Focus, focus, focus: Build one business at a time

Nov 16, 2012 // by jswima1 // Blog // No Comments

The other day, I had a Red Rocket client pitch their startup for potential funding. The pitch went something like this:

They were part services company and part technology company. The technology was both an online video platform and an advertising sales platform. They had B2C and B2B components to their sales and marketing plan. Their B2B sales were selling into entertainment, corporate, government and university clients. They had revenues from both product sales and advertising. And, they were convinced they had a game-changing business poised for success.

But, all I could think was the founder lacked focus.

The skills necessary to succeed vary wildly between services businesses and technology businesses, or B2C marketing versus. B2B sales businesses. And clients in different industries have different end-product requirements. And they didn’t think of the channel conflicts of both selling technology to advertising companies while at the same time trying to compete with those companies with an advertising sales model of their own.

It was a mess indeed. And when I communicated that to the founder, all I got was a blank stare of disbelief.

This is really an easy mistake for an entrepreneur to make. In those early months of getting a business up and running, many entrepreneurs float like dust in the wind, throwing a bunch of darts up in the air, just to see what is going to hit. And when people are desperate for revenues from anywhere and anyplace to stop their burn rate, they think that is the right thing to do. But all this does is create confusion for everyone and anyone — both internally with the employees building the company and externally with clients trying to understand exactly what your core strengths are.

To be successful, you really need a very simple business plan in a very targeted market with one key revenue stream. You can’t be all over the place and everything for everybody. Hence, the title of this post: Focus! Focus! Focus!

I, myself, was not immune to these mistakes while I was a first-time entrepreneur building iExplore in the adventure travel space.

At the same time during the early years of the business, I was trying to build: (i) a leading Internet portal website; (ii) an adventure travel agency; (iii) an iExplore branded tour operator business; (iv) a corporate events vendor; (v) a fund raising events management company; and (vi) an advertising sales representation company.

It was simply too much, with each business having different requirements, pulling the company in different directions. It wasn’t until we laser-focused our business around building the largest website in the industry, supported by an advertising revenue base, that the bottom-line profits really started to take off.

So, I challenge you to all study your current business and make sure it’s designed as simply as it can be for long-term success. If you cannot simply describe your business in one sentence, it is too complicated.

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

Look before you leap: 5 things to think about before buying a biz

Nov 2, 2012 // by jswima1 // Blog // No Comments

By George Deeb

Sure, you can build a business from scratch. But sometimes, the quickest path to entrepreneurship is to buy an existing enterprise.

There are many reasons why it may make sense to buy a business: to acquire technology or other assets, patents, or a revenue stream or client base. Or even, to simply take out a potentially competitive long-term threat.

Here’s how to:

1) Identify targets

2) Approach targets

3) Scope out warning signs to look for during due diligence

4) Value target companies, and

5) Structure the deal

My guess is you most likely have a target in mind if you are reading this post. But, if not, there are many places to look for prospective targets. Most industry associations have lists of key companies in their industry. Many journalists or bloggers have specific industry or startup focus, and they may know about various players in the space. As do various investment bankers, many of whom typically have a specific industry focus. So, use Google to track down who these key players are — they can point you in the right direction. In addition, there are several websites that advertise companies for sale by industry, including BusinessesForSale.com, BizQuest and BizBuySell.com, to name a few.

When you have found a target, how you approach them will go a long way toward increasing your odds of getting to the finish line. Sometimes it makes sense to approach a business owner directly, and other times it makes sense to approach him or her through a third party intermediary. The latter is better with highly competitive businesses or with executives who may not present well on a first call. And, when you do approach targets directly, I recommend not jumping right into merger discussions. This is all about building up a relationship and comfort for the target company. So I like to start with “potential partner” discussions, that ultimately evolve into “potential merger” discussions down the road. And, worth mentioning, the word “merger” sounds less threatening than “acquisition” for the target who is not quite ready to let go the reins.

