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Here’s your program
Andrew: Hey, everyone. My name is Andrew Warner. I am the founder of Mixergy.com, home of the ambitious upstart here today for you with an interview I can use myself. Big question for today is how do you make sure that what you’re building is a real business instead of just creating an overwhelming full-time job for yourself?
Today’s guest says you can do that by building your business with the company’s sale in mind. John Warrillow transformed his company, Warrillow and Company, from a boutique consultancy into a subscription-based business with the recurring revenue model. Then, he sold it in 2008 to The Corporate Executive Board. Today he has a new book out called “Built to Sell.” There it is right there, “Built to Sell,” which shows founders how to turn their businesses into companies they can sell. John, welcome to Mixergy.
John: Thanks, Andrew.
Andrew: So where are you now, by the way?
John: Well, I’m actually in our home in a little place called Aix-en-Provence which is in the south of France. It’s getting a little darker here than it is where you are, I was thinking, Washington DC.
Andrew: Right.
John: Yeah. We moved here, I guess, it was the year after Warrillow was acquired. We just kind of wanted to have a fairly big life experience. I was in one of those businesses, I don’t know if you can empathize at all, but where everything sort of came down to serving clients and it was very hard to get myself personally out of the depths of the day-to-day running of the business. And so, I just decided if I was ever able to sell the company that we’d move, and I’ve moved here with my wife and our two young kids, and we’re enjoying life over here.
Andrew: Oh wow. Congratulations. I’m trying to think of where to go first with this. Actually, you know what, maybe, we’ll go with a little bit of your background, and then I will get into the book because, as I said, I needed it. I told you earlier today before we hit the record button on this, I’ve been freaking exhausted. I don’t know how to manage it all, and I think part of the problem is that, well, I’m doing the same things that the character in your book in “Built to Sell” has done.
As an entrepreneur, it’s very easy to get carried away doing it all yourself and creating a business that doesn’t have much of a structure. Anyway, I said I read this with a need in mind, and I’m coming into this interview with that need in mind. I love the book, and I need its help. But let’s tell the audience a little bit more about you before we get into what you wrote about.
John: Sure.
Andrew: So, the consultancy, Warrillow and Company. What did you guys do before, and what was life like before the transformation?
John: Yeah. We were a classic, kind of consultancy, a research company that did all kinds of projects, focus groups, telephone surveys and the like. What we found or what I found personally is that because we did so many different things, I was asking a lot of my staff to do things that were way out of their comfort zone, way out of their experience.
And as a result, I became this kind of control freak where I needed to look at everything before it went to a client. Of course, that worked fine when the business was small, and we grew quite quickly in the beginning. We went from, I think, $150,000 revenue to $300,000 revenue, $750,000. We were doubling every year, and then we hit this plateau at $3.3 million in revenue, and we could not get beyond it.
I remember year after year, three consecutive years, we tried to get beyond this $3.3 million in revenue, and I couldn’t figure out what I was doing wrong. I realized after the fact that it was because the business was so bottlenecked at me. The reason it was so bottlenecked at me is because I was doing way too many things, and as a result I was really trying to control things way too much.
And so, we streamlined a lot of the things we did. We went from offering hundreds of services down to really one subscription that enabled us to punch through that revenue ban. We hired a sales team and scaled up the business. That’s the short story on where we come from.
Andrew: What’s the one thing you focused on and built the subscription around?
John: Yeah. And this is what I encourage anyone listening to this to do. I just plotted my services, all of those different services, on an access, X and Y access, one for teachable and the other for valuable. So teachable stands for just how teachable is that service to other people, or was that dependent on me or one of my senior members of my team to do it? So how teachable was it, number one?
And number two, how valuable was it to clients? In other words, how commoditized was that service? If it was highly commoditized, lots of people doing it, replying to our RFPs it would score low on the value criteria. If it was highly unique, it would score high. Once I scored all of the different services on teachable and valuable, the third thing I did was just eliminate anything that was not recurring because acquirers, I mean, if you’re going to build a subscription model, obviously there has to be a recurring element to it.
But really, acquirers look for businesses where there’s going to be a stream of revenue after you’re gone. So it’s important to find one service that meets those three criteria. It’s got to be teachable, valuable and really importantly, recurring or repeatable.
Andrew: So what’s the one thing you found that had all three criteria?
John: In our case, we focused on a subscription to our conferences and research. It was like a magazine subscription where every month you would have a series of research reports and conferences that you could attend. In our case we had a series of big company subscribers who subscribed to this package, and they were able to send various executives to the various conferences that we produced, but it was on a subscription basis.
That’s probably one of the biggest things that I can sort of reinforce entrepreneurs as to how important recurring revenue is, and it doesn’t have to be subscription revenue. I talk a lot about subscription revenue because I believe in it, but you can also think about it from the standpoint of membership clubs.
I love red wine, and so I’m a member of a red wine club, that I get a bottle of red wine once a month. So they know that they’ve got me for the next year and probably for the next ten, come to think of it. Where it’s a membership program as long as they can kind of keep me as a member and the hundreds of other members that they have. An acquirer can look at a business like that and say, yep, that’s a revenue stream that’s going to continue.
