Tag: Business

M&A Lingo for CEO’s – 15 MUST-know Terms

CEO giving talk about M&A and Private Equity phrases

If you own or run a private business, chances are Private Equity firms are knocking on your door. But if you aren’t prepared for the unique language of private equity and M&A, conversations will leave you lost-in-translation, or worse, left in the dust by your PE-backed competitors.

To stay ahead of the game, every business owner, CEO, CFO, and President should know with these key terms for when acquirers come a-knockin:

1.) Turns / Multiple

“What multiple were they looking for?”
“Sounds like six to six-and-a-half…”
“I bet we can get them signed up if we give them another half-turn.”

Explained:

Turns or more commonly multiples of EBITDA are the standard in middle-market ($20-200m revenue businesses) for quickly comparing the cost of acquisitions to other transactions in the private market. For significantly sized businesses and outside of VC, tech and public markets, multiples are usually of EBITDA instead of revenue. In the middle-market, multiples generally range from three times (3x) to ten times (10x) EBITDA depending upon the specifics, with a typical range being 4-6.5x EBITDA. A business doing $5 million in EBITDA on $50m might sell for a 5x multiple (of EBITDA) leading to a $25m TEV (Total Enterprise Value). A turn would be going from a 4x EBITDA price to a 5x EBITDA price (or vice-versa). More simply, some might consider this as the number of years it might take for an investment to pay back (i.e. 4-5 years)

2.) Points

“We traditionally set aside a few points in a management pool to keep interests aligned.”

Explained:

Points are traditionally percentage points of equity, usually in a business. This is a conversation about reserving some percentage of equity ownership in the business for management to earn as an incentive for good performance of the business going forward.

3.) EBITDA (“Eeh-Bit-Dah”)

“How big is the business? How does your EBITDA look?”

Explained:

Earnings Before Interest, Tax, Depreciation & Amortization. This is THE key high-level and preliminary financial metric (in addition to Revenue) that is used in comparing acquisitions and investments to other transactions in the industry. A business doing $5 million in EBITDA on $50m might sell for a 5x EBITDA price (multiple) leading to a $25m TEV (Total Enterprise Value).

4.) Book

“Is there a book? When will the book be available?”

Explained:

Confidential Information Memorandum (CIM) or OM (Offering Memorandum) is also known in the industry as a “book” – a packet of materials for marketing a transaction with a business. Traditionally this is a multi-page document (say 20-50, but I have seen as many as 250+ pages) put together by a management team, investment banker, broker or M&A adviser that describes the operation of the business, their end markets, growth story, customers, leadership, plans for the future. Having a book that can be readily shared with potential acquirers (alongside an NDA of course) demonstrates a level of seriousness about a transaction. Many books today come in the form of detailed slidedecks.

5.) Concentration

“Are there any concentration issues?”

Explained:

Typically referring to industry and customer concentration. Diversification is the name of the game here. Risk is the enemy of private equity, and customer concentration has been shown to be one of the biggest non-starters for would-be acquirers. Most PE firms like to see companies with no customers that make up more than 10% or so of annual revenue. What happens if that 30% customer walks out the door?

6.) Roll

“How much is ownership looking to roll?”

Explained:

Rolling is a question of how much equity an existing owner is willing to keep on the table / reinvest / retain in the business going forward. Traditionally a Private Equity firm will want to take a majority equity position in a business, say around 80% to the existing owner’s 20% post-transaction. Technically speaking equity is usually rolled into a new entity as many transactions are asset sales (i.e. the owner is cashed out 100% from the existing business and purchases a 20% stake in the new entity, which acquires the assets of old entity).

7.) Platform / Add-On

“This business is too small as a platform, but we might look at it as an add-on for XYZ company.”

Explained:

Generally speaking Private Equity firms have growth-through-acquisition in mind when acquiring any business. Traditionally their initial investment in a given industry or niche is larger, and considered the nucleus or platform around which they can build. A given firm will usually raise a fund of committed capital and will traditionally acquire somewhere between 5 and 15 primary businesses within that found. Around each of those, they will often acquire many smaller synergistic businesses (“add-ons”) which allow the platform to grow accretively in addition to organically over the course of their funds ownership of the business.

