The Bootstrapped, Scalable Start-up: Charlie vs. Ted (Part II)

October 24, 2009 – 10:27 pm | by Matt Ackerson

When we last left off, Charlie and Ted were pushing hard to get their start-ups off the ground. Both are now about 5 months out of the gate. Charlie has 4 customers and is charging $75 per Digi-Widget, while Ted has 10 customers and is charging $100 per Digi-Widget. Both believe that the service is at a point where they can begin to scale the service.

Chapter 3: Growing Pains

Charlie:

  1. Kicks it up fundraising efforts a notch, goes to Angels and a few VC’s to make presentations on why they should invest in his Digi-Widgets company.
  2. The business plan is rejected by all potential investors–it’s too early and they’re not comfortable. One month has passed, Charlie is watching his bank account.
  3. Hustles for another month, and manages to raise $500,000 in funding, but not on the best terms. He is forced to give up 40% of his company in return.
  4. Doubles the size of his team to 10. But this is a good thing because the 5 new hires are experienced sales people and engineers. The burn rate is raised to $80,000 per month, everyone gets a raise.
  5. All of the engineers need to make use of their time, so they start adding features to the service. All of the sales people need to also make use of their time so they start selling to businesses. They sell 100 Digi-Wdigets in a month. Nice.
  6. Sells 50 more the next month, however, they start receiving strange customer complaints about the product. Unsure of what to do, Charlie hires 2 more engineer and tells them to add two key features that should fix the issue. Charlie gives a pep talk to the sales people because output was half of what it was last month. There’s tension as he suggests that compensation be tied more directly to commission rather than a base salary.
  7. The sales team squeaks out 40 sales, but 50 of the first 100 sales stop buying the Digi-Widgets, and send them back. Charlie is livid and panicked. He meets with his advisors and investors who encourage him to let a few of the engineers go who seem to not be performing. Charlie does so and gives a pep talk to the whole team immediately following. They all go out for drinks later that week–hopefully to forget this difficult episode, thinks Charlie…

Ted:

  1. Puts his head down with his business partner: they create a back-end sales management system hosted on the web
  2. Creates sales scripts, power point decks, a sales training and support process, and other sales materials.
  3. Has virtually no money, just enough to pay for rent, food, and internet.
  4. Uses Facebook, LinkedIn, Twitter, and Craigslist to find people who are willing to work on a commission basis selling the Digi-Widgets to customers. After a month he has found 5 sales people willing to sell it at 50% commission.
  5. Trains the sales people to the best of his ability. Afterwards they start selling to businesses, but it’s rough going because they aren’t very experienced at selling this type of product. Though they only sell 15 Digi-Widgets, Ted and his partner are elated because they have enough money now to keep the company going a little longer.
  6. Ted works with the sales team to refine and tweak the sales scripts on how to overcome obstacles that commonly come up when they pitch the product. Ted recruits two more sales people; his networking pays off when he snags a bonus engineer who’s willing to work for equity in the company. They make 25 sales that month. Ted is focused and encouraged.
  7. The Digi-Widget malfunctions and orders are delayed by one month. Luckily the new engineer on board is an ace and able to fix it, as well as stabilize some other potentially faulty features for future use. Ted breathes easy, they still have enough cash to last a while. Though the new orders were delayed and had to be discounted 50% to make up for it, there were 60 new sales. Ted hires and trains 3 more sales people.

