aside the gloom and doom headlines; now
is actually a great time to start a business, according
to Mario Morino.
It’s not an easy
time, mind you, but that’s because true entrepreneurship is
never easy. Now that the bubble has burst and bootstrapping is
back in fashion, the
panel of early-stage entrepreneurs at this Netpreneur Coffee &
DoughNets event held October 23, 2002, discussed some of the
basics of business building, from validating the market to closing
that first customer. Morino wraps up with a summary, analysis of
economic conditions, and more information on Netpreneur’s
Alemán, President, Cairo
“P.V.” Boccasam, founder and CEO, Approva
Britton, founder and CEO, Network
Chung, co-founder and CEO, Cyracle
Robertson, Principle, Lighthouse Consulting
Morino, Chairman, Morino
Copyright 2002 Morino
Institute. All rights reserved. Edited for length and clarity.
Statements made at Netpreneur events and recorded here reflect
solely the views of the speakers and have not been reviewed or
researched for accuracy or truthfulness. These statements in no
way reflect the opinions or beliefs of the Morino Institute,
Netpreneur.org or any of their affiliates, agents, officers, or
directors. The transcript is provided “as is” and your use is
at your own risk.
mary macpherson: welcome
you for coming this morning to Coffee & DoughNets.
I've talked to many of you this morning and last night and
exchanged emails with a lot of you about the announcement
we sent out yesterday about sunsetting Netpreneur. We are
extremely gratified by everyone's support and the incredible
interest you’ve expressed in working with us as we transition
got a two-part program this morning.
The first part is the one you signed up for, “Blocking and
Tackling: Operational Challenges For Startups,” in which we’ll
hear Larry Robertson lead our great panel of entrepreneurs.
We've changed the format a little to eliminate some of the
introductions up front. You've
got good bio
information on everybody, so we're going to just jump right
into the issues. A lot
of the questions that came to us from The
Loop discussion group will be integrated into the conversation
that Larry is going to lead.
we're going to ask Mario Morino to come up. He's the bonus part of
the program this morning, and he's going to talk about the
announcement that we made yesterday, some of the thinking behind
it, as well as providing his wrap-up for part one.
introduce Larry, let me acknowledge our volunteers this morning, Dorothy
Camer of Car
Free Mobility, Fred Kelly of HiTek
Solutions, and John MacKinnon of Teligent. Thank
you very much for helping us out.
I would also like to thank the Netpreneur team for their work
in putting the program together.
Now, let me
turn it over to Larry.
Mr. Robertson: Thanks, Mary. The topic this
morning is “Blocking and Tackling:
Operational Challenges For Startups.”
This is a thick topic, so we've tried to find ways to narrow
it down a bit and also to make it valuable to your needs. Let me
say up front, by way of background, that I've had my own company
for 10 years, and I've gone through a lot of the challenges of
startups and growth spurts along the way. Prior to having my own company, I also sat on both sides of the
table looking at these challenges and determining how to deal with
them. When I say both
sides of the table, I mean, first, on the investment side with two
venture capital firms and an investment bank, and, on the
operational side, doing startups and acquisitions within a larger
company. In many ways,
my business now is helping companies to deal with these blocking
and tackling issues.
As I said, this
topic is pretty broad and it can be as varied as the people in the
room. One of the best
ways that I tell my clients to deal with these issues is to try to
anticipate them. With
that in mind, we've put our collective wisdom together over the
last week and talked about some of the most common challenge
areas. These are the five we're going to focus on this morning:
moving from concept to an actual business model,
finding and validating your market,
building and providing incentive to a team early on,
especially in those money-shy days,
attracting customers when you don't have any, and
from the funding side, determining how long to go it alone,
whether and when you need to go outside for funding support, and
how to make that decision.
That's the way
we're going to try to focus the conversation and make it useful
within the confines of this one hour. We're also going to try to expand the conversation beyond this
session. As Mary said,
we solicited some questions earlier, and we're going to
incorporate them into our discussion today.
After the session, we're going to continue the conversation
online in Netpreneur's The
Loop email discussion group.