8.) LP

“Our LP’s are hungry for direct investment, so we can definitely stomach larger acquisitions than our fund size might infer.”

Explained:

Limited Partners are the money behind the money. Each private equity fund (and most successful firms have many funds / vintages over their life) is a fixed-life vehicle for acquiring, building and selling companies with the objective of returning a profit to the investors. Limited Partner or LP’s are the institutions, high net worth individuals, government entities, foundations, etc that have committed an amount of capital to a fund with the understanding that they will receive a certain return on their investment. Often the promise from PE firms is 20-30% IRR and has a minimum preferred rate of return or Hurdle rate.

8.1(bonus term): Hurdle

“We won’t even be close to clearing the hurdle on that investment.”

Explained:

LP’s typical have a hurdle-rate or preferred return established with PE firms with whom they invest. A typical hurdle rate is 8%. The majority of the upside that PE firms earn is from the carried interest or earnings of a given fund, but most firm’s do not get any/much of that upside until they have at least cleared their hurdle rate (say 8%). While traditionally this applies fund-wide (vs deal-by-deal), this becomes an important number above which PE firms must ensure their companies/investments perform. While not common, some investors will structure that same hurdle or preferred return into their investment in a business to ensure they get the returns their investors desire.

9.) Independent Sponsor

“We have been operating as an independent sponsor for 10 years
and have closed 12 transactions in that time.”

Explained:

Independent Sponsors are also known as “Unfunded Sponsors” meaning they do not have an established, committed pool of capital from which then can draw. This means that after negotiating a transaction with a seller, they must pitch the deal to LP’s and other investors to get it funded. While this model is very successful for some, for others who are inexperienced or without the proper connections, sellers signed up under LOI (and exclusivity) can be dragging around for many months (and even years) with constantly prolonged closing as the buyer attempts to secure funding.

10.) LOI / IOI

“We are ready to move forward. When can we expect an LOI?”

Explained:

Letter of Intent (LOI) or Indication of Interest (IOI). Think of this as the term sheet, or offer on the table. This is fulfilling the old, “I don’t believe anything until I see it in writing.” Both are non-binding, though an Indication of Interest is usually more preliminary as in, “I believe your business is worth between $50m and $55m, and I am interested.” An LOI gets into more of the details about the value being brought to the table, what a transaction might look like, and when the buyer forsees closing upon a transaction (i.e. 60 days of diligence upon signing followed by 15 days to finalize a definitive agreement and close).

11.) Signed Up

“If we can get this signed up by next week, I don’t see
any reason why we can’t close by the end of June.”

Explained:

In addition to being time-sensitive (having an expiration date and time), LOI’s traditionally have a block for countersignature by the seller, asking the seller to agree to the preliminary terms of a transaction and to agree to work exclusively with said buyer for a certain period of time. When the seller / owner of a business returns a countersigned LOI, the deal is said to be “signed up” under exclusivity. While under exclusivity the seller agrees not to shop for a better or different deal, and to only work with this seller for the time being.

12.) Earnout

“What if we structure this thing? Are they open to an earnout?”

Explained:

An earnout is the process of paying out a seller over time post-closing, often dependent upon meeting pre-defined benchmarks. If the Total Enterprise Value (TEV) is $25m with $20m cash-at-close and $5m in the form of an earnout, then that $5m will be paid out over time from the proceeds of the business in years to come, not at closing.

13.) Leveraged Buyout

“We use a modest amount of leverage in all of our transactions.”

Explained:

It might seem like the old dirty word from the 80’s and 90’s, but majority-recapitalization LBO’s are still the standard operating procedures of Private Equity firms worldwide. Even if they don’t mention it up front, that PE firm in front of you will ABSOLUTELY be putting some debt on the business, and there is a damn good reason: it super-charges returns.

Consider this: you are going to acquire a majority stake in a business that all parties have agreed to value at $100m. You negotiate with the seller to acquire 80% and he will keep 20%, and he will continue to run the business day-to-day. So at this point you could write a check for $80m for 80% of the business, but instead you get a bank to pay for half of that ($40m) putting $40m in debt on the business, and you only have to cut a check for the other half ($40m). The business continues to grow, five years later the business has paid off all of the debt and is now worth $125m – nice work team! But more importantly, since the debt is all paid off, you truly own 80% of that $125m, or $100m. And how much cash did you have to invest to get to $100m? That’s right, $40m. That is a 2.5x cash-on-cash return giving you an IRR of 20%! So yes, that PE firm will be using debt and there is a damn good reason (so long as they don’t over-lever).

