Friday, December 29, 2017

6 Guidelines On How And When To Use Non-Disclosures

confidential-disclosure-agreementAs an advisor to entrepreneurs, I often have to deal with people who are convinced that they must get me to sign a non-disclosure agreement (NDA) before they begin talks about their new venture. They seem shocked to learn that most professional investors and advisors, myself included, routinely decline such requests, due to costly litigation and administrative nightmares.

My view is that non-disclosures won’t protect you from unscrupulous business contacts, so you simply shouldn’t deal with the flood of unknown people who will contact you via the phone or Internet. Stick with people you meet through warm introductions, or count on the integrity of professionals who have a visible reputation and references, instead of a legal document.

Yet I recommend to every entrepreneur that there are still situations where an NDA (sometimes called Confidential Disclosure Agreement) makes sense compared to normal situations, where your risk of losing an investor or advisor is greater than the risk of your idea being compromised. Here are my guidelines for when a signed agreement is required, versus other alternatives:

  1. Insist on a two-way NDA for partner negotiations. Most often, your best partners are in some way a competitor, or already in a business complementary to yours. They could easily copy your business, so a mutual non-disclosure is required for protection in both directions. It pays to talk to competitors about the business, but not your business.

  2. Get an NDA before detailed patent disclosures. Entrepreneurs should never disclose the details of a planned or current patent application to any outsiders, until after a non-disclosure or other contract has been signed. Potential investors don’t need this data, except perhaps as part of a final due diligence after an initial signed agreement.

  3. Never disclose trade secrets without a contract. Some entrepreneurs avoid the patent process, since patent details become public once a patent is issued. Trade secrets, which may be recipes, formulas or processes, should only be disclosed on a need-to-know basis, even to employees, and then always accompanied by a contract.

  4. Don’t ask for an NDA from trusted investors and advisors. If you are approaching a recognized venture capital group, or even an accredited angel investor, a non-disclosure agreement is counter-productive. These professionals value their integrity, like your therapist or financial advisor, and will not share your business details nor steal your idea.

  5. Don’t even respond to unsolicited requests for details. If you receive an email or phone call requesting details on your plan from someone you don’t know, don’t assume that asking them to sign an NDA will protect you. The same is true for strangers who may approach you at networking events or industry conferences. Prepare a high-level pitch.

  6. Read NDAs carefully for scope and duration. In today’s world of rapid innovation and new technologies, any individual or company should be hesitant to sign an agreement that limits their activities for more than two years, or is too broad in scope. If a longer term or scope change proves necessary later, any agreement can be amended as required.

In my experience, trying to tantalize a person of interest to you by dangling an NDA for signature, almost always backfires, to define you as too risk averse or paranoid to be a successful business person. In fact, if you have a good idea, you need smart investors and professionals to spread the word to other good people, so you really want them to talk and get feedback for you.

I also recommend that you practice explaining your concept in marketing terms through social media, networking opportunities, and crowdfunding. If that doesn’t get any attention, the details probably don’t need protection. Demanding an NDA too early is a sure way to kill your dream before the people who can help you even know what you have to offer.

Marty Zwilling

*** First published on Inc.com on 12/15/2017 ***

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Wednesday, December 27, 2017

10 Questions To Ask Before Selecting A Search Firm

executive-recruitmentI started out in business as a techy geek, so I understand why technologists starting a new venture spend so much effort getting the product just right. Yet I’ve learned over time that building the business is all about having the right team members. Thus I’m frustrated when I see founders pushing off recruiting, or jumping to quick and cheap solutions, like Craigslist and free job sites.

I’m fully convinced that you get what you pay for with people. That doesn’t mean you need to hire an expensive recruiter for every position, but it does mean that you must put the same time and effort into finding rockstar people, as you do in building a rockstar solution. I believe the quality of your employees becomes more and more critical to survival and growth as the business matures.

In fact, according to a new book, ”Recruit Rockstars,” by Jeff Hyman, ninety percent of business problems are actually recruiting problems in disguise. Hyman started his career at the preeminent search firm Heidrick & Struggles, and has built four companies, so he knows the ropes. He and I both believe the right people are the most competitive advantage you can have in business.

