Finding the Financial Metrics That Matter

Financial Metrics

As an entrepreneur, it’s not enough to just have an idea. In addition to all the necessary management, marketing, and business development skills that accompany starting a business, a good entrepreneur must also know how to handle the finances of the company. Overlooked and taken for granted all too often, financial literacy can make or break an organization.

Financial literacy doesn’t mean being able to calculate long strings of numbers, it’s really about being able to tell the story of the financials to investors and stakeholders, and being able to make sense of what the numbers actually actually say. It’s no easy feat to learn all the financial fundamentals on your own, which is why Intelligent.ly is teaming up with Dan Allred from SVB to teach you about the financial metrics that matter. He dropped us a line this week and told us all about what it takes to be financially literate.

I.LY: What are some of the key financial metrics that entrepreneurs should pay attention to?

D.A.: Gross margin is easily overlooked by a lot of entrepreneurs. It feels great to get early revenue, but if you’re doing that through low pricing and the gross margin is likewise low, then you are not really building value, especially if it is a model where it is difficult to raise prices as the business scales. Gross margin is the percentage of your revenue that is left after you pay the costs associated with producing and delivering your product or service.

I.LY: You’ve worked with a lot of startups before. Could you talk about the one of the worst financial situations you’ve seen a company get into?

D.A.: The toughest situations I’ve seen are when an entrepreneur and a capital provider (angel, VC, bank, etc.) do not see the future the same way. I can’t stress how important it is to align with your capital providers on how much money you need and how much risk you plan to take with that money. All of these classes of capital (angel, VC, debt, etc.) have pros and cons, and you need to be clear on that going in. You also need to make sure you and the individual providing the capital are aligned on expectations. There will always be surprises, but you have to get aligned as much as possible upfront.

I.LY: What is one of the most common financial mistakes entrepreneurs make when first starting out?

D.A.: Not raising enough money because of concern around valuation. You have to make sure you have enough capital to get through to key valuation inflection points, or the valuation you negotiate upfront will never really matter – you’ll either run out of cash or require more capital at a time when you have not hit your milestones and your investors have all the leverage.

I.LY: Are founders better off hiring someone to do their finances, or can they manage on their own?

D.A.: Founders need to be able to tell the financial story, but they don’t need to do the books themselves. There are lots of great resources available to entrepreneurs, ranging from bookkeeping services that will do routine work to outsourced contract CFOs who will get involved in strategic planning, financial modeling and investor/BOD meetings.

I.LY: What is your top piece of financial advice to someone who is starting a company?

D.A.: Make yourself attractive to capital. Investors and lenders are always impressed when they meet with a company and think “how did this entrepreneur accomplish all of this without any outside capital”? Nothing will endear you more to investors and lenders.

Join Dan for his FREE class next week on May 15th!

Riffing Rob Go: Avoiding the Trough of Sorrow

Riff with Rob
Back in February, we kicked off a new series, Riffing with Rob Go, to give you direct access to one of NextView Ventures’ founding partners, Rob Go. We’re inviting the entire Boston startup ecosystem to hit him with your best shot—ask Rob the burning questions you want answers to!

Check out Rob’s responses to two of the first questions we received below:

What are some common-sense tips for startups as they seek to avoid the “Trough of Sorrow” that Brian Balfour has blogged about? That is – running out of cash, letting staff go, facing potential failure. What can founders do in advance to make the trough as shallow as possible?

[Rob Go] This is a great question! There really aren’t many easy answers – honestly, most startups face some sort of trough of sorrow. Even Mailbox (which just got acquired by DropBox for likely a big number) I’m sure faced a trough of sorry when they shifted resources away from their original product (behind which their raised their seed round) and pursued what could have been yet another email client. The trough I’m sure happens even for every successful companies.

That said, I have a couple basic tips of advice:

1. Know that the trough is coming. Sometimes, just knowing that hard times are ahead allows you to get yourself and your team ready to push through. These troughs tend to happen at somewhat predictable points. First, the first time products hit the market and it’s clear you don’t have 100% product market fit. Second, when you do have PMF, but growth starts to stall. Third, when you have PMF and growth, and you find yourself needing to really build a repeatable business model. Fourth, when major team members start vesting serious chunks of their equity and start finding themselves unmotivated or lured by other companies. etc etc. Be aware that these milestones are ahead of you and be prepared!

