On the recommendation of my business partner Tuan Pham, I spent some time on a recent vacation reading The Startup of You by Reid Hoffman (founder & chairman of LinkedIn and partner at Greylock) and co-author Ben Casnocha, and I am now, in turn, recommending it to you.

The basic premise of the book is that people, like great entrepreneurial companies, are in permanent beta. You should think like an entrepreneur in order to make your career one that is defined by curiosity, creativity and breakout opportunities. But you don’t need to be an entrepreneur, a techie, a VC, etc. to get something out of this book. I’m a banker and middle manager at a bank with $20 billion in assets and nearly 2000 employees worldwide. That probably does not seem very entrepreneurial, but it certainly does not stop me (or my colleagues) from thinking entrepreneurially about our business. And this book led me to think even more entrepreneurially about my own career, especially with respect to plans, risks & networks.

Plans

How many times have you asked yourself or an employee or a mentee, “where do you want to be in 1 year, 5 years, 10 years?” Hoffman makes a good argument that such planning is severely limiting, essentially because we are confined to today’s known options when we plan this way. Planning is better guided by vision & values but flexible as to which avenues present themselves as means to achieving the vision. This is what great companies do. They know what they value and generally know where they are heading, but they constantly evaluate how they are getting there.

This jives well with changes we have been making on my team at the bank as to how we think about planning. Like all business people, we sign up for a few significant annual goals and metrics, but we have shifted to “seasonal priorities” as we think about how to achieve these goals. This keeps our team fresh and our plans relevant with respect to our strengths, our passions and as importantly, the market realities. Hoffman talks a lot about aligning these three variables in the book. 

With respect to personal career planning, the book really stretched me to consider what I’m good at and what I’m passionate about. I’m not going to go into that right now, but several of you with whom I’m close, will be hearing a lot more about this over coffee sometime soon - I can’t wait to hear your ideas! As importantly, it made me think about the markets that I play in and how they’re changing. The fact of the matter is that banking is going to look completely different in 10 years. I feel like I’m adding a new client every month that is in some way leveraging new technology to compete with banks. This is a huge threat to business as usual and likewise a huge opportunity for those who can figure out how to harness technology and offer financial services in a more transparent, efficient and customer friendly way. I want to be on the right side of that change. Better yet, I want to help make that change happen.

Risks

While advocating that individuals think of themselves as entrepreneurial start-ups, in no way does Hoffman encourage cowboy-like behavior and wild risk-taking. What he does encourage is action. One piece of advice in the book that really stuck with me is to act even when you are unsure of what the next step should be, but when you do so, make sure that step is one with high option value. A good first step is one that opens up a large number of potential second steps. Sounds like common sense, but this is not the way we typically think about risk. We think about how to mitigate or eliminate the downside versus this perspective of opening up other options.

Life is about taking risks. This perspective allows us to think about how, not whether, to take those risks. What is involved in pivoting to the next step if things go poorly - opportunity cost, tarnished reputation, lost income, etc.? Can you live with those risks? If so, act. If not, how can you alter the first step so that you can continue to thrive during your personal pivot to the next step?

Everyone will have different tolerances for risk and reward, based on age, stage and other circumstances. It is prudent to think of risk relative to the people and institutions that we care about and to assess risk and reward based on the values we share with those people and institutions, but it is also good to remember, as Hoffman points out, that breakout opportunities will have a higher degree of “perceived” risk. The key is to be thoughtful about what others see as real risk and to decipher for ourselves if it is really perceived risk and thereby a unique and valuable opportunity.

Networks

Of course the founder of LinkedIn had plenty to say about networks in his book. To some extent, the book reinforces a lot of things that people reading this blog already know, namely that an individual’s influence and power is significantly enhanced by leveraging his or her network.

What is unique about Hoffman’s analysis is the way he talks about multiple approaches to leveraging a network, from passive interactions such as social networking to intimate connections like trusted partnerships (and everything in between). Throughout this analysis, he stresses that valuable networks are built on genuine relationships, not transactional ones. Hoffman says that a genuine relationship depends on 1) seeing things from another person’s perspective, and 2) considering what you can contribute to the relationship versus what you can take from it.

Hoffman does not diminish the value of weak connections in a network; however, even with these connections, he notes the importance of contributing to these relationships as well. One great example he gives is utilizing social media to give value to your network. He says that “seeing what someone is reading is like seeing the first derivative of their thinking”. I could not agree more, and this is one of the things I love most about Twitter and LinkedIn. Having articles and blog posts recommended to me by people whom I have chosen to follow or to associate with professionally tells me a lot about those people and more often than not, endears me to them.

Having said that, Hoffman does say that the size of your address book is not what matters most and that an emphasis on quantity over quality inevitably leads to a weak network or one that is purely transactional and likely always in flux. He likens a network to the memory card in a digital camera. You can fill it up with lots of low quality images, or you can focus on the highest and richest quality media, recognizing that you can not “fit” as much on the card.