He provides some great guidance from his experience, which I learned the hard way, on how to select the right recruiter, when you do decide to get some professional help finding the right people. Here are ten key questions you should ask in selecting any recruiter or firm:

  1. What are your search successful completion metrics? Competent recruiters should be willing to share the percentage of searches that they actually complete. Numbers in the 80 to 90 percent range indicate market-leading efforts. Other measures to gauge process efficiency include the interview-to-offer ratio, and the offer-to-close percentage.

  2. What percentage of your hires have stayed two years? This is often referred to as the “stick” rate for new hires. Eighty percent or higher is a good starting point, since twenty-four months is the current national average for job tenure with a company. Low numbers here may indicate poor vetting of candidates, or an inadequate search.

  3. On average, how long does it take to complete a search? The national average is 90 to 120 days. An efficient recruiter who isn’t overloaded with searches can often do it in half that time. The longer the search takes, the more money you are losing by not having the position filled and productive. This cost can far exceed any search firm retainer.

  4. How many searches are they working on concurrently? You want to know if your search will be one of fifteen they’re working on, or one of three. Good recruiters limit the number of concurrent searches, so they can give each one the proper personal attention. You want efforts to contact ideal candidates, rather than a total reliance on tools and lists.

  5. How involved is the recruiter in the search process? Some search firms hand off all the real work to interns or call centers. Good recruiters develop their own candidate list, are creative and smart about how to message your opportunity, and are persistent in their follow-up. This can make all the difference in attracting the right candidate.

  6. What is their vetting process for candidates? Make sure the recruiter fully understands your expectation of competency and culture, and is able to integrate that into their selection process. Find out who will be doing the interviews, how many rounds are expected, and whether the process will be done in person, by phone, or Skype video.

  7. What are the rules and size of off-limits list? Usually a recruiter doing a search for a company will agree not to recruit anyone out of that company for another client for a certain period of time, usually a year or two. Thus larger search firms with large clients in your niche may not have access to the candidates you need to fill a specific role.

  8. How will they position your company and opportunity? To attract the best candidates, they need to differentiate your company and your opportunity. Ask the potential recruiter to prepare a draft of the message they will be using, and make sure you agree that it will be compelling. Create job invitations, rather than job descriptions.

  9. Will they provide complete visibility to the pipeline? Just because you intend to use a recruiter doesn’t mean you can totally delegate the hiring process. You should ask for a report on progress weekly, and take the time to review who has been contacted, vetting progress, and interview results. Only then can you provide timely input and adjustments.

  10. What are the terms of any replacement guarantee? Most firms will recruit a new candidate for no additional fee, if the first one leaves or fails to perform. A guarantee of one month is not worth much, since this barely covers the honeymoon period. The best will offer a year, since poor fits and failures will certainly be evident by that time.

With these questions, and the commensurate work on your part, you too can attract rockstars who can really make your winning technology a leading business in the marketplace. Life is too short to get halfway there, and be held back by team members who don’t share your drive and commitment.

Marty Zwilling

*** First published on Inc.com on 12/13/2017 ***

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Friday, December 22, 2017

5 Steps To Reduce Due Diligence Investment Failures

investment-due-diligenceIn my activities as an angel investor, and my work with new ventures seeking investment, I find the “due diligence” stage to be fraught with the most risk. Usually this stage only really starts after an investor has expressed serious interest, or already informally agreed to invest. Most founders consider the story already told and the deal pending, so they aren’t sure what more then can do.

Others schedule long and exhaustive practice and coaching sessions for everyone on the team, including showcase customers, to make sure that everyone tells the most positive and consistent story. Trying to stack the deck probably won’t work, but some effort makes sense, since I have personally seen more than one deal fall apart due to key team members being totally out of sync.

My best advice is to put some structure and discipline into your due diligence preparation, including the following steps:

  1. Schedule a team meeting to bring everyone up to date. This meeting should include the CEO giving the investor pitch to the whole organization, and distributing the current business plan document to everyone. Since due diligence will include one or more visits from investors, everyone needs to be on the same page, with no surprises.

  2. Identify and resolve any pending personnel situations. You need to brief the investor early if there are organizational or people changes that are in process, or conflicts that may become apparent during the due diligence visits. Make sure everyone accurately posts their role with your startup on social media profiles, resumes, and references.

