Category: Strategy

When I started my company I would pinch pennies whenever I could. I still do. The big difference now is that I’ve come to realize that many things are better done by paying full price instead of laboring through different strategies to save a few dollars. Here are a few examples:

• There are many do-it-yourself kits to incorporate a business, but it is worth paying a lawyer to walk you through the many considerations and setting it up right the first time. This is a tough one because it can easily be $1,000-$2,000 dollars – it is money well spent.
• Yes, I can design my own logo with Photoshop or a free logo generating site, but paying a couple hundred dollars to one of the many excellent outsourcing sites gets a professionally done design that shows you’re serious about the business
• The difference in quality between a business class cable modem and dedicated T1 line is dramatic. For us, paying several times more for high quality bandwidth and Internet access is more than worth it.

These are just a few of the areas that I’ve found it is better to spend money instead of trying to save a buck and spend more time. Building a frugal mentality into the corporate culture is important, but the old saying that you have to spend money to make money still rings true.

Earlier today I was watching a video where Mark Suster (entrepreneur turned venture capitalist) was interviewing Scott Painter, the CEO of Zag. The best part of the video was where Scott lays out his company’s dashboard and talks about the metrics that drive his business. Take a look at minutes 43-48:

In the video, as part of talking through his company’s dashboard, Scott hits on the number one reason startups can’t raise money, without mentioning it directly. The main reason an entrepreneur isn’t able to convince an investor to invest: the entrepreneur can’t demonstrate defensible, metrics-driven data on how he/she is going to build a large business. Scott’s dashboard includes the following information for the past 30 days:

• Unique visitors
• Active prospects
• Sales (cars sold)
• Revenue

While this idea makes sense, it is amazing to see how many entrepreneurs don’t fully realize it, spend a good bit of time trying to raise money, and end up disgruntled with investors by the end of the process. My recommendation is to build a story, with metrics, of how you’re going to build a big business, and then paint the picture for how the investor is going to make an out-sized return investing in your company.

What else? Do you agree?

Note that this is especially true in markets that are more conservative with startup investing like Atlanta.

Continuing the post from yesterday on the freemium business model, which elicited several comments, I wanted to offer up some more thoughts. In general, businesses are better off offering a proof of concept/free trial the majority of the time instead of a free edition of their product. With that said, here are the ideal characteristics of a product where the freemium approach works:

• Ability to demonstrate immediate and obvious value (I contend most freemium products fail because it is too difficult to get value from them without serious hand holding by the vendor)
• Minimally invasive product e.g. it doesn’t take over a website, doesn’t require a DNS change, doesn’t require IT people to help configure, doesn’t introduce confusing jargon, etc
• Known type of market e.g. people already have expectations of product functionality like email marketing, CRM, etc
• Clear value proposition and reason for upgrading later e.g. limits to key functionality, additional features, etc

What else? What are some other ideal characteristics of a freemium model?

At a lunch last week (yes, I believe in never eating alone) the entrepreneur and I were talking about places to eat. He offered up three nearby places for us and mentioned that one place was always empty at lunch time. After I asked why, he said that when they first opened they were dinner only and didn’t serve lunch. The restaurant’s early market signal that they weren’t open for lunch made it exceptionally difficult to later pivot and get into the minds of the local business people that they were an option. My friend’s guess is that the restaurant will be closed within six months.

My recommendation is to pay special attention to market signals, especially at the launch of a new business. Some signals include:

• Hours of operation
• Pricing
• Target customer
• Brand / design

I’m a fan of making decisions quickly and constantly iterating based on new information. The one caveat: take more time on decisions that aren’t reversible.

Earlier today I talked to an entrepreneur about his upcoming marketing program. The entrepreneur has been working on a book about his industry that attempts to educate potential clients on certain pitfalls and how the major players in the market don’t always have their clients’ best interests in mind. After talking for 20 minutes about the book and some of its contents, I jumped into the reason for the call: talking about how to handle all the leads that the book will generate.

Only a couple minutes into the meat of the conversation I realized things were awry. The entrepreneur had spent significant monies on a customized Microsoft CRM implementation, new website, marketing consultant to do market research, and still hadn’t launched the book. All the infrastructure work was in preparation for the perceived onslaught of leads that he wouldn’t be able to handle. I quickly told him that he was doing way too much pre-mature optimization of his business and that generating more leads than he can manually handle would be a great thing. Of course, this was difficult to hear but he took it in stride and agreed.

My recommendation is to not pre-maturely optimize for an expected outcome when you’re a startup and can deal with issues quickly. Launch projects early and often and iterate based on feedback. Nothing replaces gathering real information from the field.

At lunch today I had a good conversation with a serial technology entrepreneur and the topic of market leaders came up. Of course, in the public markets companies like Salesforce.com (NYSE: CRM) get premium valuations — the question is why. What value is there in being a market leader other than being the biggest?

By being a market leader, especially in a market that has been around and is fairly mature, the main benefit is that cost of customer acquisition will be lower than competitors. Whenever a company thinks about buying the type of solution a market leader provides the market leader will always be in the deal, almost like an incumbent even though they aren’t even the vendor yet. The other, non-market leaders will be the ones forced to differentiate their products and they’ll have to work harder and longer to win the deal compared to the market leader.

With a lower cost of customer acquisition, the market leader will have better margins, and is likely to grow faster and/or more profitably. In the end, the result is that market leadership compounds on itself and produces more valuable companies.

What else? What are some other benefits of being a market leader?

Lately I’ve been on an autobiography kick reading four in the past couple months. I went from Richard Branson, to Tony Hsieh, to Andre Agassi, and I’m about to finish Ted Turner’s autobiography. Ted does a great job telling stories about his companies, sailing, family, and everything in between.

From a business perspective, Ted’s stories really capture the growth and dynamism of the TV, cable, and entertainment industry. Here are a few of my takeaways:

• Ted was constantly pushing his business to the limit financially and several times almost lost control of the company
• Leverage (debt) using junk bonds made many of his acquisitions possible
• His biggest regret was having to raise money after an acquisition he couldn’t afford, resulting in new board members that had veto power in his business (he still had a majority stake but their preferred shares could block certain transactions)
• He had the idea for CNN several years before he launched it, and didn’t do it right away because he thought one of the big networks would do it, but they didn’t
• Big ideas, some of which were failures, were a trademark of Ted, and he kept pushing the envelope with everything he did

The book is a great read and I’d recommend it, especially for Atlantans as it gives some good history of the city.