SOPHISTICATED FINANCE

HBS: A New Model for Innovation

Innovation is a subject that interests me, in part, because of its critical role in entrepreneurship. Christensen may have defined the economics of innovation, but the process of innovation continues to be a subject of much continuing research and study. Today's HBS First Look led me to an interesting article about the research of HBS faculty member Karim R. Lakhani. Lakhani's area of interest is the open-source software community, but this work has lead him into research on "models for innovation".

Lakhani draws two important conclusions about the process of innovation:

1. Introducing problems to those with expertise at the periphery of a problem produces the quickest and most effective solutions
2. "Innovations happen at the intersection of disciplines."

The lessons to be derived from this research include:

1. Experts, such as CEOs, do not necessarily produce innovative solutions
2. Diversity in the workforce probably encourages "expertise at the periphery"
3. To be an innovative thinker one must be multi-disciplined, studying and solving problems in unrelated fields, e.g. mathemeatics, music and education

A SF post from October 2007 about my friend Jeff Stamp made both of Lakhani's points. The credit probably goes to Jeff who also teaches and does research on innovation in entrepreneurship.

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The Discipline of Writing

Will Price is a blogger who I like very much. In a post today he references a quote from William Faulkner, which is below.

"Faulker said, "I don't know what I think until I read what I said." That's not just a joke. You learn what you think by codifying your thinking in some way. Codifying one's thinking is an important step in inventing oneself. The most difficult way to do it is by thinking about thinking  - it helps to speak or write your thoughts. Writing is the most profound way of codifying your thoughts, the best way of learning from yourself who you are and what you believe."

Will goes on to expand upon this quote in the context of blogging, but I think it also directly relates to my post The Discipline of Elegance and Simplicity.

Clear and measured writing requires a discipline to distill the complex into a more understandable form. In fact, I would go so far as to say that people who do not write well usually have not, in part, thought something through completely. If you are not using writing as a means to refine your thinking, you are missing out on a valuable tool.

To improve your writing (so you have fewer excuses not to use the technique), Elements of Style is a classic instructional text. It was written in 1918 and is still widely used in colleges and universities. It is only about 100 pages, so it is an easy read.

The Discipline of Elegance and Simplicity

I have a long held interest in both good design and mathematics. The common thread in both these subjects is that properly done, both achieve an elegance and simplicity in the expression of complex ideas and concepts. To achieve the necessary simplicity and elegance requires considerable discipline. In fact the discipline in some ways becomes the methodology to produce the end result. This type of discipline also applies to how you think about your business and communicate it to customers, prospects, employees and shareholders.

I try to avoid controversial issues in this blog, except for my occasional advice to President Obama on foreign affairs :) I am not violating my own policy, but a bumper sticker I saw yesterday illustrates the power of simplicity and elegance. The bumper sticker said:

"It's a child..not a choice"

I thought that this phrase was the best framing of the anti-abortion position that I have seen. Clear, simple, focused, but with the ability to generate an emotional reaction from the reader. In fairness to the pro-abortion side, perhaps this phrase is equally compelling:

"Do not legislate...in my body"

The point here is not about the abortion debate but to illustrate the power of distilling a complex issue down to its simplest concept. Simple elegance is very compelling. An example from the One Laptop Per Child project illustrates this point yet again. The one liner to explain the project is:

"Give a laptop. Change the world."

Equally strong might be the following:

"One child...One laptop"

Ernest Hemingway, the renown writer, was once challenged to write the shortest story possible. The result was a six word story, which Hemingway later went on to describe as the best story he ever wrote. The story in its entirety follows:

"For sale. Baby shoes. Never used."

Simplicity and elegance can initiate an emotional response that engages the reader/customer. If you can not distill your business concept down to a single elegant phrase, you probably do not sufficiently well understand the concept. The discipline to achieve a simple and elegant description will help you to really understand your business, greatly improve your message and probably help all the constituencies you need to communicate with to better understand the business concept.

Notes:(a) to encourage simplicity and elegance throughout your organization, stop telling people the length of the document you want. One of the best student papers I ever received answered three questions in only ten sentences about the complex book by Israel Kirzner-- Competition and Entrepreneurship. (b) the best book on simple and elegant PowerPoint design was written by Stephen Kosslyn, who has a new book coming out that I received from Oxford University Press as a pre-release draft. More on that later.

