I sat in my own safety net while weaving it.

Editor’s note: Berni Jubb was an Inc.500 entrepreneur, after years as a senior marketing manager of a large computer company.  He regained his senses, and now runs a small resort and restaurant in Costa Rica.

By Berni Jubb

My First Startup…

…never started, nor did my fifth or sixth.  My desire to run something stirred inside me early in life, but the first real entrepreneurial adventure finally took hold after a lot of failed experiments.  Each one had a steep learning curve.  And all were missing a key ingredient or two.  One thing, though, that never bothers an entrepreneur is fear of the unknown.

The good thing was that I had a certain ability to see ahead of the obvious horizon so I could often find resources we didn’t have, and grasp those issues we knew we didn’t know about.  It is not today’s idea that makes the business a success, it is tomorrow’s.  It is not today’s screw up that really messes up your business but the one yesterday that you didn’t know about.

I digress for a moment with a business lesson direct from the hand of our mentor at the time, Mister Berkus himself.  I was asked to explain my issue at a CEO round table for one of Dave’s membership groups.  The date of the round table happened to coincide with the man-falling-onto-safety-netclearing up of the remains of a nasty event that caused my company to teeter on the edge of bankruptcy.  Of course it wasn’t just one event that was the cause, as you might guess.  It was mismanagement that caused the event – rapid growth and the simultaneous realization by our big vendors that we had grown faster than our ability to pay.

[Email readers, continue here…] The notorious credit crunch, as Wikipedia puts it succinctly “is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.”  Ouch!

We thought we had a friendly banker as a lifeboat.  But the creditors and our bank somehow realized our “growth problem” all at about the same time, and when we went to use our bank line of credit, the bank told us we had blown it and the line was withheld.  Our suppliers had been careless lenders – and we had been careless borrowers of their credit.  The bank just sent us … condolences.  We missed all the signals. And we were one of the twenty-five fastest growing companies in the INC.500 list at that time. Double ouch!

In three weeks of fast restructuring of our credit, tamping down our growth, reworking our marketing plan, repairing our inventories, calming down our vendors, working with our bigger customers (i.e. fixing everything),  we saved the company, and the bank pitched in to support our new plan.  The post mortem occurred at Dave’s round table a month later.  I will always remember Dave’s observation when I smugly concluded with “we know how to deal with this kind of thing now.”  He snarled across the table with a knowing smile  . . .  something like “It won’t be this Pink Elephant that will sit on you again.”  These days I always have an eagle eye out for unknown Pink, Purple or Magenta Elephants waiting to trample on something I haven’t thought of or experienced yet.

But how do you see these things before they hit you?  What kinds of detectors are available to avoid these things?  You can’t stop an entrepreneur from starting a new business or activity that is viewed as hopelessly stupid by detractors – and merely insane by close relatives.  As an entrepreneur, you have a genetic problem.  The bomb disposal guy in The Hurt Locker comes to mind.

Entrepreneurs often crash headlong into these nasty, often dangerous and sometimes exhilarating experiences.  I posit that in fact entrepreneurs sometimes tempt fate to get off on the experience – tread close to the edge to keep the fire inside burning.  They sometimes don’t care; they are often reckless adventurers.  Or as one of the richest guys in the world is quoted as saying, “A real entrepreneur is somebody who has no safety net underneath him.”

The problem is that we weave that safety net even as we sit in it, making the job doubly difficult.

Posted in Finding your ideal niche, Hedging against downturns, Protecting the business | Leave a comment

BERKONOMICS CELEBRATES 6TH ANNIVERSARY WITH OVER 100,000 CIRCULATION

September 21st, 2015 marks the sixth anniversary of publication for BERKONOMICS, the blog containing insights for business management, entrepreneurs, and investors.  Starting with just 4,000 circulation in 2009, BERKONOMICS has grown to well over 100,000, and Berkonomics new theme 2015is read on five continents by an audience that is 45% female.  One third of its readers are aged 25-34.

