Scaling a Hypergrowth Enterprise – Part 5 of 5 (Capital)

This is the 5th and final installment in my 5-part series on the five elements of Elements of Scaling a hypergrowth enterprise.  I was the co-founder and CEO of CyberRep, a hypergrowth CRM and call center enterprise which grew annual revenues from $500,000 to over $1.6 billion over a 17 year period.   That’s revenue growth of 320,000% (3200x).

So what are the 5 elements of scaling a hypergrowth company?  Part 1 of this series talks about People, Part 2 discusses Culture, Part 3 examines Scalable Customers, and Part 4 delves into Process.  The 5th element is Capital, which is the necessary fuel that every hypergrowth company must have.

While many startups can be bootstrapped with limited capital, the Hypergrowth Enterprise absolutely needs capital.  In order to put in place the foundation for hypergrowth, you need the money to build and perfect your product or service, to hire your awesome talent, and for working capital as you book revenue.

Two Essentials for Raising money are to 1.  Raise money from a Partner, not just an investor and 2.  Raise more than you need, but not too much.

THE INVESTOR PARTNER

To fuel our growth, we raised $20 million in mezzanine capital (subordinated debt with warrants) and $1 million in equity from one partner, Allied Capital, a Washington, DC-based, publicly traded business developement company (BDC).  We did 3 separate rounds over a 4 year period for expansion of facilities, working capital, and the acquisition of 2 complementary targets.  We had multiple term sheets from VCs, mezz investors, and private equity firms.  We chose Allied because, in our opinion, they were more than a capital source, they were a Partner.

A Partner has Deep Pockets – Our partner had a $5 billion portfolio with an average deal size north of $20 million.  While we only raised $4 million in our initial round, we knew we would need to go back to the investor for more money as we grew.  Therefore, we needed a partner who woud readily put more capital into our business.  Raising money is VERY time consuming and disruptive to your business, so by having a deep-pocketed Partner who could fund additional rounds quickly, we avoided having to spend tons of time shopping for new investors for our 2nd and 3rd rounds of funding.

A Partner Understands Your Space – Having made numerous investments in the business services and information services space, including a company directly in our space, our partner brought to us expertise and experience which, inside and outside of the boardroom, proved to be very valuable.  If your investor knows your space deeply, they won’t waste your time with stupid questions and uninformed opinions. Instead, they can focus on the nuances of your industry and add true value.

A Partner Has Operational Experience – Our partner owned outright many of the companies in their investment portfolio. As the owner of these businesses, they had an operational focus on all of their portfolio companies including ours. This was invaluable to us, as we were quite inexperienced and needed all the help and guidance we could get. Too many professional investors have no operating experience, and have never had to hire people, fire people, make a payroll, or close a sale.  Lack of practical experence puts these investors at a disadvantage and, worse, the advice they give you could put you out of business!  Conversely, professional investors who have started and built companies are the best kinds of partners to have because they can share their knowledge and experience with you. They know firsthand how super hard it is to build a business from zero, and they can relate better to you.

HOW MUCH MONEY SHOULD YOU RAISE?

Raise more than you need, but not too much.  What do I mean by this? Whatever amount you think you need to raise, raise a little more.  I know I am generalizing, but in the VAST majority of requests I see, the entrepreneur does not ask for enough money.  Who knows why.  Maybe she’s trying to minimize dilution, or maybe she thinks this current round gets her to a milestone where she can get a higher valuation with the next round.

Regardless, the key thing to keep in mind is that capital is the FUEL for your growth.  If you’re driving from New York City to DC, do you fuel up your car every 50 miles, or do you put enough fuel in your tank to make the entire trip?  Same thing with raising money for your growth.  Be less concerned about dilution and equity give-up and more concerned about having the fuel to reach your destination.  Raising money is a big distraction from company operations, and it’s a real time killer.  Founders need to be focused on wowing their customers and building an amazing team, NOT being in constant fundraising mode.

So how much do you really need?  Think through your scenarios, be conservative on your projections (sales always take longer than you think), and get advice from seasoned pros and advisers as to the appropriate amount.

