Should you use an Incubator for your Startup?

There are incubators in Silicon Valley and all over the world as entrepreneurs who have “won” start opening up their own incubators (often with their cash outs) as well as cities looking to attract new start ups.  The biggest question for an entrepreneur should be what do I get out of it besides a physical office space and what should I be considering when evaluating incubators?

There is little doubt incubators are playing an increasingly important role in raising investment for entrepreneurs.  Some incubators act as an office with minor introductory or connections as part of the mix.  Then there are incubators who are looking for a substantial stake in your company (Silicon Valley average ranges from 2 to 10 percent) to become an alumnus of their incubator.  So, if they are asking for that kind of stake what would an entrepreneur anticipate receiving in return and is it worth it?

Many of these incubators will offer intensive coaching, warm introductions to potential investors that they think fit your companies profiles (and most importantly get you in the door – rather than ending up in the stack of plans that get weeded out by the new analyst at the VC) and networking with other founders / connections that are of value.  Incubators level and intensity of services varies considerably but it can provide first time entrepreneurs and especially international teams that aren’t familiar with US VC’s critical initial linkage in Silicon Valley.

An entrepreneur looking at an incubator (especially first timers) should look at an incubator just like they should look at potential investors / Venture Capital money.  What can they do for me and what do I have to offer them.  Here are some questions to ponder:

• What companies have they invested in, do those companies look like me, will they have knowledge / connections in the space that I need?

You need to evaluate each incubator just like you do a VC.  Some incubators such as AngelPad, Y Combinator or 500 Startups are well known – some others that maybe worth looking at are listed on Berkeley’s Lester Center for Entrepreneurship resource page: and still others like Australia’s Startmate offer an incubator like service while investing (25K for 7.5% / post valuation of $333K) in your company without a physical space as part of the bargain.

The key point is you need to know what is important to your potential investors by spending time looking at their sites and in some cases reviewing what they look for – as they will spell it out to you. Make a proposal that will resonate with the decision makers and hit the key points they have likely already articulated for you.  Last be prepared for a dance just like you have to do with VC’s.  See some helpful hints on this blog post: Top Ten Investor / Entrepreneur lies.

• Understand the challenge that incubators face

An incubator acts like a VC in many aspects.  They have to believe that they can get other like minded investors to put money into your business, early on, or it doesn’t make sense to invest in you.  You have to convince them that your idea and people are winners.  By investing in your team they will be part of that winning company.  Your team must look the part and preferably have the chops that make them believe in you.  If you get in, they will help you with your pitch at the next level.

•         As always, Introductions do matter / use LinkedIn

Look at the incubator team and do everything you can to find someone who can make a friendly introduction, just like you would with a VC.  Review companies the incubator teams members have either been a part of or invested in. Use LinkedIn to gather this information if it isn’t readily apparent and then use your connections to get an in and avoid the application death bin.  Another excellent resource is LinkSV.

• You have an interview now what?

I’m a big believer in the keep it simple approach.  Keep your presentation to 10 slides (check out Garage Ventures Guy Kawasaki’s model if you haven’t seen it previously) and do your homework.  Hopefully you know who will be in the meeting.  If you do, make sure you tie anything your company will do to something the investor can relate to (preferably a “positive” thing).  Also make sure that your team is prepared to answer questions based on their role.  CEO should answer market / business questions, CTO – Tech questions etc.,.  Last practice, practice, practice.  You only get one shot in these situations – bring in people that will “professionally” beat you up with questions so that when the live bullets fly – you’re ready! 

• Does an alma mater, matter?

Absolutely!  Think about what school you went to.  Generally the more prestigious the University you went to the more market cache you’ll have.  If you went to Stanford and are looking for work in Silicon Valley you know what I mean.  However, for international startups they usually don’t have the US university pedigree and going through a well known incubator can be critical, supplying you with credentials that last a lifetime.

Mentors and relationships from your incubator will provide you with many springboards in later pursuits as well as giving you that initial leg up with your current startup.  Plus you’ll work side by side with other companies with similar dreams and knowledge to pass on along the way.  Entrepreneurs are likely to have many different jobs over the course of their working lives and incubators provide an opportunity to work with like minded people that maybe your next team mates.

Incubators aren’t for everyone and there are many success stories for companies that didn’t use incubators to start.  However, if a first time entrepreneur is looking for a fast path to knowledge, connections and increased success.  Incubators are worth serious consideration.

