Hundreds of thousands of businesses across the United States have used government contracting to effectively grow their business. Their success or failure in this arena depends largely upon how prepared they are to contract with the government. A well-prepared business will succeed in attracting and keeping government business.

One of the most cost-effective places to start is to investigate business opportunities in your own backyard. Explore your local city or county government and inquire about the registrations necessary to do business with them. Local governments usually have more simplified paperwork and processes compared with the state and federal agencies. This is a great way to build “past performance.”

Advantages of Selling to the Government
Last fiscal year, the federal government spent over $500 billion on private-sector businesses. This means the federal government bought goods and services worth over $500 billion directly from small and large businesses of all types. The federal government buys just about everything imaginable from companies of all sizes. Buildings and roads need to be built and maintained; people and infrastructure supported; communications and computer systems installed and serviced; equipment, supplies and commodities purchased; and services of all kinds provided. If you are providing a product or service to consumers or other businesses, there is an excellent chance government agencies will also buy what you sell.

Federal government agencies always pay their bills, and with proven payment processes like government credit cards and electronic direct deposit payments, you get paid very quickly. In general, the government has a great track record of making payments in comparison to consumers and private businesses.

Once you have experience as a contractor and have established a good track record as a trusted vendor, you have a very good chance of getting regular, repeat business.

Where Do You Start?
Government agencies are open for business and actively seeking new contractors with which to work. When you realize there are over 200 federal government agencies with thousands of offices spread throughout the United States and over 3,000 counties, cities and boroughs, it can seem like an insurmountable task just to find out how to open the doors to getting government contracts.

The first step in determining if you’re ready to compete for a government contract is the length of time your company has been in business. To be the prime contractor, most government contracts require at least two years of business experience. However, if you are a subject matter expert in your field and have worked for others for a significant length of time, then you may be considered sufficiently experienced. The key is documenting your knowledge and ability.

Your small business should be stable, with no risk of company failure. Contracting officers are risk-averse and will not award a contract if they think a particular product you wish to sell is your only product or that the government sales could “rescue” your company. It is your job to show the contracting officer you are able to help manage the risk. The goal is to develop a strong working relationship and ensure that the products or services are delivered on time, within budget and to specification.

Small business owners must possess the following before bidding on a government contract:

• Financial resources for execution of the project or production of the product
• Outstanding business integrity and ethics
• Qualifications to perform the scope of work
• Business skills (organizational, financial and technical)
• Tangible assets required for the project or product production (e.g., building or equipment)
• Staff and resources to meet the schedule
• A proven record of on-time delivery

You will need to complete a Capability Statement, in which you provide factual evidence of your capability and capacity. This document is often requested as part of a “sources sought” notice or may be requested by a contracting officer who may be interested in pursuing a relationship with you. In this document, you will clearly state your core competencies, differentiators, past performance and relevant company data.

You will also need to register in the proper databases to ensure that you are viewed by contracting officers and others seeking vendors of your goods and services. Please remember all these registrations are free; it is not necessary to pay third parties for the listing.

Common Processes for All Levels of Government Contracting
All government agencies are responsible for their own budgets and expenditures. There is no one central agency or organization responsible for making purchases for all agencies. Therefore you must contact each individual agency to register, ask for notification of upcoming contracts, and submit and negotiate proposals and contracts. Every government agency has an office of small and disadvantaged business utilization (OSDBU) and a small business liaison office (SBLO). These offices are dedicated to finding trusted vendors and making sure socioeconomic purchasing goals (i.e., goals to purchase from woman-owned and service-disabled-veteran-owned businesses, and from disadvantaged businesses and businesses in historically underutilized business zones) are met. Most government agencies and prime contractors share out-year procurement plans on this website.

Do not pursue agencies that do not have a need for what you offer. It is important for you to determine who buys what you sell. You may glean that information by researching procurement histories of various agencies. The Connecticut Procurement Technical Assistance Program (CT PTAP), described in greater detail below, can provide guidance on this.

The government has different levels of purchasing with a set of rules for each. It is important to know and understand these purchasing methods so you know where to find the opportunities that meet your business capacity.

Credit Card/ Micro Purchases: If you do not yet accept credit cards for payments from customers, you will want to do so when selling to the government. Agencies at all levels utilize credit cards for smaller purchases. Buyers are permitted to use procurement cards (PCARDS) for purchases up to $3,000. Last year, the federal government made over 25 billion dollars’ worth of credit card purchases. These purchases can be made without obtaining competitive quotations.  More and more of the smaller dollar requirements are being purchased via a credit card or Government Procurement Card (GPC). If you accept Visa or MasterCard, please let your government customers know. If you want to accept credit cards, investigate this option with your bank. Almost 97 percent of the purchases under $3,000 are now made with a GPC.