  3. Set up an interview room, stocked with current docs. The right preparation, including the latest business plan, org charts, process documentation, and an assigned executive other than yourself who can explain all of them, will go a long way in speeding up the process and creating a professional impression. Be prepared to follow-up as required.

  4. Ask each of your leads to prepare for an interview. Investors or their consultants will expect to talk to several key personnel, looking for an update on how the business really works, depth of skills, culture, traction, and action plans. It’s fair for you to ask for a few slides from each in advance, and make sure the overall story is complete and consistent.

  5. Update reference customers, partners, and vendors. Use this opportunity to validate their satisfaction and support for your company and your solution. If you find open issues that can’t be immediately resolved, be sure to proactively communicate these to investors, with an action plan, rather than try to hide or gloss over them.

The key theme for a successful due diligence is full disclosure and no surprises before or after the commitment. If more potential marriages were subjected to the same rigor, the divorce rate would likely not be in the current 50 percent range. In business as in other relationships, people on the team have to be above reproach, committed, and working on the same goals and values.

Startup equity investments imply a long-term business relationship, lasting five years or longer. During that period, it is very difficult for either party to get out of the deal, since there is no public market for the stock, and business divorces normally mean bankruptcy. It’s worth your time to do a little extra work here, and make the honeymoon phase a win-win one for both sides.

The founder needs to remember that investor meetings up to this point have been primarily off-site, with staged demos, and managed personally by the CEO or one or two executives. Due diligence reverses this process to include on-site visits and informal discussions with any or all members of the team, vendors, and good customers as well as bad.

Based on the size of the investment, and the runway available, the due diligence process can take several weeks, or even a couple of months to complete. Of course, it’s always appropriate to concurrently and openly reverse the process on your potential investor. A relationship as important as this one should never be a one-way street. Make it work for your new venture.

Marty Zwilling

*** First published on Inc.com on 12/05/2017 ***

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Friday, December 15, 2017

7 Groups Of Difficult Customers Test Every Business

woman-customer-frustratedHave you ever noticed that some of your business owner friends get all the bad customers, and yours all seem fairly reasonable? Or is it the other way around? I’m always amazed that, in my role as a business advisor, bad customers somehow seem to gang up on certain businesses. I long ago learned that the customer is not always right, but you can turn most around to be great.

In my experience, turning difficult customers around is more art than science, but it does help to understand all the ways they can be frustrating. I saw some good insights in a new book, “Dealing with Difficult Customers,” by Noah Fleming and Shawn Veltman. These authors are experts on customer service and customer experience, having helped hundreds of companies of all sizes.

I always try to remember that no matter how many businesses I have helped, I am still a customer more often, usually many times a day almost every day of my life. Thus the first step in understanding difficult customers is to put yourself in your customer’s position, and think how often you find yourself in one of the following difficult customer categories:

  1. Expecting what was promised but not delivered. This is called the expectation gap. As a business owner, you have to take a hard look, with your customer hat on, at what you promise and imply to your customers in your advertising, marketing materials, and your customer service. A winning strategy is to always under-promise and over-deliver.

  2. Unwilling or too cheap to spend for good service. The reality is that a good customer experience today is more important than a premium product. No customers, including yourself, are willing to tolerate multiple bad experiences, just to get the lowest price. For your business to prosper, don’t associate good service only with high-price products.

  3. Being unreasonably demanding of others. If you don’t feel like you are getting the proper attention or attitude, do you sometimes become difficult and demanding with business support personnel? On the business side, this translates into hiring customer-facing people with the proper training, motivation, and solutions to defuse difficulties.

  4. Learning that your expectations were wrong. The reality is that we all make mistakes, so no customer is always right. Even when customers are wrong, they don’t have to be difficult if you treat them with respect, empathy, and personal consideration. Every business needs processes, but must empower employees to define exceptions.

  5. Intentionally ignoring loyalty, despite good service. I think we all believe that loyalty is not an entitlement. Customer loyalty has to be earned through day-in-and-day-out good service, and returned in kind. Make sure your total customer experiences, not just service, are worthy of loyalty, and you won’t find customers walking away.

