Rich’s Last Words

February 16th, 2010 by admin

This blog brings us to the final section of the book Bootstrap Business: A Step-by-Step Business Survival Guide.  Rich discusses the three attributes necessary to succeed as an entrepreneur.

Writing this book has required more effort and patience than either Ron or I thought possible. I now understand why I have never found a volume like it on the shelves. Setting the work aside, it has been an amazing opportunity for reflection and contemplation and has brought me to a conclusion I had already come to: entrepreneurship is truly an art form.

Several months into the writing, Ron suggested we create a company as a test case for the book. This has proved to be an invaluable exercise. As we went through the creation and launch of this company, we forced ourselves to analyze each important action in light of the principles espoused.

I am delighted to report that the fundamental tenets have held fast. Ron and I started the company with a total of $5,000 in March 2007. In seven months we grew the monthly revenue stream from $0 to over $60,000, with a gross net profit of $40,000. As of October 2008 the business is generating monthly revenue of $110,000 at a 65% margin. Has it been easy? No! Were there moments of confusion? Yes! After all, this is entrepreneurship.

Many of the things that haunted me during my first voyage into starting my own company are the same things that keep me awake now. There are no guarantees in life or in business. However, 27 ventures later, my nerves have settled. I have “learned” my way to solid ground. The principles herein will help you learn your way to solid ground much sooner. This learning was achieved through a progressive series of choices, ventures, successes, and failures.

The entrepreneurial path is worth the climb. It has provided countless individuals with financial stability, it has allowed personal freedoms, and it has facilitated an exhilarating and liberating lifestyle. One of the greatest joys I have in my life is helping young entrepreneurs who are facing the same quandaries I encountered early in my career. This has been one of my main motivations for writing this book.

Inevitably, as associates find out about this project they ask me, “What’s the key thing I need to know to be a successful entrepreneur?” Honestly, it isn’t as simple as one thing, but following are three critical attributes I have found are necessary to succeed.

1. Unalterable Determination
I am associated with a young entrepreneur named Mike Proper. When he was in the ninth grade, he was placed in foster care. Under duress he ran away from the foster family, finding safety in another state. Mike dropped out of school in order to support himself. Even though he does not have a formal education, he possesses an intense, relentless drive and an unconquerable spirit. Mike has since founded a company that has grown to a value of over ten million dollars. Mike Proper simply will not be denied.

The single most important factor to success in entrepreneurship and life is unalterable determination. I often say I’m not the smartest, I’m not the fastest, and I’m not the most handsome, but I’m definitely the most determined.

2. An Undeviating Support System
I had a young man in my office the other day who possesses incredible entrepreneurial drive and talent. He stood on the threshold of his first entrepreneurial venture. He was looking for some final advice and encouragement as he jumped from a warm, safe corporate job into the cold, harsh realities of business ownership. As we discussed the required sacrifices ahead of him, his face took on a look of fierce determination. As I looked in his eyes, I knew he had what it takes; however, I still had one remaining question. “How is your wife doing with all this change?” I probed.

At the very mention of his wife, calmness transformed his countenance. He responded, “She is amazingly supportive.” He nervously laughed as he recounted a dream his wife had the night before. She woke him in the middle of the night to share what she called a “hellish nightmare.” In a state of terror, she recounted how she went shopping and bought a vast array of expensive makeup and clothing. In the dream, she felt sick and was worried she had jeopardized her husband’s dream of starting his own company. He commented, “I am so lucky to have a wife like this.” Indeed, he is a lucky man! Some of the most talented and capable individuals I have known simply could not follow the course of their dreams due to the lack of support from their significant others.

Without an undeviating support system, it will be very difficult to succeed. Not only will this type of relationship provide fortitude, but the sharing of all you do will enhance the joy of the ride.

3. A Greater Purpose
The final key to entrepreneurship is having the source of your motivation rooted deeper than the shallow objective of making money. You have to be driven by a purpose greater than owning a BMW, something beyond cashing a big check. Making money will be a natural derivative of achieving a greater purpose. Your motivator must be deep and meaningful. It will make the entrepreneurial journey more purposeful, more enduring, and more valuable. I wake up in the middle of the night dreaming about enabling educational opportunities for disadvantaged girls in third-world countries. It consumes me, it inspires me, and I am drawn to it. This type of motivator is far stronger than making money.

