Applying to Incubators Takes More Than a Great Idea

18 Apr

As the month of March trudges on, we are getting closer each day to spring and eventually summer when numerous startup incubators hold their camps for early-stage companies. Many incubators are still taking submissions, including TechStars Boulder, but in case of Y Combinator, the deadline has since come and gone. Theoryville is a startup that has already been asked to interview for a spot with Y Combinator, so if you are still looking to apply for one of this summer’s incubators, you may want to heed its founder’s advice.

Trevor Burnham, co-founder of Theoryville, a startup looking to ease the process of sharing data and documents between professors and scientists, recently blogged about how his company managed to snag a highly-coveted in-person interview for Y Combinator. Burnham reveals that through the process of applying to several incubators, he and his partners realized some early mistakes they had made.

One important lesson they learned through their first set of interviews is that they hadn’t talked to anyone but themselves about the idea. After all, if you’re trying to create a service that will change the way scientists and college professors share information, shouldn’t you talk to them about what their needs are? Investors and organizations want to see more than a great idea; they want to know you’ve thought it out and have identified a specific audience that has needs. For Burnham and his team, after being shown the door a few times, they turned around and spoke with their “users,” even though they didn’t have a product to show.

“We started asking for input from every potential user we knew and sending cold e-​​mails by the dozen to [University of Michigan professors] to ask them to talk with us about their software needs,” writes Burnham on his blog. “Based on the feedback we were getting, our understanding of the market completely changed.”

If there is one thing startups can learn from the perilous launch of Google Buzz, its that getting feedback from users is a good thing to before launching; or in the case of Theoryville, before looking for funding or acceptance to an incubator. Burnham and his partners assumed that they needed a working demo before they could get any useful customer feedback, but in reality, there is much to be learned about your audience before you start building.

In fact, it makes a whole lot more sense to speak with the people you want to see using your product before you waste time, resources, and perhaps money on building an early prototype that they will snub their noses at. It’s a lot like making sure the plot of land you have chosen to build your house on is a solid and stable foundation. That is not to say, however, that building a demo does not lend itself to learning valuable lessons about your product.

“[Building a demo] led us to grapple with some design decisions that weren’t apparent when we were just using white boards and static mockups,” says Burnham. “That, in turn, gave us a more specific notion of what our product’s advantages are.”

So they checked the foundation before building, but when their house was done they realized that too many windows were facing west and catching the hot late-afternoon sun – a regrettable error and a lesson learned (especially for home builders where I’m from). Despite some changes that needed to be made, Burnahm says “it gave us some momentum, which we’re using to build a much-​​improved demo now.” So the best way to make early progress, it seems, would be to get that first rough draft out the door and begin iterating over and over on it; move some windows around until the latest version is a better, more mature version of your product.

It also seems like it helped that they had applied to earlier incubators before applying to Y Combinator. They also participated in TechStars For A Day in Boulder, where they not only learned a lot from the mentors but were able to network with potential users of their service in the area. Attending these events and applying to other incubators worked like spring training before a preliminary interview with Y Combinator via Skype, and it couldn’t have looked bad on their application either.


The Entrepreneur Thesis

27 Mar

by MARK SUSTER on MARCH 1, 2010

I was going to save this post for a while but the “Patzer Problem” meme has forced my hand.  I, for one, am with Rob Hayes of First Round Capital on this one.

“If we are doing things right and our company founders are successful, then over the long run we should be successful. If we get to the point where our founders are successful but we can’t be, we should be rethinking our business.”

I have a philosophy.  A thesis.  An entrepreneur thesis.  I’m not talk about the age old debate amongst investors whether you back entrepreneurs, markets or products (or as many people like to hedge – product / market fit).  I’m unequivocal on that topic.  It’s entrepreneurs I back.  I’m on the record as saying I’m 70% management, 30% market.  We’ll have that debate another day, I promise.

Today’s post is about my investment thesis.  It’s what I call the “entrepreneur thesis.”  My investment philosophy is to back the best possible entrepreneurs I can and to stick by them through the growth (or sale) of the company.  I’ve outlined already what I believe makes a great entrepreneur and I’ve stated unequivocally that this is a subjective view of what it takes.  But when I’m looking to invest the dollars that my Limited Partners have entrusted my firm with I’m going with my view.