Consumables also work in a similar sort of way. You’ve heard the example of the toner cartridges, the consumable element of printers. The printer is great, but it’s a one time purchase. So the consumables, the cartridges gives you a recurring revenue stream which, again, that’s really what an acquirer is going to look for is where is the revenue going to come from after you’re gone.
Andrew: John, as you’re talking about taking all the different . . . first of all, the repeatable subscription model makes a lot of sense to me. I agree with it, and I want it, but as you’re talking about paring down all your offerings to just one, that started to make me nervous because I imagine as an entrepreneur listening to me or even me, myself, we add a lot of products because we want to grow our revenues.
And we’re worried that if we pare down from two to one or from 100, I think you said, to one that we’ll lose 50 percent or 99 percent of our revenue, and it’ll look like we’re shrinking as an organization. So, we’ll resist doing it. Why should we do it despite those concerns?
John: Yeah. You’re not alone, and I did the exact same thing. The first subscription offering I made actually was a failure. It was back in, I think, 2001, and I was in the same boat as you. I was saying, well, I’d love to get the scalable subscription revenue going, but on the other hand I don’t want to shrink as a company, and we want to make sure to continue to grow. As a result I want to continue all of these other services.
I went up to the market with a subscription offering, and I found that customers and employees really didn’t take me seriously in the subscription model because they knew I was offering both. I was kind of half pregnant, as the expression goes. And as a result, they kind of said, oh, that sounds interesting, John, but really what we’d like is our customer project over here.
I think until you show the market that you’re committed, the market’s going to react to that and know that you’re really not. I think that, in fact, once you figure out one thing, you can actually grow much more quickly than if you could if you are selling lots of things. At least, in our case that was the case primarily because once you focus on one thing, you can stop doing all the selling yourself.
Again, what I found when we offered many, many different services, a lot of the sales came down to me or to my senior team. It was very hard to hire sales people because it took years to search, train them on what we did, and by the time they were trained they’d leave. But once you’ve had one thing, sales people thrive on repetition.
And so, once you’ve got one thing packaged like a product, you can hire a sales team. That’s really the secret to scaling up a business in my view is separating yourself personally from doing a lot of the selling. It’s not until you kind of narrow your focus that you can actually start to hire sales people. At least, that was my experience.
Andrew: Okay. I want to ask you about that in relation to the book, but first I should explain to people that the book is kind of like a story. It’s not a business self-improvement book the way that we expect it. It’s the story of a person who’s an entrepreneur who’s going through the issues that I’m talking about, that I’m facing right now, a business that depends on him, that’s overwhelming him. He’s actually in a situation where I think he’s even losing money which fortunately I’m not there, but I can understand the stress of being there for him.
You take us through his story and we see how his mentor, Ted Gordon, helps him rethink his business and get out of it. In this case, you’re like my Ted Gordon here in this conversation, my audience’s Ted Gordon. Now, when Ted though walks Alex Stapleton, the lead character, through the process of finding the one thing, it happens in a matter of a page or two. Here, you and I in this conversation talk about finding the one thing. In a paragraph or two you told me how you found your one thing.
How does someone in my audience who is doing multiple things and whose revenue is depending on all of those things find the one core thing that’s so powerful that it’s worth more in revenue than all of those other things combined? How do you get to the one?
John: Yeah. It’s a great question. I think it comes down to applying things on a teachable, valuable, repeatable, and I think what you’ll find is that some of the things that are most teachable are least valuable, right? They’re the most commoditized on the market but it’s easy to teach someone to stuff envelopes, but nobody’s going to pay for a service like that.
Likewise, the things that are kind of most valuable, often rely on you personally. And so, it really comes down to finding that the sweet spot… It sometimes is usually a compromise of both of those two. It’s usually not the product that’s on either end of the spectrum, but it’s a compromise. And it’s often a bundle of things. So it’s often a package where you include both the product and a service that you can bundle together into something that is incredibly compelling to your audience.
In your case, obviously, the Mixergy interviews are so very special, so you could argue that that’s really the subscription, but maybe there are other things that if you screened it with some access to Andrew and some access to live events, you start to build a really compelling package that’s not available anywhere else. So I think oftentimes it’s an iterative process. It’s not something that you could do over one brainstorming session, but you’re really looking for something that gets you to the top right-hand corner of that access way back teachable and valuable on either ends of the spectrum.
Andrew: I see. So, I just keep looking for something that’s teachable, valuable and repeatable, and it’s not going to come in one session. It’s not going to come on my first attempt, with the first thing that I launch, but it’s a process of getting to that, to that one thing that satisfies the criteria.
John: Sorry, Andrew, to interrupt. I think you’re absolutely right. One of the things that I would encourage people to do and as I explain it in the story, is put together a rank order list of your best prospects, let’s say, your Christmas card list, 200 folks that you’re in touch with. And rank it from most valuable customer or prospect to least. I think we’re tempted to go to our most valuable customer with our new offer and say, oh, isn’t this great? Look at this new offer. Don’t go to your best customer first.
Start with the 200th person on your list and start to hone your pitch and see what resonates because my experience is the first ten pitches are going to be a waste. It may be the 11th, the 20th pitch that you start to get a sense of what customers think is most teachable and valuable and most relevant to them. So I think, starting from the bottom of your list, honing your pitch, getting up the list you’ll find that you’ll land on something that I think is going to be compelling for your customers.