As for raising TOO MUCH money, this is also a problem.  Why?  Because having the security of a fat bank account can make a startup SOFT and too comfortable. They lose their edge, the bootstrap mentality which is necessary for creativity, scrappiness, and resourcefulness.  Look at all the Dot Com failures that raised too much money, and then wasted it on pricey office space, expensive furniture, ridiculous marketing, etc. because they couldn’t find a better use for that precious resource.  They got soft, then couldn’t be self sufficient when the VC market dried up.

So….raise more money than you need, but not too much.

Thanks very much for reading.  I hope this 5-part series was informative.  What do you think?  I’d love your feedback and thoughts, so please Comment below…and please sign up for my Blog too!  (See the Signup box on the sidebar of my Home Page)

Featured image courtesy of Asthma Helper licensed via creative commons.

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Scaling a Hypergrowth Enterprise – Part 4 (Process)

This is the 4th in a series of Posts on the five elements of scaling a hypergrowth enterprise.

A “ONE IN A MILLION” HYPERGROWTH STORY

I was the co-founder and CEO of CyberRep, a CRM and call center company which grew revenues nearly 160x (16,000%) to over $80 million over a 9 year period.  In the 8 years since we sold CyberRep, the organization has grown an additional 20x (2000%) to over $1.6 billion in annual revenues.  Yes, that’s “billion” with a “B.” So, over a 17 year period, this enterprise grew 3200x, or 320,000%.  I’m not a business historian or a statistician, but I would bet that these numbers would put our little startup from 1992 in the “better than one in a million” category of organizations that have experienced this level of growth.

In Part 1 of this series, I talked about People as the first of 5 key elements for scaling a hypergrowth company.  In Part 2 of this series, we discussed Culture, and in Part 3, we examined Scalable Customers. The fourth key element in scaling a hypergrowth enterprise is Process.

THE BENEFITS OF PROCESS

A critical success factor in our ability to grow the business was our commitment to mapping and implementing all of our key business processes.  The 3 key benefits to this were:  1.  We were able to dissect HOW we were doing certain things, and thereby make improvements along the way (process engineering, in essence) 2.  We were now able to “cookie cut” or repeat business processes that were vitally important to our business and our customers (improved business operations), and 3.  We minimized errors and were more consistent in our service delivery (happy customers!).

We didn’t get bogged down in the “flavor” of process engineering or documentation, a la TQM, ISO, or Six Sigma.  We just did the best we could, got them down on paper, trained our people, and put in place measurements to monitor our adherence to the processes.

You may think you are too small to create processes for everything.  In fact, this may even seem to be a waste of time for a startup that has limited resources and “other” more important priorities.  But the simple fact is that every organization, whether a startup or Fortune 100 company, will benefit from developing and implementing SOME key processes.  As a company grows, it becomes imperative to document more and more proceses in order to establish a firm foundation for hypergrowth.

THE “PROCESS PROCESS” – THE WHAT AND THE HOW

At my company, we documented and implemented close to 200 different KEY business processes.  This was a very time consuming task, but once completed, maintaining and adding to our library was relatively easy.  We had processes for things such as business acceptance, hiring, internal communications, various types of training, employee suggestions, innovation, client reviews, different kinds of reporting, and maintaining & upgrading IT and telecom systems, for example.  We even had a process for developing and rolling out processes, the “process process.”

Who’s responsible for the process process?  We were lucky in that our COO was a TQM expert and a trained process engineer, so he owned the process process.  I would suggest that a C-level player in your organization take ownership for sure.  The process process is so critical to winning that it deserves C-level attention and sponsorship.

We assigned a process champion for each process, who was responsible for gathering the information and procedures, as well as getting buy in from the people who would be most affected by the process, e.g. the people who had to follow the process.  I do NOT recommend having one person create processes in a vacuum because the most difficult thing about doing processes is NOT the documentation.  It’s the actual implementation, where you put theory into practice. Where people are involved, the easiest way to gain adoption is to have a cross-section of people involved in all aspects of the planning and implementation of each process.