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Miami, FL

Best Posts--Management

This week I am traveling in Asia for a client. Posts may not be as frequent as usual. What follows are the best posts in management.

1. The Stages of a Startup AUG-07
2. Customer-centric Management NOV-07
3. Ideology JUL-08
4. Delegation JUL-08
5. A Competent Team JAN-09
6. What is Sophisticated Finance JAN-09
7. Corporate Culture Understood JUL-09

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Why Entrepreneurs Lack Focus

My Twitter reading this morning of Spanish posts on entrepreneurship highlighted a post on Loogic (SP)-- "The Difficulties of Entrepreneurs to Focus" (Spanish language post is here). Lack of focus or the inability to focus by the founder/CEO is one of the biggest reasons that early stage companies fail. I may not have enough evidence for a journal article in academia, but I see the focus problem almost everyday.

The writer cited three reasons that explain the lack of focus:

1. To focus requires clear goals
2. To focus requires faith in the strategy being pursued
3. To focus requires the ability to say no to offers of deals, partnerships and other "home run" opportunities

My thoughts on the lack of focus of entrepreneurs are very similar to the writer, but what caught my attention was the concept of faith.

By "faith" what we are really talking about is self-confidence. Many entrepreneurs lack confidence in the strategies they thoughtfully prepared for their new business, especially after one or two setbacks. An example may illustrate the point.

The founder of a website that sells a specialized piece of software budgets $20 for customer acquisition on a product selling for less than $50. When I asked why such a high budget, the founder told me "I am not confident about my marketing strategy so I added a cushion".

Rather than having confidence in the original plan or re-thinking the marketing plan, the entrepreneur changes the whole marketing approach by changing the spending levels. A lack of focus is brought about by a lack of confidence.

To improve self-confidence in business decisions, three tips follow:

1. Bounce important plans and decisions off your mentor(s)
2. Research competitors for how they executed similar projects
3. Look for analysis of similar issues on blogs (VC blogs are particularly useful)

How do you know when to use these techniques. As any sailor will tell you, "when in doubt--reef the mainsail". When in doubt about a major decision, use the three techniques above. For those of you who believe that entrepreneurs must use their intuition or gut instinct, always remember that intuition is just "facts that you can not articulate". The facts will come from 1-3 above.

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Miami, FL

Leadership

Drew Faust, President of Harvard University, recently made some remarks to commemorate the 100th anniversary of Harvard Business School. Amongst the topics, he spoke about leadership and the five essential elements that HBS must teach.

1. Developing judgment
2. Having an entrepreneurial perspective
3. Using good communication skills
4. Behaving with integrity
5. Having the courage to act

I find two essential elements missing from the list.

First, there is no concept of commitment to the mission--the over riding principle for which the organization is devoted. Examples of missions might be "defending the U.S.", "improving the lives of our customers", or maybe even "increasing shareholder value".

Second, there is no element of selflessness--putting the good of the team, the company or the country ahead of your personal ambitions.

When it comes to leadership, I prefer the way it is taught at West Point. I think bullets bring a clarity of thinking that the Harvard professors may be missing. For more on the West Point philosophy of leadership, read this post.

I found the story through this post.

Miami, FL

Ohio Entrepreneurship Workshop

I am taking my show on the road. I am joining the folks at Bold Thinking to do a two day advanced workshop on entrepreneurship in Cincinnati on October 24-25. The "advanced" workshop is for company founders who are already in business but are probably struggling with their growth strategy or value creation. Bold Thinking's approach is summarized in this quote:

"The most important tool that today’s entrepreneur must possess is the ability to make value sustaining decisions that directly relate to their enterprise’s ability to remain competitive.  The Bold Thinking methodology provides a proven framework for decision-making designed to enhance the creation of value and strengthen competitive advantage." 

The workshop will combine lectures with case studies to improve business owner decision making. Also, each attendee will be able to work one-on-one with each of the workshop presenters to refine their business model and value creation strategy.