Re-posted with permission by tens of blog sites, postings include Office Depot-Office Max, SoCalTech, LinkedIn Pulse, and numerous entrepreneur and angel investor sites in the United States, Canada and Europe.  Over 15,000 subscribers receive BERKONOMICS through RSS feeds, 50,000 by direct email, and 5,000 through LinkedIn, Twitter and Facebook – posted directly to those sites immediately upon publication of the primary blog each Thursday morning.  An estimated additional 40,000 circulation comes from re-postings.

BERKONOMICS, authored by Dave Berkus with occasional guest authors, has never missed a weekly installment in its six years of publication, and will have celebrated a searchable inventory of 312 posts on its anniversary date.

The series has been collected into three books, BASIC BERKONOMICS, BERKONOMICS, and ADVANCED BERKONOMICS, as well as a series of eight books in the SMALL BUSINESS SUCCESS collection, each of the books in the collection addressing a single subject in depth, from starting up through management and marketing to a successful exit.

 

Posted in General | 1 Comment

Patent litigation can kill the small guy.

When you think of patents, you think of added value to the corporation in the form of protection of its intellectual property.  In fact, many corporations spend millions developing surrounding patents to form what is known as a “patent thicket,” much like Brer Rabbit jumped into to protect himself against his detractors in the briar patch.  Investors like to see patents or patent applications as evidence of intellectual property value and barriers to entry.

But there is a darker side to patent protection.  The cost for filing patents and extending the filings to multiple countries is expensive, but often manageable.  The problems come from either prosecuting or defending a patent, and those problems can come in many forms.

[Email readers, continue here…]  First, if your patent is challenged at any point, even after it has been granted, the cost of defense is dramatically higher than the original patent patentfiling and attorney fees.  It has become a common practice for large companies to fight their patent wars in the Patent Office itself, by filing legal challenges, requiring re-examination and sometimes an appeals process that can lead all the way to appeals court.

Second, if you elect to prosecute a violator of your patent, you begin a process you cannot easily abandon.  Depending upon the size of the company or companies you go after, some will counter sue for violation of adjacent patents they may own, or sue for causes seemingly unrelated to the patent.  This happened to one of my companies, and the cost of defense escalated out of control, exceeding the cost of prosecution, ultimately contributing to the death of the company.

Third, if you are sued in a patent case, and elect not to settle the suit early (bypassing a strategy of the prosecution), then your defense costs increase over time to reach amounts a small company CEO would never permit if in control of the situation. But to defend a lawsuit is not to control it.  And patent litigation can kill the small guy.

Posted in General, Growth!, Protecting the business | 3 Comments

There’s gold in re-purposing intellectual property.

Several times a month, I’d have lunch with one of my CEOs, and each time we’d find ourselves digging into the intellectual property developed by the company over the years, just to refresh ourselves about what the intended use was back then,  and whether new developments or technologies might make these older ideas and patents relevant again.

Since I have been involved at the board level with so many companies over the years, sometimes I can see connections that might be missed by a CEO with a singular focus.  So I was surprised and excited when one of these verbal fishing expeditions during a lunch brought up a technology the company had patented back in 1995 and forgotten.  The image1436814514Internet was young, and the patented product allowed a visitor to dial into a computer (does anyone remember dial-up electronic bulletin boards?) and be redirected to a screen that would allow the user to identify himself,  pay any fees required for use and agree to the terms of service.

[Email readers, continue here…]   From my more recent experience, I recognized that this describes exactly what every guest must do when attempting to gain access to the Internet in a hotel, or Starbucks, or any of thousands of public places.  And I recalled that there was a patent war starting to take shape in this segment, centered about who was first to patent just this guest access.

It turns out that our patent was years ahead of those others, and was general enough to cover all forms of access to the Internet, not just dial up.   The CEO began what continues as a licensing effort and lawsuits to protect the patent that could be worth more money in the end than the entire corporation was worth before the discovery.

Intellectual property is the principle asset of technology companies.  The value of old patents cannot be easily estimated as new technologies reinvigorate those patents for new uses, such as the one we discovered during lunch.  So: do you have hidden treasure in your vault?

