have real
benefits for your employees (e.g., a plan from a less known insurer
where the employee’s doctor is not in-network will be meaningless
to them).

And, worth mentioning, more and more companies (especially

startups) are cutting healthcare benefits altogether. The plan
expenses have been rising so quickly over the last decades, that they
have created a terrible burden on the employers’ budgets. And,
frankly, employees are not staying with companies for decades at a
time, they are hopping from job to job every couple of years. So,
because of this, many people are buying their own individually-
sourced and funded healthcare plans on their own, so they don’t
always have to reapply and risk getting denied for pre-existing
conditions down the road.

And, individual healthcare plans are easier to buy than ever from the
big insurers websites, and the costs of these plans can often be
comparable (or cheaper) than paying for the same coverage via a
company-sponsored group plan (especially for startups). As, an
example, my family coverage at iExplore was a $20,000 annual bill
to me, and my individually-sourced plan (also from Blue Cross) was
only a $12,000 bill to me, as I was able to customize it to exclude
maternity coverage, since we were done having kids. So, it can offer
be cheaper to give an employee an extra $5,000 in salary (for them
to cover their own healthcare expenses) than for the company to
carry the costs of funding their own healthcare plan for the
company.

Another popular benefit is offering your employees a 401k plan,

including a modest annual company match (e.g., 3%-5%). But,
again, this can get expensive and should only be implemented if
your business can afford it. If employees desire a way to create the
tax benefits of 10% payroll withdrawals and taxes deferrals until
funds are distributed from the plan down the road, you can always
educate them on how to set up an individual IRA plan for
themselves, outside of the company.

At the end of the day, each employee is driven by different things.

Ask them what benefits are most important to them, offer them what
you can afford and offset any benefits shortfalls with increased
salaries, to stay competitive. The job market is very competitive,
and you always want to make sure your employment packages
(salary and benefits) are in line with the market, for a company of
your size. Your insurance broker will be able to coach you to the
right answers here, based on what they are seeing in the market
based on the actions of their large mix of clients.

Lesson #60: Importance of Employee

Handbooks
Following my previous lesson on Determining Employee Benefits
For Your Startup, I thought we would talk about the importance of
having a well-written employee handbook, a step that is often
forgotten about in the early days of getting a startup off the ground.

First of all, what is an employee handbook? It is basically the “rules

of engagement” for all employees of the company. It clearly lays
out key employment policies, expected employee conduct, expected
hours and compensation policies, company operations policies,
leave of absence policies and employee benefits policies. I will try
to summarize the guts of an employee handbook below.

Employment policies deal with topics like equal opportunity

employment, employing disabled persons, classifications of
employment, treatment of personnel files, employment references,
employing family members, restrictions on outside employment,
performance evaluations, promotions and advancements, and
termination process, to name a few.

Expected employee conduct deals with topics like anti-harassment,

violence, health and safety, no weapons, accidents, keeping the
office drug free, romantic relationships with staff, appearance,
personal calls, restrictions on use of company resources, internet
code of conduct, smoking and complaint resolution procedures, to
name a few.

Expected hours and compensation policies deal with topics like

hours of operation, payday, automatic payroll deposits, absenteeism,
tardiness, emergency closing, time sheets, overtime, and wages and
salaries, to name a few.

Company operating policies deal with topics like travel, gifting, use
of company vehicles or assets, and no solicitation rules, to name a
few.

Leave of absence policies deal with topics like family and medical
leave, continuation of benefits, military leave, education leave,
public service leave, bereavement leave, jury duty and workers’
compensation, to name a few.
Employee benefit policies deal with topics like national holidays,
vacation days, sick days, personal days, voting days and other
company benefits, to name a few.

This document serves to: (i) communicate the company’s policies to

the entire staff; (ii) create a formal paper trail, upon execution by the
employee confirming they have read, understood and agreed to such
policies, in case there are any employee issues down the road; and
(iii) creates a formal defense for the company, in case you or your
staff are ever accused on not treating employees fairly, or
implementing actions not previously communicated.

So, your lawyer should be able to help you with a good template
handbook. But, if you want to look at an example, I am happy to
send you one for your review. Long story short, clearly document
all company policies and expected “rules of engagement” to protect
yourself, and make sure all staff members execute an agreement
acknowledging their receipt, review and understanding of such
handbook. It will save a lot of unnecessary heartache down the road,
in case any employee issues develop over time. And, as your
employee policies change, which they may from time to time, make
sure to send out a revised handbook to all employees, and get them
to sign their acknowledgement of the amendments.

Lesson #75: How to Implement Layoffs

Usually, startups are in growth mode, creating new jobs. But, many
times, things do not go as planned, and a startup needs to implement
job cuts to “right size” their cost structure to the going forward
revenue base. Today’s lesson will address key considerations on this
difficult subject.

Cut early. As soon as you have a sense things are not working out, it
is in the company’s best interest to make any cuts sooner than later,
to preserve your limited remaining capital. Don’t wait until you run
out of cash, and have no other options. Not only, will early cuts help
your balance sheet and income statement faster, it will make the
company more attractive to new investors, with a lower burn rate.
And, cutting early, also leaves cash to pay for severance payments,
to calm cut staff.

Cut deep and once. It is absolutely critical you make the cuts deep
enough, that you do not need to go back and make secondary cuts
soon thereafter. You only have one chance to tell your remaining
employees, “We had to make one time cuts, the rest of you are safe,
now let’s get back to building greatness.” Which is a critical
message to deliver the remaining staff to keep them motivated and
not panicked looking for another job. You lose all that trust, the
minute secondary cuts are made.

Manage communications prior to cuts. As you know, I am a big fan

of open communications, in good times and in bad times. Which
means making sure your staff is aware of the business challenges
via monthly meetings, so they can both help generate new ideas to
resolve the situation, and not be surprised by unexpected cuts. That
said, if cuts are truly eminent, do not hint to it, on a random
employee basis (who are sure to gossip amongst themselves). You
either tell everyone and make the cuts, or you tell no one and don’t.
You can’t have your entire staff in a frenzy, entirely unproductive
waiting for the guillotine to fall. And, risk your best staff, looking
for the door in the process.

Manage communications the day of cuts. Depending on the size of

your staff, will dictate whether you tell people on a one-off basis, or
tell people as a group. But, it is important you tell people all roughly
at the same time, so the rumor mill doesn’t start swirling around in
the interim.

Have witnesses. At the time of cuts, make sure you have a second
person in the room with you, to serve as a witness in case you are
ever sued by the cut staff member down the road. A witness can
verify what was said to the cut staff member, and verify that the
employee was not cut for any other discriminatory reasons (e.g.,
gender, age).

Get signatures. Get good legal advice on what documents need to be

signed at the time of exit (e.g., clearing you from any future claims,
keeping news confidential, acknowledging their last day of service).
Remember, cut staff are not going to be in the mood to be doing you
any favors or signing any documents. So, whatever you need them
to sign at the time of their exit, I would typically accompany that
document with the offering of a pre-paid severance check, that
won’t be handed to them without the signed documents needed.

Expect attrition/incentivize your remaining staff. Regardless of how

well you try to manage the situation, you are most certainly going to
experience additional attrition from remaining employees quitting
the company within a few months of cuts being made. So, plan
ahead for which employees are most critical to keep long term, and
make sure they are properly motivated with additional incentives to
stay. And, even then, you still may need a back-up plan to quickly
source replacement staff for key roles. Hopefully, the more honest
you treat your staff, the more honest they will treat you.

Treat cut employees fairly. Remember that employees are human

beings with emotions and mortgages to pay, not just a line item on
your expense sheet. So, if you do implement layoffs, make sure you
treat your staff fairly. That includes paying them at least 30 days of
severance, to help minimize the pain and give them time to look for
a new job. And, make sure they know you will be a good reference
for them, assisting them in any way you can in helping them find a
new job.

Beware the disgruntled employees. Cut staff will certainly be upset.

So, if you can avoid it, cut staff should not stick around after they
are cut (as that can be cancerous to the remaining staff and morale).
Their last day, should be cut day. So, if you need any transition
information from them (e.g., files, contacts, passwords), make sure
you creatively get it before you make any cuts. And, don’t forget,
cut employees may also be good friends with the remaining
employees and may try to stir up problems with the remaining staff
after their departure. And, remaining staff may also try to stir up
problems on their own, between themselves, on behalf of their cut
friends. So, the better you can manage this process, the less
casualties you will suffer on the back end.

Lesson #76: How to Implement an Employee

Change
Back in Lesson #34 and Lesson #35 we talked about how to best
recruit and screen employee candidates for your startup. And, in
Lesson #15 we talked about hands-on vs. hands-off management
styles in developing your staff, once hired. But, sometimes, despite
our best recruiting and development efforts, a staff member is just
not working out. This can be due to poor work performance or
simply not fitting into the cultural fit within the office. Today’s
lesson is going to discuss how best to deal with situations like this.

The most important thing to remember is that this process is not a

one-time event; it is a step-by-step process that you lead up towards
over months. To protect yourself legally, you need to have a very
clear paper trail documenting that you had communicated key areas
of improvement with the staff member (preferably that they have
acknowledged via their signature), and gave them a reasonable time
period to fix such issues, prior to actually terminating their
employment. And, to the extent you have witnesses present in those
employee review and termination meetings, the better it will be to
defend your position, in case the terminated employee ever sues you
for wrongful termination for reasons other than performance (e.g.,
gender, age, race).

I typically follow the following process when dealing with

employees I need to change: (i) let the employee work for a period
of time; (ii) if things not working out as planned, communicate such
to the employee as a key area of improvement in the coming
months; (iii) if things still not working after that period, I would
give the employee a “last chance” review, that if you do not see
material improvement in the next 30 days, you may need to make a
change; and lastly (iv) if things still not working, you have properly
laid the ground work to implement the termination. The key
advantage of point (iii) is that thirty-day notice may end up being
the impetus they need to start looking for a different job and quitting
on their own, before you actually need to terminate them.

Before we even get to the point of termination, I do everything I can

to try to have the employee come to the conclusion themselves, that
things are not working out. I would ask questions like “are you
happy here?” or “are you comfortable in this position?” To try to get
them to admit things are not going as planned from their
perspective, to then lay the groundwork for a mutually acceptable
transition period. I would respond with “I want what’s in your best
interest, so if you are not happy, let’s figure out a win-win
transition”. That way they are not embarrassed by being fired, and
they think the decision was their own. And, you keep them involved
long enough to transition any required files, passwords or contacts.

If you get them to start this transition process on their own, you
typically don’t have to pay any severance. As any salary you are
paying them in the transition period, is like paying them severance,
but you have the added benefit of them still doing their day-to-day
job during this period. And, make it easy for them to schedule time
out of the office, to schedule new job interviews. And, make sure
they know you will serve as a good reference for them, in case any
recruiters call. This ends up being best for all parties, not risking
embarrassment or reputation risk by the employee that comes from
a firing, and not exposing the company to a potential lawsuit for
wrongful termination, since the employee ended up quitting instead.

As you can see, I try to avoid terminating staff for many reasons: (i)
wrongful termination lawsuit risks; (ii) having to pay severance
payments; and (iii) giving the employee the chance to file
unemployment claims, which the company ultimately has to pay for
in its insurance premiums. So, where you can, creatively plant the
transition idea with the employee, so they feel the decision was
theirs, not yours, and you can creatively avoid many of these issues
that come from terminations.

And, don’t forget, any time an employee exits the company, make
sure you talk to your lawyer, and get all the appropriate employee
termination documents signed (e.g., non-disclosure, last day of
employment verification, agreement not to bring claims).
But, worth mentioning, getting an employee to meet your goals is a
two-way street: you as the manager need to be making an effort to
make sure you are mentoring and training all employees with the
right skillsets desired for the position. So, make sure you are doing
your best efforts here, before you start this process.

Lesson #83: Startup Roles & Responsibilities

Every startup is different and has their unique challenges. But, most
startups have similar managerial needs. Today’s lesson tackles
typical roles and responsibilities within a startup. Although I am
going to use C-Level titles for purposes of this discussion, it is not
critical you actually use C-Level titles within your organization.
Some people are motivated by them, and others are not. So,
determine which titles are appropriate for your company’s culture
and personality.
With that said, the typical roles within a startup’s management team
are: (i) CEO/President; (ii) CMO/CSO; (iii) COO; (iv) CTO; and
(iv) CFO. Let’s discuss the specific job descriptions for each.

The CEO/President is typically the founder within a startup. But,

that is not always the case. Sometimes, the founder is smart enough
to know when their personal skills are lacking for ultimate company
success, and they look outside of the company for their CEO. As a
refresher, please re-read Lesson #14 on role of the startup CEO. The
summary is the CEO is the visionary of the business setting long
term strategy and direction, and navigating competitive waters. The
CEO is typically an outward facing role, meeting with key
investors, partners and other strategic advisors. On the flip side, the
President role is typically an inward facing role, managing the day-
to-day operations of the business. In most startups, the CEO and
President is the same person. But, when the company’s growth can
afford it, the CEO and President roles are split, to allow the CEO
more time to focus on “steering the ship” and the President more
time for “optimizing operations.”

The CMO or CSO of an organization is in charge of all marketing

or sales driven activities of the business. This role can sometimes be
called a Chief Revenue Officer, as without effective marketing or
sales leadership, there will be no revenues. Most B2C businesses are
marketing driven and would need a CMO. And, most B2B
businesses are sales driven, and would need a CSO, which for a
startup, is most likely one of the team’s salespeople, as well as the
sales manager. At the end of the day, whether it is a CMO or CSO,
it is all about driving new leads for the business, as cost-effectively
as possible. And, getting existing customers to close into repeat
sales. In my opinion, this is the most important hire for the business,
even more so than the CEO, as it will make or break your revenues.

The COO is in charge of all the operations of the company, and in

many respects is duplicative with the President role. The only real
difference is the President is also in charge of managing the other C-
Level executives (e.g., CTO, CFO, CMO), as well as the COO of
the business. Whereas the COO is solely focused on operations. So,
after the CMO or CSO brings leads into the business, the COO
takes over to ensure a solid customer fulfillment experience. Think
of the CMO/CSO is “pre-sale” activities with clients; and the COO
as “post-sale” activities with clients.

The CTO is in charge of all technology decisions for the company.

This technology could be the entire lifeblood of a “dot com” e-
commerce company. Or, it could be as mundane as the back office
systems and software that keep the business functioning (e.g.,
finance, HR, CRM, call center, network). Obviously, the more
important a role technology plays in your business, the more critical
this person is to the company’s success.

The CFO is in charge of all financial, accounting, budgeting, cash

management and reporting decisions for the company. This not only
includes managing internal controllers, treasurers and bookkeepers,
but managing relationships with any outside CPA’s or bankers. In a
startup, the CFO is also the controller and treasurer of the business,
managing all accounting and cash decisions themselves, until the
business gets to the scale it can afford a bigger staff.

I didn’t add a General Counsel to this organizational structure, since

a startup typically cannot afford a full-time counsel. Instead, I
would rely on your outside law firm for any legal assistance that
may be required from time to time, until your business grows to the
point its legal needs require full-time support.

So, when you are pulling together your management team, make
sure you are hiring with this type of organization in mind (or
something similar, as this is not set in stone). And, make sure the
individuals for the job have the proper skills required to succeed in a
startup environment. Please re-read Lesson #34 and Lesson #35 for
more details on how best to recruit and screen candidates for your
startup. And, worth mentioning, it is equally important this team
gets along personally and shares the same long-term vision for the
business for the company to succeed.

Lesson #93: Make Your Employees Feel

Appreciated
Too often in startups, we are so busy executing on our visions that
we forget to lift up our head, take a breath and celebrate our
successes with our staff. The more your reward your employees for
desired results (or just because you want to be nice), the more
appreciated they will feel, and the more invested they will be in
your mutual success.

Below are a few examples are employee rewards that have had
success with in my past:

1. Gift certificate to the sales team leader each month, to the store of
their choice

2. Employee features in the company newsletter and “shout-outs” at

weekly team meetings

3. Celebrate all birthdays with a cake; celebrate all holidays with a

party

4. “Lunch with CEO” program for one-on-one time, regardless of

position within the company

5. Monthly all-staff event (e.g., bowling night, happy hour, ball

game)

6. Early office departures and mandatory time off around big

holiday weekends

7. Employee discounts on the products or services you sell (e.g., “at

cost”)

8. Open door policy—to walk in with any idea they have, or

problem needing solving

9. Free company-paid trip a year for each of the travel agents I had
at iExplore—they liked the trip, and I liked the fact they would
better sell the destination when they came home

10. Get to know your employees—what do they like, what drives

them—and and wrap incentives around such personalized interests

This list could go on and on. The point here is: employees are not
simply cogs in the wheel of the day-to-day grind. They are people
with interests, emotions, and desires and they deserve the
appropriate respect and recognition for a job well done. And, the
more you invest in your team, the higher return they will invest
back into the company.
4 Technology

Lesson #36: Picking The Best Technology for

Your Web Startup
I am a business person first, and a tech person second. So, I solicited
the input of my technology colleagues, Tyler Jennings and Todd
Webb from Obtiva, a leading web development company in the
Chicago area, who have done terrific work for Groupon and others.
So, be sure to follow up with them directly, for any detailed
questions from here.

One of the biggest mistakes I made at iExplore in 1999 was building

the website in entirely the wrong way. The first problem, it was not
a lean startup, by any means. It was built using the most expensive
technologies of its day, from providers like Oracle and Sun. We just
assumed the site would be a huge success, so we built a “mack
daddy” backend to handle the meteoric growth. But, the site never
grew to 10MM visitors a month, it only grew to 1MM visitors a
month. And then, we were saddled with huge overhead costs of
around $25K per month, just to run the website. I equate it with
building the foundation for a 10,000-foot mansion, but only
constructing a 1,000-foot house on top of it, which was a very
inefficient use of capital for a startup (with the 9,000-foot
uncovered hole in the ground taking on water).

The second problem was the site was not easy to maintain, requiring
complicated builds to refresh the site for even the most simple of
changes and a staff of expensive, hard-to-find developers that were
proficient in the technologies we were using. So, the key lessons: (i)
never build a tech infrastructure in excess of reasonable growth
targets (to keep your costs at an absolute minimum); and (ii) build
your technologies in a scalable way where the site can easily be
developed and maintained over time, by easy to find developers.

Below is some high-level guidance on current trends in the startup

tech community. But, the most important guidance of all: finding
the right CTO is 10x more important than picking the right
technology itself. Technology needs vary wildly based on the
specifications of various projects. And, only a strong CTO or
technology consulting firm will ensure you are heading in the best
direction, based on your specific needs and budgets. And, in all
cases, don’t get romanced by “Rolls Royce” solutions, when a
“Honda” will do just fine, for the needs of most lean startups. And,
keep in mind, preferred technology platforms for startups continue
to change from year to year, as new advancements hit the market.
So, read the below from that perspective. And, hopefully, this lesson
will not become obsolete by the time I have finished writing it!

Most lean startups with basic website needs today are building their
web-based businesses using the Ruby on Rails coding platform,
which is entirely based on inexpensive and freely available open-
source technologies. So, if you can, avoid more expensive, licensed
platforms based on Java, C#, PHP or VisualBasic.net. Ruby has
become the preferred language of choice since: (i) you can get your
product to market faster with less code to write; (ii) it is a flexible
language easily tied together with other systems; (iii) it is easy to
scale and iterate; and (iv) Linux based hosting providers are
numerous and inexpensive. Many successful startups like Groupon,
Living Social and Hulu, were all written with Ruby. The only real
negative of Ruby is that it is still a relatively new technology, and
experienced talent are in high demand (although many new
developers are learning the language in force).

As for the alternatives, Microsoft’s VisualBasic.net technology is

not advised unless there is a real business need to using it, like
having to integrate with other Microsoft based technologies. This is
due to: (i) the ubiquity of open source solutions; and (ii) the higher
expense of hosting sites on the Microsoft platform. But, there are
times when more complicated or expensive technologies could be
the way to go. For example, if you are processing tons of data, Java
is a good choice. If you are doing tons of number crunching, C#
could be the way to go. If you have a very small project that does
not need to scale, PHP could be a good alternative, as it is
inexpensive to host and requires fewer resources to operate.

Now, that we have picked our development language, we need to

make our hosting decisions. And, for lean startups, you can’t beat
the low-cost of cloud-based hosting. So, instead of investing big
monies in hardware, software and systems administrators,
piggyback on the services of the cloud with a “pay as you use it”
solution. This is much preferred to building your own infrastructure,
to run in your own server room or in a full co-location facility,
which can get really expensive. Leading cloud-based hosting
providers with expertise with Ruby include Amazon’s EC2 cloud,
Engine Yard, Rails Machine and Blue Box, to name a few. At some
point (e.g., once you get to Groupon scale with tons of traffic), the
cloud may become too expensive compared to internally built and
managed solutions. But, for most startups, the cloud works perfectly
fine and is the preferred way to go.

As for other elements of your web architecture, assuming you move

forward with Ruby as your coding language of choice, the following
open-source LAMP stack is preferred: (i) Linux as the operating
system; (ii) Nginx as the web page server; and (iii) MySQL as the
database. PHP written sites would be similar, except Apache would
be the web page server of choice. Other operating system options
include RedHat, gen 2, and Debian. Another database option
includes Postgres. But, in all cases, these are less used than the
optimal set-up above. All of these are free open-source
technologies. Each cloud-based hosting provider has their unique
architectural set-ups and options, so research them accordingly, to
make sure they are compatible with your needs.

The other thing to consider is making sure your product is readily

available for use on multiple web or mobile platforms (e.g., web
site, iPhone, iPad, Android). The most inexpensive way is to build a
browser-based “touch site”, which automatically resizes and re-
skins your website based on the users’ device. This can cost $10-
$30K to build this kind of functionality. The other option is to
actually build and maintain “native apps” for each of the various
platforms, which can cost $50-$75K per platform, or $200K-$300K
for the 3-4 key platforms. So, much more expensive than the “touch
site” option. The primary reasons to build native apps are the full
customizability of each app to each platform, and the marketing
benefits you will get as consumers are browsing for new apps in the
iPhone Store or Android Market. So, consider this incremental
investment as part of your marketing budget to attract new users,
especially if you are a mobile-based business which will be
dependent on those stores for new business.

