The Eric Lefkofsky Blog

Accelerated Disruption

2010-03-17T09:48:00.000-07:00

First, let me say that incase you haven't figured it out, this blogpost was really designed to be a way for me to provide segments of my book, Accelerated Disruption, to the public for free. So, it's really more of a essay listing than a blog. That being said, I still think it's useful so I'll continue to add sections from the book from time to time.

If you want to follow my blog, go to ericlefkofsky.wordpress.com. Thanks

PAIN

2009-08-23T11:50:00.000-07:00

The only common attribute I can find when it comes to understanding every truly innovative business I know, is that they all address some type of pain. In other words, they make something easier or better.

Pain is all around us. It can be found in every ounce of frustration we feel as consumers every day of our lives.

Think about it:

Before Google, searching the internet was miserable. Before itunes, buying music online was difficult. Before intel, computers were slow and obtrusive. Before ebay, auctions were hard to find.

If you stop and really think about it, pain is the binding tie for almost every innovative business model that has gained wide spread acceptance in the marketplace.

If you have any comments or thoughts on this theory, I would love to hear them.

Promote Your Passion

2009-07-20T07:05:00.000-07:00

Charles Schwab said, “I consider my ability to arouse enthusiasm among men the greatest asset I possess. The way to develop the best that is in a man is by appreciation and encouragement.”

I don’t believe leadership or salesmanship comes naturally to a lot of people. I’ve met CEOs who weren’t necessarily the best speakers or the most magnanimous men and women in the room. What sets them apart, at least for me, is their central belief in what they’re doing and their passion for communicating that belief. In other words, what’s valuable is their ability to galvanize people around the mission of their company and the potential of their products and services. While we’re not excessive about the use of public relations—we believe growing sales and earnings provides the best PR results so we tend to focus on that—we do believe that you have to find a way to get your message out to the broadest audience possible. For us, it begins with being passionate about open communication.

Once you have come up with a disruptive idea, you have to share it with everyone who will listen and you have to share all the facts and not only with people who support your particular point of view. I often get criticized for discussing issues like ownership or salaries or finances with people who might not normally be privileged to that level of information. My attitude is simple: If I have to filter what I am saying, something is wrong. I’m not smart enough to remember who I should or shouldn’t say something to so I choose the alternative—I say everything to everyone and I get feedback, hopefully honest feedback, from anyone and everyone who will provide it.

Besides open communication internally, you have to preach your message to the outside world every chance you get. You have to take every meeting you can and jump at every opportunity to tell people about your business model and solicit their feedback. When you have a high-growth model, you need to create momentum. If you’re a start-up, you have to create that momentum from a standstill. That takes an enormous amount of energy and to create that energy you need a network of people to help you. It goes beyond those you hire. You have to think in terms of contacts who can introduce you to a world of suppliers, customers, employees or investors. You need to create buzz. You need to create enthusiasm and excitement. That takes promotion—constant promotion.

Identifying Pain In Your Business

2009-06-15T06:10:00.001-07:00

When you’re starting a business, there’s a world of pain out there that you can’t fully envision. But it does become clear in a relatively short time as you develop processes and systems to run your business. Pain, in this context, is the discomfort that comes from processes and practices that take time, energy and financial resources from your business. Painful processes not only distance you from your customers and the best suppliers in the marketplace, but they prevent you from using your staff resources in the most efficient way possible. You have to identify key sources of pain within your business and wipe them out through automated solutions. Such solutions can give your company the agility it needs to launch a disruptive solution within a chosen industry. Automation doesn’t just block distractions—it fuels your entire business. The key here is to move from the general to the specific. Focus on every aspect of every operational procedure from order inception to completion and determine which components can be improved upon and which are already optimally efficient. Start with your employees. Ask what slows them down. You’ll hear loud and clear about manual processes that are inefficient—they tend to stick out like a sore thumb. Don’t waste time digging—just walk up to your people and ask them. They’re at ground level. They deal with your systems on a minute-by-minute basis; they know where your problems are.