Chapter4: Scaling and Failing

  • Charlie is bothered by the lingering effect of the having to lay off several of the engineers. Team moral is poor, but he’s working hard to be positive.
  • Ted promotes his best sales people to sales managers. He needs more administrative help, orders are coming in quicker now. He has stopped making changes to the sales materials and system for the time being. He trains his sales reps on how to train and hire other sales reps. 20 more sales reps are hired from the 5 that are promoted. Ted hires another engineer to help keep up with the maintenance of the product. His monthly burn rate is now $15,000.
  • Charlie is sullen: this month’s work turned out a meager 30 sales, meanwhile another several dozen customers return the product and stop ordering. When asked why, they complain that it’s too complicated, it wasn’t what they thought. Charlie asks the engineering team to cut-out features in response but encounters resistance and some bitterness.
  • Ted is spending most of his time managing and networking now. Everyone in the company is excited about the growth. Spirits are high as they top 100 sales this month.
  • Charlie’s investors seem to be holding back in their meetings with him. He is frustrated and wishes he could wring their true thoughts out of them–they probably think they know what’s best! But who are they?… Time and money are running low. Charlie knows what he has to do. He must lay off most of the staff to conserve cash and simplify the Digi-Widget to its core features, while upping overall quality. It seems like an impossible task.
  • Ted’s networking pays off when he enters into a partnership with Digi-Mart to distribute his Digi-Widgets. Sales skyrocket the next month when the first orders come in. They do 1000 sales that month and hire 3 new engineers to help ensure quality.
  • Charlie is overwhelmed. He has laid off all of the sales staff and two of the engineers in order to conserve money. He’s offering the remaining team members equity in exchange for severely reduced salaries. Two other members said they needed more and quit. Charlie knew they were disloyal and tells the rest of the team that it’s all for the best. No one believes him.
  • Ted starts taking a small salary and rents out a modest office for the growing company.
  • Charlie starts doing sales, and remains convinced that his product is valuable and that his company can get its legs back. The company’s burn rate is $6,000 a month. Charlie will continue to fight.
  • Ted makes a presentation on his company to a few investors who have invited him to pitch. All of them offer him term sheets, but he graciously turns them down.
  • Charlie doesn’t meet much with his investors these days.
  • Ted makes the Inc. 500 fastest growing company’s list a few months later.
  • Charlie reads about Ted’s company.

Questions to consider:

Why did I write this? Was Ted’s success at starting and growing his business a miracle? Was is luck or magic? A trick or skill?

More importantly do you think this is something that can be taught?

What is the importance of being aware of the mistakes others have made in their business experience? What are the different types of mistakes made? Did Ted make any mistakes?

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  1. 6 Responses to “The Bootstrapped, Scalable Start-up: Charlie vs. Ted (Part II)”

  2. By Ahmad on Oct 25, 2009 | Reply

    This was a really good write up and a really good read!! For a newbie into the business and entrepreneurial world, to see a role play story of organic company growth is really eye opening.

    I think Ted’s success in growing his business was from experience. Ted, unlike charlie, was not concerned with going big from the start. Ted worked his way up step by step continuously building on a solid foundation.

    Charlie saw the potential his company had and wanted to just scale it up – he went to investors, got more money, hired more workers and hustled in the same manner he started in.

    Ted networked to improve his brand name and bring in new customers, he employed workers under a cost effective system and slowly built them up. Ted’s business was progressing slowly but surely.

    Mistakes to avoid – don’t get ahead of yourself even if you have a terrific idea!!

  3. By Matt A.* on Oct 25, 2009 | Reply

    Thank’s for the comment Ahmad, I’m really glad you enjoyed it. I think you’re definitely right with respect to not getting ahead of oneself in doing a start-up. Ted knew that he could produce the Digi-Widgets on a small scale at first without drawing on outside funding, but Charlie thought he needed it to grow a bigger team, which turned out to be more expensive and complex than he had anticipated. A lack of funding required Ted and his partners to work a bit harder for a while, but for Charlie, the irony is that it really became burden in some ways.

  4. By John Exley on Oct 26, 2009 | Reply

    This story reminds me of Mike Michalowicz’s “The Toilet Paper Entrepreneur” philosophy…how entrepreneurs are more creative and resourceful with the less outside funding they have.

    Very interesting read. A good endorsement for starting small and and not trying to “fake it to make it” by leasing the big office and raising VC money with no products sold.

    We have an entrepreneurship major here at Clarkson University, and I know several friends around the country who are entrepreneurship majors (Bryant University, Wichita State, etc.) and they love their program.

    Your article makes me think more of the potential impact a “Sales” major might have. I think a sales degree might be better suited for the aspiring entrepreneur, and more applicable for someone who is passionate about business but not certain she/he wants to pursue starting her/his own company.

  5. By Matt A.* on Oct 26, 2009 | Reply

    Hey John. A sales major would be a very useful major I think, wish they had that when I was an undergrad. I think academia looks down on “practicum” like that though, at least it some schools. I’m glad to hear that Universities like Clarkson have an entrepreneurship major.

    I think if one were to craft a sales major it would certainly have to include the study of scalability (e.g. how do you scale a sales operation to produce repeatable results)

  6. By Michael Miller on Jun 30, 2010 | Reply

    sometimes Sales Management takes a lot of effort and skill.-*;

  7. By Matt Ackerson on Jul 4, 2010 | Reply

    Ok…

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