As Mary said, I
don’t want to do a résumé download on each of our panelists,
but I would like to tell you briefly who they are, what they do,
and why they're relevant to this conversation.
person I would like to introduce is Don
Britton, founder and CEO of Network
Alliance, a leading subscription computing service
firm. They provide
small and medium-size businesses with what is sometimes their
first, but also their ongoing computing solutions. Network
Alliance has been in business for five years.
If nothing else, that's relevant to this discussion because
it's been an interesting five years and they are still thriving.
Secondly, Don and his team consciously avoided going to
venture capital firms for funding in their early stages. One
reason is that they did not feel that the investors fully
understood their vision. They had some concerns about whether or
not they would be able to make that vision happen if they were to
team up with VCs at those early stages.
Some of their insight and foresight proved true.
person I would like to introduce you to is Alba
Alemán, President and one of the founders of Cairo Corporation,
an IT services firm.
They also do technology integration and coursework development
with two client bases, state and federal government clients and
corporate clients. There are many ways in which Alba is relevant to this conversation,
not the least of which is that Cairo has been in business for
three years and has been profitable since its first month. They
are a small business competing in a market—the state and federal
government market—that is usually not very friendly to small
businesses, so I think she'll have some interesting contributions
to this discussion.
Next, I would
like to introduce you to Duke
Chung, one of the cofounders and the CEO of Cyracle
like Cyracle’s tag line: Online customer support made easy.
That means that they build online software solutions for
companies that want to off-load their traditional customer service
and put it in an online format. Among other ways Duke will
contribute to this conversation, his original team of five not
only worked out of that proverbial basement, they worked out of an
actual basement in Ithaca, New York, for their first year or so.
They then looked at the possibility of venture support but
decided to go with an angel investor, who, besides providing some
funding, became one of the solutions to their management
challenges. I think
that will be interesting to discuss.
Boccasam is the founder and CEO of Approva. You wouldn't know it by looking at him, but he's the gray-hair of
this group. Approva is
his third startup, and the first two were very successful. Approva is just shy of a year old, and the concept is just a little
older than that. Unlike
our other three panelists, P.V. went straight to the venture
market where he not only raised money successfully, but he raised
it in a down cycle. It
will be interesting to hear his perspective on things.
Now, let's jump
into the questions, and we'll start with the first area: Moving
from concept to an actual business model.
One of the things I find interesting is that there's often a
mandate, or at least a suggestion, that you should lay out your
business model in your business plan up front, before you start
your business. There's not much talk, however, about why or what
you do with it after you've put together this nice little
document. One of the things I try to do is to advise my clients to think
about the process, then use that process as a guide going forward,
perhaps as a means of measuring and later coming back to
re-evaluate their business.
I would like to
address this first question to Alba.
I'm curious as to whether or not you went through that process
of putting together a formal business model, and did you do it the
right way? What should you have done?
Ms. Alemán: We wrote down our plan before we started the company, so we had a
written document that we still go back to today and evolve. The financial models of that initial plan get looked at and revised
monthly. We track to
the plan, and the financial models that we developed back then are
still in place today. The
other parts of the plan get reviewed and revised, maybe every six
months. We're tracking towards them.
We underachieved in one of those years against the initial
plan, but over the last three and a half years we are on target
with what we estimated originally.
emphasize enough the importance of writing things down. What's in
your head looks different once you put it on paper, and it begs
other questions. It gets you to think about things differently.
Getting things on paper is critical, especially since no one
will look at you from a financial perspective if you don't have
your thoughts on paper with financial models to support how you're
going to be successful.
Mr. Robertson: P.V. and I talked a bit beforehand about the fact that he looks to
measure aspects of his business in order to understand how well
he's tracking to his original business model.
Would you share some thoughts on that?
Mr. Boccasam: Sure. First, I've got to admit that I'm not much of a football fan.
I’m more of a golf fan, so, for me, it's like finding the right
swing instead of blocking and tackling.
It is really about how you
get to the hole, or how you know how many shots you need.
