Description
Lessons From Bootstrap To Billions
Lessons from
Bootstrap to Billions™
M k Y B i C it l Effi i t Make Your Business Capital-Efficient:
Finance can be your Strategic Weapon
Dileep Rao, Ph.D.
Entrepreneurial Finance Columnist: Forbes.com
Adjunct Professor, Carlson School, U of Minnesota
Author: Finance Any Business Intelligently®
uEntrepreneurs com™
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T i i d i f hi i l i h l i i f b
uEntrepreneurs.com™
The Learning Center for Entrepreneurs
Copyright Dileep Rao
2010
1
Transmission or reproduction of this material, in whole or in part, in any manner or form or by any
means, without the written permission of the author is prohibited.
Goal Today Goal Today
• Discuss: How to build a high-performing venture
with or w/o VC – lessons from my books:
Bootstrap to Billions™ & Finance Any Business
Intelligently®
• Link between financing, finance and business
• Overview of the webinar series
Copyright Dileep Rao 2010
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My Experience
• I’ve had the privilege to look at Entrepreneurship from
multiple sides:
• Financing 450+businesses: • Financing 450+businesses:
Equity, debt, development finance and leasing
• Managing five turnarounds for a private fund:
4 were successful
• Advising Governments, Entrepreneurs and
Corporations in New Business Development
• Teaching New Business Development in
MBA/Executive MBA programs in the U.S.,
Europe and Asia… 3-Time Teacher of the Year
• Writing books & column: Forbes.com &
wwwuEntrepreneurscom www.uEntrepreneurs.com
• Being an entrepreneur
• Studying very, very successful entrepreneurs…
only007%reach$100million Studied28 only 0.07% reach $100 million. Studied 28
• Conclusion: Doing + Studying Others gives a great
perspective of why things work or do not.
Copyright Dileep Rao 2010
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Introduction
Copyright Dileep Rao
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Bootstrap to Bootstrap to
Billions®
• Profiles & Rules from 28 entrepreneurs who built:
• World’s largest medical device company
• World’slargest consumer electronicsretailer World s largest consumer electronics retailer
• World’s second largest fastener company
• U.S.’s largest wedding invitation printer
• U S’sbiggest salonbrand • U.S. s biggest salon brand
• U.S.’s second largest online university
• & More
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Highlights Two Methods to Build
High-Performing Ventures
• High-Potential OpportunityModel…
High Performing Ventures
High Potential Opportunity Model…
SV VCs
• High PerformanceEntrepreneur “Rest • High-Performance Entrepreneur Rest
of Country” Model
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High-Potential Opportunity Model:
Sili V ll VC
• Most widelyknown
Silicon Valley VCs
Most widely known
• Predicting/financing/developing Home
Runs: Google
• Product/Service: Strongcompetitive • Product/Service: Strong competitive
advantage
• Industry: Emerging, high-growth, high-
potential potential
• Management: Experienced, Expensive
Team
M I t illi • Money: Invest millions
• Grow fast and exit via IPO or Strategic
Sale
• Key for entrepreneurs: VCs demand
control to change management team and
structure financing
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High-Potential Opportunity Model:
Sili V ll VC
N b f b i Ab 600000
Silicon Valley VCs
Laying Bets on High-Potential Technologies
• Number of new businesses: About 600,000
• Number of startups financed by VCs: ~300
• Total No. of ventures financed/year: ~3,500
• VCs: Top 4% make 66% of IPO profits
• IRR of Top 25%: 32% ; Rest: 5%
• Winners Need Home-Runs: Few
• Timing: With emerging industries
• Areas: Mainly Silicon Valley
• Sample Portfolio:
• T t l f il 20% • Total failures: 20%
• Partial failures to minimal return: 60%
• Good returns: 18%
• FANTASTIC returns: 2% -- HOME RUNS
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High-Performance Entrepreneur
“Rest of Country” Model
• Opportunity: Entrepreneur’s Passion/Trends
Rest of Country Model
• Growth Limits: Entrepreneur’s Skills/ Industry
Size
• Problem: How to grow without equity?
• Why do this:
• May not be able to get VC
• May want to change management
• May want to control the financing:
Financiers can be hazardous to your wealth
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High-Performance Entrepreneur
H d hi h f i t b ild
“Rest of Country” Model
• How do high-performing entrepreneurs build
their businesses from scratch
• Process:
• Picked one state to maximize percent of
entrepreneurs interviewed
• MN – highest per capita F500 HQ in US
• Sought entrepreneurs who grew from no net
worth to $100 million+sales/ valuation
36 d d • 36 were recommended
• 3 in 90s; unable to participate
• 2 made unreasonable demands
• 3 did not want to be included
• 28 agreed
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How the 28 Financed
$100 MN+ Ventures?
• NONE/28 used VC at start
• 2 used after bootstrapping by entrepreneurs
• 4usedGrowth/TurnaroundCapital yearslater 4 used Growth/Turnaround Capital years later
• Angel financing was usually under $10,000
• 22/28 NEVER used VC
• DickSchulzeof Best Buy($9000) • Dick Schulze of Best Buy ($9,000)
• Richard Burke of UnitedHealth Group ($0)
• J ill Blashack Strahan of Tastefully Simple
($16,000) ($ , )
• Key Q: How do you build an $84 billion or
a $50 billion or a $140 million business a $50 billion or a $140 million business
without VC/Angels/Equity?
Copyright Dileep Rao
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11 Copyright Dileep Rao
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Key Question To Build Your
High-Performance Business: g
Capital-Efficient or Capital-Intensive?
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Capital-Efficient or Capital-Intensive?
• What is Capital-Efficient:
• Know cost of money at startup: ~60-80%/year
• Availability of money: SCARCE
• Achieve goals with less investment
• Balance customer needs and your interests
• What is Capital Intensive: • What is Capital-Intensive:
• If key advantage is money
• If competitors have tons of VC money
• If industry is growing fast and cannot be C-E
Non-Financial More control; Depends on Source:
Institutions
Keep more wealth Strategic v. Other
Financial
Institutions
More control;
Growth rate/banks
Less control;
Financiers’ record?
Capital-Efficient Capital-Intensive
Copyright Dileep Rao 2010 13
Steps if Capital-Efficient
• C-E BUSINESS STRATEGY: How to Understand
your Opportunity & Develop your Unique Advantage
for maximum value?(Horst from salons to schools) for maximum value? (Horst from salons to schools)
• C-E FINANCIAL STRATEGY: How to Sell
Efficiently& OperateEffectivelytoSatisfy Efficiently & Operate Effectively to Satisfy
Customers with Minimal Investment? (Own
distribution system for more margins and sales driver
efficiency for better products)
• C-E FINANCING STRATEGY: How to Finance to
Create Wealth & Keep it? (Horst: high margin
products/ services and high-value positioning for high p g p g f g
cash flow and controlled growth with internal cash
flow)
ild ff i O i i ? • How to Build an Effective Organization?
• How to Be a Better Leader & Dominate Competitors?
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Steps from Bootstrap to Billions
C-E
Financial Strategy:
Implementation
C-E
Business Strategy:
Unique Advantage p q g
C-E Financing Strategy
Effective Organization
B G t L d Become a Great Leader
• CE Business Strategies… Customer focused
• CE Financial Strategies… Internal
implementation
• CE Financing Strategies… Financing focused
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Q1. How to
Understand your Opportunity/Business y pp y
& Develop your Unique Advantage?
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Finding Opportunity: VCs g pp y
$$
Sales
Time
• High-potential, emerging Industries
• Superior product/service
• Have target ROI when investing
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Finding Opportunities:
Corporations
New
Products
3. New products easier 4. Higher risk
Sometimes needed
Existing
Products
1. Current markets and
products
2. New market
expansion easier.
Find right
customer segments customer segments
Current Markets New Markets
• 1 If growthrateishighandsufficient in(1): • 1. If growth rate is high and sufficient in (1):
Find resources and controlled growth
• 2. If easier to expand to new markets
• 3. If easier to expand with new products
• 4. New Products/ New Markets: Higher risk
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Finding Opportunities: High-
P f i E t Performing Entrepreneurs
Opportunity Passion pp y
No Trend 1 (3%) 7 (25%) 8 (28%)
Trends 10 (36%) 10 (36%) 20 (72%)
11 (39%) 17 (61%)
If h d b i d • If you have not started your business and are
seeking: Try Trends or Passion
f h d b i d d i • If you have started your business and are doing
poorly, may want to check whether you can add
passion or move towards trends
• If you have started and are doing well, see
corporations
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Finding Opportunity: Entrepreneurs
• Passion
– J ill Blashack Strahan: Gifts
– Gary Holmes: Real estate
– Earl Bakken: Electronics
– Dick Schulze: Consumer electronics
B bKi li N t db lt – Bob Kierlin: Nuts and bolts
• Trends
– Steve Shank: Capella (next slide)
O t it • Opportunity
– Rod Burwell: Cargill and barge covers
– Tim Doherty: Third shift
– GlenTaylor (NBA Timberwolves): Printer Glen Taylor (NBA Timberwolves): Printer
• No idea how big. Just grew and grew.
– Exactlyhowmanybusinessestheybeat tobecome#1 – Exactly how many businesses they beat to become #1
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Surfing the Trends.