  6. Spending more money there, so expect better service. In reality, every customer’s version of “more money” is different, so as a business, you must demonstrate “better service” than expectations and competitors to everyone opening their wallet. You want every interaction to be positively memorable, so no one has to keep score.

  7. Complaining about everything, even the small stuff. If you have already built loyal customers for your business, they are willing to brush off an odd mistake as an anomaly. People usually become difficult due to a real problem, which they amplify by throwing in all the small stuff. Being consistently good is better than being great once in a while.

Of course, we all know people in our life and business who act irrationally difficult, despite our every effort to provide exceptional support. These deserve to be fired as customers or friends, since life and customers are all about building and maintaining win-win relationships. In fact, if you treat your customers as do your best win-win friends, you probably won’t have any bad ones.

Marty Zwilling

*** First published on Inc.com on 12/01/2017 ***

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Monday, December 11, 2017

5 Keys To New Venture Financial Projections That Work

New-venture-financial-projectionsAs an angel investor and business advisor on new ventures, I expect to see five-year financial projections from every entrepreneur. Yet I get more pushback on this request than almost any other issue. Founders point to the great number of financial unknowns in any new business, and are reluctant to “commit” to any numbers which may come back to haunt them later.

From my perspective, projecting financial returns is part of the homework every business person needs to do in sizing customer opportunity, product costs, pricing, competition and customer value, before expending their own resources in a highly risky venture. You need these projections to assess viability, set internal goals and milestones, and measure your team’s progress.

For investors, it’s more of a credibility and intelligence test. Does this entrepreneur understand the basics of business costs in the selected business domain, growth dynamics, and the competitive environment? Reasonableness and business sense are the issues, rather than accuracy, since everyone knows that key parameters will change often before success.

There is no black magic involved in predicting numbers, and I always recommend sticking with the some basic guidelines, outlined here. With these, if you can paint a positive picture for your new venture, I assure you that investors will sit up and take notice, and you will also know how to drive yourself and your team:

  1. Determine your gross margin on sales. Per-unit cost less your cost per unit sold is your gross profit margin. If you lose money on every unit, you won’t make it up in volume. As a rule of thumb, most new businesses need a margin above 50 percent, even on wholesale prices, to cover operational expenses and survive long-term as a business.

  2. Project unit-volume and price levels. Based on your market size and penetration expectations, size how many units you will sell, at what price, in every channel. This should ideally be a “bottoms-up” commitment from your sales team, not your own optimistic guess. Be sure to include expected volume cost and price reductions over time.

  3. Quantify overhead and growth costs. It’s amazing how fast costs escalate as you grow. You need 5 percent or more of revenue for marketing, more for new development, and people costs will double as you add benefits, insurance, training, IT and processes. Check competitor numbers and industry average statistics to get you in the right range.

  4. Set a target growth and market penetration rate. If you want to be assessed as a “premium” acquisition candidate down the road, an aggressive but reasonable target might be doubling revenue each year. For credibility, market penetration within five years should be at least 5 percent. Numbers far afield from these need special explanations.

  5. Calculate cash-burn rate and investment timing. Initial sales success means more cash will be needed for inventory, receivables, facilities and people. Project your cash burn rate to keep at least 18 months between venture capital or angel investments. You need to know how many units to sell, and how much time you need to break-even.

From a planning and strategy standpoint, I offer these additional recommendations to maintain your credibility with outside investors, and to balance your risk due to market uncertainty:

  • Add a buffer to your investment calculations. Investment requirements should always be based on financial projections and cash-flow calculations, not on what you think you can negotiate. If your cash flow shows a shortfall of $750,000, add a 33 percent buffer, and ask for a million. Be willing to give up 20 to 33 percent of your equity to support this.
  • Update financial projections at least every quarter. Financial forecasts for startups are assumed to be estimates that will be updated as more information is known. Adjust revenues quarterly or even monthly, and replace forecasts with actuals as soon as a period ends. A business plan with old projections, ignoring actuals, will kill your credibility.
  • Avoid high-medium-low projections, as well as irrational ones. Investors want entrepreneurs to be aggressive, but don’t make projections that make you look like the next Google. Entrepreneurs tend to be driven by their own targets, so pick an aggressive one, and you will likely do better than starting with a conservative one.

