Grassroots Marketing | Inc.com

If you are struggling to gain market traction this is for you.

Inc. put together a great list of mini articles with some equally great insight into the creativity it takes to compete in a crowded marketplace as a startup. A must read for almost any consumer focused startup: Grassroots Marketing | Inc.com (Link).

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A VC: Difficult Is Good

After reading a great article (Build Something People Need: On Raising Venture Capital And Creating Startups That Matter) about proper entrepreneurial focus on the FastCompany Blog by Rod Ebrahimi, it reminded me of another article (A VC: Difficult Is Good) by Fred Wilson that I had saved earlier this year and meant to write about before now.

Both of these articles touch on two essential characteristics of successful entrepreneurs...they focus on value to customers and work incredibly hard. When those two characteristics are coupled with talent and a dash of luck big things can result and, as an investor, that is the canoe I want to be in.

Entrepreneur Resources - Getting an Education

So you are an entrepreneur wanting to learn about starting and running a high growth company or about the angel/vc finance world. Where do you go?

Right here:

1. For Videos - (LINK) YouTube
2. For Books - Check out the recommended reading list - (LINK)
3. For BAN information - check out our website (http://www.birminghamangels.com/)
4. For current topics/articles follow BAN on:

Facebook - (Page LINK)
Twitter - (Profile LINK) @bhmangelnetwork
LinkedIn - (Group LINK)

(Article) The Four Main Things that Investors Look for in a Startup | Both Sides of the Table

This is a good overview that is worth keeping in mind. I still like the Blue Ocean Strategies factors, but this gets to the point too.

The Four Main Things that Investors Look for in a Startup | Both Sides of the Table

"1. Momentum,
2. Management Team,
3. Market Size, and
4. Money."

Organized for success...

Many new (and even some experienced) entrepreneurs seem to struggle with the dizzying array of business entity choices and their various combinations. To name a few there are: proprietorships, partnerships, limited partnerships, LLPs, LLCs, Trusts, Corporations and S-corporations. Each entity has its place and time, but for high growth potential businesses I will choose a corporation almost every time. The reason is mainly tied to tradition and corporate governance.

"Tradition" you say...why in the world would that be a big deal? Well, the reason is rooted in a desire to maximize available resources and standard corporations have been the traditional entity of choice for high growth entities for a long time. That has resulted in most of the resources being created with a heavy Corporation bias and that bias runs the gamut from internet articles to professional expertise.

Corporate governance is the other reason and it is probably the biggest. By corporate governance, I mean the structure of how the entity develops, authorizes/makes decisions and holds people accountable.

Corporations have three main levels of authority to get these things done: (1) Board of Directors ("Board"), (2) Shareholders and (3) Officers. The basic process flow is: Shareholders elect the Board; the Board approves strategies and major decisions, including hiring/salaries of Officers; and Officers suggest strategies and actions to the Board for approval, then work to implement. As payment for their respective parts Shareholders receive profits, Officers (and employees) receive salaries and Board member compensation varies, but they typically receive a stipend of some kind.

By having the Board to focus on overall strategy and wade in on major decisions the company can ensure that planning is occurring (i.e. "doing the right things") while Officers focus on the day to day activities (i.e. "doing things right"). Meanwhile, Shareholders hold everyone else accountable for the end results.

This division of labor is critical in a high growth entity because, without the checks and balances, the high volume of necessary work makes it very easy for the favorite activities of the founders to take dominance to the detriment of other necessary activities. The typical result....Chaos and frustration reign.

In very small companies (startups or otherwise) maintaining a proper division of labor is complicated as well, which can be double trouble for a high growth startup. Small companies by definition don't have a lot of people involved, so it is easy not to properly maintain the division of labor because there aren't actually different people performing each function. When small size is combined with entities that do not legally require such a division of labor it is easy to understand why it may never occur at all and in companies where planning, implementation and accountability are not all treated with due respect (which can certainly happen in a corporation too) the results are going to be sub optimal.

