Dharmesh Shah, Founder & CTO of HubSpot, Serial Software Entrepreneur and Startup Blogger 

The Rich Niche Group blog interviews and enables you to hear directly from successful entrepreneurs, product managers, venture capitalists and others about the steps they took to grow their businesses/products and how they were able to create, penetrate, and/or dominate their niche.  This week we interview Dharmesh Shah.

Interviewee:  Dharmesh Shah, serial entrepreneur, author and startup blogger. 

Why Selected:  Dharmesh is the founder and CTO of HubSpot.  HubSpot provides marketing software for small businesses.  The company, based in Cambridge, Massachusetts, has raised over $30 million in venture capital, and has over 1,700 customers. 

He developed grader.com – a free suite of online tools for marketing measurement.  These tools, including WebsiteGrader.com and TwitterGrader.com have won numerous awards and have been used by millions.

Dharmesh is the co-author of the new book “Inbound Marketing: Get Found Using Google, Social Media, and Blogs,” published by Wiley in October, 2009.  The book has been consistently ranked in the top 100 business books on Amazon.

He also authors OnStartups.com, a top-ranking startup blog with over 15,000 subscribers and 100,000 members in its online community.  He is an active member of the Boston area entrepreneurial community and a frequent speaker on the topic of startups and internet marketing.

Dharmesh has a B.S. in Computer Science from UAB and an M.S. in the Management of Technology from MIT.

In the following interview, Dharmesh discusses how he used inbound marketing techniques to help his company’s grow and how any business regardless of the sector it is in can use these same techniques to reach its customer base.  During the interview, Dharmesh provided some great insights on what it takes to launch, grow and sustain a company in today’s market.  The key points you’ll take away include:

1. It is critical for entrepreneurs to figure out a way to efficiently gain access to customers and to really reach people, you need to give them something that is valuable and compelling. 
2. As your company grows, one of the challenges you needed to be prepared for is how to stay on top of rapid growth and ensure that the organization shares a common vision and maintains the culture that has made it successful thus far.
3. Successful companies that enter a niche have a good understanding of how the existing players are failing to deliver sufficient customer value.
4. Companies that dominate a niche find some sort of “network effect” whereby each additional customer adds value to the remaining ones.

In your new book, Inbound Marketing: Get Found Using Google, Social Media, and Blogs, you show how any business can use inbound marketing to help their business drive prospects and clients to them; can you describe how you have personally used these techniques to build the companies you started? 

 My startup HubSpot was built from the ground-up with inbound marketing techniques.  We’ve used several different forms of content to effectively draw prospects in.  For example, in the early days of the company, we started a blog on the topic of small business and marketing.  This blog (http://blog.hubspot.com) is now one of our top 5 sources of leads for the company.  Another example is our suite of free tools, including Website Grader and Twitter Grader, both of which have been great marketing vehicles.

 Many internet and high-tech start-ups use inbound marketing, can you talk about how important it is for other smaller businesses and sole proprietors such as doctors, lawyers, plumbers, interior decorators, etc. to utilize the techniques you describe to help them maintain and grow their businesses? 

Inbound marketing actually works even better for mainstream, non-technology businesses.  The reason for this is that high-tech businesses are often very innovative — and pursuing an entirely new market or creating a new category.  Though inbound marketing can certainly help businesses, one challenge is that in these new, emerging industries, there may not be strong existing demand for the offering (people are not searching for those products, because nobody knows about them yet).  On the other hand, mainstream businesses like lawyers and interior designers often have very strong existing demand.  Inbound marketing is a great way for these kinds of businesses to connect to that existing demand and pull in customers.

 If inbound marketing works best for mainstream companies, how do you suggest they get started?  Most of them have never used inbound marketing and thus could use a few simple steps to get started.

 The best way to get started with inbound marketing is to start getting involved in the blogosphere.  Before writing the blog, it’s helpful to start finding relevant blogs in the industry and start engaging in the existing discussion.  Then, begin engaging in social media sites (LinkedIn, twitter, Facebook) and find relevant people/discussions there.  The idea is to start forging connections with those in the industry.  Then, start producing valuable content (usually a blog).  

 In today’s market business professionals and consumers are bombarded with marketing messages in everything we do, in your opinion, what can a small business and/or start-up do to ensure their message gets through to their target audience and drive them to come to your business to either learn more or buy?  

 The answer is very simple — but not easy.  Product content that is useful and interesting:  One of the common mistakes that marketers make is to believe that their customers are different than they are.  They’re not.  Just like us, our prospects hate cold calls, throw away junk mail, and ignore most advertising.  To really reach these people, we need to give them something that is valuable.  We need to create content that is compelling and will pull them in.  Websites that are nothing more than brochureware just won’t work — people ignore those.

 You are currently on your second start-up (HubSpot), what have been the biggest obstacles at the different stages of each of the two companies? 

