The Value Equation

Capital Options Update for Small Business Owners

You still have capital options, but the fact is that capital is now more expensive (capital is all about collateral; i.e. with banks it’s either personal guarantees, assets, and/or receivables, with investors percentage of ownership).

Because of the financial misdeeds lenders have tightened their underwriting guidelines in response to their own challenges acquiring capital. Three of the dozen firms we are currently advising have already had to deal with issues with their line of credit and extending their loans. Ephor strongly urges scenario and contingency planning before your next lender or investor meeting whether its in 2008 or 2009 (contact Ephor for a more detailed list of Do’s and Don’ts).

By definition, the “Death Spiral” is not a problem today, it’s whether your business will be a victim in 6 or 18 months – how confident are you?

Sequoia’s forecast of the “Death Spiral” for small business has many entrepreneurs cutting costs.  Prudent entrepreneurs are preparing with contingency planning, bolstering customer touches and service (a few basic Do’s and Don’ts). More importantly this opportunity is the time to steal a few star performers, evaluate corporate acquisitions, and shore up any operational deficiencies.

Email is Dead – Or At Least Being Reduced By Web 2.0 and Other Advancements

Actually, it has been dead since last year according to Slate due to a new generation of technology, tools, and the ever evolving online sophistication of users that are using portals, wiki’s, twitter, web conferencing, shared calendaring and other tools to, if not eliminate completely, at least subdue email into submission.

A few companies have banned internal emails, while others reduce the quantity of email by using portals and RSS feeds for internal emails in addition to the following:

• For basic communication why not move to instant messaging or web conferencing??
• For calendaring, what about shared corporate calendaring systems or even simple solutions like sharing your Outlook calendar.
• Note taking, group information and file sharing – Why not build a wiki around your client-prospect relationship, internal initiative or whatever you are doing? It takes about a minute to setup and the medium induces collaboration, knowledge sharing, and allows for more freedom of expression and innovation.
• CYA – I don’t have a solid alternative for this yet, any thoughts?

Collaboration, communication and even sharing files with wiki’s, portals, and other file sharing tools is secure and more reliable for getting past ISPs, corporate filters, and SPAM/virus blockers.

Still don’t believe? Think about who is not using standard email:

1. Generation Y and anybody after. Hello, Facebook, Twitter, etc.
2. Most executives use Blackberry, Palm, iPhone or equivalent anyways (each of these mobile email solutions is at or near 15 million users).

Studies vary, but general consensus found on the Web is that 30 minutes a day per employee is spent on non-business email and up to 2.5 hours per day per employee. The average corporate email account receives 18 MB of mail and attachments each day!!

Is SaaS B2B’s Web 2.0?

In much the way Web 2.0 brought about the influx of new technology around 24x7 user generated content, the SaaS market opportunity for today’s entrepreneurs revolves around creating online business service models that deliver the second “S” in SaaS; i.e. Service.

Saying the SaaS market opportunity is huge might be an understatement, it’s a $3B market today and is expected to grow 10X to $30B and 50% market share by 2013 according to Gartner. Salesforce.com alone has 50k monthly recurring paying customers and Zoho has a million users.

The benefits of SaaS have been well documented (constant improvement: frequent updates and product improvements, pay-as-you-go: fixed monthly fee per user, limited upfront investment costs: quick implementation, disperse workforce fit, guaranteed service level agreements (SLAs), integration APIs that let you integrate with existing ERP/CRM/HRIS systems or other business productivity systems increased flexibility and usability of the application, and a reduced dependence on IT).

Technology enabled business services that deliver all of the above at an affordable monthly price plus aggregate content and services will be rewarded (the markets have already rewarded public SaaS companies with a median multiple of 4.0x v. 2.5x for traditional software companies. Private SaaS valuation multiples average 2.5X).

Technorati Tags: SaaS,technology enabled service business,software as a service,valuation multiple,entreprenuer,business service model

Entrepreneurs Roadmap for Today’s Death Spiral

Lots of unrest in the business world amid the economic woes and while many are panicking (CNN for example) prudent investors and operators like Guy Kawasaki have this to say, “Don't sweat the DJIA--just keep on making, selling, and supporting good stuff.”

A controversial forecast by Sequoia Capital, which has successfully funded between $100 thousand and $50 million in hundreds of companies like LinkedIn, Netezza, YouTube, and eHarmony, entitled Sequoia Capital’s 56 Slide Presentation Of Doom spoke of the end of “Hockey Stick Funding”, a 15 year cycle back to good times, and the “Death Spiral.”

