SOPHISTICATED FINANCE

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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HP 12C iPhone App

(The original HP 12C)

For some reason I am always interested to read posts about what gadgets people carry in their briefcases. Very few people carry flashlights (very useful in hotel fires) and even fewer now carry calculators. I bought my first hand held calculator in 1973, which was the first step for me in automating financial modeling. It also lead to the retirement of my sliderule, which had served me well for about seven years.

My first calculator was made by Texas Instruments and only had the four basic functions (+-X/) and no programing capability. This calculator served me faithfully until 1981 when a power surge in Lima, Peru hurt it badly. A local fixit man was able to temporarily restore it but it failed for good a few months later. 

To replace my friend from TI, I purchased an HP 12C calculator. This is the finest handheld finance calculator ever made and I still carry it with me. Partly I carry it out of tradition, but I am sure the calculator's feelings would be hurt if I started to leave it home after so many years of traveling together. My HP 12C has been with me for every dollar of financing I have ever raised and has never needed a re-boot in 28 years. I have also noticed over the years that nearly every good finance professional owns an HP 12C and that one should be very wary of finance professionals that do not use the 12C. This rule still applies today in the age of Excel because people will still whip out a handheld calculator for a quick calculation at a meeting.

Today I learned in a post on BijanSabet.com that HP has created an iPhone app of the HP12C (picture below text). I guess this is the natural evolution of technology, but for probably the first time I am a bit sad to see such a remarkable device as the HP 12C replaced by a newer technology. Now, how will we be able to spot the real finance people? Ask for a list of their iPhone apps?

I do not think my HP 12C reads blogs so please keep this news quiet out of respect for my old friend.

Sophisticated Finance--2nd Anniversary

This month marks the second anniversary of this blog. We are not yet one of the top 100 most popular blogs in the U.S. but we continue to work on it. I am thinking to promote myself as an SEO (search engine optimization) expert given the number of SF posts that appear as first choices on Google. (It's all in the titles and tags.) I always laugh when one of my posts shows up on Google ahead of the company mentioned in a SF post. Note to McKinsey, I am available if you need an SEO expert.

Topics of the most interest to readers continue to surprise me. In order of popularity the topics are:

1. Web-related technology
2. Startup management
3. Current events (helps to have had a financial crisis)

Maybe I will rename the blog "Sophisticated Technology" or Sophisticated Startup". No stealing those names.

Another thing I have noticed is that a series of posts on a single topic bring in many more readers. Thanks to all the readers who had suggestions for how to extend the series on key performance indicators (KPIs). Thoughts on a topic for a new series are most welcome. Leave them in the comments or email me.

The most fun in writing this blog has been all the great people from all over the world with whom I have corresponded. Still waiting for a speaking offer in India or Russia, but it would not surprise me.

I have also learned that putting images in a post increases readership. In honor of the second anniversary of SF, I have put up a picture of one of my heroes--Alf. For those too young to know about Alf, he is honored in this Wikipedia article.

Also, in honor of the second anniversary, I would like to remind new readers to visit this post on HUTM--the Hacker Universal Theory of Management. GO HUTM! GO NAVY!

Thank you to all the readers for their readership and continuing support.

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Miami, FL

Florida Growth Fund Launches

According to Silicon Alley Insider, the Florida Growth Fund has launched with $250 million in capital earmarked for venture capital investments in Florida. Funding was provided by the State of Florida Retirement Pension Fund under special legislation. This is a good decision by the State of Florida given the scarcity of venture money in Florida and something I have been advocating for the last ten years. In my plan I always thought the fund should be managed by a first class VC who would set up operations in Florida. Think Kleiner Perkins, Sequoia, etc.

The State of Florida appointed Hamilton Lane (who ?), an institutional money manager based in Pennsylvania, to run the fund. Hamilton Lane is an institutional money manager that specializes in the private equity asset class and offers discretionary and non-discretionary services. In other words, they pick private equity firms to put client money with or make the decision to co-invest client monies in PE firm deals. The good news is the State of Florida did not pick a three man firm in Boca Raton to manage the firm.

A few concerns:

1. How much Florida deal flow will a firm near Philadelphia have? Hope they are not relying on Florida politicians to send them deals.
2. If Hamilton Lane specializes in private equity then they are likely to fund late stage, near IPO venture deals; Florida does not lack for late stage funding and Hamilton Lane will just be another source of capital in a market that is already robust.
3. Hamilton Lane does not appear to have significant experience in seed and early stage investing, which is where Florida badly needs capital.

Let me not be too negative. I applaud the state government for organizing the fund. Let's follow developments and see what kind of deals this new fund will do. Wonder if they would be interested in a medical device company I am representing?