During due diligence of the target company, make sure you have your lawyer send over a detailed information request list, which could include review of: (i) all company financial statements, historical and projected; (ii) all company ownership history and shareholder records; (iii) list of all known assets of the business; (iv) a list of all known liabilities of the business, or its shareholders; (v) a list of all current and past employees by title, including resumes;(vi) a list of all contracts of the business, and (vii) a list of all intellectual property, to name a few. These schedules will become the basis of any representations or warranties made by the seller in the closing documents. But, more important than anything, make sure you trust the people you are “getting in bed” with. So, make sure there is a good personality fit, a good skill fit and a good trust factor with the selling company and their shareholders. Call their trade and personal references as a critical step during due diligence.

In terms of valuing a target business, the methodologies are no different than how you would value your own startup business with prospective investors, which we discussed a few weeks back. So, please re-read that post for the details. But, with a merger, there is one additional technique which can be used, which is a “relative contribution analysis”. The relative contribution could relate to revenues or profits or website visitors or customers or whatever other metric the two companies can agree properly value their relative contributions. So, let’s say the acquiring business has $1 million of revenues and the target business has $500,000 of revenues. In this example, Newco could be owned 66.7% by the acquiring company and 33.3% by the target company, using this methodology.

But, if you do not like what the relative contribution method has to say, or if you don’t want any outside shareholders in Newco, cash will be your primary currency using one of the techniques discussed in that previous post. Beyond making the cash or equity acquisition decision, other structural considerations include the following. The most important is deciding between an “equity purchase” or an “asset purchase”. The latter is preferred, as it leaves all the liabilities and other “skeletons in the closet” with the target company’s shareholders, and do not transfer to Newco.

The timing of payments is another consideration. If you don’t have all the cash day one, you can structure payments over time if the seller is willing to take a seller’s note from the buyer at closing. Or, if you cannot agree on upfront valuation, you can put earn-out mechanisms in place, to get the target future upside payments if certain projection thresholds are met. But, earn-outs are complicated to write for both the buyer and the seller, so get good legal advice here.

The other structural consideration is making sure the seller gives the buyer proper representations and warranties (from both the company and their underlying shareholders, individually and collectively), to make sure there are refunds to the buyer if anything was not delivered as promised after closing. And, don’t forget to make sure the target company is delivered to you with an adequate amount of working capital, in line with historical levels.

At the end of the day, there are a lot of things that go wrong with acquisitions, and very few go perfectly to plan. So, be conservative in your forecasts, and consider haircuting target revenues by 50% as a cushion, especially if the “entrepreneurial fire” of the target’s CEO are not going to be a part of Newco. And, before going down this road in the first place, make sure you have done a complete “buy vs. build” analysis for this decision. As, it may be cheaper to ultimately build the solution yourself, and not have to deal with any of the business combination or cultural integration issues of a merger or acquisition. Proceed only with caution here, to not upset the apple cart.

This is too complicated a topic to detail in a simple post, so get a good lawyer to help you here.

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

The pros and cons of franchising

Oct 26, 2012 // by jswima1 // Blog // No Comments

By George Deeb

Buying into a franchise can seem like a fast track to entrepreneurship. That’s because, for a franchisee, franchises allow you the opportunity to start your own business, but in a way that reduces your startup risk by piggy-backing on the expertise of the franchisor.

But while there are upsides to franchising, there are some catches to consider.

As an example, let’s say you wanted to open new fast food restaurant. You could either design your own business from scratch (which have all kinds of startup risks), or license a franchise from an established chain like McDonald’s. With a franchise, you get the power of the McDonald’s brand name and marketing expertise, plus decades of operational learnings. All you need to do is be the investment capital behind the new store location, and manage that business going forward (with high level support from the franchisor). McDonald’s will find the site, tell you how big the store needs to be, provide the architectural/design specs, source the construction team, source equipment, source systems, design the menu, source food, etc. And, you write the check and run that business. Plus, you will need to pay McDonald’s a percentage of the ongoing revenues from the business, in exchange for their ongoing marketing and operational support.