But how do you build strong networks? I believe it comes back to thinking about our strengths, our passions and the market realities. How do your knowledge, connections and abilities matter to others? My partners and I spend a lot of time thinking about this and doing our best to act on it. And thankfully, we are surrounded by people in our networks who do the same. This is truly the most rewarding part of being in business. Whether we are entrepreneurs, investors, lawyers, bankers, whatever, it is the people part of the business that matters the most. And it is lots of fun.

When I moved to Boston five years ago, I heard so many warnings of how insular this town can be and just how hard it is for outsiders to break in. However, I have found quite the opposite to be true, especially in the tech & startup circles. I was recently reviewing a list of new clients from 2011, and I was floored by the number of entrepreneurs who have moved to Boston in the past year to start and grow their companies here. I reached out to a few of them to have them contribute to this post, as a means of telling some of their stories and also a means of shining a light on what makes Boston so attractive as a destination for entrepreneurs.

One of Boston’s key strengths is the availability of capital. Everyone knows about the VC funds resident in Boston, but the angel community here is vibrant as well. As the cost of starting a company has decreased dramatically, this group has also gained favor with entrepreneurs and shown an ability to exert real influence on the companies where they invest their time and money. Perhaps as importantly, the angel community has become much more open, approachable and willing to advise startups. As the old adage says, “if you ask for money, you get advice and if you ask for advice, you get money.”

Nick Francis and his team at HelpScout moved to Boston from Nashville a year ago as part of the TechStars 2011 class, and he wanted to share about his experience with Boston’s angel community and the culture of mentoring for which our city is starting to be known:

·         “One thing that’s blown us away from day one about Boston is the active angel investing community. Current and former entrepreneurs come out of the woodwork to offer advice, make introductions and invest capital in local companies. Our seed round consisted of 17 truly incredible entrepreneurs, all of which would go out of their way to help us on a moment’s notice. That’s one of the biggest reasons we’re glad Help Scout calls Boston home.”

Here in Boston, we love to talk about all of the things we are not good at, which is a real shame because there are so many sectors where we are incredibly strong in terms of talent, customers and capital. A couple of weeks ago, I caught up with an entrepreneur doing a big data play that leverages academic research data to sell to biotechs, pharmas and money managers. That sounds like a company made for Boston.

Fred Lalonde started Hopper in Montreal and recently raised money from Atlas Venture and moved to Boston to grow his company. Investors all over the world (including Silicon Valley) wanted in on the Hopper opportunity, but when Fred and I caught up about his decision to move here, it was clear what gave Boston the nod:

·         “Hopper is a big data company. We run our own data center and up until recently we used to make our own servers. Most of our days are spent trying to run algorithms on a thousand computer cores.  Late last year we decided to move Hopper headquarters from Montreal, Canada to Cambridge.  Our two primary motivations where: the balmy January weather and the tragic outcome of the 2011 Stanley Cup playoffs. In truth, when we decided to come to Cambridge we made a bet that we would meet super smart people that share our love for solving insanely hard problems – and that in itself would justify all the pain and cost of relocating. Now that we are here, we are discovering a bustling community of big data practitioners, entrepreneurs and venture firms. Every week there is another big data meet-up in Cambridge or Boston where we bump into someone brilliant form Vertica, Cloudant, ITA, Basho, Bluefin or Hadapt. It really feels like Kendall Square is becoming the Haight-Ashbury of big data, and we are psyched to be here.”

You’ve really got to love that Haight-Ashbury metaphor, and I think that Fred may end up being our Jerry Garcia.

As many of you know, I moved to Boston from Durham NC five years ago, and in that time I’ve been asked about a million times about how I’ve found the transition from NC to MA, usually with a not so subtle tone implying that only a fool would leave the sunny south for New England. I love getting that question because it tees me up to talk about just how great life here is. I believe that I live and work in one of the greatest cities in the world. Even beyond the tech scene, we have great schools, museums, sports, beaches, mountains, and I could go on and on. Sometimes you just need an outsider to give you fresh perspective on yourself.

Sravish Sridhar and I first met about three years ago when he was starting an energy monitoring company in Austin. I loved the guy from the first meeting, and about a year ago, when I found out that he was moving here to start Kinvey, I was thrilled. I always appreciate his perspective, whether we’re talking about start-ups or the best restaurants in town or whatever, so I was excited to get his perspective on Boston for this post:

·         “It amuses me that Boston’s Green Grass is being seen as Dirty Snow:  I moved to Boston from Texas, via entrepreneurial stints in Austin, Chennai, Pune, London, Zurich and Paris.  After a few weeks in Boston, I was in absolute awe of the startup firepower in this city. Game-changing companies, talented and committed people, amazingly helpful mentors and an investment firehouse drawing funds from many billions of dollars of assets.  I felt I was in entrepreneur-heaven, and continue to believe that even today.  But, I have one negative observation. The locals don’t know how good they have it.  Try moving to any of the other cities I’ve lived in, and start a successful company there.  MUCH harder!  My goal as a community member is to do my bit to change the impression from within.  Let’s become proud of calling ourselves Boston Built!”