Automate, Automate, Automate

2009-05-04T05:50:00.000-07:00

The order management and administrative costs of a new business can be more expensive than any other category of your overhead. If you’re starting up a new company, it’s best to set up an automation strategy from day one. Create a customer and supplier solution that reaches from your organization into theirs, makes their lives easier and collects specific data that will be valuable to your organization every step of the way.

Automation is not just for large companies. You have to start automated from day one, even when you are small. According to information on PayStream Advisor’s website, by the end of 2006, only 10 percent of small and 25 percent of medium-sized businesses had implemented an automated expense control solution compared to 40 percent of companies with $2 billion or more in revenue. The irony is that smaller organizations really need automation to grow quickly.

As for physically creating the system, the process works no differently than creating any other form of custom software in your organization. If an out-of-the-box solution won’t do for the long term, create a functional spec first, build a prototype, bring certain customers and suppliers into the system to test its flaws and capabilities and if necessary reconstruct the system once it is fully functional on a more robust, scalable and secure platform.

Focus on these key automation opportunities:
• Internal accounting functions
• Order management and processing
• Lead and proposal generation
• Customer and supplier records
• Customer feedback and marketing information
• Administration
• Order tracking
• Digital asset management and repository
• Salesforce data
• Legal and compliance

We don’t believe, as some purists do, that you can automate humans out of the equation. But think about how much more productive you can make a business out of the box by focusing on optimal tasking for staff as opposed to nuts-and-bolts manual operations. When you automate your processes you optimize the human capital that you have working at your company. This too creates a significant gain in productivity in that you are able to utilize your personnel more effectively.

You will always be paying people to work in your business, but why would you want to hire gofers when you can focus your recruitment on strategic thinkers, good managers and creative people who can keep the automation ball rolling? Allowing people to keep the more interesting and challenging parts of their jobs while dumping the menial tasks might actually help you retain talented employees and attract new ones.

There’s a Time To Be Objective

2009-04-09T06:17:00.000-07:00

When you actually launch a disruptive business, your mood needs to change from passionate to objective. This means you need to distance yourself a bit from your love of the concept. Your primary concern at this stage should be: Does this idea have value and can I make money at it?

There are two specific tests that we apply to any business we have launched to determine if it should make it through the Law of Objectivity.

EBITDA neutrality. EBITDA (Earning before interest taxes and depreciation) is a key measurement in determining whether a business is working and whether or not there is arbitrage. In simple terms, EBITDA neutrality means that your operating income (revenues less expenses) is equal to or greater than zero. We pull out certain items from this test (interest, taxes and depreciation) because they are non-operational in nature. For example, you might pay a lot of interest to a bank, but if you make money over time and retire your bank debt, that component will disappear. Hence it’s not related to the core operations of the business.

If you can’t achieve EBITDA neutrality within 12 months, that’s a signal that you’re doing something wrong and you should either shut the doors or make a radical change. We believe that if you can’t get to breakeven in a year, don’t desperately look for solutions; the odds are your business is broken. While this is not always true (i.e. Google reportedly lost money for more than a year, as did Genentech—two of the most valuable companies in the world), most of the time this philosophy is accurate.
Winning customers. This key test is obviously much simpler and far more decisive. In simple terms, if you can’t win customers you don’t offer value. If you take a product to market and you can’t get your key audience to respond in six months or so, you might also want to consider closing up shop. Again, while this is not always true (some businesses purposely don’t solicit customers for a longer period of time and they have solid economic reasons for it), it is usually spot on. Certainly once you begin selling your product, if people aren’t buying within six months, it means something is wrong. It could be your sales approach or salespeople, but in our experience it often has deeper implications regarding the viability of your model.

Even a bad salesperson can usually sell bottles of water to someone who is dying of thirst in the middle of the desert.

