Million Dollar Deal with no Numbers

Caution: Spoiler Alert – visit Dragons’ Den on CBC to watch the episode if you have not already seen it.

If you are an entrepreneur, you likely know the importance of keeping accurate records, and that potential investors will be taking a careful look at those numbers before deciding to invest in your company. Apparently, someone forgot to tell James Krane and Ron Whittick to bring their numbers along when making their pitch – and it didn’t matter.

James Krane and Ron Whittick appeared on the March 10, 2010 episode of Dragons’ Den to pitch their business – Insect Defend Patch, which could double as a hang-over cure. It works by releasing Vitamin B1 into the skin, which acts as a deterrent to mosquitoes and other insects. As well, one of the effects of alcohol is a reduced ability to absorb vitamins, which does not affect the patch, which works by absorption through the skin.

Asking for $5 million for a 75% stake in the company, it would have been safe to assume that there would be impressive sales to back that up. Maybe there were, but James and Ron didn’t know what the sales were, beyond the fact that the company was, in fact, profitable. Their inability to show specific numbers meant that some of the Dragons, at least, were not going to be interested.

But not all the Dragons were scared off. Starting with Brett Wilson, then joined by Jim Treliving, an offer was made, despite the lack of numbers. From his perspective, due diligence would turn up the company’s revenues, costs, obligations, and so on. He was more interested in the idea, which, with the right marketing, could easily become a multi-million dollar deal.

The offer was for 75% of the company – for $500,000 in cash, and the balance of the $5 million to be paid as a royalty from future sales.

Shocking? Yes, but remember, we only see part of the presentation on the show. James and Ron may have known a lot about their product, and the company’s rights to the technology. While they may not have been able to justify a valuation of $7 million, from Brett’s perspective, they merely need to earn $500,000 for him to recoup his investment (after paying the royalty), and the applications of their invention certainly have that potential.

If you’re planning to pitch your idea, it may not be that important to know your numbers at the first presentation. What you need to be able to present is the viability of the product as a business, and that it is making money (even if it isn’t much at the moment.

The Most Important Client

You never know where your next lead will come from.

In any business, there is always the dream client or customer. While the precise details of what constitutes such a customer depend on the exact business, there are a few common factors:

  • The profit margin is high
  • The value of the contract or purchase is large
  • The risk is low (i.e. the customer will pay promptly and the work itself is low-risk)
  • The visibility of the work is high  (i.e. you’ll get good PR from it)
  • The customer is easy to deal with

Often, such a customer can stimulate the growth of a business. These are the customers you want. The only questions you have are:

  • Who will the customer be?
  • When will the customer first show up?

Unfortunately for you, there’s no way to know the answer to these questions in advance. That means that any customer or client you work with could be or become your dream client. Or, any of your existing customers could refer your dream client to you.

However, while you might consider a particular customer to be the most important, the truth is, it’s your dream customer that’s the most important to your business. Therefore, you need to treat all of your current customers as though they were the path to your dream customer, because any one of them might be.

Even when you think you’ve determined who your dream customer is, you still need to treat the rest of your customers the same as your perceived dream client. When your dream client has moved on, or you’re ready to expand and grow your business again, you will once more need to rely on the relationships you established by how you treated your clients to facilitate that growth, and to find your next dream client.

Make sure you treat all your customers like gold. It’s possible that one of them is holding the pot at the end of the rainbow.

Next Generation Appointments

One of my readers was kind enough to send me a link to a piece of software he’s been working on for about a year, and asked if I could provide some feedback. I did what I normally do when I get such requests – I went to his site, spent 3 minutes browsing, and decided that it was worth a second look, and for multiple reasons.

Why write a review?

There are two reasons that I decided to write this review. Normally, I choose to review sites I’ve discovered, products that I like, services I think would be of use to my readers. This service certainly matches that criterion.

The second reason is because of what Edward Lejun, the founder of Setster, wrote to me. He explained that he’s worked on the product for about a year, is looking to expand and add new features, and was wondering if I could help him out. As a fellow entrepreneur, I’m happy to oblige, to help another entrepreneur reach success.

The Product

Setster is an online appointment scheduler, which can be added to sites, and allows you, the visitor to the site, to book appointments by seeing the schedule and selecting an available slot. Based on the type of appointment you request, an appropriate amount of time is allocated.

This product certainly has a variety of applications, from making medical or dental appointments, to scheduling dates. This is precisely the type of service I would want if I were running an office and didn’t want to hire an appointment secretary to schedule my day. It lets clients know your availability, it allows you to control your exposure, and clients in general would like to know that when they call, you’ve blocked your schedule to give them your undivided attention.

The price of the service is pretty good too. There’s a free plan, which allows a single user to book up to 10 appointments per month. Upgrading to Pro Personal gives you an additional 40 appointments at $9.95 per month ,while upgrading to Pro Business gives you 300 appointments and 5 user accounts for $29.95 per month. Changes to your account level can be made at any time, subject to certain conditions.

The balance is pretty good, although a change I would recommend is to remove the limit on the Pro Business account in terms of how many appointments are allowed. As a business owner, that’s not something I want to think about (although 300 appointments works out to about 2 appointments per user per day, but in a doctor’s office, for example, that might not be anywhere close to enough).