Do it, Implement It, and Live it.  In order to make the process process work, you need to be serious and consistent about your commitment to it.  Pay especially close attention to the implementation.  Keep monitoring and measuring for the first 60 days or so to insure compliance.  And live it!  When your team sees its top leaders embracing this, or any initiative for that matter, it becomes ingrained into the organization’s culture, and becomes a matter of individual, team, and corporate habit.  And a funny thing will happen:  the discipline that your team puts into the process process will lead to hypergrowth, as your existing scalable clients grow, and your business operations run more smoothly.

Thanks very much for reading.  Please tell me what you think.  How do you see your organization getting more disciplined about the process process?  Which specific processes you have had success or challenges with implementing?  What are your ideas on how a company can improve its “process process”?

I’d love your feedback and thoughts, so please Comment below…and please sign up for my Blog too!  (See the Signup box on the sidebar of my Home Page)

3 Types of Startup Founders – a Cooking Metaphor

What do chefs and entrepreneurs have in common?  Both try to use great ingredients, and apply their energy and experience to create masterpieces.

I love to cook, and I love to watch cooking shows.  Maybe it’s because I worked in my Dad’s restaurants as a young kid.  Anyway, I have found that there are 3 basic types of chefs:  1.  Scientist, 2. Magician, and 3. Artist.

To make a meal, the Scientist is the left-brained chef who meticulously measures and weighs ingredients, and follows religiously a 50-step recipe.  The Magician has no recipe and, in fact, has no preconceived idea what kind of meal she’s going to cook. Instead, she goes to the market and sees what’s fresh and in season, then she goes back into the kitchen and conjures up a creation on the spot.  The Artist is a combination of the first two. He has a general sense of what he wants to make, and how he wants to make it, and works within these guidelines to create his meal.  He dosen’t work off an exact recipe, but instead relies on instinct and creativity to work within his themes.

Having observed, invested in, and worked with dozens of startups over the years, I theorize that Startup Founders also fall into 3 categories, each one similar to those in the cooking metaphor above.

For example, the Startup Scientist may have a super detailed business plan and 30 pages of financial projections including a dozen pages of assumptions (ok maybe I’m exaggerating, but you get the drift).  Some years back, a good friend of mine sold his company for a tidy sum and used the 12 month noncompete period to develop a detailed business plan for a consumer-oriented startup.  He raised $10 million in venture capital. His business plan was amazing, and every possible contingency and possibility was covered, this even before his company earned Dollar One.  What happened?  Within 2 years, he burned through all of his cash and folded the venture.  Why?  I think the Scientist and his team were enamored by his plan, they hired too many executives too soon, and failed to be flexible and responsive to clients needs.  I really think his “awesome” business plan worked against him, and he stuck with it even though he should have pivoted and iterated. The bottom line is that startups are not a “science,” and this approach works better for large companies than startups.

The Startup Magician has NO PLAN.  He has a business idea, and gets to work, whether it’s developing a killer app, or acquiring customers and adopters.  He is open to change and creativity, and pivots and pivots until he finds something that works.  This kind of startup has no real business model per se.  Can this kind of company succeed? Remember Google? They had no business model until a year or so before they went public.  What was Facebook’s business model 2 years ago?  Does Twitter have a business model today?  Most would say it is undefined, but it has to be considered a very successful startup.  These are exceptions.  My personal feeling is that it’s very difficult to build a hypergrowth enterprise in this manner.  Some Startup Magicians create successful businesses, some create nice lifestyle businesses, but most either stagnate, or fail, usually because of a lack of direction.

What about the Startup Artist?  This entrepreneur has rough guidelines for what she wants to achieve in her business.  She knows her product or service, her company culture, the kinds of people she wants to hire, and the markets in which she will compete.  She has a general mission and vision for the startup, and a set of core values which serve as guiding principles.  Maybe she doesn’t have an awesome business plan, or a 10-scenario DCF analysis, but those things are not only NOT NEEDED in a startup, they will in fact inhibit growth and innovation. Ideally, she and her team work off a one-page plan with a couple of key areas of focus, and then they concentrate on EXECUTION.  I believe this type of startup has the best chance of winning because it allows for flexibility and adaptation to changing market and business conditions.  The company also has a general sense of its direction, culture, and style, which will keep it from meandering aimlessly.

