Entrepreneur’s Journey

Thank You Sir May I have Another

Musing:
Recently CurrentCo grew and we needed to fund that growth.  And while we are a profitable enterprise, all companies that grow need some type of growth capital.  In fact Inc magazine has an interesting article called "The Company That Grew Too Fast."  I've heard these stories before and I've had personal knowledge of companies that couldn't meet payroll because a client promised to pay quick, but ended up paying slow.  In fact we were in such a bind recently, and I had to come up with $100K to cover expenses from a mortgage line of credit.  Lucky it was only for 8-10 days, but if I didn't have it available we would be in trouble.  So I started looking around and asking banks how to fund things like receivables.  And mostly what I got was a "you're not big enough" and "you're too much of a risk" answer.  It took a while but our attorney eventually lead us to a bank that deals with start-ups and after we switch banks from our existing vendor, created a secure CD and equipment lease, and spent several months depositing our revenue (like clockwork), the bank finally gave us access to their structured financing department.

And boy did I feel privileged.  They looked at my business, understood the quality of our cash flows, and created a customized proposal to fund operations ... significantly fund operations, albeit collateralized by our high quality receivables.

Then I started looking at the fine print.  The bank's rate ... we'll let's just say that if I fund the company with credit cards I'll be paying less in interest.  Of course the problem is that I don't have any where near available in credit as the bank is willing to offer.  And this is the business's receivable line so it will build up the business credit.  But the terms are quite heavy and expensive and in the end it may be a questionable deal ... the problem is ...

Problem:
How can a young company grow without having to pay very high fees?  I'm sure Microsoft, Dell, and all the big players had this problem ... that's one of the reasons they went public (not the only one obviously).  But they were growing at such a fast pace that their financing options were very different from a small company growing at 65%-100% per year.  Still a good clip, but not the wunderkind type of company.

What is a good growth company to do when it needs expansion capital?  And how can you get it without paying too much?

Solution:
Well I haven't found the perfect solution yet.  And yes, I did take the revolving credit line.  However, the terms are such that I don't have to use the line if it is not necessary (I still pay a hefty setup fee), and so I will try to make sure that I won't use it.  Actually this is a typical problem in a first year MBA course (and yes we had this exact problem as a homework assignment).

The answer is simple ... well at least the academic answer is simple ... stop growing so fast.  That means focus on accumulating cash to fund operations and don't outstrip your internal ability to have a bunch of cash for when you grow.

That works well in the text books.  But my business is based around a few large customers.  And when I win one of those customers I can't turn my back because the competition will grab them, and it may be years before I'll have the chance to get back in and re-win.  And each new elephant customer can add 20%-75% to the top line.  So, stop growing so fast works in text books, but not in real life (imagine telling Google, Dell or Microsoft to stop growing so fast).

My answer is four-fold

1.)  Go out and start securing financing now for your needs 12+ months from now.  You are going to get raked over the coals.  You are a small business and unless you are the next Dell, or you have a great VC behind you who can push financing sources around, you will be viewed as a high risk and although you are the one most in need of cheap financing you will be the last one to get it.  I know it's not fair, but that's the way of the world ... deal with it.

Start talking to banks, finance companies, debt originators, angels, etc.  You probably will find that they are interested in talking to you if you have a realistic need for financing that will be collateralized with high quality customer orders.  But that is the key.  Don't just go out and try to find a $1MM line of credit secured against your good word.  It won't work.  Find out from your resources (accountant, attorney, consultants) who will start to work with you to build secured financing.  Then start the process and be prepared to walk away several times because I am sure you will get some terrible proposal (both expensive and onerous) at the beginning.  And it is going to take quite some time before you get what you need.  Don't wait until the last minute.  Last minute shopping is always much more expensive and this is definitely a place where you want to comparison shop.

2.)  Keep expanding margins.  This is something that unless you are trained in business you probably think you are doing but are not.  Most entrepreneurs I've met look at revenue, and at operations, but rarely can tell me what their gross and net operating margins are on a monthly basis, by product line and by customer type.