14.) Purchase Agreement

“I hope this is the final version of the DPA…”
“Don’t count on it.”

Explained:

Definitive Agreement (DA or DPA), Asset Purchase Agreement (APA) or Stock Purchase Agreement is a legal document that lays out all the details of a transaction. This document is very much final / definitive, and oftentimes transactions die here from hangups negotiating covenants and restrictions, exact legalese, details surrounding taxation once the deal becomes real, new discoveries during diligence, and frankly many petty personality and ego clashes.

15.) Retrading

“I swear to God, if they retrade on this, I’m walking away.”

Explained:

The process of retrading is, in my opinion, a horrible last minute attempt to change something in the purchase agreement often when you are down to the wire ready to close. This most often comes up as a “surprise” or “discovery” during diligence where new and previously unknown risks are used by the buyer to justify reducing the price. Some firms have a bad habit of throwing out big numbers with their IOI’s and LOI’s to get deals signed up, only to retrade multiple times in diligence to get to the value they actually wanted. This is not a common practice for most reputable PE firms, but something to watch out for none-the-less.

The world of Private Equity and M&A is full of success stories, successful exits, management buyouts, inter-generational transfers of ownership, growth, and long-term value, as well as letdowns and failed attempts. These key terms and pro-tips should help you avoid the potential pitfalls when pulling together a transaction. If you have other terms you would like explained (or believe would be helpful to others), just drop me a note in the comments below :).

Full disclosure, I spend the majority of my time connecting buyers and sellers as an M&A matchmaker, but am compensated by the buyers of the world. That said, I would be more than happy to learn about your transaction needs and see if one of the hundreds of buyers I work with might be a right fit for your business.

 Dan Herr on LinkedIn

View Daniel Herr's profile on LinkedIn

Disclaimer

The above materials (as well as other content on my blog) are for informational purposes only and not for the purpose of providing legal advice.

Project Vesto – A call to arms

Out of the ashes of recession
A state born of the battle, reinvents itself
Makes opportunity in a deserted land
Turns loss into opportunity
And gives new life in an empty void

$100,000 pooled
To start new hope
To launch a new Nevada business
Not what the Project wants
What we the people need
Not California rebranded
Not in Nevada for the sake of a state-shaped logo
But because we are from here
We were born in a great struggle
We were born in the sage and the Basin
We don’t show up to party in the black rock
We were in the desert before the desert was hip
This is not a conglomerate and outside consulting firm
This is not Silicon Valley money
This is not an out-of-state investment
This is Nevada money for Nevada people
This is us, pulling ourselves up
This is our own grunting hard work
Our own get-it-done
Our own micro-brewed, down-home, self-serving revival of Nevada business
Investing in ourselves for ourselves
Reinventing how we, the real Nevadan’s, revive our economy
Revive our business culture
Rebuilding; one startup at a time

We the people of Nevada
Launch Project Vesto
In Nevada
For Nevada
On Nevada Day
Giving new life
With our battle-born business rebirth

Vesto Logo

Elko to Host Startup Weekend for Entrepreneurs

Reblogged from SWElko:

Click to visit the original post

Elko to Host Startup Weekend for Entrepreneurs
Startup Weekend Elko will connect local innovators
and startup enthusiasts to share ideas and launch companies

ELKO, NV – Startup Weekend, a national grassroots business-launching event, is coming to Northern Nevada, September 28-30, 2012. Startup Weekend Elko will connect local entrepreneurs, developers, designers and startup enthusiasts with mentors and resources for a weekend of sharing ideas, forming teams and launching startups. The weekend-long event will take place at the Great Basin College campus in Elko.

 Whether participants found companies, find a cofounder, meet someone new or learn a skill outside the usual 9-to-5, they will be better prepared to navigate the chaotic and exciting world of startups.

