Article first published as Why Selling To The Government Can Downgrade Your Startup on Technorati.

First Greece, now Spain and Italy. Across Europe, historically solvent sovereign governments are suffering from an acute case of systemic deficits. Now, more than ever, government agencies in the US and abroad are lousy startup customers.

I am not a government contracting expert. In fact, during my many years as an operational entrepreneur, I explicitly avoided working with governments, for the reasons described below. However, I am familiar enough with the government procurement process to know that it can result in the down grade of an unwary startup’s credit rating.

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Note: I use the term government herein as a matter of convenience to apply to all forms of municipal organizations; city, county, state and federal.

As highlighted in Negotiating With Pawn Stars, an entrepreneur’s two most valuable assets are time and money. Government customers abundantly waste both of these assets by negatively impacting a startup’s cash flows while causing it to spend unnecessary time participating in laborious approval processes and elongated sales cycles.

Some startups opt to partner with larger companies which have pre-established relationships with government customers. In the parlance of government contracting, this approach is termed a “prime and sub-prime relationship.” Although it mitigates the negative impact on a startup’s time and money, this arrangement requires the sub-prime startup to surrender a significant portion of their margin. In addition, prime contractors often jealously guard their relationship with the government buyer, which confounds the startup’s efforts to graduate from sub-prime to prime status.  

The Downside Of Government Contracting

Vendor Approval Process – In many instances, governments require companies to abide by arduous vetting processes in order to become an "approved" vendor. In the case of the US Federal Government, the steps a company must traverse to become approved by the Government Services Administration can take years and cost a small fortune of precious startup capital – time and money most startups simply cannot afford.

Slooooooow Mover – The typical government procurement process is not driven by a sense of urgency. Rather, the purchasing process is generally lengthy and requires vendors to commit significant time and resources, with no certainty that they will derive a single dollar for their efforts. Approved vendors are then required to participate in cumbersome Requests For Proposals. As noted in RIP RFPs, these voluminous documents should generally be avoided by startups, as most young companies do not have the internal resources or the luxury of time required to succeed in a multi-vendor bakeoff.

Successful startup selling is largely predicated on velocity. Thus, startups should Go For The No; quickly determine which prospects are most likely to purchase in the near term and focus your adVenture’s energy on delivering these prospective customers an awesome user experience. This is nearly impossible to quickly determine when the sales process is rigidly defined by arbitrary rules..” Indecisive prospects diffuse your focus and slow down your sales velocity. “Maybes” are much worse than quick “No’s.” Unfortunately, governments seldom do anything quickly, including telling a startup, “No.”

Slooooooow Payer – The government is a notoriously slow payer. Officially, the Prompt Payment Act requires the US government to pay its vendors in 30-days “after receipt and acceptance of material and/or services.” In actuality, payments routinely extend beyond this threshold, with 120-days outstanding not uncommon.

When the US government announced the 2009 Cash For Clunkers stimulus plan, it promised dealers they would receive payment “within 10-days.” Unfortunately, the majority of the government’s payments were not submitted until months after the dealers had paid for the used cars which they purchased on the government’s behalf. Even when the government has good intentions, it is difficult for it to act in a timely manner. Good intentions will not pay your light bill.

Capricious – Non-government customers sometimes make irrational decisions that are difficult to predict; government customers do so on a routine basis. As the decision makers come and go with the latest election cycle, a startup can lose a government account for no reason other than the newly elected officials want to give a hearty "thank you" to a company that greased the skids for them during the election. In addition, government budgets are prone to draconian, across-the-board cuts which often have no correlation to the efficacy of specific programs or vendors’ solutions. It is frustrating to lose an account to a formidable competitor. It is downright criminal to lose a hard-fought sale because of crony capitalism.

Set Asides – Despite the controls bureaucrats create to ensure a fair procurement process, it is any but. Most startups do not have the financial wherewithal to make adequate campaign contributions to purchase government set-asides or win no-bid contracts. In most cases, startups are “set aside” to make room for Big Dumb Companies (aka Big Dumb Campaign Donors), when it comes to obtaining lucrative government contracts.

Bro Factor – An inherent advantage startups enjoy is the Bro Factor. Unfortunately, this startup weapon is difficult to deploy when dealing with governments, due to the dispassionate nature of most bureaucrats. Exceptions certainly exist, but most government purchasing officers make a concerted effort to avoid developing friendly rapports with commercial vendors. More significantly, many government employees are simply not passionate about their jobs, which further complicates the Bro’ing up process, as it is difficult to create intimate, personal relationships with dispassionate, detached workers.