Top Ten Investor / Entrepreneur Lies / Fibs, Their Posturing & What I Think

IMES works with many companies that are either raising capital, have done it or are thinking about it in the future.  Many of the companies that want to raise capital won’t be able to and will need to bootstrap it (which I often encourage when possible).  Some will get it via the 3f’s Friends, Families and Fools and some will get it from Angels or Venture Capitalists.  Where ever the money comes from to either seed or expand a business the bottom line is that you have to make a pitch to get the money to start from someone.

Raising capital isn’t easy and we have blogged about ways to do it, keeping your VC slide deck short & sweet and executive memorandums.  However, on the more humorous side I thought I would add some commentary to a post from one of the more entertaining and semi famous VC’s I follow (Guy Kawasaki).  He recently posted the top ten lies of entrepreneurs and investors and I took the liberty of adding some tongue in cheek comments in bold (& where appropriate).

Guys post:

I leave you with two sets of top ten lies: one of entrepreneurs and one of investors so that you know what not to say and what not to believe.

Top Ten Lies of Entrepreneurs

1. “Our projections are conservative.” (But if I don’t show a hockey stick of growth you won’t listen and tell me I can’t make enough fast enough)
2. “Jupiter says our market will be $50 billion in ten years.” (And if I show you it is only $500 million you will tell me it is to small for a VC of your stature – as you’re only interest in home runs – not singles)
3. “Several Fortune 500 companies are set to do business with us.” (yep and If I don’t have name clients ready to go, you’ll tell me to get go get them before you can consider funding us)
4. “No one else can do what we’re doing.” (and if I tell you there is lots of competition and we’re not very different except for our positive attitude…………..)
5. “Hurry up because other investors are about to do our deal.” (we all know you’re going to drag your feet and take your time to do your due diligence and you know / we know we need your money  yesterday – so what would you like me to say, take your time you’re the only game in town?)
6. “Our product will go viral.” (hockey stick again – Entrepreneur speak “we’re posed for slow steady growth and although you won’t get your money back within the life of your current VC fund you can’t lose!”)
7. “The large companies in our market are too big, dumb, and slow to compete with us.” (If we didn’t think we could beat them why would we be here and why would you invest in us..?)
8. “Our management team is proven.” (would you prefer “we’re a bunch of propeller heads but we will learn on the way – with your money – forget about it………..we’re good to go”)
9. “We filed patents so our intellectual property is protected.” (And if we didn’t file you would tell us we don’t have any IP so if we fail you have nothing to fall back on so go get some IP or you can’t invest)
10. “All we have to do is get 1% of the market.” (yep, didn’t we hear that with China?)

The average number of these ten lies that I hear in most pitches is ten. At the very least, tell investors new lies.  (I like that at least Guy is being honest – twist the pitch in a new way so I don’t get bored with the same ten slides I tell everyone to show me:-)!)

Top Ten Lies of Investors

1. “I liked your company, but my partners didn’t.”  (happens, VC’s don’t want to be the only to pick a company within their own VC team – if something ever goes wrong guess where the finger points!)
2. “We are patient investors who want to help you build a great company.”  (Ha, Ha – my fund is a 10 year closed one and I have 3 years to invest 3 more to re-invest and 4 to divest – you figure out the timing)
3. “If you get a lead, we’ll invest too.” (Ummm, I didn’t say I would invest with just any other lead investor, did I?)
4. “There are no companies in our portfolio that conflict with what you’re doing.” (yep, there is also this game called liar’s poker and man are we good at it!!!!!)
5. “Show us some traction, and we’ll invest.” (can’t laugh at this one because it is fair … most of the time – but if I don’t have money to gain traction – how can I do it……?)
6. “We love to co-invest with other firms.” (as long as we take the lead, they follow what we want, our lawyer is bigger than them, we get our equity out first, we choose the next CEO+Board+management and………….)
7. “We’re investing in your team.” (but wait, didn’t we already say we don’t think your team is proven….?)
8. “We have lots of bandwith to dedicate to your company.” (As long as it doesn’t interfere with our golf and sailing schedule – we’re so busy you know. Oh and don’t forget if one of our companies starts looking like the next Google, Facebook etc., we’re really really busy )
9. “This is a plain, vanilla termsheet.” (except for all the perks for us that will hurt you down the line – you have no idea how much we pay our lawyers to slide stuff in – and we know you can’t afford a good lawyer)
10. “We will get other companies in our portfolio to work with you.” (right…………………..)