“Many of us in Nevada had the rug swept out from our feet the past few years and we’ve had to adapt; become innovative and entrepreneurial to survive,” said Daniel Herr, life-long Northern Nevadan, organizer of the event and a recent participant in the Las Vegas Startup Weekend.  “Northern Nevada has a lot of hidden gems and I am really excited about bringing this fast-paced startup proving-ground to Elko. It will be great to bring entrepreneurs from many of Nevada’s smaller North-Eastern communities together.”

On Friday night, attendees will take the open mic to…

Read more… 457 more words

Looking forward to this awesome event on September 28th in Elko! Read the rest of the post on the elko.startupweekend.org blog ->

One Sand-Skeeball-Sculpture at a Time

Building sandcastles and other sand structures is incredibly similar to being an entrepreneur. Everyone on the beach has the tools and resources to do so right in front of them, but few try for one reason or another. Perhaps some have never thought to try, they do not have the creative vision. Others might think it a cool idea, think back on times as a child, and say, “Well I will be shunned by society if I try; and I’m likely no good at it anyhow, so I won’t bother.”

Growing up my father loved to make his classic Skeeball game on the beach out of sand. I do not know where the idea sprang from to do so, but every summer on the beaches of Ocean City Maryland, we would make grand sand-sculptures: from mermaids, to hammerhead sharks, turtles, and the famous beach Skeeball. The sand was our canvas and we could create darn-near anything out of it; why not create a classic game to play? We would build a giant mound of sand, water it down, pack it out, use buckets to create perfect hole, and personally I loved to build in automatic ball returns for every hole.

Today we were at Big Carona Beach in Orange County, California and after a swim out to the buoys, body-surfing, some paddle-ball and a brief nap in the sun, it felt like time to add my creative touch to the sand for all of my fiancés cousin’s little children to enjoy. Skeeball.

It is crazy the level of doubt at first outset. So many lack the vision. Perhaps it is because I have been there before, made other versions. The fact remains; so many doubt what they cannot see. And the progression is always the same: doubt, disregard, curiosity, desire.

I tried to recruit a number of the kids, and full grown cousins, to help without avail. I did get one young-in to grab me one bucket of water, but that was enough for him. People walk by and you can tell the look on their faces says, “Why is that full-grown man piling up sand; weird. Keep walking.” The slow progression moves toward; “Wow, that is a big mound of sand,” people whisper, “that must have taken him a while.” Not too long, thanks. “What ‘cha makin?” come the next and more curious questions. “Skeeball, wanna help?” “Skeeball hunh? Cool (I think). No that’s alright, I’ll let you do your magic,” followed by a thought of, “Wow, he’s taking this too seriously.” Or “That’s kinda lame; no thanks I’d rather boogie-board. Have fun playing in the sand though (you grown-as man).” I was probably done in 20-minutes or less, though it definitely took longer do it by myself than when I was a kid with my father, brother, sister and cousins helping.

But once you finish, everyone wants to gather around and play the game. “Wow, can I play?” “It’s my turn, give me the ball.” “This is awesome!” And finally those who ignored the call build upon that original vision and make it better once you’ve created it.

The joy in these kids faces as they played the game time and time again was fantastic. The laughs and excitement as they ran around the back to grab the ball they overthrew is that unexpected value and feeling of success that many search for their whole life-through. This value of creating for others out of seemingly nothing is one thing I cherish most in life.

Success is not eminent in the sand; there are many ways for the vision to fall off track. Perhaps you run out of time. Maybe you don’t have great vision at the outset and build it poorly; or make it in haste leaving people to understand the vision but think, “Wow this really had potential, but just isn’t that cool.” Or you could be entirely unlucky and have a wave (or mischievous child) come knock your masterpiece to the ground before completion; but perhaps you could have planned better for this.

At the end of the day, sand will return to sand: bound to gravity and mulled around by the ebbing sea. But for a time, it is possible to build a grand work: as simple or complex as you like. For a time you can enjoy what you have created out of the world’s canvas. For a while you can create value that is life and enjoyment thereof. But understand that in time all will be washed away to not but memories of what once was.

Even Reno Landscape Companies Kill it with Social Media Marketing!

