Yaniv Nizan's Personal Blog

Closing Costs - Critical Lesson

This is a post I was putting on the bench for some time but I think enough time has passed for it to go live.

One of the invaluable lessons I learned as one of the founders of EyeView was about closing costs. Simply put, Closing costs is the minimal amount of money you will need to close the company. I'll go into more details about how to calculate it but let me share the lesson first.

After raising a first round of $1M, it almost seemed like EyeView can never run out of money. We were young and inexperienced at that time so that sum of money seemed like it can last for a very long time. Reality was different. Once you move from a garage based operation to actually having employees and offices the money start to vanish quickly from your bank account. Our case was no different. We arrived very quickly to a situaiton where additional funding was needed.

One advantages to having a VC back you up is that you have a pretty good idea where the extra funding can come from. However, that extra level of comfort comes with a price - you don't know if you are getting a fair deal or not. As inexperienced as we were we decided that we should shop around before taking the initial offer from our VCs. In retrospect, this was a bad move especially as we overlooked two critical points. One false assumption that we made is that the offer we received from our existing VCs will be waiting for us after we shop around - this was not true. The other mistake was ignoring our closing costs in our assessment of how much time we have before we will have to default to the original offer.

The end of that story was that we realized our closing costs in the middle of a round and didn't have time to close the external round. We had to come back to our VCs with almost 0 negotiation power and the initial offer that we weren't sure about got a lot worse. The round we raised wasn't a down round but we lost much more equity on that than we needed.

How to calculate closing costs

I'm sure there are more thorough ways of doing the math but the following rough estimations could save you 90% of the trouble. Assuming your notice period for employees is 30 days and the accomulated unused vacation time is 14 days (since it's unlikely that your employees used their vacation balance / PTO balance), you need to calculate 1.5 months worth of salary for any non-founder employee. For 6 developers this would roughly be $100K. To that you want to add the notice period on your office rent contract multiplied by your monthly rent and any other significant commitment you might have such as hosting, freelancers and vendors.

What to do with that number

So after you calculated that, you might have some dollar figure in your hands let's say $150K. This is actual money you need to put aside. Painful as it may be, you don't really have that money as you already comitted to pay it. If you don't put it aside, my advice is to consistantly deduct it from any cash balance calculation you are doing and to make sure every time you calculate how much time you have before you need more funding, you don't relay own that money.

 

Top 10 Challenges of Intrapreneurship

Being an Intrapreneur can be very challanging. Here are the top challanges for taking an idea and turning it into an Intra-startup based on my experience as the Intra-foudner of INTENTclick.

1. Develop and qualifying your idea - there are many ideas out there but the process of taking an idea and making it into something that is going to worth your time and energy requires a lot of effort. Moreover, it requires speaking to a lot of people and getting invaluable feedback that will help you evelove the idea. Doing so inside a company requires a lot of courage.

2. Locking management commitment - unlike with external ventures an Intra-startup doesn't raise capital. However, in order to start executing on your ideas as your full time job inside a company and to be able to get additional resources you will need to get management buy in. The process is very simillar to pitching to a VC, at the end of the day it's all about making the busienss case for your venture.

3. Not giving up - preseverance is a big piece of the puzzle in entrepreneurship but it's actually harder for an Intra-founder to push through endeavors as the alternative of going back to the comfort of the corporate world is relativly easy.

4. Crossing the chasm - once you have reached a few market successes you need to start rolling your product out. Intraprenuers are faced with 2 alternatives - going through the existing sales department or developing it's own sales and marketing.

5. The internal sale - Sales orginzations are success driven and tend to focus efforts where the success is easy and rewarding. New products usually represent the exact opposite as they require more effort and are initially harder to succeed with.

6. Market Cannibalization and Territorial Conflicts - Developing an alternative sales organization can be very challanging as it presents the risk of internal competition between the two organizations. Doing so requires a clear differentiation between the markets that each organization is pursuing.

7. Corporate alignment - Startups usually have to figure this one out only when they are getting acquired but an Intra-startup has to constantly check it's alignment with the overall corporate vision.