2. Don’t fool yourself for too long. The challenging points I mentioned above happen to nearly every company. The trough is worse when you have less time and resources to deal with these problems. You don’t want to fool yourself into thinking your product is great, or just one or two features away from success until you have 3 months of cash left and it’s clear that things aren’t working. Be brutally honest with yourself. The best trick I’ve heard (which is actually really hard to do) is to talk to customers, but to do it from the perspective of a skeptic. If you are in the pre-product launch stage and want to ask random people what they think of your idea or product, don’t say “hi, I”m the founder of XYC company, can you tell me what you think of this product?”. Say instead “hey, a good friend of mine is thinking about quitting his job and starting this company. I think it’s a pretty risky move, but I said I’d help him get feedback from potential users. Do you mind having a look? I just don’t get it… but maybe I’m missing something?”. By positioning a question like that, you are way more likely to hear the negative feedback, and probably the honest feedback vs. the sugar-coated feedback of someone not wanting to crush your dreams. Find ways to get realistic feedback so you know sooner not later that trouble is brewing.

3. Find good financing partners. You want to find financing partners who help you in the situations described above, don’t become yet another impediment. When you are going to be dealing with growth and business model scaling issues, it’s nice to have big VC’s that are committed to your company because they can write you one more check if it’s just taking a bit longer to figure stuff out. If you are still really early and aren’t sure exactly how big your venture could become, you might not want to take money from big VC’s who could kill you with signal risk, but instead finance your company with angels who can help you navigate a plan-B type funding path if things are going well but it looks like your opportunity isn’t as big as you hoped. Which leads us to our second question:

Two friends and I are building a company part-time. We all have full-time jobs elsewhere, but hope to work for our company full-time by the end of 2013. We want to bootstrap as much as possible and believe we can because we should be profitable by summer (not a lot of profit, but some). Our desire to bootstrap may be a good thing because we don’t believe our industry is one where we could have a huge exit and potentially attract investors before we get there. So here is my question: should a company that wants to bootstrap apply for an incubator/accelerator? Is it possible to take seed money and not go for the Series A, etc, and just earn revenue? If we never want to exit and plan to own and run the company forever, would anyone invest any money at all? 

[Rob Go] Sounds like you are being very realistic about the company you are building and smart about thinking through your financing options.

On the accelerator question, it depends on the accellerator. I find that accelerators that are run more by ex operators (and in many cases, operators who have been successful without huge sums of VC money) are pretty good at helping companies that might not go the VC route. Usually, accelerators do build a portfolio of companies, some of which are kind of binary, others that might be smaller but more straightforwad businesses. Also, many companies that come out of accellerators are funded by angels who would be happy with a non VC outcome that happens through capital efficient financing (and potentially faster).

Now, I will say that all investors in a company will hope to see some liquidity from their investment at some point. Hopefully, anyone investing in an early stage private company knows that that liquidity will not come for at least 5-years+. But if you think you are building your company in a way that it mgiht never go public or get sold, then you probably want to have some concept of how investors will get their money out in a reasonable amount of time with relatively little headache. There are a number of ways to do this. One is to do a royalty based financing, where some percent of revenues goes back to investors. John Landry has been a proponent of this for certain companies.

Another option is the investor put-option, where the investor at some point as the right to sell a portion of their holdings at a pre-determined multiple. The third is some sort of dividend structure. Whatever approach you pursue, do more research and talk to your lawyer and fellow entrepreneurs about the pros and cons of each approach. As an investor who focuses on companies with GOLAZO potential, I rarely contemplate these sorts of structures, but I do respect the fact that different types of companies can be financed differently. And for many investors, this kind of company can be quite attractive!

What do you want to know? Rob Go’s all ears! Submit a question to Riffing with Rob Go today.

How to Open a Business and Avoid Legal Mistakes

Expert on how to open a businessIt’s not easy starting up a company. Most people think that all they need is an idea and the rest will follow, but there are a whole host of legal obstacles and hoops one must jump through in order to successfully open a business that can be pretty difficult to navigate.

Enter Mick Bain and Janene Asgeirsson. They’re experts on start-up law from WilmerHale they’re here to show you how to open a business and avoid the most common legal mistakes in their FREE class next week, Legal Land Mines: What to Know When Starting Your Startup.

Mick wanted to tantalize you with a preview of all the gold nuggets of legal info you’ll receive by attending the class. He gave us the rundown of what to expect and answered a few questions for us. Read on below:

What’s the most common legal mistake you see startups making when they’re first beginning?  