 Each company had different challenges.  In my first startup (Pyramid Digital Solutions), the challenge was always one of resources.  The company was bootstrapped and did not raise any venture capital.  This meant that we could only grow as fast as our revenues allowed.  In many ways this was great, but it was tough because there were never enough people to pursue all of our ambitions.  At HubSpot, we have a different problem. We’ve raised significant outside funding ($33 million) and as such, have been able to hire exceptional talent consistently.  The challenge now is — to stay on top of this growth and ensure that the organization shares a common vision and maintains the culture that has made it successful so far.

You talk about maintaining the culture as HubSpot has grown, what specific steps did you take to ensure the culture did not get outstripped by the company’s growth?

 Several things:  First, we make “cultural fit” one of the key hiring criteria.  You’d be surprised at how many companies don’t have this in their list of priorities when recruiting.  We try to maintain an environment of “passionate and fun” in the office.  It’s a good work environment and it’s not possible to spend 15 minutes in the office without hearing someone laughing.  We have regular work-but-not-work activities that help people come together.  This includes a live weekly web TV show on Friday afternoons where we invite anyone from the outside to be part of the studio audience.  The idea is not to be overly serious, but not be frivolous either.  It’s not just about free beer on Fridays.  It’s about recognizing that HubSpot occupies a large part of our people’s lives and we’d be silly not to recognize that and make the environment as pleasant as possible so great people can work with other great people and do spectacular things.

How have the two start-ups differed and what key piece of knowledge from your first company (Pyramid Digital Solutions) helped you the most when launching your second business?

 The two companies were very different.  Pyramid was focused in a very niche (but lucrative) market whereas HubSpot is in a much broader and bigger market.  The big lesson from Pyramid was that in order to build a very big company, there needs to be a market opportunity to support it.  Though Pyramid was very successful, there were intrinsic limits to how big it could grow. Though I learned a lot from the experience, I always felt that I wanted to pursue larger opportunities.  So, with HubSpot, I made sure that the opportunity was large enough that I could potentially build a big, successful business.

When the CEO of a start-up and/or small business is putting together their Board, what advice would you give them and how often they and the company’s executive staff should be interacting with Board members? 

 This varies a lot based on the situation.  A common board meeting schedule is usually once every 2-3 months — particularly if the company has raised capital and has investors as board members.  The key to a functional board relationship is to ensure that there’s a good balance between standard “governance” and strategic decisions.  The board and executive team should be able to have candid discussions around company issues and opportunities.  Done correctly, the board can bring great value to the management team because there’s often a wealth of experience and wisdom.

How often do/did you interact with your Board and how important are/were they to the success of your business?

 When we first formed our board, we met about every 6 weeks.  Now we meet every 10-12 weeks.  Our board has been extremely helpful with some key issues — particularly during the early stages.  Areas where we received the most help were around marketing, sales, finance and strategy.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche?

 Today, it is critical for entrepreneurs to figure out a way to efficiently gain access to customers.  Most of the startups that I talk to don’t have issues with building a reasonably good product, they struggle with marketing and sales.  As such, my advice would be to start very, very early with inbound marketing efforts (the topic of my recent book, Inbound Marketing: Get Found Using Google, Social Media, and Blogs.  The idea is to start creating content and building a network within your target community.  This should happen well in advance of a product launch (and in fact, done correctly, can help you figure out what product to build). 

What are the key characteristics of companies that have been able to penetrate a niche, even niches dominated by another company?

 Usually, successful companies that enter a niche have a good understanding of how the existing players are failing to deliver sufficient customer value.  The key is to figure out what’s wrong with what’s out there now, make sure the problem is worth fixing and talk to as many customers as possible to figure out a viable solution.  It also helps to find industries that are going through a transformation whereby the existing offerings are becoming less and less effective.  The important thing is to be realistic as to whether or not your solution is *significantly* better such that some number of customers are willing to take the risk and adopt a new product.

When you think of companies that dominate a niche, who do you think of and what do you see them doing to keep that dominating spot?

 They generally deliver a fair amount of customer value (or at least they did in the early days).  They leverage this be deepening the relationship with the customer and making switching costs higher.  Often, they find some sort of “network effect” whereby each additional customer adds value to the remaining ones.  This kind of effect can act as a major barrier to entry for new market entrants.  (NOTE: for more on this see the earlier blog interview with Ara Bagdasarian and how this “effect” played an important role in his company).

What are the biggest threats to losing that dominating position? I would assume these same threats would be the opportunities for those looking to penetrate a niche?

 The biggest threat to a dominant player is to have the level of “unhappiness” in the customer base exceed the switching costs.  If customers are unhappy enough, they will consider switching, regardless of the level of vendor “lock-in” that might exist.  The other big threat (discussed in depth in the “Innovator’s Dilemma“) is that a new market entrant can focus on a different dimension of performance than the existing players.  A good example would include Southwest Airlines.  Often, a simpler, easier product will beat out existing players (over time) despite being much worse on a primary dimension of performance that historically was important and defined the industry.  But, a new class of customer often has different needs. 

Finally, which companies come to mind who once held a niche dominating position and then lost them and why do you think they lost that position?

