Helping Competitors for Fun and Profit

Daryl HattonEntrepreneurship

I spent 90 minutes today helping a competitor with his business and I feel really good about it.

We discussed challenges, strategies and market opportunities. Afterwards I made some introductions to people I think might be good to add to his team. I also introduced him to two customers we tried to sell on our solution but came up short.

Many rational people would say, “What??? Why???”

I asked myself the same questions. The answers that came back highlight some of my core philosophy and are worth sharing.

  • Doing the right thing to help someone when you can is rarely if ever the wrong thing to do.  Making the world a better place for someone is never a bad thing in my book because it makes all of us richer and safer. I could help him. It was the right thing to do so I did it.
  • There is more than enough business to go around. Helping him is therefore not actually hurting me – even though we are competitors. Our solution in that niche market isn’t yet a good fit for most customers. His is slightly better but still not a killer value proposition. There is lots of potential in the market but neither of us is really unleashing it yet. If I truly care about the customers (which I do) then my highest ideal would be for at least one of us to evolve the solution so that it works for them. It would be good if it was mine but if it was his it is a better result than if it wasn’t anyone’s.
  • Having it all is a waste. Working on having the right things is WAY better than trying to have everything. Giving away what is marginal business makes room for really good business to fill the space. We only have so much time and energy. Wasting it on stuff that is not quite ‘right’ in order to try to have everything dilutes the result badly. Saying ‘no’ to the marginal stuff makes me richer because, based on the point above, there is more than enough good stuff in in the pipeline if I just have the time to go get it.
  • A little friendly but competent competition raises the quality of play for both participants. I think some of my best work comes out when I’m actively competing with someone. When they play well it makes me try even harder. The results for both of us are frequently better. So finding a good competitor to play against is a good thing for me.
  • If you can help a customer do it – if not, help them find someone who can help. If I go into a store looking for an item and they don’t have it but recommend a place where I can get it, I almost always find myself back at the first store the next time I’m looking for something. Helping customers find the right solution frequently brings them back to you in the future when what you have to offer might match what they need.
  • Paying goodwill forward without expectation of payoff counter-intuitively always has a benefit. I have no idea if what I did will ever benefit me directly. However, I’m absolutely clear (as a faith-based position) that it has a huge indirect benefit for me because it has a direct benefit for someone else in the closed ecosystem called Planet Earth. This is probably another way of thinking about my first point to some but I think it is worth highlighting that this concept works because I DON’T expect a specific return, not vice versa.

This is longer than I thought it would be but it is because the event was very rich for me.

Hopefully this provokes you to consider giving away a bit more time/energy/help so you can become even richer in these same things.

My daughter McKenna’s poetry

Daryl HattonPersonal, Poetry

Prepared in 30 minutes for a Grade 11 science course assignment. There was a list of required words for the poem. She nailed it.

Volatile

Here sat an ancient volcanic neck,

It stood tall and proud; a stacked card deck.

From its peak, a once known crater,

 Not what it used to be, now much later.

Below lay a dormant vent,

A downward shaft, slightly bent.

And even more so was the dike,

Which sprouted like a warping spike.

Abase the tunnel lay the sill,

Flat but flowing like’ melted chocolate spill.

And even deeper, it rested tranquil,

The batholith, sleeping with its belly full.

From there it plummets, but up we return.

To the laccolith, a burrow cut like an urn.

And what results from its prominent bump?

That smooth and hill-like looking lump?

A break, a breach;

Streaming like a leech.

The active and frothing magma vent,

Spilt its lava flow like none had been spent.

And up it rose, along with ash,

Dark clouds forming, mixing with gas.

That old volcano, all tall and gray,

Was seeing action again that day.

Ode to a Man, Obsessed

Daryl HattonHumor, Personal, Poetry

First Performed for my best friend Dave Mason
In Front of Friends and Family
On Robbie Burns Day
January 25, 2003

We know not quite when this affliction first started,
Our poor auld man Davie, his senses departed.