So what is this “entrepreneur thesis?”  It’s the view that I back great entrepreneurs and help them pursue their dreams no matter what.  Sometimes this will mean we collectively double down and try to build a bigger business and sometimes it may mean selling earlier than I had thought we would.  I know this sounds Polly Anna-ish.  I’m not just writing that “I love entrepreneurs” to curry favor with startup CEO’s.  Anyone who has ever worked with me knows that I’m no pushover and I’m certainly not a wallflower.  I’ll argue my point vociferously.  But I don’t believe in betting against founders.

Let me explain.

A few years ago I was having dinner with a friend of mine who works for one of the biggest known Silicon Valley firms.  He was telling me about a deal he had done.  He invested $8 million in a company in the computer networking space.  They had an offer to be acquired for $80 million, which would have dramatically changed the lives of the founders forever.  My friend blocked the deal.  It was “only” a 2.5x for him.

His logic was, “when I invested the management team knew that I wanted a multi-hundred million dollar exit so they shouldn’t be surprised.  This return won’t be enough for me to justify to my partners.”  I literally said to my friend, “You’re a dick.  Do you not see the consequences you’ve weaved?  You’ve now got a management team that hates you.  They hate you for life.  They will tell every other entrepreneur in town not to work for you.  Presumably they are talented if they created a company worth $80 million.  They’ll never work with you again.  Nor will any of their friends or colleagues.  Are you that short sighted?”

I kid you not when I use quotes there.  My wife was really uncomfortable because she was there and so was his wife.  I’ve known this guy and his wife for a LONG time.  My wife was actually mad at me for being so blunt.  But she knows it’s a character flaw of mine so she forgives me (I hope).

To this day I still don’t understand what he was thinking.

I’ve had the conversation of what will happen upon an exit with founders so many times I feel like a broken record.  Before I outline my views let me give you one more story.

In 2006, Steven Dietz, a partner at my firm, GRP Partners, had given me $500,000 in a seed in convertible debt when I started my second company, Koral.  GRP Partners had also funded my first company.  I had an offer to sell my company to in 2007.  Steven knew that from a fund perspective he wasn’t going to earn the amount of money that a typical VC might look for since we were selling early.  But he also knew that it would change my life forever.  He was grateful since I stuck with my first company, BuildOnline, well beyond when others would have (since I had taken great dilution during the dot com bust.).  He decided to let me earn.  I will never forget that.

So it was kind of obvious when Steven and Yves Sisteron (the partner on my first deal) offered me a role as a partner in their firm that I would work here.  I knew that we were aligned intellectually and ethically.  I had initially called them wondering if they’d fund my third venture.  I never imagined I would switch sides of the table.

So, to my thesis:

1. Work with the best at early stages: I’d like to get involved with capital efficient companies early in their lifecycle.  I want to back entrepreneurs that I believe have similar ethical values, are fun to work with, trust me, have big aspirations, are willing to work hard, are smart and want to have an impact on the world.  I want to see small amounts of money go in and I often tell these entrepreneurs, “I don’t have a goal for you to come back and quickly ask for more money.  Go slowly if you need.  Spend wisely – you need to “grow into your valuation.”  And by investing smaller amounts at early stages I am impacted if a quicker-than-anticipated sale happens.  I view this as The Patzer Opportunity.

2. Go in planning for a big outcome: I tell each person that I am going to work with the same story.  I hope to build a billion dollar company with them.   GRP Partners has created more than a dozen of these so as a firm we know something about creating big companies.  I don’t go into deals with a plan to sell for $20 million.  $100 million at least.