• Path of highest growth. Track trends and
evaluate impacts:
• New technologies/products: PCs, Internet
• New markets: Global
• New business models, etc.: Internet
• Steve Shank of CapellaUniversity
• Knew that PCs were everywhere y
• Knew that adult education was key for
personal growth and country’s competitiveness
• Long-distance education was becoming easier g g
due to cheaper L-D calls
• Internet was an unexpected boon
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Surfing the Trends:
F B t t t Billi From Bootstrap to Billions
• Taylor: UPSExpansiontoRural America • Taylor: UPS Expansion to Rural America
• Taylor: Bridesmaids dress colors
• ITI/Auth: Wireless security technology
• Medtronic: Electronics/Batteries
• United Health: HMO Legislation
• Dahlberg: Microelectronics g
• Doherty: Employee leasing/ Temps
• Ryt-way: Outsourcing
• BI: GIsfromwar Diamonds • BI: GIs from war – Diamonds
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Steps to Design the
Right C-E Business Strategy
• Evaluatetheopportunity: What isthe • Evaluate the opportunity: What is the
VALUE you are adding? What will
customers pay more for?
• Test to determine competitive advantage
• Fail small, win big.
• Adjust • Adjust
• Is it Capital-Efficient?
• Examples from Bootstrap to Billions
• Horst: Salon vs. Schools
• Glen Taylor: Why should anyone buy from me?
• Bob Kierlin: Vending machine
• Roitenberg: Modern Merchandising (see slide)
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New Business
Opportunity Evaluation Steps
Supply (Technology) Based:
Sources: Internal/ External
Market-Trend Based:
Markets: Main/ New/ Niche
Superior Product:
Long-Term Proprietary Advantage
Segment from Heaven:
Best Segment. Size. Growth. Priority
Competitive Long TermAdvantage
Opportunity: How Good?
Pricing; Revenue & Profit Potential; Proof. Valuation; IRR
Unattractive
Competitive Long-Term Advantage
Unattractive
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Do More Business with Less Money
• Don’t assume that there is only one option.
There are many ways to the promised land
Seek a Capital-Efficient Business Strategy…
Asset-Light vs. Asset-Intensive
• Harold Roitenberg
• Selling branded consumer electronics & diamonds
• Needed volumes for good prices from vendors
• No cash to build showrooms
• Got entrepreneurs to open showrooms
• Got great prices from CE manufacturers
• NO markup on products
• Made money in catalog: $20 million/ year
• Grew to $6 billion in network sales
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Focus to Dominate
• Focus or diversify?
• Focus to dominate market: Know what you will do –
andwill not do…ING and will not do… ING
• Focus where Return >COST over the long-term
(cost is high at the start): Product/ Customer
segment/ Sales driver
“C t h t bbit t ti ” JBS • “Cannot chase two rabbits at same time”… JBS
• Earl Bakken of Medtronic:
• Developed pacemaker. Sales grew
• Developed variety of products. Losses grew – nearly
lost company
• Obtainedturnaroundcapital • Obtained turnaround capital
• FOCUSED on implantable therapeutic devices –
Cut diagnostic and lab products
• Grew to $38 billion company (market cap) and
world’s largest medical device manufacturer
• % from B2B in over industry __?
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Price to Value
• Price High-Low: Low to attract. High for
margins
• Glen Taylor
• Lower on “standard” items that can be compared
• Higher on everything else
• Roitenberg: Lower on CE; Higher on diamonds
• Tom Auth
• Reduced cost of installation by $2,000
• Higher life-time value of new customer: $1,500
• Priced to keep $2,000.
• To price higher, DIFFERENTIATE …
Based on your customers’ needs
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Summary:
Capital-Efficient Business Strategy Capital Efficient Business Strategy
• Goal: Improverevenuesandoperatingincome Goal: Improve revenues and operating income
with less assets
• Sell productsthat addvalueandmargins. Sell products that add value and margins.
Eliminate low-margin products with high asset
needs IF customers do not value them
• Focus on segments to add more value and
higher margins (with higher pricing)
• Focus on segments to sell more at less (sales
and marketing) cost
• Minimize waste. Test. Don’t gamble. (will
discuss later).
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Q2. How to
Sell Efficiently & Serve Effectively y y
To Satisfy Customers
with Minimal Investment?
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Implementing Your Strategy
B i G l
Implementing Your Strategy
Business Goals
CC--E Growth (Cash Flow based); Maximize Valuation; E Growth (Cash Flow based); Maximize Valuation;
Corporate: Control & Optimize; Acquire & Consolidate; Corporate: Control & Optimize; Acquire & Consolidate;
See where road leads See where road leads
Competitive Business Strategy
Product/Segment focus/Advantage;
S l D i & M k ti St t O ti Sales Drivers & Marketing Strategy; Operations;
Financial Projections and Financing Strategy
Financing, Launch & Monitor
PRAY PRAY
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Sales
• “Business without sales is like Hamlet without the
i ” J hS h t prince” … J oseph Schumpeter
• “43% of great salespeople like interacting with
people” From Fortune (September 29 2008) people From Fortune (September 29, 2008)
• Q: How did the other 57% become great?
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Sales in Startup Ventures Sales in Startup Ventures
• Technologists assume “sales happens”
“I have 80%of skills of good sales people” I have 80% of skills of good sales people
• Sales & “Bottom-Up Marketing”
• Not from “strategy” to tactics but from
tactics to strategy (Al Ries & J ack Trout)
• Find what works (tactics), and then develop ( ) p
the strategy from what works
• Who is in charge of sales?
Everyone wants to be in “marketing” Everyone wants to be in marketing
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Sales Drivers:
How will you get Sales?
• Types of Sales Drivers
• Retail Traffic Counts: Walk-in/ drive-
by traffic y
• Direct mail: Numbers mailed
• Sales Personnel: Sales calls & time
• Advertising: Readership counts
• Internet: Eye-balls
• Distributors: Sales force/ Retailers/ …
• Translate investment in sales driver to:
• Investment in Driver
• Prospects & Customers
• Average sale per customer by period
• Sales by Period
• Calculate Sales/Investment in Driver
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Shift Marketing
From Cost to Revenues
• Changemarketingintoaprofit center • Change marketing into a profit center
• JBS using parties to recruit
• DR using seminars to find deals
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Sell Intelligently®
• Effectively & Efficiently at low cost
• J ill Blashack Strahanof TastefullySimple J ill Blashack Strahanof Tastefully Simple
• Saw article on multi-level sales
• Knew that she could do it
• Started network of sales consultants
• Horst of Aveda: Own distribution system
• Sought distributors, but did not want to be 36
th
• Started selling through students g g
• Built retail stores as billboards – no billboard cost
• Developed exclusive image to charge more
• With success, employees became distributors –
Exclusivity
• Don Kotulaof Northern Tool
• Placed ad in magazines for men who like tools
• Tracked very ad
• Sold instruction booklet for log splitter
• Sold log splitter
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Operate Intelligently® p g y
• Make v. Buy (Assets/ Cash)
• D ’t i C C t • Don’t give away Core Competence
• Break-even levels: Fixed v. variable costs
• Flexibility: Maintain since projections
will bewrong will be wrong
• Risks: Minimize at start but keep
crown jewels
• Proprietary Advantage from Operations
• Great location: Wal-Mart
• Great model: Dell
• Location Impact: Joel Ronning
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Grow Intelligently®
• Grow to resources. Grow to market.
Grow Intelligently®
• Speed can kill. Stagnancy can fossilize.
• Tim Doherty
• Tried to push employee leasing business faster than
customers wanted to buyy
• Nearly went out of business
• Negotiated with bank; cut back marketing costs
• Grew with market and became one of largest
regional
• Bob Kierlin: 30% for cash flow – margins,
turns training turns, training
Copyright Dileep Rao
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Test:
Fail Small. Win Big.
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Common Mistake:
Total Faith in Vision/Instinct
“Planning is for wimps…
like my accountant, consultant or banker” y ,
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Can You Eliminate Risk? Can You Eliminate Risk?
• “You can try to limit your risks by not
getting out of bed. But then you could end
up with twins”
…. Some English Lord
• Can you create and keep a competitive y p p
advantage by offering more value to
satisfy customers’ needs, be more
profitable and do it with a lower
investment?
Copyright Dileep Rao
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Know your Assumptions Know your Assumptions
• Reduce risks.
• Mark Knudson of Venturi Group
• Develop the “Critical Experiment”
• Know whether product works under actual
conditions when YOU STILL HAVE MONEY IN
THE BANK THE BANK
• Gary Holmes of CSM: Mortgage banker to
knowhowtofinancereal estate know how to finance real estate
• Wanted to be a real estate owner/ developer
• Went to mortgage banking after college to learn
how financiers think
• Reduce the risk of not getting money for projects
Copyright Dileep Rao
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Monitor &Control
I lli l ® Intelligently®
Copyright Dileep Rao
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What are you doing with your What are you doing with your
cash?
Copyright Dileep Rao
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Cash Management g
• “You can trust me. I am here to help you with
your cash.”
Would you believe the above from:
Guy with ski-mask in dark alley
Government official from Washington,
DC, such as Henry Paulson, Ben Bernanke
or Tim Geithner
Investment banker from New York
Super-smart, high IQ 26-year old whiz kid
with Ph.D. in Math & Finance (also known
as “quant” and “smart money”) who has
just found the formula to make money in
the stock market
Copyright Dileep Rao
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Monitor the Dashboard.
Control the Firm.
• Identify key numbers.
Control the Firm.
• Track them regularly.
