CSOs and CMOs Must Hang Together

As recently as five years ago, few would’ve predicted the unification of Chief Sales Officers (CSOs) and Chief Marketing Officers (CMOs). They didn’t speak the same language, often with differing definitions of terms as fundamental as “what is a lead?” They fiercely competed for budget… the CSO wanting to hire more sales people and the CMO wanted to fund additional marketing programs. They blamed each other for shortfalls in revenue. The CMO was the creative type and the CSO was the customer relationship expert. Although they sometimes sat in adjacent offices, they couldn’t have been farther apart.

So, what has changed that will finally unite CMOs and CSOs? Answer…The buyers are back in control. Today’s post explains what this means and the four steps CMOs and CSOs must take (together) to stay relevant.

Five years ago, sales people had all the information that buyers needed. Buyers had to engage sales in order to get information and make informed decisions. Today, the proliferation and availability of companies’ product information on the Internet has put buyers back in the driver’s seat. Buyers today have seen your (and your competitors’) products on your website, read reviews on your company, seen a demo, downloaded white papers, attended a webinar, configured their solution, and probably reviewed pricing long before speaking with anyone from your sales team. In fact, many buyers, now referred to as Customer 2.0, have already made decisions prior to speaking with a single sales person.

So, how does sales and marketing get re-engaged with Customer 2.0 and influence the buying process? CSOs and CMOs have now been forced to work hand-in-hand to remain relevant to buyers, follow the buyer’s journey through the buying process, and find ways to influence the buyers though their exploration. Here are the steps they are taking, together.

Step 1 – Gaining visibility into this new buying process

Marketing Automation tools like SilverPop, Pardot, Eloqua, and Marketo, combined with sales automation tools like Salesforce.com give companies the ability to track a buyer’s journey through this new buying process. The tools detect every click on your website, every white paper the prospect downloaded (from your company), every email they opened, every webinar and demo they registered for, as well as all the interactions with your sales team. And they do this for every prospect that in some measurable way engages with your company.

The thirst for customer data and the loss of the buying process control is forcing CMOs and CSOs to work together to find budget to purchase these analytics tools and sit together to agree upon a common language to understand what the numbers are saying.

Step 2 – Understanding Customer 2.0 buying behaviors

CMOs and CSOs must cooperate to understand the behaviors and activities that buyers undertake during their buying journey. Which content on your website is popular? Why do customers stop interacting with you as a result of seeing your online demo? Which are the common sets content and interactions that led to a purchase for a particular vertical industry? When is the appropriate time to introduce a sales person?

The aggregate buyer behavior intelligence and analytics from the marketing and sales automation tools are amazing. And while the dashboards are awesome, CMOs and CSOs have to really roll their sleeves up and get dirty in the data to really understand what’s going on, especially early in the learning process.

Step 3- Build campaigns, content, and tools that attract buyers

The content needed to attract Customer 2.0 is much different than the content of yesteryear. These buyers don’t want to be sold to. They want to learn and they like learning through webinars, podcasts, twitter, videos, blogs, and thought leadership content. They want to understand best practices and how other companies are solving their problem. CMOs and CSOs must co-create budgets to fund these campaigns, content, and tools. They must work together to build, test, and determine when is appropriate to deliver which piece of content to customers, based on their behavior.

Step 4 – Processes and execution

CMOs and CSOs must create much tighter linkages and effective handoffs between sales and marketing teams. And, they must consort to change all the marketing processes, sales processes, forecasting methodologies, manager coaching practices, etc., etc., etc. They must change the working relationship, language, and communication between their teams. Leveraging both the new content and the marketing and sales automation tools, they must work together to proactively engage with Customer 2.0, influence them, create and nurture the opportunity, and close the deals.

The bottom line

Changes in buyer’s behavior and the necessary tools needed to compete for and attract buyers have created an environment whereby CMOs and CSOs must now work in resplendent harmony. Failure to do means certain failure to attract and keep customers over time. Customer 2.o is here to stay. So, I sure hope the CSO and CMO like the person in the office next door.

Question: What are you seeing that demonstrates this new buyer behavior? Have you noticed your CMO and CSO burying the hatchet and collaborating?

Why your sales team stinks at forecasting – part 3

Re-Qualify and Reclassify Every Deal

In Part 1 of this series, Here’s why your Sales Team Stinks at Forecasting Revenue, we reviewed the facts about just how bad we are at forecasting, thought through “why we stink,” and outlined three steps to redeeming ourselves as sales professionals and leaders. In order to help companies dramatically improve forecasting, we must:

Review and re-define the qualification criteria and sales pipeline stage definitions that are at the heart of weak pipelines and poor forecast accuracy. (Covered in Part 2 of this series)
Re-qualify every deal, reclassify the deals based on the new sales stage definitions, and clean out the rubbish…and methodically apply these criteria in real time, forever. (Covered in this post, Part 3)
Create a new sales culture and cadence that focuses the majority of discussions around building strong pipeline, rather than forecast.

In this post, Part 3, we re-qualify every deal, reclassify the deals based on the new sales stage definitions, and clean out the rubbish…and methodically apply these criteria in real time, forever. I’ll walk you through the steps needed to implement the new stages, discuss how to avoid two major implementation pitfalls, and review why It will totally be worth it!!

Clear out your sales rubbish by re-qualifying and reclassifying all deals

Cleaning out pipelines is just like cleaning out your garage. Take everything out and put back only what you

should keep. Anything put back into the garage should be organized well and should be kept organized. Here are the implementation steps:

Move ALL of the deals in the pipeline to stage 1. This is to be sure undertake a full review of every deal, and rebuild the pipeline based on our new stage definitions (from Part 2 of this series).
Review each deal. Remember that each stage definition is based on customer-verifiable criteria. Therefore, the sales person will likely need to connect with the customers to ensure that the new stage definitions are verified to be 100% true.
Apply the new sales stage definitions to each opportunity and update the opportunity’s Stage (1, 2, 3, etc.) in your Customer Relationship Management (CRM) software or pipeline spreadsheet. Be strict in making sure ALL criteria are met for the stage and all previous stages. If the sales person’s information does not meet all the criteria, then chose the lowest stage that all criteria are met.

