Category Archives: Business Stories

The Broken Spreadsheet That Birthed a Business Startup

I thoroughly enjoyed doing this Mixergy Interview, published this week, about how I bootstrapped Palo Alto Software from zero to about $10 million annual revenues:

Tim Berry on Mixergy
Tim Berry on Mixergy

It started one morning at 2 a.m., when I had to deliver a finished set of financials the next morning. It was 2 a.m. and I was tired and done with the financials but I had done something in either Lotus 1, 2, 3 or Excel because I use both. I don’t remember which one it was but I had done something to break the damn spreadsheet! If the financials are going to work, when you change the assumptions the balance still balances and the cash flow, and so on.

So it was 2 a.m. and I had broken the spreadsheet. I thought to myself, there is so much productizability in this. I have to be [building this out,] assumptions, inputs, outputs [and so on], so that this doesn’t happen again.

Mixergy is a collection of interviews with entrepreneurs. Andrew Warner, founder, does a great job interviewing, and collecting interviews. The goal is a collection of thoughts and stories about entrepreneurship. I’m proud to be included.

Andrew posts the complete transcript along with the interview, so it’s easier to browse. Here’s another snippet, about raising venture capital and buying them back:

But then, and this is what’s important for the story, you need compatibility with your investors. When the whole thing crashed in 2001, then we had completely different business models. Our investors needed us to have an exit, a liquidity event. Valuations were back down onto what they really were, you know, two and a half times revenues, for example, for a healthy software company.

But two and a half times revenues wasn’t enough money to make me and my wife and our family feel like we wanted to just sell the business. I had to be 10 or 20 times revenues. But, our VCs were trapped as minority investors. And they were trapped forever. I now have eight angel investments. I understand how bad it is to be trapped as a minority investor with no hope of a liquidity event. I don’t want investors, even as a minority, who aren’t happy with me or my company, so we negotiated. Their lead partner there told me later that not until the negotiations were done, “Tim, actually I can tell you now, you are our best investment for 1999.”

Andrew led me through a lot of stories: How I failed as a hippy, how we got started on the web, how we realized we needed downloadable software, how I changed my role seven years ago to open the field for a new management team, and others.  This led to a Business Startup.

Required Reading on Business Owners Making Critical Mistakes

For a good time take a look at the answers to this question on Quora: What are some classic examples of a founder letting his or her ego get in the way of making the right decision for a company? 

owner mistakes business mistakes

Now yes, that’s one stellar example of a loaded question. But — loaded or not — it’s attracted some very interesting answers. It makes for good business reading, for sure.  

One particularly-well-written answer (this one) narrates a painful story of a successful pivot turned to failure by a stubborn founder insisting on doing things the old way 

We tried this before … We failed. Miserably. … our sales staff, followed by myself, along with the other partner all advised against the move … Then, all of the sudden, two months later, he made some executive vote to change everything overnight.  … Our revenue streams dropped immediately. 
I stressed for months on end, … but he didn’t listen. 
He just made the move, and everyone eventually lost their jobs. 

That’s a small piece of a long answer, and I’ve clipped it significantly. It makes a good story and good reading. That answer goes on with some other examples too, which makes me wonder. Maybe its biased and just sour grapes. 

Another interesting quote from another answer:

The thing with egos is they cause a distortion of reality which means they’re either too fragile to accept the truth (self-esteem) or they’re so starved for attention that their bullying gets in the way of real progress (narcissism). … Jobs was so broken inside and so desperate for recognition that he worked his staff mercilessly hard and caused rifts between the Macintosh and Apple II (I think) teams. His narcissism caused him to bully and press on others. He damaged morale in the company and hurt sales.  

Maybe these are twisted answers from people bitter about things having gone wrong. Maybe they are exaggerated. But regardless of historical accuracy, every business owner should read through these. And I write that as a business owner.  

The Fitness App That’s Working for Me

Combine ease of use, and real science, by a real expert: It’s a fitness app I’ve been using on my iPhone, MiFitLife, which is the first one of these I’ve used that actually works for me. It’s based on science, developed by a real expert, and it lets me input workout data in 10 seconds instead of — like every other I’ve used — 10 minutes.