MB: I’d say the biggest mistakes at the start-up phase typically relate either to (i) mistakes with capitalization (resulting in somebody owning equity that really shouldn’t) or (ii) IP – not patents, etc., but situations where the company doesn’t really own the idea/invention.  Either of these mistakes can make the company un-fundable.

Any startup legal horror stories? 

MB: Oh brother, yes.  I once had a client that thought he owned 100% of his company.  But he made a mistake along the way that would have been so very easy to avoid (and would have cost nothing).  When he later sold his company for several millions of dollars, it became clear that he had given away about 30% of the company.  We ultimately settled out with those other “would-be” owners, but it cost him nearly $1 million to do so.

What are the main differences in the types of legal entities a company can choose to incorporate as? 

MB: Usually the choice of legal entity is driven by taxes – whether you have one level of taxes or two.  But they can also be driven by complexity and cost (or the desire to avoid both).   It’s important to ask yourself what type of entity will make sense for the particular type of business long-term.  Sometimes going down one path doesn’t end up giving you the tax benefits you think it will given the ultimate direction of the company.

If you only had one piece of legal advice to give to entrepreneurs, what would it be? 

MB: This sounds self-serving, but failing to get expert advice in order to save money.  Getting good legal advice to start the company doesn’t have to be expensive.  Frankly, it doesn’t have to cost anything.  In contrast, the cost to fix mistakes down the road can be expensive.  But beyond pure legal advice, a good legal advisor who has a lot of experience working with start-ups can become an important extension of the early team and provide important strategic advice.  Having seen “the movie” played hundreds of times before can really help ensure that you aren’t repeating unnecessary mistakes.

If you could be an expert in any type of skill by tomorrow, what would it be? 

Well, I’d really like to be a rock star.  Touring around in a rock band would be a ton of fun.   But beyond that, I wish I knew how to write code.  Of course, I grew up before computers were cool…

Don’t miss out on free legal advice! Sign up for Mick and Janine’s class here.

Leverage User Research to Design a Perfect Product

IAmy is an expert in user researcht’s not easy designing the perfect product for your customers, but having a recipe makes it a little easier. Not only does effective product design involve blending in elements of psychological motivation, but it’s also useful to pepper in some user research to see what your customers actually want, listening to their words and actions.

But user research can cost a lot of money and take time…right? It doesn’t have to! Amy Bucher, a behavioral scientist at Wellness and Prevention, a Johnson and Johnson company, has mastered a method for success.

Amy’s back for a third time teaching class at Intelligent.ly, and this time it’s a double header! Not only will she teach one of our most widely attended class about design psychology, but she’ll also take it a step further and teach a second class a week later about user research tools and tricks.

We asked her for the inside scoop about user research and how it’s applicable to your company. Read on to learn how.

You’ve taught at Intelligent.ly before and are now back for round three. What are you looking forward to in teaching a two-part series of classes?

AB: At both of my previous classes, people asked a lot of questions about how to test their products, so the new second course seemed like a natural choice. I’m excited to have that continuity of conversation from the first course to the second. I’m also really excited to hear how members of the Intelligent.ly community are considering using user tests in their product lifecycle. I think when people have minimal background on these research techniques, they sometimes come up with the most clever ways to implement them, because they haven’t been spoiled by the idea that there’s only one or two “right” ways to answer these questions.

You’ve spoken before about how consumers provide unreliable judgments of their future behavior. What is the most surprising finding you’ve come across in your work where a consumer’s behavior diverges from their opinion?

AB: There’s a huge divide between what people intend to do and what they actually do. I read one interesting explanation of this in Baumeister and Tierney’s Willpower: We make a wrong assumption that our future self will have much more motivation and energy than our current self, so we sign her up for a workout or a volunteer session that turns out to be just as unappealing then as it is now. I’ve been pleasantly surprised to find that we can overcome this resistance by helping people find a really personal motivation source. We’ve started to encourage people to write a “mission statement” right off the bat when they start participating in our health programs, and we find that the people who do that are way more likely to stick with the program over time. You’ve got to be doing it for your own reasons or you won’t keep it up.

Your second class focuses on user research techniques. What are the main differences between the quantitative and qualitative research methods and what is each good for finding?