Implementation Pitfalls

As straight forward as the steps sound, the leadership team must be ready to manage 2 predictable pitfalls from the sales professional during implementation.

First, Sales Teams have invested a lot of time and energy into getting deals to later stages of the pipeline. The difficultly in implementing customer-verifiable sales stages is that most sales teams are forced to admit that qualified deals are…well…no longer qualified to be in that sales stage. And, watching all the deals in the pipeline slip drastically back to early stages is unnerving for salespeople.

If we are honest, customers change their priorities, budgets, and their minds all the time. Right? But, Sales People almost never move a deal that was in stage 4 back to stage 2, do they?

When deals move backward to earlier stages, the sales person will feel the anxiety of his/her perceived pipeline strength diminishing. We need to help them get over that initial resistance. Even in Step 1 above, moving all the opportunities to stage 1 typically takes some coaxing from leadership. Once the Manager and Sales Person agree that all the opportunities are in the correct stage, a newfound confidence will arise. I promise!

And the second predictable pitfall? In Steps 2-4 above, managers and sales leaders must continuously reinforce that the sales person be self-discipled about stage accuracy. For example, once a customer can no longer can verify the timeline to sign a contract, the deal should be moved back to a lesser stage that meets all the verifiable criteria.

Sales leadership and salespeople must be resolute in applying the new definitions of the stages. Definitions must be strictly applied to the pipeline. If most or all of the pipeline returns to Stage 1, so be it.

It’ll be Totally Worth It!!

Once the sales teams are honest with themselves, and all deals are in the correct stage, we get our first accurate assessment for the health and maturity of our pipeline (possible for the first time, ever!). A hygienic pipeline based on customer-verifiable outcomes yields four important outcomes:

The noise that normally clutters pipeline is gone. Gone! Now, we can clearly see where to focus our sales energy!
Sales teams now have a clear path for all the customer-verifiable activities that must occur before a deal can reach the next step and before a deal will close.
Sales leaders can now use the customer-verifiable criteria to continuously qualify deals and coach teams. And, by influencing deals in stages 1-3 of the pipeline, managers and leadership can impact those deals during the early phases and systematically build stronger deals at all stages of maturity.
By the time deals get to stages 4 and 5, the deals are strong and are whose closed dates are much more predicable. We have customer-verifiable substance behind any forecast that is created, based on deals in a strong pipeline. Hallelujah!

In Part 4 of this series, we will review how we can leverage these four It’ll totally be Worth It outcomes to create a culture of strong pipeline generation. Once we can build strong pipelines full of very well-qualified deals, the forecast discussions will be simple, shorter, and will yield amazing accuracy.

Matt Oess is a Strategy, Sales & Marketing partner in TechCXO’s Atlanta office. See Matt’s full bio or contact him: matt.oess@techcxo.com.

Why your sales team stinks at forecasting – part 2

In Part 1 of this series, “Here’s why your sales team stinks at forecasting revenue”, we reviewed the facts about just how bad we are at forecasting. We self-diagnosed “why we stink”. And, we outlined three steps to redeeming ourselves as sales professionals and leaders. In order to help companies dramatically improve forecasting, we must:

1. Review and re-define the qualification criteria and sales pipeline stage definitions that are at the heart of weak pipelines and poor forecast accuracy (in this post, Part 2)
2. Re-qualify every deal, reclassify the deals based on the new sales stage definitions, and clean out the rubbish…and methodically apply these criteria in real time, forever (part 3 of this series).
3. Create a new sales culture and cadence that focuses the majority of discussions around building strong pipeline, rather than forecast (part 4 of this series).

The Old Way Leads to Misery

So, new pipeline stage qualification criteria… What’s wrong with the current stage definitions? In a word, everything. Nearly 100% of sales teams define their sales stages in terms of their own selling activities.

Here’s a typical example: “Stage 2 – We had a Discovery meeting”, “Stage 3- We did an Assessment, “Stage 4 – We did a Demo of our software”, “Stage 5 – We delivered a Proposal”, and “Stage 6 – We are Negotiating”. We need look no further than the sales stage definitions in Salesforce.com or some other CRM to validate this point.

The flaw in this approach is made obvious by the following example (using the Stage definitions above). Suppose we conduct a demonstration of our solution (Stage 4) and deliver a proposal (Stage 5) to a customer. Most sales organizations assume that when the customer “loves” the demo and asks for a proposal/pricing, the deal is now in the negotiating (Stage 6) and becomes available to consider when compiling the forecast.

In some cases, this is true. The customer buys in the next 30 days, as expected, and everyone is happy. But, what if you believe you are at Stage 6, but the customer only needed the pricing to establish next year’s budget? Or, maybe the customer just needed pricing to justify a business case that must now be reviewed against 17 other projects… all seeking new budget. (Or, maybe the customer just asked for the proposal to get the Sales team out of his/her office.) These deals tend to linger at an advanced stage in the pipeline for a LONG time. And, those are the kinds of deals that ultimately make up the deals that are available to support a sales person or manager’s forecast. Clearly, these pipeline stage definitions are disconnected from the customer’s processes.

What if a customer needed pricing to justify a business case? What if the customer just asked for a proposal to get the sales team out of his/her office?

So, one might deduce that the correct stage definitions are not selling activities, but buying activities. Good point! A few good sales training companies and consultants have started moving in this direction over the past 5 years. For example: “Stage 1 – Customer has a Stated Problem”, “Stage 2 – Customer has identified possible solutions/vendors”, “Stage 3 – Customer is considering Proposals from Short-listed Vendor Candidates”, etc. These stages are certainly more connected with the buyer’s process than our previous sales stages. While buying activities are superior to selling activities for stage definitions, there is something even better!

A Much Better Way

At TechCXO, we believe strongly that the best stage definitions for pipeline and opportunity management are based on a concept we call Rising Level of Customer Commitment. It measures how committed the customer is to 1) making a purchase, 2) your solution, and 3) your company. And, as you will see, these stages can actually be verified by the customer. Perfect!! As you will see, the customer’s growing level of commitment is a fantastic indicator for deal progress and the a great forecasting barometer for the likelihood of the customer completing a purchase.

Can your pipeline define a “Rising Level of Customer Commitment”?