But margins are where you are going to get the working capital you need to fund growth without going to outside sources.  This is an exercise I learned in school, through books (including Running Money from Amazon), and through discussions with successful business people.  What is amazing is that as we started looking at margins (about 12 months ago) we have successfully been able to raise prices to existing clients, re-price our services to increase margins, and apply technology to reduce costs that directly impact margins.

What this did mean was certain things that would have been allocated to growth (i.e. advertising, new sales reps, additional marketing literature) were put on hold, and that money was spent on technology or other systems to increase margins.

But it has paid off.  Although I did get the credit line, I am now looking 12+ months out and I probably will only need it sporadically.  Without the focus (and yes, we look to increase our margins around 5-10% per quarter, and we measure them monthly, per client, per product line) we would have spent a ton more money on financing costs.

3.)  Run constant cash flow models.  This is also something that I hear preached, but is not so practiced.  Cash is king and the MBA courses prove it.  You should be running 10 week rolling cash flow forecasts.  These can be done in Excel or in your accounting tool.  Whatever, you should be able to say where you expect your bank balance to be every week for the next 2 1/2 months.  Don't be fooled into thinking you know, because if you are not projecting it, then comparing how real your projections are, you'll end up being surprised (i.e. the Christmas party required a $5K deposit that you didn't realize would drain the account).

Stop looking at profit ... look at cash flow first ... then margins (both gross and net), which should give you the P&L your looking for ... one you can fund.

4.)  And yes, stop growing so fast.  We'll this is the nasty one.  If you didn't get your funding in order 12 months ago, and you didn't keep expanding your margins, then yes, you will need to reduce the spending on sales and start collecting more in the kitty.  Otherwise you'll either lose the business (see the Inc article above), or go out of business, or some external force will slow it down for you (your suppliers, stock-outs, customers) and that type of external slowdown will be very expensive (either via moral, lost customers, reputation, late fees, etc).

See you on the wire.

Steven Cardinale

Voices in my head

Musings:
It was an interesting day: I did not work at all, but I couldn't get work out of my mind.  Everything from CurrentCo's sales pipeline (which is not nearly as full as I would like) to NewCo's new product line (that does not’t exist yet) and how everyone else seems to already have a product/web site/service that does something similar.  I have these types of days every so often.  Days in which my internal critic seems to switch on and tell me that everything is going to hell.  I don't know if you have these types of days, but as an entrepreneur I get them and they are tough to shake.

Part of the problem (I guess) is the lack of certainty in an entrepreneur's life.  Some days are great and everyone is buying, and other days suck; no one is buying and the competition is not only at the door, but they are at the dining room table having your P&L as a midnight snack.

Problem:
The internal critic.  I'm sure we all have times in which our internal critic won’t shut-up.  I tend to get these days when I see other people who are either further in their career than I am, have a more stable business or business plan (i.e. they have venture funding), or are further in a career that I'd like to have (at least the romantic version I have in my head, I'd like to have).  And today is no different.  I talked with a friend of mine who has a career that is very, very stable (although exceedingly time consuming) and will be making mid-six figures in 5-7 years ... almost absolutely.  It is times like these that I think to myself I made the wrong choice being an entrepreneur.  So the question is ... how do you get the internal critic to quiet down and when should you listen to him?

Solution: Uncertainty & Variability:  I have found there are a couple of things that help me, although they didn't do much today, so I can't say they work all the time.

1.)  Figure out how to become comfortable being uncomfortable.  That is something I have told my father, but it is more difficult to execute than as it initially seems (isn't everything worthwhile that way).  I've read and listened to all the self-help experts (and I would definitely recommend listening to Anthony Robbins and Wayne Dyer since they do have nuggets of gold in their teaching that help at these times). 

