Den Pitches Rise and Fall

There’s something interesting about the show Dragons’ Den that seems to appeal to a certain type of business person. People come on the show with their businesses, hoping to leave the set with a potential investment from one of the five dragons, yet in the average show, only 2 businesses will get lucky. Having watched the show for a few seasons, I’ve started to notice a change in the businesses.

There are a few types of businesses that make appearances. There are the truly good businesses, with solid number behind their smooth pitch, realistic expectations, and they generally walk away with a deal. These are the businesses that could have acquired an investment elsewhere, though the relatively easy access of the dragons leads them into the den. Not that getting the investment is easy, but getting the investors to listen is a lot more straight-forward.

On the other end of the spectrum are the spectacularly bad businesses, with lousy pitches, no numbers, and unrealistic expectations in regard to the value of their business. While some get deals, it is unusual, and often not because of the merit of the business, but rather to support some other cause (Brett Wilson is often the investor in those cases).

This week, one business arrived with a new reason for needing money – speed.

Sometimes, even a profitable needs money for rapid growth, for the simple reason that expansion happens in one of two ways. Either it’s done in bits and pieces as the cash flow in the business allows, or it’s done in a sudden spurt, in which case, outside financing will be required.

John Rowe and Justin Rowe from Honibe understood this. Their dehydrated honey business, offering a unique product with wide appeal, was already quite profitable. They could have continued along their path, slowly expanding into new markets as their internal finances allowed. However, they wanted to expand into the US, and for that, they needed money – a lot of it.

Robert Herjavec felt that the request for money was perhaps short-sighted, and that giving up equity for the cash would be a decision they would eventually regret. But the other dragons didn’t care about that – it was a good business, profitable, and the money was being directed toward something likely to provide a return. They were willing to back it to the tune of $1 million, split between an investment and an operating line of credit.

John and Justin took the offer, because $1 million is not an offer to walk away from lightly. I suspect that following their appearance, they’ve taken a look to see if they could acquire alternative forms of financing that would result in them keeping a higher percentage of teh company. However, they also recognized the value in having the dragons as major stakeholders in the company, and the eventual advice and experience they would have access to once the deal completes.

Effective Marketing Strategy

Recent discussions with one of my clients brought to light a common problem with marketing plans made by businesses without the foresight to consult with marketing companies, or companies involved in aspects of marketing. The client in question was looking for ways to promote their product, and thought of several different methods by which they could reach out to their target users. Like many businesses, their marketing budget was limited, and so they were looking for the best way to use their budget effectively.

The suggestion I made came from a piece of advice provided during a course on business planning, and that was to pick 3 marketing methods they wanted to use. One would be their primary method, being allocated 50-80% of their marketing budget. One would be the secondary method, garnering 15-30% of the budget, and the third would be a minor player, getting as little as 5% of the budget.

The result of this breakdown is that each aspect to their marketing plan will be given its best chance to succeed. The method deemed to be likely to see the widest success (in their case, creating channels to promote their product) would be given the highest priority. The method which is likely to do somewhat well gets just enough resources to be useful, but not so much as to detract from the primary marketing effort.

The third marketing channel is what I call the wildcard. There is the off chance that something a bit different will work. It might be a pet theory of the business owner, or something a manager in the company stumbled on and wants to try. Rather than risk the entire venture on this, a small budget (and corresponding time and effort) is given to the plan, just enough that it can succeed, but not so much that it interferes with the other, more central plans.

I found this interesting, because there are many things in business that deal with the number three. Timelines are often short by a factor of three, budgets in the initial years can be off by as much as a factor of 3. Strategies are made in groups of three – this week, this month, this year.

Marketing is just one more aspect of business that should be running off the number 3.

Plan B? Support Plan A

There is a tendency for prudent people to have a Plan A, or what they really want to have work, and a Plan B. In business, though, your Plan B should be to support Plan A.

The true reason for having multiple plans is when there is an outside factor which can influence whether or not a plan is feasible. For example, if you’re planning a camp outing, you don’t have control over the weather. Plan A would then be for a beautiful sunny day, while Plan B would be in case it rains. Since you won’t be able to control this factor, having a second plan (or a third, as the situation demands) would be perfectly reasonable.

In business, however, having multiple plans can actually hamper your ability to succeed at your primary plan. Setting up your business, you have a path of how you would like to grow your business. Some parts of that plan are flexible, others are not. However, all your planning should be dedicated toward removing obstacles to Plan A succeeding.

As soon as you start to devote effort toward a secondary plan, you diminish the effort put into Plan A. Suddenly, with obstacles arising in your chosen path, it becomes easier to say you’ll switch to Plan B, rather than persevere toward your original goal.

To flip this around, not having a second plan can seem foolish – it’s known that life rarely follows along our ideas of perfection. As such, how can one justify not having a recourse?

