Situation: A Company has a key customer that wants to upgrade the Company’s status as an approved supplier. This comes with a catch – the customer demands that the Company reduce the amount of its total revenue represented by its business with the customer. The customer doesn’t want the Company to be overly dependent upon them or their business. One option that the Company may explore is purchasing another business. When does it make sense to buy a company?
Advice from the CEOs:
The Company may be working under a false premise.
If the Company is truly a critical supplier, the customer is not likely to go away just because they don’t like a single ratio on how the Company runs its business.
The risk that the Company takes on buying another business is that this distracts the Company and ends up jeopardizing current business both from thus customer and others.
It makes more sense to explore acquiring another company if the Company’s broader goal is to become more diversified, or if new business commitments are forthcoming from this or other current customers.
What about this strategy makes sense?
Provided that the purchase of another company makes strategic sense, it may be feasible to finance the purchase of that company through a leveraged buy-out.
Be sure to build an earn-out with incentives contingent upon the seller staying on and helping to maximize long-term value of business.
As an alternative to buying another business, it may be possible to build a new lower cost/price version of the Company’s current product or service and build a new customer base for the lower cost version. This is how automobile companies use the same or similar frames, engines and many of the same components to create different cars for different markets.
Situation: An SMB CEO has sold his business and seeks a new opportunity. Options range from a mid-level position in a large company to various options in existing or start-up smaller companies. How do you evaluate your career choices?
Advice from the CEOs:
The most important factors are to determine what you want to do and what will make you, and your family, happy. Start with a Pro/Con analysis of each type of opportunity compared with your short and long-term desires. Which among the following choices are more important?
o Financial stability and some level of job security vs. higher risk and potential reward with lower security.
o Desire to be a player or to be the person in charge vs. being happy with a staff position.
o Ability to create your own path or willingness to adapt to the priorities of others.
Given these choices, here is what you may find:
o In a large or established company the most likely opportunity will be a staff position. The trade-off is stability for authority, but be aware that large company organizational politics may be severe.
o In a small existing company it is possible to be a player in a key position. The trade-off is lower stability and viability for more authority.
o In a new company there is the chance to be the CEO, bringing business experience to a group with technology expertise. The trade-off is high risk, long hours and low stability for a high level of authority.
Other factors to consider are how critical your personal situation is and the depth of your resources. If you have time and flexibility, take the time to find a situation that best meets your needs.
Situation: A company was challenged by a client to design a product to demonstrate the capabilities of the client’s processor. The result was a wonderful success, and has received very positive press. The client does not care about the product, only about their processor. How does the company test the appeal and potential marketability of the new product?
Advice from the CEOs:
Go to a local arcade, for example one operated by Golfland USA or a multiplex theater. Show them your product and ask whether you can test it for appeal with their customers. This will enable you to measure coin-drop numbers and generate demand and market appeal data. With these data you can assess the value of either selling or licensing the product. The objective is to see whether the product generates sustainable demand, or whether it is just a short-lived curiosity.
The big issue with a product like this is very simple – is it addictive?
If your initial tests show that the product generates sustained interest and revenue it is similar to a console game. There are a number of avenues to pursue, including:
Early exclusives use agreements with casino or theater chains – it will have value if it helps them to drive traffic to their venues.
Novelty markets – corporate events, etc.
Evaluate a lease model for target venues.
Consider selling the product to air table companies as a demo unit.
Situation: A company recently set up an operation in Shanghai. An immediate shock has been that that the Chinese engineers have not been able to solve problems creatively. To date their solutions are limited to following an outline provided by the home office. How does the company address this? How do you get a Shanghai office up to speed?
Advice from the CEOs:
Current Chinese culture is to do what you’re told, and not to vary from the direction given by those to whom you report. However, these are smart people. Given time and training they will get through this. Can you be patient enough to allow this to occur?
The most important role in your Shanghai location is a trusted, competent Chinese General Manager. This individual can get you where you want to be the fastest. It is also the hardest position to fill in China.
One option is to investigate connections through the SCEA – Silicon Valley Chinese Engineers Association. Many SCEA members are Chinese who have been educated in the US but want to return to China. You may find good candidates here.
The best candidates have bi-cultural exposure – they understand Chinese culture, but also understand US standards, expectations and operations.
