Shaulablog

I had the pleasure of speaking on a panel at StartupWeek in Seattle this year.  It was a rich assortment of content and is usually the 1st or 2nd week of October so look for it one year.  The full schedule fills in fairly close to the conference, and it’s a total bargain at $35!

Valentina kicked us off by talking about the value of quick consumer responsiveness. As an example she cited WildFang, a women’s apparel company that was able to generate 250K of new revenue in less than a week by putting out a jacket with a phrase responding to a current event. They donated all the proceeds to an immigrant rights organization and got tons of media coverage.

Scott works entirely with direct-to-consumer brands.  His key metrics are 1) the Cost to Acquire a Customer (CAC),  the LifeTime Value of a customer (LTV), and also Earn Back Period (EBC) – how many purchases must the customer make and how frequently before you’ve recouped the cost of acquiring them?  He emphasizes the value of direct contact with the consumer for customer feedback and analysis.

I spoke about my experience with companies using distribution models. I’ve learned that core metrics are footprint (how many stores is your product in?) and velocity (what are the per-week sales metrics per store?).  Distributors will often make you purchase that data, and you need to be doing it. Otherwise you will get a distorted image of your actual sales.   Velocity is sometimes called “sell through rate”. You can find more retail metrics here: https://www.thebalancesmb.com/retail-math-formulas-2890409

Much thanks to Kathleen Baxley of Startup Valuation Resources for her moderation!

In startup-land, there’s lots of support for how to create a great investor pitch (Guy Kawasaki, anyone?), and support for financial modeling, website building, hiring/hr, legal.  But there’s very little discussion about intentional job creation.  It seems like you have to get to be a pretty good sized company before job design and employee retention becomes a “thing” and by that time a culture is already established. More support is really needed because startup companies don’t have time to do research- they need things they can grab and run with.   So what’s out there to support a small company who wants to be intentional but doesn’t know what to intend?

Amazingly, Hitachi Corporation started a private foundation years ago as part of building relations in the US.  It closed just a couple years ago, but while operating it evolved a mission of “Discover, demonstrate and expand business practices that both measurably improve economic opportunities for low-wealth individuals and enhance long-term business value”. Bang! My holy grail for sure. They did some amazing work and a gift they’ve left behind for us is a series of two-page Business Action Guides on 24 job quality topics, including Incentivizing Continuous Improvement, Non-financial Compensation, Effective Onboarding and Mentorship, Hiring for Culture Fit and more!   Browse and download this treasure trove here.

On their way to close, Hitachi granted out the last of their endowment to three organizations: The Aspen Institute, MIT/Sloan School of Management, and Investors’ Circle.

I know the Aspen Institute FIELD program from my days on the board of a microfinance/training organization (Ventures), they’ve done lots of research on business.  They are a little more research-y, and have great materials that will be helpful to grantmakers, long-term investors and policymakers, less so the CEO on-the-go.   If you’re in a larger company doing longer-term planning it will be helpful.  They also have a program for social “intrapreneurs”.  As part of their larger Economic Opportunites Program, they’re doing a series of blog posts that have small case studies and issue studies that provide a stream of inspiration.

MIT/Sloan has the Institute for Work and Employment Research. It’s also the home of Zenyep Ton’s Good Jobs Institute.   Zenyep Ton came to my attention when I decided to chat up a Mud Bay store manager. I had heard they used Open Book Management and I wanted to know more. He told me the whole company was reading/discussing her book: The Good Jobs Strategy.  I read it and found it very interesting – she highlights Costco as one of four retailers who get it right and emphasize that high quality jobs go hand in hand with operational excellence. Dr Ton describes a virtuous cycle of investing in employees who can perform, which generates results, and that generates rewards for all. Unfortunately too often retailers focus on labor purely as a cost and instead drive a vicious cycle.  I highly recommend this book, and not just for retailers.  For handy back-reference after reading, I did find a summary/analysis here.

Finally, there’s Investors’ Circle.  IC is an impact investing angel group where I now have the privilege of serving on the board, and thus learned about the great work of The Hitachi Foundation.  With the support of their Hitachi money, IC recently merged with its original incubating organization- the Social Venture Network.  Truly, SVN at 30 years old has held the heart for doing good through business.  The two organizations are working to make the most of their synergies, the fall conference is the best way to dip into this energizing pool of “we can do it!”.  Learn more here.