“We sold $150,000 in one day though, can you believe that?”
– Small-time Reno Landscape Guy

Social Media Marketing isn’t just for the chic & trendy businesses anymore. This morning I must have walked in on good ‘ol boys landscaping industry meeting at Starbucks. Okay it was definitely nothing official but four guys from different landscaping companies were definitely having coffee together this morning… Collusion in Landscaping perhaps?

I didn’t catch where the others were from, but one of the company tee-shirts was clearly legible (but will remain nameless here) Anyway, I couldn’t help but overhear their conversation about what works and what doesn’t in advertising and marketing today.

They started off my talking about the fresh orange teeshirt the guy with the long pony-tail in his 50’s was obviously proud of. The young guy of the four chimed in about the cost of having one of those billboards up in Verdi on I-80 and how bummed he was that some backyard waterfall company landscape company that he didn’t care for was using one.

Finally the biggest and oldest started talking about the Anniversary Sale he had recently posted on Facebook. He said, “We sold $150,000 in one day though, can you believe that? People just started sharing our ‘45% off everything’ post that we put up on Wednesday and you know it went viral.” The pissing contest continued. “Everything didn’t go perfectly, but we learned a thing or two in the process.” He said, “Well I’ve been getting all those calls from Groupon and LivingSocial the past couple months, but then we figured out that we could do the same sort of deal ourselves.” And in the process not give away 75% of the farm!”

Who knew? Landscaping businesses making big money with Social Media Marketing?! You got it. He was not at the table this morning, but if you want a great example of a Lawn and Landscaping Business in Reno that is doing all the right things in Social Media, look no further than Cory’s Lawn Service:

coryslawnservice.com/

Are MBA’s a Waste of Time for Engineers?

I know the feeling, wanting to get out of the monotonous routine, get out from the cubicle, and get away from your boring boss that has been working for the firm for 30 years. I’ve been there and I am seeing more and more that many engineers get that same itch. That need to use the other half of your brain, to engage that creative nature that has been suppressed. The desire to act on a vision, build with your hands, mix it up, do what feels natural and control your own destiny.

Right now you feel like:

Here is your problem,
here is your paycheck,
now go solve it monkey.

… but you have so much more potential. About 35% of the students in my MBA program that did engineering for their undergrad and are now looking to follow their true passion (which may not have been socially acceptable in their mind to their family when they were younger) to be an entrepreneur. It is only natural to ask if getting the MBA is the right bridge to connect your future:

  • My good buddy Pat began working in Silicon Valley with his B.S. in Mechanical Engineering as a Sales Engineer for the company that makes processor testing equipment. Within five years he had the have that change, left his job, sold all of his possessions and went to Alaska for a year.
  • My buddy Mike designed radio antennas on vehicles in the Midwest for years before ditching it all to come out to Lake Tahoe and become a message therapist.
  • I worked for HDR Engineering, and Domenichelli & Associates on Wastewater Treatment, Reservoir Design, Hydrology and Hydraulics; today I am working on business plans for independent movie theaters, adventure voluntourism projects, local business investment funds, and most importantly a new type of entrepreneurship competition.

But is the MBA the answer? Or is it just another, “do what you’re told, and I’ll give you what you want,” in this case a passing grade. I have serious concern for those engineering undergrads who want to become entrepreneurs because doing what you’re told is not an entrepreneur. Many important business tenets (that you may not experience otherwise) can definitely be learned through and MBA (such as time value of money, basic accounting, and how to work effectively in teams to accomplish a goal) but much of the same must be learned when you’re in the fire of a startup business.

I would argue that you are no more ready to be an entrepreneur as an engineer with and MBA than you were as an engineer without an MBA.

First thing’s first… If you’re serious about being an entrepreneur, stop making excuses and in the words of an awesome blog I just read by @RubyBuddha:

“I hereby grant you the permission to start doing whatever you need to do
to be the person you claim you want to be.”

Thank you for reading my blog – Daniel S. Herr.
I invite you to connect with me on Twitter @DanHerr
Or follow to my blog 

Image sources:

Natural Inelasticity: Providing Value instead of Value Engineering

“Sell to the classes, eat with the masses.
Sell to the masses, eat with the classes.”
– Henry Ford

One recent point in my class on Economics and the Firm looked at how to maximize revenue in a business from the standpoint of an economist. The example has been, “If you increase the price of your product by 10% and you lose less than 10%, you likely aren’t charging enough and haven’t maximized your marginal revenue.” Once you  lose the same percentage of your customers as the percentage you increase in your price, you have maximized your revenue. All of this lead to an interesting point in my head demonstrating that Henry Ford, from an economists standpoint, would be dead on to market and sell to the masses.