The downside of being a franchisee, though, is this: Your long-term financial returns are typically not as high as they could have been, had your launched your own business yourself. Whatever percentage fees are going to the franchisor, would have been long term monies into your own pocket. But, it is the classic risk/reward conundrum: although the rewards would be higher with your own business, the risks and work are certainly higher, as well (e.g., building business plan, store design, location strategy, menu design, marketing plans).

You just need to figure out what your personal appetite for risk is, and go from there. Do you want to piggy-back on McDonald’s coattails for a smaller potential return? Or, do you want to launch the next great fast food chain, for a bigger potential return (from a lot more work)?

For a franchisor, the advantages are pretty clear: you have opened up a near limitless supply of investment capital from your franchisees footing the bill of your expansion. That is how companies like Starbucks, Subway and Dunkin Donuts have seen rapid expansion on a global basis. Yes, you now need to manage this network of franchisees, which can be distracting. But, no more so than managing your own growth. And, by franchising, you get your brand to market much faster, before somebody else comes in with a competing concept. And, what many franchisors do, is use franchising to roll out the brand as quickly as possible, and then buy back their best-performing franchisees over time, as cash from operations start flowing through the business, and they have the resources to scale up revenues with company-owned locations. Quite a clever model, as the franchisor, with the franchisees taking most of the financial startup risk. The only downside is the franchisees may not be required to sell, so the franchisor may permanently lose key markets long term (so, plan ahead for which markets will be most critical for your long term strategy).

There are many websites where you can go to research or advertise franchise opportunities. Here are a few to get you started: Franchise.com, Franchise Direct, Franchise.org, Franchise Clique and Franchise Gator. Entrepreneur Magazine also has a great annual list of the Top 500 Franchises, where you can do additional research. There are franchise opportunities in literally most any business line (e.g., restaurants, retail, education, home services, business services), so it is worth exploring for both entrepreneurs looking for opportunities and established businesses looking for ways to fund their growth.

But before you make any franchise decision as a franchisee: (i) make sure you clearly read the obligations of the franchising agreements (e.g., the UFOC franchise disclosure document), as the devil is certainly in the details, for both the franchisee and the franchisor; and (ii) make sure you have done your due diligence on the franchisor (e.g., how long have they been in business, are they well funded, are locations growing, are other franchisees happy). The last thing you want to do is start a new franchise without perfect information on your cash obligations or sale restrictions, your franchisor’s committed contractual support or a franchisor that is in a weak financial position to back up their promises. Here is a good article on Franchising.com about key things to look out for in the UFOC. But, in all cases, call references and get a smart franchise lawyer to help you!

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

How to pick the best technology for your startup

Oct 19, 2012 // by jswima1 // Blog // No Comments

By George Deeb

I am a businessperson first and a tech person second. So, for this post, I solicited the input of my technology colleagues, Tyler Jennings and Todd Webb, veterans of Obtiva, the web development company acquired recently by Groupon Inc.

One of the biggest mistakes I made at iExplore in 1999 was building the website in entirely the wrong way. The first problem: It was not a lean startup, by any means. It was built using the most expensive technologies of its day, from providers like Oracle and Sun. We just assumed the site would be a huge success, so we built a “mack daddy” back end to hand the meteoric growth.

But the site never grew to 10 million visitors a month, it only grew to 1 million a month. And then we were saddled with huge monthly overhead costs of around $25,000 just to run the website.

I equate it with building the foundation for a 10,000-square-foot mansion but only constructing a 1,000-square-foot house on top of it, which was a very inefficient use of capital for a startup (with the 9,000-square-foot, uncovered hole in the ground taking on water).

The second problem was that the site was difficult to maintain, requiring complicated builds to refresh the site for even the simplest changes and a staff of expensive, hard-to-find developers who were proficient in the technologies we were using.

So, the key lessons:

1) Never build a tech infrastructure in excess of reasonable growth targets (to keep your costs at an absolute minimum).

