Category Archives: Management

Some Posts on Managing During a Crisis

Business Planning, Management

If you’ve noticed a three-month pause on this blog, it’s not because I haven’t been writing. I’ve been focusing on managing during a crisis and posting on the main bplans blog instead of here. These are very tough times, and planning and good management are needed more than ever. Here are some of my related posts of the last three months.

  • Estimating Realistic Startup Costs, earlier this month. What will it cost to start your business? It’s hard to know for sure. And harder in a crisis. Learn how to accurately estimate startup costs and get your business off the ground.
  • The Difference Between Cash and Profits, last month. Profits are not the same as cash, and understanding the difference between them is a vital part of running a successful business. Your cash management has to tighten during a crisis.
  • Should You Start a Business? Test Your Idea First. May 21. Have a business idea you’re sure is a winner? You’ll want to test it first, especially during a crisis. Find out how to test if your idea is viable and if you should start a business.
  • How To Forecast Cash Flow. May 19. Your business may be profitable, but it can still fail if you run out of cash. Learn how to forecast cash flow to avoid unforeseen cash flow problems.
  • How to Conduct a Market Analysis in a Crisis. May 13. Even in a crisis the fundamentals still apply. But you have to adjust some estimates.
  • Turn What-if to What-Now: The Importance of Scenario Analysis. In April. Scenario analysis is looking at what might happen and developing a plan for how to act. Find out why this is so vital and how you can do it your business. It’s especially important during a crisis.

Most of those focus and highlight managing during a crisis. I hope you find them helpful.

6 Common Misconceptions About Angel Investors

Management,

The question on Quora was “What do investors ‘get’ that other people don’t?” I answered that question from the point of view of angel investors, specifically … not just investors.

1. Some of the healthiest businesses are not good investments

Many people think that a good business makes a good investment. The truth is not necessarily. Many real good businesses are bad investments …

For example, the founder-driven business that generates enough cash to fund its own growth. It’s founders may choose to not exit soon enough to offer a good return for investors. In these cases, founders are better off without investors. And investors have higher risk of never seeing an exit.

2. Angel investors make money on exits, not profits.

Investors own shares in the business, not revenue, and not profits. They make money when they sell their ownership for money. Increasing valuation generates a return on investment. Profits, without the exit, don’t flow to investors in normal startup situations; dividends are for stable companies, not profits.

Angel investors make money on growth, not profits.

3. There is an interesting underlying trade off between growth and profits; you can’t optimize both. It’s one or the other.

A company that loses money but grows well in terms of revenues, users, subscribers, and so forth can be an excellent investment because most valuations in high-tech startups are based on revenue, not profits.

Ironically, investors may be better off with high-growth that loses money because their money becomes more valuable, and more important, when it is all that stands between growth and not growth. Investment is more likely optimized when it funds growth.

4. Angel investors shoot for the big win, not a minimum

All serious angel investors know that most startups fail. They don’t look for the low risk investment that might yield a more reliable return, because those startups fail too. So they look for the big win, the next big bonanza, the huge success that will pay for all the failures.

5. Angel investors want to see your numbers but don’t believe them

Market estimates, market share potential, sales, costs, and all the rest … investors want to see them because they show what you’re thinking and how well you understand the business. Ideally it shows that you understand the drivers and the fixed costs, plus cash flow problems, and all the rest.

Regarding market numbers, they are going to review them but they will look at your assumptions and decide whether they believe them or not. The best market estimates trigger the dream and the imagination of the investors.

6. Angel investors scoff at analyses like NPV and IRR

Note above that angel investors don’t believe your numbers. How naive to think a number generated by assumptions compounding on assumptions has any actual metric value. My personal opinion is that when startups believe their IRR matters, they are too green, not long enough out of school.

(Here is the link to the original on Quora)

New Conversational Commerce App Increases Online Sales

Business Strategy, Management, Marketing, ,
Octane.AI

Is “conversational commerce” the next big improvement in online shopping? I hope so. I’m closely following the success of the new Octane AI conversational commerce app. It was announced this week along with convincing data on significant sales increases it generated by actual users. It works with Shopify, the shopping cart platform used by half a million eCommerce sites.

