Internet Companies - Now Grownups
Bill Warner Thursday, December 18, 2008
In reflecting on the recent Internet Summit in Research Triangle Park there were certainly an impressive group of entrepreneurs, investors and consultants presenting on a wide variety of topics. In addition to a delightful key note presentation by Bob Young, the conference covered such topics as the current state of the internet markets, as well as the future of the SaaS, email marketing, blogging, search engine, ecommerce, mobile internet, and social networking businesses. Many related topics about venture capital, internet law, internet infrastructure and internet marketing rounded out the conference with an overall comprehensive look at the state of internet-based businesses.
However, it struck me how different this group of people is from the comparable group of people who were presenting as little as eight years ago. During the dot.com era of the late 90’s and early 2000’s, there certainly was as much enthusiasm as we saw at this Internet Summit, but the business maturity of the presenters at that time was far less than today.
In the dot.com era, we would have heard about how “cool” the internet is and what the possibilities are for reaching consumers and collaboration, but not much on why any of it made business sense. Yet, these companies got millions of dollars to try out their ideas; signed on the backs of napkins over a beer at the bar.
At this Internet Summit, the discussions and presentations were distinctly different from the dot.com era:
- We heard about successful business models instead of business dreams.
- They presented where internet commerce is today in dollars and cents instead of the assertions that it will be billions someday.
- We got information on what works and what doesn’t work in internet marketing and blogging instead of claims that everything works.
- Entrepreneurs talked about how revenue traction is effectively achieved instead of boasting that the world would beat a path to their doors.
- Venture capitalists were discussing quantifiable markets and revenue models that work and had solid opinions on what makes business sense instead of clamoring to write checks.
- The black cloak was taken off of email marketing with a very real perspective as to why it makes sense today, instead of glossing over its simplicity.
- We heard about the details of what makes the SaaS model effective and the solutions to the real issues of successfully deploying the infrastructure and achieving cost effective marketing and sales programs instead of words about moving to the ASP model because it is cheaper.
- They presented solid business rationale for mobile applications and the outlook for new mobile technologies instead of explaining how cool ringtones are.
- The realities of social networking were presented including a balanced view of this delicate business model instead of projections about the wonderful world of collaboration.
- We got the down-to-earth realities about the future of search engine businesses were presented in a very candid and realistic way instead of the techno-geek talk of the dot.com era.
There was a distinct absence of the unrealistic zealots of the dot.com era. Where did they go? Heck, many of the people we saw at the Internet Summit were some of the very same people who made the outrageous claims during the dot.com era. They look older now. They sound like business people with a purpose. They make sense.
Then it dawned on me. Many of the entrepreneurs of the dot.com era have grown up and are now adults in the business world. They have learned a great deal from their experiences, regardless of success or failure. They are seasoned and thoughtful business people who absolutely know the ins and outs of their businesses. They are well connected to their industries and know exactly how their business models work, know what’s wrong with them and have innovative ideas on how to fix them.
Out of the ashes of the dot.com era has come a powerful bread of internet business professionals that know how to build successful internet-based businesses. In fact, they are teaching others as they lead their companies and mentor other entrepreneurs in the community. We are not in Kansas anymore. You can have much greater confidence that this industry is now being led by some of the brightest, energetic and insightful business professionals in America.
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Internet Commerce - Weathering the Storm
Bill Warner Saturday, November 29, 2008
At the recent Internet Summit in Research Triangle Park, the kick-off presentation was a sobering look at the business status of internet commerce given by comScore, a global Internet information provider to which leading companies turn for consumer behavior insight that drives their marketing, sales and trading strategies. comScore maintains massive proprietary databases that provide a continuous, real-time measurement of the myriad ways in which the Internet is used and the wide variety of activities that are occurring online, giving them a comprehensive view of consumer behavior. In other words, this is company that is watching your every mouse click and key stroke.
Intuition would tell you that internet commerce is suffering just as much as the rest of the industry in this market downturn. However, your intuition might not tell you the deeper insights that you need to know. Through the 3rd quarter 2008, ecommerce is up 10 percent over 2007. That is less than half the annual growth that has occurred since 2002, but nevertheless is growing. This can be broken down by consumer income segment, observing that spending by people whose income is less than $100,000 per year is actually declining, while those above $100,000 is increasing 14% over 2007. Clearly, the economic downturn is affecting the lower income group the most.