Andrew: Okay. So a lot of my people in my audience aren’t in your business. They’re not in the interview business either. I want to make this relevant to them. Let’s pick another industry that they might be in. They might be running a dev shop, a shop where they develop websites for other people. A lot of it, maybe, depends on them, their guidance, their work, and they want to push the business beyond them so that it’s actual business and not a full-time job for them with a lot of assistance.
And so, what they would do is, maybe, go through their prospect list and, like you said, go down to the 200th most valuable person and pitch them on one system. In the book Alex comes up with, I think, it’s a five step logo creation process for his business, right?
John: That’s right.
Andrew: And that’s the first thing he pitches. They need to come up with some kind of systemized process that they would sell to someone else and think of it more as a product than a service that they’re pitching. Pitch it to the 200th person, get turned down, go to the 199th most valuable person, get turned down but improve until you get something good enough to take to your lead customer.
John: Yeah. I don’t mean to be dogmatic about my response to your question, but my advice would actually be in the form of a question back to that developer who develops websites and says, do you want to be a website developer, or do you want to run a business that develops websites? And I know that sounds similar, but there’s actually a really big distinction there. One, you’re doing the work and in the other case you’re actually building the company that does the work.
If you’re going to do the latter, i.e. build a company that develops websites, you’ve got to hire people to develop the websites. If the business relies on your expertise, your creativity, your brilliance, there is no business. It’s really just a job that you happen to file a tax return through the IRS, through the business form of the IRS.
What I’d encourage you to think through is how do you actually create something that other people can deliver? That means dumbing it down to a system where you’ve actually got people doing the work other than you, the subject matter expert. The other thing that I think, to go back to the idea of subscription business and recurring revenue, is to think through, is there a way that you can start to educate your audience as a value proposition as opposed to doing the work?
So, for example, the Internet web developer that you talked about, is there a way that they could morph themselves into an education business so they’ve got some unique, creative way to develop websites? How could they create a revenue generating arm of the business or morph the business to actually educate people?
I’ll give you two quick examples. Nancy Duarte, the woman who created Al Gore’s “Inconvenient Truth” slide deck, she was in the business of creating high end Power Point presentations. It couldn’t scale beyond her. It was just her frustrating business to be in. She got in the business of actually systemizing, how do you create a great Power Point presentation? She wrote a book, and now she has scaled up to 83 employees that go around teaching Fortune 500 Company executives how to give great presentations. She’s not creating presentations anymore. She’s running a business that actually educates people in how to create presentations.
Another quick example, a guy up in Whistler, British Columbia, a snowboard instructor, he was creating little videos of how to actually . . . well, first of all he teaches how to snowboard, and he wanted to scale up his business. And so, he created these video downloads of how do you do certain tricks? He’s selling on a subscription model now, and as a result he’s been able to scale his business up. But he’s not doing the snowboarding teaching anymore. He’s now got these DVDs and these downloadable videos that help people learn how to snowboard and do new tricks.
Andrew: All right. I’m thinking of this. This makes a lot of sense. I’m thinking of the listener going into the office determined to do this, and then he’s going to have a situation like Alex had, the smoldering fires as you said in the book, “Built to Sell”, where someone comes up to him and says, we need to renew the lease on the copier. Another person says, I need help with this design over here. A third person says that they need help with something else, and then before long, bam, he’s right back into where he was because there’s no time to adjust. What do you do in that situation?
John: It’s a great question, and, I mean, when you’re making such a radical change as I’m suggesting in the book to your business, there’s going to be bumps in the road. What I think’s important is you really focus in on your cash flow statement as your number one operating statement. And to some extent, put your profit and loss statement on the back burner and really for your number one, kind of key performance indicator, focus on your cash flow because as long as you have cash flow you’ve got the fuel to make some of the changes that I’m recommending.
One of the things that I think will benefit listeners, if they apply some of these lessons, vis-Ã -vis cash flow, is if you do create something that meets those three criteria, teachable, valuable and repeatable, you’ll find that you’re able to change the dynamic of the conversation around how you get paid because if you’re in the web development business and you’re offering a service, you’ve got to actually develop the website or a large portion of it before you can send the invoice. You’ve got to wait 30-60-90 days to get paid. You’ve got a negative cash flow cycle, and not only is that stressful it also devalues your business.
So what you want to do is flip that on its head and get paid in advance. We’re used to paying for products before we use them which is one of the reasons you want to actually productize your service so it looks like products. Grab a bottle of Tide from the grocery store and look at how they package it. It’s got a name. It’s got directions for how you use it. It’s consistently, always… It’s got cautions, how not to use the product. All of these things make it feel like a product and allows them to charge up front before you take it out of the store.
So I think once you productize your service, if that is what you’re in the business of doing, you’re able to charge for it up front. You know, the wine club I referenced I’m a member of, $200 I paid for it up front for the entire year because I feel like it’s a product as opposed to a service, like window cleaning where we’re all used to paying after the service is rendered.
Andrew: Okay. I see what you’re saying. I’m trying to think, does that address the issue fully or not? I’m trying to put myself in my audience’s shoes and say, all right, they get paid up front. So you’re saying then that they take this money, and they use it to hire people that will solve these issues of the copies that needs to get renewed, of a client who’s complaining about a problem for the last month, and another one who’s demanding new service for next month.