Finally, there is a personal element that connects many people to Boston. We all make decisions about where to live and work based on many variables, many of which are personal such as where we went to school, where our family lives, where we want to raise kids, what kind of neighborhood we want to call home, etc.

I have been getting to know Nick Ducoff who is the former CEO of InfoChimps since he moved to Boston a few months ago, and I thought his personal perspective on Boston was helpful:

·         “For us, we were deciding between SF, Austin, and NYC, all cities we had lived in, and Boston, where my wife’s family is from (well, RI). The levers we were optimizing for were: startup community, long term career opportunities, proximity to family, and city feel. We have a preference for dense cities where we don’t have to commute. SF scored high on all but proximity to family and lost some points for being spread between the city and the peninsula. Austin scored high on startup community and proximity to family (my parents live in Houston) but lost points elsewhere. NYC is the greatest city in the world, but isn’t close to our families. For us, Boston had it all: multiple top tier universities, dozens of VC funds, hundreds of startups, a diverse business community, proximity to family, all the major sports teams, and good public transportation. We’ve been welcomed with enthusiasm and already feel at home. We fully expect this to be our last stop, and are happy to be part of this vibrant startup community!”

So, is Boston a melting pot, or is it the insular community that so many have painted it to be? It is obvious what I think, but I would love to hear more from you. What do you think? And if you are new to Boston yourself, tell us your story. Thanks for reading, and thanks to all of my guest contributors!

I am wrapping up a stretch where I’ve had 10 consecutive days off. I take my fair share of vacations, but 10 days off is a real treat. We spent 4 days in NC with my parents, Steph’s parents and our siblings, and we also got to see my best friend from college while we were there. Then we came back to Boston and spent some good time together as a family. Steph and I got to watch some movies together, I made some good progress on the Steve Jobs biography, and I spent a lot of time playing my new guitar, an awesome gift from my lovely wife. 

But now, on the eve of getting back to work, I’m really excited to do so. I like to think of excitement as a place of disembarkation, leaving for another port of call known as reality. You never know what that destination is actually like or if you will even enjoy it, but the journey is usually a lot of fun. 

Here are three reasons why I am so excited about getting back to work in 2012:

1) My team. As corny as it sounds, I really miss these guys. Ten days away from the guys I spend most of my days with is enough to remind me that I genuinely like my teammates. I spent part of my time off mapping out strategies and goals for 2012 and I can’t wait to share these ideas with my team to get their feedback and ideas.

On top of missing my existing team, we also have a new relationship advisor starting on 1/3/12 to accommodate our expanding client base, which is further cause for excitement. What a great way to start the new year!

2) Our new clients from 2011. We brought on a record number of new client relationships in 2011, evidence of the incredible wave of start-up activity in Boston in 2011. As we enter a new year, I am really excited to see these companies grow in their second year, and obviously, I am excited for us to do whatever we can do make these companies be successful as they start to scale. I think back to the talk that Eric Ries gave at the SVB CEO Summit in Mountain View CA in October 2011 when he discussed the “boring” second year of a start-up’s life as being the most pivotal, even though the hype and big announcements come in the first year and the big numbers and results come later. We have so many clients that are at the threshold of that “boring” year, and I can’t wait to help them block, tackle and build their companies this year.

3) Being more analytical. I’m really big on setting goals, including those that stretch me and my team. This is a stretch goal for me in 2012. I value my gut over number crunching, pro/con lists or other means of analysis, especially relative to most bankers. While that is not altogether bad, in 2012 my team and I are testing several new approaches to our business to make sure that we are maximizing the way we spend our time and other resources and to make sure that we are bringing the right products and solutions to bear for our clients, at the right time and in a manner that will benefit our shareholders. Don’t expect me to become a slave to spreadsheets or focus groups, but I know I can further improve performance through thoughtful analysis, and I look forward to tackling this goal this year.

So, here’s to 2012 and to the journey. See you out there!

Guest blogger today! Please meet my colleague Drew Devine who will educate you on a few simple strategies for managing foreign currency exposure as you expand your business overseas.

At SVB we have the pleasure of working with clients ranging from pre-revenue VC backed startups to large, publicly traded companies. Across that spectrum, regardless of size or life stage, international services and Foreign Exchange are becoming an increasingly important concern. Whether you are funding monthly payroll at foreign subs or managing complex international receivables, FX rates can have a profound impact on your business. While these topics can seem daunting or complicated, a few simple tools can help you easily transact international business- In many cases without even having your own international banking presence. In this post we will explore two relevant and timely concepts:

·         U.S. Dollar Vs local currency pricing

·          Leveraging an existing core USD account into a surprisingly versatile international tool

Many times U.S. based companies will default to doing international business in U.S. Dollar terms. While this offers a certain degree of convenience, it may not be the most cost effective method to transact international business. Milton Friedman famously said, “There is no such thing as a free lunch”. In Foreign Exchange we say, FX risk is never eliminated, it is simply transferred.