3. Keep options on the table: I believe in my bones that entrepreneurs shouldn’t “over raise” capital.  They should right size their capital raises.  That doesn’t mean being cheap.  That doesn’t mean raising the least amount possible.  But it means not over raising money.  I know I’m being vague.  Each situation warrants different amounts.  But let me give you an example.  If you can raise $2 million or $10 million up front (maybe you’re a hot entrepreneur in a hot space) I know that my vote would be with the $2 million (again depending on the situation).  If you raise $2 million you preserve your options.  Somebody may come along and offer you $25 million to buy your company.  You might like to accept that.  It might just change your life (for example if you personally own 33% of the company).  Or if you didn’t sell and the next round comes along.  You raise $5 million at a $20 million post money.  That by definition means you were hot.  You should still be able to sell for $50 million.  At each step you preserve your options.  If you go to quickly to take down a $50 million round from late stage funds you have one option – go big or go home.

4. Don’t block founders from selling: OK, so if you raise $2 million at a $10 million post money (e.g. maybe I own 20% of the company) or $5 million at a $20 million post (I own 25%) shouldn’t I block that sale of a company a cheap price?  This is the “Patzer Problem.”  Some people assert that the later stage investors didn’t make a high enough return.  My view: If you’re absolutely convinced that it is the right thing to sell I need to support you.  My bet: if you sell and I helped you earn and was a key contributor to your company then you’ll tell everybody you know to work with me.  Over time I should see great deals as a result.  When you go to do your next company (most entrepreneurs do) you’ll call me first in the way that I called GRP Partners for both my second company and my third (which never materialized).

5. Persuade you and align you to swing for the fences with me: But of course there is more to my views.  I’m hoping that when your $25 million or $50 million exit comes along I can convince you (if I believe it) that we should swing for the fences and create a larger company.  If I really believe it I ought to let you earn now by taking money off of the table.  I have already written about this.  I believe our incentives need to be aligned at this point in time.  You need to have your “feed the family” money so that you want to swing for the fences.  You also need to believe that the higher outcome is possible.  If I’m not willing to let you take money off of the table and if I’m not willing to put more money into the company to help you achieve your goals then how convinced am I really about the upside?

I’m not trying to be nice to entrepreneurs so you’ll read my blog or take my money.  It is simply the thesis that I believe in.  It’s the “entrepreneur thesis.”  Let me outline the contra viewpoint, which is seldom expressed openly, but it what I believe gives our industry a bad reputation.

Large early stage rounds – Too many investors whose funds are too large feel that they need to put “a lot of capital to work” in order to justify being involved with your company.  So much so, that when I was raising capital in 2006 and asked for $2 million several funds told me that they wouldn’t give me money unless I’d take $5 million.  And they actually hinted that I could get a better valuation.  Tempting.  The problem is that it takes options off of the table.   And the same logic that forced them to put $5 million to work also forces them to block your sale at prices that might just change your life.

Change management teams – A lot of well known, historical VCs have a belief that management teams are expendable.  You simply bring in a more talented team after your $10 million investors and the founders become senior members of the team but don’t run things.  I accept that this may sometimes happen.  But it’s the absolute last course of action for me.  I believe that a motivated founder trumps a well-hired mercenary CEO any day of the week.

Outsized returns through sharp elbows – OK, here is what it boils down to.  I really believe that some firms have the strategy of edging out the entrepreneurs, bringing in a new management team, recapitalizing the company, minimizing the founders’ share and taking maximum ownership for the VCs.  This is dreadful behavior but I truly believe that some firms go into investments with this mindset.  I’ve heard very similar stories in the VC corridors.  ”Well, we’ll just do their next round and take 50% of the company.  They’re struggling to raise funds anyways.”  Look – it does happen.  And sometimes it is warranted.  I just don’t believe that any VC should go in with this strategy.  It’s why I always tell entrepreneurs to reference check their VCs.

Listen, who you work with matters.  Brand isn’t everything.  And firms that get outsized returns on occasion to so at the expense of the founders.  My thesis is that I should align myself with my customers (the CEOs) as it is the most likely path to great financial returns for my investors.  And if I’m in this business for a long time I’m betting this will pay off.  You?  Taking VC money is more difficult than marriage.  At least if you fall out of love you can legally get divorced in America.  Not so venture capital.  Raise wisely.

Update: After reading the comments I want to make one thing clear.  I don’t believe this strategy has any sacrifices – I believe it will mathematically pay off bigger over time. Why?