The biggest thing I've learned is to embrace uncertainty and that internal critic when it comes my way.  Basically I typically let my internal critic run wild for a couple of hours.  This tends to be a very depressing couple of hours and by the end I am usually thinking I should quit what I'm doing, go get a job and climb the corporate ladder.  Even then my internal voice tends to say that I couldn't get a job if I tried and that no one would hire me since I don't have ... or ... or ... (fill in the blanks with anything).

Basically I let myself get into a very negative space and then I write out what my internal critic says.  This way I can go through the writings later on and either come up with good solutions, or throw away what I thought as pure negative ramblings.

So now that I've got the negativity out of my system (and sometimes it takes a couple of days, not a couple of hours, but I've got to get it out), I start thinking about the uncertainty of it all: Both from a negative and a positive side.  This helps me focus on how to create more direction in my outcomes by coming up with actions that help close off the negatives (i.e. doing the "if this client left" exercise and basically doing what Benjamin Franklin used to do: plan for the worst and when the best happens be pleasantly surprised).   This helps me get control of the uncertainty and let’s me anticipate and pre-plan for problems.  And this takes some of the nervousness out of being uncertain.

From what I’ve seen there are many entrepreneurs out there that can only see the positive side of the business (i.e. every company is going to become the next Google).  I find that the negative internal critic exercise and putting in place measures to prevent failure, counters the unbridled enthusiasm that cam accompany entrepreneurship.  I’m sure investors (from angels to VC and beyond), employees, and partners want someone who can drive the enterprise through rough waters.  The internal critic and becoming comfortable with being uncomfortable help drive this point home (as my sales coach says, “the veteran sales pro thinks he’s lost until he’s won, while the amateur thinks he won until he’s lost” – more on sales in a future post).

2.) Reduce variability (personally and professionally).  This is not something I learned until much later in life.  Being an entrepreneur is about taking risk, and risk is about the possibility of failure, and failure is about the amount of time and/or resources it takes to recover to the condition prior to failure.  I didn’t used to think about risk in this way.  I used to think that risk was basically external actions that would sink my new found idea (i.e. not getting the right funding, not landing the right clients, etc).  But thinking about risk in terms of the time it takes to recover means that you must have enough resources in place to recover.

There are plenty of good books on risk (I’ll come up with a personal reading list later), but most of these books have either an academic bent to them or don’t give practical tools to help manage risk.  So the following is what I’ve learned:

* Personal Risk Reduction: An entrepreneur can be more level headed and think clearly when less of his personal lifestyle is at stake in the daily decision making of the organization.  When everything you have is tied up in the business you start thinking from a scarcity point of view (I’m an Econ guy so many of my mental models come from the world of Economics).  The scarcity model is about hording as much as possible as quickly as possible.  This is a real problem because it creates short sighted thinking and either makes the entrepreneur take cowboy style risks (i.e. let’s spend all our marketing money on the SuperBowl ad, then if we don’t get the response we projected we are sunk, but at least we tried).  Or the entrepreneur becomes scared to take any risks and becomes paralyzed.

To counteract this problem, I recommend (at least it has worked for me) that every entrepreneur start immediately crafting income streams that are not dependent upon the business.  Real Estate is great (yes it may sound like a cliché, but the Rich Dad Poor Dad model really works and I would recommend his book).  The problem is that real estate takes precious time to manage.  Basically what I have found that works for me is managed real estate (investment trusts, individually managed properties, such as NNN properties individual pieces of real estate, REITs are riskier and require more analysis than I am willing to take , etc, whatever, works for you) and I AM NOT ADVOCATING ANY PARTICULAR INVESTMENT, YOU NEED TO TALK TO AN INVESTMENT PROFESSIONAL BEFORE PUTTING ANY MONEY TO WORK. 

But you need to get income coming into your personal pocket that does not change with the fortunes of your business.  This lets you take a more balanced view of your business decisions.

This was never clearer in CurrentCo than when I had to fire a client.  When it became apparent that keeping the client would harm our reputation, I had to make the tough decision to fire a $500K/year revenue stream.  Very, very tough to do, and I would not have been able to do it if I didn’t have the security of at least some other personal revenue coming into my pocket (in the end it was the right decision, scary, but right).