At first it was hidden, that much must be true,
For he married a lassie much like Nancy Drew.

She watched and she tested, checked each little thing,
Of the man she would marry (though she picked her own ring)

Somehow he passed muster, each one of us fooled,
Not then did we know, for Scotch how he drooled.

It weighed on his brain, each long waking hour,
When his bottle was dry, his expression went sour.

He must find a way to forget his fav’ Whisky,
But not with techniques he might find too risky.

The key to his happiness came to him one day,
“I must find a way to get carried away.

And pick a new focus, others things to consume me,
I’ll just get up early, trim the lawn on my knee”

The effort and time he put into his yard work,
He toiled night and day, most definit’ly berserk

The cut was just perfect, no moss left in sight.
Heaven forbid it rains too much tonight!

For like his fine whisky, Dave’s passion for grass,
Occasionally made him a pain in the ass.

Now what other fellow would admonish you so,
For placing a chair right where he might mow!

But this passion for green grass did awaken anew,
His love for the game Scotsmen play in the dew.

‘Twas Golf, so ancient and Scottish a game.
The devilish rascal that men’s souls do blame,

For many a night spent unable to sleep,
From dreaming of shots that make other men weep.

So off to the bookstore, much research to do.
For what Davie must do, he must do well, too.

More books, facts and articles, endless it seemed.
New videos played ’til his poor eyes, they screamed!

All during this process, a list Davie made up
Each item he needed, how much, could he trade up?

For Davie is master of shopping for things,
Skills many a year searching London Drugs brings.

Nevada Bobs could ne’er quite figure out,
The confusion that reigned when Dave was about.

Good sales people kept wondering just what had they done,
The month Dave spent asking questions, mostly for fun.

Things like this make most men go completely insane,
Chasing down many a detail most think quite inane.

Over time Dave’s collection of clubs kept on growing,
In spite of the pain in his back that kept blowing,

Any real chance of playing and making a score,
That he could still brag about and not be a bore.

Much practice, more practice, a lesson or three.
He never even took much time off to go pee.

Lessons with Golf God, a game with his boss.
Things started to look up, even though he still lost.

So frustrated from many a game won by others,
And having to deal with a few family mothers,

Brought Dave back to where we began this tall tale,
In search of a replacement for strong English ale.

Beer just didn’t quite cut it after a fine afternoon,
Of swinging the clubs and scaring a loon.

So back to the whisky Dave’s attention returns,
To that fine old Scotch water that pleasantly burns.

Yet whisky is one drink that costs lots of money,
A fact that you frequently hide from your honey.

For prices ’round here, they’re much worse than you think,
It costs twice a fortune, just to buy some fine drink.

The cost of this liquor, it was worse than his coaching,
and then there were friends that were always there poaching.

Then one day he decided, “enough of this pain,
I’ll go off to Calg’ry, and challenge this bane.

I’ll just run on over, to the local outlet,
and see what good prices, I’m able to get”

Surprise? No surprise, the prices were great,
And Davie stocked up, enough for a crate!

He smuggled them back, to the wet coast he flew,
WestJet was the carrier but they never knew.

His baggage was laden with many an ounce
The liquor inspectors, oh how they would pounce!

If ever they had a hint of his treasure,
To put him away, that would be their great pleasure.

But Davie, as obsessed as he had become,
Was willing to risk such an unpleasant outcome!

This scheme, it was working, so Dave kept importing,
His friends and relations thought it would be sporting,

If Dave would consider, and give it a try
On his next trip back East, for them also to buy.

Soon Davie was running a slick operation,
And bringing back liquor from across this great nation.

Word of more Eastern bargains that he claimed to have found,
Soon led friends to think of ideas profound.

Why not get together and strike up a club,
To bring in fine Whisky, and not meet at the pub.

One thing about Davie, a bargain he’ll find,
But Government laws put him in a bind.

So Dave said, “This club, let it be in Alberta
And avoid all the tax – no need for that hurt, ‘ah’”

We still do not know if we’ll make this thing work,
But if we can make it, it’s certainly one perk

Of being good friends of that great auld man Davie,
Whose knowledge of Whisky, well, that’s just more gravy.