• J oel Ronning
• On 9/15 (the day Lehman croaked), Ronning knew
something had gone wrong by 10 AM g g g y
• Alerted team
• Started working on plan immediately
• Don Kotula
• Sales of each store by 10 AM
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Summary: y
Capital-Efficient Financial Strategy
• Evaluate business/implementation policies
to improve cash flow and reduce investment
• Become asset-light:
Partner vs. Own (Make vs. Buy)
• Develop Reverse Cash Flow Model:
Get paid before you have to pay
• Cash-Optimal Financial Model:
Balance Growth Rate; Margins; Inventory
& Receivable Turns
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Q3. How to Finance
To Create Wealth & Keep it?
Copyright Dileep Rao
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Finance Intelligently® Finance Intelligently®
• Right levels of debt, equity and incentives
• Use right financing sources
B k t hfl d ll t l • Banks want cash flow and collateral
• Investors want returns
• Development financiers want social benefits
• Right financing instruments: Risk and reward
• Right strategies to obtain
• Goal: Lower cost & reduce your risk
Copyright Dileep Rao
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High-Growth Venture Stages g g
$$
Sales
“Hockey Stick”
.. Slow at start
.. Faster later
What Entrepreneurs
Project!
Net Income
Time
Cash Flow before Financing
Pre-
Product
Emerging:
Sales/ Loss
Growth
Sales/ Profits
Seed/
Startup Product Sales/ Loss Sales/ Profits Startup
• “I got vision and the rest of the world’s got bifocals”
Butch Cassidy 19th Century American Philosopher
Copyright Dileep Rao
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…Butch Cassidy , 19th Century American Philosopher
What is your Cost of Money What is your Cost of Money
• Cost: Prime + 2% (with personal
guarantees) to 30% - 100% per year (VC)
based on stage
• Stages – Risk:
• Pre-Product (80 – 100% per year)
• Product ready/ Startup
• Sales/ losses
• Sales/ profits/ negative cash flow
• Sales/ profits/ positive cash flow (25+%)
• Implication: Expand in stages when cost of
money is lower and your capacity is higher
• “Precious”… Lord of the Rings
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Should you Use VC?
• VC can be Right or Wrong
1 2/100 l VC f di • 1-2/100 plans sent to VCs get funding
• 1-2/100 become home-runs
• Loss of control… You may not be CEO
• VCshavetoexit timingmaybewrong • VCs have to exit… timing may be wrong
• Be Capital Efficient: Do More with Less
C E Fi i l S i C hfl • C-E Financial Strategies: Cash flow
• C-E Financing Strategies: Financing
• But less capital may mean less competitive
• Dick Schulze: Best Buyy
• J oel Ronning: Digital River
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Capital-Efficient Financing Strategy
How to Create Wealth & Keep It How to Create Wealth & Keep It
• 1 Higher margins for higher cashflow; • 1. Higher margins for higher cash flow;
lower needs and more control
2 T t b f i i di C E • 2. Test before raising or spending. C-E
does not mean you raise less than you
need. It means you test to know the results
andraiseright amount and raise right amount
Copyright Dileep Rao
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Capital-Efficient Financing Strategy
How to Create Wealth & Keep It How to Create Wealth & Keep It
• 3. Reduce unfunded assets: Bootstrap to
Billions
• Hasse: Customers signed contract to pay for
equipment
• Hasse: Development financiers/ jobcreation • Hasse: Development financiers/ job creation
• Dick Schulze: Non-financial sources – Vendors
• Rod Burwell: Traditional to get non-traditional
• J oel Ronning: Location next to main vendor’s
warehouse; Bought at 2PM andshippedsame warehouse; Bought at 2 P.M. and shipped same
day; Paid vendor on 29
th
day; Grew to $40
million with $40,000 credit card loan
• Eric Paulson: Software vendor to carry
inventory: Highest margins
• Strategicinvestors(RichardBurke)
Copyright Dileep Rao
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• Strategic investors (Richard Burke)
Capital-Efficient Financing Strategy
H C W l h & K I
• 4. Get investors if you need them… when you
How to Create Wealth & Keep It
have clout
• J ill BlashackStrahan(Tastefully Simple)
• Partner’s garage for 3 years until cash flow g g y
• $17,000 equity +$20K bank loan
• Built $150 million company
• SteveShank(CapellaUniversity) Steve Shank (CapellaUniversity)
• Own money and partner’s to build company
• When profitable, sought VCs
• Hadchoiceof VCs Had choice of VCs
• Earl Bakken(Medtronic)
• Used garage for first 12 years
Did ll j b f d i t l • Did all jobs from design to sales.
• When NOT to Bootstrap?
Copyright Dileep Rao
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Q4. How to Q
Build an Effective Organization
Even without Resources?
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Q5. How to
B B tt L d Become a Better Leader
To Dominate your Competitors?
Copyright Dileep Rao
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And Finally…
Copyright Dileep Rao
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Next in Series of Webinars
FINANCE
1. TODAY: Make Your Business Capital-Efficient
2. Link Your Business Plan to your Financing Needs
3 FinancingNeedstotheRight Financial Structure 3. Financing Needs to the Right Financial Structure
4. Fine-Tune Financing: Find Right Sources/Instruments
5. Reduce the Agony: Learn How to Find Financing
6. After the Financing: Better Decisions & Control
BUSINESS BUSINESS
1. Proven Rules for Start-ups: From Start-up to Profit
2. Proven Rules for Growth: From Profits to Wealth
Copyright Dileep Rao 2010
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Order of Webinars
6. Capital-Efficient Business
Strategy: Unique Advantage
6. Capital-Efficient Financial
Strategy: Implementation
1-5. Capital-Efficient Financing Strategy
Effective Organization
Become a Great Leader
• C-E FINANCING STRATEGY
H t Fi t C t W lth& K it? • How to Finance to Create Wealth & Keep it?
• C-E BUSINESS/FINANCIAL STRATEGIES
• How to Understand your Opportunity & Develop your
Unique Advantage?
• How to Sell Efficiently & Serve Effectively to Satisfy
CustomerswithMinimal Investment?
Copyright Dileep Rao 2010 59
Customers with Minimal Investment?
Good Luck
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Q4. How to Q
Build an Effective Organization
Even without Resources?
Copyright Dileep Rao
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Develop the Best Team in the Industry
• Why do you need the best team?
p y
y y
• You are unlikely to have all the skills needed.
Best teamwins Best team wins
• How to recruit the best team without the
resources? resources?
• How to give them the opportunity to reach their
potential? potential?
• Key: Can they trust you to protect their
interests? interests?
• Glen Taylor: Taylor Corporation
Copyright Dileep Rao
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Q5. How to
B B tt L d Become a Better Leader
To Dominate your Competitors?
Copyright Dileep Rao
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#1 Risk #1 Risk
(Reason for Bankruptcy)
• Poor management whichincludes: • Poor management, which includes:
• Poor opportunity analysis
• Poor competitivestrategy • Poor competitive strategy
• Poor implementation strategy
• Poor execution • Poor execution
Copyright Dileep Rao
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#2 Risk #2 Risk
(Reason for Bankruptcy)
• Poor finance skills
• Not understanding financial implications
of businessdecisions of business decisions
• Poor financial policies
• Poor financingstructure sourcesand • Poor financing structure, sources and
instruments
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Become the Best Leader in the Industry
• Key factor limiting your business: You
• VCs vs. H-P Entrepreneurs regarding CEOs:
• VCs recruit CEOs by stage for experience.
• Entrepreneurs develop own capacities.
• Improve or implode: To improve potential,
b b h i d become better than your competitors and
continuously plug your weaknesses
• What does this require?
• Humility to be willing to learn
• Skills
J d H i j d ? • Judgment: How can you improve judgment?
• Gary Holmes: J oined Mortgage Bank/Bank Board
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Invest Cash Wisely: y
Zip your pockets
• Consider Every Expense as an Investment
“ h O ” – “There are NO expenses”
• Return on your investment > Cost of money
– Cost of Sales Personnel?
• Know the cost of your lifestyle benefits
– The cost of a Mercedes
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Become a ‘Numbers Person’
• Understand theFinancial Implications of
your decisions
• Understand your Financial Statements and
j i Projections:
– Don’t say “my accountant understands it”
– Home repair company
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Return > Cost etu Cost
• Know the real cost of money
• Financial
• Control
• Distractions (Multiple cooks)
• Know the real return from the money
• Value added
• Value created
• Cash flow
• Invest only in projects where
• Real return exceeds real cost
• Cash inflow >Cash outflow (and before outflow)
• You know the above for real
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Know the Impact of Money
• Capital availability/cost affects your strategy
• Availability: How much do you need?
How much can you get?
• What is your Cost of Money by Stage?
Will your decision earn more than your cost?
• How you finance can affect your risk?
Design the right financing structure based on
your type of business, stage, cost, goals, etc.
• What are the various sources of money?
Find the right ones for you
• What are the various financial instruments?
Which are right for you?
• How can you get the right financing from the y g g g
right sources and instruments?
Develop and Sell the Right Business Plan
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Benchmark Benchmark
• Pull ahead. Stay ahead.
• Bob Kierlin of Fastenal
– Benchmarked competitors
– Continuously tried new ways to help customers
– Obtained feedback from employees on how to
improve Opendoor topeopleandideas improve – Open door to people and ideas
– Soon started doing better than competitors
– Competitors tried to steal employees
– Most stayed due to great culture and package
– Once Fastenal pulled ahead, stopped going to industry
meetings since others were behind.