Bold Thinking was founded by Dr. Jeff Stamp and Colleen Post. Jeff is a widely recognized expert on innovation and creativity. He has worked with companies such as Pepsi and American Express on new product development and consulted to large companies around the world. He has also started four or five companies. Colleen and I worked together at the Pino Entrepreneuraship Center at FIU and she was instrumental in encouraging me to develop my workshop series on business model and financial planning. Colleen's area of expertise is in helping companies understand how their customers see them, a valuable but rarely discussed subject.

For more information on the workshop, send an email to post@boldthinking.com or contact me.

Enterprise IT

Jeremiah Owyang is a former star analyst at Forrester Research and writes a well regarded blog called Web Strategy. In a post today he writes about collaboration and says:

"...IT must develop a collaboration strategy or run the risk of being blind-sided by business units developing it without them." (My emphasis)

At first this comment struck me as uncharacteristically not profound. Then I realized the real error--it begs the question of what is the mission of enterprise IT today. Web 2.0 and social media has turned all of us (with a heart beat) into "guerrilla" content providers, videographers, entertainers and diarists. The related technologies have unleashed a worldwide creative potential probably not seen since Gutenberg. To think that these technologies and methods will not be brought into the workplace is naive, but to think that the "company" should control these technologies is to miss the really big opportunity. These technologies liberate the workforce, foster unparalleled creativity and unencumbered by corporate IT departments will lead to a pace of change in business process and business model that is unheard of in corporate America.

What I think enterprise IT should become in the face of this dramatic change is:

1. The operators of the network (somebody has to maintain and upgrade connectivity and maybe maintain security)
2. Special forces type operators who possess certain special skills (e.g. Oracle, AWS, etc.) and are parachuted in to do quick prototyping for a project, if needed

Everything else is handled by individual employees. Productivity software selection becomes a personal decision (perhaps within a budget constraint), collaboration products are selected largely on the basis of who on a team will take the responsibility to maintain the collaboration platform, enterprise software is in the cloud and all that is really needed is domain expertise (accounting, finance, etc.) and whatever does not fall into these categories is probably outsourced to SAAS providers.

Some will argue that today's workforce requires training on software and therefore my model is tragically flawed. In another 5-10 years a whole generation of workers will have grown up with computers. There is no training or training manual for Facebook and workers will have developed the skills to learn software without help, especially if they get to pick the software they use. This new generation is also learning to use their "communities" for help on all kinds of questions and will naturally reach out to these informal sources for help.

The new technologies are breaking down the centralized control model of business in favor of greater individual initiative. Enterprise IT people better buy paratrooper boots (for dropping in) or go to work for cloud computing and SAAS companies.

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Miami, FL

Standards Affect Outcomes

 

Yesterday I heard Nicholas Negroponte speak at a conference. Dr. Negroponte was the founder of the world famous MIT Media Lab and now devotes considerable time to the One Laptop Per Child project (OLPC) which he also founded. Through OLPC, Dr. Negroponte is credited with inventing the netbook computers that are becoming so popular.

Dr. Negroponte told a story about how he founded the MIT Media Lab and decided that he would not solicit government grant money as the means to finance the organization. His concern was that the reporting and review process related to government grants would limit the risks that the researchers would be prepared to take in exploring new applications of computer technology.

The management lesson here is that how you set the standards for performance has an effect on the outcomes derived. Dr. Negroponte was willing to accept some failures in order to achieve significant breakthroughs and therefore eliminated standards (government grant review) that conflicted with this approach.

An example from my days in retailing may illustrate the point more simply. We started a new merchandise department in the stores. The merchandise we selected sold out in one day. All the buyers were ecstatic because they had achieved their sales goal so quickly. I asked "how much more of that same merchandise can we sell". By asking this simple question, I was able to change the standard to the riskier but more profitable goal of maximizing sales rather than selling out the inventory. The department went on to achieve $40 million in annual sales.

My experience is that people are incredibly resourceful and effective in achieving goals, given the proper resources, training, standards and goals. If results are sub-par but you have given the proper resources and training, the problem could be that you have established the wrong standards and you may not be encouraging people to take enough risk.