Mitigating Downside – Unlike the private sector, in which many buyers are focused on gaining a competitive advantage, the fear of loss is often the primary criteria motivating politicians and their appointees. As such, optimizing your company’s value proposition to satisfy the government’s low-risk threshold might result in a sub-optimal solution in the commercial arena.

High Volume / Low Margin – The combination of the low profitability of competitive bid contracts, the large size of many government procurements, and extended payment terms can be deadly for a fledging startup. Many a small business has been driven out of business attempting to satisfy a marginally profitable government contract.

The Tyranny of Low Expectations – Post sale, governments are typically undemanding customers, due to the lack of accountability in most bureaucratic organizations. Aggressive commercial customers help startups improve its value proposition with frank criticism, product roadmap suggestions and new use cases. Conversely, governments generally offer little constructive feedback.

When I was leading enterprise sales for GoToMyPC, we closed a very large deal with a municipality in Texas. The software was purchased with federal money from a “green initiative” which attempted to reduce the number of commuters. In concept, it sounded great. Commuters would use GoToMyPC to occasionally work from home, thereby reducing the number of cars on the road. In actuality, a minority of the purchased licenses where activated, resulted in a waste of tax dollars. The lack of accountability as to the program’s success doomed it from the outset, despite our diligent efforts to demonstrate GoToMyPC’s inherent value.

Lethargy Can Be Your Friend

Many of the factors which make governments disadvantageous startup customers also act as competitive barriers, once a relationship is established.

Barrier To Entry – Once you are in with a government entity, the same inertia which made it difficult for you to secure the sale will make it similarly challenging for your competitors to displace you. Government programs generally continue in perpetuity, as do many of the procurement contracts which underlie these never-ending initiatives. An existing relationship also facilitates selling additional goods and services by simply amending your previously approved government contract.

Low Default Risk – Unless you are selling to Greece, Mozambique or California, the risk that you will never get paid is relatively low. The relatively slight default rate risk facilitates factoring such receivables, thereby accelerating a startup’s cash inflows. This startup financing tactic is discussed at length in Venture Debt.

Budget Drain – Government workers are trained to drain their budgets annually to avoid being granted a smaller budget in the following year. Approved vendors who enjoy an existing relationship with the government can leverage this inclination to waste money at the end of each fiscal year by pre-selling additional products and services. If the government cannot take delivery of such items by the end of their fiscal year, you can negotiate an upfront payment, which allows the bureaucrats to fully expend their budget while providing you with guaranteed future revenue and interest-free financing.

Although government customers are not without their merits, startups should only target such bureaucracies when they can obtain a market price and avoid an extended and costly sales process. By focusing on commercial enterprises that share your adVenture’s sense of urgency and profit motive, your startup can maintain its solvency and avoid a credit rating downgrade.

Despite what the most earnest Marketing Executive will tell you, tradeshows never make or break a company. Ignore your sales and marketing people when they tell you that your company will be embarrassed if you do not purchase an expansive, $150,000 booth. They should be embarrassed for uttering such ludicrous advice. If one or more of your team members has booth envy, require them to memorize the refrain from Public Enemy’s “Don’t Believe the Hype”.

Splash in the Revenue

If you are not closing sales at a tradeshow, the investment to place a booth on the show floor is likely unwarranted. Using a tradeshow to establish brand identity and make a splash is usually money poorly spent. Only Big Dumb Companies (“BDC’s”) have enough money to waste in such a profoundly inane manner. As noted in Conventional Wisdom Isn’t, in many instances, bigger is not better.

Your customers will buy from you because your solution economically fulfills their expectations. They will not remember what your tradeshow booth looked like by the time they get on the plane to sleep off their hangover on the flight home. Booth size does not matter to them and it should not matter to you either.

Assuming you are closing business on the show floor, you can enhance your close rate by making it as easy as possible for your prospects to become customers. One way to do so is to create a streamlined, show-only contract that is short, limits your prospects’ risk and can be signed right on the show floor without the need to get the prospect’s legal team involved. Depending on the nature of your product, this might be best represented as a Paid Pilot or some other demonstration oriented sale. Pricing should be positioned as a show special and you should give your prospect an easy out if your solution does not satisfy their needs.

