"Companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time."
---Jamie Dimon (Chairman, JPMorgan Chase)
If you Google "biggest problems facing entrepreneurs today," you'll find 100's of different answers on the subject. There are dozens of laundry lists to choose from and most offer some very good suggestions on the pitfalls you should avoid. That said, you'll find little commentary regarding the impact or importance of each problem in these articles. Therefore, I thought we would add our opinions on the matter into the discussion. We'll start with what we believe the top challenge every entrepreneur will face at one point in their journey is, if they hope to gain traction. As you'll soon learn, it's a challenge that entrepreneurs have faced in free market economies for eons.
If We Knew Then What We Know Now
There's a good chance that you're a foundling entrepreneur or that you work for a startup if you're reading this. If that's the case, I'm sure you have big dreams for your products or services. At least, that was the case with me when I founded my first business back in 2008. It was a real-time valuation service catering to antiques / collectibles merchants and avid hobbyists. My vision was that CollectCentric would quickly become an invaluable resource within the industry. I dreamed we'd one day be the 800 lb. gorilla within the category.
We built a working prototype and began searching for suitable investors so we could bring our concept to market. To make a long story short, CollectCentric was beaten out by another Atlanta-based startup: WorthPoint. Their business plan was more agile than ours and they also had deeper pockets. It turned out that they were also better negotiators too. They locked the principal data supplier (eBay) into a long-term, exclusive agreement. Needless to say, we were no longer able to compete in the category once the deal was announced.
The truth of the matter was that we were blind to factors that our team hadn't ever worked through before. In retrospect, we should have taken time during our development cycle to brief analysts and industry press. They could've been used as eyes and ears to let us know how the competitive landscape was shaping up. If we had done this, we might have altered our strategy and avoided the mistake of launching an also-ran product.
The Universal Challenge: How To Scale?
CollectCentic's tale mirrors similar stories dating back through the centuries (e.g. Nicola Tesla). Like Tesla and countless others, our principal challenge was scalability. A scalable company is one that can maintain or improve profit margins while sales volume increases. In other words, a startup cannot afford to lose revenue traction in order to produce more goods or services unless it has a well thought out strategy to secure a second round of funding (or your first round if you're bootstrapping).
Our revenue forecast was a different matter entirely. We didn't have deep supplier relationships, so we anticipated a rather lengthy ramp up time. This was a barrier for some potential investors and it put us in a difficult negotiating position with others. You have to understand that angel investors take a huge risk when they invest in a startup. Consequently, they generally seek a return of 10x or more on every investment they make. They also generally want to recoup their investment in a relatively short time period. To receive serious consideration from angel Investors your ROI should be 30-40% minimum. Additionally, the payback and dividend period should be no more than five to seven years out. As we found out, it's difficult to come to quick agreement on terms if your revenue streams don't meet these requirements.
What We Learned Along The Way
In hindsight, we made the mistake of underestimating the competition in an emerging market. WorthPoint had the more sustainable business strategy. They went after the suppliers aggressively while we concentrated on both branding and the development of our end user interface. We never saw Worthpoint's agreement with Terapeak (eBay's data aggregator) coming. Naturally, it was a hard pill for all of us to swallow when we learned of the agreement.
beaten into oblivion by experienced entrepreneurs and wiser businessmen just like we were. As an old adage goes, your only two choices as an entrepreneur are "get better or get beaten." In other words, you need to solve your company's scalability equation early or you'll probably be outflanked by your competition.
"All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved."
Effective strategic planning is essential for any entrepreneur who envisions profit and growth for their company. It’s the key to looking toward the future and forging a deliberate path for your organization. In today's competitive marketplaces, effective strategic plans helps executives build their companies based on the values that matter most of them while maintaining their focus and sanity. The alternative is to simply react to the market whenever the wind shifts. In other words, effective strategic planning distinguishes the leaders from the followers.
Traditionally, strategic planning meant going offsite for a few days once a year. Businesses would conduct team building exercises and map out their company's direction and goals for the next 12 to 18 months. Most businesses, particularly large enterprises, felt obliged to engage in this exercise to get their management teams on the same page.