Technology Accelerates the Law of Adoption

2009-03-02T11:34:00.000-08:00

Because our proprietary technology is constantly measuring the behavior and decision-making of our customers and suppliers, we’re in a position to know what they value at any given moment. We don’t assume it will be the same thing they will value six months or even six weeks from now. Adoption is a living, breathing instrument that must be nurtured.

If shipping customers are thinking about turning the way they buy freight upside down, we don’t wait for them to tell us. Our technology tells us. Our systems are continually built to pick up cues—changes in usage requirements, order patterns and other behavioral data that allow us to analyze, suggest and develop solutions that evolve as customer needs evolve. Customer service shouldn’t be based on response—it should be based on anticipation.

We’re living in exponential times, but we’re also living in increasingly customer-centric times. Your customer base—consumers, businesses, governments and virtually every person and institution in between—is growing increasingly impatient. They don’t want to have to live with pain for very long before a solution appears to take that pain away.

These forces (pain, fear, speed and customization) are in a constant state of conflict. On the one hand, consumers are impatient and they want relief quickly. On the other hand, they want the relief tailored to them even if it costs them time. And finally, regardless of their pain or their lack of patience, they are resistant to change. Adoption is the result of successfully bringing relief and harmony to these conflicting forces in an effort to win clients.

To get adoption you need to blend art and science. Science allows you to view ordering and usage patterns with an eye toward revolutionizing process and disrupting an entire industry. Art is all about the ability to see through conditioned, almost Pavlovian responses to old-industry questions in an effort to uncover opportunities to build value.

Putting Process Under a Magnifying Glass

2009-01-29T10:20:00.001-08:00

Disruptive technologies need to serve as bridges that span all aspects of your operation to your suppliers, internal operations and most important, your customers. Automation is the connective tissue that pushes down cost and builds efficiency. If you fail to find these opportunities for mass automation throughout your operation, you’ll risk disruption from a competitor with a more fully integrated solution, because the more fully integrated and automated you are, the lower your internal cost of operations and the more efficiently you can price your products to gain market share.

Automation needs to extend not just inward but outward to your customers as well. Conventional systems that address customer automation or connectivity have typically taken one of two major approaches: They’ve connected one system to another through integration or they’ve added Customer Relationship Management (CRM) as a way to track and analyze their customer base. We do both because it is exponentially more beneficial to not only track your customers’ behavior but also integrate with their operations every chance you get. If your model is truly disruptive, you’ll likely gain market share in the early stages of your model as customers test your solution.

Yet from day one, it is essential to connect your business to theirs with an easy technology solution that assures maximum stickiness. If a competitor is coming after your customers with its own disruptive solution, it’s your best defense to be as technologically ingrained as possible inside your customers’ organization. If customers are thinking about leaving you, the process should be both cumbersome and risky for them because your systems are doing so much behind the scenes that your customers rely on, that they are hesitant to just up and leave you without serious consideration.

To make CRM and customer automation really effective, you can’t stand outside your customer’s building waiting for them to tell you something. That’s why you need your automated solution to invade your customers’ work environment. You need your system to solve deficiencies within their system. This is how you make yourself

The Design Process For Our Solutions

2009-01-02T08:53:00.000-08:00

We build technology systems like a kid builds Legos—one block at a time—until our vision starts to take shape. As we discussed previously, we have utilized rapid application software in most of our business technology prototypes that we’ve allowed our customers to test at each stage of development.

We’ve used rapid application tools like FileMaker to build our prototype systems. In each case, the process is similar:

We determine the business requirements that are necessary to bring our idea to life. In other words, we gather tons of information and data and we try and design at 30,000 feet what we want the system to do.

We draft a functional spec that details what each screen is supposed to do, how it is supposed to look and how the system is supposed to perform.

We model a database and test it to determine if we can extract the necessary information that we are going to need in order to gather data that should provide us an informational advantage.

Then—and this is the part that is atypical—we build an entire functioning system using a rapid application toolset that by design will only be used for a very short period of time, at most three–nine months.

We build a working prototype system that is fully functional without security or scale and start conducting business through the application—taking orders, managing procurement and tracking inventory so we can test its workings and incorporate what we learn.

