Soaring on Ridgelift

Investor fixation

Raising money for a company is a time consuming process at the best of times. The process requires lots of preparation, many meetings and worst of all, can take senior managements eye off their primary job – running the company!

Because of the time and effort that fund raising requires, it's easy to be seduced into fixating on a potential investor who spends serious effort on diligence.

Serious diligence doesn't necessarily lead to a term sheet and money. Even if you are brought in to present to the full set of decision makers, the odds are not in your favor of getting a deal consummated – in my own experience, only about 30-40% of companies that present to a partnership get approved for investment.

If you fixate on one potential investor you:

• Lose leverage in negotiating the terms of the financing IF you get a term sheet. Having other potential investors keeps momentum going in the funding process. Momentum gives you options if you don't like the terms of a specific deal.
• Lose time in getting other potential investors through THEIR diligence process when the investor of your fixation says no.

The first is annoying, the second can be deadly – time = money and if you haven't reached profitability yet, it's the only fuel you have in the tank. Running out of fuel is a bad idea!

How do you avoid investor fixation?

Juggling responsibilities creates time pressure (too many things, too little time) and is a major source of investor fixation. Fund raising is a full time job. If you are the one fund raising, delegate your other responsibilities to the team and focus your time and energy on the fund raising process.

 

Ramping Sales…

The most challenging phase in the life of an early company is ramping sales.  It's the time where the rubber meets the road – will the prospects hand over the money and become customers?

Get into a sales model with high friction and you can burn through a lot of capital in short order.

I find myself concentrating more and more on the issues of sales friction – it's the largest determinant of how much capital it's going to take to ramp sales for a company.  The more capital you need into a company, the larger the exit has to be in order to make all shareholders happy – VC investors and the management/employees of the company.

So what is SALES FRICTION?

Sales friction is anything that increases the time and effort it takes to convert a prospect into a paying customer.  Here are some examples;

• Selling to a wire-line or wire-less service provider.  The scale of these companies forces them to be very conservative about buying any new product – even from their existing large suppliers.  The sales cycle is very long, requires field trials, complex contract negotiations – only to find that the service provider flat out won't buy from a startup.
• Selling to large enterprise accounts.  IT has become mission critical in almost every company regardless of size.  IT professionals get fired for making decisions to buy things that don't deliver or where the company they bought from goes out of business.  It's safer to wait and buy from established suppliers when they (eventually) deliver the same thing.
• Solutions that require integration with other systems within the prospects environment.
• Solutions that are "in-line" – if they fail, they bring down the application/system/users – harder to sell than solutions that are not in-line.
• Solutions that require extensive training or process changes in how the prospect does their own business.
• …

Ramping sales takes time even with a product or service that is unique and solves major headaches for the customer.  The higher the price point, the higher the sales friction.

Historically, early stage companies had little choice in determining how to sell their products.  Consider the alternatives:

OEM – selling to a larger corporation who already has a sales force and distribution channel.  It's harder to make decent margins as two companies have to make a profit on the sale – you and your OEM customer.  As a rule, companies OEM to fill holes in their offering and cancel you out in a New York minute when they no longer need what you offer.

Channel Distribution – not really an option.  Channel distribution is a fulfillment mechanism to satisfy demand.  No demand, no sales – you have to create the demand!  Channel sales are rarely a match for new products unless there is an established set of value added resellers who see how they can greatly benefit from working with you AND there's a huge need for what you do.

Direct – hire a set of experienced sales executives who are good at breaking into new markets.  These folks cope well with a missionary sell and are adept at helping the company match the product/service to what the prospect needs.  Even a modest sized sales force will burn through $1.5-2M a year.  This gets very painful when the revenue ramps slowly (it always ramps slower than you want!).

Unfortunately, even direct sales runs into higher friction than it did even 5 years ago.  You can see some of the reasons in the examples above – Enterprise IT buyers are much (much!) more conservative than they were 5-7 years ago… plus, as we head into a likely recession, IT budgets will be one of the first victims of corporate budget tightening.  You can already see this demonstrated in the financial reports of public companies and the guidance they have begun to offer.

Building a direct sales force is also harder and more expensive than it was in the past.  One of the experienced CEOs I work with was commenting on the challenges of hiring direct sales professionals:

• It's very hard to find young, up-and-coming sales people in their late 20's or early 30's.  Why?  Because the classic training grounds for those kinds of people were IBM, HP, Cisco etc. who have all become primarily distribution sales models.
• As a result, you find sales people who have been doing the same job for a long time.  They don't do well with missionary sales and many just aren't that hungry.
• Typical compensation packages for the experienced people you CAN get are much higher – probably by a factor of two from 5-7 years ago.

The cost of ramping sales puts an imperative on finding ways to reduce sales friction.  Enter the Internet.  The Internet through search engines, blogs, online publications etc. offers a low cost way of reaching potential prospects.  This isn't about advertising, this is about getting the word out about what you do and the benefits you offer.

This helps reduce marketing costs but you can extend it to reducing sales friction as well.

• Offer a free (limited function) version of the product/service that can be downloaded or provisioned over the web.
• Open source your product – let prospects download it and try it out for free and then provide them the opportunity to buy support, on-going enhancements etc.
• For hardware products, can you offer a free software version of your product that prospects can download and try out as a sales lead generator for hardware sales?

Be creative – think about ways in which you can engage the prospects without having to have direct touch or telesales call on them.  Ideally, find a way to market, sell and support your product completely on-line.

If you want some more inputs to help you think through this process, grab a copy of Seth Godin's latest book – MeatBall Sundae.  It's a quick read and will make you think about how to apply the Internet to Sales & Marketing.

Bottom line – lowering sales friction will help you ramp revenue on less capital.

 

Amazon Web Services for startups

It has been almost a year since I first wrote about Amazon Web Services as a way to out-source your infrastructure. Two of the companies I work with have been using AWS for either their primary infrastructure or as a way to quickly build test configurations. The results have been terrific and low cost!

Today's WSJ has a good article that summarizes the experiences of several other startups in using AWS to provide their back end infrastructure and it's well worth a read. You can find the WSJ article here.

AWS isn't a plug and play solution for your infrastructure needs – it's like furniture that comes with "some assembly required". Tasks such as load balancing, dealing with bringing up new servers, recovering when a server goes down etc are left up to you.

That said, the ability to have a redundant data center that is managed 24/7 with high availability at a rate you can charge to your credit card is very compelling. For early stage companies this is a huge benefit and one that you shouldn't pass up!

A VERY wet day!

The newspapers are full of reports today about the heavy winter storm that hit Northern California yesterday – January 4^th. I think it was one of the wettest days I've seen in the 20+ years I've lived in the Bay Area.

As I've written before, I'm somewhat of a weather geek – so it probably won't come as a surprise that I have my own weather station. We had a lot of rain yesterday – 3.69" in 24 hours.

As I looked at the reports from the weather station software this morning I realized that the standard reports didn't do justice in displaying just how heavy the rain fell – so I extracted the data into Excel and produced the following chart:

This shows the cumulative rain fall for the 24 hours of January 4^th – 00:00 to 23:59 PST. As you can see, the bulk of the rain fell from about 7am through 2pm.

The road outside the house was flooded in several places and the small creek that runs alongside the road nearly overflowed its banks. Fortunately our numerous drainage projects over the last few years proved their worth – we stayed dry and fortunately with power all day.

As I write this article, it's raining again…

I'm really curious how this translated into snow in the Sierras – this could be an awesome ski season!