Simplified Acquisition Procedures (SAP) apply to acquisitions between $3,000 and $150,000. The majority of these purchases are set aside for small businesses. The business submitting the successful quotation under these procedures is issued a purchase order, and performance of the order constitutes contract acceptance.

Purchases over $150,000 are considered large purchases and require a sealed bid process. Sealed bidding begins with an invitation for bids (IFB) that contains the information needed to prepare and submit a bid. All bids are submitted on a standard form that must be received by a certain time and date. The bids are opened in public, and the contract will be awarded to the responsive and responsible bidder that offers the best value to the government.

Regulations concerning aspects of federal procurement made with appropriated funds are published in the Federal Acquisition Regulation (FAR) (http://farsite.hill.af.mil/). The FAR is designed to unify all procurement practices, forms and requirements for the federal government. It also allows each major agency to issue supplements containing regulations unique to that agency.

Subcontracting
It is important you do not neglect the multi-billion-dollar secondary market of subcontracting. You should investigate potential opportunities with prime contractors by researching their websites to determine if they have a need for what you provide. Many of the federal government’s requirements may be beyond the scope of a single small business, and prime contractors are encouraged to subcontract and team with small business concerns.

Emergency & Disaster Recovery
Many contracting opportunities arise from disaster recovery operations. It is important that you declare your intention of providing disaster recovery products or services in your System for Award Management (SAM) profile. Small Business Development Centers (SBDCs) and the Small Business Administration (SBA) play an important role in disaster recovery efforts and will use a search application in SAM to find disaster assistance. Emergency responders need vendors that can clear debris, provide facility support services, furnish necessary supplies and much more. In the aftermath of a disaster, different aspects of the recovery operations may be led by the federal government through the Federal Emergency Management Agency (FEMA), state government response programs, city or county emergency response programs, or nonprofit organizations like the American Red Cross.

This article describes just a small sampling of the intricate mechanisms involved in government contracting. The CT PTAP is tasked with helping Connecticut businesses expand into government markets. If you are thinking of pursuing this market or are already doing government contracting, please give us a call. Our services are free, and we are friendly, knowledgeable and willing to help you navigate these opportunities. Explore our website for more information or to request an appointment.

About the Author

Lisa Wood is the statewide director of the Connecticut Procurement Technical Assistance Program. She is located in the program’s New London office. You can contact Lisa at lwood@secter.org.

You have created an invention. You have found the perfect business partner–someone with the capital and connections to bring a product to market and pay you royalties. All you need is the license. How hard can it be? More difficult than you think, but much easier if you take the time to prepare before you start your licensing negotiations.

You have no doubt poured years and dollars into developing your intellectual property. When it’s time to license it, first invest some time and money in preparing to license wisely. Some of the suggestions below may be arriving at your doorstep a little late in the day, but perhaps not so late that you can’t take advantage of them.

