As part of the new section on Exits in the Second Edition of the book (order here), there’s a specific chapter around Preparing Your Company for an Exit.  That’s pretty different than Preparing Yourself (last week’s post).  

This chapter really focuses on two things.  One is how to think about who within your company knows about the possible deal, which conversations you keep private and which you have more in public.  I’ll save the details on that one for the book.

But there’s a second topic that’s important as well.  And it’s about due diligence and disclosure schedules.  What fun!  I call it “Begin with the end in mind.”  The advice in this section of the book, which is “get a full and complete due diligence checklist from your lawyer before you start a sale process” is something I wish I had done the day I started the company, not the day I started the sale process. 

Knowing what things buyers will want to see, in what form, and how well organized, would have influenced me and my CFO to be more orderly about corporate records (things like shareholder votes and board minutes) as well as client contracts. It’s not that we were disorganized, but over 20 years we put things in several different places and didn’t always migrate old records to new systems. When it came time to put together due diligence and load things into the data room, it was a lot more complicated than it needed to be.

As you can imagine, we are doing this very differently at our new company.  Even if you aren’t well organized now at your company, put on your to do list some kind of spring cleaning of corporate records.  The earlier you do it, the better. Besides, when you first startup you won’t have a ton of details to keep track of so it ought to be easy to do. As you scale you’ll have systems and processes in place as well as, hopefully, ONE PLACE where you store all this information. The time NOT to do it is when you’re in the middle of a very time consuming sale process and simultaneously trying to run your business.

I’ve always thought my grandmother was a remarkable person. At age 92 (sorry to publish it, Gma), she is pretty hip — drives a Lexus, plays a mean game of bridge, carries a cell phone, and until recently, used WebTV.

She was getting tired of the slow connection via dial-up, so Mariquita and I gave her an old laptop we had and installed a cable modem (I have to commend Cablevision of Westchester/Optimum Online on a very smooth and easy installation process), so now she’s the world’s newest computer user. Those of us who work with computers every day take some of the basics for granted, but if you’ve never used Windows or a mouse before, this stuff is not easy to learn.

But I’m proud to say that Grandma Hazel, after three short days, is using Outlook, used Return Path to announce her change of email address to her address book, set up 1-click on Amazon and bought a couple books, read my blog, and even subscribed to receive email alerts when I post.

After 5 years of WebTV, I think she’s in for a real treat with how fast the web can be and how much there is to explore out there. And if anyone can figure out how to use this stuff, it’s her. Welcome to the web and to blogs, Gma!

Angry, Defiant, and Replete with Poor Grammar

I didn’t see Bush’s farewell address on TV on Thursday, but Mariquita and I did see his press conference on Monday.  It was exactly what you’d expect it to be and quite frankly just like the last eight years:  angry, defiant, and replete with poor grammar.

I’ve said repeatedly that I think Bush has destroyed the Republican party and will go down in history as one of the worst presidents this country has ever had, if not the worst.  It’s not surprising that his tone at the end is as the title of this post describes.  But it is a shame.  His whole administration is a shame.  The really sad part is that it didn’t have to be.  People make mistakes — even really bad ones.  And they can recover from them and go on to do great things in life if two conditions exist:

1. They solicit feedback on their performance, and

2. The internalize and act on that feedback

Bush not only didn’t “get” these two points; he seemed to revel in them.  “Not paying attention to polls” and “At least you know where I stand” seemed to him to be pillars of strength as opposed to pillars of ignorance and complete and total lack of intellectual curiosity.  You don’t have to try to win a popularity contest to find out when something is going wrong on your watch.  And you can be bold, admit a failure, learn from it, and move on instead of just digging yourself deeper and deeper into the same hole.

I read a great article in The Economist last night that summarized its current view of Bush’s legacy, and in fact it noted a bunch of areas in which Bush appeared to learn from his mistakes, though he probably wouldn’t phrase it that way.  The fact that his second administration did do more to reach out to key allies in Germany and France is one example.  And to the article’s credit, it even noted some of Bush’s accomplishments, or at least the areas in which his thinking was right — those those are just dwarfed in the end by his failings.  

At any rate, I’m delighted he’ll be leaving office on Tuesday.  Inauguration day is one of my favorite days in America, and I look forward with optimism to the incoming administration as I always do, regardless of how I voted.

But as for Bush, I think I’d rather have the pilot of that USAir flight as my commander in chief.  Now there’s a guy (I don’t even know his name, and I probably never will) who had a quick grasp of a difficult situation and produced a brilliant and elegant solution in short order!