In investing, folks like to talk a great deal about “multiple”s.  IE I got a “1.5X return”. In my experience, professionals are pretty happy with the ones that are >1.0, and it’s common in a successful fund to fall between 0 and 2.5.  The ‘X’ is “times”, as in 1.5 times my return. Meaning that I put in 10,000 and I got back 15,000.  Depending on how long that takes, that can be pretty good money, or not much at all, as compared to earning interest in a bank.  This money invariably costs more in time and effort to make the investment and support it, that’s why it needs to earn a higher return than money in the bank. Otherwise, the only thing left for your investors to gain is ego points, and is that what you want to pay in?

A key tenant of what I’ll call “economic development investing” is finding ways to invest in early companies and get the investment back without requiring that the company be acquired by another company.  How do we invest in companies and leave them standing?  Methods that I have seen create ways for the company to buyback its shares at a later date, as a multiple of the original purchase price.  For a global worker-owned cooperative with >20M in annual revenue and a >10 year track record of paying an annual dividend? That multiple is One.  IE, if you sell your shares back to the company, you get back the price you paid for them, and you get to keep your dividends earned in the meantime.   For little startups with no operating history and track record? I’ve seen multiples of 2X and 2.5X.

Is that a bargain? Is that fair? Is that outrageous?  Well, if our theoretical alternative is buying a CD at the local bank, it depends on how much time goes by before that startup buys those shares back.  If I can buy a CD earning about 2.5%, and my startup will pay 10-12% in interest on a loan, there’s a nice window where it’s win-win for both of us, once I get compensated for my time/effort. That ignores the greater risk that some % of my investments will go to zero, which is highly unlikely for a CD. A fund needs returns that can absorb that risk.  True Angel investing is best budgeted as an expense that gets to revolve a few times before being totally spent.

To keep my head straight as I look at these investments, I made a handy reference table.  Here’s a copy for you!

QuickRef IRR vs multiples as PDF

QuickRef IRR vs multiples   as xlsx

I recently had a fun experience doing some shopping in my local economy, which resulted in a blog that Ventures published on their site. Ventures is a training-led Community Development Finance Institution (CDFI), which means they do some small business lending but the preponderance of their work is in doing training and technical assistance. I was on the board back when they were known as Washington CASH (Community Alliance for Self Help). Read more about my adventure here!

In my years of angel investing, many is the time I’ve been in due diligence groups looking at a projection and someone asks “so where is the marketing spend to support that growth?” Usually the answer is along the lines that folks will discover the product online, or refer their friends, that it will “go viral”, and that’s what we’re all investing for, because we believe that it’s that kind of product, right?  Another common answer is that one of the roles will really be spending 50% of their time on sales, or that sales will be part of everyone’s job.

Many years and a few hands-on lessons later, I have a more experiential awareness of what needs to underlie that answer.  Once you’re in a company, trying to manage to those numbers, it becomes clear that there’s no substance to it.  We modeled 10% month-over-month growth! Well, it didn’t happen this month so now what?  Without a plan of the measurable activities that were expected to generate that growth, there’s no way to look back and ask: did those activities happen? If yes, perhaps they’re not the right activities so let’s try some different ones. Perhaps we think they are the right activities but the sales cycle is turning out to be longer than we expected, let’s keep an eye on that and prepare to make some adjustments lest we run out of capital before we’ve figured out the true cost of a sale.  If those activities didn’t happen, why not?

Startups are fundamentally short-handed and the sales/marketing person is often not a specialist, and maybe they haven’t done sales/marketing before.  Likely they’re getting some uptake because it’s a new product or service and they get a little bit of earned media attention and they don’t know that the product won’t continue to sell itself. A few things do grow purely on word of mouth, or are fundamentally viral in that use of the product inevitable exposes new potential users to it. Even those things can be broken down into assumptions: each user uses the product x times per month and exposes Y other users to it, Z% of those decide to try it for themselves.

But sadly, the truth is things have to be sold, and over time I notice  how successful businesses build the cost of selling into the product – things like mutual funds having “12b-1 trails” that throw a small percentage to the platforms that carry them, or retail products having to build into their price assumptions about doing periodic discounting, offering coupons, paying cuts to distributors and brokers.

I felt validated to see in a recent business competition, Business Impact NW went beyond asking for a financial projection and also asked for a specific sales projection.  They work with small, local businesses, and apparently they’ve also decided it’s an important next step to making sure the business is actually successful.

So going forward, my experience is that a general question about “where’s your marketing spend?” isn’t really enlightening or helpful to the business.  A better question would be: where’s your sales plan – who will do what activities to promote the product/service and what’s your expected effort-to-reward ratio?  I have heard investors ask “how long is your sales cycle?” when looking at products that will be making dozens of large sales. Time is one measure of effort, and thinking about person-hours and intermediary fees and google ads needs to apply to the hundreds of small sales too. Helping an entrepreneur break that down ahead of time will help them figure out how to adapt as they gather more data, and set them up to start measuring/monitoring those assumptions from the start.