• Know What You Own. While it is hard to state a general rule for each of the different types of intellectual property (IP) that you might be licensing, you should review and document what you have before you commence the licensing negotiation. This is essentially a two-part process, because you should be creating improved documentation while you are confirming the existence and breadth of your IP. For example, if your technology is based on a patent, you should conduct and maintain current documentation of a systemic analysis of the patent and how it is used in the applicable products or services delivery. Bring into this development process not only your own staff and counsel, but also outside sources from other disciplines that might be able to help you understand the market potential for your IP. You will benefit in licensing negotiations from knowing who the potential customers of your potential licensee could be and what economic model will make the most sense in determining the royalty rate. This process can also inform the limited fields of use that you might choose to offer to the initial licensee, broadening your world of potential licensees.
• Help Your Employees Understand What You Own. Both you and your employees should know what you own. Your employees should be able to identify your company’s valuable IP assets. Teach them (and encourage them to reveal to you) what makes up your company’s unique and valuable assets and why. (And, no, they do not need to know the secret formula or how to diagram the system, but they all should generally understand what has value and why.) Your employees then become part of preventing the unintended use and distribution of your valuable assets.Is your IP’s value based on patents, trademarks, copyrights, information held as a fiduciary, or proprietary trade secrets that create the valuable secret sauce that you will be licensing? The value may arise out of any combination of these legal categories. Your employees should be aware of what you own and that carefully drafted legal documents are necessary for retaining your IP’s value.Don’t bury important documents that your employees need to sign in dense employee handbooks. Present the documents that protect your company’s trade secrets and the inventions that your employees develop at work in an informative meeting. Help each employee understand his or her role in contributing to the development of the company’s IP. Educated employees are part of the defense of your IP and will be instrumental in monitoring whether it has been compromised or is in use by others. Educated employees are also less likely to torpedo your licensing negotiations.
• Conduct Internal Due Diligence with Your Legal Staff on Your Rights and Filings. Particularly with regard to patents and trademarks, conduct your own internal review to make certain that all the paperwork is in order before you commence any licensing negotiations. Do you have all of the documents from all of the contributors to the IP? Do you have up-to-date files and electronic evidence of the filings with the U.S. Patent and Trademark Office (USPTO)? Do you have all of the necessary underlying licenses for the tools and software that are used in your proprietary process? As licensing is a form of monetizing your asset, you should expect the same level of due diligence from the potential licensee as if you were selling your company or selling your IP (and you should therefore be as rigorous in your own preparatory due diligence).
• Take Steps to Maximize Your Rights in Your Intellectual Property. Consider with your counsel whether there is anything you can do, before the negotiations begin, to enhance the IP rights that you have confirmed that you control. Do you need to go back to outside engineers and obtain confirmation that they have assigned all of the rights to the software they developed? Do you need to update your staff’s nondisclosure agreements? Have you been using new trademarks that would benefit from registration? Has your internal due diligence revealed business processes that you have developed that should be protected as “know-how” and other trade secrets that might enhance the value of your existing IP?If you have put off getting an assignment from the software consultant you used last summer, now is the time to do so. Don’t forget the fabricator who developed a key component of your system. Rely on your counsel to help you assure that the legal agreements you are using for the contributions that go into your IP give you the rights that you are paying for.
• Present the Organized Results of Your Process. Be organized, look organized, and it can affect the way you are treated by the people on the other side of the bargaining table.
• Research Your Potential Licensee Before You Negotiate. Before you negotiate, know with whom you are negotiating. An IP license is likely to be a long-term relationship, and no amount of legal legerdemain can protect you from an unfaithful business partner. Conversely, successful licensing can be mutually beneficial to both companies. Your IP is unique, and you may have only one opportunity to license it wisely.
• Protect Yourself with a Nondisclosure Agreement Before the Negotiations Begin. If the potential licensee refuses to sign a standard two-way nondisclosure agreement before negotiating license terms, please review the previous bullet again.
• Think Like a Licensee. Figure out why the potential licensee of your IP is courting you and is interested in your IP. Figure out how much value your IP is bringing to the potential licensee. Then consider what the licensee has to offer you and what it is going to take to maximize what the licensee is willing to pay you.
• Royalty Rates Vary. No matter how experienced the licensee on the other side of the table is, be confident that there is no such thing as a standard way to calculate royalties, nor a standard royalty rate. Do not be intimidated by the experience, bluster or economic advantage of a potential licensee who may be claiming that you are unreasonable or asking for too much. Make sure that you have done your own economic modeling of the market potential for your IP and stick with reasonable advice that you have received from reliable sources.
• Don’t Breeze Through the Boilerplate. Some examples of license terms that are too often not considered to be important enough to be challenged in licensing negotiations appear below. Material that the licensee may be trying to convince you is “standard boilerplate” often constitutes provisions that can affect you most.
  • Make sure that you and your lawyer have reviewed in excruciating detail what is covered under the license, to make sure that it covers only those things that you intend to be licensing.
  • Be clear as to who is responsible for maintenance of the IP rights and who owns what regarding later-developed technology that may be developed using your IP.
  • Focus on who the licensee is. Many licensors find it to be an unhappy surprise when they realize that the entity that they thought would be the only entity authorized to use the licensed technology actually included other entities or sublicensees. Plan in advance for what should happen if the licensee or its assets are acquired (particularly if by a competitor of yours) or if the licensee grows.
  • The license duration is critical to its value. Avoid renewal clauses that automatically kick in with long lead periods. There is no reason that an agreement should trick or trap somebody into an automatic renewal. Further, either party may benefit from being able to change the terms of the license based on more recent circumstances. If the licensee is still interested in using your product, the business will be sure to notify you before the term ends (and maybe far in advance, if the license has contributed to its success, which is of course when it might be time for you to look for a pricing adjustment).
  • Be specific in negotiating the separate aspects of the license grant, such as whether the license is exclusive or nonexclusive, its territory and its scope. The scope may address questions like: How many concurrent users may access the licensed technology? On how many separate stations? May it be used only for internal operations?
  • Put a confidentiality provision in the license agreement (in addition to the one that you signed before you started negotiating).
  • Be familiar with the Uniform Commercial Code warranties that you, as licensor, are making, in addition to the warranties that you expressly make in the license itself.
  • Follow your attorney’s advice with mandatory venue and choice of law clauses to ensure that each party is discouraged from commencing litigation without trying to work matters out first, but is not deterred from bringing a suit when one ought to be brought because it would be inconvenient or expensive to do so.
  • In the indemnification area, a party should not have to pay for what it cannot control.
  • The termination provision should have different periods before the other party may terminate for different events. The termination provision should also deal with what happens with the IP after termination. Some obligations should stop, but others must survive. 