Because the service was built with the Intuit Workspace, there’s good integration with other Intuit products, specifically, Quickbooks Online. This also will help Edward Lajun reach a large number of potential clients, so growth should occur as long as he maintains the quality of the application.

Where I think the product could use some help is in terms of what information is provided when an appointment is booked. Currently, there are a limited number of fields. Perhaps adding the ability to attach a file to the appointment would be useful, so that additional information can be provided if necessary.

All in all, I believe that Edward Lajun and Setster have built a viable product that will save its users money and hassle, and it’s merely a matter of good exposure that will propel them to great success.

A Balancing Act

Look at a typical business, and you will see that they have multiple clients active at any point in time. This is nothing unusual – few jobs allow you the dedication to focus completely on a single client or project for any length of time. When you’re working for yourself, though, you need to be careful that all your clients are getting your attention, while at the same time, ensuring that none of your clients feel they are not getting your undivided attention when you work on another project.

The reality is that if you have 10 clients running simultaneously, (and we’ll assume that the amount of work for each is equal,) then you’ll be spending about 8% of your time on each client. (The balance of 20% is for your overhead of administrative work and locating new clients.) You can’t give any one client more than that percentage.

To handle that, I suggest you adopt some of the following strategies. If you have other ideas, please share in the comments.

  1. Keep a list of what needs doing for each client, so that the time you spend on that client isn’t wasted figuring out what to do next. Just select something from that list and do that. This will help you be better organized with your time, which may end up freeing up more of your time.
  2. Don’t answer the phone if you can’t give it 100% of your attention. Let the client leave a message, and use that to determine if you should call back immediately, or if it can wait a bit. Book some time in your daily calendar to make that call, when you don’t have something else to keep you busy.
  3. With e-mails, split your incoming messages into 2 groups (if you feel it necessary to constantly watch your mail) – one that can be answered in a sentence or two, and the other to be dealt with later. Sending off an e-mail that doesn’t address the questions the client was asking properly can generate negative feedback, which you can easily avoid by taking the time to read the questions slowly.
  4. Publish your calendar online so your clients can see when it’s best to get in touch with you. Sure, emergencies crop up, but if you allocate specific times each day for phone calls, you should see the number of calls at other times go down significantly. (I didn’t say your calendar has to be accurate, or even fully published – just a list of times that you have booked for meetings/phone calls and a list of available times would suffice.
  5. Block off time to work on each client’s projects to the exclusion of all others. Treat that time as if you were in a meeting, that is, only be disrupted if it really is urgent.

Do you have other suggestions for balancing multiple clients and projects? Please let me know of your ideas in the comments below.

A Leader is Born

There is  a story which I recall from when I was in day school on the subject of leaders:

There was a rabbi who traveled between towns, staying a few days at each to speak, and then moving on. One town was particularly poor, but they treated him well, offering what they could, and acting respectfully. As he was leaving, he blessed them saying:

“One of you will become a great leader.”

Shortly thereafter, he was visiting a town with many wealthy inhabitants, and yet he was treated like a beggar. As he was leaving, he gave the town a blessing as follows:

Many of you will become great leaders.”

His assistant, who traveled with him, asked for an explanation. The rabbi explained – a small town can only support one leader. Blessing a town with a great leader means that they will be led well. Blessing a town with many leaders means that the town will be subject to political fighting between the various leaders, disrupting the ability of the town to be led at all.

I don’t know if the story is true or not, but it illustrates a key point in running an organization of any kind.

First, the chain of command must be clear to everyone. There must be a known leader, the one who makes decisions.

Second, there can, ultimately, only be one leader. While many people can help arrive at conclusions, only one person can be responsible for making those decisions. Introducing a second leader reduces the ability for the organization to make decisions, and often, decisions that are made are split, trying to appease everyone, instead of consistently presenting clear vision and direction.

Looking back at an earlier article I wrote, regarding the optimal number of founders for a company, I realize that I missed this point. In addition to bringing the various skills required to the business, one of the founders must also be clearly defined as the leader. This is not a question of equity, but of ability to make decisions.

How many people make decisions in your business?

Say No to a Million Dollars

I heard someone say no to a million dollars the other day.

I was watching Dragons’ Den on CBC, in which entrepreneurs can pitch their ideas to 5 wealthy investors. If you’ve never watched the show, you can check it out and watch old episodes on their site.

Caution: Spoiler Alert

A pair of entrepreneurs came on pitching their idea, a website called UseMyBank, which allows its users to make payments directly from their bank accounts, without providing their banking information to client sites. Sound familiar? It’s another version of PayPal, except it works like a debit card, not a credit card.

They were asking for a million dollars for a 5% stake in their company, essentially stating that their company was worth $20 million. To back that valuation, they had current revenue of about $5 million in the previous year, of which about half was profit for them.

The problem they were facing is that there are several competitors with similar ideas to their own, and the founders, Brian Crozier and Joseph Iuso, needed a lot of money to help get a jump on the competition. Each existing site offering the service was specific to a particular country, and Brian and Joseph were looking to become the standard processor in as many countries as possible.