– getting invited to be in the handful of deals each year in the US that really matter vs. getting mediocre deals
– getting the best entrepreneurs to work with you multiple times
– finding the right balance where sometimes the “early sale” doesn’t happen because you allowed some founder liquidity (on a case-by-case basis) that enabled you to swing for the fences where other entrepreneurs may have pushed for an early exit when incentives weren’t aligned

Becoming Market Leader: Finding and Beating the Competition

12 Mar

In the late 90’s, a spokesperson for the Coca Cola corporation said, “Our primary competition isn’t Pepsi. Our real competition is water, tea, nimbupani and Pepsi… in that order.”

While it’s a gruesome thought to see water considered competition to the top cola manufacturer, I didn’t include the quote to make a commentary on public health or privatization. I did it to remind startups that competition includes all products that solve the same problem, in this case – thirst. When a startup claims they have no competitors, it makes me wonder if there’s a need for their product in the first place. You have competitors. Below are a few ways you can find them, research them and then beat them.

It’s About Solving A Problem: Whether you are connecting friends online, providing a reference resource or building a better mousetrap, your product is one approach to a problem and you need to find others who claim to take on the same challenge. Your obvious competitors are those with similar products but your less obvious ones are those with vastly different products who still compete for market’s attention.

Know Your Competitors: Think about your problem statement and the problem-related keywords and categories that drive users to your site. Now take those same keywords, type them into your favorite search engine and look at who dominates those pages. This is a good indicator of your competition. You can also search your keywords and categories through sites like KillerStartupsYouNoodle and LinkedIn to determine others in your space. Conversation tracking services like Echo and UberVu also allow you to track your perceived direct competitors through public conversations, blog posts and traditional media sources.

Reach Out Early and Make A Better Case: Often when ReadWriteWeb writes an article about a company, we get a pitch about a similar product the next day. Unless you prove that your product solves the problem much better than the last guy, we are not going to write about you. Similarly, investors don’t want to hear a pitch about an exact replica of a product they’ve already funded. It is your job to reach out to stakeholders early, explain the problem, give an accurate description of the competitive environment, and then blow our minds. You need to prove that you are the best solution to the problem bar none.

Kevin Rose’s 10 Tips for Entrepreneurs

12 Mar

Kevin Rose, Digg’s founder, spoke this week at Webstock in Wellington, New Zealand and covered 10 amazing tips for entrepreneurs. They were truly insightful

– and obviously came straight from the heart and soul of someone who worked a day job and built his dream after hours. This is our take of what he had to say.

1: Just Build It: You don’t need anyone’s approval and in fact, you probably won’t get it, so don’t even try.


2: Iterate: Build, release and iterate. Make a list of the features you want to create over the next six months and get going! For small companies, once a week; for larger companies, maybe twice a month.

3: Hire Your Boss: Make sure you hire people that you would want to work for, who challenge you and you can learn from.

4: Demand Excellence: Ensure staff are committed to and understand your vision. Passionate, committed staff have a tendency to rub off on people. There is nothing like a new junior developer who runs circles around everyone to get people hyped up and raise the bar! Stay involved in the hiring process as long as you possibly can.

5: Raising Money: The higher your evaluation is, the more equity you have to work with. Beg, borrow and steal. Be creative about finding ways to cut costs. For example, tell the bar you are having a “birthday party” instead of a corporate event (which they would charge you $5,000 for). Rent servers, don’t buy them. Don’t just take the cash, make sure your investors can add value. Stick with angel investment. Venture capital mean board meetings, which is a huge sap on time and resources.

6: Hack the Press: Hit up the lower-end bloggers at your favorite tech blog. They have just as much opportunity to write about your product as any other blogger on the team. Attend the after-event parties. The same crowd that attends the events also goes to the parties, but the parties are free.

7: Invest in Advisors: Give away a small amount of stock to advisors (which they can vest after a few years) who you can call on in a pickle or for general advice as issues arise. Set the ground rules so you and the advisor know how much time you have access to.

8: Connect With the Community: Hold a live town hall where you can collect feedback and get advice from your users.

9: Leverage Your User Base to Spread the Word: Facebook notifications is a great example of how to do this.