About the Author 

Nancy A. D. Hancock is a member of the law firm Pullman & Comley LLC. She chairs the firm’s Emerging Business and Venture Capital practice and serves on the firm’s Executive Committee. Nancy is based out of Pullman & Comley’s Bridgeport and Stamford, Connecticut, offices. You can contact her at nhancock@pullcom.com.

Maximizing the value of early adopters can help your brand succeed

When former Connecticut Innovations portfolio client Open Solutions was ready to introduce an entirely new server-based computer platform to the banking industry, it faced a challenge common to most startup businesses. Nobody in the market was positioned to take advantage of their products.

In fact, in the highly regulated, risk-adverse banking industry, protocols worked against the Open Solutions product. “Everything at that time was mainframe,” noted Mike Nicastro, then senior vice president and senior marketing officer of Open Solutions. “Our product was not only something no one was using at the time, but regulations cautioned strongly against using untested software.”

However, Open Solutions was fortunate, according to Nicastro. “Simsbury Bank was at the time a startup in the community, and their management had the attitude that if they were going to be a new bank, they couldn’t think like an old bank,” he said. “They found us. They became our early adopter, and overnight, we had a product.”

Pairing up as innovators
Open Solutions and Simsbury Bank worked closely together to continue to develop the product. The benefit to both parties was clear. Open Solutions was able to turn to investors and say, “We’ve got momentum,” and Simsbury Bank could position itself to its customers as a problem solver – a great asset to the banking community.

Finding this type of mutual win is the key to identifying early adopters. Every industry has its “Simsbury Bank.” Such companies like to tout their risk-taking attributes and, when you let them share in your success and allow that success to become their career builder, you’ve got loyalty for life. This is what you want in your early adopters. They are not only your first users. They are potentially your cheerleaders and endorsers for the long term. It’s possible that these early adopters will even become your investors.

Where and who the early adopters are
The challenge to finding these customers isn’t lost on anyone. The scenario that Open Solutions found itself in cannot be counted on, so where do companies with no as-yet-established brand recognition turn to find reputable users of their new products? Peyman Zamani, CEO of LogicBroker Inc., a Connecticut Innovations portfolio company, has this advice: “Use the reputations of your people.”

You have put together an expert team of product developers and executives, and they all have networks. At this point, your company’s greatest asset is most likely in the people who conceived of it. “They have relationships and respect within your industry,” Zamani noted. “Use their contacts.” This will help minimize the extent to which you will have to scour the market landscape just to find one user of your product. Odds are, as a startup, although you have some money to invest in marketing, most of the venture capital is in the product at this point. Tapping personal networks becomes key to finding people who will invest their trust in you.

“This approach got us some good partners, and the industry started to notice us,” Zamani added.

Find the gaps in the market
Ted Russell, vice president of sales and marketing, ZetrOz Inc., another Connecticut Innovations portfolio company and maker of a small, efficient, low-cost, portable/wearable ultrasound system for the treatment of pain in humans and animals, points out that early adopters will be experiencing their own gaps and bottom-line stress. In the case of ZetrOz’s market, the company went after a small portion of the medical community who were not getting reimbursed for all of their services by insurance companies.

“The types of medical practices and healthcare providers we targeted needed something to offer as a point-of-sale item to boost their profitability,” Russell explained. “Our product enabled them to plug that gap and also offer something that distinguished them from their competition.”

When looking to find these types of gaps, here are some considerations:

Look for customers who can find new and unexpected ways to use your product. Early adopters like to guide development, so use this for mutual advantage. In ZetrOz’s case, chiropractors and physical therapists offered the product as part of an overall pain-management system.

Solicit feedback. Open Solutions used Simsbury Bank, its early adopter, to help identify or confirm why the server-based platform offered enhanced security, value and flexibility for end users. Encourage your early adopters to offer ideas on what features could be enhanced or changed to improve the value proposition.