Posted in Growth! | 2 Comments

Whatever it is, try to deliver it via the cloud

By David Steakley

Editor’s note:  Popular contributor, David Steakley, returns this week with his take on the importance of cloud delivery for technology businesses. – DWB

Everyone knows that software-as-a-service has displaced the old style of delivering enterprise software. You may have assumed that this has transpired as a natural evolution of technological capabilities. Wrong. The key driver is to shorten the decision path.

With old-school enterprise software, closing a sale required you to get the customer’s lawyers to sign off on the software license; getting the customer’s IT personnel to bless your architecture and grudgingly deign to allow your software to enter the holy chambers of IT; getting the green shades to issue a check which would often contain six figures or David_Steakleymore; persuading the IT gnomes to buy adequate disk space, CPU power, terminals, and network capacity to allow your software to operate; and many other relatively impossible hurdles. It is kind of amazing, in retrospect, that any enterprise software was ever purchased.

[Email readers, continue here…] Software-as-a-service, often sold in a freemium model with the simple features available at no cost, allows the individual end user to decide on a whim to try out your solution, and IT never even has to know! “Contract? Well, there was some funny language I clicked on…”

There’s a lesson in this for any company which intends to try to sell to huge corporations: design a sales model which requires the least possible action by the customer in order to close the sale, that involves the least number of corporate personnel, and requires the smallest possible amount of cash outlay at the outset. The closer you can be to allowing the actual end user of your product or service to decide on his or her own to buy your product or service, the better off you are.

If this type of approach simply doesn’t work for what you’re doing, then you have to grit your teeth and plan for success, to overcome the inherent obstacles of selling to corporations.

Posted in Growth! | Leave a comment

Bottom up budgeting creates waste. Top down!

budgetingMany people believe that bottom up budgeting leads to waste and misdirection. The advocates of top-down budgeting are strong in their belief that if you give each person or department no guidance, they will budget to their wants or specific needs, not to those that support a corporate goal.

So, they argue: Give your people a top-down generated target. Have them fit their plans into the target.  This way the corporate financial and strategic goals come from the top, as they should, and all departments fit into those strategies with their contribution and their overhead.

[Email readers, continue here…]  Over many years, in in many companies, I’ve overseen budgeting both ways, and agree with the advocates that it is often masked waste in the form of allowances for unknowns, extra padding for protection, and even higher budgeted expense numbers to make the managers look good at the end of year by under-spending, that are  found deep within bottom-up budgets.

On the other hand, often departments cannot fit their required costs into the structure required to meet a profit goal for the corporation, or just as important, corporate revenue goals.  In both instances, top down or bottom up, negotiations between department and corporate managers require compromise. The difference is that in a top down budget, the discussion almost always centers on compromises to meet the corporate goal, a much more important discussion than one centered around department goals.

Budgeting from the bottom up more often works in non-profit enterprises, where many departments are involved deeply into the detail of staffing and program delivery, and where the goal of the non-profit is service, not profit.   Either way, a budget is a necessary road map for a successful enterprise, and should never be ignored or worked upon after the year is already underway.

Posted in Growth!, Protecting the business | 3 Comments

White-label it: Make it ‘YOU’ inside.

By David Steakley

This week’s insight comes from David Steakley, who has contributed several great posts to Berkonomics this year.  David is an active angel investor in Texas and is a former management consultant, where he obviously plied his trade well.  – Dave

Companies can strike it rich by finding an element of business operations which many companies need, but few have the capability or expertise to execute with excellence – and then aim to supply that element.  Sometimes this is called a white label strategy, because whitelabelyour customers offer your product as their own product, writing in their brand name on the blank label in your underlying offering.

But, more often, this is just the virtualization of what we used to call outsourcing.  On the web, not only does no one know much of who you are, but no one cares how you sourced your widgets.

Bazaarvoice, a company in Austin, Texas is a great example of this kind of operation.  To be quite frank, the first two or three times someone told me what they do, I couldn’t understand it.  My preconceived notions of the possible range of business models simply didn’t include this one.