So the net-net is that I usually recommend corporations for high growth potential companies, but I would always recommend that companies think hard about what structures are in place to address planning, implementation and accountability regardless of the entity choice.

Communication and Planning in a High Growth Company

Ralph Waldo Emerson once said, "Speech is power: speech is to persuade, to convert, to compel. It is to bring another out of his bad sense into your good sense."

For quite some time I have suggested a plan (see below) of communication to clients and BAN participants.  It's not anything ground breaking, but it is a programmatic way for a company to facilitate orderly communication.  Nonetheless, it is amazing how few of them really follow it (or any other) systematic plan of communication and I think it ends up hurting them...potentially a lot.

Effective internal communication among stakeholders (Management, Employees, Board, Shareholders, JV partners, etc.) is critical to coordinating efforts and maximizing the opportunities for success, but it doesn't just apply to startups...most companies would do well to try and systematize some regular forms of communication.

Suggested Plan:

1.  Quarterly (maybe monthly early on) board/advisors meeting
-- Progress
-- Plan
-- Challenges

2.  Weekly recap email of progress and "to do" items

3. Monthly Financial Statements *(email updated statements even if no revenue)
-- Income Statement  (aka P&L)
-- Balance Sheet

4. Annual letter (recap and vision)

If you are looking to make a change for the better in your business, give it a try or work out your own plan and let us know how it goes.  I bet you will be surprised at the energy and progress it will create.

Niche, Dominate and Repeat

I was having a conversation with Jonathan Sides, Daxko VP of Finance, the other day about startups in Birmingham and he told me a bit about their story.  He summarized their business strategy as "niche, dominate and repeat."

I have seen a lot of strategic theories and there are plenty of books that talk about niching, but I had not heard that phrase used as a complete strategy before...I loved it.

"Niche, dominate and repeat" encapsulates a lot of good strategic thinking because "niching" forces a company to define exactly what they want to be and who they want to serve while "dominating" reinforces that niching process and encapsulates most of the strategic tools such as:

• product/service differentiation
• value proposition planning
• creating a minimum functional unit
• customer experience focus
• adoption planning
• etc.

"Repeat" is also a critically powerful tool because it implies both continued process improvement and new market growth.  

A lot of business planning and strategy is cumbersome and somewhat clunky to use, with graphs and graduate level books to understand and it can be difficult for many entrepreneurs to actualize the theory.  On the other hand "niche, dominate and repeat" is just four words and it doesn't take a rocket scientist to figure out what it means.  With that kind of simple strategy, everyone on the team ought to easily be on the same page and what a powerful place to start.  I don't think it is a surprise that the guys at Daxko are getting it done.

If you are in an existing business or starting a new one..."niche, dominate and repeat" is not a bad place to start.

Just Do It....

Nike has made the phrase "Just Do It" famous.  They started with the sports arena and now it is a part of the American English lexicon.  It applies to business as well.

I have seen many smart people and good businesses suffer because of a desire for perfection...the perfect label, the perfect timing, the perfect product, the perfect customer, etc. etc.

Unfortunately, waiting for perfection usually is a permanent wait.  Even Apple's Steve Jobs (a notorious perfectionist) has to eventually declare the product "good enough" and start selling, but for most startups even a Jobsian style wait may be too long and wastes two of the primary advantages of a startup...speed and flexibility.

For most startups, the best strategy is to plan quickly, execute to the best of your ability then iterate.  By following a speed to market strategy startups can take advantage of their relative size and use it against the bigger, slower competition.  It also has the advantage of minimizing the time spent in the negative cash flow "valley of death" and that can significantly increase any businesses chances of success.

So don't sit around waiting....Just Do It.

The company financing life cycle...

I ran across this diagram of the financing cycle of startup companies on eandua.com and thought it was an elegant expression of where true seed stage capital fits in the overall scheme of our economy and the critical role it plays despite it's relatively small dollar amounts.

I also think this points out a somewhat obvious, but often overlooked, concept...things can really start to take off once a company gets to Break-Even and is cash flow positive.  