This was in order to facilitate their exit strategy – where a large payment processor would buy them out on account of the size of the market they control. However, to reach that point, their company needed to be able to expand quickly.

There was a deal offered, oddly, from all five investors. Each would put up $200,000 in exchange for 40% of the company – dropping the valuation to $2,500,000. A counter-offer of 15% equity for half the money, with the balance as a loan was met coldly by the five Dragons.

Brian and Joseph refused the offer.

Knowing that the episodes are filmed months in advance, at the time of refusal, getting a million dollars from anyone at any terms was next to impossible. Even now with the economy improving, their request for funds would be hard to acquire.

However, they turned down the offer because, in their opinion, the numbers didn’t match. The argument was about the value of the company. It may have been worth $20 million. It may have been worth $2 million. But with the numbers that far apart, coming to an agreement somewhere in the middle was nearly impossible.

I visited their site, and frankly, I wasn’t impressed. Granted, I can’t see the workings behind the scenes, but the look and feel to the site did not inspire me with confidence. I don’t think I would use their service, and I believe that the concept they’re operating on is fundamentally flawed, and that there is not a demand for their service, certainly not at the level of $20 million or more.

However, based, on that, were I to have received an offer like the one posed in the Den, I would have taken it. You can always back down later. But when an offer like that is on the table, you take it, and worry about the details later.

How about you? Would you have said no to a deal like that? Could you have left that much money sitting on the table?

Elimination of Process by Process of Elimination

When I first started working at a large corporation, I was fresh out of school, where my life ran on minimal scheduling. I went to class, studied, and worked on my projects. Work was completed in time for when it was due, and I showed up to my classes (most of the time). I followed whatever few rules there were, because there weren’t very many.

Process by Ivan Walsh

Process by Ivan Walsh on Flickr.com

At my company, however, there were rules for everything. Want to make a small change to some text in an error message? Make sure the change was properly requested, documented, signed-off by the appropriate person, and only then can you check it into a test region. Want to put it into Production? Be prepared for a few days of paperwork and waiting for approval. Want to make it simpler to make small, routine changes? There’s a process for making changes to the process too.

I don’t question the need for process in any business – in fact, without any process at all, a business is doomed. Did you get a new client? Make sure you’ve documented that in your financial statements. Did you buy a new computer? Make sure you list it in your expenses, as well as in your company’s assets. Trying a new marketing strategy? Prepare some metrics to assist in determining how successful the strategy is.

On the other hand, as a company grows, it becomes increasingly difficult to remain both flexible and in control. That is, you as the owner are ultimately responsible for the success or failure of the business. You’re responsible for the image your business has. If someone in your company makes a blunder that costs you a customer, you have to absorb that.

At the same time, you want to trust your employees, and to give them the flexibility to get the job done, to take initiative for the benefit of the company. You don’t have the time to micro-manage (a topic of its own that I won’t get into here).

The end result is that your risk increases, because you can’t know everything that’s happening in your business, much as you would like to. As a result, your processes must adapt to changes in how your business operates, but at the same time, not become bloated to the point that your employees are either gaming the process, or ignoring it.

To do so, what I would recommend is that you take a look at the processes you have, and make sure that it is proportionate to the task to which it applies. For example, the same standards should not apply to which brand of coffee is used as applies to making a decision to hire someone.

Look at any process you have in place. The purpose of process is to reduce the risk associated with having multiple decision-makers. If a given process does not reduce that risk, then it should either be replaced, or eliminated. If the decision to be made does not expose your business to a risk, then the process should be dropped.

Time spent on dealing with process is wasteful, and yet, many companies find that they spend more time with the process than they do with actual work. Make sure you’re not one of those companies!

Whose Problem are You Solving?

One of the main focuses of my company, Optimal Upgrade Consulting, is to look at the core problem our clients are trying to solve. This may or may not be the same problem as the one the client thinks they have, simply because they are often unaware of available solutions to the real problem they have.

This is not to say that I argue with my clients about what they really want. Quite the opposite – I want my clients to be happy, so I give them what they ask for. However, by understanding the problem I’m being asked to solve, I can ensure that I provide the best service possible.

There’s another benefit as well. If I am asked to do some work for a client, and I understand the nature of their business, then I can possibly find other opportunities to help them. This in turn helps me – it’s what drives my business.

If you're not a part of the solution, there's good money to be made in prolonging the problem.

If you're not a part of the solution, there's good money to be made in prolonging the problem.

There’s an expression I liked the first time I saw it, and I’ve seen it come up several times since. It’s best expressed in the poster on the right – If you aren’t part of the solution, there’s good money to be made in prolonging the problem.

Naturally, this is poking fun at consultants, who can often charge exorbitant fees and produce no real results at the end of the day. But there’s truth here as well. As a consultant, you can either solve a problem, or further complicate a problem. One solves the need of the client, the other solves the need of the consultant.

As a business, you want to be solving the problem of the client. I prefer to be known as someone who solves problems, not as someone who makes a killing developing complicated solutions to problems that didn’t exist before I first showed up.

How about you? Whose problems are you solving?