Foreign Payables –  The Foreign Currency Purchase

 When paying international invoices in USD terms, a firm effectively transfers the FX risk to the counterparty. As you might imagine, this risk transfer comes at a cost – A higher price for you. To get a better idea of what this cost might be to you, try these two simple steps:

·         Compare “apples to apples” - get a price quote in both USD and local currency terms

·         Leverage your banking partner - execute a “spot” transaction (Foreign Currency transaction for immediate delivery) to purchase the foreign currency and send a wire payment to your international counterparty

We should pause here for a moment and note that purchasing foreign currency to complete international payments does not require an overseas banking presence. Your domestic banking partner will simply debit your existing core USD account for the U.S. Dollar equivalent and send the international wire in local currency terms on your behalf. Taking advantage of these capabilities within your existing domestic banking relationship gives you the ability to manage your international payments in a prudent and cost effective manner without requiring a local banking presence or opening another account.

Foreign Receivables -  The “Nostro” Account

This same logic applies to pricing receivables in USD terms. In this case, you are transferring FX risk to your customer. Consider this- for a European customer, the cost of goods or services priced in USD terms increased by 10% in the month of September alone. By pricing in local currency terms, a firm can achieve two key strategic outcomes:

·         Position the firm, products or services more competitively in the local marketplace

·         Extract more value from transactions by utilizing a banking partner to manage the foreign exchange risk

While many firms intuitively understand that a local banking presence is not required to purchase foreign currency, they are pleasantly surprised to learn that there are also options to receive foreign currency without having a local currency bank account. In this scenario, you will leverage your partner bank’s global correspondent banking network to receive foreign currency funds on your behalf in locations all around the world. When the foreign currency funds hit your bank’s foreign currency account, called a “Nostro” account, your existing core U.S. Dollar account is simply credited with the USD equivalent. There is no set up time or additional costs involved to take advantage of this capability. It is just a very simple, yet effective way to begin transacting in international terms – and we haven’t even opened up a new bank account yet!

Netting Payables and Receivables – The Multi-Currency Account

As international activity increases on both the payables and receivables side, many firms find it desirable to have a vehicle that allows them to hold foreign currency funds and take advantage of natural netting or hedging opportunities. This capability can often be achieved with a U.S. based Multi-Currency Account (MCA). The MCA is a foreign currency account held with your existing partner bank. The MCA has two benefits for a growing international firm:

·         It is based in the United States for tax and regulatory purposes, so it is extremely simple and fast to set up

·         It allows firms to net foreign currency flows and reduce overall FX exposure- All without even crossing a boarder to set up an account.

Managing risk – The Forward Contract

While natural hedging techniques are ideal, most firms find that there is residual FX exposure on either the payables or receivables side. If fluctuations in Foreign Exchange rates become a concern on this residual exposure, consider using a simple but effective risk management tool such as the Forward Contract to achieve certainty in your foreign cash flows.

·         The Forward Contract gives you the ability to lock in a Foreign Exchange rate today for an expected payment date in the future.

Summary

While conducting international business can be challenging, there are an array of simple solutions available to help scale globally and mitigate international payment risk, all of which are readily available with your existing domestic banking partner. When considering your initial international strategy, remember that your existing core USD account can be leveraged into a surprising versatile and low cost international tool. Also, note that in the solutions above, we did not even cross a boarder to open up a bank account! Used alone or in combination, the Spot contract, Nostro Account, Multi-Currency Account and Forward Contract are simple but very effective tools to help manage international expansion with ease.

Please contact me for further discussion.

Drew Devine

Silicon Valley Bank
Foreign Exchange Advisor

275 Grove Street

Suite 2-200
Newton, MA 02466

Phone 617.630.4145
Mobile 617.276.5470
ddevine@svb.com 

By all accounts, SVB’s CEO Summit in Mountain View, CA on Thursday 10/6/11 was a big success. However, there was no avoiding the fact that our industry had lost one of it’s greatest leaders the evening before. In a fitting tribute, Guy Kawasaki, one of the keynotes for the Summit, scrapped his prepared speech and re-wrote a top 12 list of lessons that he had learned from Steve Jobs, and he shared that with the attendees. I’ve done my best to re-create that list here. You can also view the speech yourself here.

1) The experts are clueless.

Surround yourself with smart people and use your collective judgement to make your own decisions. Investors, journalists, analysts, pundits, etc. will all have opinions, but do not put too much stock in what they say. Of further emphasis, especially beware of those experts who actually call themselves “experts”.

2) The biggest challenges beget the best work.

Challenge your people. There is no doubt that Steve Jobs was a hard person to work for, but look at the results. Challenge your team, and do not let mediocrity settle in. Greater challenge will result in better work.