* Professional Risk Reduction: This basically follows along the same lines as above, except that it is difficult for a start-up business to have multiple uncorrelated revenue streams.  What I did to manage professional risk was to keep the company as flexible as possible.  This means not investing in large facilities (either manufacturing or office space), maxing out the productivity of current employees rather than add new employees (i.e. basically keeping fixed costs as low as possible).

This “only buy what you absolutely need” / “stay as flexible as you can” / “make it easy to expand and contract” mentality has allowed CurrentCo (and hopefully NewCo) the ability to make mistakes, miss our mark and still recover (remember that is what this whole discussion is about … risk and recovery time).

I know this is a long post, and I probably need to break this up into several separate topics, but once I get going it’s hard to stop.

Hope some of the ideas are beneficial.

See you on the wire.

Steven Cardinale

Blog structure

I'm trying to find my own voice for this blog.  Basically something that feels more than just the ramblings of a madman.  Unfortunately I haven't been able to come up with any good frameworks, yet ... except the following one.  I'm not quite sure if it will work, but I'm going to try it for a while and see how it feels.  I'll only use it once in a while and trade off with my standard stream-of-consciousness writing style to see what works best.  For the structured blog, I propose the following:

Musings: Basically the back story that led me to post that day's entry

Problem: A description of the problem that I am encountering, be it from strategy, financing, sales, teamwork, internal.

Solution: An outline of the solution I have it upon.  The solution(s) I'm trying, and input from others who have had the same problems (whether it be magazine articles, blogs, news articles, or books).

I hope this will make the blog more understandable and usable than just my stream-of-consciousness.

See you on the wire.

Steven Cardinale

Truth & Entrepreneurship

I was having an interesting discussion with my father last night.  We were talking about why people do certain things and what is it about most people that causes them to be intently afraid of the truth?  You see this all the time from personal relationships to business people who consistently make poor decisions.  And as an entrepreneur I have a front row seat to this folly, since entrepreneurs tend to wear many, many hats, we get to see this fantasy/role playing behavior from all different angles.

Why am I commenting on this and what does it have to do with running and growing a business?  Well, everything.  In my discussion with my father it became evident that being accountable to the truth is one of the greatest things about being an entrepreneur.  I realized in my discussion that is why I love starting companies, because there is no room for fantasy: either you won the account or you didn't, either the money is in the bank to cover payroll or it's not, either the product works or it doesn't.  And you are the final one responsible.

Entrepreneurship is pure: Very much like Hollywood or Wall Street.  The intentions of these industries are right out there for everyone to see (Hollywood: We love you as long as the grosses don't go down, Wall Street: We love you as long as you are highly profitable ... otherwise go away).  This Truth in Entrepreneurship is what makes being an entrepreneur so great.  As the leader and business owner there is no place to hide.  No big organization where you can stuff your failings under the desk and point to Bob in the next cubicle and say it was his fault.  Even if the failings are not directly caused by you, they are still your responsibility as the driving force in the company.  "It's beautiful man" (sorry, couldn't help myself).

So what does all this truth have to do with running a company ... well that's in my next post ... Truth, Justice ... and selling the American way.

See you on the wire.

Steven Cardinale

Truth, Justice ... and selling the American way

This post is a direct result of my discussion with my father and subsequent post about Truth & Entrepreneurship.

It's the truth part that is interesting and scary all at the same and the only reason that this has any bearing on growing a company is because all entrepreneurs must be good sales people.  This is not to say that there aren't exceptions: Engineers who are extremely technically talented, but are not sales focused, but it is to say that the fast majority of entrepreneurs will be the company's initial sales force.  This is true weather you are selling to customers or investors, you need to be passionate and have the sales chops needed to convince people to do something different.