[Email readers, continue here…]  Basically, the company created software for online forums.  Really, that’s a business?  Yep:  revenues of over $100 million per year with a market cap around $800 million.  The company identified an element of operations which almost every online retailer already has, or needs, but very few do well on their own.  Moreover, the company’s offerings allow the retailer to change a thing which may be seen as mostly a pain – into an engine for increasing sales, for sharpening the retailer’s value proposition, for catching and solving problems before they become real problems.  In short, the underlying value of that company is the old-fashioned underlying value of outsourcing (if there was one):  the outsourcer not only does it for you, the outsourcer shows you how to do it right, and does it at lower cost. 

Now listen to one of Bazaarvoice’s short pitches:  “Our industry- leading social commerce solutions capture & amplify user-generated content, driving the highest social media ROI, for the world’s largest brands.”  Forgive me, but I had no idea what that meant.

I heard another pitch recently, for a company which must have been unknowingly inspired by that other obscure pitch.  This one wants to supply product comparison mechanisms for online merchants.   You know, those bubble charts of products and features, by model?  Do you want zoom in your camera?  How much zoom?  How many pixels?  Thank god I had finally grasped Bazaarvoice;  otherwise I probably would have sent these guys packing.

There’s a lesson in this for business operators.  Look around your operations, and identify areas of cost which, as far as you can tell, do little or nothing to enhance the profitability of your operations – but, you must have them.  Can someone do it better than you, and at lower cost?   Have an open mind.  You’re used to outsourcing payroll, bookkeeping, and logistics.  Just for an exercise, see if you can identify someone to outsource absolutely everything in your business.

You have only so much management bandwidth.  It can only make you more effective – if you’re able to focus your attention on the things you’re best at doing – your core competency.

Posted in Growth! | 1 Comment

The five kinds of risk in building your business

If you could predict a crisis within your business before its occurrence, wouldn’t you move to prevent or reduce its impact?  Making such predictions is a skill that can be developed, and here’s one method of doing so.

There are five basic kinds of internal risks than a business faces over time. Of course, there are external risks that cannot be controlled or predicted, but can be planned for as well –

profit, loss and risk (buzzword crossword series)

.

natural disasters, sudden political or economic events that rattle the entire economy, and more.  That discussion is for a future time.  Here are risks you can address.

First, there is market risk.  Will the marketplace accept your product?  Is there a market for your class of product at all?  Market risk is constant and should be of greatest concern to any executive or entrepreneur.  Mitigating market risk is not easy.  Someone within your firm must be finely attuned to the changes in the market, including subtle signs from competitors.  If you are big enough to have a dedicated product manager, that person is a good candidate for this ongoing task, as is a marketing manager, who should be attuned to the changes in the environment.

[Email readers, continue here…]  Second is product risk.  Totally controllable within your organization, the quality and durability of your finished product should be at the top of someone’s job description.  Whether it is you or a quality control manager, someone must assure that the product or service you send out to the world will not fail to perform at least to the level of customer expectation, if not to delight those customers most likely to be critical.

Third is finance risk.  Too often the person you call your chief financial officer is trained in accounting, which is primarily a process of looking backward over events in the past.  A real CFO must be one to project and plan for the future as well, aware of the need for increased cash during times of growth or market disruption, and aware of the weekly challenges of shifting cash flow.  The worst thing a fragile, entrepreneurial business can endure is to run out of cash.  Not only is the enterprise threatened, but confidence is shaken among employees, suppliers, even customers. Competitors have a field day when hearing about cash problems at a company; and the rumors they pass on can reverberate for months or longer after the problem is solved.

Fourth is competitive risk, which consists of two separate risks. Do you have a significant barrier to entry to keep competitors from undermining your effort?  And does a competitor have a better story and product to compete effectively against your offering? Someone within your firm must be finely attuned to the changes in the subtle signs from competitors.  These include having a current knowledge of competitors’ hiring practices, pricing strategy, and more.

Fifth is execution risk, which is squarely on management to perform, to take the company to and beyond profitability. It is your job to oversee the constant gathering of information, efforts to mitigate these risks, and even to hold senior level planning meetings around analyzing data and asking “what if…” questions that bring out the doomsday scenarios that could hobble your company.   Once defined, the obvious next step is to role play responses to each challenge, or even to put in place preventative measures well in advance for each identified risk.