Do you know what the difference is between the lies of entrepreneurs and the lies of investors? The investors have money.

It’s not all bad news. Think of everything that an entrepreneur needs (tech ones, anyway), and you’ll see that most things are free or cheap.

• Marketing: use blogs and social media to promote your products.
• Tools: most tools are Open Source and free. Microsoft offers free versions of applications like Word, Excel and PowerPoint in the cloud!
• Infrastructure: More cloud goodness—you don’t have to buy servers anymore.
• People: callous for me to say, but in a recession, people are free or cheap.
• Office space: what office space? You can work out of your garage (like David Hewlett and Bill Packard) or just form a virtual team.

(I think the above is great advice!  Keep your posts coming Guy – they are always entertaining and more often than not have some great pearls of wisdom!)

Interview of Danish Serial Entrepreneur Martin Thorborg by David Brown

Last week we had the pleasure of interviewing Danish serial entrepreneur Martin Thorborg. Martin is an accomplished writer, blogger, speaker and co-founder of SPAMfighter (as well as a couple of others).  He currently lives in the US and is on a six month trip interviewing Danish entrepreneurs across the USA. During this interview Martin and David discuss some of the challenges Danish, Australian and American entrepreneurs face, review some of the issues Danish and European start ups deal with (Danish companies must be born international to survive) and what is similar between all three countries entrepreneurs. They also go into what is happening with Silicon Valley, whether a start up should immediately move to Palo Alto or stay with their base, use their home connections and build critical mass first.

It is a wide ranging interview covering many of the issues Startups all over the world face. It is a three part series starting with this segment, part one: http://youtu.be/BI2f2d76VKo

Australian Tech Start ups expanding with US Venture Capital Increasing

Just read an interesting article in the Australian Age http://www.theage.com.au regarding investment in Australia by US Venture Capital. The only VC I’m aware that has offices in Silicon Valley and Australia is Southern Cross run by John Scull, Larry Marshall & Tristen Langley.

One of the tenants of the article is that Start-ups don’t need to move to the US to succeed. My feeling on that one is that is true initially but in order to grow they will need to have office(s) in the US in order to access the market just like they always have. The other interesting note was the authors idea that many US start ups were over valued and therefore Australian start ups were more attractive. I don’t know if that is actually the case but in my experience the big hitters Sequia, DFJ, Kleiner Perkins etc., have always been willing to look at Australian companies as long as they have a disruptive idea and they are properly prepared and introduced. http://www.theage.com.au/technology/technology-news/aussie-tech-gold-rush-nothing-off-limits-20111103-1mwyn.html

Clean and Green Rain in Los Angeles

Many of you are probably familiar with the massive rainfall that Southern California / Los Angeles is experiencing as I write this.  Many more are familiar with the cyclical water shortages California has been experiencing for half a decade and that the vast majority of water used in Southern California is pumped there from Northern California and other states.  This pumping of water translates into approximately 19% of California’s annual electricity budget for a state that prides itself on being / going “green”.

The funny thing is that Southern California’s water and our electricity usage problem is self inflicted to a certain extent.  For example, the Los Angeles County building codes mandate that rainwater be moved from the roofs to the street where it goes into the storm drains and is then flushed down huge concrete canals straight into the Ocean.

The sad part of all this engineering, is that an inch of rain translates into approximately 7.5 billion gallons of water that is currently “flushed”.  Instead of sending it to the Ocean, why not use giant cisterns to capture the rainfall and use it in Southern California, instead of paying to transport water 100’s of miles – (a portion of which evaporates on the way)!  If you think of it, over half of current annual water requirements could be met with cisterns alone.  Thought of it another way California could significantly reduce its electrical power plant air pollution by reducing water pumping 25 – 50%!!

The sad fact is that cisterns are not a new idea, they just weren’t planned into city development like they were with ancient civilizations (see the Roman empires awesome gravity fed canal systems).  The current canal system was built when water and electricity were cheap and it has been “easier” to add more water and electricity to the problem, rather than rethink it.

My clean and green wish for the holidays is that Californians help our environment by telling our government to do something simple and economically viable.  Building new aqueducts maybe necessary in the future but let’s do what is smart first, instead of how we usually handle problems by throwing more bond money at a problem that needs to be re-evaluated from the ground up!

Happy Holidays!!