Boothmates and Conference Rooms

The Fringe method for maximizing the impact of a tradeshow is to cajole one of your partners into giving you a small portion of their booth space. This will save you money while still providing you presence on the show floor. The very public affirmation of your relationship with the BDC will also enhance your credibility. If you properly leverage your partnership exposure, you should be able to encourage other BDC’s to partner with you.

You can also economically establish a presence at a show by booking a conference room or suite in a nearby hotel. Use such rooms for private meetings, to perform product demonstrations and entertain prospects in a controllable and intimate setting. This approach allows you to play upon prospects’ and potential partners’ egos by emphasizing the exclusive nature of a private invitation to your solution suite.

As noted in Competing From The Fringe, tradeshows are ideal settings to gain competitive insights. The confidentiality afforded by a private forum will preclude your competitors from gaining firsthand competitive knowledge that they might be able to use against you.

Nurses in T-shirts

Do not confuse chachkie interest with product interest. At one tradeshow I attended early in my career, our company had one of the busiest booths on the show floor. We had a very novel product that was new to the market. We also were giving away really cool T-shirts.

The Chairman of the company, who also attended the show, would tell anyone who would listen (and even some who would not) that, “our booth was nearly knocked over by nurses”. In a vacuum, this was a true statement. Unfortunately, the nurses were interested in snagging a free T-shirt and really could have cared less about our product. The minority who had a legitimate interest in our product had no influence on the buying process. As we eventually (and quite painfully) learned, our product was purchased by surgeons and hospital administrators, not nurses. As such, we should have escorted the nurses out of our booth to make room for real customers, rather than giving away T-shirts purchased with investors’ money.

The fact that the Company’s Chairman was at the tradeshow is indicative of some of the challenges we faced as a Management Team – see Founderitis for suggestions regarding how to deal with a rogue, misguided Chairman.

Lessons Learned: Qualify your lead source, properly differentiate product interest from chachkie interest and only give out chachkies to potential decision makers.

Tradeshows Are Not Vacations

Tradeshow organizers place marginal shows in resort destinations for obvious reasons. They know that BDC employees are more likely to attend a show if it is hosted in a desirable locale, even if it is a complete boondoggle.

Unfortunately, your firm does not have an equivalent travel budget of the typical BDC. As such, remind your team that they can take plenty of vacations once your adVenture is purchased by a BDC. Until then, tradeshows should only be attended by people who can drive sales. Less is more – a small team focused on closing sales in a private suite is enough.

Be sure your team understands that the proper way to look at competitors’ lavish booths is to assess how many sales they must close to recoup their costs, let alone make money. You might also remind your folks that you prefer to put cash in your employees’ pockets while investing the remainder to fuel the company’s growth, rather than purchasing glitzy, ego-driven tradeshow monstrosities.

It’s fake that’s what it be to ‘ya, dig me?
Don’t believe the hype…
Public Enemy

Tradeshows are marketed based on fear of loss. Entrepreneurs are encouraged to believe that they must pay top-dollar for the ideal booth location, compelling chachkies and an imposing booth that will capture the imagination of its potential customers. Don’t believe the hype.

Your decisions related to tradeshows should be devoid of ego and emotion. As with any significant expenditure, deploy a rigorous and disciplined return on investment analysis to each show. You can secure your place on The Fringe by rejecting booth envy, focusing on closing sales on the show floor and policing tradeshow attendance to avoid them turning into company paid vacations.

Do you have any tradeshow tips and tricks you care to share? We would love to hear about The Fringe initiatives you have used to drive show sales and/or reduce tradeshow costs.

Once you obtain funding, it will be worse than hitting the Lottery. Instead of hearing from your long lost third-cousin, you will be inundated with an avalanche of ‘congratulatory’ emails, calls and letters from people who want to relieve you of the burden of your hard-earned equity round. Many such ‘congratulations’ will come from consultants.

An entrepreneur’s two most important assets are her time and money. There is nothing under the sun that will suck up your time and money faster, more prodigiously and less effectively than a consultant.

Please Look at My Watch and Tell Me What Time it Is

Jack Black was wrong. In the movie School of Rock, his irreverent character tells a group of teachers, “Those who can’t do, teach. Those who can’t teach, teach gym.” In fact, a more accurate statement would be, “those who can’t teach, consult.”

Can a fee-based consultant ever economically add value to a startup? I suppose so, but I haven’t ever seen it. Surely, among the tens of thousands of effective and honest consultants running about, a significant number of them are well positioned to help startups – right? Sadly, the answer is “No.”

