Tag Archives: Management

Watch Your Burn, Then Take Off!

When entrepreneurs start businesses, one of the last things they want to think about is running out of money. Whether the money is one’s own, that derived from friends and family, angel investors, or the bank, it has to be managed so that cash outflows are balanced by reserves and inflows. The term “Burn rate” is used commonly to describe  negative cash flow in a start-up. It indicates the speed of depletion of invested capital form shareholders. Once the cash reserves are used up, the company will either have to start making a profit, find additional funding, or close down. Venture Capitalists (VCs) are obviously very concerned about burn rates because they don’t want to see their investments wasted.

[Tom Tunguz, of Redpoint Ventures, in his blog, Ex Post Facto, writes the following:]

How does a VC think about your burn rate? First, it’s important to note that every company is different. Second, geography is an important factor. Third, pure consumer companies’ finances will differ dramatically from  e-commerce or SaaS companies. Given all those caveats, I’ve made a table of the rough figures that I expect to see in a company of various stages, immediately after financing.

When I make an investment, my aim is to fund the company to a milestone that enables the company to raise a subsequent round. Such a milestone tends to be achievable in 12 to 14 months. But a startup should raise 18 to 24 months’ capital to ensure some flexibility in case things don’t go according to plan.

A good rule of thumb in Silicon Valley is that every employee costs about $10k per month. By that estimate, a company of 20 people burns $200k for staff plus 25% for overhead, or $250k per month/$3M per year. This is on the richer side of burn rate calculations but given the rate of increase in engineering salaries recently, it may be closer to the norm.

For revenue generating companies, net burn (revenue – expenses) should be kept under $400k – $500k. A company burning more without the immediate prospect of revenue can be a concern because of how quickly these high burn rates reduce runway. Additionally, the company should aim to reach cash flow break even sometime after the Series B, before a Growth round. Again, every company is different, these guidelines are the mental model I’ve built of typical companies who have pitched us and worked with us.

Granted, Silicon Valley is more expensive than many other locales. Similarly, labor rates/salaries that drive the burn rate math are higher than in other regions. Even still, Tunguz makes a good point about the need to raise about 50% more than one expects will be required in terms of time to reach milestones. The “runway” referred to is the total amount of time before the venture crashes and burns due to lack of cash. As your company grows from solopreneur to employing 5+ people, these guidelines should come in handy to successfully manage the enterprise and its valuable cash.

The Great Urban Entrepreneur

Five years ago, a pair of adventure loving buddies found a way to bring their love of thrills into an urban environment. They since have grown Red Frog Events into an $85 million business that hosts competitions during which teams solve clues and complete mental and physical challenges while discovering their city in a fresh way. Joe Reynolds and Ryan Kunkel have parlayed their $5,000 initial investment into a successful Chicago-based company with more than 60 full-time employees, three signature extreme races and a serious following.

The company’s most popular event, Warrior Dash, a 5K race packed with obstacles like a pond filled with logs, a rock wall, a tunnel of flames and a sinking mud pit, made appearances in 35 cities across the country in 2011 and drew 600,000 participants. This year the company is going international for the second time, taking its events to Ireland and Great Britain. Reynolds says, “When you’re really passionate about your business, you can see lots of tremendous opportunities.”

Nancy Mann Jackson says (in her Entrepreneur magazine article about him) “Reynolds had previously owned a house-painting company, but had no idea how to contend in the event-production business. What he did know was that he loved competing and creating fun experiences–and he wanted to share his passion with the masses. With hard work and dedication, he’s now doing just that. If, like Reynolds, you’d like to turn what you love into a viable business enterprise, start with these six tips:”

1. Don’t count on passion alone.

“Sometimes passion can blind you to the potential downside of your idea,” says John Torrens, a serial entrepreneur and an entrepreneurship professor at Syracuse University. “The one non-negotiable factor for any sustainable business is that they solve a problem for a specific customer segment in a way that is appreciably better than the next best alternative. Get as much feedback from potential customers as possible. No matter how great you think the idea is, you still need to understand what your market thinks.”

Remember the details. There are tons of ancillary functions that go along with running a business that must be performed well for it to succeed.

Dole out responsibility.  You’ll either have to delegate the primary work to others, or you may choose to delegate managing the operation to someone else so you can continue to focus on the primary work yourself.

2. Hire passionate people.

Having employees who share your zeal for the business will help your company succeed. For instance, at the Warrior Dash Louisiana in 2010, a series of tornadoes tore through the landscape during the event. Neither Reynolds nor Kunkel were in Louisiana, but the staffers who were managing the race stayed up through the night to repair the course and get all the obstacles ready again, so the competitors who weren’t able to finish could complete the course the following day.