2) Build your technologies in a scalable way where the site easily can be developed and maintained over time, by easy-to-find developers.

Below is some high-level guidance on current trends in the startup tech community. But, the most important guidance of all: Finding the right CTO is 10 times more important than picking the right technology. Technology needs vary wildly based on the specifications of projects. And only a strong CTO or technology consulting firm will ensure you are heading in the best direction, based on your specific needs and budget.

In all cases, don’t get romanced by Rolls Royce solutions when a Honda will do just fine, for the needs of most lean startups. Keep in mind that preferred technology platforms for startups continue to change from year to year, as new advancements hit the market. So read the below from that perspective. And, hopefully, this post will not become obsolete by the time I have finished writing it!

Most lean startups with basic website needs are building their web-based businesses using the Ruby on Rails coding platform, which is based on inexpensive and freely available open-source technologies. If you can, avoid more expensive, licensed platforms based on Java, C#, PHP or VisualBasic.net. Ruby has become the language of choice since you can get your product to market faster with less code to write, it is a flexible language easily tied together with other systems, it is easy to scale and iterate and Linux-based hosting providers are numerous and inexpensive. Many successful startups like Groupon Inc., LivingSocial and Hulu were written with Ruby.

As for the alternatives, Microsoft’s VisualBasic.net technology is not advised unless there is a real business need for using it, like having to integrate with other Microsoft-based technologies. This is due to the ubiquity of open-source solutions and the higher expense of hosting sites on the Microsoft platform. There are times when more complicated or expensive technologies could be the way to go. For example, if you are processing tons of data, Java is a good choice. If you are doing tons of number-crunching, C# could be the way to go. If you have a very small project that does not need to scale, PHP is inexpensive to host and requires fewer resources to operate.

Now that we have picked our development language, we need to make our hosting decisions. And, for lean startups, you can’t beat the low-cost of cloud-based hosting. So, instead of investing big money in hardware, software and systems administrators, piggyback on the services of the cloud with a “pay as you use it” solution. This is much preferred to building your own infrastructure, to run in your own server room or in a full co-location facility, which can get really expensive.

Leading cloud-based hosting providers with expertise with Ruby include Amazon’s EC2 cloud, Engine Yard, Rails Machine and Blue Box, to name a few. At some point (e.g., once you get to Groupon scale with tons of traffic), the cloud may become too expensive compared to internally built and managed solutions. But for most startups, the cloud works perfectly fine and is the preferred way to go.

As for other elements of your web architecture, assuming you move forward with Ruby as your coding language of choice, the following open-source LAMP stack is preferred: (i) Linux as the operating system; (ii) Nginx as the web page server; and (iii) MySQL as the database. PHP written sites would be similar, except Apache would be the web page server of choice. Other operating system options include RedHat, gen 2, and Debian. Another database option includes Postgres. But, in all cases, these are less used than the optimal set-up above.

All of these are free, open-source technologies. Each cloud-based hosting provider has unique architectural set-ups and options, so research them accordingly, to make sure they are compatible with your needs.

The other thing to consider is making sure your product is readily available for use on multiple web or mobile platforms (e.g., web site, iPhone, iPad, Android). The most inexpensive way is to build a browser-based “touch site” that automatically resizes and reskins your website based on the users’ device. It can cost $10,000 to $30,000 to build this kind of functionality. The other option is to build and maintain “native apps” for each platform, which can cost $50,000 to $75,000 per platform, or $200,000 to $300,000 for the three to four key platforms. That’s much more expensive than the “touch site” option.

The primary reasons to build native apps are the full customizability of each app to each platform and the marketing benefits you will get as consumers are browsing for new apps in the iPhone Store or Android Market. Consider this incremental investment as part of your marketing budget to attract new users, especially if you are a mobile-based business that will depend on those stores for new business.

I hope this helps get your development efforts off to a good start in a “lean startup” kind of way: investing the minimum amount as possible to take a viable technology to market as quickly and cheaply as possible. Thanks again to the Obtiva team for their help here.

