New Board Members Bring the Capital
BUT “Opinions” Impact the Success of the Company
Enterprise Value Accelerator
(Blending Marketing and Finance)
Story #6
(6-minute read)
I acquired a small Midwest factory with all the production tools and a skilled plant manager. With my partner, Jen, and our production manager, Bev, I dove into consumer research, established a market position, and created our strategic plan. We were all in agreement as we created product concepts for artesian made, high-end leather accessories for men and women.
Over the first three years, we used our expertise in consumer research, data analytics, and competitive analysis to bring a startup to success. We worked hard establishing consistent and reliable actions based on true teamwork. I was frequently called out as the team member who was “too metric-driven” for spending hours researching the market as we methodically introduced new products.
Three years in, Jen, Bev, and I stood at the next crossroad for the company, proud of our hard-earned teamwork, and pleased with our growth. We knew our years of planning, measuring, and adapting to changes had created success in our niche:
Artesian products, made in the USA, with a natural look and feel, for wealthy consumers admiring the rich look and smell of the finest most aromatic leathers created by small tanneries across America.
The business had grown by creating five new styles a year. Growth was good at 55% per year. However, cash for inventory and plant equipment proved to be the classic problem for early growth stage companies. Our growth had outstripped the ability of the founders to finance the future. Banks only took us so far, so we decided to take a new road using outside investors. We decided to bring on a Los Angeles-based firm as a partner: Center Point Venture Capital.
It was not quick and easy. Our new partners were experts at the legal and financial aspects of business and everything took time. They had not been deeply involved in operations, but they knew how to create the Operating Agreement that would run our business. We were off and running with enough capital to operationally breathe easily and rapidly expand the product line. The investor’s, our now partner’s, goal was to rapidly grow the product line, increase profits, and reap the reward of the increased Enterprise Value by selling the company in 5 years.
To the Founders, the key point was the Board was increased by two members. The Board now included the three Founders and two members from the venture capital company.
New member number one was Carl. Carl was on site frequently. He was a partner at Center Point and highly skilled at investment analysis as well as analyzing early-stage companies. A Harvard Business School graduate, he was a perfectionist at the legal and financial reporting aspects of his investments. He also loved the best restaurants around the world and was a beer fanatic, understanding beer from every country, and proud of his home brewing operation.
New member number two was Veronica. Veronica was especially active at the new product development meetings as she was considered an industry expert. She was LA savvy and knew the names of every designer, and the models who displayed the top-of-the-line clothes and accessories. She was also linked to other industry experts and drew upon their expertise. Veronica was a young recent MBA graduate from Pepperdine University, with deep personal interest, and business experience in fashion, especially fashion trends of young men and women. As a matter of fact, her undergraduate degree was in Art with a focus on fashion design.
The new Operating Agreement clearly emphasized the five-member Board would have a major role in approving new products. The Operating Agreement seemed to be in our favor. We needed the additional capital and the Operating Agreement provision requiring Board approval of new products did not seem burdensome. The original three Founders maintained control of the Board, and the two new members were seemingly focused on cash management and investment in new production equipment.
But what did we know?
Over the first year with our new partners, we continued with our proven focus on quantitative analysis and market research. We often had phone calls with Carl and Veronica, but only formally met to discuss new products every three months. No red flags or inflated egos came up as Carl and Veronica learned about our industry, our products, and our new product development methods.
Then, their voices started.
Veronica started to question our choices and with Carl’s support little changes, based on her tastes, started to happen. Our working relationship began with a thorough understanding of our diligence in research-based decisions. We researched every detail of the product. But Carl’s ideas, and especially Veronica’s, began to go against our focus group data. Opposing opinions began with product design including color, shape of hardware, and interior material and design. Our research diligence was set aside for their “expertise.”