This is where the truth comes in, because you are not going to be able to sell to people if you don't understand THEIR TRUTH.  What drives them to make certain choices, and what you will need to do in order to get these people to CHANGE their focus and see things in a different light?  To see the truth of why your product or solution will help them or why your idea is the next Google.  This is not convincing them of a fallacy since you will never get any customer/investor to buy into a lie.

This has become uncomfortably clear as I have been responsible for running sales in my current company.  I have met many entrepreneurs in my time, and most of them think they can sell, but I believe that is a fallacy as well.  They delude themselves into thinking this, but it is not the truth.  Selling skills are not typically something that you are born with or something that you learn in business school (trust me I know, I've been through the Wharton School of Business).

Sales skills are something you need to cultivate and develop.  It is all about understanding the client, understanding what it will take to make them change (Fast Company has a great article on change called "Change or Die"), and what they currently believe as the truth (i.e. what is important in a product, even if is not what you believe is important ... so you better understand their truth).

The sales aspect is so difficult that we brought on a sales consultant from The Complex Sale.  They have written a great book entitled "Hope Is Not A Strategy" which talks about winning the complex sale.  When I first read the book, I thought to myself: "Simple ... common sense ... I already do all that."  And that is what I heard from most of my peers.  But that was not the truth (damn, there is that truth thing again).  The information in the Fast Company article, and the behaviors that you need to get under your skin from The Complex Sale are the necessary tools to help you close the big difficult sale ... and I am pretty confident that you are NOT doing these things on a consistent basis now.

And that is the truth.

See you on the wire.

Steven Cardinale

Baseline

Just to setup some type of baseline on who I am, where I got here, and what I'm doing, I thought I'd write a post to describe the current situation.  I will keep the names of companies and people generic to protect the innocent ... and guilty alike, so don't get aggravated when I don't give up the exact details of a deal or information.

I am currently the co-founder of a medical management company in the San Francisco bay area.  I moved up here about 5 years ago from Los Angeles (my home) to get in on the Internet action.  I joined a eRealty company that had promise but crashed and burned.  After that gig, I ended up connecting with my current business partner as my wife and I were making friends in the bay area.  He was doing some health care consulting work and we started talking about how we could create a business around the industry.

We ended up creating the company I currently run (which I'll call CurrentCo for lack of a better term).  CurrentCo is a medical management company which helps large organizations reduce their total health care costs.  Right now we focus on workers compensation and have been doing well.  My partner and I started the company with $5K and we are currently doing well with 100% increases in revenue year over year.  What all this means is that I have gotten a company off the ground with essentially nothing but will power and now I have a platform that supports me while I grow it and look at other opportunities.

There were many, many bumps in my path, and we are still a very small company with many risks.  However, we are innovative and taking on the big players.

What I am doing now, and what I will be blogging about is my path to build the next enterprise.  An enterprise with a valuation of $20MM - $50MM+, all the while nurturing and growing CurrentCo.  Most of my ideas are around Web 2.0 and the new Bubble 2.0.  I think there are many, many opportunities for the fleet footed and smart entrepreneur now.  I'm not looking for the Google, or Amazon or eBay type of opportunities (I think those have as much to due with luck as with skill ... not to take anything away from the entrepreneurs who started those companies, but the stars did align just right with those few household names).  Don't get me wrong, if I happen to get a Google type idea, I'll run with it: I just don't think I can predetermine things.

So, now you know where I've been (a little), where I am (CurrentCo with the ability to start new gigs), and where I'm going (NewCo's, with many ideas, hopefully releasing a new idea once a quarter following the Release Early & Often model).  In future posts I'll be putting up my ideas, what I'm working on at the moment, and what is happening with CurrentCo that might be beneficial to others.

See you on the wire.

Steven Cardinale

Release Early & Often

Ed Sim posted some interesting notes on his BeyondVC blog recently when he was trying to figure out the secret sauce necessary to create a winning technology company.

BeyondVC:
"1. Release early and often - It is better to release an imperfect product, get feedback, and continue evolving than trying to release the perfect product because you may never get there and run out of cash before doing so."