10: Analyze Your Traffic: Pay attention to how people are using your site, and then learn and evolve. Use Google Analytics to understand and track traffic sources and entrance and exit paths.

Always Be Closing: Ink the Deal and Do It Quickly

12 Mar

abc_suster_feb10.jpgJust because you’ve been in talks doesn’t mean the deal is done. Entrepreneurs need to remain diligent about timelines in order to ensure that the deals they’ve set in motion actually come to fruition. If you’re negotiating a term sheet, building a partnership or on the verge of an acquisition, get the papers signed. Legendary GRP VC investor Mark Suster has seen his fair share of successful deals, and he writes, “don’t pop the champagne until the ink is dry on the contract and the money is in the bank.”


dali_clock_feb10.jpgSuster wrote a great post on the need to close deals in a timely manner. While it’s important to negotiate well, he’s seen firsthand how deals can go up in smoke if given too much time. Suster raised a round right before a market crash and is convinced that if he’d waited even a month, his offers would have been rescinded. He explains that market crashes, deal fatigue, complacency, or losing your deal sponsor could mean the difference between a banner year and a missed opportunity. Some suggestions to expedite the deal process include:

1. Don’t Over Shop: Although a healthy interest from a number of players is important for leverage, shopping around too much has its downside. Says Suster, “There is a fatigue factor.  If deals drift, people start whisper campaigns.  It is a tight-knit industry.  Like it or not everybody knows each other. ” If you haven’t closed a deal in a timely manner others may assume something negative is holding you back.

2. Don’t Grind Every Detail: Know the important points that you want to negotiate and stick to them. He writes that you shouldn’t get caught up in inconsequential details as they’ll potentially add weeks to the legal process and you’ll risk creating ill will with your newfound partners.

3. Don’t Be Complacent: Suster suggests that you hold all those involved to their deadlines and ensure that lawyers get the documents out when promised. If someone is behind, call them and let them know you are both interested and that you’re willing to fly out and meet them or take calls in the middle of the night to acommodate them.

4. Get People In Person: Put yourself, your negotiating partner, both sides of lawyers and the other party in a room to hash out the details. Suster stresses that it’s important to create goals for what you want to accomplish and take breaks to gain consent from any higher authorities.

How to Improve Your Cold-Calling Skills

12 Mar

Let’s face it: Nobody really enjoys making cold calls. But the fact is that cold calling remains a part of life whether you are a business owner, a job seeker, or even a volunteer looking to raise money for your local non-profit group, says Eliot Burdett, co-founder of Peak Sales Recruiting in Ottawa, Canada. “Even with the rise of the Internet, which has changed the way people buy, having the ability to connect with someone cold on the phone remains a valuable skill for anyone to have,” he says.The problem, quite frankly, is that like any skill, cold calling requires practice. And even then, the numbers don’t always add up, says Joanne Black, founder of NoMoreColdCalling in Greenbrae, California, and author of a book by the same name. “People who cold call will make between 100 and 150 dials, talk to between 18 and 20 people, and schedule six to eight appointments,” she says. “And if they’re lucky, close one deal.”We’ve compiled some expert tips below to help you improve your odds of closing more deals with fewer dials.Dig Deeper: Improving Your Cold-Calling TechniqueImproving Your Cold-Calling Skills: Set a Calling ScheduleSet a target number of calls per week and schedule time every day to make a portion of these calls, Burdett advises. “This kind of discipline will create rhythm and the calling habit, don’t procrastinate, just do it,” he says. “The more calls you make the easier it gets.”

The best times to call are early or late in the day when potential customers are less busy and more likely to answer their own phones. You may also prefer to use a hands-free device or headset that allows you to stand up and walk around when you’re talking to sound more energized.

One of the first questions to ask  might be, “Is this a good time to talk?” If it isn’t, ask the person when a better time might be. Then, get them to schedule it on their calendar. Then, when you call back, they’ll be expecting you. Pick a quick and clever way to break the ice – perhaps with a short dose of humor.