I was in a Board meeting last week (not Return Path’s), when one of my fellow directors came out with this gem:  “No one will ever thank us for keeping our prices low.”

When I first heard this, as is the case with most great quotes, I was drawn to its wit and simplicity.

But then I started thinking – is it true?  My mind first went to retail.  Having a reputation as being a low-cost provider can be in and of itself effective marketing – if that reputation is strong enough and your selection is wide enough, at least in retail-oriented industries, customers may consistently buy from you even if you’re not ALWAYS the low-cost provider.  Wal-Mart and Amazon prove this one out every day.  That’s the economic equivalent of customers thanking you for keeping your prices low.  Or pick an even more extreme example – gas stations, where there’s even more limited brand loyalty and even more product commoditization.  There’s really no reason to buy gas from a station who charges more than a couple pennies more per gallon than its neighbor.  No, thank you.

But in a B2B environment with smaller numbers of customers and smaller numbers of SKUs, this comment makes a lot more sense.  IT or Marketing departments don’t exactly go to the grocery store twice a week to buy data or software solutions!  I’m a big believer in the diminishing differences between the B2C and B2B universes, but this area may be one where the difference is still sharp.

Low prices might lure prospects to your doorstep, but they’re not going to keep buying your product if it’s not of sufficiently high quality.  Buyers measure quality in different ways, but here are three frameworks to think about as you contemplate the quality of your solutions relative to their prices:

• Is the quality of your product “above the bar”? Meaning, does it work well enough to get the job done that customers are hiring you to do?  If not, you do not have a sustainable business.  If so, see the next two questions
• Is the value of your product strong enough relative to the price you charge? Value-based pricing is increasingly difficult in an era of hyper competition, but if you can offer tailored enough solutions by vertical or of course by client, you can really optimize your pricing model
• Is your price/value equation strong enough relative to the price/value equation of a competing solution? Sometimes a “just barely good enough” solution can beat out a superior solution as long as it’s a LOT cheaper and the job the client needs done isn’t mission critical

The final thought vector in this equation is friction.  Go back to the consumer examples above – your switching cost to buy gas at Station A one week and Station B the next week is zero.  But in a B2B environment, there’s always at least some friction around switching products.  Friction could be implementation cost, time, execution risk.  It could be employee or customer training.  It could be integration with other systems or workflows.  It could even be desire to maintain a halo effect from doing business with you.  The more friction you have with your product, the easier it is to maintain higher pricing.

So my conclusion is that high prices are rarely going to chase someone away in a B2B, low client count/low SKU/moderate friction environment.  And that means my fellow director was spot-on:  no one will ever thank you for keeping your prices low.  All in, this comment was a great reminder for any B2B organization about how to think strategically about pricing.

Parenting and Corporate Leadership

Let me be clear up front:  I do not think of my colleagues at Return Path as children, and I do not think of Casey, Wilson, and Elyse as employees.  That said, after a couple weeks of good quality family time in January, I was struck by the realization that being a CEO for a long time before having kids has made me a better parent…and I think being a new parent the last three years has made me a better CEO. 

Here's why.  The two roles have a heavy overlap in required core interpersonal competencies.  And doing both of them well means you're practicing those competencies twice as many hours in a week than just doing one – and in different settings.  It's like cross training.  In no order, the cross-over competencies I can think of are…

Decisiveness.  Be wishy washy at work, and the team can get stuck in a holding pattern.  Be wishy washy with kids, they run their agenda, not yours.

Listening.  As my friend Anita says, you have two ears and one mouth for a reason.  Listening to your team at work, and also listening for what's not being said, is the best way to understand what's going on in your organization.  Kids need to be heard as well.  The best way to teach good verbal communication skills is to ask questions and then listen actively and attentively to the responses.

Focus.  Basically, no one benefits from multitasking, even if it feels like a more efficient way of working.  Anyone you're spending time with, whether professionally or at home, deserves your full attention. The reality is that the human brain is full of entropy anyway, so even a focused conversation, meeting, or play time, is somehow compromised.  Actually doing other activities at the same time destroys the human connection.

Patience.  For the most part, steering people to draw their own conclusions about things at work is key.  Even if it takes longer than just telling them what to do, it produces better results.  With kids, patience takes on a whole new meaning, but giving them space to work through issues and scenarios on their own, while hard, clearly fosters independence.

Alignment.  If you and your senior staff disagree about something, cross-communication confuses the team.  If you and your spouse aren't on the same page about something, watch those kids play the two of you off each other.  A united front at the top is key!