I always recommend that entrepreneurs do their own financial projections, rather than rely on an outside expert, because it’s the process that adds the value, more than the numbers. For additional value, I suggest the use of a spreadsheet financial model, with a few variables, like price and volume. This allows a quick analysis of alternate assumptions, with revenue impacts.

You don’t need complicated ratios for a startup business plan, since you don’t have a history. On the other hand, without financial projections, you don’t have a viable venture proposal. You don’t need an MBA to be credible with investors, just some common sense business expectations, and passion based on some data. Most of us need full investor support to turn our dream into reality.

Marty Zwilling

*** First published on Inc.com on 11/28/2017 ***

See Portuguese translation, thanks to Artur Weber

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Friday, December 8, 2017

7 Plan Elements That Separate Businesses From Hobbies

handmade-hobby-or-businessUnless you are a serial entrepreneur with a string of successes behind you, you need a business plan to convince investors that you can build a business out of the dream that has been driving your passion to change the world. Don’t believe that Silicon Valley myth that all you have to do is sketch your idea on the back of a napkin, and investors will line up to give you money.

Based on my experience as an angel investor and a mentor to dozens of entrepreneurs, having no business plan is the quickest way to define yourself as just a dreamer, or at best a hobbyist. Let me be quick to say that a plan doesn’t have be a book, and probably should start as a “pitch deck” of maybe a dozen slides which cover all the right bases. The details can be added later.

Now let’s talk about the bases that need to be covered. Since this document is outward facing, it is important to keep the terminology and tone consistent with that of your customer set, investors, and business partners. Skip the acronyms and jargon. Open your pitch by grabbing the investor's attention with a statement or question that piques their interest, then hit the following key bases:

  1. Definition of customer problem, followed by your solution. Use concrete terms to quantify value and pain. For example, “I just patented a new cell-phone technology that will double battery life for half the cost. No more pain of phone shutdown in the middle of a call.” This is your elevator pitch hook, which you must be able to deliver in 30 seconds.

  2. Opportunity segmentation and competitive environment. The market scope for your solution should be quantified in non-technical terms, with data sourced from professionals in the industry, rather than your own opinion. List key competitors and alternatives, highlighting your sustainable competitive advantages, such as patents and trademarks.

  3. Provide details on the business model and cash flow. Every business, including non-profits, needs a business model to survive. Providing your product or service free to customers may sound attractive in marketing materials, but you need revenue sources to survive. Free is a dirty word to investors, since it’s hard to get a financial return from free.

  4. Highlight why your team is the best for this challenge. Make sure you name your key players and advisors, and include any prior startup experience and prior leadership in the relevant business domain. Current and past titles don’t convey this information. Professional investors look for the right people, more than the right product.

  5. Marketing, sales, and customer experience. I’m assuming that most of you will see these as essential elements of a real business, but not needed for a hobby. Yet I continue to get funding requests that never mention any specific plans or costs to be associated with these elements. No mention usually means no plan and not competitive.

  6. Project revenues, costs and investment needs. If you are not willing to set targets for yourself, don’t expect investors to commit their funds. Major milestones along the way should be outlined. When sizing your funding request, be aware of the value of your startup today, since most investors expect an equity share for their contributions.

  7. Outline the potential investor return, and payback process. The best way to do this is to highlight a recent similar company payback to investors, via going public or acquisition exit. Angel investors look for high-growth potential companies who can double revenues yearly, and sell for a high multiplier, providing a 10- times multiplier return.

If you don’t have the time to write things down, or your writing skills leave something to be desired, don’t be afraid to get some help. No executive I know writes all his own contracts, but every smart one owns every one that is written for him, and understands every element. An entrepreneur who can’t manage a plan, probably won’t be able to manage the new business.

There are no guarantees, but various studies have found that entrepreneurs who start with a plan generally double their chances of building a successful business. In any context, and especially in the high-risk world of startups where more than 50 percent fail, you don’t need to start your venture by convincing key players that you have nothing yet but an expensive hobby.