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Know Where Your Business is Going
• Uncertainty of outcome affects your risk. Do
you want to reduce your risk of failure?
– Test. Test. Test. Fail small. Win big.
• Monitor your business. Track your numbers.
Become a “numbers person”
– Are you really earning more than your cost?
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Become Dominant.
• Benchmark
• Team Development
• Culture: Employee motivation
• Expansion: Products/Markets/Revolutionary
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Stay Dominant
• Trends
• Acquisition
• Strategic Alliances
Pl ithth Bi B & Gi l • Play with the Big Boys & Girls
• Adapt: New times, competition, bureaucracy
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Be Humble: Know your y
‘Circle of Competence’
• Product: Develop or License (P&G)
O ti M k B (Vi t l C ) • Operations: Make or Buy (Virtual Co.)
• Markets/ Channels: Develop or Alliance
• Selection Criteria
– Impact on ROA
– Business flexibility
– Lower break-even
– When to “make”?
• Capitalize on others’ strengths to reach your
goals– but protect your crownjewels goals but protect your crown jewels
• “Define your circle of competence…
Especially the perimeter”
ff
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… Warren Buffett
Stay Flexible: Your Projections y j
will ALWAYS be WRONG!
• Get a Devil’s Advocate who will question you –
without worrying about their “pay”
• Chimpanzees and the WSJ Dart Index Chimpanzees and the WSJ Dart Index
• “Man will never reach the moon regardless of all
future scientific advances“
... Dr Lee DeForest. Inventor of the Audion tube
df h f di b 2 196 ( k and father of radio. Feb. 25, 1967. (Newsweek
1/27/97 p. 86)
• "There is no reason for any individual to have a
computer in their home“ computer in their home
... Ken Olsen, CEO, Digital Equipment ‘77.
• "Who the hell wants to hear actors talk“
... Harry Warner, Warner Bros. ... a yWa e, Wa e os.
• “Forecasting is difficult, especially about the
future” …Source unknown
S M i A l P f d Adj
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• So… Monitor Actual Performance and Adjust
When do Entrepreneurs and
Managers Fail? Managers Fail?
• Business grows and managers do not
T d h d d t • Trends change and managers do not
• Scope expands but controls do not
• I’ve got mine and you do not
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Timing for Reality Timing for Reality
• Know when to enter, expand and exit.
• Tom Auth of ITI: Exit
• Found that competitors were selling to
customers who could not pay
• Sold – peak.
• Guy Schoenecker of BI
• GIscomingback fromwar andgetting GIs coming back from war and getting
married
• Started selling diamonds
• Thenfurniturefor their homes Then furniture for their homes
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Know the Seasons: Know the Seasons:
Timing is Key
Product Application Business
Spreadsheet for PC Visicalc Lotus Excel
Internet Browser Netscape Netscape Explorer
• Enter: When the trends are favorable?
• Exit: When assets are priced to perfection
• Know how to calculate VALUE
• “Know when to hold ‘em, know when to fold
‘em” KennyRogers em … Kenny Rogers
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Pick the Right Time
Wh i th b t ti t t t • When is the best time to start your
entrepreneurial venture?
• Most HPE’s started entrepreneurial activities
between11and19 between 11 and 19.
• Few after college
• Few after two years of working
f b f f ki • Few after number of years of working
• So start doing “something” now.
• JBS… Get urgency: Know the time value of
money & the money value of time
• Plan Change of Control: Know when to exit
• Tom Auth: ITI
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Good Luck Good Luck
“ • “We all get the same amount of
luck. Some get their ice in the
winter and some get ice in the winter and some get ice in the
summer”
… Arizona Player (Gambling magazine 10/15/02 – p.11)
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Your Options Your Options
• Harvest: Runit fromFlorida • Harvest: Run it from Florida
• Sell: Right time. Right buyer.
• Go Public and Develop a Succession Plan
• Bequeath to your children: How?
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Rule #7.
Keep Your Fortune
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Key Paths to a Small Fortune y
• Start with a large one
• Trust Wall Street managers with the latest
quant formula
• Seek a money manager who really cannot
handle you now but has a spotless record
over the last 60 quarters
• Find a money manager from your country
club
• Find a money manager from your place of
worship
• Finance movies because you have great taste
• Invest in vineyards because you have a nose
• BecomeaVC withyour ownmoneybecause Become a VC with your own money because
you have great instincts
• Marry a trophy spouse
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Serve the Right Segment
• Satisfy their unmet needs
Serve the Right Segment
• Horst of Aveda:
• Startedout inasalon Started out in a salon
• Client financed his new salon
• Trained hair dressers
• Other salonownersstolethembypromising • Other salon owners stole them by promising
to pay a higher percentage
• Horst decided to sell the salon and open a
hair dressingschool andaskedsalonowners hair dressing school and asked salon owners
to send trainees
• Then opened herbal line of cosmetics to sell
throughhisnetwork through his network
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Add More Value Add More Value.
• Find the unmet need. Often undefined need.
• Glen Taylor of Taylor Corporation
– Wanted an edge
– Went to NY Bridal Shows to find colors for next
season
Orderedcolorsfrompaper makers – Ordered colors from paper makers
– Sold as “in” colors
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Use Finance as a Strategic Weapon.
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Price to Value
• What did your mother teach you?
• What do most entrepreneurs do?
• Implications of High vs. Low:
– Sales
– Assets
– Profits
– Cash flow
• ‘HightoLowvs LowtoHigh’ High to Low vs. Low to High
• Price Strategically
– LBO vs. Equity
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Waste not. Want not.
Make a lot Make a lot.
• Keep your operations efficient & effective.
• Flexibility: You will ALWAYS be wrong in your y W S g y
forecasts
• Initial investment/ Scalable: TOUGH &
EXPENSIVE to raise money for a startup
• Break-even: Keepit low; WHEN will youget Break-even: Keep it low; WHEN will you get
there
• IP/ Trade secrets – How to PROTECT?
• Quality and service: How to ensure
M i M b l WHEN b i i • Margins: May be lower – WHEN to bring in-
house?
• GlenTaylor • Glen Taylor
• Used incoming boxes for outgoing product
• Cut waste to practically zero
• Usedpaper moreefficiently Used paper more efficiently
• Minimized sales expenses by carefully picking
potential partners in each city
• Expanded geographic territory as UPS expanded
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U Fi St t i W
• Develop bottom-up, real projections for
Use Finance as a Strategic Weapon.
control and credibility.
• Dick Schulze
– When changing from small stores to warehouse-stores
– Had lost all equity; Net worth down to 0
– Vendors offered financing only because DS always
hi d j ti dibilit achieved projections - credibility
• Don Kotula
T k d l b di ( d l i ) – Tracked sales by media (ad, catalog, magazine, etc.)
– Tracked sales by each customer over lifetime
M kK d • Mark Knudson
– Critical experiment early allowed viable projections
– Financiers knew that money would not be wasted
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Avoid Common Mistakes
Faith in plan:
“I don’t need to monitor..
I have an instinct for my business.”
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U Fi St t i W
• Finance intelligently. Raise money or be rich
Use Finance as a Strategic Weapon.
• Dick Schulze
– Vendor financing for growth
• Rod Burwell
– Advance from customer for barge tops
• J oel Ronning
– Corporate alliance to startup
V d fi i f th – Vendor financing for growth
• Ray Barton
R i d ll fi f h h h – Reinvested all profits for growth rather than pay tax
• Eric Paulson
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– Vendors with highest margins to carry store inventory
Grow Right Grow Right
• What doyouwant togrow Implications: • What do you want to grow – Implications:
– Sales
– Profits
– Cash Flow
Value – Value
• How fast:
– Maximum growth rate: Cash flow & debt
Raise equity before youneedit – Raise equity before you need it.
– Don’t grow faster than ability to control
• How: Pick right strategies to grow:
Innovation: Cater tocustomers – Innovation: Cater to customers
– Execution: Become a better manager
– Acquisition: Most screw it up – Companies
looking to buy usually overpay
Surf afast Trend – Surf a fast Trend
• “A man’s just got to know his limitations”
… Dirty Harry
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Value Cash:
K R O ( h) A Know R O (non-cash) A
• Lessassets=Lessfinancing Less assets Less financing
• Less assets may = More flexibility
• But less assets may = More competitors
• Non-cash assets cannot pay the bills
(Health-care company)
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Why Financiers are Conservative
• Most new categories take off at least 3 years
after launch
Definition: “Take off: >3% of target market adopting Definition: Take off: >3% of target market adopting
each year”
• Product Launch Take-Off Years
Mutual Funds 1924 1980 56
Cell Phone 1983 1994 11 Cell Phone 1983 1994 11
Index Funds 1976 1985 9
PC 1977 1984 7
TV 1945 1950 5
PDA 1990 1996 6
WWW/B 1991 1997 6 WWW/Browser 1991 1997 6
TiVo/Digital VR 1999 2004 5
Compact Disc 1982 1985 3
Viagra 1998 1999 1
• That’s why financiers are ‘conservative’ but
developers/ champions tend to be optimistic
– “Cut sales in half; double expenses and time to reach
sales” sales
• Source: Karl Ulrich (MIT) at Allen Shockley Lecture at CSOM.
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doc_796826959.pdf
Lessons From Bootstrap To Billions
Lessons from
Bootstrap to Billions™
M k Y B i C it l Effi i t Make Your Business Capital-Efficient:
Finance can be your Strategic Weapon
Dileep Rao, Ph.D.