Be sure to check US references of any candidates who are currently in the US.
Early operations and adaptations are the most difficult. Talk to people in Shanghai who have solved this problem.
Develop a separate project selection / development methodology for projects you want to transfer to China. This will change as the Chinese employees begin to approach US standards.
As you hire new Chinese employees, look for individuals who play and write music. They are naturally more creative. Microsoft has used this approach successfully in China.
Situation: A company has a successful product, but the market is changing. Previous customers were savvy, but the market is shifting to more naïve customers who don’t understand how to use the product. How so you respond when the market for your product changes?
What you are seeing is a typical market evolution. (See Clayton Christensen’s book Crossing the Chasm.)
When a new product is introduced, early adopters are typically savvy users who quickly grasp the utility of the product. They don’t mind some inconvenience provided the product is useful.
As the market matures and starts to attract mainstream customers, new users will not be as sophisticated and expect the product to be easy to use.
If you don’t adapt to these new customers your product will languish as new competitors enter the market with user-friendly adaptations.
The path is clear. Figure out how to make your product easy to use. If you use a GUI (graphic user interface) make the GUI intuitive. Allow customers to get what they need with as few choices or clicks as possible.
These changes may alienate more sophisticated customers, but they usually only represent a small segment of your potential market.
Add a customer-friendly service component. This builds a service income base around the product. You have different options.
Align the customer with appropriate level of resource – you may not require high level resources to assist the customer, particularly if the product is one where the service consultant only needs to be one page ahead of the user.
Outsource the service component to a partner or use independent contractors.
Consider a remote monitor system:
A dashboard interface with easy to read visuals or messages that tell the customer when service is needed. This will enable them to perform simple maintenance using your tools, or alert them when they need to contact you for service.
An example is Norton’s evolving system of products that enables an unsophisticated home computer user to either use Norton tools to perform routine maintenance, or directs them to the Norton web site for assistance or more sophisticated solutions.
Situation: The Board of a company has asked the CEO to generate to forecast of revenue for this year. Their primary technology is new and the company has just started receiving orders. An achievable revenue forecast my not please the Board. However, the company may lack manufacturing capacity to meet a higher level of demand. How do you forecast revenue for a new technology?
Be realistic in your forecast. While the Board may not like your number, the impact of setting the goal too far out of reach is potentially significant, including discouraging the team, and impairing credibility with the Board. However, if you aim realistically and significantly exceed the target you will be heroes.
How is it best to approach this in discussions with the leadership team?
Create a set of objectives and revenue targets and put probabilities around each. Also look at the obstacles to hitting the higher numbers, including manufacturing capacity and the cost of increasing capacity.
For examples if your most likely forecast is $X, then put probabilities around achievement of multiples of this number:
$X – 95%
.75X – 99%
1.5X – 75%
2X – 60%
Once your determine the objective, think through everything that must be covered to meet that goal, from sales to production, and start developing plans and contingencies to address these.
Share your probabilities with the board, as well as your plans and contingencies that may increase likelihood of reaching the higher targets. Ask for their input and assistance hitting the higher targets.
Situation: An early stage company is preparing for an IPO. The founder and Board have selected a new CEO with experience taking companies public. How do you facilitate a CEO transition, and how can the founder best position himself to support the new CEO?
Advice from the CEOs:
Get clear on your own strengths and desired primary responsibilities, but prepare to be flexible in negotiating responsibilities with the new CEO. For example, if the founder’s strengths are marketing, IP and early stage fund raising, see how these compliment the strengths of the new CEO. Then select a title which will allow you to leverage your strengths without impinging on the focus of the new individual. Don’t pigeon-hole yourself with your new title; keep it as broad as possible, for example Executive Vice President.
If you, as the founder, have a good long-term relationship with your VCs and the Board this will be one of your strengths. Be prepared to counsel the new CEO on individual personalities and objectives of this group. The CEO will form him own relationship with the VCs and Board over time.
Chemistry between the founder and new CEO will be very important. The job of the new CEO is to captain the ship. Your new job is to be a superior first mate.
It appears that you have an excellent learning opportunity. Learn as much as possible from the new CEO as well as the experience of the IPO process.
To smooth the transition personally between the two of you, take the opportunity to tell the CEO that you believe that the Board made the best choice and that you look forward to the opportunity to learn from him. This might be best done outside of the office, for example taking the new CEO to dinner.
