Starting and building a Successful Company with no Money
Sometimes, amid the excitement and turmoil involved in moving a start-up business into second gear, entrepreneurs just need to hear good, solid advice from someone who has trail-blazed a similar path and succeeded. And that is exactly what EA-Tokyo members were lavished with when Amir Ayalon, Founder of Sozon Inc. (www.sozon.com), a successful Tokyo-based online marketing firm leading the Japanese market in SEO (Search Engine Optimization), took to the podium at the City Club of Tokyo on December 6th, 2005.
Ayalon was joined by Jeff Char, Founder of J-Seed Ventures Inc. a Tokyo-based venture incubator that was instrumental in helping Sozon get to first base.
Since opening for business in September 2003, Sozon’s headcount has surged from 3 to over 30 and continues to grow rapidly, sales went from zero to one million dollars in two years, and in October 2005, the majority of the company was sold to Internet business solutions provider ValueCommerce Co., Ltd for a tidy sum.
One of Sozon’s main products is SeoSpy(TM), an online software suite that enables clients to optimize their websites resulting in greater visibility and more site traffic.
Making a sale not automatically money in the bank
“We started Sozon with zero in the bank, and for the first year, the only time we made any money was when we made a sale, EAyalon explained. “And even that wasn’t completely true, because making a sale doesn’t automatically mean money in the bank. What made money was when we were paid for a sale, so I think one of the important lessons, particularly for any new business, is understanding this, and that it is definitely in your interests to be really hard on your customers at first when you are a small company and encourage them to pay you as quickly as possible. E
Char pointed out that ideas are cheap. “It’s not just about cash flow. In the beginning, Amir had this great idea about SEO, went out and created the software, and it worked. But initially we were talking about selling it without even setting up a company. We spent a lot of time talking with a potential buyer and ultimately Amir figured out that he could make a lot more if he took his own technology and built a company around it. And that has proven to be the case. E
Ownership dilution a risk
Char said there are many different ways to start a company. “Incorporating off the bat still requires minimum capital, however the laws are changing and people will soon be able to start a company without the Government telling them what the minimum capital is. While you will still need some money to start a company, the new regulations also mean you can get a company up and running without relying on other people. This is very important because if you have to rely on other people from day one it means you are going to be diluted fairly significantly. E
The 100% rule
Ayalon explained that when the company started up, they had no money to invest. “We weren’t ready to form a company, so instead of going out and fundraising which may have taken 6 months, we decided it would be faster if we set up our company as a part of Jeff’s J-Seed Ventures, and if we did well enough we would spin it off into its own company. Jeff was kind enough to let the team use office space on the condition that he would be paid should Sozon ever make any money. So that way we didn’t have to go through all the bureaucratic red tape of having to register the company, getting an office, phone numbers, etc. Really there wasn’t much to lose except Jeff’s company’s credibility, Ehe said, drawing laughs from the audience.
Having no money meant that hiring staff was likely to be problematic. “I needed some help but didn’t have funds to pay anyone, EAyalon said, “but I had a good friend who was skilled at modifying Web pages and another person who was a designer. This is where I figured out something I call The 100% rule ∁E E00% of nothing is nothing.’ E
As he couldn’t pay people any money, Ayalon told them that if they joined and worked hard for free for a couple of months, he would give them shares in his company. “Since we weren’t incorporated, I could only sign an agreement to give them virtual shares in a company that would be created if we succeeded, Ehe said. “They were fairly optimistic and agreed, so I had two people who would work full time. I figured that with The 100% rule, 100% of nothing is nothing, so if I gave away 20% or 30%, I would still have as much as I started with, which was nothing. So, if you have no money up front, I think giving away equity is definitely a creative way to get people to work with you. And it doesn’t just work for staff, but also partners and clients. E
Sozon motivated partners using a similar method ∁E“We suggested that if they generated certain amounts of revenue, they would earn certain amounts of equity, EAyalon said. “This worked very well for us with a few carefully selected partners. They were highly motivated to send us business. So being able to get staff generated partners, partners generate clients, and clients generate cash. E
Make every move count!