Not replace … enhance

“We are not trying to replace ecommerce websites or apps, said Octane AI CEO Matt Schlicht. “Instead we make them measurably more profitable and effective. Our new app dramatically improves the customer experience on online stores. We combine them with an automated concierge, and we have the numbers to prove it.” Those numbers, by the way …

Stores in the Octane AI private beta, including VerClare Boutique, Pure Cycles, Apt2B, Pearl Paradise, Filly Flair, Sweat Tailor, and Epic Rights, on average had 1 out of 9 Messenger messages sent convert into a sale, over 75 percent open rates on messages sent to customers, and recovered twice as much abandoned cart revenue. Stores in the private beta have made over $750,000 in new revenue.

“Conversation is actually one of the most natural and oldest ways to shop,” Octane AI VP Product Megan Berry told me. “What’s amazing about conversational commerce is the ability to do that at scale through messenger apps and chat. All of your customers can get personalized, instant attention with the help of messenger, automation and artificial intelligence.”

Messenger marketing for ecommerce

How does it work? CMO Ben Parr adds, “Octane AI is a bot concierge for your store that lives on Facebook Messenger. An Octane AI bot answers customer questions, recovers abandoned carts, and increases sales automatically — their customers see a 7 to 25 percent increase in sales on average. Imagine talking to a store on Messenger and automatically getting product recommendations, shipping notifications, and all of your questions answered. They are leaders in conversational commerce — using conversation, messaging apps, and voice platforms like Alexa to improve the shopping experience.”

The Octane AI website links to specific case studies with detailed numbers. VerClare Boutique founder Cristina Vercler says the app increased her business’s monthly sales by 14%. Pure Cycles founder Jordan Schau said “Octane AI has enabled us to talk to over 10,000 of our customers and has grown our revenue online by about 14%.” And there are more real numbers on the website at octaneai.com.

For the record, I don’t do paid commercial endorsements on this blog. I never have. Occasionally I promote my own books and software, but even that is only a handful of posts among more than 1,800 posts here. Octane AI is special because the Megan Berry I quote above, VP Product, is my daughter. I’ve also known and respected co-founder Ben Parr for years. And as of last year, I am also an investor. So that’s bias, and I’m proud of it.

20 Reasons to Write a Business Plan

business plan, Business Planning, Lean Business Plan, Management, Planning Fundamentals, Planning Process

all businesses need a business planQuestion: What are some of the main arguments for writing a business plan?

Here are 20 good reasons to write a business plan. Please note, however, that a business plan is not necessarily a traditional formal business plan. It ought to be a lean business plan that gets reviewed and revised often. It ought not to be static, used once, and then forgotten.

These apply to all businesses, startup or not:

Key elements of a lean business plan

  1. Manage the money. Plan and manage cash flow. Will you need working capital to finance inventory purchase, or waiting for business customers to pay? To service debt, or buy assets? To finance the deficit spending that generates growth? Are sales enough to cover costs and expenses? That’s planning.
  2. Break larger uncertainties into meaningful parts. Go from big vague objectives to specific numbers, lists, and tables. It’s compatible with the way most humans think. A plan makes it easier to estimate and visualize needs, possibilities, and so forth
  3. Set strategy. Strategy is focus. It’s what you concentrate on, and why. It’s who is in your market, and who isn’t; and why and why not. It’s what you sell, to whom. You need to set it and then refer back to it, frequently, as things change. You can’t revise something you don’t have.
  4. Set tactics to align with strategy. Tactics like pricing, messaging, distribution, marketing, promotion have to work and they have to align with strategy. You can’t manage a high-end strategy with low-end pricing.
  5. Set major milestones. Concretely, what is supposed to happen, when? who is responsible? Humans work better towards specific milestones than they do moving in general directions. New product launch, website, new versions, new hires. Put it into milestones.
  6. Establish meaningful metrics. Of course that includes money in sales, spending, and capital needed. But useful metrics might also include traffic, conversion rates, cost of customer acquisition, lifetime customer value, or calls, emails, ads, trips, updates, hires, even likes, follows, and retweet. Good planning includes methods to track.

Dealing with business decisions

  1. Set specific objectives for managers. People work better with specific objectives, especially when the come within a process that includes tracking and following up. The business plan is the perfect tool for making this happen. Don’t settle for having it in your head. Organize and plan better, and communicate the priorities better.
  2. Share your strategy selectively. Let other people involved with your business know what you’re trying to do. Share portions of your plan with key team leaders, partners, spouse, bankers, allies. Don’t you want them to know.
  3. Deal with displacement. You have to choose, in business; particularly in small business; because of displacement “Whatever you do is something else you don’t do.” Displacement lives at the heart of all small-business strategy.
  4. Decisions on space and locations. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn’t that be in your business plan?
  5. Hire new people or not. Who to hire, why, and how many. Each new hire is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.
  6. Make asset decisions and asset purchase or lease. Use your business plan to help decide what’s going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?