I hope this helps get your development efforts off to a good start in
a “lean startup” kind of way: investing the minimum amount as
possible to take a viable technology to market as quickly and
cheaply as possible. Thanks again to the Obtiva team, for their help
here.
5 Fund Raising

Lesson #4: How to Raise Capital for Your

Startup
Of all the consulting inquiries I get at Red Rocket, fundraising is by
far the biggest need of these startups. And, the problem is, not all
startups are venture backable for a variety of reasons, which we will
discuss in this lesson. Today we will tackle: (1) is my industry
appealing to venture investors; (2) is my business appealing to
venture investors; and (3) if so, various ways for attracting capital
for your business.
First of all, angel investors and venture capital firms invest in a
wide variety of industries (e.g., technology, digital media, CPG,
retail, real estate, healthcare, life sciences, manufacturing). So,
before reaching out to any investors, make sure your industry is
clearly in their sweetspot and skillset. That said, there are certain
industries that have a LOT more startup activity than others. As a
rule, business that heavily invest in real estate, inventory or other
capital risk, are materially less desirable than simple technology
businesses. So, bad news if you are a start-up restaurant, retailer,
REIT or manufacturing business. Good news, if you are a dot com,
software or technology business. The reason for this investor bias is
the extra levels of risk that get added to your startup. Business
startup risk is bad enough, with only one in 10 startups succeeding.
But, when you layer on real estate location risks, long-term leases or
merchandising inventory risks, it becomes a much bigger pill for the
startup investors to swallow, unless they have deep expertise in that
space.
But, even if your industry is in one of the more active venture
markets, there are still numerous hurdles to cross in assessing your
specific business. Are you B2C focused or B2B focused? Are you a
sales-driven or marketing-driven company? Do you need $1MM or
$25MM to succeed? Do you have one-time revenues, or a recurring
revenue model? Are you the first mover in your market or entering a
highlycompetitive space? Is your technology patentable or not? Is
your business easily and cheaply scalable, or does it have heavy
overhead investment along the way? Are you serving a $1BN
market, or a $100MM market? Is my forecasted ROI going to be a
10x return or 3x return? Is it a first time CEO, or an established
veteran? How deep is the management team? Has there been proof
of concept, with revenues or site traffic to date? So, as you can see,
lots of hurdles to get over to get an investor’s attention for your
business.

Now, let’s assume you are one of the lucky 5-10 in 200 that has a
venture backable business. How do you typically phase in
investment? You can’t simply show up at a big Silicon Valley
venture firm with your piece of paper idea and say cut me a $10MM
check. Investors are typically segmented by life-cycle stage of the
business: angel investors or friends and family typically get a
business off the ground from a piece of paper to a working
prototype; Series A venture capitalists will put in $1-$5MM after
there has been a preliminary proof of concept, based on revenues,
pipeline, site traffic or some other metric; and Series B venture
capitalists will put in $10-$50MM to hit the accelerator after the
model is finely tuned and scaling. So, when you are approaching the
investment community, make sure you have thoroughly researched
not only their industry focus, but their stage of business focus as
well.

Once the term sheets start flowing in, how do you ultimately decide
who to move forward with? At the end of the day, you need to
follow your gut. Who is going to be the best partner for my
business, bringing a Rolodex of relationships to the table? Who is
going to be the most pleasant to work with around the board table,
especially when things start to go wrong (as they always do)? Who
has the deepest pockets to invest additional monies in follow-on
rounds? Who is giving me the best valuation? Whose term sheets
are more or less onerous than others in terms of liquidation
preferences and anti-dilution ratchets? So, hopefully, what you are
hearing is, not all venture capital is the same shade of green, and it
is important you do your homework upfront, to avoid misery down
the road. And, if you are not clear you are making a good decision
on your own, ask an advisor to help you.

But, overriding all of this, if you can figure out a way to fund your
business, with no outside capital, that is the preferred model. It
preserves the founder’s 100% control of the company’s equity,
board control and the timing of a sale (or not), at terms 100%
satisfactory to the founder. Don’t get romanced by the idea of
raising venture capital, because it certainly has its strings attached,
given the reasons above. But, if you think you have the next big
idea at the scale of a Google, Facebook or Groupon, the venture
community will be your best partners, having funded several of
those similar businesses and navigated the various pitfalls along the
way.

In the words of my old boss at CSFB . . . “Happy Hunting!”

Lesson #5: Finding Angel Investors for Your

Startup
As we read in my previous lesson about fundraising options for
your business, angel investors (not venture capital firms) are the
most likely candidates to get your businesses from a piece of paper
to a proof of concept. Now we will tackle how do you find these
angel investors across four distinct groups: (i) friends and family;
(ii) angel investors directly; (iii) networks aggregating monies of
angels investors; and (iv) fundraising advisors.

Friends and family investors have their distinct plusses and minuses.
The plusses are these people know you the best, so they are the
closest to you in determining whether or not you are backable, as
first-hand references. The minuses are pretty major: these are your
friends and family! It is very difficult to mix personal and
professional relationships. And, as we know, only one in 10 startups
is successful. So, there are very high odds you lose all the money
invested by your closest friends and family, which will make for
VERY awkward Thanksgiving dinners from that point on. So, if
you decide to ultimately go down this road (which for many startups
are their only option), make sure your friends and family know this
investment is HIGHLY risky, and they should not invest the funds
unless they are prepared to lose 100% of their investment (e.g., like
money they would gamble in a casino).

As for finding angel investors directly, this by far is the hardest

route. First, because they prefer to stay anonymous. And, second,
because they don’t know you at all. Sometimes rich individuals
have built formal family investment offices, with professional
managers screening deals for them. But, I have found, if they can
afford a family office, they prefer to invest $5MM+ in more typical
venture investments, not $500K for a startup. Preferably, you need
to find an individual that understands your industry and business
model and can bring real value to the table, understands your needs
and is easier for them to get over the investment hurdle.

So, for example, if you think you have the next great video gaming
technology, I would research what similar video game technologies
have recently been sold (meaning the founder just got very cash
rich), and reach out to that founder to tap into their expertise as an
advisor, board member or investor. Notice I didn’t lead with
investor. You need to establish credibility with this individual
before jumping into the investment question. And, if he doesn’t
want to invest, he may know others in the industry that would, so
ask him for references. Venture capital firms are also aware of key
angels in their market, so reach out to them for guidance. There is a
great website called Angel List that makes finding angels for your
region/industry easier than ever, so check them out as a good place
to start.

This last category, is my favorite category: networks aggregating

angel investors. Like the family offices, investors set aside funds for
angel investments, screened by a professional team that sources
deals for the network. So, the individual angel gets to keep their
anonymity and have the comfort of a team of smart managers doing
due diligence on investment targets, on their behalf. So, instead of
one angel investing $1MM by themself, 100 angels aggregate
$100MM and invest as a group in the deals they like the best,
individually or collectively.

Here in Chicago, the big three angel networks are Hyde Park
Angels, Cornerstone Angels and Heartland Angels. These angel
networks very much prefer to invest in their own backyard. So, if
you live in Chicago, reach out to these three. If you live in another
city, you will need to research who the angel networks are in or near
that city. I stumbled on this great list of angel networks by city
compiled by Andy Whitman, a Partner at 2x Partners, an early-stage
venture capital firm in Chicago with expertise in the CPG space.
This list applies to all industries, not just CPG, although Andy does
indicate what CPG deals these networks have invested in.

If all of the above fails, you should consider engaging a boutique

start-up fund raising advisor. The problem with this road is raising
funds via this channel can be more expensive, with the advisor
typically taking a 5%-7% success fee in cash, plus a 5%-7% success
fee in warrants, and often times, plus a monthly retainer to cover
their costs. As an example, Red Rocket takes a 5% success fee in
cash, plus 5% warrants (without charging a monthly retainer), for
stories we believe are fundable from our network of investor
relationships.

Hopefully, this information helped to make the angel identification

process “less scary”, knowing there are viable angel investor
options which can be pursued. And, over time, expect more and
more angels to get more active in early stage investing as a core part
of their portfolios (as a way to exceed the returns in the stock
market and fill the void left by venture capitalists who have gone
out of business). Good luck!

Lesson #10: How Best to Approach VC’s or

Angel Investors
I can’t tell you how many entrepreneurs first approach investors,
either at the wrong time, in the wrong way or in the wrong format.
Today, we will tackle these simple to fix pitfalls.

Firstly, what do I mean by wrong time. It is important you have all

the required elements in place before approaching investors. This
includes completing all the necessary research supporting your
business plan (see Lesson #7 on how to write a business plan). And,
if possible, it is preferred to have some type of “proof of concept”
behind you. This could include a working prototype, closed
customer contracts, brand name pipeline, growing traffic to the site,
proven team in place, etc. Anything that gets the investor
comfortable that heavy lifting research is behind you, there is some
initial traction for the product and a solid team is ready to begin
execution of the plan. If you don’t have these pieces of the puzzle
firmly in place, wait before approaching any professional investors.

Secondly, the proper way to approach an investor is typically

through a referral. The investor is much more likely to hear your
pitch (among the 200 they listen to each year), if it is being sent to
them via somebody they already know and trust, that can vouch for
you. So, use LinkedIn looking for mutual connections that can open
that door for you, if possible. Or, asking your lawyer or accountant
for intros. If there are no mutual connections, you have no choice
but to cold call the investor, your lowest odds of probability to
getting a deal done. But, if that is your only option, it is important
you come across and professional, smart, enthusiastic and well-
polished in both your information and your delivery.

As for the desired format, I typically find that investors are very
busy, and are more receptive to getting an introduction via email
(which you can access via their website or calling their office).
Email gives them a chance to research you and your idea, before
committing to a phone call or an in person meeting. So, make sure
you keep a clean social networking trail on Facebook and Twitter,
as they will most certainly be Googling you. And, make sure your
LinkedIn profile is complete and compelling, as it is your online
resume.

The contents of that email are the most critical. Remember the short
attention span of investors: if they can’t understand your business in
30 seconds of reading, they are moving on to the next one. So, you
need a very short and sweetly written cover letter that summarizes
your story in a few sentences (not paragraphs!). Something that gets
them jazzed up.

For example, iExplore’s email could have read: “iExplore is the #1

ranked website in the rapidly growing $10BN adventure travel
industry with over 1MM visitors per month and a strategic
partnership with National Geographic. Our revenues are growing
50% per year and we are raising venture capital that should yield
you a 10x return. See attached for more details in our executive
summary. Let me know a good time for an introductory call or
meeting to discuss further. How do you look on Friday morning?”
That’s all you really need, including a clickable link to your website
so they can easily learn about your product in more detail (so make
sure you have a snazzy website, to back up your snazzy pitch).

Notice what that paragraph did: (i) described the business and its
leading market position; (ii) detailed industry size and growth; (iii)
highlighted a brand name strategic partner; (iv) showed the business
was driving revenues, and how quickly they were scaling; (v) and
wet their beak with the opportunity to make a big 10x return. That
was a lot to accomplish in two sentences. The paragraph also closes
(as it always should) with a clear call to action, which will be very
easy for the investor to hit reply and say “Friday looks fine at 9am.”

Now that the cover letter is solid, follow the above linked Lesson #7
to prepare a 1-2 page executive summary information (with the best
of the best from the bigger business plan, include management bios
and five year forecast). That is it. Do not send them any more than
this, as they will not read it at this time. They will certainly ask for
much more information during the due diligence process, which you
will already have prepared with your full plan sitting in reserve.
And, worth mentioning again, graphics and charts, go a lot further
than text to getting your message across as quickly and effectively
as you can.

You only have one chance to make a good first impression with a
prospective investor. Don’t blow it!

Lesson #27: How VC’s Define a Backable

Management Team
Having a great, defensible business idea in a scalable market is only
half of the puzzle to attracting venture capital. The other half is
having a backable management team. In this lesson we are going to
define exactly what that means, in the eyes of a venture capitalist.

The first thing a VC is looking for is domain expertise in the

industry you are targeting. How many years of experience do you
have in that industry? In what roles did you operate that were
relevant to your new business? Or, for tactical positions like CMO
or CTO, what other marketing or technology roles have you had in
the past, and were they relevant for a startup in this industry (e.g., a
Fortune 500 CMO will not understand how to market a startup on a
shoestring budget). While in these positions, what successes can
you share, and what failures did you learn from? And, frankly, they
care a lot more about your failures to see how resilient you were and
how battle tested you are at getting your business through the bad
times (which will always happen at some point).
The second thing they look for is credibility. Is your business plan
well thought out and are your revenues assumptions believable in
relation to your industry size and marketing budgets. So, be sure to
re-read Lesson #7 on How to Write a Business Plan. And, never
come across as overlypushy or too salesy. The last thing a VC wants
to back is a “used car salesman” trying to sell him the Brooklyn
Bridge.

The third thing a VC looks for is passion and energy. Do you have
the fire in the belly to wake up every morning and bust your ass to
execute the business plan? I think it is safe to assume most good
entrepreneurs are not lacking in this area, but you would be
surprised how many startups come in with unenthusiastic or boring
presentations that doesn’t get anybody excited, regardless of how
great the idea may be. And, if you cannot get your VC’s excited, it
is unlikely you will get potential business customers excited in
driving revenues and hitting the VC’s ROI expectations.
The fourth thing VC’s look for are your listening and
communications skills. The biggest mistake an entrepreneur can
make is to assume they are the only smart person in the room, and
nobody else knows what they are talking about. Hence digging in an
entrenched viewpoint. Let’s not forget a good VC sees around 200
business plans a year, 2,000 plans a decade. And, most likely, many
very similar to your own, in one form or another. So, they bring a
ton of market intelligence to the table, to help you avoid known
pitfalls. It is critical they think you are flexible and will listen to
input as needed. And be prepared, at some point, a VC may make a
recommendation to put in a new CEO with more skills than
yourself. So, listen with open ears, as protecting your 65% equity
value is a lot more important than protecting your job title. But,
hopefully, you will never give them that opportunity by knocking
the cover off the ball the entire way up.

The days of the dot com boom in the 1990’s are long behind us. No
longer can a 21-year-old with a high-level idea on a piece of paper
(without even a revenue model) walk into Silicon Valley and collect
a $10MM check. You are much better served with at least 5-10
years of real life work experience, and the relevant lessons
therefrom. And, frankly, a second-time CEO, is a much better
venture bet than a first-time CEO, since that entrepreneur has
already learned how to avoid many startup pitfalls and can point to a
proven track record.

That basically narrows the attractive pool of entrepreneurs down to

a very small list. But, there are ways to offset your own lack of past
executive history, by surrounding yourself with a smart team of
people that are proven experts in their field. If you are launching a
new search engine, and you have a Google engineer on your staff,
that will get a VC’s attention. If your startup is dependent on
Facebook for successful social marketing, and your CMO is an old
Facebook executive, with a lot of relationships there, that will get a
VC’s attention. Not to mention, the VC’s will be impressed by your
hiring skills (finding the best talent) and your sales skills (getting
these proven winners to buy into your vision). This deep team
around the management table is exactly what the VC’s want, to
make sure your business is more than a “one man show”.

Entrepreneurs are an eccentric bunch, often flying by the seats of

their pants. Living on the edge between reality and pipe dream the
entire way up. These trailblazers and visionaries are what make
startups so exciting, and potentially, a lucrative investment
opportunity for VC’s. But, at the end of the day, a VC is looking for
an experienced, credible, passionate, energetic and flexible team
more than anything else. Management teams make or break
businesses, and they know good teams when they see them.

As I have said before, and it’s worth reiterating, VC’s would much
rather invest in an A+ team with a B+ idea, than an A+ idea with a
B+ team. So, keep that in mind.
Lesson #32: How to Value Your Startup
Business
One of the questions I get, more often than not, is what is the
appropriate valuation of my business. Typically related to an
upcoming financing or pending takeover offer. And, the answer is
quite simple: like for anything, your business is worth what
somebody is willing to pay for it. And, the methodologies applied
by one buyer in one industry, may be different from the
methodologies applied by another buyer in another industry. In
today’s post, I will give you some key drivers on how to value your
business, in a way that will make sense to you, and will be in line
with investor expectations.

To start, let’s not forget about the obvious: the natural economic
principles of supply and demand apply to valuing your business, as
well. The more scarce a supply (e.g., your equity in a hot new
patented technology business), the higher the demand (e.g., multiple
interested investors competing for the deal, and taking up valuation
in the process). And, if you cannot create “real demand” from
multiple investors, “perceived demand” can often work the same
when dealing with one investor. So, never have an investor think
they are the only investor pursuing your business, as that will hurt
your valuation. And, before you start soliciting investment, make
sure your business will be perceived as new and unique to maximize
your valuation. A competitive commodity business or “me too”
story, will be less demanded, and hence require a lower valuation to
close your financing.

Related to the above, is the industry in which you operate. Each

industry typically has its unique valuation methodologies. A next
generation biotech or clean energy business, would get priced at a
higher valuation than yet another family diner or widget
manufacturer. As an example, a new restaurant may get valued at 3-
4x EBITDA and a hot dot com business with meteoric traffic
growth could get valued at 5-10x revenues. So, before you approach
investors with valuation expectations, make sure you have studied
the valuations achieved in recent financing or M&A transactions in
your industry. If you feel you do not have access to relevant
valuation statistics for your industry, engage a financial advisor that
can assist you.

In terms of techniques investors use to value your business, they

will study things like: (i) revenue, cash flow or net income multiples
from recent financings in your industry; (ii) revenue, cash flow or
net income multiples from recent M&A transactions in your
industry; and (iii) a discounted cash flow analysis of forecasted cash
flows from your business. As mentioned earlier, these multiple
ranges can be very wide, and vary substantially, within and between
industries. As a rough ballpark, assume EBITDA multiples can
range from 3x to 10x, depending on your “story”. And, forecasted
earnings growth is typically the #1 driver of your valuation (e.g., a
25% annual net income grower may see a 25x net income multiple,
and a 10% annual net income grower may see a 10x multiple).

If there are no earnings yet, with your business plowing profits into
long-term growth, then revenue multiples or some other metric
would be used. Revenue multiples for established businesses are
typically in the 0.5x-1x range, but in extreme scenarios, can get as
high as 10x for high flying dot commers with explosive growth
(e.g., Groupon). But, that is, by far, the exception to the rule. And, if
there are no revenues for your business, unless you are a biotech
business waiting for FDA approval or some new mobile app
grabbing immediate market share before others, as examples,
raising funds for your business, at any valuation, will be very
difficult. Investors need some initial proof of concept to get their
attention.

Worth mentioning, private company valuations typically get a

25%-35% discount to public company valuations. While at the same
time, M&A transactions can come at a 25%-35% premium to
financing valuations, as the founders are taking all their upside off
the table.

And, remember, at the end of the day, the investor will have a very
good sense to what a business is worth, and what they are willing to
pay for it. As they see deals all the time and typically have their
finger on the market pulse. So, collect a few term sheets from
multiple investors, and compare and contrast valuations and other
terms, and play them off each other to get the best deal. As a rule of
thumb, expect to give up 25-50% of your equity, in your first
financing round, depending on the size of the investment and the
type of investor (e.g., angel vs. venture capitalist).

Most importantly, you need to put on the hat of your investor in

setting valuation. To get them excited about your startup vs. the
hundreds of other startups they see each year, they are looking for
that next 10x return opportunity. So, make sure your 3-5 year
forecasted earnings, will grow large enough in that time frame, to
afford them a 10x return. So, as an example, if you are worth $5MM
today, post financing, and the new investor owns 25% of the
company ($1.25MM stake), they are going to need a financial plan
that will get their stake up to $12.5MM (and the company up to
$50MM) within 3-5 years. Which, as an example, could mean
driving EBITDA up to $5-$10MM within that period. So, do not
show them a forecast that grows less than that, and make sure you
have built a credible financial plan to achieve these levels before
approaching investors.

There are too many nuances to valuing a startup business than I

could do justice in this short lesson, but hopefully this introduction
gives you a good sense of the high-level issues in play.
Lesson #49: How to Get a Loan, or Not!!
I am chuckling to myself while typing this lesson, as the concept of
startups getting traditional loans is the equivalent of first-timers
trying to summit Mount Everest; it is nearly impossible for a true
startup to have any realistic chance of closing a traditional loan with
a bank, or elsewhere. So, for all of you really early-stage
entrepreneurs out there, your time will be better spent elsewhere, as
it is very unlikely you will ever get through a bank’s underwriting
process and meet their very restrictive criteria (detailed below).

If this describes you, and you prefer to raise debt instead of equity,
it is most likely going to come in the form of a convertible debt
instrument from a traditional angel investor, not a bank. So, go back
and read Lesson #5 on How to Find Angel Investors, and pitch
those angels a debt instrument, instead of equity, and you will most
likely negotiate towards some convertible debt instrument in the
middle. That said, if you are beyond seed stage, and are actually
driving profits that can service a loan, keep reading.

Notice I said “driving profits,” as without profits, the loan

conversation is practically a non-starter from traditional sources.
And, frankly, in the current economic climate, the traditional banks
are ultra-conservative, not looking at any company without at least
$3MM in annual profit, and a proven multi-year historical track
record at such level to boot. Perhaps you can find a more aggressive
bank, like Silicon Valley Bank that specializes in earlier stage
businesses, which may be a little less restrictive. But, they too will
require meaningful profits to ensure you can cover the debt service
costs and the ultimate repayment of the principal within the term.

In addition to a proven multi-year history of company profits based

on your tax returns, a lender is most likely going to want to see: (i)
enough hard-assets in the business to collateralize the loan; (ii) a
personal guarantee from you, so you are personally on the hook if
the company goes under; (iii) sufficient equity invested in the
business as a percentage of total capitalization; (iv) a credible
business plan and financial forecast that shows a timely repayment
of the loan; and (v) a good credit score for you personally. So, if
you don’t have any of these things, or are unwilling to provide
them, that pretty much ends the bank discussion, and it is back to
the angel investors or venture capitalists for you.

Now, there are a few exceptions to the rule. If you are trying to
finance hard assets (e.g., equipment, real estate), or bridge known
accounts receivable for working capital purposes, certain lenders or
factoring companies could be a little easier to work with, lending
50%-80% of the asset value depending on the nature of the assets
and risks associated with loan recovery. This includes financing any
equipment or other physical assets through capitalized leases, which
require minimal upfront payment for the assets, but over the life of
the lease, typically add up to 2x-3x the cost of the assets had you
purchased them for cash upfront. Just how mortgage payments add
up on your house over time (therefore helping near term cash, but
hurting long term cash). These asset-backed lenders will also
require personal guarantees, which are never fun if your business
goes under, as it can take you down personally, as well (adding
insult to injury).