Here is my parting thought: You can do this. You will have family, friends, mentors, professors, and any number of other folks tell you otherwise. Honestly apply the principles of this book, and you will not only survive entrepreneurship, but you will thrive in it! The hardest step for most people is simply taking those first few determined steps toward making something happen.

Timing And Greed

February 11th, 2010 by admin

As we discussed earlier in the chapter, timing your entry and exit is absolutely vital. I have seen many entrepreneurs who had an opportunity to sell a company for tens of millions of dollars, but hung on until the company became worthless. Why didn’t they let go? Greed.

I’ll never forget a very painful conversation I had with one such business owner who, in a matter of weeks, went from being a multimillionaire to the depths of bankruptcy. Words can’t express the heaviness of his heart and the pain in his soul as he confessed that he had jeopardized his family’s security and his children’s college education.

On the other hand, David McInnis, the founder of PRWeb, had the opportunity to sell his business for twenty-eight million. Everyone was telling him to hold onto his company. He really struggled with the decision. The business had very strong fundamentals, it kept very healthy margins, and it led the market in its segment. He sold in the end, but could it have gone for more? Probably; the market stayed pretty stable. David hit the bank button and stabilized his life. He actually had multiple offers for the company and did not choose the offer with the most upside, but rather the smaller downside risk.

In your first time or two through this process, your priority should be stabilization. I think David got it right.

I had another visit from a young entrepreneur who was in turmoil, hovering around the decision to sell or not for over a year. He asked my opinion, and I shared my first-time philosophy. If given the opportunity, sell. Pay off your home, pay off your debt, and save for a rainy day. After that, you can build back up and do it again. There is no limit to how many times you can step up to bat.

After tremendous torment, this young entrepreneur made the decision to sell the company. From a bootstrap investment he had a seven-digit gain. I saw him again after the sale, and he was happy and full of light. All of his debt was gone. He had paid off his house and cars and stashed some away for his kids’ education. The confidence gained in a first liquidity event that gets you out of the rat race is worth more than the money itself. It will put you in a powerful position for future ventures and give you the satisfaction of success.

One Last Note: The FAQ

I frequently get asked: what multiple can I expect from a sale? The answer to this question is pretty diverse and is based on your industry and how strategic your company value is. A small owner of an income-generating business is typically valued at three times gross annual profits. More strategic acquisitions can sometimes command five to seven times earnings.

There are situations where you get crazy multipliers, too; for example, The New York Times acquired About.com for a double-digit multiplier. In another crazy one, Google acquired YouTube for a billion dollars— and, for crying out loud, YouTube was losing money. These situations are very rare—almost flukes—and should not be your goal.

The safest, most secure way to get an exit event is to get profitable quickly and then stay profitable. Making your mark in the entrepreneurial world has nothing to do with falling into a fortunate fluke; rather, making your mark in the entrepreneurial world has everything to do with making it on your own, starting right, sticking through it, and ending strong.

Porter’s Points – Timing and Greed

  • The biggest obstacle to successfully timing your exit is your greed. Everybody wants to make it big, but if you hold out too long, the market may fall out from underneath you.
  • When you are new to the entrepreneurship world, sell! Having a good exit event, even if not as huge as you would like, increases your confidence and prepares you for bigger future accomplishments.

From Cradle to Exit With a Big Fat !

February 10th, 2010 by Rich Christiansen

We did it!

Yesterday, CastleWave was formally sold to Imergent. CastleWave will be used as a key infrastructure component in Crexendo which is IMergent’s venture into creating a nationally dominant SEO Marketing Agency.

This was a cradle to grave (hopefully not grave) exit in 2 years 3 months and 10 days. CastleWave was formed on November 1st, 2007.