The lesson here, I think, is that it’s best for a startup NOT to be to be too exact, nor too free form.  Planning is great, but the plan itself should not be Gospel. The benefit of preparing a business plan is in the planning process itself, where you and your team think carefully about your capabilities and differentiators, your customers, your competitors, financial assumptions, and markets.  But, it’s imperative to keep in mind that the one true thing about any startup’s business plan is that things will NEVER turn out as planned.

To build a hypergrowth company, you must be ready to pivot, to develop new solutions, to move into markets you didn’t originally foresee, and to take on other opportunities without being beholden to some preset plan which was made in theory to begin with.

Thanks for reading, and please leave a Comment below.  What style of Startup Founder do you think has the best chance of succeeding?  Am I being too critical of the Scientist?

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Note:  This Post is dedicated to my good friend Derek Coburn (@cadredc), Founder of CADRE, the UN-networking organization of remarkable advocates.  Thanks D, for suggesting I write a Post about this topic!

Warren Buffett’s Ten Rules for Winning

While enjoying a nice lunch with my Son at a Minneapolis Jimmy John’s sub shop this weekend, I saw this “WARREN BUFFETT’S TEN RULES” sign tacked to the wall.

Unfortunately, I wasn’t able to take a glare-free or hi-res photo, so let me list out these Rules below (with my comments in bold Italics):

No. 1:  REINVEST YOUR PROFITS – When you first make money, you may be tempted to spend it.  Don’t.  Instead, reinvest the profits.  Buffett learned this early on. In high school, he and a pal bought a pinball machine to put in a barbershop. With the money they earned, they bought more machines until they had eight in different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another business. No surprise that this is Rule #1.  He is the greatest investor of our time and one of the reasons is because he followed his own advice here.

No. 2:  BE WILLING TO BE DIFFERENT – Don’t base your decisions upon what everyone is saying or doing. When Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not on Wall Street, and he refused to tell his partners where he was putting their money. People predicted that he’d fall, but when he closed his partnership 14 years later, it was worth more than $100 million.  In short:  Don’t be afraid to be contrarian.  Time and time again, we see tremendously successful investors, businessmen, entrepreneurs take a contrarian approach.  Wasn’t it John D. Rockefeller who said the best time to buy is when there’s “blood in the streets”?

No. 3:  NEVER SUCK YOUR THUMB – Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a deadline. Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking “thumb-sucking.”  Buffett invested $5 Billion in Goldman Sachs during the worst moments of the 2008 financial crisis when Wall Street appeared to be melting down.  He committed this money in a 15 minute (no thumb sucking here) phone call with Goldman CEO Lloyd Blankfein.  Result?  A $10 Billion profit in 30 months.

No. 4:  SPELL OUT THE DEAL BEFORE YOU START – Your bargaining leverage is always greatest before you begin a job – that’s when you have something to offer that the other party wants. Buffett learned this lesson the hard way as a kid, when his grandfather Earnest hired him and a friend to dig out the family grocery store after a blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less that 90 cents to split.  This advice holds not only for jobs, but also for any kind of negotiation, investments, partnerships, JVs, etc.

No. 5:  WATCH SMALL EXPENSES – Buffett invests in business run by managers who obsess over the tiniest costs. He once acquired a company whose owner counted the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only the side of his office building that faced the road.  I think the lesson is also that the devil’s in the details, and that little things mean a lot. The best organizations have a handle on all of the nuances and details of their operations.

No. 6:  LIMIT WHAT YOU BORROW – Buffett has never borrowed a significant amount – not to invest, not for a mortgage. He has gotten many heartrending letters from people who thought their borrowing was manageable but became overwhelmed by debt. His advice: Negotiate with creditors to pay what you can. Then, when you’re debt-free, work on saving some money that you can invest.  If our country had followed this advice, we wouldn’t be in the financial pickle we’re in now, that’s for sure.  Seems like Buffett is not only saying to limit what you borrow, but also very simply to be disciplined, and that’s a key success driver

No. 7:  BE PERSISTENT – With tenacity and ingenuity, you can win against a more established competitor. Buffett acquired the Nebraska Furniture Mart in 1983 because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in North America. Her strategy was to undersell the big shots, and she was a merciless negotiator.  This is my favorite of the Buffett Rules.