While this traditional goal setting method still holds some value, most companies really aren’t satisfied with the outcome. This is particularly true for startups and other companies with agile business models. A recent survey by The Alternative Board, shows that many entrepreneurs are dissatisfied with the end results of their strategic planning efforts. Indeed, more than 27% of entrepreneurs said that they wished that they had invested more time and effort into strategic planning! Besides more time, 15% of the respondents indicated that they should have spent more money on the their strategic planning processes. "Operations, technology investments and product development were all ranked lower" on the wish list, and only 1% of the entrepreneurs surveyed indicated that would have spent more time seeking venture capital and pursuing investors.
The Consequences of Poor Strategic Planning
It's clear that most of the leaders who were surveyed think strategic planning is essential. The consensus from the respondents who expressed regret is that they did not realize a return on investment for the time and effort spent. Ineffective strategic planning sessions often produce lofty objectives. However, they rarely produce quantifiable long-term results. Unfortunately, we've found that ineffective strategic planning often produces negative outcomes and breeds cynicism throughout the organization.
Startups should pay serious attention to the pitfalls of poor strategic planning. It’s a given that investors are going to expect you to deliver on your mission and end goals. Consequently, you can expect a great deal of scrutiny from qualified investors on exactly how you intend to deliver. You’ll also likely be asked about your backup plan if market forces change or you face unforeseen adversity. Therefore, be certain to avoid these five mistakes when you pull together your team for strategic planning sessions:
1. Lack of Focus
During early-stage strategic planning sessions, companies often get lost in the semantics of defining their mission, vision, and values. They spend a lot of time and effort trying to understand what these terms mean and how they fit together. It becomes mentally exhausting and unproductive. As a result, there’s little creative energy left once they get on to strategic opportunities, implementation and execution.
Tip: Concentrate on activities that are likely to produce long-term results during your initial strategic planning efforts. Ideation sessions and and contingency planning discussions are more likely to produce meaningful results for your company vs consensus building on value and mission statements. These types of activities will also help to create organizational culture where outside-the-box thinking is encouraged and rewarded.
2. Little or No Accountability
In some cases, a company’s strategic planning process becomes a political battle. When innovative strategies threaten established managerial duties, turf wars can ensue. Also, people will point fingers and the blame game will start if things don’t go according to plan, When, divisiveness occurs, key processes are likely to break down and the strategy is likely doomed to failure.
Tips: Set realistic and quantifiable benchmarks for each and every strategic objective. Identify process owners within your executive ranks and tie their compensation to to the benchmark goals. Filter the goals down throughout the organization to key management stakeholders. Produce benchmark metric reports and communicate performance throughout organization on a regular basis.
3. Lack of Flexibility
Many strategic plans become obsolete if market conditions fluctuate or when the competitive landscape changes dramatically. If regular status updates and strategic review sessions aren’t incorporated into your process, the results could be catastrophic to your company.
Tip: In the information age, the ability to adapt quickly to changing conditions is necessary for survival. Goals need to be revisited regularly if you're to stay on point and meet your financial objectives. It's best to adopt strategic best practices that allow you to change direction quickly. Consider incorporating agile planning processes, scenario planning approaches and Baysesian methods into your strategic planning toolkit.
Tip: By definition, a strategy is an action plan designed to achieve a major or end objective. Like a winning sports coach, a good business leader must understand that tactical goals shift while the game is being played. As a result, strategic plans need to be evaluated routinely. Additionally, your tactical goals often need to be reformulated to achieve desired results.
5. Insufficient Resources
To achieve your desired end goals, you must balance delivery time with the implementation / execution costs. For example, our firm worked with one company that had previously formulated an aggressive strategic marketing plan for a new product. Half way through the launch cycle, they had to abandon their plan completely. When asked why they replied that they had blown through their advertising budget because of the short time frame they were given to generate pre-orders.
Tip: When it comes to time, cost and quality: you can only pick two, Consider incorporating quality management tools into your strategic planning processes. A basic understanding of Lean Planning and Six Sigma methods is extremely beneficial for entrepreneurs, startups and other businesses with tight budget constraints.
