Strategy 101

Everytime I meet a startup for the first time, I ask the founders what their ambition for the company is.  Normally I have to clarify that “I’m looking for what the company will do for them at the end, not at some intermediate point”.  What I’m looking for is the end point – the destination.

Frequently I’m talking to idealistic young entrepreneurs that honestly answer that they don’t mind where they end up, they are doing it for the experience – for the journey. Other times co-founders look at each other and it is clear that not only is there no consensus but it hasn’t been seriously discussed before.  Both answers makes having a strategy impossible.

Strategy defines how you get from where you are today to where you want to go. Strategy tells you how you are going to get from Point A to Point B.  If you don’t know where you want to go then you cannot even have a conversation about strategy, let alone actually have one.

Many people get confused between tactics and strategy. Tactics define how you are going to hit some interim goal, strategy defines how the tactics combine together to achieve the ultimate purpose of why you founded the company. That should be in terms of you, afterall you’re setting up the company. What will the company have achieved for the founders when the game is over?

Do you want to exit the company through trade sale? If so, for how much? After how long? Do you want a comfortable lifestyle? What does that comfort look like? Do you want to leave a legacy? What legacy?

Imagine your friend says that they want to go on a journey – but they have no idea where they want to go. How can you decide if you should walk, drive, take a bus, fly or boat. How can they convince anyone else to join them? How much money will they need? This is all impossible until they eventually decide on an actual destination, then everything becomes simpler.

Whatever your destination, it defines the strategy, not the other way round. If your ambition is to trade sale the company for €10M then a strategy to raise €20M to fund growth is not compatible. Similarly if your ambition is to sell the company for €1 Billion then a strategy of bootstrapping the company is incompatible.

Once you know your destination it is normally possible to work backwards from that destination. For example if you are going to trade sale to €100M then who is likely to buy you? Why are they going to buy you?

  • For your IP?
  • For access to your customer?
  • For your revenue?
  • For your Profit?

Once you can answer these questions it becomes clearer what type of company that you need to build to achieve your ambition.

Strategy starts with knowing where you are and where you want to go

Stop Using Funding as Market Validation

It drives me mad when I hear startups use the fact that one of their competitors received €X Million in funding as market validation. Customers are a measure of success, so is revenue, so is profit. Funding is not.

Investors put money in high growth companies because they expect a high return but they also accept a high degree of risk. A typical Series A VC is hoping that 10% of their investment will be a huge success and a further 20-30% will return their money. The remainder are going to fail. So on an investment basis they expect that only 1 in 10 companies will achieve their ambitions.  

If you use funding as a measure of success you will be wrong 90% of the time. Being wrong 90% of the time isn’t good.

No one should set up their company for the purposes of attracting funding. You take on funding as a means to achieve a much larger ambition. Funding is a vanity metric. It is a metric that people use to make themselves feel important, to boast about and to intimidate others. But funding is nothing to be proud of, it is what you do with the funding that matters.

Your Job is to Make Tough Decisions

As CEO of a startup, it is your job to make tough decisions and if you aren’t making them you aren’t doing your job.

Tough decisions are decisions where you don’t have enough data to be fully informed but you need to make one anyway. Tough decisions are where you decide to fire a staff member who is trying their best but isn’t up to the job. It’s going back to a long term customer and telling them that they aren’t going to be your customer anymore because you have decided to pivot the business. It’s telling your co-founder they aren’t performing.

Easy decisions are obvious and by their very definition anyone competent would make the same decision. It’s the difficult decisions that define you and your business.  If you aren’t making these sorts of decisions then the company could have any CEO – you are letting circumstances control your business. It is through difficult decisions that you shape the future of your company.

We all face difficult decisions every week. How we address these decisions decides the fate of the business. Never let difficult decisions slide, they rarely become easier. Bear in mind that consciously deciding not to make a decision until you have better data is a decision and can often be the best course of action. However, do not use this an excuse not to make the tough decision when you need to. You do not have the luxury of time and resources that these unnecessary delays will require.

At the end of each week ask yourself what difficult decisions you made. If those painful decision aren’t front and center in your mind then you’re probably not addressing the real problems in your business.  We all want to ‘kick the can down the road’ but we all know that is a losing strategy. Be a winner, be brave, make the tough decisions.