Why are consultants usually an ineffective use of a startup’s funds?

Consultants are best suited for Big Dumb Companies (“BDC’s”) who want someone to tell them what they already know in order to substantiate a preordained course of action. For instance, many a BDC CEO has initiated a consultant to study cost cutting issues before announcing a significant layoff. In this way, the consultant becomes the scapegoat behind the tough decisions that the BDC’s do not have the guts to execute on their own. Startups cannot afford such scapegoat luxuries.

There is an inherent conflict in a consultant’s business model and the needs of a startup. Consultants trade their time for money whereas startups need to trade their money for results. In order to eliminate this conflict, any consulting relationships you establish must be performance-based. In this way, by tying compensation to results, your startup can trade its money for even more money.

For instance, if a consultant proposes to help you with public relations, pay them a commission equivalent to the greater of a flat fee per story placed or a percentage of revenue generated from the PR coverage. Tracking such revenue can be a challenge but is possible to approximate the revenue impact of PR activities via the use of unique URLs, customer surveys, etc.

If a consultant claims they can enhance your marketing efforts, pay them based on their direct impact on your incremental sales. Basing a consultant’s compensation on the incremental revenue they generate is a great example of a deal that is on The Fringe (for other creative approaches to partnering, see Agreements on The Fringe).

Performance-based deals are healthy for all parties. In the ‘normal’, non-startup world, a consultant will generally accept any engagement in which the client can pay for their services. The relative value of the consultant’s impact upon the client’s business is usually not the consultant’s primary consideration when evaluating whether or not to accept a particular engagement.

However, when you pull the consultant out on The Fringe and negotiate a performance-based deal, you are ensuring that they will only enter into an engagement with you if they believe that they can move the needle and make a real impact on your adVenture. The consultant will be compelled to vet your engagement based on their ability to drive concrete results, rather than your wherewithal to pay their invoices. Thus, performance oriented deals reduce the risk that your startup will waste its two most valuable resources.

I hope you are not thinking, “But John Greathouse, the consultant cannot take on my execution risk. What if they give me great advice and I cannot properly implement it?” If the consultant truly believes in you and your team, then they will be willing to share the execution risk with you.

Time Is Not Money, Time Is Everything

Performance-based deals can effectively mitigate your monetary risk of entering into a non-productive consulting relationship. However, it is more difficult to address the risk associated with the misuse of your time.

One of the best things about being an entrepreneur is that there are no rules. You can do anything you want with your time.

One of the worst things about being an entrepreneur is that there are no rules. You can do anything you want with your time.

Exactly.

The lack of rules and structure causes many entrepreneurs to work incessantly. Such entrepreneurs soon discover that no matter how hard they work, there is never enough time to do everything that has to get done. Given all the demands on your time, the hours spent educating a consultant regarding your business are costly. This time investment is even more expensive when you consider that the consultant’s edification will likely be lost to your organization once the engagement is terminated. Unlike employee training costs, which can typically be spread over years of service, the relative return from training a consultant is modest and pricey. In addition, when a consultant moves on to another client, any institutional knowledge they may have gained walks out the door with them.

Passion Cannot be Outsourced

Any function within your startup that involves iterative learning, passion and/or close proximity to your customers should not be outsourced. Such positions include: PR, Sales, Product Development, Lead Generation, Strategic Planning, Fund Raising, etc. As noted above, you can contract with a performance-based consultant to assist with PR, but never place sole responsibility for the execution of a passion-driven duty into the hands of a dispassionate third party.

The relative degree that passion is a prerequisite for success and the rate of iterative learning both diminish as your company expands. Thus, as your startup matures, many of your operational functions can be successfully outsourced. This is why BDC’s can often successfully outsource a wide variety functions. Their story, market positioning, products, etc. are well defined and broadly understood. BDC’s focus on executing defined tasks, not on defining the tasks to be executed, as is often the case at a startup. At the early stages of your company’s life, you cannot rely on disinterested, hired guns to define your company’s key tasks.

Pyramid Power

To fully appreciate why consultants often do not fulfill a startup’s needs, it is important to understand the typical consulting engagement sales cycle.

When a consulting firm tries to get their hand in your pocket, they usually lead with their Rainmaker. This is generally an engaging, glib, attractive person that you can almost guarantee you will not see again, once the Engagement Letter is signed. Instead of focusing on the welfare of your business, the Rainmaker will be off making rain somewhere else while your engagement is managed by worker bees who are likely biding their time as a Junior Consultant before earning their MBAs with the intent to graduate and become Rainmakers in their own right.