John: No. But it gives you the confidence to make the changes. If you’ve got cash in the bank and your bank account can finance the changes you’re trying to make, you’ll have the confidence to hire the people you need to hire, let go the people that don’t fit the new model, and invest in the marketing you need, invest in the sales people that you need. As humans, we all need the air to breathe, and so you take the cash out of the business and nothing else matters.
As a result, at least, in my case when we had cash flow concerns, nothing, not strategic stuff, I didn’t care. All I carried about was getting cash in the door. So that was really, I think, the essence. It doesn’t eliminate the issues of the photocopier needing to be renewed or the employee that’s threatening you to leave unless you give them a raise, but it just gives you the confidence to implement these bold changes.
Again, most businesses today aren’t really sellable because they’re so highly dependent on the owner. It does take a fairly significant seat change to make them less dependent on the owner, and making those changes requires a strong stomach. I think having the cash in the bank does give you the strength that you need to make some of the big changes.
Andrew: Is what we’re talking about here just related to service businesses, or do product businesses have a lot of these problems, too?
John: They sure do, and in the case of product businesses, the big concern about product businesses is they get commoditized. Once a product, like a pen, exists, that’s a commodity product that can be ripped up and produced by many manufacturers and for the lowest price. Then, the game just becomes kind of an issue, kind of a race to the bottom in terms of pricing.
So if you’re a manufacturer of a product, the key is to actually differentiate your product so that it is a solution, in other words. I hate the word solution, but I can’t think of a better word, but basically packaging a service that a product makes it something unique in the marketplace. And so, I think all service businesses need to be productized, and the inverse, I think, is also true that all product businesses need to be servicized.
And so, it’s actually the creation of the two that gives you the uniqueness and the platform to build a sellable business. An example of this is probably a good example of that. Retailing shoes is the most commoditized business. Every mall has 15 shoe retailers, right? But Zappos build a $900 million company. How much Amazon bought them for by adding service, i.e. two way return guarantee into their business model. They take a commoditized product and don’t just hawk shoes. They say, OK, what are we going to do to build the trust of our customers, and they offer the two way guarantee. And so, it’s really adding service to the product that gives you the complete whole egg, if you will.
Andrew: Hey, how much in revenue did you get to after you made the switch? You said that you had a point beyond which you can grow when it was a service business. When you made the switch, how did it grow?
John: Yeah. So we started to grow between 25 and 50 percent a year. We went from… At any one point in time a dozen customers who we were sort of on a regular basis to, to over 200 subscribers all of which were very large Fortune 500 companies. So those were some of the operating statistics that we were able to achieve.
Andrew: What did the revenue get to after you made the change?
John: The actual revenue was, let me see, three and a half… I can’t remember the exact numbers that we went to four and change five et cetera and on from there. The actual deal, before the company was acquired, it’s not a public deal so I can’t talk specifically about the revenue profitability when the company was acquired. But I can tell you that we started to grow fairly significantly after we made the changes.
Andrew: Well, all right. So after a long time of not being able to grow, I think, beyond $3.5 million, you suddenly were able to shoot up. Was it sudden? How long did it take for you when you cut out your services to recover the revenue to get back to $3.5 million?
John: We actually, I’m trying to think. It would have been . . . the year we made the change, and I think this is the same of anyone that will make this change, was a down year in terms of revenue. But after the second year, I believe we started to grow after the second year especially if you’re going to go to a subscription model. The way an accountant will tell you to account for either a subscription model or a membership model or any sort of model where customers agree to a long-term agreement. The accountant will tell you on a profit and loss statement to spread that revenue out during the time of the agreement.
As a result, if you sell a membership to your wine club in April, if it’s a one year subscription, you’ve got to then take 1/12 of that revenue and put it in each of the next 11 months after the month that you sell it. As a result, on your profit and loss statement you’re actually going to recognize all of the money that you got, only 1/12 of the year actually becomes a negative on a revenue standpoint.
But then, after that when you go into year two, you go into the year with revenue on the books. That’s a real luxury for a lot of business owners. Most business owners, every month they’re recreating themselves, and when you go into business, into the month with revenue on the books, it’s a good feeling.
That’s why I say in the first year, kind of ignore the profit and loss statement because you’re going to get discouraged if you’re looking at revenue numbers go down. It’s really just mathematics. What’s important is you’ve got the cash in the bank to finance the change, and if you’re charging up front, you’re productized on a subscription business, you’ve got the cash to make the strong change.
Andrew: Recurring revenue just keeps coming up over and over and over in my interviews. It’s not as easy to get recurring revenue, I don’t think, as it is to get one time because from what I’m seeing in my own life and also my customer’s experience, people are afraid to lock themselves into a recurring payment process because they’re afraid that maybe tomorrow things will change. Or they’re afraid a year from now they’ll look back and that they’ll realize that they forgot to cancel, all of those things. How do you get someone who has all of those legitimate concerns to sign up for recurring membership expense?
John: Well, I think part of it comes down to sort of what the proposition is and how serious you are about recurring revenue. For example, when the iPhone 4 launched. AT&T said the only way you get the iPhone is if you sign up for a three year deal. that’s a contract. Their stock price goes through the roof every time they put another thousand subscribers on the books, but they were willing to be firm with their customers and say, we’ve got the shiny new ball. You can’t have it unless you sign up.