This can mostly be attributed to higher prices, led by the over 30 percent increase in motor fuel, all of which has significantly squeezed discretionary spending. But, fuel prices over the last several weeks has fallen to less than $2.00 per gallon and food prices are starting to drop as well. One might think that ecommerce is going resume its 20 plus percentage growth again, but that is not what is going to happen. When asked what their major issue is now, the concern about rising prices of consumers whose income is greater than $100,000 is being replaced by a significant concern about the financial markets. For consumers whose income is less than $100,000, their concern is about inflation; including prices, jobs and financial markets.
When asked what they thought their spending for the holiday season would be, about 60 percent of consumers whose income is less than $100,000 said they would be spending less than last year, while 43 percent of those greater than $100,000 said the same.
comScore can only tell us what has occurred, not what will occur. So they have no crystal ball. They did ask about the effect of the presidential election showing that over one third of the consumers are either not sure or have less confidence in making near-term expenditures. The Obama effect is a big unknown and the markets are hanging on every word he says or doesn’t say as well as what the administration says about the various bail-outs that are being proposed.
We certainly have not seen the end of the trend setting for consumer spending as the situation is still very volatile with more shoes to fall with the change in administration.
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Stock Options - The Next Dilemma in the Market Downturn
Bill Warner Sunday, November 16, 2008
As in most market downturns, the value of employee stock options often drops below the stock price at which they were offered. This undermines their primary purpose of providing an incentive for employees to stay with their companies and later reaping the proceeds of having high valued stock in their company once the vesting period has ended. Well, we are here again as most public company stock options are “under water.” Some reports say that over 80% of public technology companies have “under water” stock options. The same could be true of private companies as their market valuations get tamped down over the next several months.
Companies, usually with stockholder approval, can reprice employee stock options, or offer a stock option swap for new options at a lower price, thus resetting the option price to a new level consistent with the current company stock price. This would naturally make employees quite happy.
The dilemma is that it will not make stockholders very happy. Hey, stockholders don’t get a chance to reprice their stock. Why should the employee stock be repriced? Stockholders took the risk to invest. Why should the employees be sheltered from the same risk? After all, employees knew what they were getting into when they hired onto the company. Stockholders are not terribly interested in further diluting their stock by such a repricing action.
On the other hand, employees say that the decline in the stock price had nothing to do with them. They didn’t cause the credit melt down that started the downturn. They need to be rewarded for achieving their milestones, those things that they have control over. Of course, employees should also be accountable for their results. If they have not met their milestones, then it becomes harder for them to argue that their options should be repriced. The real situation is usually a mixture of missed milestones and general market downturn. So, where do you draw the line?
The lesson here is that employees don’t really act like stockholders and view their stock options as a form of compensation that could represent great upside potential if the company performs well. They are not thinking of the broader market risks when they get a grant of stock options from their company.
The answer to the dilemma probably will come as a compromise between the interest of employees and stockholders. Some companies are trying to pre-empt shareholder opposition, designing “value-neutral” plans that allow employees to exchange existing options for a smaller number of new ones at lower exercise prices. That will help protect part of an employee’s grant but avoid large-scale dilution or additional accounting charges.
Company boards are very motivated to solve this issue quickly. None of them want a mass exodus of key employees and executives to other companies that will grant their stock options at today’s prices.
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Raising Capital - Consider Debt Financing
Bill Warner Friday, November 07, 2008
Debt can be your friend. It can be used in many ways to strategically fill out your overall financing plan. However, there is no doubt about it, loans have to be backed by some form of collateral and the money has to be paid back over an agreed upon period of time and interest rate. Here are some important possibilities for the use of debt financing:
- Early market research can be financed with debt. You can use a credit card or borrow against your assets. A nominal amount of money is usually needed to conduct a disciplined market research on your entrepreneurial idea. There is usually no need to buy expense research reports, but some money is needed for travel for testing the market and for the development of materials for your research work.
- Once you have satisfied yourself that you have a good market opportunity, it is often necessary to develop an early prototype and perform some more in-depth market testing. Again, bank loans are a viable source of financing for prototype development and for filing patent applications.