As described in Roping In The Legal Eagles, service firms are pyramids. A handful of Rainmakers sit at the top, while most of the ‘real work’ is done by less experienced and therefore less insightful folks. The larger the firm, the larger the pyramid. The larger the pyramid, the greater the distance between the Rainmaker who closes the sales and the worker bees who have to deliver on the Rainmaker’s promises.

Thus, do not be enamored by a service firm’s size. Size does matter, but in an inverse manner. The larger the firm: (i) the greater the disconnect between the Rainmaker and the workers, (ii) the higher the personnel turnover, and (iii) the more time you will be forced to expend training each new crop of MBA-wannabe’s. Remember – your adVenture’s time is precious.

Rhymes with a Type of Pasta

One startup I joined was very proud that they had been ‘accepted’ as a client by a prestigious Silicon Valley law firm whose name rhymes with a type of pasta (they are lawyers after all, so I have to be careful here…). Over the course of several months, our lead contact changed repeatedly as the various worker bees departed the firm to join dot-bomb startups. With each change in staffing, I was forced to reacquaint the latest Junior Lawyer with our business, re-explain the current legal issues we were in the midst of addressing, etc.

The final straw came when I asked the latest 25-year old a simple ‘yes / no’ question related to stock options. After I posed the question and my proposed response, he incredulously asked, “How do you know that is the correct approach?” I told him that I had previously taken a company public, but that it had been a couple of years since I had addressed the specific issue at hand. Unable to confirm if my proposed approach was correct, he indicated that he would have to check with his SEC group and that ‘someone’ would get back to me. ‘Someone’ never called and I fired the prestigious and inept firm shortly thereafter.

The ultimate irony is that when we later sold the Company for a substantial amount of money, it was discovered during due diligence that the prestigiously inept firm (whose name rhymes with a type of pasta) screwed up a basic corporate filing. This mistake, if left uncorrected, could have resulted in significant negative tax consequences for both our employees and the company.

The firm, (did I mention that the name rhymes with a type of pasta?) never admitted they had made a mistake (they are lawyers, after all) despite the fact that they put in a lot of non-billable hours trying to cover their collective backsides. This rookie error by one of their junior lawyers resulted in some truly unnecessary eleventh hour heartburn for everyone involved in the deal. Who knows what other egregious errors the inexperienced, under supervised junior lawyers would have made at the ‘prestigious’ law firm if we had not switched to a smaller, more capable firm in which our primary point of contact was a Senior Partner, who had over twenty-years of legal experience.

Get A Company on The Fringe

If you must work with a consultant, force them to join you on The Fringe by implementing one or more of the following suggestions:

Base their compensation upon quantified, clearly understood results; preferably something that can be measured in incremental gross revenue or direct cost savings; nebulous goals will lead to nebulous results and an ineffective use of your vital time and cash

Ensure that the Rainmaker is engaged in your engagement; include in the Engagement Letter periodic meetings and other regimented communications that ensure you are being given attention from the top of the pyramid

Allow the consultant to invest in your future success; in lieu of cash, grant them equity in the form of Non-qualified Options that vest based upon the attainment of quantifiable goals; keep in mind that adverse tax consequences may be associated with such equity grants, so check with your accountant before deploying this form of compensation

Negotiate a startup discount; you may be surprised how often you can get a break on such fees, especially if the service provider truly believes in your future viability

Pull a Blondin (see: Do They Believe?); make the service provider prove their belief in you by getting on your back as you step onto the proverbial entrepreneurial tightrope. Having consultants accept equity in lieu of cash, define their compensation based on concrete results and defer their payment until the attainment of certain milestones (including fundraising) are all ways you can execute the Blondin Test. If the consultant really believes in you, your team and the prospects of your adVenture, they will be willing to ‘get on your back’ and trust that you will make it to the other side unscathed.

In the end, if you determine that a consultant is just looking to exchange their time for your precious money, smile politely and give them your competitors’ contact information, followed by a short, sharp kick in their arse as you usher them out the door. Unlike many ‘lottery winners’, you are looking to turn your fundraising cash into a nice return for your shareholders, not a windfall for those who cannot teach.