The answer is that the recourse is to plan better – think through the various possible scenarios, all the things that could go wrong, and plan for them. If your flyers don’t generate a lot of leads, then you’ll adapt your marketing strategy to use direct mail postcards. If the average customer spends $50 in your store instead of the planned $75, you’ll implement a plan to increase the number of customers.

However, in the big picture, all these actions and plans are to achieve a single goal, whatever that might be. Plan B is merely one of several plans for when Plan A needs a bit of tweaking to succeed.

I Have a Great Idea – What Now?

One of the most common questions encountered in regard to new businesses is in regard to what to do with an idea. There is often a misconception among those who have not yet ventured into the realm of starting a business that an idea has value. In truth, ideas are fairly worthless without execution.

If you have an idea for a new business, a product, or a service, the first thing you need to do is to get customer validation – that is, confirm that someone with no ulterior motive (that rules out your parents/siblings/kids) would pay for a good execution of your idea. For more details on this aspect of getting started, read my earlier post on Starting a Business.

Assuming you can get your idea validated with a paying customer, it’s time to do some thinking about your ability to succeed at your project. This is, perhaps, one of the reasons that some advocate writing a formal business plan – because it will make you think about some of the questions you really should be answering:

  • Who is your competition?
  • What are they doing?
  • What are some of the industry rules, processes, or expectations?
  • How will you set yourself apart?
  • What are the barriers to entry?
  • What are your start-up costs and your operating costs?
  • Where will the money to run the business come from?
  • How will you make money, and how long will it take to prove profitable?

There are, of course, many other questions that a business plan covers. It will walk you through an overview of your business, industry analysis, marketing plans, sales, operations, finances. It will enable you to see the bigger picture of your own business before you risk a single dime.

I recently advised a couple of people who were setting out to build a business. Both were creating online stores to market and sell their products, and wanted to know what it would take to succeed. In both cases, the products were high quality, with a corresponding price tag. In one case, there was a large start-up cost in terms of machinery, other than that, the two businesses were quite comparable.

For both, I advised they start with the most basic eCommerce system available that could be quickly installed and configured, although it’s longevity for their business was questionable. The reason was that the system is free to install, and can get someone non-technical running with an online store in a matter of hours (this includes many kinds of reports, product management, newsletters, etc). However, once both their businesses start to be profitable, I suggested that they then invest in a better eCommerce solution, which would be more pricey.

In other words, both needed to understand that the distribution channel would not set themselves apart, and so they shouldn’t be focused on it (even though both would be primarily marketing via their websites). However, their product needed to be as good as possible, and that’s where the energy was directed.

If you want to succeed, you need to understand what it will take, and which parts of the road are not important. For the unimportant pieces, push it out to the most time- and cost-effective solution, while for the important pieces, spend the time and money to do it right.

Question: What would drive you away from a business?

A concern that every business owner or manager should be paying attention to is what drives customers away. As much as attracting customers is important, if other customers are leaving, it’s important to understand why. The best way to understand motivation for customers to leave is to think about what would make you, or someone you know, stop using a particular place of business.

What would make you leave a business?

Measuring Progress

In last week’s question, I was interested to know what factors you use in business to measure progress, or your ability to reach goals.

In a recent course on writing business plans, I learned that while many businesses use income as a measure of progress, it’s actually counter-productive to do so. For example, a business which wants to earn $120,000 a year needs to bring in $10,000 per month. Perhaps that’s not such a big deal, but if after 6 months it’s realized that the average has been only $5,000 per month, it can be de-motivating.

Perhaps this is why the focus in business plans is driven toward number of customers, or leads, rather than dollars. I might know that a customer is worth about $5,000 in income, and that to reach my goal of $120,000 I need to find 2 customers per month. If, however, after 6 months I realize that I’ve missed my goal by 50%, that’s an extra 6 customers to find in the second half of the year.

As well, since many businesses operate on a recurring basis, that is, where customers come back over time to continue to support the business, the importance of any given month is limited, since there is the secondary influx of consumers that will happen over time. While missing the monthly goals continually will hamper a business’ ability to flourish, people are still aware that minor bumps in the road can still be navigated successfully.

Other ways to measure goals can involve number of positive reviews from clients, the number of referrals acquired and turned into clients, the number of networking events attended at which at least one new contact was made. The goals, though, should be directed at the long-term success of the business, and not the monthly quota – that is, they should be used to benchmark those events which bring your business closer to its eventual success. When you fall short of those goals, it is easier to pick yourself up and move forward, since falling short does not negatively impact your business, but rather, fails to have a positive impact.