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

How to read resumes and scope out the best hires

Oct 12, 2012 // by jswima1 // Blog // No Comments

By George Deeb

In my last post, we learned how best to recruit employees and get high-quality resumes coming in. We also talked about ways to automate the candidate screening process, so your time is more efficiently spent on interviewing your best candidates.

So, now you are down to “reading between the lines” — finding the best candidate for your open position by properly reading a resume and asking the right questions during the interview.

For any candidate, I am trying to ensure:

1) They have the right skills for the job

2) They have a proven track record of career or educational success for the position

3) I can afford them

4) They have the right personality fit with the company

5) They have references that will validate their claims, and

6) They fit the company on other tangential topics.

Making sure a candidate has the right skills for the job sounds intuitive enough. For example, a candidates with 20 years of marketing experience should know something about marketing. But, the devil is in the details.

Was that marketing person in your industry? Marketing tactics vary wildly by industry. Was that marketing person a B2C marketer, when you need a B2B marketer? Was that person spending huge budgets in mass media, when you have small budgets needing viral social media? Did the person do the marketing themselves, or were they relying on a big team they managed? You get the point: Drill down from the 30,000 foot view to ground level.

As for a proven track record in their educational history, I am looking for the following: Does the candidate have the right college degrees for the position (e.g., majored in accounting or finance for a CFO), with post college degrees carrying more weight than undergraduate degrees (e.g., MBA in Finance worth more than a B.A. in Liberal Arts). What school did they go to? A Harvard or Stanford degree in business is worth more than a Southern Illinois or Ball State degree, in my opinion. Did the candidate get good grades while in school? There are always exceptions to these rules, so read accordingly.

As for a proven track record in their career, you need look for these kind of things: Was the candidate in big companies their entire career, or do they have real startup experience (which is more important for startups)? Have there been nice upward promotions over time, with titles increasing in importance from manager to director to Vice President to Executive Vice President? Does the candidate have longevity from position to position?

I get really nervous about candidates with 10 jobs in 10 years being poor performers or simply bored easily, and am looking for a minimum of two to three years per company, unless there are logical reasons for quick job moves (like the company was sold).

Was the candidate cut during a layoff? Sometimes, but not always, companies typically cut their underperformers when they tighten their belts. Are there quantifiable successes they can point to that illustrate they have led and managed rapid startup growth and success in a similar environment to your own? Ask for examples.

Affordability of a new hire is pretty straightforward, but sometimes a candidates says they are willing to work for $100K salary just to get in the door, but are really looking for $150K and don’t tell you until you are “sold” on them as your key addition to the team. In that scenario, think creatively. Will they accept $100K salary plus $50K in performance-based bonuses or other incentives? If appropriate for the position, would they accept a four day a week schedule, allowing the the open day to make more money elsewhere? Would they work for equity until we close our financing, and then will pay you $150K after funding closes?

But if there are any long term discrepencies between what you can afford to pay and what a candidate thinks they are worth, they will most likely be looking for another higher paying job down the road.

Personality fit perhaps is the most critical to the whole candidate review process. You are going to be spending a lot of time working with this person. Entrepreneurs tend to be Type A personalities and like to be surrounded by other Type A go-getters, which help to infuse that energy into the rest of the company. Nobody wants to be around a perpetual pessimist, a constant downer or a pain in the ass, so make sure the candidate fits your desired company culture, regardless of how good they are on paper. It’s just not worth it, if you can’t get along with a co-worker.

References are always good. But remember, a candidate is going to provide you their best references, people who will most likely only say good things about them. So, a couple things to consider: Did the candidate give you references that are relevant to the position (e.g., their former bosses and former direct reports and former investors)? If not, there may be a red flag that they are trying to hide something. So be sure to ask to speak to those people that can speak best to their skills, if possible. And, frankly, do a little digging on your own. Do you share any colleagues in LinkedIn who may be able to speak about this person? And, in all cases, remember that the person you are calling could be worried about violating employment laws with any negative reviews, so take references with a grain of salt. And, if you don’t get a response to your reference call, that sometimes means they didn’t have anything nice to say and preferred to avoid an awkward phone call. So, read between the lines.