Economists create some pretty lame terms, but I have to go into one for you here. All that “price elasticity” means is “how much people will react when you change your prices.” If I am selling my Aqua-Globe doodad for $20 each, will no one buy them anymore if I raise the price to $40 each? What about if I just raise it by one dollar, how many people will just say, “The heck with this, I’ll get a friend to come over and water my plants”? To address these questions economists came up with their terms:

  • “Elastic” – like a rubber band, it can be changed / stretched easily
  • “Inelastic” or solid stuff, doesn’t like to change

With an  inelastic product people won’t really change how much they purchase and with elastic they will. Anyway, enough with economics vocabulary… the point was that you want to build an “inelastic” business so your customers won’t leave when prices change (perhaps by building a connection with them, proving that you are about value more than cheapest price, etc.).

To Henry Ford’s point, if you are selling more of a product (selling to the masses) you will tend move toward the economist’s “inelastic region” and rest on the right side of the maximized revenue point (eat with the classes). I believe Mr. Ford had some great points, and obviously proved his abilities and business values far more than I have, but I would make sure to emphasize that more than simply selling to the masses, you need to provide enough value such that customers keep coming back. I believe Mr. Ford would agree.

I would argue that in focusing upon value, your business will naturally end up in that “inelastic region”. Sure you may be more likely to reach that region by selling large quantities (which are likely at a lower price), but I believe businesses can also get there with a cult-like status. Build a business that provides so much value and genuine emotional connection that it is near impossible to replicate the results: Disney, Grateful Dead, Harley Davidson, Red Bull, Google, or Incline’s T’s Mesquite Rotisserie. Once you’ve built that great business, even if your prices come up, or competitors try to imitate you, you won’t lose many customers. When your business is just barely “inelastic” (whether naturally or economically engineered) an increase in price still increases your revenue and your business is less susceptible to another Great Recession (or decrease in customer income).

Bringing us back to the first example, if I want to operate in this attractive inelastic region, I can’t just maximize my revenue. Once I focus simply on maximizing my revenue, any change in the economy will push me off the hill and down the slope into elasticity where all the customers care about is the cheapest price. No longer are you a value provider, but just another name in the game of the lowest bidder. To that end I say:

Don’t forfeit your values to squeeze every last penny out of your pricing.
Focus on providing Value instead of Value Engineering.
– Me, Today (25-May-2012)

This is all too often what you see companies do just before an Initial Public Offering, trying to puff up their feathers for the potential investors. “Look! Our revenue has grown 100% in the last year! We are booming!” Fail. If you subscribe to this philosopy, please allow me to give you a little lesson Value vs. Growth stock investing (for educational purposes only).

In wrapping this up, economists basically went through all this to show that you should try to have a hook that keeps customers coming back (inelastic) and if you’re interested in making more money, sell to more people. Amazing that it takes all this math and graphs to figure out something that is common sense. Gotta love economists.

Thank you for reading my blog – Daniel S. Herr.
I invite you to connect with me on Twitter @DanHerr
Or follow to my blog 

If you’re still unsure about price elasticity, these simple examples should help:

Inelastic = We don’t react as much when price goes up ( we keep buying)

  • Arm, Leg & 1st Born−0.09 Gasoline (Short run)
  • −0.1 Eggs
  • −0.20 City Bus Fare / Pass
  • −0.3 First Class Airfare
  • −0.31 Gasoline(Long run)
  • −0.31 (Medical insurance)
  • −0.5 Cigarettes
  • −0.5 Chicken
  • −0.8 Beer
  • −0.87 Movie Theater Visits
  • −0.9 Discount Airfare
  • −1.0 Wine

Elastic = We definitely buy less when prices are jacked up

  • −1.5 Spirits
  • −1.5 Pleasure Air Travel
  • −2.8 Purchase New Car
  • −3.8 Coca-Cola
  • −4.4 Mountain Dew
Some Sources:

Julia Boorsten of CNBC: I have an Inbound Marketing lesson for you

Facebook’s IPO is obviously a landmark achievement; $16 Billion raised in no time, $104 Billion Market Cap, estimated wealth in excess of $20 Billion for Mark… Well done guys. One of the big concerns prior to the Facebook IPO has been GM’s announcement (or leak) that it was pulling away advertising on Facebook, and asking why would GM do and say that now.