A good friend of mine has always refused to participate in loyalty programs. He figured, not unreasonably, that the company’s interest and his are not guaranteed to be aligned and the trouble of monitoring that was not worth whatever benefit might be gained.  So it’s only recently that I’ve considered getting a mileage credit card.  As part of a change in household, I signed up and began my new relationship with Bank of America.

Wait a second, Bank of America? A big corporate bank? I’m supposed to be an Impact Investor, a triple-bottom-line consumer. Why would I divert a significant percentage of my annual expenditure stream through their card, allowing them to pull a tithe from the business community via invisible-to-me credit card fees?  Because one thing I’m well aware of as a business consultant is that all those points and miles we earn are paid for by the businesses where we use our cards- through slightly higher credit card fees.  Businesses have no ability to sort cards, if they take one Visa they must take them all.

Of course the reason I would do this is simple: payola, in the form of airline miles.  I started asking around among friends and in Seattle, an Alaska Airlines hub, the Alaska Airlines card is everywhere. My friends fly with their miles. Some friends have an Amazon card, held by “Synchrony Bank”, which I know nothing about. Milage cards are not just about miles: Alaska charges bag-check fees, which they waive if I book my ticket using an Alaska credit card. Using the card saves me $50 per round trip when I need to take luggage. Add in a free annual companion ticket and it only takes one trip per year to more than pay pack the annual $75 fee.

Economy is based on the latin word for household.  If we want to change the priorities of our household, we need to think about who is in it, making decisions.  The small decisions we can make about which institutions we support through our incidental activity can add up to big decisions. This was the premise behind the “move your money” campaign that lead many people to move their money from banks to credit unions.  Who provides your access to credit is, if you have a decent credit rating and can make choices, the same decision.  I’m currently banking at a credit union, and their card would be the obvious choice. Certainly on an interest-rate and fee basis, it’s a much better choice than the loyalty card. It just doesn’t come with such powerful payola.

Making that moral choice costs me real airline dollars! With an opposite-coast family, I will fly annually. I was feeling ready to make that stand anyway when my voice of envy took a new turn and made a case not about gain but about loss: successful businesses who take credit cards recognize the fees as the cost of doing business and price accordingly. For example, Square charges small businesses a flat processing fee of 2.75%, which greatly exceeds the fees paid to Visa, so Square is collecting credit card premiums from businesses regardless of whether or not they pass them on to the full consortium of Visa, BOA and Alaska Air. A pessimistic view might be that those of us not using loyalty cards are left subsidizing those who do, or just padding the pockets of the card processors.  Ooo, that argument was more difficult for me.  Fine, I thought.  Surely there was some compromise between selling my economic allegiance and leaving money on the table.

The answer I came to is a loyalty card with a values-based bank that I am proud to direct a revenue stream through, to a cause I believed in.  I remembered a friend who had a “Salmon Nation” card that supported an environmental organization in Portland.  It was issued by Beneficial State Bank.  I went to their website to survey their options and was immediately drawn to the B-Corporation visa (I get no referral if you click that link :).  A chance to support a cause I passionately believe in – an organization doing third-party certification of good internal corporate management in the 5 areas of Governance, Community, Environment, Employees and Customers. I applied and awaited my card.

In the intervening duration I thought again about the free trip I could probably earn every year if I instead selected a mileage card, or about how much stuff I still end up buying on Amazon despite my commitment to purchase locally as much as I can. Or the marginally higher fees I would have with this card than a vanilla credit union card (but still lower than a BOA card).  Was I being silly?  The card answered the question. I’m so pleased to pull out this card, and the opportunities it provides to talk about B Corporation and why I think it’s something more people should know about, I don’t for a second regret it.

I was also feeling less impressed with Alaska’s milage program; having just come off a binge of using up old United miles to travel to DC, Alaska required 30% more miles for the same trip.  Looking harder though, with the companion ticket, plus the free checked bags each way, using the Alaska card to book my annual opposite coast family trip produced a 400% return on my $75 annual fee.   So in the end I got the Alaska card, too, which I only use for booking Alaska travel.

The deep issue here that merits attention is how incredibly embedded in our everyday financial transactions there are invisible corporations that effectively tax us, and how little we know about those taxes or what they pay for.  It’s an interesting systems issue. Change does happen, Square is new on the scene and has bred a host of competitors, but it seems likely they’re yet another layer of technical middleman, taking another cut out of the value exchange between consumer and business.

Merchant Maverick was my go-to resource when I set up billing for a new business a couple years ago, they have a great writup on the credit card processing fee stack here.