Here are some example pipeline stage definitions that you can use as the basis for your new stage descriptions, based on customer-verifiable activities (credit: Brad Milner and Rick Nichols, TechCXO). Notice how each successive stage describes an increased level of commitment to your company and solution.

Stage 1 – The customer has not yet engaged in an opportunity that we have identified.
Stage 2 – We have a scheduled meeting on the customer’s or prospect’s calendar in the next 30 days.
Stage 3 – Out Customer contact has fully verified 1) a need for our product or solution, 2) budget availability, 3) timeline for purchase, and 4) the decision-making authority or process.
Stage 4 – All decision-makers have verified the criteria in stage 3 and have also verified that we can meet their requirements.
Stage 5 – All decision-makers have told us “you won this business”.
Stage 6 – Closed won. Contract signed.

Try it Yourself

These definitions might need to be tweaked to fit the buying process of your particular customer segments or industry. But, by changing the focus of the stage definitions from our own selling activities to customer-verifiable buyer commitment, we remove much of the risk that exists when we try to predict when the customer will ultimately say “yes” and purchase. The removal of this risk is unbelievable benefit of this methodology and can’t be overemphasized.

So, if we just change the definitions of the pipeline stages and reclassify the stage each deal in the pipeline, things get better, right? The answer is… absolutely! Implementation of these simple definitions will help with better insights into deals, help you ask better questions, and should create better dialogue between Salespeople and Sales Leaders. Feel free to give these stage definitions a try, and reach out to one of us at TechCXO if you have questions.

That said, we aren’t done. While new definitions are definitely necessary to improve our pipeline health and forecast predictability, they are not sufficient for maximum Sales performance. It turns out that we need a new pipeline management process to go with our new sales stage definitions. In Part 3 of this series, we’ll walk through the steps on implementing the new stages and investigate the challenges.

Matt Oess TechCXO

Matt Oess is a TechCXO on demand sales executive in its Atlanta office. You can reach him at: matt.oess@techcxo.com. See his full bio and other articles here.

Why your sales team stinks at forecasting revenue

According to a CSO Insights 2016 study of 1,200 sales organizations, on average, a sales person who forecasts a deal to close will win that deal only 45.8% of the time. In contrast, the odds of winning at roulette on a “pass” bet are 49.29%!

So, sales teams stand a better chance of winning at roulette than they do at closing a forecasted deal. If that isn’t scary enough, when I ask clients and prospects to estimate their close rates (without looking at their data), they believe their win rate on forecasted deals to be 60%, or greater.

So, how can we improve the forecast accuracy of sales teams?

Believe it or not, the answer doesn’t lie in increased focus on forecasting or a different set of forecasting rules. The answer lies in the sales pipeline of opportunities that underpin the forecast.

To gather the insights required to solve forecast accuracy, we must first be honest with ourselves about the forecast and pipeline.

Here are some underlying truths about forecast and the underlying pipeline:
1. The preponderance of deals in most sales opportunity pipelines are truly unqualified.
2. Because sales pipelines are full of weak, semi-qualified deals, a sales person who is under pressure to forecast “the number” must choose from deals that are not truly in the late stages of closing.
3. Managers who are also under pressure from their senior leaders to produce numbers have little choice but to direct the sales person’s time and energy on pulling in and delivering these weakly-forecasted opportunities.
And so, the majority of sales teams stink at forecasting.

It’s time for we, the sales profession (sales people, management and leadership) to regain control of the process that has lead to such disastrous forecast accuracy. We owe it to ourselves to do 3 things.

Firstly, we have to review and re-define the qualification criteria and sales pipeline stage definitions that are at the heart of weak pipelines and poor forecast accuracy. (Part 2 of this series)

Secondly, we must take stock of our teams’ pipelines. We must re-qualify every deal, reclassify the deal based on the new sales stage definitions, and clean out the rubbish. (In part 3 of this series, we will investigate how to do this)

And thirdly, we must completely flip-flop our sales cultures and conversations from an almost pure focus on forecast to near-complete focus on building a strong pipeline of well-qualified opportunities. (Part 4 of this series)

Let’s face it, our credibility and reputation as sales leadership professionals is at stake, here! A 45.8% close rate on forecasted deals is terrible and we owe it to ourselves to be honest with ourselves and fix forecast accuracy once and for all.

Parts 2, 3, and 4 of this series are intended to do just that! Stay tuned.

Question: Did the 45.8% close rate of forecasted deals surprise any of you? I know it surprised me. I would love your thoughts.

Matt Oess is a Strategy, Sales & Marketing partner in TechCXO’s Atlanta office. See Matt’s full bio or contact him: matt.oess@techcxo.com.

Before Mounting the Synergy Unicorn: New Skills for Merged Management Teams

Companies seek to accelerate revenue growth or enter new markets through mergers and acquisitions. A great deal of excitement and justification surrounds the projected synergies and combined financial models.

Synergy: 1+1>2

Or is it?

However, as we all know, few companies realize the true value of the acquisition synergies. When M&A fails, it fails during integration. Much of the effort and capital spent on acquiring the target is sub-optimized or in many cases wasted.

In this piece, I’ll briefly cover what dynamics occur among the senior leadership team that erode synergistic value. And, I’ll discuss the two skill sets that the leaders of the combined entity must have to mitigate value leakage.

[The article was adapted from Matt Oess‘s original blog post]

WHY M&A FAILS

A major failure mode of integration happens when the two leadership teams from the companies come together. The company’s executives create a detrimental amount of dysfunction when they unknowingly engage in the following:

Jockey for position – Who’s going to sit in what seat when the final org chart has been created? Even the most objective leader can’t help but worry about what role they and their close peers will play in the future state of the company. Even when the CEO of the merged entity tries to paint a clear picture of his or her future organization, the senior staff knows that “the changes are never over” and “I have to look out for myself or I’ll end up with the short end of the stick”. The human mind is amazingly good at painting worst-case imagery of “what if I don’t get the role I want?”. This drives behavior that destroys alignment among leaders and marginalizes the intended synergies.
Protect my people – Executives can’t help but have a bias for and a comfort with those that have helped them to be successful in the past. As humans, we are also protectors of those we are closest to. And, we want what’s “best for our team”. This dynamic precludes objectivity when assembling the best possible team to lead the resulting company and limits optimal outcomes.
Bias toward “what got us here” – No integration meeting would be complete without several incantations of “That’s not how wedid it in the past” or “We’ve tried that before, and it didn’t work”. Fear is an incredibly powerful force that creates enormous risk and dire outcomes in the minds of the two leadership teams. These barely-detectable fears paralyze good ideas that should be implemented, but don’t. As importantly, these behaviors almost always ensure that the teams can not fully align. And, that dynamic destroys synergy.