Australian Innovation Showcase

I attended last night’s ANZA Technology Network kickoff to the “Gateway to US Executive Summit” at Silicon Valley Bank last night and I think Viki Forrest may have put forth one of her best programs to date.

The companies that attended this year were:  8 Shot International, Australian Survey Research, Aviator, Evanscorp, iAsset, inference Communications, Jasondb, Red Lizard Software and X-Ped.  Mick Johnson Whereoscope and Bardia Housman Business Catalyst (both of whom we interviewed previously) were also there as guest speakers.  Whereoscope looks pretty interesting as it is focused on using an iPhone App to find out where your kids are.  Putting the obvious big brother implications aside and being a parent myself I’m confident there is a market for it, if it is properly positioned and marketed.

The speech by Andrew Lacy (Tapulous / now owned by Walt Disney) was especially entertaining as he provided the entrepreneurial audience with some sage advice (at least from my perspective).  He didn’t come out and say this but the theme was don’t let your business plan get in the way of success.  Tapulous’s business plan was not focused on “Tap Tap” but Andrew saw an opportunity when an Engineer / inventor he was looking at hiring came in and although he knew he wouldn’t be a good fit as an employee, he bought the App and 40 million downloads later he “guessed” right.  The other item he brought up which I also though was prescient was the element of luck.

Many times you have the right idea but the timing is wrong, the team is wrong or something just doesn’t click the way it should.  In his case the App was a bit of luck and Disney coming in was also lucky as they were looking to raise capital rather than “exit”.  Having created a site for selling photography back in the late 90’s I completely get the timing thing as I had the right “idea” but it was too soon, (internet speed for most consumers, was not ready for buying photo’s on line).  Today there are many successful photography sites; RedBubble, Art.com etc.,.

The other take away I had was savvy.  For many CEO’s it is much easier to stay the course than to jump on something in midstream, especially when you’re playing with Venture Capitalist money.  The VC’s bought into Andrew’s idea (meaning the CEO “sold it” ) and the rest is a bit of Aussie history.

My take away from last night was “don’t let a business plan get in the way of success”!

EPAct Alternative Fuel Infrastructure Workshop

I attended the San Francisco EPAct workshop last week to learn more about the Californian alternative fuel network for one of my cleantech clients.  E-Cofueling has a diesel engine retrofit kit (heavy to light duty) that vaporizes ethanol in the combustion chamber increasing horsepower, torque and fuel mileage while decreasing emissions.  I went to get a better understanding of where ethanol (E-85) fueling stations are now, where they are planned for the near future and which fleets are using them.

The workshop covered alternative fuels such as: biofuel, ethanol, natural gas, propane and electric charging in California.  Stakeholders for each alternative fuel spoke about how their product was currently being utilized, how to best use it and what they thought the future looked like for their niche.  One of the speakers from NREL (National Renewable Energy Laboratory) noted that all federal vehicles with alternative fuel vehicle (AFV) capability are mandated to utilize alternative fuels if they are within 5 miles or 15 minutes of drive time (EPAct 2005 Section 701) helping to “fuel” the need for more Alternative Fuel stations.  It was also interesting to hear that there is a huge push for electric vehicles to be purchased by government organizations even though the ROI for them does not appear to be as strong as other alternative fuels.  It seems like electric is sexy and “in” right now and the politicians want to get on that wagon more than others even though it does not use a renewable fuel source.

It will be interesting to see which fuels become dominate over the next ten years in California vs. the rest of the country.  Each fuel that was reviewed at the workshop has merit but also liabilities that must be taken into consideration before a fleet owner chooses which way to go.  The larger fleets are trialing a number of different alternative fuel vehicles in order to make a real world assessment of what works for them, which seems like a good plan. 

Companies and government organizations which need to move large amounts of goods and that have plenty of money to spend are buying new more fuel efficient diesel engines or AFV’s.  Those that don’t have the money but still want to go green need inexpensive alternatives to retrofit existing vehicles.  Diesel engines are without question the backbone of the US trucking industry as well as municipalities, schools etc.,.  These engines as a whole last longer (than their standard gas counterparts) and there are millions of them on the road today.  E-Cofueling and other niche diesel retrofit technologies that can increase fuel mileage as well as reduce emissions, will have an opportunity to make a difference.

Part II: Non-Profit Marketing vs. For Profit Marketing: Is there a difference?

This is part two of the interview with Mr. Eddy.  We left off with what he does for his clients to help differentiate them.