 One example that jumps to mind is Siebel.  They had a dominant position in the CRM industry.  However, salesforce.com entered the market with a much simpler, lower risk option.  Despite the fact that salesforce.com was not nearly as powerful and had a fraction of the features (when it launched), it was “good enough” for many companies.  Over time, the product got better and better, and salesforce.com wedged its way into significant market share. 

Please let others know about the blog and our Entrepreneurs & Small Business Leaders group on LinkedIn.  The larger we can make the group, the more helpful it can be to everyone. We are also always looking for new topics and/or people to interview for the blog, please send any recommendations to Ken Balog at ken@richnichegroup.com

This week we are going to review a new U.S. Government initiative you may not be aware of: The Department of Commerce’s new Office of Innovation and Entrepreneurship and The National Advisory Council on Innovation and Entrepreneurship.  These new programs are designed to help entrepreneurs launch and/or grow their businesses and help lead the economic and jobs recovery. 

Why is this important?  According to a study by the Kauffman Foundation, the world’s largest foundation devoted to entrepreneurism, “More than half of Fortune 500 companies were founded in recession or bear market.”  The current economic challenges have lead many Americans to look at starting their own business and for many these budding entrepreneurs, they need to understand where and from whom they can get reliable advice.  According to a Department of Commerce spokesperson, this is exactly what the new Office of Innovation and Entrepreneurism is designed to accomplish.

Here are some of the key takeaways regarding these new programs:

1. The home page for the new Office of Innovation and Entrepreneurism can be found at http://www.entrepreneurship.gov/
2. The National Advisory Council will advise the Secretary of Commerce and the Administration on issues relating to innovation and entrepreneurism and they are taking statements of interest from anyone who is interested in serving on the council.  More information is below:
3. Entrepreneurship.gov is designed to streamline the process entrepreneurs need to go through in order to find and get access to U.S. government assistance.

Recently U.S. Commerce Secretary Locke announced a new Office of Innovation and Entrepreneurship within the Department of Commerce and the launch of a National Advisory Council on Innovation and Entrepreneurship; can you tell us what these initiatives mean to someone who is either starting a business or running a small business? 

The mission of the Office of Innovation and Entrepreneurship is to unleash and maximize the economic potential of new ideas by removing barriers to entrepreneurship and the development of high-growth and innovation-based businesses.  One of its goals is to drive policies to help entrepreneurs translate new ideas, products, and services into economic growth.

The National Advisory Council on Innovation and Entrepreneurship will advise the Secretary and the Administration on key issues relating to innovation and entrepreneurship.  The Council will identify and recommend solutions to issues critical to the creation and development of entrepreneurship ecosystems that will spawn new businesses and jobs. 

For someone who would like to take advantage of these programs, how do they go about signing up/getting involved?

We plan to make entrepreneurship.gov a virtual one-stop destination for government resources, programs, information, and data for entrepreneurs.  We will post information there on new initiatives and programs for entrepreneurs.

The National Advisory Council on Innovation and Entrepreneurship will include successful entrepreneurs, innovators, angel investors, venture capitalists, non-profit leaders, and other experts on these issues.  All meetings of this council will be open to the public.

Can you give some examples of how you see entrepreneurs and small businesses utilizing these programs? 

The Office and Council will focus on identifying issues, recommending policies, and developing programs most important to entrepreneurs, such as

• Encouraging Entrepreneurs through Education, Training, and Mentoring
• Improving Access to Capital
• Accelerating Technology Commercialization of Federal R&D
• Providing Data, Research, and Technical Resources for Entrepreneurs
• Exploring Policy Incentives to Support Innovators, Entrepreneurs, and Investors.

How do these new initiatives differ from similar programs at the U.S. Small Business Administration (SBA)?   How will the Office of Innovation and Entrepreneurship and SBA work together to foster the development of U.S. start-ups and small businesses?

The Office and Council will focus on promoting and supporting high-growth and innovation-driven entrepreneurship.  The U.S. Small Business Administration (SBA) aids, counsels, assists, and protects the interests of all small businesses.  SBA has many programs (including its 14,000 counselors) that are useful for entrepreneurs.  We see SBA as a key partner in our efforts to serve high-growth entrepreneurs. 

The Advisory Council sounds like a great opportunity for an entrepreneur to learn from and interact with seasoned entrepreneurs and others that have been and are involved in launching a company; will there be multiple regional advisory councils or just a national one?  Again, how can an entrepreneur take advantage of this initiative?

The National Advisory Council on Innovation and Entrepreneurship will advise the Secretary and the Administration on key issues relating to innovation and entrepreneurship.  The Council will identify and recommend solutions to issues critical to the creation and development of entrepreneurship ecosystems that will spawn new businesses and jobs. 

We will have one national council, whose meetings will be open to the public.  Anyone interested in serving on the Council should send their resume and statement of interest to entrepreneurship@doc.gov.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche about how they can take advantage of the multiple programs being offered by the U.S. Government?

We encourage them to take advantage of the wide range of resources available through programs at the Department of Commerce, Small Business Administration, and other U.S. government agencies, which are currently accessible at entrepreneurship.gov, export.gov, trade.gov, business.gov, data.gov, and others.

