Welcome, entrepreneurs!

This blog is for you, whether you are dreaming of starting a business, getting your new company off the ground, looking to raise capital, or just making sure your startup is on the right track. You’ll find topics like: What’s in a business plan, how to determine whether you’ve got a good idea for a business, and how to think about financing your venture. You’ll see that my approach favors speed and flexibility - a combination I find practical for today’s environment. You’ll also find me saying that the most important aspect of business planning is the thinking behind the plan.  Need some help? Click here to learn how UpStart Advisors can help you launch your venture. And click here to follow me on Twitter.

Lifetime value of a customer

If you’ve got any interest in marketing, you should be reading Seth Godin’s blog. Today, he talks about the lifetime value of customers.

When planning a new business, it’s easy to get mired in the weeds of complex financial projections – that are nearly almost wrong. But very often, so-called back of the envelop numbers are more useful and accurate. For example, unit contribution, and break-even volume. Understanding the costs of acquiring an average customer and the lifetime value of that customer are also at the top of the list, especially for companies with large numbers of customers. Here’s an excerpt from Seth’s take:

If you walk into a company-owned cell phone store to sign up for a contract, what are you worth? Given the huge gross margins at AT&T and Verizon and the standard two-year contract, I think it’s easy to figure on more than $2000 in lifetime value…

Few businesses understand (really understand) just how much a customer is worth. Add to this the additional profit you get from a delighted customer spreading the word–it can easily double or triple the lifetime value.

So, a chiropractor might see a new patient being worth $2,500, easily. And yet… how much is she spending on courting, catering to and seducing that new customer? My guess is that $50 feels like a lot to the doc. Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it’s important to not only recognize but embrace the true lifetime value of one more customer.

Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers? That’s more money than you have to spend right now, I know that, but what would happen? Imagine how fast you would grow, how quickly the word would spread.

Here’s how you’ll know when you’ve really embraced this–a good customer at your podiatry practice (or supermarket or tax firm) walks out the door in a huff and you turn to your partner and say, “There goes $74,000.”

To publish, or not to publish…

I’m finishing up a draft of my first book, working title: “The UpStart Manifesto: Planning New Businesses with Speed and Flexibility”. Like any good entrepreneur, I want it published yesterday. So I met with a close friend who is a seasoned veteran and a senior exec at one of the largest publishing companies. I found it fascinating, so I thought I’d share:

• If you epublish with us, it will take about 6 months before you can start selling
• We’ll then want the rights to publish the hard copy, which will take 12 months to reach the shelves/Amazon
• We’ll also demand 360 rights, which will impact the rest of your business (more on that soon; building an online school for startups with branding linked to the book)
• Oh, and we won’t do much to promote your book, or give you much of an advance, since you are not a proven commodity in publishing yet
• To top it all off, you won’t make more than a few dollars for every book (you promote and sell)

Needless to say, I wasn’t jumping over the table to sign that deal. So looked into self-publishing, which seems at first blush to be a better way to go.

My startup philosophy is about planning with speed and flexibility. By self publishing, I can move much faster, retain the rights to my other books and lines of business, and make much more money on each copy I sell.

The downside? I lose the cache of being published by a major imprint. That cache is important to traditional media companies, so it’s less likely I’ll appear on the Today Show or in the New York Times based on my book. Bummer, but I think I can still play well on the long tail, and if my distance learning business is a hit, I can use that to get big media coverage since it will be pretty innovative and unique.

Any gurus out there willing to share opinions?

4 things you should NOT say to potential investors

1. “I really don’t want investors meddling in the business.” I heard this beauty from someone who asked me for an introduction to an investor. Needless to say, the conversation stopped there.
2. “Our financial projections are conservative.” Puhleeese. You’ve got revenue of um, zero, now. And within three years you’ll have $x0,000,000. Sounds very conservative to me.
3. “I’ll send you my pitch deck.” NOOOOOO. Send a 1 page synopsis. You should present your pitch in person, or at least via web conference.
4. “Before I tell you the basic idea, I’ll need you to sign an NDA.” If you think your basic idea is the true source of the value you’ll create over the next 3 – 5 years, you’ve got bigger problems. It’s (nearly) all about how well you’ll execute.

mooooooooooooo

Got some fun business cards from moo.com. Inexpensive, great quality, fast, and easy to customize. Thought I’d share the designs for the backs of the cards:

 

Working through the numbers on ownership

One of my clients is raising a seed round of financing. Of course, she’s a smart cookie, and bootstrapped her way to some impressive results before raising the money. In case you go about something like this, I’ll show you how the ownership structure gets impacted.

First, she starts with some (arbitrary) number of shares – or units if it’s an LLC.

Then she issued some more units to key employees and advisors.

After that, she raised the round. The price per share is simply the pre-money valuation divided by number of shares before the round ($900,000 pre-money valuation / 10,640 shares = $85.59 per share). The investors put in $250,000, so the company issues an additional 2,956 units to them ($250,000/$85.59 = 2,956).

Everytime the company issues more shares, the previous owners are left with a smaller fraction of the total shares (barring anti-dilution provisions). They are effectively “diluted”. However, as long as the valuations keep rising, they’ll own a smaller piece of a bigger pie, so the value of their ownership will increase.