3. Share your passion.

If you have a hobby, likely there are others out there who share that interest and would like to learn more about it. Sharing your knowledge can be a great way to build your business.

4. Keep the passion alive.

Reynolds and Kunkel make a point to continue competing in races themselves so they can maintain their love for running and recreation. Rather than feeling responsible for thinking of everything and micromanaging their employees, Reynolds and Kunkel empower their staffers to develop solutions to their own problems.

5. Prioritize fun.

Torrens says, “In the authentically passionate companies, everything grows from that passion, including the people, policies, branding and community relations. That obsessive focus on whatever it is that gets you out of bed can’t be faked, but it takes work to create the circumstances under which it can thrive. “

6. Expand your passion.

Reynolds launched Red Frog Events because he wanted to combine his love for adventure travel and competitive runs. But over the past five years, he and Kunkel have realized they are excited about producing recreational events in general, not just runs. This year they plan to enter the music festival industry, starting with their own Firefly Music Festival, which they hope will compete with some of the world’s largest such events.

Refuse to Lose (Investors’ Money)

Clarence Wooten, who sold his start-up Image Cafe to Verisign 7 months after founding for $23 million, told an audience at MIT/Sloan recently that there are keys to the entrepreneurial mindset. Barb Darrow with GigaOm summarized his comments into 12 lessons:

  1. Paycheck is an addiction. Not unlike crack cocaine. Entrepreneurs have to break that addiction to build an asset that will pay off long-term, not in a weekly paycheck.
  2. Beware of naysayers. Because 99 percent of this country works for the 1 percent, they  have risk-averse employee mentalities. Don’t listen to them.
  3. Just do it. Be like Nike. There is no roadmap. If you don’t do it, it won’t get done. Work lean. Corporate people are used to resources — HR departments, assistants but entrepreneurs do it on their own.
  4. Fail fast, fail cheap. You will fail a lot because you’ll need to try a lot things. So do that on the cheap. Instagram’s first product  – Brbn — failed but they distilled that app to its bare essence and it caught fire.
  5. Partner pitfalls. It’s scary to be out there alone. You want someone to share the ups and downs. Often one partner will work harder than the other but share the same upside. Share the downside as well and don’t necessarily split equity equally. Set up reverse vesting:  When you issue founder’s stock, make sure it vests in case someone leaves they don’t leave with all equity just with what has vested.
  6. Be naïve. Unlearn what you learned in corporate America about hierarchy. Being naive means being ballsy. Facebook turned down a $1 billion offer from Google and people thought Zuckerberg was crazy. He wasn’t but he may have been naive. That paid off pretty well.
  7. Business is a team sport. Would you rather own 100 percent of a $1 million-a-year business or 20 percent of a $100 million-a-year business? Everyone needs equity. You need as much brainpower as possible.
  8. Challenge your comfort zone. I knew I had to put myself out there speaking in public. I wasn’t comfortable with it but I did it.
  9. Image matters. People judge you when you talk about your company and you have one chance to make a first impression. If you’re not a design person, don’t do your own logo. Crowdsource if you need to.
  10. Shadow of a leader. You determine what your company culture looks like. Build it as a place you want to work every day. People watch you. At Image Cafe, I brought in a CEO who was religious. I wanted to act like a customer to get competitors’ pricing and she said “absolutely not.” She set the ethical tone.
  11. Investors want their money back. This is important. Investors back you. Your integrity is on the line. So know your exit strategy. I’ve never lost an investor’s money and I carry that chip with me every day.
  12. Cash and customers. Lessons 1 through 11 you can learn on your own but for #12 it helps if you have some education and understanding finance and marketing.

Wooten feels that entrepreneurship is a combination of talent, preparation and hard work. Following the 12 guidelines above will give you as an entrepreneur a chance to be more successful.

Minority Entrepreneurship & Mentoring Needs

Minority entrepreneurs like Rene Diaz are playing a bigger role in America’s growth story. Diaz was featured in a Forbes magazine article last year about the growing impact of minority entrepreneurship. In 2010 immigrants accounted for nearly 30% of new business owners in the United States, versus 13% in 1996, according to the Kauffman Foundation. Nationally, 40% of minority-owned businesses are owned by Hispanics, and about 28% each by Asian- and African-Americans.