- Most businesses in the US can actually be started through bank financing, as long as the entrepreneur has the necessary backing. The backing can come from the founder or from friends, family and business associates. Of course, these people that take the risk to back the loan should be rewarded by the company. Approaching local banks that offer SBA backed business loans is an excellent way to get the money you need to start a company. It is not always necessary to approach angels of any kind. This way, the entrepreneur does not have to sell shares in the business and will therefore own the entire company, keeping control of its destiny.
- Also for most small businesses, getting loans from other people is very common. Many businesses get financing from family members, friends and business associates without every approaching a bank. These loans have to be paid back with interest but the terms are usually more attractive than with banks.
- There are several banking institutions that will loan money to early stage companies for them to purchase capital equipment, where the equipment acts as the collateral for the loan along with the company’s cash position after having received its first round of financing. Sometimes personal guarantees are required which founders can consider and perhaps get assistance from their backers to accomplish as well.
- A fairly common use of debt is for investors to actually loan money to a company that will later be converted to equity at the next round of funding. This helps a company gain some financing without having to declare the value of the company until the next formal round of funding. Other considerations are provided to the debt provider in the form of discounts and warrants.
- Companies that have ongoing revenue and a good financial track record can get a line of credit from a bank that can serve to plug the drain to cash flow that occurs during periods when accounts are not yet paid and to meet periodic payroll demands. The accounts receivable backlog can often be used as collateral for such loans as well.
Bank financing can be a valuable tool at all stages of company maturity. As with any financing activity, it has to be approached with discipline and a well thought out and managed business.
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CEO Coach - Orders For The New Economy
Bill Warner Wednesday, October 22, 2008
Credit is flowing slower than tree sap in a New Hampshire winter. The board of directors demand actions to respond to the economic mess and wants everything to happen immediately. Investors want to save cash and get to exit as quickly as possible. New investors are renegotiating their terms or backing away all together. Customers are starting to reprioritize purchases they had previously committed to. Wow, it’s a great day in the life of a CEO.
Let’s take a breath and not panic. Action certainly needs to be taken and it is very much the same thing that a CEO has to do in a turnaround situation:
- Reassess where you are with your revenue forecast. Talk to your most loyal customers and reassure them that you will be there for them and see where they are on future purchases. Take a hard look at new customer purchasing to verify that purchasing timeframes are still real. Adjust the revenue plan based on this brutally honest near-term view of customer purchases.
- Tighten the belt on the cost structure of your products and services. It’s time to take cost reduction actions that will provide a short-term yield. Cut personnel that are not essential to the manufacturing of products and to providing services.
- Take a hard look at expenses looking for ways to save cash on discretionary spending, payment terms to suppliers, lease payment terms, unnecessary personnel and even look at stabilization of salaries. If an expense item is not serving the main mission of the company, question it.
- The conservation of cash is what this is all about. More drastic actions could include the curtailment of development of future products and getting out of markets and discontinuing customers that are not profitable. Any action like this has to be done in the context of the company’s cash position and a judgment made as to whether there is enough cash in reserve to take the company through these hard times which could last through all of 2009.
- Rerun the income and expense report, cash flow statement and balance sheet forecasts with the operational changes you have made. Take a hard-nosed look at whether or not you will have enough cash to sustain your business. If not, more cost and expense is going to have to be removed from the business, which might mean you have to change the fundamental strategy of the business. You must get cost and expense in line with your realistic view of the revenue outlook.
You may be faced with the need to raise additional funds to get you through these tough times. Do not go to outside investors without having first done your homework. Bank loans are much harder to get, but if you have a realistic financial outlook and satisfactory past performance, you have a reasonable chance of getting help. If you have angel investors, you need to work closely with them and give them the same brutally honest view of the business and ask for their continuing help with additional funds. If you need to get institutional money (VC’s), you are faced with a tough negotiation.
This is going to be survival of the fittest, requiring much more discipline and focus than ever before. The necessary actions are well known. We have been through this before. The difference will be in the execution of what needs to be done.
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CEO Coach - Building An Ethical Culture
Bill Warner Tuesday, September 23, 2008
A distinction that is sometimes misunderstood is the difference between compliance issues and ethical issues. Compliance programs deal with external issues that have internal implications on a company (i.e. compliance with the SEC, IRS, Sarbanes-Oxley, and the law). Ethics programs deal with internal issues that have external implications (i.e. company values and codes of personal and business conduct). A frequently unrecognized challenge for CEOs and business owners is to fully understand how they are the symbol and the source of the culture of their organizations.