Earlier today I was watching the Facebook Special on CNBC’s PowerLunch when something concerning caught my ear (good thing we have TV with a DVR in preparation for the Olympics – thanks babe!). Today Julia  Boorsten said:

“I think if you look at the numbers of what GM was actually spending; they were spending $10 Million on Facebook Ads, but $30 Million on creating content for Facebook. That’s a wierd mix. A lot of people say that that’s not the way you should advertise on Facebook.”

Bravo Julia on subscribing to the old-school advertising bandwagon that is dying. You’ve done a lot of digging into the Facebook story, but I’d say GM has the might know a bit more about social media than you at this point…

No Bullshit Social Media:

Only 5% of people trust advertising, and only 9% say advertising companies act in customers’ best interests while 84% of people buy based upon what other people have to say online. The web, post dot-com bust, is about relationships, communication, and sharing by the people (exhibit A for Facebook’s success thus far).

Some other hard to swallow numbers for traditional marketers:

  • Newspaper advertising revenue fell more than 28% in one quarter in 2008. More than 20 metropolitan daily newspapers have folded or moved online since 2007.
  • Television advertising is predicted to fall more than 75% in the next decade
  • Since 2007 radio advertising has declined for 14 consecutive quarters (to publication of book in 2010)
  • From 2008 to 2009 only cable TV and online mediums showed audience growth with network TV, local TV, magazines, and newspaper all in decline.

Inbound Marketing

Ch1: “The bottom line is that people are sick and tired of being interrupted with traditional outbound marketing messages and have become quite adept at blocking marketers out!” The “10-years ago” tactics in marketing do not work anymore, people primarily gather information through search engines such as Google today. As you are well aware, the average info-seeker performs dozens of searches every day. The second place people look is at one of the more than 100 million blogs on special topics. Thirdly people learn/shop (other than search engines & blogs) with recommendations through social media.

Ch3: In order to move from outbound to inbound marketing you have to stop interrupting people and “get found” by them instead.

Ch4: Remarkable content is the gift that keeps on giving, unlike paid advertising.

Ch7: The value of Facebook is the ability for content to go Viral and for remarkable content to be genuinely shared with friends of friends, not advertising.

Ch11: On average inbound marketing leads are 61% less expensive than outbound marketing leads.

Ch12: In years past Procter & Gamble, Coca Cola, and IBM perfected the craft of interrupting their way into customers’ wallets using outbound marketing, but the era of interruption-based marketing is coming to an end.

My Thoughts on the Facebook IPO:

In case you care about my two cents on Facebook: The stock price will jump because its hyped in the short-term but personally I would not go long on it. Facebook will continue some good growth as it enters into more new markets for the next few years; I have seen that stalker-book obsession of new users too many times since thefacebook.com’s introduction to Cornell in 2004 to not place merit on its new market growth potential (currently less than 1/7th of the world is on Facebook).

You might remember, one of the main reasons people shifted to Facebook from Myspace was because it was clean, simple and free from ads and spammy content. Facebook, in looking to become a more and more profitable business, has forgotten its original premise and those of us who were on the site when there were less than a few thousand people have begun to distance ourselves from it. I do not believe that outside of application (in game etc) advertising Facebook has a solid-enough revenue model as people are more and more annoyed with interruption advertising and are exceedingly better at ignoring it (which devalues Facebook’s offerings). Their introduction of sponsored stories changes the game a little bit, but again at some point, people will get sick of the advertising in this manner.

In the midst of the hype it may seem like Facebook is the end-all conduit for online communication of the future, but I believe its time is coming and that its purchase of Instagram for so elevated a price is a warning sign and insecure fear of insignificance from the leadership.