Steven's Comments:
This actually fits with the Innovator's Solution model by Clayton Christensen.  I read and try to follow his work religiously.  If you haven't already read the Innovator's Solution.  Go out and buy it (Amazon has it readily available).  Clayton's point is that products on the innovation curve need to be just "good enough" and not try to deliver too much functionality.  Rather they should try and deliver the RIGHT functionality to get a job done that hasn't been easily accomplished before.  I have taken this advice to heart (at least I think I have) and in my upcoming enterprises I will release many times (probably with many bugs) but at least I'll be out there getting customer feedback.  The one caveat is that I am really trying to focus on helping customers get jobs done that they otherwise would not be able to easily do.

BeyondVC:
"2. Filling the product management/marketing role early is key. Having a person who can shape the product and prioritize features by gathering the data in terms of what customers need near-term and what the market may need longer term is imperative. More often than not I find early stage companies that are engineer-driven that spend too much time on features that the market may not need. Avoid this problem early on and focus your limited resources on the right priorities."

Steven's Comments:
I both agree and disagree on this comment.  In working my current enterprise (CurrentCo) I have found out that is ABSOLUTELY TRUE that what you think you customers want and will pay for most probably WILL NOT BE what they want and will pay for.  It is difficult getting into the mind of the customer, especially if you like cool gadgets and are very engineering-like.  I am still constantly amazed at what my customers believe to be important and what they will blow off.  Being an entrepreneur and therefor the top sales dog in the pound is a very humbling experience.

With that being said, I think it is an experience that you need to have as an entrepreneur and not necessarily something that you should immediately be hiring in.  I guess if I was a VC I'd want that experience in my portfolio companies, but I also want to make sure that the entrepreneur has his vision as close as possible to the customer, and I don't think you can get that if you hire the marketing/product management guy too early.  The other problem is that an early product management team may not have been indoctrinated in the vision, and may be looking to build problems that already are solved vs. do what Clayton Christensen says: "help the customer do a job they haven't been able to easily get done in the past."

BeyondVC:
3. Sales ramp - Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins."

Steven's Comments:
Absolutely agree ... to a point.  I think it is difficult to know when you have a repeatable selling model and until you get some early adopter sales under your belt you won't have the institutional learning necessary to get up the sales curve.  We did this by pure mistake and out of necessity.  The company I currently run is 3 years old and since we have no outside capital we are just now looking for our first sales person.  However, we missed some good opportunities early on since it was just the founders doing sales/marketing/finance/engineering, etc.  We learned a lot about the customer but now must fight some entrenched players (which is hard even if they DON'T know the customer).

So my comment from my experience would be to hire smart and only hire enough sales people so they can hit their metrics.  And figure out what those metrics are early and before any hires.  That way you get the institutional learning without missing the early sales.

Hope these comments make sense.  They certainly were earned in the trial-by-fire world of start-up businesses.

See you on the wire.

Steven Cardinale

Introduction

OK, well I took the big plunge and started blogging about my experiences as an entrepreneur.  Actually it is a bit nerve racking, since in the past I have always done things and taken chances in private.  Now, I'll be doing it in public, completely out in the open where everyone can see my brilliant moves and moronic mistakes.

I decided to start writing this blog since as I am going about my daily life, I am discovering many unique truisms and points of view about building a business.  That is what this blog is about.  A day-to-day journal of my journey as an entrepreneur.  I intend on writing about the circumstances I find myself in, the learning I experience and their outcomes.

I've noticed that although I consider myself well read and educated (I have a degree in Econ from UCLA and an MBA from the Wharton School of Business) I am constantly learning new things from being an entrepreneur and ultimately being responsible for the well being of my ventures.  I am taking these nuggets of gold and hopefully learning to piece together a web of models that I can use to help navigate my way to success.

I look forward to putting my thoughts and experiences down and hope you will add your comments and experiences as well and once in a while a nugget of gold will drop into your hands.

See you on the wire.

Steven Cardinale