Entrepreneurial Finance Columnist: Forbes.com
Adjunct Professor, Carlson School, U of Minnesota
Author: Finance Any Business Intelligently®
uEntrepreneurs com™
All Right Reserved.
T i i d i f hi i l i h l i i f b
uEntrepreneurs.com™
The Learning Center for Entrepreneurs
Copyright Dileep Rao
2010
1
Transmission or reproduction of this material, in whole or in part, in any manner or form or by any
means, without the written permission of the author is prohibited.
Goal Today Goal Today
• Discuss: How to build a high-performing venture
with or w/o VC – lessons from my books:
Bootstrap to Billions™ & Finance Any Business
Intelligently®
• Link between financing, finance and business
• Overview of the webinar series
Copyright Dileep Rao 2010
2
My Experience
• I’ve had the privilege to look at Entrepreneurship from
multiple sides:
• Financing 450+businesses: • Financing 450+businesses:
Equity, debt, development finance and leasing
• Managing five turnarounds for a private fund:
4 were successful
• Advising Governments, Entrepreneurs and
Corporations in New Business Development
• Teaching New Business Development in
MBA/Executive MBA programs in the U.S.,
Europe and Asia… 3-Time Teacher of the Year
• Writing books & column: Forbes.com &
wwwuEntrepreneurscom www.uEntrepreneurs.com
• Being an entrepreneur
• Studying very, very successful entrepreneurs…
only007%reach$100million Studied28 only 0.07% reach $100 million. Studied 28
• Conclusion: Doing + Studying Others gives a great
perspective of why things work or do not.
Copyright Dileep Rao 2010
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Introduction
Copyright Dileep Rao
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Bootstrap to Bootstrap to
Billions®
• Profiles & Rules from 28 entrepreneurs who built:
• World’s largest medical device company
• World’slargest consumer electronicsretailer World s largest consumer electronics retailer
• World’s second largest fastener company
• U.S.’s largest wedding invitation printer
• U S’sbiggest salonbrand • U.S. s biggest salon brand
• U.S.’s second largest online university
• & More
Copyright Dileep Rao 2010
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Highlights Two Methods to Build
High-Performing Ventures
• High-Potential OpportunityModel…
High Performing Ventures
High Potential Opportunity Model…
SV VCs
• High PerformanceEntrepreneur “Rest • High-Performance Entrepreneur Rest
of Country” Model
Copyright Dileep Rao 2010
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High-Potential Opportunity Model:
Sili V ll VC
• Most widelyknown
Silicon Valley VCs
Most widely known
• Predicting/financing/developing Home
Runs: Google
• Product/Service: Strongcompetitive • Product/Service: Strong competitive
advantage
• Industry: Emerging, high-growth, high-
potential potential
• Management: Experienced, Expensive
Team
M I t illi • Money: Invest millions
• Grow fast and exit via IPO or Strategic
Sale
• Key for entrepreneurs: VCs demand
control to change management team and
structure financing
Copyright Dileep Rao 2010
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High-Potential Opportunity Model:
Sili V ll VC
N b f b i Ab 600000
Silicon Valley VCs
Laying Bets on High-Potential Technologies
• Number of new businesses: About 600,000
• Number of startups financed by VCs: ~300
• Total No. of ventures financed/year: ~3,500
• VCs: Top 4% make 66% of IPO profits
• IRR of Top 25%: 32% ; Rest: 5%
• Winners Need Home-Runs: Few
• Timing: With emerging industries
• Areas: Mainly Silicon Valley
• Sample Portfolio:
• T t l f il 20% • Total failures: 20%
• Partial failures to minimal return: 60%
• Good returns: 18%
• FANTASTIC returns: 2% -- HOME RUNS
Copyright Dileep Rao
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High-Performance Entrepreneur
“Rest of Country” Model
• Opportunity: Entrepreneur’s Passion/Trends
Rest of Country Model
• Growth Limits: Entrepreneur’s Skills/ Industry
Size
• Problem: How to grow without equity?
• Why do this:
• May not be able to get VC
• May want to change management
• May want to control the financing:
Financiers can be hazardous to your wealth
Copyright Dileep Rao 2010
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High-Performance Entrepreneur
H d hi h f i t b ild
“Rest of Country” Model
• How do high-performing entrepreneurs build
their businesses from scratch
• Process:
• Picked one state to maximize percent of
entrepreneurs interviewed
• MN – highest per capita F500 HQ in US
• Sought entrepreneurs who grew from no net
worth to $100 million+sales/ valuation
36 d d • 36 were recommended
• 3 in 90s; unable to participate
• 2 made unreasonable demands
• 3 did not want to be included
• 28 agreed
Copyright Dileep Rao
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How the 28 Financed
$100 MN+ Ventures?
• NONE/28 used VC at start
• 2 used after bootstrapping by entrepreneurs
• 4usedGrowth/TurnaroundCapital yearslater 4 used Growth/Turnaround Capital years later
• Angel financing was usually under $10,000
• 22/28 NEVER used VC
• DickSchulzeof Best Buy($9000) • Dick Schulze of Best Buy ($9,000)
• Richard Burke of UnitedHealth Group ($0)
• J ill Blashack Strahan of Tastefully Simple
($16,000) ($ , )
• Key Q: How do you build an $84 billion or
a $50 billion or a $140 million business a $50 billion or a $140 million business
without VC/Angels/Equity?
Copyright Dileep Rao
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11 Copyright Dileep Rao
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Key Question To Build Your
High-Performance Business: g
Capital-Efficient or Capital-Intensive?
Copyright Dileep Rao
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Capital-Efficient or Capital-Intensive?
• What is Capital-Efficient:
• Know cost of money at startup: ~60-80%/year
• Availability of money: SCARCE
• Achieve goals with less investment
• Balance customer needs and your interests
• What is Capital Intensive: • What is Capital-Intensive:
• If key advantage is money
• If competitors have tons of VC money
• If industry is growing fast and cannot be C-E
Non-Financial More control; Depends on Source:
Institutions
Keep more wealth Strategic v. Other
Financial
Institutions
More control;
Growth rate/banks
Less control;
Financiers’ record?
Capital-Efficient Capital-Intensive
Copyright Dileep Rao 2010 13
Steps if Capital-Efficient
• C-E BUSINESS STRATEGY: How to Understand
your Opportunity & Develop your Unique Advantage
for maximum value?(Horst from salons to schools) for maximum value? (Horst from salons to schools)
• C-E FINANCIAL STRATEGY: How to Sell
Efficiently& OperateEffectivelytoSatisfy Efficiently & Operate Effectively to Satisfy
Customers with Minimal Investment? (Own
distribution system for more margins and sales driver
efficiency for better products)
• C-E FINANCING STRATEGY: How to Finance to
Create Wealth & Keep it? (Horst: high margin
products/ services and high-value positioning for high p g p g f g
cash flow and controlled growth with internal cash
flow)
ild ff i O i i ? • How to Build an Effective Organization?
• How to Be a Better Leader & Dominate Competitors?
Copyright Dileep Rao 2010 14
Steps from Bootstrap to Billions
C-E
Financial Strategy:
Implementation
C-E
Business Strategy:
Unique Advantage p q g
C-E Financing Strategy
Effective Organization
B G t L d Become a Great Leader
• CE Business Strategies… Customer focused
• CE Financial Strategies… Internal
implementation
• CE Financing Strategies… Financing focused
Copyright Dileep Rao 2010 15
Q1. How to
Understand your Opportunity/Business y pp y
& Develop your Unique Advantage?
Copyright Dileep Rao
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Finding Opportunity: VCs g pp y
$$
Sales
Time
• High-potential, emerging Industries
• Superior product/service
• Have target ROI when investing
Copyright Dileep Rao
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Finding Opportunities:
Corporations
New
Products
3. New products easier 4. Higher risk
Sometimes needed
Existing
Products
1. Current markets and
products
2. New market
expansion easier.
Find right
customer segments customer segments
Current Markets New Markets
• 1 If growthrateishighandsufficient in(1): • 1. If growth rate is high and sufficient in (1):
Find resources and controlled growth
• 2. If easier to expand to new markets
• 3. If easier to expand with new products
• 4. New Products/ New Markets: Higher risk
Copyright Dileep Rao
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Finding Opportunities: High-
P f i E t Performing Entrepreneurs
Opportunity Passion pp y
No Trend 1 (3%) 7 (25%) 8 (28%)
Trends 10 (36%) 10 (36%) 20 (72%)
11 (39%) 17 (61%)
If h d b i d • If you have not started your business and are
seeking: Try Trends or Passion
f h d b i d d i • If you have started your business and are doing
poorly, may want to check whether you can add
passion or move towards trends
• If you have started and are doing well, see
corporations
Copyright Dileep Rao
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Finding Opportunity: Entrepreneurs
• Passion
– J ill Blashack Strahan: Gifts
– Gary Holmes: Real estate
– Earl Bakken: Electronics
– Dick Schulze: Consumer electronics
B bKi li N t db lt – Bob Kierlin: Nuts and bolts
• Trends
– Steve Shank: Capella (next slide)
O t it • Opportunity
– Rod Burwell: Cargill and barge covers
– Tim Doherty: Third shift
– GlenTaylor (NBA Timberwolves): Printer Glen Taylor (NBA Timberwolves): Printer
• No idea how big. Just grew and grew.