Note: The Florida Growth Fund website is currently just a placeholder.

Miami, FL

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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EXCEL Tips--Double Click

It has been awhile since I wrote a post related to Excel. The last Excel post was by guest blogger Rickert Warnelid. Today's post focuses on productivity tips to work faster in Excel. For those of you still addicted to using the mouse, these tips should be helpful.

The tips come from a post here, which appears to be a site devoted to Excel and charting. Of the seven double click tips, I did not know three and I think only one of the tips can be done with keyboard shortcuts. If anyone knows how to do any of these tips using just the keyboard put instructions in the comments.

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Sales Referrals

In one of my operating jobs I oversaw a 60 person sales force. Two points came away from this experience:

1. Bad sales people show up early in their time with a company; a bad start almost always means a bad sales person
2. Good sales people are consistent month to month in achieving their targets and earning the resultant bonuses

What I found about good sales people is they almost always ask a new customer at signing for a referral to another prospect. Nothing more compelling than calling a prospect and saying "Joe Blow just signed up as a customer and he thought you would be interested in.....".

A good discussion of sales referrals is in this blog post on Selling Magic. Don't be confused by the purple banner. I found it on Twitter.

Following the advice in the post, I would ask my readers to refer their friends to this blog, tell them about my upcoming workshops at FIU and most importantly refer prospective clients. Thank you.

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Miami, FL

Treasury Announces $68 Billion in Expected CPP Repayments

A loyal reader of this blog sent me today's press release from the Treasury Department, the introduction of which is below.

"WASHINGTON – The U.S. Department of the Treasury announced today that 10 of the largest U.S. financial institutions participating in the Capital Purchase Program (CPP) have met the requirements for repayment established by the primary federal banking supervisors. Following consultation with the primary banking supervisor of each institution, Treasury has notified the institutions that they are now eligible to complete the repayment process. If these firms choose to do so, Treasury will receive $68 billion in repayment proceeds."

The reader posed two good questions to me:

1. Too much repayment, too fast?
2. Was this money really ever needed?

Answer 1

Given the scarcity of capital in current markets, the general nervousness that surrounds the economy, the fact that we are seeing only a very few positive economic indicators, and the economic "upturn" could be a false signal, I would not have given the government back their money yet. Having to go back and ask the Treasury for a second capital injection in the future should definitely be a CEO career ending event.

Answer 2

The money was never really needed, except by Bear Stearns, Lehman Brothers and AIG. Only the later group had real cash flow problems. Almost everybody else had to take the money in order to increase confidence in the financial system. 

As I have said before, a financial crisis is in large part a crisis of confidence. A crisis is of such consequence that most people immediately overreact, especially when it is the first financial crisis of their lifetime, government tenure or banking career. When the government gets involved significantly in the "turnaround" and all its aspects, we can be confident that the government will overspend, over regulate and generally focus on issues of no economic consequence. This is true regardless of political party.

The best thing the Obama administration could do would be to stop spending stimulus money and recognize that more normal market forces are now at work and will gradually right the U.S. economy. Maybe even in time for the 2012 presidential elections.

If the government continues stimulus spending and running huge deficits, government borrowing will crowd the private sector out of the capital markets and we will see interest rates not seen since 1980, when the Fed Funds rate was above 10 percent for almost the entire year and peaked at 19.44 percent. In the early 1980s government borrowing was to finally pay for the Vietnam War. (As an aside, someday the U.S. has to pay for the wars in Iraq and Afghanistan.)

The current Fed Funds rate is at an extremely low historical rate of approximately 19 basis points, .0019, in large part to provide economic stimulus. However, the U.S. Government can not borrow forever before bondholders demand higher returns to match the enormous supply of new bonds coming on the market each month. Then interest rates will move upward dramatically. Will they reach 1980 levels--hopefully not, but interest rates have to move much higher.

WolframAlpha-- A New Kind of "Search"

I have written several times about the large amounts of data being generated by Web 2.0 (here and here), and in March I wrote:

While some think about the evolution of Facebook and Twitter as Web 3.0, I think that developing simple, user friendly tools for the analysis of large amounts of data is a more likely direction of the Web.

Last week WolframAlpha launched. WolframAlpha describes itself as follows:

Nice enormous vision statement--making all the world's systematic knowledge computable. Systematic knowledge is things like the sciences and math but also includes data sets such as stock prices or economic data. The infrastructure behind the site comes from Mathematica. Mathematica was developed beginning in the 1960s and today offers a programing language, a computing environment and a very large knowledge base. For example, if you want a visualization of a complex polynomial, use Mathematica or now WolframAlpha. WolframAlpha's future will in part be dependent on the development of its computational power but much more so the addition of new data sets.