8. Hiring employees - Intrapreneurship is very rewarding but at the same time it is very demanding and requires a pesonal sacrifice. This is also true for anyone who will come to work on your venture so you need to make sure they are able to enjoy the rewards by allowing them to identify themselves with the venture.

9. Maintaining focus - keeping an eye on the target is key to succeeding with any venture. An Intra-startup is exposed to a great deal of distractions from various internal sources which makes it all that harder.

10. Aiming High Enough - comparing my role as Intra-founder of INTENTclick to CEO in a VC backed company. The latter one is forced by his investors to aim high while an Intra-founder sets the bar for himself in many of the cases.

 

 

Thoughts on Mediamind acquisition

Earlier this week Mediamind (formerly EyeBlaster) was acquired by DG for $414 million in all cash transaction. As noted by several Industry vaterns, the main motivation for DG with this move is to enter the digital advertising market. While the acquisition makes perfect sense in retrospect I'm wondering how many experts was able to predict such an acquisiiton before it happend. You have to give the credit to Gal Trifon who found an oppotunity to sell by not looking under the light and chasing the usual suspects (Google, Microsoft, ...).

This brings another interesting observation that there is a difference between selling a small company and selling a big company. Small companies can be bought by a bigger company from the same industry (mainly for their technology). Examples in that category - 5min Acquisition by AOL, Dapper acquisition by Yahoo or Teracent acquisitoin by Google. At the same time, if you were able to grow your comapany beyond a certain size like Mediamind did you will be better off looking for your buyer by positioning yourself as a category leader and looking for a buyer outside of the market. Another example of this kind of acquisition is the acquisition of Omniture by Adobe where Adobe - a company that provides technologies and tools for creative agencies acquired omniture who are a category leader in the e-commerce analytics space.

 

Are you Still Calling your Employees Resources?

Have you noticed that more and more companies are renaming the HR department to Human Capital? Is employees really resources that you move around like pieces of equipment or are they the core asset in your company? I guess that depends on the type of the company. In the High Tech Industry the answer is very clear – the employees are one of the biggest assets of the company. In other industries it might not be the case but even if it isn’t – calling employees resources is quite diminishing and bears very little benefit.

One way to take this approach to a more practical level is in the way the company is staffing projects. Most companies would look at the project as the core and will ask what employees/resources we can use to staff the project? A company that really treats its employees as assets will probably try to keep the teams together and assigning projects to a team that is already working together even if it means that the project has to wait a few days more. This creates a situation where the team has already passed all the stages of forming and learning to work with each other so when they take on the project they start performing immediately. It also means that the team sticks with the project from the beginning until the end and has more accountability for a high quality timely delivery. The team also gets to enjoy the success together which builds up the team as a unit and enhances motivation and performance. A true WIN-WIN.

 

Bringing Guy's 2 by 2 to the ground

I first saw Guy's 2 by 2 in his presentation The Art of Start which I highly recommend. In his presentation, Guy uses funny examples to bring across a simple point that your product needs to be both unique and valuable.

While really enjoying Guy's examples and sense of humor, his point seemed very simplistic so I didn't give it a lot of thought. Guy's claim that your product needs to bring value to the customer and needs to be unique felt more like common sense than profound wisdom that someone should take the time to fully understand it. 

It was only years later when I realized that the true value of this advice relies in actually taking the idea you have for a future product,  breaking it down to a specific use case and than validating it by using a specific potential customer and a specific competitor. Going back to Guy's 2 by 2 - the Value aspect means really checking that the specific customer gains value from your product, that he really cares about this value, that he is willing to pay money for this value and that the value justifies the price he has to pay in management attention, resources and product price. On the Uniqueness aspect, you need to ask yourself, the customer and other people in the industry what would be the alternatives for obtaining a similar value to what your product gives. Once you have done that, try to check how unique your product is. Most likely, you will find out that some features are standard while other features are unique. If that's the case, you need to go back to the value aspect and isolate the value of the unique features of your product compared to what the customer can already obtain using existing products and check that he still has value.

It is recommended to repeating this process with multiple customers who represent large market segments until your market size is big enough.