That’s the kind of thing you need to do if you’re a disciplined company and you have something really unique, and certainly making customers sign up for that, I think, is worth doing. Iron Mountain, for example, has their subscription business where you store your documents with Iron Mountain, and they just keep billing you once a month because the proposition of actually losing your tax documents or losing important files is just too important to not want to have them protected.
And so, they’ve got a very compelling value proposition, by far the largest in the marketplace, and people are confident in them. So they’ll go there with them. Part of that then, it goes back to idea that we were talking about in this conversation which is finding something that’s not commoditized because that changes the dynamic of the relationship you have. In our case when we were doing all kinds of different things, we’d do focus groups and focus groups are RFPs and RFPs in a sense, 15 companies bid on the work, and it gets ground down on the lowest common denominator in terms of price.
Well, that’s not a model that you can then turn around the say, oh, and we want a subscription model. But if you do one thing and it can’t easily be replicated by your competitors, that’s when you’ve got much more, if you will, power and dynamic with your client base. And you’re able to actually drive the terms that you want as a business owner.
I think, again, I don’t want to get to going on my high horse, but I think as business owners we have listened to way too many customer service gurus telling us that we have to listen to our customers and respond. And I get that, but at the same time I think that there are examples. I mean, Steve Jobs, comes to mind where you’ve got to lead the market. The market’s not going to say, I want a thousand songs in my pocket. MP3s were out many, many years before the iPod, but Jobs said, no, if we develop it right and we make it easy enough to use it, and we make it attractive, make it sexy people will want it.
And so, I think it’s incumbent on all of us as entrepreneurs to listen to customers but also to lead customers and to say, I know they will want this. I know they will like this if we build a really elegant solution. So, again, it comes back to not commoditizing yourself, to really developing and leading the market.
Andrew: And one of the things that we want to offer our customers is what’s called the standard service offering. What’s a standard service offering?
John: It’s really the package of how you go about offering your service. I’ll give you an example. There’s a guy named Jim Vagonis. He runs a company called Hassle Free Homes. Jim was in the business of helping people keep their homes up, regular maintenance, toilets running, light bulbs need replacing, and he found that customers were willing to actually buy and sign up for an annual subscription to his services that they would preemptively manage a home for you.
So they’ll come preemptively and change your furnace filter or rake the leaves or figure out when your pool needs to be open in the springtime. That’s a standard service offering, when you go from answering the phone and saying how can I help you to offering one thing on an annual subscription basis that customers buy. And so, at Hassle Free Homes you buy it on a subscription. It costs you a fair chunk of change, but you also get peace of mind that you know that your house is going to be well maintained and protected through the life of its relationship with the company. So, that’s what a standard service offering is.
Andrew: The reason we don’t end up with that in the first place as entrepreneurs is that customers come to us early on and say, we need this and we say, ah, OK, I’ll give it to you. And then, another customer comes over and says, I need that and now you have this and that. And then, another one comes over and says, I need a third thing, and you’ve got all three and so on and so forth.
Part of that feels like a big mess in the end for the business, but another part feels like you’re hunting for that one thing that customers are really going to love. How do you do it right? How do you keep yourself from adding too many things that people depend on and at the same time open yourself up to experimenting and finding the one thing what customers are going to absolutely love you for?
John: I think part of the answer . . . I’m laughing because I know you know this world so very well, just by your questions. They’re so good, and you’ve obviously lived this yourself.
Andrew: Thanks.
John: So that’s why I’m laughing. I think one thing that you can do is equally as important as your profit and loss statement and your cash flow statement. Start to write as evaluation statement for your business once a year. At the end of the year, sit down, maybe, sit down with a mergers and acquisitions professional. There are a number of tools out there, but sit down and figure out what your business is worth because there’s good revenue and there’s bad revenue.
Good revenue is revenue that’s scalable. It’s not dependent on you. Bad revenue is may look great on a profit and loss statement, but if you’re the guy or the girl or the woman having to develop and do that project, it may give you a short injection of cash and profits, but it doesn’t make you a valuable business.
I think having the reminder annually, semi-annually if you need it, of just having an evaluation statement for your business, having a third party emanate it, a professional. Take him to lunch. It’ll cost you just the lunch, just an opinion on hey, this is what I’m doing. What do you think my business is worth because I think what you’ll find is that will drive some of your decision making?
Again, you don’t necessarily have to want to sell your business to actually have a business that you can sell. Those are two different things. Having a business that you can sell is something that is able to be scaled up, able to grow, that’s a valuable asset. That’s different than necessarily wanting to go sell your business tomorrow.
Andrew: All right. Here’s another thing that I’m concerned with for my audience. A lot of these guys I think about who are going through these issues, I want to talk to them directly when I email them. I don’t want to talk to their assistant. I don’t want to talk to someone else. I love that I get to talk to the head of the company. I’m thinking. Let me come up with a good example.
All right. Here’s one, David Cohen of Tech Stars. Entrepreneurs have told me that they will email David Cohen or call him up and ask him for advice, and he will be there to give them advice. He’s the guy who runs the investment company. Tech Stars is the guy who incubate these businesses. They want to go directly to him. I think that’s wonderful for the entrepreneur, but then what happens to David or what happens to entrepreneurs in David’s position?