BE: For my clients I write a new business plan every year.  A SWOT is a keystone of that.  In the past nonprofits were just given money so they really never had to think about “getting” customers, how they were doing or what they needed to do better next year.  They figured they would just out and get another grant, same old same old….

In fact, there are a number of prognosticators that have written that 100,000+ nonprofits will go out of business next year (Paul Light, NYU).  There are about 1 million right now. Thus, near 10% of those will fail because there are too many players trying to go after the same funding dollars.  Therefore, the competition is intense, and will increase as more compete for the same shrinking donor pool and foundations dollars.

DB: Do you believe more marketing will come into play, because of this coming shake out?

BE: Most nonprofits are PROGRAM and operational driven, and need to become much more MARKET driven organizations I believe that nonprofits are the last untapped area for marketing to get in.  Innovative nonprofits are putting marketing strategies and business plans into place already.  They are using the downturn to refocus and attack.  The complacent ones will be the ones in trouble because they will wake up and realize they need to do something different too far down the line..

I also believe that there are more marketing people and consultancies that are starting to focus on this sector.  Because they are looking for opportunities and this is a green field which will be forced to react sooner or later there is probably a lot of opportunity for consultancies to go after.

DB: interesting.  Do you have any idea how you would differentiate nonprofits?

BE: Absolutely!  There are three different kinds of nonprofits in the market today:

A. Those which make things happen

B. Those which wait for things to happen

C. Those that wonder what happened

DB (laughing): That sounds like a for profit perspective!

BE: Agreed.  Many nonprofits want to solve all their problems internally.  That doesn’t work because you have the same, well intentioned people looking at the same problems and coming up with the same nonworking solutions.  This is often brought on by a fear of others telling them they are doing their job wrong or losing their jobs.  This is a real fear that needs to be overcome for success to be bred into the nonprofit culture.

Nonprofits must diversify their revenue streams in order to succeed because there is only so much cost cutting that they can do.  In fact I look at it as cut, cut, cut isn’t a strategy it is an “action” that can only be done so many times.    They never had to have the business mentality to survive and therefore it is a problem.  Bottom line: no money= no mission. They have to have a business mentality to survive in the coming fallout.

DB: How should they diversify their revenue streams, are their major buckets they should be aware of?

BE: Social enterprise ventures – for profit driven but have dual role of fulfilling social mission as well – Such as a Church having a pre-school / nursery school.

Social enterprise Charter school – fee based, commercial vs. tied to “earned income” not government money.

Looking for funding dollars that are not government grants.

There are 4-5 different revenue streams that they could go after.  However, many Private Equity firms are funding social enterprise ventures – like Bill & Melinda Gates foundation – focused on certain causes / enterprises.

DB: I’m familiar with the Gates foundation simply because of Bill Gates and the dollars that are behind it.  How would a nonprofit go about finding relevant ones, would it be a traditional market research endeavor?

BE: If you have the personal on staff yes.  However there are also lots of intermediaries that help nonprofits apply for and find them.  Ones such company is the Bridgespan Group which was an offshoot of Bain Consulting and Bridgespan is now one of the main knowledge players in this space for non-profits.

DB: Interesting. Are most of the consultancies besides Bridgespan of the small mom & pop variety or are they big organizations that believe there is a niche they can exploit?

BE: Bridgespan has some 150 nonprofit clients which range in size from small community based nonprofits to the large national footprint nonprofits, i.e. Boys town, etc.  They help nonprofits focus on areas to get clarity on impact, theory of change, and scale. Like marketing, many non-profits have not been great at strategic planning, and getting to the root of the issues.  Thus, many have no clue on what a value-proposition is nor how to just focus on their true core competencies.   One case study they have done is called The Nonprofit Starvation Cycle.  Like products, organizations go through lifecycles, and the next cycle for nonprofits will prove to be the most challenging they have ever encountered.   The tsunami is on the horizon. The real question is your nonprofit organization prepared & properly positioned to weather this storm?

DB: That is a good question.   Where would you begin if you’re a NP that hasn’t done anything yet?

BE: I would start with a SWOT analysis (if they have done one in the past it is time to dust it off and start again).  Look at the core competencies of the organization as compared to what the organizational mission is.  Do the activities of the organization directly correlate with the NP mission (mission centric)? Next would be mission related.  Third would be mission unrelated.  They need to look at those three core items to understand where they stand vs. where they should be.  This is a broad way of looking at program alignment vs. Mission.  Many NP’s get into what is called “Mission Drift” or they have gotten away from what they were created to accomplish.  This can get a company into the 990 issue we talked about previously where they can lose their non-profit status if a significant amount of their program dollars go in a direction that is not what they have registered for.