You Can’t Spend All The Money you Raise (or at least you shouldn’t)

Everything takes longer and costs more than you think it will. However, everyone should know this already and most companies allow for this to degree (not nearly as much as they should do) and I’ll write an article about this at a later stage. However, this post talks about the fact that you can’t spend all of the money that you raise and therefore you need to raise more money – confused yet?

When you raise funds you do it to invest in your company. As you invest you increase the company’s cost base (salaries increase, you move offices, etc.).  As your cost base increase so does the buffer of cash you need to ensure you can meet those cost without interruption (failing to meet payroll is a very bad thing).

Let’s say you raise €2 million to grow your software company. A few programers here and a sales team there and before you know it you have a payroll of €150K and a total monthly cost base of €200K. Now cast you mind forward to when you’ve scaled the company and your total cost base is €200K a month. Just how low would you be willing to let your cash balance go or are you willing to run it all the way to zero and risk bankruptcy? 1 month? 2 months? 3 months?

If it’s 3 months then you only have €1.4M to invest in your company not the €2M that you actually raised. The remaining €600K is going hopefully sit in your bank account to protect you from the possibility of not making payroll. You can’t spend all the money you raised.

There are loads of reasons why you need to raise more than you think but working capital requirements is one of the easiest to quantify and inexcusable to ignore.

Where’s The Mango Market?

Run through this thought experiment with me.

  • How many mangos are sold in your city? It doesn’t matter how wrong your answer is – a guess will do.
  • How much does a mango sell for?
  • So what the mango market worth? This isn’t a trick question, just multiply the previous two answer together
  • Where is the mango market?

Ok, the last one is a trick question. This is because there is no mango market. There is a fruit and vegetable market.

Mangos sales aren’t significant enough and compete so directly with alternatives that they don’t have their own market. The price and availability of alternative fruit is almost as significant to the volume of mangos sold as the price of the mangos themselves.

Who cares whether there’s a mango market or not? Well, no one reading this. However every entrepreneur should care whether their product or service has its own market or if it is just one small part of a much larger market.  It is a common mistake to assume that just because there is a demand or need for a product that the product automatically creates its own market.

This is important because it is not possible to have a go-to-market strategy without recognising the market that you are in. The market dictates where your customers gather, what websites they visit, what conferences they go to, who they buy from, how they buy, the terminology they use, etc..

As a general rule if your ‘market’ doesn’t have an industry conference or any independent trade publication you should be asking if it exists in its own right or is just a part of another market.

Example: There is no flavoured water market – there is a soft drinks market. If you want to buy a bottle of flavoured water you go to the chiller cabinet in your convenience store. The flavoured water competes with all soft drinks for shelf space. If the flavoured water you want is out of stock or too expensive you will buy some other soft drink.

While there may be a demand for flavoured water there is no market independent of soft drinks. If you were the CEO of a flavoured water brand, realizing that you compete directly against bottled water, juice and sugary drinks in their market faces up to reality and allows you to create a credible go-to-market strategy. Thinking that you’ve got your own market is self-delusional.

If there are lots of alternatives that you haven’t included in your market then the chances are you are fooling yourself. There is no point trying to sell to this market because there are no customers there – they are all at the soft drinks cabinet.

  • There is no firewall market – there’s a digital corporate security market.
  • There is no invoice reconciliation software market – but there is a financial software market.
  • There is no wooden puzzle market – however there is a games and puzzles market.
  • There is no SMS market – there is a messaging market.


Stop looking at your analytics all the time

Whatever gives you that dopamine hit first thing in the morning: Google Analytics, Adwords, Mixpanel, bank balance, overnight orders, Stripe, stock price, Salesforce ….  it’s time to stop. You know you’re exhibiting compulsive behaviour, you know there’s no business reason you need to check your key metrics 20 times a day and certainly you don’t need to hit refresh to see if things changed in the last 30 seconds.

All you are doing is searching for that next high. Like a self-destructive addict, if the first metric is good you go onto the next, knowing if you keep going you will eventually find the inevitable – a metric that’s going the wrong way. If you are tracking 15 metrics it is statistically improbable that they can all be positive.

Once the negative metric has been spotted, it’s impossible not to keep looking. Logically you know that it’s not statistically significant and you can’t judge your site or product’s performance hour to hour, but you do it anyway, living the emotional rollercoaster of highs and lows dictated by the shape of the graph.