MiFitLife Richard Brown fitness app

The developer, Richard Brown, is a friend, a long-time Eugene OR resident, and beloved professor at the University of Oregon. He also has a PhD degree in Exercise and Movement Science, has trained more than a dozen olympic athletes, and is a member of the athletic hall of fame of the U.S. Naval Academy. Disclosure: I do have a financial interest, because he’s also a client of Eugene Social, in which I’m a partner.

I really like, actually, believe in, the science behind the app. It’s based on VO2 Max:

You should care about VO2 Max because the best measure of your ability to convert energy is your ability to deliver oxygen to your cells.

For more on that you could check it out in Wikipedia, or Richard’s explanation on MiFitLife.com.

What it means, for me, in daily use, is easy to use, because of easy data entry. I’m a regular at the gym. I lift weights, do cardio, etc. So with any of the half dozen or so leading iPhone fitness apps I’ve tried, entering workout data had me entering the exercise like every set of weights defined by what it was, what weight, and how many reps; or how many miles in how many minutes. With MiFitLife I enter the time and the VO2 Max level, with a simple sliding scale. That’s 10 seconds instead of 10 minutes. And that means I actually use it. I input my workouts and follow its recommendations. It works for me.

Another advantage is that it starts by getting my details, like age, weight, exercise habits, etc., so it can add value with recommendations. How much to do, and how often, is not a random anonymous algorithm. At my age that’s reassuring.

And it accommodates any exercise, easily. One of my daughters records the stairs and vacuum cleaner exertion of cleaning her apartment. It does swimming, cardio, rowing, sports, walking, whatever … it’s all a matter of VO2 Max. Time and effort. Simple.

Unfortunately, this recently-released iPhone fitness app is up against hundreds, maybe thousands, of competing fitness apps. And when you get into tag lines and marketing, they all say the same thing. Every one of them claims science, and tailoring, and easy to use. But this one actually is.

 

Highest Paid CEOs in Charity

The infographic here about the highest paid CEOs in non-profits seems useful to me for two reasons.

First, many people seem uncomfortable with non-profit organizations, serving higher social goals, paying market-level compensation to employees. In my years of dealing with students of entrepreneurship there was an assumption that people who work in non-profits earn less than their counterparts in the rest of business. I question that assumption. If the non-profit is funded by donors, doesn’t it have to pay fair rates to keep good people? Do its employees have to be donors as well, in the sense that their salaries are below market rates?

Second, aside from compensation levels for all employees, looking at the CEOs and what they earn (in this infographic), is there a top end to this that goes to far? Should organizations funded by donations pay their leaders salaries like the ones in this infographic? Maybe they have to in order to get the right level of leadership? 

What do you think? 

The Highest Paid CEOs in Charity
Source: BestMSWPrograms.com

Sticky Questions on Startup Ownership and Buy-Sell

I received this interesting detailed question from the ask me form on my website. I’ve decided to answer it here. I think my answer might be useful for others with similar questions. I’m putting the question in quotes, paragraph by paragraph, and adding my response directly where it comes in the question. 

It starts like this:

A person ‘X’ owns 15% stake in a startup company – not by investing money but purely by virtue of having dedicating hours for building a product for the company. No salary was to be paid as per an initial agreement. The 15% stake was deduced by a simple calculation: (value of company) / (number of hours worked) x (dollars per hour).

Was it clear in the initial agreement that the formula here was to be used in future buy-sell transactions? Was that agreed to by all? 

The question continues: 

The value of company is therefore, sum of [(number of hours worked) x (dollars per hour)] and [hard cash invested by a person ‘Y’, also taking into consideration year-on-year appreciation of this hard cash]. Lets call that VC.

No, it’s not. The value of the company is what somebody pays for it when they buy it. And if nobody is buying it, then the value of the company is an estimated value. There are lots of formulas for estimating it, and estimates will vary widely. I’ve got more on that below, in my specific recommendations. 

However, it could be valued like you propose, for purposes of a buy-back transaction, if there was a buy-sell agreement that set that formula in the beginning. That’s if and only if. Issues like these are the reason experts recommend that partners and cofounders talk about the eventualities and agree, before the business starts, on how they’ll be handled. You have to agree beforehand or you’re stuck with arguing and negotiating the valuation afterwards. And when you try to pull it apart afterwards, without the benefit of an agreed-upono buy-sell formula, then many formulas might apply. 