DB: So now we have completed the SWOT and know where we stand what is our next step?

BE: Lets back up a minute.  99% of the NP’s use an old standard NP process that can take 9-12 months to develop and while they are doing this they lose time – this type of planning comes from the 70’s and 80’s.  They thought wow this works and it did for quite awhile but business has moved on and they are way behind and need to respond differently.  They move to slow and there is a total disconnect between the planning and the doing.

They have to supply all their planning to all their employees and the board.  Which just takes too long.  Too many people involved in the process which slows everything down and creates a big lag between strategic thinking and doing.  They are not as nimble as they need to be and it is really difficult for a NP to get a social impact because of all the hoops they need to go through.

DB: You paint a picture that is rather gloomy.  What is the best way to make the NP better?

BE: You’re only as good as the system you operate within.  The current NP strategic planning cycle is broken and needs to change.

DB: Okay, can you elaborate?

BE: Empowerment is a key buzzword in this space.  Where are the reporting lines?  Non-traditional reporting / decision making must be deployed in these organizations – creating at a flatter hierarchy.  This will allow increased marketplace agility and better alignment.  Marketing often sees what is happening much sooner than the rest of their organization because that is my job.  The challenge is translating what I see into action.  For example many of these NP’s are looking at 70%+ government funding.  We all know the government has to reduce this as we continue to spend more than they have.  So, NP’s need to look at different funding sources to complete their mission.

So, where am I going with all this?  You need an ongoing market research mentality / mindset to dedicate internal resources to gather market data and find the funding niches before others in the NP space do.  This is more of a for profit perspective – chasing the dollars – vs. chasing the funding.  NP’s as a rule never had to be innovative until now.  Now they need to be much more pro-active to get to different funding mechanisms if they want to survive.

DB: Understood.  So, when will you be opening your own consultancy?

BE: When I grow some hair (laughs)!  There is an inherent need for new skills / consulting in this space.  One of the biggest requirements is marketing and business development across the board.  Someone who is reading this probably has a good picture of what the problems in this space are and what can be done.  However, as stated previously in this interview there will be doers and those that will live with the status quo and slowly fail.

DB: Any last thoughts to share with our readers?

The reality is, a new model must be formed, as the traditional nonprofit model is a dinosaur. However, the culture in many NPO’s do not embrace change and in many cases it prohibits change.  Why not do things like we always have done?  In business, it’s execute or be executed. (they get it) However, with NPO’s this type of mindset and urgency is just not there…yet.

The ideal solution is to create a separate operating division with the key change agents, and pilot and refine  new processes.  They do this in manufacturing, with cell models, and gather data to create best practices to yield better results going forward.  This helps with the buy-in, and this new approach slowly gets rolled out into other areas of the organization.

At the end of day, market forces will prevail.   As with any situation in the “real business world”, when you have too many companies chasing too few customers, you get consolidation.  Thus, NPO’s that have a clear value proposition,  show clearly how their service/solution offerings differ, and produce sustainable  social impact, will be left standing.

DB: Thanks for your time today Mr. Eddy.  You have brought up some really interesting points and I can see why and where this space has tremendous opportunity to improve.

Non-Profit Marketing vs. for Profit Marketing: Is there a difference?

Today I had the pleasure of interviewing Mr. Brian Eddy, MBA Binghamton University – Business Development & Marketing, for The Rehabilitation Center, large nonprofit in Olean, New York (south of Buffalo) (bio attached below). Mr. Eddy is a Subject Matter Expert in nonprofit marketing with over 17 years of experience within the sector.   He was kind enough to provide us an overview of some of the rather major differences in the nonprofit world, an idea of the looming shakeout in this space and some ideas on what nonprofits need to be aware of in order to succeed.

The following blog post is part one of a two part interview with Mr. Eddy.

DB:  Thanks for taking the time to join us today Mr. Eddy.

BE: Pleased to be here David and looking forward to this interview.

DB: When I think of nonprofits, marketing and sales don’t immediately spring to mind, but with the economic downturn I would guess that funding for nonprofits is down and many need to consider things they perhaps would never have done previously?