Marty Zwilling

*** First published on Inc.com on 11/22/2017 ***

See Polish translation, thanks to Weronika Pawlak
See Hungarian translation, thanks to Elana Pavlet
See Czech translation, thanks to Ivana Horak
See French translation, thanks to Mathilde Guibert
See Swedish translation, thanks to David Mucchiano

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Friday, December 1, 2017

10 Top Revenue Models Drive Viable Businesses Today

AirbnbToronto5I was mentoring some graduate students at a local university recently, and I sensed again that profit seems to be a dirty word these days to many aspiring entrepreneurs. I’m certainly not a fan of customer rip-offs, but even non-profits have to be cash-flow positive, or have deep pockets, to help anyone for long. Every business needs to develop a revenue model even before a product.

The alternatives range from giving the product away for free (revenue from ads), to pricing based on costs, to charging what the market will bear (premium pricing). The implications of the decision you make are huge, including brand image, funding requirements, and long-term business viability. It’s na├»ve to think you can sell below costs, and make it up by attracting more customers.

This may seem like Business Fundamentals 101, but the market changes rapidly, so I thought it might be useful to share what I see as the most common revenue models being used by businesses today. As an experienced business advisor, here is my current summary, with some of the pros and cons or special considerations for each:

  1. Product is free, revenue is from advertisers. This is the most common model used by online businesses and apps today, the so-called Facebook model, where your service is free, and the revenue comes from advertising. The challenge is to get the first million customers, before advertisers will sign up. Facebook spent $150 million getting started.

  2. Freemium model – people pay for upgrade. In this variation on the free model, used by LinkedIn and many other online and app offerings, the basic function is free, but premium services are only available for an additional fee. This also requires a base critical mass, and real work to differentiate and convert users to paying customers.

  3. Price based on product costs plus margin. In this more traditional product pricing model, the price is set at two to five times the product cost to cover overhead and operational expenses. If your product is a commodity, the margin may be as thin as ten percent. Use it when your new technology gives you a tremendous cost improvement.

  4. Price based on average value to customer. If you can quantify a large value or cost savings to the customer, greater than your cost, charge a price commensurate with the value delivered. This doesn’t work well with “nice to have” offerings, like social networks, but does work for new drugs and medical devices that solve critical health problems.

  5. Price with recurring low subscription payments. This is a very popular model today for Internet services, with monthly or yearly payments, in lieu of one higher up-front price. Advantages for your business include a stable revenue stream, customer retention, and increasing customer investment over time. The customer advantage is a lower entry cost.

  6. Tiered pricing based on volume on customer scope. In product environments, where an enterprise product may have one user or hundreds of thousands, a common approach is to price by user ranges, or volume usage limits. Keep the number of tiers small for manageability. This approach doesn’t typically apply to consumer products and services.

  7. Revenue is a percentage of every transaction. This is another popular model for platforms, e-commerce, and affiliates, where you as the transaction or product provider get a small percentage or royalty on every ultimate sale to customers by others. Amazon led the way on this one online, but distributors have long used this model in retail.

  8. Low product price, but support is extra. In this model, the product price is attractive or free, but the customers are charged for installation, customization, training and other services. This model is good for getting your foot in the door, but it is basically a services business with the product as a marketing cost. Customers generally dislike this model.

  9. Low entry price, with priced features additional. This approach works if your product can be configured “bare-bones” for a low price, and additional features priced separately. It is a very competitive approach, but requires design and development effort for value at every level. Expect extra costs for development, testing, documentation, and support.

  10. Low price base, make money on disposables. With this model, popularly called the razor-blade model, the base unit is often sold below cost, with the anticipation of ongoing revenue from expensive supplies. Today, think cheap printers with expensive ink cartridges. This is another model that requires deep pockets to start, so be careful.

If you don’t like any of these models, you can always try the non-revenue model, sometimes called the Twitter model, where you count on investors to sustain your costs while your valuation increases exponentially based on millions of customers. The nonprofit version of this is a service so valuable and recognized, like UNICEF, that you never run out of donors and philanthropists.

Yet smart people don’t count on being one of these, and have a plan to validate their business model, concurrent with their plan to validate their solution. Certainly you shouldn’t be afraid of using the word “profit” in your discussions with a business advisor, potential investors, partners, and even customers. A reasonable profit will make your idea a reality for all, rather than a dream.

Marty Zwilling

*** First published on Inc.com on 11/17/2017 ***

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