Go after the thought leaders. Every market has its users who drive the conversations about what is needed to address specific challenges. Finding these people as early adopters is a good tactic for growth, establishing your own credibility and getting traction more quickly. These thought leaders can be a great source of promotion.

Be cautious about enlisting “big users.” They are certainly attractive as early adopters, but they also come to the party with big demands. These demands come in the form of specific requirements on your systems, time and production capacities. They also come with a need for special customization or development. This is different from enabling early adapters to help you enhance your product. Unless you are targeting a niche market, you don’t want to get into the custom-design business too early.

Some additional tactics
Although most startup cash flow is invested in development, it is wise to reserve some for marketing, even in this earliest phase. Raising capital is traditionally focused only on the product, but underestimating the need to build marketing firepower to sell the product can be the difference between concept and having an actual company.

Having said that, here are some tactics for boosting your visibility among early adopters:

Look for flatter organizations
Companies with strong hierarchies often protect their decision makers. You want to find the companies whose leadership team is close to their day-to-day operations and their markets, where decisions are made quickly and with minimal bureaucracy. This gives you an entree to sell a holistic solution readily.

Launch a launch page
You can’t do anything in today’s market without having an online presence. But this presence goes beyond your company website. Set up a launch page for your product that has the capability to “go viral.” Social media can make your product a household name. The landing page should contain details such as your company name and email, and it should generate a URL for the user to share among his or her social community. Consider including a free gift or coupon, depending on your product, for the most active referrer.

Introduce yourself to bloggers
Getting attention through traditional media channels can be especially challenging as news organizations continue to downsize and streamline their newsrooms. As an offset to this reality, bloggers have taken on an increased and more influential role. Use this to your advantage. Contact bloggers and give them early inside access to your company and its development activities. Bloggers often follow trends and issues based on their own interests, so be sure to identify who is who within your market sphere of concern.

Attend trade shows
You can pitch early adopters at trade shows as you build visibility for your brand. Everyone who comes through the door at a trade show, including other exhibitors, is a potential early adopter.

NOTE: Special thanks to those who shared their insights for this article:

• Mike Nicastro, Senior Vice President and Chief Marketing Officer, COCC
• Ted Russell, Vice President of Sales and Marketing, ZetrOz Inc.
• Peyman Zamani, Chief Executive Officer, LogicBroker Inc.

Nearly 5,000 manufacturers make up Connecticut’s manufacturing base, which is among the most productive and capable in the world.

Connecticut manufacturers serve a wide range of markets and have broad capabilities in: machining, forming, casting, extrusion, injection molding and additive manufacturing. There are also companies that provide supporting services such as soldering, brazing, welding, coating, heat treating, plating and anodizing. Still others produce fabricated assemblies and a variety of products for businesses and consumers. There are also manufacturers producing a range of chemicals and pharmaceuticals.

The largest segment of Connecticut manufacturers, about three-quarters, consists of contract manufacturers. They make things in response to requests from customers, but typically they do not have design capabilities. Therefore they must be provided with a sketch or blueprint that indicates what is to be made and what materials are to be used. Moreover, most make only components, as opposed to subassemblies or finished products.

Prototyping

First-Stage Prototype

If you are an early-stage company in Connecticut that has developed a product you would like to manufacture, how can you access help here in Connecticut, and where do you start? Your initial step is to build a first-stage prototype that demonstrates proof of principle – that your idea is functional.

This prototype could be made of wood or paper and carved out with a hunting knife; it does not matter. It is intended to prove the principle, and it may not be fully functional. It might be machined by a conventional machine shop, or it might be manufactured by companies that do 3D printing in plastic or metal.

There are companies in Connecticut that specialize in prototype manufacturing – with diverse capabilities, including 3D printing. The manufacturing resources listed later in this article are a good place to start to find the manufacturers you need.

Second-Stage Prototype

After you have demonstrated proof of principle with your first-stage prototype, you will be ready to manufacture a second-stage prototype. For this prototype, choose a method that can produce at least small quantities of product suitable to introduce to the market, even if only for an assessment of market reaction. This manufacturing method does not need to be the optimum method to use later for large-volume production; at this stage, your aim is to introduce product to the market for evaluation and demonstrate that the product can be made by commercial practices. An important benefit of the second-stage prototype is that it will provide you with insights on the cost-versus-sales-price relationship, which you can determine if you know the distribution path to the market and can calculate the markups by distributors, wholesalers and others.