As all of you know, this business was created with $5,000 to prove the principles in the book. CastleWave indeed was profitable from day one, generated over $1MM the first year at 50% margin and this past year did apx $1.4 MM. We have offices in both NYC and Utah and presently have 23 employees and apx 30 active clients ranging from smaller companies like Bank On Youself to large customers such as OpenTable and IMax.

What an amazing ride the past several years have been. We have built an amazing little team which was initially based on 4 teenagers that we affectionately refer to as our linker boys. The team now has 5 amazing account managers, several project managers, and a whole slug of off the chart smart linker boys.

The main thing I will miss will be the association with this high energy can do little team. I personally thank this rag tag team for their efforts and want to let them know of my confidence and belief in them in their future careers. I expect great things from you guys.

CastleWave Team

CastleWave Team

I am thrilled that we were not only able to talk about the principles in BootStrap Business, but prove it. Indeed, we ate our own cooking and went through the entire process from chapter 1 to now chapter 19 the exit.

It is really a satisfying feeling to be able to write this post closing both chapter 19 in the book and in the business.

With this exit, I will now be freed up to be much more active in dialog, discussion, and yes posting to the blog. It is perfect timing with the blogs on the book now coming to the end of the book. If you have any specific blog topics or discussion items you want me to cover, please email me and I would be happy to hit them. rich at bootstrapbusiness dot com.

Types Of Exits

February 9th, 2010 by admin

While I have my favorite exit style, it isn’t the only one. I have mentioned some and hinted at others; some bad, some good, all possible. You can plan for any of them; or, at the very least, you can put some backup plans in place. There are seven main categories of exits. When you start a business, you need to consider each of these, even if you rule some out in the planning stage.

Types of Exits

  1. Market Failure or Natural Catastrophe
  2. Competition Closing In
  3. Selling Your Business
  4. Merging
  5. Going Public
  6. Raising Venture Capital
  7. Systemizing and Cash Cows

#1 Market Failure or Natural Catastrophe

These are devastating and almost impossible to predict. Three of my digital businesses collapsed due to 9/11, and I wasn’t alone. Countless ventures tanked as a result of the downshift in economy and morale. One of my associates happened to be running a highly profitable call center at the time. When the tragedy began to unfold, nobody was in the mood to take surveys, respond to customer queries, or engage in any type of telephone interaction.

That mindset persisted for quite some time. What could he do? Between office space and employees, he had a fixed overhead cost. I sympathized with his dilemma. Should he lay everyone off or hang on tight and hope the world would bounce back? In the end, he tried to save his team. It was an honorable thing to do but, regrettably, it was the wrong decision.

Think of emergency exits like you think of going to the dentist with a toothache. Deal with the unsalvageable tooth quickly, and you’ll not only get rid of the pain but save yourself additional damage. Before you start on a venture, remember that catastrophes beyond your control are a possibility. Make rules up front so that you don’t get stuck going down with the ship. If you are sinking, head for the lifeboats sooner than later and then wait out the storm. On a sunnier day, go ahead and try again. Getting out early also gives you and your team a chance to find something more solid while the market is still reeling.

I’ll be the first to tell you that this is an area I have routinely struggled with. I tend to hold on too long. An entrepreneur never wants to give up, but it’s sometimes best to let a dying venture go. Maybe your slant on the market isn’t working out. Diversify! After 9/11, telemarketing plummeted, sure, but it was the perfect time to get into security systems. You can take a market catastrophe and find the next big thing, but it requires hard decisions and, sometimes, having to leave an old and beloved idea behind.

#2 Competition Closing In

The only thing you can do in the face of a monster competitor is to stay out of reach. You have to keep toward the front edge of the wave. As a small business, you have a big advantage. You are flexible and quick, without any corporate drama to bog you down. If you can surf your venture on the front end of that wave, it will take you for a thrilling ride. Just be careful; the only thing that hurts more than a competitor who squashes you is a wave that crashes you right into the rock-hard coral. Don’t ride so far ahead that you can’t stay on the wave you caught.