Many entrepreneurs and small business people have either a real or perceived notion that getting involved in any government program will be bureaucratic and involve them having to complete massive amounts of paperwork and/or call several different people in order to take advantage of the program(s), what has been or is being set up to streamline the processes and get entrepreneurs and small business people involved quickly and easily in the new Office of Innovation and Entrepreneurship and/or National Advisory Council on Innovation and Entrepreneurship? 

Both initiatives are designed to do exactly that.   Our first step is to make entrepreneurship.gov a virtual one-stop destination for government resources, programs, information, and data for entrepreneurs.  We will post information there on new initiatives and programs for entrepreneurs as well.

This week is Thanksgiving week in the U.S. and the kickoff to the holiday shopping season.  During this week many Americans will gather with their family and friends to give thanks and I encourage all of you to reach out and thank those that have helped you get to where you are today.  It would take me hours to thank all of those that have supported me through the years but I would like to thank my wife and kids, parents and in-laws, all my family and friends and all of those that have helped my career and this blog.  I wish you all a safe and Happy Thanksgiving and holiday season!

Please remember to recommend this blog to others.  Thank you for taking the time to read this posting.

Ken & The Rich Niche Group Team

The Rich Niche Group blog interviews and enables you to hear directly from successful entrepreneurs and product managers about the steps they took to grow their businesses/products and how they were able to create, penetrate, and/or dominate their niche.  This week we interview Barry James Folsom and we’ll come to understand how he has “focused” his companies in order to grow more quickly:

Interviewee:  Barry James Folsom, serial entrepreneur. 

Why Selected:  Barry James has over 37 years of executive management and strategic marketing experience with a successful track record of growing divisions and companies rapidly into category leaders. He has played pivotal roles in the creation of 4 major market categories: PCs, Workstations, Internet Data Centers and Web Conferencing.

As a respected company leader, Barry James was Frost & Sullivan’s 2002 CEO of the Year.  He is also a frequent speaker, e.g. Ad:Tech, Media Summit, Digital Hollywood, & Digital Connections.

Barry James is CEO of Twirl TV. Twirl TV is a Social TV gateway experience to online TV for the 30M 16-to-24 year old YouTube on-demand Generation whose PC is their TV.  Twirl TV viewers have choice – from over 400 shows/6000 episodes –  as well as camaraderie with their Twirl TV friends, including chatting and watching together on their respective PCs.

I had the pleasure of partnering and working with Barry James when he was the CEO of PlaceWare (now known as Microsoft Live Meeting) which he sold to Microsoft for $200M. 

In the following interview, Barry James provides you with some insights on how he was able to come into PlaceWare and implement some changes and processes that enabled them to grow faster.  In addition, he gives us a look inside his new company, Twirl TV, and how it is changing the way young adults access, watch and interact with their favorite TV shows.  During the interview, Barry James brought up several points and ideas about what it takes to solidly grow your company.  The key points you’ll take away include:

1.  Look for the pain points of your target market and how your solution can solve them.

2.  If your target market is already in the customer base of an established business, leverage that business to reach and gain customer acceptance.

3.  Know what your adoption cycle is and look for ways to decrease the time it takes to get a “sold” client using your service/product.  This will have an impact on everything from customer satisfaction to cash flow!

4.  Focus, focus, focus…by being narrowly focused you can get to know your prospect’s and client’s needs better and deliver a product/service they highly value.

You are now on your 2^nd start-up, how has the start-up Twirl TV differed from when took over at Placeware?

Twirl TV and PlaceWare are different in three ways. Twirl TV is 1) a raw startup focused on consumers, specifically 16-to-24 year old viewers; 2) leverages Facebook to gain viewers; and 3) Social TV collaboration aka chatting about the latest TV episode. Whereas PlaceWare was 1) had 30+ employees and revenues as a B2B business, 2) had a direct sales force and 3) business collaboration aka how are we going to close the sale. 

What drove you to start Twirl TV and what made you believe you could evangelize the concept to end users, investors and partners? 

We saw two major trends to jump in front of and we saw major pain points for our initial target segment (16-to-24 year olds).  The two major trends are 1) episodic primetime TV is readily available online/on-demand and the content library is growing daily; and 2) advertisers need smarter ways to gain access to, and engage with, the highly coveted 16-to-24 year old demo.

For our initial target viewers of 16-to-24 year olds, they have major pain points we at our age (older adults) don’t relate to, nor grasp.  And those pain points are that their PC is their only TV screen and they have a hard time discovering relevant entertaining content to chill out to with their TV friends.

Internet/Mobile TV (ITV) is a new concept for much of mainstream America and thus getting consumers to notice Twirl TV vs. the competition has to be difficult, what is Twirl TV doing to set itself apart from the competition?

As you indicate, first there are several ‘spaces’ and thus it’s all very confusing.  There is trying to get online video content to the TV (Internet TV), there are those trying to get video to the mobile phone, and finally there are a few of us working on delivering the TV experience, and in our case a new Social TV experience, to the PC/MAC.

