Business & Finance

B2B SaaS vs CPG: A Comparative Analysis

After recently building companies in both the B2B SaaS and CPG sectors, a common question I encounter is, “Which one do you prefer?” Both have their merits, but here are the key distinctions that have stood out to me over the past year or so:

1. Acquisition Path: Build or Buy?

When it comes to Mergers and Acquisitions (M&A), a recurrent question to potential acquires is whether to construct a new product or feature in-house or to acquire a company that already offers it. Here’s how this unfolds:

  • Technology & B2B SaaS: Major tech companies often possess the means and innovation drive to build new products and services in-house. An M&A prospect prompts teams internally to perform a ‘build vs. buy’ analysis, weighing the benefits and drawbacks of internal development against those of acquisition. This creates more internal debate and friction, which can impede the ability to get a deal done.
  • Consumer & CPG: Conversely, in the consumer space, most strategic acquirers rarely construct new brands from scratch. The challenge of distinguishing a new brand in a crowded market and the associated capital expenditure makes it a daunting endeavor, compared to allocating more capital to winning brands with existing distribution. Consequently, consumer companies have a more predictable acquisition trajectory than their tech counterparts.

2. Business Model Dynamics

  • CPG Companies: The business model for consumer goods is remarkably linear: design a product, package it, and sell it. Although challenges arise in marketing and pricing, the general model and contours for the business remain consistent across the board.
  • B2B SaaS: The business model here is multifaceted, and can often feel like a game of four-dimensional chess. I know it has for me. Founders must consider product-market fit, define target customer profiles, understand pricing dynamics, deal with platform risk, and stay on top of an ever-shifting competitive environment. This landscape is populated by well-established players, emerging and well-funded startups, and copycats, all vying for market dominance. Yes, all of these things are true in the CPG world, but I think they are much messier and elevated in the software world especially since you can, and have to, iterate on the products every day.

3. Profitability Profile: Understanding the Costs

  • Consumer World: The financial framework for physical products has established rules that are easily comprehensible.
  • Technology World: At Salesforce years ago, I would hear people talk about the beauty of SaaS because it is an annuity business. You build the software, sell it, and your gross margins are high because your marginal cost to build the product again is zero. You’re just provisioning a new account. However, what sometimes gets lost here is that software companies have to keep innovating and investing in R&D to stay ahead, which can mean more people and more expense. Not to mention adding customer success people to ensure the customers are happy and using the software correctly and successfully. Add to the fact that the most talented engineers are expensive, in terms of cash and stock-based compensation, and you quickly realize that your COGs for software development may get out of hand very quickly in order just to compete and stay ahead. We saw this happen this past few years which resulted in mass layoffs from larger tech companies. 

4. Brand Awareness: Social Media’s Role

  • CPG Companies: The world of social media has no shortage of discussions about beloved brands and products. This kind of visibility can boost brand awareness, making it exhilarating for those involved when their products become household names.
  • B2B SaaS: In contrast, enterprise software seldom garners the same kind of public enthusiasm. People rarely give the same amount of love to a workplace tool or solution in the same way they’d rave about their new favorite snack, shoe, beauty product, or piece of clothing. This translates to a subtler brand awareness for B2B companies.

In summary, we’re really comparing apples and oranges here and one is not better than the other, however, these are just some of the categories that have been most top of mind for me the past year or so when asked about the differences of running a CPG companies vs a B2B Software company. 

9 Tips for Mergers & Acquisitions

This is a repost from a LinkedIn post, for easy reference and since the topic keeps coming up.

A lot of entrepreneurs are now hustling to raise more money or sell their companies. Having just lived through two M&A events this year with P&G and Salesforce, wanted to share some brief M&A lessons:

1. Companies don’t buy companies. People at companies buy companies. Know who your buyers and champions are and build relationships with them.

2. 1,000,000 things need to go right for successful M&A. 1 thing needs to go wrong for unsuccessful M&A. Every detail matters.

3. Bankers are helpful, but don’t expect them to be a silver bullet to getting a deal done. You may pay more than feels reasonable, but it’s still a good insurance policy to making sure a deal gets across the finish line.

4. A deal isn’t done until it’s done. The unexpected will almost certainly happen.

5. You need competitive tension and urgency. Just like sales, or raising money, without compelling events and some FOMO in the process, it’s easy for things to drag out. See 1.

6. Get organized. All of your files, contracts, documents, vendor lists and pretty much everything you’ve ever done will need to be reviewed. Get ahead of it and organize it all so you can move fast and efficiently. Also, see 2, 3.