More on sharing information

  1. Onboarding for new hires. Make selected portions of your business plan part of your new employee training.
  2. Manage business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.
  3. Lawyers, accountants, consultants. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.
  4. When you want to sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it’s worth and why they want it.
  5. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.

The standard arguments that apply more to startups

  1. Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.
  2. Estimate starting costs. Aside from the general in the point above, there’s the specific estimates that list assets you need to have, and expenses you need to incur, in order to start a new business.
  3. Seek investment for a business, whether it’s a startup or not. Investors need to see a business plan before they decide whether or not to invest. They’ll expect the plan to cover all the main points.
  4. Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.
  5. Vital for your business pitch and summaries. You can’t really do a good business pitch without knowing already the key parameters you estimate in your business plan, for headcount, starting costs, and of course milestones and key strategy and tactics.

 

10 Most Common High Tech Business Plan Fails

Management

I was asked about high-tech business plan fails on Quora recently. So this isn’t about lean plans for all business owners, but just the business plans submitted for angel investment and business plan competitions. I read about 100 of those business plans per year. So here’s my list of high-tech business plan fails:

  1. Naive profits. Drives me crazy. First of all, startups are rarely profitable. Secondly, get a clue – if the industry average is 8% profits to sales, you aren’t going to make 43%. You’re not showing that your business will perform way better than most; you’re showing you don’t know the business. Thirdly, why would I value your plan based on numbers that aren’t credible. It makes your plan worse, not better.
  2. Self-assigned superlatives. Disruptive, game changing, etc. Skip the fashionable check-the-list buzzwords. The more you claim it, the less credible you are. Stick to the content and leave the adjectives out.
  3. Not having projections. You don’t get to say projections are useless. Readers won’t believe them on the surface, for sure. But savvy plan readers want to look at your projections not because they will believe the top or bottom lines, but to see how well you understand the drivers and the workings of the business. Do you know what drives sales? Do you understand direct costs? Are your expenses realistic.
  4. Amazing headcount. I often see plans that would run enterprise-level businesses with startup-level head counts. I’ve seen plans in which 20 people supposedly run $20-million-annual-sales businesses. (Yes, this is a variation on #1 above; and relates to #3)
  5. No marketing expenses. Another variation on #1 and #3. The projections show huge profits and tiny marketing expenses. Fat chance. Marketing expenses are what make profits and growth incompatible.
  6. IRR and NPV. Nobody cares what your calculator or spreadsheet function tells you is the results of multiplying one far-out unrealistic assumption by another and another. These analyses are useful for teaching the time value of money and for some sophisticated financial analyses. Not for business planning.
  7. No competition. A sure-fire sign of lack of research, depth, and understanding of the way competition actually works.
  8. Cash machines. I’m surprised how often this happens. Plans that are supposed to be related to angel investment project cash immediately and more cash every day, and even accumulate huge cash balances. First of course that’s completely unrealistic. Second, why would yo share ownership of that cash machine with investors?
  9. Good business, bad investment. This is quite common, and I often encourage and admire these. Businesses that don’t need investment do show up now and then. Hats off and congratulations. But that doesn’t make a good investment for outsiders who need you to need more cash and eventually to exit to liquidity.
  10. Vague puffery in team backgrounds. Way too often people talk about relevant experience in generalities. For example, “a startup veteran” or “had a successful startup exit.” Tell me what companies and when. When the vitals are left out everybody suspects exaggeration. I sometimes insist on details and discover there was really nothing there. The startup was a poster campaign on a college campus. The exit was dissolving the business and selling the computer it owned.

Why Do We Need Financial Forecasts?

Business Plan Financials, Management

Business owners and managers do financial forecasting to enhance  management. Anticipate essential flows of money to manage them better. Forecasting is a necessary first step towards managing plan vs. actual results, which means course corrections. It’s like steering a business.

A Quick Example

Consider this simple illustration:

financial forecasting variance
You can’t identify changes in flow if you don’t have a forecast to refer back to as you review and revises according to changes.

Real management is a matter of minding the details while working towards the right long-term directions. Step by step. Forecasting is part of the management process. When sales are different from planned, you look at the connected spending, and adjust. Change the resource allocation when things are going well or poorly. Identify problems with execution, and opportunities that result from the unexpected.