CEOs Set the Example
Close scrutiny of a CEO’s personal conduct occurs every day by employees, customers and business partners. Ethical behavior by the company’s leadership will establish respectful business relationships and solidify employee loyalty. Unethical behavior will undermine the integrity of the company. If there is a difference between what a leader says and what a leader does, everyone will see it, and employees and business partners will emulate the bad behavior.
Whether it is simply through ethical behavior or by instituting a full blown ethics program, the company’s leadership must fully stand behind their actions. Establishing an ethical culture is a process, not an end, requiring the company’s leaders to demonstrate the highest standards of integrity and accountability.
Types of leaders
- Ethical leaders are committed to acting ethically and insist upon that from their organization and from their business partners. Not only are they demonstrably accountable for their actions, they are perceived that way as well. They foster a culture that emulates their own dedication to ethical behavior.
- Ethically neutral leaders are inherently committed to ethical behavior, but no one knows it. They are perceived as leaders who have done nothing ethically wrong, but their decision making process has no context of values or code of conduct.
- Unethical leaders believe that ethics is not relevant to the business world. They make pragmatic decisions, without concern for their ethical implications, which sometimes don’t stand up as ethical behavior under external scrutiny.
Foundation for ethical behavior
Executives must establish the ethical foundation for their companies, which will serve as the cultural underpinnings that guide their leadership. Ethical behavior is founded in:
- A set of values that spell out the way employees will relate to each other and the company will relate to its customers and business partners.
- A framework of principles for personal and business conduct that is unambiguous and integral to everyone’s behavior; so that unethical behavior is not an option.
- Selling ethics to others so that ethical behavior is fostered by exemplary conduct by the company’s leadership, where decisions and actions send a clear message of what is tolerated and what is not.
- Standing for what is right in everyday actions by rewarding positive ethical behavior and counseling others when a breach in ethical behavior occurs.
There’s no way around it. Ethical behavior cannot be delegated and unethical behavior cannot be tolerated. Leaders have to be conscious of what is right and what is wrong, and set the example for others by asserting their integrity and honesty. As their reputation grows, so will the respect and dedication of others.
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CEO Coach - Improving Communications
Bill Warner Monday, July 14, 2008
Getting your ideas across, helping your employees, and achieving your ambitions all come with effective communication. Even though you may already be a good communicator, everyone can improve on their current abilities and approaches to communications.
Network With Other Executives
One way to improve your communications skills is to take advantage of local business organizations. Many business communities have organizations like the Council for Entrepreneurial Development (CED) which is housed here in Research Triangle Park, North Carolina. The CED is a place where entrepreneurs can gather to share ideas and gain training on business related topics. Take advantage of CEO gatherings, industry networking events, business seminars and communications coaching opportunities.
Get Out and Meet People
Other ways to improve company communications include implementing an aggressive program of Managing By Walking Around (MBWA). CEOs can’t communicate if they are stuck in their offices. Get out and walk the halls and visit the cubes of ALL your employees. Ask questions about how the employees are doing, what they are doing and how they are going it. Be interested or at least act interested in your employees and the teams they work within.
Regular Employee Communications
Share information about the company freely. If the CEO does not share the information, the employees will make up their own information. This is the dreaded rumor mill. Share information in person in company meetings on a monthly or quarterly basis. Implement a company newsletter/newspaper/e-letter and encourage every department and team contribute.
Be Consistent
Be consistent in your communications. Many CEOs complain that they have set the company vision and shared it with the employees, but “everyone is going in different directions?” What they don’t realize is that each time they share the vision they state it slightly differently and the employees hear a different vision.
Be brief and only communicate the minimum required to get the message across. To elaborate and elaborate slightly differently each time just breeds confusion and lack of focus.
Focus on Improvement
The most effective way of improving communications is to assess your situation, identify and improve on your areas of weakness, and capitalize on your strengths. Where do you start? Ask your employees.
Make communications a daily drum beat. Communications effectiveness starts in the CEOs office, continues with MBWA, and ends in the CEOs office. You can even get a coach, who can impartially discuss your communications needs and strategies.