And, if you are financing real estate, there are plenty of mortgage
companies to reach out to. But, you will need to have enough
personal or other income to insure that the mortgage costs
(combined with the costs of any other debts you have, like your
home mortgage or car loans) are not higher than 40%-45% of your
monthly income. Not to mention, having enough other cash on hand
to afford the 10-20% down payment. I don’t know many startups or
entrepreneurs that will successfully meet this criteria, so most
likely, this too will lead to a dead end.

One additional road to consider is trying to apply for an SBA-

guaranteed loan. In this case, the SBA is not the lender, the banks
are still the lender to approach. But, the SBA guarantees up to
$200,000 of the loan, hence making the loan a lot less risky to the
bank. So, a bank’s lending criteria is a little more lenient for loans
under this amount, assuming the SBA guarantee is in place. And,
the terms of the SBA-guaranteed loan, tend to be a lot longer, given
you more time to repay the loan. To see if you meet the criteria for
an SBA-guaranteed loan, check out this link on the SBA Website.
But, keep in mind, you will have to have 10%-30% of additional
cash sitting around, to contribute as additional equity, to close a
loan like this. So, in this case, once again, it takes money, to raise
money (monies you most likely do not have sitting around). And,
the SBA will only provide a guarantee, if you really have run out of
all other options (e.g., no excess cash sitting around, and have been
turned down by a bank already).

Sorry to be “doom and gloom” in this lesson, as that is not my style

or desire, to demotivate entrepreneurs. But, just keeping it real, to
save you from wasting your valuable time. I have personally
approached enough banks enough times in my past, in better
economic markets than these and with more sizeable businesses
than your own, to know how really tough it can be to get through
the underwriting process. So, my advice to most of you looking for
loans for your startups: focus on angels, venture capitalists or other
alternative asset-backed lending sources, not the banks, which will
most likely lead to a dead-end for startups.

Lesson #66: Preparing for a Due Diligence

Process
Whether you are selling your business or raising new capital from
professional venture capitalists, you are most likely going to be
required to prepare for, and complete, an exhaustive due diligence
process on your business. So, the sooner you can prepare for such
process, before you start it, the better off you will be. Due diligence
usually revolves around questions about the business and questions
of about your financials. I will summarize the high level topics you
should expect below.

Business information requests will include things like: (i)

organizational documents (e.g., charter, operating agreement, board
minutes, ownership chart, list of managers, lists of investors); (ii)
key customers/suppliers (e.g., top 10 customers, top 10 suppliers,
key relationships); (iii) litigation (e.g., all pending, settled or
threatened lawsuits; (iv) key contracts (e.g., standard forms, non-
competes, joint ventures, acquisitions, oral agreements, material
breaches); (v) regulatory matters (e.g., violations of any government
regulations for environment, employment and anti-trust, business
licenses, regulatory filings, workers’ compensation history,
employee training documents; (vi) insurance matters (e.g., list of all
active/cancelled policies, claims history); (vii) employee matters
(e.g., list of all employees, salaries, hire dates, benefit plans,
employment agreements, employee handbook/policies, tax status);
and (viii) security/data protection (e.g., policies, procedures, credit
card compliance, technical firewalls, password access, disaster
recovery).

Financial information requests will include things like: (i) debt

obligations (e.g., lines of credit, bonds, investor notes); (ii)
historical and projected financial statements (e.g., income statement,
balance sheet, cash flow, accounting policies, A/P and A/R aging
schedules); (iii) tax matters (e.g., federal/state/city income filings,
sales, payroll, unemployment, abandoned assets/property, tax
sharing agreements); (iv) key assets/property/liens of the business
(e.g., real estate, leases, mortgages, appraisals, titles); and (v)
intellectual property (e.g., patents, trademarks, copyrights, owned
software, licensed software, domain names).

By no means is the above intended to represent an all-encompassing

due diligence list, as investors/buyers may ask for much more than
what is listed above, depending on the depth of their due diligence
process. And, as you can see, this process can be quite time
consuming (both in preparing the requested materials and educating
the investor/buyer on such information), and it will certainly distract
you from your core business for a couple months. But, hopefully,
you are keeping clean files, as part of your everyday normal
operations, to make this process less painful than it could be, by
having to create a data room from scratch.

And, worth mentioning, the same due diligence list that is being
asked of you, as a seller, can be used by you, as a buyer in any
acquisitions you are considering. So, keep this lesson handy to make
sure you are asking the right questions of any acquisition targets.
Lesson #97: Securing a Small Business Grant
Grants can often be an effective vehicle to finance your business,
just as venture capital can be. And, the upside of a grant is,
oftentimes, it does not need to be repaid or come with any long-term
hooks, like investors bring. That said, grants are not easy to secure.
So, if you can get one, more power to you. Today’s lesson will
summarize a few basics around securing a small business grant.

Grants are basically funds distributed by governments, corporations,

foundations, universities or trusts to fund some specific project that
is important to their cause. According to Wikipedia, there are over
88,000 grants issued each year, totaling over $40BN in size (a
sizable chunk of money). These monies are usually granted to non-
for-profit businesses to use in their specific research or
development, that relates to the desired cause. But, sometimes,
grants can be made to for-profit businesses where interests are
aligned. So, for example, if a startup biotech business is working on
a new cure for cancer, they could get a grant from the American
Cancer Society to help accelerate their efforts. Or, as another
example, let’s say the Elvis Presley Foundation is trying to preserve
rare old video footage of Elvis Presley, they could make a grant to a
video preservation company.

As I mentioned, grants are not easy to secure, given the high level
of competition looking for the same monies. But, if you: (i) know
where to look for available grants, (ii) engage the services of a
professional grant writer, and (iii) submit a proposal in the correct
format, you have as good a chance as anybody to secure such funds.
I wouldn’t invest a ton of time here, given the low odds of closure,
but it is definitely worth a little high level research to see if there are
any low-hanging-fruit opportunities that you can easily pursue.

In terms of finding grants, there really isn’t one centralized place

that spans all the various entities that have grants available. So, it
will require a lot of digging via Google, using the word “grant” and
the relevant keywords for your industry. As in the examples above,
that could include searches like “cancer research grants” or “video
preservation grants”. That said, the federal government has done a
nice job of centralizing all federal government grants at Grants.gov.
There, you can easily search over 1,000 annual grants offered from
26 different federal government agencies, across a wide range of
categories (including small business grant opportunities). So, I
would start your search there.

The next step could be to engage the services of a professional grant

writer, who has expertise or relationships in the space and knows
the “tricks of the trade.” There is a good tutorial on how to hire a
grant writer on the American Grant Writers Association website.
And, there are many professional grant writers and grant
researching companies that I found from a “grant writer” keyword
search at Google. So, research a few, to see who has expertise
within your industry or the organization you are trying to approach.
Expect to pay $50-$100 per hour for the assistance of a service like
this.

You can also try to write the grant proposal yourself, to save some
money. The elements of a good grant proposal can be found on this
grant writing page on Wikipedia. So, follow the standard format,
and make sure you address all the detailed requirements that are
being asked for by the granting organization.
6 Finance

Lesson #61: Set Up Proper Accounting

Controls
Startup entrepreneurs are typically too busy executing on their
vision, that they sometimes forget to implement the proper
accounting controls for their business. And, the sooner you put these
controls in place, the easier it will be down the road, when dealing
with banks, investors or auditors, during a due diligence process or
otherwise.

I don’t think you need anything fancy here. All you really need is
some basic and inexpensive small business accounting software,
like QuickBooks or Peachtree, to track all revenues and expenses of
the business, all balance sheet accounts (e.g., accounts payable,
accounts receivable) and related cash flow items. In addition, keep a
good paper trail in your files (e.g., invoices paid including check
numbers, invoices collected including deposit records), which backs
up all numbers entered into the accounting software system, in case
an auditor ever needs to see them.

I do not think a startup needs to engage an auditor, nor will

prospective investors require them. As, formal audits can get
expensive and are not worth the investment for small, private
businesses with limited capital to spend. That said, I would engage a
competent accounting firm that can assist you with your annual tax
filings. They will ask to review your internal financial reports from
the business in preparing your tax filings, and that is like getting
professional third-party validation that yourfinancial reports are
“clean,” assuming you have a proper paper trail backing up
everything you entered into the system. Annual tax work should
cost you no more than $5K-$10K a year.

Prospective investors will be impressed with accounting controls

like this, to ensure their invested monies are in “good hands” with
competent business people. And, if you don’t have your accounting
controls set up like this from the start, investors will most likely
make you set it up this way before they invest, as part of the due
diligence process, which can be a complete distraction, trying to
recreate all the historical financial records down the road. And,
frankly, it is just good business sense to run your business like this,
whether investors require it or not, as it will give you an easy and
immediate look at all your financial accounts, for any period and at
any point in time.
Lesson #67: Managing Accounts Payable &
Accounts Receivable
The more diligent you are at managing your working capital,
specifically your accounts payable and accounts receivable, the
easier it is to manage the ebbs and flows of your cash flow.

Accounts payable are current liabilities less than one year old. And,
more practicably, they represent your normal monthly operating
expenses that get invoiced to you monthly. One way to stretch your
cash resources as a startup is to stretch out the timing on when you
actually pay your monthly bills. Most bills get invoiced with 30-day
due dates. But, stretching those payments to 45-60 days can give
you an extra 15-30 days of time to allow cash from revenues or
other sources (e.g., financing) to materialize before having to go
cash out of pocket.
That said, the longer you stretch out the timing on paying your bills,
the higher odds you piss off your vendors, where they may want to
drop you or implement prepayment terms to continue the
relationship. In addition, late payments by you also increase the
odds such late payments get reported to business services like Dun
& Bradstreet (D&B) or the Better Business Bureau (BBB). So, you
don’t want to use any long-term techniques that would impact your
public facing business credit ratings or corporate image. So, only
use these techniques when you have no other choice.

Accounts receivable are current assets less than one year old. And,
more practicably, they represent your normal monthly revenues
which you invoice monthly. So, the keys here are: (i) make sure you
are invoicing your customers on the first date of each month, to get
the collections clock started sooner than later; and (ii) make sure
you have a process each month to follow up with late paying
customers, to collect your cash sooner than later (e.g., monthly
aging reports, controller who tracks down late payments). The
longer you take to invoice clients and the longer you take to collect
late paying receivables, the more cash strains you are putting on
your business.

And, manage your customers accordingly. If you find yourself with

consistently late-paying customers, change the terms of doing
business with them (e.g., to prepay only). Or, an effective tactic is to
shut off your services, until such late paying customer becomes
current with paying your bills. When all else fails, after months of
delays in collecting payments, you may have no choice but to
terminate the relationship with that customer, report them to D&B
and the BBB and turn over your materially past-due receivable to a
collection agency. So, keep a budget for bad debts expense based on
the credit of your customers, and what percent of your receivables
they represent.

Don’t get so bogged down with the running of your startup, that you
forget to manage the timing of bills you need to pay and the timing
of receivables you need to collect. It can make a material difference
to your cash flow, and can more easily get you through the tough
times.

Lesson #78: How to Build a Budget

Building an accurate budget is one of the hardest things to do for a
startup, as you have very limited historical information to forecast
with. But, following the below road map should help you create a
budget that should get you pretty close.

Sales/marketing drives revenues. For me, the entire budgeting

process starts with sales and marketing expenses, since those areas
will be the key drivers of revenues for your startup. So, please re-
read Lesson #21 on How to Set a Sales & Marketing Plan for Your
Startup. As a recap, your business will either be sales driven (like
most B2B companies), and you will need a certain number of sales
people calling on new clients to drive revenues. Or, your business
will be marketing driven (like most B2C companies), and you need
to think through what media buys or viral marketing initiatives will
be most optimal for your business.

For sales-driven businesses, assume each salesperson can close a

certain percentage of the calls they make. My rule of thumb is: it
typically takes 100 calls, to close 5 transactions. And, a good
salesperson can be making 100 calls a month (about 5 each business
day). So, you would multiply these 5 transactions times the average
selling price of your product or service, to forecast revenues each
month. But, you need to build in a monthly ramp-up period before
your sales person is fully productive (e.g., 3 months for lower priced
products, up to 2 years for million dollar products).

For marketing driven business, you need to identify what your

target demographic is and identify channels where your prospective
customers may be looking. And, remember, viral marketing through
social media (please re-read Lesson #52), is going to be the cheapest
cost of marketing, followed by other online marketing activities
(like search marketing in Lesson #53, email marketing in Lesson
#77 and mobile marketing in Lesson #68). Offline marketing
activities like direct mail, print buys, television and radio are
typically better vehicles for more established companies with larger
budgets, that can afford the branding advantages of vehicles like
these

Once you decide what budgets/vehicles you want to market with,

you add up the total costs of such marketing activities, and then
determine what your cost of customer acquisition will end up being.
Your cost of acquisition can vary significantly based on your price
points, products, demographics, etc. So, before building your final
budget, make sure you have tested a couple of your primary
marketing initiatives, to determine how much spend it will take to
drive one customer. Then, run that cost of acquisition through your
going forward revenue forecast. So, as an example, if you spend
$100,000 at a $100 cost of acquisition, that would drive 1,000
transactions, which you would then multiply times your average
transaction price point to forecast your revenues.

Expenses. Expenses are a lot easier to forecast than revenues, since

they are largely in your control. You decide how many people you
need to hire, what technology you need to buy, what back office
expenses you will have, etc. So, provided you don’t spend more
than you have budgeted, your actual expenses should come pretty
close to your budget. In addition to the sales and marketing
expenses discussed above, the key expense categories you should
include are: (i) payroll (including payroll taxes and employee
benefits); (ii) technology (e.g., development, design, support,
administration, connectivity, hosting); (iii) home office (e.g., rent,
utilities, phone, cleaning, supplies); (iv) insurance (e.g., general
liability, E&O, D&O); (v) professional services (e.g., lawyers,
accountants, recruiters); and (vi) other administrative expenses (e.g.,
travel, entertainment, meals).

Payroll is typically the hardest to forecast, as you do your best to

match your budgets with the requirements of the best candidates for
the job. And, you need to make some smart assumptions on how
much salary will actually be required to find good talent for each
position. So, ask around to determine market rates by role for your
market, prior to building your budget.

Capital expenditures. Capital expenditures for most startups

typically revolve around technology (e.g., servers, software) and
assets needed for your home office (e.g., furniture, equipment). So,
budget accordingly based on your tech build out needs and the
forecasted number of employees in your office. Depreciation
expenses over a 3- to 10-year life, depending on the nature of the
asset, will then run through your income statement from there.

Interest. If you have any debt, you need to pay interest expense.
And, if you have a big cash balance, you will earn interest income.
Make sure you pick these up in your forecast, as well.

Taxes. If you are running a profitable company, you will also have
to budget for annual corporate income taxes at the levels appropriate
for your city and state. Understanding, you may have net operating
loss carry-forwards from prior years’ losses, to offset your early
profits.

Validate with historical/industry numbers. Where you can, validate

all assumptions made with historical data you have from past
experience from your business, and then increase such levels for
around 3% annual inflation. If there is no historical data from within
your business, reach out to similar sized businesses in your industry,
or other mentors/advisors, to learn what they are paying for key
things. So, at least you will have a relevant industry benchmark to
reference to help validate your assumptions.

Sanity check. At the end of the day, does your forecast pass the
“sniff test”. If you are only spending $500K in marketing, is it
reasonable to build a $100MM revenue business? Probably not. If
your industry is only $100MM in size, and you are building a
$50MM business, is it reasonable to achieve 50% market share in
your first year (or ever, for that matter)? Probably not. So, just make
sure your forecast is credible in light of your sales/marketing budget
and industry size.

Build a cushion. Startups should always build a cushion into their

forecast, as things are most definitely not going to go 100% as
planned. Please re-read Lesson #28 on Expecting the Unexpected.

Once you have taken into account all of the above, you should be in
a very good position to finish your budget and forecast the cash
needs of your business. So, make sure you raise enough capital to
cover at least 12-18 months of your going forward operations.
Otherwise, you will constantly be in fundraising mode, and not
focused on building out your business.
7 General Business

Lesson #3: The Importance of Timing and

Luck for Your Startup
Timing and luck is one of the most important elements for success,
but is hardest to identify and control. There are a few pieces to the
timing puzzle: (1) market timing; (2) economic conditions; (3)
execution speed; and (4) knowing how long to ride the wave.

Market timing is basically being in the right place at the right time. I
will use MediaRecall, my past company, as an example.
MediaRecall had built the fastest, cheapest solution to digitize large
archives of film and video content, for publishing on the web. The
business was launched in 2006, well before online video started to
take off, so the big film archives had not yet began to think about
digitizing their archives. So, the company struggled to build a sales
pipeline until 2009, post the rapid success of sites like YouTube and
Hulu and all film archives scrambling to find a way to get their
archives monetizing online. Had MediaRecall launched in 2008, it
would have saved two years of burn rate. But, you are never that
smart to time the market. So, just make sure there is solid customer
interest for your product, before investing too heavily in your
business (e.g., the lean startup principle). But, launch early enough
to be the first to market, and beat any potential competitors to the
market.

Economic conditions are entirely out of your control. I will use my

other past company, the adventure travel website iExplore, for this
example. iExplore launched its site in February 2000 in the peak of
the dot com boom. And, then the dot com bubble burst in March
2000, a month later, making it immediately an uphill slog right out
of the gate. Had we launched three years earlier, riding the
momentum of the dot com boom wave would have made it much
easier to grow the business. Or even worse, nobody could have
predicted 9/11/01 and the negative impact that event would have on
both the economy overall, and especially the travel industry. It
almost took iExplore out of business entirely. All you can do here is
to keep your business nimble, so it can easily scale up or down,
based on external market conditions. And, when times are good, run
as fast as possible to build your coffers for the downtimes.

Execution speed simply means build your business at light speed, be

a first mover (if you can) and continually exceed the efforts of your
competitors. And, better yet, using Google or Amazon as an
example, continue to widen your lead over your competitors to
make the gap insurmountable. Never get “comfortable” with your
success. Continually have a sense of “controlled paranoia”, pushing
your research and development efforts and sales and marketing
tactics to new heights in each year. The turtle never wins this race,
if the rabbit keeps clearly focused on continued and accelerating
growth with their competitors further and further back in their rear-
view mirrors.

And, on the sell side of your venture, it is important you know how
long to ride the wave. Don’t make the mistake of the riding the story
too long. Somethings may change to hurt the business (e.g., market
conditions, competition) that will result in a much lower sale price,
had you sold at an earlier time. And, equally important, the
prospective buyer of your business will want to see upside on their
investment. They will not want to buy a story that they perceive has
reached its full potential.

And, overriding all of this? Luck! So, carry your four leaf clovers
and rabbit feet in your pocket at all times!!
Lesson #8: Startups Require Flexibility to
Optimize Business Model
The #1 reason nine out of ten starts ups fail is the fact they did not
pivot fast enough, or stayed too focused or impassioned on their
original failing model. For most successful startups, their final
business model was the end product of numerous iterations and
evolutions from where they first started. It is critical you constantly
tinker with your model until you get it right.

Here are a few notable examples to emphasize this point. YouTube,

who gained success as a video portal site, started off as a failing
video dating site. Groupon, who gained success as a deal of the day
site, started off as a failing fundraising site. Trip Advisor, who
gained success as a hotel reviews site, first started off as a failing
search engine technology for the travel industry. Similar pivots
happened at Twitter, PayPal, Pandora and numerous other “home
run” startups, before they hit it big. That is not to say that 100% of
all startups require a pivot to succeed, as there are numerous
examples of companies that did just fine with their original model
(e.g., Amazon, eBay, LinkedIn, Facebook, Yelp). But, the point is,
identify your pitfalls and failures early enough, while there is still
time to evolve the business before it is too late.

I will use iExplore, the online adventure travel business I ran for 10
years, to further exemplify this point. iExplore’s original revenue
model was being an online travel agency of 5,000 adventure tours
from 200 third-party suppliers, earning a 15% commission on any
tours we booked through our call center. We learned there were a
few problems with that model: (1) 15% commissions are not a lot of
money to drive a very profitable business without tremendous scale;
(2) there were too many suppliers to drive enough volume to any
one to become important to them; and (3) the huge product selection
was too intimidating for the user; all the customer knew was they
wanted to go on a safari to Africa, and they could not easily
differentiate between the 100 safaris we offered on our site going to
unknown places like Kenya, Tanzania, South Africa, Botswana,
Namibia and Zimbabwe.

So, iExplore’s first pivot was to dramatically cut back the trip and
supplier offering, cutting to 2,000 trips and 20 key suppliers. That
made the customer experience more easy to navigate, while at the
same time, started pushing more volume to a select group of
preferred vendors. This latter point was critical to driving our
commissions up from 15% to 20%, the commissions paid by
suppliers to their highest-volume travel agencies.

iExplore second and third pivots happened in the wake of 9/11/01,

when revenues were very hard to come by and the company was
bleeding cash as consumers stopped traveling. The second pivot was
to evolve the travel business even further. Instead of being a 20%
travel agency, if we changed the nature of how we secured our
suppliers, we could become a 35% margin tour operator, competing
directly with many of the suppliers we had worked with to date. So,
instead of working with the U.S.-based tour operators like
Abercrombie & Kent, Backroads or Mountain Travel Sobek, we
established relationships with the actual ground operations
companies based in 70 cities across the globe (e.g., the same ground
operators our suppliers were using), and a launched a line of 300
iExplore branded tours.