To get a sense of how a person thinks on the fly in the topsy-turvy world of startups, I like to see how candidates handle random questions on random topics. First, on something they are familiar with, perhaps related to their favorite hobbies (e.g., ask a book reader how they would go about writing a book). And, second, on something completely random (e.g., how would you determine the weight of a jumbo jet). You are simply trying to determine how they think and see how logically their brain works in unknown situations, which often a startup can lead to.

And, there are other things to consider. What is going on in their personal life that may require a lot of time away from the office? Can you deal with 10 smoking breaks a day? How far does the candidate live from the office, as a long commute won’t last long before they start looking for a new job down the road? As people get older, they typically have less energy, so make sure they have the stamina for a startup. But, tread lightly on these areas, avoiding direct questions about gender, age, pregnancy, etc. which violate employment laws.

There is no one right way to recruit for candidates, given the wide variety of people, talents and personalities, but hopefully these ideas will point you in the right direction.

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

The best way to recruit staffers for your startup

Oct 5, 2012 // by jswima1 // Blog // No Comments

By George Deeb

As a startup, odds are you will not be able to afford a dedicated human resources person or 30 percent headhunter fees. Most likely, you’ll be doing the recruitment yourself. Here are a few tips on how to find the right talent for your business — in a way that brings in the best candidates and reduces any distraction from your main business focus.

There are lots of different job posting sites out there, some are huge (Monster, CareerBuilder, CraigsList) and others are small (job boards on trade magazine sites). Some offer national candidates and others local candidates. And some are targeted to senior executives (the Ladders, Netshare, Execunet) and others for specific entry-level jobs. So, before randomly placing a job posting, figure out which audience is most relevant for your position.

For example, I may go to Dice or CraigsList for technology developers, LinkedIn for mid-level managers and the Travel Industry Association website for national travel agents. But, in most cases, I will first look for local job boards in my home city (such as the Chicago Interactive Marketing Association for marketing people in Chicago), since I will not have budgets to relocate employees. Unless national job boards are my only option, and then I will detail no relocation budget within the posting, so candidates know we cannot afford to relocate them or pay for their travel to interview.

And, let’s not forget the power of working your network and word of mouth marketing via LinkedIn, Twitter, Facebook or otherwise. It is a lot better to find a “colleague of a colleague” with first-hand references in place than to start blind with a random candidate. Frankly, sites like LinkedIn are my favorite recruiting sites, simply because I can learn a lot about the candidate, above and beyond their simple resume data. How many connections do they have? Who are those connections, and can they help me? Do I have any overlapping connections that I can call as a reference? Also, it provides really good insights to how socially engaged the candidate is and the types of connections they can bring to your business.

Once you have identified where you want to be recruiting, you need to figure out what your job posting should say to stand out from the thousands of other job postings a candidate may be looking at; and limit the clutter of resumes coming into your office and simplify the screening process.

Do not be vague in your copy, and disclose as much as you can to ensure the reader knows all the pluses and minuses, so only the most interested will apply.

That means disclose your company name (so potential candidates can research your business on your website) and salary range (so people desiring a salary above that range do not apply). The only time you need to be more confidential in your posting is when you don’t want an existing staff member to know you are recruiting a replacement for their position, or if you are worried about a competitor learning you are hiring for certain skills. But, as a rule, more disclosure is better than less for all involved.

Also, if there is specific information that would be useful to you in screening candidates, make sure you ask for such information to be provided in your posting. For example, if you need a technologist with strong C# coding experience, make sure that is detailed as a requirement for all candidates, and that they need to rate themselves on a scale of 1 to 10 for that skill in their cover letter. If there are many skills that are required, and can easily be assessed by some simple Q&A, set up an online Q&A recruitment form on your website so you don’t have to waste time on the phone asking the same questions over and over (since answers can easily be screened via the online responses).