And here’s the heart of the question: 

The company is not profitable yet. Person ‘X’ decides to give up his 15% stake of the company. My questions:

– How much is ‘X’ entitled to receive as the value for 15% stake? 
– Calculating backward, would X receive as much as [(number of hours worked) x (dollars per hour)]? 
– How does this change if the only buyers of the 15% stake are also two other stake-holders within this company, one of them by virtue of cash invested in the company, and the other by virtue of hours spent working for the company?

Normally, unless otherwise specified, owning 15 percent of a company means you own some shares that amounted to 15 percent of the total shares issued when they were issued. Ownership privileges are defined in company documents. You might have a seat on a board of directors, or not. You might get dividends when that’s relevant. And you’ll be able to sell those shares subject to securities and exchange regulations. 

Just hypothetically, as an example, say you agreed two years ago that you got 15% because you had put $15,000 worth of work on it for free and the founders agreed then that it was worth $100,000. If it’s launched and very successful now, with sales of $1 million annually, then it’s worth something like one or two times revenues, less a discount for debts, less a discount for not being liquid. In that case your 15% is worth something like $100,000. On the other hand, if it launched, has no sales, no profits, and has spent all its money, then your 15% is worth about zero. Companies are almost never worth a formula based on hours worked. 

So unless you have that buy-sell agreement stipulating the formula you’re using, then it doesn’t apply. Here’s what I recommend. 

  1. Agree on an estimated valuation. The formula you’re suggesting seems like it might be one-sided and self-serving. Good luck with it because it’s going to be hard. Expect disagreements. Depending on how much money is at stake and how severe the disagreement, you might need to work with an attorney and a valuation expert you can agree on. Here are some posts on this blog about valuation. This one is particularly relevant: 5 things business owners need to know about valuation. Sales, sales growth, profitability, and scalability and defensibility make it worth more. Debt, and not being liquid shares, low growth, and losses make it worth less. 
  2. Take 15% of that valuation and negotiate with your cofounders based on that value. I hope for your sake and the sake of your cofounders that things are going well for this business and they’re happy to buy you out. If they aren’t, then you’ll have to keep discounting until you get to an amount they’ll pay you. Or just keep your 15% of the shares, stop working for the company, and hope that someday they’ll be worth something. 

The moral of the story: please, the vast majority of business marriages (partnerships, startups with founders, etc.) end in divorce. Do a business pre-nuptial agreement, which is what they call a buy-sell agreement. 

 

 

Greatly appreciate your response and all your help!

The Best Business Success Factor is Value

Keys to entrepreneurial success? We talk about passion, persistence, ideas, funding, planning, sales, product-market fit, and all of that. Do what you love, we say. My opinion changes according to recent events, experience, even mood. Which is fine, because it’s a reaction to events, and we don’t want to get static. But on the long term, most often, what I see making the most difference in business is value. Offer value to customers.

You can do what you love, and if nobody wants to pay you, you don’t have a business. Nobody’s going to pay me to play my guitar, or draw, or ski. I have to think of something I like to do that other people will pay for. So I ended up with business planning. Maybe they’ll pay you to play your guitar. And if you like skiing, maybe you end up as a ski teacher, or you own a resort, or you do ski movies. And maybe they will pay you to draw, if you’re a graphic artist.

And then you give value. It’s not about you and what you want. It’s about them, your customers, and what they want.

I realize it’s a bit out of date, a 1987 book, but Paul Hawken‘s Growing a Business is still my favorite business book.  Growing_a_business It’s the first one I recommend.

Hawken tells real stories of real businesses wrapped around people doing what they like because they like doing it, they think it should be done, and the doing of it flows simply into the logic of filling needs and offering value. Two guys in Vermont get involved with their ice cream. They start selling it. It ends up being Ben and Jerry’s Ice Cream. It’s a great story.

They aren’t all bearded ex hippies. The stories include a bank in Palo Alto, Patagonia (outdoor clothes), Apple computer, etc. What they have in common is a sense of organic, natural growth from the foundations of doing what you want to do, when that’s something that other people want to have done. And they offered value to their customers.