That is why I believe the goal of most seed stage investments should be to get companies to a positive cash flow.  When a company gets sustainable positive cash flow all kinds of good things are possible because the home runs have a chance to happen, but solid returns can be achieved over time even without them.

ESOPs...with rising taxes it may be time to look.

Our main clients are closely held businesses (and their owners), so business and individual planning are often tied at the hip in our office.

With what appears to be inevitable rising taxes, both business and individual, in a still tough business environment we are having to look hard for tax advantaged strategies that (at a minimum) won't hurt the underlying business operations.

One of the strategies that keeps popping up are ESOPs (employee stock ownership plans).

Basically, ESOPs have some commonly stated benefits that include:

1. Capital gains tax deferral (IRC Section 1042); **this is the one that gets all the press

2. Tax free income to the ESOP from an S-corp.;

3. Employee motivation and retention; and

4. Succession planning.

ESOPs have been bounced around in our offices for a long time, but we seem to be finding more situations that fit than in the past. I think that is because in the past, most of our clients were looking at a leveraged ESOP as a tax free exit (#1 above) and often the underlying economics didn't work, but recently we have had some clients looking at ESOPs for other reasons and the results seem to be more favorable.

There are, of course, a lot of factors to to look at before anyone pulls the trigger on an ESOP, but it looks like we may be seeing more of them in our future and they are definitely something to consider in the right situation.

Content Based Website - Profitability Analysis

I love spreadsheets for evaluating the relative financial feasibility of a deal. It just helps me to take the personalities out of the equation for a little while and run some scenarios.

I have a fairly basic and flexible version (See Link) that I thought might be a helpful place to start if you are thinking about monetizing a content based (i.e. "eyeball" or advertising based) business.

**Hint - don't start unless it looks REALLY good because no one ever seems to meet the pro formas (at least not in the short run).

For more in depth help (or if you are a Spreadsheet Jockey in training) there are any number of books, etc. available.

Monetizing a Website or Blog...just the Basics

Ok, I have had several conversations in the last few days about monetizing websites or web businesses (Blogs certainly included here). Basically, it comes down to adding up the value of each visitor, plus any services or products a site sells.

But for a simple lawyer like me, I needed to have a basic course in what revenue streams were available for a content based site.

After a bit of reading...the core seems to be: (Article)

1. AdSense
2. Affiliate Marketing (Article)
3. Banners
4. Sponsors

AdSense pays a percentage of the (reportedly 1/3) of the Google Adwords fee paid by the advertiser. Affiliate marketing (like Amazon's program) is similar, except the payment is a sales commission. Banners are similar to AdSense, especially if you use a banner management program.

In all of these situations, click through rate ("CTR") is very important. Typical CTRs are in the range of 1-5%, but there are occasional reports of higher rates. (Article)

Sponsors (and sometimes banners) are simply companies paying a fee for a branding presence or maybe even individual donations. The drawback with site sponsorship are that they usually need to be individually sold (which requires time), but they have the benefit of bringing a potentially larger revenue stream into the site owner if the correct fit is available.

If all that revenue grows substantial the time may eventually come to sell..., but that is another topic for another day.

Sales Strategy...Solutions v. Products

I see a lot of startups and more seasoned companies that are trying to cold sell their product. Cold selling a product is hard.

What I mean by cold selling is that they have a product (could be a service too) they like/love and they think just about everyone else will too, if they knew about it. This attitude is often characterized by statements like:

- "Everyone is a potential customer"
- "Sales are not a problem if I just had some more money"
- "I'm not worried about sales"

****Newsflash - Everyone should be worried about sales...it is the lifeblood of the company****

And there is help available.

Sales are indeed a process. In fact there are any number of websites that will be happy to show them to you. One simple flowchart is from www.better-sales-and-selling.com :



This type of chart is a good start toward a real sales strategy because it is simple enough to be flexible for a variety of companies, but segmented enough to build a legitimate strategy outline.