3) Customers cannot tell you what they need.

I have to admit that we heard this one contradicted by other speakers throughout the day, but Guy’s point is a good one. If you are designing something that is truly revolutionary and such a compelling product that the customer will fundamentally change the way they work, play, think, etc., then by definition, they cannot tell you about it yet. Apple never relied on focus groups under Steve Jobs.

4) Design matters.

Not sure that I really need to expound on this one. Just take a look at your Apple devices. Think about why you love them.

5) Use big graphics & big fonts.

Guy said that Steve Jobs’ average font size in a presentation was 60 point. Not sure if that number has been verified, but whatever. The point is that you need to give people something different, not the same tired, predictable charts. Lead with big ideas and demonstrate how your solutions and strategies fit with those ideas.

6) Jump curves, do not just attempt better sameness.

Think in terms of 10 times better than the status quo, not 10% better. Guy used the example of the ice industry: at one point ice could only be made in cold cities during the winter months, then ice could be made in factories in any city in any month, then ice could be made in refrigerators in any home at any time. Each step along the way, companies failed or thrived as the industry changed. Steve Jobs clearly understood how to see a curve and jump it. Just think about how you interact with music now versus 10 years ago.

7) “Work” or “doesn’t work” is all that matters.

The point here is not to get caught up in ideological battles about product design. The example that Guy used was whether iPhone apps should be open or closed. He noted Apple’s strategy changes along the way, specifically that they focused on making the product a highly satisfying customer experience as opposed to being wed to one particular strategy or product design philosophy over another. At this point, you could call the App Store open (anyone can develop an app) or closed (Apple has to approve the app). The point is that it works!

8) Value is different than price.

I think we all understand this one. Apple has never had the cheapest products, but we are willing to pay. After the conference I was joking with a client and with my colleague Raymand Nasr. Raymond is SVB’s talented and fun-loving in-house sommelier, and he was talking about SVB client wines at the reception. I was joking that Raymond makes more money than me even though he just goes around to parties to talk about wine. The client I was talking to reminded me that “value is different than price”! Ouch.

9) A players hire A players.

We have all heard this one before, too. B players hire C players, C players hire D players, and so on. Guy referred to this as the “bozo explosion”. Someone identified a breakdown in logic and asked who hired the B players in the first place. Guy’s response: “Boards of directors, which is code for venture capitalists.”

10) Real CEOs can demo.

And in Guy’s opinion, no one could do it as well as Steve Jobs. I think this really goes to the heart of leading with great product. That needs to be embraced from the very top of the organization.

11) Real entrepreneurs ship (not slip).

Do not wait for the perfect product. Get something out there, even if it has flaws. This is especially true when you are jumping a curve. Guy talked about the first laser printer that they shipped having lots of flaws, but it was still a laser printer and changing the face of printing. “Do not ship crappy products, but it is OK to ship products that have some elements of crappiness.” Understand the difference.

12) Some things need to be believed to be seen.

We usually hear this the other way around, but this is one of the essentials of entrepreneurship. Cultivate vision in your company and commit to it.

I look at lots of financial plans, and I often help entrepreneurs think through their financial modeling. One of the questions I get a lot is whether a financial plan should be based on a tops down analysis or a bottoms up analysis.

In my experience, a bottoms up analysis is much more valuable when it comes to operating a business and checking the vital signs of a business such as progress versus plan, performance to expectations, hitting key performance indicators, etc.

That said, you need to do a tops down analysis as well, but that analysis should be a quick exercise to help determine which markets are attractive to your business.

Here’s how I think about building a financial plan:

Step 1: Conduct a tops down analysis of the market where you intend to do business. This analysis should tell you whether the market is attractive enough - i.e. big enough, dynamic enough, etc. - for you to pursue it.

Step 2: Assuming the market is attractive enough for you, build a bottoms up financial plan that illustrates what your penetration of this market will look like - from the perspective of both revenue and expenses.

A good bottoms up financial model is the reality check to the excitement that comes from a tops down analysis of a really attractive market. More than that, it is a management tool for your business because it forces you to think through the performance metrics that will be key value drivers for your business.

Let’s take a look at what it looks like to build and use financial models in the way I describe above.

Tops Down Analysis

A tops down analysis typically starts with an estimation of how much money is spent in a particular industry on an annual basis. This information can be gathered from analysts such as Gartner and IDG or from industry trade groups.

These figures often include practically everything spent within an industry, although they are more helpful approximations of the true attractiveness of a market when they can be narrowed to the market segment that is directly relevant to the product or service that you are developing. It makes sense to spend some time on this because 1) better analysis of the data is going to be helpful to you as you think about your financial and marketing plans, and 2) prospective partners, investors, etc. are going to challenge you on your assumptions about the market.

Many businesses are targeting multiple markets and therefore need to conduct this exercise several times over. The results will be helpful as you begin to build a bottoms up model as it will help you prioritize markets and decide how to deploy your finite resources to attack each market.