No. 8:  KNOW WHEN TO QUIT – Once, when Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He lost again, leaving him with close to nothing. He felt sick – he had squandered nearly a week’s earnings. Buffett never repeated that mistake.  The only one making money at the racetrack is the owner.  I bet he’s happy he learned this lesson at a young age.

No. 9:  ASSESS THE RISKS – In 1995, the employer of Buffett’s son, Howie, was accused by the FBI of price-fixing. Buffett advised Howie to imagine the worst- and best-case scenarios if he stayed with the company. His son quickly realized the risks of staying far outweighed any potential gains, and he quit the next day.  Continually assess current and future risks and mitigate those you can to help shape and control your future.

No. 10:  KNOW WHAT SUCCESS REALLY MEANS – Despite his wealth, Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire fortune to charities, primarily the Bill and Melinda Gates Foundation. He’s adamant about not funding monuments to himself – no Warren Buffett buildings or halls. “When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you lived your life.”  What a great definition of “success.”  After all the effort, the blood, sweat and tears, and the battle scars from the business and investment world, the Master defines his success so simply and elegantly.

I can’t help but think that the world would be a better place, and the economy would be in much better shape if we all followed Warren Buffett’s Rules.

Hopefully, President Obama will continue to seek Mr. Buffett’s sage counsel and (I know this is a stretch) convince him to become our next Treasury Secretary when Tim Geithner (my Mandarin language TA at Dartmouth) retires.

Thanks for reading, and please leave a Comment below.  Which Buffett Rule is your favorite one? What kinds of things do you think Mr. Buffett would do if he were Treasury Secretary?

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FounderCorps – Entrepreneurs helping Entrepreneurs Win!

A few months ago, I joined a group of two dozen or so like-minded tech entrepreneurs and company Founders at the home of Jonathan Aberman of Amplifier Venture Partners to create a new and UNIQUE not-for-profit organization called FounderCorps.

Managed by experienced technology entrepreneurs for the benefit of entrepreneurs, FounderCorps has already assisted a number of community groups and Universities in business formation and mentorship activities, including George Mason University, George Washington University, University of Maryland, Startup XLR8R and others.

There are so many great organizations and resources in our market, so why start FounderCorps?  Do we really need another organization in town?  The answer is YES! We all felt that there exists a tremendous need to promote greater coordination between experienced entrepreneurs and new business creation. There is so much activity in our region, and we wanted to create a group dedicated to providing the experienced entrepreneurs’ perspective to connect the dots between entrepreneurs and technology company creation. The underlying feeling of all of our members is that there is a uniquely successful version of entrepreneurship here in the DC region, and we want to promote and provide resources to this community for sustained growth.

Right now, our membership comprises over 57 experienced technology entrepreneurs who have started, managed or exited successful technology businesses. FounderCorps promotes technology entrepreneurial development by actively partnering with existing organizations to create a supportive infrastructure for technology entrepreneurship. Our core mission is to promote a broader and deeper technology entrepreneurship community in the Greater Washington Region. FounderCorps creates and delivers mentorship and support programs to emerging entrepreneurs who are creating businesses.

Today, FounderCorps announced the establishment of the FounderCorps Fellows Program. The new grant program supports our core mission of promoting technology entrepreneurship in the Greater Washington Region and selects individual entrepreneurs nominated by our members for long-term mentorship and guidance. The initial activity of the FounderCorps Fellows Program will be to provide prizes and assistance to winners of business plan and creation competitions organized by FounderCorps’ partner organizations.  Click here for the link to the press release.

Check us out, and if you are interested in learning more, please visit our website.

Thanks very much for reading.  I’d love your feedback and thoughts, so please Comment below…and please sign up for my Blog too!  (See the Signup box on the sidebar of my Home Page)