For there’s nay (not) an “eh”, in the word Whisky my lad
As Davie will tell you, when he’s wearing plaid.

So together we’ve come, all the Bad Bards of Burns,
To party all night, each taking our turns,

At draining the bottles of fire in his stash,
with nary an offer of replenishment cash.

Though many times we give Dave much grief and trouble,
He’ll always come running, usually on-the-double

I’ve found that, at times, Dave’s research is handy,
The car that I bought is really quite dandy.

For me, many things in my life might be hell,
If my good, best, friend Dave didn’t do obsession so well.

Letting go of expectations

Daryl HattonEntrepreneurship

It is bloody amazing what can happen when I just let go of expectations and trust it will all work out.

We were told on Wednesday, November 21st we had to be out of our office at 321 Water Street by the end of December. Short notice rescinding a previous promise to let us stay until June on a month to month. Grrr…

Starting looking – hit despair quickly – most available properties were crap. We really want to stay in Gastown in a place similar to what we have now: brick, glass, wood beams, view…

The “feel” of our place saves me thousands of dollars a month in salary-based motivation  – the team LOVES working there for many reasons.  When the key assets are our people, paying higher salaries is not the only way to build retention in a very competitive market for talent.

Saw the four best available properties that Thursday – only one even close to what we want already had an offer and wasn’t available until March in any case.

Went to bed Thursday night with the thought ‘somehow this will all work out’. Woke up to an email from the agent for the place we liked but that was taken. The second floor of the same building just became available – the tenant had just given late notice they wouldn’t renew and wanted out before March if possible.

Gave the place a tour Friday afternoon… and the new place was even better than its sibling: 2nd floor (fewer stairs), more and better use of space, glass and rustic brick walls, looks out over both Water St and the North Shore, room for bike parking (two on the team ride to work), really nice meeting room with skylight to third floor, glassed offices big enough for our small teams, server room with extra power and network access, kitchen, washrooms in suite, some nice fixtures, 2 bucks cheaper per square foot… Sold!

It needs a little refresher paint and we want to strip out the carpet but otherwise a good cleaning after the tenant is out and we are ‘home’.

We obviously just need to clear the hurdles of signing a lease (!) but I think we’ll be OK.

We’ll push our current landlord for a two month extension but will work out of coffee shops and some local tech ‘hoteling workspaces’ if necessary. It will all work out!

I’m a lucky man…

P.S. Wrote this post end of last month as an email. Finally got round to posting it. Signed and finalized lease was returned today (December 7th).  I also received a message from an investor that the deal to stay in 321 until March is almost in hand. We are IN! And happy!!

American Politics, Family Politics and my Philosophy

Daryl HattonPersonal, Politics

I had an interesting online debate on Facebook with my niece tonight. It is just 48 hours before the US 2012 election will be decided and we ‘got into it’ about the issue of race and the Republican party. I made a claim about the racial composition of the crowds behind Romney in his speeches not reflecting the demographic mix of the US because of the Republican Party’s heavy bias to ‘white American’. My niece took offense. She challenged me that bringing race into the issue was ‘cheap and weakminded’. She claimed it was not about race. She is so right and so wrong at the same time. It is sad that, in her naivete, she can’t even see how race is so much a part of the party she supports.

It shouldn’t be about race. In 2012 we should (I have issues with that word) be beyond that. But we are not. I can recall in 2008 a staunch Republican I know as saying “I can’t believe we let that black monkey win the election”. These thoughts and feeling run deep in the Republican party – especially in the South. I hear echoes of them still in some of comments of my business friends (who tend to be more politically correct publicly but not so much privately) but even more so in the social media comments (which are not censored at all and therefore more representative of the true thoughts/feelings of the community) around the campaign.