BE: You’re right David.  There has been an unprecedented change in this space and there is going to be a big shakeout in the near future between those that are willing to change / be proactive and those that just try to ride things out. Many factors, including the economy are driving what experts are calling Convergence. Basically, the three sectors, Government (Federal, State, Local), Nonprofits, and Businesses creating new, innovative business models, that go well beyond just doing a RFP & outsourcing services.

DB: What do you think is the greatest difference between nonprofit marketing and for profit marketing today?

BE: Nonprofits are governed by their structure and tax reporting mechanisms which have a big say in the marketing of them and how they are run.  In addition, nonprofits have several gatekeepers: (constituents) boards of directors, customers, and the CEO (marketing) has to report to.  Often a nonprofit has multiple boards that have to be reported to.  This makes the marketing much more challenging because you have to please multiple boards, getting approvals from many different internal gate keepers.  This is prior to going after your customers, and getting a buy-in from these folks. You add all the compliance and transparency regulations from funders, it’s a true wonder programs actually run and deliver services effectively with the reality of actual overhead costs not fully reimbursed.

DB: For some reason I never thought there would be multiple boards?  In most businesses there is only one that I’m aware of.  How does that affect a nonprofit?

BE: For the marketing director it creates quite the quagmire.  Who am I reporting to, what do I need to accomplish?  99% of the battle is keeping the internal constituents happy rather than outbound marketing planning, which you would think would be the base for all plans. Mission-based organizations tend to seek satisfaction from the people they serve, as these internal customers drive what programs & services offerings are based on what they want.

DB:  Interesting.  So it sounds like the duality of mission vs. profits is just the start and that pleasing the multiple boards, constituents and trying to figure out what you can market is down the track, rather than on the front burner with most for profits?

BE: Yes, you’re right.  There is always an ongoing internal battle of where is the line between mission and profits?  A nonprofit must have revenue of some sort in order to keep the nonprofit afloat. No money=No mission, no services provided, no reason for being. Thus, the word nonprofit is really an inaccurate or subjective term these days.

DB: That makes sense but why do nonprofits struggle with all their tax advantages vs. for profit companies?

BE: Since 1970, only 114 nonprofits have exceeded the $50 million revenue mark vs. 46,136 for profit for profit entities.  Scale is one of the biggest issues for marketing because nonprofits just do not have scale in most regards.  The larger the company the more likely marketing will play a bigger role, influence revenue and the ability to do more.  Thus, it is very hard to get ROI on a very small scale of many of these marketing rollouts.

Another part of the puzzle is that building capacity is an issue dependent on the resources involved (for example if you’re using disabled people to do the work there is a limited pool to draw on in your local nonprofit constituency) since you can only scale to the size of the workforce.  Thus, constraining marketing’s ability to bring in new business.  You can only sell as much capacity as you’re capable of delivering vs. for profit, which just goes out and hires more people.

DB: Interesting.  I don’t think most people would have that perspective.  What other issues besides scale do marketing directors face?

BE: I think one of the best ways to elucidate the answer to that question would be by using some thoughts from Dan Pallotta’s (Harvard Business School) book “Uncharitable” which states that there are economic “apartheid” issues that nonprofits face.  In his opinion the top 5 are:

1. Constraints on compensation

You can’t get the best and brightest with lower salaries, which limits you’re ability to scale and be a top organization.

2. Culture rewards timidity

Risk taking is not an inherent part of a non-profit whereas in a “for profit” company it is the best way to differentiate and quickly grow.

3. Discouragement of a long term vision

Given the constraints of the 990 IRS tax reporting – you have to dispose of most of what you make the same year or re-allocate.  Large nonprofits like Harvard have “foundation” dollars which allows them to get around this.  Small nonprofits do not have the financial wherewithal nor access to savvy tax planners to legally accomplish this.

4. Discouragement of paid advertising or marketing vehicles that could stimulate demand for services in the market place.

The driver here for most nonprofits is that they think that any dollars not spent on programs are wasted dollars.  They are often challenged to understand that you need to spend some money in order to get more money in for their programs and contribute to the overall social good they aspire to.

DB:  Does this come back to the nonprofit idea, or mentality that they should be able to get money for free without any outbound effort or a half way effort?

BE: Sort of.  99% of these nonprofits were set up to fill an unmet social service gap that the fed, state or county did not meet.  The whole structure was setup as a service delivery model – it was cheaper than doing it via the Fed or state.  This got around the Fed/State “Cadillac / very expensive employee fed benefits packages” allowing the same service to be delivered significantly cheaper.  Everyone benefited as it cost fewer tax dollars but provided the same or more benefit.