We let our customers become our power users and through their real use of our system we essentially let them design the final product that we’ll use to code the secure and scalable system for mass deployment.

These initial prototypes are not scalable enough or secure enough to run Wal-Mart, but who starts off at the size of Wal-Mart? We build complex solutions by starting with simple technology applications that rely on the richness of their data and the architecture of the business solution to add value. Then we enhance the interface with lots of bells and whistles, which are often much easier to develop but viewed by our customers as much more valuable, given that they enhance their experience more than the guts of the system which they can’t see or touch.

As our customers find flaws or issues, we modify the system at speeds that are simply unattainable unless you are using rapid application tools like FileMaker. Through this process, we take a working prototype and mold the application in real time to the desired final product within months, instead of years.

Protecting a Disruptive Idea

2008-12-08T05:34:00.000-08:00

When you incubate a new idea, especially one that could disrupt an entire industry, you have to assume that others will try and derail your model at some point, especially early in your development. We’ve obviously spent considerable time in previous chapters pointing out examples of product innovators who couldn’t maintain their momentum. The question is: What can you do to protect yourself during the stage in which you are new and vulnerable?

You have to protect your intellectual property at all times. Talented legal and strategic advisors are critical. You should only be sharing sensitive information with those that have signed non-disclosure agreements. Every employer or contractor you hire should sign an Employee Innovations and Proprietary Rights Agreement that guarantees that everything you pay them to develop belongs to you. You need to hire talented employees, especially early on and you have to try and keep your first-generation employees happy and engaged so they don’t leave. Departures only slow you down and force you to spend more time educating and training at a juncture in your lifecycle when time is the most precious. You need more than a few key suppliers in case of problems—and there will always be problems. If you are reliant on a small number of suppliers you are vulnerable. Find redundancy in your supply chain. Make sure you have plenty of cash on hand and do whatever it takes to avoid crippling debt at the outset of starting your business. There is no substitute for financial security. If you’re developing on a shoestring budget and one thing goes wrong, you could find yourself out of business or severely handicapped in your execution. You need to keep your ideas relatively quiet until you have amassed enough strength and scale that you can thwart off competitive threats. It’s a very small example, but I try to avoid sending our business plans or financial models via e-mail. Some people might think this is crazy given how much we love technology, but I always send them via overnight mail. Sensitive data online is vulnerable the minute it leaves your firewall. I’d rather ship a hard copy with a responsible carrier. While it might sound a bit paranoid, it’s added protection against the widespread dissemination of sensitive information when a business is young and therefore fragile.

This is what we call constructive pessimism—building a company while steering around potentially lethal business obstacles. Technology-driven companies have to be especially secretive early on and protective of their value proposition.

Humans Should Be Thinking

2008-07-21T10:20:00.000-07:00

It sounds a bit sci-fi, but what jobs within your business are absolutely necessary for humans to do? To get a correct answer to this question, you have to look at every single process within your organization from cradle to grave, order to close-out.

Every point in your organization where a human touches something is an opportunity for automation. For example, in several of the companies we’ve launched, human hands don’t touch invoices unless somebody needs a printout. Our systems are so automated that a customer’s keystroke sets in motion a domino effect of actions that instigate ordering, billing, payment and most important, data gathering at every stage of the transaction. Our system gets smarter with every call and response, all during an order management phase that is largely devoid of human interaction.

What do our employees do then? They figure out how to make these processes work even better and faster and they spend their time making sure our customers are satisfied—that’s their highest and best use.
Here’s is the main trigger point for us to study automating a particular task: If a person is doing something more than two to three times a day, we either find a way to automate it or make sure we are collecting data from it.

• Consider the following tasks that happen in every business, every day:
• Data entry of the specs of an order
• Sending out a quote to various suppliers to bid
• Entering price data into the system to compare prices
• Communicating with vendors to determine where your order is
• Issuing customer invoices
• Reconciling your invoice against the vendor invoices you receive
• Applying cash to your open accounts receivable
• Paying your vendors
• Passing information from your operating system to your accounting software
• Generating customer reports

These are all examples of time-consuming processes that can and should be automated. And this list is only a fraction of what we’ll attack in our own businesses over time as our technology continually improves.