For better or for worse I’m actually not that bugged about the race issue – it feels to me like it is working itself out and will eventually become a non-issue. I find that I’m generally color-blind; I don’t care very much the race or creed of anyone. I see this same trait in many people I know. At some low level ‘race’ probably affects my thinking but for the most part I try (and mostly succeed) to treat people as people.

What bothers me about Romney and the current iteration of the business people in the Republican Party is that they seem to have forgotten the contribution to their wealth and success of the people who work for them and who buy their products and services. They are quick to laud their own accomplishments and denigrate the ‘47%’ whom they rely on for their success. These people are generally considered ‘not like them’ in race or in socio-economic status and are therefore, less valuable. I find this reprehensible.

The debate with my niece helped me articulate my beliefs and why I’m opposed to the Republican Party and their leader. I believe that the best of humankind comes forward when individuals have the right and the opportunity to improve their position in the world through their intelligence and hard work. Some come by success easily through luck or family connections. Some of us work much harder than others and in many cases take risks and sacrifice tremendously to achieve our success. That is our choice and, if the world is at all fair, we probably should be rewarded for our extra effort.

However, regardless of how we achieve our success, in my world view, we are OBLIGATED to use our position of power to help others. This concept is called noblesse oblige and, I’ve discovered, is hugely important to me. It governs how I treat my team, how I treat my peers, my customers, my suppliers, my business partners and even how I treat the street people I meet every day in Gastown near our office. I care what happens to them and the success they have in life because, in my opinion, it MASSIVELY affects my future.

We can debate the direct impact the success of these individuals has on my life. What is harder to debate is the fact that, if these people in the microcosm, and by extension, everyone like them in the macrocosm, are not successful, eventually, my life, the life of my family, the life of my peers, the life of my community and the life of the planet will be compromised. If 7 billion people (less 1%) have a bad experience of life, the potential for unrest and trouble and disruption for the remaining 1% is very high. Even a small percentage of these people saying ‘me, first’ to try to achieve Western ideals of success will have disastrous effects on our environment and our society.

At first this may seem like a huge stretch but if I walk you through all the steps of thinking about it, it is very hard to see how the outcome I suggest in not only possible, it is probable. For me to know that in the end I will be most successful, the holistic result I need to strive to create is for as many people to be successful (by their definition) as possible.

This thinking requires WAY more thinking about and valuing long term results more than short term results and is why most people avoid it. In our ADD, instant gratification society, we tend to go for the quick fix as opposed to choosing the path that gives us better results in the long run.

If I had one wish, it wouldn’t be to end world hunger. It would be for everyone to be able to see the long term consequences of their decisions and therefore actions and to thereby chose more wisely. If I was granted this wish we’d see the end of world hunger and many of the other major issues we face right now within a generation and perhaps much less. This is the antithesis of ‘me, first‘ thinking because it focuses on the best result, not the most immediate result.

I think the Republican party stands, at its heart, for ‘me, first‘. In my opinion that is a path to the destruction of the very thing they hold dear (their safety and security) and I sincerely hope that they lose not only this election but every other election as well. At least, until they change their mind and show they care more about their community and the world than their own interests.

Noblisse Oblige is a high ideal and takes personal integrity and courage to live by. I know they can do it if only they’d try.

The Family Politics part of this is that my brother and his family moved to Texas from Canada many years ago. Recently his daughter (my niece) has graduated high school/college, left home, is working in a hospital and has got engaged to be married. Since her engagement to a man from a 1% family she has become stridently Republican and spouts party rhetoric frequently. Her bashing of Obama’s socialized medicine policies has been particularly irritating to her extended family in Canada because she possibly wouldn’t be alive today if it weren’t for the social medicine policies she so vociferously denounces. I hope she will ignore the influence of her surroundings, take a real, unbiased look at the issues in front of her, see the long term negative implications of her actions in supporting Romney and act accordingly on election day.

It is unlikely this will happen but, as part of my belief system, I MUST have faith that people will rise to the occasion at least some of the time.

Fingers crossed…

In the meantime, I need to take her thoughts and beliefs as a test of my own convictions and use them to help me understand (and perhaps change) what I fundamentally believe about these issues and more broadly about life. Any time I get an opportunity like this I’m thankful for it.