The takeaways for entrepreneurs are two-fold:

First, if hockey stick funding is indeed over, cash flow and EBIT attractive firms that have proven revenue and service models will receive funding. So some entrepreneurs will ask why would they raise capital if they have proven they can bootstrap?

The benefits of investment capital still apply:

1. Raise growth capital to take advantage of a market opportunity; and
2. To acquire competitor revenues at a discount, star performing employees, technologies and patents, and additional capabilities at their most cost-effective rate.

Second, preventing the “Death Spiral” must be a priority for all businesses and starts with:

1. Must be #1 or #2 in your niche
2. Sequoia’s Ron Conway: “Cut expenses now!” – I have seen four firms already in Houston and DFW proactively eliminate ‘C Players’ and increase “managers” responsibilities
3. Benchmark Capital: “Conserve capital” – treat as a precious commodity

A few insightful posts related to this topic:

• How do you balance capital conservation with business priorities?
• Great post here on how does this affect those raising funds now? highlights that it’s going to take longer and will cost me more (i.e. lower valuations), but will be easier for those with solid fundamentals and nonexistent for those that rely on forecast results. The business case for finding “Useful Capital” is even more applicable.
• Don’t cut your sales and marketing too much as you need that engine to balance the costs, otherwise there should be no limits to the cuts IMHO.

While these will certainly be interesting times organizations with solid fundamentals that plan and manage their risk and spend will thrive on the opportunities present in the marketplace.

20% Reduction in Manager to Employee Ratio With Effective

A colleague asked “What is the ideal manager-to-employee staff ratio?”

The problem is that organizational structure rarely follows strategy. If a company is in fast-growth mode then 1:11 ratio to ensure effective onboarding, training, and goal management make sense and cents.

For steady growth the manager-to-employee staff ratio depends on the “Span of Control”; i.e. how many employees can a manager effectively oversee. The general rule is 1 supervisor for every 6 to 11 employees depending upon the industry manager's skill and experience (according to the US Census it is 1:9.5) across the US. 

Without regular a) supply and demand workforce planning, b) performance reviews and goal setting, and c) a management scorecard process hires and promotions are made on the wrong criteria and thus the manager-to-employee staff ratio is typically 20 – 40% higher.

For mid-market enterprises (i.e. not global and not a startup) I readily found this benchmark information online:

     -  For professional services firms multiply the ratio by a factor of 30%
     -  1 manager for every 15 inside sales / call center employees
     -  1 HR Admin FTE for every 100 employees up to a thousand employees 

RPO – Recruiting Process Outsourcing Investment Factors

RPO has been a hot sector for years, at least since the Pinstripe funding in 2005;  although the current economic woes may force consolidation or a move to provide a more holistic service offering that is recession proof (an RPO value-proposition that includes vendor management services and technology/reporting for example). 

We went on the record with our RPO trends in Q4 of 2007 which can be downloaded here: http://www.ephorgroup.com/sitemap.asp

Our forecast was based on a study we conducted on behalf of a private equity firm that had set aside $40M to invest in the HRO/HCM space.  The research revealed a a variety of mid-market players (9 with Technology Platforms, 30 services focused, and 33 with niche client concentrations and at least 9 employees). 

Based on this research the attributes needed to deliver on the RPO value-proposition (which the RPO Association states as: “RPO exists because of the need for higher quality, lower costs, and better speed to desired results in the staffing and recruiting functions.”) are the following:

     I.    Customer Acquisition Model below 20%
     II.   Niche/Industry Sector Client Concentrations
     III.  Holistic Customer-Centric Solutions Offering including: 
               a) Services Delivery Model; and
               b) Pricing Model 
     IV.  Technology &/or Reporting Platform.

Only a select handful of the mid-market providers are working to provide all of these attributes.