7. Understand the buyer’s intentions. What’s strategic to them and why? Your business will be valuable for different reasons to different buyers, therefore, your story will need to be different to different buyers. For example, with TULA, some buyers cared more about our science and R&D while others cared more about our digital capabilities.

8. Delegate everything. Once you get into the M&A track, it becomes a full time job. Make sure you’ve delegated as much as possible to your team so you can focus on getting a deal across the finish line. Also, see 3.

9. Manage your emotions. The highs are high and the lows are low. Be prepared to deal with a roller coaster of emotions.

If you’re going through M&A, thinking about it and/or have some questions, drop em in the comments.

Qualified Small Business Stock and ChatGPT

Qualified Small Business Stock (QSBS) is a critical topic that most founders are unaware of.

Instead of writing my own blog post about what it is and why it is important, I asked ChatGPT:

describe what qualified small business stock and why it is financially beneficial to people that have equity that qualifies as qsbs

And the answer:

Qualified small business stock (QSBS) is a type of investment in the equity of a small business that offers certain tax benefits to the investor. QSBS is generally defined as stock in a domestic C corporation that is acquired at its original issue, directly or through an underwriter, and that satisfies certain requirements regarding the corporation’s active business, gross assets, and length of time the stock is held.

One of the main financial benefits of QSBS is that it allows investors to exclude a portion of the gain from the sale of the stock from their taxable income. For example, if an investor buys QSBS at a cost of $100,000 and sells it later for $200,000, they may be able to exclude up to $100,000 of the gain from their taxable income. This can result in significant savings on taxes and make the investment more financially attractive.

Another potential benefit of QSBS is that it may qualify for a lower capital gains tax rate. Under certain circumstances, the gain from the sale of QSBS may be taxed at a maximum rate of 28% rather than the higher rates that apply to other types of capital gains. This can further reduce the tax burden on the investment and increase the potential return on the investment.

Overall, QSBS can be a financially beneficial investment for people who have equity that qualifies as QSBS, as it offers potential tax savings and may be eligible for a lower capital gains tax rate.

It missed an important point about how much tax exclusion you can benefit from so I followed up with:

What is the total amount of money an investor can exclude from the gain of the sale if the equity is treated as qualified small business stock?

And the answer:

The total amount of gain that an investor can exclude from the sale of qualified small business stock (QSBS) depends on several factors, including the amount of the gain, the length of time the stock was held, and the amount of the exclusion that was previously claimed on the stock.

Generally, an investor can exclude up to 50% of the gain from the sale of QSBS if the stock was held for more than five years. This means that if an investor buys QSBS at a cost of $100,000 and sells it later for $200,000, they may be able to exclude up to $100,000 of the gain from their taxable income.

However, the amount of the exclusion may be limited if the investor has previously claimed an exclusion on the same QSBS. In this case, the exclusion is limited to the greater of 10% of the stock’s adjusted basis (i.e., the cost of the stock plus any improvements made to it) or $10 million. For example, if an investor previously claimed an exclusion of $5 million on the same QSBS and the stock’s adjusted basis is $100,000, the exclusion would be limited to $10,000 (10% of the adjusted basis).

In summary, the amount of gain that can be excluded from the sale of QSBS depends on several factors and can vary depending on the specific circumstances of the investment.

Lastly, I needed an image for this post. So I asked Dall-e-2:

create an expressive oil painting of a dog in a suit, smiling, depicted as an explosion of a money flying all around them

The results:

So there are two really important and unrelated points here:

  1. If you are a founder or early-stage employee, you should internalize QSBS and speak with your accountant about it.
  2. It’s worth spending some time with OpenAI and ChatGPT. It’s wild and only took me 5 minutes to create this post.

Five Questions to Ask Before Joining that Start-up

This post originally appeared on Harvard Business Review.

Mark Zuckerberg reinvigorated an entire generation when he added nine zeroes to the end of his bank account before he was 30 years old. He made start-ups great again. He showed the world that youth is not a preventative factor of success and that work can actually be fun. This theme of wealth creation while doing something you love is why an increasingly large percentage of graduates are turning to start-ups over more traditional jobs. It might also be why people are quitting their consulting gigs and investment banking positions to pursue a career in start-up land. Just yesterday I ran into a recent Harvard Business School graduate who quit her consulting gig in order to follow her dream at a new start-up.

Unlike big, established corporations or what we might classify as a “steady job,” start-ups present more inherent risk because there are more variables and questions for a prospect to consider. Things like: Does this start-up have the right team? Do they have money? What if I choose the wrong company? Nevertheless, this risk is often overlooked because start-up employee prospects realize that new ventures are more fun, are intellectually rewarding, and could have big paydays down the line.

