My Entrepreneurs Top 10 List – Why Not?

Quote: “When I see the Ten Most Wanted Lists, I always have this thought – If we’d make them feel wanted earlier, they wouldn’t be wanted now.” – Eddie Cantor

 

I never quite understood the world’s obsession with lists.  In searching for some pithy quote on lists to get your attention, I found some lists which were unbelievable.  What about “10 Bizarre Things You Can Get from a Vending Machine” or “Top 10 Influential People Who Never Lived.”  You also have to consider David Letterman who has made a career out of his Top 10 List segment.  I thought the above quote said it all in a humorous, yet profound way.  But, I digress…

When you spend your lifetime working with entrepreneurs, you can’t help but devise your own list of things you think they should be focused on.  My list is in no way unique – it is just some advice based on my experience.  So, here it goes:

  1. Keep your vision – Never lose sight of it; even if a “pivot” is necessary.  Make sure you stay focused on the why of your product or service.  Stay broad enough to remain viable (Yamaha – sell keyboards vs. Steinway – sell pianos.) Provide yourself periodic quiet time to think.
  2. Check your “How’s” periodically – Production, new product development, marketing, etc.  Once a quarter, pick one or two and brainstorm to see if you can do it better (lean, etc.)
  3. Maintain competitive analysis – Understand why you are losing any sales or deals.  Study your competitors to understand, fully, how they are approaching the market.  Beware of paradigm change – think of the Amazon impact on book stores!
  4. Focus on Revenue – Always have a view-by-product line, by territory and by salesman/customer as to where it stands.  Constantly consider untapped distribution channels.
  5. Periodic strategy review – Confirm that your business model still works and what you offer remains relevant in the market.  Consider what you need to make your offering more complete and anything you can eliminate.  A periodic SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) can pay big dividends.
  6. Keep owner issues in perspective – Know where you are now, where you are going and who replaces you.  You should know how you are going to get out.
  7. Know your worth – Not just gut reaction; have a periodic objective assessment of the value of your business. Understand the value drivers.
  8. Use dashboard reporting – Stay focused on the type of periodic information you need to make decisions and to understand the status of your business.
  9. Assess team strength – Know how you stand in key positions and how you might strengthen the team now and in the future. Your most valuable asset will always be your people.
  10. Happiness quotient – Do you enjoy what you do?  Are you happy today; are you looking forward to tomorrow?  Speak about it to others.  And most importantly – how do your members/team/employees truly feel.

There are no magic bullets here; just some points of reflection which hopefully allow you to assess your progress in achieving your goals.

Advertisements

Advisory Board / Board of Directors – Is There a Difference?

Woodstock: ”What’s the password?”original
Ace Ventura: ”New England clam chowder.”
Woodstock: “Is that the red or the white?”
Ace Ventura: “Ah, I can never remember that.  White.”
[Door opens]
Ace Ventura: “Yes.”  – Ace Ventura – Pet Detective

So, I was at an advisory board meeting at one of my growth companies, recently, when certain previously omitted items appeared on the agenda.  The items included approval on capital improvements, a key decision on a lease and ratification of compensation for key executives.  I would like to say it seldom happens but as the subjects started to be discussed, all I could think about was this famous scene from Ace Ventura.  I began to realize, again, that despite the sophistication of many of the entrepreneurs that I work with, purpose seems to get blurred between the roles of an advisory board (AB) versus a Board of Directors (BD).  So, I thought I would provide a little refresher.  Please note; this is not a legal analysis but just pure practical experience.

An advisory board consists of a group of experienced and knowledgeable mentors that has no official capacity and no fiduciary responsibility.  While members do their best to help provide guidance on the problems at hand, their role is to serve as a sounding board for ideas and solutions and not to be either a problem solver for an entrepreneur or an “approver” of corporate actions.  Many entrepreneurs misunderstand this role and believe that the advisory board can serve in a very active almost management capacity and provide all their expertise to the company.  This usually does not happen resulting in frustration for both parties.  That being said, I strongly encourage entrepreneurs (especially the less experienced) to have an AB.

