2: Remember Business Fundamentals – Mike McFall

(upbeat music) Hey, welcome to Finding Your Venture Podcast episode number two. This is a session on business basics, and I'm talking very business basics. Here's what we need to remember. Selling to companies is different than selling to consumers. Consumers are people just like you and me. Everybody we know and we make very complex and sometimes irrational buying decisions. I know I do all the time. Companies are different though. They are motivated really just by two things. Number one, they want to increase the revenue and grow. And then the other thing is they want to cut costs so they can make more money. And the fact that they have these two very straightforward goals makes it a lot easier to understand how they make buying decisions. And you can use that to your advantage. The other reason I really like business to business opportunities is that if you solve a big problem for them, they can pay you a lot of money for the solution. Their problems aren't always obvious to the casual observer. So if you take the time to dig in and really understand how the business and the industry works, that means there can be less competition for some of these big opportunities. That's why we focus mostly on business to business opportunities in this class. So there are infinite approaches to increasing revenue and lowering cost, which is why business is fun. And there's opportunity for innovative startups like yours. There's a good chance that even though a problem or an industry has existed for a long time, that they haven't necessarily thought of or given a shot to the solution that you come up with. So it's okay for your solution to be new and innovative and I think that's a good thing, but it always needs to be grounded in those two fundamental business objectives. You can never lose sight of what the benefit is to the business. So if you never forget what you're trying to do for the business and for your customer, increase revenue or lower costs, you're in good shape and you'll be ahead of the pack. So I asked Mike McFall to share a story about remembering these business fundamentals. Mike McFall, you'll remember from episode one, Mike's the co-founder and co-CEO Bigby Coffee. He's got a great new book called Grind Out. He's also the new co-instructor for Finding Your Venture, a very popular course offered to the University of Michigan Center for Entrepreneurship. Mike's success as a franchise or requires really fanatical attention to detail about these business fundamentals. And so he has to have this like crazy focus on revenue and cost. And so the story that he tells is a really great reminder about not getting lost in the weeds and forgetting these big picture business objectives. - I remember I had a conversation with one of our owners and he wasn't in good spirits about his business. He was losing money, he was maybe, I would say, four to six months in to his operation. He was losing anywhere from probably $3,500 to $5,000 a month. And he was in bad shape. In that situation, we always talked about how are you gonna generate more customers? How are you gonna sell more cups of coffee? And so I went into his store, I was there to coach, I was there to help him in his situation. And I walked in with certain tools that I use in that situation that have worked. And that's my job, right? Is to bring the experience to the table. And so I started doing that and all he wanted, all he wanted to talk about was the cost of blueberries. And I sat there for a while and I thought, well honestly, I thought he was joking at first, but then when I realized he wasn't joking, so the backstory on it is as we do these things called yogurt parfaits. It's got berries in the bottom, yogurt, grown on top, they're delicious, right? It's a fantastic product. So, and we always put five blueberries in the bottom. And so he had decided that the blueberries were prohibitively expensive. And so he wanted us to switch to strawberries and he wanted to quarter strawberries and put one strawberry quartered in the bottom as opposed to five blueberries. And the only reason I go into that much detail is 'cause the guy was obsessing, right? And so I sat there for a minute and then I went and did the math. And quartering a strawberry versus putting five blueberries in the bottom of yogurt parfait was gonna save him like 47 cents a week. It was, I mean, I don't, I can't remember the exact number 'cause we were talking 20 years ago now, but I mean, it was some absurd amount of money. And I said, and I just, I couldn't understand the mentality and he wouldn't, he couldn't get off the dime. That we were wasting money. And it wasn't about the dollar amount, it was that we were wasting money by putting blueberries, even though the blueberry is a better product than the strawberry in the bottom of yogurt parfait 'cause it doesn't disintegrate, right? So anyway, all I wanted him to do was to transition his thinking to, we gotta sell more cups of coffee. When you get out and you bring in a new regular customer and you convert that person to a regular, that is a compounding effect on your business 'cause they're in 3.5 times a week. And they're gonna be around in a year. And then everyone you add is a compounding factor where you cut your cost of blueberries one time, you get that cost savings once. And that's finite and it stays there. - It's so easy to hear about somebody else's crazy behavior and recognize how ridiculous it is. It's so much harder to recognize our own crazy behavior and especially in the moment. And the blueberry story is just awesome for illustrating just how obsessed and in the weeds you can get about your company and you're not really thinking about the big picture and the stuff that really matters and the stuff that's actually gonna solve your problem. And sometimes it's not even just you or me that has the problem. It's an entire organization or even an entire industry. And that's how bubbles happen. That's