Each step in the process should have a defined solution and in really great sales organizations there are numerous solutions to each step.

Nonetheless, the heart of the process will almost always be the solution. The solution has to have a compelling value proposition to the customer, or inertia and the noise of life/business will makes sales much more difficult. If a company has a solution with a compelling value proposition then most of the remaining process is simply communication.

To validate or formulate a value proposition is critical and there are also any number of websites that will talk about that process as well. Blue Ocean Strategy is probably my favorite, but the simplest one is something I have heard many times around the house:

1. The easiest thing to sell is something that "makes" money,
2. the next easiest thing to sell is something that "saves" money, and
3. the hardest thing to sell is something that "cost" money.

Whatever they choose to use, if a company wants to have better sales, they probably need to look at their overall sales strategy because it can (and usually will) drive the success of a company.

Is a Company ready to think about outside investment....?

"Sequence of Blue Ocean Strategy" is pretty much a summary of the initial evaluation of an angel deal... www.blueoceanstrategy.com/abo/sequence.html

1. Product/Service has Significant Value/Utility to the User
2. Compelling Price
3. Appropriate Cost of Production (i.e. good margins at the compelling price)
4. Reasonable Adoption Plan

At least self certifying (if not certification by a relevant 3rd party) that a deal passes well through this evaluation should probably be a requirement for beginning any fundraising effort.

What is a minimum functional unit and why should I care?

I'm not certain where I first ran across the concept of a "Minimum Functional Unit", it was probably is a software engineering book or maybe in a biology blog. Basically, the concept for a business refers to the simplest revenue producing activity that may be sustained in a given market space.

Wherever it initially came from, I have certainly jumped on the bandwagon, at least as it relates to start-ups.

You ask, "Why is it such a great concept for start-ups?" Because most entepreneurs have ADD. Most are creative, go-getters with an abundance of energy. Unfortunately, many have a really nasty habit of starting projects, getting a feel for the major issues, then getting bored or distracted by some new project.

Getting distracted and losing focus for a start-up can mean death because there isn't enough time or money to get everything done anyway, so success depends on focusing all available resources on the highest impact activities.

Additionally, focusing on a core activity and doing it great simplifies almost everything else.

Once that minimum functional unit is operational, the goal is to continue systematizing and perfecting the unit, it is also time to consider scaling the business, which is where a small business starts toward becoming a big business.

Startup Professionals Musings: Ten Keys to an Investment-Grade Business Plan

Startup Professionals Musings: Ten Keys to an Investment-Grade Business Plan

Thanks to Glenn Kinstler for pointing this one out ( http://www.alabamalaunchpad.com/ ).

Very good bullet point post on the elements of a good pitch and probably something I will provide to our BAN presenter pool.

Now go build something.

Entrepreneurial Edge - In a Recession, Angel Investors Are a Little Less So - NYTimes.com

Entrepreneurial Edge - In a Recession, Angel Investors Are a Little Less So - NYTimes.com

Interesting article about some of the current issues facing both startup companies and their backers.

It's probably worth noting that here in Birmingham, I know of one VC firm that has recently raised a new fund and another VC group that has a portfolio company IPO planned in a couple of weeks, so things aren't completely grim.

Now get out there and build something.

Leverage your Private Equity

I periodically have companies seeking private equity or venture capital funding that need LOTS of funding. Such companies are quite often in the industrial services or products realm, but can come in almost any industry.

Companies that have viable business models, but capital requirements that exceed what typical PE or VC funding will provide have additional and sometimes prohibitive hurdles to overcome in order to make their visions a reality.

If a company is to make the leap from great idea to business reality, then the management team is going to have to strategize a way to leverage the PE or VC funding in order to reach even greater sources of capital. Those other sources of capital could be a public-private partnership, public debt or even a private-private partnership, but in any case there will need to be substantial thought given to the source of that second round of financing because the quality of the plan for realizing the second round will likely play a large role in whether or not the company gets the first round of financing.