So how do we set ourselves apart from the competition?  First, by being very focused on our initial target market of 16-to-24 year olds, we can leverage Facebook in many ways to deliver a Social TV experience with the few friends that are into TV with them.  So out of say 500 Facebook friends, we only expect our viewer to have 3 to 7 Twirl TV friends that they share their passion for say ‘Family Guy’ with.

Of course we will be compared to Hulu as our competitor, yet we actually focus on who are meta-competitor is and that is user generated content.  Why?   Because that’s where our target spends most of their video viewing time!  At a higher level, the entire TV industry has to come together collectively to help deliver compelling entertainment to this demo so they start watching more TV, not less, than the prior generation did.

In the end what really sets up apart is that Twirl TV has nailed what this demographic loves to do – socialize around their favorite TV episodes with their Twirl TV friends and that we are the only ones ‘who get them’.

When evangelizing the business, I have found many entrepreneurs have the same pitch for each audience.  Can you share your experience and the need to different pitches for each target audience (investors, partners, end-users)?

At the end of the day, the pitch has to answer for each audience “what’s in it for me”????  For business end-users, does it improve productivity, increase revenues or decrease costs?  For partners, does working with you gain us any competitive edge, increase our servable markets or open up a new market we can’t reach? For investors, if the opportunity really exists, can this team execute on winning major market share both effectively and efficiently so I get a 10X return on my money?  (And it’s worth noting today, many financial investors see today’s stock market having the potential to deliver a 5X return at much less risk than venture investing).

What were the biggest obstacles you ran into at the different stages of Placeware’s growth and how did you overcome them?  Are you seeing any of these same issues at Twirl TV?

There were three stepping stones (or obstacles we climbed) to get to success.  First was converting the emphasis from technology and features to nailing the experience and having a rock solid service.  That was a major change in values! Second was really understanding our sales cycle AND our adoption cycle (two vastly different loops).  Make sure a senior person is assigned full time to owning the adoption cycle of your users/consumers. Our analytics on our adoption cycle lead to major process/structural changes that improved adoption immensely as well as increased our sales!  Third, as you grow, the sales team collectively will ‘justify’ going off in several different directions.  It’s important to remember your size – we were $35M on the way to $50M in revenues, and we kept our focus and did not start a second product line.

At one point Placeware became known as a leader in the web conferencing/webinar niche. Once in that position, what did you set-up so that you stayed in that leadership position?  What were you doing different than others?

PlaceWare definitely owned the large scale webinar segment of the market.  Our competitor WebEx did a great job in the Small/Medium Enterprise market around small meeting collaboration.  We extended our lead in the F1000 niche with a strong secure service that the financial services industry came to deeply trust in time.

 Ken:  Having worked with PlaceWare from almost its inception, I want to add a little to what Barry James has pointed out:  When PlaceWare first came out of Xerox’s Parc Research Lab, it was an extremely feature rich web conferencing application, over time PlaceWare narrowed the features to the most widely used and earned their customer loyalty and new customers by providing a great experience coupled with exceptional new customer training and support.  This last part was a key factor during this time as web conferencing and webinars were still a new concept for most companies and individuals and the training was a key to getting client/partner buy in.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche?

Simple to say, very hard to do in practice:  The more narrow you focus your initial market, really really narrow, the larger your market actually is!! Yep, re-read that.  Counter-intuitive you bet.  Because when you are narrowly focused, you drill down 3 to 5 layers of detail in knowing your customer to really deliver specific value to that target vs. being generic (and feature rich) but not delivering the core – if you take this away, I will do you bodily harm – VALUE to that target.

Thanks for the insights Barry James!

When pitching your business to venture investors, sharing a well designed financial model is very important!  Why?  Because how a financial model is designed helps investors learn some things about you and your business:  it provides insights into how you think about your business, helps clarify what are the main assumptions that drive it and also implicitly sends messages about how you are approaching the business.  Is this obvious?  Not if you look at the inconsistent quality of financial models we see every day.  For some entrepreneurs, it is almost like an afterthought.   So I thought about creating a list of things that entrepreneurs and managers need to keep in mind as they design a model for their business.  This advice applies to young startups as well as established or even public companies.

1. Keep it simple.  This is most important.  You are into all the details of your business.  You really like to be on top of everything.  And might be tempted to create a model that covers every eventuality and every variable.  Don’t.  The purpose of a financial model to be shared with investors is to get them excited about your business.  You may have budget spreadsheets that go into a lot of detail.  But the place for that complexity is in your back office, not the model you share with investors.  Think of the model as a way to tell the story of your business.  It should be easy for someone to follow and understand.  This requires effort and time and you need to put in the effort.  Examples?: make sure you use a format that is easy to follow, don’t have too many unecessary sheets in your file, clearly state and label the assumptions vs the calculations, don’t create too many assumptions/variables if they are not consequential to the business; emphasize the appropriate time period for your business (mothly, quartrely, yearly).

