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Built for Life

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I believe we can bring a LOT more value to the world by building GREAT companies (for life) vs. being an investor or entrepreneur who aims to flip.


A couple things overlapped in the past month that made me think more about this.
1. A VC fund announced it raised $600 million and would have raised more but wanted to get its investment cycle down from 4 years to 3 years.
2. While washing my 13 year old golden retriever, a thought crossed my mind… the trend is to own companies for a third the time people would own a pet.
3. 60 Minutes did a segment on a 600 year-old family-owned wine business in Italy (view). Now run by the 26th generation!!
4. Mark Cuban’s Rule’s for Startups: 1. Don’t start a company unless its an obsession and something you love, 2. If you have an exit strategy, its not an obsession.
5. Jim Collins most recent book, Great by Choice, that profiles the incredible 10x success of longer-term-thinking, built-for-life companies like Southwest Airlines.
6. A book about Hobby Lobby, More than a Hobby (that my amazing wife, who is truly addicted to the place, bought me). It tells a story of organic, built-for-life growth, that’s a similar story to how In-N-Out Burger, Trader Joes, Zingerman’s, & Southwest airlines grew… one profitable store/business/route at a time.
7. This last one is the most disturbing, but makes a point. If we wouldn’t sell our children, then why would we sell our companies, that we put just as much if not more of our care and energy into.

I’m gathering an exclusive group of successful entrepreneurs who are passionate about building their companies for life. If that is you, drop me a line.

Bonuses

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Last week I had couple conversations about bonus structures. I’ve experimented with a lot of things over the years and here’s what I’ve come to believe. I think of bonuses in two categories:
1. Incentive
2. Appreciation
I think they have more impact when kept separate. Let me explain…
Incentive Bonuses
I believe we all have an instinct to want to play games. I call it “the gaming gene”, and we all tend to get excited to have games to play, keep score, and win. I also believe this instinct is the basis for why some, albeit a small % of people, are truly motivated by money. It’s a score to keep track of their progress in the game of life.
The incentive bonus is really more about a “prize” that individuals and teams can look forward to as a result of hitting their goals or playing the game well. I’ve seen more motivation come from offering $100 worth of movie tickets than receiving $100 cash. So the “prize” or bonus does not need to be a cash, in fact it may be more effective if it isn’t. But, what’s really important and motivating is setting up the “game” well. For example at RegOnline, we would have quarterly departmental goals that were focused on moving the needle above and beyond where we were. Sales may be looking to increase conversion on their demo’s by 10%, or development would be pushing to get an extra project released, or marketing would be focused on getting a few more top search engine rankings for a couple more keywords. Goals seem to work best when they:
1. Move the needle/important to where the company wants to head
2. Achievable – aim low, make progress
3. Short term – no longer than 3 months
4. Team oriented – the team agrees and is excited
5. Fun/motivating bonuses (i.e. everyone gets massages, we all go to Mexico, Fridays off for the next quarter)
Appreciation Bonuses
I believe that unexpected bonuses go a LONG way with sending a caring message. Much more so than giving regular expected bonuses that are really just a way to true-up below-market pay. Pay market rate and then do the UNEXPECTED. I try to make them random both in timing (3-4 times a year) and in format (ipads, cash, airline miles, spa treatments, trips to mexico, etc.). I love how excited my co-workers are when they receive a bonus/gift they weren’t expecting. It makes it SO much more fun for everyone.
I’ve never been a huge fan of holiday bonuses because they are expected. But, I also know that it helps people who aren’t as good at saving for the holiday gifts. So, I tend to give cash/gift cards in the 4th quarter to help.
I also believe in splitting my bonus budget EQUALLY amongst full-time employees. Doesn’t matter if someone makes double the salary of another. I believe differences in salary has little to do with ability to be of value to the company. I’ve seen $35,000 support team members win customers for life with their care and responsiveness and $80,000 developers cause customers to head for the door because of poorly written code. I also like sending a signal to EVERYONE in the company that everyone CAN (and does) make a big difference regardless of pay.
Motivate and Appreciate SEPARATELY.
Engender team work.
Have fun with it (with prizes instead of cash)

Expansiveness

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In the past couple months I’ve participated in three intensive, mind-blowing workshops/gatherings. All three helped me grow and expand my view of what’s possible in my businesses and personal life.