Thanks.

Notes to a Startup

Daryl HattonEntrepreneurship

Here are a few pieces of advice I offered to a new start-up company in Vancouver in response to some questions they had about taking on outside investment. I thought it was worth sharing…

1)      Regardless of whether we went with a debt (based on future earnings) model or an equity model, would we need to create an official board of directors, or can we just have an advisory board? We’d prefer the latter, so we can avoid all the governance issues. 

As a private incorporated company, you are required to have a Board. Not having one doesn’t avoid governance issues – it creates them. This is actually a big deal. Running the company with proper attention to governance (regular meetings, minutes, resolutions, etc.) builds investor confidence.

Anyone making an investment in you will require it to be properly structured. This usually means a Chair and two Directors. You could be the Chair. Your co-founder could be a Director. The investor(s) will probably want to nominate the second Director.

In practical terms, the pair of you still carry the majority power on all decisions at the board level and the same at the shareholder level. The investor(s) may make it a requirement to change that somewhat in the terms of their investment. For example, they may try to get Preferred Shares with voting rights that can trump your Common Share rights.

Think of it from their perspective: they will give you a substantial chunk of cash but you have all the power to spend it any way you want including paying yourselves every penny and they have NO recourse. A big concern of theirs will be that you will create a ‘lifestyle company’ that is designed to provide you with a substantial income but that will never provide a return to the shareholders because you are not incented in any way to give them an exit or pay them a dividend.

Having this properly structured also allows you to apply for BC Small Business Venture Capital Act tax credits. Check these out:

Tax Credits
Small Business Venture Capital Act

These credits are an AMAZING way to get small/angel investors interested in your business. I can explain in more detail if you like.

2)      In forming an advisory board, is there protocol/etiquette? For example, should I be asking all the major investors to be on the board? Should I be concerned if they want to invest but do not want to be on the board? (After all, we also want the brainpower, not just the cash). 

You should certainly have advisors (sometimes called ‘mentors’) to help provide you guidance in running the business. These advisors should be selected for their ability to contribute expertise. If they invest, so much the better. Having a ‘silent investor’ on your advisory board is a waste of your time and the time of the other advisors.

There is some debate in the community as to the value of an advisory ‘board’. This is because some companies have filled their boards with every small investor and a bunch of people pretending to help. Boards like this are laughed at. They are sometimes an attempt to distract investors from asking for influence on the Board of Directors. It rarely works.

If you pick your advisors carefully and they regularly meet together to help you, you have an advisory board. If they work independently, they are mentors.

One big issue with advisors is compensation. These are professionals who usually expect some benefit in return for their time/expertise.

If they have invested, they may want to provide free advice to help grow the company and therefore their value. These are multi-win people to have in your company – get lots of them (assuming they offer advice that is actually helpful).

There are some advisors who want to help for altruistic reasons and don’t require compensation. This can be wonderful but you have to weigh their contribution against your expectations of their willingness to hang in with you for the long haul (5 or more years). Also, if they get no value in actually making the best decisions for the company, other factors can come into play in their advice to you and it can lead you astray at crucial times for the company.

One of the ways to reward advisors for their contributions is via stock options. You may want to consider an Employee Stock Option Plan to reward directors, advisors, executives and key employees with either stock options or restricted stock. These are not hard to set up. I can give you details if you like including recommended ratios for the different groups.

The benefit of the stock options is that they have no cost to you or the grant recipient at the time they are issued. However, they do have what can be a big cost to you in the future when you sell the company or issue dividends. Most small companies give away a bit too many options at the beginning.

Another way to compensate advisors is to obviously pay them. From this point of view, your lawyer, auditor and accountant are advisors, especially if you get some free advice along the way.

3)      We keep having people ask us, “How much do you want to raise?” We’re not sure yet. That will be partly driven by the global sales/marketing strategy, and we first need advisors who have done this before to tell us how much they think that might cost. Almost all of our Biz Dev experience has been the dialing for dollars and slow, relationship building routes, but this new strategy will be vastly different, and it’s foreign terrain for us.  So, should we really have those marketing costs nailed down in the business plan before we go ask for funding? 