Normally a move like that could have been suicidal, abruptly

competing with our suppliers. But, in iExplore’s case, the iExplore
website had grown to over 1MM unique visitors per month and had
built up a well-known brand name in the space (compared to the
traffic at our suppliers in the 50K per month range). So, we felt we
could comfortably make that pivot without impacting the business.
And, frankly, we had no choice in the wake of 9/11/01, as we
needed a major model shift to stop the cash bleed.
iExplore’s third pivot was its most important. It transitioned the
business from basically a breakeven travel business, to a wildly
profitable economic model. That involved entering the online ad
sales business, as a secondary and complementary revenue stream to
our travel revenues. When we studied the traffic from our 1MM
visitors a month, only 10% were in the trip finder where we sold
trips and drove revenues. The other 90% were looking at tour book
content and engaging in the travel community. So, we tested placing
online advertising on that 90% of our traffic. Once we were sure
there was no negative consumer impact to our travel business, we
rolled it out more aggressively. The resulting impact was a 30% lift
in revenues, with a 75% contribution margin revenue stream
(compared to 10% contribution margins on our travel business),
fueling the bottom line profits to new heights. That was the Eureka!
moment for the business, and put the company in position to be sold
in 2007 (eight years after launching the business).
Had iExplore stayed an online travel agency, it would have never
survived 9/11/01. Had Groupon stayed a fundraising site, or
YouTube an online dating site, neither of those businesses would
have become the huge successes they ultimately did. So, constantly
tinker with your business and take off your blinders for ultimate
success (or survival). Good luck!

Lesson #28: Expect the Unexpected – Always

Have a Cushion
On the morning of September 11, 2001, I was sitting at my desk
working on the final draft of a $4MM venture capital financing, that
was due to close on September 15, 2011. It was the last round of
capital that iExplore would need to bridge it to profitability. It was a
very exciting time for the business and continued the validation of
our business model. Then I heard a commotion in the office, as our
staff was gathering in the conference room, huddled around the
television. As I walked into the room, 45 people were glued to the
news broadcast of two planes having crashed into the World Trade
Center, in an obvious act of terrorism on U.S. soil.

My head of sales and operations at the time was a seasoned travel

industry veteran, formerly with Abercrombie & Kent, a leading tour
operator in the industry. He had remembered the first Gulf War and
the negative impact that had on the travel industry. By the look on
his face, he was clearly troubled, and pulled me into the other room.
He basically said iExplore should prepare for the worst, that travel
sales were most likely going to come to a halt in the wake of 9/11. I
was still wrapped up in the moment, trying to digest the falling
towers in NYC, and wasn’t really sure what was going to happen in
term of future travel sales.

But, those words of caution surely proved true in the days that
followed 9/11. The investors that were supposed to fund our last
round, got nervous and pulled their committed funding. And, sure
enough, travel sales fell off a cliff, at exactly the same time the
company was nearly out of cash (optimistic the venture funding deal
was only a couple days away). But, in the words of show business,
“It ain’t over until the fat lady sings”. And, iExplore found itself
with 45 employees, no cash, no prospects of cash, a ton of debt and
no revenues, staring over the edge of the abyss and at the precipice
of bankruptcy. In one fell swoop, a really exciting time in
iExplore’s history, became its worst nightmare and darkest moment.

In the months that followed, we ultimately got through this difficult

period (I will save the details for my next post). But, the point here
is to always have a cash cushion and plan far enough ahead. I
should have never let the cash position get near zero, on the 95%
odds a venture round was closing in a couple days. Regardless of
the opposite advice I got from my board, I should have had at least a
few months worth of cash on hand, by the time a venture capital
round was supposed to close, leaving a cushion in case anything
delayed the deal. A valuable lesson for next time.

So, when doing your budgeting and fund raising, always assume
you will need 2x the money you think you will need, 2x the
timeframe to achieve profitability and 2x the length of time required
to close any financing, and that should leave you with enough
cushion to get through the bad times or any delays. Building cash
reserves like this is not always easy for a startup, but it is critical if
you want to survive any and all scenarios. So, where you can, keep
your expenses razor thin until revenues or funding allow you to do
otherwise. And, do your best to “turn pennies into manhole covers”.
You’ll never know when you’ll need them!

Lesson #29: No Matter How Bad It Gets,

Persistence Wins
In my last lesson, we talked about iExplore’s scary experience in the
wake of 9/11/01, and the need for startups to expect the unexpected
with enough cash cushion on hand. I mentioned iExplore ultimately
survived that negative impact on the travel industry, but did not give
you the details of how we actually avoided bankruptcy and kept the
business afloat. I will highlight a few key points below, summarized
as “no matter how bad it gets, persistence wins!”

To set the stage, here were the key datapoints for iExplore’s
business at 9/11/01. The company had about $5MM in debt
($3.5MM from venture capitalists and $1.5MM from creditors), a
cash burn rate of around $250K per month, no revenues coming in
(due to low demand post 9/11/01), a low margin business and no
cash in the bank (with our $4MM committed venture deal falling
apart post 9/11/01). To say the situation was bleak was an
understatement, and any normal business would have called it a day
and closed the business. But, I was passionate about the business
and our progress to date, and knew the markets would ultimately
recover. All I needed to do was to restructure our business to give it
a chance to succeed long term.

It terms of the $250K burn rate, that was net of any discretionary
spending like marketing that we had immediately cut. It was largely
the expenses related to our 45 person staff. With no cash in the
bank, and no cash in sight, I had no choice but to layoff 100% of
our staff, including myself. That got the burn down close to $50K
per month, a much more reasonable level to find a “white knight”. I
basically told nine of our employees, that if you are willing to
volunteer your time over the next couple months, they would be
rehired (and paid any unpaid back pay) if a new financing closes.
But, no promises, proceed at your own caution. Believe it or not,
those nine employees were as impassioned about iExplore as I was,
and agreed to stay on for no pay, on the hopes of having a job on the
back end. Those were some really terrific people!

The second thing I needed to do was come up with an alternative

revenue stream, to make the business more attractive to investors.
So, I evolved the business from a 15% travel agency (selling third
party trips) to a 35% margin tour operator (selling iExplore branded
trips). And, at the same time, entered the 75% margin online
advertising sales business, selling banner ads on the iExplore
website. Those two changes allowed us to present a profitable
business plan, even in the low travel demand environment post
9/11/01.

The third thing I needed to do was to settle our debts at much

reduced levels, as new investors would not touch our business with
a $5MM noose around our neck. For the $3.5MM of venture debt,
those investors agreed to convert their stake into equity in the going
forward business, if I could find new cash investors. This debt was
intended to convert to equity anyway, albeit not at the much reduced
valuation that was required post 9/11/01, so the investors ultimately
agreed given the company’s dire straits.

Settling the $1.5MM of creditor debt was a lot trickier, as they were
not board members and did not have a vested equity stake. The
good news was, these creditors were not iExplore customers or
going forward vendors. They were 100 old vendors that we did not
plan on using going forward (e.g., old advertising agency, unneeded
software/hosting vendors post our reorganization). So, we hired
bankruptcy counsel who filled in a 75 page draft bankruptcy filing
and sent it to the 100 creditors with a cover letter that basically said,
“we all know what happened at 9/11/01, iExplore is illiquid and
needs to raise cash, new cash has been identified but only if you
settle your debts at $0.10 on the dollar, and if you don’t agree, you
are sitting behind $3.5MM of senior venture debt and will get zero
when this draft document gets filed”. It was basically a huge game
of “chicken” with what would become 100 hostile and pissed off
creditors. But, after lots of calls by myself and our CFO, we got
100% of the creditors to agree to the settlement, since $0.10 on the
dollar was better than zero. And, we turned $1.5MM of liabilities to
$150K of liabilities, a lot easier for a new investor to digest.

The final thing we had to do was raise the new capital, which was
torture in the wake of 9/11/01 when the whole financial market
basically went on pause. I had made 400 phone calls to my venture
capital colleagues looking for anyone to listen, and they were just
too worried about the long-term impact on the travel industry in a
world of increased terrorism. So, I had no choice but to call my
uncle, who was one of my advisors, that was willing to fund me
$50K per month, assuming he could see material progress in our
business. That was our lifeline, that gave me the time to ultimately
find $1MM of new venture capital that was willing to fund the
business in January 2002. These investors got more comfortable the
longer we got away from 9/11/01 and they could actually see
revenues starting to recover. Not to mention, buying into established
iExplore (with over 1MM visitors a month) at much reduced
valuations, could lead to juicy financial returns when the market
fully rebounded.

So, that was how iExplore survived 9/11/01 and lived to fight
another day. And, as we all know, it ultimately became the largest
website in the adventure travel space, and was sold in 2007 to TUI
Travel PLC, a $25BN company and largest seller of leisure travel in
the world. The investors who saved the business after 9/11/01 made
a good return on their investment. And, I now have a success story
on my resume and not a failure.

This clearly demonstrates that no matter how bleak a position you

think you are in, persistence will ultimately win the day. And, with
a lot of hard work and creative thinking, a phoenix can indeed rise
from the ashes!
Lesson #31: The Power of a Pivot - Thinking
Out of the Box
We are all familiar with the meteoric success of Groupon, the daily
deals website. But, as you can read in this Groupon case study at
Business Insider, they were a struggling business in the group
fundraising space called The Point. Had, they not pivoted their
business model from a “tipping point” for fund raising needs, to a
“tipping point” for consumer deals, they would most likely be out of
business today, and not a company valued at $15BN. Somebody
inside of The Point had to be smart enough to realize their old
business model wasn’t working, and they needed to think drastically
out of the box to create a winning long-term business model. And,
as you remember, there were many other examples of successful
business pivots that we discussed back in Lesson #8 on startups
requiring flexibility. Today, we are going to tackle: (i) when pivots
are required; (ii) how to identify what pivot opportunities may exist;
and (iii) how these pivots can be minor or material in nature.

I think it is pretty self-explanatory, if limited revenues or traction is

being made with the current business model, something needs to
change, and fast. But, is the business model flawed (requiring a
pivot), or is the sales and marketing plan or the management team
executing such plan the problem. You need to do your best to assess
the success of each of these elements in isolation, before resorting to
a business pivot. So, for example, if you have the exact same
business model as several other successful businesses, your problem
is most likely the wrong sales and marketing plan or management
team. But, in other examples, where the sales and marketing plan
makes sense for your industry and you have a proven and competent
team in place, if nobody is buying your product, that most likely
means it is time for a business pivot.

In determining where the pivot opportunity is, you need to study the
core assets of the business and how they may be applied in new
ways. In the Groupon example, it was the “tipping point”
technologies used in a new industry (e.g., consumer deals, instead of
fundraising). There are other examples, where the exact same
product wasn’t working for B2B clients, but was demanded by B2C
consumers. Or, the product doesn’t sell as a branded frontend
solution, but does as a white label back end solution. Or, maybe
your technology is too expensive on an installed license basis, but
sells better under a more cost effective SaaS solution. Maybe
corporations don’t need your solutions, but government or
university clients do?

Or, maybe there are dramatic changes that could lead to much better
financial returns on your investment. In one example, at
MediaRecall, a digital video services and technology company
serving the film studios and television networks, we learned that
instead of taking an upfront cash fee for services provided, we could
do the work for free and keep a 50%/50% revenue share on the
resulting professional entertainment content. These content royalties
would ultimately result in 10x the overall revenues than what we
would have received from the upfront for-fee services model, as the
resulting content gets distributed and monetizing on sites like
YouTube and Hulu. So, if we could fund the upfront work,
definitely worth the wait for revenues over time, instead of upfront.

So, when looking for your strongest assets, look enterprise wide.
Your asset can be a technology. Or,in distribution and logistics. Or,
in search engine marketing. Or, offshore product sourcing. Or, in
call center operations? Or, whatever. Just figure out what it is, and
leverage the hell out of it in new industries, sales channels or
applications.

Lesson #39: The Art of Negotiation

Strong negotiating skills are often the single most important
differentiator between closing good deals vs. great deals, or not
closing any deal altogether. That is because negotiation is more of
an art, than a science, as it involves creatively “reading” your
audience, and knowing when to dig in, and when not to. In this
lesson we will present some high level guidance on how to
negotiate your best deal.

First and foremost, for any negotiation to work, both parties need to
feel like they are getting a good deal. It can’t be lopsided in one way
or another, for the deal to have any reasonable chance for success.
So, structuring deals means working towards a win-win outcome for
both parties. Make sure the other party has clear responsibilities that
meet your goals, and vice versa. You know both parties have done a
good job negotiating, when they both feel “good” about the deal,
not one party feeling “great” and the other party feeling
“lukewarm.”
Secondly, most smart parties never lead with their best offer. They
always leave some wiggle room. So, as an example, when you are
buying a property listed for $1MM, it is not uncommon for your
first offer to be $900K and the parties agree to somewhere in the
middle near $950K. That 5% discount was already built into the
seller’s going in psychology, and they were prepared for that move.
But, had you started with a $500K offer for that $1MM listing, the
seller could be insulted by such a low offer, and the conversations
could end before they even got started. So, take advantage of
building in cushions, in both your asking price when selling, and bid
price when buying, so the other party feels like they have negotiated
a good deal too, through the process. But, don’t go overboard in
your starting positions, or risk a deal never happening.

Thirdly, it is important to know how to use time to your advantage.

Sometimes, to get the best deal, you need to move very quickly. As
an example, putting an expiration date on any offer, before the other
party has the luxury of more time, to shop the deal to other potential
parties. In our real estate example above, this could be making an
offer that expires before their scheduled broker open house, which
will open up potentially more interested buyers. In other scenarios,
dragging out a discussion, could work to your advantage. If you feel
the other party is “hot and heavy” to work with you, but is not
budging on a key point, there is a good chance they budge, the
longer it takes to close the deal, as they will not want to lose the
deal to another company in the interim.

Which takes us to the fourth point: in order to get the best terms, the
other party needs to feel you have a “hot product” and that they are
in competition with other bidders. If the other party thinks they are
the only bidder at the table: (i) they may get nervous about
proceeding, and that they may be missing something; and (ii) they
have no reason to move on terms, if they think you are desperate,
and need them, more than they need you. As an example, when
iExplore negotiated our strategic partnership with National
Geographic, in a subtle and non-threatening way, I was sure to let
them know I was having similar conversations with multiple other
parties, including Discovery Channel, their archenemy they would
not want to lose the opportunity.

The last point involves construction of the contract. Most often, the
parties negotiating the deal, are not the same parties executing the
deal. And, you do not want to leave any desired partnership points
“up for interpretation” or undocumented, including key deliverable
dates. In that same deal with National Geographic, we cut the deal
with their CEO and CFO, but then got handed off to 50 execution
people in the trenches: various publishers and editors at three
magazines, a cable channel, a website, a retail store and direct mail
list. All fiefdoms trying to grow their own businesses, with no clear
incentives to see iExplore succeed. I just assumed our senior level
contacts would be our internal champions company-wide. And, they
were to open up those doors, but it was ultimately up to the
execution people to fulfill any obligations. So, the devil is in the
details.

And, worth mentioning, negotiating is also about the intangible

things, like watching facial expressions, listening to tonal inflections
in their discussions and creative presentation of information that can
support your case, to determine where the real pressure points are,
and to assess when parties are bluffing, or not. When, I had to settle
old iExplore creditor debts for $0.10 on the dollar after 9/11/01, we
would have never been able to accomplish that without a draft
bankruptcy filing filled in, and the creditors seeing their name far
down the list, behind the senior creditors that would get 100% of
any liquidation monies, if the company filed bankruptcy (therefore
making $0.10 a better option than zero).

But, big picture, if you think it is important to make a deal, then get
the deal done without trying to carve every last penny out of it. As
an example, I thought the National Geographic strategic partnership
discussed above was worth 25% equity to them, but they dug in on
30%. I wasn’t going to quibble over that extra 5% equity stake, at
the risk of losing the deal altogether, when their brand association
and marketing support had to potential to double our business over
night. But, if you are far apart on important points to you, hold your
ground, and don’t flinch.

I hope you found these tricks of the trade useful to you in

negotiating your next deal.

Lesson #40: Focus! Focus! Focus! Build One

Business at a Time.
The other day, I had a Red Rocket client pitch their startup looking
for funding. The pitch went something like this. They were part
services company and part technology company. The technology
was both an online video platform and an advertising sales platform.
They had B2C and B2B components to their sales and marketing
plan. Their B2B sales were selling into entertainment, corporate,
government and university clients. They had revenues from both
product sales and advertising. And, they were convinced they had a
game changing business poised for success.

But, all I could think was the founder lacked focus. The skills
necessary to succeed vary wildly between services businesses and
technology businesses, or B2C marketing vs. B2B sales businesses.
And, clients in different industries have different end-product
requirements. And, they didn’t think of the channel conflicts of both
selling technology to advertising companies, while at the same time,
trying to compete with those companies with an advertising sales
model of their own. It was a mess indeed. And, when I
communicated that to the founder, all I got was a blank stare of
disbelief.

It is really an easy mistake for an entrepreneur to make. In those

early months of getting a business up and running, many
entrepreneurs float like dust in the wind, throwing a bunch of darts
up in the air, just to see what is going to hit. And, when people are
desperate for revenues from anywhere and anyplace to stop their
burn rate, they think that is the right thing to do. But, all it does is
create confusion for everyone and anyone: both internally with the
employees building the company and externally with clients trying
to understand exactly what your core strengths are. At the end of the
day, to be successful, you really need a very simple business plan in
a very targeted market with one key revenue stream. You can’t be
all over the place, and everything for everybody. Hence, the title of
this lesson: Focus! Focus! Focus!

I, myself, was not immune to these mistakes while I was a first time
entrepreneur building iExplore in the adventure travel space. At the
same time during the early years of the business, I was trying to
build: (i) a leading internet portal website; (ii) an adventure travel
agency; (iii) an iExplore branded tour operator business; (iv) a
corporate events vendor; (v) a fund raising events management
company; and (vi) an advertising sales representation company. It
was simple too much, with each business having different
requirements, pulling the company in different directions. It wasn’t
until we laser focused our business around building the largest
website in the industry, supported by an advertising revenue base,
that the bottom line profits really started to take off.

So, I challenge you to all study your current businesses and make
sure it is designed as simply as it can be for long-term success and
focus. If you cannot simply describe your business in one sentence,
it is too complicated.
Lesson #47: The Importance of Networking
The old adage, “It is not what you know, it is who you know,”
resonates particularly well for startup entrepreneurs. And, it holds
true across most all areas of a startup’s business, including driving
sales, hiring employees, raising capital and securing key
partnerships. Therefore, establishing, nurturing and mining a deep
network of relationships can often make or break the success of a
startup. I know many of you may be uncomfortable with
networking, but hopefully this post will help you understand the
importance of networking and the need to break down any barriers
between you and your network. Let’s discuss the various types of
networking opportunities available to you.

Firstly, when people think networking, they think attending events

to meet people that may be able to help them. This could be industry
specific events related to your business, or business task events
(e.g., strategy, marketing, technology) related to certain specific
business needs, or other events bringing together like-minded
individuals (e.g., fellow CEO’s, fellow startups). Do your best to
stay abreast of all of these types of events via your respective
industry trade associations, professional associations or local startup
groups with the calendars posted on their websites.

And, certainly, make time to attend the most important of these

events. I used to think time spent on networking was time away
from the business, and tried to avoid it. But, over time, I quickly
learned a strong network can actually help me build my business
faster than I could on my own, and should be a vital part of a startup
executive’s efforts. You never know what new client, investor,
employee or other business colleague will come out of events like
these. And, they can be a lot more productive than in-the-office
initiatives, given the face-to-face natures of these events.

But, you do need to be sensitive to investing your networking time

wisely, to get the biggest bang for your buck. When assessing in-
person networking opportunities, I try to have a good sense to: (i)
the expected size of the event (hoping to meet more people than
less); (ii) the quality of the attendees (hoping to meet more CEO’s
than lower level staff members); (iii) the location of the event (less
time-consuming to attend events in my home city, than having to
travel, if I can avoid it); (iv) the type of event itself (e.g., hoping to
avoid dinner events where locked into one table of people, instead
of roaming the room); and (v) the reputation of the hosting
organization (e.g., looking for the leading brands in the space to put
on the best events).

Equally importantly, I want to make sure I have a clear mission for

the event (e.g., what specific companies or executives do I want to
meet based on announced presenter or attendee lists made available
prior to the event). This often means trying to arrange a meeting
time with your desired targets prior to the event itself, which can
often be crazy bedlam and tough to find the people you are looking
for. And, keep in mind, you don’t always have to be the “hunter” at
networking events. Sometimes you can get in front of more people
faster, by being the “hunted” as a featured speaker or panelist at the
events. So, figure out a reason for you to be the “featured attraction”
(e.g., “one of the hottest startups in town”, “pro in online
marketing”), which can also save you on any event fees.

But, your networking efforts should not be limited to in-person

events. Networking has never been easier with the internet. You
should be an active user on networking sites like LinkedIn, Twitter,
Facebook or other sites or list serves specific to your industry or
location (e.g., The BuiltInChicago.org business networking site for
tech startups in Chicago). This means having a rich profile page that
positions you as an expert in your field, posting relevant news and
updates to your status updates and joining/engaging with the
relevant “sub-groups” within that network. But, remember, when
networking online, it should not be a “one way sale” to the
audience, it must be a “two-way conversation” to get the dialog
started. So, an example, answering forum questions (in a “non-
salesy” way) can also be a great way to meet new relationships.

We all know how busy you are as a startup executive. But, you
can’t bury yourself in your office, and you can’t be bashful when
building your business. Start building your network, and great
things (e.g., new clients, employees, investors, partners) are sure to
follow. And, don’t forget, networking is more than simply the
networking event itself: you are building long-term relationships
and need to follow up with these new colleagues after the event, and
over time. So, manage this network nurturing process accordingly.

Lesson #50: Do What You Love!! Passion

Drives Success
Passion is one of those intangibles that drives an entrepreneur, gets
them through the good times and the bad times, and ultimately
dictates the success of any startup. If you are not passionate about
what you are building, you might as well pack up your bags right
now, as your startup will never work.

Webster’s Dictionary defines passion as “an intense, driving or

overmastering feeling of conviction” or “a strong desire for or
devotion to some activity or concept”. I couldn’t have said it any
better. Passion needs to ooze from every pore of a startup
entrepreneur. This passion is usually instilled by some core
knowledge of the product or service that is being built, which
translates into clear domain expertise and first-hand knowledge and
confidence that you are heading in the right direction. This passion
also translates into infectious enthusiasm, which ultimately feeds
the energy and drive of every employee in your office. And, most
importantly, this passion is the glue that holds the company together
and gets it through its most difficult times.

When I launched iExplore, the whole business idea was conceived

based on my personal frustrations experienced while planning my
personal vacations as an avid adventure traveler. I wanted a “one-
stop shop” to look for all adventure tours in one place, I wanted the
confidence of buying from a trusted resource and I wanted the
flexibility to customize my itinerary and dates to my exact needs.
iExplore would fill the huge void in this highly-fragmented,
packaged-tour industry, and our passion to build a better customer
experience sparked the fire to iExplore ultimately becoming the #1
adventure travel website. So, my personal passion as an avid
adventure traveler and my personal experiences in the industry,
fueled the vision and direction of the company.