Promoting Your Disruptive Idea

2008-06-17T14:00:00.000-07:00

I took a negotiation class when I was at University of Michigan's Law School. The class was taught by one of the finest professors and legal minds alive today, James J. White. The idea behind the class was to create live simulations whereby law students would have to negotiate in small forums against each other and those who achieved the most optimal result would win the negotiation and get the best grade in the class. Professor White's thesis, or at least one of them, was that all things being equal the most prepared students would win the negotiations because they would "know" the outcomes they were trying to achieve. My theory, as it related to that class, was that a good negotiator could out-negotiate even a more knowledgeable opponent by simply reading and reacting to his or her posture and position. My theory was proven right‹I received an A in the class without researching topics before the negotiations at all. But that was life in the classroom and I came to realize that my theory was actually dead wrong.

In the real world, knowledge and information create advantage because they prepare you for the unknown. As students, we actually knew much more about each other than we acknowledged. Outside, beyond name and affiliation, most of the people you will negotiate against will largely be strangers and information is your armor. The more you truly understand a topic, the more ingrained it is in your thought process, the better off you are, not just in negotiation but promotion as well.

When you come up with a new and disruptive idea, you have to do two things to promote it: First, believe it and second, live it. Let's focus on the second, because I think we would all agree it's nearly impossible to promote something you truly don't have faith in. So what does it mean to live it? In order to sell a solution you have to become immersed in it. You have to know everything about it. You have to read about it, ask questions about it and explore every aspect of it. You should become so knowledgeable about the topic that people say to you, "How do you know so much about this? You must have been doing this for years."

Chicago Olympics 2016

2008-05-14T07:37:00.000-07:00

I've joined the Chicago 2016 Olympic Committee to lend my support to this great idea; Chicago's the perfect venue for the Olympics: great infrastructure, a diverse and welcoming environment as well as a long sports history. I'm really looking forward to making sure Chicago gets this opportunity.

Ten Key Questions to Disrupt a Business

2008-04-15T07:52:00.000-07:00

In the early days, you’re really trying to become a student of your suppliers’ and competitors’ businesses, because you have to disassemble those processes in order to rebuild them.

Here are some general questions to frame the conversation, but because these questions relate specifically to procurement, you might want to tailor them based on the industry you’re hoping to enter:

We’re trying to do X and we’re trying to learn a bit more about the business. What’s your history and experience? (First you have to establish a basic relationship.)

What equipment do you use to produce X? (See how old their capital equipment is and how often they replace it.)

Has that process/raw material gotten more or less expensive in the last few years? (Check how close they are to their suppliers.)

Who do you directly compete against? (Always seek out as much as you can about the competition.)

What makes you better then them? (You need to understand advantage and disadvantage in the marketplace.)

For our next project, we might be increasing the quality/quantity of what we need to produce. What solution would you suggest for that? (This will give you an idea of the high-end product in this industry and what it costs to supply it.)

What are the busiest/slowest times for you? (This will help you predict capacity in the market that you can capitalize on.)

What are potential problems that could occur in getting my order/job/project filled? (This will tell you about various manufacturing breaking points that you need to be aware of.)

Are you investing in any new equipment to serve your business? (This gives you an idea of production equipment or technology that’s average or cutting edge in the industry.)

Are you expecting any price increases in the next few months? (Understand the factors that go into their price adjustments to determine if you can find a way to overcome these price drivers in your business structure.)

If You’re Not Moving at Warp Speed, You’re Not Moving

2008-02-26T05:06:00.000-08:00

Robert Falcon Scott, Richard Branson and Buzz Aldrin all have something in common. They all came in second at making history—Scott got to the North Pole after Roald Amundsen, Branson’s hot air balloon didn’t make it around the world before Steve Fossett’s and Aldrin’s footprints followed Neil Armstrong’s on the surface of the moon.