Marketing Best Practices

Ephor will be speaking at the Fourth Annual Marketing Excellence Luncheon, “SPEAK LOUD: small budget Marketing Secrets You Can Afford” later this month.  Specifically, we will cover the following marketing effectiveness best practices:

1. Segmentation Rules – Cost-Effective Targeting and Profiling
2. Influence Customer’s Buying Criteria and Process – Education and Nurturing
3. Highly Define the Value-Proposition and How it Will be Ensured
4. Effective Measurement and Metrics: Internally and Externally
5. Market and Sell to Different Entities
6. “Pull Marketing” Becomes the Norm vs. “Push Marketing”
7. Always Migrating Strategically to Different Product/Service and Revenue Mix
8. Have Effective Alternative Distribution Methodologies 
9. The Brand is Known and Means Something Special and Unique
10. Business Model illustrates Matching Expense Increase to Revenue increase 

 To view event details or register go here:  http://www.houston.org/events/news/marketingexcellence/registration/

 
In lieu of this event we’d like to share a few Ephor downloads on related topics:

     -      Go-To-Market Planning Exercise: Marketing Best Practices 

     -      Partnering Best Practices

     -      Five Ways Ephor Grows Your Business  

     -      Corporate Development Revenue Acquisition Plan

Capital Options - What Not To Do

CNN’s Money had a funny article on funding options for emerging businesses that included 8 sources of capital: Grants, Venture Capital, Credit Cards, Angels, Factoring, Friends and Family, Microlenders, and Credit Unions. 

Of course startups must do whatever it takes to get off the ground, but we see many make crippling decisions that they cannot recover from. 

While all businesses need cash to capitalize on great market opportunities; founders should only raise capital when a “happy ending” for all shareholder’s has been created.  Many firms pick Inappropriate times to raise capital:

1.    When you need cash – The majority of fundings come in times when cash is needed most so ownership buys capital at its most expensive point. Sun-Tzu said “The victorious only seek battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory.”
   
2.    To end shareholder disputes – Negotiating from a position of strength means aligning all constituencies towards a shared vision. Many times, additional cash is raised to enable earlier investors to exit, but excludes these investors from future risk and reward.
   
3.   When cash is available – Without a shared vision among all stakeholder’s and a defined business model capital is treated as a commodity which erodes the long-term value of the business.
   

If a business does not need to grow to claim customers and market position before competitors or substitutes then the industry sector is most likely unattractive to investors and thus non-investable by institutional investors (private equity and venture capital).

Today, funding is available for emerging firms in technology and high profile service industries such as outsourcing, human capital, marketing, and healthcare with proof-of-concept customers and a repeatable and scalable business model.

Ten Workforce ‘Star Performer’ Attributes of a Perform-Based Technology Enabled Service Business

1. Results Oriented – Mediocrity is Not Accepted; Accept Nothing Short of Improvement.  
2. Set High Expectations of Themselves and All Others - Exhibit a Sense of Pragmatic Urgency.         
3. The Customer is #1 - “No Ego’s” and Blame is Not Accepted.
4. Effective Change Agents - Flexible and Nimble: Always Searching for Better Methods.
5. Process Champions - Not Event Oriented: Process to Measurements and back to Process Optimization.
6. Assertive Decision Makers - Decision Making Occurs as Close to the Customer or Worker as Appropriate, Assertive in Handling Difficult Situations and All Problems are Employee “Owned” (i.e. Not the Organization's problem).
7. Externalists – Have  a Perspective of  the Industry and Players.       
8. Revenue Enhancers –Always Selling and Seeking More Revenue Per Customer.  
9. Resource Sharers – Team Knowledge is the Most Important.
10. Are Focused – Exhibit Specialization “Pockets” of Expertise and Are Not “All things to all people.”

In all of the value-creating enterprises that we have been apart of where founders and employees became rich ALL of these attributes were prevalent.  

‘Star Performer’ Enterprise Attributes: Key Success Factors of Wealth Creating Enterprises

When emerging enterprises create alignment of the following three resources, capital is available and daily performance (i.e. execution) becomes the norm. 

     #1: Talented People: “A Talented Team” of ‘A’ and ‘B’ Players assembled and supported by industry thought leaders, domain experts, external advisors and strategic partners.  

     #2: Unique Business Model and Refined Processes: Financial model and the business plan validated by the following:

a.   30 Referenceable, ‘Raving Fan’, Well-Known Clients; and

b.   Market Validated Operational Scalability (i.e. less than 20% customer acquisition cost and above industry average gross profit).

3.        #3: Capital to Execute: ‘Useful Capital’ is required for growth and expansion to create exponential equity value. 

Our history and research has proven that enterprise ‘Star Performers’ attract 3 – 8 x multiples creating wealth for founders and all stakeholders.