Before approaching a manufacturer for your second-stage prototype, it is essential to answer these three questions:

1. What do I really know about the market? Do I understand where it is, how big it is, how I access it, and where my product will fit in terms of price and value relative to the rest of the competition? While you are exploring this question, you will also need to learn something about the market’s infrastructure – how to access customers, what the regulatory issues are, what the quality standards are, and so on.
2. What protection do I have, and need, to put samples in the field, or even discuss seriously with a manufacturer what I want?
3. What portions of the business do I want to control tightly? Think about whether you wish to eventually manufacture this product in-house or outsource the manufacturing, and whether you will focus on product innovation and development, sales and marketing, distribution, or some combination thereof.

The answers will impact which manufacturer you choose at this stage and determine whether the second-stage prototype will be used for marketing assessment only or will also represent how you will produce small volumes of your product.

If, as is usually the case, you need engineering and design help before approaching a manufacturer, you may wish to work with a component maker with design capability or go to a design house that can connect you with a manufacturer.

Further, if you are willing and able to serve as a general contractor, you can utilize multiple manufacturers (e.g., you might use one that produces components, another that provides intermediary services like heat treatment or finishing, and another that assembles the components into a product, inspects, packages and ships). If you do not wish to be a general contractor but would still like to engage multiple manufacturers, the company you select to do assembly may be willing to, in essence, serve in that role and help find the manufacturers you need.

No matter how many manufacturers you ultimately work with, development of your second-stage prototype is likely to be an iterative process requiring some trial and error before you arrive at a functional, aesthetic and economically viable product. This process will offer a good guide for tooling costs and for unit pricing over some volume range, but it may not represent the costs for tooling optimized for higher volume production.

How do you decide what path is best and access the capabilities you need? To access local talent, the following resources should be helpful.

• New Haven Manufacturers Association (NHMA)
• Aerospace Components Manufacturers (ACM)
• Smaller Manufacturers Association (SMA)

The websites of these associations share directories that provide members’ contact information and a brief description of the services they provide. ACM members are essentially all manufacturers. The other two associations also have a significant number of members that provide services to manufacturers, like marketing, financial help and so on.

• CONNSTEP: CONNSTEP is a consulting group that assists manufacturers in Connecticut and has a network of local manufacturing resources. As an affiliate of the National Institute of Science and Technology (NIST), it also has ties to a 50-state manufacturing network. One member of this network, in Cleveland, focuses on providing support for small companies developing new products. That member can work with Connecticut startups through CONNSTEP.

You may access any of the above resources through CONNSTEP by calling Frank Rio or Jack Crane at (860) 513-3201. Be prepared to clearly convey your needs and provide evidence that you understand the market you are targeting and have access to funds to pay for the services you are requesting.

Finally, at this stage you should have secured sufficient intellectual property protection for your product or technology – enough to protect your second-stage prototype in the field and when you are discussing it with prototype manufacturers.

Third-Stage Prototype

After you have evaluated the performance of the second-stage prototype in the market and decided you want to proceed, the next step is to prepare the pre-production, or third-stage, prototype. The third-stage prototype is the production model and will help you establish production costs at various volumes.

If you plan to use a domestic manufacturer, you will either continue with the manufacturer that made your second-stage prototype or find another that is more capable of manufacturing in the volumes you are now considering. If you plan to use a manufacturer in a low-cost country, make certain you have assessed the issues associated with offshore sourcing. Offshore manufacturers often rely on large-volume production and make deliveries only when they can ship large quantities, in order to minimize freight costs. The outcome is that deliveries from such manufacturers may be infrequent. Additionally, product modification may be a nightmare. NIST has published a good assessment tool to determine realistic cost comparisons for products made abroad in low-cost countries versus those made in the United States. You can access this reference through CONNSTEP.

Meeting with Manufacturers

The best approach to take when meeting with manufacturers to discuss prototyping, larger-scale production, cost estimates or possible collaboration is candor. Express your needs and expectations clearly, provide as much detail about the product as possible and offer market projections based on professional market research. Also, be clear about how you expect to pay for the services you need.

Keep in mind that despite the apparent sluggish economy and the desire of contract manufacturers to make new products, most small manufacturers are wary of startups. They do not want to waste their time working with startups that have a poor understanding of their markets and anticipated production volumes. They will expect you to have market research to support your claims.

About the Author

Jack Crane is director of growth and innovation services at CONNSTEP. He provides manufacturers with guidance and mentoring in strategic planning, marketing, strategy deployment, lean manufacturing, product development and materials troubleshooting. You can contact Jack at jcrane@connstep.org.

Premature scaling is not a skin disease. It’s the primary cause of startup failure, according to a recent Startup Genome blog post. Premature scaling means ramping up your company ahead of the business model.