But there are practical questions that all start-up prospects should consider when looking to join the next could-be big thing.

How many outstanding shares exist? Joining a start-up can have significant upside if you own equity in the business. That upside is determined by two things: the percentage of the company you own and the valuation or price of the company upon a liquidation event (e.g., the sale of the company). When you join a start-up you are often issued stock options. Maybe you are issued 1,000 options; maybe you are issued one million. This number is only as important as the number of outstanding shares in the company. If you are issued 1,000 options and there are 10,000 outstanding shares, then you may own 10% of the business. Make sure you ask your prospective start-up employer how many outstanding shares there are, so you can understand what part of the company you own. If they don’t want to tell you, then you may want to reconsider the job altogether. If they can’t tell you this, what else might they be hiding?

What is your stock option vesting schedule? Time flies in start-up land. When you get an offer from a start-up, make sure you understand how long it will take to actually receive the equity you are entitled to. A typical vesting schedule has a one-year cliff with a subsequent three-year earn out that vests each and every month. So if you think you might leave within four years, make sure you are comfortable with the vesting schedule. Four years is a long time in a start-up.

How restrictive is your noncompete or non-solicit agreement? I once read a noncompetition agreement that said anything I worked on — in- or outside of the office, during working hours and non working hours — was owned by the employer so long as I was employed there. This is a very restrictive agreement and in so many words says you are a slave to the company. Make sure you understand what this part of your contract says. Employees in the start-up world often bounce to and from various companies, so you want to make sure you’re not putting yourself in a compromising situation down the road.

Does the team have a track record? Winners know how to win. It’s why venture capitalists tend to favor entrepreneurs that have a proven track record (PDF). A VC once told me that he “looks to invest in people with an unfair advantage over their competitors.” These entrepreneurs are people who know the ins and outs of a successful path in a specific domain. Before joining a start-up company, make sure you have a very strong understanding of the team, their investors, and their advisers. This will give you a great indication as to whether or not the start-up has the right ingredients for success. If the team members don’t have a track record, that’s alright, but make sure you understand what it is that will put them on a winning path.

Why am I really doing this? The most important thing you need to ask yourself when joining a start-up is why. Some people do it because they hate their jobs. Some people do it because they want the credentials. Others join because they think they will get rich or it’s the cool thing to do. Ultimately, when you are looking to join a start-up you need to understand the real motivational factors behind your search, because if your reasons do not align with the opportunity, it is likely you will be neither happy nor successful.

With advancements like cloud-based hosting, labor marketplaces, online education, and video conferencing, it is now cheaper than ever to start a company. As a result, we will see continued growth from emerging start-ups and their respective employment opportunities. If you are debating whether or not to join an early-stage venture, make sure you are asking the right questions in order to mitigate your risk and maximize your chances of success.

5 Corporate Hacks to Make Your Company More Social

This post originally appeared on Forbes.com.

If Facebook has taught us anything over the past few years it has taught us this:

Cover of "Hackers"
Cover of Hackers

1. A hacker culture works to drive accelerated growth in a business. Mark Zuckerberg writes in a letter to his investors, “Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo.”  It’s hard to argue that this approach doesn’t work. Facebook today has over 850 million people and to give you some perspective, that would make it the third largest continent in the world behind Asia and Africa. So clearly, a hacking culture does help move a business and it’s product forward. But why should a hacking culture be limited to a silicon valley technology company?

2. The world is social. Legacy, societal hierarchies no longer exist. Almost every day I encounter new stories with a similar theme: a group of like-minded individuals come together to affect change – and they do so from the bottom up. A great example is something called Cash Mobs, where a group of people visit a local business, as a large group, and share in a collective spending spree. In many cases they can even alter the prices of products. It happens organically and it happens from the bottom up.

Yet another example is one I learned about recently, called “Invisible Children.” This movement is working to disarm Joseph Kony, one of the world’s worst war criminals, from his position of power in Uganda. When the movement first started, the members unsuccessfully challenged government officials to intervene. Shortly thereafter, the organization decided to use social media to raise awareness and demand change. As a result, they were able to to generate participation from hundreds of thousands of people, the original naysayers, acclaimed celebrities and even President Obama. In today’s world, all organizations should expect this paradigm shift to affect their business in one way or another – without their control and without their permission.

So how can businesses embrace a Facebook-like hacking culture that could lead to accelerated growth?