One of the attributes identified by all of the venture capitalists questioned was, “Frugal use of capital”. In fact, several of the venture capitalists pointed out that successful entrepreneurs often have to be encouraged and pushed to spend more aggressively. Successful, serial entrepreneurs on The Fringe instill an urgent sense of frugality into their adVenture’s corporate culture.

“Bah humbug” you say? Read on.

Mayday Mayday

The most prevalent cause of private aviation accidents is running out of fuel. In these instances, the amateur pilot miscalculates the amount of gas required to reach his destination. A number of issues can impact gas usage, including the speed of headwinds, unexpected FAA requests to modify the route, average altitude flown, cargo weight, number of passengers, etc. A mistaken assumption in any one of these areas can result in a crash landing, and the pilot’s grieving family on the 11:00 news.

Cash is the fuel in your corporate gas tank. You will not reach your destination without it. Your adVenture’s journey is akin to a trip across the desert with no gas stations in route. When you embark on your journey, it is prudent to plan on crossing the desert on a single tank of gas. You cannot afford to speed, gun the engine, take detours, or spend your precious cash on a killer stereo to entertain you during your trek. If there happens to be a gas station along the way where you can fill up for a reasonable price, great. However, do not count on it.

Living Below Your Means

Frugality was missing-in-action at many bubble-era Dot Bomb companies. In many cases, these companies were led by untested and unproven entrepreneurs who did not understand the importance of frugality.

In fact, in 2000, I helped raise $30 million at an $80 million pre-money valuation – for a startup with absolutely zero revenue. After we closed this funding round, I vividly recall a conversation with a Senior Engineer who was aghast that I was not willing to commit millions of dollars to a billboard campaign in Times Square. His argument was, “What’s the risk? If it doesn’t work, we can just raise some more money.” This is not an apocryphal story. These words were actually uttered by an otherwise intelligent human being. This absurd statement caused me to realize that I had done a poor job of instilling a sense of frugality into our organization.

Along with Selling (see Be Like Sam) and Networking (see Making Stone Soup and Personal Pitch), negotiating is one of the vital skills that must be embodied at your startup. These skills are applicable to everyone in your organization. The practice of these skills should be encouraged until they become an integral aspect of your corporate culture. ALL of your employees must sell, network and spend the company’s money as if it were their own.

Most rational adults are fairly judicious with their own money (obviously to varying degrees), but these same adults often spend their company’s money as if it is an infinite resource. One way to combat this inclination is to instill a sense of pride in not paying full price. For instance, whenever someone at your venture saves your company money, send a company-wide email acknowledging the money saved. Although some of these emails will highlight relatively small savings, these communications will serve as a reminder that every member of the team should keep their eyes and ears open to money saving opportunities. It will also create a forum to acknowledge and reward employees who put into practice this important aspect of your corporate culture.

By publicly acknowledging employees’ efforts to spend the company’s money wisely at the aforementioned startup, we went from the spendthrift mindset uttered by the Senior Engineer to a culture in which employees stopped me in the hall to tell me how they had saved the company $50. See Bang a Gong for other tips related to celebrating your team’s small victories.

If you are embarrassed to ask for a discount, you are not an entrepreneur on The Fringe. You should be embarrassed to pay full price. Encourage all of your employees to ask, “Is that your best price?” when they rent a car, check into a hotel, buy paper for the copier, etc. This simple question will result in real savings and will help to ensure that your employees spend the company’s money as if it were their own.

Every dollar your team spends in a non-productive fashion has a direct impact on each employee, irrespective of the stage of your adVenture. In the early stages it equates to an additional dollar that must be raised in a future funding round, thereby increasing the relative dilutive impact of such a round. In a company’s latter stages, a wasted dollar directly impacts the company’s valuation, which is often derived as a multiple of the company’s net income.

Enter Liquidator Larry

The manner in which you and your employees spend your precious cash should have no correlation to how much money you have in the bank.

Case in point. Despite the fact that we had over $30 million in cash in the bank, I dubbed one of our salespeople “Liquidator Larry”, due to his talent for purchasing used office equipment and furniture from failing, wastrel companies. Our adVenture was located in an incubator, and as each Dot Bomb went up in flames, we purchased their office equipment (and sometimes even their office supplies) in conjunction with taking over their office space. In fact, in some cases, we were able to acquire a sizable amount of office equipment and furniture for free, in exchange for relieving the failed companies of their lease obligation. Go ahead and blush Mr. Karl Marx – Darwinian economics is a beautiful thing, especially when you are on the victorious side of corporate evolution.