I was this soldier. I’d check 20-30 metrics across 5 different systems within 60 seconds of my eyes opening in the morning, 7 days a week. Occasionally I’d wake in the middle of the night to get my fix. Some days I’d check hundreds of times.

It wasn’t like it was even my job to stay on top of them. I had good people looking after all aspects of the business. But I felt like it was my job. I felt like I had to be on top of every aspect of the business and I boneheadedly took pride in being more up to date than anyone.

Self-realization dawned early on a Tuesday morning. I’d woken at about 5am and, as was my habit, checked revenue, site availability & traffic. Something was very clearly wrong. Even though the site was normally quiet at this time of the day, revenue was way out of line. I got out of bed. I was worried and stressed and I picked up my phone to call my CTO. It was then I realized that the best course of action was to do nothing and wait till the office opened and fresh, well rested engineers looked into the problem. My revelation was that information is valueless unless you are prepared to act on it.

I created a new rule for myself – only look at metrics when I was prepared to act on them. For example unless looking at the bank transfers that had arrived overnight would lead me to make a different decision then I wouldn’t look.

So I created a schedule for myself. Firstly, no looking at analytics in the AM unless they were needed for a specific purpose such as a meeting.  This allowed me to me to be proactive in the morning without having the day blown off course.

Schedule

  • Everyday 1.30pm: Bank Balance
  • Every Friday: 1.30pm Analytics, Revenue and Sales Pipeline  (Alright I’ll admit it became daily on the last week of the month. I didn’t say I was totally cured).
  • First day of the month. Adwords, Engineering tickets, site performance and everything else

Did I stick to it? Mostly. Every now and then I’d still crack but I easily cut out 95% of my habit.  I was happier and able to focus on the longer term and didn’t waste time stressing over irrelevant data.  This resulted in more thoughtful business decisions, better time with my family, and better time with me.

Next time you reach for your crutch of choice, ask yourself what decision you are going to make differently. If you are not sure and the answer is that you ‘just need to know’ then stop. You are not making anything better by looking and you are making life a lot worse for you and everyone around you.


Sales – it’s about Getting to No

Trying to sell something?

Well the answer’s no. Get used to it.

Stop looking for ‘yes’. It’s never yes. It’s always no.  If it  was yes then they’d already be your customer.

Your goal should be discover why it is no. Once you know why, you can work to overcome the objection. Maybe it’s price (it’s never price), credibility, risk, timing, authority, budget. You are dead in the water if you don’t know why.

If you go in looking for yes, then the best case is you find out that it’s not a ‘yes’. The worst case is you don’t even get that and the prospect stays in your pipeline like a ship becalmed. Your job is to force the issue, to question, to probe and to discover why they won’t do business with you NOW

Why I Hate A/B Tests

I hate A/B tests that are recommended to startups when they don’t have the volume to run them. I hate when they are used to avoid being courageous. I hate the false lessons they teach. I hate the illusion of certainty they give. In short I hate nearly everything anyone says about them and nearly every application of them.  So yes, I hate A/B tests.

They Provide No Insights and Generate False Narratives

A well executed A/B test will tell you which side performed better but it won’t tell you why. At the end of the day you may know that “Sign Up” works better than “Create Account”. Is it because the word “Account” has a very specific meaning for your target audience? Did “Sign Up” simply fit the button better? There are any number of possible explanations and you have no idea what the real answer is.  

The worst thing is that humans need narratives and when presented with a fact that is unsupported by a narrative we invent one. That invented narrative will spread further and be remembered longer than the original ‘fact’. But you have no idea if that narrative is actually true – someone just made it up. Try it yourself, go along to Optimizely and try not to create a narrative in your own mind.

They require a LOT of traffic

Split tests require a lot more traffic than most people who are running them have. If you have a page converting at 5% then on average you need about 30,000 visitors to that page to run an A/B test with 95% confidence. With the random walk inherent in your results you might sometimes need triple that. How long is that test going to take to run?  Are you happy standing still during that time?

Even then, the test is going to be wrong 5% of the time – statistically significant does not equal true.