Some of the blogs have done comparisons between Google, Google Squared and WolframAlpha. I think this is similar to comparing motorboats and sailboats--both boats but very different features and performance objectives. Showing the results for a search "weather Miami" in WolframAlpha  below makes clear that data drives WolframAlpha and information and links drive Google.

Notice the ease with which one can change the time frame of the data or convert the data to metric equivalents. I have no idea if these changes can even be done on Google. Note also that this is just a portion of the screen info. Next time you are checking weather for an upcoming trip try out Wolfram Alpha.

I think WolframAlpha is great. Don't make the mistake of thinking of it is an alternative to Google. It is a specialized "computational" engine and an example of what I think we will see a lot more of as the data on the web increases.

Miami, FL

SECInfo.com-A Different Business Model

One of the hardest parts of working with early stage companies and teaching entrepreneurship is to get people to reconsider their revenue model. It appears to be baked into the genetic code as the default setting that we sell a product or service for cash. One of the most effective ways to change this way of thinking is to show creative examples of doing revenue models differently.

SECInfo.com provides information filed with the SEC by publicly traded companies. This SEC info is a bountiful store of information not only on a particular company but also on industry trends, comparative analysis, KPIs, acquisition valuations, etc. SECInfo is my preferred site when I want to review a company's 10-K, 10-Q or S-1 filings. (SEC filings are explained in this file that can be downloaded. Download Edgform.)

I received the following email yesterday from SECInfo, which showcases an interesting example of a revenue model.

 Dear Robert Hacker:

Thank you for using our http://www.secinfo.com service.  In return for the free access you are currently receiving, we ask that you recommend SEC Info to all your friends and associates.  This will benefit you, because, by increasing our user base, there will be less of a chance that we will someday ask you to pay us to continue using our site.

How does this work?  The revenue to maintain and improve our site comes from our very-most-frequent users.  If and when your usage pattern puts you in that category, we will ask you to subscribe.  Because we measure your usage against that of all users, the more people that you can help us attract, the less the probability will be that we will consider you a frequent user and ask you to pay.  But even if we don't grow fast enough and do ask you to pay, our subscription rates are less than our competitors ($10/month for individuals, and less per-user for groups).

We think this is a very fair deal, and thank you for your support.

SEC Info - Registrar
http://www.secinfo.com

If I promote the site I do not have to pay. I like this model because my incentives are aligned with the company's. I also like the clear message to explain their logic and the fact that the email was automatically generated based on my usage yesterday.

As an aside, please visit SECInfo and check out the site. If you are not familiar with SEC filings, send me an email and I will do a series of posts on the information contained in each of the major SEC filings.

Miami, FL

WEB 2.0 is not an Epistemology

Epistemology is the theory of knowledge. Since ancient times philosophers have studied how we "know that" something is true and there are many schools of thought on the subject. The famous "did the tree fall in the forest" question is at the heart of the epistemology debate. Yesterday's post was tangentially related to epistemology. In fact, epistemology plays a key role in much of computer science and in particular in artificial intelligence.

If you are not following me, the Geek & Post cartoon below sums up the subject nicely. For additional reading on epistemology, there are over 2500 years of writing on the subject starting with Plato.

Miami, FL

Life Online?

We have two French women students staying with us for the summer. They are doing an internship at the Rosenstiel School of marine science. Both women want to be marine engineers, are very computer literate and think about things the way engineers do--logically and methodically (those are good qualities). Both women are on their first trip to the U.S.

Last night we went out to do some shopping for necessities. One woman commented that "Miami looks so familiar". I asked her what she meant. She answered that it looked just like Grand Theft Auto, the video game which uses Miami as a background for a portion of the game. Miami looks like GTA? This concept troubled me.

Fellow Hamilton alum Matthew Chamberlin posted yesterday on the future of Facebook. Matthew stated:

"As a broader concept, there is an entire generation of people who are growing up living their lives online. It's completely normal for them and they don't call it "social media." They call it "life."

Another post yesterday talked about how the study of history is changing. Rather than digging around looking for bones and broken pots, historians will data mine the terabytes of blog posts, photos and tweets stored on servers to understand how we lived and the events that shaped our lives.

While I understand the three examples above and I suspect that Matthew is correct, I would caution everyone. We have just lived through the greatest economic crisis in eighty years, a crisis brought on in part by an egregious imbalance in values. To think of Web 2.0 as "life" is an equally dangerous view in my opinion. Remember I can always turn off the electricity. Then what is life?

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Miami, FL