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Miami, FL

Entrepreneurship Class 1

Yesterday was the start of a new semester at FIU. I have about 65 entrepreneurship students including 15 students participating remotely by video from another school. All the video will be archived, so I am thinking I may be able to do a video series of my entrepreneurship lectures.

I begin the semester by trying to dispel the illusions the students have about entrepreneurship. First, I explain the difference between self-employment and entrepreneurship. Entrepreneurship is about company building and ideally large companies.

Then I explain that entrepreneurship is not about epiphany moments but rather based on a rigorous analytical process, which is the five step process I teach and that forms the core of the course. I quote Peter Drucker, as follows:

“Entrepreneurial management is not natural, creative, or spontaneous but instead is based on a systematic, thoughtful approach….”

I then develop the theme that financial reward is a bi-product of entrepreneurship and executing one's passion should be the focus. Consistent with this theme is the idea that entrepreneurs should be building companies that are socially responsible and not just focused on profitability. The quote to illustrate this point comes from Eric Ries, a Venture Advisor at Kleiner Perkins (a world renown venture capital firm).

"Every startup has a chance to change the world, by bringing not just a new product, but an entirely new institution into existence. That institution will touch many people in its life: customers, investors, employees, and everyone they touch as well. I believe we have an obligation to ensure the resulting impact is worthy of the energies we invest in bringing it to life."

To conclude the first lecture, I show the TED video of Richard St. John on the "8 Secrets of Success". Richard's eight factors are recurring themes through out the semester. Just watch this very entertaining video to discover the 8 key factors.

Corporate Culture Understood

I will admit that I have never understood all the academic and professional interest in corporate culture. In my naive view of the world I always believed in five simple concepts:

1. Always be ethical
2. Always act in the best interest of the company
3. Work really hard
4. Hire the smartest people
5. Promote from within and develop your people

I always knew that many companies just paid lip service to culture and values. Until yesterday maybe I had seen one believable description of a culture or value system (Chase Manhattan Bank circa 1977). Yesterday on the NetSetter I read a presentation on the corporate culture at Netflix, a successful, publicly traded company. The thought that went into this presentation makes the culture believable. The clarity of thought actually makes it an incredible tool to understand what is meant by "corporate culture". The value system espoused is spot on correct. I would probably not change a word in this presentation. This presentation will become a classic in the teaching of corporate culture. Read all 128 slides, then study it.

The presentation is also an excellent introduction to human resource management. Reading it from that perspective should also be beneficial to any start up.

Miami, FL

Guest Post: Who is Managing The Business of Your Business?

With so much success from the Rickert Warnelid guest posts (here and here) on project finance and financial modeling, I have been actively seeking out new guest bloggers for here at SF. I met Deborah Koch, Senior Vice President of Gibraltar Bank in Miami, at a breakfast networking event. Gibraltar Bank focuses on serving small and middle market private companies and entrepreneurs. Deborah's understanding of entrepreneurs impressed me so I asked her to do a guest post, which follows.

Remember your first and probably second years in business?  You wore many hats --- CEO, Sales Manager, HR Director, Operations Coordinator, Purchasing Associate, and Receptionist, just to name a few.  You took on these diverse roles to efficiently launch your dream; either you couldn’t afford to hire professionals for these jobs, or just wanted to do it your way.

 

In short, you ran the business of your business.  Somehow, you carried this off in addition to delivering the special skill that drove you to start your company, whether it be as an inventor, consultant, writer, plumber, or chef.  

 

This is a common entrepreneurial dilemma…how do you maintain and grow your business and deliver your unique value proposition?  Can you be adept at both?  

 

We all know success stories that make the answer to this question a resounding YES; however, these people are not successful by accident.  A close friend who runs a CPA firm told me it was years before he trusted anyone else to make business decisions, but eventually he was so busy being a CPA that he had to hire a professional manager for the firm. In those early years, he spent many late hours tending to routine responsibilities necessary to keep the firm on the right path --- everything from ordering office supplies to paying the bills and hiring staff. 

 

When you are ready to share your dream, here are a few tips to help you grow into your role.

Trust.  Hire smart people whom you trust.  Letting go is much easier when your staff is empowered to perform.