But, it was more than that. Because I was so passionate about

iExplore, I came to work jazzed up every day, and that enthusiasm
rubbed off on all of our employees. And, I was intentlyfocused on
hiring other impassioned adventure travelers that shared the
company vision based on their own personal adventure travel
experiences. It was like the iExplore staff was a team of whitewater
rafters, all paddling in unison to avoid the potential business hazards
of the rushing rapids, because, in fact, we all were whitewater
rafters in real life. So, our personal and business passions had
become one, making for a very powerful combination and recipe for
success.

And, had the iExplore team not had passion in the wake of 9/11/01
(remembering the company’s dire straits in Lesson #29), the
company would have never survived. Believe me, it would have
been a lot easier to close the business and move on from the
carnage. But, we were all passionate about what we were building,
knew this was a short-term hurdle and that we were committed to
living and fighting another day. A business only fails, when you
stop trying. And, passion was the lifeboat that carried us through
those dark days.

Also, worth mentioning, there is no question that you are going to

be a lot more passionate about your own startup, than you would be
about someone else’s startup. I lived for iExplore and bled for
iExplore for 10 years of ups and downs. I can’t say I would have
done the same for another business that was not “my baby”. So,
keep that in mind in your hiring practices, to find people that are
equally enthusiastic about what you are building, and motivating
them with equity incentives to share in your collective successes.
Or, when looking to join another startup, make sure to find products
or services that you are truly passionate about, and which are
willing to reward you for your hard work and effort.

I used to close every company meeting at iExplore with a question:

“What are we building?” And, like a football team breaking out of a
huddle, the staff’s response was loud and clear: “GREATNESS!!”
Passion cannot be taught, it has to be instilled into the DNA of your
entire company, starting with and fueled by yourself: the Chief
Cheerleader.

Lesson #71: Launch Fast! Fail Fast!

A few key words of wisdom I give entrepreneurs is: (i) launch fast;
and (ii) fail fast. I’ll explain more of the guts of this guidance
below.

Launch fast simply means figure out a minimal viable product

(MVP) and get it into the market as soon as possible. Too often an
entrepreneur wants to build a “Rolls Royce” solution with all the
bells and whistles that are in their head, instead of simply launching
a functional “Ford” to start, and evolving to the “Rolls Royce” over
time. The MVP advantages of the “Ford” is: (i) it is less expensive
to build with your limited startup capital; (ii) it can get your product
in the market faster, before your competitors do; and (iii) it more
quickly allows for consumer testing, to ensure consumers really like
the core service and truly need the additional luxuries that would get
built into the “Rolls Royce.”

Fail fast simply means you want to learn whether or not your model
is working, and has a reasonable chance for profitability and long
term success, sooner than later. Too often an entrepreneur: (i) hasn’t
clearly identified the key success metrics for their startup; (ii)
doesn’t put the proper tracking and processes in place to ensure
such success metrics are met; and (iii) hangs on trying to keep a bad
idea on “life support” for too long, simply because they can’t walk
away from their “baby”. All that does is continue to invest “good
money” after “bad money”, and exacerbates your pain and capital
lost, when you ultimately have to shut the business down. So, make
sure you are clear on your ultimate success metrics and pull the plug
sooner than later, as soon as it becomes clear you are not heading
towards long-term success.

Too often, an entrepreneur is afraid to fail, and unnecessarily

prolongs their misery. The sign of a smart entrepreneur is one that
does not get too emotionally invested in their idea (to being blinding
beyond the point of rational business judgment) and knowing that
failing is OK, allowing you to “fight another day”, albeit in a new
startup or different direction that has a better chance for long-term
success.

Lesson #85: Tap Into Your Local Startup

Ecosystem
I was at Demo Day for a class of ten startups in the Excelerate Labs
excelerator program. It was really a great event at the House of
Blues with several hundred entrepreneurs, investors and startup
advisors in the audience. And, the energy in the room was
infectious, with everyone wanting to see these companies succeed,
and willing to do whatever they could to help. This included Rahm
Emanuel, the mayor of Chicago, making a guest appearance saying
he was committed to helping the local startup ecosystem create
more jobs in Chicago, including a warning to Silicon Valley and
New York, to “watch out . . . Chicago is coming.”

But, despite all of this excitement in the room, one of the highlights
to me was the introductory and inspirational speech by Joe Born, a
serial entrepreneur and Excelerate Labs mentor in Chicago. Joe is
currently the CEO of Neuros Technology and has had many
successful startups in his past. And, the summary of his speech was:
he could have never achieved the success that he did without a
robust supporting cast within the Chicago startup ecosystem.
Whenever he was knocked down, there was always someone there
to help pick him up and brush off the dust, giving him the additional
motivation to get back in the fight. The point being, us
entrepreneurs should never feel like we are trying to move
mountains by ourselves. There is always someone you can tap into
that has been in your shoes before, who can provide their guidance
to help you succeed and navigate any challenges you may be
experiencing.

When we talk about a “local startup ecosystem”, we are talking

about tapping into all the people in your market that are directly
involved in working with startups. This includes other
entrepreneurs, venture capitalists, angel investors, lawyers,
accountants, consultants and bankers. And, it includes other local
entrepreneurial organizations like incubators, accelerators,
universities, industry associations, government entities, chambers of
commerce, professional networks or big corporations making
investments in innovation.

And, for us in Chicago, this ecosystem has never been stronger than
it is today. I only wished I had an ecosystem like this to tap into
when I was starting up iExplore back in 1999, when Chicago was
the “flyover” city, compared to finding startups on the coasts in
Silicon Valley or New York. This includes all the tremendous
efforts of entrepreneurial groups like the Chicago Entrepreneurial
Center, Illinois Technology Association, TiE Midwest, Illinois
Venture Capital Association and Built in Chicago. And, the
entrepreneurial clubs within business schools and engineering
schools at Northwestern, U-Chicago, UIC, IIT, Depaul and Loyola.
And, all the venture investments by New World Ventures,
Lightbank, i2a Fund, OCA Ventures, MK Capital, Apex, Merrick,
Origin Ventures, Baird, Illinois Ventures and others. And, the angel
investor networks at Hyde Park Angels, Cornerstone Angels,
Heartland Angels and Wildcat Angels. And, the startup lawyers,
like Bart Loethen, Scott Glickson, Michael Gray, Bruce Zivian,
Frank Ballantine and Craig Bradley. And, startup advisors like Red
Rocket, Color Jar, Strongsuit, Venture Lab, AEGIS and
MidVentures. Incubators and accelerators like Sandbox, Excelerate
Labs, Tech Innovation Center, ScaleWell and Tech Nexus. And,
local events like Tech Week, Lean Startup Circle, BNC Tech Pitch,
Big Idea Forum, Founders Institute, Chicago Innovation Awards
and Funding Feeding Frenzy. And, startups like Groupon, Grub
Hub, Sitter City, Clever Safe, Braintree, Mu Sigma and others,
whose halo effect on the local market have put Chicago on the map
in a bigger way, attracting outside investment from the bigger
venture funds on the coasts.

I applaud you all, for doing your part to helping make Chicago one
of the best cities to start a new business and creating an amazing
startup ecosystem in the process. Us entrepreneurs couldn’t do it
without you.

I encourage all of you to tap into your local startup ecosystem, and
greatness will surely follow.

Lesson #86: Perception Often Outshines

Reality
Sometimes, there can be a lot of “smoke and mirrors” around a
startup. You may have one startup with a great idea and very
competent team, get overlooked by another startup with a lesser
idea and no track record. Why is that? The answer is simple:
perception can often outshine reality. Below are a few examples of
what I am talking about.
Investors and partner/customer prospects tend to put a lot of weight
around the “intangibles” in assessing a business: (i) is the company
the next Facebook (sexy) or a widget manufacturer (not sexy); (ii)
did the CEO graduate Harvard (huge pedigree globally) or Wayne
State (unknown outside of Detroit); (iii) did the head of marketing
used to work at Google (a boom) or Pets.com (a bust); (iv) are the
company’s investors Kleiner Perkins (respected VC) or friends and
family (unknown angels); (v) does the company have customers like
McDonald’s (known Fortune 500 brand) or Susie’s Diner (unknown
small business); (vi) does the company have a strategic partnership
with Discovery Channel or nobody you have heard of before; (vii)
does the founder have an outgoing A-type personality (that jazzes
you up) or a demure B-type personality (that puts you to sleep); or
(viii) is the company based in my home town (easy to meet) or half
way across the country (hard to meet).

And, these initial perceptions are not always justified. As example:

(i) that widget manufacturer may be able to capture 33% market
share in a $1BN market with very little competition, compared to
trying to knockoff industry leading Facebook; (ii) Wayne State is
one of the best medical schools in the country, and is a perfect
school for a medical-related startup; (iii) the Pets.com marketer led
grow from zero to 5MM visitors and left the company a year before
it collapsed; (iv) the friends and family investor also happens to be
the former Chairman of Expedia, perfect for a travel startup; (v) it’s
a lot easier/faster to close sales for a lot of Susie’s Diners than try to
bag slow-moving Fortune 500 elephants; and (vi) that B-type
personality may also be a 150 I.Q. genius with a game-changer idea,
compared to that A-type personality selling you on unproven
assumptions.

It is not fair that this happens, but the reality is, these “intangibles”
can often rule the day. And, lack of these “intangibles” can make it
an uphill battle for your startup to get off the ground. So, do your
best to make sure you have all your T’s crossed and all your I’s
dotted, from a perception basis, as well as a business basis, before
approaching prospective investors or partners/customers. And, if
you can’t fix perceptions, for whatever reason, figure out how to
turn your perceived weaknesses into communicated strengths,
tackling them head on.

And, worth mentioning, perception can sometimes help you get

through a really rough jam. Let’s say your business is running out of
cash and is going through tough internal pressures. It is important
those pressures stay limited to insiders of the company. It should
never seep out into your public facing persona. Your
partner/customer prospects don’t need to know that is happening.
As an example, when iExplore was going through its very difficult
time driving travel revenues after 9/11/01 (which almost put the
company out of business), we always put on a “business as
usual/growth story” into our public-facing messaging with
prospective customers/partners. Why? Because perception can
outshine reality. Had news of iExplore’s weak financial position
ever leaked to our customers/partners, they would have stopped
buying from us or working with us, further exacerbating the
problem, putting the company into a death spiral.

Everyone initially wants to dance with the prettiest girl at the ball,
even though she may have an I.Q. of 75. But, people can’t assess
I.Q. based on a first glance from across the dance hall. So, make
sure you put on your best evening gown and ruby slippers, so you
too can get that first dance, and wow them from there.

Lesson #87: The Art of Decision Making

A startup executive needs to be knowledgeable, intuitive, receptive,
nimble and flexible in their decision making process. This lesson
will provide a few recommendations for mastering this art of
decision-making.

Knowledgeable. Having a core base of information to work with is

pretty self-explanatory in any making any decision. Making a good
decision requires you have a solid grasp of the key variables at
hand, and which of those variables have the highest chance of
leading to your most desired outcome. If you don’t feel you have
enough information to make a good decision, it is up to you to ask
the right questions to help you address that decision. And, it is up to
you, to know your own personal limitations, seeking internal or
external assistance to help you formulate a well-thought action plan.
As a rule, make sure you have enough information to prioritize your
decisions around which actions will most “move the needle” in
terms of driving or protecting revenue.

Intuitive. Sometimes, being smart is not enough to make a good

decision. Some decisions cannot be easily researched ahead of time.
And, in those cases, you will need to follow your gut instincts. Nine
times out of ten, your gut instinct will always pull you in the right
direction. I call it having a “spider sense”. Learn to nurture and
follow those instincts, even if it is contrary to everything else you
are hearing from others. And, don’t be afraid of making a mistake in
the process. Sometimes you just need to go for it.

Receptive. Decision-making should not only be a self-determined

process. If you have surrounded yourself with a smart management
team, investor group, board of directors, mentors or other advisers,
tap into the collective experience of the group to help you better
formulate your thoughts. And, more practically, if you don’t solicit
your team when making key decisions, or listen to and implement
their new ideas presented along the way, you will alienate them and
make for a dysfunctional team.

Nimble. It is more important to move quickly, than to wait months

trying to research the answer to a problem with 100% certainty. If
you can come up with an A- answer in four weeks, and an A+
answer in four months, go with the A- to get a perfectly acceptable
solution into the marketplace three months faster. Once again, don’t
get bogged down with too many details, afraid of making a mistake,
that the market opportunity passes you by in the process.

Flexible. Do not dig in on making your original idea happen, if the

original idea is not getting any traction. The original idea may not
be getting traction for a reason, and you need to be flexible enough
in your thinking, to take whatever feedback the market is telling you
about your product or service, and focus on the advice or input that
the market most desires. Or, if market conditions make your old
model unsustainable, quickly figure out a new model. As an
example, if iExplore had stayed a 15% travel agent model in the
wake of 9/11/01, we would have gone out of business. It wasn’t
until we became a 35% margin tour operator and online travel
publisher for additional revenues from advertising, that our
profitability finally took off.

Keep in mind, often there is more than one right answer to a

problem. And, being a good decision maker involves cutting
through the clutter, and prioritizing the best of these options (most
usually around driving the most revenues as possible).

Lesson #90: Proper Business Etiquette for

Startups
Being a startup requires you to pay extra special attention to proper
business etiquette, to build trust with established companies and
increase your odds of closing the deal. Below are a few suggestions
to help present you and your company in the right light.
Know Your Audience. Whenever you are pitching somebody, you
want to make sure what you are pitching is relevant to that business
and that person. For example, if you are selling a $200,000 CRM
package that is most likely only affordable to larger companies, so
don’t waste your time pitching it to smaller companies. Or, if you
are pitching cash management services, it is best to pitch that to a
CFO, not a CEO. And, in that cash management example, the CFO
would be right for a smaller business, but maybe you would have
more success with a Treasurer in a bigger business, that is closer to
that topic in their day-to-day job. Prioritizing your company calling
lists, and your optimal executive targets therein, will save a lot of
wasted time, both for you and your prospects.

Don’t Harass Prospects. There is nothing more annoying than the

pesky salesperson that won’t leave you alone, or is calling every
other day looking for updates. That is the sure way to kill a deal.
Understand the normal pace of business, and that getting a deal
done can take months, or even years, depending on your product.
So, be sensitive to how frequently you are reaching out to a specific
individual. And, if you don’t get any response from them after three
tries (perhaps spread out over 3 to 6 weeks), move on to the next
person.

Listen More Than You Talk. Often times, the biggest mistake an
entrepreneur has is having “diarrhea of the mouth”, sharing their
vision and rambling on about the features and functionalities of their
product or service. It is much better to go into a meeting with your
ears wide open, not your mouth. Ask probing questions that will
help you better learn the exact needs of your prospective client.
Then, once you know exactly what they are looking for, pound
home the key assets of your business, which directly address their
sweetspot.

No Bravado—Be Respectful. Yes, I know, us entrepreneurs are all

changing the world with the hottest new product or service that is
going to revolutionize the way business is done. It is good to have
excitement and confidence. But, sometimes, that gets dangerously
close to arrogance or a know-it-all attitude, which can immediately
put off the other party. You need to respect that the person across
the table has years of experience in their industry, does not want to
be perceived as being stupid or out of touch on current trends and
certainly does not want to be embarrassed in front of their boss (in
case they are in the room). You got the meeting for a reason—they
must have liked what they saw at first glance. So, ease up on the
machismo and focus on learning and serving their needs!

Work Towards the Middle. The worst negotiating position a startup

can have is “take it, or leave it.” As a startup, you really don’t have
as much leverage as you think you have. The bigger company
always has the best cards at the negotiating table, and they are pros
at using them. And, they want to think they are getting the best deal
they possibly could (just like you). So, always do your best to
negotiate towards the middle, and only dig in on the really
important things. Be sure to re-read Lesson #39 on The Art of
Negotiation.

Manage Your Social Footprint. Companies will research everything

and anything about a startup before they cut a deal, since they don’t
want to make a mistake or “get in bed” with the wrong player. That
includes researching the executives’ social footprints on Twitter,
Facebook, LinkedIn and otherwise. So, keep your tweets and posts
clean and professional at all times, and consistent with the image
you have presented to them to date. As an example, I have shut off
my wall on Facebook, so I won’t be associated with anyone posting
inappropriate information that is not in line with my personal brand
image. So, no crazy pictures of you engaged in drunken revelry with
your friends!

Dress The Part. Always research the dress code of the other party
and dress equal to or better than they do. You never want to show
up in jeans to a company that works in business casual. The better
you dress, the more professional you will come across, increasing
the confidence of the other party in doing business with you. So,
hide the tattoos, take out the piercings and polish up your wingtips.
Remember, intangibles, like the way you present yourself, really
matter.

Lesson #92: Building Your Personal Brand

As a startup executive, your personal brand is as important to you as
your business brand, to instill trust with prospective partners.
Today’s lesson provides a few suggestions on how best to increase
your personal brand.

Strong Track Record. The more you can prove your historical
success, the better odds people will bet on your future success. Did
you graduate a name brand school? Did you get good grades there?
Did you work for name brand companies in your past? Did you
have a quantifiable level of success there? Have you done a startup
in the past, and if so, what was the outcome for its investors? Have
you won any relevant awards? The answers to these questions can
help build your credibility.

Visibility as an Expert in Your Industry. Where you can, you want

to be perceived as a trusted authority in your space. Are you getting
quoted by major trade magazines? Are you speaking at any trade
events? Are you writing a blog with high quality content? Do you
have a large following on Twitter, Facebook or LinkedIn? What
level of connections do you have in LinkedIn (e.g., thought-leading
CEOs or entry-level staff)? What is your Klout score? The answers
to these questions further emphasize your expertise in the space.

Strong References. It is less important what you have to say about

yourself. It is much more important what other people have to say
about you, especially mutual colleagues that a prospective partner
already trusts. Are your references publicly published on LinkedIn?
Do you share any colleagues with the partner on LinkedIn that can
sing your praises? If so, great. If not, do you have a list of credible
references that can sing your praises, understanding your former
CEO boss is much more credible as a reference than a secretary in
that business or one of your unknown friends.

Clean Social Media Footprint. Make sure you clean up all your
public facing profiles in the social media world. You want to make
sure your persona is professional and trustable at all times. So, no
crazy party pictures, swearing or liking/publishing offensive
content. Potential partners will do their home work on you, and you
do not want to leave them with any excuse not to trust you.

Clean Search Results. Same as keeping your social media footprint

clean, you want to make sure partners will not stumble on anything
offensive when they do a Google search using your name or
company. So, do a Google search on yourself, and make sure
nothing published out there you don’t want prospective partners
stumbling on. If you can, reach out to such sites to take down such
pages. If you can’t, make sure you have clear explanations to such
topics if the question comes up.

Clean History. Having a free and clear criminal history and a good
credit score (personally and professionally) are a must for when a
prospective partner does their background checks on you and your
business. This should be pretty self-explanatory.

The Way You Carry Yourself. How you dress, how you talk, your
personality style, your listening skills, your professionalism, your
smarts all impact your personal brand. So, play the part required of
you in order to get the trusted attention of your prospective partners.

Hopefully, you will follow these words of wisdom, and your

personal brand will sparkle.
8 Sales

Lesson #21: Setting a Sales & Marketing Plan

For Your Startup
Sales and marketing planning are my favorite part of building any
company, as they are the key drivers of the company’s revenues.
The lack of a solid sales or marketing plan is typically the #1 reason
a business fails, as any shortcomings here will result in revenues
and profitability falling short of goals. So, this area requires intense
focus for any startup to succeed.

First of all, what is the difference between sales and marketing.

Sales is typically human driven, with a salesperson introducing your
company to prospective customers. These salespeople can either be
inside salespeople, residing in the home office, or outside
salespeople, traveling to clients’ offices. What drives the ultimate
success of your sales plan, is the quality of the salespeople in terms
of thier training, skill base, and Rolodex. So, hiring the right
salespeople with the right relationships will make or break your
efforts here. In addition, it is critical to make sure these people are
appropriately incentivized with a meaningful commission plan for
closing sales and hitting their targets.

Marketing is typically media driven, where an advertisement or

other communication is introducing your company to prospective
customers. Marketing can be driven via multiple channels, including
the internet, social media, word of mouth, print, television, radio,
billboards, events and direct mail, to name a few. What drives the
ultimate success of your marketing plan is a smart marketing team
that has properly studied your prospective customer demographics,
and placed the appropriate marketing messages in front the
appropriate media placements where these customers are looking.
So, hiring the right marketing team with proven experience working
within your industry and desired budgets will make or break your
efforts here.

Most B2B companies are sales driven organizations, and most B2C
companies are marketing driven organizations, with numerous
examples of companies overlapping between the two. The reasons
most B2B companies are sales driven are three fold: (i) they are
usually dealing with a much smaller base of customers, more easily
reachable by a sales team; (ii) corporate customers are typically
relationship driven, and want the comfort of working with a
salesperson that best understands their needs; and (iii) the average
transaction size can get very large, often into the millions, which
needs the comfort provided from a face to face meeting to close a
sale (e.g., the trust factor).

So, for example, if you are an auto parts manufacturer, your

prospective calling list in the U.S. is pretty small, with GM, Ford
and Chrysler your primary prospects. But, as you can imagine,
given the size of those companies, tons of auto parts manufacturers
are trying to get their attention, since any one order can make or
break their business. And, only a saleperson with solid relationships
in the industry can break through that clutter, get the attention of the
key buyers and closes those sales.

The key downside of a sales driven organization, particularly for

large ticket orders, is the lead time can be very long before
transactions start to close (e.g., 6-24 months, depending on the
product). So, it will take a lot of money to keep the business funded
until revenues start driving, especially when trying to break into big
Fortune 500 companies, where established relationships and
processes are hard to change.
The reason most B2C companies are marketing driven organizations
really comes down to one primary reason: media is the most
efficient way to get in front of millions of prospective customers. It
would not be practical building a salesteam to call on 300MM
Americans. Media comes in multiple forms and reach, from
500MM unique monthly visitors on websites like Google, YouTube
or Facebook, to 100MM households on cable channels like
Discovery Channel or History Channel, to 10MM people that drive
by a certain billboard each month to 5MM people you can direct
mail to the National Geograpic subscriber list to 1MM people that
read the Chicago Tribune. You get the point, lots and lots of
different marketing options, based on your desired medium, reach,
demographics, frequency and budget.