Here’s the thing. I truly believe that people show up to do their very best and do so with the very best intentions. And, the leaders who exhibit the above behaviors do so, unknowingly. The brain’s protection mechanisms kick in to protect our own best interests. It’s perfectly natural for the brain to create the fear-based stories in our subconscious that drive undesirable behavior. And, this is where the change management aspects of the integration erode tremendous value.

So, imagine what the combined executive team looks like, as a unit, from the stakeholder’s purview. Each executive is trying their best and is well intentioned. But, the brain’s protection mechanisms drives the actions of the individuals that combine to create a team that typifies mis-alignment, dysfunctional communication, and poor collaboration.

Before putting in motion all the strategies, goals, org charts, and tactical action plans necessary to realize true potential of a merger, something more important must take place. The two management teams must know about the attitudes and behaviors they are about to engage in. And, they must develop the emotional intelligence skills and support each other to navigate these tough waters.

NOW WHAT?

The first step is to take the unconscious actions and behaviors of these executives…and make them conscious.

To that end, the first skill set that we must impart to the executives is self-awareness of the mechanisms in our brains that create the behaviors that will destroy the very stakeholder value that they wish to enhance. Left undetected, the executives will navigate through their natural gut feel, which creates the appearance of false truths and leads to dysfunction.

Second, we help the executives build and leverage the necessary observation and communication skills required to create desirable outcomes and support each other. By creating intentionality and dramatically increasing the true situational awareness skills of the individual executives, we drastically increase the combined team’s emotional intelligence (as a collective leadership unit). And, we add a new dimension to their leadership skill set.

This isn’t a one-and-done training. We plan during the M&A due diligence phase. We launch on day zero. And, we support every senior executive until integration is complete and we achieve the synergies. Only through this intentionality and constant focus can newly-formed companies avoid the pitfalls mentioned above.

TAMING THE UNICORN

Merger and Acquisition teams, CEOs, CFOs, and Board Members that are considering buy/sell/merge activity have the power to mitigate the risks and deliver the allusive synergistic value. Strategy and actions are necessary, but not sufficient. Call it an insurance policy. Call it intentionality. It’s a simple formula…

Synergy:

1 + 1 + Team Emotional Intelligence > 2

Every M&A deal needs a program to mitigate these risks. The earlier these skills and competencies are enabled across the entire executive team, the faster the M&A teams mitigate the integration and change management risks. The broader and deeper these competencies are driven, the faster M&A teams create the alignment, collaboration, and communication required to deliver the synergies of the acquisition.

Fundraising: A Primer for the CEO

For non-finance professionals, much of what a CFO does is a mystery and more than a little daunting. Cash flow statements, 409a valuations, tax, audit, treasury, stock options, D&O insurance are among the many topics that strike fear in the hearts of CEOs, especially those new to the role. But more than any other topic in finance, the concept of fundraising is often the most daunting and misunderstood.

How much do we need?

When do we need it?

Where do we get it?

Under what terms?

After 30 years of being a CFO and helping more than 50 companies raise an aggregate of a billion dollars plus in debt and equity, I have some guidelines and advice for how companies should manage their fundraising process.

Patience

When it’s you, your partner and your dog working out of your basement, you have a unique opportunity to think about your business before deciding what it is you need to fund your plan. This thinking stage evolves into a more detailed plan, usually in the form of a slide deck (20 – 30 slides, no more!) that follows a traditional outline and describes the product, the team, the market, the opportunity and the underlying financial plan.

Based on your assumptions and estimates, you should be able to articulate what it will take to launch the business. The funding required is typically adequate to fund the company for 12+ months and/or to a specific value inflection point. The key is to take the time to do your planning and take as little money as possible to support the launch. Ideally, you should self-fund the business until you’re ready to talk to outsiders.

Friends & Family (F&F)

If you need more time or more money than you can commit to yourself, then the next option is the so-called Friends & Family round. This is where you hit up your parents, siblings, Uncle Joe and others who are willing to invest in you, no matter what your business plan.

Unless you are lucky enough to come from a wealthy, extended family and because there are generally not many of these people in the first place, F&F rounds tend to be relatively small – no more than $1 million. The process is quick and simple, but although these people can be very supportive of you, the risk of failure is still very great, and you should be honest about that. You should know that one’s heart often follows the pocket book.

Angels

A step up from the F&F, individual investors or “angels” are your next best option. Angels are high-net-worth individuals and often invest in groups to help streamline the process. Angel rounds can be anywhere from $500k to $3 million and many of these people are experienced entrepreneurs who can add value with their operational acumen or their connections.

The biggest problem with raising angel money is that it is not unusual to have 20 or 50 or even more individuals who have invested. Because angels are often entrepreneurs themselves and want to know what’s happening in the business from day to day, this can be time consuming and expensive to manage. The term “herding the cats” is often used to describe the process of managing your well-meaning, but inquisitive angel investors.

Terms and valuation/dilution

It’s worth pausing here to discuss the mechanics of fundraising. The best advice I can give is to keep it simple and don’t be greedy. For the F&F and angel rounds, I recommend using a convertible note as a way of keeping it simple. This avoids the inevitable fight about valuation and ownership until a later date. Any funds received will be invested as a note payable and will accrue interest until some qualifying event occurs, usually a larger financing round. Upon closing a qualified financing round, the principal and interest will “convert” into the new security, often with some sort of discount for having taken the early risk. The simplest form of such a note is a SAFE or Simple Agreement for Future Equity that can often be as little as 1 or 2 pages.

The ownership / dilution issue is the most difficult for an entrepreneur and I’ve often seen companies ruined because the owners could not accept the terms that were offered and end up with $0. This is your baby and it’s really hard to let go, but you have to be realistic about what investors will expect and what you’ll need to be successful. The best thing to do is to run a process and have more than one option available so you have some leverage. I always tell my clients that you don’t get paid on your Series A (or B), rather you get paid when you sell your company or if you are very lucky, when you go public. So don’t sweat the difference between 5% and 10% ownership. If you have good, patient investors and are successful, it won’t matter.