When one or several of these events hit you and your team, and they certainly will someday, you’ll be better prepared to respond quickly and with a more appropriate, planned response.  That will reduce the possibilities of suffering a catastrophe, and will more quickly calm the many stakeholders who have reason for concern, looking to you for assurances.

Why not plan a series of meetings with the appropriate members of your firm to discuss these challenges as you and they identify them, and prepare a plan for overcoming each?  The time it takes may well be the difference between survival and doom; or it may be the plan that distances you from your competition if events do occur in your mutual future.

Posted in Growth!, Hedging against downturns | 3 Comments

My story: Fail locally, one customer at a time.

By Frank Peters

Our guest insight this week is from Frank Peters, well-known in the angel and in the bicycle worlds for his podcasts and passion.  His personal story is full of lessons for us all. – Dave

We’ve all heard the modern day mantra: Fail Fast. It’s good advice; the theory being that entrepreneurs can discover the flaws in their business models sooner, make course corrections and move in a more favorable direction.

In my case as a young software entrepreneur, I had a different approach: Fail Locally, one customer at a time. Perhaps like many businesses, mine started out painfully slow; wage-wise, I think it was three years before I earned $30,000. For me I had few alternatives; wall_st_bull_0working for someone else had proved to be a frustrating experience. I became an entrepreneur by default. I was fortunate that I could write software and doubly fortunate that my despair at working for ‘the Man’ – and feeling compelled to strike out on my own – coincided with the dawn of the personal computer era.

[Email readers, continue here…]  I’ve often looked back and said that you didn’t have to be a genius at that time. You just had to be lucky, write reasonably good code and land in an industry with some legs, and of course, treat the customer well. Prior to bombing out of corporate life, I worked as a management consultant and at a very early age I was dealing with the presidents of very large companies. This would serve me very well as my product moved from individual clients to entire Wall Street firms licensing my code. But there was something else at work here.

I can’t imagine encouraging an entrepreneur to follow in my path, but for me, operating alone with no board of advisors, no business plan and no outside capital, I was making it up as I went. I look back and describe the early days as ‘selling software out of the trunk of my car’. I would write code all night then get in the car around noon each day to make my rounds. On the West Coast, where I started, the stock market closed at 1 pm and that’s when my customers wanted to see me.

I was fortunate that these individual customers were well healed; they had the money and were looking for an excuse to buy a computer. As I look back, I can remember so many times where I benefited from good luck. Who would’ve guessed that a day would come when a major Wall Street firm would make a strategic decision to open high profile offices across Southern California? How would they populate these new fancy offices? They would lure the best and the brightest away from their current employers with fat cash advances – enough for a new car, and a new computer. I was a beneficiary of this development. When one of my clients was recruited away from a user, and all his new officemates saw his computer, pretty soon I was invited into the new companies for all those ‘me, too’ sales.

Oh, how I tortured these early clients! Ours was a 2-man operation in those earliest of days; I knew nothing of quality assurance. It would not be unlikely at all that a major update to the software would break critical features that previously worked fine. Flaws like these could cripple my clients, causing them grief, lost productivity and worse, a loss of good will with their clients. Thankfully, these mini disasters occurred in small sizes. I could fix the bugs and hand-deliver the repairs before I infected more clients. In this way I learned a great deal. I would take the slings and arrows of my disappointed clients face to face. And I would learn customer service.

Years later, when news of my product spread to Wall Street and I had my first appointments in these corporate offices, I was well prepared. My earliest job experiences had placed me in similar hallowed places; I was not overwhelmed. At this point in the company’s life, I had developed a mature product used by thousands of happy individual clients who were clamoring for the home office to build interfaces to minimize their manual data entry. But maybe best of all, as we arrived in Manhattan to move my officer to the source, I arrived with a good reputation and, as I like to say, I hadn’t pissed off anybody on Wall Street.