Bottoms Up Analysis

The key to the bottoms up analysis is the assumptions you make as you build the model. Think of a bottoms up model as building a house. You make some key assumptions about customers - how long will it take to close a customer, how much will each customer spend with you, how long will you keep them, etc. - and these assumptions lay the foundation of the house. These assumptions really drive the model as they drive the revenue build, which is probably the primary long-term value-driver in your business (along with profitability). You also make some assumptions about how you will attract and convert these customers. Think of these as the walls of your house, what people see when they look at your company. These sales & marketing assumptions will help build out the expense portion of your bottoms up model. Finally, you need keep your house safe and make it livable for your employees, shareholders and customers, so you need to invest in IT systems, financial oversight, legal counsel, human resources, insurance, etc. These general & administrative expenses are like the roof and plumbing of your house - not the parts you spend a lot of time thinking about but very important nonetheless.

Here is some advice on how to think through each assumption category:

Revenue assumptions
- Think about the types of customers you have and build an assumption case for each type of customer.
- Think about the products that you have and how they are priced. Which products are each class of customers most likely to buy, will you be able to upgrade them to higher priced products or sell them additional products? If so, when?
- How long will you realistically keep these customers? How much money will you make on them over that time period - subscription revenue, maintenance revenue, upgrades, upsells, cross-sells, etc.?
- How much does it cost you to deliver your products and/or services to your customers? Factor in any variable cost into this section of your bottoms up plan as cost of goods sold (COGS). These would be expenses such as material costs, implementation costs, customization of software, etc.
- Are there network effects or other inflection points in your business that allow you to either charge more or deliver your product at lower cost? If so, make sure you build those revenue enhancements and efficiencies into your plan as you achieve the relevant milestones (probably closely related to a certain number of customers).

Sales & marketing assumptions
- Lots to think about here. Most fundamentally, how do you sell your product: direct sales, inside sales, ecommerce, channel sales, OEM, etc.? The answer to this question has significant bearing on the assumptions you make here as it affects how you market your product, who you employ to sell the product and how much cost is associated with each of those employees.
- Think about your sales funnel and relate it to the assumptions you made above about the number of customers you plan to attain. For each of those customers, how many sales people need to be involved and over what period of time? And how many other potential customers do they need to talk to in order to land one - i.e. what is their realistic conversion rate?
- In a somewhat related assumption, how long does it take a new salesperson to come up to speed before the assumptions you made above about their effectiveness is relevant? Factor that in.
- Where do all of these prospective customers come from - i.e. what does the very top of your sales funnel look like? If you have a channel strategy, how do you develop this channel and what costs are associated with that? If you have an inside sales force, how do you generate leads for them to pursue - inbound marketing, SEO, SEM, etc. What costs are associated with this? If you have a direct sales force, then chances are you have a more complex sale with a longer sales cycle, not to mention more expensive sales people, so factor this in.
- Building out this portion of your bottoms up model should be a good exercise for you and your team. This is a reality check for both the revenue assumptions you’ve made as well as the tops down analysis you completed. This bottoms up plan should give you a blueprint for how you will attack the market and what kind of resources you will need to do so.

General & administrative assumptions
- This should be a small portion of the expenses for an early-stage company and will grow over time as the business becomes more complex, requires more oversight, third party opinions, etc.
- Think about the systems, services, policies, etc. that you need and ask around to get an idea of the cost assumptions you need to make around these items. Our market has many great resources for outsourced G&A services, such as finance, accounting, human resources, etc. Taking advantage of these resources will help you get experienced people on your side without committing to the expense of full-time employees. There are also many service providers , such as attorneys, bankers, real estate advisors, etc., who are accustomed to working with start-ups and willing to tailor their services, fees, etc. to the needs of a start-up with an understanding that they will grow into a more traditional relationship as your business scales. So ask around (and ask me)!

In my estimation, your bottoms up model will require at least 15-20 times the effort of your tops down analysis, but it will add real value to your business. If done properly, a bottoms up analysis will tell you: 1) how much capital your business requires in order to reach the revenue & profitability objectives in your plan, and 2) how to manage your business according to the key metrics that drive value in your business, as you would have thought about all of these metrics up front when you made your assumptions.

I have had a lot of conversations lately with entrepreneurs about how to value their businesses. This is always an emotional topic but a very important one nonetheless. In this blog post, I will put forward three methods for valuing a start-up, all three of which I believe should come in to play for most businesses.

Method #1 - using financial metrics:

No duh, right? This is how you are supposed to value a business. This is the kind of stuff they teach in business school. When we look at public companies, we talk about their value in terms of their P/E ratio in an effort to collapse all companies into a common measurement where we can understand their value (price) relative to how much cash they generate on an annual basis (earnings).