Venture Capital

VCs are the first of the so-called institutional investors and will invest in early stage, high risk opportunities. They will invest anywhere from $2 million to $50 million and often specialize in a specific industry. This is a broad range and there are VCs who focus on the company formation end of this range (typically Series Seed rounds) and those who focus more on later investments (Series A and beyond). These firms are staffed by only a handful of partners, the best of whom have already been successful entrepreneurs. They in turn will have raised money from larger institutions and are responsible for managing and investing huge sums of capital.

From the outside looking in, VCs can seem pretty intimidating with their teams of Harvard MBAs and seemingly unlimited access to capital. And they are tough to reach. The best advice to getting the attention of a VC is to use your network and get a “warm” introduction anyway you can. While many VCs claim to be risk takers, like any good investor, they will be looking for deals with higher rewards and lower risk. If you’re part of a team that has built successful companies or are in a hot space, then your job is a little easier.

Growth Equity

As the name implies, growth equity players specialize in investing in mid to late-stage companies that have de-risked their business and need significant capital to grow, either by investing in manufacturing, sales & marketing or just building the team. Unlike VCs who will invest in companies with no revenues or profits, growth equity players are looking for companies with traction, usually $5+ million in sales and if not profitable now, then within sight (e.g. less than 12 months) of achieving profitability.

Strategic investors

So-called strategics are companies in your industry who may be interested in investing in your company to nurture innovation or expand into new lines of products. On the one hand, a strategic investment can be a great way to gain valuable knowledge about processes or markets and leverage the might of a larger player for things like sales distribution. However, having a strategic investor can sometimes eliminate a set of buyers because they view the investor as a competitor.

Government grants

There are numerous government initiatives to support entrepreneurs and they vary widely by industry and design. There are loans, grants or in-kind services that can help you build your business. Of course this assistance comes with certain strings attached, most notably rigorous reporting requirements that can be challenging for small businesses. The Small Business Administration (SBA) is a good place to start to research the various options and how they might apply to your company.

Mergers & Acquisition (M&A)

Unless you go public, M&A is the most likely way to generate liquidity for you and your investors. This is where all your hard work pays off and you reap the rewards of your success by selling some or all of your company. You can do this yourself, but I recommend employing a professional such as a business broker or investment banker.

The inflection points & metrics

Inflection points are the key stages in a company’s life cycle where value increases exponentially. In product companies, examples are the first prototype, the first commercial revenues, market expansion and profitability. For pre-revenue companies such as biotechs, examples include identifying a lead drug candidate, producing the compound and then the various stages of the FDA approval process through to commercialization. For any type of company, inflection points might include hiring a crackerjack CEO or doing a deal with a strategic partner.

Metrics are used to help both the company and investors quantify when these inflection points occur. Companies use metrics such as sales growth, average selling price (ASP), gross margin, earnings before interest, tax, depreciation and amortization (EBITDA) or net income to measure their progress against goals. It’s critically important to establish the right metrics for your team and report on them in an accurate and consistent fashion. Knowing your business’ metrics and being able to demonstrate growth and strength in the company is the best way to support a sales process.

Investors often look at the same metrics but will typically use a multiple of revenues or EBITDA (a good proxy for cash flow) as a way of valuing your business. You should be well-armed with examples of companies that are comparable to yours and how your metrics stack up against your peers. You can then quantitatively demonstrate the worth of your business in a sales cycle.

Closing the deal

Fundraising takes an inordinate amount of your team’s time and it can often feel that you are neglecting your core business in the chase for dollars. Experienced teams will know how much they want to raise and where that money will take them before they have to raise more. They will also cast a wide net, run a process with multiple interested suitors and enlist the help of friends and advisers to augment their team and make introductions.

The process can be nerve wracking and at times, disappointing. But there’s nothing more gratifying to entrepreneurs than closing a deal that can help them execute on their dream.

Best Audit Ever

BEST AUDIT EVER: FOUR GUIDELINES

TechCXO partners are fond of saying credible numbers lead to credible management.

Audits may not be sexy but a smooth annual audit shows your board, lenders and auditors that you have your financial processes and systems in place, which builds confidence. These four guidelines will help you extend that confidence.

1. Control Your List – Auditors want the world in terms of information. That’s the nature of the job. Often, they’ll ask for things that aren’t material to your business, which creates busy work for you. For example, if you’re a $10 million company, you don’t want auditors asking to review $1,500 contracts. You can take control of your Prepared by Client Schedules (PBCs) by discussing what is material and what isn’t. Also, part of your fees should include preliminary work. Compare the work done the year previous to see what can be started early.

2. No Surprises — Busy Season is Busy Season. Your auditors have zero flexibility this time of year and delays will cost you money. An audit for a regional firm may cost about $200 per hour. At 300 hours for an audit, that’s $60,000. Make all the pre-closing entries you can ahead of time. Even if you don’t have numbers for all 12 months, you have 11 month’s worth. Start working on audit schedules now. If you can’t close your books on time, you can’t complete your schedules and your audit field work is delayed – that will cost you. Have your Prepared by Client Schedules done; and more importantly, have internal management’s
review of PCBs done, before the auditors show up to avoid surprises.

3. Hard Close – Year-end means additional entries. A company may buy property all year long and never enter into a fixed asset ledger. All of a sudden those two dozen computers purchased throughout the year are “hand grenaded” into depreciation entries. Build in some buffer time for these year-end tie-ups. Make sure sub ledgers tie and reconciliations are in order. This is a good time to establish a robust monthly closing process.

4. Expensing Options – FAS 123R requires companies to expense options. That means you have to create a value for your options which results in operating expenses. Make sure you understand your pricing model, how it is computed and you have reviewed it internally. Your auditors need to buy off on variables such as volatility and risk and it all needs to be supported – complicated audit, preferred stock, stock options accounting, be sure to allow time. Get valuation done every year as part of the audit.

CFOs and Sales

Should CFOs Advise Sales?