I also think video can be a very effective tool to dig deeper than just a resume. So, maybe set up your Q&A form with a video-based recruitment site, like Expressume, where you will get video responses to your questions and learn a lot more about the candidates’ communication skills and personality fit in the process (again without wasting time on the phone).

The big-picture point is: Waste as little time as possible in the minutiae of recruitment, as that is time better spent on your business. Put processes in place that allow for very efficient screening of candidates (detailed posting, Q&A forms, video responses), so only the most appropriate candidates apply, and they can easily be screened from there. Then, once you find your favorite three candidates, dig in and spend quality time learning more about the candidate.

Finding the right team members for your startup is critical for its success, so you have to invest the time here to get it right. But make sure that time is most efficiently spent (that is, in interviewing the best candidates, and not on preliminary screening of all that apply). You never want to rush a hiring decision or take a marginal candidate just to fill a position. Long-term, this will never work out for either party. And it is a lot more expensive and time-consuming to remove a poor performer down the road than to get it right the first time.

In a future post, I will help you learn how best to screen a resume, so you are asking the right questions.

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

George’s posts appear on Crain’s blog for Chicago entrepreneurs on Fridays.

Follow George on Twitter at @georgedeeb.

Join Crain’s LinkedIn group for Chicago entrepreneurs. And stay on top of Chicago business with Crain’s free daily e-newsletters.

The power of the pivot

Sep 14, 2012 // by jswima1 // Blog // No Comments

By George Deeb

We are all familiar with the meteoric success (and recent stumbles) of Groupon Inc., the daily-deals website. But as you can read in this Groupon case study at Business Insider, Groupon originally was a struggling business in the group fundraising space called the Point.

Had Groupon’s founders not pivoted their business model from a “tipping point” for fundraising needs to a “tipping point” for consumer deals, they would most likely be out of business by now. Somebody inside the Point realized their old business model wasn’t working, and they needed to think drastically out of the box to create a different approach. And, as you remember, there were many other examples of successful business pivots that we discussed in an earlier post on startups requiring flexibility.

Today, we are going to tackle:

1) When pivots are required

2) How to identify what pivot opportunities may exist

3) How these pivots can be minor or material in nature

To start with what might seem like an obvious point: If limited revenue or traction is being made with the current business model, something needs to change, and fast.

But is the business model flawed (requiring a pivot), or is the sales and marketing plan or the management team the real problem?

You need to do your best to assess each element in isolation before resorting to a business pivot. So, for example, if you have the exact same business model as several other successful businesses, your problem is most likely the wrong sales and marketing plan or management team. But, in other cases, where the sales and marketing plan makes sense for your industry and you have a proven and competent team in place, if nobody is buying your product, that most likely means it is time to pivot.

In determining where the pivot opportunity is, you need to study the core assets of the business and how they may be applied in new ways. In the Groupon example, it was the “tipping point” technologies used in a new industry (e.g., consumer deals, instead of fundraising). There are other examples where the exact same product wasn’t working for B2B clients but was demanded by B2C consumers. Or the product doesn’t sell as a branded front-end solution but does as a white-label back-end solution. Maybe corporations don’t need your solutions, but government or university clients do?

Or maybe there are dramatic changes that could lead to much better financial returns on your investment. At MediaRecall, a digital video services and technology company serving film studios and television networks, we learned that instead of taking an upfront cash fee for services provided, we could do the work free and keep a 50-50 revenue share on the resulting professional entertainment content. These content royalties would ultimately result in 10 times the revenue than what we would have received from the upfront for-fee services model, as the resulting content gets distributed and monetized on sites like YouTube and Hulu. So, if we could fund the upfront work, it was definitely worth the wait for revenue over time, instead of upfront.

When looking for your strongest assets, look enterprise-wide. Your asset can be a technology. Or in distribution and logistics. Or in search engine marketing. Or offshore product sourcing. Or in call center operations. Whatever. Just figure out what it is, and leverage the hell out of it in new industries, sales channels or applications.