One of the biggest signs of skilled entrepreneurship is timing. When do you get on the wave? How long will you ride? Most important, when will you get off? Several years ago, I rode a very successful wave in the mortgage market and had the opportunity to sell the company for millions of dollars. I opted to try to stick with it. Sure, I prolonged the joy of the ride, but I ended up standing neck deep in the undertow. Out of necessity, I finally closed the company and laid a number of people off. Timing is everything. Keep your eye on the approaching shoreline.

#3 Selling Your Business

This is a fun and exciting strategy for a quick exit. Like I said about the competitive landscape model, you can quickly determine who your potential acquirers are. If you are filling a smaller hole with lots of borders, you can make it a larger event. Don’t announce your arrival into the space until you’ve built something viable; once you’ve launched, though, get your name out there.

While I was general manager of About.com’s Web Services Division, a second-tier page search provider started reaching out for occasional contact with us and other large competitors in the area. They weren’t divulging anything big, just opening a friendly “I’m here” dialogue. Sure enough, within a year that little company was snapped up for millions of dollars. I had a similar experience with an international sports equipment company I owned. The process let me have fun with the business and come out with some cash in the end.

Selling is not a universal exit strategy, though. Take time to consider the pros and cons before selling your business. While a sale is quick in and out and quick to cash, you and your teams don’t get to stick around very long. Since you target a niche market, it’s possible that the competition could stomp you out before you build to the sale.

At the same time, though, this approach lets you fly under the radar and avoid the public eye. With a bit of anonymity on your side, you can come in quietly, make your money, and leave. Some like that, some don’t; usually, the low-flying outcome is the norm, though. Very few companies sell for the big bucks that will land your name in the Wall Street Journal.

#4 Merging

Merging is a great way to take what you’ve built and double down your bet for resources and stability. Often, opportunities arise to merge with bordering companies that have complementary skills where your strengths can fill each others’ weaknesses. Ron and I went through a merger with our business to increase our probability for success. Going in, our core skills were engineering and SEO. We began in the early stages to have discussions with a New York firm specializing in sales contacts and affiliate marketing. Midway through writing this book, we decided to formally merge.

In essence, a merger is a stabilization mechanism. Merging is a way to diversify the talent. A good merger should stabilize your venture, elevate your chance of success, significantly add to the breadth of your market, and make it more difficult to displace you. However, all this stability comes with some pretty serious cons. A merger will dilute your ownership, introduce partner control issues, and create new concerns over culture. The new company basically steps in as a partner to your company; just as with any new partner, make sure that your priorities line up. Is it a good match? If not, it’ll be a nightmare.

#5 Going Public

Going public is a valid and lucrative option. If you come from a bootstrap model, however, it can take you a number of years to get to this point. There are exceptions, but you generally need a fair amount of capital and some real energy behind you. This is an incredibly significant liquidity event. If you want an exit plan totaling more than just a couple million, this is the way to go. A successful IPO is outrageously labor intensive, however, and your company will be subject to serious scrutiny. Going public is not for the fainthearted. A business needs stamina to make it through the process; I’ve seen many die trying. It requires absolute accountability and an unyielding structure.

#6 Raising Venture Capital

Listing this as an exit event actually makes me laugh. I can hardly believe I’m writing this. Seeing what I’ve seen, however, I know that this issue needs to be discussed. Too many young entrepreneurs build a business plan, get lucky (or wily) enough to receive venture capital, and then treat it like some grand exit. After all, when the millions roll in, you can live the business high life—right?

Think again. Once you cash that check, the work really begins. You may have stabilized your business by securing significant financing, but you have locked yourself down and decreased the probability of a smaller, quicker exit. Why? Read the fine print. Venture capitalists typically require a multiplied return on their investment. If they give you two million dollars, they will not even think about selling the company unless you can do so for an incredibly high multiple—four or six million just won’t cut it.

Let’s talk through this. Say I build the company and things go well. A year and a half into the venture, it has evolved to a point where I can sell for five million dollars. Personally, that sounds pretty good. If I could pick up even three million dollars, I would be inclined to do so. But let’s go back to that contract you signed. If a venture capitalist is invested, it’s not going to happen, baby. Theirs is a bang-or-bust mentality. You don’t even have the freedom to make the choice for yourself.