2. Build bottoms-up/ validate top-down. This is especially important for startups or early stage businesses.  I have seen projections that start with a huge market and then a revenue plan that is driven by an assumption of market share: “The market for this service will be $2BN in 2011 and if we get 2% of that market, which I think we can, we will be a $40MM business.”  That is an instant loss of credibility.  You need to build a revenue and cost plan based on actionable assumptions that you control and can demostrate.  That is what I mean by bottoms-up.  You then need to revisit it and ask yourself whether the numbers, esp. the later year numbers make sense top-down, i.e. Is the market penetration by number of customers believable?

3. Altitude is important. This is closely related to the 1st point.  Make sure you can see the forest and not just the trees.  You need to know what level of detail is important to your audience.  Understanding how much ink toner you are going to use is not relevant unless you are in the publishing industry.  The level of detail has to be relevant to what your investor is trying to understand.  Most likely whether the business has potential, can it grow fast, be profitable or require too much capital; not whether you can predict the travel budget of your salesperson in year 5.  You model also needs to be relevant to the stage of your business.  At the stage of an idea, you should only have general assumptions around key items.  Not things you can’t predict that are irrelevant.  Creating too much detail not only makes it hard to understand your business; it also says you are not in touch with reality, so make sure you “fly” at the right level.

4. Find the key drivers. Your financial model is not a crystal ball into the future.  And investors are not asking you to predict the future.  What they want to understand is what drives your business.  What will accelerate or slow down your business, what will make it more profitable or less capital intensive?  In every business there are a few numbers that business performance is most sensitive to.  The most important thing you can do with your model is help identify those things that drive your business: the key drivers.  Is it sales conversion, number of customer calls per sales person, cost per widget by volume, growth in demand, etc?  Understanding and clearly explaining what those are has a double bonus: it helps investors understand your business and also sends the message that your are on top of your business.  Both build trust and confidence in investing.

5. Well spaced bread crumbs. My partner Scott wrote a blog entry about this so I will just point to it here. You need to help investors understand the story of your business.  You need to guide them so that they stay engaged and interested.  You need to make it easy.  Here is a practical example: create a powerpoint presentation to explain your business model.  One of the companies we looked at recently came prepared with a presentation that highlighted all their main assumptions, compared those key assumptions to other competitors and highlighted why they thought they were conservative and reasonable in their projections.  That made it a lot easier to follow and significantly shortened the amount of time we would have to spend on due diligence.

More info on New Atlantic Ventures’ bog can be found at http://navfund.com/blog.

This week we are taking a break from the normal interview of an entrepreneur to answer a question we frequently get at The Rich Niche Group.  While there are several ways to answer this question, we have boiled it down to 5 skills which we have seen lead to a more effective leader and company.  The 5 skills are:

1. A passion for providing an extraordinary customer experience and an understanding of your client’s and prospect’s problems.
2. An unwavering focus on your core strengths and using those to solve your client’s and prospect’s problems.
3. Being a source of innovation for your clients and partners and a leading innovator in your market.
4. An understanding of finance and financial statements. 
5. Company culture plays a very important role in the success of your business.

Let’s examine each of these and look at some examples how possessing these skills have aided in a company’s growth.

Passion for Extraordinary Customer Service

We all have personal examples of working with and buying from companies that treat us well even if they are higher priced than their competitors.  Smart leaders not only know this, they make it a central part of their company’s philosophy.  Simple things such as calling each new client and listening to their feedback or sending each new client a “welcome to the family” gift, as well as, setting up customer service so that the company can get quick and needed feedback on what it needs to improve and move customer service from just being a “complaint department” to being a strategic part of the organization.  John Goodman, Vice Chairman and co-founder of TARP World­wide, in his new book Strategic Customer Service: Managing the Customer Experience to Increase Positive Word of Mouth, Build Loyalty and Maximize Profits, shows how successful companies use customer service as a “catalyst,…making the organization more proactive, accelerating responsiveness, and boosting its effectiveness.”  John also points out the financial impact good and/or bad/no customer service can have on an organization.  In the coming weeks, we will have John as one of our interviewees.  

Here’s an example of an executive providing great customer service: Recently my wife and I stayed in a hotel and during our stay we had a small problem with our room.  Since we were there just one night, we did not report it but I did complete the comment card to make them aware of the issue.  A few days later, I received a call from the hotel’s General Manager asking for more details and comments on our entire stay.  Next time we’re Ft. Lauderdale, his customer service will earn his hotel a return visit.  As John Goodman points out, strategic customer service is applicable in every market and impacts every department within an organization.  Successful business leaders understand this and ensure customer service plays a central role in every decision made.

Unwavering Focus on Your Core Strengths

David Packard, co-founder of Hewlett-Packard, once said “A great company is more likely to die of indigestion from too much opportunity than starvation from too little.”  Companies of all sizes tend to lose focus at different points of their evolution (Successful companies regain it quickly).  Some will say they are “re-inventing” themselves or “innovating” but if they are doing these things without regard to the company’s core strengths, they will most likely fail.