Maintain your relationship with the key VCs on the Board. Let them know about your future ambitions and that if the right opportunity opens up in one of their portfolio companies, you could be interested.
Situation: A company has been presented with a new business opportunity. The opportunity is compatible with the company’s current business, but also involves skills and markets with which the company is not familiar. How do you evaluate a new business opportunity?
Advice from the CEOs:
There are at least four critical questions to assess as you evaluate any new businesses opportunity:
What is the total available market, and what is the immediately convertible market for the product or service?
Can you acquire expertise in the new markets that this will open to you?
Do you have a track record starting and nurturing new business within your company?
Is there sufficient seed money available – through company funds or outside investment – to keep the effort going for at least a couple of years as you develop the core team that will operate this business and gain traction?
If there is an offer of outside investment, consider how many months this funding will support the salaries of the team that will build this business, plus operating and overhead costs. You want to be sure to give yourself an adequate runway.
New business development opportunities typically require huge energy, creativity and focus for the first few years. Key management will have to devote all of their effort during the start-up period. Can the company afford to lose the services of key personnel for the time that you estimate this effort will take?
Before deciding to pursue this opportunity, take the time to investigate the market for this opportunity.
In particular, look for other companies that have tried to enter this market, and learn from their experience.
Develop a network of advisors who understand this market and can help you understand both the workings of the market and why companies may have struggled trying to enter the market.
Situation: A company just hired an individual to fill a key position. The position has a steep learning curve, and requires an on-site presence so the CEO made sure during the interview process to emphasize that he wanted a 3-5 year service commitment. Two days after the new individual started he told the CEO that his wife and child are moving to North Carolina and asked whether he could he work remotely from NC. The CEO said this was not an option. The employee says that he will stay, but the CEO is concerned whether this individual will fulfill his verbal commitment of service. How should the CEO handle this situation going forward?
Advice from the CEOs:
Verbal commitments made during an interview process are difficult to enforce. Further, under California law once you have hired an employee, you cannot fire or let the employee go except for cause – performance or company financial adjustments such as layoffs.
What should the CEO say to the employee at this point about the situation?
Thank him for his honesty. Let him know that if the situation changes you would appreciate knowing as soon as possible. Assure the employee that you will not fire or otherwise penalize him for giving you this notice.
Is there anything else that the CEO can do to protect his training investment?
As the employee moves from training into productive work, make it one of his responsibilities to thoroughly document the position and responsibilities. If he eventually leaves, this may reduce the learning curve of his successor.
Interview with Luosheng Peng, CEO & President, GageIn
Situation: A fast-growing company is working to engage new users on their platform. They are leveraging ease of use, demonstrated ROI, and fit within an existing ecosystem as their levers to attract and engage new users. What have you found effective to attract and engage new users in a new platform or service?
Advice from Luosheng Peng:
The most important factors to attract new users are ease of use and a demonstrable ROI. It is important to address a complex value proposition simply and easily.
You must know, ahead of time, the single most important value for your target user. Your examples must be clearly tied to your target user’s most important need.
Quick, simple, visual and verbal illustrations are effective. For example, we used short and fun videos like Tracker the dog to explain our products.
You must demonstrate a clear ROI and increased productivity. Your ROI must be real if you want to gain users attention – particularly if you want to gain viral levels of attention.
In business intelligence, finding information is not a problem. The challenge is finding the right information, filling the gaps in information from standard sources, and delivering it at the right time. We spent a great deal of development time getting this part of our product right.
To improve understanding of your ROI, engage early adopters and get their feedback on your current features and how to improve your platform. Early adopters are more analytical and passionate than other users. They want to be acknowledged so be responsive to them.
Offer a freemium model so that new users can try you out and test your value proposition. If they like what they experience, offer a low cost limited premium model with incrementally scaled pricing for additional features or functionality.
Manage your ecosystem. Building a new ecosystem takes a lot of effort and expense. Most small ventures will want to compliment or fit into an existing ecosystem.
Existing ecosystems may already be crowded. Small companies have to be able to break through the crowd and be seen. We completed major integrations with Yammer’s Enterprise Social Network and Salesforce.com’s CRM. Your platform will have the most success if you address a gap or unmet need within the existing ecosystem.