Urban futurist Joel Kotkin provides unique insights into what drives the increased rate of entrepreneurship among minorities. Those who are immigrants, he argues, are far more likely to start businesses because they are risk-takers in general, as evidenced by their willingness to pick up and move. Kotkin and a couple of other researchers were asked by Forbes magazine to examine the immigrant entrepreneur phenomena across the top 52 metropolitan areas. Based on rates of self-employment, housing affordability, income growth and migration, immigrant entrepreneurs tend to prefer sprawling, heavily suburbanized regions, many of them clustered in the South and Southwest. Cities in these regions (Raleigh-Cary ranked 22nd on the list) are usually characterized by cheap rents, affordable space, job growth, strong immigration and general economic health. Traditional hotbeds of entrepreneurship have not fared as well among minority entrepreneurs (San Francisco was 35th, Minneapolis, New York #39, Boston#45, San Diego #48,  San Jose #46, and Chicago #50, all in the same strata as cities like Detroit, Cleveland, and Milwaukee), largely due to the affordability issue.

North Carolina is now 6th in the country in number of African-American residents and 11th in Hispanics. North Carolina has seen a boom in its Hispanic population, with the percentage of total residents growing by 111% over the past 10 years. Locally, we have seen many minorities move to our area due to a stronger economy than other parts of the country. As these newcomers begin to start businesses, we expect our market to look very different.  From 2007 to 2011, Hispanic-owned businesses in North Carolina grew from 9,000 to 21,301, according to the census and the Latino chamber. The Research Triangle Park is also home to a large and growing Asian population, with the two biggest subgroups being Indian and Chinese. There are now an estimated 200,000 minority-owned businesses in North Carolina, increasing at a rate of 50-60% every five years.

Minorities own 15% of all businesses, but 20% of franchises nationally.

Why are minorities attracted to franchise concepts?

Survival rates among minority-owned businesses ranked highest among Asians, and Asians were the only minority population whose rate surpassed the general population.

Why do non-Asian minorities struggle to attain similar survival rates?

We think the answers to these questions are actually one-and-the same. The franchise concept is attractive because it comes with a business plan, a blueprint as to how to make an idea profitable, complete with templates for each and every category of decisions to be made. When the business is not a franchise, it is imperative that the entrepreneur find a mentor and other key resources to guide the preparation and implementtation of a solid business plan as well as the other key decisions. Perhaps the Asian-Americans are doing a better job of this than others?

 

American Restaurants Struggle to Stay Alive

Back in the late 1980s, the Turnaround Management Association was birthed out of a research project conducted at the Kenan Institute of Private Enterprise at the University of North Carolina at Chapel Hill. As the lead researcher, I had the opportunity to personally pull together a bibliography of articles about businesses whose travails were significant enough to hit the national headlines in various business publications. From the research, we published a monograph and wrote articles about best practices that appeared in 46 national business periodicals in our first 18 months of existence as a trade association. As I and other involved with the Association moved on to other pursuits, TMA moved off campus, starting gaining momentum in chapter development, and now enjoys international members as well as domestic. One of the publications of TMA is the Journal of Corporate Renewal. The Journal‘s lead article for May discusses the struggle of restaurants in the United States to remain profitable.

Some interesting facts from the National Restaurant Association are cited:

  • Restaurants account for 4% of GDP
  • 10% of the U.S. workforce is employed in the restaurant industry
  • 50% of adults have worked in a restaurant
  • one-third of all workers had their first job in a restaurant
  • 48% of the average household’s food budget goes to restaurants (vs. 25% fifty years ago)

The bankruptcy filings of a number of restaurant chains since the recession began in 2008 is but one indicator of a model that is teetering on the brink of survival. The photo above is taken from a Food Network show entitled Restaurant Impossible, wherein Robert Irvine turns a restaurant around in 48 hours. The menu is revised, customer service issues are addressed, $10,000 of strategic remodeling is performed, the revenue and costs are examined for opportunity, and the restaurant owner is challenged to run the business at a profit going forward.

Macro trends in the recent few years towards buying more groceries or becoming value-conscious have definitely affected the top and bottom lines of many restaurant owners. Franchises, which account for about half of the restaurant revenues produced nationwide, have really taken it on the chin. Franchisees who own one or only a few stores have inadequate access to capital these days. Another big factor is the conflict of interest in most franchise agreements that are based on sales volume. The franchisor can implement discounting programs to increase traffic and sales volume, but the franchisee has less and less profit as a result of the agreements.

What can be done? Turnaround experts recommend a process of performing store-level profitability analysis, followed by benchmarking against peer stores. These analyses can highlight purchasing/inventory issues, training issues that are evidenced by waste, and theft/shrinkage that depletes the operator’s assets needed to produce a return.

There are many good consultants who can help a restaurant owner sort through the challenges and create a plan for growth and renewal.