Someone sets the goal. Folks
who haven't raised venture capital can set their own pars. Unfortunately —or
perhaps I should say fortunately—for venture-backed companies,
you need to have very specific measured milestones.
We tend to
force a business model around our business. A business model for a
company like Microsoft is to increase revenue per PC shipped,
okay? So start off at
$20, $40, now it's probably $120 or $180, but it’s a very simple
business model—the more software pieces that get shipped, the
more software they sell. If
you're Wal-Mart, your model is to increase revenue per customer
that walks in the door. A fairly simple business model.
For any kind of
business, you need to spend a little bit of time thinking about
what that simple business model is. It doesn't have to be a complex entity. When we went out and pitched, it was based on a very simple
business model that articulated how we could make money. Do you require a big plan to support it? Sure, but you must be able to measure what it is, whether it's
increasing revenue per employee or decreasing costs per
transaction, whatever the particular metric is. I'm not saying
it's easy to do, it does take awhile, but it forces you to focus
on what is really core. If something doesn't relate back to the core and you can't measure
it, then it's probably not worth doing. That's how we focus in on
our business plan.
Mr. Robertson: Don, when you look back at where you started five years ago, what was
your business model, whether you wrote it down or not, and how
dramatically has it shifted over time? What have you done
personally and as a team to take account of those shifts?
Mr. Britton: When we first started, it was more of a concept that I had from working
in public accounting, and it was a matter of refining that
concept. Once we
refined it, it was a matter of getting my personal belief behind
it and then developing a team that would share that same belief
and would work late nights. One of my coworkers is here today. There were a couple of months when we were sleeping at the office
with the rest of the team. It was a personal commitment and a
belief that the model would work.
It wasn't so much about what we wrote down on paper, it was
more about the core concept, and everything else along with it
would get tweaked here and there as we learned from our tests in
the market and from building the system. It was also a factor of getting other people, major members of the
community, to believe in us, as well as having a team to go
forward from there.
Mr. Robertson: I want to shift to one of the questions that we received online. I'll
read it so that I get it exactly right.
“One of the
factors often facing technology-based early stage companies is
that an engineer or scientist founded the company.
Often this founder has little or no management experience and
“productization” and “monetization” may be foreign
concepts. What has been
the experience of the panelists in getting the founder to give up
the operational reins to a professional business management
Mr. Chung: There were five of us who started and built the company.
We were five engineers at Cornell. At that point it was purely
a concept. We had an
idea and we were just trying to prove it out in the marketplace to
see if it would work or not.
A lot of people approached us and either offered us some money
for some equity or the possibility of joining our team.
We looked at every single possibility and evaluated what the
short-term and long-term results would be. We looked at every
individual very carefully, and we were approached by a lot of
people who said they could help us.
We were still a very young company and could have used a lot
of management experience, especially since we were coming out of
school and had not built a business before.
were approached by an individual we thought could bring our
company to the next level. This individual, who is our Chairman
today, had built a company before and was very successful in his
first venture. We
looked at that, and we looked at what he wanted to do.
He originally approached us about putting some money in the
company. Later, he said that he was getting bored since he had
retired from his first venture four years before and was looking
for something to do, a new challenge. We thought it was a good opportunity for us to take advantage of.
He wanted a new challenge, and we looked at it as something
that would take us to the next level.
I look at it
from a very optimistic standpoint.
If you think a person is really going to be able to help you
for the long run—and it comes down to a lot of your gut
instincts, of course—but for us it was one of the luckiest
things that has come around for our business.
Mr. Robertson: What kind of expertise has that person brought that you didn't have? If
you had tried to take on those challenges with your original team
of five, what might you have had difficulty with?
Mr. Chung: We are a very technical company. In
the beginning we had hired a bunch of programmers who worked with
us. It was all about
product-building at that time and finding customers.
A lot of it was building our network and building the
infrastructure for the business, which was something nobody in the
company had experience doing.