Can they hire assistants and say, hey, you know what, I’ve got an intern here. I can’t answer your question. My intern’s going to answer your question, or this other person is going to answer your question. How do they at some point…
When people come to Tech Stars looking for David, they want David. When people came to Warrillow and Company, they wanted John Warrillow. They wanted the guy whose name was on the door. Same thing is going to happen to my audience.
John: Yeah. It gets back to the issue, do you want your ego stroked and feel important? Do your people want me and I solve problems? All those things are wonderful, but it’s not helping you create a business that you can sell.
Andrew: It’s not that we want that. It’s that they want that.
John: Sure. And that doesn’t mean that you have to give it to them.
Andrew: Okay. So what do we give them instead?
John: Well, a process. You say, we’re going to give you a thousand songs in your pocket. We’re going to give you a hassle free home. We’re going to give you a template and a tool on how to create presentations, like Nancy Duarte. Nancy Duarte is no longer creating Power Point presentations. She wanted badly enough to scale up an 82 and 83 person company because that was important to her. It was more important than having her ego stroked by someone who’d say, wow, Nancy, you built me a great PowerPoint presentation.
Again, I think as entrepreneurs you’re right. We all have, to some degree, ADHD. We all like the shiny new ball, and we all love that feeling of being important. And I think serving the customer and getting that atta boy, slap on the back, saying great job. Those are all good things, but that doesn’t necessarily mean you’re building a sellable company. And so, I think that’s really the distinction. It’s a hard reality, but asking yourself, is what I’m doing today building profit, or is what I’m doing today building a more valuable company?
That can often be the same thing, but more often than not they’re actually different. The things that you would do to create a valuable company are again different but just necessarily short-term profit.
Andrew: All right. What about this, John? For the stressed entrepreneur who’s taking everything on and everyone wants to work directly with him, he’s giving great quality. His name is on the door. His name’s on the product. Everything is up to his criteria, up to his standards. The future that we’re talking about for them is a business that operates around a standard service offering that people who offer it are experienced and are offering it, maybe, better than the entrepreneur.
Between the now and the then, there’s a middle period where people are just figuring it out, where the new people are trying to get things right and they’re screwing up. Where you’re trying to figure out the right service offering and you’re getting it a little it wrong. In that process, you’re really risking your reputation, a reputation that you’re counting on to be there in the future when this whole process is up and running, and people are buying the process not you. How do you avoid that, that problem?
John: Yeah. I mean, I think it can be in shades of gray to some extent. It can be an evolutionary process. So once you lay out the solution, in the case of Jim Vagonis at Hassle Free Home, we’re going to come and fix your filters. Maybe, in the beginning Jim fronts it. In the beginning he takes the customer’s phone call. He goes and visits with the customers, but then he hires someone to change the filters and hires someone to do the pool and hires someone to rake the leaves.
Over time, maybe, he gets himself out of having to do the first consultation and just answers the phone, and over time he’s able to get someone else to answer both the phone and do the first consultation. So I think it can be an iterative process where you’re delegating the most time consuming, least valuable tasks over a period of time, but it comes down to having, again, to having a process so customers know that steps one, three and nine you’re going to get Jim or Andrew or John. In steps two, three, whatever you’re not.
Unless you lay out the process and tell them what they’re going to get, they’re going to expect you. At Warrillow, my name was on the door. They’re going to expect me unless I proactively tell them they’re not going to get me. If your name is on the door or you’re a very vocal entrepreneur, people kind of buy your expertise, the minimum expectation they have is that you’re going to be there.
If that’s the case, change their expectation in the beginning by laying out a set of processes, a set of steps, again making it clear that you’re involved in certain steps but not all the steps.
Andrew: I’m looking back here on my notes. Let’s see what else I’ve got to talk to you about. By the way, you’re an interviewer yourself. The way that you and I met is you write a piece for Inc Magazine. You interviewed me for that piece, and I tried to get you to come and do an interview here, and you said, wait, wait, we’ll get the book. I admire that because you had the patience to say, Andrew, not right now. I feel flattered that you want to interview me, but I’ve got a plan here. Let’s stick with the plan.
Why do you do interviews? Why do you do interview for Inc? Why do you do them at all?
John: Yeah. It’s probably the same reason you do. I read a few of your background. I think it’s just the greatest education. I think number one, I think entrepreneurs are the most fascinating people in the world. If I were stuck on the side of Mount Everest, I’d want an entrepreneur to help me get off the side. I think they’re tenacious, pragmatic, pull yourself up by the boot straps, stop complaining, get it done kind of people, and I just love being around them.
I think I’ve learned more from interviewing. Before the Inc stuff, I produced nationally syndicated radio shows, so I’d hate to say, hundreds of interviews with entrepreneurs. I just really like the way that entrepreneurs think, and I just consider it a privilege to be able to share time with them. It kind of energizes me, I think.
Andrew: Is there a way to systemize interviews? By the way, I want to make sure I’m not looking to out source the interviews here. I’m not looking to systemize them. It’s everything else that goes into putting Mixergy that’s exhausting me. The interviews themselves are a freaking load of fun. I love ’em. Is there a way to systemize the interviews, to systemize them even a little bit?