Here are a few corporate hacks you can use to make your company faster and more social:

The “Team Collaboration” Hack: Assembling and curating ideas can be very time-consuming. It can also destroy your email inbox and waste hours of your day. Instead of accruing very long email threads, create a private Facebook group to facilitate the conversation. It is a free, private forum and you can invite only those you want to invite.

The “Customer Service” Hack: Social media is less about “media” and more about real communications between real people. People will either praise your brand or complain about your product so make sure you have people on your team listening to your brand. You can create google alerts or twitter alerts using their search functionality and RSS feeds. This will alert you when certain keywords are mentioned and from there, you can reach out to engage with them.

The “I Need Legal’s Approval” Hack: In many corporations, marketing teams require legal approval.  In today’s market there are many recent law graduates looking for work. Think differently about hiring and consider opportunities for lawyers to be an integral part of your social media marketing efforts. You’ll have someone on board that can quickly approve content.

The “Product Development” Hack: Why spend a ton of energy and time trying to figure out what your customers want? Simply ask your customers what products they want and use that feedback in your product development cycle. If you don’t ask, they’ll tell you anyway so you might as well ask.

The “Customer Acquisition” Hack: People are opting in to become fans and followers of certain brands. It is now easier than ever to identify and recruit customers of your competitors. Just look at their social media properties, reach out, and engage in good, meaningful dialogue.

Those are just a few social hacks to drive additional progress in your organization. What else have you seen?

Connect with Dan Reich on Twitter – @danreich.

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It’s All About Execution and Stick Figure Cat Drawings

English: Mark Cuban
Mark Cuban is an investor of iwanttodrawacatforyou.com

This post originally appeared on Forbes.com.

What would you say if I told you I was going to make stick figure cat drawings?

Your first response may be to highlight the fact that I’m above the age of 4. Now what if I told you that this was not a child’s arts and crafts project, but my business idea. Not only is this my business idea, but my sales pitch includes a song and dance called, “I want to draw a cat for you.” What would you say then?

I think many of you would ask me if I’ve lost my mind and that would be a fair question. However, the truth is that absurd business concepts, even dramatically idiotic ones like stick figure cat drawings, can be brilliant, revenue generating businesses so long as they are properly executed.

On ABC’s Shark Tank, a show where investors get pitched and invest their own money, a guy named Steve Gadlin walked into a room, stood before five prominent investors and proved that execution is all that matters. He danced, he sang, he pitched a business predicated on cat drawings, and secured an investment from Mark Cuban, a billionaire investor and owner of the Dallas Mavericks. This is something worth seeing for yourself.

The lesson to be learned here is that there is so much more to a successful business than just the idea. The trick to taking a business idea and turning it into a successful reality is all in the execution of that idea. It’s about taking your concept, regardless of how “out there” it may be, and making it work even if those around you liken your idea to the works of a 4 year old. It takes inventiveness, creativity, and lots of hard work.

Many of todays greatest inventions, if turned into a sales pitch, would be as television worthy as stick figure cat drawings. Just imagine what a Wright brother’s sales pitch may have sounded like. “So you see what those birds are doing? Yeah, its basically like that but with lots of wood and metal. Wanna invest?”

We encounter people every day who come up with crazy ideas, but the people that succeed are the ones that can execute. They are the people whose convictions and beliefs outweigh the objections and negativity of the naysayers.

So as I look out of the window and watch the planes fly overhead, I’m constantly reminded that no idea is too small or too stupid. Ideas don’t mean anything without good execution. And if the planes aren’t enough of a reminder, I suggest you order a picture of a stick figured cat and hang it above your desk.

Connect with Dan Reich on Twitter – @danreich.

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How To Start A Company

This post originally appeared on Forbes.com.

Starting a company is a daunting task and taking the first step sometimes seems impossible. I’ve encountered a number of people with the dilemma of “I know what I want to do but I don’t know how to start.” And rightfully so. Taking an abstract idea from thought to fruition is one of the hardest things to do. It’s why the failure rate of new business endeavors is so high. It’s also why most investors value people and execution of ideas above anything else. Ideas are a dime a dozen, but being able to execute on a vision is an entirely different story.

So how does someone actually start a business? The great thing about starting a business is that it requires creativity. Sure, you need to be creative in formulating the idea, but I think what goes overlooked often is the fact that you need to be even more creative with specifics around how you start the business. It doesn’t really matter what industry you are in. If you can be creative at both developing the idea and launching the business, I think you’ll have greater chances of success.

Here are a 7 examples of how you might consider starting a business.