Then more opinions followed, making small changes like increasing the length of straps or changing the interior material fabric of briefcases. Although uncomfortable with a move away from our usual decision pattern, we three Founders, without suspicion, accepted these changes with minimal discussion or resistance. It was natural to trust the “expertise” touted by Veronica and her industry expert connections. It definitely helped ease any suspicions that Carl backed her all the way. After all, they knew the Millennial market, especially the California college students, and they were experienced venture capitalists, and they had the money.
Big Time Opinions Hit the Board Meeting
In January, following the holiday season, a post-holiday Board meeting was called to celebrate our first successful year together and to focus on our next goal of fast growth with new products. Carl and Veronica had been with us for the good part of a year, and the Founders were eager to have them join the planning for the new products. We assumed the new investors were ready to go, big time, pursuing our market and our approach to new product development. We didn’t recognize the disconnect between our assumption and their personalities and patterns.
Jen, Bev, and I sat in our factory conference room. The rapid sounds of the machinery matching the rhythm of our anticipation for outlining plans, based on our proven strategies, that helped us earn success over the past year. Our anticipation turned to suspicion as Carl walked into the conference room wearing one of his quintessential sharp suits and holding an armful of documents. Veronica, equally sharp, in her demeanor and her fashionable ensemble, passed out a copy of a 350-page commissioned report from the University of Texas. The pile of copies landed on the table with a force as big as our surprise to see it.
“What is this?” all 3 Founders asked in unison.
It was an expensive research project by graduate students at the McCombs School of Business at the University of Texas. It had a 2-page summary, a 51-page report, with 220 pages of statistics, and details in the appendix. I’ll spare you the full text, but the key details were:
First section: History of the Company
- Brand — Strong national brand with a 55% annual growth rate.
- Market — Males 55 years + and females 45 years +.
- Market size — $400 million annually.
- Price elasticity — Market was less sensitive to price increase than the general market.
- Product attributes — Quality, artisan-made, USA production, lifetime guarantee, premium-priced heritage leather, superior customer experience. 100-year history dating back to WWI.
Second Section: New Market and New Product Line
Based on secondary research of print and broadcast news, industry articles, visiting fashion trade shows, and interviews with industry experts, a new target market was created.
- Brand — Unchanged strong national brand.
- Market — Age 18 to 35 college students and recent graduates (basically Millennials).
- Market size — $400 million annually in USA.
- Product offering — Youthful gym bags, bags supporting the use of technology. Marketing using digital catalogs and focusing on social responsibility.
The new year was officially upon us with the clear recommendation from Carl and Veronica: Push the new market for Millennials and add 10 new products for the next holiday season.
With this recommendation, all product development would be devoted to the new products. The rushed development would require outside resources at a cost of $1 million — 10 times any prior product development budget.
In the moment, with the sounds of sustaining our success mirrored in the ambiance of the machines, we all echoed excited energy at the thought of tripling our target market, increasing Enterprise Value, and moving to a point where investors could get their due reward.
With our history of product success year after year, this next step made sense and trusted “experts” were willing to fund the development. Jen and I had been the architect of the strategic direction. So, I took it upon myself to challenge the lack of data from consumer research and focus groups. The trust Bev, Jen, and I had in our process-focused our energy on ways to use our historic success and not be overwhelmed by the excitement of the huge new market.
Our momentum of planning, using our analytical methods, was disrupted by the amplified opinions of the new Board members in the room.
“We did not have time for detailed focus group work. The market of the 18- to 35-year-old Millennial was so large we could not miss.”
Carl and Veronica’s voice, supported by their own “industry expert,” would dictate the future. No product positioning in the new market, no focus group research, none of our previously proven methods were available in the budget or in the timeline. The three Founders spoke their doubts; the business school study covered none of these points. Even though our proven methods were not being followed, those concerns melted away with the strong opinions of the business experts with the money.
By March, furthering the quell of internal doubts, the 10 new products were being developed quickly by outside resources. The work was impressive and retained the image of the company. The Founders’ doubts, regarding the opinion-based decision-making, continued to be overshadowed by the feverish pace of product creation.