I'm sure there are others…but these are the main things that jump to mind.  And of course one can be great in one area without being in the other area at all, or without being great in it.  Are you a parent and a business leader?  What do you think?

What Kind of Entrepreneur Do You Want to Be?

I had a great time at Princeton reunions this weekend, as always.  As I was talking to random people, some of whom I knew but hadn’t seen in a long time, and others of whom I was just meeting for the first time, the topic of starting a business naturally came up.  Two of the people asked me if I thought they should start a business, and what kind of person made for a good entrepreneur.

As I was thinking about the question, it reminded me of something Fred once told me — that he thought there were two kinds of entrepreneurs:  people who start businesses and people who run business. 

People who start businesses are more commonly known as serial entrepreneurs.  These people come up with ideas and love incubating them but may or may not try to run them longer term.  They:

– generate an idea a minute
– have a major case of ADD
– are easily distracted by shiny objects
– would rather generate 1 good and idea and 19 bad ones than just 1 good one
– are always thinking about the next thing
– are only excited by the possibility of what could be, not what is
– are more philosophical and theoretical
– probably shouldn’t run the companies they start for more than a few months, as they will frustrate everyone around them and get bored themselves
– are really fun at cocktail parties
– say things like “I thought of auctions online way before eBay!”

The second type of entrepreneur is the type who runs businesses (and may or may not come up with the original idea).  These people:

– care about success, not just having the idea
– love to make things work
– would rather generate 1 idea and execute it well than 2 ideas
– are problem solvers
– are great with people
– are maybe less fun at cocktail parties, but
– you’d definitely want them on your team in a game of paintball or laser tag

Neither one is better than the other, and sometimes you get both in the same person, but not all that often.  But understanding what type of entrepreneur you are (or would likely be) is probably a good first step in understanding whether or not you want to take the plunge, and if so, what role you’d like to play in the business.

Retail, No Longer

I’ve evolved my operating system as a CEO many times over the years as our business at Return Path has changed and as the company has scaled up.  I’ve changed my meeting routines, I’ve delegated more things, and I’ve gotten less in the details of the business.

But there’s one specific thing where I’ve remained very “retail,” or on the front lines, and that is the interview process.  I still interview every new hire, usually on the phone or Skype and in most cases only for 15-30 minutes, and then I also do an in-person 15-30 minute check-in when someone is around the 90-day mark as an employee.  For me, these have both been great mechanisms for collecting data about the organization, for making a personal impression on the culture, and for continuing to get to know all employees, at least a little bit.

But the system is starting to break as we scale.  Last year, we hired 82 people.  In the first six months of this year, we hired 80 more.  My calendar is groaning under the strain — and I assume, though they’ve never uttered a complaint about it, that my assistant and our recruiters feel like they’re playing a game of Sudoku with invisible ink trying to make it all work.

So today I changed the policy.  I’ll still do interviews and 90-day check-ins for all manager hires, but otherwise I’m delegating it to my staff.  We all feel that it’s critical for executives to stay as close as possible to the front lines, so we’ll share in the responsibilities.

It’s definitely a bittersweet moment.  It’s great that we’re big and growing fast, and it’s important for us to evolve.  But I will miss the personal connections with everyone, and I’ll have to work harder just to remember names as I walk through the hallways, particularly of our Colorado office, which has the majority of our staff but which I only visit 6-8 times/year.

I heard two great lines recently applied to CEOs that are thought provoking when you look at them together:

You have to care about everything more than anything

and

You can do anything you want but not everything you want

Being a CEO means you are accountable for everything that happens in your organization. That’s why you have to care about everything. People. Product. Customers. Cash flow. Hiring. Firing. Board. Fundraising. Marketing. Sales. Etc. You can never afford not to care about something in your business, and even if there’s a particular item you’re more focused on at a given point in time, you can never get to a place where you care about any one particular thing more than the overall health of the business.

But caring is different than doing. As a CEO, even if you’re hyper productive, you can’t do everything you want to do – and you shouldn’t. Others in your organization have to take ownership of things. And you can’t burn yourself out or spread yourself too thin. But you do have the prerogative of doing anything you want in and around your company as long as you do it the right way.

This second line is particularly interesting when applied to a CEO’s activities outside of work. As with anyone, it’s critical for CEOs and founders to have outside hobbies and interests, time for friends and family, down time, and even non-work work time like sitting on outside boards. Staying fresh and “sharpening the saw” is good for everyone. A CEO should be able to do anything she wants outside of work — from sitting on outside boards to being in a band. But a CEO can’t do everything she wants outside of work while still devoting enough time and attention to work.