John: Please? Again, I think you want to apply a process and say, OK, what’s involved in getting an interview? There’s the whole research that you’ve got to go through to get somebody that you want to talk to that’s interesting. There’s the process of getting in touch with them. There’s the process of convincing them why they need to be interviewed. There’s the whole logistics around getting the call set up, et cetera.
And you’ve done a great job with Tristan to actually get her involved in a lot of the work and, maybe, you have a lot of other people doing some of the work. So I think the actual live interaction, I’ve seen some of the interviews that you’ve done, you ask poignant questions and you obviously sat in the shoes of the people you interviewed. So that’s the tough part. It’s going to be tough to out source. But all the other elements you can certainly interview.
And, again, I’d come back to the issue of why you do what you do. If doing interviews is something you do naturally, then maybe it’s not a business that you want to scale up. I’ve heard the expression that the worst thing to do is turn a business into a hobby because it ruins the hobby. I don’t know that I’d go that far. I think a lot of business ideas come from hobbies, but again if you love horseback riding, bad example, but if you love horseback riding, then starting a horseback riding company is probably a pretty quick way to lose that passion in your life. If you love horseback riding, I bet you know products that you can sell, ways that you can deliver service because you’re so deeply entwined in that industry.
Quick example, I’m a runner. I have a pair of shorts. In the back they have a pocket for power gels. No other running shorts I can find have the pocket in the back. They always put them in the crotch, and you have to kind of reach down in your crotch. It’s a disaster, right? So you put them in the back. I cannot find, for the life of me, another pair of these running shorts with the pocket in the back. Because I’m a runner I know that, and I’m tempted to start a business that creates endurance athletic gear with the athlete in mind as opposed to somebody who’s kind of a marketing manager at a big company.
That’s an example of not turning my passion, running, into a business. I’m not teaching people how to run, but it’s also an example of where oftentimes the best ideas come from. It’s your very own life.
Andrew: I see. Yeah, a lot of Nike pants have that little pocket right in the front. I’m not even talking about the sides. C’mon, in the back.
John: There’s important equipment down there.
Andrew: There’s one company that does that well, only one, and I don’t know why Nike hasn’t copied them. It’s called RaceReady.
John: Oh, how about that?
Andrew: You never see them in stores. You’ve got to find them online. They make several pockets in the back for the gels, for anything else, but they put them where they need to go. It’s called RaceReady.
John: I’ll check it out. Okay. Great. You solved my problem.
Andrew: I wonder why Nike hasn’t copied them. I’m also going through my list here and seeing that there’s some kind of basket of goodies that you’re offering people. I’ve got a note here to ask you about that. What is it?
John: Yeah. So “Built to Sell” the second edition. The one that actually you’ve been holding up which is the first edition which I’m grateful for you to show. The new edition has a slightly different cover on it, so don’t be thrown by that. It’s still called “Built to Sell.”
Andrew: Okay.
John: But it comes out on Thursday, and I’ve actually developed what I think is a cool little basket of goodies. I think that if you order a copy this week sometime you get a complimentary subscription to Inc Magazine. It’s an annual subscription. A BizBuySell evaluation report to get a sense of what your business might be worth. We’ll do a two hour conference call together.
We’re going to do a key balloon for everyone who actually orders a book this week and an eMyth eBook which is a special eBook that the company behind the book, the eMyth, has developed really around building a valuable company. So that’s not available publicly. It’s just for the folks that order the book this week.
Andrew: The book, the cover price is like, $24, $24.95. It’s cheaper on Amazon. You’re saying… It sounds to me like you’re giving people more money than they’re spending on the book.
John: Yeah.
Andrew: And that’s just for a limited time because you want to get book orders up early.
John: Yeah. Absolutely. So on Amazon I think it’s $16 this week. Like a book, like a movie these days it’s all in the first week, right?
Andrew: Right.
John: It’s building momentum. It’s the snowball effect. It’s getting . . . it’s ranking right up there. So that’s the reason behind the offer. Yeah, you’re right. It’s a $16 book, and I think the package is worth about $65.
Andrew: As book buyers need to recognize our buying power in that first week and use it. If you’re going to buy the book, you’ll get lots of stuff and also go to the author’s home page to see what he’s giving out because . . . sorry. Go ahead.
John: No. No. I think it’s brilliant. I think there’s a Groupon offer definitely in the making.
Andrew: Yes. Yes. Book of the week, you’re right. Actually, I was going to say not enough people buy books, but it’s not about the book. The book is what you buy, but it’s the other stuff that people get excited about than reading the book in some cases. That’s a pretty frigging good idea. All right. What else do I have here on my list?
We talked about standard service offering. We talked about specialize. In the book you go into more, not more detail but you’re more forceful. Alex, the main character, absolutely needs to specialize. He needs to push away everything else and be forceful about it.
You say no client needs to represent more than 15 percent of your business, or else you’re essentially an employee of that customer and you’re at his mercy. And other businesses don’t want to buy businesses that are no dependent on one client.
Charge up front, we talked about that. Turn down work, we talked about that. What else do I have here? Oh, get more sales people. Alex is actually told in the book to let go of others and hire one more sales person. Why?