– Exactlyhowmanybusinessestheybeat tobecome#1 – Exactly how many businesses they beat to become #1
Copyright Dileep Rao
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Surfing the Trends.
• Path of highest growth. Track trends and
evaluate impacts:
• New technologies/products: PCs, Internet
• New markets: Global
• New business models, etc.: Internet
• Steve Shank of CapellaUniversity
• Knew that PCs were everywhere y
• Knew that adult education was key for
personal growth and country’s competitiveness
• Long-distance education was becoming easier g g
due to cheaper L-D calls
• Internet was an unexpected boon
Copyright Dileep Rao
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Surfing the Trends:
F B t t t Billi From Bootstrap to Billions
• Taylor: UPSExpansiontoRural America • Taylor: UPS Expansion to Rural America
• Taylor: Bridesmaids dress colors
• ITI/Auth: Wireless security technology
• Medtronic: Electronics/Batteries
• United Health: HMO Legislation
• Dahlberg: Microelectronics g
• Doherty: Employee leasing/ Temps
• Ryt-way: Outsourcing
• BI: GIsfromwar Diamonds • BI: GIs from war – Diamonds
Copyright Dileep Rao 2010
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Steps to Design the
Right C-E Business Strategy
• Evaluatetheopportunity: What isthe • Evaluate the opportunity: What is the
VALUE you are adding? What will
customers pay more for?
• Test to determine competitive advantage
• Fail small, win big.
• Adjust • Adjust
• Is it Capital-Efficient?
• Examples from Bootstrap to Billions
• Horst: Salon vs. Schools
• Glen Taylor: Why should anyone buy from me?
• Bob Kierlin: Vending machine
• Roitenberg: Modern Merchandising (see slide)
Copyright Dileep Rao
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New Business
Opportunity Evaluation Steps
Supply (Technology) Based:
Sources: Internal/ External
Market-Trend Based:
Markets: Main/ New/ Niche
Superior Product:
Long-Term Proprietary Advantage
Segment from Heaven:
Best Segment. Size. Growth. Priority
Competitive Long TermAdvantage
Opportunity: How Good?
Pricing; Revenue & Profit Potential; Proof. Valuation; IRR
Unattractive
Competitive Long-Term Advantage
Unattractive
Copyright Dileep Rao 2010 24
Do More Business with Less Money
• Don’t assume that there is only one option.
There are many ways to the promised land
Seek a Capital-Efficient Business Strategy…
Asset-Light vs. Asset-Intensive
• Harold Roitenberg
• Selling branded consumer electronics & diamonds
• Needed volumes for good prices from vendors
• No cash to build showrooms
• Got entrepreneurs to open showrooms
• Got great prices from CE manufacturers
• NO markup on products
• Made money in catalog: $20 million/ year
• Grew to $6 billion in network sales
Copyright Dileep Rao
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Focus to Dominate
• Focus or diversify?
• Focus to dominate market: Know what you will do –
andwill not do…ING and will not do… ING
• Focus where Return >COST over the long-term
(cost is high at the start): Product/ Customer
segment/ Sales driver
“C t h t bbit t ti ” JBS • “Cannot chase two rabbits at same time”… JBS
• Earl Bakken of Medtronic:
• Developed pacemaker. Sales grew
• Developed variety of products. Losses grew – nearly
lost company
• Obtainedturnaroundcapital • Obtained turnaround capital
• FOCUSED on implantable therapeutic devices –
Cut diagnostic and lab products
• Grew to $38 billion company (market cap) and
world’s largest medical device manufacturer
• % from B2B in over industry __?
Copyright Dileep Rao
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Price to Value
• Price High-Low: Low to attract. High for
margins
• Glen Taylor
• Lower on “standard” items that can be compared
• Higher on everything else
• Roitenberg: Lower on CE; Higher on diamonds
• Tom Auth
• Reduced cost of installation by $2,000
• Higher life-time value of new customer: $1,500
• Priced to keep $2,000.
• To price higher, DIFFERENTIATE …
Based on your customers’ needs
Copyright Dileep Rao
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Summary:
Capital-Efficient Business Strategy Capital Efficient Business Strategy
• Goal: Improverevenuesandoperatingincome Goal: Improve revenues and operating income
with less assets
• Sell productsthat addvalueandmargins. Sell products that add value and margins.
Eliminate low-margin products with high asset
needs IF customers do not value them
• Focus on segments to add more value and
higher margins (with higher pricing)
• Focus on segments to sell more at less (sales
and marketing) cost
• Minimize waste. Test. Don’t gamble. (will
discuss later).
Copyright Dileep Rao 2010
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Q2. How to
Sell Efficiently & Serve Effectively y y
To Satisfy Customers
with Minimal Investment?
Copyright Dileep Rao
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Implementing Your Strategy
B i G l
Implementing Your Strategy
Business Goals
CC--E Growth (Cash Flow based); Maximize Valuation; E Growth (Cash Flow based); Maximize Valuation;
Corporate: Control & Optimize; Acquire & Consolidate; Corporate: Control & Optimize; Acquire & Consolidate;
See where road leads See where road leads
Competitive Business Strategy
Product/Segment focus/Advantage;
S l D i & M k ti St t O ti Sales Drivers & Marketing Strategy; Operations;
Financial Projections and Financing Strategy
Financing, Launch & Monitor
PRAY PRAY
Copyright Dileep Rao 2010 30
Sales
• “Business without sales is like Hamlet without the
i ” J hS h t prince” … J oseph Schumpeter
• “43% of great salespeople like interacting with
people” From Fortune (September 29 2008) people From Fortune (September 29, 2008)
• Q: How did the other 57% become great?
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Sales in Startup Ventures Sales in Startup Ventures
• Technologists assume “sales happens”
“I have 80%of skills of good sales people” I have 80% of skills of good sales people
• Sales & “Bottom-Up Marketing”
• Not from “strategy” to tactics but from
tactics to strategy (Al Ries & J ack Trout)
• Find what works (tactics), and then develop ( ) p
the strategy from what works
• Who is in charge of sales?
Everyone wants to be in “marketing” Everyone wants to be in marketing
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Sales Drivers:
How will you get Sales?
• Types of Sales Drivers
• Retail Traffic Counts: Walk-in/ drive-
by traffic y
• Direct mail: Numbers mailed
• Sales Personnel: Sales calls & time
• Advertising: Readership counts
• Internet: Eye-balls
• Distributors: Sales force/ Retailers/ …
• Translate investment in sales driver to:
• Investment in Driver
• Prospects & Customers
• Average sale per customer by period
• Sales by Period
• Calculate Sales/Investment in Driver
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Shift Marketing
From Cost to Revenues
• Changemarketingintoaprofit center • Change marketing into a profit center
• JBS using parties to recruit
• DR using seminars to find deals
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Sell Intelligently®
• Effectively & Efficiently at low cost
• J ill Blashack Strahanof TastefullySimple J ill Blashack Strahanof Tastefully Simple
• Saw article on multi-level sales
• Knew that she could do it
• Started network of sales consultants
• Horst of Aveda: Own distribution system
• Sought distributors, but did not want to be 36
th
• Started selling through students g g
• Built retail stores as billboards – no billboard cost
• Developed exclusive image to charge more
• With success, employees became distributors –
Exclusivity
• Don Kotulaof Northern Tool
• Placed ad in magazines for men who like tools
• Tracked very ad
• Sold instruction booklet for log splitter
• Sold log splitter
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Operate Intelligently® p g y
• Make v. Buy (Assets/ Cash)
• D ’t i C C t • Don’t give away Core Competence
• Break-even levels: Fixed v. variable costs
• Flexibility: Maintain since projections
will bewrong will be wrong
• Risks: Minimize at start but keep
crown jewels
• Proprietary Advantage from Operations
• Great location: Wal-Mart
• Great model: Dell
• Location Impact: Joel Ronning
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Grow Intelligently®
• Grow to resources. Grow to market.
Grow Intelligently®
• Speed can kill. Stagnancy can fossilize.
• Tim Doherty
• Tried to push employee leasing business faster than
customers wanted to buyy
• Nearly went out of business
• Negotiated with bank; cut back marketing costs
• Grew with market and became one of largest
regional
• Bob Kierlin: 30% for cash flow – margins,
turns training turns, training
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Test:
Fail Small. Win Big.
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Common Mistake:
Total Faith in Vision/Instinct
“Planning is for wimps…
like my accountant, consultant or banker” y ,
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Can You Eliminate Risk? Can You Eliminate Risk?
• “You can try to limit your risks by not
getting out of bed. But then you could end
up with twins”
…. Some English Lord
• Can you create and keep a competitive y p p
advantage by offering more value to
satisfy customers’ needs, be more
profitable and do it with a lower
investment?
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Know your Assumptions Know your Assumptions
• Reduce risks.
• Mark Knudson of Venturi Group
• Develop the “Critical Experiment”
• Know whether product works under actual
conditions when YOU STILL HAVE MONEY IN
THE BANK THE BANK
• Gary Holmes of CSM: Mortgage banker to
knowhowtofinancereal estate know how to finance real estate
• Wanted to be a real estate owner/ developer
• Went to mortgage banking after college to learn
how financiers think
• Reduce the risk of not getting money for projects
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Monitor &Control
I lli l ® Intelligently®
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What are you doing with your What are you doing with your
cash?
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Cash Management g
• “You can trust me. I am here to help you with
your cash.”