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CEO Coach - Effective Communications
Bill Warner Wednesday, June 25, 2008
Over 80 percent of our waking life is spent either sending or receiving information. The ability to communicate effectively at work and in our personal lives is perhaps the most critical skill for everyone, especially the CEO. Poor communication leads to poor performance, yet it is common in the workplace. Luckily, communication skills can be improved and the more effective the communication, the better the overall performance and therefore the greater the level of business success.
Some CEOs don’t realize that communication is a two-way process. In addition to getting your own message across, it is also important to listen to and understand what others have to say, a technique known as “active listening.”
But an even more important communication skill that is often overlooked by CEOs was expressed best by Peter Drucker, “The most important thing in communications is to hear what isn’t being said.” Effective communication allows CEOs to use all the other skills they have to their fullest. The ability to motivate, delegate, organize, solve problems, and obtain information all rely on the ability to communicate effectively with others.
Effective Communications Brings Business Results
Evidence suggests that bad communication is probably the cause of most of the problems people encounter at work. It starts with an unclear company vision, gets worse because of ambiguous personal objectives, and is exacerbated by a company culture that evolves rather than being set by the clear communications of the chief executive. Jack Welch, the past CEO of GE said it best, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
Effective communication can transform how well people work. Imagine an organization in which everyone is kept informed, knows exactly what to do, and has all the information necessary to do their job. The effective CEO fosters teamwork, empowers key employees with responsibility and authority, and communicates key information to the organization. These CEOs not only use effective communication, but they also gain employee buy-in to the vision and objectives, build employee confidence in the company and create respect for the management team.
Setting a culture of sharing knowledge is critical to business success. If, rather than keeping quiet, people shared their knowledge with others, and problems were solved using everyone’s knowledge, skill development of less experienced people would dramatically increase. It would also allow more delegation and facilitate problem solving. The CEO who operates this way creates cohesive teams and builds uniqueness of purpose
Think of the effect it would have on the performance of your organization if culture drove everyone to feel motivated and empowered.
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Know the Buyer’s Food Chain
Bill Warner Saturday, March 22, 2008
Knowing that you have, or will have, a winning product does not give you time to rest. You have to grease the skids by making your buyers aware that you have a product that solves an important problem that they have. Founded upon your in-depth understanding of your buyers, you need to structure the appropriate marketing campaigns that raise buyer awareness of the product’s value and availability. This can be mind numbing work, but is very necessary in order to not have surprises that could stop your business later. Many hours spent on understanding the distribution channel can save you from a whole lot of costly mistakes later when you are trying to get the revenue for your hard work.
Know How the Buyer Buys
Almost always, it is not obvious how the buyer actually buys. Knowing this is the subject of millions of dollars that some companies spend in order to introduce products to the consumer retail industries. Advertising agencies and research firms get rich figuring this stuff out. The best way, and a lot cheaper, is to ask them yourself. Approach representative examples of your buyers and ask them how they purchase products in your market segment. Answer these questions:
- Who do they buy from
- Where do they learn about new products
- What are the payment requirements
- What incentives are offered
- What are the terms and conditions for the purchase
- Is credit required
- What are the price ranges
- How is the delivered
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Engage with the North Carolina Sustainable Entrepreneurs
Bill Warner Wednesday, March 19, 2008
Paladin and Associates is a proud co-founder of the North Carolina Sustainable Entrepreneurs Group (NCSEG). We are fostering entrepreneurship in NC by providing guidance to companies that have sustainable technologies. Our organization was founded on the basis that there is tremendous support throughout NC that provide assistance to entrepreneurs. The problem is that entrepreneurs don’t always know how to form their companies and get them launched. We take entrepreneurs under our wings, give them some initial guidance on what they need to do and then get them in touch with the right organizations and resources that they need to take the next step in their company’s formation.
Early this week we had our regular monthly meeting. We are just getting started but here are some of the things that are on our radar screen:
- Supporting the NC Green Fund by guiding companies to their application process
- Engaging in some public forums to make the business community aware of our group
- Having further meetings with successful sustainable companies
- Engaging with university programs and make entrepreneurs award of their services
We encourage all entrepreneurs that have technology that has sustainability characteristics get in touch with us. Perhaps we can help you too. Go to our website at www.ncseg.net to learn more.