When you have limited cash, it is like having limited fuel ∁Ethere is very little margin for error. “Limited cash keeps you focused on what counts, EAyalon emphasized. “You have to carefully plan every yen you spend, because if you spend it on the wrong things it could really mean the end of your company. E
Highlighting an example to underline the importance of this mindset, Ayalon mentioned how in early 2004, Sozon was presented with the opportunity to participate in the SES Tokyo (Search Engine Strategies) conference, a first time in Japan event that had the potential to open doors to future business. “However, it was costly to become a sponsor and the total cost exceeded the company’s savings at the time, EAyalon recalled. “After negotiating a discount, we had to decide whether to attend the event or pay ourselves a salary. We decided to attend and it worked out very well. We found many potential customers and partners. E
Priorities please - The Attack List
To help the team focus on their priorities, Ayalon took advantage of what he calls "The Attack List." How does "The Attack List" work?
The list is comprised of 4 columns in a table:
Column 1: Status ∁Ecurrent status of communication with the Client or Partner.
Column 2: Client (or Partner) name.
Column 3: Potential Revenue (from that Client/Partner).
Column 4: Speed to Revenue ∁Ethe length of time until payment is expected from that Client/Partner.
Instead of randomly going after clients, Ayalon suggested entrepreneurs create a list of their ultimate clients and ultimate partners. “Highlight the exact people you need as clients because they really need what you have, and companies that would be perfect to partner with because they will help you grow. Then score them with Potential Revenue. We tried to balance opportunity with Speed to Revenue and tried to work on both. Keep focused and review the Attack List every month or so. E
Choose maximum impact clients
Ayalon warned that when entrepreneurs are trying to build a large and reputable company, they should be careful not to sound desperate in front of clients. “You also need to make an effort and spend time working on companies that are going to make maximum impact for you in the future and generate a large amount of revenue. E
In Sozon’s initial year, the team spent a lot of time building relationships with partners, which produced beneficial results. “The only catch about working with large companies is that it usually takes 3-4 months to get around their legal department and actually get started working, and once that begins, it usually takes between 3-6 months for them to pay you, so they really like to drag things out, EAyalon said. “So you need a balance of small companies and large customers and partners to go after. E
“Interestingly, some of the partners later turned around and introduced clients to us, EChar added. “At the same time when we were going after the large companies that would pay us hefty amounts for the services we provided, we met our day to day obligations by doing small jobs for smaller companies that had a much shorter payment schedule. E
Show me the money
Typically, companies develop products, then sell. If at all possible, Ayalon recommended selling an idea first, then developing it.
Ayalon pointed out that the team spent significant amounts of time building tools for companies often based on client/partner recommendations, and then found themselves up against the wall as companies dithered or rejected the ideas outright. “So, instead of wasting valuable time developing products and then going out and selling them, we got smart and created PowerPoint presentations, screen shots, etc, that demonstrated the [as yet unbuilt] technology, signed deals, then returned to the office and started building it. So rather than expending resources for uncertain returns, we just sold from PowerPoint presentations. E
“We followed the SMTM (Show Me The Money) protocol, EChar said. “We did work based on who would pay us and how much they would put on the table. E
Other points Ayalon made were:
◁EA sale is not always immediate cash.
◁EBargain hard for favorable payment terms (blame the accountant).
◁EConsider setup fees, pre-payment, advance payment discounts.
◁EBarter and trade for things you need.
◁EWork on getting valuable PR and media coverage.
◁EConserve Cash - A yen saved is a yen you don't have to earn!
Ensure contracts focus on what counts
Char zoomed in on a problem that he believes many start-ups face ∁E“They have a lot of contracts, either with customers, suppliers, etc, and it costs a lot of money to go out and hire a lawyer. EHe recommends entrepreneurs focus on what counts, and he pointed out 3 sections that really matter on a contract, in this case for technology companies: Intellectual Property Rights, liability, and payment terms.