Taken together, the two lines are interesting. As a CEO, you have to care about everything, but you can’t do everything. That pretty much sums up the job!

(This post was inspired by Startup CXO and was originally published by Techstars on The Line.)

In most startups, one of the founders is the first salesperson — often out of necessity as much as passion. But as startups scale they add sales reps or maybe some form of a Sales Manager once there are more than a couple of reps. But how do you know when to bring on a senior sales leader? Too soon and you have a very expensive employee, too late and your sales reps are creating their own processes and approaches. As a CEO there are several telltale signs that you need to hire a CRO, for example:

• You wake up in the middle of the night concerned about HOW you’re going to make this quarter’s number. You have no clue about what the levers are, or what the pipeline/forecast details are, to get there.
• You are spending too much of your own time managing individual deals and pricing, or teaching individual reps how to get jobs done.
• Your Board asks you if you’re ready to step on the gas and scale your revenue engine and you don’t have a great answer and aren’t sure how to get to one.

But don’t wait until you’re waking up in the middle of the night to hire a CRO. Instead, use this simple process to build some consistency in your sales team and set yourself up to scale rapidly when the time comes.

Building a Sales Team: From “Whiteboard” to “PDF”

There is a framework we learned from one of our original investors at Return Path, Greg Sands. Greg always talked about the evolution of an enterprise selling process as going from “selling on whiteboard, to Powerpoint, to PDF.” A “Whiteboard” approach to sales is one that is exploratory and conceptual. A “Powerpoint” approach is a sale that requires creativity and tailored pitches, while a “PDF” sale is a standard sale that can be taught quickly to an inexperienced sales rep and used with a high degree of predictability to all customers.

Many startups think that they need to be at the PDF stage quickly but as a startup your goal should not be to deliver a polished, buttoned down and refined final PDF to customers. Your goal should be to start with a mindset of discovery.

Whiteboard Sales Approach

Your initial sales team (maybe the CEO and/or Head of Product) should go to a prospect’s office and literally use a whiteboard, drawing things out (drawing charts, and frameworks, and circles, and arrows, and exclamation points), while you try to understand your potential customer’s problem. You’re creating this with the client because you don’t have a deck yet, much less a PDF. It can be very interactive and engaging selling on a whiteboard and using that very intimate moment to try to develop the right story for your product.

Powerpoint Sales Approach

As you evolve and grow, chances are you’ll have a sales deck and a pitch because you won’t be discovering what the customer needs. You’ll have very refined (and tested) ideas about their needs and maybe you’ll even have customer segments. But a caution here is that what could (and often does) happen is that your deck, your pitch, get modified along the way — for every single pitch. So, if you have four salespeople, each of them has a different version on their laptop, and there’s probably no central organizing body yet that has thought about what the tone and tenor of the brand should be.

This is the “Selling with PowerPoint” stage and it’s here that good, clever, senior, business development-oriented salespeople are most successful because they will create custom pitches for each client based on their learned history of what has and has not worked in other places. You are still miles away from being a sales machine and what you need is a level of sophistication and market understanding that enables you to get to a PDF presentation.

PDF Sales Approach

A PDF is something that’s complete, that can’t be modified or altered, and it ensures that everyone’s speaking the same language. At this point you have the kind of consistency and message and positioning that enable you to be repeatable and scalable. You can hire a new, junior sales rep, train them for a few weeks, hand them a prospect list and a pdf, and have a really good sense of that person’s likely productivity.

Of course, selling by whiteboard — and even PowerPoint — is sufficient to a point in time but if you’re thinking about unleashing your product on a massive scale, then you have to get to the point where you have a very smooth presentation and message that you know resonates with the audience.

You might be thinking that you can get your sales team from whiteboard to PDF quickly, that it’s a matter of understanding the process and then executing it. But the reality is that there is no quick way to get from whiteboard to PDF and it’s not a linear process. You can’t put into your business plan that you’ll spend the first six months selling with whiteboard, the next six months selling with PowerPoint, and the next six months selling with PDF. It’s much more nuanced, there’s a lot of trial and error, a lot of experimentation, and a lot of thinking and rethinking based on customer ideas and feedback. At Return Path, for example, it probably took us somewhere between five to ten years before we got from whiteboard to PDF and it was only after refining our approach and materials that we were able to build a sales machine.  

Obviously, a startup can’t wait the five to ten years to hire a CRO, but even at the “Whiteboard” stage an inquisitive person, excited about your product and customers, could help build and grow a dynamic sales team… and certainly by the “Powerpoint” stage, a strong senior sales leader can make a world of difference — and drive you to the “PDF” stage.