The first was a 4-day Lifebook workshop I did with my amazingly-supportive wife, Chelsea. Where we went through 12 categories of our lives and created visions for what the next level of growth looked like. While 4 days seems like a long time to lock ourselves in a room with 10 other couples, we found some real nuggets for growth in our lives.
Then came another two days with the genius-founder of Zingerman’s (see last March’s trip description here). I went with my partners from StickerGiant & SurveyGizmo, and manager from PosterBrain. We pealed back the layers of our businesses and created new enhanced visions for our companies and teams that gave us all a TON of new energy and excitement for growth. That gave our teams a whole new energy as well.
Then I spent three days at the Conscious Capitalism Summit (see last year’s notes) with incredibly conscious leaders/founders of some GREAT companies like Whole Foods, Panera Bread, Starbucks, Dansk shoes, Southwest Airlines, Nordstroms, and more. They each spoke of the visions/consciousness by which they have built and are building their companies. When I asked John Mackey, the founder of Whole Foods, what is the bottleneck for more companies to grow in a more holistic way, his answer was simply “the consciousness of the leader”. Each time a leader expands their consciousness, or more simply grows, the company will naturally follow.
All three of these gatherings were great reminders of:
1. The joy I get out of engaging in things that help me grow and expand my view of what’s possible.
2. The HUGE benefits to me, my family, and my businesses from growing
3. The desire to find more opportunities for growth
4. The incredibly HUGE power of VISIONING (or expanding my view of what’s possible)
I have always gravitated towards a handful of “growth” trips each year. A lot of times as the trips get closer, I don’t feel like going. But I’m always glad I did because I attribute a lot of my success and happiness to those opportunity to expand my view on things.
Other trips I do/have done…
Annual trip to Berkshire Hathaway to hear Warren Buffet and Charlie Munger talk for 4 hours
Annual trip to Endicott House in Boston where 50 entrepreneurs gather to engage with top-of-their-fields people for 4 days (a more intimate version of TED)
Field trips to see the inner workings of different businesses (Zappos)
Personal growth workshops (Tony Robbins, DreamWork, Mankind Project)
Please share if you have growth experiences that have expanded your views on life and business that you’d recommend.

Own it

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I’ve had a couple experiences as a consumer this summer that have made me want to scream. Things go wrong all the time. Thats ok. It’s when an organization doesn’t own it and communicate quickly about it that erodes trust and desire to do business with them.

I also believe OWNing IT is a MAJOR trust builder and the more we do it, in a timely and personalized way, the more people will LOVE to do business with us.
One of the most basic tactics I have used in my businesses is to automatically send a follow-up email immediately after their first use… so we could own any problems that may have come up. For example, at PosterBrain we send this email the day after someone receives their order…
“subject: How’s your poster order?
Hi Jim,
Did your poster order get to you ok? What did you think of the quality (and your experience with us)?
On a scale of 0-10, how likely are you to recommend PosterBrain to a friend or colleague? Can’t wait to hear.”
90% of replies are a “GREAT!”
10% of replies are about things that went wrong that we then have the opportunity to WOW them with our customer service.
If we didn’t ask directly, most people won’t give unsolicited negative feedback. Then we would lose a customer without even knowing it.
At RegOnline we periodically had glitches in our system. We would move as quickly as possible to email those that were affected, be specific about what happened, and explain how we were solving the problem so it wouldn’t inconvenience the customer again. I was always amazed by how many people would reply back and say that’s why they loved doing business with us, because we were quick to own and communicate our problems.
Are we asking for enough direct timely feedback? Are we owning the problems before our customers need to mention them?

Little Bets

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A friend recently gave me this great book… Little Bets. The basic theme is about how the most successful folks around also ITERATE the most. They try lots of little new things and then amplify what resonates for their audience/customers. One great example is how the comedian, Chris Rock, shows up at a small comedy bar in New Jersey to test out new content. Most of what he does flops there, but he makes note of the ones that get the laughs and keeps iterating until he gets the best content for his HBO specials and tours.
I’m a big fan of iterating in every business I’m involved with. Here are a couple examples of how we’ve iterated recently and discovered things that resonate:
1. PosterBrain adding Wurther’s candy to every order – customers now regularly email us about how much they love the little surprise inside.
2. StickerGiant sending follow-up emails to every customer to see how their stickers turned out – we now get both rave reviews and know right away of any issues
3. PaySimple simplifying their online application to take half the time to complete – drastically improving conversion rates
4. SurveyGizmo promoting “Enterprise Survey Software” on the homepage – increased conversion rates of our core business
Sounds easy, right? Well, for every success there’s probably 10 things we try that fall totally flat and one that actually has a negative impact. The key is to test without shame and as nimbly as possible. My mantra has always been “how quickly can we test this?”
I find that it’s real easy to over-engineer projects and as a result they can take way too long to see the light of day. An example of an idea that I was involved with at RegOnline four years ago, has finally launched with tremendous impact… a one-page homepage (no navigation bar) has seen a 90% lift in conversion! What was our opportunity cost of not having tested this four years ago?
How many little bets can we make this week to see what happens?

