Category: Strategy

The Importance of Bootstrapping

The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.

Bootstrap – adjective

A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.

“The business was a bootstrap operation for the first ten years.”

The importance of bootstrapping

Most startups do not have a bunch of cash lying around.  The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have.  We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.

The temptation to abandon bootstrapping is strong, especially when investors come knocking.  One of my clients attracted large investors with a business plan I had prepared for him.  Initially, I budgeted a modest salary for him in the financial projection.  He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself.  I had to tell him to reduce his salary.  I am not alone in emphasizing this sentiment:

  • A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary.  Ultimately, Mark and all the other sharks walk away from the deal.
  • Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.

Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate.  In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.

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Product extension

When you think of McDonald’s food you think of burgers.  Maybe other things too but mainly burgers.  However, back in the late-80s/early-90s the Golden Arches tried to expand into pizzas.

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Image Credit:  Collecingcandy.com

This was ultimately an unsuccessful expansion for reasons beyond a confusing palate.  They failed because they expanded beyond their core competency:  making hamburgers.

Operations

From an operational stand point hamburgers are different than pizzas.  Making pizzas require different equipment and ingredients.  One reason for McDonald’s profitability at relatively inexpensive pricing is due to cost efficiencies from economies of scale; every inch of a McDonald’s kitchen is optimized.  Fry pans have a designated size that fit with the size of the patty, that are heat up at a certain rate.  Pizzas don’t need frying pans.  They need ovens.  Ovens that are expensive to put into existing restaurants and take up valuable kitchen space.  Pizzas also took longer to prepare than the fast food burger.  People had to wait longer; an unusual thing for a fast food company to ask of their customers.  Lastly, pizzas not fit through the drive through window as easily as a bag of burgers and fries.

Marketing

They could’ve had success with pizzas if they approached it from a different angle.  McDonald’s found success with a production expansion with the Egg McMuffin.  Originally, skeptically received, breakfast is a McDonald’s staple now.  Burgers are lunch thing, but they successfully introduced breakfast.  Pizza is a dinner thing.  Therefore, instead of pizzas, McDonald’s should have brought in pizza by the slice (a very well-known concept at pizzerias) or at least personal sized /small pizzas.  A slice of pizza for lunch is not a foreign concept.  An entire pizza for lunch is.  

The difficulty in making and selling different types of food is probably why even large chain restaurants choose to differentiate different palates under different brands as Pizza Hut is doing with WingStreet and Carl’s Jr. with Green Burrito.

pizzahutwingstreetcarlsjrgreenburrito

Now it will be harder to reintroduce pizzas because McDonald’s is busy rebranding itself to health with marginal success.  Pizzas aren’t considered to be healthy.  Nonetheless, it is not hitting their market value with a 5 year high at $118/share.

mcd stock price

McDonald’s might set up for another go at extension but instead of a product extension (i.e. new product), they might go brand extension (i.e. new company).  The popularity of fast casual dining such as Chipotle (before the e-coli debacle) and Blaze Pizza might be an attractive direction to expand McDonald’s.

Calculating what equity percentage to give

2000px-Cake_quarters.svgMy clients are often in the position of having to offer equity in their company to potential investors.  However, how does one know what percentage to give?

Well, one way is just by gut.  You got a person willing to invest $20,000 into your company but you don’t know want to give up too control so you offer 25%.  Conversely, on Shark Tank we see entrepreneurs be given very little money while giving up a large portion of ownership in their company.

There are other more quantitative methods such as asset-based, comparable, option-based, etc.  However for a start-up without much in assets or earnings per share data, these methods are difficult because there aren’t enough figures to go by.  Also, if the business is truly unique, then comparisons of “similar” companies don’t exist.

One of the more common measurement for valuing public and private companies used by investment bankers is the Discounted Cash Flows Method.  This is useful because with every business plan and financial projection I create for my clients, I create a cash flow statement.  With this I take the total projected cash flows from each year and adjust their future value into their present value.  This is to adjust for interest (i.e. $100 today doesn’t the same as $100 in ten years).  Then I take the discount rate (risk-free U.S. treasury rate is most common) to calculate the present day equity value of the company in X years using this formula:

dcf formula

The amount of investment capital received is the percentage of equity given.  There is obviously room for negotiation because forecasted cash flows is debatable and the amount of involvement (i.e. sweat equity) the investor wants to put in is also a factor.  Nonetheless, it is a gauge one can use to make sure they’re not giving up too much.

 

Maximum efficiency for your effort

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A lot of my clients (and generally all people) have difficulty juggling work, life, and starting up their business.

I find for me, not watching TV helps.  I do other activities (surf, Brazilian jiu-jitsu) for relaxation/stress relief.  I get my news online, eat clean/take vitamins to keep my energy up, and stay focused while working by listening to music that helps me zone in.

Of course everyone is different so you gotta find a schedule/method that works for you.

Here are a list of other things you can do to be more productive with your time.

Walmart hits the slumps

sad walmart

Walmart lost $21 billion in market value after it forecasts drop in 2017 earnings resulting in the steepest decline of the company’s stock in 25 years.