It is the Board of Directors who has ultimate responsibility for corporate governance which includes everything from major decisions to potential sale of the company to removal of key management members including the CEO, if necessary.  It is that fiduciary responsibility (and potential liability) that sets the two apart (thus the famous Directors and Officers insurance for BD members.)

It is important for any entrepreneur to know the difference between an advisory board and Board of Directors, and if necessary, to seek help and guidance in establishing the roles and in recruiting members.  I know a number of experienced board members who do not take AB roles but only join a BD.  They believe they need to have skin in the game for their advice to matter; many BD members invest and most are granted incentives such as fees to attend meetings, stock-options and the like.  They believe they need the authority that allows them to function as “board members.”

While both are extremely important, not having a Board of Directors to handle key fiduciary responsibilities can put the owner at risk, so strongly consider having one.  Having said that, if you keep your expectations in check, any entrepreneur will find an advisory board can also be a very valuable asset.

Money, Money, Money, Money – Money or Business Pitch Fatal Flaws

Quote: “It’s just business; nothing personal” – Mario Puzo from The Godfather

 

iStock_000016249315XSmall-425x272I had the chance to review five pitch decks this week (a bit slow; it is the summer) from startups looking for funding.  Now, if you are assembling a “pitch,” there is an abundance of guidance available about basic contents.  Many financial sponsors and angel investors have them on their websites and if that fails, you can use our “Perfect Pitch.”  You can find this by clicking through the Entrepreneur Power Play Book tab on this blog (just follow the “Rookies” string.)  Many startups ask us to critique their “deck” and offer our comments and observations.  We are always glad to do so (gratis) – our standard caveat is like the quote from The Godfather – the comments are just business – nothing personal.  Almost all are taken in the spirit in which they are offered.

I must admit, I am usually impressed by the passion and creativeness of theses presentations, but I also focus on their principal purpose which is to raise money.  So, what surprises me the most?

Very often, it is the lack of two elements which I think are fatal flaws – and both revolve around what the O’jays proclaimed – money, money, money, money.  First, “how much do you need?” and second, “how are you going to make it?”  Why a startup thinks any investor, at any level, has no interest in these two points remains a bit of a mystery to me.  Now, I know what you are thinking… he is a CPA and, of course, he wants to see detailed financial projections.  Not so fast, grasshopper, what about even a half-baked conceptual discussion?

If you are asking for money, why not make three simple basic points – how much you need, how you are going to use it and how it will help get you to the next level.  By the way, the odds of all of this working out as you planned are slim to none, however, investors want to know that you thought about it and have some fiscal discipline to, at least, venture how you will manage these precious resources.

The old “if you build it, they will come” theory of a business model is also DOA in the eyes of an investor.  Let them know your estimates of market size, unit sales and revenue per unit.  If you are providing a transaction based service and think you can get $5 as your “take” on each deal, let an investor know what you are thinking and why.  Some undeveloped thoughts alluding to how this may one day become a revenue stream are not going to help your cause.

So, keep those creative juices flowing and please continue to dream and innovate.  Just remember that while it is great to fly at 30,000 feet – keep in mind you do have to land the plane every once in a while.

It’s Just Personal; Nothing Business – A Lesson for Family Business Owners

Quote: “No good deed goes unpunished”  – Clare Booth Luce

In the “typical family business,” many of the issues which arise appear to be centered on one common thread; a lack of clear communication.  To illustrate this, I will recall one of the more unique family business problems I was asked to help resolve.

IThe-Godfather-marlon-brando-9109847-1191-842 assume most of you will recognize my “twist” on the famous line from The Godfather.  I must admit, I struggled between this and the famous quote from Clare Booth Luce and decided to sight both.  The relevant background (modified to protect the innocent) is a parent of a very prosperous family-owned business who decided at the end of one particularly successful year to bestow upon his four children an equal and substantial amount of money.  It should be noted that all four were shareholders as well as employees in that business.  So far, so good; so what can go wrong?