Are sales teams adding value?

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For years, a good friend of mine (who owns Finished Basement Company) and I have debated the real value of commissioned inbound sales teams. He claimed his $10 million+ revenue company couldn’t survive without his coin-operated sales guys. Then about three months ago, after being sick of feeling like he was being held hostage by his 6-person sales team, he decided to let them all go and see what happened.
Instead of prospective customers going through a salesperson and being “closed” by them, they now speak directly with the basement design team. The designer asks the customer what they envision, what their budget range is, and then gives the customer a design. The customer then chooses to buy.
The process runs far smoother. There is much better service with all the communication going directly to the “technician” (the designer) vs through the sales person. Budget conversations are a straight forward matter of the design process vs. a chess match between seller and buyer. At the end of the day the client wins with a better design, better communication and better service.
What’s the difference in sales so far? Close rates and profitability have nearly doubled. Overhead is down, cost to the client is down and frustration with a pain-in-the-butt sales team is down to zero.
P.S. (added 5/26/11)
I’ll also add that the reason we had these conversations to start was because RegOnline started with a similar commissioned inbound sales team. I didn’t have the guts to amputate the whole team, but I did convert the team to a no-commission “Client Services” team and found better results at half the cost and none of the hassles of a commissioned team environment. We did experiment recently with SurveyGizmo leaving some of the inbound leads untouched by a human (and just get automated emails) and found that human interaction DID have a significant impact on sales and justified their non-commissioned compensation.

Berkshire Hathaway 2011

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This year’s trip to Omaha to listen to Warren Buffett & Charlie Munger answer questions for five hours was the same as previous years… a great cleaning of my investing windshield, an epiphany (or two), and a good time connecting with my 77 year-old father (and brother-in-law and nephew this time too).

This year’s epiphany was about cyclicality. Buffett & Munger talked about how their residential businesses are not doing well right now and how they are perfectly comfortable with “lumpy” profits and cyclicality. They made a comment about how most people understand and are comfortable with seasonality in businesses, but few have a comfort level and understanding of cyclicality. Most overreact both on the ups and downs of cyclical industries like real estate. A great read that talks about how much opportunity there is in understanding cycles is Howard Mark’s book The Most Important Thing (chapters 8 & 9).
Eight more nuggets:

1. Munger prefers to have permanent partners in acquiring companies vs. pushing paper in out-smarting others in marketable securities (although Buffett disagreed).
2. Biggest mistake – going into smaller business that could never be bigger
3. Raising rich kids – don’t let them think they are special because of being rich and give incentive to work.
4. Fancy projections do more damage than good because people start believing they will be true. Don’t ask the barber if you need a haircut – investment bankers love projections… Reduced expectations are best defense for investing.
5. All $35 billion of BRK’s cash is in treasuries because they want a parking place where we know we’ll get our car back.
6. “Serving on boards is for the birds.” – CM
7. Buffet’s replacement? Get the right person with the right values, comp structure secondary.
8. “I wish I could read faster. It’s a huge advantage to read fast. There’s hardly anything more pleasurable then reading, and reading, and reading and reading. Charlie and I do a lot of it, and we continue to do a lot of it, but I don’t do it as fast as I would like to.”
And 53 more…