Yes, we did say it: most companies should have the CFO – if they are experienced and strategically-capable — advise the Head of Sales. Here are four reasons why:

1. Margins: It’s not what the dollars you get, it’s the dollars you hold – most salespeople (TechCXO Sales Executives excluded) aren’t keeping their eye on margins. They are doing what they are supposed to do – convert leads, sell, hit goals. Often that will include loose contracts that include deep discounts, even if their hot-selling product has little competition. A CFO may forbid discounts for products with little or no competition. Conversely, since cash is important too, a CFO may deeply discount inventory for clearance, promotions, or incentives. When the focus is on margins and profitability, logic – and profitability — reigns.

2. Pricing: Pricing and profitability go hand-in-hand. In a previous article, we noted that a 1% improvement (increase) in your price will generally create an 11% increase in operating profit. If a profit goal requires an overall 2.5 percent price increase, for example, CFOs can create systems that optimize individual product prices based on multiple dimensions (including geography, distribution channel and brand) rather than raise every price on the list by 2.5 percent. A CFO can also quantify power and risk, in that the company can increase price most where there is the highest power and lowest risk, and be most cautious where power is low and risk is high.

3. Customers: Companies consistently coddle its larger, better-known customers for prestige, perceived branding advantages and other reasons, even if it is actually small and midsize customers that are the most profitable. For example, some of your customers may be taking too many deliveries or requiring too much service; or order sizes may be too small to justify delivery costs. Perhaps the mix of products is wrong to keep the deliveries cost-efficient. A CFO who understands customers at the item level can overcome flat or down revenue with vastly improved profit margins via the right mix of customers.

4. Business Discipline: Sales are exciting. So exciting, in fact, that the CEO and Head of Sales can get caught up in some strange behavior such as a string of non-standard quotes. Enough “custom selling” will start to compromise the strategic plan, operating plan and actual decision making. After the third non-standard quote, the whole market may be wondering if the company is setting a new street price. CFOs need to forecast, refine and simplify to attempt to build predictability into the business. With ad hoc processes, controls are lost along with the ability to ask: Is this trend showing us something about the business? Is our message right or wrong ? What is the market telling me? Do I have the right sales team? Forecast-Refine-Simplify-Repeat offers an organization institutional discipline.

Managing Cash: Look Here

Look Inside, Outside and Across

Try to run your car while neglecting the engine’s oil and the results are predictable. The same is true for running your business without proper attention to managing cash. Where should you focus your attention? Three areas: Inside. Outside. Across.

#1 Inside. Start with the “inside” of your company when managing cash. First, you want to have a firm grasp of all revenue and cash assumptions in the forecast. Do this by going right to the source: the sales organization. With tools like salesforce.com and other CRM-related software, there’s really no excuse for surprises or gaps between revenue forecasts and cash. The CFO and VP – Sales should be talking weekly about incoming orders and forecast realization. Consider too, moving to rolling forecasts as opposed to only annual plans. Weekly, monthly, quarterly rolling forecasts will give you a closer, more dynamic look at the organization. Don’t, however, discard your in depth 12-month look at the organization.

This is the third of a four-part series from TechCXO focused on Managing Cash and Optimizing Profits. See Part 1: Math Behind Growth. See Part 2: Should CFOs Advise Sales?

Second, in tough sales seasons, the sales organization might be more inclined to create special terms. That may be OK, but the CFO should be on top of all of the financial and credit terms the sales team extends to prospects, and should have the power to approve or reject exceptions to standard terms.

Third, manage commissions wisely. A good rule of thumb is to hold back the last third of sales commissions until the money is in hand and not just housed in accounts receivable.

#2 Outside. Your second area of focus is “outside”, meaning tight management of receivables and vendors. When receivables go outside of your Net 30 Day terms, start calling customers on day 31, not day 40. Call consistent payment laggards even a little earlier. You will be setting expectations for how you expect to be paid. You also want to be prepared to be tough with stopping shipments and services for customers who are slow to pay. This is particularly important with newer customers.

While you may not be granting much grace in your receivables, you may want some grace extended to you from your vendors. Depending on your relationships with key vendors, you may need to stretch typical Net 30 days to more like Net 60 days. Be warned, however, staying under Net 60 in your accounts payable will keep you off your vendors’ radar, but you don’t want to go out to 75 days. Your reputation runs a major risk of getting dinged, and there could be pricing implications… word spreads fast.

#3 Across. By “across”, we mean that you leverage every tool possible across available financial vehicles. For example, we
always recommend to any company with cash balances of six figures and above to have sweep accounts, as in “sweep” your cash into an interest-bearing overnight account.

Another caveat: while it’s good for your cash to be working for you, don’t keep your primary cash accounts too close to zero. Banks need to make money and they are always watching. Have a chat with your banker, to make certain that you are in sync. They may be more than glad to execute a sweep account if they manage your “available” cash for you . You’ll need a track record of a healthy cash account just for aesthetics and if the need arises to get some additional capital. Investors and creditors like to see healthy cash amounts.

Why Your CFO Might Be the Most Overlooked Growth Strategist in the Room

If you think your CFO’s contribution to increased profitability is only from cutting costs, think again — you may be looking past your biggest pro-growth asset.

A New Attitude: CFO as “Growth Strategist”

A CFO’s job is to spend money. That’s right… spend money. The association with finance executives and cutting costs has twisted the true function of your top finance executive. The CFO pays employee wages, pays vendors, pays taxes, pays rent, pays benefits, pays utilities. They are constantly spending money. And yet the association with CFOs as an agent for growth and profitability is almost non-existent. That’s a mistake.

Since the CFO is the biggest spender in your company they also know where the money is best spent. Here are three ways to leverage a CFO or finance executive’s capabilities to increase margins:

1. Understanding the Math behind Growth – In a typical company a 1% improvement (increase) in your price will generally create an 11% increase in operating profit. Let’s repeat that: a 1% improvement in price will create an 11% increase in profit.
By contrast, a 1% improvement in variable costs gives you a 7% increase in profitability and a 1% improvement in fixed costs gives you only a 3% profitability bump. We naturally turn to CFOs to help improve costs but do we bend their ear about pricing? What
about discount incentives or pricing inventory for clearance, promotions, or incentives?

An experienced and strategically-minded CFO should have a seat atthe table when setting prices, discounts and contract-terms for your company.