As a startup, your marketing budgets typically can’t afford that

thirty second ad on the Super Bowl for $3MM, despite almost one
billion people watch the game worldwide. You need to be much
more frugal in your initial spend, looking for cost effective (or even
free) tactics. Especially since you want to test all tactics first, with
small budgets, to make sure they are working as planned, before
hitting the accelerator and spending a bigger budget. Here you are
talking about doing search engine optimization of your website for
free inbound traffic, keyword based advertisements in Google’s
search results on an affordable cost per click basis, leveraging the
powerful word of mouth benefits of social media via Facebook or
Twitter, affililate or cross marketing relationships with similar
businesses, and PR based communications, to name a few.

The downsides of marketing are: (i) it can get expensive for any
budget, so you will need to have cash resources to spend; (ii) the
results are not always perfectly attributable to a specific marketing
piece, so you may not be able to know with 100% certainty which
tactics are working better or worse than others; and (iii) we are
living in a world where small budget startups are competiting with
big budget brands for the same marketing real estate.

Lesson #25: How to Structure Your Sales

Team & Procedures
Along with your marketing efforts, your sales strategies will make
or break the success of your startup, as they are equally critical to
your abilities to drive revenues. Today, we will tackle (i) how best
to structure your sales team; and (ii) how best to design internal
sales procedures. Our next lesson will tackle sales incentives for
motivating your team.

There is no one right answer on how best to structure your sales

team. It is largely dependent on the size of your team, the
complexity of your product, the size of your average transaction and
what works best for your industry. As a rule, sales teams are
structured either as: (i) inside sales teams based in your home office,
or outside sales teams working on the road; (ii) inbound call
handlers vs. outbound callers; and (iii) geographically split based on
regions of the country, or split on other industry-specific verticals
(e.g., corporate clients, government clients, university clients).

The inside vs. outside decision typically comes down to complexity

of the product and the average transaction size. It will be hard to
close a $1MM complicated technology sale, without face-to-face
contact to educate the client and instill trust in your company. On
the other hand, selling a $199 airline ticket can easily be done over
the phone, since people are pretty clear on what they are buying and
it is a relatively small transaction size.

The inbound call handler vs. outbound callers decision is largely

tied to the best marketing tactics for your business. If you are a big
online travel site selling airline tickets, the customers are typically
coming to you researching air itineraries on your website, and then
calling your customer sales desk with any questions or to book the
flight. On the other hand, especially for products that consumers are
not naturally coming to you, telemarketing sales tactics are
employed. And, we all know how annoyed we get by telemarketing
calls, especially around election time. But, sometimes,
telemarketing can be tastefully engaged if relevant to a consumer.
For example, “I was doing your neighbor’s landscaping yesterday
and saw that you needed your flower beds weeded.” Or for repeat
clients: “we last washed your windows a year ago, and would like to
schedule this year’s service?” Both examples are very tasteful, and
should not upset the listener given its relevance to a real need they
may have.

The geographic vs. client vertical split decision typically comes

down to the size of the prospective market, and the varying needs of
a particular industry vertical. If you are serving 1,000 prospective
clients, you could easily split sales efforts around Eastern U.S. sales
and Western U.S. sales. If you are serving 1,000,000 prospective
clients, your geographic splits could get down to the city level.
Geography splits work fine, as long as there are an even mix of
clients in each region. But, let’s say you are selling products to the
entertainment industry largely based in Hollywood, maybe you split
your sales team based on film producers vs. television producers vs.
gaming producers, all based in Los Angeles. Or, in another
example, let’s say you are selling digital video technology, and the
needs of a film studio (e.g., entertainment driven ) are different from
the needs of a corporate video client (e.g., marketing driven) and the
needs of a government video client (e.g., intelligence driven). In that
scenario, different user cases and needs may require expert
salespeople just around that user case.

As for designing internal sales procedures, a couple key points.

First, you want your best sales people spending all their time closing
sales. So, often times they may need an assistant to be helping with
their cold calling efforts. The assistant makes the 100 outbound cold
calls looking for viable leads, and then hands off the 10 viable leads
to the salesperson to close. A very efficient use of everybody’s time,
if your budgets can afford it. If not, the salesperson is making their
own cold calls, which may be your only option (but not the most
efficient use of their time or your budget).

The other key procedural point is the speed at which you respond to
a new lead. The faster you respond to a new lead, the higher your
odds you close that lead, before one of your competitors calls the
customer back. At iExplore, customers would reach out to three or
four tour operators while doing their research, and our sales
conversion rate was directly proportional to the response time of our
sales team (e.g., one hour response closed at 25% rate, 8 hour
response closed at 10% rate). And, if it was that dramatic for a four
week sales cycle product, imagine the implications for a “real time”
sales cycle product (e.g., I need business cards for a meeting
tomorrow).

The final procedural point is the frequency at which you follow up

with old leads. I can’t tell you how many startups simply deal with
new leads and forget to follow up with old leads, or worse yet,
forget to follow up with repeat past clients. It is critical you use
some type of CRM to catalog all your leads as they come in, and set
follow up schedules for each. If you have the budgets to afford an
expensive product like Salesforce.com, great. If you don’t, often
times a simple Excel spreadsheet will accomplish your goal just the
same.

In terms of frequency of the follow up itself, it is directly

proportional to the immediacy of the sale. If a client is calling for a
July 1st vacation on June 1st, you better follow up with them in the
next day or two, as they need to book their trip quickly. If a client is
calling to book travel for a 2013 family reunion on June 1st, 2011,
you can probably follow up with them weekly or monthly given the
long lead time before the trip. But, the key point: it is critical you set
up an operational procedure to follow up with all old leads until
they close or go dead, as well as a process for past repeat clients to
stimulate a repeat purchase in a reasonable repeat sale timeline (e.g.,
their once a year summer vacation).

Lesson #26: Designing Sales Incentives to

Motivate Your Sales Team
In our last lesson, we discussed how to structure your sales team
and procedures. Today, we are going to tackle the other part of
designing a winning sales strategy: designing motivational sales
incentives for your team that accomplish your internal business
goals. So, there are really three pieces to this puzzle: (i) what
metrics do you want your sales team focused on for your business
needs; (ii) what incentives will get the salesperson excited about
achieving that goal, while working for your business; and (iii) what
is the frequency of paying out those incentives. We will tackle each
of these points below.

You may be thinking that revenue targets are the most logical and
easy way to design your sales plan. And, often times they are. But,
if you simply give your team a sales target, they may not be paying
attention to other important metrics like the profit margin on their
sales, or the conversion rate as a percentage of leads they are being
given. When at iExplore, we actually were driving our sales team on
the latter, since if they were driving gross profit and converting a
high percentage of the leads we were sending them, the top line
revenues would naturally follow. So, figure out what key metrics
drive your business, and get your team religiously focused around
those metrics, which may or may not be revenues for your business.
There is a second piece to this, which is incentivizing the team
based on their individual performance vs. the company’s overall
performance. There could be scenarios where the company has a
bad month overall, but an individual does great, and vice versa. In
my opinion, it is important to reward good individual behavior, in
all scenarios. So, at iExplore we said that 50% of the incentive
would come from individual performance, regardless of company
performance, and 50% of their incentive would come from company
performance, regardless of their individual performance. That did a
good job of balancing the ebbs and flows of both the individual’s
and the company’s sales cycles.

In terms of the incentive itself, every individual is driven by

different things. Most people like cold hard cash. But, others may
psychologically be better driven by a free vacation or new iPhone or
whatever. Or, maybe they are trying to earn equity options in your
business, if available. It is the job of the sales manager, to figure out
what makes each individual tick, and tailor a plan that meets
everyone’s goals. I do not think a “one-size-fits-all” strategy is the
best. I typically will set the overall incentive plan based on cash,
and use trips or prizes as “bonus” incentives for the sales leader in
each sales period, letting the sales leader pick whatever they want
from a menu of options, which they had input in designing in the
first place.

In terms of the percentage of base salary vs the percentage of

incentive income, it really varies based on the complexity of your
products and difficulty in hiring replacement staff. If you are selling
something simple, like window washing, most anybody could be
trained to sell it. So, maybe your salesperson has a $40,000 base
salary and a $20,000 incentive if they hit reasonable goals. If you
are selling aerospace engineering components with big government
contracts on the line (much tougher to find expert staff), you may
have to pay that salesperson a base salary of $250,000, with
incentives which could double that. Do competitive intelligence to
determine “market rate” for your industry, and plan around that.

In terms of the frequency of the sales incentives, there are plusses

and minuses of monthly vs. quarterly vs. annual incentives. If
monthly, the individual will appreciated seeing cash faster, but it
doesn’t leave any real “hooks” to stay with the company. The
minute they find a better job, they could leave. On the contrary, an
annual plan will set the long term “hooks” (e.g., won’t leave mid-
year to lose their commissions), but the individual may not like only
seeing checks one time a year.

The way to accomplish a happy middle ground is the following.

First, you could have a portion of the plan (e.g., individual-based
incentives) paid monthly or quarterly, and the other portion of the
plan (e.g., company-based incentives) paid annually. In addition, if
an annual plan is desired, perhaps there is a way for individuals with
near team cash needs to take a “early withdrawal” on their annual
commission based on performance to date, if there is some crisis
they are dealing with at home (e.g,. unexpected medical bills). The
more you work with your sales team to help them acheive their
individual needs, the more they will feel that you care about them,
instilling long term loyalty to you and your business (which is the
ultimate goal).

Worth mentioning, I always like the sales team to have a visual

picture of where the company is and where the individual is in terms
of their monthly sales goals. Like a big pie chart on the wall that
gets filled in each day the closer we get to the goal. Or, a daily or
weekly sales report by team member, which will create a healthy
competition between the team members, and let underperformers
know when they need to pick up their pace.

But, the most critical overriding point is: in whatever sales incentive
plan you put in place, make sure it works for both the company and
the individual. Nothing will demotivate a sales team faster than an
individual working their ass off, and not seeing any fruits for their
labor. And, we all know how hard it is to recruit good sales people,
and keep them on staff. So, think long term, not short term, with
your sales team, even in the bad months.

There is no single right answer here. Solicit input and reactions

from your team and tinker with it over time to find the right long
term package that works for everybody. Good luck!

Lesson #98: Securing a Government Contract

The U.S. government is the largest buyer of products and services in
the world. In 2009, the federal government set aside $422BN to
spend with small businesses. But, only $96BN (22%) was actually
awarded to small businesses (the rest going to large corporations),
given the lack of properly registered and qualified small businesses
to work with. So, if your product or service can be sold into the
government channel, it only makes sense to properly register your
business to do work with the government. Especially, given how
large government contracts can be, in terms of driving material
revenues for your business.

In order to qualify as a small business to do work with the

government, you need to: (i) have done at least $25,000 in annual
revenues in the last two years; (ii) not employ any W2 government
workers; and (iii) not source any of your products or services
outside of the U.S., unless such countries are listed on the approved
U.S. trade partners list.

If you qualify, then you need to file a U.S. Federal Contractor

Registration (CRR) and negotiate preferred, 5-year government
pricing with the U.S. General Services Administration to get on its
GSA schedule. The government typically does not work with any
vendor that is not on a GSA schedule. And, unless you pay up to
expedite the process, it can take months or years to get through the
entire approval process. So, the sooner you start, the better. You can
learn more about the GSA approval process from this useful tutorial
fromContracting Services Group, a third party consulting firm that
can assist you through the process. There is also useful government
contracting information on the Small Business Association website.
For CRR registration consulting assistance, check out US Federal
Contract Registration.

Once you are approved, you will be added to the GSA

Advantagewebsite, an easily searchable database of all GSA
approved vendors that government employees use to find vendors
by product or service.

But, you don’t want to be reactively waiting around for government

leads to come in. Given the heavy competition to get these
contracts, you need to proactively go after these government leads.
One place to look for such government contract leads is at the
Federal Buying Opportunities website, which has a database of over
40,000 active federal contracts, easily searchable by product or
service. There are also independent websites, like B2Gmarket.com,
Bloomberg Government and GovDirections.com, that may be
helpful to you here.

So, now that you better understand the government contracting

process, you can hopefully tap into this huge market.
9 Operations

Lesson #33: The Importance of Customer

Service
This may sound pretty obvious, but don’t take your customers for
granted. They are your lifeline, especially for a startup, and you
need them to help serve as good references and to spread positive
word of mouth. Today, I will give you a couple examples from
iExplore of how offering premium levels of customer service,
helped to build long term customer loyalty and drive repeat sales
and word of mouth for our business.
Go The Extra Mile: iExplore had sold a horseback riding trip in
South Africa to a mother and daughter. On the day of departure
from the U.S., we had a panicked call from the mother while at JFK
airport that her crying daughter had forgot her horseback riding
boots at home, and wondered if there was any way we could help.
We could have said, that is not our job, we just sell travel. But, we
took the extra effort, tracked down a horseback gear retailer in Cape
Town, and had a pair of boots waiting for the client upon their
arrival at their hotel. The client was thrilled.

Add A Personal Touch: You always want your customers to feel

special, like they are getting something above and beyond the norm.
So, when we were selling tours, we would always include
something in the client’s trip, that they were not expecting from
their purchased itinerary. For example, maybe it was a bottle of
champagne and fruit basket waiting for them upon their arrival. Or,
a special private dinner in a tented camp while on safari. Or, a free
tour book with their pre-departure materials. Pleasant surprises go a
long way to instilling long term loyalty.

Own Up To Your Mistakes: When things go wrong with your

customers, how you go about resolving these errors will dictate
whether or not the customer will buy from you again. If you show
you sincerely care about them and making right by them, that is
almost more powerful to long term loyalty, than had nothing gone
wrong in the first place. As you can imagine, when selling travel,
there were a lots of places where the trip could go awry (e.g,.
missed transfer, bad hotel, poor food, unpleasant guide, missed
activity). And, when they did, we would compensate the client with
cash refunds and additional perks to make up for it.

Take Responsibility for Your Suppliers: In one extreme example of

customer service, one of iExplore’s sub-contractors in Alaska had
gone out of business, and the client had already passed through their
monies to the tour operator for their trip, scheduled to leave the next
month. It was a double problem of a client losing all their money
and the client losing their valuable vacation time in Alaska. Even
though our contracts clearly stated issues like these were not
iExplore’s responsibility, we in fact found another tour supplier and
paid for the trip out of iExplore’s pocket. That customer was very
grateful, and we had numerous repeat bookings from that family.

Get Yourself Directly Involved with Customers: There is no better

way to learn about your product and interact with your customers,
than to put yourself directly into the customer experience. At
iExplore, we had a “Travel With Our CEO” promotion, where I
personally led trips with 8-10 customers at a time, in various
destinations around the world. It was a way for me to better learn
about the business and our customers, and a way for our customers
to get a special experience of traveling with the head of the
company. So, a win-win for all involved.

A good customer experience, will lead to 2-3 new customer

referrals from positive word of mouth. And bad customer
experience, will lose you 8-10 referrals from negative word of
mouth. And, your litmus test to how well you are doing on customer
service, is how quickly your repeat sales and word of mouth sales
are growing. So, make sure premium customer service is instilled
into your company’s DNA from day one.

Lesson #41: Security Considerations for Your

Startup
Security is certainly not one of my glitzier topics, but it is equally
important to discuss for any startup business. And, security has
multiple levels: (1) the physical facility and files; (2) electronic files
and internal systems; and (3) your website and other externally
accessible systems.
When locating and setting up your office, make sure that: (i) the
building is secure, with a doorman or keypad entry; (ii) your office
unit is secure, with dead bolts or alarms; (iii) any rooms with
sensitive information or equipment, are locked at all times; and (iv)
any file cabinets with important or confidential documents are
locked at all times. This will prevent any external theft and limit
internal access to key documents on a “need to know” basis.

In terms of protecting your internal intranet and electronic records,

make sure that: (i) access to your entire systems are password
protected by user (so you can track activity person by person); and
(ii) for any shared file drives, limit access to such drives to
employees in the respective departments that need to access such
information. And, never publically store any sensitive documents,
like employee records, contracts, financial information, ownership
records, website code, that you do not want desiminating through
the entire office. And, it makes sense to save any shared files as
“read only”, to prevent any unauthorized changes to the base
documents.

In terms of protecting your website or other external access to your

systems, make sure that: (i) there is a firewall installed that prevents
external hacking into your systems; (ii) any confidential
information, like credit card information, is encrypted and stored on
secure servers; and (iii) that your server room is secure in a
controlled environment (with air conditioning and fire protection).

You just never know what “evil” is lurking in the night, both by
disgruntled employees or competitors sniffing around for
information. So, better safe, than sorry.

Lesson #56: Frequent Legal Questions of

Startups
Getting good legal advice, from the very beginning of your startup,
can save a lot of unnecessary hassles down the road. For this lesson,
I solicited the input of a great lawyer here in Chicago, Bart Loethen
atSynergy Law Group, whose practice specializes in assisting early
stage startups. Below are some frequent questions early stage
companies ask of their lawyers, and Bart’s high level
recommendations for each.

What business structure should I form (e.g., C-corp, S-corp, LLC)?

When building an enterprise, it is usually suggested to form it as an
LLC. An LLC brings all the legal protections of a corporation (e.g,.
protects your personal assets if the company is ever sued), but
avoids double taxation of the income from the business with
flowthrough of the profits of the LLC directly to the shareholders.
That said, if you anticipate raising outside capital from venture
capitalists, many of them will require you to form as a C-
corporation for them to comply with Section 1202 of the tax code
(which is set to expire in 2011, so this matter may become moot). If
a C-corporation is required by your investors, it is easy enough to
transition from an LLC down the road. If a financing is not
imminent, the tax savings you will realize from the LLC is typically
greater than the legal costs of switching to a C-corporation down the
road. So, more often than not, it is best to start with an LLC.

The time to use an S-corporation is when you are launching a

personal services business (e.g., law firm, ad agency, consulting
firm), where you would not have multiple types of partners with
different interests and where you do not intend to sell the company
because the value is merely that delivered by the founder. Also, S-
corporations allow modest self employment tax savings compared
to LLCs.

In what state should I form the company? The answer to this

question is largely around protecting the board of directors from any
lawsuits from disgruntled investors down the road. So, typically,
venture backed businesses, or other businesses where the majority
of the company is not controlled by a tight group of founders, will
form their business in Delaware or Nevada, two states that provide a
higher level of protection for the board of directors than in other
states. These protections will help you attract venture capital
investors and high-quality outside directors for your board. If these
are not issues to you, there is no reason you cannot form your
business in your home state, unless there are tax benefits of forming
elsewhere.

How do I protect my intellectual capital? Do I need a patent? Keep

in mind, companies have intellectual rights whether they have a
patent or not. All a patent does is ensures no one else can come up
with the same idea and claim it on their own. The answer to whether
or not it is worth the $10K average cost it takes to file a patent
application varies on a company-by-company basis. If you are a life
sciences or hardcore technology business where your solution is
critical to your business survival, then by all means, it makes sense
to file a patent right from the start. If you are a SaaS or services
business, where protecting your process is less important to your
survival, you can wait to file a patent until you have more cash
flows from revenue, or after you have achieved proof of concept,
when you can better afford such fees. That said, patents are
definitely selling points to talk about with investors or other
partners. So, keep that in mind, if you think it will help you close an
investment.

But, even if you have a patent as a startup, they can be very

expensive to defend, often adding up to hundreds of thousands of
dollars in legal fees, which most startups typically don’t have lying
around. So, where you can, look for a patent lawyer who is willing
to work on a contingency basis, taking their fees from any resulting
awards to the company from their efforts on the back end.

How important are getting Non-Disclosure Agreements signed? As

with patents, you still have intellectual rights if you don’t have an
NDA in place. So don’t be too worried about sharing your idea with
prospective investors. As a rule, venture capitalists do not want to
sign NDA’s, and are often insulted by founders that ask them to
sign an NDA, as that is not how they work. So, proceed with VC’s
without an NDA, understanding there is nothing that stops them
from investing in a similar business. So, don’t give away all the
company secrets until you are far down the road with them.

But, for strategic partners, it is perfectly acceptable to ask for them

to sign an NDA, most typically on their standard form, which your
lawyer should review. Theoretically, a strategic partner prospect is
already in a similar business to start, otherwise you wouldn’t be
reaching out to them. And, the benefit of an NDA is that it specially
lays out your rights with governing rules of what needs to be done
with the disclosed information. More importantly, it proves they had
access to the information at a certain point in time, which helps in
your defense of your intellectual rights down the road, if necessary.

How should I structure my equity in the business, both for founders

and outside investors? There are too many variables based on your
specific situation to specifically answer this question. So, I will lay
out a few things you need to be sensitive to around this topic.

First of all, it is important that any work done on your business prior
to formation, is legally documented as owned by the company at the
time of formation. So, collect key signatures from all founders,
employees, contractors, etc. with them agreeing that all work done
for the company was done on a “work for hire” basis and they
assign all inventions to the company. And, this document needs to
be in place for any and all employees and contractors going
forward, so no one can ever claim rights to the company’s
intellectual capital down the road. This is relevant to equity
discussions, so no previous founders or employees that are no
longer working with the business, come back looking for equity
value down the road after you hit it big.

If there are any co-founders in the business, their shares need to be

put on a vesting schedule, earning full rights to such shares over
time, in case they quit or die during the early months or years of
building the business. That way there is no confusion on what to do
in those scenarios. And, this document should clearly lay out any
transfer restrictions on their equity, how the holder can liquidate
their equity, and at what valuation metric, etc. And, it should
consider whether there needs to be multiple classes of stock, based
on one founder investing cash or not, needing to get their invested
capital returned before anyone else, or any other voting rights that
need to be decided, for change in control or corporate issues.

If you are taking in outside venture capital, that opens up a whole

new layer of complexity to your capital structure. An investor will
most likely be asking for preferred shares (at the top of the payout
pile), with a certain level of liquidity preference (1x-3x return
before common shares see any payouts). And, they will be putting
in lots of voting/board controls for themselves, and adding other
restrictions on transferring or selling equity, or otherwise. And, they
will be putting in mechanisms, called rachets, that protect them
from anti-dilution based on decreases in the company’s valuation
from “down rounds” down the road. Way too complicated and way
too many options to consider to get into any more detail for this
high-level lesson.