So ask yourself this question. Each put in the proper amount of work and sacrifices to get to the pinnacle. But does anyone remember they even got there? As Vince Lombardi would say, “There is no room for second place.” And that’s particularly true in the world of technology. In fact, in the world of technology, we call this “first-mover advantage” and quite often it’s the most significant advantage you can have in a new or evolving market.

But don’t get used to it. While speed can catapult your model to the front of the pack and give you first-mover advantage, the far greater risk is missing the potential for obsolescence in your model over time if you move slowly.

Technology as measured through scientific breakthroughs has marked the upward surge of mankind through history. In the past, however, breakthroughs largely came from great minds that made significant individual strides, like Einstein’s theory of relativity or Newton’s discovery of gravity. While a disruptive idea today can be the product of one great individual’s thought process, its continued dominance in the twenty-first century depends on hundreds or perhaps thousands of individuals who may never get any credit for moving it along.

This is the new paradigm of innovation—the widespread sharing of viewpoints, suggestions, criticism and even code via technologists who willingly come together through the Internet to improve something for their own advantage or the collective advantage of the entire user community.

Smart companies are listening and reacting to this paradigm shift.

The effect of this growing force on the speed of innovation is undeniable. We are in an era of accelerated evolution of disruptive theories, concepts, models and businesses. If you examine the sheer number of sites that get reviewed on TechCrunch, the pace is staggering. Each day a new model, a new site, a new business, a new feature gets reviewed in detail on that site and on other similar venues on the Web. Ideas are going from birth to death in a record pace. Just in the last year alone, millions of new websites were created. Think about that fact.

Consider the Internet a decade ago. Websites were nothing compared to the way they look and function today. Flash had just been invented but wasn’t in wide use. We didn’t have Ruby on Rails or other rapid application tools that are common in website production as this book was being written. There was no social networking in the way we think about it now. No text messaging. No MySpace, No Digg, No Facebook, No Craigslist and no Wikipedia. Blogs didn’t exist. Google was an obscure idea that had yet to catch on. YouTube wasn’t even possible five years ago—if you wanted to watch moving pictures on the Net, you settled for the strange cartoons at Icebox.com. Today, people are catching their favorite TV show on their computers and soon they’ll be catching their favorite movie on their cell phone.

Progress means advancing in a collective and accelerated manner—it enriches the lives we lead and enhances the businesses which we rely on.

Size Does Matter

2008-01-28T08:48:00.000-08:00

When I was a freshman in college, a high school buddy
of mine, Noah Siegel, had a father in the carpet
business. One of his constant problems was what to do
with remnants, those sections of carpet left behind
after a room with wall-to-wall carpet was finished or
an area rug cut off a bolt left behind weird sizes
that no one wanted. And of course, there was that
leftover green shag in the corner of the warehouse
that no one had touched since 1973….

One summer, my friend’s father casually suggested that
we load up those remnants in a van and try and sell
some of them at school during move-in days as a way to
earn some beer and pizza money.
At the time, we had no clue how good that idea was. We
thought this was going to be a one-time thing, but by
the end of our first year we were selling out our
inventory at my alma mater, the University of
Michigan, and we knew we were on to something bigger.
Swarms of students and parents were lined up to
purchase our carpets because the idea of walking on
that icy-cold floor every day was unbearable and the
only alternative was a carpet store miles away. What
they needed was available now, sitting in our truck.

We had to navigate a few issues. We had to figure out
how to sell carpets when there were city restrictions
and permits needed. We also had to find out how to get
a constant supply of remnants since we had long since
solved my friend’s father’s problem of having excess
remnants in his store. By my senior year, we had five
schools under contract (Purdue, Michigan, Notre Dame,
Ohio State and Wisconsin) and we were selling
thousands of remnants every summer. The business had
actually become real—real employees, trucks, revenues
and happily, real profits.