Another Reason to Be Like Bill

For many years after Microsoft became highly successful, its executives (yes, including Mr. Gates) flew coach. Clearly they could have afforded more luxurious accommodations. However, Gates and company realized that there were far more productive uses of Microsoft’s cash than to expend it to ensure the temporal comfort of a handful of traveling Executives.

Be like Bill. Spend your money on assets that will deliver a Return on Investment (“ROI”). Do not purchase mahogany office furniture and Aeron chairs. In a few select instances, such showy spending might be warranted, especially in the public aspects of your business (e.g., the lobby, customer training rooms, etc.). However, when outfitting your offices, keep your ego in check – only purchase expensive accoutrements if they will directly lead to incremental sales.

As noted in Entrepreneurial Enterviewing, do not hire employees who value such non-monetizable creature comforts. Focus on making your employees comfortable by focusing the company’s expenditures on acquiring productive assets which will maximize the value of their equity and ensure that they will be consistently receive a paycheck every two weeks. A mahogany desk or a blowout Holiday Party will not motivate employees who are on the brink of losing their jobs. In fact, non-ROI spending will ultimately fuel resentment and disillusionment and cause employees to ask the very reasonable question, “What is valued more at this startup? Executive perks, lavish parties, fancy furniture, or the employees?”

Hey, I saw you roll your eyes. Go ahead, ignore this advice. Live large, go for it. By acquiring non-productive, high-end accouterments you will eventually jumpstart the efforts of an entrepreneur on The Fringe who will picked up your expensive acquisitions for pennies on the dollar. So please, go big and then go home so a frugal entrepreneur can succeed in your spendthrift wake.

Along with Dr. Seuss’ “Green Eggs and Ham” and Marcia Brown’s “Stone Soup”, the seemingly innocuous board game “Monopoly” has played a pivotal role in the United States’ rise as an economic superpower.

Although Monopoly originated from a variety of sources and evolved regionally over several decades, it was brought to Parker Brothers in 1934 by Charles Darrow. A number of international versions were developed soon after its initial release, but America has consistently remained the bastion of Monopoly’s popularity. In contrast, the USSR and other communist nations foolishly banned Monopoly, thereby denying their citizens an inexpensive yet effective hands-on course in entrepreneurship.

As stated in its official rules, the object of Monopoly is to, “become the wealthiest player through buying, renting and selling property”. A more negative way of looking at this objective is to “drive all the other players into complete and utter bankruptcy”.

Why has Monopoly, which takes hours to play, moves at a relatively slow pace, is completely devoid of surround sound and offers players no opportunity to blow up aliens or other combatants in high definition, remained so popular over the past 70-years? Part of the reason for its enduring legacy in America, and its emergence as a popular pastime in burgeoning free-market economies around the world, is because it acts as a proving ground for budding entrepreneurs to hone their business savvy, negotiation tactics, and communication abilities – all of which are highly compensated skills in capitalistic societies.

Given that over 750 million people have played the game, I will assume that most of you are familiar with the basic rules. If you are not, you may have already blown your chance at becoming a successful entrepreneur on The Fringe, as your future competitors gained hundreds of hours of hands on experience while you played with your GameBoy.

Hands on Learning
Numerous entrepreneurial lessons and skills are developed as you drive your friends and family into the Monopoly poorhouse, including the following:

Lady Luck – Just like in the ‘real world’, luck plays a significant role in the outcome of Monopoly, as two dice dictate each player’s movements. Luck intervenes with the first roll of the dice, which determines the order of play. The players who go first have a much higher probability of landing on an available property during their initial trips around the board.When starting a company, luck plays a bigger role than successful entrepreneurs care to admit, and a smaller role than unsuccessful entrepreneurs like to claim.

Cutthroat Negotiating with a Smile – There is only one winner in Monopoly; ties are non-existent. This winner take all style of gameplay engenders a manic, hypercompetitiveness among the players. Although luck plays a considerable role in the game’s ultimate outcome, you can significantly enhance your chances of winning by strategically cutting deals with your opponents. Monopoly is a ‘social’ game, which requires you to establish a rapport with the other players if you are to be a successful dealmaker. Often, the best deals are the ones in which you form an alliance with another player, to the detriment of all the other players on the board. For instance, you might sell a property to another player that grants them a monopoly, but include in the deal that you can land on any of the properties that comprise the newly formed monopoly rent-free for the duration of the game. Such a deal ensures that your opponents will pay a higher price whenever they land on any of the properties which make up the monopoly, while you simultaneously increase your cash position by selling the lynchpin property at a premium.Even though the game is cutthroat by design, most people consistently play the game with the same basic group of family and friends. As such, successful players realize that a ‘bad deal’ they cut in one game will carry over to future games, and may limit the other players’ willingness to negotiate. This is also very ‘real world’. You can try to screw everyone once, but that is generally an expensive and inefficient business model. You are far better off establishing solid relationships based on mutual gain and trust, rather than cutting a one-sided deal which results in a short-term ‘win’.