"Those who cannot remember the past are condemned to repeat it."
---George Santayana (1906)
Earlier today, President Trump held a press conference in New York City announcing his new infrastructure plan. One of the key tenants of the plan is an emphasis on leveraging private sector capital and expertise to rebuild our nation's crumbling buildings, roads, transportation and waste disposal systems. In his prepared remarks, President Trump asserted that the trillion dollar public / private spending plan will efficiently stimulate the economy - leading to at least one million news jobs, wage growth, and new business opportunities in a number of key industries.
When the President concluded his short speech, he opened the floor for questions from the press. Immediately, the line of questions turned to the violent events that occurred in Charlottesville, VA over the weekend. We watched the live press conference and only counted one legitimate question related to the President's infrastructure proposal. The rest of the questions the President fielded from the press pertained to race relations and placing culpability on the individuals and groups behind the violent incidents in Charlottesville. Needless to say, we were disappointed that the questions strayed away from economics.
Why the New Infrastructure Plan Isn't Today's Top Story
The fact that most of the mainstream news media outlets aren't focusing their spotlights on the new administration's policy initiative roll-out isn't at all surprising. Let's face it, they're in the ratings game. Sensationalism and emotionalism outdraw straight reporting. Couple that with the fact that more and more people are turning to online sources for their news (9 out 10 people according to Pew Research), and you begin to understand why partisan story lines are now superseding objective journalism en masse. News consumption is at an all-time high, attention spans are low and competition within the market has exploded exponentially.
Partisanship isn't a new phenomenon in American journalism. As James L. Baughman noted in a 2011 article, partisan reporting was a standard operating practice for newspapers in the years preceding the Civil War. He sites, "Editors... unabashedly shaped the news and their editorial comment to partisan purposes. They sought to convert the doubters, recover the wavering, and hold the committed."
So what has the renewed trend toward hyper-partisanship meant for entrepreneurs in recent years? While the financial viability of new news media startups remains in question, the shift has presented a number of opportunities for quick buck artists to reach niche markets online through targeted digital advertising. That said, news media hyper-partisanship should ring alarm bells for any entrepreneur with a long term vision in most any industry category. Free market venture capitalists should be concerned as well. Here's why:
News Media Partisanship Feeds Social Unrest
As we mentioned earlier, President Trump spent a good deal of his time during today's Q&A session fielding questions about the extremists behind the violence in Charlottesville. He defended his original statements that fringe elements on "both sides" [sic] shared blame for the inflaming the incident. The media picked this up and ran with it.
We have an AP news feed in our office. The very first AP news report we received relating to the infrastructure announcement made little mention of the plan. The headline spoke only to the President's comments on the weekend's events in Charlottesville. The article was, in our opinion, a pseudo op-ed designed to further fuel a specific partisan political narrative.
Let's be clear here. The President didn't handle the onslaught of questions very well. That said, his defense was truthful. Multiple fringe groups were indeed in attendance at the rally in Charlottesville this past weekend. They included several white supremacist groups such as the KKK, Nationalist Front, and Rebel Yell. They also included a loose collective of leftists he termed the "Alt-Left" [sic]: presumably referring to Antifa members, Black Lives Matter, and others that stood in opposition of the rally organizers and participated in the violence.
If you're relatively familiar with 20th century European history, the scene that played out in the streets of Charlottesville were eerily reminiscent of events in Germany in the early 1930s. Take a look at raw film footage captured by independent journalists covering the event during the melees. You'll see armed, similarly clad combatants engaging in a battle over ideologies. There were indeed two fringe camps fueling violence at the rally on Saturday. However, we'd argue that they both represent the same side of the political spectrum: the far far left. Let us explain:
The Risk of History Repeating Itself
Fringe groups with disparate agendas but common core principles did indeed engage in battle on the streets of Chalottesville this past Saturday. Like most Americans, he fell into a trap and placed the fringe into two separate political camps labeled "left" and "right." By failing to point their similarities, we believe that President Trump missed a clear opportunity to rally consensus support for his message and unify the the nation.