However, start-ups do not have any E yet. Let alone earnings, they may not even have any revenue in the early days! Notwithstanding, it still makes sense to think about value relative to key financial metrics. I like to understand a company’s financial opportunity from both a tops down and bottoms up perspective. This is probably enough material for another blog post, but basically, entrepreneurs should be able to talk about their market opportunities from a tops down perspective and be able to demonstrate that they are attacking a large and growing market that is ripe for whatever disruption they are bringing into it. Likewise, they should be able to talk about their business strategyfrom a bottoms up perspective and demonstrate just how much of that market they will capture, when they will capture it, and at what level of gross margin. Tops down proves that the market is worth pursuing, and bottoms up is the litmus test that measures just how well the entrepreneur can pursue the market. The bottoms up approach should walk the thin line between ambition and realism, as entrepreneurs are so often requred to do.

So, for early-stage ventures valuing a company on financial metrics is almost always forward looking. Looking backward to trailing revenues (as is common with traditional companies) is unattractive to the entrepreneur because an early-stage company is typically in hyper-growth mode. However, looking ahead is entirely subjective. There are two key considerations:

1) What is the likelihood that the forward looking revenue can be attained? Answering this question demands an evaluation of the entrepreneur, the plan, the market conditions, the resources (i.e. cash, sales people, etc.) required to get the company to the sales milestone. The chief evaluator in this question is whoever is trying to value the company, most likely an investor or potential acquirer.

2) What type of multiple can be assigned to the forward looking revenue? This is really a market driven metric and it ranges from as low as 2x in bad times to 10x+ in good times. Check around with other entrepreneurs or advisers (call me!) to check on this metric and how it is trending. Also, consider your gross margin, not just your top line revenue. It is a pet peeve of mine when gross margin is ignored. If your gross margins are low, it does not make sense to peg your value to a forward looking revenue multiple, similar to what a company with high gross margins can get.

Admittedly, this is all very subjective, which is why it is so important for an entrepreneur to be able to articualte a plan to attack a large and growing market and also to incite confidence in others that he or she is the one to do the attacking. 

Method #2 - using strategic metrics:

All of us in the start-up ecosystem love “strategic value” because it basically means that some companies are willing to pay well beyond what makes financial sense because the asset is so strategic to them. That is the positive side of strategic value. The negative side is that there is almost always a limited universe of players who will view the company in such a way.

As a result, strategic value is a great thing to leverage when selling your company, but it is a much harder thing to leverage when financing your company. Sure, entrepreneurs can bring in strategic investors to a round of financing, but they need to be well aware of the timing and impact of such a move, especially if it means that business opportunities with another strategic partner are limited as a result. If the entrepreneurial company’s strategic direction can remain open and unencumbered, then bringing in a strategic investor can be a great move.

Within the strategic value framework, especially with respect to acquisitions, there are three ways to think about assigning value:

1) Financial assets: you may hear this referred to as an “accretive” acquisition - i.e. one that has an immediate impact on the acquiring company’s bottom line. The valuation method here will be more similar to the financial metrics described above, although the acquiring company may think about costs they can strip out of the target business as well as scale they can achieve because of their established sales & marketing infrastructure, branding, etc.

2) Technology assets: oftentimes, the entrepreneurial company’s advantage is that it can develop technology and products faster and better than large companies. A “technology” sale proves that out as the superior technology of the smaller company becomes part of the product offering of the larger company. This can be a great outcome for an entrepreneurial team, especially if going to market would have been difficult for the smaller company due to cost, competitive pressure limiting access, etc. The valuation exercise here is to assess how much further investment is needed to prepare the technology for commercial success inside the larger company and then to weigh that cost against the financial upside (again using the financial valuation methods described above).

3) People assets: another key differentiator for entrepreneurial companies is their ability to attract intelligent and creative people who are excited to attack problems on the bleeding edge of the market. This is incredibly valuable to large companies as well, especially once the entrepreneurial teams have amassed market knowledge and domain expertise. Therefore, large companies will sometimes acquire companies to get access to their employees. This is especially true in times like this when hiring advanced engineers is difficult and competitive. One caveat: the acquirer is valuing the people much more than the company or the assets it owns (i.e. technology, products, etc.) and that is reflected in what they are willing to pay. These acquisitions are typically good for the employees (salary, bonus, long term incentives like stock options, etc.), but they are not as good for the shareholders (i.e. the acquirer is not really willing to pay up for the company’s stock).

Method #3 - using practical metrics:

Everything above needs to be tempered with a level of common sense and practicality. We are at a point in the market where certain companies - i.e. Facebook, Twitter, etc. - are able to raise money at astronomical valuations based on very forward looking multiples (in the case of Facebook) or highly differentiated strategic value (in the case of Twitter). Those kind of extremes do not apply to 99% of entrepreneurial companies.