What Is a Business Model?
Simply put, a business model is how you make money. Over 50 years ago, the Xerox Corporation invented a way to make copies of documents using a technology that kept the paper dry. Prior technologies involved chemicals that wet the paper. The problem for Xerox was that its machines cost thousands of dollars. In the middle of the 20th century, that was more money than customers were willing to pay, even though everyone preferred dry copies to the wet ones.

Xerox solved that dilemma and became one of the largest companies of the time by modifying its business model. Instead of selling the machines, or even leasing them, Xerox put together a lease package that included a fixed number of copies per month and a set charge for every copy over that amount. (I believe it was 2,000 copies free and a few cents for every copy over that – but don’t hold me to those numbers.)

Here’s the reason it worked. People made the purchase decision based on their history with wet copies, and figured the monthly fee would be a bargain. But the new technology meant people made a lot more copies than they had predicted, and they were happy to pay for them because of the quality.

It wasn’t the technology alone that made Xerox a success. The business model made it work. Xerox lost its edge when companies in Japan made smaller and cheaper machines, thus creating a different business model around the same technology. But that’s a story for a different time.

Recently, a Connecticut Innovations portfolio company, Continuity Control, has been reworking its business model. The company developed technology that helps community banks and credit unions with their regulatory compliance. It’s cloud-based software, and the company started selling different modules as apps with monthly fees that all integrated into a complete solution but allowed clients to start simply. Business was slow to take off. Clients were hesitant because they didn’t see how all the parts would integrate into a complete solution, and they were cautious following the financial collapse of 2008. So the company bundled a set of apps with a few days of setup assistance from a virtual compliance officer. Continuity Control also included some time with a trained individual to help clients customize their app configurations and offered clients credit to purchase some additional apps. Simultaneously, Continuity Control raised the price. Sales became quicker to close – and much more profitable.

Then Continuity Control made further tweaks to optimize the business model. Now it sells a complete automation platform for compliance management bundled with seasoned regulatory expertise – for an even higher price. Yes, the app technology is still vital, but it’s no longer the primary selling point; the value-added regulatory expertise, customization and setup assistance are the key selling points. Sales have continued to grow.

The Business Model Formula (Simple Version)
The business model is about how you solve a customer’s problem in a profitable way, and there’s a useful formula you can use to understand it. Every dollar your company spends is spent for one of two reasons: either to acquire a customer or to serve that customer. What you spend for the second reason (to serve a customer) subtracted from all the money the customer pays you (over as many purchases as they make) is called the lifetime value of that customer, or LTV. What you spend to acquire that customer – all your marketing and sales expenses – is the customer acquisition cost, or CAC.

Obviously, the LTV needs to be more than it cost you to acquire that customer or you’re paying the customer to buy from you. To say it another way, LTV minus CAC should be a positive number, or LTV – CAC = $$. This is not traditional accounting, of course. Financial reports tell you what you spent money on; the business model shows why you spent it. If the result is a positive number, then you’ve found a model that can scale.

The Job of a Startup Is Not to Sell Product!
The job of a startup is to learn – to develop a scalable business model that will lead to profitability. You’ve done that when you have documented everything it costs to acquire a customer, including things like knowing how long the sales cycle is and what you have to spend in overhead during that time. Plus you’ve documented everything it costs to serve that customer, including not just the cost of goods sold, but the cost of building the platform to deliver those goods. Also, you’ve determined the optimum selling price and how often the typical customer will buy from you. These numbers help you determine LTV and CAC. And finally, you’ve got data to back up these numbers so they are repeatable, and predictable.

Using the Xerox example, you can see that plugging in the numbers when you’re attempting to sell a multi-thousand-dollar machine results in a very different model than when you’re selling a monthly lease plus a bunch of copies that cost a few cents. Same machine, same benefit to the customer, but very different business models.

Not every startup needs to invent a completely new business model. Advertising is an old one that works for many companies, freemium is not unique, and subscriptions have been around since before the web. And of course, selling a single product at profit has been done since money was invented. But you have to discover the business model that works in your situation, based on what your customers are willing to pay to solve the problem that your company solves for them.

Startups vs. Scale-ups
Once you’ve discovered the right business model for your company, it’s time to scale up. That means adding capacity – to acquire customers and also to serve them.

The Business Model Formula (Advanced Version)
If you’re scaling up, you need the more complex version of the formula (LTV – CAC) * N = $$ where N is the right number of customers for profitability. Spending money on N means you’re increasing your capacity to sell more and to serve more customers. The trick is keeping those two things in balance and not running out of cash while you grow.