Vigilance – You cannot take your eyes off the board when playing Monopoly, as you risk a player landing on one of your properties without paying the appropriate rent. This same dogged vigilance is required in your adVenture. You need to focus on constantly delivering value to your customers and ensure that you are paid for all of the value that you deliver.

Cash Flow – Entrepreneurs on The Fringe know that properly managing their cash is one of their primary objectives, especially during an adVenture’s early phases. Monopoly is a great training ground to develop cash management skills. It also exposes young capitalists to a number of other financial concepts, including: mortgages, interest, counting currency, dealing with a bank, etc.

Government Intervention – As every successful entrepreneur knows, the government prefers to punish you for your success, rather than ‘thanking you’ for risking it all and creating numerous jobs for your fellow citizens. Monopoly is no different. In addition to the Luxury Tax board space, there are also Chance cards that require you to pay a percentage of your net worth in taxes.

Location Matters – In a very real-world sense, the location of your properties is of critical importance. Some properties have a higher rental charge and some have a higher probability of opponents landing on them, due to the distribution of potential outcomes from the rolls of the dice. In addition, there are several Chance cards that direct a player to “Go To” a particular property, as well as cards that require a player to “Go Back Three Spaces”. Each of these factors impact the probability that certain properties will be visited more than others. As noted in “Nurture or Nature”, the location you chose for your adVenture (as well as any retail or satellite office locations) will have a huge impact on your probability of success.

Tenacity, Persistence & Endurance – One of the most important lessons to be derived from Monopoly is that in business, the spoils often go to those who remain at the table the longest. The game usually takes hours to complete, and in many cases it becomes a battle of wills to see which players have the requisite stamina to see the game through to its conclusion. Thus, as is true with your adVenture, doing whatever you can to ‘stay in the game’ will go a long way toward your ultimate victory. If you quit before the game is over, you can be assured that you will never have the chance to ‘win’.

Passing Go – With a few exceptions, every time a player passes “Go” on the Monopoly board, they are given $200 by the bank. Often, these funds are all that sustain a player and allow them to remain in the game. In business, you want to get $200 for passing “Go” as well. One way to do this is to structure a portion of your sales in the form of evergreen annuities, annual maintenance payments, quarterly license fees, or monthly subscriptions. The specific form that such payments will take varies depending on the specifics of your business model. However, the key is to smooth the ‘lumpiness’ of your cash inflows by structuring all, or a portion of your revenue to be recurring.Recurring revenue provides you with far greater predictability, which will ease your cash management responsibilities. Such annuity revenue allows you to ‘stand on the shoulders of each prior month’, and thus grow your overall revenue in a predictable and linear fashion. For instance, if you establish subscription revenue of $10,000 per month, you enter each new month with at least $10,000 of revenue, less any revenue lost due to customers that terminate your service. Investors and acquirers also grant recurring revenue a higher premium, because it reduces the business’s overall risk profile.

Jail – Like it or not, entrepreneurs have a social and a legal contract with their customers, employees, investors and other stakeholders. Just like in Monopoly, if this contract is broken, the entrepreneur can be thrown in jail. The Jail board space serves as a reminder to budding entrepreneurs that ruthless competition is OK, as long as it is kept within the acceptable bounds of fair play.

America’s Not-So Secret Weapon
Monopoly is now sold in over 80 countries, and has been translated into over 26 languages. Even citizens of the former Soviet states are now avid Monopoly fans. There are, no doubt, thousands of lively games of Monopoly being played all over the globe, even as you read these words.

Monopoly is training a global force of entrepreneurs who will internalize the skills which the game embodies and ultimately the rewards as well. Some of these entrepreneurs will join The Fringe and create thousands of jobs, and billions of dollars in wealth.

“Thank you”, Mr. Charles Darrow or should I say, “Без перевода”…