If you visit the websites of the radical fringe groups that encouraged member participation at Saturday's rally, you'll find remarkable commonalities in their platforms. Better yet, follow their blogs and read their social media postings ("left" and "right") and you'll realize a similarity in their end objectives. They're both interested in dismantling many (if not all) of our founding principles including freedom of religion, speech, press, assembly, and markets — as well as limited government.
While we hear much ado about the neo-fascist "Alt Right", the media has given little or no scrutiny to the platforms of the egalitarian collective President Trump labeled the "Alt Left." The mainstream media has largely been sympathetic to the BLM and Occupy movements despite their overt hostility to core American principles. More disturbing perhaps, a handful of news outlets (including the Yahoo News and the Washington Post) have even run articles glorifying the anarchist activity of the the Antifa collective.
What we're witnessing today seems to be a nascent rise of Communist / Fascist ideology right here on American soil. Historians and political scientists like Vladimir Tismaneanu are quick to point out that the ideologies often go hand in hand and feed off one another. The cancerous ideologies spread across European continent during the early 20th century, most notably in the Soviet Union and Nazi Germany "where the final destination was the deplorable Gulags and the gas chambers of Auschwitz."
Communism and Fascism share some remarkable similarities:
The core difference between the two ideologies is their organizational structures. Fascism is a class-based system while Communism is egalitarian. What that means is that you get a Fascist dictatorship or a Communist oligarchy - both are oppressive / conformist forms of rule.
What This All Means For Entrepreneurs and VCs
We are definitely encouraged by the five tenants of the Trump Administration's infrastructure plan and their potential macroeconomic benefits. For entrepreneurs and free market venture capitalists there appears to be a lot of upside if this plan, or a similar plan with bi-partisan support, is passed through Congress.
As the president left the Press conference, he was asked by a reporter what it will take to begin to heal our nation's deep cultural divide? Mr. Trump offered a short response that emphasized two things lacking in this day and age: "jobs" and "wage growth." Given recent studies showing that being healthy and having a good job are two of the most important ingredients associated with subjective well-being, he may be on to something.
The U.S. hasn't seen real wage growth since the late 1990's and our true unemployment rate remains a question. More significantly, the Millennial unemployment rate is more than double the national average. Opportunities to find gainful employment and begin to live the American Dream, would no doubt quell sympathy for the far far left agitators and the lose collective of anarchists who fuel them on.
Conversely, a stalled plan poses serious concerns. A stagnant economy will only fuel more social unrest and further polarize our nation. There are reports out that more rallies similar to the one in Charlottesville are being planned across the country in the upcoming months. You can be certain that leaders of both factions of the far far left (communist and fascist) see them as marketing opportunities and are actively engaging in on-line recruitment campaigns to attract new members (and sympathizers) to their causes.
That said, there are glimmers of hope that responsible community organizers from the left and the right are starting to come together. Case in point, leaders on both sides of the Civil War statue debate held a joint press conference in Charleston S.C. today condemning violence and announcing their commitment to engage in objective discussion to reach a compromise. Although the platforms of the two group's spokespersons are well outside the mainstream, it does demonstrate that Americans with opposing views, who share our basic common values and principles, can reach agreement when they rise above identity politics.
We won't speculate on how future events will unfold. We'll leave that to the talking heads in our polarized free press. That said, every American who values our basic founding principles ought to take stock of our mainstream news outlets and begin to hold them to account. Journalistic standards are dying before our very eyes.
It's important to realize we're not dealing with "Fake News" in a true sense. Rather, we're flooded with agenda-driven partisan propaganda (left and right) that threatens the very fabric of our Constitutional Republic. Obviously, free market capitalists around the globe have reasons to be concerned.
We were on a call today discussing the changing landscape in social media and web media in general. Suffice it to say, it was a pretty interesting discussion. If you're not aware, the major social media networks have been criticized in recent months for censorship of conservative voices. Other web media giants, like Google, have also been accused of similar practices in content prioritization recently. The basic assertion by those affected is that the politics of the these web media giants is trumping free speech, free expression and free dialog.