2. Add Value First, Reduce Costs Second -This dovetails with the math of point #1. Instead of just seeking to take costs down by 10% (you shouldn’t stop trying to do that), also look to add value that will justify a sales price increase of 10%. What services an features can be added inexpensively? Added value equals higher margin gain. Customers will expect you to pass costs savings onto them anyway so look first at adding value, benefits, margins, such as more expensive warrantees before reducing costs.

3. Looking Under the Right Rocks (for Costs) – Most organizations will look to attack costs where they “feel” things are the most wasteful. Bad idea. You need to prioritize the search for cost improvements by tackling the largest dollar chunks in the product/service production and delivery stream. For example, if you produce a $100 product that costs $10 for assembly and $50 for key components, but you know your assembly has excess costs in it, don’t waste time in the $10 assembly system – go immediately to key components. Maybe you can shop for new component vendors or change the contract structure.

You can engineer-out more dollars attacking big items than you can in sweating out more efficient operations.

Why Independent Board Members Are Crucial to Strong Governance and Strategy

Board Management: Independent Board Members

As part of your Board Management activities, we point out that you’ll want to bring in an independent board member as soon as possible. This person should neither be a part of your team nor an investor. Independents can be an invaluable source of industry knowledge, but perhaps more importantly, can inject some much-needed objectivity into an environment that can become insulated. There is usually a cost to bringing on non-investor board members, but the potential benefits far outweigh those costs.

What is the benefit of having an independent director on my board?

There are two primary benefits to having an independent join your board. The first is described by the title “independent” because an independent director is presumed to provide a level of objectivity that might be missing in a group of insiders. Management may struggle to view issues and challenges objectively because they are often in the center of these discussions and rely on the company for their livelihoods. Investors might be influenced by events, good and bad, in their portfolios and might not be able to separate those issues from the governance of the company.

The second benefit is the ability to leverage deep industry or scientific knowledge. An industry veteran who can help the company through a financing or a partnership discussion can significantly improve the company’s chances of success. While someone with specific sector expertise, whether it is science or finance, can play a critical role in helping to guide the company’s strategy.

When should I think about bringing on an independent director?

Obviously, you need the resources to compensate these individuals, but you must also have broad agreement from the rest of your board. Being able to articulate the issues you are trying to solve and the benefits of bringing on an outsider will be key to convincing your fellow board members that this is a commitment worth making. Some companies are opportunistic and bring on a new director if that person becomes available and is willing to work for the company. In general, sooner is better so the person can have a greater impact on decision making and the company’s success.

Where do I find independent directors?

Once you have made the decision to at least consider bringing on an outside director, then you need to do everything you would normally do to recruit talent. Write a job description with input from your other directors on the role and expected compensation. Use your network to identify qualified candidates and if you are not getting the traction you seek, then you may have to consider employing a recruiter.

In summary, inviting an independent voice to join your team can be a huge advantage for your company. Make sure you build a consensus before you act and take great care to define the role and ensure that your new director is a good cultural fit.

How Much Should You Pay Your Board? A Guide to Board Compensation for Startups and Private Companies

Board compensation for directors of large, publicly traded U.S. companies has passed a threshold of $325,000 per year in total fees. What’s less clear is how directors at private companies and startups are compensated — a key consideration in your Board Management and compensation committee.

Elements of Board Compensation

Total compensation for all public and private company board directors can have any number of elements that may include:

cash retainers
per-meeting fees
full-value stock awards
stock options
signing equity grants
ownership grants, and
deferred compensation.

Large Company Board Comp vs. Small Public Companies and Startups

The differences in directors’ packages at publicly traded S&P 500 and Russell 3000 companies versus private companies and startups are significant. For example:

Cash Retainers and Per-Meeting Fees – Publicly traded companies generally have richer cash payments and annual retainers of $200,000 or more. In contrast, private companies and startups may either pay a per-meeting fee or a much smaller retainer. (See chart 1)
Equity vs. Cash – Equity represents the majority of total fees for public company directors — about 60% of total compensation versus 40% cash on average. Some startups may forego cash payments altogether and instead attract board directors with “real equity” in the form of stock options or restricted stock/units.
Forms of Equity – Public companies primarily provide equity in the form of full-value stock awards (i.e., fully vested stock, deferred stock, restricted stock/units) and, perhaps, small stock option grants. Private companies and startups, whose stock is generally not liquid and whose value realization depends on an event, such as an IPO or the sale of a company, will grant restricted stock or stock options.

According to Chris Thomajan, TechCXO’s Managing Partner in Boston, and author of The Board of Directors Management Guide for Startups, compensation for private companies and startups is considerably lower, as those directors face less risk and fewer disclosures and regulatory hurdles than their public counterparts.

“Early-stage companies should expect to pay $5,000 per meeting or $25,000 per year to your directors. That number increases the closer a company gets to an IPO and can be in the range of $40,000 per year for pre-public or public companies,” said Thomajan. “It’s worth noting that investor directors — your VCs — do not get compensated at private companies.”

Early-stage companies should expect to pay $5,000 per meeting or $25,000 per year to your directors. That number increases the closer a company gets to an IPO and can be in the range of $40,000 per year for pre-public or public companies

Investor directors — your VCs — do not get compensated at private companies.

Board Management eBook (PDF)

Non-Executive Board Members’ Median Compensation

[/fusion_title][fusion_table fusion_table_type=”1″ fusion_table_rows=”8″ fusion_table_columns=”6″ animation_direction=”left” animation_speed=”0.3″ animation_delay=”0″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility”]

Company ($ in Revenue)	Cash/Retainers	Per Meeting Fees*	Full Value Stock Awards	Stock Options	“Real Equity” or Long-Term Incentive Equity Grants
Large Cap Public	$200,000	$2500*	$190,000	1%
Mid Cap Public	$80,000+	$2000*	$140,000	1%
Small Cap Public	$70,000	$1500*	$120,000	2%
Private $251M – $500M	$50,000	$5000			1.2x cash retainer
Private $51M – $250M	$40,000	$5000			1.2x cash retainer
Private Up to $50M	$30,000	$5000			1.2x cash retainer
Startups	$25,000 or **	$5000			0.1%-.5%

All the Ways Board Members Receive Compensation

Board members receive compensation in the form of cash, equity, stock options, and, for startups, ownership equity grants. According to an FW Cook report, the average mix of compensation of cash to equity is 40% cash and 60% equity. Technology firms skew higher with equity representing more than 70% of total compensation.

