blocking and tackling

Set 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 upcoming sunset.

panelists:
Alba Alemán, President, Cairo Corporation
Prashanth “P.V.” Boccasam, founder and CEO, Approva
Don Britton, founder and CEO, Network Alliance
Duke Chung, co-founder and CEO, Cyracle Technologies

moderator: Larry Robertson, Principle, Lighthouse Consulting

wrap-up: Mario Morino, Chairman, Morino Institute

Copyright 2002 Morino Institute. All rights reserved. Edited for length and clarity.

Disclaimer: 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

Thank 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 Netpreneur.

          We've 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.

          After that, 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.

          Before I 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.

conversation: five common challenges

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.

          The first 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.

          The second 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 Technologies. I 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.

          Finally, P.V. 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.

          I can't 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 team?” Duke?

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.

          Luckily, we 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.

          That 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 today.

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 story.

          For example, 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 it.

          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 through.

          We 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.

          Defining your 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 solve.

  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?

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