Say No to a Million Dollars – Again

Last March, a pair of entrepreneurs from Toronto surprised viewers by turning down a potential investment of a million dollars on the show Dragons’ Den. In this week’s episode showcasing entrepreneurs who have been given a second (and in one case, a third) chance on the show, the same pair turned down yet another offer of a million dollars.

Brian Crozier and Joseph Iuso have now presented their business, UseMyBank, twice on Dragons’ Den asking for the exact same investment, at the same valuation – $20 million. The first point of contention is therefore the fact that their previous valuation a year ago was clearly wrong – a company that does not change in value over the course of a year is quite unusual.

Once again, they turned down the offer, which was for a 50% equity stake in the company, or a $2 million valuation. Clearly, the difference in opinion as to the value of the company was quite high. What I found interesting, though, is the fact that they got any offer at all.

When I wrote my previous review of their pitch, I looked at their website and was not impressed. The current website, though, is a lot more sleek and polished, which was a significant problem with the prior version of the site. However, based on my research, at the time of their most recent presentation, sometime mid 2010, they were still using the old website, which did not bolster confidence. Various technical details about their current site also leads me to question their credibility with the volume of exposure they claim to be getting.

At a more fundamental level, I do not believe that the market wants their product. With the increasing number of stories of fraud, the use of a credit card, or any kind of intermediary service, can help reduce the risk of fraud. If someone uses my credit card, I can dispute the charge with the credit card company before I actually pay any money. With a debit service, I need to dispute the charges after the money has left my control. While some people may accept the risk, more people will look for ways to use existing intermediaries to handle their online transactions.

The fact that they turned down the offer is not surprising – it was a massive difference in valuation, even worse than last year. The fact that they are still in business, and claim to have high transaction rates, and yet continue to seek an investment of 20% of their income for the previous year, however, begs questions as to their true ability to run a proper business.

New Business from Old

A question pondered by owners of businesses is how to fit new ideas into existing businesses, or whether the new idea should be the basis for a new business. Often, the new idea arises from an existing part of a business, or is being developed using resources from the existing business. Perhaps it is only because of the current business history that the idea even has potential, for example, if it will be marketed using existing channels to similar customers.

However, if the new product or service is sufficiently different from the existing business operations, then trying to run with it within the existing business structure may not make sense. Even if legally this is possible (that is, you are not operating with a regulated industry which may object to running the two businesses together conceptually), there could be other reasons to run them independently of one another.

For one thing, isolating the two business operations from one another, when being run within a single business entity, becomes difficult, if not impossible. There is a strong bias toward using existing resources for the new venture, which can negatively impact existing operations.

Second, determining the true value of the business can be difficult, since there is no clear demarcation between businesses.

However, the mere existence of an independent business entity does not mean that the business will be any easier to manage, nor does it ensure that true measures of costs and income will be any easier to calculate. However, if the business succeeds, then spinning off the business to be operated independently, or to be sold, or to acquire an investment, becomes a lot simpler to do.

The advice I would suggest, though, is a cross between the two. Internally, consider the business to be separate, operating off its own accounts, with its own books, and “renting time” for any shared resources with other parts of the business. That way, even if the same people are working on the new idea, their contributions can be measured accurately.

If, after some time, it is determined that the business will succeed, then the effort can be made to set up a proper corporate structure for the business which will further isolate the separate business units. If the business does not succeed, then there has been no harm done, and the idea can be easily discarded.

Goals for 2011

Last year, I continued my tradition of posting and reviewing my goals from the previous year, as well as inform you of my new goals. Like last year, I haven’t had a perfect batting average on my goals, but I’m okay with that.

First, my goals for 2010 were accurate as of the time of writing, though priorities changed over the year, and with good reason. To recap the goals, and my current status with them:

  • Learn PHP and Zend to a reasonable degree of proficiency – this has gone well, and while I would hesitate to call myself an expert on either, I am comfortable programming a web application using those technologies. I’m still working on getting the turn-around time down, but it’s moving in the right direction.
  • Launch Client Data Tracker – this has not happened, because priorities change. The project turned out to be significantly larger than I anticipated, and I put it on the side because I didn’t feel I could do the project justice.
  • Continue side development until I’m doing in excess of 30 hours a week of billable time – this has happened, and I’m now working solely on a contract basis. Happily, I’ve been able to leave the corporate setting.
  • Complete the work required for KNIRL.com – this has not happened, though we learned a lot of interesting pieces of information and technology working with it.

Overall, 2010 was a good year for business, and looking forward, 2011 looks like it will be even more exciting:

  • Launch the product I’m working on for my primary client before the end of the first quarter;
  • Learn the intricate details of a fairly large industry to determine how to be able to carve out a niche in it;
  • Solidify my knowledge of certain technologies I use frequently to the point I would call myself an expert.

What are your goals? Do you have a way to measure yourself against them?