Tuesday, March 29, 2011

Two Flaws Lowering Your Valuation

I listened to an amazing web programmer talk about the features of the Software-as-a-Service (SaaS) product he will have ready for launch in a couple of months. He's been working on it for years, and he is very passionate about what it can do. After seeing what the product can do, I believe there are potentially several commercially-viable applications for his product.

Admittedly, he explained that he has neglected the "business-side" of his product, and he's secretly hoping a larger software company will absorb his technology for some outrageous price. So he has two flaws in his thought process:

FLAW #1: He is not a viable acquisition target until he can prove that his software works and it has "raving fan" users.

FLAW #2: He will command the highest valuation possible if he develops the most repeatable and scabable way to sell his product and executes on that bsuiness model as much as possible. This includes all the pivots that come with a start-up SaaS product. The more pivots, the better--meaning he is closer to perfecting the model.

Do you want to improve your valuation? Get more customers and hone your business model into the most repeatable and scalable way to generate cash flow. For once, stop talking about how great your product is and invest some time in figuring out the benefits (not features and advantages) your customers will receive from using your products and find the vertical of customers that are most likely to be early-adopters. From there, only make improvements to the features of your product if you can validate the improvements within the context of your business model.

Entrepreneurs who follow this pattern will set themselves up to receive the best valuation possible for the stage of development and growth they have achieved.

Monday, March 21, 2011

Everyone Has Competitors

One of the quickest ways to lose credibility with anyone who knows anything about business is to tell them you do not have competitors. Everyone has competitors that would love to take business away. Acknowledging competition and differentiating oneself is the way to beat your competitors.

A couple of months ago my wife spotted a mouse in our house. He (gender assumed) darted across the floor and into the laundry room, disappearing behind the dryer. We now knew he existed, and it certainly would have been foolish for us to pretend he didn't. My wife (why is she always the one who sees him first?) next saw him on a shelf in her closet. He had found an old bag of halloween candy my wife had convinced our kids to give up in exchange for a toy. He knew my wife spotted him, and, with no where to run, he decided to stay still, thinking the bag hid him from view. But his entire back half, including a long tail, exposed the sneaky creature. I was called in to excercise my well-honed mouse-catching skills--after all, I had done this once before.

I found a tupperware container, quietly approached the bag, and placed the container over the top of the bag and the mouse. Then I slid a thin piece of carboard under the container, keeping all of the contents inside, and drove that mouse to a nice field far away from our house where he would have to work a little harder to find tasty halloween treats.

Pretending I did not exist proved a bad choice for the mouse, and it will not work out well if you do the same to your competitors. But I caution you about another transgression entrepreneurs make when it comes to competition. It is competitor obsession. If you find yourself so focused on your competitors that you are, even in the slightest way, distracted from improving your own business, then you have competitor obsession.

So, my advice is to be aware of your competitors but not obsessed with them. Focus on improving your business and differetiating and "niching" your products and services and you will find the most success.

Monday, March 14, 2011

When is the Right Time to Hire?

I've had this question asked of me a lot lately: "Is it time for me to hire another employee?" I also hear questions like: "Is it time for me hire?" or "When can I add another manager to take some of the load I have been carrying?"

This is probably a good sign that entrepreneurs are experiencing some business growth but are cautious about hiring too quickly or being over-staffed, especially if their business does not maintain its current levels of business with some promise for future growth. Whatever is causing their need to know, each one of them needs to carefully consider the 6 Steps to a Good Hire that I wrote for American Express OPEN Forum. In addition to those six steps, I have some additional thoughts for your consideration.

Each industry has benchmarks for labor costs, and there are also plenty of general guidelines to follow in terms of what your business can afford and what makes sense in your business model. You should collaborate with as many of these resources as possible to properly staff your business.

For example, I recently completed an initial 5-Year IMPACT Forecaster for a customer and we could easily see when the business growth would justify new hires. With input from the entrepreneur and several other resources, we were able to etermine which employees would be more critical at certain phases of the business growth and allocated the new hires to those departments at the most opportune and effective times in the growth cycle.

If you are starting to feel overwhelmed with your business growth and are wondering when you should hire either your first (besides yourself) or an additional executive to your team, your financial validation for the addition can come from several sources. First, you might find that your revenue per employee is higher than the average and you are confident that the added cost will not impair your cash flow or profitability. Second, you may find that your industry spends, on average, 4.5% of its total revenue on executive compensation. If you are lower than that, or will be soon, it may be time to make the hire. Third, if you look at the organization chart of other organizations like yours and find they have more executives and managers than you (relative to size of organization), then you may find value in getting more leadership help.

Monday, March 7, 2011

The One Bet I Hope I Lose

A little more than a year ago one of the companies for which I serve as the CFO was experiencing very good sales growth. In fact, about seven months into the year it looked like the company might hit its sales projections for the year by the end of the eleventh month, one month quicker than we forecasted. As we discussed this as an executive team, I launched a friendly challenge to the Director of Sales: "I'm not sure you can hit our projection for the year by the end of the eleventh month. I'll bet it takes you all twelve months to reach the target."

He stiffened in his chair and showed a competitive grin. "I'll take that bet if it means I can win a steak dinner."

Not intending for him to take me up on my teasing, I was left no choice. "Okay, you're on. But it will be the first time I root against myself, because it would be great for the whole company if we could beat our forecast."

For the duration of the year not an executive team meeting went by without that steak dinner being a major point of discussion, and the company reached record sales and beat its budget weeks before the 11th month was over--a victory for everyone. Yes, it was a victory for me, even though I was going to buy the Sales Director and his wife dinner.

We put a pretty aggressive growth plan in place for the next year, and the company came out of the gates well in the first month, handily beating the sales forecast. Before I had a chance to fulfill my commitment from the prior year, I was offered a double-or-nothing scenario, which I gladly accepted. It's becoming evident that I will be buying two sets of steak dinners in the near future, and I couldn't be happier about it.

How is this company achieving such amazing sales growth? From its inception, the company was created on the solid foundation of customer needs it could uniquely solve. As sales are dropping for others in the same industry, this company continues to grow impressively. And its technology is innovative enough that the competitors initially disregarded the company's products and have only made feeble attempts to mimic some of the features, still falling far short of delivering the benefits to which the customers are becoming accustomed. Really, it's a classic example of Clay Christensen's The Innovator's Solution.

I am not the type to gamble or bet. In fact, I don't think I've ever done either before. I'm about to be zero for two, and I couldn't be happier about it!