 

Delegate.   If you trust your team, let them do what you hired them to do.  They may do it a little differently than you would have, but you never know, it just may turn out better.

 

Plan.   At least once annually, take time away from the office to plan for the next year, next five years, next ten years.  Include your management team however large or small the group.

I like the clarity and elegance of Deborah's advice. Maybe we can have her back for more guest posts.

Social Media Correlates with Faster Revenue Growth

ReadWriteWeb reported on a study that documents a correlation between faster revenue growth and increasing use of social media by the top 100 international brands. "Those brands that were the most engaged saw their revenue grow over the past year by 18% while the least engaged brands saw losses of negative 6%."

The companies in the study are both consumer and business oriented and include Starbucks, Dell and SAP. "The study grouped the brands into one of four engagement profiles that related to the number of channels they're involved in and how deep that involvement is", as shown below.

The study includes detailed case studies on some of the companies with the greatest use of social media, such as Dell and Toyota. There is a link where you can rate your company's use of social media. You also have the option to enter your company information in the database and become part of future studies.

If the big companies are using social media effectively, then they will be training customers to expect customer service responses from Twitter complaints, forums to discuss new product feature wishes and many informal channels of communications between employees and customers. Startups will need to come out of beta stage with these customer services in place or they may not get the traction they are expecting.

The full report is here. Download ENGAGEMENTdb_Report_2009

How to be a CEO

Scott Davis, @scottatlyzasoft, was nice enough to retweet my post Make Things Simple, which led me to his blog. His blog, Circumspecting: People, Tech and Business is a thoughtful combination of strategy, operations and tech.

His most recent post, Yo-Yo's Make the Best Leaders, talks about the need for the CEO to function at multiple levels, including operations. The American education system devotes little time to operations--that boring stuff like manufacturing, warehousing, logistics, sourcing, customer service, etc. Instead, we train future executives in branding, corporate culture and Wall Street dealmaking, to name just a few lower value-added activities.

I have consistently talked about the need for companies and especially the CEO to be customer focused. I learned this principle in the retail industry. Visiting stores allows you to see and meet customers face to face, observe how they shop and see first hand the customer reaction to merchandise. Stores also allow you to visit operations and observe inventory levels, outdated merchandise and store housekeeping. When I ran a retail company I spent 1-2 days every week visiting my stores and the competition. Wal-Mart executives do the same thing, every week.

If your business model involves widely disparate customers, then spend time every week in customer service. You will learn more about your own operations, the frequency of customer complaints and the image your company presents to the customer than any financial report will ever tell you. When I ran a telephone company, I would spend one day a week (usually two hours per day) in customer service. It was absolutely the most effective time I spent each day because I was able to learn first hand about the customers and the operations that served them.

So as Scott might say, "yo-yo between CEO stuff, the customers and operations". You will be a much more effective CEO.

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Miami, FL

Make Things Simple

Howard Lindzon, hedge fund manager, investor in Twitter, constant critic (deservedly) of CNBC and blogger, had one of his usual market analysis posts this morning. In each of Mr. Lindzon's opinionated posts there is always a single gem of wisdom, unless you are actually interested in understanding the stock market (which he discusses thoroughly and insightfully on an almost daily basis). Today's gem was the following quote:

"People love to make things difficult."

If you have read this blog for awhile, you have hopefully come to realize that I am a simple (simpleton?) thinker. I do not have the kind of mind that can analyze problems in sixteen dimensions. In fact, more than two or three dimensions to a problem and I get short tempered and a bit surly. Complexity drives me crazy. My startup and early stage clients, on the other hand, seem to heartily embrace complexity. Two examples will illustrate my point.

1. A struggling, very cash flow negative client has decided to pursue a joint venture in Japan as the means to turn around the business. I worked in Japan for ten years and arranged five joint ventures there. As one of my staff used to say, "there is no technology yet invented that can measure that complexity of doing business in Japan". Should only take 12-18 months to get a joint venture signed, if it ever does get signed. Not a realistic turnaround strategy.
2. Another client is a desktop software company with about 22 free users and no real plan for how to get more users except "raise a big round of VC money". The product development strategy showcases their love of complexity. Launch download version of desktop product, build and launch SAAS version, offer in-the-cloud storage for clients (think Google Docs) and physically distribute software in Europe. And this is just the 12-18 month plan. Maybe they are going to outsource company management to Google or Microsoft.