Our chairman had the experience of building a company up to
about 50 or 60 people, which he eventually sold to Rational
Software. He knew who
we needed to bring in at what point in the business, and that was
very important for us. He was able to forecast and say: In the
next quarter or the next two quarters we need to find these two
people and we need to start looking for them today, not wait until
the end of the next quarter to do it.
was one area. The second area was his network.
From a financial standpoint, he was very successful, and he
has a very good network. One
of the decisions we made was to move to this area from New York.
He was based down here, and he said that if we moved we’d
have access to his network of people who could help us build the
business. Today, we've got a board of advisors of more than 20 people who are
industry leaders in this area.
All of these people contribute to us, but, if it wasn't for
our chairman, I think half the people wouldn't be on our board
Mr. Robertson: On this topic of moving from concept to the business model, I would be
curious to get some thoughts on
putting together the strategy and focus of the business, the
financials that go behind that, some of the structural elements,
and how much of that process is a self-assessment. I would like to
start with P.V., because there was an article in The Washington
Post some months ago that tracked him through his process of
seeking venture capital and securing it. One of the things that stood out for me is that he keeps a personal
scorecard of how he's performing relative to his goals for the
business, which he shared with the investors. It would be interesting to hear you talk about that, P.V.
Mr. Boccasam: It goes back to the measuring aspect we talked about earlier.
It’s one of the great ways to diffuse the tension in the
room, especially when you're presenting to partnerships for very
large funds who, when they make these investments, lay out a fair
amount of money for the company.
You want to choose investors who are willing to stick with you
through thick or thin, especially during the lows when you need
infusions of cash, like most companies have had to do in the last
couple of years.
When we were
presenting to a lot of the VCs, I had just a few customers who had
expressed interest, and I had done a fair amount of presentations
articulating their pain back to them. They had nodded and said,
“Yes, if you build it, we'll buy it.”
It's hard to take that kind of message and get someone to say
they'll fund the idea, so we spent some time putting together some
key parameters around the things that Duke was talking about
earlier—management team, product idea, risks, etc.
Basically, what you're doing is rating yourself and the
knowledge that you have around your business model. You grade
yourself and say, “I understand that I don't know much about
competition right now, but once I get the money, I'll have one guy
who looks at competition.”
Saying what you
don't know is actually big for them. It helped us frame the
problem quite well. Instead of having them beat you up on not
having a management team or a company analysis or a business
model, you put up the six key metrics that you think you need to
be successful, and you grade each.
We do it at every board meeting.
I put up a slide and
say, “This is how we’ve progressed from the last board meeting
to this one, and this is how we grade ourselves.” It helps
people focus on the places where you need help. If they can't be a
part of the solution, then they aren't adding any value. The
whole idea around putting scorecards together is to get people to
focus on areas where they should be helping you.
Mr. Robertson: Another thing that P.V. mentioned earlier, and I'll just steal his
quote, "What you can't measure you can't reward." Earlier, he and I were discussing that if you don't look at all
aspects of your business using metrics that can gauge how well
you're doing and where you need to change course, then chances are
that the piece you're not measuring is going to end up adrift.
Is that fair?
Mr. Boccasam: Absolutely. If you go back to
the lovely golf analogy, imagine playing 18 holes with no pars.
You would be totally bored.
It's important that the masters realize what you're measuring,
and you've got to measure the right things.
You don't want to go overboard in measuring because you'll be
more focused on the metrics, but the key thing is to get the
concept into the minds of the people investing in you, that says,
“I realize that I need to spend more time putting together a
financial model that will meet standard venture returns.
Do I have the answer today?
No. Am I smart
enough to figure it out? Sure.”
Being able to
talk to folks in very specific terms and constantly grading
yourself on these key metrics also helps your focus and allows you
to do the right things at the right time.
You may have a great story about your product, but you have to
explain to them, for example, how you fit in the overall scheme of
things vis-à-vis competition, vis-à-vis market, vis-à-vis
market drivers, etc. One of the hard parts in measurement is being able to articulate
the growth factors, regardless of the business you're in. For
Cairo, in the federal space, for example, one of the great growth
spurts was huge federal spending. Obviously, you can't time some
of these events, but being able to articulate the metrics very
clearly and grade yourself on them means something.