Cash Compensation / Retainers – This is direct cash paid to each eligible director for their service. Most companies prefer a retainer-only structure versus paying a retainer plus meeting fees. As many as 85% of mid-size to larger companies prefer to have only retainers. Startups, however, may tend to prefer the cash plus meeting fee model.
Meeting Fees – Just as the name implies, board members are paid for a pre-set number of meetings per year (see averages below), and additional payments for more meetings may exist. Startups may only pay either a small retainer ($25,000 on average) or a per-meeting fee of approximately $5,000.
Equity Compensation / Stock Awards & Stock Options – Overwhelmingly, mid and large-cap companies grant an “equity retainer,” which is a full-value stock award annually. Most do not issue stock options to directors. However, some sectors, such as technology, provide both full-value stock awards and stock options.

Pay Differences Between Board Directors Based on Role

If you are an independent board member of a private company or you are a lead director or committee chair, more compensation can be expected in the form of additional retainers and/or meeting fees.

“Distinctions are certainly made for the specific role of a director. The chairman of the board or someone with relevant scientific or financial expertise, like an audit committee, might be paid more than a regular director,” according to Thomajan.

Independent Directors at Startups

Chris Thomajan, who has sat on more than a dozen boards, many of which are for biotechnology firms, is a strong advocate for attracting independent board directors as quickly as possible.

Unlike a company’s officers, such as a CEO, and their investors who sit on your board, independent directors are typically paid a combination of cash and equity for his/her services.

There are several ways to structure the cash compensation, but in general, the director is either paid a flat fee per meeting or a flat fee per year (paid quarterly) that assumes a certain level of commitment. He also said that while there is a cost to bringing on non-investor board members, the potential benefits far outweigh those costs.

“Independents can be an invaluable source of industry knowledge, but perhaps more importantly, can inject some much-needed objectivity into an environment that can become insulated,” Thomajan said. “Independent directors also expect to receive equity grants along with their cash compensation. The amount and frequency of such grants also vary by the stage of the company. However, an early-stage company should expect to grant 0.1% to 0.25% of equity with a vesting period of two to three years. Additional annual grants are also expected.

Making the Hard Decisions

Making hard decisions is one of several skills CEOs and CXOs must master in order to lead. The failure to do so can, at times, be deadly or crippling to achieving healthy growth and profitability.

Critical decisions are often difficult, perplexing, and very stressful. Making career-making (or breaking) decisions requires thought, deliberation, execution and follow through. Even the most decisive leaders can be thrown into a state of indecisiveness when faced with making career making or breaking decisions. There is no single approach serves well every time, but several key factors should be considered to ensure reaching balanced and effective conclusions.

People respond to the pressure of big decisions in different ways. Decision-makers often either rush to conclusions or develop analysis paralysis and decide too late to affect positive change and results. Finding a middle ground is difficult. How much time is needed is related to the magnitude and complexity of the decision.

Nick Saban’s career-defining move to change quarterbacks at halftime of the National Championship demonstrated key decision making principles.

Involve Others but Own the Outcome

Don’t make decisions in a vacuum. Involve your team and don’t rely only on yourself. Collaborating with trusted advisors and team members exposes you to differing opinions, assures a more informed decision and gives you a better shot at winning buy-in from those affected. Important issues, such as corporate strategy typically require input from several sources but, at the end of the day, needs to be decided by one person who accepts accountability for the outcome and not a group consensus of several individuals who have no or little stake in the consequences of the decision.

Trust Your Gut Reaction but Challenge Your Rationale

Your first instinct may be right, but is probably not based on detailed and rational thought and formal analysis. Question your initial reaction and test it with more data and analysis. Intuition is like a lightning bolt. Explain your reasoning to others because if not, others may not understand your thought process.

Be Open to Considering New Information

Don’t pre-judge the situation – forming an opinion early on in the process, based on preliminary information, and sticking with it despite what you learn later. Pre-judgment is when someone is referring to data or examples that support their point of view and disregarding data or examples that are inconsistent with it. Be a devil’s advocate and continually challenge your initial assumptions. When you find information that maintains your perspective, ask yourself whether there is a dissenting point of view that you need to seek out and consider.

Don’t Always Correlate Today’s Challenge and Decision with Your Past Experience

Human tendency is to make big decisions by correlating a current decision to addressing a past situation. Making these connections can serve well, but there are drawbacks as well. Relying on past experiences may not be relevant. Reasoning by analogy may lead you to focusing on similarities and ignoring differences between situations. This is often where problems and challenges may arise. Refer to previous incidents as data and context, but question how pertinent and useful they truly are in the current decision.

Be Aware of Your Personal Predispositions and Possible Prejudices

We all are presented situations where we have a predisposition – things we are attached to or our own subconscious self-interests. Making a decision because it will be easier to implement or because it is the one that is easiest and most popular aren’t good reasons. Focus on reaching a fair, balanced and best decision, putting aside your personal feelings and predispositions.

Don’t Close the Book When the Decision is Made

Decision making is not a perfect science. Many times, you don’t have complete information on which to move ahead with a decision. This is not a reason to procrastinate and remember, no decision is a decision. Continually monitor the situation closely and make necessary adjustments as the situation and circumstances change.

Take-Aways

– Own the decision, its outcomes and possible consequences

– Get others’ insights to better understand the various issues and points of view involved

– Recognize when you may be predisposed to a person or situation and ask a trusted advisor to check your possible prejudice

– Regularly review decisions you’ve made to ensure they are still valid, update as current circumstances dictate.

Don’t

– Rely exclusively on your gut instinct or unfounded initial reactions you have

– Ignore new information or insights, especially if they challenge your current point of view

– Assume the issue is exactly like past situations you’ve encountered and decisions you’ve made.

Rick Nichols, TechCXO Managing Partner
rick.nichols@techcxocom
678-480-8988

Rick Nichols is TechCXO’s Managing Partner for the firm’s Strategy, Sales & Marketing practice. See Rick’s full bio here.

Functional Roles

Industries

About Us