We started thinking about further expansion. And
that’s when the light bulb flickered off.

We sat down and realized that even if we had 100
percent market share, which meant we would have had
contracts with over 100 major universities, we might
be able to achieve annual sales of $10 million.

While that was a lot of revenue for a couple of
college kids managing a business part-time, it was
finite. In other words, our grand slam was relatively
small. In addition, we knew we could never hope to
achieve 100 percent market share and so our prospects
were even dimmer.

It was my first introduction to being in a market that
was literally too small to disrupt.

A Healthy Dose of Pessimism Helps To Attract Capital

2007-12-21T03:42:00.000-08:00

In my role as a venture capitalist, I look for companies that have complete belief in their idea but also have the ability to be realistic about its potential for disruption and the resources that will be required to achieve the desired end state. I am exposed to nearly 50 companies a year and one of the amazing things I see over and over again is a complete ignorance of cash needs.

When the majority of people come in to talk with us, we see tons of energy but very little realism about capital and the resources that are going to be necessary to turn their ideas into a viable business. Entrepreneurs will walk in and say, “I need $500,000,” and we’ll say, “That doesn’t seem like enough,” and they’ll blink and look at us like we’re nuts. Telling them that they need more money is not an indication that we want to throw money at them; it’s simply a reflection of our experience and our belief that they have not yet learned to be pessimistic when it comes to their internal operations and requirements. The single truth among most young companies is that they will all run out of money at some point and because they haven’t lived through that experience, they have no true appreciation for cash flow and how critical it is to conserve financial resources.

The entrepreneurs shake off our “you-didn’t-ask-for-enough-money” comments and then go on with their tale of how great the product is and how many units will sell within a specified period of time with a relatively problem-free outlook. We ask about anticipated quality defects and potential for packaging and transportation errors. We ask how much of their current business is signed up with one customer. We ask about production problems or their lack of experience. We ask about their intellectual property concerns. We ask about their ability to staff the business properly. We ask about competitive threats and scalability. We ask about dozens of other operational, technological and financial issues.

But in the end, they’re still hopelessly hopeful. They believe the idea is so great that it will circumvent all of our concerns.

Sometimes it actually will. But we know from our own failures that most of the time a great idea cannot survive poor analysis and execution. A failure to counteract all the negative things that could happen in a business is the result of a lack of experience.
And this is especially critical in an environment that is experiencing accelerated technological advancement because technology creates two layers of instability—speed and change. It is hard enough to compensate for a lack of experience, but to do so in a market that is experiencing accelerated disruption is especially difficult and requires an even greater appreciation for what can go wrong.

Take for example financial projections. We see plenty of hockey sticks when we look at financial projections of high-growth technology companies. This means that an individual comes to us with a financial projection that literally looks like a hockey stick—the company is currently generating very little revenue and no profit but at some point in the near future its revenues and profits skyrocket up. Unlike a less-severe escalating line which gives you the comfort that gains are expected to be gradual and predicable, a hockey stick implies that a new company’s finances will accelerate in a sudden and speculative manner.
We hate hockey sticks. They’re generally unrealistic. We want to see financial projections with more reality in them. We need to see evidence of significant growth in revenues and profits on a gradual scale. Seeing no rise in revenues for eight quarters means that there is very little likelihood that you will see significant rises in quarter nine, unless something explains the sudden escalation like a product launch that’s years in the making.

So where do new entrepreneurs get experience when they simply don’t have it? The answer, unfortunately, is that there is no substitute for experience or Cliffs Notes for wisdom. Yet there are things you can do to hedge your lack of experience.

Find mentors: Find people who have experienced what you haven’t and let them rake your ideas over the coals. Still to this day, we seek out people who know failure—those who have navigated a tough spot and come out of it—to review our ideas and think of nuances in new opportunities we might have overlooked.

Find your No. 1 pessimist: Designate a world-class pessimist within your business who can be counted on to shoot bullet holes through virtually every aspect of your plan. You want to know every potential misstep, production problem, financial, legal and competitive risk out there. If you’ve never stepped in such a minefield personally, you need to find someone who has or someone who has the natural tendency to be pessimistic and cautious.