John: Well, again, it comes back to scaling the business. I found personally in the consulting practice that we have that I was referencing earlier, I did, maybe, 50 or 60 percent of the sales which is why I reached that ceiling which we just couldn’t go beyond. And every time I hired a sales person, they’d be good at the beginning conversation. They’d go out and meet the client. They’d evaluate their needs, but because they didn’t have the same experience and knowledge of the company, et cetera that I had, oftentimes they weren’t able to close the sale.
Again, that comes back to what I found personally is the importance of actually creating a product and then scaling up, and then you’re able to hire sales people. And really, it’s just a matter then to figure out how big you want your company to be. It’s trying to understand how many sales people you have, what each sales person can generate in a given year, and then figuring out how many sales people you need.
So if you decide you want a $10 million business and every sales person can generate $500,000 in sales, you know you need 20 sales people. And providing there’s enough revenue, enough customers and demand that can keep 20 sales people busy, that’s how many sales people you need.
In the book Alex spends a lot of time working backwards from what he wants his revenue to be, and then how many sales people he needs to drive that amount of revenue. It’s all based on his own experience and how he’s selling and how much a successful and effective sales person can sell.
One final word on sales people. I found that sales people you can categorize into two buckets. You can categorize them into ones that are good at selling services and ones that are good at selling products. The people that are good at selling services are the people that work at ad agencies, consulting companies, graphic design studios, market research companies.
And what they really do is they do consultative selling. When they go out asking questions, they come back and develop a custom solution. You want to avoid, like the plague, service sales people, people who have worked in service-based firms because they’re just trained to redevelop your product, and you’re going to be fighting tooth and nail forever about why you can’t change this about your product. Why you can’t change this?
Remember, customization is the enemy of scalability. And so, what you really want to find, at least, in my case, what I loved doing is working with sales people that had sold products, cars, houses, mobile phones, things that don’t change, that the sales person has to do the mental gymnastics on figuring out how this cell phone that they can’t change is going to meet the needs of the customer. That’s gymnastics that you learn by doing. I like to hire people who have sold stuff.
Andrew: That’s a great point. There’s nothing like having to argue with a sales person, nothing more painful, it feels like, than talking to a sales person about why he should be selling that and why we can’t offer what he’s just sold.
John: Right. Right.
Andrew: All right, one last point. You use equity with your employees as a last resort. Why?
John: Well, I mean, for a number of reasons. I think when a lot of founders start up, it can be very lonely. There can be a sense of excitement that you’re going to create the next Groupon, or Facebook, so you want people to buy into that excitement. And one of the ways that I think we often do that is by sharing equity, and I think sharing equity is a decision that is very large.
Obviously, if you’re in a tech company and it’s scaling up very quickly and you’re attracting venture capital, then, sure, having options packages is going to be a way to retain your employees. But 99 percent of companies out there, maybe 95 percent, just aren’t going to go public any day soon.
And so, what you find is if you start sharing a bunch of equity, feeling like you need to, to create a group of teammates, et cetera, I think you’re setting yourself up for disappointment because employees are employees because they’re not entrepreneurs and trying to force them to be entrepreneurial oftentimes they’ll never be as entrepreneurial as you are. And you’ll never get them feeling as much like owners as you are as an entrepreneur.
So I’m a big believer in making sharing equity as your absolute last resort as a way to retain employees, again, with the caveat that you’re not the next Groupon. You’re not the next big time startup. There are other ways to retain employees, in particular through the sale of your company that don’t involve options. You can simply put it in a blunt instrument. You can simply put a stay bonus in place. A stay bonus is a simple bonus that is put in place. If an employee stays for a period of time, they receive the bonus.
And you can simply say if we sell the business and you stay on for 12 month after that, you’ll be entitled to this bonus. It’s a blunt instrument, but again there are other ways to incentivize loyalty than just as a knee jerk reaction sharing equity which I think, unless you’re the next Groupon, you may find you’ll be disappointed in the result at the end.
Andrew: Yeah. There are always exceptions to these rules, but you’re right. If you’re not on the venture path, giving out equity is very tough, and it’s probably just not worth the work for you or the employee.
John: It’s time consuming. It’s a lot of legalese, and what you find is that you get this really messy capital structure with all these really small shareholders, and an acquirer looking at a company like that will say, OK, we love Andrew, but boy I’m not sure about these 78 other shareholders that own, like, .6 percent of the company, .3 percent of the company.
Each of those shareholders has certain rights. We’ve got to treat them equally, et cetera, et cetera. Depending on the jurisdiction you’re in, those shareholders may have significant rights that you can’t just dismiss, even if you are the largest shareholder. So complicating your capital structure with a bunch of very, very small equity holders, I wouldn’t say never do it, but it’s something to be taken very, very seriously. And there may be other ways to do it that serve your needs just as well.
Andrew: The book is “Built to Sell” and, John, I’m holding up the older version. People can understand that this is just a place holder for them. They’ll find the newer version at their local book store.
John: You’re a pioneer, Andrew.
Andrew: You’ve even actually got, John, the website, BuiltToSell.com, not BuiltToSellBook.com or BuiltToSellSomethingElse.com. BuiltToSell.com, great domain.
John: Thank you.
Andrew: You bet. And thanks for doing the interview. Thank you all for watching.
John: Thanks, Andrew.