It helped for me that I was a customer of the bank in Palo Alto, and of Ben and Jerry’s, Patagonia, and Apple Computer, and my wife loved buying at Smith and Hawken. I believe in the underlying idea that businesses depend on value — value to the customer — and values — the people in the business have to believe in it.

The business in this book isn’t what you learn in business school. It’s what you want to do. It isn’t about building a business to make money, but rather building a business because it should be built and you want to do it. With that kind of foundation, it seems — and I’ve seen for years now, with hundreds of different business — it grows.

ps: I shared the podium with Paul Hawken in the late 1980s, at Apple, when I was speaking on business planning and he was speaking about the ideas behind this book. He seemed a man whose persona was based on ideas, on the underlying values. I’m not surprised at the way his career has gone since.

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7 Steps to Practical Business Stories

Remember, stories aren’t just stories. They’re truth and promise and relationships established. They’re vital to business. There’s more truth in stories than in all the statistics ever published. 

Geoffrey James posted How to Tell a Great Story on Inc.com last month, quoting Mike Bosworth of Solution Selling, and Ben Zoldan, one of his top trainers. So this is how to tell a memorable business anecdote:

1. “Decide on the takeaway first.” There’s a business goal. Yes you want to make conversation, but also make a business point. If you’re selling shoes, tell a story about a shoe disaster, or a shoe rescue. 

2. “Pick the ending ahead of time.” Get the ending that supports the takeaway. 

3. “Begin with who, where, when, and a hint of direction.” He adds:

Every great story–and indeed, every great movie, novel, or TV show–starts with a person (who is going to do something), a place (where things are going to happen), a time (so people can relate “then” to “now”), and just a hint of direction, indicating where the anecdote is headed.

4. “Intensify human interest by adding context.” Details, done right, make it a story. Try to put your people there, caring about the people and the situation. 

5. “Describe the goals and the obstacles.” They call that plot. What was the problem, and how was it solved. 

6. “Describe the decision that made achievement possible.” 

It’s important not to confuse the decision (or turning point) with the ending of the story.  The turning point is not “what happened”–it’s the decision that caused what happened to happen.

7. “Provide the ending and highlight the takeaway.” Don’t assume your listener figured it out. Make sure to say it, out loud. Tell everybody what happened and why it’s important. 

Nice post, good recommendations; thanks Geoff, Mike, and Ben. 

The Myth of Persistence Can Ruin Your Life

Kudos to Barbara Taylor for Reaching Your Limit as a Business Owner on the NYTimes blog, a thoughtful reminder about a huge problem: The myth of persistence in business ownership. Given the wrong circumstances, running yourself into a brick wall, over and over, is simply not useful.

Her point, put simply:

Many owners reach a point in the life of their businesses where they hit a wall, a point beyond which they are either unable or unwilling to go.

And her personal story: 

In my case, I felt like a pinball … I was managing 16 food-service employees, which felt like more than enough for me. My least favorite management tasks – human resources — were consuming the bulk of my time. I knew I needed to scale the business, adding at least one more location to support hiring a full-time manager to take the burden off my husband and me. In short, growth was the answer to our problem, but it would require more money, most likely in the form of a Small Business Administration loan, and I didn’t want to take on either the headache of expanding the business or the worry of incurring debt. My husband and I chose to switch gears and devote the next year to selling our business.

She also quotes John Warrilow, author of “Built to Sell: Creating a Business That Can Thrive Without You, with his experience: 

Somewhere around $3 million dollars of revenue, I went from being the driver of my business to the bottleneck. Each year we stood still, I grew more frustrated. I felt like I was trying to swim in a pair of jeans.

Finishing, selling, quitting, or whatever you want to call it, should be obvious, not surprising, and not defeat. It’s far better than getting caught in the myth of persistence, holding on forever, and getting dragged down with it. Don’t go down with your ship. 

Key to the Pitch: Make Me Care

Never underestimate the business value of the good story. Business planning is telling stories and making them happen. Startups make stories come true.

In this delightful TED talk storyteller (filmmaker) Andrew Stanton boils it down to this: Make me care.

If you want to sell a business idea, tell it as a story. The best elevator speech tells the story of a need and filling that need. The best market analysis in business planning is stories of people and what they want and need, and people getting together to execute an idea.

Note: click here the source site for this TED talk.