My CEO Life

The team at Classified Ad Ventures is working with companies around the world to help them refine their business models and to accelerate their growth.   One observation we have is that management and owners are often overly enthusiastic about of their revenue growth, expense requirements and ultimately market cap.  Why is this happening and what should these operators think about it?

The first issue we come across is that many of the founders are entrepreneurs and more often than not they fit into one of two categories – technologists or marketing guys.  The technologists are usually fantastic at developing new products and servies and will work their butts off to make it happen.  However they sometimes dont understand the subtleties of marketing and sales.  The sales guys, while understanding what it take to sell things, are often over estimate their abilities or the demand for their product. 

The second issue is the cost side of the business.  We often come across business plans that underestimate how much it really costs to make these businesses happen.  They usually underestimate the number of people and more often than not, underestimate the marketing side of the business.   For example i recently had a long discussion about conversion rates and how many leads from a web site were needed to convert into a sale.  The whole revenue plan was built and this yet it was very theoretical.  What they should have been doing is getting on with it and experimenting – not burying themselves in spreadsheets.

Finally, it is often the combination of the first two issues plus the sometimes blinding passion of the founders that lead to unrealistic valuations for businesses.  These valuations often use comparatives to established larger businesses – often those listed.  This is just unrealistic.  The founders need to understand that they have to prove that they have a business and that they are able to grow a business.  Just because it looks good on paper doesnt prove anything.   Also, they need to leave value on the table for the angel investors – as they want to get a 20x + return on thier investment.

So what should they do?

Firstly – be conservative in the revenue projections and experiment early and often to firm up the assumptions with some facts. 

Secondly, think carefully about all the expenses and plan appropriately.  It is better to have too many expenses planned for and not spend them than the other way around.

Finally, in valuing the business, check your ego at the door, and make sure that there is clear value left on the table for the potential investor.  No one is going to pay for value that has not yet been created.

Finally,

Related posts brought to you by Yet Another Related Posts Plugin.