In June, by mid-year, it was a madhouse photographing product for catalogs and for social media. The products were in production, inventory was building and ready to be shipped. Marketing worked to create sources of prospect lists of Millennials, 18- to 35-years-old. The sales group found regional retailers interested in carrying the new Millennial product line.
In December, following the Christmas holiday, it was clear. We knew where we stood, and it wasn’t the success we had anticipated.
New product was sitting unsold in the warehouse — 10,000 items. That was half the total production run. Of the 14 new regional retailers carrying the Millennial product line, 7 had asked to return unsold product or have it exchanged for our other top-selling products.
We learned “Success is not the Goal”
Success is not the goal. Success is a bi-product of passionately following your methods and procedures. Success as a goal, passionately voiced, failed us.
The company survived, but the owners, including the venture capital firm, were deeply diluted with the heavy debt from this misstep.
Details: Managing the Impact of Opinions and the HiPPO Effect
Opinions are everywhere both in our social and business life. In this business case, strong, powerful, researched-based metric analysis has more impact than opinions. How do we move away from the dominance of opinions in our decision-making?
But also, how do we keep the Highest Paid Person’s Opinion (HiPPO) from dangerously swaying a company off a proven course?
In general, using research and testing metrics, as the basis of decision making, moves us away from opinions dominating the direction of the business.
The metrics can be used in a very rigid sense, as the results of a regression analysis, or in a more general sense, as in a 1 to 10 ranking score from focus group research. In either case, the metric can be used as a “driver,” as the basis for planning sales or expenses. I still use the word “driver” to explain how I manage budget creation based on metric tools. The term was first shared with me by my associate Chris years ago and I have used it ever since. The result is the creation of a projection that can be measured, analyzed, adapted, and adjusted to move the business performance to success. This is best done by using a metric as the basis of the driver creating your sales and expense projection. Clearly, using an opinion to create projections for your business leaves one without any understanding or ability to measure results or to adapt business plans and create success.
Specifically, let us analyze how the development of the new product line for Millennials (age 18 to 35) should have been approached, as we move away from opinion-based decision making, to build step-by-step sales and expense projections based on metrics.
The business school study did a good job of identifying the new market segment—its characters, its size, and the potential interest in the product line. The study left the company without an indication of the steps needed to understand how the market segment should have been approached.
Follow these steps to create the metrics to proceed:
- Industry Book Research
Build an overview of “NEED” by doing book research to determine the size and characteristics of the market, as well as the role and success of players in the market (to be competition). This work was done by the business school’s team and was a good starting point
- Survey of the Market
Use a large survey tool of about 300 potential customers in the market segment. Use a written concept sharing the brand, the product, and the pricing. The goal is to understand the uniqueness of the product and purchase interest.
- Market Position Statement
Develop a positioning strategy statement. With information from #1 and #2 develop a unique defensible positioning in the market and use this statement to pursue additional research.
- Focus Group Research
Display and use sample product to learn the focus group’s knowledge and interest in the brand name, and the look and feel of the product. The focus group discusses competition and pricing. Ideally, create focus groups in 3 sites using about 20 people in each city.
- Product Test with Real Product and Real People
Provide in-store mockup shelf displays with competitive product, pricing, brand, and product name. Create interactive focus group-type discussions and information retrieval with 100 active customers from the target market who take the product home and use it for a month. Host weekly and monthly calls from researchers to understand actual use experience.
Based on the above information, you can develop a detailed plan using metrics, with measurable drivers for sales projections, and advertising expense budgets, based on product positioning and pricing.
Interested in reading more stories? Click on the links below:
Blog #1: Credit Card Fraud
Blog #2: COVID Shut Factory Down
Blog #3: Best Investor Pitch to Raise Capital
Blog #4: Owners Fear Dilution During Capital Raise
Blog #5: Best Pricing for Gross Profits
Blog #6: Risks of Opinion Based Decisions
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