1. Build a specific solution, for a specific problem, for a specific client. Most doctor’s offices confuse me. Not only do they confuse me, they drive me crazy. When I walk into a doctor’s office today I look over the counter and see endless shelves of manila envelopes. There must be thousands of sloppy, handwritten notes just sitting there unprotected in those color coated manila envelops. Every time I walk in I have the urge to walk up to the doctor and say, “give me $100,000. I’ll build you a digital solution for this mess and you will get lifetime rights to the technology. I’ll get to sell this to other doctors but you will get to use this technology forever.” If you see a specific problem that you think you can address, you might be able to find one client who will fund development. You will give them lifetime rights to the technology and in return, they will pay you and let you resell the solution to others.

2. Sell now, build later. Sometimes the best way to go about starting something is to first understand whether or not it makes sense to start. The best way to do this is to sell or pitch an idea to perspective clients before you even have a working or tangible product. When I was in college, I told the owner of a bar that I wanted to host an event on behalf of my marketing firm. I told him I was going to donate money to the charity I’ve worked with in the past. I told him I was going to bring in my entertainment. I told him I was going to create a marketing campaign. These were all lies. I didn’t have any of these things. I didn’t have a “marketing firm.” Well, he agreed to the event and I built up all the necessary pieces after it was sold through.

3. Go back to school. Do you know how much intellectual capital exists in academic universities? That’s why they are called academic institutions. They are pillars of knowledge and these pillars often facilitate cutting edge research. But sometimes these new technologies are never designed with the goal of commercialization in mind. When I was in school, I had a professor working on technology that could literally change the world. He had no interest in bringing this technology to market. He only cared about being published in some research paper. When I asked if I could take the technology to market, he was ecstatic. I expect there are others out there that have great innovations but have no interest in building a business with them. But maybe you do. Physically going back to school to explore these opportunities could potentially lead to the start of a new endeavor. It could be a school visit. It could be a school enrollment.

4. Combine and conquer. Sometimes two heads are simply better than one. It’s tough work staying motivated or even getting motivated in the first place to create a business. When you team up with someone and bring on a partner, you might find that a little bit of motivation and encouragement are enough to move the needle in terms of execution. Having a partner might also free up some burdens so you can focus on more pressing issues. And just having concerted dialog with someone else, who has the same directional goals, could also be that missing factor needed to start a new business.

5. Take money, make money. There are certain companies and industries that require a large capital investment to get started. For example, it would be nearly impossible to build an alternative energy company without some form of initial capital investment. These funds would most likely go towards research and development or manufacturing. In some cases, you may need to just go out and ask people for money in order to fund the development of the first iteration of your product or technology. But maybe you aren’t building an energy company and maybe a quick infusion of $5,000 to $10,000 from friends and family might be enough to kick start your company.

6. Leverage a distressed asset. People make great livings flipping houses (or used to anyway). They buy cheap and sell high. Many times people will buy cheap, fix up the house and bit, and than sell high. This is no different with businesses. There are plenty of distressed assets and companies out there that would love to be acquired for peanuts even though there is still huge potential and room for growth.

7. Don’t be glamorous. I heard a story once of a guy who sold hot dogs for a living. He made about $800k a year selling hot dogs and did so by setting up two hot dog stands at the entrances and exits of Home Depot stores. Not exactly an exciting job but it definitely pays the bills. There are probably a dozen other ways you can turn a low level job into a meaningful, high income producing business.

I’m sure this list can go on for quite a while, but what methods of launching a business have you seen?

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My Company Spinback Is Being Acquired

As the news says, today my partners and I over at Spinback are pleased to announce that we’ve been acquired by Buddy Media, the Facebook management system of choice for eight out of the ten top global advertisers.

When we started Spinback the goal was to build the most cutting edge technology that would facilitate conversations and sharing of products. More importantly, we wanted this technology to also track how word of mouth marketing affects new sales and new customer acquisition.

Now as a part of Buddy Media, we will have  all the tools and infrastructure necessary to accelerate our collective mission which is ultimately about leveraging this new social web in new and interesting ways for leading companies around the world.

We are really excited to begin the next chapter and I’ll leave the rest of the details to Buddy Media.

On to the next one…

UPDATE – Here are a few press releases:

UPDATE – June 14, 2012 – Buddy Media was acquired by Salesforce

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We are Wall Street

Wall Street
Image by jpellgen via Flickr

The market almost fell 10% today and one of my i-banker friends sends me this email chain…

We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. I didn’t hear America complaining when the market was roaring to 14,000 and everyone’s 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I’ve never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?

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