So, as you can see, a good lawyer can help you think through all of
these issues upfront, before running into any unexpected snags or
ugly situations down the road. So, if you need any further help from
here, and you most certainly will, Bart Loethen at Synergy Law
Group has deep experience with startups and his hourly rates are a
lot more affordable than those charged by the bigger firms.
Lesson #62: Insurance Protection for
Startups
With startups, many things can go wrong. But, the last thing you
need is to be caught in a jam without the proper insurance
protections when an unexpected situation arises. Below are a few
policies to consider for your startup, some mandatory from the start
and some optional based on your specific situation or when budgets
can afford them.

Business Property. Since a good portion of your precious startup

capital may be going into physical assets or equipment, it makes
sense to protect such with business property insurance. This protects
the company’s physical assets from things like fire and theft, so they
can easily be replaced in the event of a casualty. The level of your
capital investment in physical assets dictates the level of criticality
of this insurance. It is usually affordable and an easy add for peace
of mind.

General Liability/Umbrella. This covers any claims that arise due to

the damage or loss of third party property, and injury or loss of life
in your office premises or your customers’ premises, due to the
negligence of the company or its employees. It specifically covers
expenses related to property damage, bodily injury, medical
expenses, and the cost of defending law suits. I classify this one as
mandatory for any business to protect itself from the unknown.

Business Interruption. This covers any loss of revenues due to an

unexpected castrophe to the business (e.g., natural disasters, fires,
crime, terrorism). The importance of this is how dependent is your
revenue stream on any one facility. If your revenues are driving by
an outside sales team, probably not all that important. If you are e-
commerce driven based on your technologies run in one central data
center, it is more important. I put this in the category as nice to have
if you can afford it.
Errors & Omissions. This covers any claims that comes from your
customers, based on malpractice, mistakes or negligence by the
company or its employees. As an example, since iExplore’s
business was driven by travel agents booking trips for our
customers, we needed this protection in case any of our staff made a
mistake in booking any components of the customers’ trips (where
the opportunity for human error was quite high given the
complexities of the product). So, if you are a people-driven,
professional services business, this coverage is very important.

Workers’ Compensation. This covers cases where the employees of

a company get injured or lose their life in the company premises or
while working for the company in any other location. In these cases
the company is responsible for the damage caused and should pay
for the medical expenses, rehabilitation expenses or lost wages.
Much like your general liability policy, workers’ compensation is a
pretty critical coverage needed, and is often required for businesses
in many states.

Directors & Officers. If you are taking in outside capital, your

investors will most likely require you to add D&O insurance to
protect them as investors and members of the company’s board of
directors, in case they are ever sued by the company’s shareholders
for any loss of shareholder value or not acting in the best interests of
the shareholders. This coverage is less important in tightly-held
companies where the founders have largely funded the business
themselves and own most of the company’s equity themselves.

Key Man Insurance. If your business is dependent on the skills of

certain key individuals, key man insurance is a nice-to-have policy
to provide additional protections for the company and its investors.
So, in case you get hit by a bus, and the business suffers a short
term impact, the key man insurance provides some additional
liquidity to recruit your replacement, offset any loss in revenues in
the interim and provide monies to distribute to shareholders, if they
require such with such key man.

In addition, there may be other policies which are specifically

needed for your industry. So, get good advice from your lawyer or
your insurance broker, and make sure you put the proper insurance
protections and coverage levels in place from the start.

Lesson #70: Protect Your Intellectual

Property
Intellectual property includes all human-built assets of your
business, from your company name, logo, content, technology,
contracts or any other proprietary trade secrets of your business. It is
often the lifeblood of any startup, and should be protected, as you
would protect any other assets of your business.
Right from the start, you should file a trademark for your company
name and logo, that prevents others from using the same name or
logo in your space (including a clear TM mark on your logo). And,
if you are producing a lot of content, for use on your website or
otherwise, you should make sure that it is copyrighted, to prevent
others from re-publishing your hard work, as their own (including a
clear copyright mark in the footer of your website). And, when
budgets can afford such, consider getting patents filed for your
unique inventions or processes, to prevent others from claiming
such inventions or processes as their own.

A couple interesting case studies from iExplore, as it relates to

intellectual capital. One hurt us, and one benefited us. The one that
hurt us was when iExplore went to expand into Australia and we
could not secure a trademark because a similar adventure travel
business, called iXplore, had been in business and filed a trademark
before us. This was particularly troublesome since iXplore’s
business was in trouble, impacting their customer experience and
reputation. Which ultimately rubbed off on iExplore in the U.S.,
with the iXplore customers calling us at iExplore for refunds for
trips we had nothing to do with. So, make sure you research and file
for trademarks in all countries you plan on operating right from the
start, to prevent issues like this happening to your startup. It may be
useful to re-read Lesson #24 onHow to Choose a Name for Your
Startup to make sure you are covered here.

The second case study was where our trademark helped us. There
was a company that was trying to “piggyback” on the iExplore
name, by launching travel websites like iexploreegypt.com,
iexploreturkey.com and iexploregreece.com, including a logo that
looked very similar to our own. Here too, customers were getting
confused, thinking they were buying from us, but were not. We sent
a cease and desist letter and threatened a lawsuit, and amicably
resolved the situation, making them change their logo, feature their
company name in the header (not iExplore), and clearly state they
were not affiliated with iExplore on their About Us page. So, make
sure you keep an eye out at all times, for potential competitors
trying to piggyback on your success.

As for protecting your other intellectual property, I suggest you re-

read Lesson #56 on Frequent Legal Questions of Startups, which
has a section on patents and protecting all employee work as
company inventions. In addition, please re-read Lesson #60 on The
Importance of Employee Handbooks, which has a section on getting
all employees signing acknowledgement that they are hired on a
“work for hire” basis, and all work is the property of the company.
And, re-read Lesson #41 on Security Considerations for Your
Startup for other things to consider for protecting your facility and
digital files related to your intellectual property.
Lesson #73: Consumer Usability Testing
Following up on my previous lesson, The 10 Basics of Website
Design, I thought it would be a good time to discuss best practices
for consumer usability testing. Because at the end of the day, it is
more important what your customers think of your website or
product, than what your designers and developers think. So, it is
critical to get consumer usability testing into your design schedule
right from the beginning, and iteratively therefrom, to ensure your
user design is logical to your consumers and working the way you
originally intended it to. And, you never know what great ideas will
initiate from your users, by playing with your website or product.
Not to mention, you will save hours of redevelopment costs by
fixing issues as you go, as compared to launching an untested
website or product, and having to restart from scratch.

There are many ways to do user testing, including: (1) in-person;

and (2) via technologies. We will summarize both of these methods
below.

In terms of in-person testing, you can do moderator-led focus

groups before and after a user uses your website or product. Before
they use it, and before you start building it, you are trying to assess
whether or not there is a real need in the marketplace for your
product based on simple descriptions or example screenshots. Users
will tell you whether or not there is an actual need,whether or not
they would use it, what features and functionality they would expect
from the product, and whether or not they would pay for it (and how
much). This will give you a high level sense to meeting a known
need in the market, and what consumers would be expecting. And,
when doing focus groups like this, it is important your focus group
comprises individuals in your targeted demographic (e.g., gender,
age, income, education), to make sure you are getting the best
response possible (e.g., don’t use a focus group comprised of lower
income individuals for a luxury product).

Focus groups can also be done, immediately after a user first plays
with your website or product. To get their immediate reaction to
whether or not they liked it, and what they see as potential areas of
improvement. And, you would be surprised how much the answers
to the same questions can materially change from focus groups
completed prior to seeing the product, to after they see they product.
As an example, they may be willing to pay a lot more for it, once
they see the product in action, meeting their real life needs. And,
focus groups like this are also good for A/B testing, in case you are
not sure what direction to go. This allows you to show the user two
different options while they are using your website or product,
version A and version B, and letting them decide which version they
like better.

In addition to generic Q&A sessions at focus groups, there are also

technologies you can use while the user is playing with your
website, live in person. For example, there are sophisticated helmets
and cameras you can use that tracks a user’s real-time eye
movement, and heat maps what elements on the page attracted their
eyes, in what order and for how long, to assess if that was the user
experience and emphasis you were expecting. For example, if their
eye is focuses on a big picture of the product and misses the “buy it
now” button, that could be a problem with the design.

But, the problem with in-person focus groups is that they can be
time consuming and expensive. You typically have to pay
participants $50-$100 per session for their time, which certainly
adds up with the scores of participants needed to get a good data
sample, for each step of the design process. The good news is there
are many affordable technologies that can help you accomplish the
same usability testing goals.

I am not a pro on all the various tools in the marketplace, nor have I
used them all. So, I did a little research on the internet and
discovered this great list of 24 Usability Testing Tools from Craig
Tomlin’s usability testing blog. Craig is an expert in the usability
testing space and did a great job summarizing the pluses and
minuses of the various tools you have at your disposal. And many
other readers of Craig’s blog have posted additional valuable input,
in the comments section.

The technologies listed cover the gamut of usability testing needs,

from recruiting real users (with tools such as Ethnio) to conducting
live one-on-one remote moderated tests (UserVue) to analyzing
results of usability changes using A/B testing (Google Website
Optimizer) to many more from there. So, check out Craig’s post, as
it is very relevant to this conversation and will point you in the right
direction.

Hopefully this lesson gave you a good sense to why you need to do
consumer usability testing, and various ways to implement such,
both in-person and via technologies. If you need more help from
here, Craig looks like a good guy to know (although I have not met
him personally). And, if you are ever in a jam, your marketing firm
or development firm often have access to many good resources to
assist you here.

Lesson #80: Pitfalls to Avoid When “Reeling

in the Whale”
Every B2B startup wants to close the $1MM contract with the
Fortune 500 company, and every B2C startup wants to cut the big
strategic partnership with the bohemoth media marketing partner in
their industry. It can be a very exciting time for a startup, with lots
of “high fives” slapping and an earned right to celebrate after
months (or years) of “reeling in the whale”. The immediate instinct
is to focus on the huge revenue upside relationship, and how you are
finally “on your way”. But, in today’s lesson, we are going to learn
that these “whales” can easily kill your business, just as easily as
they can accelerate them. So, we are going to highlight a few
common pitfalls to avoid, through a couple real life examples.

Let’s start with MediaRecall, the B2B digital video services and
technology business I ran. We were in discussions with NBC on
digitizing their entire news archive for the last decades, with
hundreds of thousands of hours of content that needed to be
serviced. It would be a $25MM contract over five years that would
“change our world”. Especially since the largest contract we had
ever closed prior to that was $500K. We were all jazzed up about
this project, for what it could do to stabilize our revenues as a
startup and cover our overhead costs for the foreseeable future.

But, once the revenue potential “euphoria” wore off, the impact of a
contract that large was actually quite sobering: (i) our technology
infrastructure would need to be materially improved and expanded
to support all the additional volume; (ii) we would need to build a
second services facility onsite in New York, with rare equipment
specifically needed for that one project only; (iii) the work would
require a lot of energy around fragile old film reels, when video
tapes are a lot easier to work with without risk of damaging the core
content (which we were indemnifying against damages); (iv) our
human resources efforts would need to accelerate to hire and train
all the additional staff overnight; (v) we would need to move to a
material larger home office to staff the new team, materially
increasing our going-forward overhead; (vi) this contract would
most certainly be all-time-consuming, for at least the first year,
putting at risk our efforts with other clients, slowing our new client
pipeline and putting all our eggs in one basket; and (vii) if one thing
goes wrong with this high profile project, that news could spread
through this very tight-knit industry and basically “black list” our
company. A lot was riding on the success of this project, and it
required religious focus to not drop the ball on any of these potential
pitfalls.

Let’s move on to the second example: iExplore’s strategic

relationship powering B2C travel booking services in partnership
with National Geographic (please re-read Lesson #6 for the details).
At face value, it was a marriage made in heaven, the biggest brand
in “dream creation” partnering with the new startup for “dream
fulfillment” in the adventure travel space. The power of National
Geographic’s 80MM household reach in cable TV, 6MM magazine
subscribers and 5MM unique visitor website was almost
intoxicating to think about as a startup trying looking for low
hanging fruit to scale up our business. At face value, this reach was
most definitely worth giving National Geographic a 30% stake in
our business, combined with being directly associated with their 112
year old trusted brand name.

Then reality settled in with unexpected pitfalls along the way: (i) the
people we executed the partnership with handed us off to an
execution team, comprised of about 50 individuals in various
departments that had no real vested interest to help iExplore succeed
(pulling teeth to get anything done); (ii) the contract was not written
with enough clarity, leaving it up for debate what was really
intended in certain areas; (iii) the contract was written with the
assumption that iExplore would be flush with cash throughout the
five year period, and could afford buying 50% discounted ad space
in the magazines and direct mail (which wasn’t the case after
9/11/01, taking this marketing support off the table--BOOM!, there
goes 6MM magazine subcribers); (iv) the cable TV division could
never find a way to promote us cost effectively (BOOM!, there goes
80MM households); (v) although we found permanent placement on
their website, we were buried deep on their site with links that were
hard to find (BOOM!, there goes 5MM uniques, in exchange for
50K uniques); and (vi) it made cutting a strategic deal with
Discovery Channel (one of my goals), much more difficult, as they
are arch enemies with National Geographic. Did I already mention
we gave up 30% of the company for this relationship?? Lessons for
next time: the devil is in the details!!

So, as you can see, “whales” can be great for revenues, but they can
put a lot of strain on the business in other ways. Some you can
expect, and some you can’t. So, make sure you think through all of
the potential pitfalls well in advance of signing the contract, and
make sure you get any expected support in writing (and in
excrutiating detail, so there is no ambiguity on what you are
expecting).

Lesson #82: Project Management &

Prioritization
Startups always have a million projects on their plate, trying to
change the world. Often times these projects revolved around their
technology and building out their product/website/app. Today’s
lesson is about how best to prioritize, manage and develop these
projects.

First for prioritization. When I was at iExplore building out the

original website, we had a list of 200 features and functionalities we
wanted built into the website. A list that long is too cumbersome to
build into your beta website, which should be kept to a minimal
viable product (MVP) to get it tested and into the market sooner
than later. So, we needed to pick which 10 features of the 200 we
desired long term were going to be most critical to our launch.

The way we prioritized our tech list was to determine: (i) which
core features were “must haves” for launching a product that
consumers would be excited to use (and sufficiently differentiate
ourselves from our competition); and (ii) which features will do the
biggest job of moving the revenue needle or meeting our other
customer acquisition goals.

So, in launching iExplore, we decided a robust one-stop adventure

trip finder was the absolute key to our initial launch, and we would
roll out a tour book section (for researching needs) and a travel
community section (for social needs), in versions two and three of
the service. Then, within the trip finder section alone, there were a
lot of features therein that we needed to choose between in
prioritizing our efforts. But, we started with ones that we though
would best assist us with closing bookings (e.g., live chat
functionality with expert agents, robust photo/video gallery for each
trip, sophisticated data model for easy searching by
destination/activity/price/difficulty/comfort). Everything else on our
list got prioritized in a similar manner, and put into a production
schedule for interim future releases throughout the following year.

In terms of managing the project, it comes down to: (1) making sure
the entire team is clear on what they are building (and that they had
input in such vision); (2) making sure the team is entirely clear on
the date of delivery; and (3) having the team work in an agile
process of development.

If you told your team you were building a new car, you would be
surprised how many different interpretations your team may have,
in terms of what type of new car you were building. Some may
think red, others blue. Some may think van, others SUV. Some
make think luxury car, others may think more mainstream. So, you
need to pull your team together at the time of the project launch, and
through the process itself, to collaborate and collectively agree that
the new car we are trying to build is a yellow luxury sedan.
Hopefully, this open communication process will eliminate any
confusion amongst the group in terms what it is you are actually
building.

In terms of communicating a delivery date, that is pretty self

explanatory. But, people need to be managed in bite size chucks
along the way. If you tell the team they have three months to finish
the project, they may work at 35 mph for the first two months, and
then realize they need to work at 90 mph for the last month to have
any chance of catching up. Which all that does it put stress on them
and the rest of the team. So, instead of saying “deliver me the full
project in 100 days”. Say, “deliver me the first 10% of features
within 10 days, then the next 10% within the following 10 days, and
so on.” It keeps them focused with acheivable deliverables within
shorter time frames and keeps the overall project heading towards
its overall goal.

The last point is about having an agile style of development. In the

old days, the management team would think through the entire
project, building the specs for everything, hand it over to the
developers and then they would start building out the entire project.
And, to make matters worse, there was very little interaction
between management and the developers doing to the work in
helping to set priorities and understand the overall business
objectives.

The problem with that old “micromanaged, waterfall” style of

development is: (i) the people doing the development in the trenches
did not have clear insights into what the company’s goals were or
how their work fit into the bigger picture, where they could offer
additional ideas to help; and (ii) almost always, whatever vision
management had day one, is most likely going to change within the
first couple months as they are getting new information to work
with, so they wasted a lot of time building a full technology
specifications document for a site that almost immediately becomes
obsolete.

So, in today’s day and age, the iterative and incremental agile
development process is the way to go. The key components of the
agile manifesto are: (a) individuals and interactions, over processes
and tools; (b) working software, over comprehensive
documentation; (c) customer collaboration, over contract
negotiation; and (d) responding to change, over following a plan.
Or, said another way: (i) open communications and collaboration
with the entire cross-functional team from ideation through
completion; (ii) small bite-sized projects that need to get completed
every two weeks; and (iii) each person on the team responsible for
one specific piece of the puzzle (e.g., Joe tackling sign up form
functionality, Jimmy doing user design, and Susie doing database
integration).

Hopefully if you follow these suggestions, you will keep your

projects on time and on budget, and built in a way of open
communications and achievable goals that motivates your team.
10 Case Studies

Lesson #84: Lady Gaga—An Entrepreneurial

Case Study
Back in 2003, Stefani Germanotta was an unknown first-year music
student at NYU trying to get her career off the ground. And, now, 8
years later, the renamed Lady Gaga has turned into one of the most
successful musicians and marketers in history. And, let’s quantify
Lady Gaga’s success over this time: (i) over 13MM albums sold and
51MM singles sold; (ii) 12 Grammy nominations and 5 Grammy
wins; (iii) $90MM in earnings in the last year alone; and (iv) over
43MM fans on Facebook and 13MM followers on Twitter (and
counting). It is pretty incredible that a 25-year-old could achieve so
much artistic and business success in such little time.

But, how exactly did she do it? What lessons can we entrepreneurs
take from such a meteoric rise. To me, it comes down to the
following drivers of her success: (i) she took a page right out of a
proven playbook (e.g., Madonna); (ii) she always keeps her
followers guessing and wanting more; (ii) she produces a very high-
quality product; and (iv) she has a sincere personal relationship with
her customers/fans. Let’s study each of these points in more depth
below.

Lady Gaga was not the first female mega-popstar. She was clearly
preceded by many others, including one of her idols, Madonna.
Madonna was cutting edge for her day (the 1980’s and 1990’s). She
surrounded her music with controversial subject matter, videos
oozing with sexuality, and costumes that would make any mother
blush. And, she was the pro at staying relevant in an industry
littered with one-hit wonders. As she got older, she took bold
chances to keep her name at the forefront of her industry (e.g.,
leading role in Evita movie, music collaborations with hot stars of
the day, like Justin Timberlake). But, what Lady Gaga did, was take
that Madonna playbook, and put it on steroids. Lady Gaga became
more than simply another “over the top” music celebrity, she also
became a fearless fashion icon and a revered cheerleader/role model
for her fans. Time will tell if Lady Gaga will withstand the test of
time, like Madonna has. But, she is certainly off to a great start with
an already proven playbook.

But, unlike Madonna, who seemed to reinvent herself every year or

two, Lady Gaga appears to reinvent herself every couple months.
She always has her fans and the media guessing what she is going to
do next. Have you ever seen crazier outfits (e.g., her famous meat
suit she wore to the Video Music Awards in 2010)? Of course not.
And, that unexpected craziness keeps her front and center in every
People magazine, E! News broadcast and every other entertainment
media outlet, all further fueling free publicity for Lady Gaga and
pounding home her already “bigger than life” persona.

But, honestly, none of this would be possible if Lady Gaga didn’t

deliver an absolutely great product. She insists on writing all of her
own music. Her songs are well-written with a great beat. Her
concerts are an amazing spectacle and production. If the quality of
the product wasn’t there, people wouldn’t buy into all the other
craziness in isolation. Even if you took away all the pomp and
circumstance, Lady Gaga would still be selling a ton of albums. But,
the pomp and circumstance adds to her story, and has her selling
even more.

But, perhaps, Lady Gaga’s biggest success is not her music or her
fashion sense. It is her uncanny ability to connect with her fans, at a
very personal level. She affectionately refers to her fans as her Little
Monsters (more marketing genius), and she has positioned herself as
their leader and champion, for those that cannot champion
themselves. She stands up for all who have been bullied or teased
for being different (almost as if she has personal experience of her
own in this regard). So, she is more than a musical artist to her fans.
She is their leader and role model, giving people a voice that
otherwise would not have a voice of their own. This is pretty
powerful stuff, resulting with Lady Gaga accumulating 56MM
fans/followers on Facebook/Twitter (a very large platform to
communicate her various messages).

I am a huge fan of Lady Gaga—the musician, the fashionista, the

humanitarian and the businessperson. All with an aura of
authenticity that makes it credible. There are plenty of valuable
lessons in Lady Gaga’s success that we can all apply to our
businesses.
Lesson #89: Startup Lessons from Scrabble
What does the game of Scrabble have to do with startups? Not
much, other than being a game board sitting on the shelf in the
break room. However, there are some valuable strategies you can
apply from Scrabble into your startup business. Read on, and this
will all start to make better sense.

Shuffle Your Letters. I can’t tell you how many times I will be
blankly staring at my rack of tiles, and can’t create any words. But,
when I start to randomly shuffle up the letters within the rack, my
brain starts to see potential words that it otherwise missed at first
glance. And, the business lesson here: when you are challenged by a
specific business problem, try to look at it from multiple
perspectives, and a solution may present itself that was not
immediately evident.
Use Your Highest Point Letters. Sounds pretty obvious, but I have
seen people play a six-letter word for six points (one point per
letter), and leave a ten-point Q sitting on their rack unused. And, the
business lesson here: always leverage your best assets in any
situation. As an example, would you walk into a big sales
opportunity leading with your stodgy controller, or your firecracker
salesperson. Or, as another example, don’t try to sell a toaster, when
your core competency is building blenders.