There are quite a few different influences on this:

  • the amount of money you need right now to get you to the next level in the business,
  • the amount you will need in the future to achieve the maximum level of market penetration you can envision,
  • the amount of equity you will give away in your company now and later to get the money you need (which influences valuation),
  • the amount of money the investors would prefer to invest at the current state of maturity of your business, etc.

Asking for too little and for too much are both difficult.

Too little and you risk not achieving the goal, investors get nervous and it gets difficult to raise the amounts you need in the future.

Too much and you give up too much equity at too low a valuation making it difficult to raise money in the future (I know this sounds strange but I can show you why it works like this).

Everyone has a different opinion. My hunch (without looking at your numbers) is that you will be looking for a Seed round of around $1M. If you can show significant market traction in the next few months i.e. while you are trying to raise the round you may be able to go for a Series A VC round of $2.5 to $4.0M and really shoot for the moon. Actually looking at the numbers may change this SIGNIFICANTLY.

In your business plan, I think you need to figure out:

  • The life-time value of a target customer to you expressed in revenue/year for X years.
  • The number of customers you think you can acquire in each of the next few years.
  • The expected cost to acquire a target customer. This includes the promotional costs divided by the number of customers they will influence and all the staff costs for running these programs and the customer outreach.
  • The expected cost to service the customer. This includes all customer support staff costs divided by the number of customers they can service.

Actually testing the incremental cost to acquire a customer (ad or direct mail costs plus apportioned staff time) will provide you HUGE benefits in figuring all of this out.

If the numbers are working out correctly, you will show that $X of investment in the marketing functions will generate $Y of profit. If Y > X by more than 50% it makes sense to grab as much money as you can (assuming you can actually build the business very quickly).

Short answer: nail the numbers and your ask will be much easier.

4) Is it better to have just one or two major investors or 10-20 smaller investors? I can see pros and cons each way, but what would be your opinion?

Smaller number of investors is better. You have fewer people to keep updated and your time is your most precious commodity.

5) In the eyes of investors, what is a reasonable salary for the CEO to take these days? My income has been well into the six figure range for more than a decade, and at my age and stage, I’m not willing to work for Ramen noodles. But I also realize that if I take a $15K/month salary (which would still be a big step back for me) then that would quickly deplete the piggy bank. So, is there sort of a generally accepted amount that most CEO’s would be taking and that most investors would accept without questioning it? 

Tough one. It depends a whole bunch on how much the business is generating. If you are cash flow negative right now they will be very reluctant to pay you a full salary. I’ve heard a few investors say they won’t pay more than $120K i.e. sustenance money because they want you REALLY motivated to grow the business to a successful exit where everyone makes a fortune. Otherwise, the risk of you turning it into a lifestyle company is substantially greater and they will be very reluctant to work with you.

Think of it a bit like this: the more cash you take out of the business along the way, the less it is worth in the end because you haven’t invested that cash in leverage-able revenue generating activities. And, at exit, a dollar of profit is worth $20 or more in your pocket (based on typical exit multiples). As a retirement income vehicle, this is a huge thing because that $20 is taxed at capital gains rates, not regular income rates which makes it worth almost twice as much to you or over 40X more than the $1 of income in the end.

I’d recommend you take out the absolute minimum that you can afford to live on. From there, set up a bonus structure where if you achieve certain milestones (e.g. cash flow positive at $2M per year revenue) you get a kicker to make life a bit more fun.

Finally, because of the logic behind taking the absolute minimum you can afford to live on is so financially compelling, every dollar you need above that point decreases the amount the investor thinks you believe in your plan and are trying to hedge your bets. It can really have a negative impact on your ability to raise money.

These are good thoughts but not perfect thoughts. Please take that into account if you apply them to your situation. I’m happy to clarify them personally for you if you ask.