Many start-ups and small businesses continually chase “one-offs” and justify them by saying they provide revenue and while this may be true, it takes away precious resources that are needed to move the company forward and normally is not a service that can be easily duplicated for other clients or prospects.  As your company grows, the need to focus becomes more challenging as current clients ask you and/or your sales reps to do a “little more” or “can you provide us…”  It is hard to say no when clients are willing to pay you to do something, but in most instances that is exactly what you must do.  How do you know when to say no?  Ask yourself these questions:

1. Is the service/product being requested an enhancement to our core service/product or something totally new?
2. If it is an enhancement, will other clients be able to understand the enhancement, are they interested in it and willing to buy from you?
3. If others clients are interested in it, can we add the enhancement to our service/product with our current resources or do we need to bring in additional resources?
4. Will the enhancement add value to our current offering and/or enable us to differentiate our product from that of our competitors?
5. Can I support the enhancement?
6. Will our ROI (return on investment) meet our margin requirements?

Recently I asked Peter Wakeham, the founder and former CEO of World Investor Link (WIL) which he sold in 2006 and is now known as PrecisionIR Group, his thoughts on how a company can be successful and penetrate and dominate its niche.  Peter said, “I do not think one can describe “Niche” better than “differentiation through focus” but the basics of strategy continue to apply regardless. WIL achieved differentiation through focus on i.) retail investor segment and ii.) annual reports.”  Peter also talked about focusing on the company’s core strengths by developing mutually beneficial partnerships with leading financial service organizations which “provided significant competitive advantages and blocked other entrants into the market”, as well as, “operational efficiencies…which no other competitor could match without significantly reducing service standards.”  Not just a focus on the company’s core strengths but also a passion for extraordinary customer service, no wonder Peter and his team were successful.

Source of Innovation

Being a source of innovation for your clients and partners and a leading innovator in your market is a key trait of companies that have penetrated and/or dominate their niche.  Back in 1986 while in college at The Ohio State University (Go Bucks!), I had an international business professor who had us use a draft of his upcoming book as our text book and on the opening page he wrote “Companies that fail to innovate and adapt to changing markets will be out of business by the year 2000!”  In today’s global market, innovation is a key to survival!  But innovation has to be tied to the company’s strengths and to either the company’s short or long term goals.  Innovation for innovation sake is nice but frankly of no value to your clients, partners, employees or investors and the current CEO of HP, Mark Hurd, has mandated that all projects coming out of HP’s research labs must provide economic value to the company.  In 2008 he reorganized HP Labs to “…ensure that HP is focused on groundbreaking research that addresses customer needs and creates new growth opportunities for the company.”  An example of this on the small business side comes from our first blog, where we interviewed Bob Cowan and talked about his former company American Teleconferencing Services, Ltd. (ATS) and how ATS was known for “not stealing market share but for creating new markets.”  As the head of Business Development at ATS, I can tell you this was not easy.  Every partnership, alliance and/or new product we wanted to offer HAD to be part of one of the company’s annual goals and fit within our service delivery capabilities or we had to justify the exception to the executive staff and the board of directors and get their approval before moving forward.  This made us focus on innovation initiatives that would positively impact ATS. 

Do you have an innovative new product or service being developed?  Does it tie to your company’s goals and strengths and is it something clients and prospects have given you feedback on?  If not, take a hard look at it and get moving to answer why.

Understanding of Finance and Financial Statements

In all businesses “cash flow is king” but in a start-up and/or small business it means life or death.  Every decision you and your management team makes will have a financial impact on the organization and you need to be able to see that in your reports.  Understanding the basics of finance and financial statements will enable you to quickly recognize problems, negligence, maintain the confidence of your employees, bankers, investors and board, and better enable you to evaluate the use of your limited resources.

When discussing this topic with Jerry Clarke, Chairman of the Board and retired CEO of Energy Services Group, International (ESG) – a Specialized Staffing and Business Solutions company he co-founded 26 years ago, here is what he had to say:

“The Chief Executive should be his/her company’s number one salesperson.  The CEO must not only be able to sell the company’s product or service to the customer at the Executive level, they must sell the company’s integrity, ability to succeed, including profitability and financial accountability to the financial institutions that provide banking relationships, insurance, accounting and auditing.  Additionally, the CEO must sell the company and particularly the executive element to the employees. It is improbable if not impossible at this level to be a convincing salesperson without an in-depth knowledge of finance and accounting principles.

One does not truly learn finance and accounting from a classroom or a book.  Books give you the basics and can teach the language but to understand financial statements the executive must live with the numbers.  You need to know how and where they are generated and what they mean.  Most accountants only collect data and put the numbers in the accounts that apply without any understanding of the big picture.  They press a key and a financial statement comes out, usually without any idea if the results are reasonable for that business.  The executive must have the accounting and business knowledge to examine a level one statement for reasonable results and if they see anything that is unreasonable, they must be able to examine sections of level five statements for application accuracy.