Char highlighted that payment terms can often be very unreasonable, and for a start-up, waiting until the end of the following month to get paid can mean they go out of business. “We also said, ‘To heck with standard payment terms, here’s what we need to survive. ESo for every contract, we would actually give up on certain points on the contract and trade all the other horses but make sure we got the payment terms we needed, because in the beginning, that is what is going to keep you alive. Push your customers to pay you on time and ensure that you agree to a reasonable time frame for payment. E
Likewise, when negotiating payment terms with suppliers, entrepreneurs need to be able to negotiate reverse payment terms that may be a little bit longer than standard terms. Char added, “If clients say the terms are not standard, that’s when you pull out your Gaijin card and say that standard rules do not apply. ‘This is what is reasonable and what I need to stay alive. Do you want to put me out of business? EUse whatever arguments you have to make but get the terms that you need in order to stay in business. E
Ayalon often used the Etrict accountant Eexcuse, telling customers that, “our accountant is a real hardball and won't let us change the payment terms. E
“Poor contracts can be a lot more expensive than good ones, EAyalon said, “so whilst legal fees can be expensive depending on where you go, poor contracts ∁Enot just in terms of cash flow but in terms of business and what you are getting yourself into ∁Ecan really end up being a lot more expensive than if you spend a bit more money and got a good contract made. E
Quality of company depends on quality of people
The things you don't know you don't know are important!
Q: How do you find out the things you don't know you don't know?
A: Quality people and advisors.
In the beginning, Ayalon knew he had a great product, but was unaware of the many necessary standards of business needed to effectively and efficiently put a product on the market.
Ignorance, he said, can be very expensive. “Make sure you have good people around you who can give you advice. Bad decisions are costly and can hinder future investment and growth plans. I really think one of the important things that has helped us to grow at the speed we have has been the quality of the people who work with us in the form of staff, advisors and partners. I believe the quality of the company depends on the quality of the people. If you are the smartest person in your company or you have no advisors or no one you can talk with regularly that you can learn from, you might want to find some new people to mix with or learn from. E
Highlighting that staff can either speed up your success or speed up your failure, Ayalon suggested sourcing quality people and advisors. “Experienced successful people are always happy to share their knowledge and advice. E
Q: You talked a lot about the value of your partners. How does that work ∁Eare you creating a relationship where they are introducing you to prospective clients?
A: The core base of our partners is a group of companies that refer business to us. So generally the agreement that we have depends on the company. In some cases we will mark up the price or give them a commission, and generally they are companies that are offering related but non-competitive services. So when we created our Attack List, we considered which companies were already talking to our potential clients who need our services.
Q: Do you charge for personnel services as well as products?
A: In the beginning we started selling software services. This evolved very quickly into a consulting service. Initially we fixed a set charge for our services and offered our partners the ability to mark up prices, but later, after we found some partners were charging their clients far more than the amount we were selling to them for, we set a fixed commission rate.
Q: How do you find the decision-maker in a company?
A: A lot of the initial partner contacts we had with companies were just personal contacts, or introductions by personal contacts. In many cases, one of us in the team just happened to know someone in a company, and that became the initial point of contact. A precise and meaningful introduction wherever possible can save tens if not hundreds of hours of unnecessary meetings working your way to the decision maker.
Also, if we had a really good relationship with them, we would ask them to introduce someone in their company to us who could assist us.
Q: Advisors. Everyone recognizes the value of going out and getting a good accountant, for example. Are there any other core professional advisors you have found helpful?
A: If you are looking to build a large business, you will definitely need good legal advice and initially it doesn’t have to be a lawyer (ie: it can just be a staff member with a reasonable amount of legal knowledge), but it is always good to have a legal firm there when you actually need to get the contracts made or if you really need some professional advice.
Q: Key people ∁Eapart from providing stock options, how do you keep your key people motivated when your company is a nobody?
A: In terms of keeping quality people ∁Ethe trick is to only hire quality people, and then all your team will be quality people. But you don’t always know. We did have some people leave. I really like my staff and think it is important not only that you like what you do, but that you like the people you do it with.
When we hire people, we don’t do so necessarily based on skills, but also on good personality, a good attitude, a desire to get ahead, and communication skills. All the rest can be taught. It is a lot easier to teach skills than it is to change personality.
Text: Jonathon Walsh
Jonathon Walsh is a professional Editor, Writer and Director of Business Grow, an innovative company specializing in providing a wide range of high quality Editorial Content and Advertising services
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