1. All businesses are doing better, except those related to residential real estate.
2. Sokol affair was “inexplicable & inexcusable”. “It’s a mistake to assume perfect rationality in very able people” – CM (Charlie Munger).
2.b. “You can always tell a man to go to hell tomorrow.” in response to their congenial press release about Sokol
3. Separating the Chairman & CEO roles enables better management/change of management.
4. If were to develop new expertise would want it to be in the tech or energy field.
5. Difficult to identify people with competence in areas we don’t have competence.
6. Ease of entry – always 1st question in determining durability.
7. Standard of living in the past century increased six fold. How can anyone NOT be enthused about this country. Power of capitalism is incredible. Resusitive growth pattern will continue. Our system works incredibly well.
8. Best companies require little capital to grow and can price adjust with inflation (vs. businesses with tons of inventory or receivables)
9. Continuous learning important to success
10. Ideal asset – royalty on sales on inflation adjusted products
11. We don’t view BRK as over-priced. Would use BRK stock unless fairly valued (which isn’t now)
12. Doesn’t like the CAPEX on utilities with inflation
13. Dividends – if can’t reinvest internally, then dividend out. Stock price would go down as an admission of inability to create greater returns.
14. Outlook on banks – returns will be considerably less because of reduced leverage. Have added to their WellsFargo position.
15. M&T bank wonderful company and annual report. Same with Jamie Dimon’s (JPMorgan) letter to shareholders.
16. When BRK started a share was worth $1 of gold, now worth $1,500 of gold today (vs. $120,000 stock price)
17. ALL currencies have declined in value over time.
18. Gold 67 foot cube = all world supply
19. Value is based on what asset will deliver/produce. Invest in good PRODUCING businesses.
20. Rising prices creates excitement. Over time, not way to get rich though.
21. “Doesn’t seem rational to buy an asset that goes up if the World goes to hell” – CM
22. How’d you attract investors? “It helps if you conduct yourself so that others trust and you deserve that trust.”
23. We ARE a conglomerate, but ok if not a stock issuance machine to do it.
24. Legacy? “Fortune fairly won and wisely used” – CM, “Teacher” – WB, “At last I sleep alone” – Wilt Chamberlain
25. No question that purchasing power of all currencies will decline over time (hard to tell which relative to each other). $1 in 1930 worth 16 cents today. “A great civilization has a lot of ruin in it” – Adam Smith
26. Index fund is best if not actively managing. Like BRK at current prices
27. Reduced expectations are best defense for investing.
28. General culture of trust in organization better than big compliance department
29. US has had foot to the floor with both monetary and fiscal policy
30. Residential construction flat-lined – when excess inventory bought up, economy will take off again.
31. Rail shipments (gauge of economy) 1Q06 = 219, 09=150, 11=190
32. Haven’t learned from our recent excesses. Need to more heavily tax undesirable financial activity
33. Oil? 88m barrels/day – finite supply. $ price of most things will go up. Think about productive assets rather than speculating in commodities.
34. “Go to bed every night a little wiser than you woke up.” – CM
35. Need to at least make CEO’s of failed institutions dead broke. Expect more messes in lifetime. Failure due to stupidity not evil.
36. Goodwill should not be used in valuing. Amortization of GW doesn’t make sense.
37. Costco extreme meritocracy that created extreme loyalty. GM – worst – wiped out common shareholders
38. Will not participate in auctions and would pay less if came back afterwards.
39. Make different deals at different times because of different opportunity costs
40. “I wish I could read faster. It’s a huge advantage to read fast. There’s hardly anything more pleasurable then reading, and reading, and reading and reading. Charlie and I do a lot of it, and we continue to do a lot of it, but I don’t do it as fast as I would like to.”
41. Views job as CEO as Chief Risk Manager
42. Shareholder charitable giving program – $/share allocated to 3 charities. Stopped because didn’t want the parent company to be a distraction b/c of social issues they were contributing to.
43. China? – tax laws, customs, shareholder sentiment. Make allowances for lack of understanding. Absurd discounts to cover the risk.
44. Windpower – doesn’t work without subsidies.
45. BRK share of taxes = 2% of all corp taxes in US
46. Improve your own skills – only diploma WB has hanging in office is Dale Carnegie – communication skills.
47. Find what you’re passionate about and then improve your skills there. Didn’t succeed in re-insurance business for 15 years.
48. Beware of the salesman selling a derivative product.
49. Won’t take the risk of going after a really big elephant.
50. Companies issue stock to trade confetti for real assets.
51. Wants to continue buying businesses they know and management they like.
52. “What do we care if we buy a good business that’s lumpy in its profits?” – CM
53. Look at cyclical business the same as would seasonal.

Lessons from Trader Joe’s

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I had the opportunity to spend some time with the former president, Doug Rauch, who helped build Trader Joe’s over the past 30 years.