While concerns over censorship began with the far right, mainstream conservatives have also expressed frustration and dissatisfaction with the policies and practices of the major web media companies as of late. Surprisingly, even voices on the left, like Bruce A. Dixon, are starting to express concern that specific political narratives are driving what people see in their Facebook / Twitter feeds and Google / Bing / YouTube search results.
As a result of the growing backlash, a number of promising social media startups have cropped up recently. They aren't necessarily catering to conservatives. Rather, they're building platforms that are firmly rooted on 1st Amendment principles. It seems the free market also favors our basic freedoms. They're starting to get attention in from venture capital world too.
Gab, a direct competitor to Twitter, launched in August of 2016. It recently raised nearly $500,000 through the crowdfunding platform StartEngine. Reports suggest that Gab's membership base is ramping up fast. Consequently, VC's are starting to look for other promising startups in the in the web media arena.
In late August of this year, a new social media platform called InfinitySN will launch. Their business model is designed to attack Facebook with a vengeance. As one InfinitySN insider stated today, their aim is "to turn Facebook into the modern day MySpace" by 2020. One of their founders had an interesting (and historically accurate) perspective on their chances of success. To paraphrase, "It doesn't necessarily pay to be first to market. Others learn from your mistakes, build a better product, and push you out of the category."
Athough there has been a little buzz on social media discussing InfinitySN and what their promising to deliver, it appears the startup is waiting until launch to hype the product through traditional PR channels. They're currently flying under the radar screen and seem to be banking on the fact that growing dissatisfaction with the social media behemoths by the general public, combined with positive word of mouth, will fuel interest in the platform.
InfinitySN started as a social media platform for the Colorado community. They saw an opportunity to expand their market, retooled and will launch globally August 29th. It'll be interesting to see if InfinitySN will live up to the hype we heard on the call. That said, we left the call scratching our heads and wondering why it's taken so long for a serious competitor to enter this market?
You can read an old press release from InfintySN relating to their Colorado launch here.
Scale, Value and Execution? Does your startup's business plan deliver?
Late last year, Chi Rho Consulting was approached by a Green Energy startup that needed to raise a substantial investment capital to begin operations. The company possessed a groundbreaking patent on hydroelectric energy technology that would potentially revolutionize the power grid in developing nations. From our initial conversations, it appeared that the company had substantial competitive advantages and that they would likely be a no-brainer for potential investors.
We agreed to assist the founder and eagerly awaited a preliminary draft of their business plan for review. When the business plan arrived, we were saddened to find that the company lacked three critical criteria we've found are necessary to attract attention from suitable investors. Unfortunately, this wasn't the first time that we'd had this experience.
Time and time again, we've been approached for assistance from budding entrepreneurs that have significant shortcomings ingrained in their business plans. In many cases, Chi Rho Consulting has been able to help these clients address their shortcomings and strengthen their capital formation strategies. Unfortunately, this was not the case with this particular client.
Investors look to minimize risk by selecting ventures that offer rapid growth potential, a high rate of return and strong management teams. We’ll examine each of these criteria in this article and explain how our client missed the mark on each of these criteria:
1) Your Business Model Must Scale!
As Investopedia explains, a scalable company is “one that can maintain or improve profit margins while sales volume increases.” In other words, a business cannot afford to lose revenue traction in order to produce more goods or services unless it has a well thought out strategy to secure a second round of funding.
Angel investors take a huge risk when they invest in a startup. Consequently, they generally seek a return of 10x or more on every investment. They also want to recoup their investment in a relatively short time period. To receive serious consideration from Angel Investors your ROI should be 30-40% minimum. Also, the payback and dividend period should be no more than five to seven years out.
When we examined the business plan of this green energy startup, they appeared to meet this criterion at first glance. However, when we dug into the financials, we realized that their cash flow assumptions were seriously flawed. Their revenue forecast assumed payment in full for their power plant facilities from municipalities before they planned to break ground. Furthermore, their plan assumed revenue at full capacity the very first day their plants were to begin producing power! When we remodeled their financials, it was evident that they would burn through their anticipated investment well before the first plant could be completed. Obviously, this was a serious flaw in their capital formation strategy.
