Entrepreneur Myths (17 page)

The retailers can make you or break you.

I was managing some of the largest retail accounts in America for Berkeley. One particular retail store chain controlled 40% to 50% of the entire entertainment software market. The entertainment buyer was unbelievably smart — and ruthless. She was young, only in her 20s, but knew her shit when it came to buying entertainment software. I took my marketing wizards and genius sales director to meet with her and she basically blew them off. She told them bluntly, she hated the package, hated the low price, wanted more market development funds, hated our retail marketing materials and was not going to pick up 10,000 units to start. There was no fucking way she was going to load up the retail shelves with our product. She said they might pick up a few thousand — for the entire holidays. The sales director and the marketing MBAs freaked out because she was the most powerful buyer of entertainment software in the entire retail channel.

You live or die during the holidays in the entertainment sector. Retail is a tricky and tough business because if you don’t put enough product on the shelf, you could be fucked when the customer goes to the store and the shelves are empty. Besides, replenishing the retail shelves is not as easy as people think — especially during the holidays.

Berkeley’s management team started to panic. Without good representation on the retail shelves of the largest retail player in the entertainment software business, you’re kind of fucked. What made it worse is that the second largest retail player in the business also hated the packaging. So things got worse, and the likelihood of having wide product distribution was looking grim.

This is a simple example of how difficult it can be to obtain retail distribution. You Don’t Know Jack did get on the retail shelf with decent exposure — but it was by chance.  A few weeks after the meeting, I ran into the buyer at the airport. We happened to be on the same flight headed to Las Vegas for a computer trade show, and she decided we should sit together. On the plane, we bullshitted about everything but business. We landed at the Las Vegas airport, and she invited me to go to the Cirque du Soleil show with her and her brother. We had a good time. Not once did I mention the product or pitch her on putting more You Don’t Know Jack on the shelves. After the show, she questioned me about the company and the product. I was brutally fucking honest. You see, I hated the packaging and pricing too. I told her so. I thought the price for the product should have been $39.99, because everyone could make more money at that price point, and the consumer was willing to pay that price anyway.

We were in Las Vegas for a few days and at the end, out of the blue, she came out and told me she would increase the order. I guess she thought I was a cool guy. Hey, I didn’t even sleep with her. Later, I became friends with her brother too. I lost track of them both, but I’m grateful to her for what she did. I can confidently say she helped You Don’t Know Jack become the brand it became over the years. One person with power in the distribution channel can make a big difference for any brand.

The moral of the story is that you need to have good relationships in distribution in order to successfully launch new products in the retail sector. Yes, you must have MDFs to launch the product in the retail store, but that isn’t everything. In the distribution and retail channel, it’s not what you know, it’s who you know. Otherwise, you don’t know
jack
shit.

When I look at investing into companies, I pay close attention to the distribution penetration of the product or service. I ask some of the following basic questions:

How widely is the product distributed? Is the channel happy with the product?

What are its returns from the channel if it’s already on the shelf? What are the marketing dollars for the channel?

What is the MDF ratio compared to its gross margin? Which channels are more profitable than others?

What is the return risk? Does the venture have enough marketing dollars to create consumer demand and get it off the fucking shelves?

Distribution is a pimp and retail is the go-go bar. Respect it. Pay attention to it or you will get fucked.

If you aren’t familiar with some of the terminology in this chapter, don’t worry, you can learn it from reading retail trade press or hiring an experienced distribution person for your products.

Brain Candy: questions to consider and ponder

(Q1)
If you plan to launch a product into the distribution channel, do you know what you’re doing? If not, did you hire the right salespeople internally? If not, did you find the right rep firm to sell it for you?

(Q2)
Have you determined the best distribution and retail strategy for your product or service?

(Q3)
Do you know how to discount your price to distribution so everyone in the value chain makes money?

(Q4)
Do you have enough marketing development funds for the channel to put the product on the shelf?

(Q5)
How do you plan to deal with the return policy?

(Q6)
Do you have a multiple product line strategy that will enable you to stay on the shelf?

(Q7)
What is your demand advertising budget (for the consumer) vs. channel advertising budget (for distribution channels)?

(Q8)
Have you tried getting feedback from the distribution channel in regard to your retail packaging, pricing or marketing?

Entrepreneur
Myth 26
| The best exit strategy is an IPO

The one question I ask at the end of an entrepreneur’s pitch for money is, “Hey, what is your exit strategy?” Ninety percent of the time they say it’s the fucking IPO. Yeah, baby, yeah, I’m going IPO. Rah, rah, rah! Just put in the money and you can ride my IPO train, is the mentality.