From this point the company grew like wild fire. People liked the product and by buying a license for everyone in their firms, these Wall Street executives were rewarding their hard working sale force. It was hard to believe, but this was a new concept back in the days of ‘green screens’ that only offered market pricing data to the people who made all the money for the firm. We became as popular as the hoola hoop. We went from our largest-ever sale of 3 licenses at one time to a thousand. In ninety days we sold three major firms; and this would only be the beginning of our rapid growth. I look back today and muse, “No one ever asked us if we could deliver all that software.” And oh, did we struggle as we learned all over again how to provide customer service to these large and demanding new clients.

Could an entrepreneur follow this same business model today? I suppose that’s what limited releases are all about. But in our case, our test clients consumed us for our first nine years of existence – no one would advise a similar strategy today. We were lucky that we were able to learn so many painful lessons on a small and local scale. By the time a large opportunity came along, we were ready.

Posted in Growth!, Hedging against downturns | 3 Comments

Drive your recurring revenues.

This week, our guest post is by  David Steakley, a past President of the Houston Angel Network, and a reformed management consultant.  David is an active angel investor, and manages several angel funds in Texas. 

I have a positive fetish for recurring revenue. When I hear a company pitch a business model which I believe has the potential to acquire a customer once, and keep the customer paying for a multi-year period without further marketing expense, my ears perk up. Typical examples are software as a service (SaaS) models, or any kind of content-driven subscription model.

There are so many things to love about a company with this kind of subscription model. Especially for a provider of a virtual good or service, costs of goods sold do not scale with sales, as they do in the real world. In the virtual world, a much higher percentage of incremental revenue falls straight to the bottom line. In most businesses, you can look at Raising moneythe revenues all you want, and you can draw pretty pictures extrapolating the curve of revenue growth, but, usually, the reality is, the company needs to go out and sell the annual revenue all over again every single year.

With the right recurring revenue model, top line growth can really shoot the lights out. Each year, the company can commence with a reasonably predictable big portion of last year’s revenues already in the bag.

[Email readers, continue here…]  It requires special capabilities and expertise to really capitalize on a recurring revenue model, and a different way of measuring success for both executives and investors. Subscription businesses typically take longer to get to profitability, because costs of developing the product or service, and customer acquisition costs, are front-loaded, while revenue is back-loaded. By conventional measures of company performance, a recurring revenue company can appear to be struggling at first, but you have to know what measures are predictive for this kind of company.

The key calculation is the cost of customer acquisition, compared to the gross margin contribution of the customer. If an analysis of the gross margin on a new customer acquisition reveals that customer acquisition costs can be recouped in two years, you’re doing well. If you get back customer acquisition costs in one year, you’re doing great. This assumes reasonably low churn of 10% or less.

The crucial turning-point for a recurring revenue model with a potentially massive market is the moment when the acquisition model is sufficiently effective, refined, and repeatable, so you can blow it out and scale it up. If you’ve got a favorable payback period for customer acquisition, and you can repeatedly perform the acquisition model, then that is the moment to forget about profitability and spend like a crazy person by scaling up the sales machine.

When you go to sell the company, you’ll get paid based on the slope of the recurring revenue curve (up and to the right), and even if a company sale is not in your plan, you’ll be glad you sacrificed current profitability for the longer term, if you’ve picked the right moment to go big.

I’ve always thought Steve Case was the early genius of this kind of thinking. In the late 90s, you could have had a hard time picking up your mail without finding an AOL software connection CD in the mailbox. AOL spent about $300 million sending out those CDs, and at one point, half the world’s production of CDs had the AOL logo on them. The lifetime value of an AOL subscriber was about $350. Average customer acquisition cost was about $35. That extreme in postal spamming took AOL from an IPO market value of $70 million to a merger value of $150 billion when AOL was combined with Time Warner. Wow.

Recurring revenue companies have been changing hands in the last few years at four to six times’ annual recurring revenue. Steve Case’s Time-Warner bonanza of perfect timing may not be repeated any time soon, but the appetite for these kinds of companies is more robust than ever.

Posted in Growth! | 2 Comments