Play the Highest Point Space. With all other things being equal,
play open triple word spaces before open double word spaces, and
open triple letter spaces before open double letter spaces. You want
your tiles to accumulate as many points as possible, in that one turn.
And, the business lesson here: you always want to leverage your
fixed investment, by driving the highest ROI as possible. As an
example, try to close the $5,000 sale over the $2,500 sale, as the
fulfillment costs behind each are the same.
Play the Board, Not the Rack. Too often in Scrabble, people are
simply focused on the seven letter tiles on their rack and trying to
make a word as long as possible therefrom. But in Scrabble,
sometimes playing one letter can be much more valuable, like
playing a ten-point letter Z on a triple letter space on the board.
And, the business lesson here: don’t be so focused on the trees, that
you can’t see the forest. The point of business is to grow as quickly
as you can, and the easier you make it on yourself, the better.

Look For Multiple Word Opportunities. I love when competitors

only create one word on the board, simply working from one open
letter. That limits their score to only that one new word. But, as an
example, had they added an “S” to an existing word on the board,
and created a new word off that “S”, they would not only have
scored points for their new word, but they also would have scored
points for the existing word on the board, doubling up their score in
the process. And, the business lesson here: in whatever business
initiatives you are launching, think through multiple ways to drive
revenues therefrom. As an example, at iExplore, we not only tried to
drive revenue from consumer sales for our tours, we also looked for
corporate sales opportunities for those tours.

Play Defensively. In Scrabble, you never want to play a word (even

a high-scoring word), if it opens up an opportunity for your
competitor to play a word on a triple word space in their next turn.
Triple word opportunities are the best opportunities to accumulate a
lot of points, and fast. So, you want those opportunities for yourself,
not your competitors. And, the business lesson here: don’t provide
your competitors with any “low hanging fruit” to pick up market
share against you. This could be as simple as you not being aware of
a major contract in your industry, and you simply not bidding on it,
allowing your competitor to walk away with it unchallenged. Or, as
another example, not showering your existing clients with “love”,
making it easier for your competitors to come in and steal the
relationship.

Hopefully, not only have your business strategies improved from

this lesson, but now, you can more easily beat the next person you
play in Scrabble!!

Lesson #91: My Entrepreneurial Heroes

There have been a lot of great startups, led by a lot of great
entrepreneurs over the last few decades. Too many to list in this
lesson. But, below is a shout out to few of my favorites, including a
few entrepreneurial lessons we can all learn from.

Steve Jobs (Apple). One share of Apple stock back in 1996, when
Jobs regained the reigns as CEO of Apple (the company he co-
founded in 1976), was worth around $5. On the day that Jobs retired
as CEO in August 2011, that same share of stock was worth around
$366. Over that 15-year period, that was an average annual growth
rate of 33% per year, far exceeding the S&P 500’s 3% annual return
for that period. Jobs out-performed the market by 10x!! That makes
him, along with others below, one of the best CEO’s in history, as
long-term and consistent success like that is almost unheard of.
And, how did he do it: (i) intense focus on challenging the norm and
improving the consumer product experience (e.g., via iPod, iPhone,
iPad, iTunes, etc.); and (ii) a very hands-on, aggressive management
style (almost to a fault). And, we didn’t even talk about his early
success in taking the first commercially successful personal
computer to market in his first stint as Apple’s CEO, or his role in
helping turn Pixar into the undisputed leader in digital film
animation in between. One huge hit after another. I am not sure we
will ever see another Steve Jobs. So, religious attention to detail and
provocative innovations will surely lead you in the right direction.
Bill Gates (Microsoft). What Jobs was to Apple, Bill Gates was to
Microsoft. His run as co-founder and CEO of Microsoft from 1976
to 2006 produced an equally impressive 29% average annual growth
rate for its shareholders (which frankly slowed way down between
2000-2006 due to government monopoly discussions and
otherwise). The magic that drove Microsoft’s success was getting
their software products bundled into every piece of hardware
requiring such software, hence the monopoly problems that
eventually arose. But, in addition to being an equally passionate
innovator and product guy, what makes Gates so special is the way
he is giving back to the community via the Bill & Melinda Gates
Foundation, donating billions of dollars to those in need around the
world. It is not only what success you create from society, it is
equally important to give some of that back to society, for charitable
causes that are important to you.

Larry Page/Sergey Brin (Google). How can you argue with the
success of the Google Guys, driving a 22% compound annual return
for its public shareholders over the last seven years, when the
overall market has been dismal and Google’s valuation multiples
were completely off the charts at the time of their IPO in 2004.
What made the Google Guys so special were: (i) their spirit of true
innovation, coming up with a whole new way of driving search
results based on backlinks and algorithms; (ii) getting that spirit of
innovation infused into every employee in the company (e.g., giving
their engineers 20% time to build whatever innovations they want);
and (iii) their ability to see far enough ahead to make big bets (e.g.,
acquiring YouTube for $1.6BN seemed pretty foolish at the time for
a site with no revenue model, but not any more). Make sure your
employees never lose their spirit of innovation, as you never know
what next great idea they will come up with, to help your business
succeed.

Jeff Bezos (Amazon). There are very few sizable businesses that
survived the dot com boom and bust period of the late 1990’s. But,
Amazon is alive and well today, dominating the e-commerce space,
as the #1 internet retailer worldwide, largely to the credit of its CEO
and Founder, Jeff Bezos. What made Bezos so special was his
ability to bet big, in ways that were contrary to popular beliefs.
Bezos had a vision that e-commerce would take off, and even
though the markets were imploding around him, he was able to hold
strong to his vision, even though it may have confused his early
investors with atypical strategies, emphasizing long-term revenue
growth over near term quarterly earnings. It was a huge bet with a
lot of headwind, but Bezos executed it brilliantly. And, not only for
buying books, but for every other merchandise category, as well,
driving a whopping 42% annual return for Amazon’s public
shareholders since 1997 (the best returns of the group on this list).
And, did I mention contributing to the ultimate demise of retailers
like Borders, via electronic books read through a Kindle. So, hold
true to your core beliefs, despite what others are telling you, if your
“spider sense” is telling you it is the best way to go.

Richard Branson (Virgin). There is no end to the growth potential

for Virgin under the leadership of Richard Branson. What started
off as an airline, evolved into a music chain, mobile provider,
winery business, space travel company, media business and 50 other
businesses. Branson’s mandate, backed up with a big bank account,
was go big, or don’t go at all. And, sometimes that resulted in big
wins. And, other times, it resulted in highly publicized failures. But,
the ups far exceeded the downs, from one of the most adventurous
and eclectic personalities on the planet. Once you have mastered
your core business disciplines, think creatively out-of-the-box for
your next lifestyle-brand motivated growth initiatives. Because at
the end of the day, it is all about the brand.

What do all of these entrepreneurs have in common? They were

able to keep the reins as CEO from founding their businesses all the
way up to running multi-billion dollar, multi-national corporations
(although there may have been other CEOs along the way, that
ultimately got replaced by the original founders). That is not an easy
feat, as the skillsets are so very different, driving success in early
stage businesses vs. later stage businesses. Kudos to all of you, as a
few of my entrepreneurial heroes.

Lesson #94: Netflix—A User Experience

Meltdown
(This lesson was written the day of the Qwikster announcement.
Netflix has since adapted their business model with great success,
but it’s important to remember their mistakes along the way).

I received an announcement from Reed Hastings, the CEO of

Netflix, that they were splitting their business into two divisions,
Netflix for streaming movies and a newly created Qwikster for
DVD movies by mail, including a long apology for not
communicating better with their customers regarding the rationale
around key decisions. Hastings obviously didn’t practice what he
just preached, as Netflix obviously didn’t first test the potential
impact of such action with their users (as we learned to do back in
Lesson #73). The consumer reaction, including my own, has been
pretty negative based on today’s posts on the Netflix Users’ Blog.
So, based on this, I thought Netflix would make an interesting case
study on what to do (or more importantly, what not to do) from a
user experience perspective.

But, first, a little history about Netflix’s mounting woes over the last
few months: (i) they announced a separation of their DVD services
from their streaming services (which resulted in me paying 25%
more than before for both services); (ii) they lost their major content
deal with Starz, one of their only premium providers of high-quality
current movies in their offering; (iii) their forecasted users for this
year are 1MM less (5% less) than they estimated they would be at
the beginning of the year, based on these actions; (iv) their stock
price has cut in half (from around $300 per share to $150 per share),
as a result of the above; and (v) now, we have this splitting of the
business into two divisions, which is going to require users to
maintain activity, ratings and queues at two separate websites, one
for online streaming activity and the other for offline DVD rentals. I
just don’t think consumers will ultimately play that game, and
Qwikster (or Netflix’s DVD rental business) will most likely suffer
a “Qwik” death. This is probably Netflix’s long-term goal anyway,
but what a very strange business decision for Netflix to make given
the company still has the majority of its customers still using the
DVD rental services today.

So, what has Netflix done to its consumers in the last couple
months: (i) they are making them pay 25% more for bundled online
and offline services (or forcing them to pick one or the other); (ii)
they are losing current high-quality movie titles, which is
particularly evident on the streaming side of their business which
they desire to promote long term; and (iii) now, they are forcing
customers to maintain two different websites, instead of one, which
is a big ask of 12MM people (the 50% of their total business which
desires both online and offline services). Obviously, consumers are
not responding well to these actions, given the 1MM lower
members than estimated this year. And, the financial markets
haven’t responded well, with the 50% decline in Netflix’s stock
price in the last few months.

So, how did Reed Hastings get himself and Netflix into such a
mess? The answer is really quite simple: they put their business
goals in front of their customer goals. And, sometimes you need to
do that if your underlying business economics are flawed, like
Netflix’s were (e.g., the need for a price increase to cover the cost of
licensing the content—which would have been fine if
communicated that way as a better option than going out of
business). But, this most recent move may ultimately get the whole
house of cards to fall in on itself, when and if 50% of Netflix’s
customers decide to unsubscribe from all or part of the service. Let
me explain further.

At the end of the day, what are the challenges with Netflix’s
business: (i) it is much more expensive to fulfill mailing DVDs to
home, than simply streaming them over the internet; (ii) high-
quality current content is very expensive to license from the major
film studios, especially within the first 28 days of the home release;
(iii) the studios get a lot less revenues from DVD rentals, than they
do from cable on-demand or internet streaming (e.g., former simply
requires Netflix to buy DVDs, and the latter charges Netflix on a
per-subscriber basis for the service); and (iv) the markets are very
bearish on the DVD business long-term, and Netflix doesn’t want
that albatross around its neck in the financial markets (in business
practice or in name). So, when you look at Netflix’s business this
way, it is very easy to see how Netflix has ended up where it did.

I have been a huge fan of Reed Hastings, who has lead meteoric
growth at Netflix and a real change in the way consumers watch
movies (including the demise of former retail titans like
Blockbuster). And, I have been a loyal Netflix customer for years,
despite the ups and downs of their business. But, this most recent
move does not sit well with me, hence the post.

I sure hope they figure out a winning long-term business model, one
that puts the customer first with (i) high-quality current movies; (ii)
that I can watch within the first 28 days of home release; (iii) via
online streaming (or offline, if needed); and (iv) at a price that
makes sense to Netflix’s business (and is affordable to me).
Because, I am sure the major studios are trying to figure out how to
offer this service directly themselves (to cut Netflix as middleman
out of the way), or in partnership with the major cable companies
via on-demand services. But, the last thing I want to do is be forced
to re-rate 1,691 movies watched on a different service, so they know
what movies I have seen and which ones I haven’t seen, in order to
get their recommendation engines correctly working (where Netflix
is the pro and clear first mover).

So, the key lesson here: put your customers’ user experience first
when making key business decisions. You should always be
aspiring to give your customers more and more (and make your user
experience easier and easier) over time, not less and less (and harder
and harder).
11 Miscellaneous

Lesson #46: 23 Motivational Quotes for

Entrepreneurs
Entrepreneurs can use a “pick me up” from time to time. And, I
thought these 23 famous quotes would provide just the right
inspiration to keep you marching along:

“Our greatest glory consists not in never falling, but in rising every
time we fall.” –Confucius

“Victorious warriors win first and then go to war, while defeated

warriors go to war first and then seek to win.” –Sun-tzu

“Life grants nothing to us mortals without hard work” –Horace

“Energy and persistence conquer all things.” –Benjamin Franklin

“I am a great believer in luck, and I find the harder I work, the more
I have of it.” –Thomas Jefferson

“Always bear in mind that your own resolution to succeed is more

important than any one thing.” –Abraham Lincoln

“Don’t go where the path may lead, go instead where there is no

path and leave a trail.” –Ralph Waldo Emerson

“Do not hire a man who does your work for money, but him who
does it for love of it.” –Henry David Thoreau
“Many of life’s failures are people who did not realize how close
they were to success when the gave up.” –Thomas Edison

“You can’t build a reputation on what you are going to do.” –Henry
Ford

“Why climb Mount Everest? Because it’s there”. –George Mallory

“Imagination is more important than knowledge.” –Albert Einstein

“Insanity: doing the same thing over and over again and expecting
different results.” –Albert Einstein

“Everything should be made as simple as possible, but not one bit

simpler.” –Albert Einstein

“A good plan, executed now, is better than a perfect plan next

week”. –George Patton
“Courage is being scared to death, but saddling up anyway.” –John
Wayne

“Success is a journey, not a destination.” –Arthur Ashe

“Perpetual optimism is a force multiplier.” –Colin Powell

“You can’t rest on your laurels. Your own body of work is yet to
come.” –Barack Obama

“Real success is finding your lifework in the work that you love.”
–David McCullough, Author

“The secret is to hire great people, don’t interfere too much and
when they’re great, take the credit. Works like a charm.” –Woody
Allen

“Confucius always said, a schmuck is defined as someone who has

achieved all their goals.” –Sam Zell

“Summiting the mountain requires stamina and strength of heart,

and you won’t know if you have it, until you need it.” –Jacob
Kyungai, Kilimanjaro guide

Do you have other quotes you think I am missing?

Lesson #57: Required Reading for Startup

Entrepreneurs
Part of the magic of a successful entrepreneur is to stay on top of
key trends that are happening, both for their specific
industry/competition, and for the startup/venture scene overall.
I won’t go into too much detail on specific industry resources, as
there are too many to list. But, instead, I will tell you how best to
find these resources for your industry. While I was at MediaRecall,
I had to learn the B2B online video space from scratch. So, I started
doing various Google searches for things like “online video blogs”,
“online video resources”, “online video trade shows”, “online video
associations”, “online video magazines”, “online video blogs”, etc. I
clicked through all the first page links, and came up with a list of
about 100 valuable resources where I could: (i) stay on top of key
industry/competitive trends; and (2) market MediaRecall’s services
to similar B2B readers of these outlets. I then signed up for all their
relevant email or Twitter feeds so I could stay up-to-date on all
happenings and discussions over time. Repeat this process for your
business, and you will be surprised with the wealth of knowledge
that is quickly available at your fingertips.

As for generic resources that apply to most startups (particularly

with a tech/online focus) , below is a list of some of my favorite,
and most widely read, resources. Be sure to subscribe for all of their
email/Twitter feeds:

Magazines/Blogs:
Entrepreneur Magazine
Inc. Magazine
Fast Company

Blogs Only:
Mashable
Tech Crunch
Silicon Alley Insider
The Next Web
All Things Digital
GigaOM
Venture Beat
Venture Hacks
Startup Report
Startup Digest
Startup Weekly
On Startups
Startup Meme
Media Post
eMarketer

In addition, I find it useful to follow relevant people to your

industry, or startups overall, on Twitter, to review what they are
talking about. This could be key venture capitalist firms, or their
specific partners therein (e.g., Fred Wilson, Brad Feld, Dave
McClure). Or, it could be the CEO’s or other executives within
major companies in your industry (e.g., Google, Twitter, Facebook).
Or, it could be trade associations or other entrepreneur-focused
organizations in your home city startup ecosystem. I do my best to
follow these types of people or organizations within my Twitter
account, so feel free browse the list of people I am following at
www.twitter.com/georgedeeb. Or, from time-to-time, I will retweet
the best-of-the-best of what I am reading on Twitter, so be sure to
follow me there. And, scour the Twitter follow lists of other people
who are relevant to your industry, or do relevant keyword searches
within Twitter, to learn about other key influencers in your space.

Lesson #101: Plusses & Minuses of

Entrepreneurship
I finally made it to my goal of writing 101 Startup Lessons, with
this being my last lesson of this series designed as a handbook for
entrepreneurs. But, instead of a tactical lesson as my swan song, I
thought I would speak more from the heart on the emotional plusses
and minuses of entrepreneurship, and long-term implications of
starting your own business.

THE PLUSSES

Being Your Own Boss. Once you get the taste of being your own
boss, it is very difficult to ever go back to being a “cog in the
wheel” within a big corporate environment. Nowhere else can you
get the thrill of making senior level decisions across a wide range of
business topics (e.g., strategy, finance, marketing, technology,
operations). The buck stops with you (literally!), and the success or
failure of your business falls squarely on your shoulders, based on
the decisions made by you and your team. That may sound a little
daunting, at first. But, trust me, it is very exciting.

The Speed of Doing Business. Startups move at “light speed”

compared to the procedural, political and bureaucratic morass of big
corporations. If you want to do something as a startup executive,
you make a quick decision within the snap of a finger, without
multiple layers of approvals and procedures. This can make for a
really exciting environment, watching the twists, turns and
outcomes from your actions in “real time.”

The Feeling of Accomplishment. Launching and building a

successful startup is the equivalent of having and raising a baby.
And, when your startup achieves its desired outcome and long-term
success (just like seeing your baby grow into a well-mannered and
respected college graduate), it truly creates a real feeling of
accomplishment, looking back and saying “hey, I did that!” Nobody
really appreciates how hard it is to turn a “piece of paper idea” into
a thriving business, unless you actually have done it yourself. So,
don’t be afraid to pat yourself on the back, for taking the hard road
and a job very well done.

THE MINUSES

Living Like a Pauper. Let’s face it, it is not easy plowing all your
hard-earned savings into a risky startup, not getting paid in the early
months of getting the business off the ground and not being sure
where your next paycheck is coming from. Unfortunately, unless
you are wealthy from other means, launching a startup with hopes
of a long-term payback often comes with the strings of living very
frugally until the business gets its “sea legs” beneath it. If you need
the comfort and security of bi-weekly paychecks to cover your bills
or lifestyle, don’t get involved in the early stages of a startup.

High Stress Level. Obviously, with weak cash flow and other
business constraints, comes constant worry and stress. Launching a
startup was a big gamble: (i) you quit your comfortable job; (ii) you
put all your savings (and those of your friends and family) at risk;
and (iii) you will end up with nothing but life lessons learned and a
“black eye” with your investors if the business goes under. That is a
big burden to carry around each day. So, if you are not good when
dealing with stressful situations, a startup is not right for you.
Impact on Your Resume. Before being an entrepreneur, I was a big-
bracket investment banker to Fortune 500 executives. Nobody told
me after 12 years of being an entrepreneur, that big company
recruiters would label me an “early stage guy”, making it very
difficult to break into any business generating in-excess of $100MM
of revenues. Don’t get me wrong, I love being involved in startups.
But, I would at least like to control my own career destiny, if I ever
desire to try my hand at being a CEO of a bigger business. The
longer you are involved with startups, the more difficult it will be at
turning back from a lifelong career in early stage companies.

Being an entrepreneur is not right for everyone. Make sure you have
a real appetite for the risks at hand, a real passion for your product
and an unbridled confidence in your ability of building a great
business, before jumping in. But, once you do make the leap, hang
on for one of the wildest rides of your life!! As starting and growing
your own business really is one of the most-rewarding life
experiences you can have.

I hope you have enjoyed these life-learned lessons. Make sure to

keep these 101 Startup Lessons handy, and reference them as
business challenges arise. And, be sure to share them with your
entrepreneurial friends who may also find them useful for building
their own businesses.

It has been a real pleasure having you share this editorial adventure
with me.
About George Deeb
Managing Partner,
Red Rocket Ventures

George is a serial entrepreneur and Managing Partner of Red Rocket

Ventures, a growth consulting, executive coaching, shared executive
and financial advisory firm based in Chicago. George has
consulted/mentored over 500 startups since founding Red Rocket in
2010. George desires to help other entrepreneurs navigate through
their startup, fund raising or other business growth issues. George
was named to the Crains Tech 50 in Chicago, and is a contributing
author on entrepreneurship for Forbes, Entrepreneur, Wall Street
Journal, The Next Web, Alley Watch, Founder Institute, Crains
Chicago and others.

Prior to launching Red Rocket, George was the founder and CEO of
two venture-capital backed digital tech startups: iExplore (which
became the #1 adventure travel website) and MediaRecall (a B2B
digital video services and technology company). Both of these
startups were sold to billion dollar companies. George was named
an Ernst & Young “Entrepreneur of the Year” in 2001, for his
efforts at iExplore. George began his career as an investment banker
with Credit Suisse First Boston, doing mergers and acquisitions and
corporate finance in the retailing/consumer industry group. George
received his BBA in finance from the University of Michigan in
1991. He is also a founding mentor of the Chicago chapters of
Techstars and Founder Institute.

Follow George:

Twitter: http://www.twitter.com/georgedeeb
LinkedIn: http://www.linkedin.com/in/georgedeeb
Google+: https://plus.google.com/u/0/+GeorgeDeeb
Klout: http://www.klout.com/#/georgedeeb
AngelList: http://www.angel.co/georgedeeb

Contact George via the contact from on the Red Rocket Ventures
website.
About Red Rocket Ventures
Red Rocket is a high-energy, growth-oriented, results-driven
strategic consulting, executive coaching, shared executive staffing
and financial advisory firm whose partners bring a unique
combination of growth strategy, execution and fund raising
experience. Consider us a one-stop resource for companies desiring
high growth in both the B2C and B2B space. We are particularly
deep around digital strategy, digital marketing, digital media, social
media, mobile marketing, e-commerce, digital video and web
technologies, but can easily assist in other industries, as well.
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Let our team of proven strategic growth

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 And, our shared executives are designed for
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