You should note also that the value of the forecast isn’t a matter of accurately predicting the future. We’re human. We don’t do that well. Instead, it’s a matter of identifying the connections between sales and spending, and managing the ongoing interaction involved. In the example above, bike unit sales were less than planned, but the dollar sales were higher.  Is that good news or bad? It’s not necessarily either one, right? And it is also quite possibly highlighting a market trend that management should be aware of.

A LivePlan Example

Another example, from LivePlan: Monthly sales are below the plan, but above the previous year. Accessories and clothing are better than the previous year, but bicycles sales are below the previous year. Is that a trend to manage? The numbers don’t say, but the people should know. The numbers are there to begin the discussion.

Flies Buzzed. And I Like Short Sentences

Management

“Flies buzzed.” The best opening sentence I ever wrote. Also the best lead paragraph I ever wrote. And 42 years ago.

Image of newspaper clipping
This is not the “flies buzzed” story. I can’t find that one. But this is a story I wrote about that hurricane.

I don’t even have the piece. It was lost in the 42-year shuffle. But it started with “Flies buzzed” and went on to describe the third day after a brutal hurricane with flooding that killed tens of thousands. At the time I was night editor for Northern Latin America for United Press International (UPI).

The name of the hurricane spoiled the story when I tried to tell it to my kids as teenagers. Hurricane Fifi. Damn, that sounds silly. My kids giggled. But you can look it up in Wikipedia. Honduras, September of 1974. Oh, and when you look it up, you’ll discover that history recorded it as 5,000 to 10,000 people dead. I reported an estimated 30,000 dead. I had a valid source for that – a colonel in the Honduran military, Eduardo Sandino. It’s an easy name to remember because he increased his death toll estimate every time I checked in with him. And every time he did, with the obvious ulterior motive: “We need helicopters,” he said, every time we talked. “Tell them we need helicopters.”

Three reasons to mention that here today.

First, writing. Good writing communicates. What does “flies buzzed” tell you? Exactly.

Second, journalism. I was a single reporter in country for United Press International, competing with a team of seven people for AP. I won the story. I spoke fluent Spanish and found the official sources. They understood what they could get, for their country, by increasing the estimated death toll.

Third, more journalism. I believed the estimates Col. Sandino gave me. Every day for the better part of a week, I hitchhiked on private planes from the airport in Tegucigalpa to the airport in San Pedro Sula that was closest to the mudslides that caused most of the damage. A dam broke above the village of Choloma. I worked hard to get real information, validated by officials who went on record with name and position. And the information I published, it turns out, years later, was wrong. The death toll had been exaggerated. But the journalistic ethic was intact. We are all subjective. We strive for objective truth, as the goal. Sometimes we fail.

Does that tell you something worth understanding about Journalism?

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

Business Strategy, Entrepreneurship, Management, Starting a Business,

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

Forget Business Networking. It’s a Hoax

Management

Forget business networking. “Networking” as a business activity is a hoax. Business relationships that you build as business assets are meaningless. As soon as you use this vocabulary, it’s self serving, superficial, and ineffective. The people being used as assets know it, and are not fooled by it. So “Business Networking” doesn’t work.

Friendship vs. Self Interest

Instead, just be a decent person. Meet people because you want to. Listen to them when they talk. Do them a favor when you can and it’s not weird or out of balance. Be a friend. Friendship can’t be done as a business task and relationships intended as assets mean nothing. Do favors for friends because they’re friends, not as a deposit in some business asset bank. And – hooray for human nature – you’ll enjoy that more, and when you need a push or some help, people you’ve done favors for will be happy to reciprocate. That’s human nature.

The business types who started talking about “networking” 40 or 50 years ago did the world a disservice. They didn’t realize that all that was really happening was friendship, or nothing. They looked at friendship from the outside in, with business on their mind but apparently not humanity. So they parsed friendship into business buzzword, misunderstood it, and named it networking. Then they decreed that it’s a business task.

Treat People as People

People aren’t assets. Relationships aren’t assets. Nobody with any sense of self is going to golum themselves up to somebody in their so-called network to ask for favors, out of the blue, without having been a friend first. If you even try, it’s obvious and it’s off-putting, so it doesn’t work. Google glad-handing.

(Note: based on my Quora answer:  What is the best way to build strong business relationships so that you can leverage those relationships …)