What About Investors?
You may have noticed that you don’t see investors in either version of the formula. You usually have to spend money before customers pay you. It’s investors and lending sources that front you the money, before the customers start paying. Of course, they want to get their money back – and then some – so the costs of paying them back must be incorporated into your model. Depending on what you spend the money on, those costs show up either by increasing your CAC, decreasing your LTV, or both. That will show how big N needs to be so you can pay back the money out of future cash flow, or grow fast enough to give investors a good return when you sell the company.

That’s the business of business models in a nutshell. Simple, right? Deceptively so. Of course simple doesn’t mean easy. If it were easy, everyone would get it right. 

About the Author

John Seiffer runs CEOBootCamp.com and is a past president of the Angel Investor Forum of Connecticut. He’s been an entrepreneur since 1979 and lives in Milford, Connecticut. You can contact him at john@CEOBootCamp.com.

Most startups fail. A recent study of 2,000 venture capital-backed businesses showed that 75% failed in three to five years. They are not my audience. The companies that get liftoff, break free of the “small business” gravitational pull of $1M sales/year and keep going – you are my audience. Congratulations!

Growing businesses, whether they be service-, manufacturing- or technology-based companies, begin to gather momentum and then scale. That’s the point when they hit upward inflection points that are step-ups from where they are today. They expand products, plant capacity, market reach by segments, geography or international markets, and even physical locations. They may take on partners for manufacturing or distribution, and their need for what they see as “nonessential services” (like legal, finance and executive recruitment) accelerates to uncomfortable levels.

Most successful business founders have a unique ability to focus, becoming riveted on filling a customer-valued market need. Yet they all seem to have the same blind spots that cause them to miss critical transition points with common negative impacts. The results are the same: they fall behind and become reactive, leading to nonconstructive stress throughout the organization. The further one gets behind these inflection points, the harder it is to catch up.

#1 – Managing for Profitability

It is about the money. Seriously. Building a culture driven by financial goal setting, commitments and ownership, timely performance reviews and recovery plans, for if you fall behind, is critical. Required are staffs and teams that understand managerial finance, including managing-for-profit, productivity, cash flow management and building a healthy balance sheet. When do you do this? Timing and dedication to the process are key before you run through scarce capital and cash.

#2 – Transitioning to Marketing

Companies go through stages, beginning with invention and proof points and then moving into initial sales and broader market acceptance. Somewhere in there, the world notices your “better mousetrap” and competitors want “in” to your market. Some erstwhile competitors are big and have plenty of resources. So how do you compete? Refining your value proposition and aiming at defensible market niches is the key. Along the way, pricing strategy becomes crucial. The most important variable is changing the game before the competition recognizes it. That’s called marketing, and doing this too late is, well, too late.

#3 – The Most Valuable Resource – Your People

It never ceases to amaze me that many executives do not realize that their key resource goes home at night. You can have incredible patent protection, but if the “people engine” isn’t running, you are in deep trouble. Similarly, at inflection points, if you do not add key human resources, you will fail. Most growth businesses are too slow to add a human resources manager or executive, and that is a killer. Think about the complexity of staff quality and timely hiring, compensation planning and management training and development at all levels and performance appraisals. Think, also, about developing a corporate culture that is positive, progressive, honest and risk-taking. When do you get started on this? The sooner the better!

#4 – Win in Your Primary Market

You cannot sell the second if you do not sell the first. Become well established in your primary market and build upon that to be successful. Develop your credentials of value, quality and service. Too many growth businesses go horizontal into additional products and markets too soon and default their primary market before expanding. I call these “hobbies,” and they are distracting and resource diluting. In today’s business world, you must execute with precision, quality and speed. You need to determine what is a critical path and what is not.

Founding CEOs are focused and driven, and that is what ensures their success. They know what they know, but all too often they neither recognize nor appreciate what they do not know. The above stress points are very real, and simply understanding that they loom ahead is helpful. Successful companies confront them in a dedicated and timely way. Others miss the inflection points and inject unnecessary risk into their business equation. How you adjust and develop new practices will define the future performance of your business.

About the Author

Jeff Goodman is the principal of Best Practices Inc., a business consulting firm located in West Stockbridge, Massachusetts. Jeff has helped companies such as General Electric, IBM and others make timely, high-quality decisions. He will dig deeper into some of the points highlighted above in future articles. You can contact Jeff at jeffgoodman47@outlook.com.

If you are interested in learning more about this “Managing Growth” topic at a CI-sponsored seminar, please contact Melanie Hoben at Melanie.Hoben@ctinnovations.com or 860-258-7820.