In layman’s terms:  Because Walmart said it’s expecting to earn less in 2017, lots of their shareholders sold their stock and lots of potential buyers said they weren’t willing to buy unless the asking stock price is lower.

Why

  1.  Amazon.

Amazon is crushing pretty much every retailer (except some custom designers; however with Amazon Local they are partnering with may of those product/service providers).  Amazon sells practically everything you can put in a box and ship.  At extremely competitive prices.  Free overnight/2-day shipping in some cases.

Walmart offers very very competitive prices and has locations pretty much anywhere in the US.  However, they are still a brick and mortar business so there is a limitation on floor space thus a limitation on product offerings.  I say brick and mortar instead of ‘click and mortar’ because even though they have an online store, it sucks.  Last year, I purchased a product online and selected in-store pick-up.  5 days later it was available for pick-up at he Walmart that is down the street from my office.  Walmart’s supply chain management system is one of the best in the world.  However, somewhere down the road there was an implementation issue of the online business with the existing business.

Walmart’s situation has similar elements to that of Blockbuster.  They have a size and first mover advantage.  However, over time they lost their position.  I doubt Walmart will face the same fate as Blockbuster but with a $21 billion dollar loss, it is not nothing.  You can read about Netflix/Blockbuster here.

2.  Other competitors

  • Dollar stores:  Walmart is known for low prices but no one goes lower than dollar stores.  Furthermore with the long-going Great Recession and great income disparity dollar stores enjoyed great profitability.
  • Grocery stores:  Walmart has Neighborhood Market stores in some markets and super stores (all encompassing stores) in other markets.  Nonetheless, companies that are just grocery stores are a big and aggressive competitor to Walmart.

Other Factors

Walmart is also facing PR issues:  1)  It is considered low-class.  There is a search term “people of Walmart” which shows rather uncouth individuals shopping in Walmart stores.  2)  Also, Walmart is criticized for killing off small, independent stores.

Walmart is doing many things to try to turn their path around.  We’ll see how effect these efforts are.

How Quiksilver (and surf brands in general) can save it/themselves

Last week I highlighted aspects about Quiksilver’s bankruptcy.  So this is what Quiksilver and other surf brands do should to save themselves.

Sector downturn

Looks like the other big surf brand, Billabong is also hurting too with diminishing revenues and net losses from 2012 to 2014.

billabong financials

Recently Billabong also sold its other assets: DaKine, Swell.com and Surfstitch to enhance liquidity.

Billabong also thought about selling RVCA but didn’t.  I’ll get to that in a bit.

As I discussed in my previous post, Quiksilver bankruptcy is partly due to surfing not being as cool as it used to be.

So what is cool?

If extreme sports was cool in the ’90s and ’00s, extreme athletics is cool now.  MMA and CrossFit is cool.

In March 2015 WWE announced a 50/50 joint venture partnership with MMA brand, TapOut.  Founded in 1997, the brand had $200 million in revenues in 2010.   Later that year the founders sold it to Canadian company Authentic Brands Group LLC for an undisclosed sum.

CrossFit had 8,000 affiliates in October 2013.  As of January 2014 the company had 9,000.  In May 2014 it hit 10,000 affiliates.

As shown by strategyandanalytics.com’s graph featured in Fast Company’s article, CrossFit’s popularity growth is amazing.

3035118-inline-i-1-infographic-the-popularity-of-trendy-workouts-over-ten-years

Of course, most people don’t actually want to do WODs and armbars.  They only want to dress like they do, much like surfing and snowboarding.

This is why it’s no coincidence that Reebok (doing well financially with 5% growth in 2014 and seven consecutive quarters of growth) has its hand in the UFC and CrossFit.

Under Armour is so popular.  Under Armour which also makes products for MMA and CrossFit enthusiasts were named as one of the most valuable American brands by Fashionista and as one of the top 10 MMA brands by FightState.

Heck, even Adidas (Reebok’s parent company) makes judo gis!

But Reebok isn’t a surf brand!!  Quiksilver isn’t an MMA/CrossFit brand!!!

So going back to RVCA.  RVCA, is a popular surf brand that is also popular amongst the brazilian jiujitsu crowd with its sponsored athletes such as MMA star BJ Penn amongst BJJ stars.  RVCA recently did a collaboration gi with uber popular gi brand Shoyoroll.  Billabong decided to keep this brand.

As RVCA has shown, it is possible for a surf brand to do a brand extension into other lifestyle activities.

So what should Quiksilver do?

Change their marketing communications.  Surf ads right now are blondes in exotic tropical locations.  Unfortunately for Quiksilver and other surf brands is that demographics are changing:  wealth discrepancy is large also Hispanics and Asians are the fastest-growing minorities in the US.  This growing market segment might not have the money or time to travel to exotic destinations nor do they even look like a pro surfer such as Alana Blanchard.