Two sure ways to tell you have over complicated your early stage business:

1. Have an international expansion strategy
2. Have multiple product (not feature set) launches in the same year

There are probably sixteen other ways to tell if your business model is over complicated, but let's keep this post simple.

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Miami, FL

Train Like the Military

This morning I had breakfast at a 5 star hotel which is an international chain renown for its customer service. The hotel was not very busy, probably reflecting the current economic conditions. After the meal my host and I both commented on how bad the service was. Staff was generally inattentive and the service was slow--very slow. It appears that the hotel has let its standards slip because it is not very busy.

The military faces a similar situation. They are not always in combat but they have to be prepared to go on short notice. To keep skills sharp even when there is no combat, the military trains constantly. Constant training saves lives.

In this period of slow economic growth, rather than letting standards slip, perhaps you should increase training. The time is available, the people are not so stressed from daily tasks, and training sub-consciously sends a message that you think business is going to pick up.

A previous post on military type training is here.

Miami

A Great Example of Outsourcing

I am a big proponent of outsourcing for several reasons:

1. It reduces capital requirements
2. It simplifies management
3. It allows management to focus more time on the critical factors to grow the business

Of course, the key to successful outsourcing is the ability to identify what the non-critical factors are. Most management teams never really think about what is or is not critical and never seem to get around to outsourcing and simplifying management of the business.

From the earliest days in telecom, the engineers who ran telcos always considered the network a critical component of the business and fiercely protected their ownership of this hardware and infrastructure. I have always thought that network operations should be outsourced because network rarely gave you a competitive advantage.

Yesterday Sprint announced that they are outsourcing their network operations to Ericcson. Ericcson is the largest network outsource company in the world and currently operates the networks for 275 million international wireless subscribers, including portions of the Vodaphone and Digicel networks.

Now one could argue that Sprint is poorly managed and should not be cited as an example of a good management decision. Hey--everybody makes a good decision once in awhile. Notice what Sprint made clear they were retaining--customer experience, customer technical support and services review. These are the differentiating factors in modern telecom. I think Sprint thought out this switch to outsourcing thoroughly and made the right decision. Might even consider buying the stock!

Now if Sprint can outsource its huge (huge!) network, maybe you could switch your business to the web version of Quickbooks, Google mail or Salesforce.com. It's not that hard. You can do it... and, by the way, maybe your company email will even work:) After that, look into AWS.

(I just noticed that Amazon Web Services use the TypePad blogging service. One of the most technologically sophisticated companies outsources for blogging technology. Might be a lesson there!)

I found the news about Sprint on Fierce Wireless, an excellent telecom blog.

Miami, FL

Multi-tasking is Over Rated

With the proliferation of technology multi-tasking has become the accepted norm. I have never been a multi-tasker. I prefer to focus on a single project and complete it as early as possible. In fact my ability to focus is such that I have always had to train my assistants to make sure I was paying attention to them when they spoke to me. This singular focus has always helped me to produce quicker, well thought out results.

I also set aside time every day just to think. Usually I ponder complex client problems or intellectual issues (and the occasional blog post). I once spent two whole days thinking about how to build a financial model with 20 operating units. I have found over the years that conclusions can improve with about a two day dormant period where you consider a problem only sub-consciously. Don't be so quick to come to a conclusion on a complex problem.

I have also found that good solutions are simple. Complicated solutions usually signal a problem that is not well thought out or an unrealistic conclusion. The three billionaires I worked for were all very simple in their approach and the best CFO I know treats even a complex international tax problem in a simple 2-3 step approach.