Dig Deeper: Advice on How to Practice Your Sales Pitch

Improving Your Cold-Calling Skills: Communicate Value

Start your call by promising brevity and keep your promise, says Stephanie Hackney of Branding Masters in Austin, Texas. “Before you lift the receiver, you need to know, beyond a shadow of a doubt, that what you provide has value to the people you’ll be calling on,” she says. “Once you know that, and you can show why your potential customers care, create simple wording that briefly communicates that value and answers the customer’s primary question: What’s in it for me? As a customer, I don’t care what you have or what your product does, I want to know how it benefits me. How does it make my life better, easier?”

One key is to communicate the benefits of what you’re calling about, not just its features. Remember also to focus on what your customer needs, not on what you have.

Questions you should be keeping in mind, Hackney says, are:

•    Is your product and/or service offering solving your customer’s issues, or is it simply something you want to offer?

•    Have you adequately researched the market to determine there is a real need for what you have to offer? If not, then go back to the drawing board until you are able to answer “yes” to that question.

Dig Deeper: A Sales Force Built on Cold-Calling Improving Your Cold-Calling Skills: How to Head-Off ObjectionsYou should know every reason your potential customers might have for not wanting to give you the time of day, Hackney says. One way to prepare for this is to script answers to every objection you can think of, and then think of and answer more. Identify a list of several meaningful and probing questions that will stimulate a conversation and allow you to develop a relationship. Role-playing is perhaps the best way to develop the list of objections, says Hackney, especially if you can convince an uninterested (and therefore more objective) person to play the role of the customer.

If you are asked a question you can’t answer, don’t make up an answer just to fill the silence. “Offer to research the question and to get back to the customer,” Hackney says. “You will be seen as honest, professional and interested in your customer’s success.”

Dig Deeper: How to Respond to an Objection over Price

Improving Your Cold-Calling Skills: Think Research

If all you’re only goal in making cold calls is to close deals, it’s easy to get frustrated when someone hangs up on you. That’s why you should change your focus and think of the calls as research time, Burdett says. “Don’t just call and hard pitch, because everyone hates to have their day interrupted by a sales call,” he says. “Instead try think beforehand what challenges the prospect is dealing with and then use the call to collect insight, validate your assumptions, share insight about what solutions exist and what might work for them.”

Then, you make your calls, use what you have learned about your customer’s needs and leverage it, says Hackney. “Once you know, to the core of your being, that your offering can solve someone else’s pain,” Hackney says. “It will be much easier to communicate it to the customer.”Dig Deeper: How to Leverage Sales ResearchImproving Your Cold-Calling Skills: Know Your CompetitionBefore making calls, it is critical to know who your competition is. Know what they offer, along with their strengths and weaknesses, and make that part of your script. “But never, and I do mean never, belittle your competition,” Hackney says. “Every company has its strengths and weaknesses. You have yours as well.”

The key, she says, is to succinctly communicate the differences between yours and your competition’s offerings without resorting to bashing which will help you look more professional, and most importantly, will make the customer feel that you have their best interest at heart.

If the customer can’t see any difference between what you’re selling and what the competition is offering, you have not done a good job of communicating what makes you unique and the best solution, Hackney says. Or, your offering might not be the best fit, in which case you could choose to recommend a competing product or service that’s a better fit to your customer’s individual needs. The point is to try and address these kinds of questions and distinctions before you place the call.Dig Deeper: Tools on Researching the CompetitionImproving Your Cold-Calling Skills: Follow Through

One of the most important lessons in business is to follow through on commitments, Hackney says. “Be true to your word and deliver what you promise,” she says. “Just knowing that you will do so makes it easy to communicate a caring attitude and professionalism to customers. After all, that’s all most customers want: someone to make their life easier.”

It also makes sense to employ a sales tracking system such as as a way to stay on top of your discussions, emails and campaigns. Dig Deeper: Mastering the Follow-ThroughImproving Your Cold-Calling Skills: Warm Up Those CallsOf course, there are many ways to set up your calls so that if they’re not hot leads, they’re at least warm. To get there, one tip is to get referrals.”The only way for business owners to get hot leads, close more than 50 percent of their prospects, reduce their sales time, ace out the competition, and incur no hard costs, is to receive a referral introduction to their ideal client,” Black says. Referrals work as an instant connection and address the two biggest issues that all salespeople face:1. Getting the meeting at the level that counts.2. Converting prospects to prime customers.So how do you go about getting referrals? Black says there are two key ways. First, ask your current clients to introduce you to people they know. Second, create referral metrics for your company. That can include: How many people you ask each week, the number of referrals you receive, the number of referral meetings you conduct. Also measure the increase in revenue and profits and the reduction in your cost of sales.