How true was that assessment in helping build a business
model? If you don't
have those, they'll have a very difficult time believing your
now we're focused on this new technology called Web Services where
there's been a lot of hype. We took a slightly different tack saying that although the hype is
there and we're going to be there for probably the next two to
five years, there are aspects of that business that are relevant
to us. Then we quantify that business to a very discrete set of problems
and say, “This is what we're going to address.” That focused
and narrowed the problem down so the story was more believable. It's not like in the next five years your business is going to grow
$7 billion and we're going to take 10% of that pie. That kind of model is not going to work anymore, so you need to be
more specific when you measure things.
Mr. Robertson: I'm going to move us on to the second of our five challenge areas,
identifying and validating your market. I'll start by saying that
one of the biggest mistakes I see companies make, even when they
come to sessions like this and are told that they should not do
this, is to look at the total size of what they think their market
is, then circle a small percentage of it and say, “I think
that's a reasonable and attainable goal. That's my market and I'm
going to go after it.” They do that with no other detail behind
In looking at
your markets and using some hindsight here, what things did you
evaluate before you went in, or what parameters should you
have evaluated before you went in to define that market, how you
could access it, and why you were going to be competitive in it? I
would like to start with Alba because, if you look at the federal
and state government market, it's potentially huge.
Where do you start and how do you build?
Ms. Alemán: The federal government is the largest buyer in the world, so it is more
than huge. Finding your
niche in that enormous market is very difficult.
It's as challenging as some of the things that P.V. has been
started with what we knew, the agencies we had worked with in the
past. We had over a decade of experience working in a federal services
organization for a Fortune 500 company, selling both products and
services. We understood the market, we knew their needs, we knew
their weaknesses, and we knew where we could bring value.
If you don't build a value proposition, no one is going to
want to buy what you've got to sell, whether it comes in a box or
it comes in the form of human being.
value proposition depends on knowing who your customer is and
starting with what you know best. You don’t want to tell a customer, “I do X, Y, and Z,” and
have them say, “But there are only two of you.
How is it possible that you do X, Y, and Z?” When you're
starting a business you're just so passionate about what you can
do and your potential that you'll tell them what you feel in your
heart you can achieve because you believe in yourself.
Typically, business owners and entrepreneurs are overachievers
who can't work for other people. They have a vision and a dream
and strive for the world. When you go in front of a large,
multi-billion dollar integrator and tell them, “We do this, and
we do this, and we do that,” and the person turns around and
says, “We do all that.
We're at $6 billion. How is it that you do that as well?”
It’s important to get started with what you know best so you
can talk about it ad infinitum because you know it better than
anyone else. That was one of the things that helped us narrow down
and target a few select customers.
Then, once you have a customer, taking care of that customer
and growing that customer into other areas is the next challenge.
Mr. Robertson: What you're saying is an interesting contrast to looking at the market
and asking: What looks like the best potential customer, or the
best potential segment to go after, or the fattest one that I'm
going to get the richest from?
Sometimes I think that takes you away from your knitting, from
what you know best that might allow you to get to that customer in
the first place.
Ms. Alemán: The federal government market space is so big. You can look at who
spends the most dollars, the Department of Defense, but who's the
least friendly to small business?
It is the DoD. They
have traditionally been the worst offenders of the Small Business
Administration's goals for working with small businesses and
helping entrepreneurial businesses get a foot in the door.
Do you want to make your entree with the ones who want to work
with you the least just because they have the most dollars?
You don't need those billions of dollars necessarily.
Go with an agency that's smaller, one that's small business
friendly and wants to talk to you. One that's interested in what
you have to say and that has a need or a problem that you can
Mr. Robertson: Don, I got the sense that when you looked at your
potential market and were being approached initially by potential
investors, the market might have been a lot bigger than what you
felt you should initially go after. You consciously decided to
pace yourselves and how much of the market you were going to try
to seize. Can you talk
a little bit about that?