I welcome your comments…

How Google Went Kung-Fu Panda on SEO

The world is changed. I feel it in the water. I feel it in the earth. I smell it in the air. Much that once was is lost…

Search Engine Optimization (SEO) is dead. Great companies don’t fake it, and Google is out to force that hand. In the past search simply focused on providing the best results for the keywords used. It didn’t matter how great your site looked or how valuable the content was, as long as you had your SEO con-men or some smart computer guys. The name of the game was:

But no more; that has all changed. Google is forcing businesses not to cut corners. Google basically said,

Sure content is King, but content quality is what really matters.

In 2011 Google released the Panda (algorithm) and forever changed the game for schemsters and Search Engine Optimizers. Google knows that great companies do what is right; providing quality products they are proud to stand behind. Great companies provide value, not an MBA-analyzed, trick the system, triangle-scheme, convince people to but more of my junk marketing strategy. Google has adopted artificial intelligence to force companies to provide attractive, quality content if they want to be found online.

Curious why blogs and social media are becoming more and more popular? Google’s Panda uses artificial intelligence (syncronized with real people) to determine what pages and websites are of greater quality based upon design, trustworthiness, speed, and whether or not people would return to the site.

Today the name of the game is user happiness.

Google sat down with loads of real people and asked them to browse websites, and answer questions like:

  • What is the experience of this website?
  • Is it creating a brand that you are going to love and share and reward and trust?
  • Would you trust this site with your credit card?
  • Would you trust the medical information that this site gives you with your children?
  • Do you think the design of this site is good?

The fact of the matter is that people trust genuine peer recommendations and well-written experience statements over advertising copy. Blogs and social media are becoming more and more important. Look at the success of Yelp; you are looking for a place to eat and you trust the reviews of people you have never met to decide where you will spend your money. Google’s Panda, like real people, rewards humor, being human, well-written content; not just keyword-filled jargon.

So for those of you that think you can survive with at static, sale-brochure, “me-focused” website, your time is coming. Prosperity to all ends will reach those who, above having the best moves and winning any single game, strive to be of the most value.

Thank you for reading my blog – Daniel S. Herr.
I invite you to connect with me on Twitter @DanHerr
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Some of my research sources:

Venture Socialist? – Value Over Risk & Return

One June 16th, 2010 I wrote the following on my old blog @ dananimal.blogspot.com:

If I could give one thing to the world… one thing that would change it and sustain it… it would be the oxymoron of a non-profit organization that’s goal and purpose in life is to create, invest in, support, and build sustainable businesses… an organization that reinvests what is earned into the community and the world around it… building businesses not merely with the intention to get rich and the desire become the largest of the Fortune 500’s, but the goal of becoming the best business they can possibly be… choosing instead of big, instead of gargantuan, to be great.

This speaks to the heart of what I believe in and have experienced. There are handfuls of people out there with great ideas and existing small / struggling businesses. Venture Capital does not accept the returns of local startup ventures; they are looking for promising ideas that are geared toward huge growth. Banks don’t care anymore; they have shut the doors to businesses and become completely risk adverse. Personal investments today are based upon large multi-national conglomerates and large company funds instead of local, valuable, longer-lasting (more sustainable) quality businesses. To me this smells strongly of opportunity.

I have heard talk of a third metric entering the business investment space, and that is social impact. Risk, Return, and Social Impact. I might call that third term societal value, or simply value. In all the hype of the DOt cOM 90’s and the booming Real Estate Triangle-scheme like 2000’s we lost sight of the fact that return is related to value. That the market price of a stock and the appraisal of a property need to be rooted in its actual value. For years we have based return on comparable return; valuation based upon growth instead of tangible and sustainable value, real estate based upon comparable sales. Perhaps what is really missing is taking that step back to say, “how will this business change and improve our world?”

Do I have the complete answer; nope, not yet. But I believe a great start is to investigate the root of local success, share those behind-the-scenes stories, and allow the people to bring some of that money invested back home, to the businesses they trust and interact with daily. I want to start by showing why Reno / Tahoe is a great place to live and do business. I want to encourage people to come here, start businesses here, and invest here. Not a new silicon anything, but a local us thing.

What do you think? I welcome your comments…

Photo Sources:

  • heerb.deviantart.com/art/wild-horse-65218607
  • namibian.org/travel/namibia/feralhorses.html