The answer is misconception due to poor communication.  While each of the siblings was involved in the business, they all played significantly different roles.  So, immediately, each sibling reflected on what they received and each thought they were entitled to more because they felt their contribution to the business was more substantial than any of their siblings. The infighting began, became very intense and eventually led to the inclusion of the second parent who began chastising the first parent for being insensitive.  (Booth Luce was right!)

Astonished, the parent who gave the money could not believe what was happening and asked me to intervene” to straighten things out as they’re getting worse by the day.”  The solution, though relatively simple, took a bit of time to communicate.  Each of the siblings had interpreted the amount received as a “bonus” for a job-well-done when in fact, it was nothing more than a gift from a thoughtful parent.  While their roles may have been different within the company, as siblings they were on equal footing and thus were given an equal amount of money.  It was personal; nothing business.

In a typical job environment, employees and their bosses are communicating in a bit more of a structured fashion and it is usually clear when conversation is drifting from business to personal topics.  This is not the same in a family business.  It is not unusual for business to work its way into discussions at family events and soon lines get blurred between what is business and what is family.  I think the average family-owned business has to concentrate a bit more to ensure that business communications remain just that and that it is clear when the conversation is drifting to the personal side.  All that was required here was to state the reason the sibling was receiving their money – – it was a gift and this never would have been an issue.  Interestingly, this did have a happy outcome.  The client subsequently put in place some simple position descriptions that helped each sibling better understand their role in the business and so far, that seems to have worked just fine.

Don’t Suffer from Premature Equity Distributions

Quote:  “He chose poorly” – Knight guarding Holy Grail in Indiana Jones & The Last Crusade

 

The title got you, didn’t it?  There is nothing more frustrating for an advisor than to be faced with an entrepreneur (young or mature) who is challenged by having distributed ownership to the wrong people early on.  The quote above is the first thing that comes to mind.  But, if you face this issue, you are not alone and I can tell you the issue is decades old.  A quick story…

 

I was actively involved in a leveraged buyout in the early 80’s (yes, they did exist back then as did leveraged recaps).  The CEO founder (an experienced executive) recieved 51%, the financing source 30% and 4 key executives split the rest. Everything was fine, except all the financing source did was ask the CPA (who shall remain nameless) for a banking contact.  That contact ended up financing the entire deal (with no equity at all.)  Receiving 30% never sat right with the rest of the team, and when some equity was needed for expansion, the 30% financing source did not participate or help in any way… resulting in lawsuits and failure.

 

So, what are the two big mistakes that entrepreneurs make?

Private-Equity-Venture-Capital-Emerging-Growth-Companies

The first is what I call, “let’s give everybody a piece of the pie.”  Now, trust me, I am a big fan of sharing equity, but when owners start a company, they seldom see the growth and changes to come.  They reward everyone who starts with them, creating an “all for one” culture, only to find certain people are not up to the task and often other resources need to be added with little or no equity left to share.  We see this in more than half the startups we counsel, regardless of the experience of the entrepreneur.

 

The second is the “we know who the owners are” issue.  In this scenario, equity is granted to the three or four key “founders” without vesting.  Then, lo and behold, things do not work out (like the story above or the tech guy that can’t get the website or product to work) and wasted effort is spent negotiating out the party who has not performed to make way for the resource that can.  A major time and cost distraction, usually with a major emotional toll as well.

 

So a few helpful hints:

  1. Everyone vests.  If a problem does arise, it is better to address it when someone only owns part of their piece of the pie instead of all of it.
  2. A shareholder agreement is your friend.  It is best to determine what happens if things go awry at the beginning, when all are on the same page vs. trying to solve it when tensions and emotions are at record highs.
  3. Consult advisors first.  They have experience with who should get equity, ideas on %, etc.  Once you give equity, unless you build it into the deal, it may not be easy to get back.
  4.  Ownership is a state of mind.  It has to be a two-way street and someone getting equity has to embrace ownership, not just economic rewards.  Use your “gut” as to core values here.
  5. Avoid using your stock book as a checkbook.  If you believe in your business, protect your most valuable asset; your equity.

 

Premature is rarely used in a favorable context, don’t make it define your equity strategy.