Most of the entrepreneurs I meet glory in their ability to multi-task, rarely just sit and think about a problem for a few hours and invariably have the most complex, totally unrealistic solutions I have ever seen. The lessons that need to be learned are:

1. Focus on one important project at a time and ignore everything else; if it will not put you out of business it is not really important
2. Make time everyday without distraction just to think; for example, 5-7 am is a great time to do it because you are fresh and nobody is in the office
3. Force yourself to articulate a solution simply; 2-3 bullet points will usually explain anything adequately and let staff fill in the blanks (trusting the staff also motivates them)
4. Hire staff that are self-directed, independent thinkers so they are less likely to interfere with 1-3 above

Hopefully these tips will lead to better execution, which is half the battle in any start up.

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Miami, FL

Sales and Marketing

A reader wrote to ask why I was so against m__k_t__g and always focused here at SF on sales. A fair question which obviously requires clarification. I actually think m__k_t__g has a role in managing a business but not until annual revenues approach $30 million. First let me explain why sales is the focus of a start up and then I will explain the magic of $30 million in revenue. 

1. Available capital is usually the constraining resource and therefore it should be devoted to customer acquisition (sales) and not the softer, more broad based notion of m__k_t__g.
2. Most people are taught in university about m__k_t__g but rarely do these courses translate the concepts into practical applications to generate sales; most young entrepreneurs do not, therefore, know how to use m__k_t__g and should therefore just focus on sales.
3. Revenue growth is the principal objective of a start up to demonstrate a market for the product, keep investors happy, attract additional capital and keep the staff motivated; sales create revenue--not marketing.
4. A typical sales person is self-motivated by their bonus based on closed sales and bonus represents at least 50% of total compensation; a good m__k_t__g person has a fixed cost twice that of a sales person and rarely has an incentive bonus based on sales (capital management).

Now why do I change my view at $30 million in annual revenue. Two things happen at $30 million:

1. At this stage one man management breaks down and future success depends on bringing in a management team approach in order to sustain a healthy growth rate in the business.
2. A healthy growth rate would be at least 20% per annum, or $6 million in additional sales; marketing provides the leverage required to achieve such growth and it is affordable in most companies this size with EBITDA of 5-10% of sales.

Why do I think of marketing as leveraging resources? Marketing is basically the process of acquiring and retaining customers. Yes-marketing involves branding, advertising and market share but these mushy concepts never close a sale. Marketing, properly done, does expand awareness of product and company, communicate to a customer need and helps the sales force or the sales close. To generate sales of 20% per annum at this level even a good sales force needs help. Marketing leverages the sales force and increases their productivity. It's still about the closed sales!

Many successful start ups sustain growth rates of 50-100% per annum well past $30 million in annual revenue. $30 million is the trigger for when to consider marketing, not the expected growth rate of 20%. In the company I took to $1 billion in annual revenue we never hired a marketing person until sales reached $300 million. We did however constantly talk about and define the customer need, spend heavily to promote new store openings and carefully scrutinize spending that did not impact the customer. $30 million is just a good guideline.

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5 Things to Know Before a Startup

Tech Vibes has a good post today on startups entitled "5 Things I learnt from Year One in My Startup". Three of the points are themes which I have discussed here at Sophisticated Finance.

1. Solve a customer problem
2. Focus, focus, focus
3. Attract the best and pay them what they are worth

The other two points made in the post I would have stated differently.

Hire those with the best attitude and a willingness to learn over those with experience.

I would have said "hire those with experience and the ability to learn". Typically in a startup learning comes from mistakes and mistakes use up capital--the scarce resource. Experience may reduce the number of mistakes. Hire experienced people who have been in successful previous startups. The startup environment is a learning environment and a person willing to return to a startup situation has both experience and usually a willingness to learn. Another indicator of a willingness to learn is someone who has worked on a lot of successful projects. Also, remember that it is the CEO's responsibility to lead the team. If your experienced team members are reluctant to follow in a new direction, it could be a reflection on your maturity as a CEO.

A "Strategy Guy" should not be hired in a Startup

I agree that a strategy guy should not be in a startup. First, that should be a role played by the CEO. Second, a strategy guy is too expensive and too low value-added for a startup budget. Just like a marketing guy. However, I find that most startups can not articulate the basic parts of a strategy, which is why they have trouble raising capital. The CEO has to have the ability to articulate a strategy and take the responsibility to communicate, implement and update it.

Read the post for a good re-statement of the three points I agree with completely.

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