In the lifespan of every business there will arise a need for funding from external sources.  Lenders do not like uncertainty and particularly want assurance that loans or investments can be repaid.  Even though a company has a chief financial officer or controller that are CPA licensed, lenders usually require assurance directly from the CEO.  The financial world communicates with a language all their own that is typically foreign to many executives.  The CEO that does not understand and communicate in this language may as well have a sign across their forward that reads ‘I am uninformed and do not have a clue how I am going to account for your money.’  Of course this impression is not accurate but it is perceived.  This perception raises doubt and uncertainty in financiers and greatly reduces the probability of obtaining funding.  Most lenders require audited financial statements prepared by a mutually acceptable accounting firm.  Lenders used to require a “big eight” but since the consolidation of the big eight most any reputable firm is acceptable.  Accounting firms are accounting firms and not traditional businesses.  They do not understand what generates revenue or the expenses necessary to generate that revenue.  They do however know how to account for these items and the rules by which the accounting world is governed.  It is incumbent for a CEO to challenge any statement items that adversely affect the reported company’s performance.  The governing standards for accounting are “General Accepted Practices” (GAP) and “Federal Accounting Standards Board” (FASB).  The CEO does not have to quote the standards but should be aware of the existence. Let me talk about a few examples in ESGI’s life when this was very important:

In the early years of ESG, our bank required an audited financial statement from a “big eight” accounting firm.  Our in house income statement indicated a profit of approximately $300,000 but the audited statement indicated a loss of $100,000.  The difference was an investment of $400,000 that in house amortized over five years and the big eight firm expensed.  The difference between profit and loss could adversely affect the company’s ability borrow.  In the exit meeting with the big eight partner I requested, to no avail, that the investment be amortized.  When I ask if they were citing GAP or FASB as the governing body the whole situation changed.  Instantly their perception of our management changed and they saw us as equals who clearly understood the world of accounting.  The audited statement was changed to match the in house statement, we were happy, our lender was happy and our line of credit was renewed.

In another situation when ESG was in the $25 – $30 million range, we were funding operations with $500,000 of paid in capital and retained earnings with a $3 million line of credit and an additional $2 million guidance line.  (Guidance lines are not automatic funding but require bank loan committee approval.) We were awarded a $6 million short execution time (10 weeks) contract in Fl. And in all likelihood we would spend $4.5 million before any of the receivables from this contract were collected which would push us beyond the funding availability of both lines.  We prepared three flow of cash (not cash flow) scenarios which depicted best case, worst case and most probable case.  I met with our loan officer and explained the scenarios who presented them to the loan committee who in turn not only granted the guidance line but extended the upper limit to $4 million.  After the contract was completed and all receivables collected our loan officer complemented us on the presentation especially the 3 different scenarios.  He said the presentation was evidence that we completely understood the financial aspects of the business relationships.  By securing the funding for this contract we were able to grow our revenue for the year by $6 million.”

Company Culture

The knowledge that company culture plays a very important role in the success of your business is one that successful business leaders have known and have gone to great lengths to ensure the culture remains intact as the company grows.  Every company has a culture and that culture is shown in everything the company does from how it designs and implements new products and services, to how it sells, supports and bills for those products and services.  A good company culture is empowering to its employees.  They feel as if they can and do positively impact the company on a daily basis and that their personal reputation is manifested within the company’s culture.  Employees within an organization with a good culture guard that culture tightly by hiring only those that fit the culture and can make a positive impact on the entire team.   Conversely, working at a company with a poor culture is draining to the employees and they feel as if their opinions and expertise are either taken for granted and/or not valued at all.  Typically these are companies where decisions are made by one person or a small select group of people (silo decision making) with little or no input from employees, clients, partners and prospects.

A positive corporate culture starts at the top with the CEO and every executive within the organization.  New hires are not only trained to do their job they get trained about the company history and its culture.  Dharmesh Shah, Chief Technology Officer & Founder of HubSpot, as well as, co-Author of Inbound Marketing: Get Found Using Google, Social Media, and Blogs recently spoke with me about the importance of company culture within HubSpot and the specific steps they took to make sure it did not get lost as the company grew.  Dharmesh said, “First, we make ‘cultural fit’ one of the key hiring criteria.  You’d be surprised at how many companies don’t have this in their list of priorities when recruiting.  We try to maintain an environment of ‘passionate and fun’ in the office.  It’s a good work environment and it’s not possible to spend 15 minutes in the office without hearing someone laughing.  We have regular work-but-not-work activities that help people come together.  This includes a live weekly web TV show on Friday afternoons where we invite anyone from the outside to be part of the studio audience.  The idea is not to be overly serious, but not be frivolous either.  It’s not just about free beer on Fridays.  It’s about recognizing that HubSpot occupies a large part of our people’s lives and we’d be silly not to recognize that and make the environment as pleasant as possible so great people can work with other great people and do spectacular things.”  You’ll hear more from Dharmesh about being a successful two-time entrepreneur and his book, Inbound Marketing, in an upcoming interview.

Do you know what the culture of your company is?  If not, blind survey your employees and ask them what they think it is and where improvements might need to be made.

We hope you found this information helpful and if you have other traits you think a successful business leader needs to have, let us know and we’ll assemble them and add to the list.  If you like our blog, please be sure to pass it on to others.  Thanks & Make it a Great Day!