5. Prohibition of investment return

The UBIT – unrelated business and income tax returns.  You can’t have a disproportion amount of revenues not related to your sole mission and charter.  All these things are systemic structural issues that tie marketing’s hands behind their backs.  The nonprofit marketing paradigm is one that needs to be understood, addressed and worked around.

DB: So how do you make things happen from a marketing perspective with these enormous constraints?

BE: To start with very few nonprofits have integrated marketing and sales with the rest of the organization.  Peter Drucker states: In order for a nonprofit to be effective, marketing must be built into the total design.

DB:  (laughing)  I often see this in the “for profit” world.  Sales is on one side of the street and marketing is on the other.  Often they treat each as pariah – they don’t talk.  I have always seen this as a big issue.  If the marketing guys aren’t in the field with sales how do they know what the clients are saying / objections they are facing.  If sales  doesn’t work closely with marketing they often aren’t provided with the right tools.

DB: In part two, the interview will delve into what Mr. Eddy does for his clients, the key change drivers within the Convergence movement and where he thinks the nonprofit space is headed / what needs to happen in this industry.

Bio: Brian Eddy is the Director of Sales and Marketing at SubCon Industries, a division of The Rehabilitation Center in Olean, NY.  This nonprofit organization provides employment opportunities for people with disabilities.

With over 15 years of marketing experience within many industries and market channels, Brian works as a unique, social mission 3PSP (Third Party Service Provider), marketing both products, and value-added reverse logistics service solutions.  They provide companies with a social business value proposition that delivers solutions for added process capacity, customized service offerings, dedicated product return operations, and valid, transparent programs to fulfill CSR goals.

Prior to joining SubCon Industries, Brian was employed as a consultant at Universal Scheduling Co., a leading operations consulting firm.  He worked on projects at Delta Faucet and PPG Industries, focused on delivering results in productivity, quality measures, inventory planning and improving customer service levels.

Brian holds a MBA in Marketing from Binghamton University.

Groupon – I called this one!

When I first saw deal-of-the-day website Groupon in San Francisco a year or so ago I thought this is going to be a hit!  A company that can offer you major online discounts to restaurants and services in your home town, gives you Groupon “cash” to invite friends, uses Facebook / Twitter etc., has to be a winner unless they really screw up.

I started checking out this Chicago based company and liked their business model from the get go.  I cannot truthfully say that I thought a year later they would have a valuation of $1.2 Billion or that imitators would be popping up but I knew they had a solid chance to succeed if they stuck to their strategy.  As of the beginning of April they had over 3 million subscribers, are in approximately 40 markets and make money by getting a cut of the deal from the retailers (revenues expected to surpass 9 digits this year).  CEO Andrew Mason seems to have a good strategy in place.  But I’m curious how he plans to knock out the upcoming clone wars (my apologies for the bad pun – Mr. Lucas / Star Wars) which are already popping up in this space.  With the war chest he has in place ($50 million in cash) he might just squash them like Microsoft would (market leadership premium) or just continue to grow faster?

As far as I can tell there are not any patents surrounding Groupon, therefore the barriers to entry are manageable.  Silicon Valley Venture Capitalists always tell me they want something in “white space” but whenever you bring something like that to them they often have real trouble figuring out:

A. What is its value (nothing to compare it with)?

B. Are we brave enough to make the bet?

C. How quickly should we pull the trigger, or should we waffle and think about it?

The Groupon investors weren’t afraid of white space.  Early investors Eric Lefkofsky and Brad Keywell used some of the recent $135 million from Digital Sky Technologies (see Zynga) and Battery Ventures, to start a new VC called Lightbank which is re-investing in new social networking business such as Where I’ve Been and Poggled.  Both feel that the social commerce space has lots of room to grow and I’m betting their right.

Most importantly this new investment allows some of the early investors / employees to cash out now (atypical) while funding a global expansion.  Most investors / employees are first in last out waiting for their payout when the company IPO’s or more often is acquired.  Digital Sky seems to be on the forefront of this type of investment pattern (See Zynga, Facebook) and I expect it might be a welcome trend for entrepreneurs.

Notes: Previous to the $135 million “Series C” raise the Series B round of  $30 million was by Accel Partners and New Enterprise Associates.

Failures in this space of note: Mercata – Paul Allen – Vulcan Ventures