Too Many Small Businesses Are Swinging for the Wrong Fences
If the Houston Astros were a publicly traded company, the team wouldn't have won the 2017 World Series. In fact, it wouldn’t even exist anymore. From 2011 to 2014, it was among the worst teams in baseball -- boasting the worst attendance -- and the team received a 0.0 Nielsen rating in Houston twice in two years, according to Sports Illustrated.
If the Astros were a public company or backed by venture capitalists, investors would've taken over the board, replaced the CEO, dismantled the team and sold everything off years ago.
That sounds like a nightmare situation for any budding company. Yet talk to founders, and they'll most likely tell you they're looking for big-name backers who can usher them into one of those big, splashy initial public offerings with huge returns to investors and lots of liquidity on day one. Otherwise, they're hoping to sell to a major player, assuming the tech giants aren’t already focused on building internally.
I'd like to urge entrepreneurs to change their mindset. The goal should really be on building a sustainable long-term business. Attracting customers, building to scale and filling a market gap is how you become a strategic target for the bigger players. A long-term focus on building a successful company that can compete with the majors isn't the only way to win the game, but I do think it's the best.
Keep your eye on the ball.
An IPO may sound exciting, but it comes with a lot of raised expectations. Whenever you take private equity financing, VCs expect a five to 10 time return, according to the Kauffman Foundation's Entrepreneurship.org. Raise $100 million, and you’ll need to generate $500 million for your investors down the line. Every time that target goes up, you introduce more competitive threats, more industry threats and more execution risk.
And as you focus on developing something to sell to the majors, odds are they’re working on something to make your project obsolete. They have more people, money and resources, and they’ll beat you to market, sometimes without even realizing you exist.
Regardless of which outcome you're swinging for, you’ll need to build a sustainable business to get there. Building the company gives you a position of power. You can negotiate better valuations and fewer protectionist term sheets; you'll be less disposable to investors and have better control of the board.
Ultimately, if you want to build a successful, sustainable business in today’s environment, you need to take three important steps.
1. Train to be a slugger.
Every team has its star players: athletes who consistently deliver game-winning results -- often under incredible pressure. When the bases are loaded and it’s the bottom of the ninth, all coaches worth their salt will call in a slugger. This tried-and-true heavy hitter is the player most likely to take up the bat and deliver a home run. Successful businesses are sluggers. They’re consistently able to step up to the plate of their customers’ pain points and knock a solution out of the park.
A coach’s worst nightmare is to sign a promising new player at a high salary only to watch him underperform throughout his first season. This was exactly the case for investors who backed Juicero. Sure, it raised a lot of money ($120 million, to be exact) and became a media darling right out the box. But the product didn’t perform to a notable level, and it was widely ridiculed by consumers who weren’t happy about the prospect of spending $400 on something they could do themselves. The company quite publicly fizzled out.
Instead, find an actual gap in your marketplace and fill it with something people need. Make sure you're building a business, not just a product. Think about customer engagement, the customer life cycle and consumer demand. And most importantly, understand how you fit into the rest of the market. For example, some Israeli companies are doing this very well. Major tech players bought out Waze and SalesPredict because each understood the tech ecosystem and filled an existing gap.
2. Understand your fan base.
It’s great to know a market size, but that doesn’t necessarily mean the entire market is clamoring for your offering. There are nearly 8 billion people alive right now, but that doesn’t mean your market is 8 billion. If you’re building a payment processing company, it doesn’t mean the $800 billion restaurant industry is yours for the taking.
New York University professor Aswath Damodaran and investor Bill Gurley had an interesting debate over Uber’s valuation back in 2014. Damodaran focused on Uber’s initial offering, UberBLACK, which addressed the market for taxis and limo services. Gurley looked beyond Uber’s minimum viable product, believing the company would inevitably address the entire transportation market.
He was eventually right: Uber understood its core value proposition, wisely tackled the smaller market first, and then expanded upon that initial offering to become the industry leader it is today.
3. Turn fans into ticket holders.
Just because fans watch sports from the comfort of their couches doesn’t mean they’re going to splash out on season tickets. You must create an appealing business plan that makes someone want to pay for your offering. The choices available in any market segment these days are endless. The brands that rise up are the ones that address legitimate pain points and respond with exclusive solutions, which will in turn drive premium valuations.
This goes beyond simply creating a "better product." In our on-demand world, what separates the haves from have nots is a focus on the customer. Consulting firm Capgemini recently found that only 30 percent of consumers believe organizations are customer-centric.
Even Facebook has recently landed in hot water for allegedly allowing Cambridge Analytica to harvest the data of up to 87 million users. Frustrated by companies that don't cater to them, 81 percent of respondents said they'd be willing to pay more for a company that offered a better experience.
It’s clear which end of this trade you want to be on.
Even if you’re a serial entrepreneur looking for an exit, a smart way to maximize your return is by building a sustainable business. The Astros may have racked up some notably low ratings as a franchise, but their World Series Game 7 became the second most-watched baseball broadcast in more than 13 years. Focus on the long-term strategy, and options will open for you. That’s what the Astros did, and they’re the World Series champions. If you ever want to play in the majors, you’ll need to do the same.