I never understand why entrepreneurs want to go public. I call Wall Street “Schmuck Street.” My business partners, past and present, will confirm my dislike for Wall Street. However, one of my favorite films is the movie
Wall Street
. I love it because it teaches you that there is no easy road to success — unless you want to have a career as a shyster-meister investment banker.

Theoretically and conceptually, Wall Street is a good idea, but human nature ruins it. Among many reasons, Wall Street was developed to give investors an exit strategy and to give companies a platform for raising more capital and making their equity liquid. But when the value of a company stock is based on (1) what people think and feel about the future of the company or (2) plain, snake oil salesman hype, then the founding principles and mechanics of Wall Street put everyone at risk. Wall Street is nothing more than a legalized method of gambling. Let me not get into the business of bashing Wall Street just in case I ever have to take a company public. I’ll leave the bashing to others, like Michael Moore.

If you’re starting your venture with the goal of going public, forget it. Focus on building the business, not going IPO. Building a business with a revenue mindset is more prevalent today than during the Dotcom Bubble of the early 2000s, and this is a major reason why the market dynamics are different this time around. When I ask a startup entrepreneur about their exit strategy, the response I look for is a simple, “How the fuck do I know? I’m focused on building a business that has customers, revenues and profits.”

It’s easy to bash Wall Street, but what are your options other than going public? Sure, there are exits for investors to sell their shares in the private market, like Sharespost or Second Market — but this could, and should, be regulated eventually down the road by the SEC.

Your options, besides going IPO, are simple: (1) acquisition by another company with stock, cash or both or (2) build a profitable and cash-flowing venture. The acquisition is your quickest exit. Nobody does this better than the entrepreneurs in Silicon Valley. They have the start, build and sell formula down to an art.

Wall Street is not the key driver of entrepreneur and investor exits for startups and emerging companies. The Silicon road usually takes a different route when it comes to exits.

On the average, the Silicon journey works like a computer program:

Code 1
: Silicon Valley entrepreneur starts a venture.

Code 2:
Entrepreneur raises capital from angel investors or self-funds the venture.

Code 3:
Once the technology has been developed and market acceptance proven, the entrepreneur goes to Sand Hill Road and raises money from VCs. This process is not easy. The entrepreneur might succeed, if they’re smart, persistent and a little lucky.

Code 4:
If VC funded, the venture builds market momentum, and the steam builds for everyone involved with the hopes of going IPO. (Of course, everyone hopes the venture will go IPO, but most Silicon Valley entrepreneurs know the reality.)

Code 5:
During the huffing and puffing of the IPO train, the entrepreneur or one of the venture capitalists involved arranges for the startup to be quietly acquired by a larger public technology company — providing a quick exit for the entrepreneur and the investors. In and out. It could happen within six to nine months. It’s a matter of being there at the right time. The entrepreneur must ride the technology market, whatever the technology, fast and furious.

Code 6:
The entrepreneur and investors receive cash and/or stock from the acquiring company, based on their ownership percentage of the company.

Code 7:
The investors exit quickly. However, the entrepreneur (1) stays with the acquirer for a set period of time; (2) cashes out some or most of their stock, after a set period of time; (3) takes some time off; and then (4) reboots and restarts the Silicon Valley journey.

This is the fucking reality more often than not. If you think you’re going IPO, baby, and believe it one million percent, then please don’t fucking tell me about it while pitching me for money. I don’t want to hear it. The odds are stacked against you, so why put pressure on yourself? Do you want me calling your ass every week asking when we’re going IPO? Just prove to me that you do want an exit sooner or later, because I want an exit — sooner than later.

The founders of YouTube were smart enough to build their venture and cash out to Google. If you plan on being acquired, then it’s best to be acquired by a company like Google, Apple, Facebook, Twitter, Groupon, Zynga, or did I mention Google? You know a company has lost its juice when the startups do not want to be acquired by it. The days of wanting to be acquired by Microsoft are over.

During my entrepreneur days running Futuredex, Google CEO Eric Schmidt spoke at our Futuredex/Worth Magazine investor conference in San Francisco. Hearing him speak, I decided that going Googlio was a better route than IPO. I could see, even back then, that Google was going to become a monster and another exit alternative for startup companies. I should have made it my mission to kiss Schmidt’s ass and create a big pipeline to take companies to him for acquisition. But I didn’t.

Silicon Valley is like Mother Nature

Entrepreneurs in Silicon Valley know how to churn and burn. Here’s a tale of classic Silicon Valley success. Some years back, there was a venture founded by three people. This company struggled for some time and then took off like a fucking rocket. They hired their first sales and business development person — which happened to be me. They already had some revenues, but I took them to the next level of sales in nine months. When the market was at its highest on Wall Street, and contrary to other people’s advice, they sold their private company to another public company. Shit, they were printing money when they were acquired, but still chose the Googlio road of acquisition.