A little background on Trader Joe’s first. They started as a private label wine seller because of a little loophole in California wine retailer laws that enabled them to resell good wine for really cheap prices. 70% of their revenue was wine. Then Doug came in to apply a similar private-label concept to food products. Then they created a great customer service model. And then they had the discipline to stick to their great formula… and voila, 30 years later they are one of the most admired grocers and companies in the country.
Ok, so what was so unique about Trader Joe’s? And why did it work in the face of big-box-stores-are-better and branded-products-are-king? One word – they made grocery shopping fun and easy. When most stores carry 40 types of peanut butter, TJ sells 10. 4,000 products vs. 50,000 products. 80% private label (lower prices). Less selection makes it easier. And then they have fun with the limited selection they have (example).
What else?…
+ Change 1/4 of the selection each year creates surprise and discovery (difficult to do when thousands of shoppers complain about their favorite products being discontinued)
+ Put managers in front of the store (instead of in back office) to create greater team leadership/engagement.
+ Have all employees do a little of everything (register, stocking, cleaning, etc) to create a more consistent experience overall. This is a theme I recognize in other great companies like Southwest Airlines.
+ Create fun, caring culture for employees (and they’ll do the same for customers)
What I love about TJ’s is that there’s nothing “me-too” about them. They took a unique approach in the face of what everyone else was doing. And people love them for it because it’s refreshing and fun.
More:
4-minute video interview with Doug Rauch – love “a store of stories… that was the fun” and “context that transcends the content” and “a customer experience company that happens to sell food”
Good article in Fortune
Great interview in LA Times with Joe
I made two killer recipes out of a wonderful wonderful Trader Joe’s cookbook for Mother’s Day. This cookbook isn’t by Trader Joe’s, it’s by a customer who loves TJ’s so much she made a cookbook based off all the great quirky things you can buy there.
Hilarious video another customer made with his phone.
What can we do with our organizations that’ll inspire raving fans?

Setting the Table

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I read this AMAZING business book a couple months back by a great New York restauranteur, Setting the Table by Danny Meyers. He had the courage to be revealing about the in’s and outs of his very successful restaurants. I loved a couple of his themes that apply to most businesses (not just restaurants):
1. Start by bringing unique value to the community/customer base – he only opens restaurants that can bring something new and exciting to the NYC restaurant scene (no me-too’s)

2. Find a soulful source to draw inspiration and ideas from – he would travel with his partner-chefs to understand and encourage their cooking heritage
3. Plan to start with some flailing around before finding the sweet spot and working out the operational kinks – EVERY restaurant was a train-wreck to start with.
4. Being of service and connecting your community of customers is HUGELY valuable and fulfilling and still extremely rare – he fully engages in the local community on many levels
5. As success grows, stay focused on what is meaningful versus going big – with lots of offers to expand nationally, he chose to stay locally focused and great.
6. The more successful you are, the more people expect of you and the bigger the example you become (good or bad) for the press. – he learned to embrace the publicity rather than fight with it.
7. Connecting the dots between customers creates community (and value for customers). – he gets to know customers in his restaurants so he can make introductions to other customers and “connect the dots” of that local community. One of his restaurants became known as the place for publishers to eat and hang out as a result.
So as the title suggests, how are we “setting the table” of our businesses to engage more fully and authentically in the community they are creating?

Pile of Money or Creative Platform?

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I’ve had a half-dozen of conversations in the past couple weeks with entrepreneurs who are considering selling their companies… $4 million, $15 million, $20 million, $40 million, $70 million… all at crazy multiples.

My questions go as follows:
Do you NOT enjoy your business?
Do you have partnership issues?
Do you think your core model is flawed and not sustainable?
Is your growth done?
Are you lacking in money to sustain your lifestyle?

In most of the conversations, the answer to ALL of these questions has been NO. The reason for thinking about selling has been solely about MONEY. More of it. More of it in a way that they can feel more secure about their future.

Little thought is given to how they would invest it and usually after talking it through more there’s a realization that they won’t be able to beat the return they are getting from keeping their company. But diversification makes sense.

Little thought is given to what they would do after they sold. Just the thought of hitting a nice beach, buying some cool stuff, and then coasting right into their next “midas-touched” venture (rarely happens twice). Or be more purposeful in helping others through sitting on nonprofit and for-profit boards and helping others. But they’ll figure it out in between margaritas.

Little thought is given to what will really happen with their great cultures and family of great employees. But the acquirers are good people who promise and insist on not changing the magic formula or the great cultures… yah right.

Then I remind them what it took to build the amazing platform they have now. And how they are the masters of their domains. The kings of their happy kingdoms. The painters of their beautifully growing canvases. But all the annoying stuff will be gone. I saw a great quote recently, “Big offers are a good thing, but personal sovereignty matters a whole lot more over the long run”

Having gone through all of the similar thinking, I shared with them that the reality was different for me and many others I know who have “cashed out”. The reality is the money means little in the end in comparison to having a great platform/canvas to continue growing and creating great things with.

In most cases, NO ONE is advising them NOT to sell. It seems to be part of the American dream, the ultimate accomplishment, and the biggest ego stroke for an entrepreneur to “cash out”. What if we changed that dream to having pride in building great companies that our great grandchildren can be proud of?

Three of the six entrepreneurs I spoke with decided NOT to sell. Not because the money wasn’t enough (it was). But because they were excited about continuing to create and grow on THEIR hard-earned platforms.