Category: Strategy

Today I had lunch with a successful entrepreneur that bootstrapped and sold his first company five years ago and is in the middle of his second startup. His second company, much like his first, uses his domain expertise around a complex problem where he sells annual contracts with a combination of consulting, customized product, and data. Being so services intensive, the offering requires a minimum six-figure annual contract, thereby limiting the companies he can go after. Now, in order to grow the business, he wants to productize the offering, make it more self-service, and sell it at a lower price point.

Here are a few of his challenges:

• The offering is so specialized he’s worried about making it usable as a turn-key product
• He’s done all the selling to date, wants to hire a sales rep, but hasn’t had good experiences hiring sales people in the past due to a lack of results
• The lower-end market is more competitive and commoditized, but still has opportunity for growth

His goal is to build an enduring, sustainable business with a strong corporate culture. Productizing a service is extremely difficult, but with his timeline and resources he’ll be successful.

What else? What other challenges have you encountered productizing a service?

Many people have heard of Tim Ferriss’ The 4-Hour Workweek, or at least the concepts: most of the “work” people do is administrative, so outsource/offshore it to focus on what you do best. Well, much of that applies to entrepreneurs who are trying to squeeze more hours out of the week. An executive assistant is often too expensive for early stage entrepreneurs so they end up doing many administrative tasks by hand. Outsourced/offshore labor is great for freeing up time and doing tasks that seem simple but can be burdensome.

Here are some example administrative tasks for offshore labor:

• Build lists of information you want (e.g. say a site has a directory of 1,000 companies listed on it and you want to call them all — put up a job on oDesk.com for $50 for someone to build a Google Spreadsheet by hand of those 1,000 companies including contact information, company size, city, state, etc)
• Research the best flight and hotel options for a tradeshow
• Perform online research projects

I like to remind people that 50 cents an hour is a middle class wage in many countries. Entrepreneurs, even ones bootstrapping with little resources, will do well to start learning how to maximize their time and offload administrative tasks to other people that have a comparative advantage.

What else? What are your experiences using offshore labor for administrative tasks?

This morning I had the opportunity to talk with an entrepreneur that is starting the process of doing a roll-up for his market. After boot-strapping his company for the past 15 years he’s achieved a bit more than $10 million in annual revenues. Now, he’s made good money being the sole owner of the business and but he was ready for a new challenge: $50 million in annual revenue in five years through acquisitions and organic growth. His thinking is that his firm will be significantly more valuable to an acquirer with greater scale and more comprehensive offerings.

What are the economics of a roll-up strategy?

The current company, with $10 million in revenue, might have 10% margins (e.g. make $1 million/year profits), making it worth 4-5x profits (so, $4-5 million in value). Potential acquisitions are other firms in the space with lower revenues and are valued mostly based on profits, but also based on longevity of profits and growth rate. Thus, a firm with $2 million in revenue, 5% margins, and $100,000 in profits might be acquired for 10% of the equity of the combined entity even though revenue is 20% of the combined entity.

Why would the smaller company do this? As profits increase, company value as a multiple of profits increases due to the potential for greater economies of scale and sophistication of a potential acquirer such that a company with $5 million in profits might be worth 7-8x profits ($35-$40 million in value). So, for the smaller company, their same $100,000 in profits might be worth double (e.g. going from a 4x profit multiple to an 8x) due to being part of a large company. This happens all the time.

Roll-ups are extremely difficult and the best acquisitions happen with aligned corporate cultures. The economics make sense for entrepreneurs that are ready to hitch their wagon to someone else’s train and believe that the opportunity for success and the weighted expected outcome is higher.

What else? What do you think of the economics of a roll-up strategy?

At today’s EO Strategy Summit we planned the high-level goals for next year’s EO Atlanta chapter. This is the third time I’ve been through the full-day strategy summit planning session and each time the EO certified facilitators do an amazing job. Today’s event was no different.