We find that new entrepreneurs are often great salesmen. Yet we’ve found over time that salespeople are the easiest people to sell to in an organization. They’re quick to rationalize every failure, every setback, every event that should cause them to re-evaluate the model and the business. New entrepreneurs are most likely to burn cash because they are the most likely to sell themselves on the notion that their idea is so fantastic everything will work out OK in the end. In today’s fast-paced climate, by the time you realize you have spent too much or wasted too much, it could be too late to recover. Believe in your solution, not the hype.

Innovation

2007-01-30T08:15:00.000-08:00

Since 1999, I have had the pleasure of working on, in some capacity, five different technology companies. The first was a pure dot-com start-up named Starbelly.com. Starbelly was formed in March of 1999 and was sold to Halo, Inc. (a publicly traded company at the time) in January of 2000. Those 10 months represented the peak of the craziness that existed before the technology bubble burst in March of 2000. Halo was a roll-up of over 30 acquisitions that wanted to change its strategy and take advantage of the technology craze. While the Starbelly investors made out ok, Halo filed for Chapter 11 protection in July of 2001. Today, Halo is still in business and you can learn more about the company at www.halo.com.

From 1999 to 2001, I personally learned a great deal in terms of how to build a strong, prosperous, and highly scalable technology company. In September of 2001, one of Starbelly's original investors, Richard Heise, approached me to look at a print brokerage business that he had uncovered. After meeting with Brian McCormack, who at the time owned a company called BK Graphics, we decided to form InnerWorkings. My wife was one of the original investors along with a few others who provided the seed capital to get InnerWorkings off the ground. I began consulting for the firm and from 2001 to 2005, our revenues grew from just over $5,000,000 annually to almost $80,000,000 annually. Along the way, our profits increased dramatically and the efficiencies of InnerWorkings technology began to take hold. Today, InnerWorkings is publicly traded under the symbol "INWK" and is continuing to grow at a dramatic pace.

In February of 2005, I got reconnected with my old partner, Brad Keywell, who was at the time working for the famous real estate investor, Sam Zell. With Rich Heise, we decided to form another technology-enabled business services company that would be focused on the logistics industry, called Echo Global Logistics, www.echo.com. Through 2005, we were trying to figure out if the company was going to get off the ground and start to take off. In early 2006, as the technology was starting to take hold, we began to land one client after another the business picked up momentum. 2006 was a crazy year for Echo, which today employs nearly 200 people and hiring a person almost every day of the week.

In May of 2006, as my consulting agreement with InnerWorkings was coming to a close, I started to focus some of my time and energy on another field, media buying. We formed a company called MediaBank, www.mbxg.com, and began developing technology to try and improve the process of buying media in the advertising marketplace. MediaBank is still in its infancy, but the company currently has about 25 people working for it and we are hopeful that as our technology gets completed it will have the same impact on media buying that we have historically seen in other industries, such as print and logistics.

Finally, in December of 2006, we decided to launch another technology venture, www.thepoint.com. The founder of that business is a guy named Andrew Mason, who was working on his masters when the idea for ThePoint hit him like a lightning bolt. In simple terms, our mission is use the Internet, and the power of social networking, to turn words into action and build an on-line collaborative network of people working together to solve problems. The idea is brand new and I have high hopes for the business.

When I am not working on these businesses, I spend time with my family. My wife and I have three children. I am also on the Board of Directors and the Finance Committee for Children's Memorial Hospital and I am a trustee for Steppenwolf Theater. Finally, I am teaching a class at the MBA program of Depaul Unniversity on the Managment of Technological Innovation.

I hope to post quite a bit more about the business models that I am working on in the near future.

Welcome!

2006-12-26T11:54:00.000-08:00

Thanks for visiting my blog. I'm currently working on my first entry, so please stop by shortly to read about my insights into the business world and more.

Best,

Eric