So abandon their existing surf model?  No, look at the other elements of surf.  The aspects of the lifestyle that are more relatable to this large, young, and growing market segment:

  • Surf spots:  Urban surf spots such as old Huntington Beach (it wasn’t always the gentrified “Surf City USA” it is now), Long Beach, Rockaway Beach NY, San Pedro, etc.  Even urban Honolulu can be a little edgy.
  • Embrace their connections with the skate world.
  • Athletes:  Add famous MMA and/or CrossFit athletes that also surf.  Especially with the Reebok-UFC deal, lots of MMA fighters are looking for more sponsorship money.  UFC middleweight contender Luke Rockhold surfs in Santa Cruz.
  • Other lifestyle images:  Tattoos and asphalt instead of sunsets and palm trees, turntables instead of ukeleles.
  • Diversify:  Buy or strategic partnership with boxing/muay Thai brand Fairtex/etc. or Brazilian jiujitsu brand Gameness/etc.

We’ll see what the future brings.

Quiksilver bankruptcy

quik wipeout

In a nutshell

  1. Surfing isn’t seen as cool as it used to be
  2. Recession hurt consumer spending -> moved to fast-fashion retailers such as H&M and Forever 21
  3. Rossignol purchase drained their cash reserves
  4. Continued to expand stores even though market tastes changed

Read the rest of the article here

Pricing strategy

Pricing is such an important element of sales.  How much?  It can make or a break a deal.  It is used from branding (i.e. “prestige pricing”) to selling of soon-to-be discontinued product lines.

So how do you price your product/service?  There’s cost pricing which just covers your costs and expenses and maybe leaves a little margin.  Then there’s prestige pricing which sets the price very high so the customer can feel special for paying so much.  There are many other strategies too.

For example if you want to sell a $25,000 car you sell it next to a $40,000 car.  Suddenly $25k doesn’t seem as expensive.  This is an example of Anchoring.  Anchoring is the human tendency to rely too heavily on the first piece of information (i.e. the “anchor”) offered when making decision.

This great article from Blue Perks discussed the many more pricing strategies you should and shouldn’t use.

Product/Service life cycle

One of the first in a business plan is determining where on the product/service life cycle curve the product sits.  It is always helpful in any Industry and Market Analysis to get a macro view of where the product/service is in its life cycle. 

What is the product/service life cycle?

It is the birth, growth, progression, and ultimate passing of any product/service.  For example, a CD came into the market around the early 90s.  This is the birth/introduction stage.  It gained popularity and was one of the most preferred data transfer methods until recently.  So for the next ten years, it was in the growth and in the early 2010s entered the maturity phase.  Now, it is in the decline phase.  Microsoft Office is installed online when purchasing a new laptop.  No more CDs.

Of course, not all products/services will die out.  They may die out eventually but will make one or two more resurgences.  Take, for example, baking soda (sodium bicarbonate).  The earliest use of naturally forming sodium bicarbonate was used by ancient Egyptians as a component of the paints they used in hieroglyphics.  Sodium bicarbonate was also used in the 1800s in commercial fishing to prevent freshly caught fish from spoiling.  Baking soda continues its long life cycle in many, many uses, including cleaning, cooking, neutralization of acids and bases, not to mention the elementary school volcano science experiment, and more.

Product/Service life cycle curve

Maybe there will be a new use for CDs that will revive the CD, but without major modification (which will essentially change the actual product and will actually create a new/different product), it will be unlikely.  Wherever your product/service is in its life cycle, with enough investigation, a new spin could be created to find a niche demand (market segment).

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Contact us for help determining where your business offering is in the product/service life cycle.

The power of a good team

Yesterday I was watching the documentary Supermensch:  The Legend of Shep Gordon.  Shep Gordon is an ubermanager that managed Alice Cooper, Blondie, Groucho Marx, helped create the celebrity chef with his management company ‘Alive Culinary Resources’ (subsidiary of Alive Enterprises), and many others.

It reminded me how much entrepreneurs need a strong team around them to make their vision a reality.  In Shep’s case, his entrepreneurs were the musicians.  They were talented people that were passionate about what they were creating but in order to continue to create it and eventually profit from it, they needed a manager.

A lot of times an entrepreneur just has a vision.  An idea and little more than the passion to make it come to reality.  However, there are lots of technical skills that have to be utilized to make an entrepreneur’s vision come to life.

Lots of my clients have the same issue.  They have a great product but don’t have a team to make it happen.  I advise them to find all the areas in which they don’t have the knowledge/skills to make to launch their business.  Then hire the necessary person or hire/outsource that task.

If you don’t have the funds to hire someone, then you will likely have to offer equity within the company.  This is MUCH easier said than done.  Most people cannot afford to go without a steady paycheck for long periods of time in the hopes of future revenues.  That is why you gotta go through lots and lots and LOTS of candidates to find the right match; in skill sets, temperament, and even personalities (if you bring on the wrong person you will suffer, like one of my clients).  You have to sell yourself and your business to this individual.  You have to convince him/her to take this chance on your business.  Being persistent and persuasive is once of the most important skills an entrepreneur can possess.  You’ll need persistence and persuasiveness when finding partners, getting financing, negotiating rental terms, the list goes on and on.  In business school, I took a negotiating course and one of the themes was “You don’t get what you deserve.  You get what you negotiate.”  How right it can be.

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No one said starting a business will be easy.  It is not for the timid.  Nonetheless, for those that make it, the rewards are tremendous.

 

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