Pricing pixie dust

Just re-read a chapter of Predictably Irrational.  Fascinating thoughts on pricing. Consider this… Let’s say you’ve got a restaurant, and the most expensive entree is a $20 strip steak. If you add a $24 soft shell crab entree, you’ll increase revenue. But you won’t sell much if any of the $24 crab.

Huh? Pricing is all about context. Adding the $24 crab makes the $20 steak seem inexpensive on a relative basis, and you’ll sell more of it – trading customers up from the $17 entrees.

If you are thinking about pricing strategy, give this book a look.

Caught on film: BootStrapper in the wild

One of my clients just wrote me an email that warmed the cockles of my heart (though it could just be I’ve eaten too much bacon this week).

We worked together to craft a business plan for him on a business to business service . The plan helped him focus his strategy, and develop a roadmap for moving forward. He was torn between whether to bootstrap, or raise capital to grow faster. He pitched to several angel investor groups, and got through three rounds of grilling before hearing those dreaded words:  ”We’d like to see some more traction before we commit”.

At that point, it seemed the best choice was to stop spending time trying to raise money, and start spending more time closing sales.  Here’s an email he sent me today:

“The investor thing was not panning out as quickly as I had hoped, but maybe that was a blessing in disguise. (It also took time away from my focus on customers).  I (re-focused), and damn is it rolling now!!!  I’ve signed some GREAT exclusive contracts and all is going great. Moving from 0-60mph right now. The time spent with you was invaluable to my success. The structure and focus you gave to me during our sessions was a catalyst in this next generation of my business endeavor.”

All the credit goes to him (yes you, “Pablo”). You’re a text-book example of how drive, tenacity and resourcefulness lead to success, even with limited capital. You are my bootstrap hero of the week. Kudos.

16 questions to ask yourself when planning a business

Here are questions I ask my clients when helping them develop business plans to raise capital:

1. What are your goals for the business? Is there a revenue number you’d like to hit? Do you want to sell the business, and pull out some amount of personal wealth? Do you have other motivations (e.g. fame, press, a bridge to other opportunities, etc.)?
2. Who is on your current team, and why are they uniquely qualified to execute your plan? As you expand your business, what are the key management roles you’ll need to fill? Have you identified candidates for those roles yet? Do you know what the cash / equity compensation will be?
3. Do you have recent data on the size and growth rate of your industry? What are the key trends driving the business?
4. What customers will you be targeting? Can you prove that they’ve got unmet needs
5. What will be your unique positioning within the market?
6. What businesses most closely resemble the one you will build? Do you have data on how they built their business, including the evolution of their product lines, distribution, and revenue
7. What will your product offering consist of, and how will it evolve over time – including categories and price points?
8. What’s your marketing strategy?
9. What are the unit economics of your business? What does an average sale look like in terms of revenue and variable costs? What’s your break-even volume?
10. What’s most likely to go wrong with your plan, and how can you prevent it from happening? How have similar companies failed / what obstacles did they run into?
11. Who are your competitors? How are they doing? How will you differentiate yourself from them?
12. What are the next phases of implementation? What tangible milestones will you aim for in each phase?
13. What have you accomplished to date that helps prove you are capable of executing against your plan?  That can include:  the team you’ve built, distribution channels and performance in those channels, revenue, branding, etc.
14. To what extent have you projected your future revenues? Expenses? Team structure? Distribution?
15. How much capital are you raising in the current round? Where will the money get you? How will you spend it? Will you need additional funding? When? How much?
16. What’s your exit strategy? Who will buy your company? Why? What will they pay? What transactions can you point to that lend credence to your exit strategy?
17. What is the valuation of your company today, and the basis for that number? How much equity are you willing to give up to new investors in this round?

236 people get married per DAY thanks to eHarmony

A few weeks ago I sat on a panel about exit strategies for startups, run by Collective-E and the American Business Women’s Association. I’d say most of audience members were what I’d call Digital Immigrants – people over 40 who were, on a relative basis, late adopters to phenomenon like social networking.

One of my fellow panelists had her wedding site acquired by eHarmony, and the question came up, “Why does eHarmony care so much about weddings?” The answer shocked just about everyone in the room:  On average, 236 eHarmony members marry every day in the United States as a result of being matched on eHarmony. Just then, a woman in the audience of about 50 people raised her hand. “I’m one of them,” she said.

What’s the lesson here? Perhaps just an indication of how quickly and drastically the world has changed due to the web. The last time I was single was about 5 years ago, and while I consider myself to be pretty open to trying new things online, I never tried the online dating game. Now, it’s the norm, not the exception.

Lottery vs. venture capital

I was just reading in Crain’s that only 19 companies in the NY-metro area closed early-stage venture capital funding last quarter. 19!!!

That got me thinking, are you better off playing the lottery? The numbers aren’t apples to apples, but just for fun, consider this:

• 1,600 people per year in the U.S. win at least $1 million in the lottery.
• 483 companies raised seed stage VC funding in 2008, and another 1,072 got early stage funding.

Not far off!! So, unless you’re sure you’ve got the right stuff (e.g. team with previous startup wins, chance to generate $100 million+, significant traction to date, a network of vc contacts, etc.) – stick to bootstrapping or angel funding through your early stages.