Email Articles This Week

I know, not a real inspired headline.  There are two interesting articles floating around about email marketing this week.  I have a few thoughts on both.

First, David Daniels from Jupiter writes in ClickZ about Assigning a Value to Email Addresses.  David’s numbers show that 71% of marketers don’t put a value on their email addresses.  I think that may be an understatement, but it’s a telling figure nonetheless.  David’s article is right on and gives marketers some good direction on how to think about valuing email addresses.  The one thing he doesn’t address explicitly, though, is how to think about the value of an email address in the context of a multi-channel customer relationship.  Customer Lifetime Value is all good and well, but the more sophisticated marketers take the next step and try to understand by customer (or segment) how valuable email is relative to other channels.

Second, David Baker writes in Mediapost’s Email Insider about Finding New Customers Via Email.  The column is a nice discussion of how important email is to retaining customers.  We at Return Path completely agree.  However, the question Baker posed at the beginning is not well addressed — “Should I use email to find new customers?”

My company works with hundreds of smart marketers every week who say, “Yes!  Because it’s effective, cost efficient and is the only way to combine the relevancy of search with the power of online advertising.”

I applaud Baker’s note of caution to marketers planning to acquire customers via email.  It’s always a good idea to plan the campaign with the same diligence you plan any marketing outreach — making sure the targeting, message, design and offer are all optimized for the prospect interest and the medium.

However, I take great issue with his conclusion that email acquisition marketing “does more harm than good.”  Our clients disprove this claim every day.  Email prospecting done well includes a synergy of organic, viral and paid techniques.  Consumers and business professionals still want to receive relevant and informative offers via email.  More than 50,000 of them sign up every DAY for email offers from Return Path alone.

Poeple who have failed list rental tests (and there are lots of them) need to ask some hard questions of their campaign strategy, their creative, their list rental partner, and their agency.  Did you try to send the same message and design to a list of prospects as you do to your house file?  No wonder no one got the message, they don’t even know you.  Was your list double opt-in?   Did you segment the list by interest category or demographics?  Perhaps your message was mis-targeted.  Did your landing page make it easy to take advantage of the offer?  Did you test on a small portion of the list before blasting the entire file?  Did you optimize your subject line to ensure higher open rates?  Did you try to do too much?  The golden rule of email list rental is “one email, one message.”

The success of many marketers using list rental today can not be ignored.  Done well, email acquisition is extremely powerful.  And, the addition of new lead generation, co-registration and offer aggregation opportunities create even more custom and targeted opportunities to connect with prospects.

It’s too easy to dismiss something that didn’t work two years ago by blaming the medium.  Instead, recognize that old experience for what it was.  A well-intentioned effort to test out a new medium, that didn’t work because many tried to apply practices from other media to it.  Times have changed, and email acquisition has proven its value.

Stick with Daniels’ article, figure out how valuable an email address can be for you, then go out and collect as many of them as you can from customers and prospects who will be all-too-willing to give them to you in exchange for content, offers, and other points of value.

Why Do Companies Sell?

Fred has a good post today about Facebook and why they shouldn’t sell the company now, in which he makes the assertion that companies sell “because of fear, boredom, and personal financial issues.”  He might not have meant this in such a black and white way, and while those might all be valid reasons why companies decide to sell, let me add a few others:

• Market timing:  As they say, buy low – sell high.  Sometimes, it’s just the right time to sell a business from the market’s perspective.  Valuations have peaks and troughs, and sometimes the troughs can last for years.  Whether you do an NPV/DCF model that says it’s the right time to sell, or you just rely on gut (“we aren’t going to see this price again for a long time…”), market timing is a critical factor
• Dilution:  Sometimes, market conditions dictate that it isn’t the best time to sell, BUT company conditions dictate that continuing to be competitive, grow the top line, and generate long-term profits requires a significant amount of incremental capital or dilution that materially changes the expected value of the ultimate exit for existing shareholders (both investors and management)
• Fund life:  Fortunately, we haven’t been up against this at Return Path, but sometimes the clock runs out on venture investors’ funds, and they are forced into a position of either needing to get liquidity for their LPs or distribute their portfolio company holdings.  While neither is great for the portfolio, a sale may be preferable to a messy distribution

Fred’s reasons are all very founder-driven.  And sometimes founders get to make the call on an exit.  But factoring in a 360 view of the company’s stakeholders and external environments can often produce a different result in the conversation around when to exit.