It could also be wise to invest in lead-generation programs so that some of the outbound calls are more warm than cold, Burdett says. There are also countless online social media tools available to help warm up your calls and generate leads. You and your colleagues should see social networking as an opportunity to meet clients and open up entire social pockets of exposure. Check out:

•   Jigsaw •   LinkedIn•   Google Profiles•   Facebook•   Twitter•   InsideView•   ZoomInfo•   ConnectAndSellDig Deeper: Using Social Networking Sites to Drive BusinessImproving Your Cold-Calling Skills: Additional Resources  The Complete Idiot’s Guide to Cold Calling, by Keith Rosen. Alpha, 2004.Take the Cold Out of Cold Calling, by Sam Richter. Beaver’s Bond Press, 2009.Cold Calling Techniques That Really Work, by Stephan Schiffman. Adams Media, 2007.Lessons from 100,000 Cold Calls, by Stewart L. Rogers. Sourcebooks, 2008.

More Quick Tips on Cold Calling from

How to Develop a Business Growth Strategy

12 Mar

Turning a small business into a big one is never easy. The statistics are grim. Research suggests that only one-tenth of 1 percent of companies will ever reach $250 million in annual revenue. An even more microscopic group, just 0.036 percent, will reach $1 billion in annual sales.

In other words, most businesses start small and stay there.

But if that’s not good enough for you—or of you recognize that staying small doesn’t necessarily guarantee your business’s survival— there are examples of companies out there that have successfully made the transition from start-up to small business to fully-thriving large business.

That’s the premise behind the search Keith McFarland, an entrepreneur and former Inc. 500 CEO, undertook in writing his book, The Breakthrough Company. “There has always been lots of books out there on how to run a big company,” says McFarland, who know runs his own consulting business, McFarland Partners based in Salt Lake City. “But I couldn’t find one about how to maintain fast-growth over the long-term. So I studied the companies who had done it to learn their lessons.”

What follows are some of the lessons McFarland learned from his study of the breakthrough companies and how they can help you create a growth strategy of your own.

Developing a Growth Strategy: Intensive Growth

Part of getting from A to B, then, is to put together a growth strategy that, McFarland says, “brings you the most results from the least amount of risk and effort.” Growth strategies resemble a kind of ladder, where lower-level rungs present less risk but maybe less quick-growth impact. The bottom line for small businesses, especially start-ups, is to focus on those strategies that are at the lowest rungs of the ladder and then gradually move your way up as needed. As you go about developing your growth strategy, you should first consider the lower rungs of what are known as Intensive Growth Strategies. Each new rung brings more opportunities for fast growth, but also more risk. They are:

1. Market Penetration. The least risky growth strategy for any business is to simply sell more of its current product to its current customers—a strategy perfected by large consumer goods companies, says McFarland. Think of how you might buy a six-pack of beverages, then a 12-pack, and then a case. “You can’t even buy toilet paper in anything less that a 24-roll pack these days,” McFarland jokes. Finding new ways for your customers to use your product—like turning baking soda into a deodorizer for your refrigerator—is another form of market penetration.

2. Market Development. The next rung up the ladder is to devise a way to sell more of your current product to an adjacent market—offering your product or service to customers in another city or state, for example. McFarland points out that many of the great fast-growing companies of the past few decades relied on Market Development as their main growth strategy. For example, Express Personnel (now called Express Employment Professionals), a staffing business that began in Oklahoma City quickly opened offices around the country via a franchising model. Eventually, the company offered employment staffing services in some 588 different locations, and the company became the fifth-largest staffing business in the U.S.

3. Alternative Channels. This growth strategy involves pursuing customers in a different way such as, for example, selling your products online. When Apple added its retail division, it was also adopting an Alternative Channel strategy. Using the Internet as a means for your customers to access your products or services in a new way, such as by adopting a rental model or software as a service, is another Alternative Channel strategy.