When entrepreneurs think about the value of their company, they need to consider the business objectives of those who are buying in. For example, when raising a round of venture capital financing, the venture investors need to own enough of the company to be incented to spend their time, continue to invest capital as needed, etc. and the need to buy in at a price where there is reasonable upside potential for them. This is the practical governor that kicks in when entrepreneurs think about valuing their companies, even when things are going great and the valuation methods described above point to a big number.

In summary, companies are ultimately valued on the cash they generate. Start-ups are not yet at a point where that is a reasonable metric, so valuation is an art more than a science, and the key in understanding value is to assess the liklihood of how much cash can be generated, when it can be generated and for whom (i.e. for the current company, for another company that may acquire it someday and for its investors). Beauty is undoubtedly in the eyes of the beholder, and the best entrepreneurs know how to paint the most attractive picture, accenting both their financial and strategic highlights, all while keeping practical considerations in mind.

The question is one of the most powerful tools available, but it is easily commoditized. Lots of people ask the same questions over and over and just blend in with the rest of crowd. Their questions are not differentiated, which means their conversations are not either. Their meetings are programmatic and boring, which means that objectives are not satisfied and both corporate and personal brand suffer.

My intent with this post is to help people, particularly entrepreneurs and sales people, ask better questions. However, I think the 3 tips and 2 tests that I’ll outline below will also help with respect to interviewing, socializing, dating, whatever. I’d love to hear whether they are helpful to you!

Asking good questions is how one learns. The 3 tips I outline below are all about learning. Processing and responding to the answers to those questions is how one builds trust and relationship with someone in order to work together. So, the 2 tests to evaluate how one is doing with respect to asking questions are really all about listening.

Tip #1: Ask open ended questions

We’ll start with an easy one. Everyone knows to avoid yes/no and other closed ended questions. However, everyone does it. I recently helped judge a sales pitch contest and gave this piece of feedback over and over. It is just so easy to ask closed ended questions. But the problem with such questions is two-fold: 1) you learn very little, and 2) you box the other person into a corner. Nobody likes to be boxed in. Most situations are hardly black & white, so asking your questions in a way that allows someone to expound on the many shades of grey is a good approach. If you hear “it depends” a lot, then you are asking closed ended questions and the other person probably feels boxed in. They are being forced into a binary answer so they retreat and tell you “it depends”. This is a queue to shift gears and ask more open ended questions.   

Tip #2: Ask the second question

Asking good questions is like boxing: you need a good two-punch combo. For me, this is asking pairs of questions where the first question is for fact gathering (who, what, when & where) and the second question is for explanation (why & how). You really learn a lot this way. You have an opportunity to record and process a lot of the data that will be helpful to you in your business, but then you also start to discover the person behind that data, why they make the decisions they do, how they achieve results once they make those decisions, who else they involve, etc. The first question is usually obligatory (something you need to know to check a box), but the second question is usually insightful (something you need to know to be effective in the long-term).

Tip #3: Ask the non-obvious question

If asking open-ended questions is the 100 level course, then this is the graduate level course. This is a tough one, as it should be. It comes with practice, and it may not always come on a first meeting with someone. Perhaps that is the point: you should be getting to know the people you do business with, and that takes time. You need to trust them, and they need to trust you. If your conversations are solely about the transaction at hand, then your relationship will also be about that and referrals, ancillary business, and personal satisfaction will be limited. The non-obvious question is, well, non-obvious so it is difficult to offer up tips on how to ask it, but be empathetic, take a relationship risk, and ask a good, bold question that will make an impression on the person you are asking and give you insights and depth of relationship that others will not likely have. The non-obvious question is one of the keys to demonstrating that you “get it”. It will often be about the other person’s personal goals, objectives and ambitions.

So, how do you know if you are doing well with these question asking tips? I think the two tests below are good indicators, and they are easy to implement.

Test #1: Time of possession

One night when I was in college, Antawn Jamison scored 33 points against Duke and only touched the basketball for a cumulative of about 60 seconds. That is how you want to be with your questions. Your time of possession should be much smaller than your overall impact. I like to plan for a meeting (and also debrief from it) using a time of possession calculation, just like at halftime of a football game when the announcers tell us that one team had the ball for 17 minutes and the other team had the ball for 13 minutes. For a first meeting, I am comfortable with only speaking 15% of the time. In a follow-up meeting where I am presenting a termsheet or some other business proposal, I will talk a lot more, but I still like to keep my “possession” of the conversation to less than 50%. I just don’t learn much that helps me in my business when I am the one talking.

Test #2: Relevance

This is really the ultimate test of your question asking abilities. How much did you learn? How differentiated are your insights and advice and proposals as a result? In my example above, I stated that a 85/15 split for an opening meeting is reasonable. In a one hour meeting, that means you get 9 minutes. How relevant are you in that 9 minutes? If you have been asking good questions and listening and processing the answers, then you should be very relevant. Evaluate your success by your ability to get follow-up meetings, win business and get referrals beyond the business at hand. If this is happening on a regular basis, you are doing something right! If not, try out the tips above. I’d love to hear how it goes!