AB: I started my career as a total qualitative research snob; if you couldn’t run an inferential statistic on it, it didn’t matter. Fortunately for me I’ve come to see the incredible value of qualitative data. For me, qualitative data is most useful when I am at my least informed. At the very beginning stages of product development, I like to ask potential users what they need and observe their habits as much as possible. Casting a wide net at this stage lets me look for patterns and begin to identify features or concepts that are important. When I have a more solid idea of the product design, I find quantitative testing can be really useful. Which version gets higher ratings or more clicks?

There are other differences between the two beyond this; for example, qualitative research typically doesn’t require a very big sample size, where a lot of quantitative studies require tens if not hundreds of participants. That can also make qualitative research very attractive to start-ups, because the data is relatively inexpensive to obtain.

In what ways can a company immediately implement findings from their user research without having to completely overhaul their product? 

AB: Great question! One way is to focus the research on a specific feature or area that you’ve identified as needing a revamp. An example in my line of work is that we recently tested the branding in our recruitment messages, which is just one small piece of our product, but could make a big difference in our enrollment numbers. Once your product is on the market, I think it’s generally a good idea to do spot tests on specific features (or on specific features you could add to augment the original product), especially if you receive repeated user feedback about a particular aspect.

I also think it’s important to let your users know you hear them. You may run user tests that indicate the need for a big change, but not be able to implement that right away. Consider letting your users know that you have plans to address their feedback in future releases, and if you can, make a few smaller updates that move the product in the right direction. By the way, this tip is straight from self-determination theory: Getting people to feel “relatedness” will help motivate them to use your product.

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Become a user research expert by signing up for Amy’s classes.

Socialize Your Company: The Rundown on Social Media

Social media.

As a marketer you hear about it all the time. It’s a buzzterm that’s overused and talked about too much in companies–but for good reason. Although many don’t realize it, folks have slowly realized that social media is here to stay.

Consumers live on social media, and use it in both personal and professional ways. Breaching these two uses has made for an extremely powerful platform that has penetrated our deep into daily routines and has become intimately ingrained into our everyday lives.

“On one level it’s about relationships, but on a deeper level, it’s about connecting, and the two go hand in hand. Word of mouth and referrals aren’t just for businesses or products. They work with people just as well, says Ken Mueller of Inkling Media.

But how can a company leverage such a powerful tool for themselves? Andrea Squitieri, account director at Scratch Marketing and Media and an expert on social media will give you the answer in her class on next Monday, called Developing a Social Media Game Plan.

Andrea gave us a sneak peak of what to expect from her class and answered a few questions for us. Read what she has to say below!

Tell us a little bit about your background and how you got into social media.

My first job out of college was at Sermo, a recently-sold community for physicians only. Early on, CNN branded us the “Facebook for physicians.’ While my work primarily focused inside of the closed community, I was intrigued by what social could add. In my next role, social became a bigger component. We were able to use social to identify and connect with influencers and more virally spread brand messages.

There are still a good amount of people who are skeptical of the power of social media. What would you say to these folks to convince them otherwise?

The first step in social is to make sure it’s right for your audience, so sometimes those skeptics are right. Though, in nearly all cases we’ve seen, the influencers have moved to a social space, including the leading media contacts for a sector. Getting set up ahead of your competitors can give you a leg up in creating a social community where your competitors do show up.

What are the major differences between the different social media platforms in terms of audiences and content?

The different platforms may have different audiences and best performing content. For instant, Pinterest skews largely female, but we are seeing brands use it in some really interesting ways. Also, it’s highly visual, so sales can be seen as a natural extenstion (vs Facebook, where sales can be a bit harder to come by). The platforms and content that are right for you should be a reflection of your goals. For instance, our client Awareness uses white papers as a lead gen tool, so social shares of papers can create additional interest.

Where do you see the future of marketing and social media headed?

Right now, social is often relegated to marketing and communications only, when, truly, it can have a broader reach inside an organization. A recent McKinsey survey, ‘The social economy: Unlocking value and productivity through social technologies,’ shows the staying power of social: one in five hours spent online is now spent on social networks, and increasingly on mobile devices. That said, marketers still struggle to prove its value; ROI is still an elusive measurement. Social marketing will come into its own as brands get smarter about ROI measurement.

If you could become an expert in any one subject by tomorrow, what would it be?

Ask my running partner Sarah Hodges; I think we’d like to have an expert superpower that makes us better at running overnight. If there was one skill though that I could just have, it would be around visual design. I am always so impressed with people who can translate a story into beautiful design.

Think you have a thing or two to learn about social media? Learn from the expert! Sign up for Andrea’s class here!