4. Product Development. A classic strategy, it involves developing new products to sell to your existing customers as well as to new ones. If you have a choice, you would ideally like to sell your new products to existing customers. That’s because selling products to your existing customers is far less risky than “having to learn a new product and market at the same time,” McFarland says.

5. New Products for New Customers. Sometimes, market conditions dictate that you must create new products for new customers, as Polaris, the recreational vehicle manufacturer in Minneapolis found out. For years, the company produced only snowmobiles. Then, after several mild winters, the company was in dire straits. Fortunately, it developed a wildly-successful series of four-wheel all-terrain vehicles, opening up an entirely new market. Similarly, Apple pulled off this strategy when it introduced the iPod. What made the iPod such a breakthrough product was that it could be sold alone, independent of an Apple computer, but, at the same time, it also helped expose more new customers to the computers it offered. McFarland says the iPhone has had a similar impact, where once customers began to enjoy the look and fell of the product’s interface, they open themselves up to buying other Apple products.

If you choose to follow one of the Intensive Growth Strategies, you should ideally take only one step up the ladder at a time, since each step brings risk, uncertainty, and effort. The rub is that sometimes, the market forces you to take action as a means of self-preservation, as it d id with Polaris. Sometimes, you have no choice but to take more risk, says McFarland.

Dig Deeper: New Product Development on the Cheap

Developing a Growth Strategy: Integrative Growth Strategies

If you’ve exhausted all steps along the Intensive Growth Strategy path, you can then consider growth through acquisition or Integrative Growth Strategies. The problem is that some 75 percent of all acquisitions fail to deliver on the value or efficiencies that were predicted for them. In some cases, a merger can end in total disaster, as in the case of the AOL-Time Warner deal. Nevertheless, there are three viable alternatives when it comes to an implementing an Integrative Growth Strategy. They are:

1. Horizontal. This growth strategy would involve buying a competing business or businesses. Employing such a strategy not only adds to your company’s growth, it also eliminates another barrier standing in your way of future growth—namely, a real or potential competitor. McFarland says that many of breakthrough companies such asPaychex, the payroll processing company, and Intuit, the maker of personal and small business tax and accounting software, acquired key competitors over the years as both a shortcut to product development and as a way to increase their share of the market.

2. Backward. A backward integrative growth strategy would involve buying one of your suppliers as a way to better control your supply chain. Doing so could help you to develop new products faster and potentially more cheaply. For instance, Fastenal, a company based in Winona, Minnesota that sells nuts and bolts (among other things), made the decision to acquire several tool and die makers as a way to introduce custom-part manufacturing capabilities to its larger clients.

3. Forward. Acquisitions can also be focused on buying component companies that are part of your distribution chain. For instance, if you were a garment manufacturer like Chicos, which is based in Fort Myers, Florida, you could begin buying up retail stores as a means to pushing your product at the expense of your competition.

Dig Deeper: Advice on Growth Through Acquisition

Developing a Growth Strategy: Diversification

Another category of growth strategies that was popular in the 1950s and 1960s and is used far less often today is something called diversification where you grow your company by buying another company that is completely unrelated to your business. Massive conglomerates such as General Electric are essentially holding companies for a diverse range of businesses based solely on their financial performance. That’s how GE could have a nuclear power division, a railcar manufacturing division and a financial services division all under the letterhead of a single company. This kind of growth strategy tends to be fraught with risk and problems, says McFarland, and is rarely considered viable these days.

Dig Deeper: The Power of Diversification

Developing a Growth Strategy: How Will You Grow?

Growth strategies are never pursued in a vacuum, and being willing to change course in response to feedback from the market is as important as implementing a strategy in a single-minded way. Too often, companies take a year to develop a strategy and, by the time they’re ready to implement it, the market has changed on them, says McFarland. That’s why, when putting together a growth strategy, he advises companies to think in just 90 chunks, a process he calls Rapid Enterprise Design. Sometimes the best approach is to take it one rung at a time.

Dig Deeper: More Articles on Growth Strategies