So, what are the pros of venture capital? You stabilize quickly and, for a period of time, have a steady influx of cash. The cons? The work has just begun, and it’s farther to the next exit than you can imagine. You have dramatically increased your accountability and lost a significant amount of flexibility; a real exit event will have to come at a much higher multiple.

#7 Systemizing and Cash Cows

This is really a great option if you are in a stable, secure marketplace. I have had the most success in this arena when dealing with real estate. I acquire the investment property, pay it off, and leave a manager to run the business while I collect the cash. The insurance industry follows this model as well. However, if you’re entering a more volatile industry (like technology), this is not a really good option for an exit. You need to ensure that your asset doesn’t up and blow away.

If you play your cards just right, cash-cowing your venture can be considered a valid exit event. You retain ownership, you have a cash stream, and you maintain a very flexible lifestyle. On the other hand, there is a certain level of risk with retaining a company that you are not actively involved with. You can let it go, as long as you keep your finger on the pulse. If you feel it slowing, you need to take some action. Also, this sort of cash cow doesn’t come from one big event. These chunks of cash come in small increments over time.

Porter’s Points – Types of Exits

  • Decide when you enter how you want to exit. Be sure to have thought through all the possibilities and have backup plans in place. Rarely is a business a straight shot from start to finish.
  • Bad exits sometimes happen to good people. If a disaster, market-induced or otherwise, forces your business toward folding, quickly get out. Everybody—you, your team, and your later ventures—does better if they can deal with a hurricane when it’s still hundreds of miles from the coast.
  • Keep a close eye on your competition. As a small business, you have to stay at the front of the wave. Pay attention to the environment, too; just because you’ve eluded competition so far doesn’t mean you’ve escaped a changing market trend.
  • Building your business to sell works best when you place it in a competition-heavy intersection.
  • If you want to ultimately stick with your business, consider merging. A merger gives you the stability needed to hold onto your market footing after you’ve been in the game a while.
  • An IPO will make big bucks, but going public doesn’t just happen. To have success, you have to spend the time to be worth the public payout. Venture capital is not a real exit. Don’t let yourself have any delusions about where that couple of millions is going to take you.
  • Systemizing a cash cow makes for a long-term exit investment; if you are looking for the big payout, however, this isn’t the way to go.

Map It

February 4th, 2010 by admin

If your exit isn’t planned, your exit will be forced. I was forced into some unanticipated business exits because of 9/11, as were countless small businesses. Obviously, nobody could control 9/11, but it taught me to think more seriously about exit strategies, planned and unplanned. Bad exits can also come if the competition tramples over you or the wave moves away. If a bad exit comes, you and your partners need rules to govern that (see chapter 5, “Make the Rules, Live the Rules”); however, good exits need just as much planning.

Drafting an up-front exit strategy uses many of the same startup tools you’ve already employed. Keep in mind, though, that when you plan your business with your exit strategy up front, you aren’t just looking to break into the market. You’re looking to break in, and thinking about how to get out. In this way, one of my favorite exercises is competitive landscape mapping. This kind of mapping obviously gives you an idea of where to put your product in the market, but it also indicates how long and well you can operate and how you ought to exit.

I talked briefly about this model in chapter 3, “Power Tools.” Remember the gourmet root beer? In that example, we plotted out regions and price as we determined just how viable our market opportunity would be. In this chapter, we will plot products and price. Considering your competition, this is what they will be most interested in. Knowing where your competition stands tells you how to best use that for your exit. The energy expended up front gives you power at the end.

As you enter the market, diagram your competitors and the segments they play in. Are they high-cost providers? Low-cost? What breadth of service do they offer? By taking time to draw out the landscape and understand where you operate in relation to your competition, you can deliberately position your company to fit.

This little exercise will also tell you who will be in any fistfight you get into—or, if you play it right, which way you can turn to get away from the fight. The companies that your chosen space runs up against will be your most aggressive competitors. While competition helps them, they will, in some degree, want you out. Buying you might be a viable option. Definitely, the companies that border you are potential acquirers. If, you have a large gap, though, you’ll have a larger market opportunity, which means it could take you longer to have a high-dollar exit event.