Tip: Take the time to model out your financial assumptions in fine detail before you distribute your pitch deck or business plan. A P&L spreadsheet that lays out your revenue and expenses month by month is most beneficial.
2) Your Valuation Must Be Reasonable!
As we explained with criterion one, investing in startups is an extremely risky venture. In fact, its estimated that 47% all of angel investments produce zero return for the investor. Therefore, you will be expected to pay out huge returns to your Angel investor when and if your business begins to generate a positive ROI. Serious investors will definitely scrutinize most every financial assumption you’ve made when you formulated your business plan before they place their bet.
Our green energy client envisioned that they would build their first plants in developing nations. As a result, they anticipated that many communities would have access to electric energy for the very first time. These markets, they assumed, offered exponential growth!
Our strategy consulting firm did the necessary due diligence to validate our client’s market assumptions. In a sense, our client was right In their assumptions; the demand for energy in developing nations, particularly in sub-Saharan Africa, is incredibly high at present. That said, our client's financial models were built using American energy consumption assumptions and their revenue calculations were based upon American economic indicators. They assumed that they would receive over $50 in monthly income from their average customers in nations where the equivalent American annual household income hovers around $1,000 or less!
It was clear from our review that our client had failed to provide realistic valuation assumptions in their business plan. They over anticipated their initial market size and also failed to account for the real life economic conditions in their target markets. These mistakes were certain to raise red flags with investors. Worse still, they would most certainly call into question the client's overall business acumen.
Tips: Vet your financial assumptions with an experienced market / industry analyst before you distribute your pitch deck or business plan to potential investors. Also, be prepared to justify and defended your assumptions in detail when you present your plan.
3) You Must Have the Capacity and Ability to Execute!
Thirdly, and from our experience most importantly, the quality and experience of your management team are critical in the eyes of investors. As an investor acquaintance of ours once said, "I pass on great ideas all the time. I invest in great people."
The types of people who get potential investors excited include:
When we received the business plan, we were prepared to conduct thorough due diligence on the management team and assess their overall strengths and weaknesses. We were surprised to read that the founder/ patent developer was the sole person involved with the startup despite the idea being nearly two years old! Furthermore, our client had had no professional experience in the power industry nor had he ever been involved in a large scale construction project. When we inquired as to why no one else was yet involved with the company, he explained that he planned to hire a management team after he secured the funding to begin his project.
Given his lack of experience in the sector,, we strongly encouraged our client to immediately begin searching for junior managers with complementary skillsets and power industry experience to join his team. We stressed that people are the core component of any business plan urged him to retain commitments before he began courting potential investors. We also suggested that he consider seeking out a cofounder to handle the company's CEO responsibilities while he focused on the day to day operations on the company.
Unfortunately, he was unwilling to consider offering up a sweat equity plan to potential new hires. He also balked at the thought of a onboarding a cofounder who could shore up his shortcomings. As a result, Chi Rho Consulting decided to part ways with this startup despite the compelling patent technology. We wished the founder best of luck in his effort to raise investment capital to begin operations but left the door open in case he had a change of heart.
While this particular example is an extreme case, it does demonstrate why these three criteria are absolutely critical if you wish to gain traction within the investment community. To review: your business plan must demonstrate a degree of scalability, your valuation assumptions must pass the smell test, and the quality of your management team must excite potential investors in order to warrant serious attention.'
If your startup requires investment capital, consider having Chi Rho Consulting evaluate your business plan before you present your business case to potential investors. For a small fee, we’ll help you leverage you competitive advantages. We'll also provide you with practical recommendations that address any shortcomings in your operating plan. Doing so will definitely shorten the time it'll take you to find a suitable investor for your startup. It will also strengthen your position when you negotiate the terms of the investment.
Tips: If you're a patent inventor or idea originator, seriously consider on-boarding co-founders who can address your business shortcomings before you distribute your business plan. Also, consider securing soft commitments from experienced professionals for other key positions before you discuss your plan with potential investors.