how companies get it wrong and go bankrupt and it happens all the time. So here's one more story from Mike about a friend of his who was able to maintain clear focus on the stuff that matters even when other people didn't share that same perspective and how it resulted in success for the company he was running. - Guy that got me into IPO best my best run from college. He is, I still think may have changed now but he was the youngest ever CEO and chairman and traded at the New York Stock Exchange. He was at 32 years old. He was a CEO and chairman of FTD, the floral company. Mike was nominated 40, 40 in Chicago. The article they wrote about him, Richard Perry, who is a really infamous investor was, 'cause he was the investor that bought FTD. They took FTD.com and spun it out as its own entity. Mike became the CEO of FTD.com. He built the value and FTD.com to the point where FTD.com absorbed FTD and became one entity and became the CEO and chairman of both. But Richard Perry tells the story about how Mike was sitting in a conference and it was one of these petsupply.com ventures. And Mike was questioning their value proposition saying, if I look at your costs, it certainly appears like every product you sell, you lose a little bit more money. Mike said, "I don't think that works long-term." And then Mike was talked to Richard Perry and said, I think the simple answer to our business problem here is is we need to make sure revenue generation exceeds our costs and Richard Perry lit up over that, right? Like that was a moment when he understood that Mike was a very practical manager of a business in that even a.com, in the.com era, when valuations were based on all kinds of things other than fundamentals, here was a kid, literally a kid, who was saying, I think it's really important that our revenue stream exceeds our costs and then he took it on, he took it from a, I think a $200 million valuation when he started up to, I think it was just shy of a billion when they sold it like four years later. - I wanna break in and give a little bit of context for anyone that doesn't remember the late 1990s and what's now called the internet bubble of that time. So this was a time when investors in pretty much every market were giving huge valuations to companies with a lot of promise in bringing business online and the internet in general. And a lot of times those businesses lacked fundamental things like revenue and customers and so it sounds like a very basic thing that Mike's talking about, but at the time it was a very contrary in view to think that things like revenue and customers actually mattered. - It was revolutionary in that moment in time. We were talking 2,000 and 3, 4, 5. I could get the exact date that that happened but they were getting valuations based on site visits and all these weird metrics that nobody really understood but they weren't fundamental business metrics. And Mike came along and just started talking about, well I think we should be profitable, don't you? He was approaching the business when the rest of the world was off, I think in La La Land and he was adamant about making sure that when they generated revenue that there was gonna be a profit there in order to return on the equity investment that his partner is boss Richard Perry had made. - I think that we're all very susceptible today to looking at things like social media engagement, winning business plan competitions and a lot of false vanity metrics that don't really matter and drive the business forward. So the lesson from today's episode is don't forget the company's wanna increase revenue. and decrease cost. If you can tap into those two things and design an innovative solution that does one of those things and never forget what it is that you're doing for the company, your business has a better-than-average chance of succeeding and you have a better-than-average chance of looking like a genius. This podcast wouldn't have been possible without the support from the University of Michigan Center for Entrepreneurship. Before we go, I want you to hear about one really incredible program offered through CFB. It's the Entrepreneurs Leadership Program. Hi everybody, I'm Nick Moros. I'm the Assistant Director of Entrepreneurial Practice at the Center for Entrepreneurship and I direct and instruct the Entrepreneurs Leadership Program. It is one of the most rigorous course offerings that we have at the University of Michigan for students that are really driven to be entrepreneurial leaders and have a career that either grows or starts ventures that really want to be unicorn someday. So the course is very unique. It is an application-based course that any student from the University of Michigan can apply, freshmen all the way to PhD level and typically we do have a wide variety of students. Any major, any program at the University of Michigan can apply. Go to cfe.umich.edu/elp to get to the application. So the course is a three credit hour course in the winter semester and then over the summer there is an entrepreneurial experience that students take part in which could be either an internship or mentorship or actually starting their own venture. And then in the fall they continue with a three credit hour course that is going to be a capstone project focused course that is going to build off of their summer experience. So again, if you see yourself as a serial entrepreneur, this really is the course for you. Hey, I want to give you a heads up about the next episode of the podcast. It'll be three of the 13th episode for series. And this is an episode about why it's more important to find a good customer than it is to start with a great idea. And in this episode you're going to hear from Bob Kasby who was a professor of mine at Baps in college when I was there getting my MBA. And he is the mentor and friend that I credit more than anyone with giving me the confidence and the tools to start a business. So I hope you'll tune into that one as well. Thanks very much.