Business to Business Customer Handling Tips

I was going to write a long intro to this explaining how important it is to keep your customers happy. In second thought I realized its pretty obvious. So I'm going to simply list a few guidelines and insights I gave our project managers:

1.    Setting expectation from the beginning and along the way, will result in better flow and understanding on both sides.

2.    Calling  a customer is hardly ever a wrong move

3.    Being early for a call is much better than being late. Most conference  bridges allows you to be on the call early while continuing to do your emails

4.    It's recommended to use social networks to make the personal bond. Adding a picture in skype is also recommended.

6.    Try to gain as many access points to the customer as possible, this comes very handy at times of a crisis.  (ie: Email; skype; phone; mobile; phone of employee sitting close by; receptionist contact details).

7.    Whenever the customer is criticizing, try to take his side and blame the system, policy, process, industry, world, ...

8.    Answering an email with a phone call is very often a smart move. This is especially true when:

a)     You don't understand something the customer said - phone call can solve the misunderstanding in seconds

b)    The customer is criticizing you and there is audience in the cc list

c)     The customer is angry due to a misunderstanding

d)    The email thread becomes unnecessarily long 

9.    The customer contact is not making your life hard on purpose. Try to understand his challenges in getting you the information/approval you need. Once you understand his challenges you may be able to help him solve them.

10.  Whenever a crisis occurs the best thing to do is to increase the communication with the customer as much as possible, come with a plan.

11.  Notify the customer when he is misbehaving - simply let him know - don't make a fuss over it.

12.  Support issues:

a)     Notify the customer that you received his request.

b)    Let the customer know that you understand the severity/urgency/business-implications of the situation and that you will apply special effort / taking the problem very seriously.

c)     Communicate the process.

d)    Communicate to the customer when the problem was identified.

e)     Communicate the resolution estimated timeline to the customer even if you are unsure.

f)      Once the problem is resolved, inform the customer.
when relevant let him know we are also applying new procedure to essure that the problem will not happen again.

13.    Angry customer is better than indifferent customer. Anger shows that he still cares while indifference shows he gave up and made a decision to cancel.

14.    The customer is not stupid (it doesn't get you anywhere saying he is), take proactive action to explain things better/in a different way.

15.    It will be easier to get the customer's attention at the beginning of the project - right after signing the contract. the willingness to assist is higher and the resources are more available at that time.

16.    Complicated integrations require the attention of the relevant team (from both sides) at the beginning of the project.

17.    Long lasting issues – should be solved by getting the relevant people to the same room/ phone call (if impossible) à push until issue is identified & solved (always better to do it at the beginning of the project when the customer is more dedicated).

18.    Customer does not like to feel in the dark – most of the time it is better to communicate the difficulties/delays expected then to be late.

19.    When you have conflicts – you may find it helpful to consult the customer, he may solve it to you easily.

Less is More. Keeping Your Company Focused

One of the advantages of being a small company is that you can rapidly change the company's direction. Well, this is also a disadvantage. Companies that succeeded are ones that had a very specific direction and were very focused on that one goal. One of our advisors told me: "you need to be able to define your company" - I believe this is a very valid point.

Sounds easy - right? Well, It's not. There are so many distractions along the way. Potential customers telling you that your product is not good for them and you should do something else, advisors that try to push you in a direction that they want to pursue, existing customers who aren't representing the largest market opportunity but constantly ask you to meet their needs, and more and more. 

The key for keeping your company focused is doing less things despite of the distractions. In order to do that, you need to be very clear about what you do, but more importantly what you don't do. One way of doing less is limiting the amount of new initiatives. Don't get me wrong, it's important to explore the market every now and than and there might always be opportunities for you to improve the company. However, it's important to understand that exploration has a price and needs to be managed to make sure you are exploring only direction that has high potential of significantly improving your business.

Another way of doing less, is cutting down activities. There are countless publications about the Pareto Principle (or the 80%-20% rule) and I believe it also applies to management attention - 20% of the activities take 80% of the attention. If you find these 20%, you will have a lot more mental resources to drive your company to success. Examples of such "attention takers" might be: customers, employees, advisors, products, markets and territories. 

Making the necessary cuts or applying enough control to not pursue new directions is not easy and usually not vary popular. However, the easy decisions and the right ones are rarely the same ones.