The moment anything changes it invalidates your result

An A/B test requires both sides of the test to be identical except for the item being tested.  So what happens when something changes after the test? A soon as anything changes then the test needs to be rerun because the change invalidates the test. NO-ONE does this.

  • If you change a word on the page, a colour, a button, then the test is invalid
  • If your audience changes then your test is invalid
  • If the damn time of the year changes then your test is invalid
  • Even if significant time passes, your test is invalid as consumers tastes and views evolve over time

Most things aren’t worth split testing

Most of the time the cost of testing is going to far outweigh the potential benefit of the change. Your page probably has thousands of variables. The vast majority aren’t going to be worth the cost of testing.  Don’t expect minor changes to have major results.

On what basis are you choosing your test and what is your rationale?  Fear of being wrong, fear of being caught out, fear of being seen as rash or just because you think you should? Stop covering your ass and have the courage to plough forward and trust your own judgement.

P.S. A/B tests have their place and that place is where you are making fundamental changes that could radically impact performance and where you have large scale.

Adwords is like poker: If you can’t see the sucker, you’re it

When it comes to effective advertising methods Google Adwords rules the roost. You get to display your advert at exactly the right time to exactly the right prospect – the moment your potential customer is looking for it. This is astonishingly powerful and will generate over $100 billion in revenue for Google in 2018. However, all that revenue comes at the expense of the advertiser.  Most categories are now so competitive, making the cost of advertising very high, and when the costs are so high, advertisers need to live and breathe the figures in order to turn a profit.

In a competitive space Google will eventually take all the profit. Imagine:

  • There are four identical competitors
  • Each sell a digital book for $10 which they have written with no associated cost of sales
  • 10 clicks from Google Adwords are required to generate a sale
  • There are only 3 advertising slots available from Google.

How much will each advertiser bid per click?

Game theory tells us they will bid up to $0.99 cents. Any further and they won’t turn a profit. Any less and the other three competitors will out compete for the three slots and revenue goes to zero. So in for $10 sales, Google will take $9.96 – all but $0.04. In effect, Google takes all the money!

But it’s much worse than that. In the above example we limited the number of competitors to 4 and assumed they were all logical actors with complete knowledge and skills. Unfortunately this is rarely the case.

Most competitive markets have a few ill-informed actors. These actors will frequently outbid all the competition in order to maximise their traffic and resulting revenue. Imagine the above scenario with a couple of these ill-informed actors. Each bid $1.05 a click, resulting in Google taking $10.50 for each $10 sale. Google takes more than all the money!

But won’t the ill-informed actor eventually exhaust their budget, realise the error of their ways and either amend their bidding strategy or exit the market? Well yes, but there is an ample supply of ill-information actors ready to take their place.

So if you’re newish to advertising on Google, take a good look around at what your competitors are doing and if you can’t spot the one who is over bidding then chances are it’s you.   

Feedback Easily Given is Nearly Worthless

Ever received a cold call? Ever said the first thing that came into your mind to get rid of the person? Now imagine that salesperson meticulously compiling that feedback into a report. 42% of people are too busy, 30% already have a solution, 15% are driving and about to go into a tunnel and 13% of people are rude. Further imagine a company actually making business decisions on this data, confident in the knowledge that they are doing so on the basis of real market knowledge.

Ridiculous isn’t it? Yet we all do this.

No one likes to give difficult feedback. That’s why employee reviews are hard. It’s the same for customers. They don’t want to tell you that your baby is ugly – so they make something up – just so you go away.

You should always view feedback through the lens of how difficult it was to give.  If the feedback was easy to give you should regard it warily and probe for more. Conversely if the feedback was difficult you should really value it. Someone just went through an emotionally difficult time to give it to you. It has real value – do something with it.

When a prospect decides not to proceed with you, they will typically respond to your request for feedback. However, for the most part they just want to get rid of you and will tell you whatever is easy and end the conversation, not the real reason.

Be suspicious of:

  • You were too expensive
  • We decided not proceed with any vendor
  • Our budget got pulled
  • Corporate rules only allow us to do business with companies in business for over 5 years

Your job is to delve deeper and force feedback that’s difficult to give – that’s where the value is.  

Feedback Gold

  • We don’t think you can do the job
  • Your product sucks
  • Your lack of sales process worried us
  • We think you are going to go bust
  • Our engineering team hates your engineering team