Saturday, February 6, 2010

Bottoms Up vs Top Down Rev Forcasting

A hi-tech startup operated for about two years on $2M funding. It developed extremely aggressive revenue projections for their second round funding. Their strategy was based on examining the potential market sizes and assume certain percentage market share for the company thus resulting in huge revenue growth projections. Potential venture capital investors did not believe in the financial projections and did not invest in the company.

Advised the Company to abandon the "Top Down" method of revenue projections and use the "Bottoms Up" method. Individual products and services need to be laid out with detail timeline for development, production, marketing and sales processes. Detail prospective client strategies must be planned, and phased in with the product availability to produce credible revenue projections.

Adopting the "Bottoms Up" strategy into a revised business plan reduced the financial projections by approximately 70%. The new numbers were viewed to be credible by venture capitalists and several million dollars were invested into the company which then was acquired two years after the second round investment.

Focus on Core Strength

An out-sourced software testing and quality assurance service provider was not experiencing good revenue grow. The company had developed several software tools that enabled the company to perform very cost effective software testing. The Owner/Founder wanted to change the company's focus from out-sourced software testing to marketing and sales of software tools as software products. Company had no product marketing and sales experience.

Owner was an immigrant from a third world Asian country that had ambitious technology business growth goals. Recommended to the owner that he abandon marketing and sales efforts to sell software tool as products. Then use his Asian connections to leverage using off-shore software engineers to provide attractive cost benefits to his clients. He must focus on core strength of providing best software testing and quality assurance services.

The owner followed the above recommendations and is currently experiencing good revenue growth and operating profits.

CEO - Sales Responsibility

I recently facilitated a CEO group meeting where the CEO of a hi-tech startup company was a technologist who did not enjoy the "selling" function. He had an engineering background, designed successful products and had numerous patents issued. Based on his technical expertise he attracted several executives to be his Co-Founders and together raised several million dollars for their startup. CEO was disappointed that some key accounts had not closed. When questioned, CEO indicated that he was not involved in the sales negotiation because he is not good at "doing sales" and does not participate in key meeting with potential clients.

I suggested to the CEO that he already demonstrated "good sales skills" when he sold his vision of the new business to other Co-Founders and investors. Told CEO's responsibilities to the company are primarily twofold: to raise funding and to help generate revenue. Impressed the CEO that he is probably the best sales person in the company because he has the best vision and passion for the business and can articulate that better than anyone else. Advised the CEO to actively participate at the high level meetings with prospective clients.

The CEO followed the advice and now claims he is the best salesperson in his company

Thursday, March 5, 2009

Alternative Financing

The CEO of a young company has responsibility to secure adequate financing for the operation of the business. Most people are familiar with these two methods:

1. Equity investment - giving ownership for cash.
2. Debt - borrowing funds with obligation to repay loan, this is often difficult
for young companies.

There are several alternative financing methods that can be pursued:

1. Secure OEM partner or distributor to license your technology or buy your
proprietary products with advanced pre-payment; up to 1 year advance.
2. Secure a turnkey manufacturer to build your products, finance inventory and
provide extended receivable financing of 90 to 120 days you ship the products
get payment from you clients before you pay your supplier/partner.

It must be noted that these alternative financing methods are very difficult to implement. It requires highly motivated partners to provide these kind of financial support. Partners must be convinced of the outstanding technology and the great market opportunity that you bring them.

Thomas Hong
Board of CEOs

Startup Co-Founder Ownership

I recently was introduced to a new startup company where the four Co-Founders all had equal ownership. This company did not retain my consulting service, so I will not give them strong advice but I hinted that that may want to re-think the equity allocation. In the past I had provided consulting advice to two startups where the Co-Founders had equal equity ownership. There were significant problems and bad feelings after about one year of operation. After one year of operation, it became evident that the Co-Founders' talent, knowledge, experience, energy/time devoted to the business, and positive contributions to the business were not all equal. In both cases it took considerable negotiation and effort to adjust the equity division of the C0-Founders that were acceptable to all involved.

It is highly recommended that a startup business of C0-Founders should allocate equity ownership as a function of talent, knowledge, experience, and anticipated future contribution. The CEO should have greater ownership than the VPs of the company.

Thomas Hong

Board of CEOs