One of the techniques they talked about today that I hadn’t seen before was the Business Architecture Stack. I’ve seen the individual elements of it but hadn’t seen it presented in this particular manner. The idea behind the stack is that it is a concise representation of the six most important overarching aspects of a business. Here’s information on the stack straight out of the EO workbook:

• Mission – What you want to do – your reason for “being.”
• Vision – Why you’re doing what you do – the big-picture goal: have to be able to “see it” in your mind’s eye.
• Core Values – Four or five beliefs you never compromised and in which you measured against.
• Positioning Statement – A one or two sentence description of how you do what you do and for whom (i.e. what markets).
• Value Proposition – One sentence that conveys to others the value you provide for your customers.
• Tagline – Quick, catchy statement or phrase that embodies who and what you are.

My recommendation is for all startups to go through this exercise within the first 12 months of their business and revisit it annually.
What else? What do you think of the business architecture stack?

Continuing with yesterday’s business idea on Content Marketing as a Service, I wanted to flesh out the concept a bit more as the post generated a number of good comments and tweets. As the idea isn’t hard technically, the real challenge is customer acquisition and execution. Let’s look at some pros and cons of the potential business model:

Pros

• Broad, growing market need to deliver fresh content for inbound marketing
• Readily available market of journalists and marketers that can produce high quality work as freelancers (potential for stay-at-home moms and dads as well to be part of the content contributors)
• Economies of scale, expertise, and proprietary technology will enable delivery of the service significantly cheaper and more effectively compared to doing it in-house (think about the SecureWorks model)
• Marketing departments have budgets with discretionary spend
• Proliferation of online marketing tools is overwhelming for many marketers

Cons

• Difficult to convince marketers and executives that the content marketing as a service startup will be able to speak intelligently about a specific business and industry due to potential jargon and lack of domain expertise
• No barriers to entry
• Potential 3-6 month time period required to see value (visitors will come right away but marketing qualified leads could take time)
• Trust issue with giving access to WordPress account, Twitter account, Facebook Page, etc for the outsourced service provider to execute the work

Marketers and business executives need this type of service. I expect to see it on the market within 12-24 months, if not sooner.
What else? What are some other pros and cons of the content marketing as a service idea?

Today I met with two different entrepreneurs that have bootstrapped multi-million dollar revenue SaaS companies in Buckhead. Neither one raised money and neither one had a sales/lead gen strategy that accelerated their success. How would I characterize their success? They were successful because of brute force hanging around long enough to build a sustainable business. One started his company in 1999 and the other started his in 2000. That’s right, each has been in business well over 10 years. It took them 10 years to be an overnight success.

Neither had a scalable lead generation tactic leading to explosive growth but here are the customer acquisition methods they employ:

• Cold calling (one used ConnectAndSell with a senior rep and the other has four full-time in-house cold callers)
• Pay-per-click ads on Google (both cited declining value from their PPC spend due to rising costs)
• Word-of-mouth referrals from happy customers

That’s it. Each identified the same three things and said direct mail, tradeshows, and other lead gen attempts didn’t have an ROI. Their mix of those three approaches generated a small but steady supply of leads and over the course of 10+ years they built nice companies.

What else? Have you see others be successful by brute force hanging around?

After talking to a number of entrepreneurs over the years, the vast majority are focused on a building a technology product (e.g. a SaaS product or web site). Of course, there’s a natural bias since that’s what I focus on but nonetheless I talk to very few entrepreneurs trying to build technology-enabled business services startups. A technology-enabled business service is a business services company that uses proprietary technology to deliver something better/faster/cheaper than if you do it yourself or hire a traditional firm.

Here are a few examples:

• SecureWorks – an Atlanta-based managed security services provider that offers outsourced solutions to monitor and test for different security issues (as was recently acquired by Dell for a rumored $650 million)
• Liazon – a health care and benefits broker (e.g. you can buy your company health insurance through them) that differentiates itself with a proprietary portal that makes it easy for your startup employees to choose from a variety of plans and allocate a set budget (instead of having a single health insurance plan for all employees you can have several and let them pick and choose)
• SoftLayer – data center and hosting services that differentiates itself through a proprietary portal, provisioning process, and APIs that allow it to offer dedicated boxes provisioned much faster than most providers
• WebGreeter – an outsourced live chat service for web sites where the call center agents are provided a simple list of questions they can answer otherwise they collect the visitor’s information for follow-up by one of your own employees

Each of these examples is a successful business with proprietary technology that give it an edge in their market. My recommendation is for entrepreneurs to consider technology-enabled business services in addition to technology products.

What else? What are some other examples of successful technology-enabled business services?