Let’s consider a retailer in the outdoor market. We’ll use the vertical axis to plot competitors’ pricing. On the horizontal axis, we’ll label competitors’ specialization through the gamut of outdoor sporting equipment. You should have something that looks like this:

Competitive Matrix

The next step is to identify the key players. Fill in your matrix so that you put these companies where they fit into the market. Make this accurate: bigger market shares need bigger circles. Go through each of the competitors in the context of your competition. Map the coverage and look for the gaps. For example:

  • Wal-Mart is a low-cost, low-quality provider that competes mostly in the camper, trailer, and family camping sections.
  • Outdoor World competes in the camper and trailer market, but they are a higher-quality, higher cost provider, so you place them in the top left quadrant.
  • Sportsman’s Warehouse competes in the family camping and hunting markets, and pushes into the hiking markets, covering a fairly large area. They are a mid-range to higher-cost provider.
  • Back Country provides online, mid-range cost, focusing on higher quality but primarily the hiking and high-altitude market.
  • REI is very high quality, focusing primarily on the camping, hiking, and climbing market.
  • Kirkham’s competes directly with REI but at a much lower cost.

Your matrix is shaping up nicely. It should look something like this by now:

Competitive Matrix Stage 2Now that you have the landscape drawn out, examine the holes. Where are the overlaps? Can you compete at potential intersections? The larger the hole, the bigger the opportunity; however, it will take more effort to fill and more time to build to an exit event. If your venture fills a smaller opening, one of two things will happen—one, competitors at your borders could try to acquire you; or, two, they will strike aggressively and
cross the line to compete in your space.

My personality fits best with small holes. I like to fill them and plan for quick-liquidity exit events. In fact, the map we drew above is one that Ron and I used right before we acquired Campman.com. We chose to fill a small hole right at the intersection of Back Country, Sportsman’s Warehouse, and Kirkham’s. We were able to sell the company within a year.

The area you choose to enter determines what type of exit you will have. If we had tried to go nose-to-nose with Wal-Mart, we would have been stomped flat. It takes far more money and time for that kind of fight than what I was willing to invest. I learned a long time ago that you have to look for the niche and fill the space. That brings success.

Porter’s Points – Map It

  • Consider your competitive landscape map not only in terms of your potential market presence, but your potential market absence—that is, determine at the outset how you are going to go out.
  • Don’t take on the big market players at the heart of their empires. Look for a niche where a few smaller players overlap and build up to a sale.
  • Keep in mind all the possible variables in your competitive landscape map. Location may be important for some, but don’t forget product, price, and quality.

Porter’s Preface: No Exit Strategy?

February 2nd, 2010 by admin

Today we begin the last chapter of Bootstrap Business, No Exit Strategy.  Rich teaches the importance of knowing what type of exit you want, decided when you first start your business.

In business, one of the first things you need to do is plan the last thing you need to do. No, Rich isn’t going to talk about your last will and testament; what he will talk about is your exit strategy. In your venture, what’s the endgame? How do you want this bright idea of yours to play out? It’s a given that you need to plan the beginning of your venture; in fact, some entrepreneurs are so good at planning the beginning that they forget either to get to work or to remember that it will have an end. The thing is, if you don’t create an exit strategy, the market will
do it for you.

How you want to exit determines how you start. Are you looking at an asset sale in two years? Do you want to create a dynasty? Maybe you are hoping for a cash-out event to a competitor. With any of these options, you don’t need a crystal ball. You just need to make a choice. As market variables change, you may change your strategy along with them. There is no guarantee you’ll get exactly what you want, but knowing where you want to end up points you in the right direction.

Don’t lie awake at night strategizing step-by-step exit plans. Set a goal, make rules, and get back to work. Understanding your exit will help guide you in building, organizing, and establishing your business. Run your venture well—and when the curtain falls, know which side of the stage you’re going to exit on!