Would you believe the above from:
Guy with ski-mask in dark alley
Government official from Washington,
DC, such as Henry Paulson, Ben Bernanke
or Tim Geithner
Investment banker from New York
Super-smart, high IQ 26-year old whiz kid
with Ph.D. in Math & Finance (also known
as “quant” and “smart money”) who has
just found the formula to make money in
the stock market
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Monitor the Dashboard.
Control the Firm.
• Identify key numbers.
Control the Firm.
• Track them regularly.
• J oel Ronning
• On 9/15 (the day Lehman croaked), Ronning knew
something had gone wrong by 10 AM g g g y
• Alerted team
• Started working on plan immediately
• Don Kotula
• Sales of each store by 10 AM
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Summary: y
Capital-Efficient Financial Strategy
• Evaluate business/implementation policies
to improve cash flow and reduce investment
• Become asset-light:
Partner vs. Own (Make vs. Buy)
• Develop Reverse Cash Flow Model:
Get paid before you have to pay
• Cash-Optimal Financial Model:
Balance Growth Rate; Margins; Inventory
& Receivable Turns
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Q3. How to Finance
To Create Wealth & Keep it?
Copyright Dileep Rao
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Finance Intelligently® Finance Intelligently®
• Right levels of debt, equity and incentives
• Use right financing sources
B k t hfl d ll t l • Banks want cash flow and collateral
• Investors want returns
• Development financiers want social benefits
• Right financing instruments: Risk and reward
• Right strategies to obtain
• Goal: Lower cost & reduce your risk
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High-Growth Venture Stages g g
$$
Sales
“Hockey Stick”
.. Slow at start
.. Faster later
What Entrepreneurs
Project!
Net Income
Time
Cash Flow before Financing
Pre-
Product
Emerging:
Sales/ Loss
Growth
Sales/ Profits
Seed/
Startup Product Sales/ Loss Sales/ Profits Startup
• “I got vision and the rest of the world’s got bifocals”
Butch Cassidy 19th Century American Philosopher
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…Butch Cassidy , 19th Century American Philosopher
What is your Cost of Money What is your Cost of Money
• Cost: Prime + 2% (with personal
guarantees) to 30% - 100% per year (VC)
based on stage
• Stages – Risk:
• Pre-Product (80 – 100% per year)
• Product ready/ Startup
• Sales/ losses
• Sales/ profits/ negative cash flow
• Sales/ profits/ positive cash flow (25+%)
• Implication: Expand in stages when cost of
money is lower and your capacity is higher
• “Precious”… Lord of the Rings
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Should you Use VC?
• VC can be Right or Wrong
1 2/100 l VC f di • 1-2/100 plans sent to VCs get funding
• 1-2/100 become home-runs
• Loss of control… You may not be CEO
• VCshavetoexit timingmaybewrong • VCs have to exit… timing may be wrong
• Be Capital Efficient: Do More with Less
C E Fi i l S i C hfl • C-E Financial Strategies: Cash flow
• C-E Financing Strategies: Financing
• But less capital may mean less competitive
• Dick Schulze: Best Buyy
• J oel Ronning: Digital River
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Capital-Efficient Financing Strategy
How to Create Wealth & Keep It How to Create Wealth & Keep It
• 1 Higher margins for higher cashflow; • 1. Higher margins for higher cash flow;
lower needs and more control
2 T t b f i i di C E • 2. Test before raising or spending. C-E
does not mean you raise less than you
need. It means you test to know the results
andraiseright amount and raise right amount
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Capital-Efficient Financing Strategy
How to Create Wealth & Keep It How to Create Wealth & Keep It
• 3. Reduce unfunded assets: Bootstrap to
Billions
• Hasse: Customers signed contract to pay for
equipment
• Hasse: Development financiers/ jobcreation • Hasse: Development financiers/ job creation
• Dick Schulze: Non-financial sources – Vendors
• Rod Burwell: Traditional to get non-traditional
• J oel Ronning: Location next to main vendor’s
warehouse; Bought at 2PM andshippedsame warehouse; Bought at 2 P.M. and shipped same
day; Paid vendor on 29
th
day; Grew to $40
million with $40,000 credit card loan
• Eric Paulson: Software vendor to carry
inventory: Highest margins
• Strategicinvestors(RichardBurke)
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• Strategic investors (Richard Burke)
Capital-Efficient Financing Strategy
H C W l h & K I
• 4. Get investors if you need them… when you
How to Create Wealth & Keep It
have clout
• J ill BlashackStrahan(Tastefully Simple)
• Partner’s garage for 3 years until cash flow g g y
• $17,000 equity +$20K bank loan
• Built $150 million company
• SteveShank(CapellaUniversity) Steve Shank (CapellaUniversity)
• Own money and partner’s to build company
• When profitable, sought VCs
• Hadchoiceof VCs Had choice of VCs
• Earl Bakken(Medtronic)
• Used garage for first 12 years
Did ll j b f d i t l • Did all jobs from design to sales.
• When NOT to Bootstrap?
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Q4. How to Q
Build an Effective Organization
Even without Resources?
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Q5. How to
B B tt L d Become a Better Leader
To Dominate your Competitors?
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And Finally…
Copyright Dileep Rao
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Next in Series of Webinars
FINANCE
1. TODAY: Make Your Business Capital-Efficient
2. Link Your Business Plan to your Financing Needs
3 FinancingNeedstotheRight Financial Structure 3. Financing Needs to the Right Financial Structure
4. Fine-Tune Financing: Find Right Sources/Instruments
5. Reduce the Agony: Learn How to Find Financing
6. After the Financing: Better Decisions & Control
BUSINESS BUSINESS
1. Proven Rules for Start-ups: From Start-up to Profit
2. Proven Rules for Growth: From Profits to Wealth
Copyright Dileep Rao 2010
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Order of Webinars
6. Capital-Efficient Business
Strategy: Unique Advantage
6. Capital-Efficient Financial
Strategy: Implementation
1-5. Capital-Efficient Financing Strategy
Effective Organization
Become a Great Leader
• C-E FINANCING STRATEGY
H t Fi t C t W lth& K it? • How to Finance to Create Wealth & Keep it?
• C-E BUSINESS/FINANCIAL STRATEGIES
• How to Understand your Opportunity & Develop your
Unique Advantage?
• How to Sell Efficiently & Serve Effectively to Satisfy
CustomerswithMinimal Investment?
Copyright Dileep Rao 2010 59
Customers with Minimal Investment?
Good Luck
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Q4. How to Q
Build an Effective Organization
Even without Resources?
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Develop the Best Team in the Industry
• Why do you need the best team?
p y
y y
• You are unlikely to have all the skills needed.
Best teamwins Best team wins
• How to recruit the best team without the
resources? resources?
• How to give them the opportunity to reach their
potential? potential?
• Key: Can they trust you to protect their
interests? interests?
• Glen Taylor: Taylor Corporation
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Q5. How to
B B tt L d Become a Better Leader
To Dominate your Competitors?
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#1 Risk #1 Risk
(Reason for Bankruptcy)
• Poor management whichincludes: • Poor management, which includes:
• Poor opportunity analysis
• Poor competitivestrategy • Poor competitive strategy
• Poor implementation strategy
• Poor execution • Poor execution
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#2 Risk #2 Risk
(Reason for Bankruptcy)
• Poor finance skills
• Not understanding financial implications
of businessdecisions of business decisions
• Poor financial policies
• Poor financingstructure sourcesand • Poor financing structure, sources and
instruments
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Become the Best Leader in the Industry
• Key factor limiting your business: You
• VCs vs. H-P Entrepreneurs regarding CEOs:
• VCs recruit CEOs by stage for experience.
• Entrepreneurs develop own capacities.
• Improve or implode: To improve potential,
b b h i d become better than your competitors and
continuously plug your weaknesses
• What does this require?
• Humility to be willing to learn
• Skills
J d H i j d ? • Judgment: How can you improve judgment?
• Gary Holmes: J oined Mortgage Bank/Bank Board
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Invest Cash Wisely: y
Zip your pockets
• Consider Every Expense as an Investment
“ h O ” – “There are NO expenses”
• Return on your investment > Cost of money
– Cost of Sales Personnel?
• Know the cost of your lifestyle benefits
– The cost of a Mercedes
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Become a ‘Numbers Person’
• Understand theFinancial Implications of
your decisions
• Understand your Financial Statements and
j i Projections:
– Don’t say “my accountant understands it”
– Home repair company
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Return > Cost etu Cost
• Know the real cost of money
• Financial
• Control
• Distractions (Multiple cooks)
• Know the real return from the money
• Value added
• Value created
• Cash flow
• Invest only in projects where
• Real return exceeds real cost
• Cash inflow >Cash outflow (and before outflow)
• You know the above for real
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Know the Impact of Money
• Capital availability/cost affects your strategy
• Availability: How much do you need?
How much can you get?
• What is your Cost of Money by Stage?
Will your decision earn more than your cost?
• How you finance can affect your risk?
Design the right financing structure based on
your type of business, stage, cost, goals, etc.
• What are the various sources of money?
Find the right ones for you
• What are the various financial instruments?
Which are right for you?
• How can you get the right financing from the y g g g
right sources and instruments?
Develop and Sell the Right Business Plan
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Benchmark Benchmark
• Pull ahead. Stay ahead.
• Bob Kierlin of Fastenal
– Benchmarked competitors
– Continuously tried new ways to help customers
– Obtained feedback from employees on how to
improve Opendoor topeopleandideas improve – Open door to people and ideas
– Soon started doing better than competitors
– Competitors tried to steal employees
– Most stayed due to great culture and package
– Once Fastenal pulled ahead, stopped going to industry
meetings since others were behind.
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Know Where Your Business is Going
• Uncertainty of outcome affects your risk. Do
you want to reduce your risk of failure?
– Test. Test. Test. Fail small. Win big.
• Monitor your business. Track your numbers.
Become a “numbers person”
– Are you really earning more than your cost?
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Become Dominant.
• Benchmark
• Team Development
• Culture: Employee motivation
• Expansion: Products/Markets/Revolutionary
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Stay Dominant
• Trends
• Acquisition
• Strategic Alliances
Pl ithth Bi B & Gi l • Play with the Big Boys & Girls
• Adapt: New times, competition, bureaucracy
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Be Humble: Know your y
‘Circle of Competence’
• Product: Develop or License (P&G)
O ti M k B (Vi t l C ) • Operations: Make or Buy (Virtual Co.)
• Markets/ Channels: Develop or Alliance
• Selection Criteria
– Impact on ROA
– Business flexibility
– Lower break-even
– When to “make”?
• Capitalize on others’ strengths to reach your
goals– but protect your crownjewels goals but protect your crown jewels
• “Define your circle of competence…
Especially the perimeter”
ff
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… Warren Buffett
Stay Flexible: Your Projections y j
will ALWAYS be WRONG!
• Get a Devil’s Advocate who will question you –
without worrying about their “pay”
• Chimpanzees and the WSJ Dart Index Chimpanzees and the WSJ Dart Index
• “Man will never reach the moon regardless of all
future scientific advances“
... Dr Lee DeForest. Inventor of the Audion tube
df h f di b 2 196 ( k and father of radio. Feb. 25, 1967. (Newsweek
1/27/97 p. 86)
• "There is no reason for any individual to have a
computer in their home“ computer in their home
... Ken Olsen, CEO, Digital Equipment ‘77.
• "Who the hell wants to hear actors talk“
... Harry Warner, Warner Bros. ... a yWa e, Wa e os.
• “Forecasting is difficult, especially about the
future” …Source unknown
S M i A l P f d Adj
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• So… Monitor Actual Performance and Adjust
When do Entrepreneurs and
Managers Fail? Managers Fail?
• Business grows and managers do not
T d h d d t • Trends change and managers do not
• Scope expands but controls do not
• I’ve got mine and you do not
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Timing for Reality Timing for Reality
• Know when to enter, expand and exit.
• Tom Auth of ITI: Exit
• Found that competitors were selling to
customers who could not pay
• Sold – peak.
• Guy Schoenecker of BI
• GIscomingback fromwar andgetting GIs coming back from war and getting
married
• Started selling diamonds
• Thenfurniturefor their homes Then furniture for their homes
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Know the Seasons: Know the Seasons:
Timing is Key
Product Application Business
Spreadsheet for PC Visicalc Lotus Excel
Internet Browser Netscape Netscape Explorer
• Enter: When the trends are favorable?
• Exit: When assets are priced to perfection
• Know how to calculate VALUE
• “Know when to hold ‘em, know when to fold
‘em” KennyRogers em … Kenny Rogers
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Pick the Right Time
Wh i th b t ti t t t • When is the best time to start your
entrepreneurial venture?
• Most HPE’s started entrepreneurial activities
between11and19 between 11 and 19.
• Few after college
• Few after two years of working
f b f f ki • Few after number of years of working
• So start doing “something” now.
• JBS… Get urgency: Know the time value of
money & the money value of time
• Plan Change of Control: Know when to exit
• Tom Auth: ITI
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Good Luck Good Luck
“ • “We all get the same amount of
luck. Some get their ice in the
winter and some get ice in the winter and some get ice in the
summer”
… Arizona Player (Gambling magazine 10/15/02 – p.11)
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Your Options Your Options
• Harvest: Runit fromFlorida • Harvest: Run it from Florida
• Sell: Right time. Right buyer.
• Go Public and Develop a Succession Plan
• Bequeath to your children: How?
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Rule #7.
Keep Your Fortune
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Key Paths to a Small Fortune y
• Start with a large one
• Trust Wall Street managers with the latest
quant formula
• Seek a money manager who really cannot
handle you now but has a spotless record
over the last 60 quarters
• Find a money manager from your country
club
• Find a money manager from your place of
worship
• Finance movies because you have great taste
• Invest in vineyards because you have a nose
• BecomeaVC withyour ownmoneybecause Become a VC with your own money because
you have great instincts
• Marry a trophy spouse
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Serve the Right Segment
• Satisfy their unmet needs
Serve the Right Segment
• Horst of Aveda:
• Startedout inasalon Started out in a salon
• Client financed his new salon
• Trained hair dressers
• Other salonownersstolethembypromising • Other salon owners stole them by promising
to pay a higher percentage
• Horst decided to sell the salon and open a
hair dressingschool andaskedsalonowners hair dressing school and asked salon owners
to send trainees
• Then opened herbal line of cosmetics to sell
throughhisnetwork through his network
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Add More Value Add More Value.
• Find the unmet need. Often undefined need.
• Glen Taylor of Taylor Corporation
– Wanted an edge
– Went to NY Bridal Shows to find colors for next
season
Orderedcolorsfrompaper makers – Ordered colors from paper makers
– Sold as “in” colors
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Use Finance as a Strategic Weapon.
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Price to Value
• What did your mother teach you?
• What do most entrepreneurs do?
• Implications of High vs. Low:
– Sales
– Assets
– Profits
– Cash flow
• ‘HightoLowvs LowtoHigh’ High to Low vs. Low to High
• Price Strategically
– LBO vs. Equity
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Waste not. Want not.
Make a lot Make a lot.
• Keep your operations efficient & effective.
• Flexibility: You will ALWAYS be wrong in your y W S g y
forecasts
• Initial investment/ Scalable: TOUGH &
EXPENSIVE to raise money for a startup
• Break-even: Keepit low; WHEN will youget Break-even: Keep it low; WHEN will you get
there
• IP/ Trade secrets – How to PROTECT?
• Quality and service: How to ensure
M i M b l WHEN b i i • Margins: May be lower – WHEN to bring in-
house?
• GlenTaylor • Glen Taylor
• Used incoming boxes for outgoing product
• Cut waste to practically zero
• Usedpaper moreefficiently Used paper more efficiently
• Minimized sales expenses by carefully picking
potential partners in each city
• Expanded geographic territory as UPS expanded
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U Fi St t i W
• Develop bottom-up, real projections for
Use Finance as a Strategic Weapon.
control and credibility.
• Dick Schulze
– When changing from small stores to warehouse-stores
– Had lost all equity; Net worth down to 0
– Vendors offered financing only because DS always
hi d j ti dibilit achieved projections - credibility
• Don Kotula
T k d l b di ( d l i ) – Tracked sales by media (ad, catalog, magazine, etc.)
– Tracked sales by each customer over lifetime
M kK d • Mark Knudson
– Critical experiment early allowed viable projections
– Financiers knew that money would not be wasted
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Avoid Common Mistakes
Faith in plan:
“I don’t need to monitor..
I have an instinct for my business.”
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U Fi St t i W
• Finance intelligently. Raise money or be rich
Use Finance as a Strategic Weapon.
• Dick Schulze
– Vendor financing for growth
• Rod Burwell
– Advance from customer for barge tops
• J oel Ronning
– Corporate alliance to startup
V d fi i f th – Vendor financing for growth
• Ray Barton
R i d ll fi f h h h – Reinvested all profits for growth rather than pay tax
• Eric Paulson
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– Vendors with highest margins to carry store inventory
Grow Right Grow Right
• What doyouwant togrow Implications: • What do you want to grow – Implications:
– Sales
– Profits
– Cash Flow
Value – Value
• How fast:
– Maximum growth rate: Cash flow & debt
Raise equity before youneedit – Raise equity before you need it.
– Don’t grow faster than ability to control
• How: Pick right strategies to grow:
Innovation: Cater tocustomers – Innovation: Cater to customers
– Execution: Become a better manager
– Acquisition: Most screw it up – Companies
looking to buy usually overpay
Surf afast Trend – Surf a fast Trend
• “A man’s just got to know his limitations”
… Dirty Harry
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Value Cash:
K R O ( h) A Know R O (non-cash) A
• Lessassets=Lessfinancing Less assets Less financing
• Less assets may = More flexibility
• But less assets may = More competitors
• Non-cash assets cannot pay the bills
(Health-care company)
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Why Financiers are Conservative
• Most new categories take off at least 3 years
after launch
Definition: “Take off: >3% of target market adopting Definition: Take off: >3% of target market adopting
each year”
• Product Launch Take-Off Years
Mutual Funds 1924 1980 56
Cell Phone 1983 1994 11 Cell Phone 1983 1994 11
Index Funds 1976 1985 9
PC 1977 1984 7
TV 1945 1950 5
PDA 1990 1996 6
WWW/B 1991 1997 6 WWW/Browser 1991 1997 6
TiVo/Digital VR 1999 2004 5
Compact Disc 1982 1985 3
Viagra 1998 1999 1
• That’s why financiers are ‘conservative’ but
developers/ champions tend to be optimistic
– “Cut sales in half; double expenses and time to reach
sales” sales
• Source: Karl Ulrich (MIT) at Allen Shockley Lecture at CSOM.
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doc_796826959.pdf